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 January 19, 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 January 19,
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:
Unaudited Consolidated Balance Sheets 1
Unaudited Consolidated Statement 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 6-13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Exhibit 27 Financial Data Schedule
Signature 15
<PAGE>
14
Part 1. FINANCIAL INFORMATION
Item 1. Financial Statements
KIDDIE ACADEMY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
ASSETS January 19, September 29,
1997 1996
------------- --------------
<S> <C>
Current assets:
Cash and cash equivalents $639,079 $1,232,098
Accounts receivable 128,434 127,972
Prepaid expenses 205,016 60,024
Inventories 82,092 90,347
Notes receivable, current 35,113 15,361
Franchise development costs 779,025 699,527
----------------- ------------------
Total current assets 1,868,759 2,225,329
----------------- ------------------
Property and equipment 1,023,742 1,057,066
Accumulated depreciation (342,485) (300,086)
----------------- ------------------
Net property and equipment 681,257 756,980
----------------- ------------------
Notes receivable, long-term 148,161 136,635
Goodwill 150,122 116,910
Deposits 96,401 105,437
----------------- ------------------
Total assets $2,944,700 $3,341,291
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $846,395 $787,654
Deferred franchise license fees 1,127,502 1,125,002
Current portion of long-term debt 52,042 111,114
Current portion of deferred rent credits 93,992 93,992
----------------- ------------------
Total current liabilities 2,119,931 2,117,762
----------------- ------------------
Long-term debt 92,436 190,312
Deferred rent payments 220,643 159,005
Deferred rent credits 253,055 281,976
----------------- ------------------
Total liabilities 2,686,065 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 outstanding 2,025,000 20,250 20,250
Additional paid-in capital 4,289,201 4,260,280
Accumulated deficit (4,050,816) (3,688,294)
----------------- ------------------
Total stockholders' equity 258,635 592,236
================= ==================
Total liabilities and stockholders' equity $2,944,700 $3,341,291
================= ==================
</TABLE>
See notes to consolidated financial statements (unaudited).
1
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KIDDIE ACADEMY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
QUARTERS ENDED JANUARY 19, 1997 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
January 19, December 31,
1997 1995
------------------- --------------------
<S> <C>
REVENUES:
Company-owned mature centers $542,795 $367,188
Company-owned new centers 1,020,286 131,146
Franchise license fees 125,000 134,363
Franchise royalties 323,867 153,981
Product sales 235,395 45,731
Administrative fees 26,104 18,500
------------------- --------------------
Total revenue 2,273,447 850,909
OPERATING EXPENSES:
Company-owned mature centers 477,659 368,655
Company-owned new centers 1,471,511 255,894
Cost of product sales 171,037 27,571
General and administrative 665,723 453,461
------------------- --------------------
Total operating expenses 2,785,930 1,105,581
------------------- --------------------
Loss from operations (512,483) (254,672)
INTEREST INCOME (EXPENSE) 8,032 (35,246)
OTHER INCOME, net 141,929 1,795
------------------- --------------------
NET LOSS ($362,522) ($288,123)
=================== ====================
NET LOSS PER COMMON SHARE ($0.18) ($0.25)
=================== ====================
WEIGHTED AVERAGE SHARES OUTSTANDING 2,025,000 1,135,418
=================== ====================
</TABLE>
See notes to consolidated financial statements (unaudited).
2
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KIDDIE ACADEMY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
PERIOD ENDED JANUARY 19, 1997 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
January 19, December 31,
1997 1995
-------------------- --------------------
<S> <C>
Cash flows from operating activities
Net loss ($362,522) ($288,123)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 47,428 6,907
Amortization of debt issuance costs --- 26,667
Gain on disposal of asset (77,388) ---
Gain on extinguishment of debt (64,594) ---
Changes in assets and liabilities:
Accounts receivable (462) (23,713)
Inventory 8,255 (4,423)
Notes receivable (1,120) 4,084
Franchise development costs (79,498) (8,178)
Other assets (134,582) (98,081)
Accounts payable and accrued expenses 58,741 (40,572)
Deferred franchise license fees 2,500 (92,278)
Other liabilities 61,638 46,995
-------------------- --------------------
Net cash used in operating activities (541,604) (470,715)
-------------------- --------------------
Cash flows from investing activities:
Disposal (acquisition) of property and equipment 33,324 (5,000)
Net cash (used) provided in investing activities 33,324 (5,000)
-------------------- --------------------
Cash flows from financing activities:
Payments on notes payable --- (149,861)
Payments to shareholders --- (87,722)
Proceeds from IPO --- 3,982,373
Payments of long-term debt (84,739) ---
-------------------- --------------------
Net cash (used) provided in financing activities (84,739) 3,744,790
-------------------- --------------------
Net (decrease) increase in cash (593,020) 3,269,075
Cash, beginning of period 1,232,098 51,527
-------------------- --------------------
Cash end of period $639,079 $3,320,602
==================== ====================
Non-cash investing and financing activities
Early retirement of long-term debt $59,738 ---
Notes received in connection with sale of center 98,815 ---
Notes receivable retired in connection with
purchase of center 68,657 ---
-------------------- --------------------
Total non-cash activities
$227,210 ---
==================== ====================
</TABLE>
See notes to consolidated financial statements (unaudited).
