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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 5, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File No. 333-56239-01
LPA HOLDING CORP.
(exact name of registrant as specified in its charter)
SEE TABLE OF ADDITIONAL REGISTRANTS
DELAWARE 48-1144353
(State or other jurisdiction of (IRS employer identification number)
incorporation or organization)
130 SOUTH JEFFERSON STREET, SUITE 300
CHICAGO, IL 60661
(Address of principal executive office and zip code)
(312) 798-1200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of August 8, 2003, LPA Holding Corp. had outstanding 773,403 shares of Class
A Common Stock (par value, $.01 per share) and 20,000 shares of Class B Common
Stock (par value, $.01 per share). As of August 8, 2003, the additional
registrant had the number of outstanding shares, shown on the following table.
ADDITIONAL REGISTRANTS
Number of Shares
Jurisdiction of Commission IRS Employer of Common
Name Incorporation File Number Identification No. Stock Outstanding
- ---------------------- --------------- ----------- ------------------ -----------------
La Petite Academy, Inc. Delaware 333-56239 43-1243221 100 shares of Common
Stock (par value, $.01 per
share)
2
LPA HOLDING CORP. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
PAGE
------
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED):
Condensed Consolidated Balance Sheets 4-5
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) 6
Condensed Consolidated Statements of Cash Flows 7
Notes to Condensed Consolidated Financial Statements 8-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14-21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 21-22
ITEM 4. CONTROLS AND PROCEDURES 22-23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 24
SIGNATURES 25-28
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LPA HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
APRIL 5, JUNE 29,
2003 2002
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 6,142 $ 16,092
Restricted cash investments 8,420 3,516
Accounts and notes receivable, (net of allowance for
doubtful accounts of $530 and $914) 12,771 11,225
Supplies inventory 3,191 2,955
Other prepaid expenses 4,562 1,517
Refundable taxes 104 528
-------- --------
Total current assets 35,190 35,833
Property and equipment, at cost:
Land 5,442 5,168
Buildings and leasehold improvements 71,512 74,137
Furniture and equipment 10,823 16,151
Construction in progress 2,794
-------- --------
87,777 98,250
Less accumulated depreciation 45,748 52,189
-------- --------
Property and equipment, net 42,029 46,061
Other assets (Note 3) 9,175 9,674
-------- --------
Total assets $ 86,394 $ 91,568
======== ========
(continued)
4
LPA HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
APRIL 5, JUNE 29,
2003 2002
--------- ---------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Overdrafts due banks $ 5,616 $ 4,491
Accounts payable 8,909 8,069
Current maturities of long-term debt and capital lease 2,069 2,150
obligations (Note 4)
Accrued salaries, wages and other payroll costs 17,765 17,450
Accrued insurance liabilities 4,164 2,471
Accrued property and sales taxes 3,477 4,053
Accrued interest payable 5,879 2,119
Reserve for closed academies 2,048 1,833
Other current liabilities 9,081 8,754
-------- ---------
Total current liabilities 59,008 51,390
Long-term debt and capital lease obligations (Note 4) 198,630 196,963
Other long-term liabilities (Note 5) 10,878 11,220
Series A 12% redeemable preferred stock ($.01 par value per share);
45,000 shares authorized, issued and outstanding as of April 5, 70,565 63,397
2003 and June 29, 2002; aggregate liquidation preference of $74.7
million and $68.5 million, respectively
Series B 5% convertible redeemable participating preferred stock
($.01 par value per share); 13,645,000 shares authorized, 15,817 15,227
6,899,724 issued and outstanding as of April 5, 2003 and June 29
2002; aggregate liquidation preference of $15.8 million and $15.2
million, respectively
Stockholders' deficit:
Class A common stock ($.01 par value per share); 17,500,000 shares 8 6
authorized and 773,403 shares issued and outstanding
Class B common stock ($.01 par value per share); 20,000 shares
authorized, issued and outstanding
Common stock warrants 8,596 8,596
Accumulated other comprehensive income 180 246
Accumulated deficit (277,288) (255,477)
--------- ---------
Total stockholders' deficit (268,504) (246,629)
--------- ---------
Total liabilities and stockholders' deficit $ 86,394 $ 91,568
========= =========
(concluded)
See notes to condensed consolidated financial statements.
5
LPA HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(IN THOUSANDS OF DOLLARS)
12 WEEKS ENDED 40 WEEKS ENDED
--------------------- -----------------------
APRIL 5, APRIL 6, APRIL 5, APRIL 6,
2003 2002 2003 2002
--------- --------- ---------- ----------
Operating revenue $ 93,546 $ 94,548 $ 297,037 $ 295,415
Operating expenses:
Salaries, wages and benefits 49,744 51,329 164,337 163,819
Facility lease expense 10,680 10,616 35,273 34,970
Depreciation and amortization 2,407 3,391 8,084 11,356
Restructuring charges 2,186 429 3,862 1,938
Provision for doubtful accounts 649 714 2,197 2,491
Other 21,968 22,919 80,460 77,818
--------- --------- --------- ----------
Total operating expenses 87,634 89,398 294,213 292,392
--------- --------- --------- ----------
Operating income 5,912 5,150 2,824 3,023
Interest expense 4,977 4,483 16,701 17,189
Interest income (17) (40) (112) (141)
--------- --------- --------- ----------
Net interest costs 4,960 4,443 16,589 17,048
--------- --------- --------- ----------
Income (loss) before income taxes 952 707 (13,765) (14,025)
Provision (benefit) for income taxes 59 (3,236) 287 (3,236)
--------- --------- --------- ----------
Net income (loss) 893 3,943 (14,052) (10,789)
--------- --------- --------- ----------
Other comprehensive income (loss):
Amounts reclassified into operations (20) (20) (67) (67)
--------- --------- --------- ----------
Total other comprehensive loss (20) (20) (67) (67)
--------- --------- --------- ----------
Comprehensive income (loss) $ 873 $ 3,923 $ (14,119) $ (10,856)
========= ========= ========= ==========
See notes to condensed consolidated financial statements.
6
LPA HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS OF DOLLARS)
40 WEEKS ENDED
-------------------------------
APRIL 5, 2003 APRIL 6, 2002
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (14,052) $ (10,789)
Adjustments to reconcile net loss to net cash from operating
activities
Restructuring charges 3,862 1,938
Depreciation and amortization 8,084 11,356
Loss on sales and disposals of property and equipment 69 132
Other non cash items 1,590 585
Changes in assets and liabilities:
Restricted cash investments (4,904) (2,660)
Accounts and notes receivable (1,546) (134)
Supplies inventory (236) 351
Other prepaid expenses (3,045) (2,809)
Refundable taxes 424 111
Overdrafts due banks 1,125 795
Accounts payable 840 751
Accrued salaries, wages and other payroll costs 1,067 908
Accrued property and sales taxes (576) (489)
Accrued interest payable 3,760 4,190
Other current liabilities 327 2,298
Accrued insurance liabilities 597 (374)
Reserve for closed academies (2,140) (2,162)
Other changes in assets and liabilities, net (248) (63)
--------- ---------
Net cash (used for) provided by operating activities (5,002) 3,935
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (4,652) (6,793)
Proceeds from sale of assets 0 838
--------- ---------
Net cash used for investing activities (4,652) (5,955)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt and capital lease obligations (1,733) (1,418)
Net borrowings under the Revolving Credit Agreement 1,931 4,164
Deferred financing costs (496) (743)
Proceeds from issuance of common stock, redeemable
preferred stock and warrants, net of expenses 2 5,750
--------- ---------
Net cash (used by) provided by financing activities (296) 7,753
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (9,950) 5,733
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 16,092 5,414
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $6,142 $ 11,147
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $11,225 $11,425
Income taxes 115 159
Non-cash investing and financing activities:
Capital lease obligations of $457 and $801 were incurred during
the 40 weeks
ended April 5, 2003, and the 40 weeks ended April 6, 2002, respectively.
