U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
Commission file number 1-14052
Kiddie Academy International, Inc.
(Exact name of small business issuer as specified in its charter)
DELAWARE 52-1938283
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
108 Wheel Road, Bel Air, Maryland 21015
(Address of principal executive offices)
(410) 515-0788
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No _____
The number of shares outstanding of common stock, as of August
14,1996: 2,025,000 shares of common stock .
Transitional Small Business Disclosure Format (check one):
Yes ; No X
<PAGE>
KIDDIE ACADEMY INTERNATIONAL, INC.
Index
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Unaudited Consolidated Balance Sheets 1
Unaudited Consolidated Statements of Operations 2
Unaudited Consolidated Statements of Cash Flows 3
Notes to Consolidated Financial Statements 4-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Exhibit 11 Computation of Per Share Earnings
Exhibit 27 Financial Data Schedule
Signature 20
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
KIDDIE ACADEMY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<S> <C> <C> <C>
ASSETS
June 30, September
1996 30, 1995
Current assets:
Cash and cash equivalents $2,041,948 $51,527
Accounts receivable 111,224 75,640
Prepaid expenses 94,847 5,065
Inventory 76,803 6,498
Notes receivable, current 20,866 21,454
Franchise development costs 741,303 554,106
Deferred offering costs -- 485,837
Total current assets 3,086,991 1,200,127
Property and equipment 852,166 331,211
Accumulated depreciation (282,663) (234,545)
Net property and equipment 569,503 96,666
Notes receivable, long-term 136,610 85,115
Goodwill 57,766 --
Deposits 101,854 16.227
Total assets $3,952,724 $1,398,135
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable -- $549,861
Accounts payable and accrued expenses $722,618 892,778
Deferred franchise license fees 1,224,182 1,065,371
Current portion of long-term debt 93,908 291
Current portion of deferred rent credits 93,992 93,993
Total current liabilities 2,134,700 2,602,294
Long-term debt 130,438 --
Stockholder notes -- 87,722
Deferred rent credits 305,474 375,968
Total liabilities 2,570,612 3,065,984
Stockholders' equity (deficit)
Preferred stock, par value $0.01 per share:
Authorized 1,000,000 shares; no shares -- --
issued and outstanding
Common stock, par value $0.01 per share:
Authorized 10,000,000 shares; issued and
outstanding 2,025,000 (06/30/96); 925,000 20,250 9,250
(09/30/95) shares:
3
<PAGE>
Additional paid-in capital 4,237,483 214,505
Accumulated deficit (2,875,621) (1,781,604
)
Deferred compensation 0 (110,000)
Total stockholders' equity (deficit) 1,382,112 (1,667,849
)
Total liabilities and stockholders' equity $3,952,724 $1,398,135
(deficit)
</TABLE>
See notes to consolidated financial statements (unaudited).
4
<PAGE>
KIDDIE ACADEMY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
QUARTER ENDED JUNE 30, ENDED JUNE 30,
<S> <C> <C> <C> <C> <C>
REVENUES: 1996 1995 1996 1995
Company-owned child care $903,09 $318,51 $2,088,44 $1,056,4
centers 4 3 2 98
Franchise license fees 85,739 129,781 304,149 281,193
Franchise royalties 202,555 116,948 534,555 282,215
Product sales 65,665 2,782 178,513 91,003
Other 18,668 16,400 56,044 35,070
Total revenue 1,275,7 584,424 3,161,703 1,745,97
21 9
OPERATING EXPENSES:
Company-owned child care 1,145,7 351,439 2,676,053 1,121,66
centers 12 3
Cost of product sales 78,741 2,151 158,994 70,354
General and 502,606 338,862 1,501,725 1,072,18
administrative 4
Total operating expenses 1,727,0 692,452 4,336,772 2,264,20
59 1
(Loss) from operations (451,33 (108,02 (1,175,06 (518,222
8) 8) 9) )
INTEREST INCOME 23,957 (43,240 21,863 (173,912
(EXPENSE) ) )
OTHER INCOME (EXPENSE), 0 15,770 59,187 25,691
net
NET (LOSS) ($427,3 ($135,4 ($1,094,0 ($666,44
81) 98) 19) 3)
NET (LOSS) PER COMMON ($0.21) ($0.14) ($0.63) ($0.69)
SHARE
WEIGHTED AVERAGE SHARES
OUTSTANDING 2,051,9 964,709 1,746,353 964,709
09
DIVIDENDS PAID PER SHARE $0.00 $0.00 $0.00 $0.00
</TABLE>
See notes to consolidated financial statements (unaudited).