3
<PAGE>
KIDDIE ACADEMY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
JANUARY 19, 1997 AND DECEMBER 31, 1995
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. 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.
The consolidated financial statements include the results of operations
of the Company and its wholly-owned subsidiaries. All intercompany transactions
have been eliminated.
(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 January 19, 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 December 31, 1995 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 December 31, 1995 consist of
1,135,418 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 and the second and
third quarters will end on April 13 and July 6, 1997, respectively.
4
<PAGE>
2. 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 75,000 non-qualified stock
options (at an exercise price of $3.64) and 25,000 incentive stock options (at
an exercise price equal to the per share fair market value on February 20, 1997,
the date he commenced employment). Mr. Bizzarro will further be entitled to an
additional 100,000 incentive stock options if the stockholders of the Company
approve a proposed increase in the number of shares available under the
Company's 1995 Incentive Compensation Plan. Also in October 1996, the employment
agreements with George and Michael Miller were 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.
In addition, during the period ended January 19, 1997 the Company entered into a
management agreement with two of its franchisees, pursuant to which the Company
has agreed to operate the center and assume certain long-term commitments.
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 none of the current claims or complaints are material to the Company's
consolidated financial position.
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, some of which include 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; the availability of capital resources; 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
$30,000 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 Kid's Craft. The Company currently consists of
52 centers (20 of which are Company owned and 32 of which are franchised). The
number of Company-owned centers increased by three during the period ended
January 19, 1997. The growth of Company-owned centers during the period ended
January 19, 1997 resulted from the acquisition of four centers from its
franchisees and one Company-owned center sold to a franchisee.
6
<PAGE>
During the period ended January 19, 1997 the Company entered into
management arrangements with two of its franchisees (included in the four noted
above) 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 franchised center under management by
the Company are included in the revenues of Company-owned new centers as
reflected on the Company's Consolidated Financial Statements.
The number of franchised centers was impacted during the period ended
January 19, 1997 by the opening of four new centers, the acquisition of four
franchised centers by the Company, the purchase of a Company-owned center by a
franchisee and the release of one center from the system following the Company's
determination that due to changes in the community in which the center is
located, it no longer met the Company's minimum site criteria.
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 experienced by the Company during fiscal year
1996 and continued growth during the first quarter of fiscal year 1997
contributed significantly to the Company's losses. New centers typically require
up to 24 months to "ramp-up" to profitable enrollment levels and of the
Company's centers, only five had been operated by the Company for more than 24
months. In addition, many of the centers purchased by the Company from
franchisees during fiscal years 1996 and 1997 have required a longer than
average period to "ramp-up" than that experienced with new centers. This has
occurred because the Company has not had the advantage of the enrollment surge
which accompanies a typical grand opening, and as a natural repercussion of
changing ownership, and the need to overcome any negative reputation that may
have been associated with the former management. Because the Company began
fiscal year 1997 with very few mature Company-owned centers, the continued
expansion diluted the profitability of those centers.
The Company is engaged in a dual growth strategy to increase its market
penetration, consisting of a strategic balance of Company-operated center growth
and franchised-center growth. By using the same corporate staff which develops
the new Company centers to assist franchisees in locating and developing their
new centers, the Company can achieve certain economies of scale, expanded
expertise and efficiencies in the new center development process.
7
<PAGE>
Whether franchised or Company-operated, each Kiddie Academy center must
meet or exceed certain physical, trade area, location and demographic standards.
