U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required]
For the fiscal year ended June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from ___________________ to _____________________
Commission file number 0-25110
CHILDROBICS, INC.
(Name of small business issuer in its charter)
New York 11-3163443
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
200 Smith Street Farmingdale, New York 11735
(Address of principal executive offices) (Zip Code)
(516) 694-0999
(Issuer's Telephone Number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act
None
Securities registered pursuant to Section 12(g) of the Act
Title of Each Class:
Units
Common Stock
Class A Warrants
Page 1 of 13 Total Pages
<PAGE>
Explanatory Note
The Registrant, subsequent to the filing of its Annual Report on Form
10-KSB for the fiscal year ended June 30, 1996, discovered certain cosmetic and
typographical errors which were inadvertently omitted from the Financial
Statements contained in Item 7 thereof, including text which was inadvertently
omitted from the Notes to such Financial Statements. Such omissions do not
affect the Results of Operations or any other numerical information disclosed in
such Financial Statements and relate solely to the text of the Notes thereto.
The undersigned Registrant therefore hereby amends the following items,
financial statements, exhibits or other portions of its Annual Report on Form
10-KSB for the fiscal year ended June, 30, 1996 as set forth in the pages
attached hereto to reflect such inadvertent omissions to Part IV of such Annual
Report and to include the Part III information which was appropriately omitted
therefrom:
Item 7. Financial Statements and Supplementary Data
Item 9. Directors and Executive Officers; Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial Owners and Management
Item 12. Certain Relationships and Related Transactions
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Signatures
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<PAGE>
Item 7. Financial Statements and Supplementary Data
The Company's consolidated financial statements and a related schedule are
included on pages F-1 to F-22.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS; PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers
Name Age Position
- ---- --- --------
Gerard A. Reda 31 President, Chief Executive Officer and Director
Conrad J. Gunther 50 Treasurer and Director
Douglas B. Fox 49 Secretary and Director
Michael P. Sable 47 Controller
Directors hold office until the next annual meeting of the Company's
stockholders and until their successors are elected and qualified. Officers are
elected annually by the Board of Directors and serve at the discretion of the
Board.
Gerard A. Reda has been President and Chief Executive Officer and a director of
the Company since September 30, 1996. Prior to his joining the Company, Mr. Reda
had been Chairman, President and Chief Executive Officer of Just Kiddie Rides,
Inc. ("Just Kiddie") since 1989.
Conrad J. Gunther has been a director of the Company since July 3, 1996. Since
1995, Mr. Gunther has worked as a business development manager and financial
advisor with the Allied Group, a privately-owned insurance brokerage firm. He
also served as Chief Operating Officer and Executive Vice President of North
Fork Bancorporation, a publicly traded company, from 1989 to 1995.
Douglas B. Fox has been a director of the Company since July 3, 1996.
Additionally, Mr. Fox has been employed with Landmark Communications, Inc.
("Landmark"), a multi-divisional media company, since 1994, and served as Chief
Operating Officer-President of Publishing and Video Games of Landmark from June
1994 to November 1995. Mr. Fox joined Times Mirror, Inc., a newspaper group, in
1987 and served as Corporate Vice President-Marketing from October 1987 to May
1994 and as President and Chief Operating Officer of New York Newsday from
September 1990 to October 1992.
Michael P. Sable has been Controller of the Company since February 1995 and
Secretary since May 1995. Prior to that time, from September 1993 to February
1995, he was Vice President-Finance of Logitek, Inc., a defense contractor, from
September 1992 to August 1993, he was controller of L.J. Simone, Inc., a shoe
importer, and from July 1989 to July 1992, he was controller of IHC Services,
Inc., an exporter of heavy equipment.
- 3 -
<PAGE>
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and officers and persons who beneficially own more than
ten percent of the Company's Common Stock to file with the Securities and
Exchange Commission ("SEC") initial reports of ownership and reports of changes
in ownership of Common Stock of the Company. Officers, directors and
greater-than-ten percent shareholders are required by SEC regulation to furnish
the Company with copies of all Section 16(a) reports they filed. To the
Company's knowledge, based solely on review of the copies of such reports
furnished to the Company and written representations that no other reports were
required, during the fiscal year ended June 30, 1996, all Section 16(a) filing
requirements were compiled with.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information with respect to the Chief
Executive Officer and each executive officer whose compensation exceeded
$100,000 during fiscal 1996 and fiscal 1995.
