<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------
F O R M 10 - K
[X] ANNUAL REPORT PURSUANT TO SECTION l3 OR l5(d) OF
THE SECURITIES EXCHANGE ACT OF l934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 0-14368
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1097006
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
None Not Applicable
Securities registered pursuant to Section l2(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
---------------------------
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 l934 during
the preceding l2 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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
registrant on March 21, 1997 was approximately $24,218,728. On such date, the
last sale price of registrant's common stock was $5.375 per share. Solely for
the purposes of this calculation, shares beneficially owned by directors and
officers of registrant have been excluded, except shares with respect to which
such directors and officers disclaim beneficial ownership. Such exclusion should
not be deemed a determination or admission by registrant that such individuals
are, in fact, affiliates of registrant.
As of March 21, 1997 the Registrant had outstanding 6,306,958 shares of Common
Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE:
Part of the Form 10-K into which
Document the Document is Incorporated
-------- ----------------------------
Definitive Proxy Statement to Stockholders Part III, Items 10,
11, 12 and 13
<PAGE>
9
PART I
Item 1. Business
(a) General Development of Business.
General
Children's Discovery Centers of America, Inc. and Subsidiaries ("the Company"),
is the fourth largest chain of pre-schools in the United States providing
educational services for children of both pre-school and elementary school age,
operating as of December 31, 1996, 248 pre-schools in 22 states and the District
of Columbia with an aggregate licensed capacity of approximately 24,500
children. The Company provides programs to children primarily between 2-1/2 and
six years of age as well as after school programs for school age children and
infant care. The Company's school age programs include private elementary
programs for children in kindergarten through sixth grade, before and after
school programs and summer camps.
The Company's strategy is to grow through acquiring independent, community-based
pre-schools and chains, to expand in the growing employer-sponsored pre-school
market and to increase programs and services in the growing school age market.
In pursuit of this strategy, from the period from January 1, 1994 through
December 31, 1996, the Company acquired or opened a total of 94 pre-schools (net
of closings). As of December 31, 1996, 70 of the pre-schools operated by the
company are operated in conjunction with employer-sponsors, either on a
management contract basis or with one or more types of employer subsidies, such
as tuition subsidies, free or reduced rent or through the provision of services.
Also, as of December 31, 1996 the Company operated fourteen elementary schools
in conjunction with twelve of its pre-schools, leased for operation two
free-standing private elementary schools and also operated after school programs
in nine other private schools (which are not included within the total numbers
of Company centers set forth above).
The Company's proprietary computerized system monitors the staff-to-child ratio
in all of its pre-schools, enabling the Company to staff efficiently in response
to shifts in occupancy levels. The Company believes its "Piaget Discovery
Preschool Program" differentiates it from its competitors and appeals to both
employer-sponsors and parents.
The Company's principal executive offices are located at 851 Irwin Street, Suite
200, San Rafael, California 94901, and its telephone number is (415) 257-4200.
Expansion Strategy
The Company is currently pursuing an expansion strategy to take advantage of (i)
its experience in acquiring pre-schools (ii) its success in adding corporate
sponsored on-site or near site pre-schools and (iii) significant growth
opportunities in the private elementary school business.
Since the beginning of 1994, the Company has added 108 pre-schools, and closed
fourteen pre-schools. Of the pre-schools added 16 were purchased in 1995 through
the acquisition of the business conducted by Prodigy Consulting, Inc., and
affiliated partnerships ("Prodigy").
<PAGE>
The following table sets forth data regarding the number of pre-schools which
the Company has operated from January 1, 1992 through December 31, 1996, as well
as the approximate pre-school capacity at the end of each period and average
percentage occupancy for each period.
<TABLE>
1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C>
Open at beginning of period 92 131 154 193 239
Opened during period(a) 40 26 42 52 14
Closed during period (1) (3) (3) (6) (5)
Open at end of period 131 154 193 239 248
Net increase 39 23 39 46 9
Approximate pre-school capacity (at 11,200 13,000 17,500 23,500 24,500
end of period)
Average percentage occupancy(b) 69% 72% 73% 71% 69%
<FN>
See footnotes on next page
</FN>
</TABLE>
(a) Includes pre-schools acquired, new pre-schools opened and employer-sponsored
pre-schools which the Company commenced operating under management
contracts. Does not include pre-schools acquired during the period that were
operated by the Company in prior periods under management contracts.
(b) Average percentage occupancy is calculated by dividing revenues from
operation of all of the Company's pre-schools (other than pre-schools
operated on a management fee basis) for the respective periods by the
product of (i) pre-school capacity for all of the Company's pre-schools
(other than those operated on a management fee basis) and (ii) the weighted
average of the basic tuition rate for full-time four-year old children at
all such pre-schools for the respective periods. The Company uses the
tuition rate for four-year olds for purposes of this calculation because
that rate has historically represented the rate paid for more than 50% of
the total children of all ages enrolled in the Company's pre-schools.
The Company intends to continue to expand its pre-school business by acquiring
individual centers and small chains. In order to realize the benefits of
consolidation, the Company generally seeks either to acquire pre-schools in
areas close to the Company's existing pre-schools so that regional managers are
able to supervise the newly-acquired pre-schools, or to acquire a chain which
has a sufficient number of pre-schools to justify the employment of an
additional regional manager. The Company generally seeks to acquire pre-schools
in states with strict regulations in order to avoid unexpected expense and
market disruption that may be caused by complying with new regulations adopted
in states that previously lacked such regulations. The Company retains
acquisition specialists who visit and analyze acquisition opportunities on a
continuing basis.
The child care industry is highly fragmented, and a majority of existing
licensed pre-schools are owned by small operators with limited resources. The
Company believes that generally these small operators have limited opportunities
to sell their pre-schools, which enhances the Company's ability to acquire these
pre-schools on terms favorable to the Company. However, during 1995 and 1996 the
Company experienced increased competition from a few larger child care chains
for the acquisition of small child care operators. As a result, the Company has
found that prices in some instances have exceeded the price the Company was
willing to pay. These more competitive conditions contributed to a somewhat
slower growth rate for acquisitions in 1996 and may have a similar effect in
1997 and beyond. The Company attempts to leverage its acquisitions by paying
approximately one-third of the purchase price in cash and issuing long-term
promissory notes for the remainder. Because many sellers own the pre-school's
real estate facility, the Company is often able to lease these facilities on a
long-term basis through exercise of successive options, while avoiding fixed
long-term obligations.
In evaluating acquisition candidates, the Company considers, among other things,
the location of a pre-school, the local regulatory environment, demographic
trends, competition, quality of programs and management, the pre-school's
existing community image, adequacy of the facility and opportunities for
increased utilization and low-cost expansion. In addition, the Company analyzes
the financial aspects of an acquisition with respect to pricing policies, cost
control and profit margins in order to identify areas for immediate and
long-term improvement. The Company also seeks to increase the revenues,
profitability and quality of pre-schools it acquires by instituting uniform
financial and operation controls and by introducing new and improved curricula
and other services. The Company believes that through this type of expansion it
will achieve the operating efficiencies of a national chain, while offering
parents a high quality of child care that reflects the character of each local
community.
Employer Child Care Services
The number of employer-sponsored pre-schools operated by the Company has grown
substantially in recent years. As of December 31, 1996, the Company operated 70
employer-sponsored pre-schools (compared to 60 as of December 31, 1995), of
which 26 were operated for hospitals or other health care facilities, 18 for
governmental units and 26 for private sector companies, including TRW Space and
Electronics, Inc., and an affiliate of Southern New England Telecommunications
Corp. Of the 70 employer-sponsored pre-schools, 18 are operated by the Company
under management contracts pursuant to which the Company receives a fixed fee,
and the balance are operated with one or more types of employer subsidies,
generally in the form of tuition subsidies, free or reduced rent or through the
provision of services. During 1995 the Company acquired the business of Prodigy
which managed, at the time of acquisition, nine employer sponsored pre-schools.
In some cases, the Company has arrangements with employers who "reserve" a
certain number of enrollment spaces in particular pre-schools for children of
their employees and pay for such spaces whether or not they are utilized. The
Company also has arrangements with a number of large national employers,
including Bank of America, Sears and K-Mart to provide incentives for their
employees to enroll their children in CDC pre-schools. The Company intends to
continue to pursue opportunities in the growing employer-sponsored pre-school
market.
Private Elementary Schools
During 1996 the Company substantially expanded the number of elementary school
programs it operates. As of December 31, 1996, the Company operated 14
elementary school programs (compared to 9 as of December 31, 1995) and operated
111 kindergarten programs (compared to 85 as of December 31, 1995). The Company
intends to expand its kindergarten and elementary programs primarily by adding
new programs in its pre-schools and by adding additional grades to its
elementary programs as the currently enrolled children are ready to advance to a
new grade.
(b) Financial Information About Industry Segments.
The Company operates in one industry, providing child care and elementary school
services under company-operated and employer-sponsored pre-schools.
(c) Narrative Description of Business.
Company Operations
Licensed capacity of the Company's individual pre-schools ranges from 30 to 380
children, although actual enrollments are generally higher because some children
are enrolled on a part-time basis. The average percentage occupancy of the
Company's pre-schools, measured by actual pre-school revenues as a percentage of
total revenue capacity of all Company centers (other than those operated for
employer-sponsors pursuant to management contracts), was approximately 69% for
the year ended December 31, 1996.
The Company's pre-schools contain classroom and recreational areas and kitchen
and bathroom facilities. The pre-schools usually accommodate the grouping of
children by age. The pre-schools have outdoor playgrounds, often with separate
areas designed for infants and toddlers, with the exception of downtown urban
centers that often utilize nearby parks. Each pre-school is equipped with a
variety of audio and visual aids, educational supplies, games, toys and indoor
and outdoor play equipment. In addition, some of the pre-schools are equipped
with personal computers with programs specifically designed for preschoolers and
school-age children. A number of pre-schools are equipped with Company-owned or
leased vehicles for the transportation of children to and from elementary school
and for field trips.
Each pre-school is administered by a director who is responsible for the
operation and maintenance of the pre-school. The duties of a pre-school director
include the staffing and training of qualified teachers and assistants, record
keeping, regulatory compliance, tuition collection, parent relations, marketing
and home office reporting. Directors are trained and supervised by regional
managers, who generally supervise between eight and fourteen pre-schools in
geographical areas sufficiently compact to permit the regional managers to
personally visit the pre-schools under their supervision on a regular basis.
