<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 March 31, 1997
[ ] 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
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
28310 Roadside Drive, Suite 220, Agoura, California 91301
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(Address of principal executive offices)
(818) 865-1306
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(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 May 5, 1997, the Registrant had outstanding 3,985,037 shares of Common
Stock, no par value.
This report, including all exhibits and attachments, contains 24 pages.
<PAGE> 2
CHILDREN'S WONDERLAND, INC.
FORM 10-QSB
For the Quarterly Period Ended March 31, 1997
INDEX
<TABLE>
<CAPTION>
Page
Numbers
-------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
(a) Balance Sheets as of March 31, 1997 and June 30, 1996 (unaudited) 3
(b) Statements of Operations for the three months and nine months ended
March 31, 1997 and 1996 (unaudited) 5
(c) Condensed Statements of Cash Flows for the nine months ended
March 31, 1997 and 1996 (unaudited) 6
(d) Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Plan of Operations 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Exhibit 27. Financial Data Schedule 24
</TABLE>
2
<PAGE> 3
CHILDREN'S WONDERLAND, INC.
BALANCE SHEETS
MARCH 31, 1997 AND JUNE 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 62,370 $3,210,418
Accounts Receivable, net of allowance for doubtful
accounts of $71,731 and $42,676 as of March 31,
1997 and June 30, 1996, respectively 126,403 64,667
Prepaid Expenses 348,264 104,979
---------- ----------
Total Current Assets 537,037 3,380,064
EQUIPMENT & IMPROVEMENTS, NET 1,729,319 429,325
CAPITALIZED LEASES
(Net of accumulated amortization of $392,161 and
$227,991 as of March 31, 1997 and June 30, 1996,
respectively) 2,116,671 2,120,060
INTANGIBLE ASSETS, NET 1,001,474 633,415
DEPOSITS AND OTHER 707,506 433,650
---------- ----------
TOTAL ASSETS $6,092,007 $6,996,514
========== ==========
</TABLE>
See Notes to Financial Statements
3
<PAGE> 4
CHILDREN'S WONDERLAND, INC.
BALANCE SHEETS
MARCH 31, 1997 AND JUNE 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
------------ -----------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts Payable $ 1,318,615 $ 480,837
Accrued Expenses 637,604 434,665
Due to Stockholders 370,000 383,000
Short-Term Debt (Note 3) 1,902,750
Current portion of Long-Term Debt (Note 4) 286,795 325,991
Current portion of Capitalized Lease Obligation 320,479 283,103
------------ -----------
Total Current Liabilities 4,836,243 1,907,596
------------ -----------
LONG-TERM DEBT, less current portion (Note 4) 499,448 468,261
------------ -----------
CAPITALIZED LEASE OBLIGATION, less current portion 2,079,562 2,083,483
------------ -----------
COMMITMENTS & CONTINGENCIES
STOCKHOLDERS' (DEFICIT) EQUITY:
Common Stock, no par value;
20,000,000 shares authorized; 3,985,037 and
3,925,689 shares issued and outstanding as of
March 31, 1997 and June 30, 1996, respectively 9,749,138 9,638,040
Accumulated Deficit (11,072,384) (7,100,866)
------------ -----------
Total Stockholders' (Deficit) Equity (1,323,246) 2,537,174
------------ -----------
TOTAL LIABILITIES & STOCKHOLDERS'
(DEFICIT) EQUITY $ 6,092,007 $ 6,996,514
============ ===========
</TABLE>
See Notes to Financial Statements
4
<PAGE> 5
CHILDREN'S WONDERLAND, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS
ENDED MARCH 31, 1997 AND 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3 Months Ended March 31, 9 Months Ended March 31,
1997 1996 1997 1996
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUE $ 1,522,069 $ 1,213,685 $3,930,822 $3,383,513
----------- ----------- ---------- ----------
OPERATING EXPENSE:
Payroll and Related Costs 712,797 733,101 2,194,111 2,283,954
Center Facilities Costs 257,960 270,199 769,005 806,702
General and Administrative 875,207 334,189 2,323,822 987,648
Development Costs 732,152 95,310 1,409,314 150,139
Other 117,452 116,827 341,141 307,566
Depreciation & Amortization 166,188 60,703 360,624 158,678
----------- ----------- ---------- ----------
Total 2,861,756 1,610,329 7,398,017 4,694,687
----------- ----------- ---------- ----------
OPERATING LOSS 1,339,687 396,644 3,467,195 1,311,174
Interest Expense, net 136,343 76,341 317,989 196,556
Other Non-Operating
Expense 180,653 161,429 186,334 178,805
----------- ----------- ---------- ----------
NET LOSS $ 1,656,683 $ 634,414 $3,971,518 $1,686,535
=========== =========== ========== ==========
NET LOSS PER SHARE
(See Note 2) $ (0.42) $ (1.01)
=========== ==========
WEIGHTED AVERAGE NUMBER
OF COMMON AND COMMON
EQUIVALENT SHARES 3,967,716 3,946,248
=========== ==========
</TABLE>
See Notes to Financial Statements
5
<PAGE> 6
CHILDREN'S WONDERLAND, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
MARCH 31, 1997 AND 1996 (UNAUDITED)
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<TABLE>
<CAPTION>
9 Months Ended March 31,
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES $(2,662,868) $(1,240,979)
CASH FLOWS USED IN INVESTING ACTIVITIES (1,975,206) (323,599)
CASH FLOWS FROM FINANCING ACTIVITIES 1,490,026 1,553,796
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,148,048) (10,782)
CASH AND CASH EQUIVALENTS, Beginning of period 3,210,418 65,072
----------- -----------
CASH AND CASH EQUIVALENTS, End of period $ 62,370 $ 54,290
=========== ===========
</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.
