<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 11, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________________ TO _____________________
COMMISSION FILE NUMBER: 0-27656
CHILDTIME LEARNING CENTERS, INC.
(Exact Name Of Registrant As Specified In Its Charter)
MICHIGAN 38-3261854
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation)
38345 West Ten Mile Road, Suite 100
Farmington Hills, Michigan 48335
(Address of principal executive offices)
(810) 476-3200
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 of 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing required for the past 90 days. Yes[X] No [ ]
The number of shares of Registrant's Common Stock no par value per
share, outstanding at November 11, 1996 was 5,429,322.
Total number of pages included in Form 10-Q: 14
Index to Exhibits is located on page 11
1
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CHILDTIME LEARNING CENTERS, INC. AND CONSOLIDATED SUBSIDIARY
Index
FORM 10-Q
For the Quarterly Period Ended October 11, 1996
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
A. Consolidated Balance Sheet 3
October 11, 1996 and March 29, 1996
B. Consolidated Statement of Income 4
Twelve Weeks Ended October 11, 1996 and October 13, 1995
Twenty-Eight Weeks Ended October 11, 1996 and October 13, 1995
C. Consolidated Statement of Cash Flows 5
Twenty-Eight Weeks Ended October 11, 1996 and October 13, 1995
D. Notes to Consolidated Financial Statements 6-7
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 8-10
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
</TABLE>
2
<PAGE> 3
PART I
FINANCIAL INFORMATION
CHILDTIME LEARNING CENTERS, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
OCTOBER 11, MARCH 29,
1996 1996
(UNAUDITED)
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,186,462 $ 2,313,469
Accounts receivable, less allowance for doubtful accounts of $125,000 2,294,825 1,728,682
Prepaid expenses and other 1,244,273 1,174,486
Deferred income taxes 725,000 620,000
------------ ------------
Total current assets 7,450,560 5,836,637
------------ ------------
Land, buildings and equipment:
Land 10,220,000 10,220,000
Buildings 19,431,382 19,392,528
Vehicles, furniture and equipment 6,947,586 6,251,095
Leasehold improvements 4,885,813 4,628,327
------------ ------------
41,484,781 40,491,950
Less accumulated depreciation and amortization 7,660,678 7,049,522
------------ ------------
33,824,103 33,442,428
Land held for disposal 744,450 739,600
------------ ------------
34,568,553 34,182,028
------------ ------------
Other noncurrent assets:
Intangible assets, net 4,813,751 4,187,242
Refundable deposits and other 554,602 482,257
------------ ------------
TOTAL ASSETS $ 47,387,466 $ 44,688,164
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 474,224 $ 426,353
Accounts payable 1,259,683 1,245,018
Accrued wages and payroll taxes 1,642,964 2,060,037
Accrued vacation 684,787 703,078
Income tax payable 248,045 77,864
Other current liabilities 2,438,771 1,841,610
------------ ------------
Total current liabilities 6,748,474 6,353,960
Long-term debt 832,560 809,364
Deferred income taxes 4,695,000 4,571,000
------------ ------------
Total liabilities 12,276,034 11,734,324
------------ ------------
Common stock purchase warrant 1,440,000 1,440,000
Commitments and contingencies --- ---
------------ ------------
Shareholders' equity:
Common stock, 10,000,000 shares authorized, no par value; 5,429,322
issued and outstanding at October 11, 1996 and March 29, 1996 29,365,463 29,363,816
Preferred stock, 1,000,000 shares authorized, no par value; no shares
issued or outstanding --- ---
Subscriptions receivable (8,999) (64,171)
Retained earnings 4,314,968 2,214,195
------------ ------------
Total shareholders' equity 33,671,432 31,513,840
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 47,387,466 $ 44,688,164
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 4
CHILDTIME LEARNING CENTERS, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER-TO-DATE YEAR-TO-DATE
TWELVE WEEKS ENDED TWENTY-EIGHT WEEKS ENDED
---------------------------- -----------------------------
OCTOBER 11, OCTOBER 13, OCTOBER 11, OCTOBER 13,
1996 1995 1996 1995