Pre-school directors and regional managers receive incentive compensation,
determined in part by the enrollment and/or profitability of their respective
pre-schools.
Children are usually enrolled in the pre-schools on a weekly basis for either
full-day or half-day sessions. Pre-schools provide enrolled children with
snacks, and in some locations, meals. The Company's current weekly charge for
full-day service ranges from $61.00 to $282.00 per child, depending on the
location of a particular pre-school and the age of the child. Charges
customarily are payable in advance on a weekly or monthly basis.
The Company's pre-schools are generally open throughout the year, usually five
days a week, from 6:30 a.m. to 6:30 p.m. Nine pre-schools are operated in public
or private school facilities on a before and after school basis only. In
addition, one of the Company's subsidiaries operates after-school programs in
nine schools (which are not included within the total number of Company centers
set forth above). New enrollments are most often highest in September and
January, with the largest decrease in enrollment being generally during holiday
periods and the summer months (mirroring the seasonality of the school year end
and traditional vacation times). To offset the seasonal decline in enrollment,
some pre-schools offer summer day camp programs for children up to the age of
12.
Operating Controls and Procedures
Pre-school directors submit weekly financial and operations reports to the
Company's headquarters, which are reviewed by management. The Company has
installed in each of its pre-schools a personal computer with customized
software permitting faster and more comprehensive reporting of operating
information. These reports include, among other things, labor costs, scheduling,
utilization information, enrollment and tuition data by age group, a statement
of prepaid tuition and receivable data, and a listing of all cash receipts. The
Company uses such reports in conjunction with its own records of cash receipts
and disbursements to prepare monthly operating statements for each pre-school.
Management reviews these operating statements with the directors on a monthly
basis. In addition, regional managers visit pre-schools on a regular basis to
monitor all aspects of the pre-schools' operation.
All funds received by each pre-school are deposited in an account established by
the Company in a local bank. All payroll and most other pre-school expenses are
paid by the Company directly out of the Company's headquarters. The Company also
purchases certain supplies for the pre-schools. Direct expenditures by the
pre-schools themselves are limited to miscellaneous operating expenses for which
the pre-schools are reimbursed by the Company by means of a petty cash system.
The Company is committed to an effective safety program, and its operating
procedures are designed to enhance the safety of the children. While the Company
is vigilant in its efforts to promote the safety of the children at its centers,
there can be no assurance that there will be no injuries to children, or
allegations thereof, in the future.
<PAGE>
Marketing
The Company believes that it has benefited from a number of national demographic
trends including an increased birth rate through the early 1990's, an increase
in working mothers employed outside the home and a growing emphasis by employers
on making available on-site child care for employees. According to U.S.
government statistics, births in 1989 exceeded 4,000,000 for the first time
since 1964, and continued to exceed that number in each of 1990, 1991 and 1992.
Furthermore, the percentage of all American children under age six with mothers
in the labor force grew from 39% in 1975 to 58% in 1990, and the percentage of
children receiving pre-school-based child care increased from 13% of the total
number of children receiving child care in 1977 to 28% in 1990. In addition, the
number of children who are ages six to twelve increased from approximately 25
million in 1990 to 26 million in 1993 and is projected to increase to in excess
of 28 million by 1999.
The Company believes that it can increase enrollment in its pre-schools by
developing and introducing high quality curricula and programs that provide
parents with meaningful reasons to choose the Company's centers for their
children over other alternatives. The Company has designed educational and
recreational programs to develop a child's social, intellectual and physical
skills, and it has distributed curriculum manuals developed by it for each age
group to its pre-schools. In addition, the Company is committed to ongoing
research to develop curricula appropriate to children's cognitive development.
The curriculum covered by the Company's "Piaget Discovery Preschool" trademark
was developed under the supervision of an outside consultant with a Ph.D. in
Educational Psychology.
The Company's primary source of new enrollments for its pre-schools and
elementary schools are recommendations from customers in the communities in
which it operates. The Company markets its services through display
advertisements and listing in the Yellow Pages, newspaper advertisements and
distribution of fliers at schools and community functions. The Company spends a
large portion of its advertising budget in the summer months in anticipation of
the fall enrollment period, with continued advertising throughout the year. The
Company markets its services to employer-sponsored pre-schools through
relationships with consultants, attendance at trade shows and industry
publications.
The director of each pre-school is responsible for marketing and promoting the
pre-school. The director encourages parental involvement in the pre-school
through monthly newsletters and reports to parents as well as parent-teacher
conferences and parental visits to and inspections of the pre-school.
Pre-schools use promotional activities such as "Grandparents' Day," holiday
activities, graduation and open houses as part of the total marketing program.
Competition
Based on data from trade publications, the Company is the fourth largest chain
of pre-schools in the United States. The child care industry is highly
fragmented, with the 50 largest for-profit child care companies estimated by the
Company to account for no more than 10% of the industry's licensed capacity.
Competition within the child care industry is based largely upon location and
adequacy of facilities, quality of service and price. In most of the geographic
areas in which the Company operates, the Company competes with centers owned by
larger national chains such as Kinder-Care Learning Centers, Inc., and La Petite
Academy, Inc., as well as with centers owned by non-profit organizations that
may be supported by endowments and charitable contributions. During 1996 and
1995 the Company noted an increase in the number of centers operated by larger
competitors in the Company's markets and their increased use of discounts and
other promotions. The Company also competes with individually-owned proprietary
child care centers, licensed child care homes, in-home individual child care
providers and corporations that provide child care for their employees
privately. Many non-profit child care centers have lower occupancy costs for
their facilities than the Company does and, consequently, charge less for their
services. Additionally, public schools are offering, on an increasing basis,
before and after school programs that compete with services offered by the
Company. Such programs have the built-in advantages of (i) being able to use
existing, well-established facilities, (ii) having a ready source of enrollments
from their existing student population, and (iii) having tax revenue available
to subsidize the cost of the programs. The Company competes principally by
offering trained personnel, professionally planned educational and recreational
programs, well equipped facilities, and additional services such as
transportation. The Company's private kindergarten and elementary programs face
competition from the public schools as well as other providers of private
education including religious institutions, and other operators of child care
centers. The Company believes that it can compete successfully in this market
based on the quality of its educational programs, the high customer satisfaction
of its pre-school customer base, and its ability to be selective in the staff
hired and children attending the school.
Insurance
The Company maintains comprehensive general liability insurance, that provides
coverage for both bodily injury and property damage claims up to a total of $15
million. The primary general liability policy has a limit of $1 million per
occurrence and the Company maintains an excess umbrella liability policy that
provides coverage for an additional $14 million for a total liability insurance
of $15 million. The Company believes such insurance coverage is adequate. The
Company has procured limited coverage for child physical and sexual abuse
claims, subject to a $1,000,000 annual aggregate limitation. To date, the
Company has not incurred any liability with respect to any claims of abuse.
The Company has not experienced difficulty in obtaining insurance coverage, but
there can be no assurance that adequate, affordable insurance coverage will be
available in the future, or that the Company's current coverage will protect it
against all possible claims.
Government Regulation
Each pre-school or school must be licensed under applicable state or local
licensing laws and is subject to a variety of state and local regulations.
Although these regulations vary greatly from jurisdiction to jurisdiction,
governmental agencies generally review with respect to a pre-school the safety,
fitness and adequacy of the buildings and equipment; the ratio of staff to
children; the dietary program; the daily curriculum and compliance with health
standards. In most jurisdictions, these agencies conduct scheduled and
unscheduled inspections of the pre-schools, and licenses must be renewed
periodically. Repeated failures by a pre-school to comply with applicable
regulations can subject it to sanctions that might include probation or, in more
serious cases, suspension or revocation of the pre-school's license to operate.
The Company believes that each of its pre-schools is in substantial compliance
with such requirements. The Company generally seeks to operate pre-schools in
states with strict regulations in order to avoid unexpected expense and market
disruption that may be caused by compliance with regulations adopted in states
that previously lacked such regulations.
Federal regulations and licensing requirements require compliance with minimum
standards in order to qualify for participation in Federal assistance programs.
Under the Social Security Act, the Federal government provides assistance to
states that have an established plan for child-welfare services, including child
care services. As a result, state agencies have established minimum standards
for pre-schools, based on the number of eligible children enrolled in each
pre-school, in order for each pre-school to receive financial assistance. The
Company estimates that approximately 13% of its revenue is derived from various
state public assistance programs. Any significant reduction in the scope or
amount of such financial assistance may have a significant impact on the
Company's operating results.
In addition, the Company is subject to the Americans with Disabilities Act
("ADA"), which prohibits discrimination on the basis of disability in public
accommodations and employment. The ADA became effective as to public
accommodations in January 1992 and as to employment in July 1992. The Company
believes that its facilities are substantially in compliance with the
requirements of the ADA and has not received any complaints concerning
non-compliance with such requirements. A determination that the Company is not
in compliance with the ADA could result in the imposition of fines or an award
of damages to private litigants, and it could require significant expenditures
by the Company to bring the Company's facilities into compliance with the ADA.
<PAGE>
The Internal Revenue Code of 1986, as amended (the "Code"), provides for an
income tax credit ranging from 20% to 30% of certain child care expenses subject
to certain maximum limitations. The fee paid to the Company for child care
services qualifies for the Federal tax credit under the Code, provided that
various requirements under the Code are met.
The Company is also subject to the Fair Labor Standards Act, which governs such
matters as minimum wages, overtime compensation and working conditions. Less
than 2% of the Company's personnel are paid at rates equal to the Federal
minimum wage and, accordingly, increases in the minimum wage will not materially
increase the Company's labor costs.
Income Taxes
The net operating loss carryforwards of the Company and its subsidiaries are
subject to certain rules set forth in the Code that limit the ability of the
Company and its subsidiaries to use such net operating loss carryforwards to
reduce income taxes.