5
<PAGE>
KIDDIE ACADEMY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995
Cash flows from operating activities:
Net (loss) ($1,094,019 ($666,443)
)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 51,118 77,774
Gain on sale of assets (56,598) 5,030
Amortization of debt issuance costs 26,667 --
Changes in assets and liabilities:
Accounts receivable (35,584) (2,335)
Inventory (70,305) 50
Notes receivable (50,907) 45,112
Franchise development costs (187,197) (134,866)
Other assets (175,409) (20,557)
Accounts payable and accrued expenses (170,160) 75,685
Deferred franchise license fees 158,811 197,582
Other liabilities 89,874 97,664
Net cash used in operating activities (1,513,709) (325,304)
Cash flows from investing activities:
Acquisition of property and equipment (520,955) (11,521)
Proceeds from disposal of property and 40,000 --
equipment
Net cash used in investing activities (480,955) (11,521)
Cash flows from financing activities:
Borrowings from/(payments to) notes (149,861) 89,500
payable
Borrowings from/(payments to) (87,722) 85,595
shareholders
Net proceeds from IPO 3,998,613 --
Increase (decrease) in loans from -- 86,054
affiliates, net
Borrowings of long-term debt 224,346 (10,646)
Payments of long-term debt (291)
Net cash provided by financing activities 3,985,085 250,503
Net increase (decrease) in cash 1,990,421 (86,322)
6
<PAGE>
Cash, beginning of period 51,527 137,849
Cash, end of period $2,041,948 $51,527
Non-cash investing and financing
activities:
Write-off of deferred compensation $110,000 --
</TABLE>
See notes to consolidated financial statements (unaudited).
7
<PAGE>
KIDDIE ACADEMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
JUNE 30, 1996 AND 1995
1. Summary of Significant Accounting Policies
(a) Description of Business
Kiddie Academy International, Inc. (the "Parent Company" and together
with its subsidiaries, the "Company" or "Kiddie Academy") operates and
franchises education-based child care centers for children from six weeks
to 12 years of age under the name Kiddie Academy Child Care Learning
Centers. It has three subsidiaries. Kiddie Academy Child Care Learning
Centers, Inc. ("Kiddie Centers"), a wholly-owned subsidiary of the Parent
Company formerly known as Maryland Day Care Centers, Inc., was incorporated
in Maryland in 1981 and operates the Company-owned centers; Kiddie Academy
Franchising Systems, Inc. ("Kiddie Franchising"), formerly known as Kiddie
Academy International, Inc. and a wholly-owned subsidiary of Kiddie
Centers, was incorporated in Maryland in 1992 and operates the Company's
franchise business; and Kid's Craft, Inc. ("Kid's Craft"), a wholly-owned
subsidiary of the Parent Company, was incorporated in Maryland in 1989 and
operates the Company's school supply distribution business.
The Company was incorporated on June 28, 1995 to succeed to the
ownership and operation of Kiddie Centers, Kiddie Franchising and Kid's
Craft. All of the shares of Kiddie Centers and Kid's Craft were owned by
the principal stockholders of the Parent Company. Kiddie Franchising was,
and after the reorganization is, a wholly-owned subsidiary of Kiddie
Centers. Each of Pauline Miller, George Miller and Michael J. Miller
exchanged their respective shares of Kiddie Centers and Kid's Craft for
shares of common stock of the Parent Company at an exchange rate of 523.81
shares of common stock of the Parent Company for one share of Kiddie
Centers common stock and one share of Kid's Craft common stock, resulting
in a total of 1,100,000 shares of common stock of the Parent Company
outstanding. On October 24, 1995, the Company effected a reverse stock
split (.77273 to 1) reducing the outstanding shares to 850,000. On November
21, 1995, the Company effected a stock split (1.088236 to 1) increasing the
outstanding shares to 925,000. The accompanying financial statements and
all common stock and per share data included in the accompanying financial
statements and notes thereto have been restated to reflect the
reorganization of entities under common control in a manner similar to a
8
<PAGE>
pooling of interests and to give retroactive effect to the reverse stock
split and stock split. As of June 30, 1996, the authorized capital stock
consists of 10,000,000 shares of common stock, par value $0.01 per share,
and 1,000,000 shares of preferred stock, par value $0.01 per share.
(b) Principles of Consolidation
The consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (the "Commission")
and include all adjustments which are, in the opinion of management,
necessary for a fair presentation. The condensed consolidated financial
statements include the accounts of the Company and its subsidiaries.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The Company believes that the disclosures are adequate to make
the information presented not misleading; however, it is suggested that
these financial statements be read in conjunction with the financial
statements and the notes thereto included in Amendment No. 3 to the
Registration Statement on Form SB-2 (the "Registration Statement") filed
with the Commission on December 8, 1995.
The consolidated financial statements include the results of
operations of Kiddie Academy International, Inc. and its wholly-owned
subsidiaries. All intercompany transactions have been eliminated.
(c) Inventories
Inventories, consisting of educational materials, are stated at the
lower cost or market. Cost is determined using the first-in, first-out
method.
(d) Franchise development costs
Direct costs related to franchise sales for which franchise revenue
has not been recognized are deferred until the related revenue is
recognized.
(e) Property and Equipment
Property and equipment are stated at cost, less accumulated
depreciation. Property acquired under capital leases is stated at the lower
9
<PAGE>
of the present value of future minimum lease payments or fair value at the
inception of the lease, less accumulated amortization.
Depreciation, including amortization of assets covered by capital
leases, is provided on both the straight-line and accelerated methods over
the estimated useful lives of the assets as follows:
Buildings 20 years
Equipment 5 years
Furniture and fixtures 5 years
Vehicles 5 years
Amortization of leasehold improvements and items under capital leases
is provided over their useful lives or the remaining lease term, whichever
is shorter. Expenditures for maintenance and repairs are charged to expense
as incurred.
