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 June 30, 1995.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the transition period
from ___________ to ___________
Commission File No. 0-14368
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
061097006
(I.R.S. Employer Identification No.)
851 Irwin Street, Suite 200, San Rafael, California 94901
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 257-4200
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 August 7, 1995, the Registrant had outstanding 6,177,031
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.
<PAGE>
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1995
INDEX
Page
PART I. FINANCIAL INFORMATION 3
ITEM 1. Condensed Consolidated Financial Statements
a) Condensed Consolidated Balance Sheets -- 4
June 30, 1995 and December 31, 1994
b) Condensed Consolidated Statements of 6
Operations -- Three months and Six months ended
June 30, 1995 and 1994
c) Condensed Consolidated Statements of 7
Cash Flows -- Six months ended
June 30, 1995 and 1994
d) Notes to Condensed Consolidated Financial 9
Statements
ITEM 2. Management's Discussion and Analysis 12
of Financial Condition and Results
of Operations
PART II. OTHER INFORMATION 16
Signatures 17
<PAGE>
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 June 30, 1995, and the results of its
operations for the three months and six months ended June 30, 1995
and 1994, have been included.
<PAGE>
<TABLE>
ITEM 1. FINANCIAL STATEMENTS
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND
SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995 AND DECEMBER 31, 1994
<CAPTION>
June 30, December 31,
1995 1994
In thousands (Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $3,384 $21,558
Short-term investments 12,783 1,300
Accounts receivable 2,883 1,646
Prepaid expenses and
other current assets 1,484 1,178
Total Current Assets 20,534 25,682
PROPERTY, PLANT AND EQUIPMENT:
Land 878 878
Buildings 4,749 4,705
Furniture, fixtures & equipment 8,027 7,007
Transportation equipment 1,390 1,259
Leashold improvements 6,124 5,177
21,168 19,026
Less: Accumulated depreciation
and amortization (5,331) (4,429)
15,837 14,597
INTANGIBLE ASSETS 34,625 22,903
OTHER 1,450 1,509
$72,446 $64,691
<FN>
See accompanying notes which are an integral part of these
statements.
</TABLE>
<PAGE>
<TABLE>
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC.
AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995 AND DECEMBER 31, 1994
<CAPTION>
June 30, December 31,
1995 1994
In thousands (except share data) (Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $2,015 $1,690
Accounts payable 938 798
Payroll and related accruals 2,382 1,463
Other accrued liabilities 180 482
Total current liabilities 5,515 4,433
LONG-TERM DEBT,
Net of current portion 16,670 13,736
ACCRUED STRAIGHT LINE RENT 1,125 1,066
STOCKHOLDERS' EQUITY:
Special Stock: Authorized 5,000,000
share; outstanding: Series A
Convertible Preferred, par value
$.01 per share, liquidation value $2,700
and $3,250 in 1995 and 1994; 2,700
and 3,250 shares outstanding in 1995
and 1994. -0- -0-
Common Stock, Par Value $.01 per share
Authorized 20,000,000
shares issued and outstanding
6,177,031 in 1995 and
5,931,604 in 1994. 132 130
Treasury Stock (7,200,844 shares) - -
Paid-in capital in excess of par 52,707 51,391
Loans to officers (640) (640)
Unrealized gain (loss) on short-term
investments 15 (30)
Accumulated deficit (3,078) (5,395)
Total Stockholders' Equity 49,136 45,456
$72,446 $64,691
<FN>
See accompanying notes which are an integral part of these
statements.
</TABLE>
<PAGE>
<TABLE>
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC.
AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS
OF INCOME FOR THE THREE-MONTH AND SIX-MONTH
PERIODS ENDED JUNE 30, 1995 AND 1994
<CAPTION>
3 Months Ended June 30 6 Months Ended June 30
1995 1994 1995 1994
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
In thousands (except per share data)
<S> <C> <C> <C> <C>
REVENUES FROM
OPERATIONS:
Child care fees $19,643 $13,843 $37,676 $25,550
Management fees 254 56 500 110
Total revenue
from operations 19,897 13,899 38,176 25,660
OPERATING EXPENSES:
Payroll & related costs 10,594 7,502 20,268 13,838
Direct costs 4,799 3,352 9,265 6,251
General & administrative 1,443 1,112 2,901 2,083
Depreciation and
amortization 890 577 1,660 1,066
Advertising & promotion 213 143 391 243
Total operating expenses 17,939 12,686 34,485 23,481
Operating profit 1,958 1,213 3,691 2,179
OTHER EXPENSE,net 64 179 78 279
Income before provision for
income taxes 1,894 1,034 3,613 1,900
PROVISION FOR INCOME TAXES 664 294 1,296 519
NET INCOME $1,230 $740 $2,317 $1,381
NET INCOME PER SHARE: $0.18 $0.16 $0.33 $0.29
AVERAGE NUMBER OF SHARES: 7,013 4,731 6,983 4,739
<FN>
See accompanying notes which are an integral part of these
statements.