Employees
The Company's pre-schools are currently organized into regions, each of which is
under the management of a trained regional manager. Individual pre-schools are
staffed with a director, teachers and teaching assistants and, depending on its
size, an assistant director. All management personnel participate in periodic
training programs and are required to meet applicable state and local regulatory
standards. It is the Company's policy to comply with all state regulations and
guidelines pertaining to staff-to-child ratios. These ratios vary from state to
state and with the age group of the children under supervision. In this regard,
the Company employs, with respect to (i) infants under the age of 13 months, one
staff member for each three to four children; (ii) toddlers between the ages of
12 and 36 months, one staff member for each four to six children; and (iii)
preschool children 3 to 5 years of age, one staff member for each eight to
twelve children. The Company maintains a proprietary computerized system that
monitors the staff-to-child ratio in all of its pre-schools, enabling the
Company to staff efficiently in response to shifts in occupancy levels.
As of December 31, 1996, the company employed approximately 5,200 persons, of
whom approximately 40% are employed on a part-time basis. Two pre-schools
operated by a Company subsidiary have employees that are represented by unions.
The Company believes that its relations with its employees are good. The Company
experiences significant turnover of its hourly employees, which it believes is
typical of the child care industry.
Item 2. Properties
As of December 31, 1996 the Company operated 248 pre-schools in 22 states and
the District of Columbia, located as follows:
Location Number of Location Number of
Centers Centers
----------------------------------------------------------------
California 51 Oregon 5
Pennsylvania 47 Nebraska 5
Connecticut 23 Kansas 5
New Jersey 21 Rhode Island 3
Indiana 11 Alabama 3
Illinois 11 Virginia 3
New York 11 Michigan 3
Massachusetts 10 Texas 2
Washington 9 Delaware 2
Wisconsin 7 Washington D.C. 2
Georgia 7 Florida 1
Maryland 6
<PAGE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
As of December 31, 1996, the Company owned 15 centers, leased 206 centers with
terms expiring on the leased properties on various dates between 1996 and 2015
and operated 18 centers pursuant to management contracts with employers. Nine of
the centers are operated in public or private school facilities on a before and
after school basis only.
The Company's principal executive offices are located in San Rafael, California
in 6,900 square feet that the Company leases pursuant to the terms of a lease
agreement that expires in 1999. The lease calls for annual lease payments
ranging from approximately $150,000 in 1996 to approximately $168,000 in the
last year of the lease. The Company believes its properties are adequate for its
uses.
Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings. The Company is a
party to certain legal proceedings arising in the ordinary course of business
that are primarily covered by insurance.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Common Stock has been included for quotation in the NASDAQ National
Market since May 20, 1986. Until February 9, 1994, the NASDAQ symbol for the
Common Stock was "CDCRA," at which time the symbol was changed to "CDCR." The
following table sets forth for the calendar quarters indicated the historical
high and low last sales prices of the Common Stock, as reported by NASDAQ.
1996 High Low
First Quarter $5.75 $4.00
Second Quarter $8.625 $4.625
Third Quarter $7.00 $5.00
Fourth Quarter $8.125 $4.75
1995
First Quarter $15.875 $11.00
Second Quarter $17.625 $15.00
Third Quarter $17.625 $11.75
Fourth Quarter $12.00 $4.00
At March 21, 1997, there were 318 record holders of the Company's Common Stock.
The Company has never declared or paid any cash dividends or made any other
distribution on its Common Stock, and it is anticipated that in the foreseeable
future the Company will follow a policy of retaining all earnings for
reinvestment in its business. Any future determination as to declaration and
payment of dividends will be made at the discretion of the Board of Directors of
the Company.
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
(in thousands, except per share data) (1)
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Revenue from Operations $87,756 $77,627 $55,323 $38,564 $25,658
Operating Expenses 85,209 73,010 50,898 36,644 25,837
Income (Loss) from 2,547 4,617 4,425 1,920 (179)
Operations
Other Expense, net (1,421) (773) (744) (618) (382)
Income (Loss) before
provision for income taxes 1,126 3,844 3,681 1,302 (561)
Provision for Income Taxes 225 1,208 921 197 55
Net Income (Loss) $ 901 $2,636 $2,760 $1,105 $(616)
Net Income (Loss) per $0.13 $0.38 $0.57 $ 0.35 $(0.33)
share
Long-term Obligations $16,634 $17,535 $13,736 $6,896 $6,198
Total Assets $74,612 $73,795 $64,691 $36,093 $23,526
<FN>
(1) Certain reclassifications have been made to prior years financial statements
to conform to the 1996 presentation.
</FN>
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
During the period from January 1, 1994 through December 31, 1996, the number of
pre-schools operated by the Company increased from 154 to 248 and pre-school
capacity increased from approximately 13,000 to 24,500 children. The Company has
achieved this growth primarily by acquiring existing pre-schools and also by
opening new pre-schools and entering into contracts to manage pre-schools
sponsored by employers. In 1996, the Company acquired or opened a total of 14
pre-schools and closed 5 pre-schools. The results of acquired or disposed of
pre-schools are included in the Company's financial statements from the date of
acquisition or until the date of disposition. During 1995, the Company acquired
or opened 52 pre-schools and closed 6 pre-schools. During 1994, the Company
acquired or opened 42 pre-schools, and closed 3 pre-schools. Accordingly,
year-to-year results may fluctuate depending upon the timing of the Company's
acquisition of existing pre-schools and the opening of new pre-schools.
Historically, the Company's operating revenues have followed the seasonality of
a school year, declining during the summer months and the year-end holiday
period.
<PAGE>
Results of Operations
Revenue from Operations
Revenue from operations increased 13% in 1996 to $87,756,000 from $77,627,000 in
1995. Revenues for those pre-schools open in corresponding time periods in both
years increased approximately 3%, with the remainder of the increase due to
acquisitions. All of the increase on a same pre-school basis was due to price
increases, as these pre-schools experienced a decrease in enrollments of 2%.
Revenues from operations increased 40% in 1995 to $77,627,000 from $55,323,000
in 1994. Revenues for those pre-schools open in corresponding time periods in
both years increased approximately 3%, with the remainder of the increase due to
acquisitions. All of the increase on a same pre-school basis was due to price
increases, as these pre-schools experienced an enrollment decrease of less than
2%.
Operating Expenses
Payroll and related expenses as a percentage of total revenues were 53.7%,
54.4%, and 54.2% in 1996, 1995, and 1994, respectively. The decrease from 1995
to 1996 was due to an increase in supervisory controls and procedures instituted
in 1996 and to the Company having raised its tuition rates at a higher rate than
its payroll rates. The increase in 1995 from 1994 was due to a higher percentage
of payroll costs to total revenue for those pre-schools acquired in 1995. The
percentage of payroll costs to total revenue for those pre-schools that the
Company operated prior to 1995 was unchanged from 1994.
Other operating expenses were 27.2% of revenues in 1996, 25.5% in 1995 and 24.9%
in 1994. The increase in Other operating expenses in 1996 from 1995 was due to
occupancy expenses (rent, property taxes, utilities and maintenance and repair
expenses) increasing at a faster rate than the growth in average pre-school
revenue. Other operating expenses increased as a percentage of revenue in 1995
from 1994 due to the slower growth of the average pre-school's revenues in 1995
versus 1994.
Administrative expenses as a percentage of total revenue was 9.4% in 1996, 8.1%
in 1995, and 7.6% in 1994. The major part of the increase in 1996 was a one time
charge of approximately $800,000 in the fourth quarter of 1996 that the Company
recorded to provide for the potential uncollectability of a receivable
associated with a management agreement for operation of an employer sponsored
pre-school, the costs associated with the possible settlement of a legal matter,
and other miscellaneous expenses. Without this charge, Administrative expenses
for 1996 as a percentage of revenue would have been 8.4%. This increase in 1996
was due to the addition of supervisory and financial personnel to enhance
management and financial controls. The increase in 1995 versus 1994 was due to
fewer acquisitions being completed than anticipated and to higher expenses
associated with the Company's strategy to increase emphasis on expanding its
employer sponsored business.
Depreciation and amortization expenses increased by 35% in 1996 to $5,118,000
from $3,804,000 in 1995. Depreciation and amortization expenses increased by 62%
in 1995 to $3,804,000 from $2,355,000 in 1994. The increases in both 1996 and
1995 were due mainly to the increase in new pre-schools acquired during those
years and to the improvements made by the Company in its existing pre-schools.
Advertising and promotion expenses as a percentage of revenues has remained
constant at approximately 1% for all periods.
Other Expense
Interest income in 1996 compared to 1995 decreased by $535,000, due to lower
average daily cash balances and to lower average interest rates in 1996.
Interest income in 1995 compared to 1994 increased by $530,000, due to higher
average daily cash balances offset somewhat by lower average interest rates in
1995. Interest expense increased by $113,000 in 1996 from 1995 and by $559,000
in 1995 from 1994. The 1996 and 1995 increases were due to higher average debt
outstanding because of debt issued by the Company in connection with its
acquisition of pre-schools, offset somewhat by lower average interest rates on
the Company's outstanding debt. The Company's average interest rates decreased
in both 1996 and 1995 due to the decline in variable rates charged on certain of
the Company's borrowings, the retirement of higher interest debt and the
issuance of new debt in connection with its acquisitions at lower average
interest rates.
Income Taxes
The net operating loss carryforwards of the Company are subject to certain rules
set forth in the Internal Revenue Code that limit the ability of the Company to
use such net operating loss carryforwards to reduce future taxable income.
During 1996, the Company reduced its deferred tax asset valuation allowance to
recognize a portion of the benefit related to its previously reserved net
operating loss carryforwards (see Note 7 to the accompanying financial
statements). The impact of the above, after considering alternative minimum tax
and the benefit of certain tax exempt income and tax credits, resulted in the
Company's effective tax rate decreasing to 20.0% in 1996 from 31.4% in 1995.
The higher effective tax rate in 1995 of 31.4% versus 25.0% in 1994 reflected
the utilization of a proportionately lower amount of the benefit of net
operating loss carryforwards in 1995 as compared to 1994.
Liquidity and Capital Resources
Since its inception, the Company has grown primarily through the acquisition of
existing pre-schools. For acquisitions of individual pre-schools or small
chains, it is the Company's general practice to acquire pre-schools for a
combination of cash and notes to sellers. These notes are payable generally over
ten years. As of December 31, 1996, the principal amount of such notes
outstanding was $13,485,000. Furthermore, the Company seeks whenever possible to
lease the pre-school facilities on a long-term basis through the exercise of
successive options, while avoiding long-term obligations.
