<PAGE>
WASHINGTON, D.C. 20549
-------------------------------
FORM 10-K/A
AMENDMENT NO. 1 TO FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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 12(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 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
--- ---
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. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
registrant on March 20, 1998 was approximately $61,273,778. On such date, the
last sale price of registrant's common stock was $10.625 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 20, 1998 the Registrant had outstanding 6,744,499 shares of Common
Stock, $.01 par value.
<PAGE>
INDEX
The following Items have been amended and restated in their entirety:
Item No. Item Title
-------- ----------
1. Item 10 Directors and Executive Officers of the Registrant
2. Item 11 Executive Compensation
3. Item 12 Security Ownership of Certain Beneficial Owners and Management
4. Item 13 Certain Relationships and Related Transactions
All other Items have been restated without amendment.
2
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PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS.
RECENT EVENTS
On March 27, 1998, the Company entered into an Agreement and Plan of Merger (the
"Agreement") with Knowledge Beginnings, Inc., a privately-owned education
services company ("Parent") and its wholly-owned subsidiary, KBI Acquisition,
Corp. ("Purchaser"). Under the Agreement, Purchaser will undertake a tender
offer (supported by the Board of Directors) for all outstanding shares of CDC
common stock at a net price of $12.25 per share in cash and, following
consummation of the tender offer, will effect a merger with the Company (the
"Merger"). Pursuant to the Merger, all outstanding shares of CDC common stock
not acquired in the tender offer will be converted into the right to receive
$12.25 per share in cash, and the Company will become a wholly-owned subsidiary
of Parent. Holders of 1,363,700 shares of CDC common stock have simultaneously
entered into a support agreement pursuant to which they have agreed to tender
their shares and under certain circumstances sell their shares to Parent for
$12.25 per share in cash. The Company has also granted Parent an option to
purchase 1,342,155 previously unissued shares of CDC common stock (equal to
19.9% of the outstanding shares of the Company) under certain circumstances for
$10.125 per share. The tender offer will be initiated upon certain filings by
Purchaser and the Company. The completion of the tender offer is subject to
certain conditions, including Purchaser's receipt of at least a majority of the
outstanding shares calculated on a full-diluted basis and receipt of certain
regulatory approvals. Consummation of the Merger is also subject to certain
conditions including stockholder approval, if legally required.
Dr. Elanna S. Yalow, President and Chief Operating Officer, has entered into an
employment agreement with Parent to become effective on a date selected by
Parent (the "Effective Date") between the consummation of the tender offer and
consummation of the Merger. Richard A. Niglio, Chief Executive Officer and
Chairman of the Board, has entered into a two year consulting agreement with the
Company to become effective on the Effective Date, at which time will resign as
Chief Executive Officer and Chairman of the Board. Employment contracts between
the Company and Randall J. Truelove, Vice President of Finance, Jane Delaney,
Vice President, and Frank A. Devine, Secretary, will become effective on the
Effective Date.
Also, subject to consummation of the Merger, the Company has accelerated the
vesting of all outstanding stock options whether issued under Company plans or
otherwise (see Note 9), and the Company will offer to redeem all such options,
upon consummation of the Merger, for cash at a net price equal to $12.25 per
share, less the underlying exercise price of the option, any withholding taxes
due with respect to such redemption, and the balance of any loans then
outstanding from the Company to the optionholder.
GENERAL
Children's Discovery Centers of America, Inc. and Subsidiaries ("the Company"),
is a leading chain of preschools in the United States providing educational
services for children of both preschool and elementary school age, operating as
of December 31, 1997, 248 preschools in 22 states and the District of Columbia
with an aggregate licensed capacity of approximately 25,000 children. The
Company provides programs to children primarily between 21/2 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 academic programs for children
in kindergarten through eighth grade, before and after school programs and
summer camps.
The Company's strategy is to grow through acquiring independent, community-based
preschools and chains, to expand in the growing employer-sponsored preschool
market and to increase programs and services in the growing school age market.
In pursuit of this strategy, from the period from January 1, 1995 through
December 31, 1997, the Company acquired or opened a total of 55 preschools (net
of closings). As of December 31, 1997, 59 of the preschools 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, 1997, the Company operated 20 elementary schools in
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conjunction with its preschools, and also operated after school programs in nine
academic private schools operated by others.
The Company's proprietary computerized system monitors the staff-to-child ratio
in all of its preschools, enabling the Company to staff efficiently in response
to shifts in occupancy levels. The Company believes its "Piaget Discovery
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 preschools, (ii) its success in adding
corporate-sponsored on-site or near site preschools and (iii) significant growth
opportunities in the private elementary school business.
Since the beginning of 1995, the Company has added 72 preschools, and closed 17
preschools. Of the preschools added, 16 were purchased in 1995 through the
acquisition of the business conducted by Prodigy Consulting, Inc., and
affiliated partnerships ("Prodigy").
The following table sets forth data regarding the number of preschools that the
Company has operated from January 1, 1993, through December 31, 1997, as well as
the approximate preschool capacity at the end of each period and average
percentage occupancy for each period.
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Open at beginning of period 131 154 193 239 248
Opened during period(a) 26 42 52 14 6
Closed during period (3) (3) (6) (5) (6)
--- --- --- --- ---
Open at end of period 154 193 239 248 248
--- --- --- --- ---
Net increase 23 39 46 9 0
-- -- -- - -
Approximate school capacity
(at end of period) 13,000 17,500 23,500 24,500 25,000
Average percentage occupancy(b) 72% 73% 71% 69% 69%
</TABLE>
- ------------------------
(a) Includes preschools acquired, new preschools opened and employer-sponsored
preschools which the Company commenced operating under management
contracts. Does not include preschools acquired during the period that
were operated by the Company in prior periods under management contracts.
(b) Average percentage occupancy is calculated by dividing revenue from
operations of all of the Company's preschools (other than preschools
operated on a management fee basis) for the respective periods by the
product of (i) preschool capacity for all of the Company's preschools
(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 preschools 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 preschools.
The Company intends to continue to expand its preschool business by acquiring
individual centers and small chains. In order to realize the benefits of
consolidation, the Company generally seeks either to acquire preschools in areas
close to the Company's existing preschools so that regional managers are able to
supervise the newly-acquired preschools, or to acquire a chain which has a
sufficient number of preschools to justify the employment of an additional
regional manager. The Company generally seeks to acquire preschools 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.
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The child care industry is highly fragmented, and a majority of existing
licensed preschools are owned by small operators with limited resources. The
Company believes that generally these small operators have limited opportunities
to sell their preschools, which enhances the Company's ability to acquire these
preschools 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 in 1997. 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 preschool'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 preschool, the local regulatory environment, demographic
trends, competition, quality of programs and management, the preschool'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 preschools 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
As of December 31, 1997, the Company operated 58 employer-sponsored preschools,
of which 19 were operated for hospitals or other health care facilities, 21 for
governmental units and 18 for private sector companies, including TRW Space and
Electronics, Inc., and an affiliate of Southern New England Telecommunications
Corp. Of the 58 employer-sponsored preschools, 17 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
preschools.
In some cases, the Company has arrangements with employers who "reserve" a
certain number of enrollment spaces in particular preschools 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 the Company's preschools. The Company
intends to continue to pursue opportunities in the growing employer-sponsored
preschool market.
PRIVATE ELEMENTARY SCHOOLS
During 1997, the Company substantially expanded the number of elementary school
programs it operates. As of December 31, 1997, the Company operated 20
elementary school programs (compared to 14 as of December 31, 1996) and operated
135 kindergarten programs (compared to 111 as of December 31, 1996). The
Company intends to expand its kindergarten and elementary programs primarily by
adding new programs in its preschools 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 preschools.
5
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(c) NARRATIVE DESCRIPTION OF BUSINESS.
COMPANY OPERATIONS
Licensed capacity of the Company's individual preschools 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 preschools, measured by actual preschool 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, 1997.
The Company's preschools contain classroom and recreational areas and kitchen
and bathroom facilities. The preschools usually accommodate the grouping of
children by age. The preschools 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 preschool 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 preschools are equipped
with personal computers with programs specifically designed for preschoolers and
school-age children. A number of preschools are equipped with Company-owned or
leased vehicles for the transportation of children to and from elementary school
and for field trips.
Each preschool is administered by a director who is responsible for the
operation and maintenance of the preschool. The duties of a preschool 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 preschools in
geographical areas sufficiently compact to permit the regional managers to
personally visit the preschools 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
preschools.
Children are usually enrolled in the preschools on a weekly basis for either
full-day or half-day sessions. Preschools 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 preschool and the age of the child. Charges
customarily are payable in advance on a weekly or monthly basis.
The Company's preschools are generally open throughout the year, usually five
days a week, from 6:30 a.m. to 6:30 p.m. Nine preschools 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 preschools 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 preschools 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 preschool.
Management reviews these operating statements with the directors on a monthly
basis. In addition, regional managers visit preschools on a regular basis to
monitor all aspects of the preschools' operation.
All funds received by each preschool are deposited in an account established by
the Company in a local bank. All payroll and most other preschool expenses are
paid by the Company directly out of the Company's headquarters.
6
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The Company also purchases certain supplies for the preschools. Direct
expenditures by the preschools themselves are limited to miscellaneous operating
expenses for which the preschools 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.
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 preschool-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 preschools 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 preschools. 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 preschools and
elementary schools are recommendations from customers in the communities in
which it operates. The Company markets its services through display
advertisements and listings in the Yellow Pages, newspaper advertisements and
distribution of flyers 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 preschools through
relationships with consultants, attendance at trade shows and industry
publications.
The director of each preschool is responsible for marketing and promoting the
preschool. The director encourages parental involvement in the preschool
through monthly newsletters and reports to parents as well as parent-teacher
conferences and parental visits to and inspections of the preschool. Preschools
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 one of the largest chains
of preschools 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. The Company
primarily competes for employer-sponsored centers with organizations which focus
on
7
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the employer-sponsored market such as Corporate Family Solutions and Bright
Horizons, Inc. or child care chains that have divisions that focus on
corporate-sponsored business. Some of these competitors have significantly
greater financial resources than the Company. 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 preschool 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 preschool 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 preschool 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 preschools, and licenses must be renewed
periodically. Repeated failures by a preschool to comply with applicable
regulations can subject it to sanctions that might include probation or, in more
serious cases, suspension or revocation of the preschool's license to operate.