----------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
Revenues $ 17,458,453 $ 14,606,958 $ 40,714,598 $ 33,949,932
Cost of revenues 14,962,488 12,187,293 34,054,014 27,744,674
------------ ------------ ------------ ------------
GROSS PROFIT 2,495,965 2,419,665 6,660,584 6,205,258
Marketing expenses 260,219 243,034 603,769 567,007
General and administrative expenses 1,175,120 1,193,593 2,876,966 2,788,596
Revaluation of land held for disposal -- 611,568 -- 611,568
------------ ------------ ------------ ------------
OPERATING INCOME 1,060,626 371,470 3,179,849 2,238,087
Interest expense 32,562 478,334 72,647 1,141,540
Amortization expense 2,231 13,636 5,205 31,818
Other expense (income), net (143,576) (70,376) (329,776) (195,924)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 1,169,409 (50,124) 3,431,773 1,260,653
Income tax provision (benefit) 455,000 (49,000) 1,331,000 460,000
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 714,409 $ (1,124) $ 2,100,773 $ 800,653
============ ============ ============ ============
Weighted average shares outstanding 5,429,322 3,499,322 5,429,322 3,499,322
============ ============ ============ ============
Earnings per share $ 0.13 $ -- $ 0.39 $ 0.23
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 5
CHILDTIME LEARNING CENTERS, INC. AND CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR-TO-DATE
TWENTY-EIGHT WEEKS ENDED
-----------------------------
OCTOBER 11, OCTOBER 13,
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,100,773 $ 800,653
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 913,079 773,967
Deferred income taxes 19,000 (143,000)
Interest expense on subordinated note -- 235,994
Losses (gains) and provisions for losses on land,
buildings, equipment and land held for disposal (11,791) 594,780
Lease subsidy income -- (200,000)
Changes in assets and liabilities providing (consuming) cash:
Accounts receivable (566,143) 91,812
Prepaid expenses, refundable deposits and other assets (69,786) (843,025)
Accounts payable, accruals and other current liabilities 346,647 (229,908)
------------ ------------
Net cash provided by operating activities 2,731,779 1,081,273
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for land, buildings and equipment (1,062,547) (1,300,916)
Acquisition of intangible assets (533,576) (253,077)
Proceeds from sales of land, buildings and equipment 9,150 620,214
Payments for refundable deposits and other assets (72,346) --
------------ ------------
Net cash provided by (used in) investing activities (1,659,319) (933,779)
CASH FLOWS FROM FINANCING ACTIVITIES:
Receipts from revolving line of credit, net -- 1,846,742
Payments on long-term debt (256,287) (1,913,836)
Issuance of shares, net of subscriptions receivable 56,820 69,506
------------ ------------
Net cash provided by (used in) financing activities (199,467) 2,412
------------ ------------
Net increase (decrease) in cash and cash equivalents 872,993 149,906
Cash and cash equivalents, beginning of year 2,313,469 240,412
------------ ------------
Cash and cash equivalents, end of period $ 3,186,462 $ 390,318
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE> 6
CHILDTIME LEARNING CENTERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) GENERAL
The consolidated financial statements of Childtime Learning Centers, Inc.
(the "Company") are unaudited and, in the opinion of management, include all
adjustments necessary to fairly state the Company's financial condition,
results of operations and its cash flows, for the interim periods presented.
The results of operations for interim periods are not necessarily indicative of
the results to be expected for the full fiscal year. These statements should
be read in conjunction with the Company's annual report for the fiscal year
ended March 29, 1996.
Certain prior year amounts have been reclassified to conform with the
current year presentation.
(2) PRINCIPALS OF CONSOLIDATION AND CORPORATE ORGANIZATION
The consolidated financial statements as of October 11, 1996, October 13,
1995 and March 29, 1996 include the accounts of Childtime Learning Centers,
Inc. and its wholly owned subsidiary, Childtime Childcare, Inc. (together
referred to as the "Company").