For transactions involving the acquisition of larger chains, the Company has
relied principally on the issuance of debt and equity securities as payment for
a substantial portion of the purchase price. In connection with the acquisition
of AFSC in November 1992, the Company issued to the stockholders of AFSC
approximately 138,000 shares of Common Stock, as well as shares of Preferred
Stock having a liquidation preference of $3,250,000 which were convertible into
approximately 591,000 shares of Common Stock. In 1995, shares of Preferred Stock
having a liquidation preference of $550,000 were converted into 100,000 shares
of Common Stock and in 1996 shares of Preferred Stock having a liquidation
preference of $565,000 were converted into approximately 103,000 shares of
Common Stock. In 1995, the Company purchased the assets of its Prodigy Division,
consisting of seven community based centers and nine employer sponsored centers,
in a transaction for approximately $5,100,000. This purchase price consisted of
approximately $2,850,000 in cash and $2,250,000 in notes and assumed
liabilities.
Capital resources for the cash portion of acquisitions have generally been
obtained through public and private sales of the Company's securities at various
times since inception. In December 1994 and January 1995, the Company obtained
net proceeds of approximately $19,550,000 from a public offering of 2,137,500
shares of Common Stock at a price of $10.25 per share (the "1994 Stock
Offering").
During 1996, net cash provided by operations was $7,993,000. This internally
generated cash funded all of the Company's cash needs for repayment of debt,
purchases of centers and purchases of property, plant and equipment. During 1996
the Company issued or assumed $1,054,000 of indebtedness related to
acquisitions. As of December 31, 1996, the Company had cash and short-term
investment balances of $11,740,000. 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 payments. The Company also used $3,115,000 of its cash
balances to repay debt. Approximately $9,550,000 of the proceeds from the 1994
Stock Offering was used for the acquisition or opening of new pre-schools or
elementary school programs. During 1995 the Company issued or assumed $7,919,000
of indebtedness related to acquisitions. As of December 31, 1995, the Company
had cash and short-term investment balances of $10,914,000. During 1994
approximately $6,7000,000 of the Company's existing cash balances were used for
the acquisition or opening of new centers, and the Company issued or assumed a
total of approximately $9,040,000 of indebtedness related to acquisitions,
including $2,500,000 in long term debt associated with the purchase of land and
buildings in connection with one acquisition.
The Company's management believes that its 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 pre-schools and the opening of additional elementary school programs.
The Company also has available to it up to $1,250,000 under an unsecured line of
credit furnished by a commercial bank. During 1996 the Company drew down the
full amount available under the line of credit, although at December 31, 1996
had no outstanding balance. The Company currently has no commitments for capital
expenditures, which might be deemed, either individually or in the aggregate,
material to its business.
Item 8. Financial Statements and Supplementary Data
See Page F.
Item 9. Change in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information concerning directors required by this item is incorporated by
reference to the Company's definitive proxy statement to be filed pursuant to
Regulation 14A not later than April 30, 1997.
Executive Officers
The executive officers of the Company are as follows:
Name Age Position
Richard A. Niglio 54 Chief Executive Officer and Chairman
Elanna S. Yalow 42 President, Chief Operating Officer
Randall J. Truelove 48 Vice President, Finance
Rebekah A. Renshaw 49 Vice President
Jane Delaney 33 Vice President
Frank A. Devine 50 Secretary/General Counsel
None of the above has any family relationship with any other person so named,
and there are no arrangements or understandings between any executive officer
and any other person pursuant to which any person was selected as an officer.
Officers are elected each year at the meeting of the Board of Directors
immediately following the annual meeting of the stockholders.
The business experience, principal occupations and employment of each of the
executive officers of the Company during at least the past five years, together
with their periods of service as executive officers of the Company, are set
forth below.
Richard A. Niglio was appointed Chief Executive Officer of the Company in March
1987. From 1982 until joining CDC, he was President, Chief Executive Officer and
a director of Victoria Station Incorporation, a restaurant chain based in
Larkspur, California. Mr. Niglio is currently a director of Psychiatric
Management Resources, Inc., a company that manages psychiatric partial
hospitalization services.
Elanna S. Yalow has been President of the Company since January 19, 1996 and
Vice President since April 1992. From July 1989 until April 1992, Dr. Yalow
was a self-employed consultant, and served as a consultant to the Company
during that period. From September 1987 until June 1989, Dr. Yalow attended
Stanford University, graduating with a Masters in Business Administration.
Dr. Yalow has a doctorate in Educational Psychology from the Stanford
University School of Education.
Randall J. Truelove has been Vice President, Finance of the Company since
December 1987. From 1982 until joining CDC, Mr. Truelove was Controller of
Victoria Station Incorporated.
Rebekah A. Renshaw has been a Vice President of the Company since 1985, and from
1983 to 1985 she was a Regional Director with the Company.
Jane Delaney has been a Vice President of the Company since June 1995 and from
1991 to 1995 was a Regional Director with the Company.
Frank A. Devine has been Secretary and General Counsel of the Company since
October 1987. Prior to that time, Mr. Devine was Corporate Counsel of
Victoria Station Incorporated.
Item 11. Executive Compensation
Information required by this item is incorporated by reference to the
Company's definitive proxy statement to be filed pursuant to Regulation
14A not later than April 30, 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this item is incorporated by reference to the
Company's definitive proxy statement to be filed pursuant to Regulation
14A not later than April 30, 1997.
Item 13. Certain Relationships and Related Transactions
Information required by this item is incorporated by reference to the
Company's definitive proxy statement to be filed pursuant to Regulation
14A not later than April 30, 1997.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1.Financial Statements: Index to Financial Statements at page F.
2. Financial Statement Schedules: None.
3. Exhibits.
Item Number (Exhibit Number referenced to Item 601 of Regulation S-K)
1. Underwriting Agreement: Not applicable
2. Plan of acquisition, reorganization, arrangement, liquidation or
succession: Not applicable.
3. Articles of Incorporation and By-Laws
A. Certificate of Incorporation, filed on December 23, 1983, incorporated
by reference to Exhibit 3(A) to Registrant's Form 10-K for fiscal year
ended December 31, 1994 (the "1994 Form 10-K").
B. Amendment to Certificate of Incorporation filed on July 12, 1984,
incorporated by reference to Exhibit 3(B) to Registrant's 1994 Form
10-K.
C. Amendment to Certificate of Incorporation filed on January 29, 1985,
incorporated by reference to Exhibit 3(C) to Registrant's 1994 Form
10-K.
D. Amendment to Certificate of Incorporation filed on August 19, 1985,
incorporated by reference to Exhibit 3(D) to Registrant's 1994 Form
10-K.
E. Amendment to Certificate of Incorporation filed on May 27, 1987,
incorporated by reference to Exhibit 3(E) to Registrant's 1994 Form
10-K.
F. Amendment to Certificate of Incorporation filed on June 2, 1988,
incorporated by reference to Exhibit 3(F) to Registrant's 1994 Form
10-K.
G. Amendment to Certificate of Incorporation filed on March 18, 1991,
incorporated by reference to Exhibit 3(G) to Registrant's 1994 Form
10-K.
H. Amendment to Certificate of Incorporation, filed on October 10,
1991, incorporated by reference to Exhibit (4)(A) to Form S-2
Registration Statement No. 33-92533.
I. Amendment to Certificate of Incorporation filed on July 29, 1992
(incorporated by reference to Exhibit 3(H) to Registrant's Form 10-K
for the fiscal year ended December 31, 1992 (the "1992 Form 10-K").
J. Certificate of Amendment to Certificate of Incorporation filed on
December 6, 1993, incorporated by reference to Exhibit 3(H) to
Registrant's Form 10-K for the fiscal year ended December 31, 1993 (the
"1993 Form 10-K").
K. By-Laws as amended, incorporated by reference to Exhibit 3(g) to
Registrant's Form 10-K for the fiscal year ended December 31, 1989 (the
"1989 Form 10-K").
4. Instruments defining the rights of security holders, including
indentures:
A. Excerpts from Certificate of Incorporation, as amended, incorporated
by reference to Exhibit 4(A) to Form S-4 Registration Statement No.
33-38858.
B. Excerpts from By-Laws, as amended, incorporated by reference to
Exhibit 4(B) to Form S-4 Registration Statement No. 33-38858.
C. Specimen Certificate for Common Stock par value $.01 per share,
incorporated by reference to Registrant's 1993 Form 10-K.
D. Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock, incorporated by reference to Exhibit
4(D) to Registrant's 1992 Form 10-K.
5. Opinion re legality: Not applicable.
6. Reserved: Not applicable.
7. Reserved: Not applicable.
8. Opinion re tax matters: Not applicable.
9. Voting trust agreement: Not applicable.
10.Material Contracts:
A. CDC Stock Option Plan, as amended, incorporated by reference to
Exhibit 10(A) of S-2 Registration Statement No. 33-85878.
B. Employment Agreement between Registrant and Richard A. Niglio, dated
December 15, 1994, incorporated by reference to Exhibit 10(B) to
Registrant's 1994 Form 10-K.
C. Form of Stock Option Agreement dated as of June 16, 1992 between the
Registrant and each of its non-employee directors, incorporated by
reference to Exhibit 10(C) to Registrant's 1993 Form 10-K.
D. Shareholders Agreement dated as of July 16, 1992 between the
Registrant, American Family Service Corporation, LN Investment
Capital Limited Partnership and Lepercq Capital Management, Inc.,
incorporated by reference to Exhibit 10(L) of the Registrant's 1992
Form 10-K.
E. Form of Stock Purchase Agreement dated March 22, 1993 and
Registration Rights Agreement attached as Exhibit A thereto,
incorporated by reference to Exhibit 10(H) to S-2 Registration
Statement No. 33-70360.
F. Promissory Note of Richard A. Niglio dated May 28, 1993 in the
principal amount of $200,200, and related Pledge Agreement between
the Registrant and Mr. Niglio, incorporated by reference to Exhibit
10(I) to S-2 Registration Statement No. 33-70360.
G. Non-Employee Directors' Stock Option Plan, incorporated by reference
to Exhibit 10(J) to S-2 Registration Statement No. 33-70360.
H. Promissory Note of Richard A. Niglio dated December 16, 1994 in the
principal amount of $224,475, incorporated by reference to Exhibit
10(I) to Registrant's 1994 Form 10-K.
I. Non-Employee Directors' Stock Option Plan (Amended and Restated as
of August 27, 1996) (filed herewith).
