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, 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 May 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 MARCH 31, 1996
INDEX
Page
PART I. FINANCIAL INFORMATION 3
ITEM 1. Condensed Consolidated Financial Statements
a) Condensed Consolidated Balance Sheets -- 4
March 31, 1996 and December 31, 1995
b) Condensed Consolidated Statements of 6
Operations -- Three months ended
March 31, 1996 and 1995
c) Condensed Consolidated Statements of 7
Cash Flows -- Three months ended
March 31, 1996 and 1995
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, 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 March 31, 1996, and the results of its operations for the three
months ended March 31, 1996 and 1995, have been included.
<PAGE>
PART I
<TABLE>
ITEM 1. FINANCIAL STATEMENTS
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND DECEMBER 31, 1995
<CAPTION>
March 31, December 31,
1996 1995
In thousands (Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $3,006 $3,023
Short-term investments 8,197 7,891
Accounts receivable, net 2,466 2,537
Prepaid expenses and other current assets 3,162 2,371
-------- --------
Total current assets 16,831 15,822
------- -------
PROPERTY, PLANT AND EQUIPMENT:
Land 1,320 1,320
Buildings 6,067 6,024
Furniture, fixtures & equipment 9,434 9,177
Transportation equipment 1,957 1,825
Leasehold improvements 7,845 7,660
------- ------
26,623 26,006
Less: Accumulated depreciation and amortization (6,926) (6,389)
19,697 19,617
-------- -------
INTANGIBLE ASSETS, net 35,709 36,326
OTHER: 1,992 2,030
--------- -------
$74,229 $73,795
======== =======
<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
MARCH 31, 1996 AND DECEMBER 31, 1995
<CAPTION>
March 31, December 31,
1996 1995
In thousands (except share and per share data) (Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
<S> <C> <C>
Current portion of long-term debt $ 2,087 $ 2,421
Accounts payable 522 626
Payroll and related accruals 2,653 2,214
Other accrued liabilities 856 799
---------- ---------
Total current liabilities 6,118 6,060
------ ------
LONG-TERM DEBT,
Net of current portion 17,323 17,535
-------- -------
ACCRUED STRAIGHT LINE RENT 1,009 877
------- --------
STOCKHOLDERS' EQUITY:
Special Stock: Authorized 5,000,000 shares;
outstanding:
Series A Convertible Preferred, par value
$.01 per share, liquidation value $2,700
and $2,700 in 1996 and 1995; 2,700 and 2,700
shares outstanding in 1996 and 1995. -0- -0-
Common Stock, Par Value $.01 per share
Authorized 20,000,000 shares
outstanding; 6,204,231 in 1996 and 1995. 132 132
Treasury Stock (7,200,844 shares) - -
Paid-in capital in excess of par 52,733 52,723
Loans to officers (793) (783)
Unrealized loss on short-term investment 0 10
Accumulated deficit (2,293) (2,759)
------- ------
Total Stockholders' Equity 49,779 49,323
------- ------
$74,229 $73,795
======= =======
<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 OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
<CAPTION>
Three Months Three Months
Ended Ended
March 31,1996 March 31,1995
In thousands (except per share data) (Unaudited)
(Unaudited)
REVENUES FROM OPERATIONS:
<S> <C> <C>
Child care fees $20,907 $18,033
Managemnt fees 271 246
------- -------
Total revenues from operations 21,178 18,279
OPERATING EXPENSES:
Payroll and related costs 11,342 9,674
Other center operating expenses 5,700 4,466
Administrative expenses 1,763 1,458
Depreciation and amortization 1,225 770
Advertising and promotion 227 178
------- -------
Total operating expenses 20,257 16,546
Income from operations 921 1,733
OTHER EXPENSE, net 335 14
------- ------
Income before provision for income
taxes 586 1,719
PROVISION FOR INCOME TAXES 120 632
------ ------
NET INCOME $466 $1,087
======= ========
NET INCOME PER SHARE: $0.07 $0.16
WEIGHTED AVERAGE COMMON SHARES: 6,701 6,938
<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 THREE MONTHS ENDED MARCH 31, 1996 AND 1995
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 1996 March 31, 1995
In thousands (Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 466 $ 1,087
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 537 444
Amortization 688 326
Changes in assets and liabilities:
Accounts receivable 71 (425)
Prepaid expenses and other current assets (616) (307)
Accounts payable (104) (192)
Payroll and related accruals 311 346
Accrued liabilities and other 189 752
------ ------
Net cash provided by operating activities 1,542 2,031
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (4,970) (4,508)
Proceeds from sale of short-term investments 4,654 1,300
Payments for acquisitions of child care centers (58) (3,326)
Payments for the start-up of centers (97) 0
Purchases of property, plant and equipment (510) (435)
Other, net 4 (177)
---------- --------
Net cash used in investing activities (977) (7,146)
---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 66 0
Proceeds from issuance of common stock, net 0 1,304
Repayments of long-term debt (648) (2,114)
--------- --------
Net cash used for financing activities (582) (810)
--------- --------
Net decrease in cash and cash equivalents (17) (5,925)
--------- --------
CASH AND CASH EQUIVALENTS:
Beginning of period 3,023 21,558
--------- -------
End of period $ 3,006 $15,633
======== =======
<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 three months
ended March 31 (in thousands) for: 1996 1995
---- ----
<S> <C> <C>
Interest $ 420 $ 378
Income taxes 46 150
</TABLE>
Supplemental Schedule of Noncash Investing and
Financing Activities:
The Company acquired and opened 2 additional centers during the three months
ended March 31 (in thousands)
<TABLE>
<S> <C> <C>
1996 1995
---- ----
Cash payments $ 58 $3,326
Notes issued to sellers 164 2,846
Indebtedness and liabilities assumed 0 588
-------- --------
Total value of centers acquired $222 $6,760
<FN>
See accompanying notes which are an integral part of these statements.
