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 March 31, 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 February 12, 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 Statement of Operations 2
Unaudited Consolidated Statements of Cash Flows 3
Unaudited Notes to Consolidated Financial Statements 4-7
Item 2. Management's Discussion
and Analysis of
Financial Condition and Results of Operations 8-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
________________________________________________________
KIDDIE ACADEMY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
ASSETS March 31, September 30,
1996 1995
<S> <C> <S>
Current assets:
Cash and cash equivalents $2,396,557 $51,527
Accounts receivable 139,343 75,640
Prepaid expenses 91,125 5,065
Inventory 27,329 6,498
Notes receivable, current 22,623 21,454
Franchise development costs 621,198 554,106
Deferred offering costs - 485,837
Total current assets 3,298,175 1,200,127
Property and equipment 737,237 331,211
Accumulated depreciation (252,768) (234,545)
Net property and equipment 484,469 96,666
Notes receivable, long-term 135,770 85,115
Goodwill 61,223 -
Deposits 69,036 16,227
Total assets $4,048,673 1,398,135
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable - $549,861
Accounts payable and accrued expenses $590,345 892,778
Deferred franchise license fees 1,056,421 1,065,371
Current portion of long-term debt 64,912 291
<PAGE>
Current portion of deferred rent
credits 93,993 93,993
Total current liabilities 1,805,671 2,602,294
Long-term debt 128,738 -
Stockholder notes - 87,722
Deferred rent credits 328,972 375,968
Total liabilities 2,263,381 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
(03/31/96); 925,000 (09/30/95) shares: 20,250 9,250
Additional paid-in capital 4,213,284 214,505
Accumulated deficit (2,448,242) (1,781,604)
Deferred compensation 0 (110,000)
Total stockholders' equity
(deficit) 1,785,292 (1,667,849)
Total liabilities and stockholders'
equity (deficit) $4,048,673 $1,398,135
</TABLE>
See notes to consolidated financial statements (unaudited).
<PAGE>
KIDDIE ACADEMY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
REVENUES: 1996 1995 1996 1995
<S> <C> <C> <C> <C>
Company-owned child care centers $687,014 $323,082 $1,185,348 $737,985
Franchise license fees 84,047 91,412 218,410 151,412
Franchise royalties 178,019 93,448 332,000 165,267
Product sales 67,117 61,551 112,848 88,221
Other 18,876 10,063 37,376 18,670
Total revenue 1,035,073 579,556 1,885,982 1,161,555
OPERATING EXPENSES:
Company-owned child care centers 905,792 413,532 1,530,341 770,224
Cost of product sales 52,682 42,691 80,253 68,203
General and administrative 545,658 401,512 999,119 733,322
Total operating expenses 1,504,132 857,735 2,609,713 1,571,749
Income (loss) from operations (469,059)(278,179) (723,731) (410,194)
INTEREST INCOME (EXPENSE) 33,153 (67,255) (2,093) (130,672)
OTHER INCOME (EXPENSE), net 57,391 3,680 59,186 9,921
NET (LOSS) $(378,515) $(341,754) $(666,638) $(530,945)
NET (LOSS) PER COMMON SHARE $ (0.18) $ (0.35) $ (0.42) $ (0.55)
WEIGHTED AVERAGE SHARES
OUTSTANDING 2,051,909 964,709 1,593,576 964,709
DIVIDENDS PAID PER SHARE $0.00 $0.00 $ 0.00 $0.00
</TABLE>
See notes to consolidated financial statements (unaudited).
