The following items were the subject of a Form 12b-25 and are included
herein: Part I, Item 2 and Part II, Item 3
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB/A
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 13, 1997
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 April 13, 1997:
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:
Consolidated Balance Sheets for April 13, 1997 (Unaudited)
and September 29, 1996 1
Unaudited Consolidated Statements of Operations 2
Unaudited Consolidated Statements of Cash Flows 3
Notes to Unaudited Consolidated Financial Statements 4-5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 6
Item 2. Changes in Securities 6
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters 6
Item 5. Other Information 7
Item 6. Exhibits and Reports on Form 8-K 8
Exhibit 27 Financial Data Schedule
Signature 9
<PAGE>
Part 1. FINANCIAL INFORMATION
Item 1. Financial Statements
KIDDIE ACADEMY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS April 13, September 29,
1997
(UNAUDITED) 1996
----------------- -----------------
<S> <C>
Current assets:
Cash and cash equivalents $141,070 $1,232,098
Restricted cash 255,000 --
Accounts receivable 133,405 127,972
Prepaid expenses 217,491 60,024
Inventories 101,740 90,347
Notes receivable, current 39,880 15,361
Franchise development costs 773,675 699,527
----------------- ------------------
Total current assets 1,662,261 2,225,329
----------------- ------------------
Property and equipment 1,099,088 1,057,066
Accumulated depreciation (378,298) (300,086)
----------------- ------------------
Net property and equipment 720,790 756,980
----------------- ------------------
Notes receivable, long-term 136,344 136,635
Goodwill 144,815 116,910
Deposits 104,150 105,437
----------------- ------------------
Total assets $2,768,360 $3,341,291
================= ==================
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Notes payable $255,000 --
Accounts payable and accrued expenses 844,565 $787,654
Deferred franchise license fees 1,088,001 1,125,002
Current portion of long-term debt 59,413 111,114
Current portion of deferred rent credits 93,992 93,992
----------------- ------------------
Total current liabilities 2,340,971 2,117,762
----------------- ------------------
Long-term debt 118,424 190,312
Deferred rent payments 275,846 159,005
Deferred rent credits 231,365 281,976
----------------- ------------------
Total liabilities 2,966,606 2,749,055
----------------- ------------------
Stockholders' equity
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 20,250 20,250
outstanding 2,025,000
Additional paid-in capital 4,294,891 4,260,280
Accumulated deficit (4,513,387) (3,688,294)
----------------- ------------------
Total stockholders' (deficit) equity (198,246) 592,236
----------------- ------------------
Total liabilities and stockholders'
(deficit) equity $2,768,360 $3,341,291
================= ==================
</TABLE>
See notes to consolidated financial statements (unaudited).
1
<PAGE>
KIDDIE ACADEMY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
12 weeks 13 weeks 28 weeks 26 weeks
ended April 13, ended March 31, ended April 13, ended March 31,
1997 1996 1997 1996
------------------ ------------------- ----------------- ----------------------
<S> <C>
REVENUES:
Company-owned mature centers $494,148 $419,713 $1,036,943 $786,901
Company-owned new centers 1,017,693 267,301 2,037,979 398,447
Franchise license fees 105,000 84,047 230,000 218,410
Franchise royalties 270,401 178,019 594,268 332,000
Product sales 103,259 67,117 338,654 112,848
Administrative fees 21,029 18,876 47,133 37,376
------------------ ------------------- ----------------- ----------------------
Total revenue 2,011,530 1,035,073 4,284,977 1,885,982
OPERATING EXPENSES:
Company-owned mature centers 432,334 367,817 909,993 736,472
Company-owned new centers 1,284,986 537,975 2,756,497 793,869
Cost of product sales 82,820 52,682 253,857 80,253
General and administrative 683,014 545,658 1,348,737 999,119
------------------ ------------------- ----------------- ----------------------
Total operating expenses 2,483,154 1,504,132 5,269,084 2,609,713
------------------ ------------------- ----------------- ----------------------
Loss from operations (471,624) (469,059) (984,107) (723,731)
INTEREST INCOME (EXPENSE) 270 33,153 8,302 (2,093)
OTHER INCOME, net 8,783 57,391 150,712 59,186
------------------ ------------------- ----------------- ----------------------
NET LOSS ($462,571) ($378,515) ($825,093) ($666,638)
================== =================== ================= ======================
NET LOSS PER COMMON SHARE ($0.23) ($0.18) ($0.41) ($0.42)
================== =================== ================= ======================
WEIGHTED AVERAGE SHARES OUTSTANDING
2,025,000 2,051,909 2,025,000 1,593,576
================== =================== ================= ======================
</TABLE>
See notes to consolidated financial statements (unaudited).
