ITEM 1. BUSINESS
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 $0.01 (the Common Stock), of La Petite Academy, Inc., a Delaware corporation (La Petite). The transaction 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 to provide 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.
Pursuant to a pre-emptive offer dated February 10, 2003, 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. Pursuant to such offer, Parent received commitments to purchase up to $14.5 million of Series B preferred stock and issued warrants to purchase 1,692,423 shares of
common stock of Parent. In June 2003, Parent issued 341,766 shares of Series B preferred stock for an aggregate purchase price of approximately $0.7 million. The $0.7 million proceeds received by parent were contributed to La Petite and were used by La Petite for working capital and liquidity purposes.
As of September 25, 2003, LPA beneficially owns 92.5% of the common stock of Parent on a fully diluted basis, $45 million of Series A preferred stock of Parent and approximately $15.7 million of Series B preferred stock of Parent. An affiliate of JPMP owns a majority of the economic interests of LPA and an entity controlled by Robert E. King, a director of La Petite and Parent, owns a majority of the voting interests of LPA.
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 childcare to children between the ages of six weeks and 12 years. Management believes the Company differentiates itself through its superior educational programs, which were developed and are regularly enhanced by its curriculum department. The Company's focus on quality educational services allows it to capitalize on the increased awareness of the benefits of premium educational instruction for preschool and elementary school age children. At its residential and employer-based Academies, the Company utilizes its proprietary Journey(R) curriculum with the intent of maximizing a child's cognitive and social development. The Company also operates Montessori schools that employ the Montessori method of teaching, a classical approach that features the programming of tasks with materials presented in a sequence dictated by each child's capabilities.
As of June 28, 2003, the Company operated 648 Academies including 592 residential Academies, 27 employer-based Academies and 29 Montessori schools located in 36 states and the District of Columbia. For the 52 weeks ended June 28, 2003, the Company had an average attendance of approximately 70,900 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,
finger plays, 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 childcare 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.
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 childcare centers: residential Academies, employer-based Academies and Montessori schools. Academies generally operate year round, five days a week and typically are open from 6:30 AM to 6:30 PM. A child may be enrolled in any of a variety of program schedules from a full-time, five-day-per-week plan to as little as two or three half-days a week. A child attending full-time typically spends approximately nine hours a day, five days per week, at an Academy. The Kids Station program for children age's five to 12 provides extended childcare before and after the elementary school day and transportation to and from the elementary school.
Academy employees include Academy Directors, Assistant Directors (who are generally teachers), full-time and part-time teachers, temporary and substitute teachers, teachers' aides, and non-teaching staff. On average, there are 15 to 20 employees per Academy. Each Academy is managed by an Academy Director. An Academy Director 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 46 District Managers. District Managers have an average of 13 years of experience with the Company, typically are responsible for six to 30 Academies and report to one of four Divisional Vice Presidents. District Managers visit their Academies regularly and are in frequent contact to help make decisions and improvements to program quality and profitability. The Divisional Vice Presidents have an average of 17 years of experience with the Company.
Residential Academies. As of June 28, 2003, the Company operated 592 residential Academies. Residential Academies are typically located in residential, middle income neighborhoods, and are usually one-story, air-conditioned buildings located on three-quarters of an acre to one acre of land. A typical Academy also has an adjacent playground designed to accommodate the full age range of children attending the school. The latest Academy design is approximately 12,800 square feet, built on a site of approximately 1.5 acres, with an operating capacity of approximately 185 children and incorporates a closed classroom concept. The Company continues to improve, modernize and renovate existing residential Academies to improve efficiency and operations, to better compete, to respond to the requests of parents and to support the Journey(R) curriculum.
Residential Academies generally have programs to care for children from toddlers to 12 years old arranged in five age groups. In addition, over half of the Academies offer childcare for infants, as young as six weeks old. Teacher-student ratios vary depending on state requirements but generally decrease with the older child groups.
Employer-Based Academies. As of June 28, 2003, the Company operated 27 employer-based Academies. These Academies utilize an operating model that is very similar to residential Academies including collecting tuition fees directly from the employee parent, 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 28, 2003, the Company operated 29 Montessori schools. Montessori schools are typically located in upper-middle income areas and feature brick facades and closed classrooms. The Montessori schools typically have lower staff turnover, and their lead teachers are certified Montessori instructors, many of whom are certified through the Company's internal training program. In addition, unlike students at residential Academies, Montessori students are enrolled for an entire school year, pay tuition monthly in advance and pay higher tuition rates.
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
Recently, we have deferred new academy development and concentrated our efforts on strengthening our current portfolio by diverting more attention and efforts to capital improvements and stabilizing field operations. However, the Company still intends to expand within existing markets and enter new markets with Academies concentrated in clusters. We have increased our research to aggressively seek out new "turn-key" opportunities from existing local child-care operators or other users whose facilities meet our needs. 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 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 2003 year, the Company opened one employer-based Academy, four Journey-based Academies and one Journey-based Academy annex.
TUITION
Academy tuition depends upon a number of factors including, but not limited to, location of an Academy, age of the child, full or part-time attendance, utilization and competition. The Company also provides various tuition discounts primarily consisting of sibling, staff, and Preferred Employer Program. The Company adjusts tuition for Academy programs by child age group and program schedule within each Academy based on utilization and competitive factors. 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 25% of the children under its care.
MARKETING AND ADVERTISING
The Company's advertising plans are multi-faceted and heavily dependent on direct response programs, including consumer and business-to-business direct mail, mass media, and electronic media. Additional training is provided to Academy Directors as plans are rolled out throughout the country, including enhanced phone and tour sales training and tools. An additional emphasis is placed on expanding corporate partner relationships and growing the Preferred Employer Program, not necessarily through new companies, but through additional enrollment from currently participating corporations. The Preferred Employer Program allows the Company to build quality relationships with large corporations by providing preferred pricing for their employees who enroll their children at the Company's Academies.
The WOW! program, which began its launch in January, provided clear and tangible facility expectations for Academy Directors, with accountability on the District Manager level. The purpose of this program was to insure that the Academies were ready for the fall enrollment period, from a facility/sales/marketing perspective. Five sections, rolled out approximately one month apart and provided Academy Directors with a clear list of minimum facility expectations, an overview, and Q & A for each section. The project focused on: Curb Appeal and Common Areas, Pre-Kindergarten, School age, Preschool, and Infants/Toddlers/Twos classrooms. The WOW! assessments are now a component of the regularly conducted academy operations reviews.
The Parent Advisory Liaison, (PAL) continues in many Academies across the system and encourages increased parent participation and loyalty, forms partnerships between staff and parents, and creates a forum for the exchange of ideas between staff and parents for the benefit of children. To further encourage retention, the La Petite Academy Service Guarantee was implemented in July 2002. This guarantee simply states: (i) 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.
The VIP Referral Program continues to be highly successful in driving new enrollments into the Academies. Through this program, current customers who refer new customers are rewarded, and the new customer receives a discount for enrolling.
INFORMATION SYSTEMS
The Company's financial and management-reporting systems are connected through a Virtual Private Network (VPN) that connects all Academies, field management and Support Center employees. Through the use of the Company's point of sale software product, called ADMIN, and the implementation of the VPN, information such as financial reporting, enrollments, pricing, labor, receivables, and attendance are available at all levels of the organization.
The Company continues to review its management information systems to ensure the issuance of meaningful, specific performance measures, and the production of timely and accurate operating and financial information.
This year the Company's primary accounting system was upgraded to the most recent software release, providing improvements in function and processing. Many reports and forms have been moved to the Company intranet to reduce paperwork, streamline processing, and improve academy access. Telecommunications services were reviewed this year, leading to significant cost reductions through line elimination, vendor contract consolidation, and better usage of dial-up ISP services.
COMPETITION
The United States preschool education and childcare industry is highly fragmented and competitive. The Company's competition consists principally of local nursery schools and childcare centers, some of which are non-profit (including religious-affiliated centers), providers of services that operate out of their homes and other for profit companies, which may operate a number of centers. Local nursery schools and childcare centers generally charge less for their services. Many religious-affiliated and other non-profit childcare centers have no or lower rental costs than the Company, may receive donations or other funding to cover operating expenses and may utilize volunteers for staffing. Consequently, tuition rates at these facilities are commonly lower than the Company's rates. Additionally, fees for home-based care are normally lower than fees for center-based care because providers of home care are not always required to satisfy the same health, safety or operational regulations as our Academies. The competition also consists of other large, national, for profit childcare companies that may have more aggressive tuition discounting and other pricing policies than La Petite. The Company competes principally by offering trained and qualified personnel, professionally planned educational and recreational programs, 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 childcare 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 childcare provider.
REGULATION AND GOVERNMENTAL INVOLVEMENT
Childcare centers are subject to numerous state and local regulations and licensing requirements, and the Company has policies and procedures in place in order to comply with such regulations and requirements. Although state and local regulations vary from jurisdiction to jurisdiction, government agencies generally review the ratio of staff to enrolled children, the safety, fitness and adequacy of the buildings and equipment, the dietary program, the daily curriculum, staff training, record keeping 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 childcare centers or vehicle operators. In most jurisdictions, governmental agencies conduct scheduled and unscheduled inspections of childcare centers, and licenses must be renewed periodically. Failure by an Academy to comply with applicable regulations can subject it to state sanctions, which might include the Academy being placed on probation or, in more serious cases, suspension or revocation of the Academy's license to operate and could also lead to sanctions against other Academies located in the same jurisdiction. In addition, this type of action could result in reputational damage extending beyond that jurisdiction.
Management believes the Company is in compliance with all applicable regulations and licensing requirements. However, there is no assurance that a licensing authority will not determine a particular Academy to be in violation of applicable regulations and take action against that Academy. In addition, there may be 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 childcare programs. Section 21 of the Internal Revenue Code provides a federal income tax credit ranging from 20% to 35% of certain childcare expenses for "qualifying individuals" (as defined in the Code). The fees paid to the Company for childcare services by eligible taxpayers qualify for the tax credit, subject to the limitations of Section 21 of the Code.
Various state and federal programs provide childcare assistance to low-income families. These programs are generally administered through state and local agencies. Management estimates approximately 25% of operating revenue is generated from such federal and state programs. Although no federal license is required at this time, there are minimum standards that must be met to qualify for participation in certain federal subsidy programs. Many states utilize tiered reimbursement programs. These programs have quality tiers that allow higher reimbursement for low-income programs that meet the highest quality standards.