(f) Revenue Recognition
Revenue from Company-owned centers is recognized in the period the
child care services are provided. Revenue derived from initial franchise
fees is recognized when the franchise centers open. Royalties are
recognized in the same period franchise center revenue is generated.
Revenue from other services provided to franchisees, such as administrative
services, is recognized when the service is provided. The regulations of
four states require the Company to place funds received from potential
franchisees in escrow until certain performance milestones are achieved. At
June 30, 1996, funds held in escrow amounted to approximately $66,000.
Revenue on product sales is recognized at the time of shipment.
Included in deferred franchise license fees are amounts received by
the Company from prospective franchisees totaling $1,224,182 and $1,130,197
at June 30, 1996 and 1995, respectively. Such amounts will be recorded as
revenue when the centers open.
(g) Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109)
which requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets
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<PAGE>
and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted
tax rates in effect for the year in which the differences are expected to
reverse.
(h) Net Earnings (Loss) Per Share
Net earnings (loss) per common share is determined by dividing the net
earnings (loss) by the weighted average number of shares of common stock
and common share equivalents outstanding. Pursuant to Securities and
Exchange Commission Staff Accounting Bulletin No. 83, stock options and
warrants granted during the twelve-month period prior to the expected date
of the initial filing of the Registration Statement, with exercise prices
below the initial public offering price have been included in the
calculation of common share equivalents, using the treasury stock method,
as if they were outstanding for all periods presented. Weighted average
shares used in computing net income (loss) per common share consist of
925,000 shares of common stock issued in connection with the organization
of the Company, 26,909 common stock equivalents for the quarters ended June
30, 1996 and 1995, respectively (representing warrants issued in connection
with the four bridge units which were issued August 8, 1995 for $100,000
each), 12,800 shares representative of stock options and the impact of
shares issued in connection with the Company's public offering.
(i) Initial Public Offering
The Company completed an initial public offering (the "Offering") in
December, 1995 of 1,100,000 shares of common stock and 1,100,000 common
stock purchase warrants. The warrants allow the holders to purchase shares
of common stock at 120% of the initial public offering price. The Company
is using the net proceeds from the Offering (i) to open additional Company-
owned centers, (ii) to expand the Company's sales and marketing efforts,
and (iii) for working capital and general corporate purposes.
(j) Acquisition and Goodwill
The Company acquired three centers from franchisees during the second
quarter. The excess of the purchase price over the fair value of net assets
acquired was $61,223. This excess has been recorded as goodwill and will be
amortized on a straight line basis over 5 years. The preliminary purchase
price allocation is subject to change during the year ending September 30,
1996 as additional information concerning net asset valuations is obtained.
Therefore, the final allocation may differ from the preliminary allocation.
11
<PAGE>
2. Indebtedness
Notes Payable
The Company has available a bank line of credit which permits the
Company to borrow up to $200,000 which is at 1.5% over the Bank's prime
rate. The line of credit is collateralized by all inventory, equipment and
accounts receivable of Kiddie Academy International, Inc. and expires on
February 22, 1997. At June 30, 1996 there were no borrowings against the
line of credit. At June 30, 1995, $150,000 was outstanding on another line
of credit that expired on June 30, 1996.
3. Commitments and Contingencies
In many instances, the Company has guaranteed some or all of a
franchisee's obligations under the lease for the franchisee's child care
center.
The Company has entered into Purchase Agreements with three
franchisees which are subject to the fulfillment of certain contingencies
prior to finalizing the purchase. During this period the centers are
operated by Kiddie Academy which receives all revenues and assumes
substantially all ongoing obligations.
The Company is subject to complaints and claims arising in the
ordinary course of business, including its business as a franchisor. The
Company believes that no current complaints are material to the Company's
consolidated financial position.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and Notes (unaudited).
The financial information and percentages set forth below in Results of
Operations and Liquidity and Capital Resources have been rounded to the
nearest thousandth and to the nearest whole percent, respectively.
General
The Company operates and franchises education-based child care centers
and operates a wholesale and retail school supply and equipment business.
During the 15 years since the opening of its first child care center in
Maryland in 1981, the Company has developed extensive operating systems and
methodologies which the Company believes enables it to maintain uniform
high-quality standards. In 1992, the Company began franchising centers
under the Kiddie Academy name. Since that time, the Company's child care
operations have experienced rapid and substantial growth with regard to the
number of centers opened and under development. The Kiddie Academy system
currently consists of 46 open centers, (14 of which are Company-owned and
operated and 32 of which are franchised), with an additional 64 centers in
development (57 franchised centers and seven company-owned centers), as
illustrated in the following chart:
[Graphic material showing Kiddie Academy Centers
open and under development at 6/30/94, 6/30/95 and 6/30/96]
Of the 64 centers currently in development, there are 31 centers in site
selection for potential franchises, 27 centers are under lease pending the
start of construction (22 franchised and five Company-owned), and six
centers are under lease and construction (four franchised and two Company-
owned).
