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, 1997.
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 October 15, 1997, 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, 1997
INDEX
Page
PART I. FINANCIAL INFORMATION 3
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
a) Condensed Consolidated Balance Sheets -- 4
September 30, 1997 and December 31, 1996
b) Condensed Consolidated Statements of 6 Operations --
Three-month and nine-month periods ended
September 30, 1997 and 1996 6
c) Condensed Consolidated Statements of 7
Cash Flows -- Nine-months ended
September 30, 1997 and 1996
d) Notes to Condensed Consolidated Statement 9
of Operations
ITEM 2. Management's Discussion and Analysis 11
of Financial Condition and Results
of Operations
ITEM 3. Quantitative and Qualitative Disclosures
about Market Risk 13
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, 1996.
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, 1997, and the results of its operations for the
three and nine month periods ended September 30, 1997 and 1996, have been
included.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
- --------------------------------------------------------------------------------
(UNAUDITED)
September December
30, 31,
1997 1996
---- ----
<S> <C> <C>
In thousands
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $2,997 $4,826
Short-term investments 10,843 6,914
Accounts receivable 1,740 2,584
Prepaid expenses and other current 1,120 1,624
----- -----
assets
Total Current Assets 16,700 15,948
PROPERTY, PLANT AND EQUIPMENT:
Land 1,653 1,320
Buildings 7,268 6,179
Furniture, fixtures & equipment 10,957 11,015
Transportation equipment 2,366 2,233
Leasehold improvements 9,367 8,832
Construction in progress 3 750
------- ---
31,614 30,329
Less: Accumulated depreciation and (9,335) (8,798)
amortization ---------- ------
22,279 21,531
INTANGIBLE ASSETS 34,201 35,381
OTHER 2,591 1,752
----- -----
TOTAL ASSETS $75,771 $74,612
======= =======
<FN>
See accompanying notes which are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
- --------------------------------------------------------------------------------
(UNAUDITED)
September December
30, 31,
1997 1996
---- ----
<S> <C> <C>
In thousands (except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $2,222 $ 2,095
Accounts payable 638 501
Payroll and related accruals 2,919 3,005
Other accrued liabilities 1,903 1,092
----- -----
Total Current Liabilities 7,682 6,693
----- -----
LONG-TERM DEBT:
Net of current portion 15,097 16,634
ACCRUED STRAIGHT LINE RENT 1,091 998
----- ---
TOTAL LIABILITIES 23,870 24,325
====== ==========
STOCKHOLDERS' EQUITY:
Special Stock: Authorized 5,000,000
shares; outstanding:
Series A Convertible Preferred, par
value $.01 per share,
liquidation value $2,135 in 1997 and
1996;
2,135 shares outstanding in 1997 and -0- -0-
1996.
Common Stock, par value $.01 per share
Authorized 20,000,000 shares;
issued and outstanding 6,306,958 in 133 133
1997 and 1996.
Treasury Stock (7,200,844 shares in 1997 -0- -0-
and 1996)
Paid-in capital in excess of par 52,722 52,722
Loans to stockholder officers (727) (710)
Unrealized gain on short-term investments 10 0
Accumulated deficit (237) (1,858)
------ ------
Total Stockholders' Equity 51,901 50,287
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $75,771 $74,612
======= =======
<FN>
See accompanying notes which are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTHS AND NINE-MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
Three MonthsThree MonthsNine Months Nine Months
Ended Ended Ended Ended
September 30September 30September 30September 30
1997 1996 1997 1996
<S> <C> <C> <C> <C>
In thousands (except per share
data)
REVENUE FROM OPERATIONS: $22,825 $21,639 $69,661 $65,551
OPERATING EXPENSES:
Payroll & related costs 12,318 11,831 36,981 35,422
Direct costs 6,437 6,123 18,621 17,933
General & administrative 1,958 1,850 5,937 5,418
Depreciation 811 629 2,306 1,766
Amortization 701 656 2,116 1,987
Advertising & promotion 138 191 610 682
--- --- --- ---
Total operating expenses 22,363 21,280 66,571 63,208
------- ------ ------ ------
Operating profit 462 359 3,090 2,343
OTHER EXPENSE, net 202 399 740 1,096
--- --- --- -----
Income (loss) before
provision for
income taxes 260 (40) 2,350 1,247
PROVISION(BENEFIT) FOR INCOME 81 (10) 729 227
-- ---- --- ---
TAXES
NET INCOME (LOSS) $ 179 $ (30) $1,621 $1,020
====== ====== ====== ======
NET INCOME PER SHARE: $ 0.03 $ 0.00 $ 0.24 $ 0.15
====== ====== ====== ======
AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES: 6,960 6,267 6,830 6,718
===== ===== ===== =====
<FN>
See accompanying notes which are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
Nine Months Nine Months
Ended Ended
September September 30
30
1997 1996
<S> <C> <C>
In thousands
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,621 $1,020
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 2,306 1,766
Amortization 2,116 1,987
