<PAGE>
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, 1996.
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 _____ 061097006
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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
851 Irwin Street, Suite 200, San Rafael, California 94901
(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 August 8, 1996, the Registrant had outstanding 6,266,958 shares of
Common Stock, $.01 par value, and 2,355 shares of Special Stock, denominated
Series A Convertible Preferred Stock, $.01 par value, convertible into
428,182 shares of Common Stock.
<PAGE>
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1996
INDEX
Page
PART I. FINANCIAL INFORMATION 3
ITEM 1. Condensed Consolidated Financial Statements(Unaudited)
a) Condensed Consolidated Balance Sheets -- 4
b) Condensed Consolidated Statements of 6
Operations -- Three month and six month periods
ended June 30, 1996 and 1995
c) Condensed Consolidated Statements of 7
Cash Flows -- Six months ended
June 30, 1996 and 1995
d) Notes to Condensed Consolidated Financial 9
Statements
ITEM 2. Management's Discussion and Analysis 10
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, 1995.
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,
1996, and the results of its operations for the three and
six month periods ended June 30, 1996 and 1995, have been
included.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
________________________________________________________________________________
(UNAUDITED)
<CAPTION>
June 30, December 31,
1996 1995
In thousands
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 3,043 $ 3,023
Short-term investments 7,544 7,891
Accounts receivable 3,216 2,537
Prepaid expenses and other current assets 2,644 2,371
Total Current Assets 16,447 15,822
PROPERTY, PLANT AND EQUIPMENT:
Land 1,320 1,320
Buildings 6,193 6,024
Furniture, fixtures & equipment 9,801 9,177
Transportation equipment 1,984 1,825
Leasehold improvements 8,044 7,660
27,342 26,006
Less: Accumulated depreciation (7,526) (6,389)
and amortization
19,816 19,617
INTANGIBLE ASSETS 36,326 36,326
OTHER 2,500 2,030
$75,089 $73,795
<FN>
See accompanying notes which are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
________________________________________________________________________________
(UNAUDITED)
<CAPTION>
June 30, December 31,
1996 1995
In thousands (except share data)
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES:
<S> <C> <C>
Current portion of long-term debt $ 1,978 $ 2,421
Accounts payable 646 626
Payroll and related accruals 2,677 2,214
Other accrued liabilities 909 799
Total Current Liabilities 6,210 6,060
LONG-TERM DEBT:
Net of current portion 17,553 17,535
ACCRUED STRAIGHT LINE RENT 1,000 877
STOCKHOLDERS' EQUITY:
Special Stock: Authorized 5,000,000 shares;
outstanding: Series A Convertible
Preferred, par value $.01 per share,
liquidation value $2,355 and $2,700
in 1996 and 1995; 2,355 and 2,700
shares outstanding in 1996 and 1995 -0- -0-
Common Stock, par value $.01 per share
Authorized 20,000,000 shares; issued
and outstanding 6,266,958 in 1996 and
6,204,231 in 1995. 132 132
Treasury Stock (7,200,844 shares) -0- -0-
Paid-in capital in excess of par 52,745 52,723
Loans to officers (833) (783)
Unrealized gain (loss) on short-term investments (9) 10
Accumulated deficit (1,709) (2,759)
Total Stockholders' Equity 50,326 49,323
$75,089 $73,795
<FN>
See accompanying notes which are an integral part of these statements.
