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, 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 May 1, 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 MARCH 31, 1997
INDEX
Page
PART I. FINANCIAL INFORMATION 3
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
a) Condensed Consolidated Balance Sheets -- 4
March 31, 1997 and December 31, 1996
b) Condensed Consolidated Statements of 6
Income -- Three-month periods
ended March 31, 1997 and 1996
c) Condensed Consolidated Statements of 7
Cash Flows -- Three-months ended
March 31, 1997 and 1996
d) Notes to Condensed Consolidated Financial 9
Statements
ITEM 2. Management's Discussion and Analysis 10
of Financial Condition and Results
of Operations
ITEM 3. Quantitative and Qualitative Disclosures
about Market Risk 12
PART II. OTHER INFORMATION 12
Signatures 13
<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 March 31, 1997, and the results of its operations for the
three-month periods ended March 31, 1997 and 1996, have been included.
<PAGE>
<TABLE>
ITEM 1. FINANCIAL STATEMENTS
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
________________________________________________________________________________
(UNAUDITED)
<CAPTION>
March 31, December 31,
1997 1996
In thousands
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $5,540 $4,826
Short-term investments 7,730 6,914
Accounts receivable, net 1,662 2,584
Prepaid expenses and other current 1,239 1,624
assets ------ ------
Total Current Assets 16,171 15,948
------ ------
PROPERTY, PLANT AND EQUIPMENT:
Land 1,320 1,320
Buildings 6,188 6,179
Furniture, fixtures & equipment 11,214 11,015
Transportation equipment 2,277 2,233
Leasehold improvements 9,085 8,832
Construction in progress 814 750
------ ------
30,898 30,329
Less: Accumulated depreciation and (9,514) (8,798)
amortization ------ ------
21,384 21,531
INTANGIBLE ASSETS 34,672 35,381
OTHER 2,558 1,752
------ ------
TOTAL ASSETS $74,785 $74,612
======= =======
<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
MARCH 31, 1997 AND DECEMBER 31, 1996
________________________________________________________________________________
(UNAUDITED)
<CAPTION>
March 31, December 31,
1997 1996
In thousands (except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
<S> <C> <C>
Current portion of long-term debt $2,140 $ 2,095
Accounts payable 480 501
Payroll and related accruals 3,098 3,005
Other accrued liabilities 1,281 1,092
----- -----
Total Current Liabilities 6,999 6,693
LONG-TERM DEBT:
Net of current portion 15,946 16,634
ACCRUED STRAIGHT LINE RENT 1,034 998
------ ------
TOTAL LIABILITIES 23,979 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 ( 710 ) ( 710 )
Unrealized gain (loss) on short-term ( 6 ) 0
investments
Accumulated deficit (1,333) (1,858)
------ ------
Total Stockholders' Equity 50,806 50,287
------ ------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $74,785 $74,612
======= =======
<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-MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<CAPTION>
Three-months Ended March 31
1997 1996
In thousands (except per share
data)
<S> <C> <C>
REVENUE FROM OPERATIONS: $22,643 $21,178
OPERATING EXPENSES:
Payroll & related costs 11,977 11,342
Direct costs 5,946 5,700
General & administrative 2,024 1,763
Depreciation 715 537
Amortization 711 688
Advertising & promotion 215 227
------ ------
Total operating expenses 21,588 20,257
Operating profit 1,055 921
OTHER EXPENSE, net 295 335
------ ------
Income before provision for
income taxes 760 586
PROVISION FOR INCOME TAXES 235 120
------ ------
NET INCOME $ 525 $ 466
==== =====
NET INCOME PER SHARE: $0.08 $0.07
===== =====
AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES: 6,767 6,701
===== =====
<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 CASH FLOWS
FOR THE THREE-MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<CAPTION>
Three-months Ended
March 31
1997 1996
In thousands
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $525 $466
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 715 537
Amortization 711 688
Changes in assets and liabilities:
Accounts receivable 922 71
Prepaid expenses and other current 385 (616)
assets
Accounts payable ( 21) (104)
Payroll and related accruals 93 311
Accrued liabilities and other ( 23) 189
----- -----
Net cash provided by operating 3,307 1,542
activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments ( 822) (590)
Proceeds from sale of short-term - -
investments
Payments for acquisitions of child care ( 88) ( 58)
centers
Payments for the start-up of centers - ( 97)
Purchases of property, plant and ( 544) (510)
equipment
Other ( 366) 4
------- -------
Net cash used in investing activities (1,820) (1,251)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt - 66
Repayments of long-term debt ( 773) ( 648)
Net cash used for financing activities ( 773) ( 582)
------ ------
Net increase(decrease) in cash and cash 714 ( 291)
equivalents
CASH AND CASH EQUIVALENTS:
Beginning of period 4,826 2,920
----- -----
End of period $5,540 $2,629
====== ======
<FN>
See accompanying notes which are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED): continued
Supplemental Disclosures of Cash Flow Information:
<CAPTION>
Cash paid during the three-months
ended March 31 (in thousands) for: 1997 1996
<S> <C> <C>
Interest $400 $420
Income taxes 16 46
</TABLE>
<TABLE>
Supplemental Schedule of Noncash Investing and
Financing Activities:
<CAPTION>
The Company acquired and opened one additional center during the three-months
ended March 31,1997 and two additional centers during the three-
months ended March 31, 1996 (in thousands):
1997 1996
<S> <C> <C>
Cash payments $88 $58
Notes issued to sellers 130 164
---- ----
Total value of centers acquired $218 $222
==== ====
<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
MARCH 31, 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
three-month periods of 1997 and 1996 are affected by the net addition of a
total of nine centers in 1996 and one center for the first three-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 condensed 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
condensed 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.
