SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
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 March 31, 1995.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-14368
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 061097006
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
851 Irwin Street, Suite 200, San Rafael, California 94901
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 257-4200
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N/A
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(Registrant's former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 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
requirements for the past 90 days.
YES (X) NO ( )
As of May 8, 1995, the Registrant had outstanding 6,170,081 shares of Common
Stock, $.01 par value, and 2,700 shares of Special Stock, denominated Series A
Convertible Preferred Stock, $.01 par value, convertible into 490,909 shares of
Common Stock.
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CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1995
INDEX
Page
PART I. FINANCIAL INFORMATION 3
ITEM 1. Condensed Consolidated Financial Statements
a) Condensed Consolidated Balance Sheets -- 4
March 31, 1995 and December 31, 1994
b) Condensed Consolidated Statements of 6
Operations -- Three months ended
March 31, 1995 and 1994
c) Condensed Consolidated Statements of 7
Cash Flows -- Three months ended
March 31, 1995 and 1994
d) Notes to Condensed Consolidated Financial 9
Statements
ITEM 2. Management's Discussion and Analysis 11
of Financial Condition and Results
of Operations
PART II. OTHER INFORMATION 13
Signatures 14
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PART I - FINANCIAL INFORMATION
The condensed consolidated financial statements included herein have been
prepared by Children's Discovery Centers of America, Inc. (the "Company")
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. While 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 made herein are
adequate to make the information presented not misleading. It is recommended
that these condensed financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the year ended December 31, 1994.
In the opinion of the Company, all adjustments consisting only of normal
recurring adjustments, necessary to present fairly the financial position of the
Company as of March 31, 1995, and the results of its operations for the three
months ended March 31, 1995 and 1994, have been included.
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PART I
ITEM 1. FINANCIAL STATEMENTS
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1995 AND DECEMBER 31, 1994
March 31, December 31,
1995 1994
---- ----
In thousands (Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $15,633 $21,558
Short-term investments 4,508 1,300
Accounts receivable 2,071 1,646
Prepaid expenses and other current assets 1,485 1,178
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Total current assets 23,697 25,682
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PROPERTY, PLANT AND EQUIPMENT:
Land 878 878
Buildings 4,723 4,705
Furniture, fixtures & equipment 7,422 7,007
Transportation equipment 1,339 1,259
Leasehold improvements 5,448 5,177
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19,810 19,026
Less: Accumulated depreciation and amortization (4,873) (4,429)
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14,937 14,597
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INTANGIBLE ASSETS 28,916 22,903
OTHER: 1,735 1,509
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$69,285 $64,691
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See accompanying notes which are an integral part of these statements.
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CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1995 AND DECEMBER 31, 1994
March 31, December 31,
1995 1994
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In thousands (ecept share and per share data) (Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,931 $ 1,690
Accounts payable 606 798
Payroll and related accruals 1,809 1,463
Other accrued liabilities 1,222 482
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Total current liabilities 5,568 4,433
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LONG-TERM DEBT,
Net of current portion 14,767 13,736
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ACCRUED STRAIGHT LINE RENT 1,078 1,066
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STOCKHOLDERS' EQUITY:
Special Stock: Authorized 5,000,000 shares; outstanding:
Series A Convertible Preferred, par value $.01 per
share, liquidation value $2,838 and $3,250
in 1995 and 1994; 2,838 and 3,250 shares
outstanding in 1995 and 1994. -0- -0-
Common Stock, Par Value $.01 per share
Authorized 20,000,000 shares
outstanding; 6,145,081 in 1995,
5,931,604 in 1994. 132 130
Treasury Stock (7,200,844 shares) - -
Paid-in capital in excess of par 52,693 51,391
Loans to officers (640) (640)
Unrealized loss on short-term investment (6) (30)
Accumulated deficit (4,307) (5,395)
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Total Stockholders' Equity 47,872 45,456
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$69,285 $64,691
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See accompanying notes which are an integral part of these statements.
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CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994
Three Months Three Months
Ended Ended
March 31, March 31,
1995 1994
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In thousands (ecept share and per share data) (Unaudited) (Unaudited)
REVENUES FROM OPERATIONS:
Child care fees $18,033 $11,707
Managemnt fees 246 54
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Total revenues from operations 18.279 11,761
OPERATING EXPENSES:
Payroll and related costs 9,674 6,329
Other center operating expenses 4,466 2,906
Administrative expenses 1,458 971
Depreciation and amortization 770 489
Advertising and promotion 178 100
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Total operating expenses 16,546 10,795
Income from operations 1,733 966
OTHER EXPENSE, net 14 100
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Income before provision for income taxes 1,719 866
PROVISION FOR INCOME TAXES 632 225
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NET INCOME $1,087 $641
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NET INCOME PER SHARE: $.16 $.14
WEIGHTED AVERAGE COMMON SHARES: 6,938 4,731
See accompanying notes which are an integral part of these statements.
