SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File No. 0-14368
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 061097006
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
851 Irwin Street, Suite 200, San Rafael, California 94901
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415)
257-4200
851 Irwin Street, Suite 200, San Rafael, California 94901 (Registrant's
former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES (X) NO ( )
As of August 7, 1997, the Registrant had outstanding 6,306,958 shares of Common
Stock, $.01 par value, and 2,135 shares of Special Stock, denominated Series A
Convertible Preferred Stock, $.01 par value, convertible into 388,182 shares of
Common Stock.
<PAGE>
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
INDEX
Page
PART I. FINANCIAL INFORMATION 3
ITEM 1. Condensed Consolidated Financial Statements
(Unaudited)
a) Condensed Consolidated Balance Sheets -- 4
June 30, 1997 and December 31, 1996
b) Condensed Consolidated Statements of 6
Income -- Three-month and six-month periods
ended June 30, 1997 and 1996
c) Condensed Consolidated Statements of 7
Cash Flows -- Six-months ended
June 30, 1997 and 1996
d) Notes to Condensed Consolidated Financial 9
Statements
ITEM 2. Management's Discussion and Analysis 11
of Financial Condition and Results
of Operations
ITEM 3. Quantitative and Qualitative Disclosures 13
about Market Risk
PART II. OTHER INFORMATION 13
Signatures 14
<PAGE>
PART I - FINANCIAL INFORMATION
The condensed consolidated financial statements included herein have been
prepared by Children's Discovery Centers of America, Inc. (the "Company")
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. While certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, the Company believes that the disclosures made herein are adequate
to make the information presented not misleading. It is recommended that these
condensed financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1996.
In the opinion of the Company, all adjustments consisting only of normal
recurring adjustments, necessary to present fairly the financial position of the
Company as of June 30, 1997, and the results of its operations for the three and
six month periods ended June 30, 1997 and 1996, have been included.
<PAGE>
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
- --------------------------------------------------------------------------------
(UNAUDITED)
June 30, December 31,
1997 1996
In thousands
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $4,974 $4,826
Short-term investments 9,752 6,914
Accounts receivable 1,563 2,584
Prepaid expenses and other current assets 897 1,624
Total Current Assets 17,186 15,948
PROPERTY, PLANT AND EQUIPMENT:
Land 1,320 1,320
Buildings 6,193 6,179
Furniture, fixtures & equipment 10,445 11,015
Transportation equipment 2,263 2,233
Leasehold improvements 9,059 8,832
Construction in progress 1,143 750
------ ------
30,423 30,329
Less: Accumulated depreciation and (8,530) (8,798)
amortization ------- -------
21,893 21,531
INTANGIBLE ASSETS 34,808 35,381
OTHER 2,528 1,752
TOTAL ASSETS $76,415 $74,612
======= =======
<FN>
See accompanying notes which are an integral part of
these statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
- --------------------------------------------------------------------------------
(UNAUDITED)
June 30, December 31,
1997 1996
In thousands (except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
<S> <C> <C>
Current portion of long-term debt $2,211 $2,095
Accounts payable 561 501
Payroll and related accruals 3,273 3,005
Other accrued liabilities 1,657 1,092
------ ------
Total Current Liabilities 7,702 6,693
------ ------
LONG-TERM DEBT:
Net of current portion 15,918 16,634
ACCRUED STRAIGHT LINE RENT 1,067 998
------ ------
TOTAL LIABILITIES 24,687 24,325
====== ======
STOCKHOLDERS' EQUITY:
Special Stock: Authorized 5,000,000
shares; outstanding:
Series A Convertible Preferred, par
value $.01 per share, liquidation value
$2,135 in 1997 and 1996;
2,135 shares outstanding in 1997 and 1996. -0- -0-
Common Stock, par value $.01 per share
Authorized 20,000,000 shares;
issued and outstanding 6,306,958 133 133
in 1997 and 1996.
