<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to ____________
Commission File Number 0-28270
CHILDREN'S WONDERLAND, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
California 95-4455341
------------------------------- -------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
28310 Roadside Drive, Suite 220, Agoura, California 91301
---------------------------------------------------------
(Address of principal executive offices)
(818) 865-1306
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
As of November 5, 1996, the Registrant had outstanding 3,951,171 shares of
Common Stock, no par value, and 3,007,500 Warrants to purchase one share of
Common Stock at prices ranging from $2.00 to $9.44 per share.
This report, including all exhibits and attachments, contains 15 pages.
<PAGE> 2
CHILDREN'S WONDERLAND, INC.
FORM 10-QSB
For the Quarter Ended September 30, 1996
INDEX
<TABLE>
<CAPTION>
Page
Numbers
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
(a) Balance Sheets as of September 30, 1996 and June 30, 1996 (unaudited) 3
(b) Statements of Operations for the three months ended September 30,
1996 and 1995 (unaudited) 5
(c) Condensed Statements of Cash Flows for the three months ended
September 30, 1996 and 1995 (unaudited) 6
(d) Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Plan of Operation 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Exhibit 27. Financial Data Schedule 15
</TABLE>
2
<PAGE> 3
CHILDREN'S WONDERLAND, INC.
BALANCE SHEETS
SEPTEMBER 30, 1996 AND JUNE 30, 1996 (UNAUDITED)
- -------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $1,356,622 $3,210,418
Accounts Receivable, net of allowance for doubtful
accounts of $35,278 and $42,676 as of September 30,
1996 and June 30, 1996, respectively 83,115 64,667
Prepaid Expenses 257,191 104,979
---------- ----------
Total Current Assets 1,696,928 3,380,064
EQUIPMENT & IMPROVEMENTS, NET 1,397,414 429,325
CAPITALIZED LEASES
(Net of accumulated amortization of $282,227 and
$227,991 as of September 30, 1996 and June 30, 1996,
respectively) 2,182,749 2,120,060
INTANGIBLE ASSETS, NET 768,027 633,415
DEPOSITS AND OTHER 498,925 433,650
---------- ----------
TOTAL ASSETS $6,544,043 $6,996,514
========== ==========
</TABLE>
See Notes to Financial Statements
3
<PAGE> 4
CHILDREN'S WONDERLAND, INC.
BALANCE SHEETS
SEPTEMBER 30, 1996 AND JUNE 30, 1996 (UNAUDITED)
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts Payable $ 778,563 $ 480,837
Accrued Expenses 327,071 434,665
Due to Stockholders 370,000 383,000
Current Portion of Long-Term Debt 270,835 325,991
Current Portion of Capitalized Lease Obligation 325,646 283,103
----------- -----------
Total Current Liabilities 2,072,115 1,907,596
----------- -----------
LONG-TERM DEBT, less current portion 809,258 468,261
----------- -----------
CAPITALIZED LEASE OBLIGATION, less current portion 2,116,843 2,083,483
----------- -----------
COMMITMENTS & CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock, no par value;
20,000,000 shares authorized; 3,941,668 and
3,925,689 shares issued and outstanding as of
September 30, 1996 and June 30, 1996, respectively 9,638,040 9,638,040
Accumulated Deficit (8,092,213) (7,100,866)
----------- -----------
Total Stockholders' Equity 1,545,827 2,537,174
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 6,544,043 $ 6,996,514
========== ===========
</TABLE>
See Notes to Financial Statements
4
<PAGE> 5
CHILDREN'S WONDERLAND, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1995 (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3 Months Ended September 30,
1996 1995
---------- ----------
<S> <C> <C>
REVENUE $1,142,368 $1,076,823
---------- ----------
OPERATING EXPENSES:
Payroll and Related Costs 740,449 769,163
Center Facilities Costs 254,829 247,087
General and Administrative 655,800 312,624
Development Costs 235,754 17,672
Other 109,583 90,462
Depreciation & Amortization 75,365 36,950
---------- ----------
Total Operating Expenses 2,071,780 1,473,958
---------- ----------
OPERATING LOSS 929,412 397,135
Interest Expense, Net 82,286 89,952
Other Non-Operating (Income)/Expense (20,351) 25,689
---------- ----------
NET LOSS $ 991,347 $ 512,776
========== ==========
NET LOSS PER SHARE (See Note 2)
($0.25)
==========
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES 3,928,352
==========
</TABLE>
See Notes to Financial Statements
5
<PAGE> 6
CHILDREN'S WONDERLAND, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1995 (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3 Months Ended September 30,
1996 1995
----------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ (850,532) $ 64,550
CASH FLOWS FROM INVESTING ACTIVITIES (1,198,001) (458,292)
CASH FLOWS FROM FINANCING ACTIVITIES 194,737 609,498
----------- ---------
NET (DECREASE)/INCREASE IN CASH (1,853,796) 215,756
CASH, Beginning of period 3,210,418 65,072
----------- ---------
CASH, End of period $ 1,356,622 $ 280,828
=========== =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 128,034 $ 31,048
Cash paid during the period for taxes -- --
</TABLE>
Non-cash Transactions:
In July 1996, the Company leased several school buses to be used by certain
centers located in Denver, Colorado. The lease transaction has been accounted
for as a capital lease, and accordingly, an asset and a liability in the amount
of $116,924, the net present value of the minimum lease payments, were
recorded.