Government, at both the federal and state levels, is involved in actively expanding the quality and availability of childcare services. Federal support is delivered at the state level through government-operated educational and financial assistance programs. Childcare services offered directly by states include training for childcare providers and resource and referral systems for parents seeking childcare. In addition, the state of Georgia has an extensive Government-funded private sector preschool program in which the Company participates. Other states are evaluating preschool programs based upon the Georgia model.
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. The Company has not experienced any material adverse impact under the Disabilities Act.
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 NHTSA requirements, all new fleet additions or replacements must 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.
TRADEMARKS
A federally registered trademark in the United States is effective for ten years subject only to a required filing and the continued use of the mark by the registrant. A federally registered trademark provides the presumption of ownership of the mark by the registrant in connection with its goods or services and constitutes constructive notice throughout the United States of such ownership. The Company has various registered trademarks 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). 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 an insurance program covering comprehensive general liability, automotive liability, workers' compensation, property and casualty, crime and directors and officers liability insurance. The policies provide for a variety of coverage, are subject to various limits, and include substantial deductibles or self-insured retention levels. The Company believes its insurance program is appropriate given the nature of its business and its claims history. However, claims may be asserted which fall outside of, or are in excess of the limits of, the Company's insurance, the effect of which could have a material adverse effect on the Company.
EMPLOYEES
As of June 28, 2003, the Company employed approximately 12,800 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.
ITEM 2. PROPERTIES
As of June 28, 2003, the Company operated 648 Academies, 567 of which were leased under operating leases, 68 of which were owned and 13 of which were operated in employer-owned centers. Most of these Academy leases have 15-year terms, some have 20-year terms, many have renewal options, and most require the Company to pay utilities, maintenance, insurance and property taxes. In addition, some of the leases provide for contingent rentals, if the Academy's operating revenue exceeds certain base levels. The Company also leases administrative office space in the cities of Chicago, Illinois, Overland Park, Kansas, Charlotte, North Carolina, and Burbank, California.
Because of different licensing requirements and design features, Academies vary in size and licensed capacity. Academies typically contain 5,400, to 9,500 square feet in a one-story, air-conditioned building located on three-quarters of an acre to one acre of land. Each Academy has an adjacent playground designed to accommodate the full age range of children attending the Academy. Licensed capacity for the same size building varies from state to state.
The following table summarizes Academy openings and closings for the indicated periods.
During the 2003 year, the Company opened four Journey-based Academies, one Journey-based Academy annex, and one employer-based Academy. During that same period, the Company closed 73 schools. The closures resulted from management's decision to close certain school locations where the conditions no longer supported an economically viable operation.
The following table shows the number of locations operated by the Company as of June 28, 2003:
The leases have initial terms expiring as follows:
At June 28, 2003, the Company leased 567 Academies from approximately 333 lessors. The Company has generally been successful when it has sought to renew expiring Academy leases.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company has litigation pending which arose in the ordinary course of its business. In management's opinion, no litigation in which the Company currently is involved will result in liabilities that will have a material adverse effect on its financial position, liquidity or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II.
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Parent is not publicly traded. As of September 25, 2003, LPA owned 66.0% of the Parent's outstanding common stock, Vestar/LPT Limited Partnership owned 2.7%, management owned 1.2% and former management owned 30.1%.
No cash dividends were declared or paid on the Parent's common stock during the 2003 and 2002 fiscal years. The Company's 10% Series B Senior Notes due 2008 (Senior Notes) and preferred stock (see Note 4 and Note 8 to the consolidated financial statements) contain certain covenants that, among other things, do not permit Parent to pay cash dividends on its common or preferred stock now or in the immediate future.
As of September 25, 2003, there were 14 holders of record of Parent's common stock.
Note 11 of the consolidated financial statements contains a description of the stock based compensation plans of Parent, including the number of securities available for future issuance under such plans and whether such plans were approved by Parent's security holders.
Pursuant to the terms of the Securities Purchase Agreement dated February 10, 2003, entered into by Parent and its stockholders who have elected to exercise their respective preemptive rights (the "Electing Stockholders"), as amended by Amendment No. 1 to the Securities Purchase Agreement dated July 31, 2003, Parent may issue up to 6,669,734 shares of its Series B convertible preferred stock. In connection with such prospective issuance, on February 10, 2003, Parent issued warrants to purchase 1,692,423 shares of its class A common stock, pro rata to each Electing Stockholder. Each warrant is convertible into one share of class A common stock of Parent at an exercise price of $0.01 per share. In June 2003, in accordance with the commitment under the terms of the Securities Purchase Agreement, LPA, as one of the Electing Stockholders, purchased 341,766 shares of Series B preferred stock of Parent at a purchase price of $2.174 per share. Each of the foregoing transactions was exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(2) thereunder, as transactions not involving any public offering. In each of such transactions, no general solicitation was made, the securities sold are subject to transfer restrictions, and the certificates evidencing such securities contains an appropriate legend stating such securities have not been registered under the Securities Act and may not be offered or sold absent registration or pursuant to an exemption therefrom. No underwriters were involved in connection with any of these sales of Parent's equity securities.
ITEM 6.
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.
a) On April 18, 2001, the Company changed its fiscal year end from the 52 or 53-week period ending on the first Saturday in July to the 52 or 53-week period ending on the Saturday closest to June 30. 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 2 to the consolidated financial statements included in Item 8 of this report).
b) Restructuring charges resulted from management's decision to close certain Academies located in areas where conditions no longer support an economically viable operation and to restructure its operating management to better serve the remaining Academies. These charges consist principally of the present value of rent (net of anticipated sublease income), real estate taxes, common area maintenance charges, and utilities, the write-off of goodwill associated with closed Academies, and the write-down of fixed assets to fair market value. See Note 12 to the consolidated financial statements included in Item 8 of this report for further discussion.
c) During the fourth quarter of fiscal 2003, the Company identified conditions, including a projected current year operating loss as well as negative cash flows in certain of the Company's schools, as indications that the carrying amount of certain long-lived assets may not be recoverable. In accordance with the Company's policy, management assessed the recoverability of long-lived assets at these schools using a cash flow projection based on the remaining useful lives of the assets. Based on this projection, the cumulative cash flow over the remaining depreciation or amortization period was insufficient to recover the carrying value of the assets at certain of these schools. As a result, the Company recognized impairment losses of $3.1 million related to property and equipment in fiscal 2003. 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 in fiscal 2002.
d) Interest expense includes $1.2 million, $1.0 million, $1.1 million, $1.1 million, and $0.8 million of amortization of deferred financing costs for fiscal years 2003, 2002, 2001, 2000, and 1999, respectively.
e) For purposes of determining the ratio of earnings to fixed charges, earnings are defined as income before income taxes and extraordinary items, plus fixed charges. Fixed charges consists of interest expense on all indebtedness, amortization of deferred financing costs, and one-third of rental expense on operating leases representing that portion of rental expense that the Company deemed to be attributable to interest. For the 52 weeks ended June 28, 2003, June 29, 2002, June 30, 2001, July 1, 2000, and the 44 weeks ended July 3, 1999, earnings were inadequate to cover fixed charges by $15.7 million, $80.0 million, $12.0 million, $16.5 million and $0.8 million, respectively.
f) FTE Utilization is the ratio of full-time equivalent (FTE) students to the total operating capacity for all of the Company's Academies. FTE attendance is not a measure of the absolute number of students attending the Company's Academies; rather, it is an approximation of the full-time equivalent number of students based on Company estimates and weighted averages. For example, a student attending full-time is equivalent to one FTE, while a student attending one-half of each day is equivalent to 0.5 FTE.
ITEM 7.
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.
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 2 of the consolidated financial statements). The tables below present the results of the 52 weeks ended June 28, 2003, the results of the 52 weeks ended June 29, 2002, and the results of the 52 weeks ended June 30, 2001 (herein referred to as the 2003 year, the 2002 year, and the 2001 year).
New educational facilities (new schools), as defined by the Company, are Academies opened within the current or previous fiscal year. These schools typically generate operating losses until the Academies achieve normalized occupancies. Established educational facilities (established schools), as defined by the Company, are schools that were open prior to the start of the previous fiscal year.
Full-time equivalent (FTE) attendance, as defined by the Company, is not a measure of the absolute number of students attending the Company's schools, but rather is an approximation of the full-time equivalent number of students based on Company estimates and weighted averages. For example, a student attending full-time is equivalent to one FTE, while a student attending only one-half of each day is equivalent to 0.5 FTE. The average weekly FTE tuition rate, as defined by the Company, is the tuition revenue divided by the FTE attendance for the respective period.
2003 COMPARED TO 2002 RESULTS (IN THOUSANDS OF DOLLARS)
During the 2003 year, the Company opened 6 new schools and closed 73 schools. As a result, the Company operated 648 schools on June 28, 2003. The closures resulted from management's decision to close certain school locations where the conditions no longer supported an economically viable operation.
Operating revenue. Operating revenue decreased $1.0 million or 0.3% during the 2003 year as compared to the 2002 year. The operating revenue decrease is the result of a $16.6 million of reduction in operating revenue at closed schools offset by a $12.9 million increase at established schools, a $2.4 million increase at new schools and a $0.3 million increase in other revenue. Tuition revenue at established schools increased 2.7% during the 2003 year as compared to the 2002 year. The increase in tuition revenue reflects
an increase in the average weekly FTE tuition rates of 5.4% offset by a decrease in full time equivalent (FTE) attendance of 2.7%.
The increase in average weekly FTE tuition rates was principally due to selective price increases, which were put into place in September 2001 and September 2002, based on geographic market conditions and class capacity utilization. The decrease in FTE attendance was principally due to school closures and a decline in FTE attendance at established schools, partially offset by increased FTE attendance at new schools.
Salaries, wages and benefits. Salaries, wages and benefits decreased $1.2 million or 0.5% during the 2003 year as compared to the 2002 year. As a percentage of revenue, labor costs were 55.0% for the 2003 year as compared to 55.1% for the 2002 year. The decrease in salaries, wages and benefits includes reduced labor costs at closed schools of $9.3 million, and reduced bonus costs of $0.6 million offset by increased labor costs at established schools of $5.3 million, increased labor costs at new schools of $1.3 million, increased field management and corporate administration labor costs of $0.1 million, and increased benefit costs of $2.0 million. The increase in labor costs at established schools was mainly due to a 5.0% increase in average hourly wage rates offset by a 1.9% decrease in labor hours. New schools experience higher labor costs relative to revenue as compared to the established schools.