2
<PAGE>
KIDDIE ACADEMY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
28 weeks ended 26 weeks ended
April 13, 1997 March 31, 1996
------------------- --------------------
<S> <C>
Cash flows from operating activities
Net loss ($825,093) ($666,638)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 78,212 21,822
Gain on disposal of asset (77,388) (56,598)
Gain on extinguishment of debt (66,092) --
Amortization of debt issuance costs -- 26,667
Changes in assets and liabilities:
Restricted Cash (255,000) --
Accounts receivable (5,433) (63,703)
Inventory (11,393) (20,831)
Notes receivable (9,060) (51,824)
Franchise development costs (74,148) (69,092)
Other assets (26,508) (136,869)
Accounts payable and accrued expenses 56,911 (12,477)
Deferred franchise license fees (37,001) (8,950)
------------------- --------------------
Net cash used in operating activities (1,251,993) (1,038,493)
------------------- --------------------
Cash flows from investing activities:
Disposal (acquisition) of property and equipment 5,780 (467,507)
Proceeds from disposal of property and equipment
-- 40,000
Net cash (used) provided in investing activities 5,780 (427,507)
------------------- --------------------
Cash flows from financing activities:
Borrowings/(payments) on notes payable 255,000 (149,861)
Payments to shareholders -- (87,722)
Proceeds from IPO -- 3,998,613
Borrowings/(payments) of long-term debt (99,815) 50,000
------------------- --------------------
Net cash provided in financing activities 155,185 3,811,030
------------------- --------------------
Net (decrease) increase in cash (1,091,028) 2,345,030
Cash, beginning of period 1,232,098 51,527
------------------- --------------------
Cash, end of period $141,070 $2,396,557
=================== ====================
Non-cash investing and financing activities:
Write-off of deferred compensation -- $110,000
Early retirement of long-term debt $62,738 --
Notes received in connection with sale of center 98,815 --
Notes payable in connection with purchase of center 51,435 --
Notes receivable retired in connection with
purchase of center 68,657 --
------------------- -------------------
Total non-cash activities $281,645 $110,000
=================== ====================
</TABLE>
See notes to consolidated financial statements (unaudited).
3
<PAGE>
KIDDIE ACADEMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
APRIL 13, 1997 AND MARCH 31, 1996
1. Summary of Significant Accounting Policies
(a) 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 consolidated financial statements include the accounts of the
Company and its subsidiaries. All intercompany transactions have been
eliminated. 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 the Company's annual Form 10-KSB.
(b) Net Loss Per Common Share
Net loss per common share is determined by dividing the net loss by the
weighted average number of common and common share equivalents outstanding.
Weighted average shares used in computing net loss per common share for the
period ended April 13, 1997 consist solely of 2,025,000 shares of common stock
issued, as the effect of the warrants would be antidilutive. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, stock
options and warrants granted during the 12-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 the period ended March 31, 1996 common share equivalents, using the treasury
stock method, for the period. Weighted average shares used in computing net loss
per common share for the period ended March 31, 1996 consist of 2,051,909
weighted average shares of common stock outstanding and common stock
equivalents.
(c) Fiscal Year-end
During fiscal year 1996, the Company changed its fiscal year to a 52 or
53 week period which ends the Sunday nearest to September 30. As a result, the
first quarter of fiscal year 1997 ended on January 19, 1997, the second quarter
ended April 13, 1997, and the third quarter will end on July 6, 1997.
2. Restricted Cash
The Company has borrowed $255,000 on its $500,000 Certificate of
Deposit (CD) Line of Credit as of April 13, 1997. This amount is reflected in
current liabilities as a note payable
4
<PAGE>
and the applicable portion of the CD is reflected as restricted cash. The
CD earned 4.95% interest and borrowings against the CD incur interest expense
of 6.95%. On June 2, 1997, the Company was advised that its $200,000 Line of
Credit with Sparks Bank had been withdrawn.
3. Commitments and Contingencies
In October 1996, the Company entered into a three-year employment
agreement with Angelo D. Bizzarro, the Company's new Chief Executive Officer.
The agreement calls for a minimum salary level, a bonus based on a percentage of
pre-tax profits and various stock options, including a) 75,000 non-qualified
stock options (at an exercise price of $3.64 per share); b) 25,000 incentive
stock options (at an exercise price of $2.56 per share); and c) 100,000
incentive stock options (at an exercise price of $2.13 per share). Also in
October 1996, the employment agreements with George Miller and Michael Miller
were each extended to expire on February 19, 2000.
In many instances, the Company has guaranteed some or all of a
franchisee's obligations under the lease for the franchisee's child care center.
The Company is subject to complaints and claims arising in the ordinary
course of business, including its business as a franchisor. Except as noted in
Part II, Item 1 the Company believes that none of the current claims or
complaints are material to the Company's consolidated financial position.
4. Earnings Per Share
In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (EPS)
which simplifies the standards for computing EPS previously found in APB Opinion
No. 15 and makes them comparable to international EPS standards. The Statement
is effective for financial statements issued for periods ending after December
15, 1997. Had the following statement been effective for the quarters and the
six months ended April 13, 1997 and March 31, 1996, earnings per share would
have been presented as follows:
<TABLE>
<CAPTION>
12 weeks 13 weeks 28 weeks 26 weeks
ended ended ended ended
April 13, March 31, April 13, March 31,
1996 1997 1996 1997
---------- ---------- ----------- -----------
<S> <C>
1. Earnings per common share ($.23) ($0.18) ($.41) ($0.42)
2. Earning per common share-
assuming dilution ($.23) ($0.18) ($.41) ($0.42)
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Item is omitted and will be filed by amendment pursuant to Rule 12b-25.