</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 first
quarter of 1996 and 1995 are affected by the net addition of a total of 48
centers in 1995 and the first quarter 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 period. 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 a 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 three months of 1996, the Company acquired or opened 2 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 16% to $21,178,000 in the first quarter of
1996, as compared to $18,279,000 in the first quarter of 1995. The increase in
revenues was totally attrituable to the increase in the number of centers.
Revenues for those centers open for the quarter in both years decreased from
1995 by slightly less than 1% for the quarter. During the quarter revenues went
from a decrease of approximately 3% in January, due to the extreme winter
weather, to an increase of approximately 1% in March as the winter weather
returned to a more normal pattern. For those centers open for the quarter in
both years the Company raised prices slightly less than 5%.
Payroll and related costs increased by $1,668,000 or 17% , for the first quarter
of 1996 as compared to the first quarter of 1995 due mainly to the increase in
the number of centers operated. Payroll and related costs as a percentage of
revenues, however, increased to 53.6% in the first quarter of 1996 from 52.9% in
the first quarter of 1996. 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.
Other center operating expenses increased by $1,234,000 or 28%, for the first
quarter of 1996 as compared to the corresponding time period in 1995, due mainly
to the increase in the number of centers operated. As a percentage of revenue,
however, Other center operating expenses increased to 26.9% in the first quarter
of 1996 from 24.4% in the first quarter 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
utilities and maintenance and repairs was due to the severe winter weather
experienced by the Company's centers in the midwest and east coast. The increase
<PAGE>
in occupancy expense as a percentage of revenue was due to the higher occupancy
costs in the centers acquired in 1995 and to the weather related decline in
revenues on a same center basis.
Depreciation and amortization expense increased to $1,225,000 in 1996 from
$770,000 in 1995 for the first quarter. This increase was due mainly to the
increase in new centers acquired during 1996 and 1995.
Advertising and promotion expense increased to $227,000 in 1996 from $178,000 in
1995 for the first quarter. This increase was due to the increase in new centers
acquired during 1996 and 1995.
Administrative expense as a percentage of total revenues increased to 8.3% for
the first quarter of 1996 from 8.0% in the first quarter of 1995. The increase
as a percentage of revenue is due to the weather related decline in revenues and
to increased resources being utilized to manage the Company's growth in the
employer market.
Other expense increased by $321,000 for the first quarter of 1996 as compared to
the first quarter of 1995. The increase was due to lower interest income of
$269,000 due to lower cash balances and higher interest expense of $52,000
associated with the Company's acquisitions.
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 March 31, 1996, $14,039,000 in principal of such notes was
outstanding, carrying a weighted average annual interest rate of 8.7% and term
of 8.1 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 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 1995, net cash provided by operations was $4,682,000. This internally
generated cash along with the issuance of $1,483,000 in debt for the acquisition
of property, plant and equipment funded all of the Company's needs for purchases
of property, plant, and equipment, and $1,213,000 of debt repayments. During the
first three months of 1996, net cash provided by operations was $1,542,000. This
internally generated cash funded all of the Company's needs for purchases of
property, plant and equipment, scheduled debt repayments, and $155,000 that the
Company invested in new centers. During the three months, the Company issued or
assumed a total of approximately $164,000 of indebtedness related to
acquisitions.
<PAGE>
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
$1,000,000 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, 1996. 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
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: May 15, 1996
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
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