Facility lease expense. Facility lease expense increased $0.1 million or 0.2% during the 2003 year as compared to the 2002 year. The increase in facility lease expense was mainly due to lower rent credits in the 2003 year resulting from certain unfavorable lease liabilities becoming fully amortized prior to the end of the third quarter of the 2003 year offset by reductions in lease payments for facilities with contingent rent provisions and lease payments for closed schools.
Depreciation and amortization. Depreciation expense decreased $4.3 million or 29.3% during the 2003 year as compared to the 2002 year. The decrease in depreciation and amortization principally resulted from the reduction in carrying value of long-lived assets, including goodwill, as a result of the impairment losses recognized in the fourth quarter of the 2002 year.
Restructuring charges. The Company recognized restructuring charges of $7.4 million in the 2003 year in connection with the closure of 73 schools and $0.4 million in connection with the write-down to fair market value of real estate properties held for disposal, offset by recoveries of $2.9 million principally due to settlement of lease liabilities for less than the recorded reserves. In the 2002 year, the Company recognized a restructuring charge of $3.2 million in connection with the closure of seven Academies and one divisional office. The restructuring charges related to the school closures consisted principally of the present value of rent (net of anticipated sublease income), real estate taxes, common area maintenance charges, and utilities, along with the write-off of fixed assets.
Asset impairments. During the fourth quarter of fiscal 2003, the Company identified conditions, including a projected current year operating loss as well as negative cash flows in certain of the Company's schools, as indications that the carrying amount of certain long-lived assets may not be recoverable. In accordance with the Company's policy, management assessed the recoverability of long-lived assets at these schools using a cash flow projection based on the remaining useful lives of the assets. Based on this projection, the cumulative cash flow over the remaining depreciation or amortization period was insufficient to recover the carrying value of the assets at certain of these schools. As a result, the Company recognized impairment losses of $3.1 million related to property and equipment in the 2003 year. During 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 in the 2002 year.
Provision for doubtful accounts. The provision for doubtful accounts decreased $0.1 million or 5.0% during the 2003 year as compared to the 2002 year. The decrease in the provision for doubtful accounts is principally the result of improved collection efforts over the prior year.
Other operating costs. Other operating costs decreased $6.9 million or 6.2% during the 2003 year as compared to the 2002 year. Other operating costs include repairs and maintenance, utilities, insurance, real estate taxes, food, transportation, marketing, supplies, travel, professional fees, personnel, recruitment, training, bank overages and shortages, and other miscellaneous costs. The decrease was due primarily to decreases in supplies, marketing, special projects, school activity costs, personnel, transportation, travel, and utilities, offset by higher expenses in legal and professional fees, repairs and maintenance, insurance, food, bank charges and shortages, and miscellaneous expenses. As a percentage of revenue, other operating costs decreased to 26.5% in the 2003 year as compared to 28.2% in the 2002 year.
Operating income. As a result of the foregoing, operating income was $5.7 million for the 2003 year as compared to an operating loss of $58.3 million for the 2002 year.
Interest expense. Net interest expense decreased $0.3 million or 1.5% during the 2003 year as compared to the 2002 year. The decrease was principally due to a nonrecurring $0.8 million mark-to-market adjustment for derivative instruments in the 2002 year, offset by a $0.1 million increase resulting from additional borrowing, and a $0.2 million increase in debt fees, and a $0.2 million increase in interest expense related to servicing the reserve for closed schools.
Income tax rate. The 2003 year income tax expense was $0.2 million, or 2% of the $15.7 million pretax loss compared with the 2002 tax benefit of $3.2 million, or 4% of the pretax loss. Due to a change in certain federal tax laws during the 2002 year, the Company filed for and received a refund of income taxes paid in prior years. Excluding the impact of this refund, the effective tax rate was 0% in the 2003 and 2002 years due to the loss before income taxes in both years and the Company's provision of a full valuation allowance against deferred tax assets created in the 2003 and 2002 years.
2002 COMPARED TO 2001 RESULTS (IN THOUSANDS OF DOLLARS)
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 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 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 (net of anticipated sublease income), real estate taxes, common area maintenance charges, and utilities, the write-off of goodwill associated with closed Academies, and the write-down of fixed assets to fair market value.
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.
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. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are from cash flows from operations, borrowings on the revolving credit facility under an agreement entered into on May 11, 1998, providing for a term loan facility and a revolving credit agreement (the Credit Agreement), and capital contributions received from LPA. The Company's principal uses of funds are debt service requirements, capital expenditures and working capital needs. The Company incurred substantial indebtedness in connection with the Recapitalization.
Parent and La Petite have entered into the Credit Agreement, as amended, consisting of the $40 million Term Loan Facility and the $25 million Revolving Credit Facility. Parent and La Petite borrowed the entire $40 million available under the Term Loan Facility in connection with the Recapitalization. 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 $1.0 million in fiscal year 2004, $5.5 million in fiscal year 2005, and $28.0 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 28, 2003, there was $34.5 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.
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 and each of the quarterly periods in fiscal years 1999 through 2002. The Company received limited waivers of noncompliance with the foregoing financial and informational covenants through February 7, 2003. Amendment No. 5 to the Credit Agreement dated as of February 10, 2003 permanently waived such defaults.
On February 10, 2003, Parent, La Petite and its senior secured lenders entered into Amendment No. 5 to the Credit Agreement. The amendment waived the existing defaults for the first quarter of fiscal year 2003 as well as existing defaults in fiscal years 1999 through 2002 of Parent and La Petite, extended the final maturity of the Credit Agreement by one year to May 11, 2006, revised the amortization schedule to account for the additional one-year extension and revised and set, as applicable, financial covenant targets (such as maximum leverage ratio and minimum fixed charge coverage ratio) for fiscal years 2003 through 2006. As a condition to the effectiveness of Amendment No. 5, Parent was required to obtain contingent equity commitments from its existing stockholders for an amount equal to $14,500,000. Pursuant to Amendment No. 5, none of the proceeds, if any, received by Parent as a result of the contingent equity commitments is required to be used to prepay the term loans outstanding under the Credit Agreement. See Notes 4 and 8 to the consolidated financial statements included at Item 8 of this report for further information.
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. Amendment No. 6 to the Credit Agreement dated as of July 31, 2003, permanently waived such defaults.
On July 31, 2003, Parent, La Petite and its senior secured lenders entered into Amendment No. 6 to the Credit Agreement. The amendment permanently waived existing third and fourth quarter fiscal 2003 defaults of Parent and La Petite in connection with (a) the failure to deliver timely financial information to the senior secured lenders; (b) the failure to deliver timely information regarding purchases of material assets to the senior secured lenders; and (c) the failure to file certain reports with the Securities and Exchange Commission. Additionally, Amendment No. 6 revised the definition of Consolidated EBITDA in the Credit Agreement. See Notes 4 and 8 to the consolidated financial statements included at Item 8 of this report for further information.
Pursuant to the terms of the Securities Purchase Agreement dated February 10, 2003, entered into by Parent and its stockholders who have elected to exercise their respective preemptive rights (the "Electing Stockholders"), as amended by Amendment No. 1 to the Securities Purchase Agreement dated July 31, 2003, Parent may issue up to 6,669,734 shares of its Series B convertible preferred stock. LPA has committed to purchase, in accordance with the terms of the Securities Purchase Agreement, 6,662,879 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, at September 25, 2003 the contingent equity commitment from the stockholders of Parent has been reduced from $14.5 million to $13.8 million. See Note 8 to the consolidated financial statements included at Item 8 of this report for further information.
As of September 25, 2003, LPA beneficially owned 92.5% of the common stock of Parent on a fully diluted basis, $45 million of Series A preferred stock of Parent and approximately $15.7 million of Series B preferred stock of Parent. An affiliate of JPMP owns a majority of the economic interests of LPA and an entity controlled by Robert E. King, a director of La Petite and Parent, owns a majority of the voting interests of LPA.
Cash flows used for operating activities were $1.6 million during the 2003 year compared to cash flows provided by operating activities of $3.0 million during the 2002 year. The $4.6 million decrease in cash flows from operations was mainly due to increased restricted cash investments of $1.3 million and increased working capital amounts of $8.3 million, offset by a $5.0 million decrease 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 and automobile insurance coverage.
Cash flows used for investing activities were $4.1 million during the 2003 year as compared to $8.8 million during the 2002 year. The $4.7 million decrease was due to a $4.0 million decrease in capital expenditures and a $0.7 million increase in proceeds from sale of assets.
Cash flows used for financing activities were $0.9 million during the 2003 year compared to cash flows from financing activities of $16.5 million during the 2002 year. The $17.4 million decrease in cash flows for financing activities was due to a $2.2 million decrease in net borrowings under the revolving credit agreement, a $1.2 million increase in repayments of debt and capital lease obligations, and a $14.3 million decrease in proceeds from the issuance of redeemable preferred stock and warrants, offset by a $0.3 million decrease in deferred financing costs.
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.
During the 2003 year, the Company opened four Residential-based Academies, one Residential-based Academy annex, and one Employer-based Academy. Employer-based Academies are generally operated in facilities provided by the employer.
Total capital expenditures for the 52 weeks ended June 28, 2003 and June 29, 2002 were $5.6 million and $9.6 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 28, 2003 and June 29, 2002 were $5.6 million and $8.4 million, respectively. For fiscal year 2004, the Company expects total maintenance capital expenditures to be approximately $8.5 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 28, 2003 and June 29, 2002 were $15.1 million and $13.0 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 28, 2003 were as follows, in thousands of dollars:
(a) Commitments under a Separation Agreement the Company's former Chief Executive Officer and President entered into on December 11, 2002.
Management has instituted 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 included 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 is continuing to identify opportunities to maximize revenue and reduce costs and believes that implementation of 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 $13.8 million provided by LPA and certain of the other stockholders of Parent, 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.
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 2. 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 allowances. Material differences may result in the amount and timing of bad debt expense if actual experience differs significantly from management estimates.