5
<PAGE>
ITEM 2. 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.
Forward-Looking Statements
When used in this report, press releases and elsewhere by management of
the Company from time to time, the words "believes," "anticipates," and
"expects" and similar expressions are intended to identify forward-looking
statements that involve certain risks and uncertainties. A variety of factors
could cause actual results to differ materially from those anticipated in the
Company's forward-looking statements, the most critical of which is the
Company's ability to identify additional financing in the immediate future. (See
Liquidity and Capital Resources.) Additional factors include the Company's
ability to restructure rent obligations at certain centers on terms that will
allow those centers to be profitable at reasonable enrollment levels; the
Company's ability to "ramp-up" newly acquired centers to profitable enrollment
levels within a reasonable period of time; the Company's ability to identify and
secure on acceptable terms suitable locations on which to construct new
Company-owned or franchised centers; the Company's continued ability to compete
with this segment of the market; the relatively small number of Company-owned
and franchised centers currently operating which could cause poor operating
results at any one center or any unsuccessful new center opening to negatively
impact the Company's overall results to a greater result than would be the case
in a larger chain; the Company's dependence on franchisees which could cause the
Company's revenues from franchise fees and royalties to be adversely affected if
the Company's franchisees experience business or operational difficulties; the
failure of one or more franchisees to meet its or their obligations under its or
their leases which could have a material adverse effect on the business,
operations and financial condition of the Company to the extent such obligations
have been guaranteed by the Company; the Company's need to comply with numerous
state and local governmental regulations and licensing requirements; and other
risk factors that are discussed from time to time in the Company's SEC reports.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date thereof. The Company undertakes no
obligation to publicly release the results of any events or circumstances after
the date hereof or to reflect the occurrence of unanticipated events.
General
The Company derives revenue from three sources: (i) weekly tuition
generated at the 20 Company-owned and operated centers; (ii) fees from
franchisees, including one-time franchise licensing fees currently totaling
$40,000 per new franchised center, ongoing royalties equal to 7% of each
franchised center's gross revenues, and weekly administrative fees of
approximately $54 per franchised center; and (iii) the sale of school supplies,
educational toys and equipment by
1
<PAGE>
Kid's Craft. The Company currently consists of 56 centers (20 of which are
Company owned and 36 of which are franchised).
The number of franchised centers increased during the 12 week period
ended April 13, 1997 by the opening of four new centers.
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 consolidated 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, as required by generally accepted
accounting principles. 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. During fiscal year 1997, a
change in the Company's fee structure is expected to permit $10,000 of initial
fees paid by each applicant to be recognized approximately 30 days after the
applicant executes a Preliminary Agreement with the Company.
The significant growth in the number of Company-owned centers
experienced by the Company during fiscal year 1996 and continued growth during
the first two quarters of fiscal year 1997 contributed significantly to the
Company's continued losses. During this period, the number of Company-owned or
operated centers increased from seven to 20. Of these 20 centers, thirteen were
not yet profitable at the end of the period ended April 13, 1997 and the losses
from these thirteen centers was greater than the income earned by the remaining
seven centers.
The Company believes that its continued losses are attributable to
three major causes: first, the fixed rent structure at many centers is too high
for the center to be profitable at reasonable enrollment levels, and second, new
centers require up to twenty-four months to "ramp-up" to profitable enrollment
levels, and all of the newly acquired centers are still in the "ramp-up" stage,
and third, approximately two-thirds of the Company-owned centers were taken over
from franchisees, and the "ramp-up" period for those centers has been longer
than anticipated.
With respect to the rents, the Company has determined that the rent
structure at many of its centers so great that the center's enrollment level is
required to be much higher than that which is usually experienced within the
industry in order for a child care center to be profitable. Further, the rent at
three centers is so high that the Company believes that these centers may never
be profitable. The Company is in the process of attempting to renegotiate the
rents at most of its Company-owned centers in order to reduce the rents to a
level that will allow these centers to become profitable at reasonable
enrollment levels.
In addition, 15 of the Company's centers have not had adequate time to
"ramp-up" to profitable enrollment levels. New centers typically require up to
24 months to "ramp-up", and of the Company-owned centers, only five have been
operated by the Company for more than 24
2
<PAGE>
months. In addition, many of the centers purchased by the Company during fiscal
years 1996 and 1997 were acquired from franchisees. These centers have
required a longer than average period to "ramp-up" than that experienced with
new centers because the Company has not had, with respect to each of these
centers, the advantage of the enrollment surge which accompanies a typical
grand opening, and because of the natural repercussion of changing ownership,
and the need to overcome any negative reputation that may have been associated
with the former management of the applicable center. The Company believes that
when the newly acquired centers have had adequate time to "ramp-up", most will
reach profitability, if the rents can be renegotiated to reasonable levels as
described above. In addition, the Company hopes to significantly reduce number
of centers acquired from its franchisees in the future by enhancing its support
systems for franchisees and increasing its franchisee net worth and
capitalization requirements.