Earnings per Share
At the end of 1997, the Company will report its Earnings per Share (EPS)
based upon the recently issued 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 March 31 is:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Primary EPS as reported $ .08 $ .07
Pro forma effect of SFAS No. 128 $ .00 $ .00
Basic EPS pro forma $ .08 $ .07
Fully diluted EPS as reported $ .08 $ .07
Pro forma effect of SFAS No. 128 $ .00 $ .00
Diluted EPS pro forma $ .08 $ .07
</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 fifteen 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 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 7% to $22,643,000 in the first quarter of
1997, as compared to $21,178,000 in the first quarter 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 periods increased from 1996 by approximately 4.5%
for the quarter. Increased tuition rates are responsible for 3.5% of the
revenue increase and increases in enrollments are responsible for the
remaining 1% revenue increase.
Payroll and related costs increased by $635,000 or 6% , for the first quarter
of 1997, as compared to the first quarter 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 52.9% in the first quarter of 1997 from 53.6% in the first
quarter of 1996. The decrease in payroll and related expenses as a
percentage of revenue 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 $246,000 or 4%, for the first quarter of 1997, as
compared to the first quarter of 1996, due mainly to the increase in the
number of centers operated. As a percentage of revenue, however, direct
costs decreased to 26.3% in the first quarter of 1997 from 26.9% in the first
quarter of 1996. The decrease as a percentage of revenue was due mainly to
lower maintenance and repairs cost and lower utility cost. These costs were
lower due to a milder winter in 1997 than in 1996 and to stronger internal
controls.
Depreciation and amortization expense increased to $1,426,000 in the first
quarter of 1997 as compared to $1,225,000 in the first quarter 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 both periods.
General and administrative expense as a percentage of total revenues
increased to 8.9% for the first quarter of 1997 from 8.3% in the
corresponding period 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.
<PAGE>
Other expense, net decreased by $40,000 for the first quarter of 1997 as
compared to the first quarter of 1996. The decrease was due to higher
interest income of $12,000 for the first quarter of 1997 due to higher cash
balances and to lower interest expense of $28,000 for the first quarter of
1997 due to lower debt balances.
The effective tax rate increased from 20% for the three-months ended March
31, 1996 to 31% for the three-months ended March 31, 1997. This increase in
effective tax rate reflects the lesser impact of the Company's net operating
loss carryforwards, tax exempt income and tax credits on the Company's higher
pretax income.
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, 1997, $13,195,000 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 private sales of the Company's securities at various times
since inception and public offerings of Common Stock.
During the first three-months of 1997, net cash provided by operations was
$3,307,000. 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
three-months, the Company issued or assumed a total of approximately $130,000
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 a commercial
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 I -
ITEM 3. Quantitative and Qualitative Disclosures about Market Risks
None
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 1, 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: May 1, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
1996 10-K
</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> Jan-01-1997
<PERIOD-END> Mar-31-1997
<CASH> 5,540
<SECURITIES> 7,730
<RECEIVABLES> 1,662
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,171
<PP&E> 30,898
<DEPRECIATION> (9,514)
<TOTAL-ASSETS> 74,785
<CURRENT-LIABILITIES> 6,999
<BONDS> 0
0
0
<COMMON> 133
<OTHER-SE> 50,673
<TOTAL-LIABILITY-AND-EQUITY> 74,785
<SALES> 22,643
<TOTAL-REVENUES> 22,643
<CGS> 21,588
<TOTAL-COSTS> 21,588
<OTHER-EXPENSES> 295
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 760
<INCOME-TAX> 235
<INCOME-CONTINUING> 525
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 525
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