13
<PAGE>
Overall, Kiddie Academy centers are open or under development in 16
states. The Company has entered into Purchase Agreements with three of its
franchisees pursuant to which the Company has agreed to operate the
relevant center and receive all revenues and assume substantially all
ongoing obligations. Subsequent to June 30, 1996 the Company entered into
one additional Purchase Agreement. The revenues received by the Company
from each center pursuant to such Purchase Agreements are included in the
revenues of Company-owned centers as reflected on the Company's
Consolidated Financial Statements. Due to the rapid growth of the Company's
franchise operations, the customer base for Kid's Craft, the Company's
supply and equipment subsidiary, has also grown substantially. However,
franchisees are not required to purchase supplies and equipment from Kid's
Craft.
Management believes the Kiddie Academy center-based program continues
to remain more extensive and education-based than other forms of commercial
child care such as that offered by home-based child care or other single-
unit providers. All Kiddie Academy early child care learning centers meet
the strict operational and equipment standards for center-based child care
that are imposed by child care administrators in each state.
Kiddie Academy centers are open year-round and typically accommodate
approximately 90-180 children. Each Kiddie Academy center offers an
education-based child care program centered around an age-appropriate
curriculum designed to promote each child's intellectual, social, physical
and emotional growth. In addition to the traditional areas of language
arts, mathematics, science and creative arts, the Kiddie Academy curriculum
includes a preschool computer science program and a foreign language
program. The curriculum was designed and is periodically updated by the
Company's curriculum advisory council which includes individuals with
training in early childhood education and child psychology. Kiddie Academy
centers incorporate a number of features designed to promote child safety
and to support the Kiddie Academy curriculum. For example, many Kiddie
Academy centers have "low walls" (i.e., interior walls of four feet in
height) which allow for greater visibility throughout the center, resulting
in enhanced security for the children. Many Kiddie Academy centers also
include an area called "Kid's Towne USA," which is a miniature town
comprised of child-sized buildings such as a post office, grocery store,
library and restaurant, built inside the center. All Kiddie Academy centers
contain interactive educational toys, supplies and equipment, many of which
are supplied by Kid's Craft, the Company's school supply and equipment
distribution subsidiary, including educational carpets and wall
decorations. The centers are staffed with directors who are required to
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have a college degree and appropriate staff and teachers as required by
state licensing authorities and by the Company's own standards. The Kiddie
Academy program also emphasizes continuous communication between teachers
and parents concerning each child's development which the Company believes
is critical to maintaining high levels of parental confidence and
satisfaction.
Management seeks to have each Kiddie Academy center conveniently and
attractively located, in economically and demographically-appealing
communities, having an above average concentration of dual-income, young
families. Fees currently charged by the Company and its franchisees range
from $85 to $200 per child per week based upon a child's age, competitive
conditions and other market factors. Kiddie Academy centers experience
increasing revenues as enrollments grow. This growth in enrollment is
prompted by the Company's well-developed marketing and advertising
strategies used to promote each center. Kiddie Academy systemwide
enrollment at June 30, 1996 was 3,238 children.
Kiddie Academy facilities are typically leased for a 10 year term
(with renewal options) from commercial real estate developers who meet the
Company's criteria for quality, resources, and experience. These developers
construct and fund Kiddie Academy specified tenant improvements costing
from $200,000 to $800,000 depending upon the size and construction needs of
the property. The Company enjoys favorable relations with such developers
and many are seeking to build additional Kiddie Academy centers.
The Company derives revenue from three sources: (i) weekly tuition
generated at the 14 Company-owned and operated centers; (ii) fees from
franchisees, including franchise licensing fees totaling $30,000 per new
franchised center, ongoing royalties equal to 7% of each franchised
center's gross revenues, and weekly administrative fees of $52 per
franchised center; and (iii) the retail and wholesale sale of school
supplies, educational toys and equipment by Kid's Craft. Centers typically
purchase a portion of their start-up equipment and continuing requirements
of consumable supplies from Kid's Craft. The Company's ability to purchase
equipment and supplies at reduced prices from Kid's Craft for Company-owned
center enables the Company to reduce start-up and ongoing supply expenses.
Upon the execution of the Site Selection/Preliminary Agreement, the
Company receives a $12,500 fee, which is received from franchise applicants
during the site development process which amount is credited towards the
applicant's franchise license fee. The regulations of four states require
the Company to place funds received from potential franchisees in escrow
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<PAGE>
until certain performance milestones are met. Franchise applicants who are
parties to a Site Selection/Preliminary Agreement are not deemed to be
franchisees until they enter into a Franchise Agreement, and may terminate
their Site Selection/Preliminary Agreement with the Company at any time
prior to entry into a Franchise Agreement. The form of Site
Selection/Preliminary Agreement currently entered into by the Company with
the new franchise applicants provides that, upon termination by the
applicant, the Company must refund the $12,500 site selection fee less (i)
a $7,500 lost opportunity charge, plus (ii) any expenses incurred by the
Company in assisting the applicant with the site selection process. The
Company may, at its option, terminate the Site Selection/Preliminary
Agreement at any time and, in such case, must refund the full site
development fee.
The Company has experienced some attrition of franchise applicants
during the site development process and believes that such attrition is to
be expected in the ordinary course of business. During the nine month
period ended June 30, 1996, the Company entered into 32 Site
Selection/Preliminary Agreements.