See Notes to Financial Statements
6
<PAGE> 7
CHILDREN'S WONDERLAND, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1995 (UNAUDITED)
- -------------------------------------------------------------------------------
NOTE 1 - GENERAL INFORMATION
The interim financial data is unaudited; however, in the opinion of management,
the interim data includes all adjustments, consisting of normal recurring
adjustments necessary for a fair presentation of the results for the interim
periods. The financial statements included herein have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures included herein
are adequate to make the information presented not misleading.
The accounting policies followed by the Company and other information are
contained in the notes to the Company's financial statements.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Children's Wonderland, Inc. owns and operates full service intergenerational
family care centers. At September 30, 1996, the Company operated thirteen
centers located in California and Colorado.
Basis of Presentation
The accounting policies followed during the interim periods reported on are in
conformity with generally accepted accounting principles and are consistent
with those applied for annual periods. Operational comparisons between the
first quarter of fiscal years 1996 and 1995 are affected by the acquisition of
a center in December 1995 and the start-up of two new centers, one each in
March and September 1996 (see "Management's Discussion and Analysis of Plan of
Operations" which follows).
Net Loss Per Share
The weighted average shares used in the computation of net loss per share was
based upon the weighted average common shares; all common stock equivalents are
determined to be anti-dilutive. Loss per share for the three months ended
September 30, 1995 has not been presented as such information is not indicative
of the Company's performance on an on-going basis due to the significant amount
of shares issued in May 1996 in connection with the Company's initial public
offering.
For a complete discussion of the Company's accounting policies, refer to the
Company's Annual Report on Form 10-KSB for the year ended June 30, 1996,
previously filed.
7
<PAGE> 8
CHILDREN'S WONDERLAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF PLAN OF OPERATIONS
SEPTEMBER 30, 1996 AND 1995
- -------------------------------------------------------------------------------
ITEM 2:
GENERAL OVERVIEW:
The Company successfully completed its initial public offering during the
fourth quarter of fiscal year 1996. The financial results for the first
quarter of fiscal year 1997 reflect the Company's continued emphasis on growth,
including the opening of a new center in Woodland Hills, California in
September 1996, the investment of funds generated by the initial public
offering into both the refurbishment of existing centers as well as other new
centers at various stages of development, and increased marketing efforts
geared towards increasing attendance levels at all of the Company's centers.
During the first quarter of fiscal year 1997, the Company opened one new
start-up center. The results of operations of the start-up center are included
in the Company's financial statements from the date of opening. Operating
expenses for the start-up center have been included in development costs, so as
to facilitate comparisons among periods on a same-center basis. Historically,
the Company's operating revenue has followed the seasonality of the school
year, declining in the summer months which comprise the first quarter, as well
as the year-end holiday period.
Some of the statements contained herein relating to revenues, center
development, and other similar statements of the Company's expectations for
future events are forward-looking statements. These statements are made in
reliance upon the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. These statements are based on the Company's current
expectations and beliefs, but the actual results may vary substantially as a
result of a variety of factors, including risks associated with competition in
the markets in which the Company competes, the Company's ability to retain key
personnel, unanticipated problems and additional costs relating to development,
regulatory compliance, construction and marketing, natural disasters, inability
to secure adequate financing, and other difficulties encountered by the Company
in the ordinary course of business.