See notes to condensed consolidated financial statements.
7
LPA HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 of La Petite. LPA is owned by an
affiliate of J.P. Morgan Partners LLC (JPMP) and by an entity
controlled by Robert E. King, a director of La Petite and Parent.
The Company offers educational, developmental and child care programs
that are available on a full-time or part-time basis, for children
between six weeks and twelve years old. The Company's schools are
located in 37 states and the District of Columbia, primarily in the
southern, Atlantic coastal, mid-western and western regions of the
United States.
As of April 5, 2003, the Company operated 673 schools including 613
residential Academies, 30 employer-based schools and 30 Montessori
schools. For the 40 weeks ended April 5, 2003, the Company had an
average attendance of approximately 70,900 full and part-time children.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - In the opinion of management, the accompanying
unaudited condensed consolidated interim financial statements include
all adjustments (consisting solely of normal and recurring adjustments)
necessary for their fair presentation in conformity with accounting
principles generally accepted in the United States of America (GAAP).
The results for the interim period are not necessarily indicative of
the results to be expected for the entire fiscal year.
Certain information normally included in financial statements prepared
in accordance with GAAP has been condensed or omitted. These financial
statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's
Form 10-K for the fiscal year ended June 29, 2002.
The accompanying unaudited condensed consolidated interim financial
statements reflect certain previously reported restatements to the
results of operations as of and for the 12 and 40 weeks ended April 6,
2002, contained in the Company's Quarterly Report on Form 10-Q/A for
the period ended April 6, 2002. The restatements resulted from the
Company's determination 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 a net increase in net income of approximately
$4.0 million for the 12 weeks ended April 6, 2002 and a net increase in
net loss of approximately $6.1 million, on an after-tax basis, for the
40 weeks ended April 6, 2002. For a further discussion of the
restatements, see Notes 2 and 16 to the audited consolidated financial
statements included at Item 8 of the Company's Annual Report on Form
10-K for the year ended June 29, 2002.
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company was not in compliance with certain of the financial and
informational covenants contained in an agreement (the Credit
Agreement) providing for a term loan facility and revolving credit
agreement for the first
8
quarter of fiscal year 2003. The Company obtained limited waivers of
non-compliance with such financial and informational covenants from the
requisite lenders under the Credit Agreement through February 7, 2003.
The amendment to the Credit Agreement dated as of February 10, 2003,
permanently waived such defaults and among other things, revised and
set as applicable, financial covenant targets for fiscal years 2003
through 2006. In the third and fourth quarters of fiscal year 2003, the
Company was not in compliance with certain of the informational
covenants contained in the Credit Agreement. The Company obtained
limited waivers of non-compliance with such informational covenants
through July 31, 2003, and permanent waivers of such non-compliance on
July 31, 2003. For additional information on the amendments to the
Credit Agreement dated as of February 10, 2003 and July 31, 2003, see
Note 4-Long-term Debt and Capital Lease Obligations and Note 9-
Subsequent Events.
Management is instituting and executing a series of plans and actions
designed to improve the Company's operating results and cash flows and
to strengthen the Company's financial position. These plans include
cost reductions resulting from continued academy closures, targeted
reductions in operating expenses and optimization of the Company's real
estate portfolio. The Company closed 25 schools in the first quarter,
twelve schools in the second quarter and ten schools in the third
quarter of fiscal year 2003. Subsequent to the end of the third
quarter, the Company closed 25 schools in the fourth quarter of fiscal
year 2003.
Management believes that implementation of its 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 in connection with the February
10, 2003 amendment to the Credit Agreement by LPA and the other
stockholders of Parent, if needed, 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 or that the Company
can obtain additional funding from Parent beyond that noted above or
any other external source.
FISCAL YEAR END - The Company utilizes a 52 or 53-week fiscal year
ending on the Saturday closest to June 30 and is composed of 13
four-week periods. The first quarter contains four such periods or 16
weeks and each remaining quarter contains 3 periods or 12 weeks.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In June 2002, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Standards ("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. Although the
Statement may impact the timing of recognizing a restructuring charge,
the Company has determined that SFAS No. 146 will not have a material
effect on its financial condition, results of operations or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure: An amendment of
FASB Statement No. 123". This Statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative
methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirement of SFAS
No.123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported
results. The disclosure provisions of SFAS No. 148 are applicable for
fiscal years ending after December 15, 2002. As of October 19, 2002,
the Company adopted the disclosure provision of SFAS No. 148.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45
requires certain guarantees to be recorded at fair value and requires a
guarantor to make significant new disclosures, even when the likelihood
of making any payments under the guarantee is remote. Generally, FIN 45
applies to certain types of financial guarantees that contingently
require the guarantor to make payments to the guaranteed party based on
changes in an underlying that is related to an asset, a liability, or
an equity security of the guaranteed party; performance guarantees
involving contracts which require the guarantor to make payments to
9
the guaranteed party based on another entity's failure to perform under
an obligating agreement; indemnification agreements that contingently
require the guarantor to make payments to an indemnified party based on
changes in an underlying that is related to an asset, a liability, or
an equity security of the indemnified party; or indirect guarantees of
the indebtedness of others. The initial recognition and initial
measurement provisions of FIN 45 are applicable on a prospective basis
to guarantees issued or modified after December 31, 2002. Disclosure
requirements under FIN 45 are effective for financial statements of
interim or financial periods ending after December 15, 2002 and are
applicable to all guarantees issued by the guarantor subject to FIN
45's scope, including guarantees issued prior to FIN 45. The Company
has determined that FIN 45 will not have a material effect on its
financial condition, results of operations or cash flows.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an interpretation of ARB
51", with the objective of improving financial reporting by companies
involved with variable interest entities. A variable interest entity is
a corporation, partnership, trust, or any other legal structure used
for business purposes that either (a) does not have equity investors
with voting rights, or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its
activities. Historically, entities generally were not consolidated
unless the entity was controlled through voting interests. FIN 46
changes that by requiring a variable interest entity to be consolidated
by a company if that company is subject to a majority of the risk of
loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or both. A company
that consolidates a variable interest entity is called the "primary
beneficiary" of that entity. FIN 46 also requires disclosures about
variable interest entities that a company is not required to
consolidate but in which it has a significant variable interest. The
consolidation requirements of FIN 46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation
requirements of FIN 46 apply to existing entities in the first fiscal
year or interim period beginning after June 15, 2003. Also, certain
disclosure requirements apply to all financial statements issued after
January 31, 2003, regardless of when the variable interest entity was
established. The Company does not have any variable interest entities
and therefore FIN 46 will not have an impact on its financial
condition, results of operations or cash flows.