Revenue from Company-owned centers is recognized in the period the
child care services are provided. Revenue derived from franchise fees is
recognized when the franchise center opens. Accordingly, the amount of the
deferred franchise fee liability as shown on the Company's balance sheet is
directly related to the number of centers in development. All franchise
fees collected by the Company for centers in development are accounted for
as a current liability until the center opens per generally accepted
accounting principles. The amount of the Company's deferred franchise fee
liability for the fiscal period ended June 30, 1996 increased over the
comparable period in 1995 as a result of an increase in the number of
centers in development. Royalty income is recognized in the same period in
which the related revenue is generated by each franchised center. Revenue
from administrative fees paid by franchisees for services provided by the
Company is recognized when the Company provides such services.
The Company intends to expand its market share of the child care
industry by increasing the number of Company-owned centers and continuing
the growth in the number of franchised centers. Although the Company
engages in an active new site selection process, there are no assurances
that it will be able to continue to acquire and develop new sites in an
economic manner. The Company expects that such expansion will require
ongoing development of operational, marketing, and financial systems and is
using a portion of the proceeds of the December 1995 public offering to
meet this goal.
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<PAGE>
In connection with its expansion plans, the Company has begun to
increase its corporate infrastructure. This development has involved the
incurrence of substantial one-time and continuing expenses, without the
immediate realization of offsetting income. The Company's rapid expansion
significantly affects the comparability of results of operations from
period to period, in part because revenues generated by a center are
generally significantly lower during the first three to four quarters
following its opening as a result of lower initial levels of enrollment.
17
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Results of Operations
The following table sets forth, for the periods indicated, selected
information from the Company's Consolidated Statements of Operations
(except for systemwide centers open at end of period and systemwide
revenues), expressed as a percentage of revenues from operations.
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Systemwide centers open 46 30 46 30
Systemwide revenues $3,797,000 $2,101,000 $9,725,000 $5,200,000
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues from operations
Company-owned centers $903,000 71% $ 319,00055% $ 2,088,000 66%
$ 1,057,000 61%
Franchising operations $307,000 24% $ 262,00045% $ 895,00028% $
598,000 34%
Product sales $ 66,000 5% $ 3,000 % $ 179,000 6% $ 91,000 5%
Total Revenues $1,276,000100% $584,000 100% $ 3,162,000100%
$ 1,746,000 100%
Operating Expenses $1,727,000135% $692,000 118% $ 4,337,000137%
$ 2,264,000 130%
Net operating (loss)$(451,000)(35)% $(108,000) (18)%$(1,175,000)(37)% $
(518,000) (30)%
Interest income (expense) $24,000 2% $ (43,000)(7)%$ 22,0001% $
(174,000) (10)%
Other income $ --------- $16,000 3% $ 59,000 2% $ 26,000 2%
Loss before taxes $(427,000)(33)% $ (135,000)(23)% $(1,094,000)
(35)% $(666,000)(38)%
</TABLE>
Quarter Ended June 30, 1996 Compared to Quarter Ended June 30, 1995
Revenues
Systemwide revenues (tuition fees from Company-owned and franchised
centers) for the quarter ended June 30, 1996 increased by 81%, to
$3,797,000 from $2,101,000 for the quarter ended June 30, 1995. This
increase was due to an increase in the total number of centers open to 46
at June 30, 1996, as compared to 30 open at June 30, 1995 and an increase
in average enrollment levels at centers which were open during both
quarters.
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<PAGE>
The Company's revenues from operations for the quarter ended June 30,
1996 increased by 118%, to $1,276,000 from $584,000 for the quarter ended
June 30, 1995. This increase was due to an increase in revenues generated
by Company-owned centers, an increase in revenues generated by franchising
activities and increased revenues generated by Kid's Craft.
Aggregate revenues generated by Company-owned centers for the quarter
ended June 30, 1996, which constituted 71% of revenues from operations,
increased by 183%, to $903,000 from $319,000 for the quarter ended June 30,
1995. This increase was due to the increase in the number of Company-owned
centers owned and operated during the quarter ended June 30, 1996 to 14 as
compared to four for the quarter ended June 30, 1995. The Company purchased
four centers from franchisees and has entered into agreements to purchase
three other centers, which it currently manages, in the quarter ended June
30, 1996.
Revenues from franchising activities (franchising fees, royalties and
administrative fees) for the quarter ended June 30, 1996, which constituted
24% of revenues from operations, increased by 17%, to $307,000 from
$262,000 for the quarter ended June 30, 1995. Revenues from franchise fees
for the quarter ended June 30, 1996 decreased by 34%, to $86,000 from
$130,000 for the quarter ended June 30, 1995. Royalties for the quarter
ended June 30, 1996 increased by 74%, to $203,000 from $117,000 for the
quarter ended June 30, 1995. Administrative fees for the quarter ended June
30, 1996 increased by 19%, to $19,000 from $16,000 for the quarter ended
June 30, 1995. Franchising fees are recorded at the time a franchise center
opens, therefore the decrease in revenues from franchise fees is a factor
of the number of centers that actually opened during the quarter ended June
30, 1996. Four opened in the quarter ended June 30, 1996 and six opened in
the quarter ended June 30, 1995. The increase in royalties and
administrative fees resulted from the increase in the number of franchised
centers open during the quarter ended June 30, 1996 to 32 from 26 during
the quarter ended June 30, 1995.