<TABLE>
<CAPTION>
===========================================================================================================
SUMMARY COMPENSATION TABLE
- -----------------------------------------------------------------------------------------------------------
Annual Compensation
- -----------------------------------------------------------------------------------------------------------
Bonus Other Annual
Name and Salary ($) Compensation(1)(2)
Principal Occupation Year ($) -0- ($)
===========================================================================================================
<S> <C> <C> <C> <C>
Salvatore Casaccio 1996 150,000 -0- -0-
Chief Executive 1995 150,000 -0- -0-
Officer
- -----------------------------------------------------------------------------------------------------------
A. Joseph Melnick 1996 150,000 -0- -0-
President, Chief 1995 150,000 -0- -0-
Operating
Officer and Chief
Financial Officer
- -----------------------------------------------------------------------------------------------------------
Richard Bartlett 1996 150,000 -0- -0-
Executive Vice 1995 150,000 -0- -0-
President
===========================================================================================================
</TABLE>
(1) The named executive officers routinely received other benefits from the
Company, the aggregate amounts of which during the years indicated did not
exceed 10% of the salary and bonus set forth above.
(2) On July 3, 1996, the Company and all such officers named above entered into
an Employment Termination and Option Termination Agreement, pursuant to
which such officers agreed to terminate their employment with the Company
in consideration for receiving certain cash, options, and in the case of
two of such officers, certain assets of the Company. See "Certain
Relationships and Related Transactions."
Employment Agreements and Consulting Agreements with Officers and Directors
On September 30, 1996, in connection with the acquisition of Just Kiddie by
the Company, the Company entered into an Employment Agreement with Gerard A.
Reda, pursuant to which Mr. Reda agreed
- 4 -
<PAGE>
to serve as the Company's President and Chief Executive Officer for a term of
five years commencing on September 30, 1996 (the "Commencement Date"). In
addition to certain employee benefits, the Company agreed to pay Mr. Reda an
annual salary of $250,000, subject to adjustment upon terms agreed upon by the
Board and Mr. Reda, after the first anniversary of the Commencement Date. Mr.
Reda shall also be granted options at the discretion of the Board based upon the
performance of the Company and the performance of Mr. Reda. In addition,
pursuant to the Employment Agreement, the Company elected Mr. Reda to serve as a
member of the Board.
On July 3, 1996, as compensation for joining the Board, the Company agreed
to pay to each of Messrs. Conrad Gunther and Douglas Fox an annual retainer of
$18,000 per year, $1,000 per formal Board meeting and $500 for each committee
meeting of the Board, a consulting fee of $20,000, and agreed to grant 200,000
options, subject to shareholder approval, to Messrs. Gunther and Fox as
described in "Stock Option Grants" below. On October 3, 1996, the Company
entered into five-year consulting agreements with each of Messrs. Gunther and
Fox (the "Consulting Agreements"), pursuant to which Messrs. Gunther and Fox
agreed to waive the $18,000 annual retainer fee, agreed to accept $500 for all
meetings of the Board and the committees and the Company agreed to pay each of
Messrs. Gunther and Fox a monthly retainer of $2,500 plus expenses, agreed to
grant, subject to shareholder approval, to each of Messrs. Gunther and Fox
ten-year options to purchase 500,000 shares of Common Stock at an exercise price
of $.10 per share and to pay each of Messrs. Gunther and Fox additional
compensation in connection with special projects which may present themselves
from time to time. Of such options, 100,000 of each vest on the date of grant
and 100,000 of each vest on the next four anniversaries thereof, provided,
however, all such options shall immediately vest under certain circumstances.
The shares issuable upon exercise of such options are also subject to
restriction on sale without the consent of the Company for a period of two
years.
Stock Option Grants
As compensation for agreeing to serve on the Board, the Company agreed to
grant to each of Messrs. Gunther and Fox, subject to shareholder approval,
options to purchase (i) 100,000 shares of common stock of the Company,
exercisable at $.10 per share, such options to vest in three installments,
50,000 of which vested on July 3, 1996, the date of their respective election to
the Board and the next two installments of 25,000 options to vest on the next
two anniversaries thereof, provided, however all such options shall immediately
vest under certain circumstances; and (ii) an additional 100,000 shares of
common stock of the Company, exercisable at $.10 per share, such options to vest
in three installments, 50,000 of which vested on October 3, 1996 and the next
two installments of 25,000 options to vest on the next two anniversaries
thereof, provided, however all such options shall immediately vest under certain
circumstances. The shares issuable upon exercise of such options are also
subject to restriction on sale without the consent of the Company for a period
of two years.