On November 2, 1995, Childtime Learning Centers, Inc. was incorporated
with nominal authorized capital. Upon consummation of the merger and related
exchange of shares (the "Merger") of Childtime Learning Centers, Inc. and KD
Acquisition Corporation on January 26, 1996, 3,297,811 shares of Childtime
Learning Centers, Inc. common stock were exchanged for 13,191,244 of issued and
outstanding shares of KD Acquisition Corporation. As a result of such
exchange, the shareholders of Childtime Learning Centers, Inc., immediately
after the merger, owned all of its issued and outstanding shares of common
stock in the same proportion as their prior ownership of shares of KD
Acquisition Corporation. This transaction constituted a reorganization of
companies under common control and was accounted for in a manner similar to a
pooling of interests, and as a result there were no changes in the basis and
accountability of assets and liabilities. This structure was chosen to change
the state of incorporation while ensuring compliance with certain state
licensing requirements. There were minimal differences in the financial
statements before the Merger and after the Merger. All common share data
included in the consolidated financial statements and notes have been
retroactively adjusted to reflect the Merger.
(3) FISCAL YEAR
The Company utilizes a 52-53 week fiscal year (comprised of 13 four-week
periods), ending on the Friday closest to March 31. For both fiscal years 1996
and 1997, the first quarter
6
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CHILDTIME LEARNING CENTERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
contains sixteen weeks, while each of the remaining quarters contains twelve
weeks. Both fiscal years 1996 and 1997 contain 52 weeks.
(4) INCOME TAXES
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between 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.
(5) COMMON STOCK AND EARNINGS PER SHARE
For the twelve weeks and twenty-eight weeks ended October 11, 1996, earnings
per share have been calculated by dividing net income by the weighted average
common shares outstanding, including the common stock purchase warrant (201,511
shares).
7
<PAGE> 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations
GENERAL
During the first two quarters (twenty-eight weeks) of the fiscal year ending
March 28, 1997, the Company acquired 13 centers and opened 4 new centers. No
centers were sold. Accordingly, as of October 11, 1996, the Company operated
191 centers. The results of centers opened, acquired or disposed of are
included in the Company's financial statements from the date of opening,
acquisition or disposition, as applicable. Accordingly, comparisons of year
over year results could be influenced by the timing of such new openings,
acquisitions or dispositions.
RESULTS OF OPERATIONS
For the 12 weeks ended October 11, 1996, revenues increased to $17,458,000 from
$14,607,000 for the 12 weeks ended October 13, 1995, a 19.5% increase. This
increase was principally attributable to increased revenues from centers opened
or acquired in fiscal 1996 ($1,572,000, or 10.8%) and centers opened or
acquired in fiscal 1997 ($741,000, or 5.1%). For the 28 weeks ended October
11, 1996, revenues increased to $40,715,000 from $33,950,000 for the 28 weeks
ended October 13, 1995, a 19.9% increase. This increase was principally
attributable to increased revenues from centers opened or acquired in fiscal
1996 ($4,094,000, or 12.1%) and centers opened or acquired in fiscal 1997
($985,000, or 2.9%). The remaining increase for both the 12 weeks and 28 weeks
ended October 11, 1996, was attributable to comparable center growth and to a
lesser extent, management contracts and closed centers.
Comparable center revenues (centers operating during all of the 28 weeks ended
October 11, 1996 and October 13, 1995) increased 4.0% for the 12 weeks ended
October 11, 1996, and 5.3% for the 28 weeks then ended. For the 12 weeks
ended October 11, 1996, the growth in comparable center revenues was a result
of increased tuition rates, partially offset by a decrease in center
utilization due to softer then expected fall enrollment in certain regional
markets. For the 28 weeks ended October 11, 1996, the majority of the growth
in comparable center revenues was a result of increased tuition rates, while
the balance was attributable to increased center utilization.
Gross profit increased from $2,420,000 for the 12 weeks ended October 13, 1995,
to $2,496,000 for the 12 weeks ended October 11, 1996, a 3.2% increase, and
from $6,205,000 for the 28 weeks ended October 13, 1995, to $6,661,000 for the
28 weeks ended October 11, 1996, a 7.3% increase.