3. OTHER ASSETS
(in thousands of dollars)
APRIL 5, JUNE 29,
2003 2002
--------- ---------
Deferred financing costs $ 10,010 $ 9,514
Accumulated amortization (5,238) (4,342)
--------- ---------
4,772 5,172
Other assets (a) 4,403 4,502
--------- ---------
$ 9,175 $ 9,674
========= =========
(a) Other long term assets consists of primarily of properties held for
sale, which are valued at the fair market less costs to sell.
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
(in thousands of dollars)
APRIL 5, JUNE 29,
2003 2002
-------- ---------
Senior Notes, 10.0% due May 15, 2008 $144,884 $143,954
Borrowings under credit agreement 54,595 53,414
Capital lease obligations 1,220 1,745
-------- --------
200,699 199,113
Less current maturities of long-term debt
and capital lease obligations (2,069) (2,150)
-------- --------
$198,630 $196,963
======== ========
10
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 non-compliance 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 expected defaults for the second quarter of fiscal year
2003. In the third and fourth quarters of fiscal year 2003, the Company
was not in compliance with certain of the informational covenants
contained in the Credit Agreement. The Company obtained limited waivers
of non-compliance with such informational covenants through July 31,
2003, and permanent waivers of such non-compliance on July 31, 2003.
See Note 9--Subsequent Events--for further detail.
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 certain 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 is required to be used to prepay the term
loans outstanding under the Credit Agreement. On July 31, 2003, Parent,
La Petite and its senior secured lenders entered into Amendment No. 6
to the Credit Agreement and the Securities Purchase Agreement was
amended. For a description of Amendment No. 6 to the Credit Agreement
and the Securities Purchase Agreement, as amended, see Note 9 -
Subsequent Events.
5. OTHER LONG-TERM LIABILITIES
(in thousands of dollars)
APRIL 5, JUNE 29,
2003 2002
-------- ---------
Unfavorable leases (a) $ 875 $ 1,111
Reserve for closed schools (b) 3,003 2,765
Deferred severance (c) 752
Long-term insurance liabilities (d) 6,248 7,344
-------- --------
$ 10,878 $ 11,220
======== ========
(a) In connection with the acquisitions of La Petite and Bright Start, a
liability for unfavorable operating leases was recorded and is being
amortized over the average remaining life of the leases.
(b) The reserve for closed schools includes the long-term liability related
primarily to leases for schools that were closed and are no longer
operated by the Company.
(c) On December 11, 2002, the Company entered into a Separation Agreement
with Judith A. Rogala, the Company's former Chief Executive Officer and
President. The long-term portion of the Company's total contractual
obligations pursuant to the Separation Agreement is $0.8 million.
(d) Long-term insurance liabilities reflect the Company's obligation for
incurred but not reported workers' compensation, auto and general
liability claims.
11
6. COMMITMENTS AND CONTINGENCIES
The Company is presently, and has been from time to time, subject to
claims and litigation arising in the ordinary course of business.
Management believes that none of the claims or litigation, of which it
is aware, will materially affect the Company's financial condition,
liquidity, or results of operations, although assurance cannot be given
with respect to the ultimate outcome of any such actions.
7. STOCK-BASED COMPENSATION
On August 26, 2002, the Company granted options to purchase 180,254
shares of common stock of Parent at an exercise price of $0.01 to its
then Chief Operating Officer (subsequently promoted to Chief Executive
Officer). On August 26, 2002, the Company also granted options to
purchase 270,381 shares of common stock of Parent at an exercise price
of $0.01 to its Chief Executive Officer. In return for the grant of new
options, the Chief Executive Officer forfeited all previous option
grants. In February 2003, Judith Rogala, former Chief Executive
Officer, exercised options to purchase 208,418 shares of common stock
of LPA Holding at an exercise price of $0.01 and 61,963 options were
cancelled.
The 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 the 40 weeks ended April 5, 2003 was $0.00. Had compensation
cost for these options been recognized as prescribed by SFAS No. 123,
"Accounting for Stock-Based Compensation," it would not have had a
material effect on the Company's results of operations
8. RESTRUCTURING CHARGES
The Company recognized restructuring charges of $2.3 million in the
third quarter of the 2003 fiscal year in connection with the closure of
ten schools, offset by recoveries of $0.1 million principally due to
settlement of lease liabilities for less than the recorded reserves. In
the third quarter of the 2002 fiscal year, the Company recognized a
restructuring charge of $0.4 million in connection with the closure of
two schools. Included in the restructuring charges were non-cash
charges of $1.3 million and $0.9 million in the 40 weeks ended January
11, 2003 and January 12, 2002 respectively. The restructuring charges
related to the school closures consisted principally of the present
value of rent, real estate taxes, common area maintenance charges, and
utilities, net of anticipated sublease income, and the write-off of
leasehold improvements. A summary of the restructuring reserve activity
is as follows, with dollars in thousands:
Balance at June 29, 2002 $ 4,598
Reserves recorded in the first quarter of fiscal year 2003 2,877
Recoveries recorded in the first quarter of fiscal year 2003 (1,629)
Amount utilized in the first quarter of fiscal year 2003 (1,725)
----------
Balance at October 19, 2002 4,121
Reserves recorded in the second quarter of fiscal year 2003 639
Recoveries recorded in the second quarter of fiscal year 2003 (211)
Amount utilized in the second quarter of fiscal year 2003 (639)
----------
Balance at January 11, 2003 3,910
Reserves recorded in the third quarter of fiscal year 2003 2,300
Recoveries recorded in the third quarter of fiscal year 2003 (114)
Amount utilized in the third quarter of fiscal year 2003 (1,045)
----------
Balance at April 5, 2003 $ 5,051
==========
On the condensed consolidated balance sheet, the current portion of the
restructuring reserve is presented in the reserve for closed academies
line item, and the long-term portion is included in the other long-term
liabilities line item.
12
9. SUBSEQUENT EVENTS
In the third and fourth quarters of fiscal year 2003, the Company was
not in compliance with certain of the informational covenants contained
in the Credit Agreement. The Company obtained limited waivers of
non-compliance with such informational covenants through July 31, 2003,
and permanent waivers of such non-compliance on July 31, 2003.
On July 31, 2003, Parent, La Petite and its senior secured lenders
entered into Amendment No. 6 to the Credit Agreement. The amendment
permanently waived existing third and fourth quarter defaults of Parent
and La Petite in connection with (a) the failure to deliver timely
financial information to the senior secured lenders; (b) the failure to
deliver timely information regarding purchases of material assets to
the senior secured lenders; and (c) the failure to file certain reports
with the Securities and Exchange Commission. Additionally, the
amendment revised the definition of Consolidated EBITDA in the Credit
Agreement.