<PAGE>
KIDDIE ACADEMY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net (loss) ($666,638) ($530,945)
Adjustments to reconcile net loss to
net cash (used) provided by
operating activities:
Depreciation and amortization 21,822 13,378
Gain on sale of assets (56,598) -
Amortization of debt issuance costs 26,667 -
Changes in assets and liabilities:
Accounts receivable (63,703) (1,904)
Inventory (20,831) -
Notes receivable (51,824) 17,759
Franchise development costs (69,092) (113,420)
Other assets (136,869) 2,500
Accounts payable and accrued expenses (12,477) 74,878
Deferred franchise license fees (8,950) 138,846
Other liabilities - 131,899
__________ __________
Net cash used by operating activities (1,038,493) (267,009)
Cash flows from investing activities:
Acquisition of property and equipment (467,507) 2,781
Proceeds from disposal of property
and equipment 40,000 -
__________ __________
Net cash (used) provided by
investing activities (427,507) 2,781
Cash flows from financing activities:
Borrowings from / (payments to)
notes payable (149,861) 89,511
Borrowings from / (payments to)
shareholders (87,722) 7,595
<PAGE>
Net proceeds from IPO 3,998,613 -
Payments to affiliates - -
Payments from affiliates - 86,755
Borrowings/(Payments) of long-term debt 50,000 (5,955)
__________ ___________
Net cash provided by financing activities 3,811,030 177,906
Net (decrease) increase in cash 2,345,030 (86,322)
Cash, beginning of period 51,527 137,849
__________ __________
Cash, end of period $2,396,557 $51,527
Non-cash investing and financing
activities Write off-of deferred
compensation $110,000 -
</TABLE>
See notes to consolidated financial statements (unaudited).
<PAGE>
KIDDIE ACADEMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
MARCH 31, 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, George 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
<PAGE>
entities under common control in a manner similar to a pooling of interests and
to give retroactive effect to the reverse stock split and stock split. As of
March 31, 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 of the present
<PAGE>
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 related 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 March 31, 1996, funds held in
escrow amounted to approximately $56,000.
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 $1,056,421 and $926,526 at March
31, 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
<PAGE>
statements or tax returns. Under this method, deferred tax assets 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 March 31, 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
for the quarter ended March 31, 1996.
(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
<PAGE>
additional information concerning net asset valuations is obtained. Therefore,
the final allocation may differ from the preliminary allocation.
2. Indebtedness
Notes Payable
The Company has available two bank lines of credit which permit the Company
to borrow up to $350,000 of which $150,000 is at 2% over the Bank's prime rate
and $200,000 is at 1.5% over the Bank's prime rate. Borrowings under the first
agreement are collateralized by all assets of Kiddie Academy International, Inc.
and Penguin Properties Corporation, an entity owned by certain officers and
directors of the Company, and are personally guaranteed by certain stockholders
of the Company. The second line of credit is collateralized by all inventory,
equipment and account receivables of Kiddie Academy International, Inc. At
March 31, 1996 and 1995, $0 and $115,000 was outstanding on the lines of credit,
respectively. The lines of credit expire on June 30, 1996 and February 22,
1997.
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 four 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 who 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.
<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. Within the last three years, 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 42 open centers (14 of which are Company-owned and operated and 28
of which are franchised), with an additional 76 centers in development (52
franchised centers and 24 company-owned centers), as illustrated in the
following chart:
[Graphic material showing Kiddie Academy Centers open and
under development at 3\31\94, 3\31\95 and 3\31\96]
<PAGE>
Of the 76 centers currently in development, there are 48 centers in site
selection (32 franchised and 16 Company-owned), 21 centers are under lease (13
franchised and eight Company-owned), and seven franchised centers are under
construction.
Overall, Kiddie Academy centers are open or under development in 18 states.
The Company has entered into Purchase Agreements with four 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. 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
<PAGE>
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 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 March 31, 1996 was 3,008 children up from 2,545
children as of December 31, 1995 or an increase of 18% for the quarter.
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 size 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 increasing ties 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 centers enables the Company to reduce
start-up and ongoing supply expenses.
<PAGE>
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 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 six month period ended March 31,
1996, the Company entered into 17 Site Selection/Preliminary Agreements - 14 of
which were in the 2nd quarter (post IPO).
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 March 31, 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. The Company expects that such expansion will
<PAGE>
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.
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.
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 Six Months Ended
March 31, March 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Systemwide centers open 42 24 42 24
Systemwide revenues . . $3,230,000 $1,658,000 $5,928,000 $3,099,000
Revenues from operations
Company-owned centers. $ 687,000 66% $ 323,000 56% $1,185,000 63% $ 738,000
64%
Franchising operations $ 281,000 27% 196,000 34% $ 588,000 31% $ 336,000
29%
Product sales. . . . . $ 67,000 7% $ 61,000 10% $ 113,000 6% $ 88,000
7%
Total Revenues . . $1,035,000 100%$ 580,000 100%$1,886,000
100%$1,162,000 100%
Operating expenses. . $1,504,000 145%$ 858,000 148%$2,610,000
138%$1,572,000 135%
<PAGE>
Net operating (loss).