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CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994
Three Months Three Months
Ended Ended
March 31, March 31,
1995 1994
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In thousands (Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,087 $ 641
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 770 489
Changes in assets and liabilities:
Accounts receivable (425) (372)
Prepaid expenses and other current assets (307) (107)
Accounts payable (192) 164
Payroll and related accruals 346 280
Accrued liabilities and other 752 (2)
Gain on extinguishment of debt (83) 0
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Net cash provided by operating activities 1,948 1,093
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (4,508) (5,761)
Proceeds from sale of short-term investments 1,300 100
Payments for acquisitions of child care centers (3,326) (1,142)
Payments for the start-up of centers 0 (33)
Purchases of property, plant and equipment (435) (237)
Other, net (177) (40)
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Net cash used in investing activities (7,146) (7,113)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from inssuance of long-term debt 0 48
Proceeds from issuance of common stock, net 1,304 0
Repayments of long-term debt (2,031) (798)
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Net cash used for financing activities (727) (750)
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Net decrease in cash and cash equivalents (5,925) (6,770)
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CASH AND CASH EQUIVALENTS:
Beginning of period 21,558 10,662
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End of period $ 15,663 $ 3,892
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See accompanying notes which are an integral part of these statements.
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Supplemental Disclosures of Cash Flow Information:
Cash paid during the three months
ended March 31 (in thousands) for: 1995 1994
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Interest $ 378 $ 181
Income taxes 150 31
Supplemental Schedule of Noncash Investing and
Financing Activities:
The Company acquired and opened 25 additional centers during
the three months ended March 31 (in thousands)
1995 1994
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Cash payments $3,326 $1,142
Notes issued to sellers 2,846 1,797
Indebtedness and liabilities assumed 588 2.531
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Total value of centers acquired $6,760 $5,570
See accompanying notes which are an integral part of these statements.
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CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) General
The accounting policies followed during the interim periods reported on are in
conformity with generally accepted accounting principles and are consistent with
those applied for annual periods. Operational comparisons between the first
quarter of 1995 and 1994 are affected by the addition of a total of 67centers in
1994 and the first quarter of 1995 (see "Management's Discussions and Analysis
of Financial Condition and Results of Operations" below). For a complete
discussion of the Company's accounting policies, refer to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994, previously filed.
Consolidation
The consolidated financial statements include the accounts of Children's
Discovery Centers of America, Inc. and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated. Certain reclass
ifications have been made to the 1994financial statements to conform to the 1995
presentation.
Income Taxes
The Company records income taxes in accordance with the provisions of Statement
of Financial Accounting Standards (SFAS) No.109, "Accounting for Income Taxes."
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Acquisitions
In the first quarter of 1995 the Company acquired 24 centers for an aggregate
price of $6,760,000. For the year ended December 31, 1994, the Company
acquired 38 centers for an aggregate price of $15,278,000.
Pro forma results -
The unaudited pro forma results of the Company's operations for the first
quarters of 1995 and 1994 are summarized below as though the acquisitions
occurred at the beginning of 1994. The unaudited pro forma information
presented does not purport to be indicative of the results which would have been
obtained had the acquisitions actually been consummated as of the beginning of
1994, or which may be obtained in the future. The pro forma results are based
on purchase accounting adjustments recognized in combining the companies (in
thousands, except per share data).
Three Months Three Months
Ended March 31, Ended March 31,
1995 1994
(unaudited) (unaudited)
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Revenues from operations $19,111 $17,663
Net income $ 1,116 $ 680
Net income per share $ .16 $ .14
Weighted average common shares outstanding: 6,938 4,731
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
During the first three months of 1995, the Company acquired or opened 25 centers
and closed one center. During the year ended December 31, 1994, the Company
acquired or opened 42 centers and closed three centers. The results of acquired
or disposed of centers are included in the Company's financial statements from
the date of acquisition or until the date of disposition. Accordingly, the year
to year results may fluctuate depending upon the timing of the Company's
acquisition or disposition of centers.
Historically, the Company's operating revenue has followed the seasonality of a
school year, declining during the summer months and the year-end holiday period.
Results of Operations
Revenues form Operations increased 55% to $18,279,000 in the first quarter of
1995, as compared to $11,761,000 in the first quarter of 1994. Revenues for
those centers open in corresponding time period in both years increased over
1994 by approximately 8% for the quarter. The remainder of the increases was
due to the net increase in centers.Approximately one-third of the increase on a
same center basis was due to enrollment increases, with the remainder due to
increases in prices.
Payroll and related costs increased by $3,345,000 or 53% , for the first quarter
of 1995 as compared to the first quarter of 1994 due to the increase in the
number of centers operated. Payroll and related costs as a percentage of
revenues, however, decreased to 52.9% in the first quarter of 1995 from 53.8% in
the first quarter of 1994. The decrease in payroll and related expenses was due
to increased enrollments, increased prices and improved scheduling of labor
attributable to more efficient staffing.