Treasury Stock (7,200,844 shares in -0- -0-
1997 and 1996)
Paid-in capital in excess of par 52,722 52,722
Loans to stockholder officers (710) (710)
Unrealized gain (loss) on short-term ( 1) 0
investments
Accumulated deficit (416 ) (1,858)
Total Stockholders' Equity 51,728 50,287
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $76,415 $74,612
<FN>
See accompanying notes which are an integral part of
these statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE-MONTHS AND SIX-MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
In thousands (except per
share data)
<S> <C> <C> <C> <C>
REVENUE FROM OPERATIONS: $24,193 $22,734 $46,836 $43,912
OPERATING EXPENSES:
Payroll & related costs 12,686 12,249 24,663 23,591
Direct costs 6,238 6,110 12,184 11,810
General & administrative 1,955 1,805 3,979 3,568
Depreciation 780 600 1,495 1,137
Amortization 704 643 1,415 1,331
Advertising & promotion 257 264 472 491
------ ------ ------ ------
Total operating expenses 22,620 21,671 44,208 41,928
------ ------ ------ ------
Operating profit 1,573 1,063 2,628 1,984
OTHER EXPENSE, net 243 362 538 697
------ ------ ------ ------
Income before provision for
income taxes 1,330 701 2,090 1,287
PROVISION FOR INCOME TAXES 413 117 648 237
------ ------ ------ ------
NET INCOME $917 $ 584 $1,442 $1,050
====== ====== ====== ======
NET INCOME PER SHARE: $0.14 $0.09 $ 0.21 $0.16
====== ====== ====== ======
AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES: 6,766 6,744 6,769 6,717
<FN>
See accompanying notes which are an integral part of
these statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX-MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
Six-months Ended
June 30
1997 1996
In thousands
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,442 $1,050
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 1,495 1,137
Amortization 1,415 1,331
Changes in assets and liabilities:
Accounts receivable 1,021 (670)
Prepaid expenses and other current assets 727 (268)
Accounts payable 60 20
Payroll and related accruals 268 337
Accrued liabilities and other 385 296
----- -----
Net cash provided by operating activities 6,813 3,233
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (2,838) -
Proceeds from sale of short-term investments - 347
Payments for acquisitions of child care centers (637) (700)
Payments for the start-up of centers (393) (103)
Purchases of property, plant and equipment (1,374) (1,089)
Other (343) ( 317)
----- -----
Net cash used in investing activities (5,585) (1,862)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 280 89
Repayments of long-term debt (1,360) (1,440)
----- -----
Net cash used for financing activities (1,080) (1,351)
Net increase in cash and cash equivalents 148 20
CASH AND CASH EQUIVALENTS:
Beginning of period 4,826 3,023
----- -----
End of period $4,974 $3,043
====== ======
<FN>
See accompanying notes which are an integral part of
these statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED):
continued
Supplemental Disclosures of Cash Flow Information:
Cash paid during the six-months
ended June 30 (in thousands) for: 1997 1996
<S> <C> <C>
Interest $792 $843
Income taxes 468 104
</TABLE>
<TABLE>
<CAPTION>
Supplemental Schedule of Noncash Investing and Financing Activities:
The Company acquired 4 additional centers during the six-months ended June 30,
1997 and 4 additional centers during the six-months ended June 30, 1996 (in
thousands)
1997 1996
<S> <C> <C>
Cash payments $637 $803
Notes issued to sellers 480 981
Indebtedness and liabilities assumed - 73
------ ------
Total value of centers acquired $1,117 $1,857
<FN>
See accompanying notes which are an integral part of
these statements.
</FN>
</TABLE>
<PAGE>
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
(1) General
The accounting policies followed during the interim periods presented are in
conformity with generally accepted accounting principles and are consistent with
those applied for annual periods. Operational comparisons between the six month
periods of 1997 and 1996 are affected by the net addition of a total of 9
centers in 1996 and 1 centers for the first six-months of 1997 (see
"Management's Discussions and Analysis of Financial Condition and Results of
Operations" below). For a complete discussion of the Company's accounting
policies, refer to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, previously filed.
Consolidation
The consolidated financial statements include the accounts of Children's
Discovery Centers of America, Inc. and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated. Certain
reclassifications have been made to the 1996 financial statements to conform to
the 1997 presentation. The preparation of these consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
Recently Issued Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 129 (SFAS No. 129), "Disclosure of Information about
Capital Structure", which is effective for fiscal years ending after December
15, 1997. The Company will adapt SFAS No. 129 for its year ending December 31,
1997.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 130 (SFAS No. 130), "Reporting Comprehensive Income",
and No. 131 (SFAS No. 131), "Disclosures about Segments of an Enterprise and
Related Information", which are effective for fiscal years beginning after
December 15, 1997. The Company will adopt SFAS No. 130 and SFAS No. 131 for
its year beginning January 1, 1998.
These statements are not anticipated to have a material effect on the Company's
financial position or results of operations.
