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 September 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 November 7, 1995, the Registrant had outstanding 6,204,231
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 SEPTEMBER 30, 1995
INDEX
Page
PART I. FINANCIAL INFORMATION 3
ITEM 1. Condensed Consolidated Financial Statements
a) Condensed Consolidated Balance Sheets -- 4
September 30, 1995 and December 31, 1994
b) Condensed Consolidated Statements of 6
Operations -- Three months and Nine months ended
September 30, 1995 and 1994
c) Condensed Consolidated Statements of 7
Cash Flows -- Nine months ended
September 30, 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
<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 September 30, 1995, and the results of its
operations for the three months and nine months ended September 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
SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
<CAPTION>
September 30, December 31,
1995 1994
In thousands (Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $3,008 $21,558
Short-term investments 8,348 1,300
Accounts receivable 3,099 1,646
Prepaid expenses and
other current assets 2,182 1,178
Total Current Assets 16,637 25,682
PROPERTY, PLANT AND EQUIPMENT:
Land 935 878
Buildings 4,954 4,705
Furniture, fixtures & equipment 8,648 7,007
Transportation equipment 1,705 1,259
Leashold improvements 7,122 5,177
23,364 19,026
Less: Accumulated depreciation
and amortization (5,833) (4,429)
17,531 14,597
INTANGIBLE ASSETS 36,205 22,903
OTHER 1,800 1,509
$72,173 $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
SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
<CAPTION>
September 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 $2,070 $1,690
Accounts payable 739 798
Payroll and related accruals 2,098 1,463
Other accrued liabilities 199 482
Total current liabilities 5,106 4,433
LONG-TERM DEBT,
Net of current portion 16,672 13,736
ACCRUED STRAIGHT LINE RENT 1,228 1,066
STOCKHOLDERS' EQUITY:
Special Stock: Authorized 5,000,000
shares; 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
6,204,231 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 7 (30)
Accumulated deficit (3,039) (5,395)
Total Stockholders' Equity 49,167 45,456
$72,173 $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 NINE-MONTH
PERIODS ENDED SEPTEMBER 30, 1995 AND 1994
<CAPTION>
3 Months Ended 9 Months Ended
September 30 September 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 $19,056 $13,686 $56,732 $39,236
Management fees 272 70 772 180
Total revenue
from operations 19,328 13,756 57,504 39,416
OPERATING EXPENSES:
Payroll & related costs 10,879 7,676 31,147 21,514
Direct costs 5,538 3,589 14,803 9,840
General & administrative 1,536 1,083 4,437 3,166
Depreciation and
amortization 1,016 620 2,676 1,686
Advertising & promotion 243 134 634 377
Total operating expenses 19,212 13,102 53,697 36,583
Operating income 116 654 3,807 2,833
OTHER EXPENSE,net 183 219 261 498
Income (loss) before pro-
vision for income taxes (67) 435 3,546 2,335
PROVISION FOR INCOME TAXES (106) 122 1,190 641
NET INCOME (LOSS) $39 $313 $2,356 $1,694
NET INCOME (LOSS) PER SHARE: $0.01 $0.07 $0.34 $0.36
AVERAGE NUMBER OF SHARES: 6,973 4,772 6,968 4,751
<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 NINE MONTHS ENDED SEPTEMBER 30, 1995
AND 1994
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, 1995 September 30, 1994
In thousands (Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $2,356 $1,694
Adjustments to reconcile
net income to net cash
provided by operating activities:
Depreciation and amortization 2,676 1,686
Changes in assets and liabilities:
Accounts receivable (1,453) (543)
Prepaid expenses and other current
assets (1,004) (401)
Accounts payable (59) (134)
Payroll and related accruals 635 347
Accrued liabilities and other (121) (118)
Net cash provided by operating activities 3,030 2,531
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (14,538) (5,771)
Proceeds from sale of
short-term investments 7,497 2,592
Payments for acquisitions of
child care centers (8,345) (3,341)
Payments for the start-up of
centers (225) (553)
Purchases of property, plant
and equipment (3,302) (1,471)
Other, net (325) (651)
Net cash used in investing activities (19,238) (9,195)
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 283 152
Proceeds from issuance of common stock,net 1,318 0
Repayments of long-term debt (3,943) (1,575)
Net cash provided (used) by
financing activities (2,342) (1,423)
Net increase (decrease) in cash
and cash equivalents (18,550) (8,087)
CASH AND CASH
EQUIVALENTS:
Beginning of period 21,558 10,662
End of period $3,008 $2,575
<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 September 30 (in thousands) for: 1995 1994
<S> <C> <C>
Interest $1,148 $697
Income taxes 1,774 819
</TABLE>
<TABLE>
Supplemental Schedule of Noncash Investing and
Financing Activities:
<CAPTION>
For the nine months ended September 30, the Company
purchased 38 centers in 1995 and 25 centers in 1994
(in thousands) 1995 1994
<S> <C> <C>
Cash payments $8,345 $3,341
Notes issued to sellers 6,343 4,391
Liabilities assumed 993 2,531
Total value of centers acquired $15,681 $10,263
</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 nine month periods of 1995 and
1994 are affected by the acquisition or start-up of a total of 87
centers in 1994 and the first nine 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 nine months of 1995, the Company purchased 38 centers
for an aggregate price of $15,681,000. 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 nine 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.