The Company believes that each of its preschools is in substantial compliance
with such requirements. The Company generally seeks to operate preschools 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 preschools, based on the number of eligible children enrolled in each
preschool, in order for each preschool 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.
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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.
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 5% of the Company's personnel are paid at rates equal to the Federal
minimum wage and, accordingly, increases in the minimum wage should 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 preschools are currently organized into regions, each of which is
under the management of a trained regional manager. Individual preschools 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 twelve 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 preschools, enabling the Company
to staff efficiently in response to shifts in occupancy levels.
As of December 31, 1997, the Company employed approximately 4,700 persons, of
whom approximately 35% are employed on a part-time basis. Two preschools
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.
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ITEM 2. PROPERTIES
As of December 31, 1997, the Company operated 248 school programs in 22 states
and the District of Columbia, located as follows:
<TABLE>
<CAPTION>
LOCATION NUMBER OF LOCATION NUMBER OF
CENTERS CENTERS
------------------------------------------------------------------
<S> <C> <C> <C>
Pennsylvania 49 Oregon 5
California 48 Nebraska 5
Connecticut 24 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. 1
Georgia 7 Florida 1
Maryland 7
</TABLE>
As of December 31, 1997, the Company owned 16 centers, leased 208 centers with
terms expiring on the leased properties on various dates between 1998 and 2015,
and operated 17 centers pursuant to management contracts with employers. Seven
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 remaining term of the lease provides for an
annual rent of approximately $168,088. 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.
10
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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.
<TABLE>
<CAPTION>
1997 HIGH LOW
---- ---- ---
<S> <C> <C>
First Quarter $7.00 $4.875
Second Quarter $7.50 $4.625
Third Quarter $8.00 $6.375
Fourth Quarter $9.875 $4.75
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
</TABLE>
At March 21, 1998, there were 307 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.
ITEM 6. SELECTED FINANCIAL DATA
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
(in thousands, except per share data) (1)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue from Operations $ 93,015 $ 87,480 $ 77,627 $ 55,323 $ 38,564
Operating Expenses 88,530 85,037 73,010 50,898 36,644
------ ------- ------ ------ ------
Income from Operations 4,485 2,443 4,617 4,425 1,920
Other Expense, net (885) (1,317) (773) (744) (618)
---- ------ ---- ---- ----
Income before provision
for income taxes 3,600 1,126 3,844 3,681 1,302
Provision for Income Taxes 1,100 225 1,208 921 197
----- --- ----- --- ---
Net Income $ 2,500 $ 901 $ 2,636 $ 2,760 $ 1,105
-------- -------- -------- -------- --------
Net Income per share:
Basic: $ 0.37 $ 0.14 $ 0.43 $ 0.69 $ 0.43
Diluted : $ 0.36 $ 0.13 $ 0.38 $ 0.57 $ 0.35
Weighted average shares
used in calculation:
Basic: 6,703 6,307 6,185 4,014 2,558
Diluted : 6,899 6,723 6,929 4,831 3,175
Long-term Obligations $ 14,139 $ 16,634 $ 17,535 $ 13,736 $ 6,896
-------- -------- -------- -------- --------
Total Assets $ 77,740 $ 75,335 $ 73,795 $ 64,691 $ 36,093
-------- -------- -------- -------- --------
</TABLE>
11
<PAGE>
(1) Certain reclassifications have been made to prior years financial
statements to conform to the 1997 presentation. Share and per share amount
have been restated to reflect the adoption of SFAS No. 128 (see Note 1).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
During the period from January 1, 1995, through December 31, 1997, the number of
preschools operated by the Company increased from 193 to 248 and preschool
capacity increased from approximately 17,500 to approximately 25,000 children.
The Company has achieved this growth primarily by acquiring existing preschools
and also by opening new preschools and entering into contracts to manage
preschools sponsored by employers. During 1997, the Company acquired or opened
6 preschools and closed 6 preschools. In 1996, the Company acquired or opened a
total of 14 preschools and closed 5 preschools. During 1995, the Company
acquired or opened 52 preschools and closed 6 preschools. The results of
acquired or disposed of preschools are included in the Company's financial
statements from the date of acquisition or until the date of disposition.
Accordingly, year-to-year results may fluctuate depending upon the timing of the
Company's acquisition of existing preschools and the opening of new preschools.
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.
RESULTS OF OPERATIONS
REVENUE FROM OPERATIONS
Revenue from operations increased 6% in 1997 to $93,015,000 from $87,480,000 in
1996. Revenues for those preschools open in corresponding time periods in both
years increased approximately 4%, with the remainder of the increase due to
acquisitions. Approximately 95% of the increase on a same-school basis was due
to price increases, and the remainder was due to enrollment increases. Revenue
from operations increased 13% in 1996 to $87,480,000 from $77,627,000 in 1995.
Revenues for those preschools 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-school basis was due to price
increases, as these preschools experienced a decrease in enrollments of
approximately 2%. Revenues from operations increased 40% in 1995 to $77,627,000
from $55,323,000 in 1994. Revenues for those preschools 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-school basis was
due to price increases, as these preschools experienced an enrollment decrease
of less than 2%.
OPERATING EXPENSES
Payroll and related expenses as a percentage of total revenues were 52.7%, 53.9%
and 54.4% in 1997, 1996 and 1995, respectively. The decreases from 1995 to 1996
to 1997 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.
Other operating expenses were 26.6% of revenues in 1997, 27.3% in 1996 and 25.5%
in 1995. 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 preschool
revenue. In 1997, the Company had the opposite effect from 1996, in that its
revenues on a same center basis increased faster than its occupancy expense.
Administrative expenses as a percentage of total revenue were 8.5% in 1997, 9.2%
in 1996, and 8.1% in 1995. The major part of the increase in 1996 was a
one-time charge of approximately $800,000 ($600,000 in administrative expense)
in the fourth quarter of 1996. The Company recorded this charge to provide for
the potential uncollectability of a receivable associated with a management
agreement for operation of an employer-sponsored
12
<PAGE>
preschool, 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 8.5%. The increase in 1996
was due to the addition of supervisory and financial personnel to enhance
management and financial controls. In 1997, administrative expenses as a
percentage of revenue remained flat with 1996 before the one-time charge.
Depreciation and amortization expenses increased by 18% in 1997, 35% in 1996,
and 62% in 1995. The increase in 1997 was due to improvements made by the
Company in its existing preschools and to acquisitions and startups made in 1997
and 1996. The increases in both 1996 and 1995 were due mainly to the increase in
new preschools acquired during those years and to the improvements made by the
Company in its existing preschools.
Advertising and promotion expenses as a percentage of revenues declined slightly
in 1997 from 1996 and 1995 due to a decrease in expenses at headquarters.
OTHER EXPENSE
Interest income in 1997 compared to 1996 increased by $331,000, due to higher
average daily cash balances offset somewhat by lower average interest rates in
1997. Interest income in 1996 compared to 1995 decreased by $432,000, due to
lower average daily cash balances and to lower average interest rates in 1996.
Interest expense decreased by $101,000 in 1997 from 1996 and increased by
$112,000 in 1996 from 1995. The decrease in 1997 was due to lower average debt
outstanding as the Company paid off more debt than it issued in connection with
its addition of preschools and to slightly lower average interest rates. The
1996 increase was due to higher average debt outstanding because of debt issued
by the Company in connection with its acquisition of preschools, offset somewhat
by lower average interest rates on the Company's outstanding debt. The
Company's average interest rates decreased in both 1997 and 1996 due to the
decline in variable rates charged on certain Company borrowings, the retirement
of higher interest rate 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 1997 and 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 1997 of 30.6% versus 20.0% in 1996 reflected
the fact that the benefit of net operating loss carryforwards in 1997 had a
proportionately smaller effect on the larger taxable income in 1997 as compared
to 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has grown primarily through the acquisition of
existing preschools. For acquisitions of individual preschools or small chains,
it is the Company's general practice to acquire preschools for a combination of
cash and notes to sellers. These notes are payable generally over ten years.
As of December 31, 1997, the principal amount of such notes outstanding was
$11,391,000. Furthermore, the Company seeks whenever possible to lease the
preschool facilities on a long-term basis through the exercise of successive
options, while avoiding long-term obligations.
13
<PAGE>
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, in 1996 shares of Preferred Stock having a liquidation
preference of $565,000 were converted into approximately 103,000 shares of
Common Stock, and in 1997 the remaining shares with a liquidation preference of
$2,135,000 were converted into approximately 388,000 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 1997, net cash provided by operations was $10,983,000. This internally
generated cash along with the issuance of $1,185,000 in debt for the acquisition
of property, plant and equipment funded all of the Company's cash needs for
repayment of debt, purchases of centers and purchases of property, plant and
equipment. During 1997, the Company issued or assumed $480,000 of indebtedness
related to acquisitions. As of December 31, 1997, the Company had cash and
short-term investment balances of $14,716,000. 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. 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 $9,564,000 of the
proceeds from the 1994 stock offering was used for the acquisition or opening of
new preschools or elementary programs. During, 1995, the Company issued or
assumed $7,919,000 of indebtedness related to acquisitions.
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 preschools and the opening of additional elementary school programs.
The Company also has available to it up to $5,000,000 under an unsecured line of
credit furnished by a commercial bank. 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.
14
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
BOARD BIOGRAPHICAL INFORMATION
The persons named below are the current members of the Board of Directors.
The following sets forth as to each director his or her age (as of March 27,
1998), principal occupation and business experience, and the period during which
he or she has served as a director.
<TABLE>
<CAPTION>
NAME AGE DIRECTOR SINCE
---- --- --------------
<S> <C> <C>
Richard A. Niglio(1)(2) . . . . . . . . . . . . . 55 1987
Elanna S. Yalow . . . . . . . . . . . . . . . . . 43 1996
W. Wallace McDowell, Jr.(4) . . . . . . . . . . . 61 1984
Robert E. Kaufmann(3) . . . . . . . . . . . . . . 57 1985
Michael J. Connelly(1)(2)(3). . . . . . . . . . . 47 1992
Mark P. Clein(2). . . . . . . . . . . . . . . . . 38 1991
Myron A. Wick, III(1)(4). . . . . . . . . . . . . 54 1993
</TABLE>
- -----------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of Quality Committee.