In February 1997, 12,016 shares of common stock were issued in exchange for the
cancellation of 19,309 warrants; $55,392 in associated costs was charged to
expense.
See Notes to Financial Statements
6
<PAGE> 7
CHILDREN'S WONDERLAND, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS
ENDED MARCH 31, 1997 AND 1996 (UNAUDITED)
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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
Children's Wonderland, Inc. (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 March 31, 1997, the Company operated fourteen centers
located in California, Colorado, and Connecticut.
Basis of Presentation
As of March 31, 1997, the Company had a working capital deficit of $4,299,206
and a stockholders' deficit of $1,323,246 and had a year-to-date net loss of
$3,971,518 for the nine months ended March 31, 1997. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern and do not reflect the liquidation value of
assets and liabilities. The Company is attempting to raise additional financing
for the purpose of opening new full service family day care centers. In
addition, the Company is currently exploring various divestiture strategies with
respect to some of the Company's unprofitable and/or less profitable centers.
However, there can be no assurance that the Company will be successful in these
endeavors. The ability of the Company to continue as a going concern is
dependent upon, among other things, the Company's ability to obtain additional
financing and the success of future operations.
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 third
quarter of fiscal years 1997 and 1996 are affected by the start-up of three new
centers, one each in March 1996, September 1996, and January 1997 (see
"Management's Discussion and Analysis of Plan of Operations" which follows).
7
<PAGE> 8
CHILDREN'S WONDERLAND, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS
ENDED MARCH 31, 1997 AND 1996 (UNAUDITED)
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 and the nine
months ended March 31, 1996 have 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.
NOTE 3 - SHORT-TERM DEBT
Short-term debt consists of the following:
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
---------- --------
<S> <C> <C>
Unsecured promissory notes payable to individuals, interest at 10% per annum
Principal and interest are due and payable in full upon the earlier to occur of
the closing of a secondary public offering of
the Company's common stock or March 24, 1998 $1,375,000
Unsecured promissory notes payable to individuals, interest at 12%
per annum. Principal and interest are due and payable in full at
various dates through April 10, 1997 315,000
Unsecured promissory notes payable to individuals, interest at 10%
nominal rate. Principal and interest are due and payable in full at
various dates through June 23, 1997 212,750
---------- --------
Total short-term debt $1,902,750 $ --
========== ========
</TABLE>
In connection with the private placement of the $1,375,000 unsecured 10%
promissory notes payable listed above, the Company issued 687,500 Redeemable
Common Stock Purchase Warrants. Each warrant entitles the holder thereof to
purchase one share of common stock for $5.00 per share during a period
commencing one year from the completion of a secondary public offering (or
January 1, 1998 if such public offering has not occurred by that date) and
expiring on May 6, 2001.
The Company is in default on certain of the unsecured 12% promissory notes
payable listed above. The Company is currently negotiating extended payment
terms with the various lenders, and several of such lenders have agreed to
extend the maturity date on such notes for periods of up to three months.
8
<PAGE> 9
CHILDREN'S WONDERLAND, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS
ENDED MARCH 31, 1997 AND 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 4 - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
--------- --------
<S> <C> <C>
Convertible notes payable to individuals, interest at 12% per annum,
payable in quarterly installments of $6,300 through May 31, 1997,
at which time the entire principal is due and payable. At March 31,
1997, $210,000 was due to stockholders and directors. $210,000 $252,750
Promissory notes payable to individuals, interest at 8% per annum. Principal and
interest payable in equal monthly installments of $2,827 through January 2002,
collateralized by supplies and equipment. 157,740 173,201
Promissory notes payable to individuals, interest at 8% per annum. Principal and
interest payable in equal monthly installments of $2,525 through August 2002,
collateralized by supplies and equipment. 132,832 147,104
Other notes payable with interest ranging from 7% to 14.9% per
annum. 158,708 128,366
Deferred operating lease payments 126,963 92,831
-------- --------
Total 786,243 794,252
Less current portion 286,795 325,991
-------- --------
Total long-term debt $499,448 $468,261
======== ========
</TABLE>
The $210,000 in convertible notes payable listed above are convertible into
80,000 shares of the Company's common stock.
NOTE 5 - SUBSEQUENT EVENTS
As of March 31, 1997, the Company's equity securities were traded on the Nasdaq
Small Cap Market as well as on the Boston Stock Exchange. Due to the Company's
inability to comply with either the Nasdaq or the Boston Stock Exchange capital
and surplus requirements, the Company's securities were delisted from the Nasdaq
Small Cap Market effective April 29, 1997, and from the Boston Stock Exchange
effective May 2, 1997. The Company's securities are currently being traded on
the OTC Bulletin Board.