<TABLE>
Nine Months Nine Months
Ended September 30, Ended September 30,
1995 1994
(unaudited) (unaudited)
In thousands except share data
<S> <C> <C>
Revenues from operations $61,464 $59,230
Net income 2,466 1,943
Net income per share: 0.35 0.41
Weighted average common
shares outstanding: 6,968 4,751
</TABLE>
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
During the first nine months of 1995, the Company acquired 38 centers
and opened 7 new centers and closed 4 centers. During the year ended
December 31, 1994, the Company acquired or opened 42 centers and closed
3 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 41% in the third quarter of 1995
to $19,328,000 and 46% in the first nine months of 1995 to $57,504,000.
New centers accounted for 89% of the increase for the nine months and
93% of the increase for the three months. Increases in same center
revenue, defined as those centers open in the same month in both
years accounted for the remainder of the increase. Revenue for
same centers increased by 5.2% for the nine months and 3.6% for the
three months over the corresponding periods in the prior year.
Price increases accounted for approximately 95% of the increase for
the nine months and all of the increase for the three months.
Payroll and related costs increased by $3,203,000 or 42%, for the
third quarter of 1995, and by $9,633,000 or 45%, for the nine
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 increased
to 56.3% in the third quarter of 1995 from 55.8% in the third
quarter of 1994, but for the nine months in 1995 it decreased to
54.2% from 54.6% for the nine months of 1994. This increase
as a percentage of revenue for the three months was due to
lower enrollments for July and August this year on a same
center basis and to higher costs associated with the
Company's summer programs. The decrease in payroll as a
percentage of revenue for the nine months was due to
increased prices offset somewhat by increased wage rates.
Direct costs increased by $1,949,000 or 54%, for the third quarter,
and by $4,963,000 or 50%, for the nine months of 1995 as compared
to the corresponding time periods in 1994. As a percentage of
revenue, direct costs increased to 28.7% for the third quarter
of 1995 from 26.1% for 1994, and increased to 25.7% for the nine
months of 1995 from 25.0% for the nine months of 1994. This
increase was due to an increase in occupancy and other semi-fixed
costs as a percentage of revenue.
Administrative expense as a percentage of total revenues declined
to 7.7% for the nine months of 1995 from 8.0% in the same
period of 1994, and for the third quarter it was 7.9% for
both years. The Company continues to focus on administrative
expense containment during its acquisition process.
Depreciation and amortization expense increased to $1,016,000
in the third quarter of 1995 from $620,000 in the third
quarter of 1994, and to $2,676,000 for the nine months of
1995 from $1,686,000 for the nine months of 1994. This
was a 64% increase for the third quarter and a 59% increase
for the nine months over the same time period in the
prior year. This increase was due mainly to the new centers
acquired in 1994 and 1995.
Advertising and promotion increased by 81% for the third
quarter of 1995 over the third quarter of 1994, and by
68% for the nine months of 1995 over the nine months of
1994. This increase was due to the increase in the number
of centers and to additional marketing for the summer
and fall enrollment periods.
<PAGE>
Other expense decreased by $36,000 for the third quarter
of 1995, as compared to the third quarter of 1994, and
decreased by $237,000 for the first nine months of 1995,
as compared with the similar period in 1994. Interest
expense increased by $450,000 for the nine months and by
$138,000 for the third 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 $431,000 for the nine months and by
$75,000 for the third 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 higher operating expenses as a percentage of revenues
during the third quarter resulted in a decline of $502,000
in income before income taxes for the third quarter over
the same period in the prior year. However, higher
revenues, offset by slightly higher operating expenses
as a percentage of revenues for the nine months resulted
in a $1,211,000 or 52% increase in income before income
taxes for the nine month period over the same period in
the prior year.
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 September 30, 1995, $13,963,000
in principal of such notes was outstanding, carrying a weighted
average annual interest rate of 8.6%. 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, 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 the first nine months of 1995, net cash provided by
operations was $3,030,000. This was an increase of $499,000
over the net cash provided by operations for the nine months
of 1994. Approximately $8,570,000 of the Company's existing
cash balances were used for the acquisition or opening of new
centers during the first nine months of 1995 and $2,300,000
was used in the repurchase of existing debt. During the
nine months, the Company issued or assumed a total of
approximately $6,898,000 of indebtedness related to acquisitions.
The Company's management believes that the Company's internally
generated cash will cover its cash requirements for the
forseeable 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
NONE
<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: November 13, 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 September 30, 1995 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-1-1995
<PERIOD-END> SEPTEMBER-30-1995
<CASH> 3,008
<SECURITIES> 8,348
<RECEIVABLES> 3,099
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,637
<PP&E> 23,364
<DEPRECIATION> 5,833
<TOTAL-ASSETS> 72,173
<CURRENT-LIABILITIES> 5,106
<BONDS> 0
<COMMON> 132
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 72,173
<SALES> 0
<TOTAL-REVENUES> 57,504
<CGS> 0
<TOTAL-COSTS> 53,697
<OTHER-EXPENSES> 261
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,546
<INCOME-TAX> 1,190
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,356
<EPS-PRIMARY> .34
<EPS-DILUTED> .34
</TABLE>