(4) Member of Compensation Committee.
The following is a brief summary of the background of each director of the
Company:
Richard A. Niglio was appointed Chief Executive Officer of the Company in
March 1987. From 1982 until joining the Company, he was President, Chief
Executive Officer and a director of Victoria Station Incorporated, a restaurant
chain based in Larkspur, California. From 1971 until 1982, Mr. Niglio was
President of Mr. Donut of America, Inc., a wholly-owned subsidiary of
International Multifoods Corp. Mr. Niglio is currently a director and member of
the Compensation Committee of the Board of Directors of PMR Corporation, a
manager of psychiatric partial hospitalization services.
Elanna S. Yalow has been President and a director of the Company since
January 1996. Dr. Yalow was retained by the Company from July 1989 until
April 1992, as a self-employed consultant to develop the Company's
employee-sponsored business. She was appointed as a Vice President in 1992 and
was promoted to Executive Vice President in 1994. From September 1987 until June
1989, Dr. Yalow attended Stanford University Graduate School of Business,
graduating with a Masters degree in Business Administration. Dr. Yalow has a
doctorate in Educational Psychology from the Stanford University School of
Education.
W. Wallace McDowell, Jr. has been a director of the Company since November
1984. Mr. McDowell is currently a private investor. From January 1991 until
October 1994, Mr. McDowell was a Managing Director of Morgan Lewis Githens &
Ahn, the general partner of an investment partnership concentrating on leveraged
transactions. Mr. McDowell was Chairman and Chief Executive Officer of The
Prospect Group, Inc. from November 1983 to January 1990. Mr. McDowell is a
director of U.S. HomeCare Corporation, a provider of
15
<PAGE>
comprehensive home health care services; Excelsior Funds, a group of mutual
funds; and I.T.I. Technologies, Inc., a manufacturer of home security devices.
Robert E. Kaufmann has been a director of the Company since July 1985.
Since June 1, 1995, Mr. Kaufmann has been an executive search consultant for
Spencer Stuart. From 1980 until July 1994, Mr. Kaufmann was Headmaster of
Deerfield Academy, Deerfield, Massachusetts. From 1971 to 1975, he was Assistant
Dean and from 1975 to 1980 Associate Dean for Finance and Administration,
Faculty of Arts and Sciences, Harvard University.
Michael J. Connelly has been a director of the Company since November 1992.
Since April 1987, Mr. Connelly has been President of Lepercq Capital Management,
Inc., the venture capital subsidiary of Lepercq de Neuflize & Co. Inc., a New
York-based portfolio management and investment banking firm, and the Managing
General Partner of LN Investment Capital Limited Partnership ("LNIC"). He is
also Chairman, Chief Executive Officer and a director of The MNI Group, Inc., a
public company engaged in the weight-control and health and beauty aid
businesses. Mr. Connelly was originally nominated for election as a director
pursuant to an agreement entered into in connection with the Company's
acquisition of American Family Service Corporation ("AFSC") in November 1992
(the "AFSC Agreement"). See "Certain Relationships and Related Transactions."
Mark P. Clein has been a director of the Company since April 1991. Since
May 1996, Mr. Clein has been Chief Financial Officer of PMR Corporation, a
manager of psychiatric partial hospitalization services. Mr. Clein was a
Managing Director of Jefferies & Co., Inc., an investment banking firm, from
August 1995 to May 1996. Mr. Clein was a Managing Director of Rodman & Renshaw
Inc., an investment banking firm, from March 1993 until March 1995, and a
director of Mabon Securities Corp., an investment banking firm, from March to
August 1995. Mr. Clein was a Vice President of Sprout Group, the venture capital
affiliate of Donaldson, Lufkin & Jenrette, Inc., from May 1991 until March 1993.
From January 1989 to April 1991, Mr. Clein served as acting Chief Executive
Officer of Magic Years Child Care & Learning Centers, Inc., an operator of child
care centers located in the Northeast acquired by the Company in April 1991, and
served as Chairman of the Board from March to September 1990. From 1982 until
February 1990 and from August 1990 to May 1991, Mr. Clein was a Vice President
of Merrill Lynch Venture Capital, Inc.
Myron A. Wick, III has been a director of the Company since June 1993.
Since 1988, Mr. Wick has been a Managing Director of McGettigan, Wick & Co.,
Inc., a private investment banking firm. Since 1991, Mr. Wick has been a general
partner of Proactive Investment Managers, L.P., which is the general partner of
Proactive Partners, L.P., a merchant banking fund. Mr. Wick is a director of the
following public companies: NDE Environmental Corporation, which provides
systems and services to detect leaks in underground storage tanks; Phoenix
Network, Inc., a reseller of long distance telephone service; Sonex Research,
Inc., which is engaged in development of fuel combustion technology; WrayTech
Instruments, Inc., which manufactures and sells industrial weighing gauges;
Modtech, Inc., which designs, manufactures and installs modular relocatable
classrooms; and DIGITAL DICTATION, INC., a medical transcription firm which
supplies services to hospitals and medical groups.
COMMITTEES OF THE BOARD OF DIRECTORS; BOARD OF DIRECTORS MEETINGS
During 1997, the Company's Board of Directors met five (5) times. There are
four standing committees of the Board of Directors, the functions of which are
described below.
AUDIT COMMITTEE. The functions of the Audit Committee are to recommend to the
Board the appointment of independent public accountants for the Company and the
terms of their engagement, and to review, coordinate, analyze and assess
financial information presented to it by the independent public accountants and
the Chief Financial Officer of the Company. The Audit Committee is comprised of
Messrs. Connelly, Clein and Niglio. The Audit Committee met once during 1997.
COMPENSATION COMMITTEE. The task of the Compensation Committee is to review and
determine levels of executive compensation for the Company, as well as to
administer the Company's Stock Option Plan. The
16
<PAGE>
Compensation Committee is comprised of Messrs. McDowell and Wick. The
Compensation Committee took action by unanimous written consent three times
during 1997.
EXECUTIVE COMMITTEE. During intervals between the meetings of the Board of
Directors, the Executive Committee exercises all the powers of the Board (except
those specifically reserved by Delaware law to the full Board of Directors) in
the management and direction of the business of the Company in all cases in
which specific directions have not been given by the Board. The Executive
Committee is comprised of Messrs. Connelly, Wick and Niglio. The Executive
Committee did not meet during 1997.
QUALITY COMMITTEE. The Quality Committee is charged with the task of
establishing and implementing policies and procedures in the following areas:
curriculum, training, safety and remediation. The Quality Committee is comprised
of Mr. Kaufmann and Mr. Connelly. The Quality Committee met once during 1997.
There is no nominating committee or any committee performing similar
functions. The Board determines nominees for election to the Board, subject to
any applicable agreements giving certain persons the right to designate a
nominee.
During 1997, no director attended fewer than 75% of the aggregate of the
total number of meetings of the Board or the total number of meetings of the
Committees on which any individual director served, except Mr. McDowell, who was
unable to attend two meetings of the Board.
COMPENSATION OF DIRECTORS
Directors of the Company are reimbursed for actual expenses incurred in
connection with attendance at the Company Board and Committee meetings.
Directors who are employed by the Company receive no director fees, while other
directors each receive a retainer of $10,000 a year, plus $1,000 for attendance
at each Board meeting and $500.00 for attendance at each Committee meeting.
Directors who are employees of the Company receive no additional compensation
for their services as directors. However, such directors are reimbursed for
their reasonable expenses incurred in connection with attendance at or
participation in meetings of the Board of Directors or committees of the Board
of Directors.
During 1993, the Company established a Non-Employee Directors' Stock Option
Plan ("Directors' Plan") and authorized the reservation of 180,000 shares of
Common Stock for issuance thereunder. Pursuant to the Directors' Plan, effective
as of December 9, 1993 (the date on which an underwritten public offering of its
Common Stock was commenced (the "1993 Public Offering")), each of the
non-employee directors of the Company (consisting of Messrs. McDowell, Kaufmann,
Clein, Connelly and Wick) received an option to purchase 11,500 shares of Common
Stock at an exercise price of $8.00 per share, which was the offering price of
the Common Stock in the 1993 Public Offering. In addition, pursuant to the
Directors' Plan, upon reelection to the Board following the Company's annual
meeting in 1995 and 1996, each non-employee director received an option to
purchase 3,500 shares of Common Stock at exercise prices of $16.38 and $7.63 per
share, respectively. No director is entitled to receive, in the aggregate,
options to purchase more than 30,000 shares of Common Stock under the Directors'
Plan. In August 1996, the Directors' Plan was amended to eliminate the automatic
grant of stock options upon reelection to the Board of Directors of any person
and to authorize the Board (or the Compensation Committee) to "grant options" on
a discretionary basis to non-employee directors in such amounts as the Board or
the Committee deems appropriate and with no individual limitation.
Simultaneously, each non-employee director was granted options for 6,000 shares
under the Directors' Plan, one-third of which were immediately exercisable and
an additional one-third exercisable on each of the first two anniversaries of
the date of grant. Options granted under the Directors' Plan have an exercise
price equal to the fair market value of the Common Stock on the date of grant.
All options granted under the Directors' Plan will expire ten years from the
date of grant.
17
<PAGE>
COMPLIANCE WITH SECTION 16() OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers, and
persons who own more than ten percent of a registered class of the Company's
equity securities, to file with the Securities and Exchange Commission (the
"SEC") initial reports of ownership of Common Stock on Form 3 and reports of
changes in ownership of Common Stock on Forms 4 or 5 and to furnish the Company
with copies of all forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company, all Section 16(a) filing requirements
applicable to its executive officers, directors and greater than ten percent
beneficial owners were complied with in 1997, except that (a) on April 3, 1998,
Mr. Niglio reported the grant, on April 2, 1997, of options for 25,000 shares of
common stock, (b) on April 3, 1998 Dr. Yalow reported the grant, on April 2,
1997, of options for 100,000 shares of common stock and (c) on April 3, 1998,
Mr. Devine reported the grant, on April 2, 1997, of options for 10,000 shares of
common stock.