</FN>
</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, 1996 AND 1995
(UNAUDITED)
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
In thousands (except per share data)
REVENUES FROM OPERATIONS:
<S> <C> <C> <C> <C>
Child care fees $22,460 $19,643 $43,367 $37,676
Management fees 274 254 545 500
------- ------- ------- -------
Total revenues from operations 22,734 19,897 43,912 38,176
OPERATING EXPENSES:
Payroll & related costs 12,249 10,594 23,591 20,268
Direct costs 6,110 4,799 11,810 9,265
General & administrative 1,805 1,443 3,568 2,901
Depreciation and amortization 1,243 890 2,468 1,660
Advertising & promotion 264 213 491 391
------ ------ ------ ------
Total operating expenses 21,671 17,939 41,928 34,485
Operating profit 1,063 1,958 1,984 3,691
OTHER EXPENSE, net 362 64 697 78
------ ------ ------ ------
Income before provision for 701 1,894 1,287 3,613
income taxes
PROVISION FOR INCOME TAXES 117 664 237 1,296
NET INCOME $ 584 $ 1,230 $ 1,050 $ 2,317
====== ======= ======= =======
NET INCOME PER SHARE: $ 0.09 $ 0.18 $ 0.16 $ 0.33
AVERAGE NUMBER OF COMMON AND
EQUIVALENT SHARES: 6,744 7,013 6,717 6,983
<FN>
See accompanying notes which are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
<CAPTION>
Six Months Ended June 30
1996 1995
In thousands
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,050 $ 2,317
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 1,137 902
Amortization 1,331 758
Changes in assets and liabilities:
Accounts receivable (670) (1,237)
Prepaid expenses and other current assets (268) (306)
Accounts payable 20 140
Payroll and related accruals 337 919
Accrued liabilities and other 296 (243)
Net cash provided by operating activities 3,233 3,250
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (5,970) (14,538)
Proceeds from sale of short-term investments 6,317 3,100
Payments for acquisitions of child care centers (700) (7,361)
Payments for the start-up of centers (103) (77)
Purchases of property, plant and equipment (1,089) (1,487)
Other, net (317) (113)
Net cash used in investing activities (1,862) (20,476)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 89 168
Proceeds from issuance of common stock, net -0- 1,318
Repayments of long-term debt (1,440) (2,434)
Net cash used for financing activities (1,351) (948)
Net increase(decrease) in cash and cash 20 (18,174)
equivalents
CASH AND CASH EQUIVALENTS:
Beginning of period 3,023 21,558
End of period $3,043 $3,384
<FN>
See accompanying notes which are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Supplemental Disclosures of Cash Flow Information:
<CAPTION>
Cash paid during the three months
ended June 30 (in thousands) for: 1996 1995
<S> <C> <C>
Interest $ 843 $ 742
Income taxes 104 1,219
</TABLE>
<TABLE>
Supplemental Schedule of Noncash Investing and
Financing Activities:
The Company acquired 4 additional centers during the six
months
ended June 30,1996 and 33 additional centers during the six
months ended June 30, 1995 (in thousands)
<CAPTION>
1996 1995
<S> <C> <C>
Cash payments $ 803 $7,361
Notes issued to sellers 981 5,151
Indebtedness and liabilities assumed 73 766
Total value of centers acquired $1,857 $13,278
<FN>
See accompanying notes which are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(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 1996 and 1995 are affected by
the net addition of a total of 46 centers in 1995 and 7
centers for the first six months of 1996 (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, 1995,
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 1995 financial
statements to conform to the 1996 presentation. The
preparation of these consolidated financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
Accounting Changes:
Effective January 1, 1996, the Company adopted Statement of
Financial Accounting Standards No. 121 (SFAS 121) on
accounting for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to assets to
be held and used. Based on management's review, the Company
did not recognize any impairment loss as a result of
applying the provisions of SFAS 121 to its assets held for
use.
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>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
During the first six months of 1996, the Company acquired or
opened 7 centers. During the year ended December 31, 1995,
the Company acquired or opened 52 centers and closed six
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 from Operations increased 14% in the second quarter
of 1996 to $22,734,000 and 15% in the first six months of
1996 to $43,912,000. The increase in revenues was mainly
attributable to the increase in the number of centers.
Revenues for those centers open for the six months and the
quarter in both years increased from 1995 by approximately
1.5% for the quarter and 0.5% for the six months. For those
centers open for the six months and quarter in both years
the Company raised prices approximately 4.5%.
Payroll and related costs increased by $1,655,000 or 16% ,
for the second quarter of 1996, and by $3,323,000 or 16% for
the six months of 1996, as compared to the corresponding
time periods in 1995 due mainly to the increase in the
number of centers operated. Payroll and related costs as a
percentage of revenues, however, increased to 53.9% in the
second quarter and to 53.7% for the six months of 1996 from
53.2% and 53.1% in the corresponding time periods of 1995.
The increase in payroll and related expenses as a percentage
of revenue was due to the fact that the new centers added in
1995 and 1996 had higher payroll and related expenses as a
percentage of revenue than the Company's older centers.
Direct costs increased by $1,311,000 or 27%, for the second
quarter of 1996, and by $2,545,000 or 28% for the six months
of 1996, as compared to the corresponding time periods in
1995, due mainly to the increase in the number of centers
operated. As a percentage of revenue, however, direct costs
increased to 26.9% in both the second quarter and the six
months of 1996, from 24.1% in the second quarter and 24.3%
for the six months of 1995. The increase as a percentage of
revenue were due to increases as a percentage of revenue in
the Company's maintenance and repairs, utilities and
occupancy expenses.. The increase in expense as a percentage
of revenue was due mainly to the higher costs in the centers
acquired in 1995 and partially to increased repair, utility
and occupancy costs in the company's older centers.