Long-lived assets. Under the requirements of Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we assess the potential impairment of property and equipment whenever events or change in circumstances indicate that the carrying value may not be recoverable. An asset's value is impaired if 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 $3.1 million were recorded in fiscal 2003 and were shown separately as asset impairment expense in the financial statements.
Self-insurance obligations. The Company self-insures a portion of its general liability, workers' compensation, auto, property and employee medical insurance programs. The Company purchases stop loss coverage at varying levels in order to mitigate its potential future losses. The nature of these liabilities, which may not fully manifest themselves for several years, requires significant judgment. The Company estimates the obligations for liabilities incurred but not yet reported or paid based on available claims data and historical trends and experience, as well as future projections of ultimate losses, expenses, premiums and administrative costs. The accrued obligations for these self-insurance programs were $15.1 million and $11.6 million at June 28, 2003 and June 29, 2002, respectively, see "Item 8. Financial Statements and Supplementary Data, Note 2. 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 28, 2003 and June 29, 2002 would not be realized. Therefore, the Company recorded a valuation allowance to fully reserve those deferred tax assets at both fiscal 2003 and 2002 year-end. The provision for income taxes at June 28, 2003 and June 29, 2002 includes $6.3 million and $6.3 million, respectively to record these valuation allowances.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("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. Although the Statement has impacted the timing of recognizing a restructuring charge, the Company has determined that SFAS No. 146 did 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 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. Because the Company has no guarantees, the Company believes 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.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". The statement improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. The new statement requires that certain instruments be classified as liabilities in statements of financial position. Most of the guidance in SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company has determined that SFAS No. 150 will impact the classification of its Series A preferred stock and will require that accrued dividends and accretion related to these shares be classified as interest expense rather than a charge to accumulated deficit.
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 2003 year, the Company experienced inflationary pressures on average wage rates, as hourly rates increased approximately 5.0%. Management believes this is occurring industry wide and there is no assurance that such wage rate increases can be recovered through future increases in tuition. A sustained recession with high unemployment may have a material adverse effect on the Company's operations.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the Company cautions investors that any forward-looking statements or projections made by the Company, including those made in this document, are subject to risks and uncertainties that may cause actual results to differ materially from those projected or discussed in these forward looking statements.
This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this report contain forward-looking statements that are based on management's current expectations, estimates and projections. Words such as "expects," "projects," "may," "anticipates," "intends," "plans," "believes," "seeks," "estimates," variations of these words and similar expressions are intended to identify these forward-looking statements. Certain factors, including but not limited to those listed below, may cause actual results to differ materially from current expectations, estimates, projections and from past results.
- Economic factors, including changes in the rate of inflation, business conditions and interest rates.
- Operational factors, including the Company's ability to open and profitably operate Academies and the Company's ability to satisfy its obligations and to comply with the covenants contained in the Credit Agreement and the indenture.
- Demand factors, including general fluctuations in demand for childcare services and seasonal fluctuations.
- Competitive factors, including: (a) pricing pressures primarily from local nursery schools and childcare centers and other large, national for-profit childcare companies, (b) the hiring and retention of trained and qualified personnel, (c) the ability to maintain well-equipped facilities and (d) any adverse publicity concerning alleged child abuse at the Company's childcare centers or at its Academies.
- Governmental action including: (a) new laws, regulations and judicial decisions related to state and local regulations and licensing requirements, (b) changes in the Federal assistance and funding of childcare services and (c) changes in the tax laws relating to La Petite's operations.
- Changes in accounting standards promulgated by the Financial Accounting Standards Board, the Securities and Exchange Commission or the 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 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In prior years, derivative financial instruments were utilized by the Company in the management of its interest rate exposures. The Company currently does not use derivative financial instruments for trading or speculative purposes.
Indebtedness as of June 28, 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 $34.5 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 in fiscal year 2004, $5.5 million in fiscal year 2005 and $28.0 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 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements:
Independent Accountants' Report
Consolidated Balance Sheets as of June 28, 2003 and June 29, 2002
Consolidated Statements of Operations and Comprehensive Loss for the 52 weeks ended June 28, 2003, June 29, 2002, and June 30, 2001
Consolidated Statements of Stockholders' Deficit for the 52 weeks ended June 28, 2003, June 29, 2002, and June 30, 2001
Consolidated Statements of Cash Flows for the 52 weeks ended June 28, 2003, June 29, 2002, and June 30, 2001
Notes to Consolidated Financial Statements
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 28, 2003 and June 29, 2002, and the related consolidated statements of operations and comprehensive loss, stockholders' deficit, and cash flows for each of the three years in the period ended June 28, 2003. Our audits also included the financial statement schedules listed in the Index at Item 14. (a). 2. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with 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 28, 2003 and June 29, 2002, and the results of their operations and their cash flows for each of the three years in the period ended June 28, 2003, 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.
Deloitte & Touche LLP
Chicago, Illinois September 22,2003
LPA HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(continued)
LPA HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
See notes to consolidated financial statements.
LPA HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (IN THOUSANDS OF DOLLARS)
See notes to consolidated financial statements.
LPA HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (IN THOUSANDS OF DOLLARS)
See notes to consolidated financial statements.
LPA HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of dollars)
See notes to consolidated financial statements.
LPA HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
The consolidated financial statements presented herein include LPA Holding Corp. (Parent), and its wholly owned subsidiary, La Petite Academy, Inc. (La Petite), and La Petite's wholly owned subsidiaries: Bright Start Inc. (Bright Start), and LPA Services, Inc. (Services). Parent, consolidated with La Petite, Bright Start and Services, is referred to herein as the Company.
On March 17, 1998, LPA Investment LLC (LPA), a Delaware limited liability company, and Parent entered into an Agreement and Plan of Merger pursuant to which a wholly owned subsidiary of LPA was merged into Parent (the Recapitalization). LPA is the direct parent company of Parent and an indirect parent La Petite. LPA is owned by an affiliate of J.P. Morgan Partners LLC (JPMP) and by an entity controlled by Robert E. King, a director of La Petite and Parent.
The Company offers educational, developmental and childcare programs that are available on a full-time or part-time basis, for children between six weeks and twelve years old. The Company's Academies are located in 36 states and the District of Columbia, primarily in the southern, Atlantic coastal, mid-western and western regions of the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - Management has instituted 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 included 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 is continuing to identify opportunities to maximize revenue and reduce costs and 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 $13.8 million provided by LPA and certain of the other stockholders of Parent, 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 LPA 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 inter-company 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 13, the Company wrote-off the unamortized goodwill balance in the fourth quarter of fiscal 2002.
OTHER ASSETS - Other assets include real estate property held for sale, the deferred loss on real estate sale-leaseback transactions, deposits for rent and utilities, and deferred financing costs. The loss on sale-leaseback transactions is being amortized over the lease term.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the carrying amount is not recoverable and the fair value is less than the carrying amount of the asset, a loss is recognized for the difference. Fair value is determined based on market quotes, if available, or is based on valuation techniques (See Note 13).
INCOME TAXES -The Company uses the asset and liability method of accounting for deferred income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. This method also requires the recognition of future tax benefits such as net operating loss carry forwards, to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
DISCLOSURES REGARDING FINANCIAL INSTRUMENTS - At June 28, 2003 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 $87.0 million and $76.8 million at June 28, 2003 and June 29, 2002, respectively. Estimates of fair value for the Senior Notes are obtained from independent broker quotes. There is not an active market for the Company's preferred stock. Management estimates that the Series A and Series B preferred stock had no fair value at June 28, 2003 and June 29, 2002.
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 and tuition revenue 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 28, 2003 and June 29, 2002, deferred registration fees and tuition revenue were $3.1 million and $3.5 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 28, 2003 and June 29, 2002, no advertising was reported as an asset. Advertising expense was $4.3 million, $7.3 million and $6.1 million for the 52 weeks ended June 28, 2003, June 29, 2002 and June 30, 2001, respectively.
SELF-INSURANCE PROGRAMS - The Company is self-insured for certain levels of general liability, workers' compensation, auto and employee medical coverage. Estimated costs of these self-insurance programs are accrued at the value of projected settlements for known and anticipated claims incurred.
STOCK-BASED COMPENSATION - The Company accounts for stock compensation awards under Accounting Principles Board ("APB") Opinion No. 25 that requires compensation cost to be recognized based on the excess, if any, between the market price of the stock at the date of grant and the amount an employee must pay to acquire the stock. The Company has disclosed the pro forma net income (loss) determined under the fair value method in accordance with Statement of Financial Accounting Standards ("SFAS) No. 123 (See Note 11).
The weighted average fair value at date of grant for options granted during fiscal year 2003 was $0.00. 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.
SEGMENT REPORTING -The Company has determined that it currently operates entirely in one segment.
DERIVATIVE FINANCIAL INSTRUMENTS- Effective July 2, 2000, the Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the effective portion of the hedged risk are
recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portion of changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in the income statement when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. Changes in fair value of derivative instruments that do not meet hedge accounting criteria are recorded as a component of current operations. The deferred gains or losses are reflected on the balance sheet in other current and noncurrent liabilities or assets. Upon early termination of 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 4b). Additionally, the fair value adjustment to record an interest rate swap and related collar resulted in a $3.5 million ($2.1 million net of tax) charge to earnings which was offset by a corresponding gain of $3.5 million ($2.1 million net of tax) on fixed rate senior notes (see Note 4a).
The aforementioned interest rate agreements did not qualify for hedge accounting on an ongoing basis. Accordingly, such contracts were marked to market subsequent to the adoption of SFAS No. 133. The adjustment recorded upon transition to the carrying value of the fixed rate debt was being amortized to interest expense through May 15, 2003. The variable rate debt transition gain recorded as the only component of accumulated other comprehensive income is reclassified into interest expense over the remaining life of the related contract, which matures on May 2005.
During both fiscal years ended June 28, 2003 and June 29, 2002, approximately $85,000, net of taxes, was reclassified from accumulated other comprehensive income into interest expense.
The Company had no derivative financial instruments as of June 28, 2003
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In June 2002, the Financial Accounting Standards Board ("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. Although the Statement has impacted the timing of recognizing a restructuring charge, the Company has determined that SFAS No. 146 did 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 (See Note 11).
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 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. Because the Company has no guarantees, the Company believes 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.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". The statement improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. The new Statement requires that certain instruments be classified as liabilities in statements of financial position. Most of the guidance in SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company has determined that SFAS No. 150 will impact the classification of its Series A preferred stock and will require that accrued dividends and accretion related to these shares be classified as interest expense rather than a charge to accumulated deficit.