9
<PAGE> 10
CHILDREN'S WONDERLAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF PLAN OF OPERATIONS
MARCH 31, 1997 AND 1996
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ITEM 2:
GENERAL OVERVIEW:
The following discussion should be read in conjunction with the financial
statements and the notes thereto appearing elsewhere in this Form 10-QSB.
Certain statements contained in this Form 10-QSB that are not related to
historical results, including, without limitation, statements regarding the
Company's business strategy and objectives, center development, future financial
position, and estimated cost savings, are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 and involve risks and uncertainties. Although
the Company believes that the assumptions on which these forward-looking
statements are based are reasonable, there can be no assurance that such
assumptions will prove to be accurate, and actual results could differ
materially from those discussed in the forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
competition in the markets in which the Company competes, the Company's ability
to retain key personnel, unanticipated problems and additional costs relating to
center development, regulatory compliance, construction costs and cost overruns,
natural disasters, inability to secure adequate financing, and other factors
discussed herein. All forward-looking statements contained in this Form 10-QSB
are qualified in their entirety by this cautionary statement.
The Company successfully completed its initial public offering during the fourth
quarter of fiscal year 1996. The financial results for the first three quarters
of fiscal year 1997 reflect the Company's continued emphasis on growth,
including the opening of two new centers, one in Woodland Hills, California in
September 1996, and the other in West Haven, Connecticut in January 1997, 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.
The results of operations of the two start-up centers noted above are included
in the Company's financial statements from the date of opening. Operating
expenses for these start-up centers, as well as for the start-up center which
was opened during the third quarter of fiscal year 1996, have been included in
development costs, so as to facilitate comparisons between 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.
10
<PAGE> 11
CHILDREN'S WONDERLAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF PLAN OF OPERATIONS
MARCH 31, 1997 AND 1996
- --------------------------------------------------------------------------------
In addition to the funds generated by the initial public offering, the Company
has financed the ongoing expansion, refurbishment, and other working capital
requirements from private sources, including short term promissory notes to a
bank and to various individuals. On March 21, 1997, the Company completed a
private placement of Units, each of which consisted of one $50,000 face amount
promissory note and 25,000 common stock purchase warrants. Such notes bear
interest at 10% per annum and are due at the earlier of the completion of a
secondary public offering or March 1998, while the warrants entitle the holders
thereof to purchase one share of common stock for $5.00 per share during a
period commencing one year from the completion of a secondary public offering
(or January 1, 1998 if such public offering has not occurred by that date) and
expiring on May 6, 2001. In connection with the private placement of Units,
$600,000 of promissory notes payable previously issued were exchanged for 12
Units under this offering and $150,000 of commissions payable with respect to
the private placement were exchanged for three Units under this offering. The
net proceeds to the Company from this offering, including the $600,000 in
converted promissory notes payable and after deducting costs of issuance,
amounted to $1,180,326.
The private placement of Units discussed above was intended to provide the
Company with adequate working capital until the closing of a proposed secondary
public offering of the Company's common stock; such closing date was anticipated
to be March 31, 1997. Due to various factors, including but not limited to the
delay in closing the private placement of Units, the significant drop in the
Company's stock price, and the delisting of the Company's securities from both
the Nasdaq Small Cap Market and the Boston Stock Exchange (see " - Recent
Developments"), the proposed secondary public offering is no longer under
consideration.
The Company had intended to reduce, for a specified time, the exercise price of
the Company's outstanding publicly traded warrants from their stated exercise
price of $5.00 to $1.50 in order to induce the exercise of such warrants. Due to
the various factors discussed above, the Company no longer intends to reduce the
exercise price of the outstanding warrants.
In order to reduce monthly operating costs, management has recently reviewed and
reallocated various administrative duties and responsibilities, resulting in the
elimination of several administrative positions in May 1997. Following the
resignation of Mr. Michael L. Laney as an employee of the Company in April 1997,
current employees have assumed the positions of President, Chief Financial
Officer, and Secretary (see " - Recent Developments"). In addition, certain
management personnel have agreed to defer payments under their respective
employment and consulting contracts for the indefinite future in order to reduce
the Company's negative cash flows. Company management continues to review center
operations in an effort to cut expenses, with an emphasis on increasing
enrollment levels at existing centers. The Company is also currently exploring
various divestiture strategies with respect to some of the Company's
unprofitable and/or less profitable centers. Despite such efforts, the Company's
current operations still result in negative cash flows on a monthly basis, and
as such, the Company will need to secure additional financing or explore other
options to continue operations and/or to effect the planned expansion of
operations described below. The Company does not have any commitments from third
parties to provide all or any portion of the foregoing financing, and there can
be no assurance that the Company will be able to obtain such financing.