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 the period and systemwide revenues), and
amounts expressed as a percentage of revenues from operations. Due to the
Company changing to a 52/53 week fiscal year, the quarter ended April 13, 1997
consists of 12 weeks and the quarter ended March 31, 1996 consists of 13 weeks.
The year to date comparisons will include 28 weeks for the period ended April
13, 1997 and 26 weeks for the period ended March 31, 1996. While this has a
minor impact on comparability, it was not deemed material enough to provide a
pro forma of these results.
3
<PAGE>
<TABLE>
<CAPTION>
12 weeks 13 weeks 28 weeks 26 weeks
ended April 13, ended March 31, ended April 13, ended March 31,
1997 1996 1997 1996
--------------- -------------- --------------- ----------------
<S> <C>
Systemwide centers open 56 42 56 42
Systemwide revenues $5,375,000 $3,230,000 $11,564,000 $5,928,000
================ =============== ================ ================
Revenues from operations:
Company-owned centers $1,512,000 75% $687,000 66% $3,075,000 72% $1,185,000 63%
Franchise operations $396,000 20% $281,000 27% $871,000 20% $588,000 31%
Product sales $103,000 5% $67,000 7% $339,000 8% $113,000 6%
---------------- --------------- ---------------- ----------------
Total Revenues $2,011,000 100% $1,035,000 100% $4,285,000 100% $1,886,000 100%
Operating Expenses $2,483,000 123% $1,504,000 145% $5,269,000 123% $2,610,000 138%
---------------- --------------- ---------------- ----------------
Net operating loss ($472,000) -23% ($469,000) -45% ($984,000) -23% ($724,000) -38%
Interest income (expense) $0 0% $33,000 3% $8,000 0% ($2,000) -0%
Other income $9,000 0% $57,000 6% $151,000 4% $59,000 3%
---------------- --------------- ---------------- ----------------
Net Loss ($463,000) -23% ($379,000) -37% ($825,000) -19% ($667,000) -35%
================ =============== ================ ================
</TABLE>
4
<PAGE>
Twelve-Week Period Ended April 13, 1997 Compared
to Thirteen-Week Period Ended March 31, 1996
Revenues
Systemwide revenues (tuition fees from Company-owned and franchised
centers) for the period ended April 13, 1997 increased by 66%, to $5,375,000
from $3,230,000 for the period ended March 31, 1996. This increase was due to an
increase in the total number of centers open to 56 at April 13, 1997, as
compared to 42 open at March 31, 1996, and an increase in average enrollment
levels at centers which were open during both periods.
The Company's revenues from operations for the period ended April 13,
1997 increased by 94%, to $2,011,000 from $1,035,000 for the period ended March
31, 1996. This increase was primarily due to the increase in revenues generated
by an increased number of Company-owned centers, as well as 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 period
ended April 13, 1997, which constituted 75% of revenues from operations,
increased by 120%, to $1,512,000 from $687,000 for the period ended March 31,
1996. This increase was due to the increase in the number of Company-owned
centers owned and operated during the period ended April 13, 1997 to 20 as
compared to 14 Company-owned centers at the end of the period ended March 31,
1996, as well as an increase in the average enrollment in those centers.
Revenues from franchising activities (franchising fees, royalties and
administrative fees) for the period ended April 13, 1997, which constituted 20%
of revenues from operations, increased by 41%, to $396,000 from $281,000 for the
period ended March 31, 1996. Revenues from franchise fees for the period ended
April 13, 1997 increased by 25%, to $105,000 from $84,000 for the period ended
March 31, 1996. Royalties for the period ended April 13, 1997 increased by 52%,
to $270,000 from $178,000 for the period ended March 31, 1996. Administrative
fees for the period ended April 13, 1997 increased by 11%, to $21,000 from
$19,000 for the period ended March 31, 1996. The increase in franchise fees is
attributable to the number of franchised centers opening during the applicable
period. Four franchised centers opened in the period ended April 13, 1997 and
two in the period ended March 31, 1996. The increase in revenues from royalties
and administrative fees resulted from an increase in the number of franchised
centers open as of the end of the period ended April 13, 1997 which was 36
centers compared to the period ended March 31, 1996 which was 28 centers, and
the increase in enrollment levels for centers open in both periods.
Sales revenues generated by Kid's Craft for the period ended April 13,
1997, which constituted 5% of revenues from operations, increased by 54%, to
$103,000 from $67,000 for the period ended March 31, 1996, primarily as a result
of sales to new franchised centers opened during this period, ongoing sales to
existing franchise centers, a retail store and catalog sales.