RECLASSIFICATIONS - Certain reclassifications to prior year amounts have been made in order to conform to the current year presentation.
3. OTHER ASSETS (in thousands of dollars)
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (in thousands of dollars)
a) The Senior Notes mature on May 15, 2008. Interest is payable semi-annually on May 15 and November 15 of each year. Commencing May 15, 2003, the Senior Notes are redeemable at various redemption prices at Parent and La Petite's option. The Senior Notes are joint and several obligations of Parent and its 100% owned subsidiary, La Petite, as co-issuers, and are fully and unconditionally guaranteed on a joint and several basis by all of La Petite's 100% owned subsidiaries, namely, Bright Start and Services. Parent has no independent assets or operations. The Senior Notes contain certain covenants that, among other things, limit La Petite's ability to incur additional debt, pay cash dividends to Parent, transfer or sell assets, incur liens, enter into transactions with affiliates and merge with or into, consolidate with or transfer all or substantially of its assets to, other persons. In addition, the Senior Notes limit Parent's ability to merge with or into, consolidate with or transfer all or substantially of its assets to, other persons. Except for these provisions in the Senior Notes and the provisions in the Credit Agreement described in the next paragraph, there are no restrictions on the ability of Parent or La Petite to obtain funds from its subsidiaries by dividend or loan.
b) On May 11, 1998 the Company entered into an agreement (the Credit Agreement) providing for a term loan facility in the amount of $40.0 million and a revolving credit agreement for working capital and other general corporate purposes in the amount of $25 million. Borrowings under the Credit Agreement are secured by substantially all of the assets of 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. The Credit Agreement contains certain covenants that, among other things, limit La Petite's and Parent's ability to incur additional debt, and limit La Petite's ability to pay cash dividends or make certain other restricted payments. In particular under the Credit Agreement, Parent may not incur any intercompany indebtedness and La Petite's ability to pay dividends to Parent is limited to dividends which are used by Parent to pay (i) expenses for administrative, legal and accounting services in an amount not to exceed $500,000 per year and (ii) franchise fees and taxes.
The Company was not in compliance with certain of the financial and informational covenants for numerous periods, including the first quarter of fiscal year 2003 and each of the quarterly periods in fiscal years 1999 through 2002. The Company received limited waivers of noncompliance with the foregoing financial and informational covenants through February 7, 2003. Amendment No. 5 to the Credit Agreement dated as of February 10, 2003 permanently waived such defaults.
On February 10, 2003, Parent, La Petite and its senior secured lenders entered into Amendment No. 5 to the Credit Agreement. The amendment waived the existing defaults 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.
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. Amendment No. 6 to the Credit Agreement dated as of July 31, 2003, permanently waived such defaults.
On July 31, 2003, Parent, La Petite and its senior secured lenders entered into Amendment No. 6 to the Credit Agreement. The amendment permanently waived existing third and fourth quarter fiscal 2003 defaults of Parent and La Petite in connection with (a) the failure to deliver timely financial information to the senior secured lenders; (b) the failure to deliver timely information regarding purchases of material assets to the senior secured lenders; and (c) the failure to file certain reports with the Securities and Exchange Commission. Additionally, Amendment No. 6 revised the definition of Consolidated EBITDA in the Credit Agreement.
As of June 28, 2003, the Credit Agreement had a maturity date of May 2006 and payments due under the term loan are $1.0 million in fiscal year 2004, $5.5 million in fiscal year 2005, and $28.0 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 28, 2003 there was $19.1 million outstanding on the revolver, and outstanding letters of credit in an aggregate amount equal to $5.9 million.
Scheduled maturities and mandatory prepayments of long-term debt and capital lease obligations during the five years subsequent to June 28, 2003, adjusted for the impact of the amendment of the Credit Agreement, are as follows (in thousands of dollars):
5. OTHER LONG-TERM LIABILITIES (in thousands of dollars)
(a) In connection with the acquisitions of La Petite and Bright Start, a liability for unfavorable operating leases was recorded and is being amortized over the average remaining life of the leases.
(b) The reserve for closed schools includes the long-term liability related primarily to leases for schools that were closed and are no longer operated by the Company.
(c) On December 11, 2002, the Company entered into a Separation Agreement with the Company's former Chief Executive Officer and President. The long-term portion of the Company's total contractual obligations pursuant to the Separation Agreement is $0.7 million.
(d) Long-term insurance liabilities reflect the Company's obligation for reported but not paid, and incurred but not reported, workers' compensation, auto and general liability claims.
6. INCOME TAXES
The provision (benefit) for income taxes recorded in the Consolidated Statements of Operations and Comprehensive Loss consisted of the following (in thousands of dollars):
A reconciliation between the statutory federal income tax rate and the effective income tax rate is as follows (in thousands of dollars):
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 28, 2003 and June 29, 2002 are estimated as follows (in thousands of dollars):
The Company determined that based on cumulative historical pretax losses, it was more likely than not that the deferred tax assets as of June 28, 2003 and June 29, 2002 would not be realized. Therefore, the Company has recorded a valuation allowance to fully reserve those deferred tax assets at both fiscal 2003 and 2002 year-end. The provision for income taxes at June 28, 2003 and June 29, 2002 includes $6.3 million and $6.2 million, respectively to record these valuation allowances.
The Company has federal net operating loss carry-forwards and tax credit carry-forwards of $31.4 million and $1.9 million, respectively. These carry-forwards expire in fiscal years 2004 through 2023.
7. LEASES
Academy facilities are leased for terms ranging from 15 to 20 years. The leases provide renewal options and require the Company to pay utilities, maintenance, insurance and property taxes. Some leases provide for annual increases in the rental payment and many leases require the payment of additional rentals if operating revenue exceeds stated amounts. These additional rentals range from 2% to 10% of operating revenue in excess of the stated amounts and are recorded as rental expense. Vehicles are also rented under various lease agreements, most of which are cancelable within 30 days after a one-year lease obligation. Substantially all facility leases and approximately half of the vehicle leases are operating leases. Rental expenses for these leases were $48.7 million, $50.9 million, and $51.9 million, for the 52 weeks ended June 28, 2003, June 29, 2002, and June 30, 2001, respectively. Contingent rental expense of $1.5 million, $2.0 million and $2.3 million were included in rental expense for the 52 weeks June 28, 2003, June 29, 2002, and June 30, 2001, respectively.
Aggregate minimum future rentals payable under facility leases as of June 28, 2003 were as follows (in thousands of dollars):
8. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
The authorized stock of Parent as of June 28, 2003 consists of:
(i) 45,000 shares of Series A redeemable preferred stock, $0.01 par value, (Series A preferred stock) all of which were issued and outstanding as of June 28, 2003 and June 29, 2002. The original carrying value of the preferred stock of $36.4 million is being accreted to its redemption value of $45.0 million on May 11, 2008. The Series A preferred stock is non-voting and mandatorily redeemable on May 11, 2008. Dividends at the rate of 12.0% per annum are cumulative and if not paid on the June 30 or December 31 semi-annual Series A preferred stock dividend dates are added to the liquidation value. The liquidation value was $77.0 million and $68.5 million as of June 28, 2003 and June 29, 2002, respectively. Accrued dividends were $32.3 million and $23.8 million at June 28, 2003 and June 29, 2002, 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.
(ii) 13,645,000 shares of Series B convertible participating redeemable preferred stock, $0.01 par value, (Series B preferred stock) of which 7,241,490 shares and 6,899,724 shares were issued and outstanding as of June 28, 2003 and June 29, 2002, respectively. The Series B preferred stock votes on an "as-converted" basis with the Class A common stock and is redeemable at the holders' option, at any time on or after May 11, 2009. Dividends at the rate of 5.0% per annum are cumulative and if not paid on the June 30 or December 31 semi-annual preferred stock dividend dates are added to the liquidation value. The liquidation value was $16.7 million and $15.2 million as of June 28, 2003 and June 29, 2002, respectively. Accrued dividends were $1.0 million and $0.2 million at June 28, 2003 and June 29, 2002, respectively. The Series B preferred stock may be converted into shares of the Company Class A common stock at any time at the then applicable conversion price, as defined in the purchase agreement, and all shares will automatically convert into shares of the Company Class A common stock (i) upon an election to so convert by holders of a majority of the Series B preferred stock or (ii) immediately prior to the consummation of a qualified initial public offering of common stock. 13,645,000 shares of Class A common stock has been reserved for the conversion of the Series B preferred stock. The Series B preferred stock contains certain restrictive provisions that limit the ability of Parent to pay cash dividends.
(iii) 17,500,000 shares of Class A common stock, $0.01 par value, (Class A common stock) of which 773,403 and 564,985 shares were issued and outstanding as of June 28, 2003 and June 29, 2002, respectively. At June 28, 2003, 526,582 shares of Class A common stock were reserved for issuance under the 1998 Stock Option Plan and the 1999 Non Employee Director Stock Option Plan. The Class A common stock contains certain restrictive provisions that limit the ability of Parent to pay cash dividends.
(iv) 20,000 shares of Class B common stock, $0.01 par value, (Class B common stock) of which 20,000 shares were issued and outstanding as of June 28, 2003 and June 29, 2002. 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 $0.01 per share any time on or before May 11, 2008. The warrants were issued in connection with the sale of Series A preferred stock; the Company recognized discounts on the Series A preferred stock by allocating $8.6 million to the warrants representing the fair value of the warrants when issued.
(vi) Warrants to purchase 562,500 shares of Class A common stock at a purchase price of $0.01 per share any time on or before May 11, 2009. The warrants were issued in connection with the sale of Series B preferred stock in fiscal year 2002. The Company did not recognize discounts on the Series B preferred stock, as the warrants had no fair value when issued.
(vii) Warrants to purchase 1,692,423 shares of Class A common stock at a purchase price of $0.01 per share any time on or before May 11, 2009. The warrants were issued in connection with the commitment to purchase Series B preferred stock. The Company did not recognize discounts on the Series B preferred stock, as the warrants had no fair value when issued.