As set forth above, pursuant to the Consulting Agreements, on October 3,
1996, the Company agreed to grant to each of Messrs. Gunther and Fox, subject to
shareholder approval, ten-year options to purchase 500,000 shares of Common
Stock at an exercise price of $.10 per share. Of such options, 100,000 of each
vest on the date of grant and 100,000 of each vest on the next four
anniversaries thereof, provided, however, all such options shall immediately
vest under certain circumstances. The shares issuable upon exercise of such
options are also subject to restriction on sale without the consent of the
Company for a period of two years.
On July 3, 1996, the Company entered into an Employment Termination and
Option Termination Agreement (the "Termination Agreement") with Salvatore
Casaccio, the Company's former Chairman, former Chief Executive Officer and a
former Director of the Company; A. Joseph Melnick, the Company's former
President, former Chief Operating Officer, former Chief Financial Officer and a
former Director of
- 5 -
<PAGE>
the Company; and Richard Bartlett, the Company's former Executive Vice President
and a former Director of the Company (collectively, the "Former Officers").
Pursuant to the Termination Agreement, each of the Former Officers agreed to
terminate their respective employment agreements with the Company, to resign as
officers and Directors of the Company and to relinquish certain options
previously granted to them by the Company, in exchange for which each of the
Former Officers were granted, among other things, options to purchase 300,000
shares of the Company's Common Stock at an exercise price of $.01 per share. See
"Certain Relationships and Related Transactions."
- 6 -
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of October 15, 1996
(on which date 10,555,000 shares of Common Stock were outstanding) with respect
to the stock ownership of (i) those persons or groups who beneficially own more
than 5% of the Company's Common Stock, (ii) each director of the Company (iii)
each executive Officer whose compensation exceeded $100,000 in the fiscal year
ended June 30, 1996, and (iv) all directors and executive officers of the
Company as a group (based upon information furnished by such persons).
Amount and Nature of
Name and Address Beneficial Ownership Percentage of Class
- ---------------- -------------------- -------------------
Gerard A. Reda (1) 4,250,000 40.3%
Conrad J. Gunther (1) -0- (2) --
Douglas Fox (1) -0- (2) --
Roger Pratt 750,000 7.1%
14 Straw Lane
Hicksville, NY 11801
Salvatore Casaccio 699,122 (3) 6.6%
64 Burton Avenue
Staten Island, NY 10309
A. Joseph Melnick 660,000 (3) 6.3%
85 Collyer Avenue
Staten Island, NY 10312
Richard Bartlett 525,000 (3) 5.0%
2 Sunnyfield Road
Hicksville, NY 11801
All Officers and Directors 4,250,000 40.3%
as a Group (3 persons)
(1) The address of such person is c/o the Company, 200 Smith Street,
Farmingdale, New York 11735.
(2) Does not include options to purchase 700,000 shares of Common Stock, which
the Company has agreed to grant, but which are subject to shareholder
approval. See "Employment Agreements and Consulting Agreements with
Officers and Directors."
(3) Includes 300,000 options granted in connection with the Termination
Agreements. See "Certain Relationships and Related Transactions."
- 7 -
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to an Agreement of Merger among Just Kiddie, Gerard Reda and the
Company (the "Agreement of Merger"), Just Kiddie merged into Just Kiddie
Acquisition Corp. (the "Acquisition Corp."), a wholly-owned subsidiary of the
Company, on September 30, 1996 (the "Merger"). Pursuant to the Agreement of
Merger, the Company agreed to issue an aggregate of 5,000,000 shares of Common
Stock to the shareholders of Just Kiddie, promissory notes in the aggregate
principal amount of $750,000, and a non-competition payment to Mr. Reda in the
amount of $250,000 in exchange for all of the outstanding shares of common
stock, without par value, of Just Kiddie ("Just Kiddie Common Stock"). Gerard A.