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------------------------------------------
<S> <C> <C>
Richard A. Niglio 55 Chief Executive Officer and Chairman
Elanna S. Yalow 43 President, Chief Operating Officer
Randall J. Truelove 49 Vice President, Finance
Jane Delaney 34 Vice President
Frank A. Devine 51 Secretary/General Counsel
</TABLE>
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 Incorporated, 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.
18
<PAGE>
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
SUMMARY COMPENSATION TABLE
The following table sets forth a summary of annual and long-term
compensation earned by or paid to the Named Officers for services rendered to
the Company during each of the last three fiscal years:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ---------------
NAME AND PRINCIPAL POSITION -----------------------------------------
- ---------------------------
SECURITIES
OTHER ANNUAL UNDERLYING
SALARY BONUS COMPENSATION OPTIONS/SARS
YEAR ($) ($) ($) (#)
-------- ----------- ---------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Richard A. Niglio. . . . . . . . . 1995 $295,000 $0 $0 0
Chairman and 1996 $295,000 $0 $0 40,000
Chief Executive Officer 1997 $295,000 $86,040 $0 25,000
Elanna S. Yalow. . . . . . . . . . 1995 $95,000 $0 $0 0
President and 1996 $125,000 $0 $0 20,000
Chief Operating Officer 1997 $150,000 $43,750 $0 100,000
Randall J. Truelove. . . . . . . . 1995 $95,000 $0 $0 0
Vice President and 1996 $95,000 $0 $0 12,000
Chief Financial Officer 1997 $95,000 $27,710 $0 0
Frank A. Devine. . . . . . . . . . 1995 $95,000 $0 $0 0
Secretary 1996 $95,000 $0 $0 12,000
1997 $95,000 $27,710 $0 10,000
Jane A. Delaney. . . . . . . . . . 1995 $58,542 $0 $0 0
Vice President 1996 $71,750 $5,681 $0 4,000
1997 $80,875 $24,790 $0 10,000
</TABLE>
The following table contains information concerning the grant of stock
options made to the Named Officers during the fiscal year ended December 31,
1997 under the Company's Stock Option Plan or otherwise:
19
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
STOCK OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(1)
------------------------------------------------------ ----------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES EXERCISE OR
GRANTED IN FISCAL BASE PRICE EXPIRATION 5% 10%
(#) YEAR ($/SH) DATE ($) ($)
----------- ---------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Richard A. Niglio. . . . . . . 25,000 13.4 4.88 4/1/07 $76,647 $194,237
Elanna S. Yalow. . . . . . . . 100,000 53.6 4.88 4/1/07 $307,000 $777,000
Frank A. Devine. . . . . . . . 10,000 5.4 4.88 4/1/07 $30,700 $77,000
Jane A. Delaney. . . . . . . . 10,000 5.4 4.88 4/1/07 $30,700 $77,000
</TABLE>
- -----------
(1) Amounts indicated under the "Potential Realizable Value" columns above have
been calculated by multiplying the market price on the date of grant by the
annual appreciation rate shown (compounded for the term of the options),
subtracting the exercise price per share and multiplying the gain per share
by the number of shares covered by the options.
Except as disclosed above, no other grants of stock options were made in
the fiscal year ended December 31, 1997 to any of the Named Officers. No stock
options were exercised by any of the Named Officers during the fiscal year ended
December 31, 1997, except as set forth below:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Shares Value Realized Number of Securities Value of Unexercised
Acquired on (Market Price Underlying Unexercised In-the-Money Options
Exercise at Exercise Less Options at FY-End(#) at FY End(1)
------------------ ----------------------------
Name (#) Exercise Price) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ---------------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Richard A. Niglio. . . . . 38,750 67,813 340,364 36,168 $3,318,548 $352,638
Elanna S. Yalow. . . . . . 0 0 86,722 79,333 $845,536 $773,500
Randall J. Truelove. . . . 3,300 6,875 49,155 5,600 $479,261 $54,600
Frank A. Devine. . . . . . 2,500 4,375 52,955 12,600 $516,311 $122,850
Jane A. Delaney. . . . . . 0 0 6,133 8,867 $59,800 $86,450
- -----------
</TABLE>
(1) Based upon the per share closing price of the Common Stock on December 31,
1997, which was $9.75.
20
<PAGE>
EXECUTIVE COMPENSATION
GENERAL
The Company's compensation program for executive officers is administered
by the Compensation Committee of the Board of Directors (the "Committee"), which
consists of two non-employee members of the Board of Directors, W. Wallace
McDowell, Jr. and Myron A. Wick, III. The compensation program is comprised of
three elements: (i) base salary, (ii) annual incentive compensation, and
(iii) long-term incentive compensation in the form of stock options. Generally,
the philosophy of the program is to set base salaries somewhat below competitive
levels to permit the Company to rely to a large degree on the annual and
long-term incentive compensation components, which are more closely linked to
Company performance; each year's annual incentive compensation is directly
linked to the Company's earnings in that year, while stock options indirectly
reflect the Company's performance through changes in the market price of the
Common Stock.
With respect to base salary for executive officers other than Mr. Niglio,
the Committee reviews and generally accepts recommendations of Mr. Niglio, who
is in the best position to evaluate performance, competitive salaries and
relative company rank. The Committee reserves the right, however, to question
Mr. Niglio's recommendation and to discuss with him the bases for his
recommendations.
The base salary of Mr. Niglio is determined by the Committee upon an
evaluation of his overall job performance, with consideration given to both
quantitative and qualitative factors. Quantitative factors include the growth in
Company revenues, achievement of forecasted working capital position and the
progress made in expansion of the business through acquisition of additional
child care centers. Qualitative factors include Mr. Niglio's leadership
qualities, his impact on employee morale and his ability to enhance the
Company's industry reputation. Mr. Niglio's base salary for 1996 and 1997 of
$295,000 was not increased over his 1995 base salary. The Board of Directors
increased Mr. Niglio's base salary for 1998 to $350,000.
With respect to the annual incentive compensation component, in 1992 the
Company established an incentive plan which provides for the creation of an
incentive bonus pool in each year from which payments are made to executive
officers based on the Company's earnings in that year. The portion of the
incentive pool each officer is eligible to receive is based on the officer's
base salary as a percentage of the aggregate base salary of all participating
officers. In 1996, the Company's level of earnings did not reach the minimum
requirements of the incentive plan for that year and consequently no bonuses
were earned. In 1997, the Company's level of earnings reached the requirements
set by the 1997 incentive plan and consequently bonuses were earned as set forth
above in the Summary Compensation Table.
The third component of the compensation program consists of the awarding of
options to purchase Common Stock under the Company's Stock Option Plan (the
"Option Plan"). Stock options may be granted under the Option Plan with an
exercise price of no less than 85% of the fair market value of the Common Stock
on the date of grant, although all options granted under the Option Plan to date
have been granted at exercise prices which are not less than 100% of the fair
market value on the respective dates of grant. In addition, options granted
under the Option Plan are generally subject to a three-year vesting period.
Accordingly, an optionee will realize value from the grant only if the market
value of the Common Stock increases over an extended period following the date
of grant. Because the compensation element of stock options is dependent on
increases over time in market value of such shares, stock options represent
compensation tied to the Company's long-term performance. The Committee believes
compensation in the form of stock options serves to align the interests of the
executive officers directly with the interests of the Company's stockholders.
Options granted to the Named Executive Officers during 1997 are disclosed above.
The number of options granted to any officer under the Option Plan is
determined by the Committee based on a number of factors, including that
officer's corporate level of responsibility and performance, the frequency and
number of options granted to that officer in the past and compensation paid or
awarded to that officer under other aspects of the compensation program.
21
<PAGE>
EMPLOYMENT AGREEMENTS
The Company has entered into Employment Agreements, each dated as of
January 15, 1998, with Richard A. Niglio and Elanna S. Yalow (each referred to
in this paragraph as the "Executive"). The Employment Agreements have
substantially identical terms, except as noted below. Each Employment Agreement
has an initial term of three years, renewable for additional successive
three-year terms unless earlier terminated, or modified, extended or replaced by
mutual agreement. If the Employment Agreement is terminated due to death or
disability, or is terminated by the Company other than for cause, or is
terminated by the Executive for good reason, then Executive (or Executive's
estate) will receive as severance (a) a lump-sum payment equal to the greater of
Executive's base salary for the remainder of the three-year term then in effect
(including in some cases base salary for the successive three-year term) or two
times Executive's base salary, and (b) a PRO RATA bonus for the fiscal year in
which termination occurs, provided that if termination occurs within 365 days of
a "Change in Control" (as defined) of the Company, Executive shall receive a
bonus (the "Bonus Multiple") equal to two times the highest annual bonus earned
by Executive in the three fiscal years prior to the year of termination, plus
the amount, if any, by which the PRO RATA bonus exceeds the Bonus Multiple. In
addition, all of Executive's unvested stock options will vest and be exercisable
for three months and, except in the case of termination due to death, Executive
will continue to participate in all Company benefits for two years. If the
Agreement is terminated voluntarily by Executive or by the Company for cause
Executive will only receive his or her base salary and expense reimbursements
through date of termination. Pursuant to his Employment Agreement Mr. Niglio
serves as Chief Executive Officer, with a base salary of $350,000 per year, and
pursuant to her Employment Agreement Dr. Yalow serves as Chief Operating Officer
and President with a base salary of $200,000 per year. Mr. Niglio's Employment
Agreement will be superseded by his Consulting Agreement dated March 27, 1998,
and Dr. Yalow's Employment Agreement will be superseded by her Employment
Agreement dated March 27, 1998.