Pursuant to the terms of the Securities Purchase Agreement dated February 10, 2003, entered into by Parent and its stockholders who have elected to exercise their respective preemptive rights (the "Electing Stockholders"), as amended by Amendment No. 1 to the Securities Purchase Agreement dated July 31, 2003, Parent may issue up to 6,669,734 shares of its Series B convertible preferred stock. In connection with such prospective issuance, Parent issued warrants to purchase 1,692,423 shares of its class A common stock, pro rata to each Electing Stockholder. All of the proceeds received by Parent from the issuance of the Series B preferred stock will be contributed to La
Petite as common equity and 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 for $0.7 million. 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, at September 25, 2003 the contingent equity commitment from the stockholders of Parent has been reduced from $14.5 million to $13.8 million.
9. BENEFIT PLAN
The Company sponsors a defined contribution plan that was established on January 1, 2001 (the "2001 Plan") for substantially all employees. Eligible participants may make contributions to the 2001 Plan from 0% to 15% of their compensation (as defined). The Company may make
contributions at the discretion of the Board of Directors. The Company made no contributions for fiscal years 2003 and 2002
10. COMMITMENTS AND CONTINGENCIES
The Company has litigation pending which arose in the ordinary course of business. Litigation is subject to many uncertainties and the outcome of the individual matters is not presently determinable. It is management's opinion that this litigation will not result in liabilities that would have a material adverse effect on the Company's financial position, annual results of operations or annual cash flows. The Company has employment contracts with certain executive officers.
11. STOCK-BASED COMPENSATION
On August 27, 1995, the Board of Directors of Parent adopted the "Non-Qualified Stock Option Agreement" (1995 Plan). Under the terms of the 1995 Plan, the Board of Directors in their sole discretion granted non-qualified options for common stock of Parent to key executives of the Company. Options were granted pursuant to an agreement at the time of grant, and typically 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.
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, the former Chief Executive Officer exercised options to purchase 208,418 shares of common stock of LPA Holding at an exercise price of $0.01 and 61,963 options were cancelled.
The 1995 Plan, the 1998 Plan, and the 1999 Plan were approved by the shareholders of Parent.
Stock option transactions during the past three years have been as follows:
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 year 2003 was $0.00. 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.
12. RESTRUCTURING CHARGES
The Company closed 73 Academies in fiscal 2003, and closed or committed to close 7 Academies in fiscal 2002 and 15 Academies in fiscal 2001, in locations where the 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 $7.8 million, $3.2 million and $2.5 million in fiscal years 2003, 2002 and 2001, 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 (net of anticipated sublease income), real estate taxes, common area maintenance charges, and utilities, the write-off of goodwill associated with closed Academies, and the write-down of fixed assets to fair market value. Included in the restructuring charges, were non-cash charges of $1.7 million, $1.6 million and $0.8 million in fiscal years 2003, 2002 and 2001 respectively. The Company also recorded recoveries of $2.9 million in fiscal 2003, principally due to settlement of lease liabilities for less than the recorded reserves. As of June 28, 2003, 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 2004 and 2014. A summary of the restructuring reserve activity is as follows, with dollars in thousands:
On the consolidated balance sheet, the current portion of the restructuring reserve is presented in the reserve for closed academies line item, and the long-term portion is included in the other long-term liabilities line item.
13. ASSET IMPAIRMENTS
During the fourth quarter of fiscal 2003, the Company identified conditions, including a projected current year operating loss as well as negative cash flows in certain of the Company's schools, as indications that the carrying amount of certain long-lived assets, may not be recoverable. In accordance with the Company's policy, management assessed the recoverability of long-lived assets at these schools using a cash flow projection based on the remaining useful lives of the assets. Based on this projection, the cumulative cash flow over the remaining depreciation or amortization period was insufficient to recover the carrying value of the assets at certain of these schools. As a result, the Company recognized impairment losses of $3.1 million related to property and equipment. 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.
14. 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.
15. SUBSEQUENT EVENTS
On July 31, 2003, Parent, La Petite and its senior secured lenders entered into Amendment No. 6 to the Credit Agreement. See Note 4 for further information.
On July 31, 2003, Parent and its stockholders who have elected to exercise their respective preemptive rights (the "Electing Stockholders") pursuant to the terms of the Securities Purchase Agreement dated February 10, 2003, entered into Amendment No. 1 to the Securities Purchase Agreement. 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. See Note 8 for further information.
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ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
The Company maintains a set of disclosure controls and procedures (the "Disclosure Controls") that are designed to ensure that information required to be disclosed in the reports and filed under the Securities Exchange Act of 1934, as amended ("Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The Company's Disclosure Controls include, without limitation, those components of internal controls over financial reporting ("Internal Controls") that provide reasonable assurances that transactions are recorded as necessary to permit preparation of the Company's financial statements in accordance with generally accepted accounting principles.
As of June 28, 2003, the Company evaluated the effectiveness of the design and operation of its Disclosure Controls pursuant to Rule 15d-15 of the Exchange Act. This evaluation ("Controls Evaluation") was done under the supervision and with the participation of management, including the Chief Executive Officer ("CEO"), the former Chief Financial Officer, the Company's employees and outside contractors, including the current Chief Financial Officer ("CFO"). This evaluation resulted in the identification of certain material weaknesses in the Company's Internal Controls primarily related to: (a) a lack of consistent understanding and compliance with Company's policies and procedures, and (b) 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 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 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) improving accounting policies and procedures, (iv) 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, (v) increasing financial field audits of academies, (vi) increasing divisional financial staff accountability to ensure field adherence to financial policies and internal controls and (vii) commencing a comprehensive, team-based process to further assess and enhance the efficiency and effectiveness of the Company's Disclosure Controls, including establishing an informal Disclosure Committee consisting of internal and external professionals with financial, legal and operational expertise.
Beyond instituting interim measures, the Company is committed to continuing the process of identifying, evaluating and implementing corrective actions where required to improve the effectiveness of its Disclosure Controls on an overall basis. This has included instituting improved processes and procedures as they relate to such critical functions as improving the quality and oversight of the accounting staff; enhancing field level controls and developing metrics to monitor and identify accounting and operational issues.
The Company's Disclosure Controls, including the Company's Internal Controls, are designed to provide a reasonable level of assurance that the stated objectives are met. The Company's management, including the CEO and CFO, does not expect that the Company's Disclosure Controls or Internal Controls will prevent all 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.
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PART III.
ITEM 10.
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:
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.
Glenn H. Gage has been a Director of the Company since March 2003. From August 1998 until March 2001, Mr. Gage was the Senior Vice President and Chief Financial Officer of National Steel Corporation. From 1995 until 1998, Glenn was the Senior Vice President and Chief Financial Officer of Uarco Incorporated, where he also served as a member of the Board of Directors. Until 1995, Mr. Gage was a Partner with Ernst & Young. Mr. Gage has an MS in Accounting from the University of California at Los Angeles and a BS in Accounting from the California State University at Fresno. He is a CPA.
Terry D. Byers has been a Director of the Company since December 1998. Ms. Byers has more than 20 years experience in information technology ranging from hands-on systems design and development to
executive management. She has extensive experience in designing and architecting enterprise-level IT Infrastructures, developing and integrating business information systems, implementing large ERP applications, and developing and deploying technology-based solutions to clients. Since 1996, Ms. Byers has been an Executive Vice President and the Chief Technology Officer for Teleflora, LLC. She holds a Bachelors of Business Administration degree in Computer Science from the University of Central Oklahoma.
Robert E. King has been a Director of the Company since May 1998. Mr. King is Chairman of Salt Creek Ventures, LLC, a private equity company he founded in 1994. Salt Creek Ventures, LLC is an organization specializing in equity investments in technology and education companies. Mr. King is also Chairman of 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 CO-CEO 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 and the Board of Trustees for the North Central Association of Colleges and Schools. He serves on the Board of Directors of DeVry, Inc. and the Better Business Bureau of Chicago & Northern Illinois, Inc. Mr. Taylor has a BA from Harvard University and received his MBA from Stanford University.
Neil P. Dyment joined the Company in August as the Chief Financial Officer. Prior to joining La Petite, Mr. Dyment was employed by Argus Management Corporation from 2001 to 2003 providing financial consulting and interim financial management services to companies undergoing restructuring. Mr. Dyment served as interim Corporate Controller at the Company from June 2002 to December 2002 and has been providing other financial advisory services to the Company since. Prior to joining Argus Management Corporation, Mr. Dyment was Plant Manager for Chemfab Corporation from 1996 to 2000. Prior to rejoining Chemfab Corporation in 1996, Mr. Dyment served in a variety of financial capacities for various companies including Corporate Controller at Chemfab from 1986 -1991 and a variety of financial positions at Textron Corporation (formerly AVCO Corporation) from 1977 to 1984. He has a BS in Business Administration with an accounting major from Northeastern University.
Hugh W. Tracy joined the Company as the Chief Information Officer in July 2003. Prior to joining La Petite, Mr. Tracy was the Chief Information Officer at InterPark, Inc. from 1999-2002. From 1989-1998, Mr. Tracy held various positions in Information Technology and Operations for McDonalds Corporation and its licensees. He has a BS in Information and Computer Science from the Georgia Institute of Technology (Georgia Tech) and an MBA from the Wharton School, University of Pennsylvania.
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.
Lawrence "Larry" Appell joined La Petite Academy as the Western Division Vice President in January 2003. Prior to joining La Petite, Mr. Appell served as President of the International Division of Futurekids, Inc., the world's largest provider of technology education for children from 2000-2003. From 1995-2000 he was the President of Westlake Management Co., LLC, a boutique investment capital and business incubator, From 1983-1995 Mr. Appell held various senior management positions with The H.J. Heinz Company in their Weight Watchers division and The Quaker Oats Company in their Pritikin division. Mr. Appell was a management consultant from 1974-1983. He has a BA from the City University of New York and a MS in Counselor Education from St. John's University.
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 supervisory responsibility for the operations of the Company in 14 southern and midwestern states. From 1985 to 1988, she served as Divisional Director of Florida and from 1981 to 1985 she served as Regional Director of Tampa. Prior to joining the Company, Ms. Perry held various positions in the childcare industry. Ms. Perry studied childhood education at The University of South Florida.
William C. Buckland joined the Company in July 2001 as Vice President, People. From 1993 to 2001, Mr. Buckland was Vice President, Human Resources of Allied Van Lines, Inc. From 1990 to 1992, he was the Director, Human Resources for SuperAmerica Group, a subsidiary of Ashland Oil. From 1969 to 1990 Mr. Buckland held various operating and Human Resources positions with the Montgomery Ward Company. He has a BBA from the University of Kentucky.