11. Statements re computation of per share earnings is not required because
the relevant computations can be clearly determined from the material
contained in the financial information included herein.
12. Statements re computation of ratios: Not Applicable.
13. Annual Report to security holders, Form 10-Q or quarterly report to
security holders: Not Applicable.
14. Reserved: Not Applicable.
15. Letter re unaudited interim financial information: Not Applicable.
16. Letter re change in certifying accountants: Not Applicable.
17. Letter re director resignation: Not Applicable.
18. Letter re change in accounting principles: Not Applicable.
19. Report furnished to security holders: Not Applicable.
20. Other documents or statements to security holders: Not Applicable.
21. Subsidiaries of the Registrant:
Name of Subsidiary State of Incorporation
Magic Years Child Care and Learning Centers, Inc.
PennsylvaniaGreentree Learning Center, Inc. New JerseyFox Day
Schools, Inc. Illinois
Children's Discovery Centers of Illinois, Inc. Delaware
Children's Discovery Centers of Virginia, Inc. Delaware
Prodigy Consulting of Flint, Inc. Georgia
22. Published report regarding matters submitted to vote of security
holders: Not Applicable.
23. Consents of experts and counsel: Consent of Arthur Andersen LLP.
(Filed herewith).
24. Power of attorney: Not Applicable.
25. Statements of eligibility of trustees: Not Applicable.
26. Invitations for competitive bids: Not Applicable.
27. Financial Data Schedule: Filed herewith.
99. Additional exhibits: Not Applicable.
(b) Reports on Form 8-K.
None.
(c) Exhibits. Exhibits required by this item are not applicable.
(d) Additional Financial Statements or Schedules. None.
<PAGE>
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- ------------------------------------------------------------------------------
<PAGE>
SIGNATURES
<PAGE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
CHILDREN'S DISCOVERY CENTERS
OF AMERICA, INC.
Date: March 28, 1997 By: s/s Richard A. Niglio
Richard A. Niglio
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the date indicated.
Signature Title Date
s/s Richard A. Niglio Chairman of the Board March 28, 1997
Richard A. Niglio of Directors, and
Chief Executive Officer,
(Principal Executive Officer)
s/s Randall J. Truelove Vice President, Finance March 28, 1997
Randall J. Truelove (Principal Financial Officer
and Accounting Officer)
s/s Mark P. Clein Director March 28, 1997
Mark P. Clein
s/s Michael J. Connelly Director March 28, 1997
Michael J. Connelly
s/s Robert E. Kaufmann Director March 28, 1997
Robert E. Kaufmann
s/s W. Wallace McDowell, Jr. Director March
28, 1997
W. Wallace McDowell, Jr.
s/s Myron A. Wick, III Director March 28, 1997
Myron A. Wick, III
s/s Elanna S. Yalow Director March 28, 1997
Elanna S. Yalow
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
Report of Independent Public Accountants F-1
Financial Statements:
Consolidated Balance Sheets - F-2
December 31, 1996 and 1995
Consolidated Statements of Income for the F-3
Years Ended December 31, 1996, 1995, and 1994
Consolidated Statements of Stockholders' Equity F-4
for the Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years F-5
Ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements F-6
through F-14
All other schedules required by Regulation S-X have been omitted because they
are not applicable or because the required information is included in the
financial statements or notes thereto.
F
<PAGE>
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- ------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Children's Discovery Centers of America, Inc.:
We have audited the accompanying consolidated balance sheets of Children's
Discovery Centers of America, Inc. (a Delaware corporation) and subsidiaries as
of December 31, 1996 and 1995, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Children's Discovery Centers of
America, Inc., and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Oakland, California,
February 21, 1997
F-1
<PAGE>
<TABLE>
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CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1996 AND 1995 (In
thousands except share information)
<CAPTION>
1996 1995
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $4,826 $2,920
Short-term investments 6,914 7,994
Accounts receivable, net of allowance for
doubtful accounts of $143 and $246, 2,584 2,537
respectively
Prepaid expenses and other 1,624 2,371
Total current assets 15,948 15,822
PROPERTY, PLANT AND EQUIPMENT:
Land 1,320 1,320
Buildings 6,179 6,024
Furniture, fixtures and equipment 11,015 9,177
Transportation equipment 2,233 1,825
Leasehold improvements 8,832 7,660
Construction in Progress 750 -
Less: Accumulated depreciation and (8,798) (6,389)
amortization
21,531 19,617
INTANGIBLE ASSETS, net 35,381 36,326
OTHER ASSETS 1,752 2,030
Total Assets $74,612 $73,795
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $2,095 $2,421
Accounts payable 501 626
Payroll and related accruals 3,005 2,214
Accrued liabilities and other 1,092 799
Total current liabilities 6,693 6,060
LONG-TERM DEBT, net of current portion 16,634 17,535
ACCRUED STRAIGHT- LINE RENT 998 877
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Special Stock - authorized
5,000,000 shares; outstanding as:
Series A Convertible Preferred,
par value $.01 per share, liquidation
value $2,135;
2,135 shares outstanding in 1996 and
2,700 shares outstanding in 1995 0 0
Common Stock, par value $.01 per share,
Authorized 20,000,000 shares,
outstanding: 6,306,958 in 1996, and 133 132
6,204,231 in 1995
Treasury Stock (7,200,844 in 1996 and 1995) 0 0
Paid-in Capital in Excess of Par 52,722 52,723
Unrealized Gain (Loss) on Short-Term 0 10
Investments
Loans to Stockholder Officers ( 710) ( 783)
Accumulated deficit (1,858) (2,759)
Total stockholders' equity 50,287 49,323
Total liabilities and stockholders' equity $74,612 $73,795
<FN>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
</FN>
</TABLE>
F-2
<PAGE>
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<TABLE>
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (in
thousands, except per share data)
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
REVENUE FROM OPERATIONS $87,756 $77,627 $55,323
Payroll and related expenses 47,131 42,235 29,987
Other center operating expenses 23,848 19,811 13,766
Administrative expenses 8,214 6,317 4,227
Depreciation and amortization 5,118 3,804 2,355
Advertising and promotion 898 843 563
Total operating expenses 85,209 73,010 50,898
INCOME FROM OPERATIONS 2,547 4,617 4,425
OTHER INCOME (EXPENSE):
Interest income 272 807 277
Interest expense (1,693) (1,580) (1,021)
INCOME BEFORE INCOME TAXES 1,126 3,844 3,681
PROVISION FOR INCOME TAXES 225 1,208 921
NET INCOME $ 901 $2,636 $2,760
NET INCOME PER COMMON
AND COMMON EQUIVALENT SHARE $0.13 $ 0.38 $ 0.57
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 6,723 6,929 4,831
<FN>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-3
</FN>
</TABLE>
<PAGE>
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<PAGE>
<TABLE>
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(In thousands)
<CAPTION>
Series A
Preferred Common
Stock Stock
-----------------------
Unrealized
Paid Loans Gain
Number Number -In to (Loss) Total
of of Capital Stock- on Accumulated Stock-
Shares Amount Shares Amount in holder Short Deficit holders'
Excess Officer Term Equity
of Par Investment
----- ----- ----- ----- ------ ------ ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
December 31, 3 $- 3,932 $110 $32,745 $(281) $- $(8,155) $24,419
1993
Public - - 2,000 20 18,646 (359) - - 18,307
Offering
Unrealized
Loss on - - - - - - (30) - (30)
Short Term
Investments
Net Income - - - - - - - 2,760 2,760
-------------------------------------------------------------------
BALANCE,
December 31, 3 - 5,932 130 51,391 (640) (30) (5,395) 45,456
1994
Public - - 138 1 1,242 - - - 1,243
Offering
Exercise of
Options and - - 34 - 49 - - - 49
Warrants
Preferred
Stock - - 100 1 (1) - - - -
Conversion
Interest and
Loans to - - - - 42 (143) - - (101)
Stockholder
Officers
Unrealized
Gain on - - - - - - 40 - 40
Short Term
Investments
- - - - - - - 2,636 2,636
-----------------------------------------------------------------
BALANCE,
December 31, 3 - 6,204 132 52,723 (783) 10 (2,759) 49,323
1995
Preferred
Stock (1) - 103 1 (1) - - - -
Conversion
Interest and
Loans to - - - - - 73 - - 73
Stockholder
Officers
Unrealized
Loss on - - - - - - (10) - (10)
Short Term
Investments
Net Income - - - - - - - 901 901
-----------------------------------------------------------------
BALANCE,
December 31, 2 $- 6,307 $133 $52,722 $(710) $- $(1,858) $50,287
1996
-----------------------------------------------------------------
<FN>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
</FN>
</TABLE>
F-4
<PAGE>
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<TABLE>
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND
1994 (In thousands)
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $901 $2,636 $2,760
Adjustments to reconcile net income to net
cash
provided by operating activities:
Depreciation 2,409 1,960 1,371
Amortization 2,709 1,844 984
Changes in assets and liabilities -
Accounts receivable ( 47 ) (1,059) ( 478)
Prepaid expenses and other 941 (1,022) ( 486)
Accounts payable (125 ) ( 172) ( 7)
Payroll and related accruals 791 527 294
Accrued liabilities, straight-line rent 414 ( 32) 57
and other
Net cash provided by operating activities 7,993 4,682 4,495
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (1,829) (21,253) (4,270)
Proceeds from sale of short-term investments 2,899 14,599 3,070
Payments for acquisitions of child care (874 ) (9,089) (6,055)
centers
Payments for the start-up of centers (812 ) ( 475) ( 662)
Purchases of property, plant and equipment, (3,524 ) (4,952) (2,368)
net
Other, net 236 ( 496) 202
Net cash used for investing activities (3,904 ) (21,666) (10,083)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net - 1,191 18,307
of issuance costs
Proceeds from issuance of long-term debt 340 1,483 218
Repayments of long-term debt (2,523 ) (4,328) (2,041)
Net cash provided by (used for) financing (2,183 ) (1,654) 16,484
activities
Net increase (decrease) in cash and cash 1,906 (18,638) 10,896
equivalents
CASH AND CASH EQUIVALENTS, beginning of year 2,920 21,558 10,662
CASH AND CASH EQUIVALENTS, end of year $4,826 $2,920 $21,558
<FN>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
</FN>
</TABLE>
F-5
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1) OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations:
Children's Discovery Centers of America, Inc. and subsidiaries ("the Company")
provides preschool child care services at company-operated and
employer-sponsored child care centers. At December 31, 1996 the Company operated
248 centers located in 22 states and the District of Columbia with an aggegrate
licensed capacity of approximately 24,500 children (see Note 2 with respect to
the acquisition of centers). The Company provides child care and preschool
programs to children primarily between 2 1/2 and six years of age and to a
lesser extent, after school programs for older children and infant care.