Reda, who, prior to the Merger, was the owner of 85% of the outstanding Just
Kiddie Common Stock, received, as consideration for the Just Kiddie Common Stock
held by Mr. Reda, pursuant to the Agreement of Merger, 4,250,000 shares of
Common Stock of the Company.
Pursuant to the terms of the Termination Agreement, the Former Officers
agreed to terminate their employment agreements with the Company, to resign as
officers and Directors of the Company and to relinquish certain options
previously granted to them by the Company, in exchange for which each of the
Former Officers were entitled to receive $200,000 (plus reimbursement for
certain expenses approximately $17,000 in the aggregate, and in the case of Mr.
Bartlett, the repayment of loans previously made by Mr. Bartlett to the Company
in the amount of $87,620) and each of the Former Officers were entitled to
receive options to purchase 300,000 shares of the Company's Common Stock at an
exercise price of $.01 per share. At the closing of the Termination Agreement,
$50,000 was paid to each of the Former Officers (plus the expense reimbursement
and loan repayment referenced above) and the remainder of such obligations with
respect to the payments to be made to the Former Officers were evidenced by
notes issued by the Company in favor of each of the Former Officers in the
original principal amount of $150,000, which are due one year from the closing
of the Termination Agreement (subject to certain mandatory prepayments) and are
secured by the assets of Group Coin Associates, Inc., a subsidiary of the
Company. The Company has also agreed to use its best efforts to register the
sale of the shares issuable upon exercise of such options, subject to certain
restrictions on the sale of such shares by the Former Officers.
In addition, pursuant to the terms of the Termination Agreement, at the
closing thereof the Company transferred to Mr. Casaccio, all of the outstanding
shares of stock of Bayridge Playrobics, Inc., Third Avenue Playrobics, Inc., and
East Side Playrobics, Inc., the Company's subsidiaries which operate the
Company's playcenters in Bayside, Brooklyn and Manhattan, New York,
respectively.
On September 30, 1996, the Company entered into the Second Amendment to the
Termination Agreement (the "Second Amendment"), pursuant to which the Company
agreed to transfer to Mr. Casaccio all of the assets and liabilities of the
Company which are used in the operation of the Company's playcenter located at
Avenue U, Brooklyn, New York, subject to consents to be obtained in connection
therewith. In addition, pursuant to the Second Amendment, the Company also
agreed to transfer to Messrs. Casaccio and Bartlett, the Company's stock in Fun
Station USA of Staten Island, Inc. ("FSSI"), a company in which the Company has
a 51% interest and which operates a playcenter in Staten Island, New York,
subject to certain restrictions on transfer, and until such time as the Company
is able to consummate such transfer, the Company granted a limited revocable
proxy with respect to the shares of FSSI held by the Company to such
individuals. Should the Company be unable to consummate such transfer, the
Company intends to take action to otherwise dispose its interest in such
playcenter.
- 8 -
<PAGE>
PART IV
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statements
Consolidated Balance Sheets at June 30, 1996 and 1995
Consolidated Statements of Operations for the years ended June 30,
1996 and 1995
Consolidated Statements of Shareholders' Equity for the years ended
June 30, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended June 30,
1996 and 1995
Notes to Consolidated Financial Statements
(b) Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
(c) Exhibits
<TABLE>
<CAPTION>
Exhibit By Reference No. in
Number Description from Document Document
------ ----------- ------------- --------
<C> <S> <C> <C>
3.0 Registrant's Certificate of Incorporation A 3.0
3.1 Registrant's Amendment to its Certificate of
Incorporation, filed April 22, 1994 A 3.1
3.2 By-Laws B 3.2
4.0 Specimen Copy of Common Stock Certificate A 4.0
4.1 Form of Underwriter's Unit Purchase Option A 4.1
4.2 Warrant Agreement between the Registrant and
American Stock Transfer & Trust Company and
Specimen Copy of class A Warrant Certificate A 4.2
10.1 Bridge Loan Agreements, dated March 1994 A 10.2
10.2 Option Agreement, dated November 30, 1994,
between Explorations Acquisition Co. and
Explorations Holding Company, Inc. C 1
</TABLE>
- 9 -
<PAGE>
<TABLE>
<C> <S> <C> <C>
10.3 Secured Promissory Note, dated November 30, 1994,
in the principal amount of $300,000 in favor of
Explorations Acquisition Co. C 2
10.4 Financial Public Relations Consulting
Agreement, dated November 30, 1994, by and
between Childrobics, Inc. and Richard Rozzi C 3
10.5 Asset Purchase Agreement, dated November 30,
1994, between Explorations Acquisition Co. and
Richard Rozzi C 4
10.6 Asset Purchase Agreement, dated March 3,
1995, between Group Coin Amusement Corp.