5
<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 and related expenses, occupancy costs, travel and utilities);
and expenses associated with the operation of Kid's Craft (including costs of
products, freight, occupancy and utilities); and other general and
administrative expenses.
Aggregate operating expenses for the period ended April 13, 1997
increased by 65%, to $2,483,000 from $1,504,000 in the period ended March 31,
1996. As a percentage of operating revenues, operating expenses decreased to
approximately 123% for the period ended April 13, 1997 from approximately 145%
for the period ended March 31, 1996. These expense increases were due primarily
to increases in expenses associated with "ramp-up" costs for the six additional
centers operated by the Company during the period ended April 13, 1997. The
decrease as a percent is due to the economies of scale gained from the increased
revenue levels and the relatively fixed costs of corporate overhead, as well as
various cost cutting measures implemented by the Company during the current
fiscal year. These measures have included staff reductions, and the reduction of
franchise development costs.
Operating expenses relating to Company-owned centers for the period
ended April 13, 1997, which constituted 69% of total operating expenses,
increased by 90%, to $1,717,000 from $906,000 for the period ended March 31,
1996. The increase in operating expenses for Company-owned and operated centers
for the period ended April 13, 1997, as compared to the period ended March 31,
1996, is due to the increase in the number of centers and the related increases
in rent due to lease obligations, payroll, food costs and other costs increases
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, the
Company will seek to capitalize upon economies of scale. Additionally, as
"ramp-up" centers mature beyond their initial period of start-up expenses and
low enrollment, the Company believes that expense, as a percentage of revenues,
will decrease. Furthermore, the Company is continually in the process of
attempting to manage and minimize variable expenses such as payroll, food costs,
and supplies. However, the Company believes that the rent structure at many
centers is too high for the Company to reach profitability at reasonable
enrollment levels, and that three Company-owned centers may never be profitable
due to the current rent structure at such centers. The Company is in the process
of attempting to renegotiate the terms of many of its leases in order to stem
the continuing losses at those centers.
Costs of goods sold by Kid's Craft for the period ended April 13, 1997,
which constituted 3% of total operating expenses, increased by 57%, to $83,000
from $53,000 for the period ended March 31, 1996. This increase was primarily
due to an increase in product sales.
General and administrative expenses, which constituted 28% of total
operating expenses and which include the costs of corporate overhead,
franchising operations and operating expenses
6
<PAGE>
for Kid's Craft, for the period ended April 13, 1997 increased by 25%, to
$683,000 from $546,000 for the period ended March 31, 1996. Increases occurred
in order to support the substantial increase in the number of centers open and
under development and because of additional legal, accounting and consulting
expenses resulting from the Company's capital needs. (See Liquidity and Capital
Resources.)
Depreciation and Amortization
Depreciation and amortization expenses consist of depreciation or
amortization of certain equipment, furniture and fixtures, vehicles and
leasehold improvements, and goodwill. Depreciation and amortization expense, for
the period ended April 13, 1997 increased by $16,000 to $31,000 from $15,000 for
the period ended March 31, 1996. This increase was primarily due to depreciation
expense resulting from the increase in property and equipment, and amortization
of goodwill.
Interest
Interest income, net of interest expense, for the period ended April
13, 1997 was $270 as compared to interest income of $33,000 for the period ended
March 31, 1996. This change was attributable to the borrowings on the
Certificate of Deposit (CD) line of credit offset by interest earned on the CD.
In the quarter ended March 31, 1996 interest income was higher due to the
overnight investments on the proceeds from the IPO.
Other Income
For the period ended April 13, 1997, the Company recorded other income
of $9,000, and in the period ended March 31, 1996, $57,000. This decrease is
attributable to the gain on the sale of one Company-owned center to a franchisee
in the 1996 quarter.
As a result of the foregoing, the Company recorded a net loss for the
period ended April 13, 1997 of $463,000 as compared to a net loss of $379,000
for the period ended March 31, 1996.
Twenty-eight Weeks Ended April 13, 1997 Compared
to Twenty-six Weeks Ended March 31, 1996
Revenues
Systemwide revenues (tuition fees from Company-owned and franchised
centers) for the period ended April 13, 1997 increased by 95%, to $11,564,000
from $5,928,000 for the period ended March 31, 1996. This increase was due to an
increase in the total number of centers open to 56 at April 13, 1997, as
compared to 42 open at March 31, 1996 and an increase in average enrollment
levels at centers which were open during both periods.
7
<PAGE>
The Company's revenues from operations for the period ended April 13,
1997 increased by 127%, to $4,285,000 from $1,886,000 for the period ended March
31, 1996. This increase was due to an increase in revenues generated by an
increased number of 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 period
ended April 13, 1997, which constituted 72% of revenues from operations,
increased by 159%, to $3,075,000 from $1,185,000 for the period ended March 31,
1996. This increase was due to the increase in the number of Company-owned
centers owned and operated during the period ended April 13, 1997 to 20 as
compared to 14 Company-owned centers at the end of the period ended March 31,
1996, as well as an increase in the average enrollment in those centers.