Pursuant to the terms of the Securities Purchase Agreement dated
February 10, 2003, entered into by Parent and its stockholders who have
elected to exercise their respective preemptive rights (the "Electing
Stockholders"), as amended by Amendment No. 1 to Securities Purchase
Agreement dated July 31, 2003, Parent may issue up to 6,669,734 shares
of its series B convertible preferred stock. In connection with such
prospective issuance, Parent issued warrants to purchase 1,692,423
shares of its class A common stock, pro rata to each Electing
Stockholder. All of the proceeds received by Parent from the issuance
of the series B preferred stock, 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 (a) the fixed charge coverage ratio at the
end of a fiscal quarter (calculated in accordance with the terms of the
Credit Agreement) is less than the fixed charge coverage ratio target
set forth in the Credit Agreement with respect to such fiscal quarter
(a "Fixed Charge Purchase"), (b) from time to time, the cash account of
Parent and its subsidiaries is negative (as calculated in accordance
with the provisions of Amendment No. 1 to the Securities Purchase
agreement) over a historical 4 or 5 week review period (a "Cash
Shortfall Purchase"), or (c) (i) a payment default shall occur and be
continuing under the Credit Agreement or (ii) following payment in
full of the obligations under the Credit Agreement, a payment default
shall occur and be continuing under the Indenture for the Senior Notes
(a "Payment Default Purchase"). The aggregate number of shares to be
purchased, if any, by the Electing Stockholders pursuant to a Fixed
Charge Purchase shall be purchased within ten business days following
the date that Parent is required to deliver its quarterly or annual, as
applicable, financial information to the senior lenders pursuant to the
terms of the Credit Agreement, and shall equal the quotient obtained by
dividing (x) the amount of cash which would have been needed to
increase the Parent's consolidated EBITDAR (as defined in the Credit
Agreement) to an amount which would have satisfied the fixed charge
coverage ratio target set forth in the Credit Agreement by (y) 2.174.
The aggregate number of shares to be purchased, if any, by the Electing
Stockholders pursuant to a Cash Shortfall Purchase shall be made on the
tenth business day after the end of each review period, and shall equal
(A) the sum of (x) the cash deficit and (y) $500,000, divided by (B)
2.174, less (C) the number of shares purchased pursuant to Cash
Shortfall Purchases and Fixed Charge Purchases during the applicable
review period. The aggregate number of shares to be purchased by the
Electing Stockholders pursuant to a Payment Default Purchase shall be
purchased within five (5) business days after notice of such default is
delivered to the Electing Stockholders and shall equal (A) the amount
of funds necessary to cure the payment default under the Credit
Agreement or the Indenture for the Senior Notes, as applicable, divided
by (B) 2.174. The Electing Stockholders have the right to purchase
shares of series B preferred stock at any time, in which case the
aggregate number of shares of series B preferred stock to be purchased
by the Electing Stockholders with respect to a particular fiscal
quarter or review period, as applicable, shall be reduced by the number
of shares of series B preferred stock purchased prior to the expiration
of such fiscal quarter or review period. The obligation of each
Electing Stockholder to purchase shares of series B preferred stock
shall expire on the earlier of (a) the date the Electing Stockholders
purchase an aggregate of 6,669,734 shares of series B preferred stock;
and (b) the date the obligations (other than contingent obligations and
liabilities) of Parent and its subsidiaries under (i) the Credit
Agreement and (ii) the Indenture dated as of May 11, 1998, among the
Corporation and certain of its subsidiaries and PNC Bank, National
Association as trustee (as amended) are terminated.
LPA has committed to purchase, in accordance with the terms of the
Securities Purchase Agreement, 6,662,879 shares of the series B
preferred stock being offered and has received warrants to purchase
1,690,683 shares of Parent's class A common stock in connection with
such commitment. In accordance with such commitment, in June 2003, LPA
purchased 341,766 shares of series B preferred stock. Further, in
accordance with their commitment to purchase shares of series B
preferred stock in accordance with the terms of the Securities Purchase
Agreement, in July 2003 the Electing Stockholders other than LPA
purchased 570 shares of series B preferred stock. Accordingly, the
contingent equity commitment from the stockholders of Parent has been
13
reduced from $14,500,000 to $13,757,131.
Subsequent to the end of the third quarter, the Company closed 25
schools in the fourth quarter of fiscal year 2003.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and the related notes thereto
included elsewhere in this report. The Management's Discussion and Analysis of
Financial Condition and Results of Operations presented below reflects certain
previously reported restatements to the results of operations for the 12 and 40
weeks ended April 6, 2002 contained in the Company's Quarterly Report on Form
10-Q/A for the period ended April 6, 2002. For a discussion of the restatements,
see Notes 2 and 16 to the audited consolidated financial statements included at
Item 8 of the Company's Annual Report on Form 10-K for the year ended June 29,
2002.
Historically, the Company's operating revenue has followed the seasonality of
the school year, declining during the summer months and the calendar year-end
holiday period. The number of new children enrolling at La Petite's educational
facilities (the schools) is generally highest in September-October and
January-February, generally referred to as the Fall and Winter enrollment
periods. As a result of this seasonality, results for one quarter are not
necessarily indicative of results for an entire year.
The Company operated 673 schools at the end of the third quarter of fiscal year
2003 as compared to 720 schools for the same period of fiscal year 2002. The net
decrease of 47 schools is a result of 52 closures and five openings or
additions. The closures resulted from management's decision to close certain
school locations where the conditions no longer supported an economically viable
operation.
New educational facilities (new schools), as defined by the Company, are
Academies opened within the current or previous fiscal year. These schools
typically generate operating losses until the Academies achieve normalized
occupancies. Established educational facilities (established schools), as
defined by the Company, are schools that were open prior to the start of the
previous fiscal year.
Full-time equivalent (FTE) attendance, as defined by the Company, is not a
measure of the absolute number of students attending the Company's schools, but
rather is an approximation of the full-time equivalent number of students based
on Company estimates and weighted averages. For example, a student attending
full-time is equivalent to one FTE, while a student attending only one-half of
each day is equivalent to 0.5 FTE. The average weekly FTE tuition rate, as
defined by the Company, is the tuition revenue divided by the FTE attendance for
the respective period.
14
RESULTS OF OPERATIONS
TWELVE WEEKS ENDED APRIL 5, 2003 COMPARED TO TWELVE WEEKS ENDED APRIL 6, 2002
The following table sets forth the Company's operating results for the
comparative 12 weeks ended April 5, 2003 and April 6, 2002, with amounts
presented in thousands of dollars and as percentages of revenue:
12 WEEKS ENDED 12 WEEKS ENDED
APRIL 5, 2003 APRIL 6, 2002
--------------------------- ---------------------------
Percent of Percent of
Amount Revenue Amount Revenue
------------ ------------ ------------ ------------
Operating revenue $ 93,546 100.0% $ 94,548 100.0%
Operating expenses:
Salaries, wages and benefits 49,744 53.2 51,329 54.3
Facility lease expense 10,680 11.4 10,616 11.2
Depreciation and amortization 2,407 2.6 3,391 3.6
Restructuring charge 2,186 2.3 429 0.5
Provision for doubtful accounts 649 0.7 714 0.8
Other 21,968 23.5 22,919 24.2
------------ ------------ ------------ ------------
Total operating expenses 87,634 93.7 89,398 94.6
------------ ------------ ------------ ------------
Operating income $ 5,912 6.3% $ 5,150 5.4%
============ ============ ============ ============
Operating revenue decreased $1.0 million or 1.1% from the same period last year.