Income Taxes
The Company records income taxes in accordance with the provisions of Statement
of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
<PAGE>
Earnings per Share
At the end of 1997, the Company will report its Earnings per Share (EPS) based
upon Statement of Financial Accounting Standards No. 128 (SFAS No. 128),
"Earnings per Share". The pro forma effect of this accounting change on the
quarter ended June 30 is:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
<S> <C> <C> <C> <C>
1997 1996 1997 1996
Primary EPS as reported $.14 $.09 $.21 $.16
Pro forma effect of SFAS No. 128 $.01 $.00 $.02 $.01
---- ---- ---- ----
Basic EPS pro forma $.15 $.09 $.23 $.17
==== ==== ==== ====
Fully diluted EPS $.13 $.09 $.21 $.15
Pro forma effect of SFAS No. 128 $.01 $.00 $.00 $.01
---- ---- ---- ----
Diluted EPS pro forma $.14 $.09 $.21 $.16
==== ==== ==== ====
</TABLE>
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Since January 1, 1996, the Company acquired or opened eighteen centers and
closed eight centers. The results of acquired or disposed of centers are
included in the Company's financial statements from the date of acquisition or
until the date of disposition. Accordingly, the period to period results may
fluctuate depending upon the timing of the Company's acquisition or disposition
of centers.
Historically, the Company's operating revenue has followed the seasonality of a
school year, declining during the summer months and the year-end holiday period.
Results of Operations
Revenues from Operations increased 6.4% to $24,193,000 in the second quarter and
6.7% to $46,836,000 for the six months of 1997, as compared to $22,734,000 and
$43,912,000 in the corresponding periods of 1996. The increase in revenues was
attributable to the increase in the number of centers and to an increase in
revenues in the Company's existing centers. Revenues for those centers open in
both years increased from 1996 by approximately 5.7% for the quarter and 5.1%
for the six month period. Increased tuition rates are responsible for 3.5% of
the revenue increase and increases in enrollments are responsible for the
remaining 2.2% revenue increase in the second quarter and 1.6% for the six month
period.
Payroll and related costs increased by $437,000 or 3.6% for the second quarter
and by $1,072,000 or 4.5% for the six months of 1997, as compared to the
corresponding time periods of 1996 due to the increase in the number of centers
operated and to the increased pay rates at its existing centers. Payroll and
related costs as a percentage of revenues, however, decreased to 52.4% in the
second quarter and to 52.7% for the six month period of 1997 from 53.9% and
53.7% in the corresponding periods of 1996. The decrease in payroll and related
expenses as a percentage of revenue was due to an increase in supervisory
controls and procedures instituted during 1996 and to the Company having raised
its tuition rates at a higher rate than its payroll rates.
Direct costs increased by $128,000 or 2.1%, for the second quarter of 1997 and
by 3.2% or $374,000 for the six month period of 1997, as compared to the
corresponding time periods of 1996, due mainly to the increase in the number of
centers operated. As a percentage of revenue, however, direct costs decreased to
25.8% in the second quarter and to 26.0% for the six month period of 1997 from
26.9% in both time periods of 1996. The decrease as a percentage of revenue was
due mainly to lower maintenance and repairs cost and lower utility cost. These
costs were lower due to higher average unit volume, a milder winter in 1997 than
in 1996, and to better controls.
Depreciation and amortization expense increased to $1,484,000 in the second
quarter and to $2,910,000 for the six month period of 1997 as compared to
$1,243,000 and $2,468,000 for the corresponding periods of 1996. This increase
was due mainly to the increase in new centers acquired during 1996 and to the
improvements made by the Company in its existing centers.
Advertising and promotion expense as a percentage of revenues has remained
constant at approximately 1% for all periods.
<PAGE>
General and administrative expense as a percentage of total revenues increased
to 8.1% for the second quarter and to 8.5% for the six month period of 1997 from
7.9% and 8.1% in the corresponding periods of 1996. The increase as a percentage
of revenue is due to the addition of supervisory and financial personnel to
enhance management and financial controls and to prepare for future growth in
the number of new centers.
Other expense, net decreased by $119,000 for the second quarter and by $159,000
for the six month period of 1997 as compared to the corresponding time periods
of 1996. The decrease was due to higher interest income of $97,000 for the
second quarter and $109,000 for the six months of 1997 due to higher cash and
short term investment balances, and to lower interest expense of $22,000 for the
second quarter and $50,000 for the six months of 1997 due to lower debt
balances.