Revenues from franchising activities (franchising fees, royalties and
administrative fees) for the period ended April 13, 1997, which constituted 20%
of revenues from operations, increased by 48%, to $871,000 from $588,000 for the
period ended March 31, 1996. Revenues from franchise fees for the period ended
April 13, 1997 increased by 6%, to $230,000 from $218,000 for the period ended
March 31, 1996. Royalties for the period ended April 13, 1997 increased by 79%,
to $594,000 from $332,000 for the period ended March 31, 1996. Administrative
fees for the period ended April 13, 1997 increased by 27%, to $47,000 from
$37,000 for the period ended March 31, 1996. The increase in franchise fees is
attributable to an increase in the average franchise fee per center, and an
increase in the number of franchise applicants who forfeited their franchise fee
before opening a center. There were nine franchised centers opened in the period
ended April 13, 1997 and ten in the period ended March 31, 1996. The increase in
revenues from royalties and administrative fees resulted from increases in the
franchised centers open as of the end of the period ended April 13, 1997 (which
included eight new centers opened reduced by the four that were acquired by the
Company, one that was bought from the Company, and one that was allowed to drop
out of the system) compared to the period ended March 31, 1996, and the increase
in enrollment levels, for centers open in both periods.
Sales revenues generated by Kid's Craft for the period ended April 13,
1997, which constituted 8% of revenues from operations, increased by 200%, to
$339,000 from $113,000 for the period ended March 31, 1996, primarily as a
result of sales to new franchised centers opened during this period, ongoing
sales to existing franchise centers, a retail store and catalog sales.
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 operation
of Kid's Craft (including costs of products, freight, occupancy and utilities);
and other general and administrative expenses.
8
<PAGE>
Aggregate operating expenses for the period ended April 13, 1997
increased by 102%, to $5,269,000 from $2,610,000 in the period ended March 31,
1996. As a percentage of operating revenues, operating expenses decreased to
approximately 123% for the period ended April 13, 1997 from approximately 138%
for the period ended March 31, 1996. These expense increases were due primarily
to increases in expenses associated with "ramp-up" costs for the six additional
centers operated by the Company during the period ended April 13, 1997. The
decrease as a percent is due to the economies of scale gained from the increased
revenue levels, and the relatively fixed costs of corporate overhead, as well as
various cost cutting measures implemented by the Company during the current
fiscal year. These measures have included staff reductions, and the reduction of
franchise development costs.
Operating expenses relating to Company-owned centers for the period
ended April 13, 1997, which constituted 69% of total operating expenses,
increased by 140%, to $3,666,000 from $1,530,000 for the period ended March 31,
1996. The increase in operating expenses for Company-owned and operated centers
for the period ended April 13, 1997, as compared to the period ended March 31,
1996, is due to the increase in the number of centers and the related increases
in rent due to lease obligations, payroll, food costs and other costs increases
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, the
Company will seek to capitalize upon economies of scale. Additionally, as
"ramp-up" centers mature beyond their initial period of start-up expenses and
low enrollment, the Company believes that expenses, as a percentage of revenues,
will decrease. Furthermore, the Company is continually in the process of
attempting to manage and minimize variable expenses such as payroll, food costs,
and supplies. However, the Company believes that the rent structure at many
centers is too high for the Company to reach profitability at reasonable
enrollment levels, and that three Company-owned centers may never be profitable
due to the current rent structure at such centers. The Company is in the process
of attempting to renegotiate those lease terms in order to stem the continuing
losses at those centers.
Costs of goods sold by Kid's Craft for the period ended April 13, 1997,
which constituted 5% of total operating expenses, increased by 218%, to
$254,000 from $80,000 for the period ended March 31, 1996. This increase was
primarily due to an increase in product sales.
General and administrative expenses, which constituted 26% of total
operating expenses and which include the costs of corporate overhead,
franchising operations and operating expenses for Kid's Craft, for the period
ended April 13, 1997 increased by 35%, to $1,349,000 from $999,000 for the
period ended March 31, 1996. Increases occurred in all areas of expense due to
the substantial increase in the number of centers open and under development,
and the additional legal, accounting and consulting expenses resulting from the
Company's capital needs. (See Liquidity and Capital Resources.)
Depreciation and Amortization
Depreciation and amortization expenses consists of depreciation or
amortization of certain equipment, furniture and fixtures, vehicles and
leasehold improvements, and goodwill.
9
<PAGE>
Depreciation and amortization expense, for the period ended April 13, 1997
increased by $57,000 to $78,000 from $21,000 for the period ended March 31,
1996. This increase was primarily due to depreciation expense resulting from the
increase in property and equipment, and amortization of additional goodwill.
Interest
Interest income, net of interest expense, for the period ended April
13, 1997 was $8,000 as compared to interest expense of $2,000 for the period
ended March 31, 1996. This change was attributable to the pay-off of the line of
credit in December 1995 somewhat offset by recent additional borrowings,
overnight investments in the Company's sweep account resulting from the proceeds
of the initial public offering, and the elimination of capital lease obligations
and the amortization of debt issuance costs which was included in interest
expense during the period March 31, 1996, offset by borrowings on the CD line of
credit in fiscal year 1997.
