<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 September 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 November 13, 1996, the Registrant had outstanding 6,306,958 shares of
Common Stock, $.01 par value, and 2,135 shares of Special Stock, denominated
Series A Convertible Preferred Stock, $.01 par value, convertible into
388,182 shares of Common Stock.
<PAGE>
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX
Page
PART I. FINANCIAL INFORMATION 3
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
a) Condensed Consolidated Balance Sheets -- 4
September 30, 1996 and December 31, 1995
b) Condensed Consolidated Statements of 6
Operations -- Three-month and nine-month periods
ended September 30, 1996 and 1995
c) Condensed Consolidated Statements of 7
Cash Flows -- Nine-months ended
September 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 September 30, 1996, and the results of its operations for
the three and nine month periods ended September 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
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
________________________________________________________________________________
(UNAUDITED)
<CAPTION>
September December
30, 31,
1996 1995
In thousands
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $5,669 $3,023
Short-term investments 5,351 7,891
Accounts receivable 2,755 2,537
Prepaid expenses and other current 2,389 2,371
assets
Total Current Assets 16,164 15,822
PROPERTY, PLANT AND EQUIPMENT:
Land 1,320 1,320
Buildings 6,201 6,024
Furniture, fixtures & equipment 10,561 9,177
Transportation equipment 2,222 1,825
Leasehold improvements 8,454 7,660
28,758 26,006
Less: Accumulated depreciation and (8,155) (6,389)
amortization
20,603 19,617
INTANGIBLE ASSETS 35,999 36,326
OTHER 2,242 2,030
$75,008 $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
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
__________________________________________________________________________________
(UNAUDITED)
<CAPTION>
September December
30, 31,
1996 1995
In thousands (except share data)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $2,075 $ 2,421
Accounts payable 615 626
Payroll and related accruals 2,825 2,214
Other accrued liabilities 968 799
Total Current Liabilities 6,483 6,060
LONG-TERM DEBT:
Net of current portion 17,187 17,535
ACCRUED STRAIGHT LINE RENT 1,046 877
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 52,740 52,723
Loans to officers (838) (783)
Unrealized gain (loss) on short-term (3) 10
investments
Accumulated deficit (1,739) (2,759)
Total Stockholders' Equity 50,292 49,323
$75,008 $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 NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
<CAPTION>
Three-months Ended Nine-months Ended
Sept. 30 Sept. 30
1996 1995 1996 1995
In thousands (except per share
data)
<S> <C> <C> <C> <C>
REVENUES FROM OPERATIONS:
Child care fees $21,420 $19,056 $64,787 $56,732
Management fees 219 272 764 772
Total revenues from 21,639 19,328 65,551 57,504
operations
OPERATING EXPENSES:
Payroll & related costs 11,831 10,879 35,422 31,147
Direct costs 6,123 5,538 17,933 14,803
General & administrative 1,850 1,536 5,418 4,437
Depreciation and amortization 1,285 1,016 3,753 2,676 1,016
Advertising & promotion 191 243 682 634
Total operating expenses 21,280 19,212 63,208 53,697
Operating profit 359 116 2,343 3,807
OTHER EXPENSE, net 399 183 1,096 261
Income (loss) before
provision for income taxes (40) (67) 1,247 3,546
PROVISION (BENEFIT) FOR
INCOME TAXES (10) (106) 227 1,190
NET INCOME (LOSS) $ (30) $ 39 $ 1,020 $ 2,356
NET INCOME PER SHARE: $ 0.00 $ 0.01 $ 0.16 $ 0.34
AVERAGE NUMBER OF COMMON AND
EQUIVALENT SHARES: 6,267 6,973 6,718 6,968
<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 NINE-MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
<CAPTION>
Nine-months Ended
September 30
1996 1995
In thousands
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,020 $ 2,356
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 1,766 1,404
Amortization 1,987 1,272
Changes in assets and liabilities:
Accounts receivable (211) (1,453)
Prepaid expenses and other current assets (11) (1,004)
Accounts payable (11) 59
Payroll and related accruals 495 635
Accrued liabilities and other 338 (121)
Net cash provided by operating 5,373 3,030
activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (5,970) (14,538)
Proceeds from sale of short-term 8,510 7,497
investments
Payments for acquisitions of child care centers (925) (8,345)
Payments for the start-up of centers (738) (225)
Purchases of property, plant and equipment (2,052) (3,302)
Other, net 68 (325)
Net cash used in investing activities (1,107) (19,238)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 316 283
Proceeds from issuance of common stock, net -0- 1,318
Repayments of long-term debt (1,936) (3,943)
Net cash used for financing activities (1,620) (2,342)
Net increase(decrease) in cash and cash 2,646 (18,550)
equivalents
CASH AND CASH EQUIVALENTS:
Beginning of period 3,023 21,558
End of period $5,669 $3,008
<FN>
See accompanying notes which are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS: continued
Supplemental Disclosures of Cash Flow Information:
<CAPTION>
Cash paid during the three-months
ended September 30 (in thousands) for: 1996 1995
<S> <C> <C>
Interest $ 1,277 $ 1,148
Income taxes 108 1,774
</TABLE>
<TABLE>
<CAPTION>
Supplemental Schedule of Noncash Investing and
Financing Activities:
The Company acquired 4 additional centers during the nine-months
ended September 30,1996 and 38 additional centers during the nine-
months ended September 30, 1995 (in thousands)
1996 1995
<S> <C> <C>
Cash payments $ 925 $8,345
Notes issued to sellers 981 6,343
Indebtedness and liabilities assumed 73 993
Total value of centers acquired $1,979 $15,681
<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 presented 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 1996 and 1995 are affected by the net
addition of a total of 46 centers in 1995 and 7 centers for the first
nine-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, no impairment loss
is required 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 nine months of 1996, the Company acquired or opened 11
centers and closed four 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 12% in the third quarter of 1996 to
$21,639,000 and 14% in the first nine-months of 1996 to $65,551,000. The
increase in revenues was mainly attributable to the increase in the number of
centers. Revenues for those centers open for the nine-months and the quarter
in both years increased from 1995 by approximately 4% for the quarter and 1%
for the nine-months. For those centers open for the nine-months and quarter
in both years the Company raised prices approximately 4.5%.