11
<PAGE> 12
CHILDREN'S WONDERLAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF PLAN OF OPERATIONS
MARCH 31, 1997 AND 1996
- --------------------------------------------------------------------------------
Provided that the Company can raise additional financing, management intends to
continue its expansion activities in 1997 via the opening of new centers and the
acquisition of existing facilities. In connection with its acquisition strategy,
the Company has signed a non-binding letter of intent to purchase the assets of
companies that operate four assisted living care facilities and provide home
health care. The purchase price for this acquisition is $4.6 million. This
acquisition is conditioned on the Company obtaining adequate financing. Thus
far, the Company has been unable to obtain such financing, and there can be no
assurance that such financing can be obtained prior to the time deadline under
the letter of intent, which is May 31, 1997. In addition, in March 1997 the
Company terminated the escrow agreement to purchase the assets of a child care
center in Los Angeles County, California for $375,000.
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 March 31, 9 Months Ended March 31,
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
REVENUE 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
OPERATING EXPENSE:
Payroll and Related Costs 46.8% 60.4% 55.8% 67.5%
Center Facilities Costs 16.9% 22.3% 19.6% 23.8%
General & Administrative 57.5% 27.5% 59.1% 29.2%
Development Costs 48.1% 7.9% 35.9% 4.4%
Other 7.7% 9.6% 8.7% 9.1%
Depreciation & Amortization 10.9% 5.0% 9.2% 4.7%
----- ----- ----- -----
Total 187.9% 132.7% 188.3% 138.7%
----- ----- ----- -----
OPERATING LOSS 87.9% 32.7% 88.3% 38.7%
Interest Expense, net 9.0% 6.3% 8.1% 5.8%
Other Non-Operating
Expense 11.9% 13.3% 4.7% 5.3%
----- ----- ----- -----
NET LOSS 108.8% 52.3% 101.1% 49.8%
===== ===== ===== =====
</TABLE>
12
<PAGE> 13
CHILDREN'S WONDERLAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF PLAN OF OPERATIONS
MARCH 31, 1997 AND 1996
- --------------------------------------------------------------------------------
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1997 TO 1996
Revenues: Revenues increased by 25.4% to $1,522,069 for the third quarter of
fiscal year 1997, as compared to $1,213,685 for the third quarter of fiscal year
1996. Approximately $410,000 of the increase is attributable to increased center
capacity due to the addition of three centers subsequent to February 1996. This
increase in revenue was offset by temporary reductions in capacities at certain
centers for the continued refurbishment of various classrooms and playgrounds
made possible by funds generated by the Company's initial public offering. Two
of the three new start-up centers were opened during the current fiscal year,
while the third new start-up center was opened in March 1996; thus, the current
quarter includes three new centers, one of which was open for only one month for
the comparable quarter of the prior fiscal year. At March 31, 1996, the
Company's state licensed, elder/child capacity for the twelve centers then in
operation was 1,394 persons, as compared to fourteen centers with a capacity of
1,786 persons at March 31, 1997.
Operating Expenses - Payroll & Related Costs: Payroll expense related to center
operations decreased by 2.8% to $712,797 for the third quarter of fiscal year
1997, as compared to $733,101 for the comparable period for fiscal year 1996.
State law for licensed day care facilities requires a specific ratio of teachers
to elders and/or children. With respect to children, the teacher/child ratio
also varies depending on the age of the children. Accordingly, center payroll
expenses generally fluctuate in relationship to attendance levels as well as the
mix of age brackets at each center. Payroll expense as a percent of revenues for
the third quarter of fiscal year 1997 decreased as compared to the third 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
decreased by 4.5% to $257,960 for the three months ended March 31, 1997, as
compared to $270,199 for the three months ended March 31, 1996. This expense
category consists primarily of rent, repairs and maintenance, utilities, and
other such occupancy costs for the Company's mature centers; the corresponding
expenses related to the start-up centers have been classified as Development
Costs.
Operating Expenses - General and Administrative: General and administrative
expenses increased by 161.9% to $875,207 for the three months ended March 31,
1997, as compared to $334,189 for the three months ended March 31, 1996.
Moreover, general and administrative expenses as a percent of revenue increased
to 57.5% of revenue for the third quarter of the current fiscal year from 27.5%
of revenue for the third quarter of the prior fiscal year. The increase is due
primarily to increased corporate payroll as a result of increased corporate
staffing and various changes in executive personnel, as well as to increased
accounting, legal, and consulting fees in the third quarter of fiscal year 1997.
The increase in corporate staffing reflects the Company's continuing recruitment
of professional personnel required to manage the planned expansion through
acquisition and construction of additional centers, as well as the
administrative, filing and reporting requirements of a public company. In
anticipation of the Company's ability to secure sufficient funding to allow
these expansion activities to continue as planned, certain changes were made in
the Company's executive personnel and their terms of employment (see "-- Recent
Developments"). As a result of such changes, the Company accrued executive
bonuses of $110,000, of which $67,500 have been paid.
13
<PAGE> 14
CHILDREN'S WONDERLAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF PLAN OF OPERATIONS
MARCH 31, 1997 AND 1996
- --------------------------------------------------------------------------------
The increase in professional fees relate primarily to legal fees incurred in the
negotiation and drafting of a series of proposed financing offerings, as well as
various equipment and facility leases, legal fees related to compliance with
federal securities laws, consulting fees related to the increased exploration of
potential acquisitions, and exchange listing fees.