Sales revenues generated by Kid's Craft for the quarter ended June 30,
1996, which constituted 5% of revenues from operations increased to $66,000
from $3,000 for the quarter ended June 30, 1995, primarily as a result of
sales to the four new franchised centers opening during this period and
ongoing sales to existing franchise centers.
19
<PAGE>
Operating Expenses
Operating expenses include the expenses associated with operating the
Company-owned child care centers (including payroll and related expenses,
occupancy costs, and the costs of food, supplies, utilities, advertising
and insurance); expenses associated with running the Company's franchise
operations (including payroll, commissions and related expenses, occupancy
costs, advertising, travel and utilities); and expenses associated with the
operations of Kid's Craft (including costs of products, freight, occupancy
and utilities); and other general and administrative expenses.
Aggregate operating expenses for the quarter ended June 30, 1996
increased by 150%, to $1,727,000 from $692,000 in the quarter ended June
30, 1995. These increases were due primarily to increases in expenses
associated with the Company's expanding franchising activities and expenses
associated with the 14 Company-owned and managed centers in the quarter
ended June 30, 1996 as compared to four Company-owned centers in the
quarter ended June 30, 1995. As a percentage of operating revenues,
operating expenses increased to approximately 135% for the quarter ended
June 30, 1996 from approximately 118% for the quarter ended June 30, 1995.
Operating expenses relating to Company-owned centers for the quarter
ended June 30, 1996, which constituted 66% of total operating expenses,
increased by 226%, to $1,146,000 from $351,000 for the quarter ended June
30, 1995. The increase in operating expenses for Company-owned centers and
managed centers for the period 1996 as compared to the period 1995 is due
to the increase in centers from four to 14 and the related lease
obligations, payroll, food costs and other costs increased in proportion to
the number of centers operated. The Company expects that aggregate expenses
relating to Company-owned centers will continue to increase as the number
of Company-owned centers increases. However, over time, as the Company
achieves and capitalizes upon economies of scale, and as newly-opened
centers mature beyond their initial period of start-up expenses and low
enrollment, the Company expects expenses as a percentage of revenues
derived from Company-owned centers to decrease. The Company continues to
focus on improving operating results at Company-owned centers by
implementing programs designed to increase revenues such as advertising and
promotion, while continuing to control costs.
General and administrative expenses, which constituted 29% of total
operating expenses and which include the costs of corporate overhead,
franchising operations and operating expenses for Kid's Craft, for quarter
20
<PAGE>
ended June 30, 1996 increased by 48%, to $503,000 from $339,000 for the
quarter ended June 30, 1995. Increases occurred in all areas of expense due
to the growth in the corporate infrastructure undertaken in order to
support the Company's expanded efforts in franchising and the substantial
increase in the number of franchises open and under development. The
Company expects that expenses related to franchising will continue to
increase. However, over time, the Company expects such expenses to decrease
as a percentage of franchise revenues.
Costs of goods sold by Kid's Craft for the quarter ended June 30,
1996, which constituted 5% of total operating expenses to $79,000 from
$2,000 for the quarter ended June 30, 1995. This increase was primarily due
to an increase in product sales, product costs and freight costs.
Depreciation and Amortization
Depreciation and amortization expense consists of depreciation or
amortization of certain equipment, furniture and fixtures, vehicles and
leasehold improvements, capitalized leases, goodwill and organizational
costs. Depreciation and amortization expense, for the quarter ended June
30, 1996 decreased by $35,000 to $29,000 from $64,000 for the quarter ended
June 30, 1995. This decrease was primarily due to the elimination of
capitalized lease obligations offset by purchases of equipment.
Interest
Interest income for the quarter ended June 30, 1996 was $24,000 as
compared to interest expense of $43,000 for the quarter ended June 30,
1995. This increase in interest income was due to interest income from
overnight investments in the Company's sweep account offset by interest
expense on certain notes payable.
As a result of the foregoing, the Company recorded a net loss for the
quarter ended June 30, 1996 of $427,000 as compared to a net loss of
$135,000 for quarter ended June 30, 1995.
Nine Months Ended June 30, 1996 Compared to Nine Months Ended June 30, 1995
Revenues
Systemwide revenues for the nine months ended June 30, 1996 increased
by 87%, to $9,725,000 from $5,200,000 for the nine months ended June 30,
1995. This increase was due to an increase in the total number of centers
21
<PAGE>
open to 46 at June 30, 1996, as compared to 30 open at June 30, 1995 and an
increase in average enrollment levels at centers which were open during
both periods.
The Company's revenues from operations for the nine months ended June
30, 1996 increased by 81%, to $3,162,000 from $1,746,000 for the nine
months ended June 30, 1995. This increase was due to an increase in
revenues generated by Company-owned centers, an increase in revenues
generated by franchising activities and increased revenues generated by
Kid's Craft.