Other center operating expenses increased by $1,560,000 or 54%, for the first
quarter of 1995 as compared to the corresponding time period in 1994, due to the
increase in the number of centers operated. As a percentage of revenue other
center operating expenses, however, decreased to 24.4% in the first quarter of
1995 from 24.7% in the first quarter of 1994. The decline as a percentage of
revenue was due to an increase in average center revenues derived from higher
enrollments and increased prices, which resulted in a decrease in the fixed
costs of the Company's centers as a percentage of revenue.
Depreciation and amortization expense increased to $770,000 in 1995 from
$489,000 in 1994 for the first quarter. This increase was due mainly to the
increase in new centers acquired during 1995 and 1994.
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Advertising and promotion expense increased to $178,000 in 1995 from $100,000 in
1994 for the first quarter. This increase was due mainly to the increase in new
centers acquired during 1995 and 1994.
Administrative expense as a percentage of total revenues decreased to 8.0% for
the first quarter of 1995 from 8.3% in the first quarter of 1994. The Company
continues to focus on administrative expense containment during its acquisition
process.
Other expense decreased by $86,000 for the first quarter of 1995 as compared to
the first quarter of 1994. The decrease was due to higher interest income of
$200,000 due to higher cash balances because of the $19,600,000, net proceeds,
raised in a public offering in December 1994 and January 1995 (see "Liquidity
and Capital Resources" below), a gain of $83,000 from the repurchase of some of
the Company's existing debt at a discount, and offset by higher interest expense
of $197,000 associated with the Company's acquisitions.
The combination of increased revenues from acquisitions, increased prices, and
new enrollments in existing centers, and the reduction of direct operating costs
(i.e., payroll expense, other center operating expenses and advertising and
promotion expenses) as a percentage of revenues, resulted in an increase in net
profit for the first quarter of 1995 compared to the first quarter of 1994 of
$446,000.
Liquidity and Capital Resources
Since its inception, the Company has grown primarily through the acquisition of
existing child care centers. For acquisitions of individual centers or small
chains, it is the Company's general practice to acquire centers for a
combination of cash and notes to sellers, with notes generally representing
approximately two-thirds of the total acquisition price. These notes are payable
generally over ten years. As of March 31, 1995, $11,940,000 in principal of such
notes was outstanding, carrying a weighted average annual interest rate of 8.8%.
Since many sellers of centers own the facilities in which the centers are
operated, the Company is often able to lease these facilities on a long-term
basis through the exercise of successive options, while avoiding long-term
obligations.
For transactions involving the acquisition of larger chains, the Company has
relied principally on the issuance of new securities as payment for a
substantial portion of the purchase price.
Capital resources for the cash portion of acquisitions have generally been
obtained through private sales of the Company's securities at various times
since inception and public offerings of Common Stock in 1985, 1991, 1993 and
1994. During 1994, the Company raised $18,307,000 in a public offering in
December, and an additional $1,304,000 in January of 1995 on final completion of
the offering
During 1994, net cash provided by operations was $4,495,000. This internally
generated cash funded all of the Company's needs for purchases of property,
plant, and equipment, and debt repayments, including a $600,000 repayment of
notes issued in the 1991 acquisition of Magic Years. During the first three
months of 1995, net cash provided by operations was $1,948,000. This internally
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generated cash funded all of the Company's needs for purchases of property,
plant and equipment, scheduled debt repayments, and $600,000 of the $3,326,000
that the Company invested in new centers. Approximately $2,726,000 of the
Company's existing cash balances were used for the acquisition or opening of new
centers during the first three months of 1995 and $1,300,000 was used in the
repurchase of existing debt. During the three months, the Company issued or
assumed a total of approximately $3,390,000 of indebtedness related to
acquisitions.
The Company's management believes that the Company's internally generated cash
will cover its cash requirements for the foreseeable future and, along with its
existing cash balances, will allow it to continue to grow through the
acquisition of additional child care centers. The Company also has available to
it up to $750,000 under an unsecured line of credit furnished by Wells Fargo
Bank National Association. Amounts drawn down bear interest at the rate of .75%
above the Bank's prime rate, and will be due and payable in full on July 1,
1995. The Company currently has no commitments for capital expenditures, except
for the acquisition of child care centers, which might be deemed, either
individually or in the aggregate, material to its business.
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PART II - OTHER INFORMATION
Item 6.
(b) The Company filed a Report on Form 8-K/A during the quarter:
1. Form 8-K/A dated March 15, 1995, as Amendment No. 2 to
Current Report on Form 8-K, was filed to report the closing
of the acquisition previously reported in the Current Report
on Form 8-K filed on November 29, 1994 as amended by Form
8-K/A filed on December 9, 1994. The previously reported
acquisition closed on February 8, 1995.
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SIGNATURES
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.
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC.
By: /s/ Richard A. Niglio
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Richard A. Niglio
Chief Executive Officer
By: /s/ Randall J. Truelove
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Randall J. Truelove
Vice-President, Finance
Chief Accounting Officer
Date: May 11, 1995