Paul G. Kreuser became Vice President, Field Support Services of the Company in November of 2002, with responsibility for the purchasing, facilities, engineering and fleet operations. Mr. Kreuser joined the Company in 2001 as the Director of Operations Support. From 1999 to 2000, Mr. Kreuser was the Director of Supply Chain for Amazon.com. Prior to 1999, his experience included senior management positions with DSC Logistics, Office Depot and Federal Express. Mr. Kreuser has a BS in Mathematics from the University of Illinois.
Gregory S. Davis joined the Company in May 2003 as the Vice President, General Counsel. He subsequently assumed the position of Corporate Secretary. Prior to joining the Company, Mr. Davis was one of three Andersen Partners with lead responsibility for the international firm's expansions and alliances. From 1991-2001, he was a Partner in Andersen's Legal Group, responsible for litigation and risk management. Mr. Davis practiced commercial litigation in the Chicago headquarters of Seyfarth, Shaw, Fairweather & Geraldson from 1987-1991. He holds a BA from Indiana University and a J.D. from Boston University School of Law.
William H. Van Huis joined the Company in December 2002 as the Chief Revenue Officer. Prior to joining La Petite Academy, Mr. Van Huis was the Vice President of Marketing for Childtime Childcare, Inc., from 1990 to 2001. From 1986 to 1990 Mr. Van Huis was National marketing Manager for Zebart International Corporation/TKD North America, an automotive aftermarket firm. He holds a B.A. from Michigan State University.
BOARD COMMITTEES AND COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors has an Audit Committee consisting of Glenn H. Gage, Stephen P. Murray and Kevin G. O'Brien, and a Compensation Committee consisting of Stephen P. Murray and Robert E. King. The Audit Committee reviews the scope and results of audits and internal accounting controls and all other tasks performed by 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
The members of the Board of Directors are reimbursed for out-of-pocket expenses related to their service on the Board of Directors or any committee thereof. In addition, members of the Board of Directors who are neither officers of the Company nor employed by JPMP or any of its partners are entitled to receive an attendance fee of $1,500 for each meeting attended.
On August 19, 1999, Parent adopted the LPA Holding Corp. 1999 Stock Option Plan for Non-Employee Directors (1999 Plan). The purpose of the plan is to provide a means for attracting, retaining, and incentivizing qualified directors. Under the terms of the plan, 10,000 shares of Parent's common stock are reserved for issuance to non-employee directors.
Non-employee directors may exercise their options to purchase shares of Parent's common stock once those options have vested. One-forty eighth of the options become vested on the last day of each month following the date of grant, if the person is a director on that day. Each option entitles the director to purchase one share of Parent's common stock. The exercise price will equal the fair market value on the date of grant of the option to the non-employee director. Vested options and shares of common stock may be repurchased from any non-employee director who ceases to be a director for any reason. Any options that have not vested at the time the non-employee director ceases to be a director are forfeited
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table provides certain summary information concerning compensation earned for the 52 weeks ended June 28, 2003 (2003), June 29, 2002 (2002), and June 30, 2001 (2001), by the Company's Chief Executive Officer, former Chief Executive Officer and the four other most highly compensated executive officers whose salary and bonus exceeded $100,000 for the fiscal year (collectively the "named executive officers"):
SUMMARY COMPENSATION TABLE COMPENSATION FOR THE PERIOD
(1) Represents payments made to Ms. Rogala subsequent to her termination pursuant to her severance agreement.
(2) Includes vested portion of deferred signing bonus. (See "Employment Contracts").
(3) Fiscal 2003 compensation covers 44 weeks from August 26, 2002 through June 28, 2003.
(4) Fiscal 2003 compensation covers 40 weeks from September 23, 2002 through June 28, 2003.
(5) Represents auto allowance.
(6) Represents payments made to Ms. Miskimins related to her relocation to the Chicago, IL area.
(7) Fiscal 2002 compensation covers 51 weeks from July 9, 2001 through June 29, 2002.
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
(1) The equity of the Company is not traded and there is no market for pricing the value of the options. "In the Money" calculations are based on the estimated enterprise value of the Company adjusted for debt, preferred stock, common shares issued and retired, warrants and options and adjustments for market liquidity and a control premium.
(2) The Board of Directors granted to certain key executives Tranche A options at $0.01 per share, an amount that approximates the fair value of a share of common stock of the Company at the date of the grant. These options become exercisable ratably over forty-eight months and expire ten years from the date of grant.
(3) The Board of Directors granted to certain key executives Tranche A options at $66.92 per share, an amount that approximates the fair value of a share of common stock of the Company at the date of the grant. These options become exercisable ratably over forty-eight months and expire ten years from the date of grant
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
EMPLOYMENT CONTRACTS
The Company has entered into an employment agreement with Gary A. Graves. The Employment Agreement provides for Mr. Graves to receive a base salary, subject to annual performance adjustments, of $350,000 plus a bonus of up to 150% of base salary. Mr. Graves is also entitled to receive a cash Interim Bonus with respect to the Company's fiscal year ending in June 2003. Mr. Graves shall also receive options to purchase 180,254 shares of Company stock at an exercise price of $0.01 per share. The term of the Employment Agreement is three years subject to one-year automatic renewals. The Employment Agreement provides that the executive is entitled to participate in the health and welfare benefit plans available to the Company's other senior executives. The Employment Agreement also provides for severance in the case of termination without 'cause' or a resignation with 'good reason' in an amount equal to one year of base salary plus a prorated bonus as described in the agreement and a cash lump sum equal to (a) any compensation payments deferred by Mr. Graves, together with any applicable interest or other accruals and (b) any unpaid amounts, as of the date of such termination, in respect of the Bonus for the fiscal year ending before the fiscal year in which such termination occurs. Included in the severance in the case of termination without 'cause' or resignation with 'good reason' is one year of coverage under and participation in the Company's employee benefit program. The Employment Agreement also contains customary non-disclosure, non-competition and non-solicitation covenants.
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.
The Company made certain commitments to Michael F. Czlonka in conjunction with his accepting the position of Sr. Vice President & CFO. Mr. Czlonka left the Company effective August 14, 2003. The Company will continue to pay Mr. Czlonka six months of continued salary and benefits in satisfaction of the aforementioned commitments.
1998 OPTION PLAN
The Company adopted the 1998 Plan pursuant to which options, which currently represent 2.8% of Parent's common stock, on a fully diluted basis, are available to grant. The 1998 Plan provides for the granting of Tranche A and Tranche B options to purchase up to 60,074 shares of Parent's common stock. During fiscal year 2002, the Company amended the 1998 Plan, increasing to 725,000 the number of options available for grant. The options will be allocated in amounts to be agreed upon between LPA and Parent. Seventy-five percent of the options will vest over four years and twenty-five percent of the options will vest if certain transactions are consummated which generate certain minimum returns to LPA. The exercise price for the time vesting options will be 50% of the per share price paid by LPA for its common stock of Parent and the exercise price for the remaining options will be 100% of the per share price paid by LPA for its common stock of Parent. The options expire 10 years from the date of grant. Options to purchase 230,654 shares of Parent's common stock are currently outstanding under the 1998 Plan.
ITEM 12.
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 June 28, 2003, LPA Investment LLC (LPA) owned 66.0% of the outstanding common stock of Parent (approximately 92.5% on a fully diluted basis, including the warrants described below) and Vestar, the former principal stockholder of the Company, and La Petite's current and former management own approximately 2.7%, 1.2% and 30.1%, respectively, of the outstanding common stock of Parent (approximately 0.2%, 2.4% and 2.2%, 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 21.3% of Parent's common stock on a fully diluted basis.
In connection with the recapitalization, LPA purchased redeemable preferred stock (Series A preferred stock) of Parent and warrants to purchase 42,180 shares of Parent's common stock on a fully diluted basis for aggregate cash consideration of $30.0 million, the proceeds of which were contributed by Parent to common equity. On December 15, 1999, LPA acquired an additional $15.0 million of Parent's Series A preferred stock and received warrants to purchase an additional 22,051 shares of Parent's common stock on a fully diluted basis. The $15.0 million proceeds received by Parent were contributed to common equity.
The Series A preferred stock is not redeemable at the option of the holder prior to the maturity of the notes and dividends are not payable in cash prior to the seventh anniversary of the consummation of the transactions. Thereafter, Parent may pay dividends in cash subject to any restrictions contained in the Company's indebtedness, including the Credit Agreement and the indenture.
Following the consummation of the recapitalization, Parent and its stockholders, including all holders of options and warrants, entered into a Stockholder's Agreement. The Stockholders' Agreement contains restriction on the transferability of Parent common stock, subject to certain exceptions. The Stockholder' Agreement also contains provisions regarding the designation of members of the Board of Directors and other voting arrangements. The Stockholders' Agreement will terminate at such time as Parent consummates a qualified public offering.
The Stockholders' Agreement restricts transfers of common stock of Parent by, among other things (i) granting rights to all stockholders to tag along on certain sales of stock by LPA and management, (ii) granting rights to LPA to force the other stockholders to sell their common stock on the same terms as sales of common stock by LPA, and (iii) granting preemptive rights to all holders of 2% or more of Parent's common stock in respect of sales by other stockholders.
The Stockholder's Agreement provides that the Board of Directors of Parent shall consist of 5 to 8 persons as determined pursuant to the Stockholders Agreement. The Stockholder's Agreement further provides that LPA is entitled to designate four of the directors, one of whom is entitled to three votes as a director. Messrs. Murray, 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 Parent's common stock.
A majority of the economic interests of LPA is owned by J.P. Morgan Partners (23A SBIC), LLC (JPMP SBIC) an affiliate of JPMP, and a majority of the voting interests of LPA is owned by an entity controlled by Robert E. King, one of Parent's Directors. However, pursuant to the LPA Operating Agreement, as amended, if certain triggering events occur and notice is given by JPMP SBIC to LPA that it is exercising its rights thereunder, JPMP SBIC will have the right to vote a majority of the voting interests of LPA. Accordingly, if these triggering events occur and notice is given, through its control of LPA, JPMP SBIC
would be able to elect a majority of the Board of Directors of Parent. As a licensed small business investment company, or SBIC, JPMP SBIC is subject to certain restrictions imposed upon SBICs by the regulations established and enforced by the United States Small Business Administration. Among these restrictions are certain limitations on the extent to which an SBIC may exercise control over companies in which it invests. As a result of these restrictions, unless certain events described in the operating agreement occur, JPMP SBIC may not own or control a majority of the outstanding voting stock of LPA or designate a majority of the members of the Board of Directors. Accordingly, while JPMP SBIC owns a majority of the economic interests of LPA, JPMP SBIC owns less than a majority of LPA's voting stock. LPA also agreed not to take certain actions in respect of the common stock of Parent held by LPA without the consent of JPMP SBIC. At no time prior to the date hereof, has JPMP SBIC exercised such voting rights.