$(469,000)(45)%$(278,000)(48)%$(724,000)(38)% $(410,000)(35)%
Interest income
(expense) . . . . $ 33,000 3% $(68,000)(12)% $ (2,000) -- $(131,000)(11)%
Other income . . . . $ 57,000 6 % $ 4,000 1% $ 59,000 3% $ 10,000 1%
Loss before taxes $(379,000)(37)% $(342,000)(59)% $(667,000)(35)% $(531,000)(46)%
</TABLE>
Quarter Ended March 31, 1996 Compared to Quarter Ended March 31, 1995
Revenues
Systemwide revenues (tuition fees from Company-owned and franchised
centers) for the quarter ended March 31, 1996 increased by 95%, to $3,230,000
from $1,658,000 for the quarter ended March 31, 1995. This increase was due to
an increase in the total number of centers open to 42 at March 31, 1996, as
compared to 24 open at March 31, 1995 and an increase in average enrollment
levels at centers which were open during both quarters.
The Company's revenues from operations for the quarter ended March 31, 1996
increased by 78%, to $1,035,000 from $580,000 for the quarter ended March 31,
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
March 31, 1996, which constituted 66% of revenues from operations, increased by
113%, to $687,000 from $323,000 for the quarter ended March 31, 1995. This
increase was due to the increase in the number of Company-owned centers owned
and operated during the quarter ended March 31, 1996 to 14 as compared to four
for the quarter ended March 31, 1995. The Company purchased three centers from
franchisees and is in the process of purchasing four other centers, which it
currently manages, in the quarter ended March 31, 1996. Additionally, the
Company opened one new center during this quarter and sold one existing Company
center.
Revenues from franchising activities (franchising fees, royalties and
administrative fees) for the quarter ended March 31, 1996, which constituted 27%
of revenues from operations, increased by 43%, to $281,000 from $196,000 for the
quarter ended March 31, 1995. Revenues from franchise fees for the quarter
ended March 31, 1996 decreased by 7%, to $84,000 from $92,000 for the quarter
<PAGE>
ended March 31, 1995. Royalties for the quarter ended March 31, 1996 increased
by 91%, to $178,000 from $94,000 for the quarter ended March 31, 1995.
Administrative fees for the quarter ended March 31, 1996 increased by 90%, to
$19,000 from $10,000 for the quarter ended March 31, 1995. The decrease in
revenues from franchise fees is a factor of the number of centers that actually
open during the period. Two opened in the quarter ended March 31, 1996 and
three opened in the quarter ended March 31, 1995. The increase in royalties and
administrative fees resulted from the increase in the number of franchised
centers open during the quarter ended March 31, 1996 to 28 from 18 during the
quarter ended March 31, 1995.
Sales revenues generated by Kid's Craft for the quarter ended March 31,
1996, which constituted 7% of revenues from operations, increased by 10%, to
$67,000 from $61,000 for the quarter ended March 31, 1995, primarily as a result
of sales to the two new franchised centers opening during this period and
ongoing sales to existing franchise centers.
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 March 31, 1996 increased
by 75%, to $1,504,000 from $858,000 in the quarter ended March 31, 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 March 31, 1996 as
compared to four Company-owned centers in the quarter ended March 31, 1995. As
a percentage of operating revenues, operating expenses decreased to
approximately 145% for the quarter ended March 31, 1996 from approximately 148%
for the quarter ended March 31, 1995.
Operating expenses relating to Company-owned centers for the quarter ended
March 31, 1996, which constituted 60% of total operating expenses, increased by
119%, to $906,000 from $414,000 for the quarter ended March 31, 1995. The
increase in operating expenses for Company-owned centers and managed centers for
<PAGE>
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 36% of total
operating expenses and which include the costs of corporate overhead,
franchising operations and operating expenses for Kid's Craft, for quarter ended
March 31, 1996 increased by 36%, to $546,000 from $402,000 for the quarter ended
March 31, 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 March 31, 1996,
which constituted 4% of total operating expenses, increased by 23%, to $53,000
from $43,000 for the quarter ended March 31, 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 and organizational costs.