8
<PAGE> 9
CHILDREN'S WONDERLAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF PLAN OF OPERATIONS
SEPTEMBER 30, 1996 AND 1995
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
The following table sets forth the percentage of center revenue represented in
the Company's statement of operations for the periods indicated:
<TABLE>
<CAPTION>
3 Months Ended September 30,
1996 1995
----- -----
<S> <C> <C>
REVENUE 100.0% 100.0%
----- -----
OPERATING EXPENSES:
Payroll and Related Costs 64.8% 71.4%
Center Facilities Costs 22.4% 22.9%
General and Administrative 57.4% 29.0%
Development Costs 20.6% 1.6%
Other 9.6% 8.3%
Depreciation & Amortization 6.6% 3.4%
----- -----
Total Operating Expenses 181.4% 136.6%
----- -----
OPERATING LOSS (81.4%) (36.6%)
Interest Expense, net 7.2% 8.6%
Other Non-Operating (Income)/Expense (1.8%) 2.4%
----- -----
NET LOSS (86.8%) (47.6%)
===== =====
</TABLE>
9
<PAGE> 10
CHILDREN'S WONDERLAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF PLAN OF OPERATIONS
SEPTEMBER 30, 1996 AND 1995
- -------------------------------------------------------------------------------
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1996 TO 1995
Revenues: Revenues increased by 6% to $1,142,368 for the first quarter of
fiscal year 1997, as compared to $1,076,823 for the first quarter of fiscal
year 1996. The increase is primarily attributed to increased center capacity
due to the addition of three centers subsequent to September 1995, offset by
temporary reductions in capacities at certain centers during the summer months
for refurbishment of various classrooms and playgrounds made possible by funds
generated by the Company's initial public offering. At September 30, 1995, the
Company's state licensed, elder/child capacity for the ten centers then in
operation was 1,129 persons, as compared to thirteen centers with a capacity of
1,561 persons at September 30, 1996. Of the three new centers, one was
acquired from a third party during the second quarter of fiscal year 1996,
whereas the other two were centers which were started-up directly by the
Company, one in March 1996 and the other in September 1996. The Company
expects revenue to continue to grow as new centers are brought on-line.
Operating Expenses - Payroll & Related Costs: Payroll expense related to
center operations decreased by 4% to $740,449 for the first quarter of fiscal
year 1997, as compared to $769,163 for the comparable period for fiscal year
1996. State law for licensed day care facilities requires a specific ratio of
elders/children to teachers. Accordingly, center payroll expenses generally
fluctuate in relationship to the attendance levels at each center. Payroll
expense as a percent of revenues for the first quarter of fiscal year 1997
decreased as compared to the first quarter for the prior year due to increased
utilization of center capacities from higher enrollment levels as well as to
continued management emphasis on labor cost control.
Operating Expenses - Center Facilities Costs: Center facilities expense
remained consistent, increasing by 3% to $254,829 for the three months ended
September 30, 1996, as compared to $247,087 for the three months ended
September 30, 1995. This expense consists primarily of rent and utilities for
the Company's mature centers; the rent expense related to the start-up centers
has been classified as Development Costs.
Operating Expenses - General and Administrative: General and administrative
expenses increased by 110% to $655,800 for the three months ended September 30,
1996, as compared to $312,624 for the three months ended September 30, 1995.
Moreover, general and administrative expenses as a percent of revenue increased
to 57% of revenue for the first quarter of fiscal year 1996 from 29% of revenue
for the first quarter of the current fiscal year. The increase is due
primarily to increased accounting, legal, and consulting fees in the first
quarter of fiscal year 1997. The increase in professional fees relate
primarily to increased exploration of potential acquisitions, the negotiation
and drafting of various equipment and facility leases, and compliance with
federal securities laws.
10
<PAGE> 11
CHILDREN'S WONDERLAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF PLAN OF OPERATIONS
SEPTEMBER 30, 1996 AND 1995
- -------------------------------------------------------------------------------
Operating Expenses - Development Costs: Development costs increased to
$235,754 for the three months ended September 30, 1996, as compared to $17,672
for the comparable period in the prior fiscal year. This expense category
includes the costs related to personnel out in the field working with centers
currently under various stages of development, the cost of Company-wide
marketing activities, and the costs associated with start-up centers. For the
first quarter of fiscal year 1997, the Company has two centers in the start-up
phase, one each in Woodland Hills and Gold River, California, whereas there
were no centers in the start-up phase for the comparable period in the prior
year. The Company expects this expense category to increase in the future, as
the Company's business plan following the initial public offering concluded in
May 1996 continues to emphasize growth through the acquisition and start-up of
additional centers.
Operating Expenses - Other: Other expense increased by 21% to $109,583 for
the first quarter of fiscal year 1997, as compared to $90,462 for the
comparable period in fiscal year 1996. This expense category includes the cost
of food for lunches and snacks served at the centers, and as such, the expense
increases as total enrollment increases. In addition, the noted increase is
also due to the expanded corporate staffing facilities. In the second quarter
of fiscal year 1996, the Company established a National Training Center in
Oxnard, California, as well as a Field Operations office in order to
accommodate an expanded sales & development department as well as other
corporate functions. Thus, these functions did not exist during the first
quarter of the prior fiscal year.
Operating Expenses - Depreciation & Amortization: Depreciation and
amortization increased by 104% to $75,365 for the three months ended September
30, 1996, as compared to $36,950 for the three months ended September 30, 1995.