In connection with the recapitalization, Parent and its stockholders following consummation of the recapitalization entered into a Registration Rights Agreement. The Registration Rights Agreement grants stockholders demand and incidental registration rights with respect to shares of capital stock held by them and contains customary terms and provisions with respect to such registration rights.
Pursuant to a pre-emptive offer dated November 13, 2001, Parent offered all of its stockholders the right to purchase up to their respective pro rata amount of a newly created class of Series B convertible redeemable participating preferred stock (Series B preferred stock) and warrants to purchase common stock of Parent. The Series B preferred stock is junior to the Series A preferred stock of Parent in terms of dividends, distributions, and rights upon liquidation. Parent offered and sold $15.0 million of Series B preferred stock of Parent and warrants to purchase 562,500 shares of common stock of Parent.
All of the proceeds received by Parent from the sale of Series B preferred stock and warrants have been contributed to La Petite as common equity. In connection with such purchase, the banks waived their right under the Credit Agreement to require that the proceeds be used to repay amounts outstanding under the Credit Agreement.
Pursuant to the terms of the Securities Purchase Agreement dated February 10, 2003, entered into by Parent and its stockholders who have elected to exercise their respective preemptive rights (the "Electing Stockholders"), as amended by Amendment No. 1 to the Securities Purchase Agreement dated July 31, 2003, Parent may issue up to 6,669,734 shares of its Series B convertible preferred stock. In connection with such prospective issuance, Parent issued warrants to purchase 1,692,423 shares of its class A common stock, pro rata to each Electing Stockholder. All of the proceeds received by Parent from the issuance of the Series B preferred stock will be contributed to La Petite as common equity and will be used by La Petite for general working capital and liquidity purposes.
The Electing Stockholders are only required to purchase shares of Series B preferred stock if (a) the fixed charge coverage ratio at the end of a fiscal quarter (calculated in accordance with the terms of the Credit Agreement) is less than the fixed charge coverage ratio target set forth in the Credit Agreement with respect to such fiscal quarter (a "Fixed Charge Purchase"), (b) from time to time, the cash account of Parent and its subsidiaries is negative (as calculated in accordance with the provisions of Amendment No. 1 to the Securities Purchase Agreement) over a historical 4 or 5 week review period (a "Cash Shortfall Purchase"), or (c) (i) a payment default shall occur and be continuing under the Credit Agreement or (ii) following 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, at September 25, 2003, the contingent equity commitment from the stockholders of Parent has been reduced from $14.5 million to $13.8 million.
For information regarding securities authorized for issuance under equity compensation, see Note 11 of the Notes to Consolidated Financial Statements.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
J.P. Morgan Securities Inc., or JPMSI, one of the initial purchasers of the old Senior Notes, is an affiliate of JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank), which is an agent and a lender to La Petite under the Credit Agreement, an affiliate of JPMP, JPMorgan Chase Bank and JPMSI, owns 66.0% of the outstanding common stock of Parent (approximately 92.5% on a fully diluted basis as of January 31, 2003). LPA owns $45 million of Parent's Series A preferred stock, $15.7 million of Parent's Series B preferred stock, and warrants to purchase 21.3% of the common stock of Parent on a fully diluted basis. Certain employees of JPMP are members of La Petite's Board of Directors (see Item 10). In addition, JPMSI, JPMorgan Chase Bank and their affiliates perform various investment banking, trust and commercial banking services on a regular basis for the Company's affiliates.
In connection with the recapitalization, JPMP SBIC entered into an Indemnification Agreement with Robert E. King, one of Parents' Directors, pursuant to which JPMP SBIC has agreed to indemnify Mr. King for any losses, damages or liabilities and all expenses incurred or sustained by Mr. King in his capacity as a manager, officer or director of LPA or any of its subsidiaries, including Parent and La Petite.
In December 1999, November 2001, December 2001, May 2002, and June 2003 Parent sold additional equity to LPA. See "Item 1. Business -Organization"
PART IV.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
See pages 28 to 51 of this Annual Report on Form 10-K for financial statements of LPA Holding Corp. as of June 28, 2003 and June 29, 2002 and for the 52 weeks ended June 28, 2003, June 29, 2002, and June 30, 2001.
(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 28, 2003, June 29, 2002, and June 30, 2001. 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
(i) Incorporated by reference to the Exhibits to La Petite Academy, Inc.'s Registration Statement on Form S-4, Registration No. 333-56239, filed with the Securities and Exchange Commission on June 5, 1998.
(ii) Incorporated by reference to the Exhibits to LPA Holding Corp.'s Form 10-K for the Fiscal Year ended August 29, 1998, filed with the Securities and Exchange Commission on November 24, 1998.
(iii) Incorporated by reference to the Exhibits to LPA Holding Corp.'s Form 8-K, filed with the Securities and Exchange Commission on December 7, 1999.
(iv) Incorporated by reference to the Exhibits to LPA Holding Corp.'s Form 10-Q/A for the 16 weeks ended October 23, 1999, filed with the Securities and Exchange Commission on December 16, 1999.
(v) Incorporated by reference to the Exhibits to LPA Holding Corp.'s Form 8-K, filed with the Securities and Exchange Commission on December 21, 1999.
(vi) Incorporated by reference to the Exhibits to LPA Holding Corp.'s Form S-4 Post Effective Amendment #1, filed with the Securities and Exchange Commission on December 23, 1999.
(vii) Incorporated by reference to the Exhibits to LPA Holding Corp.'s Form 8-K, filed with the Securities and Exchange Commission on February 16, 2000.
(viii) Incorporated by reference to the exhibits to LPA Holding Corp.'s Form 8-K, filed with the Securities and Exchange Commission on November 16, 2001.
(ix) Incorporated by reference to the exhibits to LPA Holding Corp.'s Form 8-K, filed with the Securities and Exchange Commission on August 21, 2002.
(x) Incorporated by reference to the exhibits to LPA Holding Corp.'s Form 8-K, filed with the Securities and Exchange Commission on October 2, 2002.
(xi) Incorporated by reference to the exhibits to LPA Holding Corp.'s Form 8-K, filed with the Securities and Exchange Commission on November 5, 2002.
(xii) Incorporated by reference to the exhibits to LPA Holding Corp.'s Form 8-K, filed with the Securities and Exchange Commission on November 20, 2002.
(xiii) Incorporated by reference to the exhibits to LPA Holding Corp.'s Form 8-K, filed with the Securities and Exchange Commission on December 9, 2002.
(xiv) Incorporated by reference to the exhibits to LPA Holding Corp.'s Form 8-K, filed with the Securities and Exchange Commission on December 20, 2002.
(xv) Incorporated by reference to the exhibits to LPA Holding Corp.'s Form 8-K, filed with the Securities and Exchange Commission on February 6, 2003.
(xvi) Incorporated by reference to the Exhibits to LPA Holding Corp.'s Form 10-K for the Fiscal Year ended June 29, 2002 filed with the Securities and Exchange Commission on February 21, 2003.
(xvii) Incorporated by reference to the exhibits to LPA Holding Corp.'s Form 8-K, filed with the Securities and Exchange Commission on April 24, 2003.
(xviii) Incorporated by reference to the exhibits to LPA Holding Corp.'s Form 8-K, filed with the Securities and Exchange Commission on June 4, 2003.
(xix) Incorporated by reference to the exhibits to LPA Holding Corp.'s Form 8-K, filed with the Securities and Exchange Commission on July 3, 2003.
(*) Filed herein
(b) Reports on Form 8-K
On April 23, 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 May 31, 2003.
On June 4, 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 June 30, 2003.
(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.
LPA HOLDING CORP.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
See notes to consolidated financial statements included in Part II of the Annual Report on Form 10-K.
LPA HOLDING CORP.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (IN THOUSANDS OF DOLLARS)
See notes to consolidated financial statements included in Part II of the Annual Report on Form 10-K.
LPA HOLDING CORP.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (IN THOUSANDS OF DOLLARS)
See Notes to Consolidated Financial Statements included in Part II of the Annual Report on Form 10-K.
LPA HOLDING CORP. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS OF DOLLARS)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(continued)
LPA HOLDING CORP. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS OF DOLLARS)
RESERVE FOR CLOSED ACADEMIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned; thereunto duly authorized, on September 25, 2003.
LPA Holding Corp.
/s/ Neil P. Dyment -------------------------------------- By: Neil P. Dyment Chief Financial Officer and duly authorized representative of the registrant
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed by the following persons on behalf of the registrant and in the capabilities indicated on September 25, 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/ Glenn H. Gage /s/ Terry D. Byers - --------------------------------------- ---------------------------------- By: Glenn H. Gage By: Terry D. Byers Director Director
/s/ Robert E. King /s/ Kevin G. O'Brien - --------------------------------------- ---------------------------------- By: Robert E. King By: Kevin G. O'Brien Director Director
/s/ Ronald L. Taylor - --------------------------------------- By: Ronald L. Taylor Director
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned; thereunto duly authorized, on September 25, 2003.
La Petite Academy, Inc.
/s/ Neil P. Dyment -------------------------------------------- By: Neil Dyment Chief Financial Officer and duly authorized representative of the registrant
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed by the following persons on behalf of the registrant and in the capabilities indicated on September 25, 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/ Glenn H. Gage /s/ Terry D. Byers - --------------------------------------- ---------------------------------- By: Glenn H. Gage By: Terry D. Byers Director Director
/s/ Robert E. King /s/ Kevin G. O'Brien - --------------------------------------- ---------------------------------- By: Robert E. King By: Kevin G. O'Brien Director Director
/s/ Ronald L. Taylor - --------------------------------------- By: Ronald L. Taylor Director