Other Income
For the period ended April 13, 1997, the Company recorded other income
of $151,000, and in the period ended March 31, 1996, $59,000. This increase is
attributable to the gain on the sale of one Company-owned center to a
franchisee, the early retirement of certain debt obligations at a favorable
discount and the commission earned from the transfer of one franchised center to
another franchisee.
As a result of the foregoing, the Company recorded a net loss for the
period ended April 13, 1997 of $825,000 as compared to a net loss of $667,000
for the period ended March 31, 1996.
Seasonality
Due to the annual 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 through September). The Company expects to
continue to experience such a decrease in tuition revenues during the fourth
quarter of its current fiscal year. 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.
Liquidity and Capital Resources
During the period ended April 13, 1997, the Company has satisfied its
cash requirements from cash flow from operations, the remaining proceeds from
the initial public offering, the sale of one Company-owned center and draws on
the line of credit secured by a CD. The primary uses of cash have been for
operations, the purchase of supplies, financing the start-up of one new
10
<PAGE>
Company-owned center, the acquisition of four centers from franchisees and
capital expenditures.
Net cash used in operating activities for the period ended April 13,
1997 totaled approximately $1,252,000, reflecting, primarily, the net loss of
$825,000, increases in restricted cash, inventory, franchise development costs
and decreases in deferred franchise fees, offset by increases in accounts
payable. Net cash provided by investing activities for the period ended April
13, 1997 totaled approximately $6,000, reflecting the sale of one Company-owned
center, offset by the acquisition of two centers and capital expenditures.
The Company has renewed through September 3, 1997 its bank line of
credit which permits the Company to borrow up to $200,000, with interest at the
rate of 1.5% over the bank's prime rate. The line of credit is collateralized by
all inventory, equipment and accounts receivable of the Company and its
subsidiaries. The Company also has available the ability to borrow $500,000
against a CD for the same amount. The interest cost is 2% greater than the
interest earnings of the CD. This line of credit expires on July 26, 1997. At
April 13, 1997, there were borrowings of $255,000 against the CD line of credit
and the Company had no borrowings against the $200,000 line of credit.
As of April 13, 1997, the Company's total debt obligations (exclusive
of trade credit and the CD line of credit borrowing) consisted of $178,000 which
included a $48,000 small business loan, a $39,000 equipment loan, an $11,000
vehicle loan and various notes payable as a result of the purchase of franchisee
centers.
The Company continues to be engaged in a variety of measures aimed at
reducing costs. In September 1996, the Company reduced its corporate staff by
nine and reduced its franchise advertising expenditures. In January 1997, the
Company reduced its corporate and administrative staff by eight. A private
placement of equity financing was pursued in April and May of 1997 to address
the Company's capital needs. The Company is now reviewing the possibility of
eliminating additional staff positions from its corporate office, and reducing
salaries of the more highly compensated employees. The Company is also
investigating and evaluating various other measures including the selling or
closing of certain unprofitable centers, and the renegotiation of leases at most
Company-owned centers, and has elected to eliminate the advertising of franchise
opportunities for the foreseeable future.
Despite the above and other measures taken to reduce expenses, the
Company's financial position has deteriorated. On May 20, 1997, the Company
announced that the private placement was not successful. As a result thereof and
because of the continued deterioration of the Company's financial position, the
Company faces a serious liquidity problem unless necessary additional financing
is immediately identified. At May 27, 1997, the Company has borrowed the
remaining amounts available on its CD Line of Credit. The Company was advised on
June 2, 1997 that the Company's $200,000 bank line of credit (of which $8,000
was drawn on as of May 30, 1997) was withdrawn by the Bank. As of the date of
this filing, the Company estimates that it can only continue to satisfy its debt
obligations and working capital requirements until the
11
<PAGE>
beginning of June 1997. The Board is actively pursuing all of its alternatives
with respect to this problem.
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.
12
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is a party to the following litigation:
Two Metroplex LLC, v. Bankers Unicorp, Incorporated, Charles Brown and Kiddie
Academy Child Care Learning Centers, Inc., Marion Superior Court, Indiana, Cause
No. 49D04-9610-CP-1414. This matter was instituted in October 1996 by Two
Metroplex LLC (the "Landlord"), the owner of certain premises leased to the
Company's franchisee, Bankers Unicorp, Incorporated (the "Tenant), and arises
out of the Tenant's default under its lease. The Tenant's obligations under the
Lease were guaranteed by Charles Brown, the Tenant's sole stockholder, and
Kiddie Academy Child Care Learning Centers, Inc. In the suit, the Landlord is
seeking from the Company $184,199.36, plus interest, attorneys' fees and court
costs. The $184,199.36 includes unpaid basic rent of $22,676, delinquency
service charges of $20,252.71, plus $141,270.65 in tenant improvement costs. The
Company is defending the action on the basis that its Guaranty of Lease was not
intended to cover the amount of any tenant improvement expenses, that these
expenses were not known by or authorized by the Company, and that these amounts
greatly exceed the reasonable cost of the build-out approved by the Company.