Operating Expenses - Development Costs: Development costs increased by 668.2% to
$732,152 for the three months ended March 31, 1997, as compared to $95,310 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 $531,612 in costs associated with start-up centers. For the
third quarter of fiscal year 1997, the Company has three centers in the start-up
phase, one each in Woodland Hills and Gold River, California, and another in
West Haven, Connecticut, whereas there was only one center in the start-up phase
for only one month during the comparable period in the prior year.
Operating Expenses - Other: Other expense remained consistent, increasing by
0.5% to $117,452 for the third quarter of fiscal year 1997, as compared to
$116,827 for the comparable period in fiscal year 1996. This expense category
includes costs related to center activities and programs, as well as the cost of
food for lunches and snacks served at the centers, and as such, the expense
increases as total enrollment increases.
Operating Expenses - Depreciation & Amortization: Depreciation and amortization
increased by 173.8% to $166,188 for the three months ended Month 31, 1997, as
compared to $60,703 for the three months ended Month 31, 1996. The noted
increase is due to the timing of center start-ups; new centers in California
commenced operations in March and September 1996, respectively, and an
additional center in Connecticut commenced operations in January 1997. Thus,
three additional centers exist for the third quarter of fiscal year 1997 which
did not exist during the third 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 equipment, thus increasing
amortization expense.
Interest Expense, net: Net interest expense increased by 78.6% to $136,343 for
the three months ended March 31, 1997, as compared to $76,341 for the three
months ended March 31, 1996. The increase was due to the significant increase in
short-term borrowings during the current quarter, which were required to provide
the Company with adequate working capital, as well as to maintain the Company's
construction and development plans.
Other Non-Operating Expense: Other non-operating expense increased by 11.9% to
$180,653 for the three months ended March 31, 1997, as compared to $161,429 for
the three months ended march 31, 1996. The current quarter balance includes a
$98,000 charge related to the write off of certain notes receivable which were
deemed to be uncollectible, as well as $55,392 in costs associated with the
cashless exercise of certain warrants.
14
<PAGE> 15
CHILDREN'S WONDERLAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF PLAN OF OPERATIONS
MARCH 31, 1997 AND 1996
- --------------------------------------------------------------------------------
COMPARISON OF THE NINE MONTHS ENDED MARCH 31, 1997 TO 1996
Revenues: Revenues increased by 16.2% to $3,930,822 for the first three quarters
of fiscal year 1997, as compared to $3,383,513 for the first three quarters of
fiscal year 1996. Approximately $710,000 of the increase is attributable to
increased center capacity due to the addition of three centers subsequent to
February 1996; such increase was offset by temporary reductions in capacities at
certain centers for the continued refurbishment of various classrooms and
playgrounds made possible by funds generated by the Company's initial public
offering. Two of the three new start-up centers were opened during the current
fiscal year, while the third new start-up center was opened in March 1996; thus,
the current fiscal year includes three new centers, one of which was open for
only four months for the comparable period of the prior fiscal year. At March
31, 1996, the Company's state licensed, elder/child capacity for the twelve
centers then in operation was 1,394 persons, as compared to fourteen centers
with a capacity of 1,786 persons at March 31, 1997.
Operating Expenses - Payroll & Related Costs: Payroll expense related to center
operations decreased by 3.9% to $2,194,111 for the first nine months of fiscal
year 1997, as compared to $2,283,954 for the comparable period for fiscal year
1996. State law for licensed day care facilities requires a specific ratio of
teachers to elders and/or children. With respect to children, the teacher/child
ratio also varies depending on the age of the children. Accordingly, center
payroll expenses generally fluctuate in relationship to attendance levels as
well as the mix of age brackets at each center. Payroll expense as a percent of
revenues for the first three quarters of fiscal year 1997 decreased as compared
to the first three quarters of 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
decreased by 4.7% to $769,005 for the nine months ended March 31, 1997, as
compared to $806,702 for the nine months ended March 31, 1996. This expense
category consists primarily of rent, repairs and maintenance, utilities, and
other such occupancy costs for the Company's mature centers; the corresponding
expenses related to the start-up centers have been classified as Development
Costs.
Operating Expenses - General and Administrative: General and administrative
expenses increased by 135.3% to $2,323,822 for the nine months ended March 31,
1997, as compared to $987,648 for the nine months ended March 31, 1996.
Moreover, general and administrative expenses increased to 59.1% of revenue for
the first three quarters of fiscal year 1997 from 29.2% of revenue for the
comparable period of the prior fiscal year. The increase is due primarily to
increased corporate payroll as a result of increased corporate staffing and
changes in executive personnel, as well as to increased accounting, legal, and
consulting fees during the current fiscal year.
15
<PAGE> 16
CHILDREN'S WONDERLAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF PLAN OF OPERATIONS
MARCH 31, 1997 AND 1996
- --------------------------------------------------------------------------------
The increase in corporate staffing reflects the Company's continuing recruitment
of professional personnel required to manage the planned expansion through
acquisition and construction of additional centers, as well as the
administrative, filing and reporting requirements of a public company. In
anticipation of the Company's ability to secure sufficient funding to allow
these expansion activities to continue as planned, certain changes were made in
the Company's executive personnel and their terms of employment (see "-- Recent
Developments"). As a result of such changes, the Company accrued executive
bonuses of $110,000, of which $67,500 have been paid.