Consolidation:
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, including Magic Years Child Care and Learning
Centers, Inc. ("Magic Years") and Greentree Learning Centers, Inc.
("Greentree"). All material intercompany accounts and transactions have been
eliminated. Certain reclassifications have been made to the 1995 and 1994
financial statements to conform them 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.
Property, plant and equipment:
Property, plant and equipment is stated at cost. Provision for depreciation is
made on a straight-line basis over the related estimated useful lives of the
assets or, in the case of leasehold improvements, the lesser of the term of the
related lease or the useful life of the improvement. A summary of useful lives
is as follows:
Buildings 40 years
Furniture, fixtures and equipment 3 -10 years
Transportation equipment 3 - 5 years
Leasehold improvements 3 - 20 years
Depreciation of property, plant and equipment included in the accompanying
consolidated statements of income was $2,409,000, $1,960,000, and $1,371,000,
for the years ended December 31, 1996, 1995 and 1994, respectively.
The Company expenses repair and maintenance costs as incurred. Repair and
maintenance costs included in the accompanying consolidated statements of income
amounted to $1,229,000, $960,000, and $775,000, for the years ended December 31,
1996, 1995 and 1994, respectively.
Revenue recognition:
The Company recognizes child care fees upon delivery of child care service. For
employer-sponsored centers, revenue is recognized ratably over contract terms as
child care service is provided. The Company's revenue includes $11,093,000,
$9,195,000 and $6,359,000 in 1996, 1995 and 1994, respectively, received from
various state public assistance programs.
F-6
<PAGE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Short-term investments:
The Company follows a policy of investing only in short-term marketable
securities and holding them to maturity; however, since the Company may sell
certain securities to meet cash requirements for center acquisitions, the
Company's short-term investments have been categorized as available-for-sale as
required by Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
The aggregate fair values, amortized cost, gross unrealized holding gain, and
gross unrealized holding loss of the major types of debt securities at December
31, 1996, were as follows (in thousands):
Gross Unrealized Holding
------------------------
Fair Value Amortized Cost Gain Loss
---------- -------------- ---- ----
Municipal Bonds and $6,840 $6,840 $- $-
Other
The contractual maturities of the Company's debt securities as of December 31,
1996 were all less than two years. The net change in unrealized gain (loss) was
a ($10,000) loss.
Income taxes:
The Company provides for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 requires the asset and liability
method of accounting for income taxes. Under this method, deferred income taxes
are recognized for the tax consequences of "temporary differences" by applying
the statutory tax rate to the differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities. Under
SFAS No. 109, the effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date based on the
tax rate applicable to the year of the calculation.
The net operating loss carryforwards of the Company are subject to certain rules
set forth in the Internal Revenue Code that limit the ability of the Company to
use such operating loss carryforwards to reduce future taxable income.
Intangible assets:
Intangible assets include goodwill related to the acquisition of child care
centers, covenants not to compete, management contracts and the present value of
favorable leasehold rights acquired (calculated by comparing the market rate to
the negotiated rate over the lease term) as follows (in thousands):
1996 1995
Goodwill $21,066 $ 20,364
Covenants not to compete 13,531 13,436
Other intangibles 8,211 7,244
42,808 41,044
Accumulated amortization (7,427) ( 4,718)
$35,381 $ 36,326
These assets are being amortized over the following lives: Goodwill from
acquisitions of major chains 40 years Goodwill from acquisitions of individual
units 15 years Covenants not to compete Life of agreement (3-15 years) Present
value of favorable leasehold rights
acquired Life of lease (15-20 years)
Intangibles with management contracts Life of contract (3-10 years)
Amortization of intangible assets charged to expense amounted to $2,709,000,
$1,844,000, and $984,000 for the years ended December 31, 1996, 1995, and 1994,
respectively.
F-7
<PAGE>
Net income per common and common equivalent share:
Net income per common and common equivalent share has been computed by dividing
net income available to common stockholders by the weighted average number of
common and common equivalent shares outstanding during each year. Shares
issuable upon exercise of outstanding stock options, warrants and convertible
securities are included in the computation using the treasury stock method.
Fully diluted net income per common and common equivalent share is not presented
since dilution is less than 3%.
Consolidated statements of cash flows:
Cash and cash equivalents include deposits and short-term investments (at cost,
which approximates market) with original maturities of three months or less.
The Company paid for interest and income taxes (or received refunds) for the
years ended December 31, 1996, 1995 and 1994, as follows (in thousands):
1996 1995 1994
Interest $1,693 $1,580 $1,021
Income taxes $(426) $1,654 $1,034
Supplemental Schedule of Noncash Investing and Financing Activities:
The Company purchased centers during the years ended December 31 as follows (in
thousands):
1996 1995 1994
Cash payments and/or expenses $ 874 $ 9,089 $ 6,055
Notes issued to sellers 981 6,416 9,040
Liabilities assumed 73 1,503 183
Total value of centers acquired $ 1,928 $17,008 $15,278
Accounting changes:
On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed
of." SFAS No. 121 is required to be applied prospectively for assets to be held
and used. The Company did not recognize any impairment loss as a result of
applying the provisions of SFAS No. 121.
(2) ACQUISITIONS
The Company acquired or started fourteen centers in 1996, fifty-two centers
during 1995 and a total of forty-two centers during 1994.
All acquisitions are accounted for as purchases. The cost in excess of the fair
value of the net tangible assets acquired was first assigned to certain
identifiable intangible assets including covenants not to compete, management
contracts and the present value of favorable leasehold rights acquired in the
transactions. Any portion of the purchase price remaining after these
allocations has been recorded as goodwill.
F-8
<PAGE>
(3) LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1996 and 1995 (in
thousands):
1996 1995
Long-term borrowings:
Notes payable to banks (a) $5,244 $5,441
Notes payable to sellers (b) 13,485 14,515
18,729 19,956
Less- Current portion (2,095) (2,421)
$16,634 $17,535
(a) Consists of various secured and unsecured installment and term loans at
rates ranging from 4.5% to 15.9%, payable through 2010. The Company is
currently obligated under certain loan agreements to maintain minimum
balances with lenders of $25,000 in total cash.
(b) Consists of notes payable to previous owners of child care centers
acquired by the Company with interest rates ranging from 7% to 12% and
payable in installments of varying amounts through 2007.
A summary of the maturities of long-term debt is as follows for the years ending
December 31 (in thousands):
1997 $2,095
1998 2,290
1999 2,089
2000 1,848
2001 2,996
Thereafter 7,411
$18,729
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 of .75%
above the bank's prime rate (9.00% at December 31, 1996), and will be due and
payable in full on July 1, 1997. During 1996 the Company drew down the full
amount available under the line of credit, although at December 31, 1996, no
balance was outstanding. Under the terms of the agreement the Company is
required to maintain certain financial and non-financial covenants.
(4) LEASE OBLIGATIONS
The Company leases certain facilities under operating leases. Total rental
expense for facilities under operating leases amounted to $11,318,000,
$9,342,000, and $6,539,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Future minimum payments under operating leases (not including unexercised
renewal options) are as follows for the years ending December 31 (in thousands):
1997 $10,432
1998 9,364
1999 7,695
2000 6,540
2001 5,503
Thereafter 17,714
Total future minimum
lease payments $57,248
Minimum lease payments for operating leases shown above do not include
contingent rentals which are based on the consumer price index increases and
percentages of revenues. Contingent rentals charged to expense under operating
leases amounted to approximately $219,000 in 1996, $45,000 in 1995, and $368,000
in 1994.
F-9
<PAGE>
Rent expense due under lease agreements with a duration longer than twelve
months are recognized on a straight line basis over the term of the lease,
excluding unexercised renewal options, in accordance with SFAS No. 13,
"Accounting for Leases".
(5) COMMON STOCK
During 1996, the Company issued 102,727 shares of Common Stock on the conversion
of 565 shares of its Series A Convertible Preferred Stock (see Note 6).
In January 1995, the Company issued an additional 138,477 shares of Common Stock
at $10.25 per share, associated with the December 1994 public offering for net
proceeds of $1,243,000, after deducting offering expenses of $83,000 and
underwriters discount of $93,000.
During 1995, the Company issued 100,000 shares of Common Stock on the conversion
of 550 shares of its Series A Convertible Preferred Stock (see Note 6).
In December 1994, the Company completed a public offering of 2,000,000 shares of
its Common Stock at $10.25 per share, for net proceeds of $18,307,000, after
deducting loans to officers of $359,000, offering expenses of $512,000, and
underwriter's discounts of $1,322,000.
(6) PREFERRED STOCK
The Company's stockholders, at a special meeting in November 1992, authorized
Series A Convertible Preferred Stock. These shares are convertible into the
Company's Common Stock at an initial conversion price of $5.50 per share and
have a liquidation value of $1,000 per share. If 50% of these shares are not
redeemed or converted by November 5, 1997 and the remaining 50% by November 5,
1998, then the conversion price would reset at that time to 70% of the then
current market price of the Company's Common Stock. These shareholders will be
entitled to share on a pro rata basis in any dividends payable with respect to
the Common Stock, based on the number of shares of Common Stock into which each
share of Series A Convertible Preferred Stock is then convertible.
During 1996 and 1995, holders of the Series A Convertible Preferred Stock
exchanged 1,115 shares of the Series A Convertible Preferred for 202,727 shares
of the Company's Common Stock.
(7) INCOME TAXES
At December 31, 1996, the Company has net operating loss carryforwards of
approximately $5,800,000. The tax net operating loss carryforwards are available
to offset future taxable income, if any, subject to the limitations described
below. These carryforwards expire between the years 2001 and 2006.