Each location for a potential Kiddie Academy center is reviewed by a
multi-disciplinary committee of the Company's key executives for adherence to
these standards. The Company limits its site selection activities to selected
metropolitan areas which meet its standards and show potential for growth.
The Company continually evaluates its strategy with respect to the
balance of its franchised-center growth and Company-operated center growth.
Given the number of franchised centers currently under development, the
Company's current plans are to focus on the "ramp-up" to profitable enrollment
levels through Company-operated center growth and the advancement of existing
franchised centers under development.
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, systemwide revenues, and the proforma
information for the period ended January 21, 1996), expressed as a percentage of
revenues from operations. Due to the Company changing to a 52/53 week fiscal
year end, in order to analyze consistent period to period results and in order
to be comparable to similar practices in the industry, the first period for
fiscal year 1997 represents 16 weeks, while the first quarter of fiscal year
1996 is 13 weeks. Consequently, the Company has also provided pro forma results
for the first quarter of fiscal year 1996, based upon a 16-week period.
<TABLE>
<CAPTION>
Historical Historical Proforma
16 Weeks Ended 13 Weeks Ended 16 Weeks Ended
January 19, 1997 December 31, 1995 January 21, 1996
---------------- ----------------- ----------------
<S> <C>
Systemwide centers open 52 39 39
Systemwide revenues.. . . . . $6,190,000 --- $2,698,000 --- $3,345,000 ---
========== ========== ==========
Revenues from operations
Company-owned centers. . . $1,563,000 69% $ 498,000 59% $ 625,000 59%
Franchising operations . . $475,000 21% $ 307,000 36% $ 375,000 35%
Product sales. . . . . . . $235,000 10% $ 46,000 5% $ 62,000 6%
---------- ---------- ---------
Total revenues . . . . $2,273,000 100% $ 851,000 100% $1,062,000 100%
---------- ---- ---------- ---- ---------- ----
Operating expenses . . . . . $2,786,000 123% $1,106,000 130% $1,415,000 133%
---------- ---------- ----------
Net operating (loss) . . . . $(512,000) (23)% $(255,000) (30)% $(353,000) (33)%
Interest income (expense). . $8,000 ---% $ (35,000) (4)% $ (27,000) (3)%
Other income . . . . . . . . $142,000 6% $ 2,000 3% $ 45,000 4%
---------- ---------- ----------
Net loss . . . . . . . . . . $(363,000) (16)% $ (288,000) (31)% $(335,000) (32)%
========== =========== ==========
</TABLE>
8
<PAGE>
Historical 16 Weeks Ended January 19, 1997 Compared to Proforma 16 Weeks Ended
January 21, 1996
Management believes a more meaningful comparison of the results of
operations for the period ended January 19, 1997 would be to the pro forma
information above, which reflects a period of comparable length, rather than to
the December 31, 1995 historical information. Therefore, the following
discussion is based upon a comparison of the actual results for the 16-week
period ended January 19, 1997, to the pro forma results for the 16-week period
ended January 21,1996. A comparison of the historical results of operations for
the 16-week quarter ended January 19, 1997 and the 13-week quarter ended
December 31, 1995 would result in the same explanations as shown below, plus an
additional explanation for the increase or decrease as a result of the
additional three weeks of operations being included in the current quarter.
Revenues
Systemwide revenues (tuition fees from Company-owned and franchised
centers) for the period ended January 19, 1997 increased by 85%, to $6,190,000
from $3,345,000 for the period ended January 21, 1996. This increase was due to
an increase in the total number of centers open to 52 at January 19, 1997, as
compared to 39 open at January 21, 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 January 19,
1997 increased by 114%, to $2,273,000 from $1,062,000 for the period ended
January 21, 1996. This increase was due to an increase in revenues generated by
an increased number of Company-owned centers, as well as an increase in the
average enrollment in those 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 January 19, 1997, which constituted 69% of revenues from operations,
increased by 150%, to $1,563,000 from $625,000 for the period ended January 21,
1996. This increase was due to the increase in the number of Company-owned
centers owned and operated during the period ended January 19, 1997 to 20 as
compared to the period ended January 21, 1996 with eight Company-owned centers.
During the period ended January 19, 1997 the Company sold an existing center,
purchased two centers from franchisees and entered into an agreement to manage
two other centers all of which have revenue accounted for in Company-owned new
centers.