The increase in professional fees relate primarily to legal fees incurred in the
negotiation and drafting of a series of proposed financing offerings, as well as
various equipment and facility leases, legal fees related to compliance with
federal securities laws, consulting fees related to the increased exploration of
potential acquisitions, and exchange listing fees.
Operating Expenses - Development Costs: Development costs increased by 838.7% to
$1,409,314 for the nine months ended March 31, 1997, as compared to $150,139 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 $1,020,280 in costs associated with start-up centers. For the
first three quarters of fiscal year 1997, the Company has three centers in the
start-up phase, one each in Woodland Hills and Gold River, California, and
another in West Haven, Connecticut, whereas there was only one center in the
start-up phase for four months of the comparable period in the prior year. The
Company expects this expense category to increase in the future, as the Company
continues to emphasize growth through the acquisition and start-up of additional
centers.
Operating Expenses - Other: Other expense increased by 10.9% to $341,141 for the
first three quarters of fiscal year 1997, as compared to $307,566 for the
comparable period in fiscal year 1996. This expense category includes costs
related to center activities and programs, as well as the cost of food for
lunches and snacks served at the centers, and as such, the expense increases as
total enrollment increases.
Operating Expenses - Depreciation & Amortization: Depreciation and amortization
increased by 127.3% to $360,624 for the nine months ended March 31, 1997, as
compared to $158,678 for the nine months ended March 31, 1996. The noted
increase is due to the timing of center start-ups; new centers commenced
operations in March 1996, September 1996, and January 1997, respectively. Thus,
three additional centers exist for the first three quarters of the current
fiscal year which did not exist during the comparable period 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 equipment,
thus increasing amortization expense.
16
<PAGE> 17
CHILDREN'S WONDERLAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF PLAN OF OPERATIONS
MARCH 31, 1997 AND 1996
- --------------------------------------------------------------------------------
Interest Expense, net: Net interest expense increased by 61.8% to $317,989 for
the nine months ended March 31, 1997, as compared to $196,556 for the nine
months ended March 31, 1996. The increase was primarily due to increased
short-term borrowings during the current fiscal year, which were required to
provide adequate working capital, as well as to maintain the Company's
construction and development plans.
Other Non-Operating Expense: Other non-operating expense increased by 4.2%, from
$178,805 for the first three quarters of fiscal year 1996 to $186,334 for the
first three quarters of fiscal year 1997. The current year to date balance
includes a $98,000 charge for the write off of certain notes receivable which
were deemed to be uncollectible, as well as $55,392 in costs associated with the
cashless exercise of certain warrants, net of the first quarter receipt of
insurance funds for the loss of certain equipment which was maintained in
storage facilities.
LIQUIDITY AND CAPITAL RESOURCES:
The Company's operations resulted in a net cash outflow of $2,662,868 for the
nine months ended March 31, 1997. Moreover, an additional $1,975,206 of cash was
used for investment purposes, primarily for the development of two new start-up
centers in California plus an additional start-up center in Connecticut, 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 and
others, 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. Prior to the Company's initial public offering,
spending on advertising was limited due to a lack of adequate resources. In
addition to the expansion activity discussed above, funds generated from the
sources discussed above 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 three quarters of the current fiscal year.
The Company completed a private placement of Units in March 1997; each Unit
consisted of one $50,000 face amount promissory note and 25,000 common stock
purchase warrants. Such notes bear interest at 10% per annum and are due at the
earlier of the completion of the proposed secondary public offering or March
1998, while the warrants entitle the holders thereof to purchase one share of
common stock for $5.00 per share during a period commencing one year from the
completion of the proposed secondary public offering (or January 1, 1998 if such
public offering has not occurred by that date) and expiring on May 6, 2001. In
connection with such offering, $600,000 of notes previously issued were
exchanged for 12 Units under this offering, and $150,000 of commissions payable
with respect to the private placement were exchanged for three Units under this
offering. The net proceeds to the Company from this offering, including the
$600,000 in converted notes and after deducting costs of issuance, amounted to
$1,180,326.
17
<PAGE> 18
CHILDREN'S WONDERLAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF PLAN OF OPERATIONS
MARCH 31, 1997 AND 1996
- --------------------------------------------------------------------------------
As previously disclosed in the Company's Quarterly Report on Form 10-QSB for the
Quarter Ended December 31, 1996, the private placement of Units discussed above
was intended to provide the Company with adequate working capital until the
closing of a proposed secondary public offering of the Company's common stock,
which was anticipated to be March 31, 1997. Due to various factors, including
but not limited to the delay in closing the private placement of Units, the
significant drop in the Company's stock price, and the delisting of the
Company's securities from both the Nasdaq Small Cap Market and the Boston Stock
Exchange (see " -- Recent Developments"), the proposed secondary public offering
is no longer under consideration.
The Company had intended to reduce, for a specified time, the exercise price of
the Company's outstanding publicly traded warrants from their stated exercise
price of $5.00 to $1.50 in order to induce the exercise of such warrants. Due to
the various factors discussed above, the Company no longer intends to reduce the
exercise price of the outstanding warrants.