This revenue decrease was a result of a reduction in revenue from closed schools
of $4.4 million offset by a $2.1 million increase at established schools, a $0.5
million increase at new schools, and a $0.8 million increase in other revenue.
The revenue decrease is principally due to a decline in FTE attendance of 6.0%
offset by a 4.0% increase in average weekly FTE tuition rates. The increase in
the average weekly FTE tuition rate was principally due to selective price
increases that were put into place based on geographic market conditions and
class capacity utilization. The decrease in FTE attendance was principally due
to school closures and a decline in FTE attendance at established schools,
partially offset by increased FTE attendance at new schools.
Salaries, wages, and benefits decreased $1.6 million or 3.1% from the same
period last year. As a percentage of revenue, labor costs decreased to 53.2%
from 54.3% in the prior year. The decreases in salaries, wages, and benefits,
include decreased labor costs of $2.5 million at closed schools, decreased field
management and corporate administration labor costs of $0.1 million and $0.8
million decreased bonus costs, offset by increased labor costs of $1.0 million
at established schools, increased labor costs of $0.2 million at new schools,
and increased benefit costs of $0.6 million. The increase in labor costs at
established schools was mainly due to a 3.1% increase in average hourly wage
rates offset by a 0.9% decrease in labor hours as compared to the same period in
the prior year.
Facility lease expense was not materially changed from the same period last
year. Lower rent credits in the 2003 fiscal year resulting from certain
unfavorable lease liabilities becoming fully amortized prior to the end of the
third quarter of the 2003 fiscal year were offset by reductions in lease
payments for facilities with contingent rent provisions and for closed schools.
Depreciation and amortization decreased $1.0 million or 29.0% from the same
period last year. The decrease in depreciation and amortization principally
resulted from the reduction in carrying value of long-lived assets, including
goodwill, as a result of the impairment losses recognized in the fourth quarter
of the fiscal 2002 year.
The Company recognized restructuring charges of $2.3 million in the third
quarter of the 2003 fiscal year in connection with the closure of ten schools,
offset by recoveries of $0.1 million principally due to settlement of lease
liabilities for less than the recorded reserves. In the third quarter of the
2002 fiscal year, the Company recognized a restructuring charge of $0.4 million
in connection with the closure of two schools. The restructuring charges related
15
to the school closures consisted principally of the present value of rent (net
of anticipated sublease income), real estate taxes, common area maintenance
charges, and utilities, along with the write-off of leasehold improvements.
Provision for doubtful accounts decreased $0.1 million or 9.1% from the same
period last year. The decrease is principally the result of improved collection
efforts over the same period in the prior year.
Other operating costs decreased $1.0 million or 4.1% from the same period last
year. Other operating costs include repairs and maintenance, utilities,
insurance, real estate taxes, food, transportation, marketing, supplies, travel,
professional fees, personnel, recruitment, training, bank overages and
shortages, and other miscellaneous costs. The decrease was due primarily to
lower marketing, special projects, personnel, taxes, travel, recruitment, and
miscellaneous expenses offset by increases in legal and professional fees,
insurance, bank shortages, repair and maintenance, utilities and data
processing. As a percentage of revenue, other operating costs decreased to 23.5%
as compared to 24.2% in the same period in the prior year.
As a result of the foregoing, the Company had operating income of $5.9 million
in the third quarter of the 2003 fiscal year as compared to operating income of
$5.2 million in the third quarter of the 2002 fiscal year.
Net interest expense increased $0.5 million or 11.6% as compared to the same
period last year. The increase was principally due to prior year adjustments for
certain derivative investments held by the Company.
The provision for income taxes includes a state income tax provision. The
effective federal tax rate for the 40 weeks ended April 5, 2003 and April 6,
2002 was 0% due to the current period operating losses and the Company's
provision of a full valuation allowance against deferred tax assets.
40 WEEKS ENDED APRIL 5, 2003 COMPARED TO 40 WEEKS ENDED APRIL 6, 2002
The following table sets forth the Company's operating results for the
comparative 40 weeks ended April 5, 2003 and April 6, 2002, with amounts
presented in thousands of dollars, and as percentages of revenue:
40 WEEKS ENDED 40 WEEKS ENDED
APRIL 5, 2003 APRIL 6, 2002
--------------------------- ---------------------------
Percent of Percent of
Amount Revenue Amount Revenue
------------ ------------ ------------ ------------
Operating revenue $ 297,037 100.0% $ 295,415 100.0%
Operating expenses:
Salaries, wages and benefits 164,337 55.3 163,819 55.5
Facility lease expense 35,273 11.9 34,970 11.8
Depreciation and amortization 8,084 2.7 11,356 3.8
Restructuring charges 3,862 1.3 1,938 0.7
Provision for doubtful accounts 2,197 0.7 2,491 0.8
Other 80,460 27.1 77,818 26.3
------------ ------------ ------------ ------------
Total operating expenses 294,213 99.0 292,392 99.0
------------ ------------ ------------ ------------
Operating income $ 2,824 1.0% $ 3,023 1.0%
============ ============ ============ ============
Operating revenue increased $1.6 million or 0.5% from the same period last year.
This revenue increase was a result of a $9.6 million increase at established
schools and a $1.7 million increase at new schools, and a $1.1 million increase
in other revenue, offset by a reduction in revenue from closed schools of $10.8
million. Excluding other revenue, operating revenue at the school level was flat
with the prior year, principally due to a 5.3% increase in the average weekly
FTE tuition rate being offset by a decline in the FTE attendance of 5.3%. The
increase in the average weekly FTE tuition rate was principally due to selective
price increases that were put into place based on geographic market conditions
and class capacity utilization. The decrease in FTE attendance was principally
due to
16
school closures and a decline in FTE attendance at established schools,
partially offset by increased FTE attendance at new schools.
Salaries, wages, and benefits increased $0.5 million or 0.3% from the same
period last year. As a percentage of revenue, labor costs decreased slightly to
55.3% from 55.5% in the prior year. The increases in salaries, wages, and
benefits includes increased labor costs of $3.7 million at established schools,
increased labor costs of $1.0 million at new schools, increased field management
and corporate administration labor costs of $0.7 million, and increased benefit
costs of $2.7 million, offset by $1.3 million decreased bonus cost, and by
decreased labor costs of $6.3 million at closed schools. The increase in labor
costs at established schools was mainly due to a 2.7% increase in average hourly
wage rates and a 0.3% increase in labor hours as compared to the same period in
the prior year.
Facility lease expense increased $0.3 million or 0.9% from the same period last
year. This increase was principally due to lower rent credits in the 2003 fiscal
year resulting from certain unfavorable lease liabilities becoming fully
amortized prior to the end of the third quarter of the 2003 fiscal year, offset
by reductions in lease payments for facilities with contingent rent provisions
and for closed schools.
Depreciation and amortization decreased $3.3 million or 28.8% from the same
period last year. The decrease in depreciation and amortization principally
resulted from the reduction in carrying value of long-lived assets, including
goodwill, as a result of the impairment losses recognized in the fourth quarter
of the fiscal 2002 year.