COMPENSATION DEDUCTION LIMITATION
As part of the 1993 Omnibus Budget Reconciliation Act, Congress enacted
Section 162(m) of the Internal Revenue Code of 1986 (the "Code"), which limits
to $1 million per year the federal income tax deduction available to public
companies of compensation paid to its chief executive officers and, in certain
cases, its four other highest paid executive officers, unless the compensation
qualifies for certain "performance-based" exceptions provided for in that
section. Although it is anticipated that cash compensation payable to the
Company's executive officers for the next several years will not exceed the $1
million limitation, the Company's strategy, nevertheless, is to qualify
compensation paid to its executive officers for deductibility for federal income
tax purposes to the extent feasible. Notwithstanding the foregoing, to maximize
its flexibility with regard to executive compensation arrangements, the Company
reserves the right to take actions which it deems to be in the best interests of
the Company and its stockholders but which may not always qualify for tax
deductibility under Section 162(m) or other sections of the Code.
COMPENSATION COMMITTEE
W. Wallace McDowell, Jr.
Myron A. Wick, III
22
<PAGE>
COMPENSATION COMMITTEE REPORT ON REPRICING OF STOCK OPTIONS
On August 27, 1996 upon recommendation of the Compensation Committee, the
Board of Directors of the Company reduced the exercise price of all previously
granted options with exercise prices of greater than $6.00 to $5.25, which was
the closing market price of the Company's Common Stock as reported on the NASDAQ
National Market as of that date. The Compensation Committee, in making its
recommendation to the Board of Directors, and the Board of Directors, in acting
to reduce the exercise price of the stock options considered several factors.
One was the decline in the price of the Common Stock over a period of
approximately one year prior to the date of the repricing, which resulted in
many of the previously granted stock options having exercise prices well in
excess of the prevailing market price for the Common Stock at the time of the
repricing. As a consequence, the impact of the stock options as a motivational
tool and as a reward to the recipients was significantly eroded. In addition,
the Committee and the Board considered that no payments were made to the
Company's executive officers under the Company's incentive plan for 1995 and,
based on information available to management at the time of the repricing, it
appeared that no payments would be made for 1996 as well. In view of the
Company's reliance on stock options as a major component of its compensation
program, and that another component of the program, the incentive plan, had not
been a source of income to the Company personnel in 1995 and would not be a
source of income in 1996, the Committee and Board believed that the reduction in
the exercise prices of the options was critical to retaining and motivating the
executive personnel and others who are in a position to contribute substantially
to the progress and success of the Company. Exercise prices for options to
purchase an aggregate of 387,244 shares outstanding on August 27, 1996 were
reduced by the Board.
The following table sets forth for Mr. Niglio, Dr. Yalow and the Company's
other executive officers a summary of all repricing of options previously
granted to them which was effected during the ten year period ending
December 31, 1997.
TEN YEAR OPTION REPRICING
<TABLE>
<CAPTION>
Name Date of # of Securities Market Price of Exercise Price New Length of Original
- ---- Repricing Underlying Stock at Time of at Time of Exercise Option Term
--------- Options Repricing Repricing Price Remaining at Date
Repriced ---------------- -------------- -------- of Repricing
-------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Richard A Niglio . . . . . . . 8/27/96 72,500 $5.25 $8.00 $5.25 6.5 yrs.
8/27/96 37,500 $5.25 $8.00 $5.25 6.5 yrs.
8/27/96 66,391 $5.25 $10.25 $5.25 8.3 yrs.
8/27/96 13,889 $5.25 $10.25 $5.25 8.3 yrs.
10/19/92 38,750 $6.00 $10.00 $6.00 5.0 yrs.
Elanna S. Yalow. . . . . . . . 8/27/96 13,277 $5.25 $10.25 $5.25 8.3 yrs.
8/27/96 17,500 $5.25 $8.00 $5.25 6.5 yrs.
8/27/96 2,778 $5.25 $10.25 $5.25 8.3 yrs.
10/19/92 3,125 $6.00 $10.00 $6.00 5.0 yrs.
Randall J. Truelove. . . . . . 8/27/96 13,277 $5.25 $10.25 $5.25 8.3 yrs.
8/27/96 17,500 $5.25 $8.00 $5.25 6.5 yrs.
8/27/96 2,778 $5.25 $10.25 $5.25 8.3 yrs.
10/19/92 2,500 $6.00 $10.00 $6.00 5.0 yrs.
Frank A. Devine. . . . . . . . 8/27/96 13,277 $5.25 $10.25 $5.25 8.3 yrs.
8/27/96 17,500 $5.25 $8.00 $5.25 6.5 yrs.
8/27/96 2,778 $5.25 $10.25 $5.25 8.3 yrs.
10/19/92 2,500 $6.00 $10.00 $6.00 5.0 yrs.
Jane A. Delaney. . . . . . . . 8/27/96 1,000 $5.25 $10.25 $5.25 3.3 yrs.
</TABLE>
23
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership, as of March 27, 1998, of the Common Stock by (i) any person known by
the Company to beneficially own more than 5% of the outstanding Common Stock;
(ii) each director of the Company; (iii) the Company's Chief Executive Officer
and each of the four most highly compensated executive officers (collectively,
the "Named Officers") whose total salaries and bonuses exceeded $100,000 for
services rendered to the Company during the last fiscal year; and (iv) all
directors and executive officers of the Company as a group, including the Named
Officers. On March 27, 1998, there were 6,744,499 shares of Common Stock issued
and outstanding.
<TABLE>
<CAPTION>
Name and Address of Beneficial Owner* Number of Shares of Percentage
- ------------------------------------- Common Stock Ownership
Beneficially Owned
------------------ ---------
<S> <C> <C>
(a) 5% Stockholders
Gruber & McBaine Capital Management, Inc., et al. . . . . . 1,363,700(1) 20.2%
50 Osgood Place
San Francisco, CA 94133
Heartland Advisors, Inc.. . . . . . . . . . . . . . . . . . 880,000(2) 13.0%
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
Wellington Management Company . . . . . . . . . . . . . . . 620,000(3) 9.2%
75 State Street
Boston, Massachusetts 02109
Kennedy Capital Management, Inc . . . . . . . . . . . . . . 493,250(4) 7.3%
425 N. New Ballas Road, Suite 181
St. Louis, Missouri 63141
Dimensional Fund Advisors, Inc. . . . . . . . . . . . . . . 380,600(5) 5.6%
1299 Ocean Avenue
Santa Monica, California 90401
(b) Directors
Richard A. Niglio . . . . . . . . . . . . . . . . . . . . . 510,182(6) 7.2%
Elanna S. Yalow . . . . . . . . . . . . . . . . . . . . . . 176,655(7) 2.6%
W. Wallace McDowell, Jr . . . . . . . . . . . . . . . . . . 33,262(8) **
Robert E. Kaufmann. . . . . . . . . . . . . . . . . . . . . 30,100(9) **
Mark P. Clein . . . . . . . . . . . . . . . . . . . . . . . 33,100(10) **
Michael J. Connelly . . . . . . . . . . . . . . . . . . . . 67,066(11) 1.0%
Myron A. Wick III . . . . . . . . . . . . . . . . . . . . . 750,100(12) 11.1%
(c) All directors and executive officers as a group (includes
10 persons)(13) . . . . . . . . . . . . . . . . . . . . . 1,763,975 23.3%
</TABLE>
- -----------
* Except as noted below, each beneficial owner has sole voting and investment
power with respect to the shares reported.
** Represents less than 1% of the outstanding Common Stock.
(1) According to information supplied to the Company by Gruber & McBaine
Capital Management, Inc. ("GMCM"), an investment adviser, Jon D. Gruber and
J. Patterson McBaine, the executive officers, directors and stockholders of
GMCM, Lagunitas Partners, L.P. ("Lagunitas"), an investment partnership for
which GMCM and Messrs. Gruber and McBaine are the general partners,
Proactive Investment Managers, L.P. ("PIM") as the general partner of
Proactive Partners, L.P. ("PP") and Fremont Proactive Partners, L.P.
24
<PAGE>
("FPP"), two investment partnerships, and Charles C. McGettigan and Myron
A. Wick, III, who are general partners (along with Messrs. Gruber and
McBaine), in PIM, and GMJ Investments, Inc. ("GMJ" and, collectively with
each of the foregoing, the "G&M Group"), members of the G&M Group own
shares as follows: Mr. Gruber owns 6,100 shares, Mr. McBaine owns 38,000
shares, Lagunitas owns 207,500 shares, PP owns 522,000 shares, and FPP owns
7,000 shares. The shares reported by the G&M Group do not include 24,500
shares issuable upon exercise of options exercisable upon consummation of
the Merger which Mr. Wick has received in his capacity as a director of the
Company.
(2) Based on information set forth in a Schedule 13G dated January 23, 1998.
(3) Based on information set forth in a Schedule 13G (Amendment No. 1) dated
January 24, 1997.
(4) Based on information set forth in a Schedule 13G dated February 10, 1998.
(5) Based on information set forth in a Schedule 13G dated February 6, 1998.
(6) Consists of 131,650 shares owned directly by Mr. Niglio, 2,000 shares owned
by Mr. Niglio's wife and 376,532 shares issuable upon exercise of currently
exercisable options and options exercisable upon consummation of the
Merger. Mr. Niglio disclaims beneficial ownership of shares owned by his
wife.
(7) Consists of 10,600 shares of Common Stock owned by Dr. Yalow and 166,055
shares issuable upon exercise of currently exercisable options and options
exercisable upon consummation of the Merger.
(8) Consists of 5,262 shares of Common Stock owned by Mr. McDowell and 28,000
shares issuable upon exercise of currently exercisable options and options
exercisable upon consummation of the Merger.
(9) Consists of 2,100 shares of Common Stock owned by Mr. Kaufmann and 28,000
shares issuable upon exercise of currently exercisable options and options
exercisable upon consummation of the Merger.
(10) Consists of 5,100 shares of Common Stock owned by Mr. Clein and 28,000
shares issuable upon exercise of currently exercisable options and options
exercisable upon consummation of the Merger.
(11) Consists of 38,102 shares owned directly by Mr. Connelly, 4,464 shares of
Common Stock owned by LN Investment Capital Limited Partnership ("LNIC")
and 24,500 shares issuable upon exercise of currently exercisable options
and options exercisable upon consummation of the Merger. Mr. Connelly is
the Managing General Partner of LNIC. Mr. Connelly disclaims beneficial
ownership of shares of Common Stock owned by LNIC except to the extent of
his proportionate interest therein.