As a percentage of revenues, gross profit decreased from 16.6% for the 12 weeks
ended October 13, 1995, to 14.3% for the 12 weeks ended October 11, 1996, and
from 18.3% for the 28 weeks ended October 13, 1995, to 16.4% for the 28 weeks
ended October 11, 1996. For both the 12 weeks and 28 weeks ended October 11,
1996, this decrease was principally due to the addition of leased centers,
which typically have lower gross profit margins than the Company's owned
centers, as well as softer then expected fall enrollment in certain regional
markets. Additionally, for the 28 weeks ended October 11, 1996, this decrease
was due to initial start-up and operating losses incurred with respect to new
build-to-suit and acquired centers aggregating $467,000 for the 28 weeks ended
October 11, 1996, as compared to $317,000 for the 28 week period ended
8
<PAGE> 9
Management's Discussion and Analysis of
Financial Condition and Results of Operations - Continued
RESULTS OF OPERATIONS - CONTINUED
October 13, 1995.
Marketing expenses increased from $243,000 for the 12 weeks ended October 13,
1995, to $260,000 for the 12 weeks ended October 11, 1996, and from $567,000
for the 28 weeks ended October 13, 1995, to $604,000 for the 28 weeks ended
October 11, 1996. These increases were primarily due to the additional
marketing expenses associated with the opening of new centers during the fiscal
1996 and 1997 periods. However, as a percentage of revenues, marketing
expenses decreased for both the 12 weeks and 28 weeks ended October 11, 1996,
from 1.7% of revenues to 1.5% of revenues, respectively.
General and administrative expenses decreased from $1,194,000 for the 12 weeks
ended October 13, 1995, to $1,175,000 for the 12 weeks ended October 11, 1996,
and increased from $2,789,000 for the 28 weeks ended October 13, 1995, to
$2,877,000 for the 28 weeks ended October 11, 1996. As a percentage of
revenues, general and administrative expenses decreased from 8.2% of revenues
for the 12 weeks ended October 13, 1995, to 6.7% of revenues for the 12 weeks
ended October 11, 1996, and from 8.2% of revenues for the 28 weeks ended
October 13, 1995, to 7.1% of revenues for the 28 weeks ended October 11, 1996,
due to operating leverage provided by higher revenues.
Revaluation of land held for disposal represents the $612,000 charge required
in the fiscal 1996 periods to reduce the carrying value of the land held for
disposal to its estimated net realizable value.
As a result of the foregoing changes, operating income increased from $371,000
for the 12 weeks ended October 13, 1995, to $1,061,000 for the 12 weeks ended
October 11, 1996, and from $2,238,000 for the 28 weeks ended October 13, 1995,
to $3,180,000 for the 28 weeks ended October 11, 1996. For the 12 weeks ended
October 11, 1996, the operating income increase of $690,000 represents an
increase of 185.5% over the 12 weeks ended October 13, 1995. For the 28 weeks
ended October 11, 1996, the operating income increase of $942,000 represents an
increase of 42.1% over the 28 weeks ended October 13, 1995.
Interest expense decreased from $478,000 for the 12 weeks ended October 13,
1995, to $33,000 for the period ended October 11, 1996, and from $1,142,000 for
the 28 weeks ended October 13, 1995, to $73,000 for the 28 weeks ended October
11, 1996. These decreases were due to the retirement of approximately
$17,400,000 of debt from the net proceeds of the Company's initial public
offering in February, 1996.
The provision for income tax increased from a $49,000 tax benefit for the 12
weeks ended October 13, 1995, (due to a $245,000 tax benefit regarding the
$612,000 charge required in fiscal 1996 for the revaluation of land held for
disposal), to $455,000 for the 12 weeks ended October 11, 1996, and from
$460,000 (an effective tax rate of 36.5%) for the 28 weeks ended October 13,
1995, to $1,331,000 (an effective tax rate of 38.8%) for the 28 weeks ended
October 11, 1996.
9
<PAGE> 10
Management's Discussion and Analysis of
Financial Condition and Results of Operations - Continued
RESULTS OF OPERATIONS - CONTINUED
As a result of the foregoing changes, net income increased from a net loss of
$1,000 for the 12 weeks ended October 13, 1995, to net income of $714,000 for
the 12 weeks ended October 11, 1996. For the 28 weeks ended October 13, 1995,
net income was $801,000, or 2.4% of revenues. For the 28 weeks ended October
11, 1996, net income increased to $2,101,000, or 5.2% of revenues.