For the 40 weeks ended April 5, 2003, the Company recognized restructuring
charges of $5.5 million in connection with the closure of 42 schools, and $0.3
million in connection with the write-down to fair market value of real estate
properties held for disposal, offset by recoveries of $2.0 million principally
due to settlement of lease liabilities for less than the recorded reserves. For
the 40 weeks ended April 6, 2002, the Company recognized a restructuring charge
of $1.9 million in connection with the closure of six schools and goodwill and
asset write-downs related to closed schools. The restructuring charges related
to the school closures consisted principally of the present value of rent (net
of anticipated sublease income), real estate taxes, common area maintenance
charges, and utilities, along with the write-off of leasehold improvements.
Provision for doubtful accounts decreased $0.3 million or 11.8% from the same
period last year. The decrease is principally the result of improved collection
efforts over the same period in the prior year.
Other operating costs increased $2.6 million or 3.4% from the same period last
year. Other operating costs include repairs and maintenance, utilities,
insurance, real estate taxes, food, transportation, marketing, supplies, travel,
professional fees, personnel, recruitment, training, bank overages and
shortages, and other miscellaneous costs. The increase was due primarily to
higher expenses in legal and professional fees, insurance, repairs and
maintenance, food, bank charges and shortages, and data processing, offset by
decreases in marketing, supplies, transportation, special projects, personnel,
travel, school activity costs, and miscellaneous expenses. As a percentage of
revenue, other operating costs increased to 27.1% as compared to 26.3% in the
same period in the prior year.
As a result of the foregoing, the Company had operating income of $2.8 million
for the 40 weeks ended April 5, 2003 as compared to operating income of $3.0
million for the 40 weeks ended April 6, 2002.
Net interest expense decreased $0.5 million or 2.7% as compared to the same
period last year. The decrease was principally due to prior year mark-to-market
adjustments and termination fees for certain derivative investments held by the
Company, offset by higher debt fees and increased revolver borrowing. (See Item
3 for details on the elimination of certain derivative investments held by the
Company).
The provision for income taxes includes a state income tax provision. The
effective federal tax rate for the 40 weeks ended April 5, 2003 and April 6,
2002 was 0% due to the current period operating losses and the Company's
provision of a full valuation allowance against deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are from cash flows from operations,
borrowings on the revolving credit facility under 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.
17
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 will terminate on May 11, 2006. Payments due under the
amortization schedule for the term loan are $0.2 million in the remainder of
fiscal year 2003, $1.0 million in fiscal year 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 April 5, 2003, there
was $35.5 million outstanding under the term loan and $19.1 million outstanding
under the Revolving Credit Facility. La Petite had outstanding letters of credit
in an aggregate amount of $5.9 million, and $0.0 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 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.
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
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 June 1, 2003, LPA beneficially owned 92.3% 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 for numerous periods, including 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. In the third and fourth quarters of fiscal year 2003, the
Company was not in compliance with certain of the informational covenants
contained in the Credit Agreement. The Company obtained limited waivers of
non-compliance with such informational covenants through July 31, 2003, and
permanent waivers of such non-compliance on July 31, 2003.
18
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 is required
to be used to prepay the term loans outstanding under the Credit Agreement.
On July 31, 2003, Parent, La Petite and its senior secured lenders entered into
Amendment No. 6 to the Credit Agreement. The amendment permanently waived
existing third and fourth quarter defaults of Parent and La Petite in connection
with (a) the failure to deliver timely financial information to the senior
secured lenders; (b) the failure to deliver timely information regarding
purchases of material assets to the senior secured lenders; and (c) the failure
to file certain reports with the Securities and Exchange Commission.
Additionally, the amendment revised the definition of Consolidated EBITDA in the
Credit Agreement.
Pursuant to the terms of the Securities Purchase Agreement dated February 10,
2003, entered into by Parent and its stockholders who have elected to exercise
their respective preemptive rights (the "Electing Stockholders"), as amended by
Amendment No. 1 to Securities Purchase Agreement dated July 31, 2003, Parent may
issue up to 6,669,734 shares of its series B convertible preferred stock. In
connection with such prospective issuance, Parent issued warrants to purchase
1,692,423 shares of its class A common stock, pro rata to each Electing
Stockholder. All of the proceeds received by Parent from the issuance of the
series B preferred stock, 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 (a) the fixed charge coverage ratio at the end of a fiscal
quarter (calculated in accordance with the terms of the Credit Agreement) is
less than the fixed charge coverage ratio target set forth in the Credit
Agreement with respect to such fiscal quarter (a "Fixed Charge Purchase"), (b)
from time to time, the cash account of Parent and its subsidiaries is negative
(as calculated in accordance with the provisions of Amendment No. 1 to the
Securities Purchase agreement) over a historical 4 or 5 week review period (a
"Cash Shortfall Purchase"), or (c) (i) a payment default shall occur and be
continuing under the Credit Agreement or (ii) following payment in full of
the obligations under the Credit Agreement, a payment default shall occur and be
continuing under the Indenture for the Senior Notes (a "Payment Default
Purchase"). The aggregate number of shares to be purchased, if any, by the
Electing Stockholders pursuant to a Fixed Charge Purchase shall be purchased
within ten business days following the date that Parent is required to deliver
its quarterly or annual, as applicable, financial information to the senior
lenders pursuant to the terms of the Credit Agreement, and shall equal the
quotient obtained by dividing (x) the amount of cash which would have been
needed to increase the Parent's consolidated EBITDAR (as defined in the Credit
Agreement) to an amount which would have satisfied the fixed charge coverage
ratio target set forth in the Credit Agreement by (y) 2.174. The aggregate
number of shares to be purchased, if any, by the Electing Stockholders pursuant
to a Cash Shortfall Purchase shall be made on the tenth business day after the
end of each review period, and shall equal (A) the sum of (x) the cash deficit
and (y) $500,000, divided by (B) 2.174, less (C) the number of shares purchased
pursuant to Cash Shortfall Purchases and Fixed Charge Purchases during the
applicable review period. The aggregate number of shares to be purchased by the
Electing Stockholders pursuant to a Payment Default Purchase shall be purchased
within five (5) business days after notice of such default is delivered to the
Electing Stockholders and shall equal (A) the amount of funds necessary to cure
the payment default under the Credit Agreement or the Indenture for the Senior
Notes, as applicable, divided by (B) 2.174. The Electing Stockholders have the
right to purchase shares of series B preferred stock at any time, in which case
the aggregate number of shares of series B preferred stock to be purchased by
the Electing Stockholders with respect to a particular fiscal quarter or review
period, as applicable, shall be reduced by the number of shares of series B
preferred stock purchased prior to the expiration of such fiscal quarter or
review period. The obligation of each Electing Stockholder to purchase shares of
series B preferred stock shall expire on the earlier of (a) the date the
Electing Stockholders purchase an aggregate of 6,669,734 shares of series B
preferred stock; and (b) the date the obligations (other than contingent
obligations and liabilities) of Parent and its subsidiaries under (i) the Credit
Agreement and (ii) the Indenture dated as of May 11, 1998, among the Corporation
and certain of its subsidiaries and PNC Bank, National Association as trustee
(as amended) are terminated.