Depreciation and amortization expense, for the quarter ended March 31, 1996
increased by $13,000 to $15,000 from $2,000 for the quarter ended March 31,
1995. This increase was primarily due to the purchases of equipment, partially
offset by a decrease in depreciation expense resulting from a center that was
sold in 1995, the leases of which center had been accounted for as capital
lease.
<PAGE>
Interest
Interest expense for the quarter ended March 31, 1996 decreased by 149%, to
$33,000 of interest income from $68,000 of interest expense for the quarter
ended March 31, 1995. This increase in interest income was due to zero
borrowings throughout the quarter and interest income from overnight investments
in the Company's sweep account.
Other Income
For the quarter ended March 31, 1996, the Company recorded other income of
$57,000, and in the quarter ended March 31, 1995, $4,000. 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
quarter ended March 31, 1996 of $379,000 as compared to a net loss of $342,000
for the quarter ended March 31, 1995.
Six Months Ended March 31, 1996 Compared to Six Months Ended March 31, 1995
Revenues
Systemwide revenues for the six months ended March 31, 1996 increased by
91%, to $5,928,000 from $3,099,000 for the six months ended March 31, 1995.
This increase was due to an increase in the total number of centers open to 42
at March 31, 1996, as compared to 24 open at March 31, 1995 and an increase in
average enrollment levels at centers which were open during both periods.
The Company's revenues from operations for the six months ended March 31,
1996 increased by 62%, to $1,886,000 from $1,162,000 for the six months ended
March 31, 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 six months
ended March 31, 1996, which constituted 63% of revenues from operations,
increased by 61%, to $1,185,000 from $738,000 for the six months ended March 31,
1995. This increase was due to the increase in the number of Company-owned
centers owned and operated during the six months ended March 31, 1996 to 14 as
compared to the six months ended March 31, 1995 which started with seven Company
- -owned centers and was reduced to four due to three being sold
to
<PAGE>
franchisees. During the six month period ended March 31, 1996 the Company
opened one new center, sold an existing center, purchased three centers from
franchisees and is in the process of purchasing four other centers (which the
Company currently manages).
Revenues from franchising activities (franchising fees, royalties and
administrative fees) for the six months ended March 31, 1996, which constituted
31% of revenues from operations, increased by 75%, to $588,000 from $336,000 for
the six months ended March 31, 1995. Revenues from franchise fees for the six
months ended March 31, 1996 increased by 44%, to $218,000 from $151,000 for the
six months ended March 31, 1995. Royalties for the six months ended March 31,
1996 increased by 101%, to $332,000 from $165,000 for the six months ended March
31, 1995. Administrative fees for the six months ended March 31, 1996 increased
by 95%, to $37,000 from $19,000 for the six months ended March 31, 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
six months ended March 31, 1996 to 28 from 18 during the six months ended March
31, 1995.
Sales revenues generated by Kid's Craft for the six months ended March 31,
1996, which constituted 6% of revenues from operations, increased by 28%, to
$113,000 from $88,000 for the six months ended March 31, 1995, primarily as a
result of sales to the six new franchised centers opening during this period and
ongoing sales to existing franchise centers.
Operating Expenses
Aggregate operating expenses for the six months ended March 31, 1996
increased by 66%, to $2,610,000 from $1,572,000 in the six months ended March
31, 1995. As a percentage of operating revenues, operating expenses increased
to approximately 138% for the six months ended March 31, 1996 from approximately
135% for the six months ended March 31, 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 six months
ended March 31, 1996, which constituted 59% of total operating expenses,
increased by 99%, to $1,530,000 from $770,000 for the six months ended March 31,
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
<PAGE>
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 38% of total
operating expenses and which include the costs of corporate overhead,
franchising operations and operating expenses for Kid's Craft, for the six
months ended March 31, 1996 increased by 36%, to $999,000 from $733,000 for the
six months ended March 31, 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 six months ended March 31, 1996,
which constituted 3% of total operating expenses, increased by 18%, to $80,000
from $68,000 for the six months ended March 31, 1995. This increase was
primarily due to an increase in product sales and freight costs.