The Tax Reform Act of 1986 introduced a limitation on the amount of net
operating loss, capital loss and tax credit carryforwards that can be used
annually. This limitation applies following certain "changes in ownership". This
limitation was triggered in 1988 and again in 1991 pursuant to the public
offering of Common Stock by the Company . As a result, beginning in 1992 the net
operating loss and capital loss carryforwards that the Company may use to offset
future taxable income, if any, will be subject to an annual limitation of
approximately $350,000. In addition, the Company's subsidiary, Magic Years, has
for tax purposes separate net operating loss carryforwards of approximately
$1,000,000 available which expire between the years 2001 and 2006. This net
operating loss is subject to the "change in ownership" limitation discussed
above. The limitation is approximately $100,000 per year.
The Company's subsidiary, Greentree, has for tax purposes separate net operating
loss carryforwards of approximately $1,250,000 available to offset future
taxable income of Greentree, if any, and expire between the years 2004 and 2006.
This net operating loss is subject to the "change in ownership" limitation
discussed above. The annual limitation is
approximately $188,000.
F-10
<PAGE>
Given the uncertainty relating to the Company's ability to ultimately benefit
from its net operating loss carryforwards due to the annual limitations and that
they have to be used by the individual corporations, the Company has provided a
valuation allowance against a substantial portion of its net deferred tax asset.
In determining the valuation allowance, management considered the likelihood of
future levels of taxable income sufficient for the Company to utilize the net
operating loss carryforwards within the limitations noted above. The net change
in the valuation allowance for the year ended December 31, 1996 was $221,000.
Approximately $650,000 of the valuation allowance will be allocated to reduce
goodwill or acquired noncurrent assets if the net operating losses for Magic
Years and Greentree are subsequently recognized.
Deferred tax assets and liabilities as of December 31, 1996 and 1995
consisted of the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred tax assets -
Net operating loss $1,972 $2,227
carryforward
Straight-line rent 379 318
Other 687 400
3,038 2,945
Deferred tax asset (1,832) (2,053)
valuation allowance
Deferred tax liabilities
Depreciation (720) (828)
Reserves (252) -
Other (13) (64)
(985) (892)
Net deferred tax asset $221 $ -
</TABLE>
The difference between the statutory Federal income tax rate on income before
income taxes and the Company's effective income tax rate is summarized as
follows:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------
1996 1995 1994
--------------------------------------
<S> <C> <C> <C>
Statutory Federal income tax 34.0% 34.0% 34.0%
rate
State income taxes, net of 4.6 3.1 4.3
Federal benefit
Change in valuation allowance (19.6) (2.9) (12.9)
Alternative Minimum Tax 14.7 - -
Tax exempt interest (7.8) (2.5) -
Other, net (5.9) (0.3) (0.4)
--------------------------------------
Effective income tax rate 20.0% 31.4% 25.0%
--------------------------------------
</TABLE>
Income tax expense consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994
<S> <C> <C> <C>
Federal:
Current $223 $1,386 $646
Deferred (124) - 36
State:
Current 26 (178) 222
Deferred - - 17
$225 $1,208 $921
F-11
</TABLE>
<PAGE>
(8) COMMITMENTS AND CONTINGENCIES
The Company maintains comprehensive general liability insurance, that provides
coverage for both bodily injury and property damage claims up to a total of $15
million. The primary general liability policy has a limit of $1 million per
occurrence and the Company maintains an excess umbrella liability policy that
provides coverage for an additional $14 million for a total liability insurance
of $15 million. The Company believes such insurance coverage is adequate. The
Company has procured limited coverage for child physical and sexual abuse
claims, subject to a $1,000,000 annual aggregate limitation. To date, the
Company has not incurred any liability with respect to any claims of abuse.
The Company has not experienced difficulty in obtaining insurance coverage, but
there can be no assurance that adequate, affordable insurance coverage will be
available in the future, or that the Company's current coverage will protect it
against all possible claims.
In the ordinary course of business, the Company is subject to various legal
matters including certain compensation related matters. In the opinion of
management, after discussion with counsel, the ultimate outcome of these legal
matters will not materially impact the Company's financial position.
(9) STOCK OPTIONS AND WARRANTS
Employee Stock Option Plan
The Company has a stock option plan pursuant to which options for the purchase
of up to 800,000 shares of its Common Stock may be granted to officers and
employees. The exercise price is required to be at least the fair market value
of the common stock on the date of grant, as determined by the Board of
Directors. The plan will terminate on November 8, 1999. As of December 31, 1996
options for 617,214 shares have been granted and remain outstanding under this
plan.
Non-Employee Director Stock Option Plan
During 1993, the Board of Directors adopted and the stockholders approved a
Non-Employee Director Stock Option Plan, pursuant to which non-qualified options
for a maximum of 180,000 shares may be granted to the Company's non-employee
directors under the plan. The plan will terminate on October 14, 2003. As of
December 31, 1996, options for 122,500 shares have been granted and remain
outstanding under this plan.
Options not issued under plans
The Company has also issued options outside of either of the above two plans in
1994 and earlier. The exercise price were non-qualified and issued at least at
the fair market value of the common stock on the date of the grant, as
determined by the Board of Directors. Options for 69,126 shares have been
granted and remain outstanding at December 31, 1996.
The Company accounts for the Plans under APB Opinion No. 25, and accordingly no
compensation cost has been recognized, as under the option Plans, the option
exercise price equals the market value of the Company's stock on the date of
grant. SFAS No. 123 "Accounting for Stock-Based Compensation" is effective for
fiscal years beginning after December 15, 1995 (i.e. calendar 1996). If fully
adopted, SFAS No. 123 changes the methods of recognition of compensation cost on
the Company's stock option plans. Adoption of SFAS No. 123 is optional; however,
proforma disclosures as if the Company adopted the cost recognition requirements
under SFAS No. 123 beginning in 1995 are presented below. The Plans options vest
over four years, and all options expire after ten years.
F-12
<PAGE>
Had compensation cost for the Plans and other options issued been determined
consistent with SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company's net income (and earnings per share) would have been reduced to the
following pro forma amounts:
1996 1995
Net income: As Reported $ 901 $2,636
Pro Forma $ 176 $2,603
Primary EPS: As Reported $0.13 $0.38
Pro Forma $0.03 $0.38
The decrease in pro forma net income in 1996 reflects additional compensation
cost associated with the repricing of options during 1996 to reduce the exercise
price of the options to the current fair market value of the common stock of the
Company. Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
A summary of the status of the Company stock option plan at December 31, 1996
and 1995 and changes during the years then ended is presented in the table and
narrative below:
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ---------------- --------------
Weighted Weighted Weighted
Average Average Average
Shares Ex Shares Ex Shares Ex
Price Price Price
------- ------- ------ -------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at 648,338 $8.06 646,838 $ 7.81 486,338 $ 7.00
beg. of year
Granted 592,502 $5.20 17,500 $16.38 160,500 $10.28
Exercised 0 $0.00 6,950 $ 6.99 0 $ 0.00
Canceled 432,000 $9.16 9,050 $ 8.25 0 $ 0.00
Outstanding at 808,840 $5.37 648,338 $ 8.06 646,838 $ 7.81
end of year
------- ------- ------- -------- ------- -------
Exercisable at 647,875 506,233 380,505
end of year
Weighted $1.82 $ 6.73 N/A
average fair
value of
options granted
-------------------------------------------------
</TABLE>
F-13
<PAGE>
<TABLE>
OUTSTANDING AND EXERCISABLE BY PRICE RANGE
As of December 31, 1996
<CAPTION>
Weighted Weighted
Average Average Weighted
Range of Number Remaining Exercise Number Average
Exercise Outstanding Contractual Price Exercisable Exercise
Price Life Price
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3.63 - $5.25 573,840 7.76 $5.12 414,273 $5.19
$5.50 - $6.00 235,000 3.97 $6.00 233,602 $6.00
$3.63 - $6.00 808,840 6.66 $5.37 647,875 $5.48
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: weighted average
risk-free interest rates of 5.0% to 6.7%; expected dividend yield of 0%;
expected lives of two years from vest date; expected volatility of 50%.
Warrants
In 1992, in conjunction with a public offering, the Company issued a warrant to
purchase 60,000 shares of its common stock to the underwriter. In 1995, the
Company issued 27,200 shares of common stock in exchange for the cancellation of
the warrant.
F-14
<PAGE>
EXHIBIT INDEX
Item No. Item Title Sequentially Numbered Page
10(I) Non-Employee Directors' Stock Option Plan 1
(Amended and Restated as of August 27, 1996)
23 Consent of Arthur Andersen LLP 6
Dated: March 27, 1997
<PAGE>
EXHIBIT 10(I)
Non-Employee Directors' Stock Option Plan
(Amended and Restated as of August 27, 1996)
5
<PAGE>
Children's Discovery Centers of America, Inc.
Non-Employee Directors' Stock Option Plan
(Amended and Restated effective as of August 27, 1996)
1. Establishment. There is hereby established the Children's Discovery
Centers of America, Inc. Non-Employee Directors' Stock Option Plan (hereinafter
referred to as the "Directors' Plan" or the "Plan") pursuant to which certain
directors of CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. (the "Company") may
be granted options to purchase shares of Common Stock, par value $.01 per share
("Common Stock"), and thereby share in the future growth of the business. The
purpose of the Directors' Plan is to provide an inducement to obtain and retain
the services of qualified persons who are not employees or officers of the
Company to serve as members of its Board of Directors.
2. Status of Options. The options to be issued pursuant to this Directors'
Plan ("Options") shall not constitute incentive stock options within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended.
3. Eligibility. All directors of the Company who are not employees
of the Company or any of its subsidiaries (collectively, the "Participants")
shall be eligible to receive Options under this Directors' Plan.
4. Number of Shares Covered by Options; No Preemptive Rights. The total
number of shares which may be issued and sold pursuant to Options granted under
this Directors' Plan shall be 180,000 shares of Common Stock (or the number and
kind of shares of stock or other securities which, in accordance with Section 7
of the Directors' Plan, shall be substituted for such shares of Common Stock or
to which said shares shall be adjusted; all references to shares of Common Stock
are deemed to be references to said shares or shares so adjusted). The issuance
of shares upon exercise of an Option shall be free from any preemptive or
preferential right of subscription or purchase on the part of any stockholder.
If any outstanding Option granted under this Directors' Plan is terminated, for
any reason, the shares of Common Stock subject to the unexercised portion of the
Option will again be available for Options issued under this Directors' Plan.