Aggregate revenues generated by Company-owned centers for the nine
months ended June 30, 1996, which constituted 66% of revenues from
operations, increased by 98%, to $2,088,000 from $1,057,000 for the nine
months ended June 30, 1995. This increase was due to the increase in the
number of Company-owned centers owned and operated during the nine months
ended June 30, 1996 to 14 as compared to the nine months ended June 30,
1995 which started with seven company-owned centers and was reduced to four
due to three being sold to franchisees. During the nine month period ended
June 30, 1996 the Company opened one new center, sold an existing center,
purchased four centers from franchisees and has entered into agreements to
purchase three other centers (which the Company currently manages).
Revenues from franchising activities (franchising fees, royalties and
administrative fees) for the nine months ended June 30, 1996, which
constituted 28% of revenues from operations, increased by 50%, to $895,000
from $598,000 for the nine months ended June 30, 1995. Revenues from
franchise fees for the nine months ended June 30, 1996 increased by 8%, to
$304,000 from $281,000 for the nine months ended June 30, 1995. Royalties
for the nine months ended June 30, 1996 increased by 90%, to $535,000 from
$282,000 for the nine months ended June 30, 1995. Administrative fees for
the nine months ended June 30, 1996 increased by 60%, to $56,000 from
$35,000 for the nine months ended June 30, 1995. The increase in revenues
from franchise fees, royalties and administrative fees resulted from the
increase in the number of franchised centers open during the nine months
ended June 30, 1996 to 32 from 26 during the nine months ended June 30,
1995.
Sales revenues generated by Kid's Craft for the nine months ended June
30, 1996, which constituted 6% of revenues from operations, increased by
97%, to $179,000 from $91,000 for the nine months ended June 30, 1995,
primarily as a result of sales to the 10 new franchised centers opening
during this period and ongoing sales to existing franchise centers.
22
<PAGE>
Operating Expenses
Aggregate operating expenses for the nine months ended June 30, 1996
increased by 92%, to $4,337,000 from $2,264,000 in the nine months ended
June 30, 1995. As a percentage of operating revenues, operating expenses
increased to approximately 137% for the nine months ended June 30, 1996
from approximately 130% for the nine months ended June 30, 1995. These
increases were due primarily to increases in expenses associated with the
Company's franchising activities and expenses associated with the 14
Company-owned and managed centers in the 1996 period as compared to the
1995 period in which the Company started with seven centers which was
reduced to four due to three being sold to franchisees.
Operating expenses relating to Company-owned centers for the nine
months ended June 30, 1996, which constituted 62% of total operating
expenses, increased by 139%, to $2,676,000 from $1,122,000 for the nine
months ended June 30, 1995. The increase in operating expenses for Company-
owned centers and managed centers for the period 1996 as compared to the
period 1995 is due to the increase in centers and the related increases in
rent due to lease obligations, payroll, food costs and other costs
increased in proportion to the number of centers operated. The Company
expects that aggregate expenses relating to Company-owned centers will
continue to increase as the number of Company-owned centers increases.
However, over time, as the Company achieves and capitalizes upon economies
of scale, and as newly-opened centers mature beyond their initial period of
start-up expenses and low enrollment, the Company expects expenses as a
percentage of revenues derived from Company-owned centers to decrease. The
Company also intends to focus on improving operating results at Company-
owned centers by implementing programs designed to increase revenues such
as advertising, and promotion, while continuing to control costs.
General and administrative expenses, which constituted 35% of total
operating expenses and which include the costs of corporate overhead,
franchising operations and operating expenses for Kid's Craft, for the nine
months ended June 30, 1996 increased by 40%, to $1,502,000 from $1,072,000
for the nine months ended June 30, 1995. Increases occurred in all areas of
expense due to the growth in the corporate infrastructure undertaken in
order to support the Company's expanded efforts in franchising and the
substantial increase in the number of franchises open and under
development. The Company expects that expenses related to franchising will
continue to increase. However, over time, the Company expects such expenses
to decrease as a percentage of franchise revenues.
23
<PAGE>
Costs of goods sold by Kid's Craft for the nine months ended June 30,
1996, which constituted 4% of total operating expenses, increased by 127%,
to $159,000 from $70,000 for the nine months ended June 30, 1995. This
increase was primarily due to an increase in product sales and freight
costs.
Depreciation and Amortization
Depreciation and amortization expense, for the nine months ended June
30, 1996 decreased by $26,000 to $51,000 from $77,000 for the nine months
ended June 30, 1995. This decrease was primarily due to depreciation
expense resulting from a center that was sold in 1995, the leases of which
center had been accounted for as capital lease partially offset by the
purchases of equipment.
Interest
Interest income for the nine months ended June 30, 1996 was $22,000 as
compared to interest expense of $174,000 for the nine months ended June 30,
1995. These changes are attributable to the pay off of the line of credit
in December 1995, overnight investments in the Company's sweep account, and
the elimination of capital lease obligations.
Other Income
For the nine months ended June 30, 1996, the Company recorded other
income of $59,000, and in the nine months ended June 30, 1995, $26,000.
This increase is attributable to the sale of one company-owned center to a
franchisee and the gain on sale of asset that was realized.