and Group Coin Associates, Inc. D 1
10.7 Asset Purchase Agreement, dated March 3,
1995, between Replay Amusement Corp. and
Group Coin Associates, Inc. D 2
10.8 Asset Purchase Agreement, dated March 3,
1995, between Amusement Associates, Inc. and
Amusement Associates Distributing, Inc. D 3
10.9 Asset Purchase Agreement, dated March 3,
1995, between Turnpike Distributing Corp. and
Turnpike Amusement Distributing, Inc. D 4
10.10 Asset Purchase Agreement, dated March 3,
1995, between Medford Amusement Corp. and
Kid's Kingdom Amusement, Inc. D 5
10.11 Asset Purchase Agreement, dated April 3, 1995,
between FZL and Fun Zones of Lynbrook, Inc. E 10.13
10.12 Asset Purchase Agreement, dated June 26, 1995,
between Tunnels & Tubes For Fun, Inc. and
Tunnels & Tubes, Inc. E 10.14
10.13 Employment Termination and Option
Termination Agreement, dated July 3, 1996,
among Salvatore Casaccio, A. Joseph Melnick,
Richard Bartlett and the Company F 1
</TABLE>
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<PAGE>
<TABLE>
<C> <S> <C> <C>
10.14 Merger Agreement, dated September 30, 1996,
among Just Kiddie Rides, Inc., Gerard A. Reda,
Just Kiddie Acquisition Corp., and Childrobics, Inc. G 1
10.15 Employment Agreement, dated September 30,
1996, between Childrobics, Inc. and Gerard A.
Reda G 2
10.16 Financing Agreement, dated October 3, 1996,
by and among Sterling Commercial Capital,
Inc., Norwood Venture Corp., Vega Capital
Corp., Childrobics, Inc., Just Kiddie Rides,
Inc., Turnpike Amusement Associates, Inc.,
Group Coin Associates, Inc., and Tunnels &
Tubes, Inc.
G 3
10.17 Agreement of Sale, dated September 25, 1996,
between Childrobics, Inc. and Express Vending
Corporation with respect to Fun Station USA of
Lynbrook, Inc., excluding exhibits G 4
10.18 Agreement of Sale, dated September 25, 1996,
between Childrobics, Inc. and Express Vending
Corporation with respect to Fun Zones of
Danbury, Inc., excluding exhibits G 5
10.19 Agreement of Sale, dated September 25, 1996,
between Childrobics, Inc. and Express Vending
Corporation with respect to Kids Kingdom
Amusement, Inc., excluding exhibits G 6
10.20 Second Amendment to Employment Termination
and Option Termination Agreement, dated
September 30, 1996, among Salvatore Casaccio,
A. Joseph Melnick, Richard Bartlett, and Child-
robics, Inc. G 7
</TABLE>
- ----------
C Form 8-K Current Report dated December 14, 1994
D Form 8-K Current Report dated March 17, 1995
E Form 10-KSB Annual Report of the Registrant for the fiscal year ended June
30, 1995
F Form 8-K Current Report dated July 3, 1996
G Form 8-K Current Report dated September 25, 1996
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<PAGE>
(d) Reports on Form 8-K
1. The Company filed a Current Report on Form 8-K having a report date of
July 3, 1996.
2. The Company filed a Current Report on Form 8-K having a report date of
September 25, 1996.
- 12 -
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Company caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHILDROBICS, INC.
(Registrant)
Dated: October 30, 1996 By: /s/Gerard A. Reda
------------------
Gerard A. Reda
President and Chief Executive Officer
- 13 -
<PAGE>
CHILDROBICS, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
----
Report of Independent Accounts............................................F-2
Consolidated Financial Statements:
Consolidated Balance Sheet - June 30, 1996...........................F-3
Consolidated Statements of Operations -
Years Ended June 30, 1996 and 1995.................................F-4
Consolidated Statements of Shareholders -
Year Ended June 30, 1996...........................................F-5
Consolidated Statements of Cash Flow -
Years Ended June 30, 1996 and 1995.................................F-6
Notes to Consolidated Financial Statements...........................F-8
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders'
Childrobics, Inc.