</TABLE>
<PAGE>
<TABLE>
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND
SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1995
AND 1994
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 1995 June 30, 1994
In thousands (Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $2,317 $1,381
Adjustments to reconcile
net income to net cash
provided by operating activities:
Depreciation and amortization 1,660 1,066
Changes in assets and liabilities:
Accounts receivable (1,237) (703)
Prepaid expenses and other current
assets (306) (68)
Accounts payable 140 (69)
Payroll and related accruals 919 301
Accrued liabilities and other (243) (230)
Net cash provided by operating activities 3,250 1,678
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (14,538) (5,771)
Proceeds from sale of
short-term investments 3,100 1,339
Payments for acquisitions of
child care centers (7,361) (1,872)
Payments for the start-up of
centers (77) (33)
Purchases of property, plant
and equipment (1,487) (784)
Other, net (113) (349)
Net cash used in investing activities (20,476) (7,470)
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 168 152
Proceeds from issuance of common stock,net 1,318 0
Repayments of long-term debt (2,434) (1,167)
Net cash provided (used) by
financing activities (948) (1,015)
Net increase (decrease) in cash
and cash equivalents (18,174) (6,807)
CASH AND CASH
EQUIVALENTS:
Beginning of period 21,558 10,662
End of period $3,384 $3,855
<FN>
See accompanying notes which are an integral part of these
statements.
</TABLE>
<PAGE>
<TABLE>
Supplemental Disclosures of Cash Flow Information:
<CAPTION>
Cash paid during the six months
ended June 30 (in thousands) for: 1995 1994
<S> <C> <C>
Interest $742 $429
Income taxes 1,219 609
</TABLE>
<TABLE>
Supplemental Schedule of Noncash Investing and
Financing Activities:
<CAPTION>
For the six months ended June 30, the Company
purchased 33 centers in 1995 and 22 centers in 1994
(in thousands) 1995 1994
<S> <C> <C>
Cash payments $7,361 $1,872
Notes issued to sellers 5,151 2,385
Liabilities assumed 766 2,531
Total value of centers acquired $13,278 $6,788
</TABLE>
<PAGE>
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 three and six month periods of 1995 and
1994 are affected by the acquisition or start-up of a total of 76
centers in 1994 and the first six months of 1995 (see "Management's
Discussion 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 reclassifications have been made to the 1994
financial 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."
<PAGE>
Acquisitions
In the first six months of 1995, the Company purchased 33 centers
for an aggregate price of $13,278,000. 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 six months 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).
Six Months Six Months
Ended June 30, Ended June 30,
1995 1994
(unaudited) (unaudited)
Revenues from operations $40,787 $38,612
Net income 2,437 1,585
Net income per share: 0.35 0.33
Weighted average common
shares outstanding: 6,983 4,739
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
During the first six months of 1995, the Company acquired 33 centers
and opened one new center. During the year ended December 31,
1994, the Company acquired or opened 42 centers and closed three
centers. The results of centers acquired, opened, disposed of, or
closed are included in the Company's financial statements from the
date of acquisition, opening, or until the date of disposition or closing,
as applicable. 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 from Operations increased 43% in the second quarter of
1995 to $19,897,000 and 49% in the first six months of 1995 to
$38,176,000. Revenues for those centers open in corresponding time
periods in both years increased approximately 6% for the second
quarter and 7% for the six months of 1995 over the corresponding
time periods in 1994. Increased prices accounted for approximately
86% of the increase in same centers for the six months and all of the
increase for the quarter. New centers accounted for approximately
87% of the increase for the quarter and six month periods.
Payroll and related costs increased by $3,092,000 or 41%, for the
second quarter of 1995, and by $6,430,000 or 47%, for the six
months of 1995, as compared to the corresponding time periods in
1994 due mainly to the increase in the number of centers operated.
Payroll and related costs as a percentage of revenues, however,
decreased to 53.2% in the second quarter and to 53.1 % for the six
months of 1995 from 54.0% and 53.9% in the corresponding time
periods of 1994. This decrease was due to increased prices offset
somewhat by increased wage rates.
Direct costs increased by $1,447,000 or 43%, for the second quarter,
and by $3,014,000 or 48%, for the six months of 1995 as compared
to the corresponding time periods in 1994. As a percentage of
revenue direct costs were 24.1% for the second quarter of both 1995
and 1994, and decreased to 24.3% for the six months of 1995 from
24.4% for the six months of 1994. This increase, in dollars, was due
mainly to the increase in new centers acquired during 1995 and 1994.
<PAGE>
Administrative expense as a percentage of total revenues declined to
7.3% in the second quarter of 1995 from 8.0% in the second quarter
of 1994, and to 7.6% for the six months of 1995 from 8.1% for the
six months of 1994. The Company continues to focus on
administrative expense containment during its acquisition process.