5. Administration.
(a) This Directors' Plan shall be administered by the Compensation
Committee ("Committee") of the Board of Directors as that Committee shall be
constituted from time to time. A majority of the Committee shall constitute a
quorum. All determinations of the Committee shall be made by a majority of such
quorum or by a written consent signed by all members of the Committee.
(b) Subject to the express provisions of this Plan, including but not
limited to Section 6 hereof, the Committee or the Board shall have complete
authority, in its discretion, to interpret this Plan, to prescribe, amend and
rescind rules and regulations relating to it, to determine the Participants to
whom Options shall be granted, the number of shares of Common Stock to be
subject to each Option, the times at which Options shall be granted, the term of
each Option, and to make all other determinations necessary or advisable for the
administration of the Plan which determinations shall be final and binding upon
all persons having an interest in the Directors' Plan.
(c) The granting of an Option pursuant to this Directors' Plan shall
not confer upon the Participant any right to be continued as a director of the
Company or any of its subsidiaries. In addition, the granting of an Option
pursuant to this Directors' Plan shall not confer upon the Participant any
rights as a stockholder of the Company with respect to any shares issuable upon
exercise of an Option unless and until a certificate for such shares has been
issued and delivered to such Participant.
6. Terms and Conditions of Options; Stock Option Agreements. Each Option
granted pursuant to this Directors' Plan shall be evidenced by a written
agreement between the Participant and the Company which shall be subject to the
following terms and conditions:
(a) The exercise price of each Option shall be one hundred percent
(100%) of the Fair Market Value (as hereinafter defined) of the shares subject
to such Option on the date of grant. For purposes of this Section, the "Fair
Market Value" of a share of Common Stock shall be the closing sale price per
share of the Company's Common Stock as reported on the NASDAQ National Market
System ("NASDAQ/NMS") on the date of grant or, if the Common Stock is not traded
on NASDAQ/NMS on the date of grant, on the first business day immediately
preceding the date of grant during which the Common Stock was traded (the
"Determination Date"). If the Common Stock is not listed for quotation on
NASDAQ/NMS at the time of grant of any Option, then the Fair Market Value shall
be (i) if the Common Stock is then listed on any national securities exchange,
the closing sale price per share as reported by such exchange on the
Determination Date; (ii) if the Common Stock is listed for quotation on the
NASDAQ Small-Cap Market, the mean between the high bid and low asked prices per
share of the Common Stock as reported by the NASDAQ Small-Cap Market on the
Determination Date; or (iii) if the Common Stock is not listed on the NASDAQ
Small-Cap Market the mean between the closing bid and asked prices per share of
the Common Stock on the Determination Date as furnished by a broker-dealer which
regularly furnishes price quotations for the Common Stock. Notwithstanding the
foregoing, in the event the Initial Grant Date is the date on which the Public
Offering commences, "Fair Market Value" of the Common Stock on that date shall
be deemed to be the price per share of the Common Stock sold to the public in
the Public Offering.
(b) The exercise price of the shares to be purchased pursuant to an
Option shall be paid (i) in full either in cash or by check, (ii) by delivery
(i.e., surrender) of shares of Common Stock of the Company with a Fair Market
Value (as defined above) at the time of the exercise of the Option equal to the
exercise price, or (iii) by a combination of (i) and (ii). In addition, to the
extent permitted by applicable law, the exercise price may be paid by one or
more brokerage firms pursuant to arrangements whereby such firm or firms, on
behalf of a Participant, shall pay to the Company the exercise price of the
Option being exercised, and the Company, pursuant to an irrevocable notice from
the Participant, shall deliver shares being purchased to such firm.
(c) Options granted shall not be exercisable until they become
vested. All Options shall vest in a Participant as the Committee shall determine
provided, however, that the vesting of any portion of an Option on any
particular date is conditioned on the Participant having continuously served as
a member of the Board of Directors through such date. The number of shares as to
which an Option may be exercised shall be cumulative, so that once the Option
shall become exercisable as to any shares, it shall continue to be exercisable
as to said shares until expiration or termination of the Option as provided in
this Directors' Plan.
(d) Unless sooner terminated in accordance with the provisions of
paragraph (e) of this Section 6, an Option granted hereunder shall expire on the
date which is ten (10) years after the date of grant of the Option.
(e) In the event a Participant ceases to be a member of the Board of
Directors for any reason other than cause, any then unexercised portion of
Options granted to such Participant, to the extent not vested on the date the
Participant ceases to be a director (the "Termination Date"), will immediately
terminate and become void; any portion of an Option which is vested on the
Termination Date but has not yet been exercised may be exercised, to the extent
it is vested on the Termination Date, within one year after the Termination
Date. In the event of the Participant's death, the Option may be exercised, if
and to the extent that such deceased Optionee was entitled to exercise the
Option at the time of death, by the person or persons to whom the deceased
Participant's rights pass by will or by the laws of descent and distribution of
the state of his or her domicile at the time of his or her death. In the event
that a Participant ceases to serve as a director for cause, all Options
theretofore granted to such Participant under this Directors' Plan shall, to the
extent not theretofore exercised, terminate on the Termination Date, whether or
not any portion or all of such Option is vested.
(f) Each Option granted under this Directors' Plan may be transferred
by the Participant by will or by the laws of descent and distribution, or
pursuant to a qualified domestic relations order or upon such other terms and
conditions as the Committee may determine in any instance.
(g) Unless a registration statement with respect to the shares to be
purchased upon exercise of the Option is in effect under the Securities Act of
1933, as amended (the "Securities Act"), or any applicable state securities
laws, a Participant's right to purchase the shares issuable upon exercise
thereof shall be subject to the condition that the Company shall have received
such assurance as it may reasonably request that such purchase will be in
accordance with an applicable exemption from the registration requirements of
each such law. The Company shall not be obligated to issue or deliver any shares
upon exercise of the Option if to do so would violate the Securities Act or any
state securities law and the Company shall have no obligation to file any
registration statement or to take any other action required or permitted by any
such law. The Company shall give the Participant and his counsel access to such
information as may reasonably be requested to enable such counsel to express an
opinion as to the availability of an exemption from such registration
requirements.
7. Adjustment of Number of Shares. If a dividend or other distribution
shall be declared upon the Common Stock payable in shares of Common Stock, the
number of shares of Common Stock then subject to any Option granted hereunder,
and the number of shares reserved for issuance pursuant to this Directors' Plan
but not yet covered by an Option, shall be adjusted by adding to each of such
shares the number of shares which would be distributable thereon if such shares
had not been outstanding on the date fixed for determining the shareholders
entitled to receive such stock dividend or distribution. If the outstanding
shares of Common Stock shall be changed into or exchanged for a different number
or kind of shares of stock or other securities of the Company or of another
corporation, whether through reorganization, reclassification, recapitalization,
stock split-up, combination of shares, merger or consolidation, then there shall
be substituted for each share of Common Stock then subject to any such Option
and for each share of Common Stock reserved for issuance pursuant to this
Directors' Plan but not yet covered by an Option, the number and kind of shares
of stock or other securities into which each outstanding share of Common Stock
shall be so changed or for which each such share shall be exchangeable;
provided, however, that in the event that such change or exchange results from a
merger or consolidation, and in the judgment of the Board such substitution
cannot be effected or would be inappropriate, or if the Company shall sell all
or substantially all of its assets, the Company shall use reasonable efforts to
effect some other adjustment of each then outstanding Option which the Board, in
its sole discretion, shall deem equitable. In the event that there shall be any
change, other than as specified above in this Section 7, in the number or kind
of outstanding shares of Common Stock or of any stock or other securities into
which such shares of Common Stock shall have been changed or for which they
shall have been exchanged, then, if the Board shall determine that such change
equitably requires an adjustment in the number or kind of shares theretofore
reserved for issuance pursuant to the Directors' Plan but not yet covered by an
Option and of the shares then subject to an Option or Options, such adjustment
shall be made by the Board and shall be effective and binding for all purposes
of this Directors' Plan and of each stock option agreement applicable to Options
granted hereunder. In the case of any substitution or adjustment as provided for
in this Section 7, the aggregate option price in each stock option agreement for
all shares covered thereby prior to such substitution or adjustment will be the
aggregate option price for all shares of stock or other securities (including
any fraction) which shall have been substituted therefor pursuant to this
Section 7. No adjustment or substitution provided for in this Section 7 shall
require the Company, in any stock option agreement, to sell a fractional share.
Accordingly, any fraction of a share or other security which results from any
adjustment or substitution shall be eliminated and not carried forward to any
subsequent adjustment or substitution.
8. Effective Date and Term of Directors' Plan. This Directors' Plan shall
become effective on October 14, 1993, the date of its adoption by the Board of
Directors of the Company. Except to the extent necessary to govern outstanding
Options issued, this Directors' Plan shall terminate on, and no additional
Options shall be granted after October 14, 2003, unless earlier terminated by
the Board of Directors in accordance with Section 9 hereof.
9. Termination and Amendment of Plan. This Directors' Plan may be
terminated or amended from time to time by the vote of the Board of Directors;
provided, however, that no such termination or amendment shall materially
adversely affect or impair any then outstanding Option without the consent of
the Participant. In addition to approval by the Board of Directors of any
amendment to this Directors' Plan, if the Board further determines on advice of
counsel that it is necessary or desirable to obtain stockholder approval of any
amendment to this Directors' Plan in order to comply with Rule 16b-3 of the
Exchange Act, or any successor rule, as it shall read as of the time of the
amendment, or for any other reason, then the effectiveness of any such amendment
may be conditioned upon its approval by stockholders of the Company in
accordance with the applicable laws of the state of incorporation of the
Company, or such other stockholder approval as may be specified by the Board.
10. Compliance with Rule 16b-3. It is the intention of the Company that
this Directors' Plan comply in all respect with Rule 16b-3 promulgated under
Section 16(b) of the Exchange Act. Therefore, if any provision of this
Directors' Plan is later found not to be in compliance with Rule 16b-3, that
provision shall be deemed null and void, and in events of this Directors' Plan
shall be construed in favor of its meeting the requirements of Rule 16b-3.
<PAGE>
EXHIBIT 23
Consent of Independent Public Accountants
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K, into the Company's previously filed
Registration Statements File Nos. 33-76954 and 33-59351.
s/s Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Oakland, California
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
1996 10-K
</LEGEND>
<CIK> 0000775820
<NAME> Children's Discovery Centers of America, Inc.
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<FISCAL-YEAR-END> Dec-31-1996
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