LPA has committed to purchase, in accordance with the terms of the Securities
Purchase Agreement, 6,662,879 shares of the series B preferred stock being
offered and has received warrants to purchase 1,690,683 shares of Parent's class
A common stock in connection with such commitment. In accordance with such
commitment, in June
19
2003 LPA purchased 341,766 shares of series B preferred
stock. Further, in accordance with their commitment to purchase shares of series
B preferred stock in accordance with the terms of the Securities Purchase
Agreement, in July 2003 the Electing Stockholders other than LPA purchased 570
shares of series B preferred stock. Accordingly, the contingent equity
commitment from the stockholders of Parent has been reduced from $14,500,000 to
$13,757,131.
Management is instituting and executing a series of plans and actions designed
to improve the Company's operating results and cash flows and to strengthen the
Company's financial position. These plans include cost reductions resulting from
continued academy closures, targeted reductions in operating expenses and
optimization of the Company's real estate portfolio. The Company closed 25
schools in the first quarter, twelve schools in the second quarter and ten
schools in the third quarter of fiscal year 2003. Subsequent to the end of the
third quarter, the Company closed 26 schools in the fourth quarter of fiscal
year 2003.
Management believes that implementation of its 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 needed, 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 or that the Company can obtain additional funding from Parent
beyond that as noted above or any other external source.
Cash flows used for operating activities were $5.0 million during the forty
weeks ended April 5, 2003 compared to cash flows provided by operating
activities of $3.9 million for the forty weeks ended April 6, 2002. The $8.9
million decrease in cash flows from operations were mainly due increased
restricted cash investments of $2.2 million, increased working capital amounts
of $3.0 million, and by a $3.7 million increase in net losses, net of non-cash
charges. Restricted cash investments represent cash deposited in an escrow
account as security for the self-insured portion of the Company's workers
compensation, general liability and automobile insurance coverage.
Cash flows used for investing activities were $4.7 million during the forty
weeks ended April 5, 2003 as compared to cash flows used of $6.0 million during
the same period ended on April 6, 2002. The $1.3 million decrease in cash flows
used for investing activities was due to decreased capital expenditures.
Cash flows used for financing activities were $0.3 million during the forty
weeks ended April 5, 2003, compared to cash flows from financing activities of
$7.8 million during the same period ended April 6, 2002. The $8.0 million
decrease in cash flows for financing activities was principally due to decreased
revolver borrowings and prior year issuance of redeemable preferred stock.
During the 40 weeks ended April 5, 2003, the Company opened one new
Journey-based school, three Journey-based school annexes and one employer-based
school. Employer-based schools 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 forty weeks ended April 5, 2003 and April 6,
2002 were $4.7 million and $6.8 million, respectively. The decrease in total
capital expenditures is a result of decreased spending on maintenance and the
development of new schools. 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 forty
weeks ended April 5, 2003 and April 6, 2002 were $4.6 million and $6.0 million,
respectively.
In addition to maintenance capital expenditures, the Company expends additional
funds to repair and maintain its facilities in good working condition. Such
funds are expensed in the periods in which they are incurred. The amounts of
such expenses for the forty weeks ended April 5, 2003 and April 6, 2002 were
$11.6 million and $9.9 million, respectively.
20
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires that management make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Predicting future events is inherently an
imprecise activity and as such requires the use of judgment. Actual results may
vary from estimates in amounts that may be material to the financial statements.
See "Cautionary Statement Concerning Forward Looking Statements."
For a description of the Company's significant accounting policies, see "Item 8.
Financial Statements and Supplementary Data, Note 3. Summary of Significant
Accounting Policies", included in the Company's Annual Report on Form 10-K for
the year ended June 29, 2002.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Under the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995, the Company cautions investors that any forward-looking statements or
projections made by the Company, including those made in this document, are
subject to risks and uncertainties that may cause actual results to differ
materially from those projected or discussed in these forward looking
statements.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this report contain forward-looking statements
that are based on management's current expectations, estimates and projections.
Words such as "expects," "projects," "may," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates," variations of these words and similar
expressions are intended to identify these forward-looking statements. Certain
factors, including but not limited to those listed below, may cause actual
results to differ materially from current expectations, estimates, projections
and from past results.
- Economic factors, including changes in the rate of inflation,
business conditions and interest rates.
- Operational factors, including the Company's ability to open
and profitably operate Academies and the Company's ability to
satisfy its obligations and to comply with the covenants
contained in the Credit Agreement and the indenture.
- Demand factors, including general fluctuations in demand for
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) the ability to maintain well-equipped facilities and (d)
any adverse publicity concerning alleged child abuse at the
Company's child care centers or at its Academies.
- Governmental action including: (a) new laws, regulations and
judicial decisions related to state and local regulations and
licensing requirements, (b) changes in the Federal assistance
and funding of 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.
No assurance can be made that any expectation, estimate or projection contained
in a forward-looking statement can be achieved. Readers are cautioned not to
place undue reliance on such statements, which speak only as of the date made.
The Company undertakes no obligation to release publicly any revisions to
forward-looking statements as the result of subsequent events or developments.
ITEM 3. 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.
Indebtedness as of April 5, 2003 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 $35.5 million at April 5, 2003 and the
21
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 $0.2 million in
the remainder of fiscal year 2003, $1.0 million in fiscal year 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). A 1% increase or
decrease in the applicable index rate would result in a corresponding interest
expense increase or decrease of $0.5 million per year.
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.
With the termination of the interest rate collar on the term loan, effective
January 28, 2002, the Company has no remaining derivative instruments.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a set of disclosure controls and procedures (the
"Disclosure Controls") that are designed to ensure that information required to
be disclosed in the reports and filed under the Securities Exchange Act of 1934,
as amended ("Exchange Act"), is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms. The Company's
Disclosure Controls include, without limitation, those components of internal
controls over financial reporting ("Internal Controls") that provide reasonable
assurances that transactions are recorded as necessary to permit preparation of
the Company's financial statements in accordance with generally accepted
accounting principles.
Within the 90 days prior to the date of this Quarterly Report on Form 10-Q, the
Company evaluated the effectiveness of the design and operation of its
Disclosure Controls pursuant to Rule 15d-15 of the Exchange Act. This evaluation
("Controls Evaluation") was done under the supervision and with the
participation of management, including the Chief Executive Officer ("CEO") and
Chief Financial Officer ("CFO"). This evaluation resulted in the identification
of certain material weaknesses in the Company's Internal Controls primarily
related to: (a) the lack of timely preparation and accuracy of account
reconciliations, (b) a lack of consistent understanding and compliance with
Company's policies and procedures, and (c) the lack of stable financial
management and accounting staff. These weaknesses contributed to Company's
inability to complete the preparation of its Quarterly Report on Form 10-Q for
the quarters ended October 19, 2002, January 11, 2003, and April 5, 2003 within
the Exchange Act's prescribed time.
While the Company is in the process of implementing a more efficient and
reliable system of Disclosure Controls, the Company has, on an immediate basis,
instituted interim compensating controls and procedures to ensure that
information required to be disclosed in this Quarterly Report on Form 10-Q has
been recorded, processed, summarized and reported to its senior management.