Depreciation and amortization expense increased to $890,000 in the
second quarter of 1995 from $577,000 in the second quarter of
1994, and to $1,660,000 for the six months of 1995 from
$1,066,000 for the six months of 1994. This was a 55% increase for
both periods over the prior year. This increase was due mainly to the
new centers acquired in 1994 and 1995.
Advertising and promotion increased by 49% for the second quarter of
1995 over the second quarter of 1994, and by 61% for the six
months of 1995 over the six months of 1994. This increase was due
mainly to the increase in the number of centers.
Other expense decreased by $115,000 for the second quarter of
1995, as compared to the second quarter ended 1994, and decreased
by $201,000 for the first six months of 1995, as compared with the
similar period in 1994. Interest expense increased by $312,000 for
the six months and by $115,000 for the second quarter of 1995 over
the comparable periods in 1994. This increase was associated with
the Company's acquisitions. This was offset by interest income
increasing by $356,000 for the six months and by $156,000 for the
second quarter of 1995 over the comparable periods in 1994. This
increase was due to the higher cash balances because of the
$19,625,000, net proceeds, raised in a public offering in December
1994 and January 1995 (see "Liquidity and Capital Resources"
below).The remainder was other income.
The combination of increased revenues from acquisitions and from the
existing centers, and the reduction of payroll and related expenses and
general and administrative expenses as a percentage of revenue
resulted in an increase in net profit for the second quarter of 1995
compared to the second quarter of 1994 of $490,000 or 66%.
Likewise, the Company also recorded an increase in net profit for the
first six months of 1995 as compared to the first six months of 1994
of $936,000 or 68%.
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. These notes are
payable generally over ten years. As of June 30, 1995, $13,667,000
in principal of such notes was outstanding, carrying a weighted
average annual interest rate of 8.9%. Since many sellers of cent
ers 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.
<PAGE>
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
$1,318,000 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 six months of 1995, net
cash provided by operations was $3,250,000. This internally
generated cash funded all of the Company's needs for purchases of
property, plant and equipment, scheduled debt repayments, and
$900,000 of the $7,438,000 that the Company invested in new
centers. Approximately $6,538,000 of the Company's existing cash
balances were used for the acquisition or opening of new centers
during the first six months of 1995 and $1,550,000 was used in the
repurchase of existing debt. During the three months, the Company
issued or assumed a total of approximately $5,700,000 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 $1,000,000
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, 1996. 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.
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) An annual meeting of the stockholders of the
Company was held on June 21, 1995.
(b) The following individuals were elected as Directors
with the indicated votes:
Votes For Withheld
Mark P. Clein 5,685,435 4,775
Michael J. Connelly 5,685,435 4,775
Robert E. Kaufmann 5,685,435 4,775
W. Wallace McDowell, Jr. 5,685,435 4,775
Richard A. Niglio 5,685,175 5,035
Myron A. Wick 5,685,435 4,775
(c) The matters considered at the June 21, 1995 Annual
Meeting of Stockholders, other than the election of
directors, were as stated below:
(i) The following amendments to the Children's
Discovery Centers of America, Inc.
Stock Option Plan including:
a) Increasing the number of shares of
CDC Common Stock available for
issuance thereunder by 300,000 to
800,000.
This was approved by an affirmative vote of
4,523,893 to 848,665 negative votes with
127,768 abstentions.
(ii) The ratification of the appointment of Arthur
Andersen LLP. as the Company's
independent auditors for the 1995 fiscal year,
which was approved by an affirmative vote of
5,579,082 to 18,575 negative votes with
92,553 abstentions.
ITEM 5. Exhibits and Reports on Form 8-K
(a) Not applicable.
(b) The Company filed on June 16, 1995, a report on
Form 8-K, reporting the acquisition of five (5) pre-
school and day care centers in West Chester and
Montgomery Counties, Pennsylvania.
<PAGE>
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_____________________________________
Richard A. Niglio
Chief Executive Officer
By: ___/s/ Randall J. Truelove______________________________________
Randall J. Truelove
Vice-President, Finance
Chief Accounting Officer
Date: August 11, 1995
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Children's Discovery Centers of America, Inc. Form 10-Q for the quarterly
period ended June 30, 1995 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-1-1995
<PERIOD-END> JUNE-30-1995
<CASH> 3,384
<SECURITIES> 12,783
<RECEIVABLES> 2,883
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 20,534
<PP&E> 21,168
<DEPRECIATION> 5,331
<TOTAL-ASSETS> 72,446
<CURRENT-LIABILITIES> 5,515
<BONDS> 0
<COMMON> 132
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 72,446
<SALES> 0
<TOTAL-REVENUES> 38,176
<CGS> 0
<TOTAL-COSTS> 34,485
<OTHER-EXPENSES> 78
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,613
<INCOME-TAX> 1,296
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<NET-INCOME> 2,317
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
</TABLE>