Farmingdale, New York
We have audited the accompanying consolidated balance sheet of Childrobics,
Inc. and its Subsidiaries as of June 30, 1996, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
two years in the period ended June 30, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principals used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Childrobics, Inc. and its Subsidiaries as of June 30, 1996, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended June 30, 1996, in conformity with generally accepted accounting
principals.
The accompanying consolidated financial statements have been prepared
assuming that Childrobics, Inc. will continue as a going concern. As discussed
in Note 21 to the consolidated financial statements, the Company has
insufficient cash resources and negative working capital that raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 21. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
MOORE STEPHENS, P.C.
Certified Public Accountants
Cranford, New Jersey
October 14, 1996
F-2
<PAGE>
Childrobics, Inc.,
and Subsidiaries
Consolidated Balance Sheets
June 30,
1996
----
ASSETS:
Cash and cash equivalents $ --
Certificate of deposit - restricted 100,000
Accounts receivable, net of allowance for doubtful
accounts of $650,297 114,676
Inventory 234,866
Prepaid expenses 39,088
Net assets of discontinued operations 525,000
----------
Total current assets 1,013,630
Property and equipment - Net 3,491,235
Other 111,778
----------
Total assets $4,616,643
==========
LIABILITIES:
Accounts payable $1,296,346
Accrued expenses 1,392,821
Short term line of credit 163,798
Notes payable 607,352
Current portion of capitalized leases 7,040
Due to former officer 87,620
----------
Total current liabilities 3,554,977
LONG-TERM LIABILITIES:
Notes payable 30,671
Capitalized lease 8,595
----------
Total long-term liabilities 39,266
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Common stock - $.01 par value, 25,000,000 shares
authorized, 5,355,000 issued and outstanding 53,550
Additional paid-in capital 12,820,405
Retained deficit (11,851,555)
----------
Total shareholders' equity 1,022,400
----------
Total liabilities and shareholders equity $4,616,643
==========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
Childrobics, Inc.,
and Subsidiaries
Consolidated Statements of Operations
For the Twelve Months Ended
June 30, June 30,
1996 1995
REVENUES:
Video & arcade $ 1,672,340 $ 397,032
Sales of equipment and rides 5,507,618 1,577,909
------------ ------------
Total revenues 7,179,958 1,974,941
------------ ------------
COST OF SALES:
Video & arcade 1,203,018 297,805
Cost of equipment and rides 5,267,916 1,329,464
------------ ------------
Total cost of sales 6,470,934 1,627,269
------------ ------------
Gross profit 709,024 347,672
EXPENSES:
Selling, general and
administrative expenses 2,294,655 868,775
Officers' compensation 2,478,500 537,361
Bad debt expense 653,292 14,361
------------ ------------
Operating loss (4,717,423) (1,072,825)
Interest and financing expenses 65,848 31,239
Interest income -- (314,294)
------------ ------------
Total interest and financing expenses 65,848 (283,055)
------------ ------------
Loss from continuing operations (4,783,271) (789,770)
Discontinued operations:
Loss from discontinued operations (1,546,862) (576,450)
Loss on disposal of discontinued operations (3,543,026) --
------------ ------------
Loss from discontinued operations (5,089,888) (576,450)
------------ ------------
Net loss (9,873,159) (1,366,220)
Retained deficit:
Beginning of period (1,978,396) (612,176)
------------ ------------
End of period ($11,851,555) ($ 1,978,396)
============ ============
PER SHARE DATA
Loss from continuing operations ($1.04) ($0.20)
Loss from discontinued operations (1.10) (0.15)
------ ------
Net loss ($2.14) ($0.35)
======= =======
Weighted average number of shares used 4,620,753 3,957,287
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
<TABLE>
CHILDROBICS, INC.