Payroll and related costs increased by $952,000 or 9%, for the third quarter
of 1996, and by $4,275,000 or 14% for the nine-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, decreased to 54.7% in the third quarter of 1996 from 56.3%
in the third quarter of 1995, and for the nine-months of 1996 decreased to
54.0% from 54.2% in the nine-months of 1995. The decrease in payroll and
related expenses as a percentage of revenue was due to the fact that the
Company has been able to gradually lower the payroll and related expenses of
those centers that it acquired in 1995 from their initial levels.
Direct costs increased by $585,000 or 11%, for the third quarter of 1996, and
by $3,130,000 or 21% for the nine-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
decreased to 28.3% in the third quarter of 1996 from 28.7% in the third
quarter of 1995. For the nine-months of 1996, direct costs increased to
27.4% from 25.7% in the nine-months of 1995. The increase as a percentage of
revenue for the nine-months was due to increases as a percentage of revenue
in the Company's maintenance and repairs and occupancy expenses. The
increase as a percentage of revenue was due mainly to the higher costs in the
centers acquired in 1995 and partially to increased utility and occupancy
costs in the company's older centers. The decrease in direct costs as a
percentage of revenue for the third quarter was due to the fact that the
Company has been able to gradually lower direct costs of those centers that
it acquired in 1995 from their initial levels.
Depreciation and amortization expense increased to $1,285,000 in the third
quarter, and to $3,753,000 for the nine-months of 1996 as compared to
$1,016,000 and $2,676,000 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 decreased to $191,000 in the third quarter,
and increased to $682,000 for the nine-months of 1996 as compared to $243,000
and $634,000 in the corresponding time periods of 1995. The increase in the
nine-months was due to the increase in new centers acquired during 1996 and
1995.
Administrative expense as a percentage of total revenues increased to 8.5%
for the third quarter and to 8.3% for the nine-months of 1996 from 7.9% and
7.7% 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 $216,000 for the third quarter and by
$835,000 for the nine-months of 1996 as compared to the corresponding time
periods of 1995. The increase was due mainly to lower interest income of
$240,000 for the third quarter and $708,000 for the nine-months of 1996 due
to lower cash balances and to lower interest expense of $24,000 for the third
quarter and higher interest expense of $127,000 for the nine-months of 1996
associated with the Company's acquisitions.
The effective tax rate decreased from 33.6% for the nine-months ended
September 30, 1995 to 18.2% for the nine-months ended September 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 September 30, 1996, $13,903,000 in principal of such
notes was outstanding, carrying a weighted average annual interest rate of
8.6% and remaining 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.
<PAGE>
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.
During the first nine-months of 1996, net cash provided by operations was
$5,373,000. This internally generated cash funded all of the Company's cash
needs for purchases of property, plant and equipment, scheduled debt
repayments, and the Company's investment in new centers. During the
nine-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
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 15, 1996
<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: ______________________________
Richard A. Niglio
Chief Executive Officer
By: __________________________
Randall J. Truelove
Vice-President, Finance
Chief Accounting Officer
Date: November 15, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
3rd Quarter 10-Q
</LEGEND>
<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> Jul-01-1996
<PERIOD-END> Sep-30-1996
<CASH> 5,669
<SECURITIES> 5,531
<RECEIVABLES> 2,755
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,164
<PP&E> 28,758
<DEPRECIATION> (8,155)
<TOTAL-ASSETS> 75,008
<CURRENT-LIABILITIES> 6,483
<BONDS> 0
0
0
<COMMON> 132
<OTHER-SE> 50,160
<TOTAL-LIABILITY-AND-EQUITY> 75,008
<SALES> 21,639
<TOTAL-REVENUES> 21,639
<CGS> 21,280
<TOTAL-COSTS> 21,280
<OTHER-EXPENSES> 399
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (40)
<INCOME-TAX> (10)
<INCOME-CONTINUING> (30)
<DISCONTINUED> 0
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<NET-INCOME> (30)
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