In anticipation of securing either of the funding vehicles discussed above, the
Company made certain changes in its executive personnel (see " -- Recent
Developments"). These changes were intended to provide management expertise in
order to manage the Company's planned expansion. In order to reduce monthly
operating costs, management has recently reviewed and reallocated various
administrative duties and responsibilities, resulting in the elimination of
several administrative positions in May 1997. Following the resignation of Mr.
Michael L. Laney as an employee of the Company in April 1997, current employees
have assumed the positions of President, Chief Financial Officer, and Secretary
(see " - Recent Developments"). In addition, certain management personnel have
agreed to defer payments under their respective employment and consulting
contracts for the indefinite future in order to reduce the Company's negative
cash flows. Company management continues to review center operations in an
effort to cut expenses, with an emphasis on increasing enrollment levels at
existing centers. The Company is also currently exploring various divestiture
strategies with respect to some of the Company's unprofitable and/or less
profitable centers. Despite such efforts, the Company's current operations still
result in negative cash flows on a monthly basis, and as such, the Company will
be unable to continue to operate at current levels or to effect its planned
expansion unless additional funds can be secured. However, the Company does not
have any commitments from third parties to provide all or any portion of the
foregoing financing, and there can be no assurance that the Company will be able
to obtain such funds, nor any additional financing in the future.
RECENT DEVELOPMENTS:
Delisting of Securities
As of March 31, 1997, the Company's equity securities were traded on the Nasdaq
Small Cap Market as well as on the Boston Stock Exchange. Due to the Company's
continued losses and delays in planned equity funding, the Company was unable to
comply with either the Nasdaq Small Cap Market or the Boston Stock Exchange
capital and surplus requirements. As such, the Company's securities were
delisted from the Nasdaq Small Cap Market effective April 29, 1997, and from the
Boston Stock Exchange effective May 2, 1997. The Company's securities are
currently being traded on the OTC Bulletin Board.
18
<PAGE> 19
CHILDREN'S WONDERLAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF PLAN OF OPERATIONS
MARCH 31, 1997 AND 1996
- --------------------------------------------------------------------------------
Employment Agreements
On January 6, 1997, the Company made certain changes in its executive personnel
and their terms of employment. Mr. Michael L. Laney, a Director of the Company,
was appointed President and Chief Financial Officer. Mr. Laney also entered into
an employment agreement that provided for a signing bonus of $85,000, of which
$42,500 has been paid, and an initial salary of $160,000 per year. Mr. Laney
also received options to purchase 175,000 shares of common stock, 50,000 of
which vested immediately and the balance will vest equally in January 1998,
1999, and 2000 provided that the employment agreement is still in effect. The
options have a $7.00 exercise price. The agreement expires January 5, 2000 but
can be terminated earlier pursuant to certain thresholds. Effective April 21,
1997, Mr. Laney resigned as an employee, as the Company's President, Chief
Financial Officer, and member of the Company's Board of Directors. Ms. Debby S.
Bitticks has assumed the position of President, while Mr. William M. Popok, the
Company's Controller, has assumed the position of Acting Chief Financial
Officer. The Company has not yet named a replacement on its Board of Directors.
On January 6, 1997, the Company entered into a consulting agreement with Mr.
Kenneth W. Bitticks, the Company's Chairman. The consulting agreement provides
for the payment of $15,000 per month and expires on January 5, 2000. In order to
reduce the Company's negative monthly cash flow, Mr. Bitticks has agreed to
temporarily defer the monthly payments provided for in the contract. Mr.
Bitticks also received options to purchase 75,000 shares of common stock, 25,000
of which vested immediately and the balance will vest equally in January 1998,
1999, and 2000 provided that the consulting agreement is still in effect. The
options have a $7.00 exercise price. The agreement expires January 5, 2000 but
can be terminated earlier pursuant to certain thresholds.
On January 6, 1997, the Company also modified the employment agreement of Ms.
Debby S. Bitticks, the Company's Chief Executive Officer. Ms. Bitticks will
receive an annual salary of $165,000. At July 1, 1997, Ms. Bitticks' salary will
increase to $190,000 if the Company's annualized revenues are reasonably
expected to exceed $10,000,000. In order to reduce the Company's negative
monthly cash flow, Ms. Bitticks has agreed to temporarily defer the salary
payments provided for in the contract. Ms. Bitticks also received options to
purchase 125,000 shares of common stock, 50,000 of which vested immediately and
the balance will vest equally in January 1998, 1999, and 2000 provided that the
employment agreement is still in effect. The options have a $7.00 exercise
price. The agreement expires January 5, 2000 but can be terminated earlier
pursuant to certain thresholds.
On January 6, 1997, Mr. Robert M. Wilson, a Director of the Company, resigned as
its President, Chief Financial Officer and Secretary. He also entered into a
consulting agreement that provides for the payment of $9,000 per month plus a
one-time bonus of $25,000, which has been paid in full. In addition, the
contract provides for the payment of commissions to Mr. Wilson based upon the
value of acquisitions that Mr. Wilson negotiates on behalf of the Company. The
agreement expires in January 1999 but commencing October 1, 1997, either Mr.