Depreciation and Amortization
Depreciation and amortization expense for the six months ended March 31,
1996 increased by $9,000 to $22,000 from $13,000 for the six months ended March
31, 1995. This increase was primarily due to the purchases of equipment,
partially offset by a decrease in depreciation expense resulting from a center
that was sold in 1995, the leases of which center had been accounted for as
capital lease.
Interest
Interest expense for the six months ended March 31, 1996 decreased by 98%,
to $2,000 from $131,000 for the six months ended March 31, 1995. These
<PAGE>
decreases 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 six months ended March 31, 1996, the Company recorded other income
of $59,000, and in the six months ended March 31, 1995, $10,000. 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 six
months ended March 31, 1996 of $667,000 as compared to a net loss of $531,000
for the six months ended March 31, 1995.
Liquidity and Capital Resources
Cash flow for the six months ended March 31, 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 $667,000, payments
of notes of $150,000 and payment to shareholders of $88,000. In the six months
ended March 31, 1995 the Company had a $531,000 loss and borrowings on note
payables of $90,000.
The Company has available two bank lines of credit which permits the
Company to borrow up to $350,000 of which $150,000 is at 2% over the Bank's
prime rate and $200,000 is at 1.5% over the Bank's prime rate. Borrowings under
the first agreement are collateralized by all assets of Kiddie Academy
International, Inc. and Penguin Properties Corporation, an entity owned by
certain officers and directors of the Company, and are personally guaranteed by
certain stockholders of the Company. The second line of credit is collateralized
by all inventory, equipment and account receivables of Kiddie Academy
International, Inc. At March 31, 1996 and 1995, $0 and $115,000 were
outstanding on the lines of credit, respectively. The lines of credit expire on
June 30, 1996 and February 22, 1997.
As of March 31, 1996, the Company's total debt obligations (exclusive of
trade credit) were $193,650 which included a $50,000 equipment 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
<PAGE>
and debt obligations. The Company's long-term plans consist of opening 15
Company-owned centers through December 1997. As of March 31, 1996 the Company
has reached 47% of that goal by adding seven centers. This is an increase of
250% from March 31, 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.
<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 in which the Company is currently involved in 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.
<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.
May 14, 1996 BY: /s/ George Miller
Date George Miller
CEO/Chairman of the Board
May 14, 1996 BY: /s/ Guy A. Matta
Date Guy A. Matta
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information derived from Kiddie Academy
International, Inc.'s unaudited financial statements for the six months ending
March 31, 1996, and is qualified in its entirety by reference to such financial
statements and the notes thereto.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 2,397
<SECURITIES> 0
<RECEIVABLES> 139
<ALLOWANCES> 0
<INVENTORY> 27
<CURRENT-ASSETS> 3,298
<PP&E> 737
<DEPRECIATION> 253
<TOTAL-ASSETS> 4,049
<CURRENT-LIABILITIES> 1,806
<BONDS> 0
0
0
<COMMON> 20
<OTHER-SE> 1,785
<TOTAL-LIABILITY-AND-EQUITY> 4,049
<SALES> 1,886
<TOTAL-REVENUES> 1,886
<CGS> 2,610
<TOTAL-COSTS> 2,610
<OTHER-EXPENSES> 59
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> (667)
<INCOME-TAX> 0
<INCOME-CONTINUING> (667)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (667)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> (0.42)
</TABLE>
<PAGE>
EXHIBIT 11
KIDDIE ACADEMY INTERNATIONAL, INC.
COMPUTATION OF EARNINGS PER COMMON
AND COMMON EQUIVALENT SHARE
<TABLE>
<CAPTION>
QUARTER QUARTER SIX MONTHS
ENDED ENDED ENDED ENDED
03/31/96 03/31/95 03/31/96 03/31/95
<S> <C> <C> <C> <C>
Net Loss ($378,515) ($341,754) ($666,638) ($530,945)
Average shares outstanding,
end of period 2,025,000 925,000 1,566,667 925,000
Effect of bridge warrants
after application of
treasury stock method 26,909 26,909 26.909 26,909
Effect of stock options
after application of treasury 0 12,800 0 12,800
stock method
Average number of
shares outstanding during
the period 2,051,909 964,709 1,593,576 964,709
Earnings per common and
common equivalent shares ($0.18) ($0.35) ($0.42) ($0.55)
</TABLE>