(12) Consists of 49,000 shares owned by four trusts for benefit of Mr. Wick or
members of his family, 4,000 shares owned by Mr. Wick as custodian for his
children, 672,600 shares owned by two investment partnerships which are
part of the G&M Group and for which Mr. Wick may be deemed to have shared
voting and dispositive power, and 24,500 shares issuable upon exercise of
currently exercisable options and options exercisable upon consummation of
the Merger.
(13) Includes 810,897 shares of Common Stock issuable upon exercise of currently
exercisable options and options exercisable upon consummation of the
Merger.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective November 5, 1992, the Company acquired American Family Service
Corporation ("AFSC") pursuant to the merger of a wholly-owned subsidiary of the
Company with and into AFSC. Pursuant to the terms of a Shareholders Agreement
with LNIC, the principal stockholder of AFSC, which was entered into
simultaneously with the agreement and plan of merger in that transaction, LNIC
was granted the right to designate one person as a
25
<PAGE>
director of the Company upon consummation of the acquisition of AFSC, and to
thereafter require the Company to include in the slate of nominees for election
of directors at any meeting of stockholders of the Company at which directors
are elected, and to solicit proxies for, one nominee selected by LNIC for so
long as the shares owned by LNIC, including shares issuable upon conversion of
the preferred stock which was issued to AFSC in the transaction, constituted
more than 5% of the total number of shares of Common Stock issued and
outstanding. Michael J. Connelly was LNIC's designee on the Board commencing in
1992 pursuant to the Shareholders Agreement. During the fourth quarter of 1997
LNIC converted the remaining balance of its preferred stock into shares of
Common Stock of the Company and has disposed of a sufficient number of its
shares of Common Stock so that it no longer satisfies the 5% test referred to
above.
In 1993 and 1994, the Company furnished loans to each of its executive
officers in connection with their purchases of Common Stock. In connection with
a private placement of shares in 1993, the Company loaned $200,200 to Mr. Niglio
and $20,075 to each of Dr. Yalow, Randall J. Truelove, Vice President, Finance,
Rebekah K. Renshaw, Vice President, Operations, and Frank A. Devine, Secretary
and General Counsel, constituting the purchase price for their respective
shares. Each of the loans bears interest at 5.5% annum and is payable in 36
equal monthly installments of principal and interest, commencing on May 1, 1996.
The Board of Directors of the Company has deferred indefinitely the payment of
interest and principal of these loans. In connection with their purchases of
publicly registered shares in 1994, the Company loaned $224,475 to Mr. Niglio
and $33,825 to each of Dr. Yalow, Mr. Truelove, Ms. Renshaw and Mr. Devine,
constituting substantially all of the purchase price for their respective
shares. Those loans bear interest at the rate of 7.3% per annum, and are payable
in 36 monthly installments of principal and interest commencing in
December 1997. The Board of Directors of the Company has also deferred
indefinitely the payment of interest and principal of these loans. As of
February 28, 1998, the aggregate amount of indebtedness of each of the executive
officers to the Company pursuant to the 1993 and 1994 loans was $533,444 for
Mr. Niglio, $67,653 for Dr. Yalow, $67,653 for Mr. Truelove, and $67,653 for
Mr. Devine. In connection with the exercise of certain stock options the
Compensation Committee in October 1997 approved loans of $266,200 to Mr. Niglio,
$18,700 to Mr. Truelove, and $15,000 to Mr. Devine.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Niglio, Chairman and Chief Executive Officer of the Company, is a
director and member of the Compensation Committee of PMR Corporation. Mark P.
Clein, a director of the Corporation, is Chief Financial Officer of PMR
Corporation.
26
<PAGE>
STOCK PERFORMANCE GRAPH
The following stock performance graph reflects a comparison of the cumulative
total return on an investment in the Common Stock of the Company from December
31, 1992 through December 31, 1997 with the Amex Market Value Index, an old
"Peer Group" of other publicly traded companies (KinderCare Learning Centers,
Inc., Sunrise Preschools, Inc., and Nobel Education Dynamics, Inc.) and a new
"Peer Group" which consists of members of the old "Peer Group" plus two
additional companies primarily engaged in child care services, Kiddie Academy
International, Inc, and New Horizon Kids Quest, Inc., both of which conducted
initial public offerings in 1995. The Company has elected to utilize a new Peer
Group because it believes that the new Peer Group constitutes a more
representative sample of publicly-owned companies which are competitive with the
Company. Dividend reinvestment has been assumed and, with respect to companies
in the old and new Peer Groups, the performance of each such company's stock has
been weighed to reflect relative stock market capitalization. The comparisons
in this table are required by the SEC and, therefore, are not intended to
forecast or be indicative of possible future performance of the Company's Common
Stock.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
AMONG CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC.,
THE AMEX MARKET VALUE INDEX, A NEW PEER GROUP AND AN OLD PEER GROUP
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN AT
----------------------------------------------------------
12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Children's Discovery Centers of America, Inc.. . . . . . . . $100 $195 $246 $111 $151 $211
New Peer Group . . . . . . . . . . . . . . . . . . . . . . . 100 100 129 486 284 271
Old Peer Group . . . . . . . . . . . . . . . . . . . . . . . 100 100 129 486 284 244
AMEX Market Value. . . . . . . . . . . . . . . . . . . . . . 100 120 109 137 146 177
</TABLE>
- -----------------
* Assumes $100 was invested on December 31, 1992 in the applicable stock or
index, and that all dividends were reinvested.
27
<PAGE>
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").
28
<PAGE>
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. 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.
C. 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.
D. 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.
E. Non-Employee Directors' Stock Option Plan, incorporated by
reference to Exhibit 10(J) to S-2 Registration Statement No.
33-70360.
F. 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.
G. Non-Employee Directors' Stock Option Plan (Amended and Restated
as of August 27, 1996, incorporated by reference to Exhibit 10(I)
to Registrant's 1996 Form 10-K.
H. Promissory Note of Richard A. Niglio dated October 1, 1997, in
the principal amount of $232,500 filed as an exhibit hereto.*
I. Non-Employee Directors' Stock Option Plan (Amended and Restated
as of August 27, 1996), incorporated by reference to Exhibit
10(I) to Registrant's 1996 Form 10-K.
- --------------------
* ATTACHED HERETO
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.
29
<PAGE>
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:
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY STATE OF INCORPORATION
------------------ ----------------------
<S> <C>
Magic Years Child Care and Learning Centers, Inc. Pennsylvania
Greentree Learning Center, Inc. New Jersey
Fox 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
</TABLE>
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 are attached.
(d) ADDITIONAL FINANCIAL STATEMENTS OR SCHEDULES. None.
30
<PAGE>
SIGNATURES
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: APRIL 29, 1998 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
---------- ----- ----
<S> <C> <C>
s/s Richard A. Niglio Chairman of the Board April 29, 1998
- ------------------------------ of Directors, and
Richard A. Niglio Chief Executive Officer,
(Principal Executive Officer)
s/s Randall J. Truelove Vice President, Finance April 29, 1998
- ------------------------------ (Principal Financial Officer
Randall J. Truelove and Accounting Officer)