The noted increase is due to the timing of center acquisitions; a center was
acquired in Denver, Colorado in December 1995, and new centers in California
commenced operations in March and September 1996, respectively. Thus, three
additional centers exist for the first quarter of fiscal year 1997 which did
not exist during the first quarter of the prior year. In addition, the Company
entered into new long-term leases for equipment maintained at various centers.
These leases have been accounted for as capital leases, and as such, an asset
was recorded by the Company for the facility and the equipment, thus increasing
amortization expense.
Interest Expense, net: Net interest expense remained relatively consistent,
decreasing by 9% to $82,286 for the three months ended September 30, 1996, as
compared to $89,952 for the three months ended September 30, 1995. The slight
fluctuation is due to the timing of short-term working capital financing.
Other Non-Operating Income/Expense: Other non-operating income/expense
fluctuated by $46,040, from total expenses of $25,689 for the first quarter of
fiscal year 1996 to an income balance of $20,351 for the first quarter of
fiscal year 1997. The net other income balance for the current quarter was the
result of the receipt of insurance funds for the loss of certain equipment
which was maintained in storage facilities.
11
<PAGE> 12
CHILDREN'S WONDERLAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF PLAN OF OPERATIONS
SEPTEMBER 30, 1996 AND 1995
- -------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES:
For the three months ended September 30, 1996, the Company's operations
resulted in a net cash outflow of $850,532. Moreover, an additional $1,198,001
in cash was used for investment purposes, primarily for the development of two
new start-up centers in California, the expansion and refurbishment of existing
center facilities, and the purchase of fixed assets for new and existing
centers.
To date, the Company has financed its operating cash needs primarily from
vendor credit, the sale of equity securities, loans from certain stockholders,
the private placement of promissory notes and convertible promissory notes, and
the delivery of promissory notes to the sellers of certain acquired centers.
In May 1996, the Company successfully completed an initial public offering of
common stock and warrants to purchase common stock. The offering resulted in
gross proceeds of $8,050,000 before deducting underwriters' fees and other
costs of the offering. In addition, the Company negotiated a $100,000 line of
credit and a $400,000 multiple disbursement term promissory note agreement with
a bank in August 1996. As of November 1996, $100,000 remains available under
these two note agreements.
The Company intends to maintain its aggressive growth strategy, although
continued expansion, be it through acquisition or otherwise, will require the
Company to raise additional cash. The Company is currently exploring various
financing options which would provide roughly $3-$4 million in long-term
financing, and other short-term working capital financing. However, there can
be no assurance that the Company will be able to obtain such financing.
In addition to planned expansion, funds generated from the initial public
offering have enabled the Company to increase spending on marketing and
advertising campaigns which are geared towards increasing enrollment levels at
the existing centers, as reflected in the increased development costs for the
first quarter of the current fiscal year. Prior to the initial public
offering, spending on advertising was limited due to a lack of adequate
resources. Moreover, the Company is implementing an expense reduction program
not only for corporate expenses, but for center-related expenses as well,
including the modification of center capacities and changes in the product mix.
Management believes that the increased advertising efforts combined with the
expense reduction program will increase center profitability levels for the
existing centers. However, there can be no assurance that either the increased
advertising efforts or the expense reduction program will be successful or that
they will result in increased profitability levels.
Should new financing not become available, the Company believes that
appropriate reductions in corporate and center-related expenses, in addition to
cash presently on hand, should provide adequate liquidity for the next twelve
months. However, there can be no assurance that the Company will be able to
achieve any of these reductions.
12
<PAGE> 13
PART II
OTHER INFORMATION
Item 6. EXHIBITS
27. Financial Data Schedule
REPORTS ON FORM 8-K
None
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
CHILDREN'S WONDERLAND, INC.
- ------------------------------
(Registrant)
/s/ Robert M. Wilson November 14, 1996
- -------------------------------
Mr. Robert M. Wilson
President & Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S BALANCE SHEETS AND STATEMENTS OF OPERATIONS AS OF AND FOR THE QUARTER
ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,356,622
<SECURITIES> 0
<RECEIVABLES> 118,393
<ALLOWANCES> (35,278)
<INVENTORY> 0
<CURRENT-ASSETS> 1,696,928
<PP&E> 1,664,101
<DEPRECIATION> (266,687)
<TOTAL-ASSETS> 6,544,043
<CURRENT-LIABILITIES> 2,072,115
<BONDS> 2,926,101
0
0
<COMMON> 9,638,040
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,544,043
<SALES> 1,142,368
<TOTAL-REVENUES> 1,142,368
<CGS> 0
<TOTAL-COSTS> 2,071,780
<OTHER-EXPENSES> 61,935
<LOSS-PROVISION> 1,933
<INTEREST-EXPENSE> 82,286
<INCOME-PRETAX> (991,347)
<INCOME-TAX> 0
<INCOME-CONTINUING> (991,347)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (991,347)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> 0
</TABLE>