Revenues from franchising activities (franchising fees, royalties and
administrative fees) for the period ended January 19, 1997, which constituted
21% of revenues from operations, increased by 27%, to $475,000 from $375,000 for
the period ended January 21, 1996. Revenues from franchise fees for the period
ended January 19, 1997 decreased by 23%, to $125,000 from $162,000 for the
period ended January 21, 1996. Royalties for the period ended January 19, 1997
increased by 71%, to $324,000 from $190,000 for the period ended January 21,
1996. Administrative fees for the period ended January 19, 1997 increased by
13%, to $26,000 from $23,000 for the period ended January 21, 1996. The decrease
in license fees is attributable to the number of center opening each period and
potential franchisees who leave the franchising system before opening a center.
There were four centers opened in the period ended January 19, 1997
9
<PAGE>
and five in the period ended January 21, 1996. The increase in revenues from
royalties and administrative fees resulted from changes in the franchised
centers open during the period ended January 19, 1997 (which included four
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 January 21, 1996, and the increase in
enrollment levels, for centers open in both periods.
Sales revenues generated by Kid's Craft for the period ended January
19, 1997, which constituted 10% of revenues from operations, increased by 279%,
to $235,000 from $62,000 for the period ended January 21, 1996, primarily as a
result of sales to new franchised centers opened during this period, ongoing
sales to existing franchise centers, and the opening of a retail store.
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.
Aggregate operating expenses for the period ended January 19, 1997
increased by 97%, to $2,786,000 from $1,415,000 in the period ended January 21,
1996. As a percentage of operating revenues, operating expenses decreased to
approximately 123% for the period ended January 19, 1997 from approximately 133%
for the period ended January 21, 1996. These expense increases were due
primarily to increases in expenses associated with "ramp-up" costs for the 12
additional centers operated by the Company during the period ended January 19,
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.
Operating expenses relating to Company-owned centers for the period
ended January 19, 1997, which constituted 70% of total operating expenses,
increased by 148%, to $1,949,000 from $787,000 for the period ended January 21,
1996. The increase in operating expenses for Company-owned centers and managed
centers for the period ended January 19, 1997 as compared to the period ended
January 21, 1996 is due to the increase in centers and the related increases in
rent due to lease obligations, payroll, food costs and other costs increased in
proportion to the number of centers operated. The Company expects that aggregate
expenses relating to Company-owned centers will continue to increase as the
number of Company-owned centers increases. However, over time, as the Company
achieves and capitalizes upon economies of scale, and as newly-opened centers
mature beyond their initial period of start-up expenses and low enrollment, the
Company expects expenses as a percentage of revenues derived from Company-owned
centers to decrease. Additionally, the Company is continually in the process of
enhancing cost control programs that strive to manage and minimize variable
expenses such as payroll, food costs, and supplies. The Company also intends to
focus on improving operating
10
<PAGE>
results at Company-owned centers by implementing programs designed to increase
revenues such as advertising and promotions.
Costs of goods sold by Kid's Craft for the period ended January 19,
1997, which constituted 6% of total operating expenses, increased by 328%, to
$171,000 from $40,000 for the period ended January 21, 1996. This increase was
primarily due to an increase in product sales.
General and administrative expenses, which constituted 24% 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 January 19, 1997 increased by 13%, to $666,000 from $588,000 for the
period ended January 21, 1996. Increases occurred in all areas of expense due to
the growth in the corporate infrastructure undertaken in order to support the
Company's efforts and the substantial increase in the number of centers open and
under development.
Depreciation and Amortization
Depreciation and amortization expense consist of depreciation or
amortization of certain equipment, furniture and fixtures, vehicles and
leasehold improvements, and organizational costs. Depreciation and amortization
expense, for the period ended January 19, 1997 increased by $38,000 to $47,000
from $9,000 for the period ended January 21, 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 January
19, 1997 was $8,000 as compared to interest expense of $27,000 for the period
ended January 21, 1996. This change was attributable to the pay-off of the line
of credit in December 1995, 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 January 21, 1996.
Other Income
For the period ended January 19, 1997, the Company recorded other
income of $142,000, and in the period ended January 21, 1996, $45,000. 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 franchise center to
another franchisee.
As a result of the foregoing, the Company recorded a net loss for
the period ended January 19, 1997 of $363,000 as compared to a net loss of
$335,000 for the period ended January 21, 1996.