Changes in assets and liabilities:
Accounts receivable 844 (211 )
Prepaid expenses and other current 504 ( 11 )
assets
Accounts payable 137 ( 11 )
Payroll and related accruals ( 86 ) 495
Accrued liabilities and other 655 338
--- ---
Net cash provided by operating activities 8,097 5,373
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments ( 3,919 ) ( 829 )
Proceeds from sale of short-term - 3,369
investments
Payments for acquisitions of child care (683 ) (925 )
centers
Payments for the start-up of centers (728 ) (738 )
Purchases of property, plant and ( 2,282 ) ( 2,052 )
equipment
Other (424 ) 68
------ --
Net cash used in investing activities ( 8,036 ) ( 1,107 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 375 316
Repayments of long-term debt (2,265 ) ( 1,936 )
-------- ------
Net cash used for financing activities (1,890) (1,620)
--------- -------
Net increase(decrease) in cash and cash ( 1,829 ) 2,646
equivalents
CASH AND CASH EQUIVALENTS:
Beginning of period 4,826 3,023
----- -----
End of period $2,997 $5,669
====== ======
<FN>
See accompanying notes which are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED): continued
<TABLE>
<CAPTION>
Supplemental Disclosures of Cash Flow Information:
Cash paid during the nine-months
ended September 30 (in thousands) for: 1997 1996
---- ----
<S> <C> <C>
Interest $1,184 1,277
Income taxes 574 108
</TABLE>
<TABLE>
<CAPTION>
Supplemental Schedule of Noncash Investing and
Financing Activities:
The Company acquired 4 additional centers during the nine-months ended September
30,1997 and 4 additional centers during the nine-months ended September 30, 1996
(in thousands)
1997 1996
---- ----
<S> <C> <C>
Cash payments $683 $925
Notes issued to sellers 480 981
Indebtedness and liabilities assumed - 73
----- ----
Total value of centers acquired $1,163 $1,979
====== ======
<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
SEPTEMBER 30, 1997
(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 nine month
periods of 1997 and 1996 are affected by the net addition of a total of 9
centers in 1996 and 2 centers for the first nine-months of 1997 (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, 1996, 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 1996 financial statements to conform to
the 1997 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.
Recently Issued Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Standards No. 129 (SFAS No. 129), "Disclosure of Information
about Capital Structure", which is effective for fiscal years ending after
December 15, 1997. The Company will adopt SFAS No. 129 for its year ending
December 31, 1997.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 130 (SFAS No. 130), "Reporting Comprehensive Income",
and No. 131 (SFAS No. 131), "Disclosures about Segments of an Enterprise and
Related Information", which are effective for fiscal years beginning after
December 15, 1997. The Company will adopt SFAS No. 130 and SFAS No. 131 for
its year beginning January 1, 1998.
These statements are not anticipated to have a material effect on the Company's
financial position or results of operations.
<TABLE>
<CAPTION>
Earnings per Share
At the end of 1997, the Company will report its Earnings per Share (EPS) based
upon Statement of Financial Accounting Standards No. 128 (SFAS No. 128),
"Earnings per Share". The pro forma effect of this accounting change on the
quarter ended September 30 is:
Three MonthsThree MonthsNine Months Nine Months
Ended Ended Ended Ended
September 30September 30September 30September 30
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Primary EPS as reported $ .03 $ .00 $ .24 $ .15
Pro forma effect of SFAS No. $ .00 $ .00 $ .02 $ .01
----- ----- ----- -----
128
Basic EPS pro forma $ .03 $ .00 $ .26 $ .16
===== ===== ===== =====
Fully diluted EPS $ .03 $ .00 $ .23 $ .15
Pro forma effect of SFAS No. $ .00 $ .00 $ .01 $ .00
----- ----- ----- -----
128
Diluted EPS pro forma $ .03 $ .00 $ .24 $ .15
===== ===== ===== =====
</TABLE>
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Since January 1, 1996, the Company acquired or opened nineteen centers and
closed eight 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 period to period 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 5.5% to $22,825,000 in the third quarter and
6.3% to $69,661,000 for the nine months of 1997, as compared to $21,639,000 and
$65,551,000 in the corresponding periods of 1996. The increase in revenues was
attributable to the increase in the number of centers and to an increase in
revenues in the Company's existing centers. Revenues for those centers open in
both years increased from 1996 by approximately 4.1% for the quarter and 4.8%
for the nine month period. Increased tuition rates are responsible for 3.5% of
the revenue increase for the third quarter and nine month periods and increases
in enrollments are responsible for the remaining 0.6% revenue increase in the
third quarter and 1.3% for the nine month period.