Wilson or the Company may terminate the agreement on three months notice. Ms.
Sandra Goldstein, a Vice President of the Company, was appointed the Company's
Secretary.
19
<PAGE> 20
CHILDREN'S WONDERLAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF PLAN OF OPERATIONS
MARCH 31, 1997 AND 1996
- --------------------------------------------------------------------------------
Effective May 13, 1997, Mr. James Gott resigned as a Director of the Company.
The Company has not as yet named a replacement on its Board of Directors.
Effective May 12, 1997, the Company has entered into a consulting arrangement
with Mr. Jeffrey Kahn, a management consultant. Mr. Kahn's initial assignment
is to assist the Company in an in-depth analysis of all aspects of the
Company's operations with the objective of developing and implementing a
refined corporate and financing strategy to appropriately position the Company
to move forward.
The Company has also retained Los Angeles-based Ambient Capital Group, Inc., an
independent investment banking firm, which will be exploring financing and
strategic alliance options for the Company. Sitrick And Company, an investor
relations firm, has been engaged to assist the Company with its strategic
communications.
Litigation
On May 14, 1997, the Company filed a complaint in the United States District
Court for the Central District of California charging its underwriters, Royce
Investment Group, Inc. and First Cambridge Securities Corporation, with fraud,
intentional interference with prospective economic relationship, breach of
fiduciary duty, breach of contract and violation of California Business and
Professional Code S 17200 in connection with various fundings and proposed
financings for the Company. Also named in the complaint are Mr. John Higgins,
Mr. Paul LaRosa, Mr. John Marciano, officers and directors of Royce Investment
Group, Inc., and Mr. Kenneth Orr, Chief Executive Officer and Chairman of First
Cambridge Securities Corporation.
Planned Acquisitions
The Company has entered into a non-binding letter of intent to purchase the
assets of companies engaged in operating four assisted living care facilities
and in providing home health care. The purchase price for this acquisition is
$4.6 million, and the acquisition is conditioned on the Company obtaining
adequate financing. Thus far, the Company has been unable to obtain such
financing, and there can be no assurance that such financing can be obtained
prior to the time deadline under the letter of intent, which is May 31, 1997.
As previously disclosed in the Company's Quarterly Report on Form 10-QSB for the
Quarter Ended December 31, 1996, the Company had entered escrow to purchase a
child care center in Los Angeles County, California for $375,000. In March 1997,
the Company terminated the escrow agreement. In connection with this
termination, the Company forfeited a $10,000 escrow deposit which had been
provided to the seller.
20
<PAGE> 21
CHILDREN'S WONDERLAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF PLAN OF OPERATIONS
MARCH 31, 1997 AND 1996
- ------------------------------------------------------------------------------
Secondary Offering
As previously disclosed in the Company's Quarterly Report on Form 10-QSB for the
Quarter Ended December 31, 1996, the Company had executed a non-binding letter
of intent with an underwriter to raise net proceeds of approximately $6,000,000
through the sale of between 1,000,000 and 1,200,000 shares of the Company's
common stock in order to fund acquisitions, repay the Notes and to provide
additional working capital. Due to delays in closing the private placement of
Units discussed above, as well as the significant decline in the Company's stock
price subsequent to March 31, 1997, and other factors, the secondary public
offering is no longer under consideration.
Liquidity Considerations
As previously indicated (see "--Liquidity and Capital Resources"), the
Company's operations currently are producing negative cash flows. The Company
does not have a cash reserve. As a consequence, the Company is seeking funding
sources or other business arrangements. As a result of the Company's adverse
financial position, the borrowing opportunities being presented to and
considered by the Company are at above-market rates and also could result in
potential significant dilution to current shareholders.
21
<PAGE> 22
ITEM 6. EXHIBITS
27. Financial Data Schedule
REPORTS ON FORM 8-K
None
22
<PAGE> 23
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/ Debby S. Bitticks May 15, 1997
- ---------------------------------------
Ms. Debby S. Bitticks
Chief Executive Officer and President
/s/ William M. Popok May 15, 1997
- ---------------------------------------
Mr. William M. Popok
Acting Chief Financial Officer
23
<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 MARCH 31, 1997 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> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> $62,370
<SECURITIES> 0
<RECEIVABLES> $198,134
<ALLOWANCES> $71,731
<INVENTORY> 0
<CURRENT-ASSETS> $537,037
<PP&E> $2,133,216
<DEPRECIATION> $403,897
<TOTAL-ASSETS> $6,092,007
<CURRENT-LIABILITIES> $4,836,243
<BONDS> 0
0
0
<COMMON> $9,749,138
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> $6,092,007
<SALES> $1,522,069
<TOTAL-REVENUES> $1,522,069
<CGS> 0
<TOTAL-COSTS> $2,861,756
<OTHER-EXPENSES> $180,653
<LOSS-PROVISION> $16,376
<INTEREST-EXPENSE> $136,343
<INCOME-PRETAX> ($1,656,683)
<INCOME-TAX> 0
<INCOME-CONTINUING> ($1,656,683)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> ($1,656,683)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> 0
</TABLE>