s/s Mark P. Clein Director April 29, 1998
- ------------------------------
Mark P. Clein
s/s Michael J. Connelly Director April 29, 1998
- ------------------------------
Michael J. Connelly
s/s Robert E. Kaufmann Director April 29, 1998
- ------------------------------
Robert E. Kaufmann
s/s W. Wallace Mcdowell, Jr. Director April 29, 1998
- ------------------------------
W. Wallace McDowell, Jr.
s/s Myron A. Wick, III Director April 29, 1998
- ------------------------------
Myron A. Wick, III
s/s Elanna S. Yalow Director April 29, 1998
- ------------------------------
Elanna S. Yalow
</TABLE>
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Public Accountants F-1
Financial Statements:
Consolidated Balance Sheets - F-2
December 31, 1997 and 1996
Consolidated Statements of Income for the F-3
Years Ended December 31, 1997, 1996, and 1995
Consolidated Statements of Stockholders' Equity F-4
for the Years Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years F-5
Ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements F-6
through F-15
</TABLE>
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>
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, 1997 and 1996, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1997. 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
San Francisco, California,
February 27, 1998 (except with
respect to the matter discussed in
Note 10, as to which the date is
March 27, 1998)
F-1
<PAGE>
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1997 AND 1996
(In thousands except share information)
<TABLE>
<CAPTION>
ASSETS 1997 1996
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,763 $ 4,826
Short-term investments 10,953 6,914
Accounts receivable, net of allowance for doubtful
accounts of $260 and $143, respectively 2,774 3,308
Prepaid expenses and other 1,428 1,623
-------- --------
Total current assets 18,918 16,671
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land 1,659 1,320
Buildings 7,558 6,179
Furniture, fixtures and equipment 11,477 11,015
Transportation equipment 2,370 2,233
Leasehold improvements 9,642 8,832
Construction in Progress 4 750
Less: Accumulated depreciation and amortization (10,194) (8,798)
-------- --------
22,516 21,531
-------- --------
INTANGIBLE ASSETS, net 33,487 35,381
-------- --------
OTHER ASSETS 2,819 1,752
-------- --------
Total Assets $ 77,740 $ 75,335
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 2,934 $ 2,095
Accounts payable 701 501
Payroll and related accruals 3,352 3,090
Accrued liabilities and other 2,694 1,730
-------- --------
Total current liabilities 9,681 7,416
-------- --------
LONG-TERM DEBT, net of current portion 14,139 16,634
-------- --------
ACCRUED STRAIGHT- LINE RENT 1,091 998
-------- --------
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 $0,
no shares outstanding in 1997 and
2,135 shares outstanding in 1996 0 0
Common Stock, par value $.01 per share,
Authorized 20,000,000 shares, outstanding:
6,744,129 in 1997, and 6,306,958 in 1996 137 133
Treasury Stock (7,200,844 in 1997 and 1996) 0 0
Paid-in Capital in Excess of Par 53,011 52,722
Unrealized Gain on Short-Term Investments 15 0
Loans to Stockholder Officers (976) (710)
Retained earnings (accumulated deficit) 642 (1,858)
-------- --------
Total stockholders' equity 52,829 50,287
-------- --------
Total liabilities and stockholders' equity $ 77,740 $ 75,335
-------- --------
-------- --------
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-2
<PAGE>
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(in thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
REVENUE FROM OPERATIONS $ 93,015 $ 87,480 $ 77,627
Payroll and related expenses 49,059 47,131 42,235
Other center operating expenses 24,783 23,848 19,811
Administrative expenses 7,937 8,042 6,317
Depreciation and amortization 6,040 5,118 3,804
Advertising and promotion 711 898 843
--------- --------- ---------
Total operating expenses 88,530 85,037 73,010
--------- --------- ---------
INCOME FROM OPERATIONS 4,485 2,443 4,617
OTHER INCOME (EXPENSE):
Interest income 706 375 807
Interest expense (1,591) (1,692) (1,580)
--------- --------- ---------
INCOME BEFORE INCOME TAXES 3,600 1,126 3,844
PROVISION FOR INCOME TAXES 1,100 225 1,208
--------- --------- ---------
NET INCOME $ 2,500 $ 901 $ 2,636
--------- --------- ---------
--------- --------- ---------
NET INCOME PER SHARE:
Basic $ 0.37 $ 0.14 $ 0.43
Diluted $ 0.36 $ 0.13 $ 0.38
--------- --------- ---------
--------- --------- ---------
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 6,703 6,307 6,185
Diluted 6,899 6,723 6,929
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-3
<PAGE>
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(In thousands)
<TABLE>
<CAPTION>
Series A
Preferred Stock Common Stock
----------------------------------------------- Paid - In
Number Number Capital in
of of Excess
Shares Amount Shares Amount of Par
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
BALANCE,
December 31, 1994 3 $- 5,932 $130 $51,391
Public Offering - - 138 1 1,242
Exercise of Options - - 34 - 49
Preferred Stock Conversion - - 100 1 (1)
Interest and Loans to Stockholder Officers - - - - 42
Unrealized Gain on Short Term Investments - - - - -
Net Income - - - - -
--------------------------------------------------------------------
BALANCE,
December 31, 1995 3 - 6,204 132 52,723
Preferred Stock Conversion (1) - 103 1 (1)
Interest and Loans to Stockholder Officers - - - - -
Unrealized Loss on Short Term Investments - - - - -
Net Income - - - - -
---------------------------------------------------------------------
BALANCE,
December 31, 1996 2 - 6,307 133 52,722
Preferred Stock Conversion (2) - 388 4 (4)
Exercise of Options - - 49 - 293
Interest and Loans to Stockholder Officers - - - - -
Unrealized Gain on Short Term Investments - - - - -
Net Income - - - - -
---------------------------------------------------------------------
BALANCE,
December 31, 1997 - $- 6,744 $137 $ 53,011
---------------------------------------------------------------------
<CAPTION>
Unrealized
Loans Gain (Loss) Retained
to on Earnings Total
Stockholder Short Term (Accumulated Stockholders'
Officers Investment Deficit) Equity
-------- ---------- -------- ------
<S> <C> <C> <C> <C>
BALANCE,
December 31, 1994 $(640) $(30) $(5,395) $45,456
Public Offering - - - 1,243
Exercise of Options - - - 49
Preferred Stock Conversion - - - -
Interest and Loans to Stockholder Officers (143) - - (101)
Unrealized Gain on Short Term Investments - 40 - 40
Net Income - - 2,636 2,636
---------------------------------------------------------
BALANCE,
December 31, 1995 (783) 10 (2,759) 49,323
Preferred Stock Conversion - - - -
Interest and Loans to Stockholder Officers 73 - - 73
Unrealized Loss on Short Term Investments - (10) - (10)
Net Income - - 901 901
---------------------------------------------------------
BALANCE,
December 31, 1996 (710) - (1,858) 50,287
Preferred Stock Conversion - - - -
Exercise of Options - - - 293
Interest and Loans to Stockholder Officers (266) - - (266)
Unrealized Gain on Short Term Investments - 15 - 15
Net Income - - 2,500 2,500
---------------------------------------------------------
BALANCE,
December 31, 1997 $ (976) $15 $ 642 $ 52,829
---------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-4
<PAGE>
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,500 $ 901 $ 2,636
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 3,166 2,409 1,960
Amortization 2,874 2,709 1,844
Changes in assets and liabilities -
Accounts receivable 534 (1,035) (1,059)
Prepaid expenses and other 195 941 (1,022)
Accounts payable 200 (125) (172)
Payroll and related accruals 262 876 527
Accrued liabilities, straight-line rent and other 1,252 1,317 (32)
-------- ------- --------
Net cash provided by operating activities 10,983 7,993 4,682
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (4,024) (1,829) (21,253)
Proceeds from sale of short-term investments 0 2,899 14,599
Payments for acquisitions of child care centers (674) (874) (9,089)
Payments for the start-up of centers (1,155) (812) (475)
Purchases of property, plant and equipment, net (3,000) (3,524) (4,952)
Other, net (1,084) 236 (496)
-------- ------- --------
Net cash used for investing activities (9,937) (3,904) (21,666)
-------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of issuance costs 27 - 1,191
Proceeds from issuance of long-term debt 1,185 340 1,483
Repayments of long-term debt (3,321) (2,523) (4,328)
-------- ------- --------
Net cash used for financing activities (2,109) (2,183) (1,654)
-------- ------- --------
Net increase (decrease) in cash and cash equivalents (1,063) 1,906 (18,638)
CASH AND CASH EQUIVALENTS, beginning of year 4,826 2,920 21,558
-------- ------- --------
CASH AND CASH EQUIVALENTS, end of year $3,763 $4,826 $2,920
-------- ------- --------
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-5
<PAGE>
CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(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, 1997, the Company
operated 248 centers located in 22 states and the District of Columbia with
an aggregate licensed capacity of approximately 25,000 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 1996 and 1995
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 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:
<TABLE>
<CAPTION>
<S> <C>
Buildings 40 years
Furniture, fixtures and equipment 3 -10 years
Transportation equipment 3 - 5 years
Leasehold improvements 3 - 20 years
</TABLE>
Depreciation of property, plant and equipment included in the accompanying
consolidated statements of income was $3,166,000, $2,409,000, and $1,960,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
The Company expenses repair and maintenance costs as incurred. Repair and
maintenance costs included in the accompanying consolidated statements of
income amounted to $1,233,000, $1,229,000, and $960,000 for the years ended
December 31, 1997, 1996 and 1995, 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
$13,186,000, $11,093,000, and $9,195,000 in 1997, 1996, and 1995,
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, 1997, were as follows (in thousands):
<TABLE>
<CAPTION>
Gross Unrealized Holding
------------------------
Fair Value Amortized Cost Gain Loss
---------- -------------- ---- ----
<S> <C> <C> <C> <C>
Municipal Bonds and Other $10,926 $10,911 $15 $-
</TABLE>
The contractual maturities of the Company's debt securities as of December 31,
1997 were all less than two years. The net change in unrealized gain (loss)
was a $15,000 gain.
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 and management contracts, as follows (in
thousands):
<TABLE>
1997 1996
--------- ---------
<S> <C> <C>
Goodwill $ 22,225 $ 21,601
Covenants not to compete 13,688 13,531
Other intangibles 7,665 7,676
--------- ---------
43,578 42,808
Accumulated amortization (10,091) (7,427)
--------- ---------
$ 33,487 $ 35,381
--------- ---------
</TABLE>
These assets are being amortized over the following lives:
<TABLE>
<S> <C>
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)
Intangibles with management contracts Life of contract (3 - 10 years)
</TABLE>
Amortization of intangible assets charged to expense amounted to $2,874,000,
$2,709,000, and $1,844,000 for the years ended December 31, 1997, 1996, and
1995, respectively.
OTHER ASSETS:
Other assets include deferred tax assets related to net operating loss
carryforwards and notes receivable. Included in notes receivable are notes
from KidActive, LLC (an educational toy company) which may be converted during
1998,
F-7
<PAGE>
and along with the Company's existing shares would give the Company an
approximate nineteen percent ownership in KidActive, LLC.
NET INCOME PER SHARE:
Effective December 15, 1997, the Company adopted SFAS No. 128 "Earnings Per
Share." SFAS No. 128 supersedes APB Opinion 15. As a result, all prior year
net income per share information has been restated.
Net income per basic common share has been computed by dividing net income
available to common stockholders by the weighted average number of common
shares outstanding during each year. Net income per diluted 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.
The reconciliation of the numerators and denominators of the basic and
diluted net income per share are as follow
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
For the Year 1995:
Basic net income per share:
Income available to holders of common stock $2,636,000 6,185,077 $0.43
Shares issuable upon exercise of stock options using
treasury stock method 252,984
Shares outstanding based on assumed conversion
of preferred stock 490,909
Diluted net income per share:
----------- ---------- -------
Income available to holders of common stock and
common stock equivalents $2,636,000 6,928,970 $0.38
----------- ---------- -------
For the Year 1996:
Basic net income per share:
Income available to holders of common stock $901,000 6,306,958 $0.14
Shares issuable upon exercise of stock options using
treasury stock method 27,601
Shares outstanding based on assumed conversion
of preferred stock 388,182
----------- ---------- -------
Diluted net income per share:
Income available to holders of common stock and
common stock equivalents $901,000 6,722,741 $0.13
----------- ---------- -------
For the Year 1997:
Basic net income per share:
Income available to holders of common stock $2,500,000 6,702,607 $0.37
Shares issuable upon exercise of stock options using
treasury stock method 196,615
----------- ---------- -------
Diluted net income per share:
Income available to holders of common stock and
common stock equivalents $2,500,000 6,899,222 $0.36
----------- ---------- -------
</TABLE>
F-8
<PAGE>
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 made cash payments for interest and income taxes (or received
refunds) for the years ended December 31, 1997, 1996 and 1995, as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest $1,581 $1,693 $1,580
Income taxes $ 918 $(426) $1,654
</TABLE>
Supplemental Schedule of Noncash Investing and Financing Activities:
The Company purchased centers during the years ended December 31, 1997, 1996
and 1995, as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash payments and/or expenses $674 $ 874 $ 9,089
Notes issued to sellers 480 981 6,416
Liabilities assumed - 73 1,503
------- ------ -------
Total value of centers acquired $ 1,154 $1,928 $17,008
------- ------ -------
------- ------ -------
</TABLE>
NEW ACCOUNTING STANDARDS:
In June 1997, the Financial Accounting Standards Boards issued SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. The adoption of the standard as
required on January 1, 1998 will not have a material impact on the Company's
financial statements.