11
<PAGE>
Liquidity and Capital Resources
During the period ended January 19, 1997, the Company has satisfied its
cash requirements from cash flow from operations, the remaining proceeds from
the initial public offering and the sale of one Company-owned center. The
primary uses of cash have been for the purchase of supplies, financing the
start-up of one new Company-owned center, the acquisition of four centers from
franchisees and capital expenditures.
Net cash used in operating activities for the period ended January 19,
1997 totaled approximately $584,000, reflecting, primarily, the net loss of
$363,000 increases in notes receivable and franchise development costs, offset
by increases in accounts payable and deferred franchise fees. Net cash provided
for investing activities for the period ended January 19, 1997 totaled
approximately $33,000, reflecting the sale of one Company-owned center.
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 receivables of Kiddie Academy
International, Inc. The Company also has available the ability to borrow
$500,000 against a Certificate of Deposit (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 January 19, 1997, there were no borrowings against
any line of credit.
As of January 19, 1997, the Company's total debt obligations (exclusive
of trade credit) consisted of $144,000 which included a $42,000 equipment loan,
a $13,000 vehicle loan and various notes payable as a result of the purchase of
franchisee centers.
The Company has been 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 budget. In January 1997 the Company reduced
its corporate and administrative staff by eight. The Company is also
investigating and evaluating various other cost saving measures including the
selling or closing certain unprofitable centers. Additionally, the Company has
elected to concentrate its efforts on improving the profitability of existing
centers and completing the development of centers already in the system, rather
than on increasing the number of centers in the system. In connection with its
refocused strategy, the Company is evaluating each of the markets in which it
currently offers franchises, and has elected to concentrate its efforts in
certain selected areas. For example, in the past the Company's goal was to
register its franchise operations in every state where such registration was
required, it has now limited its registration activities, and hence its
marketing efforts, to key market areas. By narrowing its efforts, the Company
expects to realize a cost savings, and expects to be more efficient in its
future sales and development activities. Similarly, the Company has elected to
eliminate the advertising of franchise opportunities for the foreseeable future,
and expects to realize another cost savings, in order to concentrate its efforts
on the development of existing franchises. The impact of these initial efforts
is expected to be a reduction of approximately $600,000 per year in the
Company's operating expenses (approximately, $450,000 for the remainder of this
fiscal year).
12
<PAGE>
The Company believes that after implementation of these cost saving
measures, the remaining net proceeds of the initial public offering, available
cash flow from operations and its existing bank facilities will be sufficient to
satisfy its capital expenditures, debt obligations and working capital
requirements for the remaining portion of its fiscal year. The Company is also
actively seeking alternatives for raising additional financing. There can be no
assurances, however, that additional financings can be consummated at all or on
terms favorable to the Company.
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.
13
<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 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 27 - Financial Data Summary
b. Reports on Form 8-K:
Appointment of Angelo D. Bizzarro as CEO - October 21, 1996. Change in
accounting year - January 3, 1997.
14
<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.
March 4, 1997 BY: /s/ Angelo D. Bizzarro
_______________ __________________________________
Date Angelo D. Bizzarro
Chief Executive Officer
March 4, 1997 BY: /s/ Guy A. Matta
_______________ _________________________________
Date Guy A. Matta
Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information derived from Kiddie Academy
International, Inc.'s unaudited financial statements for the sixteen weeks ended
January 19, 1997, and is qualified in its entirety by reference to such
financial statements and the notes thereto.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> SEP-28-1997
<PERIOD-END> JAN-19-1997
<CASH> 639
<SECURITIES> 0
<RECEIVABLES> 128
<ALLOWANCES> 0
<INVENTORY> 82
<CURRENT-ASSETS> 1,869
<PP&E> 1,024
<DEPRECIATION> 342
<TOTAL-ASSETS> 2,945
<CURRENT-LIABILITIES> 2,120
<BONDS> 0
0
0
<COMMON> 20
<OTHER-SE> 259
<TOTAL-LIABILITY-AND-EQUITY> 2,945
<SALES> 2,273
<TOTAL-REVENUES> 2,273
<CGS> 2,786
<TOTAL-COSTS> 2,786
<OTHER-EXPENSES> 142
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8
<INCOME-PRETAX> (363)
<INCOME-TAX> 0
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<NET-INCOME> (363)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