The effective tax rate increased from 17% for the three month period and 18% for
the six month period ended June 30, 1996 to 31% for the three month and six
month period ended June 30, 1997. The lesser impact of the Company's net
operating loss carryforwards, tax exempt income and tax credits on the Company's
higher pretax income resulted in the increase in the Company's effective tax
rate.
Liquidity and Capital Resources
Since its inception, the Company has grown primarily through the acquisition of
existing child care centers. For acquisitions of individual centers or small
chains, it is the Company's general practice to acquire centers for a
combination of cash and notes to sellers. These notes are payable generally over
ten years. As of June 30, 1997, $13,075,000 in principal of such notes was
outstanding. Since many sellers of centers own the facilities in which the
centers are operated, the Company is often able to lease these facilities on a
long-term basis through the exercise of successive options, while avoiding
long-term obligations.
Capital resources for the cash portion of acquisitions have generally been
obtained through internally generated cash, private sales of the Company's
securities at various times since inception and public offerings of Common
Stock.
During the first six-months of 1997, net cash provided by operations was
$6,813,000. This internally generated cash funded all of the Company's cash
needs for purchases of property, plant and equipment, scheduled debt repayments,
and the Company's investment in new centers. During the six-month period ended
June 30, 1997, the Company also issued or assumed a total of approximately
$480,000 of indebtedness related to acquisitions.
The Company's management believes that the Company's internally generated cash
will cover its cash requirements for the foreseeable future and, along with its
existing cash balances, will allow it to continue to grow through the
acquisition of additional child care centers and the development of additional
employer sponsored centers. The Company also has available to it up to
$1,250,000 under an unsecured line of credit furnished by a commercial bank.
Amounts drawn down bear interest at the rate of .75% above the Bank's prime
rate, and will be due and payable in full on July 1, 1998. The Company currently
has no commitments for capital expenditures, which might be deemed, either
individually or in the aggregate, material to its business.
<PAGE>
PART I
ITEM 3. Quantitative and Qualitative Disclosures about Market
Risk
None.
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) An annual meeting of the Stockholders of the Company was held on
June 25, 1997.
(b) The following individuals were elected as Directors with the
indicated votes:
<TABLE>
<CAPTION>
Votes For Votes Against
--------- -------------
<S> <C> <C>
Mark P. Clein 4,818,121 48,222
Michael J. Connelly 4,818,221 48,122
Robert E. Kaufmann 4,818,221 48,122
W. Wallace McDowell, Jr. 4,349,121 517,222
Richard A. Niglio 4,817,715 48,628
Myron A. Wick 4,818,221 48,122
Dr. Elanna S. Yalow 4,818,215 48,128
</TABLE>
(c) The matters considered at the June 25, 1997 Annual Meeting of
Stockholders other than the election of directors, were as stated
below:
(i) The ratification of the appointment of Arthur Andersen LLP as
the Company's independent auditors for the 1997 fiscal year, was
approved by an affirmative vote of 4,852,020 to 5,207 negative
votes with 9,116 abstentions.
ITEM 5. Exhibits and Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC.
By: /s/ Richard A. Niglio
Richard A. Niglio
Chief Executive Officer
By: /s/ Randall J. Truelove
Randall J. Truelove
Vice President, Finance
Chief Accounting Officer
Date: August 7, 1997
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC.
By:
Richard A. Niglio
Chief Executive Officer
By:
Randall J. Truelove
Vice President, Finance
Chief Accounting Officer
Date: August 7, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Children's Discovery Centers of America, Inc. 2nd Quarter 10-Q
</LEGEND>
<CIK> 0000775820
<NAME> Children's Discovery Centers of America, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Apr-01-1997
<PERIOD-END> Jun-30-1997
<CASH> 4,974
<SECURITIES> 9,752
<RECEIVABLES> 1,563
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 17,186
<PP&E> 30,423
<DEPRECIATION> (8,530)
<TOTAL-ASSETS> 76,415
<CURRENT-LIABILITIES> 24,687
<BONDS> 0
0
0
<COMMON> 133
<OTHER-SE> 52,722
<TOTAL-LIABILITY-AND-EQUITY> 76,415
<SALES> 24,193
<TOTAL-REVENUES> 24,193
<CGS> 22,620
<TOTAL-COSTS> 22,620
<OTHER-EXPENSES> 243
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,330
<INCOME-TAX> 413
<INCOME-CONTINUING> 917
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 917
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