<PAGE>
Depreciation and amortization expense increased to
$1,243,000 in the second quarter, and to $2,468,000 for the
six months of 1996 as compared to $890,000 and $1,660,000 in
the corresponding time periods of 1995. This increase was
due mainly to the increase in new centers acquired during
1996 and 1995.
Advertising and promotion expense increased to $264,000 in
the second quarter, and to $491,000 for the six months of
1996 as compared to $213,000 and $391,000 in the
corresponding time periods of 1995. This increase was due
mainly to the increase in new centers acquired during 1996
and 1995.
Administrative expense as a percentage of total revenues
increased to 7.9% for the second quarter and to 8.1% for the
six months of 1996 from 7.3% and 7.6% in the corresponding
time periods of 1995. The increase as a percentage of
revenue is due to increased resources being utilized to
manage the Company's growth in the employer market and in
its community based business.
Other expense, net increased by $298,000 for the second
quarter and by $619,000 for the six months of 1996 as
compared to the corresponding time periods of 1995. The
increase was due to lower interest income of $199,000 for
the second quarter and $468,000 for the six months of 1996
due to lower cash balances and to higher interest expense of
$99,000 for the second quarter and $151,000 for the six
months of 1996 associated with the Company's acquisitions.
The effective tax rate decreased from 35.9% for the six
months ended June 30, 1995 to 18.4% for the six months ended
June 30, 1996. This was due to a combination of the effects
of the Company's net operating losses that can be utilized
on an annual basis and the amount of tax free income that
the Company earns on its investments representing a larger
percentage of the Company's pre-tax income in 1996 than in
1995, and a reduction in the level for allowance for
deferred tax assets associated with the partial recognition
of past net operating loss carryforwards.
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, 1996,
$14,276,000 in principal of such notes was outstanding,
carrying a weighted average annual interest rate of 8.6% and
remainig term of 8.0 years. 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.
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.
<PAGE>
During the first six months of 1996, net cash provided by
operations was $3,233,000. This internally generated cash
funded all of the Company's needs for purchases of property,
plant and equipment, scheduled debt repayments, and
approximately $400,000 that the Company invested in new
centers. During the six months, the Company issued or
assumed a total of approximately $1,054,000 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 and the
development of additional employer sponsored centers. The
Company also has available to it up to $1,250,000 under an
unsecured line of credit furnished by Wells Fargo Bank.
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, 1997. The Company currently has no commitments
for capital expenditures, 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 19, 1996.
(b) The following individuals were elected as Directors with the
indicated votes:
Votes For Votes Against
Mark P. Clein 5,550,092 405,619
Michael J. Connelly 5,906,642 49,069
Robert E. Kaufmann 5,905,642 50,069
W. Wallace McDowell, Jr. 5,906,642 49,069
Richard A. Niglio 5,906,390 49,321
Dr. Elanna S. Yalow 5,906,542 49,169
Myron A. Wick 5,906,642 49,069
(c) The matters considered at the June 19, 1996 Annual Meeting of
Stockholders other than the election of directors, were as stated
below:
(I) The ratification of the appointment of Arthur Andersen LLP as
the Company's independent auditors for the 1996 fiscal year,
was approved by an affirmative vote of 5,862,431 to 58,511
negative votes with 34,769 abstentions.
ITEM 5. Exhibits and Reports on Form 8-K
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: August 14, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000775820
<NAME> Children's Discovery Centers of America, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Apr-01-1996
<PERIOD-END> Jun-30-1996
<CASH> 3,043
<SECURITIES> 7,544
<RECEIVABLES> 3,216
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,447
<PP&E> 27,342
<DEPRECIATION> 7,526
<TOTAL-ASSETS> 75,089
<CURRENT-LIABILITIES> 6,210
<BONDS> 17,553
0
0
<COMMON> 132
<OTHER-SE> 50,194
<TOTAL-LIABILITY-AND-EQUITY> 75,089
<SALES> 22,734
<TOTAL-REVENUES> 22,734
<CGS> 21,671
<TOTAL-COSTS> 21,671
<OTHER-EXPENSES> 362
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 701
<INCOME-TAX> 117
<INCOME-CONTINUING> 584
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 584
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