(2) ACQUISITIONS
The Company acquired or started six centers in 1997, fourteen centers during
1996, and a total of fifty-two centers during 1995.
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, and
management contracts. Any portion of the purchase price remaining after these
allocations has been recorded as goodwill.
(3) LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1997 and 1996, (in
thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Long-term borrowings:
Notes payable to banks (a) $5,682 $5,244
Notes payable to sellers (b) 11,391 13,485
------- -------
17,073 18,729
Less - Current portion (2,934) (2,095)
------- -------
$14,139 $16,634
------- -------
------- -------
</TABLE>
F-9
<PAGE>
(a) Consists of various secured and unsecured installment and term
loans at rates ranging from 4.8% to 13.5%, payable through 2014.
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 8.0% to
11.9% and payable in installments of varying amounts through 2012.
A summary of the maturities of long-term debt is as follows for the years
ending December 31 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998 $2,934
1999 2,104
2000 1,812
2001 2,373
2002 2,645
Thereafter 5,205
-----
$17,073
-------
-------
</TABLE>
The Company also has available to it up to $5,000,000 under an unsecured line
of credit furnished by a commercial bank. Amounts drawn down bear interest of
1.75% above the bank's LIBOR rate and will convert to a five year term loan on
August 1, 1998. During 1997 the Company did not use any of the funds available
under the line of credit. 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 $11,605,000,
$11,318,000, and $9,342,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
Future minimum payments under operating leases (not including unexercised
renewal options) are as follows for the years ending December 31 (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
1998 $10,671
1999 8,794
2000 7,513
2001 6,509
2002 5,758
Thereafter 15,039
-------
Total future minimum
lease payments $54,284
-------
-------
</TABLE>
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 $152,000 in 1997, $219,000 in 1996, and
$45,000 in 1995.
Rent expense due under lease agreements with a duration longer than twelve
months is 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 1997 the Company issued 388,182 shares of Common Stock on conversion of
2,135 shares of its Series A Convertible Preferred Stock (see Note 6).
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).
F-10
<PAGE>
In January 1995, the Company issued an additional 138,477 shares of Common
Stock at $10.25 per share, associated with the Company's 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).
(6) PREFERRED STOCK
The Company's stockholders, at a special meeting in November 1992, authorized
Series A Convertible Preferred Stock. These shares were convertible into the
Company's Common Stock at an initial conversion price of $5.50 per share and
had a liquidation value of $1,000 per share. If 50% of these shares were 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 were
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 1997, 1996 and 1995, holders of the Series A Convertible Preferred stock
exchanged all 3,250 shares of the Series A Convertible Preferred for 590,909
shares of the Company's Common Stock.
(7) INCOME TAXES
At December 31, 1997, the Company has net operating loss carryforwards of
approximately $5,200,000. 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 and 1994 pursuant to
public offerings of Common Stock by the Company. As a result of the 1991
change in ownership, beginning in 1992 the net operating loss 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 separate net operating loss carryforwards for tax purposes of
approximately $900,000 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 separate net operating loss
carryforwards for tax purposes of approximately $1,020,000 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.
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, 1997 was $426,000 of which $195,000 was recognized as a reduction
in goodwill.
Approximately $470,000 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.
F-11
<PAGE>
Deferred tax assets and liabilities as of December 31, 1997 and 1996 consisted
of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards $ 1,768 $ 1,972
Straight-line rent 425 379
Other 760 606
-------- --------
2,953 2,957
-------- --------
Deferred tax asset valuation allowance (1,325) (1,751)
-------- --------
Deferred tax liabilities
Depreciation (780) (720)
Reserves - (252)
Other (8) (13)
-------- --------
(788) (985)
-------- --------
Net deferred tax asset $840 $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
---------------------------------------
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Statutory Federal income tax rate 34.0% 34.0% 34.0%
State income taxes, net of Federal benefit 5.0 4.6 3.1
Change in valuation allowance (6.4) (19.6) (2.9)
Alternative Minimum Tax - 14.7 -
Tax exempt interest (3.2) (7.8) (2.5)
Other, net (1.2) (5.9) (0.3)
---------------------------------------
Effective income tax rate 30.6% 20.0% 31.4%
---------------------------------------
</TABLE>
Income tax expense consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Federal:
Current $1,445 $270 $855
Deferred (617) (124) 171
State:
Current 300 79 126
Deferred (28) - 56
------- ----- ------
$1,100 $225 $1,208
------- ----- ------
------- ----- ------
</TABLE>
F-12
<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 employee 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,
1997, options for 715,289 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, 1997, 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 for these non-qualified options is
required to be at least the fair market value of the common stock on the date
of the grant, as determined by the Board of Directors. Options for 90,376
shares have been granted and remain outstanding at December 31, 1997.
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 for recognition of compensation cost
on the Company's stock option plans. Adoption of SFAS N0. 123 is optional;
however, pro forma 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-13
<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:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C>
Net income: As Reported $2,500 $ 901 $2,636
Pro Forma $2,309 $ 176 $2,603
Basic EPS: As Reported $ 0.37 $0.14 $ 0.43
Pro Forma $ 0.34 $0.03 $ 0.42
Diluted EPS: As Reported $ 0.36 $0.13 $ 0.38
Pro Forma $ 0.33 $0.03 $ 0.38
</TABLE>
The significant 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, 1997,
1996 and 1995, and changes during the years then ended is presented in the table
and narrative below:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beg. of year 808,840 $5.37 648,338 $8.06 646,838 $ 7.81
Granted 186,500 $4.94 592,502 $5.20 17,500 $16.38
Exercised (49,259) $5.96 0 $0.00 (6,950) $ 6.99
Canceled (17,916) $4.80 (432,000) $9.16 (9,050) $ 8.25
-------- --------- -------
Outstanding at end of year 928,165 $5.27 808,840 $5.37 648,338 $ 8.06
-------- --------- -------
Exercisable at end of year 728,679 647,875 506,233
Weighted average fair value $2.10 $1.82 $ 6.73
of options granted
--------------------------------------------------------------------------------------------------
</TABLE>
F-14
<PAGE>
OUTSTANDING AND EXERCISABLE BY PRICE RANGE
As of December 31, 1997
<TABLE>
<CAPTION>
Range of Number Weighted Average Weighted Number Weighted
Exercise Outstanding Remaining Average Exercisable Average
Price Contractual Life Exercise Price Exercise Price
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3.63 - $4.88 283,415 8.06 $4.78 114,230 $4.74
$5.25 - $5.25 455,000 6.54 $5.25 428,765 $5.25
$5.50 - $6.00 185,250 4.31 $6.00 184,784 $6.00
$7.00 - $7.50 4,500 4.83 $7.50 900 $7.50
------------- ------- ---- ----- ------- -----
$3.63 - $7.50 928,165 6.55 $5.27 728,679 $5.36
</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 1997, 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%.
(10) SUBSEQUENT EVENT - ACQUISITION OF THE COMPANY
On March 27, 1998, the Company entered into an Agreement and Plan of Merger
(the "Agreement") with Knowledge Beginnings, Inc., a privately-owned education
services company ("Parent") and its wholly-owned subsidiary, KBI Acquisition,
Corp. ("Purchaser"). Under the Agreement, Purchaser will undertake a tender
offer (supported by the Board of Directors) for all outstanding shares of CDC
common stock at a net price of $12.25 per share in cash and, following
consummation of the tender offer, will effect a merger with the Company (the
"Merger"). Pursuant to the Merger, all outstanding shares of CDC common stock
not acquired in the tender offer will be converted into the right to receive
$12.25 per share in cash, and the Company will become a wholly-owned subsidiary
of Parent. Holders of 1,363,700 shares of CDC common stock have simultaneously
entered into a support agreement pursuant to which they have agreed to tender
their shares and under certain circumstances sell their shares to Parent for
$12.25 per share in cash. The Company has also granted Parent an option to
purchase 1,342,155 previously unissued shares of CDC common stock (equal to
19.9% of the outstanding shares of the Company) under certain circumstances for
$10.125 per share. The tender offer will be initiated upon certain filings by
Purchaser and the Company. The completion of the tender offer is subject to
certain conditions, including Purchaser's receipt of at least a majority of the
outstanding shares calculated on a full-diluted basis and receipt of certain
regulatory approvals. Consummation of the Merger is also subject to certain
conditions including stockholder approval, if legally required.
Dr. Elanna S. Yalow, President and Chief Operating Officer, has entered into an
employment agreement with Parent to become effective on a date selected by
Parent (the "Effective Date") between the consummation of the tender offer and
consummation of the Merger. Richard A. Niglio, Chief Executive Officer and
Chairman of the Board, has entered into a two year consulting agreement with
the Company to become effective on the Effective Date, at which time will
resign as Chief Executive Officer and Chairman of the Board. Employment
contracts between the Company and Randall J. Truelove, Vice President of
Finance, Jane Delaney, Vice President, and Frank A. Devine, Secretary, will
become effective on the Effective Date.
Also, subject to consummation of the Merger, the Company has accelerated the
vesting of all outstanding stock options whether issued under Company plans or
otherwise (see Note 9), and the Company will offer to redeem all such options,
upon consummation of the Merger, for cash at a net price equal to $12.25 per
share, less the underlying exercise price of the option, any withholding taxes
due with respect to such redemption, and the balance of any loans then
outstanding from the Company to the optionholder.
F-15
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
ITEM NO. ITEM TITLE SEQUENTIALLY NUMBERED PAGE
<C> <S> <C>
23 Consent of Arthur Andersen LLP 1
Dated: March 27, 1998
</TABLE>
F-16
<PAGE>
SIGNATURES
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: April 29, 1998 By: /s/ Richard A. Niglio
---------------------------------------------
Richard A. Niglio
Chairman and Chief Executive Officer
<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
San Francisco, California
March 27, 1998
1