As a result of the foregoing, the Company recorded a net loss for the
nine months ended June 30, 1996 of $1,094,000 as compared to a net loss of
$666,000 for the nine months ended June 30, 1995.
Liquidity and Capital Resources
Cash flow for the nine months ended June 30, 1996 was substantially
increased due to the net proceeds from the public offering which amounted
to approximately $4 million. This was offset by the net loss of $1,094,000,
payments of notes of $150,000 and payment to shareholders of $88,000. In
the nine months ended June 30, 1995 the Company had a $666,000 loss and
borrowings on note payables of $90,000.
24
<PAGE>
The Company has available a bank line of credit which permits the
Company to borrow up to $200,000 which bears interest at 1.5% over the
Bank's prime rate. The line of credit is collateralized by all inventory,
equipment and accounts receivables of Kiddie Academy International, Inc.
and expires on February 22, 1997. At June 30, 1996 there were no borrowings
against the line of credit. At June 30, 1995, $150,000 was outstanding on
another line of credit that expired on June 30, 1996.
As of June 30, 1996, the Company's total debt obligations (exclusive
of trade credit) were $224,346 which included a $50,000 equipment loan,
$16,000 vehicle loan and various notes payable as a result of the purchase
of franchisee centers.
The Company believes that the net proceeds of the Offering and
available cash flow from operations will be sufficient to satisfy its
capital expenditures and debt obligations. The Company's long-term plans
consist of opening 15 Company-owned centers through December 1997. As of
June 30, 1996 the Company has reached 47% of that goal by adding seven
centers. This is an increase of 250% from June 30, 1995. The Company
believes that, depending upon its success in opening and operating new
Company-owned and franchise centers (of which there can be no assurance),
its revenues will be sufficient to meet its working capital requirements
associated with such plans.
Seasonality
Due to a seasonal reduction in enrollment during the summer months
which occurs throughout the child care industry, the Company historically
has experienced a decrease in tuition revenues during the fourth quarter of
each fiscal year (July 1 through September 30). The Company expects to
continue to experience such a decrease in tuition revenues during the
fourth quarter of its fiscal year. To help offset this seasonality trend
the Company has implemented an advertising campaign designed to enhance
enrollment in its summer programs. As a result, the Company's annual
earnings have been and will continue to be heavily dependent on the results
of operations during the first three quarters of each year.
Effects of Inflation
The impact of general inflation on the Company's business has been
insignificant to date and the Company believes that it will continue to be
insignificant for the foreseeable future.
25
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in litigation from time to time. In management's
opinion, any litigation which the Company is currently involved will not
result in liabilities that will have a material adverse effect on its
financial condition or results of operations.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits required by Item 601 Regulation S-K:
Exhibit 11 - Computation of per share earnings
Exhibit 27 - Financial Data Summary
b. Reports on Form 8-K:
None.
26
<PAGE>
SIGNATURE
In accordance with the requirements of the Securities and Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Kiddie Academy International, Inc.
August 14, 1996 BY: /s/ George Miller
Date George Miller
CEO/Chairman of the Board
August 14, 1996 BY: /s/ Guy A. Matta
Date Guy A. Matta
Chief Financial Officer
27
<PAGE>
EXHIBIT 11
KIDDIE ACADEMY INTERNATIONAL, INC.
<TABLE>
<CAPTION>
COMPUTATION OF EARNINGS PER COMMON
AND COMMON EQUIVALENT SHARE
QUARTER QUARTER NINE MONTHS
ENDED ENDED ENDED ENDED
06/30/96 06/30/95 06/30/96 06/30/95
<S> <C> <C> <C> <C>
Net Loss ($427,38 ($135,49 ($1,094,01 ($666,443
1) 8) 9) )
Average shares
outstanding, end 2,025,00 925,000 1,719,444 925,000
of period 0
Effect of bridge
warrants after
application of 26,909 26,909 26,909 26,909
treasury stock
method
Effect of stock
options after
application of 0 12,800 0 12,800
treasury stock
method
Average number of
shares outstanding 2,051,90 964,709 1,746,353 964,709
during the period 9
Earnings per common
and common ($0.21) ($0.14) ($0.63) ($0.69)
equivalent shares
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information derived from Kiddie Academy
International, Inc.'s unaudited financial statements for the nine months ended
June 30, 1996, and is qualified in its entirety by reference to such financial
statements and the notes thereto.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,042
<SECURITIES> 0
<RECEIVABLES> 111
<ALLOWANCES> 0
<INVENTORY> 77
<CURRENT-ASSETS> 3,087
<PP&E> 852
<DEPRECIATION> 283
<TOTAL-ASSETS> 3,953
<CURRENT-LIABILITIES> 2,135
<BONDS> 0
0
0
<COMMON> 20
<OTHER-SE> 1,362
<TOTAL-LIABILITY-AND-EQUITY> 3,953
<SALES> 3,162
<TOTAL-REVENUES> 3,162
<CGS> 4,337
<TOTAL-COSTS> 4,337
<OTHER-EXPENSES> 59
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22
<INCOME-PRETAX> (1,094)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,094)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,094)
<EPS-PRIMARY> (0.63)
<EPS-DILUTED> (0.63)
</TABLE>