Merrill Corporation v. Kiddie Academy International, Inc., Circuit Court for
Harford County, Maryland, Case No. 26591/59/681. This matter was instituted on
September 23, 1996 by Merrill Corporation in connection with financial printing
services rendered to the Company in connection with the Company's initial public
offering. Merrill asserts a claim in the amount of $129,710.36. The Company has
filed a defense and counter-claim to this action which is primarily based upon
the fact that Merrill has billed the Company for an amount which greatly exceeds
its estimate of $60,000, and that the additional charges were due to "rush work"
and additional services not authorized by the Company, and mistakes made by
Merrill. Merrill's motion for summary judgment was denied on February 11, 1997,
and the matter has been set for trial for June 30, 1997.
The Company is involved in additional litigation from time to time. In
management's opinion, any litigation in which the Company is currently involved,
except as noted above, 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.
The Company is currently in default under its loan documents with Sparks Bank,
and the Bank has withdrawn the Company's line of credit.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company's Annual Meeting of Shareholders was held on March 11, 1997. Each of
the Company's then current directors was elected to serve for an additional
one-year term of office.
6
<PAGE>
These directors are as follows: Angelo D. Bizzarro, Carl J. Meil, Jr.,
George Miller, Michael J. Miller, James A. Mitarotonda and
Julian R. Siegel.
The additional matters voted upon at the meeting consisted of a) a proposal to
increase the number of shares available to be issued under the Company's 1995
Incentive Compensation Plan (the "Plan") from 100,000 to 300,000, and to
establish 250,000 as the maximum number of shares or options to issue shares
that may be issued in any one calendar year to any individual under the Plan;
and b) the ratification of the selection of Deloitte and Touche, LLP as the
Company's independent accountants for the current year.
The following is a tabulation of all matters voted upon at the March 11, 1997
Annual Meeting:
1. Election of directors: For Withheld
A. Bizzarro 1,999,505 13,100
C. Meil, Jr. 1,999,505 13,100
G. Miller 1,999,505 13,100
M. Miller 1,999,505 13,100
J. Mitarotonda 1,999,505 13,100
R. Siegel 1,999,505 13,100
2. Amendments to 1995 Incentive Compensation Plan.
For Against Abstain Not Voted
1,167,637 62,550 18,500 763,918
3. Appointment of Deloitte & Touche LLP.
For Against Abstain
2,003,605 9,000 -0-
Item 5. Other Information.
The following events occurred subsequent to the end of the period for which this
report is being filed:
CHANGE OF CONTROL
George L. Miller, Pauline J. Miller and Michael J. Miller, the principal
stockholders of the Company, have assumed control of the Company as a result of
acquiring sufficient additional shares of the Company's common stock to give
them a majority. By written consent without a meeting executed and delivered to
the Company on Friday, May 30, 1997, the Millers have increased the size of the
Board of Directors, adding three new Directors, and have replaced two of the
existing Directors of the Company. A third existing Director resigned on June 2,
1997.
MANAGEMENT CHANGE
On Saturday, May 31, 1997, the newly seated Board of Directors placed
Angelo D. Bizzarro, the Company's Chief Executive Officer, on administrative
leave. Michael J. Miller, President of the Company, has temporarily assumed the
duties of the Chief Executive Officer in Mr. Bizzarro's absence, in accordance
with the Company's Bylaws.
DELISTING BY BOSTON STOCK EXCHANGE
By letter of May 28, 1997, received by the Company on June 2, 1997, the
Company was advised that the Boston Stock Exchange proposed to remove the
Company's common stock and warrants from listing and registration effective June
25, 1997.
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.
June 2, 1997 By: __________________________________
Date Michael J. Miller,
President
June 2, 1997 By: __________________________________
Date Guy A. Matta
Chief Financial Officer
7
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits required by Item 601 Regulation S-K:
Exhibit 27 - Financial Data Summary
b. Reports on Form 8-K
- NASDAQ Delisting - March 28, 1997
- Boston Stock Exchange Delisting and Liquidity Issue - May 23, 1997
8
<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.
BY: -----------------------
June 2, 1997 Michael J. Miller
- ----------------- President
Date
BY: ----------------------
June 2, 1997 Guy A. Matta
- ---------------- Chief Financial Officer
Date
9
<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.
June 2, 1997 BY:
- --------------------- ----------------------------------
Date Michael J. Miller
President
June 2, 1997 BY:
- --------------------- ----------------------------------
Date Guy A. Matta
Chief Financial Officer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information derived from Kiddie Academy
International, Inc.'s unaudited financial statements for the twenty-eight weeks
ended April 13, 1997, and is qualified in its entirety by reference to such
financial statements and the notes thereto.
</LEGEND>
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