Payroll and related costs increased by $487,000 or 4.1% for the third quarter
and by $1,559,000 or 4.4% for the nine months of 1997, as compared to the
corresponding time periods of 1996 due to the increase in the number of centers
operated and to the increased pay rates at its existing centers. Payroll and
related costs as a percentage of revenues, however, decreased to 54.0% in the
third quarter and to 53.1% for the nine month period of 1997 from 54.7% and
54.0% in the corresponding periods of 1996. The decrease in payroll and related
expenses as a percentage of revenues was due to an increase in supervisory
controls and procedures instituted during 1996 and to the Company having raised
its tuition rates at a higher rate than its payroll rates.
Direct costs increased by $314,000 or 5.1%, for the third quarter of 1997 and by
3.8% or $688,000 for the nine month period of 1997, as compared to the
corresponding time periods of 1996. As a percentage of revenue, however, direct
costs decreased to 28.2% in the third quarter and to 26.7% for the nine month
period of 1997 as compared to 28.3% and 27.4% in the corresponding periods of
1996. The decrease as a percentage of revenue was due mainly to lower
maintenance and repairs cost and lower utility cost.
Depreciation and amortization expense increased to $1,512,000 in the third
quarter and to $4,422,000 for the nine month period of 1997 as compared to
$1,285,000 and $3,753,000 for the corresponding periods of 1996. This increase
was due mainly to the increase in new centers acquired during 1996 and to the
improvements made by the Company in its existing centers.
Advertising and promotion expense as a percentage of revenues has remained
constant at approximately 1% for all periods.
General and administrative expense as a percentage of total revenues increased
to 8.6% for the third quarter and to 8.5% for the nine month period of 1997 from
8.5% and 8.3% in the corresponding periods of 1996. The increase as a percentage
of revenue is due to the addition of supervisory and financial personnel to
enhance management and financial controls and to prepare for future growth in
the number of new centers.
Other expense, net decreased by $197,000 for the third quarter and by $356,000
for the nine month period of 1997 as compared to the corresponding time periods
of 1996. The decrease was due mainly to higher interest income of $120,000 for
the third quarter and $229,000 for the nine months of 1997 due to higher cash
and short term investment balances, and to lower interest expense of $57,000 for
the third quarter and $107,000 for the nine months of 1997 due to lower debt
balances.
The effective tax rate increased from 25% for the three month period and 18% for
the nine month period ended September 30, 1996 to 31% for the three and nine
month period ended September 30, 1997. The lesser impact of the Company's net
operating loss carryforwards, tax exempt income and tax credits on the Company's
higher pretax income resulted in the increase in the Company's effective tax
rate.
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, 1997, $12,302,000 in principal of such notes was
outstanding. 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 internally generated cash, private sales of the Company's
securities at various times since inception and public offerings of Common
Stock.
During the first nine months of 1997, net cash provided by operations was
$8,097,000. 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 month period ended
September 30, 1997, the Company also issued or assumed a total of approximately
$480,000 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 a $5,000,000
unsecured line of credit furnished by a commercial bank to be used for
acquisitions. Amounts drawn down bear interest at the rate of 1.75% above the
Bank's LIBOR rate, and will convert to a five year term loan on August 1, 1998.
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 I
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
None.
PART II - OTHER INFORMATION
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: November 12, 1997
<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 12, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Children's Discovery Centers of America, Inc. 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-31-1997
<PERIOD-START> Jul-01-1997
<PERIOD-END> Sep-30-1997
<CASH> 2,997
<SECURITIES> 10,843
<RECEIVABLES> 1,740
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,700
<PP&E> 31,614
<DEPRECIATION> (9,335)
<TOTAL-ASSETS> 75,771
<CURRENT-LIABILITIES> 7,682
<BONDS> 0
0
0
<COMMON> 133
<OTHER-SE> 51,768
<TOTAL-LIABILITY-AND-EQUITY> 75,771
<SALES> 22,825
<TOTAL-REVENUES> 22,825
<CGS> 22,363
<TOTAL-COSTS> 22,363
<OTHER-EXPENSES> 202
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 260
<INCOME-TAX> 81
<INCOME-CONTINUING> 179
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 179
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