ANTICIPATED INTERNAL REVENUE SERVICE AUDIT SETTLEMENT
As previously disclosed, the Internal Revenue Service ("IRS") has challenged
the deductibility of certain costs incurred by KD Acquisition Corporation in
connection with its acquisition of the Company and had issued a Statutory
Notice of Deficiency for the tax years 1991 - 1994. Accordingly, the Company
did not recognize for financial statement purposes the income tax benefit of
approximately $900,000 associated with these deductions. Management anticipates
that a settlement will be reached in the third quarter of fiscal 1997, and that
the quarterly results may include a credit in the income tax provision of up to
$700,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements have been new center expansion (through
development of build-to-suit centers, new leases and acquisitions), maintenance
of existing centers and the scheduled repayment of debt and interest thereon
incurred in connection with the 1990 Buyout. As a result of the Company's
initial public offering and receipt of $19,219,000 in net proceeds,
substantially all of the Company's debt has been repaid. Accordingly, the
Company's primary cash requirements will be its new center expansion program
and maintenance of existing centers. The Company believes that cash flow from
operations, together with amounts available under a $10 million unsecured
revolving line of credit facility entered into by the Company in February of
1996, will be sufficient to satisfy the Company's anticipated cash requirements
on both a long- term and short-term basis. The rate of interest payable under
the new agreement is, at the Company's option, based on the Floating Rate or
the Eurodollar Rate (both, as defined in the agreement). Accordingly, the new
line of credit will bear annual interest at approximately the prime rate.
Net cash provided by operations increased from $1,081,000 during the 28 week
period ended October 13, 1995, to $2,732,000 during the 28 weeks ended October
11, 1996. During the 28 weeks ended October 11, 1996, cash provided by
operations was principally used to add 17 centers, make capital improvements
to existing centers and add approximately $873,000 to existing cash balances.
Throughout the 28 weeks ended October 11, 1996, the Company did not utilize its
unsecured revolving line of credit.
10
<PAGE> 11
PART II
INDEX TO EXHIBITS AND OTHER INFORMATION
CHILDTIME LEARNING CENTERS, INC. AND CONSOLIDATED SUBSIDIARY
Item 6 Exhibits and Reports on Form 8-K
(a) Financial Data Schedule (For SEC use only)
(b) Reports on Form 8-K: None
11
<PAGE> 12
SIGNATURES
CHILDTIME LEARNING CENTERS, INC. AND CONSOLIDATED SUBSIDIARY
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHILDTIME LEARNING CENTERS, INC.
(REGISTRANT)
/S/ Michael M. Yeager 11/20/96
-------------------------------------
Michael M. Yeager
Chief Financial Officer and Secretary-Treasurer
(Duly Authorized Officer and Principal
Financial Officer)
12
<PAGE> 13
EXHIBIT INDEX
CHILDTIME LEARNING CENTERS, INC. AND CONSOLIDATED SUBSIDIARY
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
27 Financial Data Schedule (For SEC use only)
</TABLE>
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A)
CHILDTIME LEARNING CENTERS, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED
OCTOBER 11, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERNCE TO SUCH (B)
FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> MAR-28-1997
<PERIOD-START> MAR-30-1996
<PERIOD-END> OCT-11-1996
<CASH> 3,186
<SECURITIES> 0
<RECEIVABLES> 2,420
<ALLOWANCES> 125
<INVENTORY> 0
<CURRENT-ASSETS> 7,451
<PP&E> 41,485
<DEPRECIATION> 7,661
<TOTAL-ASSETS> 47,387
<CURRENT-LIABILITIES> 6,748
<BONDS> 0
0
0
<COMMON> 29,365
<OTHER-SE> (9)
<TOTAL-LIABILITY-AND-EQUITY> 47,387
<SALES> 0
<TOTAL-REVENUES> 40,715
<CGS> 0
<TOTAL-COSTS> 37,535
<OTHER-EXPENSES> (325)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73
<INCOME-PRETAX> 3,432
<INCOME-TAX> 1,331
<INCOME-CONTINUING> 2,101
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,101
<EPS-PRIMARY> .39
<EPS-DILUTED> .39
</TABLE>