These interim compensating controls and procedures include, but are not
necessarily limited to, (i) communicating a tone from senior management
regarding the proper conduct in these matters, (ii) strengthening the financial
management organization and reporting process, (iii) requiring stricter account
reconciliation compliance, (iv) improving accounting policies and procedures,
(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 contained in the Company's SEC periodic reporting, (vi) increasing
financial field audits of academies, (vii) increasing divisional financial staff
accountability 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
22
and effectiveness of the Company's Disclosure Controls, including establishing
an informal Disclosure Committee comprised of internal and external
professionals with financial, legal and operational expertise.
Beyond instituting interim measures, the Company is committed to continuing the
process of identifying, evaluating and implementing corrective actions where
required to improve the effectiveness of its Disclosure Controls on an overall
basis. This has included instituting improved processes and procedures as they
relate to such critical functions as account reconciliations and the monthly
closing process; improving the quality and oversight of the accounting staff;
enhancing field level controls; developing metrics to monitor and identify
accounting and operational issues and transferring knowledge from outside
contractors to the Company's financial staff.
The Company's Disclosure Controls, including the Company's Internal Controls,
are designed to provide a reasonable level of assurance that the stated
objectives are met. The Company's management, including the CEO and CFO, does
not expect that the Company's Disclosure Controls or Internal Controls will
prevent all error and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.
Based upon the Controls Evaluation, the CEO and CFO have concluded that, to the
best of their knowledge and after giving effect to the interim compensating
controls and procedures discussed above, the Disclosure Controls are effective,
at a reasonable level of assurance, to ensure that information required to be
disclosed by the Company in reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported,
during the period in which the Company's periodic reports are being prepared.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the Company's internal controls,
subsequent to the date of their evaluation, other than the continuing impact of
the corrective actions discussed above.
******
23
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is presently, and has been from time to time, subject to claims and
litigation arising in the ordinary course of business. Management believes that
none of the claims or litigation, of which it is aware, will materially affect
the Company's financial condition or results of operations, although assurance
cannot be given with respect to the ultimate outcome of any such actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On February 10, 2003, through Written Consent in Lieu of Meeting of
Stockholders, LPA Investment LLC, as holders of a majority of the common stock
and preferred stock of LPA Holding Corp., (a) amended the Certificate of
Incorporation and Certificate of Designation of the series B Preferred Stock in
order to increase the authorized number of shares of series B Preferred Stock,
and (b) approved the issuance of the shares of series B Preferred Stock pursuant
to the Securities Purchase Agreement between LPA Holding Corp. and the other
parties thereto dated February 10, 2003. Except for the stockholder that
executed the Written Consent, no other stockholders were solicited and
accordingly, no votes against or withheld were received on the foregoing matter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits required by Item 601 of Regulation S-K:
99.1 Section 906 certification of Chief Executive Officer
99.2 Section 906 certification of Chief Financial Officer
b. Reports on Form 8-K:
On February 6, 2003, the Company filed a Current Report on Form 8-K
reporting that it had received another limited waiver of non-compliance
from its lenders under the Credit Agreement through February 7, 2003.
ITEMS 2, 3 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LPA HOLDING CORP.
Dated August 13, 2003 /s/ Michael F. Czlonka
-------------------------------------
By: Michael F. Czlonka
Chief Financial Officer and duly authorized
representative of the registrant
25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LA PETITE ACADEMY, INC.
Dated August 13, 2003 /s/ Michael F. Czlonka
-------------------------------------
By: Michael F. Czlonka
Chief Financial Officer and duly authorized
representative of the registrant
26
CERTIFICATIONS
I, Gary A. Graves, certify that:
1. I have reviewed this quarterly report on Form 10-Q of LPA
Holding Corp. and La Petite Academy, Inc.;
2. Based on my knowledge, this quarterly 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
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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 quarterly report;
4. LPA Holding Corp.'s and La Petite Academy, Inc.'s other
certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for LPA Holding Corp.
and La Petite Academy, Inc. and have:
a) Designed such disclosure controls and
procedures to ensure that material
information relating to the registrants,
including consolidated subsidiaries, is made
known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of LPA Holding
Corp.'s and La Petite Academy, Inc.'s
disclosure controls and procedures as of a
date within 90 days prior to the filing date
of this quarterly report (the "Evaluation
Date");
c) Presented in this quarterly report our
conclusions about the effectiveness of the
disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
and
5. LPA Holding Corp.'s and La Petite Academy, Inc.'s other
certifying officer and I have disclosed, based on our most
recent evaluation, to LPA Holding Corp.'s and La Petite
Academy, Inc.'s auditors and the audit committee of LPA
Holding Corp.'s and La Petite Academy, Inc.'s board of
directors (or persons performing the equivalent function):
a) All significant deficiencies in the design
or operation of internal controls which
could adversely affect LPA Holding Corp. and
La Petite Academy, Inc.'s ability to record,
process, summarize and report financial data
and have identified for LPA Holding Corp.
and La Petite Academy, Inc.'s auditors any
material weaknesses in internal controls;
and
b) Any fraud, whether or not material, that
involves management or other employees who
have a significant role in LPA Holding
Corp.'s and La Petite Academy, Inc.'s
internal controls; and
6. LPA Holding Corp.'s and La Petite Academy, Inc.'s other
certifying officer and I have indicated in this quarterly
report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
August 13, 2003
/s/ Gary A. Graves
- -------------------------------
By: Gary A. Graves
Chief Executive Officer
27
CERTIFICATIONS
I, Michael F. Czlonka, certify that:
1. I have reviewed this quarterly report on Form 10-Q of LPA
Holding Corp. and La Petite Academy, Inc.;
2. Based on my knowledge, this quarterly 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
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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 quarterly report;
4. LPA Holding Corp.'s and La Petite Academy, Inc.'s other
certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for LPA Holding Corp.
and La Petite Academy, Inc. and have:
a) Designed such disclosure controls and
procedures to ensure that material
information relating to the registrants,
including consolidated subsidiaries, is made
known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of LPA Holding
Corp.'s and La Petite Academy, Inc.'s
disclosure controls and procedures as of a
date within 90 days prior to the filing date
of this quarterly report (the "Evaluation
Date");
c) Presented in this quarterly report our
conclusions about the effectiveness of the
disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
and
5. LPA Holding Corp.'s and La Petite Academy, Inc.'s other
certifying officer and I have disclosed, based on our most
recent evaluation, to LPA Holding Corp.'s and La Petite
Academy, Inc.'s auditors and the audit committee of LPA
Holding Corp's. and La Petite Academy, Inc.'s board of
directors (or persons performing the equivalent function):
a) All significant deficiencies in the design
or operation of internal controls which
could adversely affect LPA Holding Corp. and
La Petite Academy, Inc.'s ability to record,
process, summarize and report financial data
and have identified for LPA Holding Corp.'s
and La Petite Academy, Inc.'s auditors any
material weaknesses in internal controls;
and
b) Any fraud, whether or not material, that
involves management or other employees who
have a significant role in LPA Holding
Corp.'s and La Petite Academy, Inc.'s
internal controls; and
6. LPA Holding Corp.'s and La Petite Academy, Inc.'s other
certifying officer and I have indicated in this quarterly
report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
August 13, 2003
/s/ Michael F. Czlonka
- ---------------------------------
By: Michael F. Czlonka
Chief Financial Officer
28