and Subsidiaries
Consolidated Statement of Shareholders' Equity
For the Period Ended June 30, 1996
<CAPTION>
Common Stock Total
------------------------ Paid-In Retained Shareholders'
Shares Amount Capital Deficit Equity
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
Beginning balances,
July 1 1994 3,850,000 $ 38,500 $ 10,128,830 ($ 612,176) $ 9,555,154
Issuance pursuant to Asset
Purchase Agreement -
March 2, 1995 375,000 3,750 699,375 $ 703,125
Issuance pursuant to Asset
Purchase Agreement -
April 3, 1995 65,000 650 104,975 $ 105,625
Issuance pursuant to Asset
Purchase Agreement -
June 26, 1995 65,000 650 56,225 $ 56,875
Net loss - 1995 (1,366,220) ($ 1,366,220)
------------ ------------ ------------ ------------ ------------
Balances, June 30, 1995 4,355,000 43,550 10,989,405 (1,978,396) 9,054,559
Sale of common stock,
March 28, 1996 1,000,000 10,000 490,000 500,000
Employment and Option
Termination Agreement 1,341,000 1,341,000
dated July 3, 1996
Net loss - 1996 (9,873,159) (9,873,159)
------------ ------------ ------------ ------------ ------------
Balances, June 30, 1996 5,355,000 $ 53,550 $ 12,820,405 $(11,851,555) $ 1,022,400
============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-5
<PAGE>
CHILDROBICS, INC.
and Subsidiaries
Consolidated Statements of Cash Flows
For the Twelve Months Ended
<TABLE>
<CAPTION>
June 30, June 30,
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss from continuing operations ($4,783,271) $ (789,770)
Adjustments to reconcile net loss to net
cash provided (used) by operating
activities:
Options issued as part of Employment and
Option Termination Agreement 1,341,000 --
Depreciation and amortization 719,525 133,592
Bad debts 653,292 14,361
Changes in assets and liabilities:
Accounts receivable (138,560) (643,769)
Inventory 931,876 (1,166,742)
Prepaid expenses 25,675 (61,013)
Accounts payable and accrued expenses 1,613,300 981,906
Other (13,995) 11,195
----------- -----------
Net cash provided (used) by continuing operations 348,842 (1,520,240)
----------- -----------
Discontinued operations:
Net loss from discontinued operations (1,546,862) (576,450)
Adjustments to reconcile net loss to net
cash provided (used) by discontinued operations:
Changes in net assets, liabilities and losses 4,699,460 (5,224,460)
Estimated loss on disposal of discontinued operations (3,543,026) --
----------- -----------
Net cash used by discontinued operations (390,428) (5,800,910)
INVESTING ACTIVITIES:
Operating assets of businesses acquired- cash paid -- (1,600,000)
Sales of (investments in) marketable securities -- 7,856,365
Investment in certificate of deposit- restricted (100,000) --
Purchases of property and equipment (639,827) (218,600)
Expenditures for (disposition of) other assets 63,866
-----------
Net cash provided by (used in) investing activities (675,961) 6,037,765
----------- -----------
FINANCING ACTIVITIES:
Proceeds of short term line of credit 200,000 --
Repayment of short term line of credit (36,202) --
Proceeds from former officer 87,620 --
Issuance of common stock 500,000 --
Repayment of capitalized lease (5,838) --
Repayment of notes payable (202,294) --
----------- -----------
Net cash provided by (used in) financing activities 543,286 0
----------- -----------
Decrease in cash balances (174,261) (1,283,385)
Cash, beginning of period 174,261 1,457,646
----------- -----------
Cash, end of period $0 $ 174,261
===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
CHILDROBICS, INC.
and Subsidiaries
Consolidated Statements of Cash Flows- continued
For the Twelve Months Ended
June 30, June 30,
1996 1995
---- ----
Supplemental Disclosures:
Cash paid during the period for:
Interest $ 65,848 $ 36,653
===========
Income taxes $ -- $ --
=========== ===========
Notes payable disclosure:
The Company issued notes payable in
fiscal 1996 pursuant to the purchase of
property and equipment as follows:
Cost of property and equipment $ 844,144 $ --
Cash paid --
----------- -----------
Liability under note payable $ 844,144 $ 0
=========== ===========
Capitalized lease disclosure:
The Company entered into two capital lease
obligations in fiscal 1995 and one lease
in fiscal 1996 for the purchase of
property and equipment as follows:
Cost of property and equipment $ 3,827 $ 17,646
Cash paid
----------- -----------
Liability under capitalized lease $ 3,827 $ 17,646
=========== ===========
Supplemental Schedule of Non-Cash Investing
Financing Activities:
During the twelve months ended June 30, 1995
the Company acquired the operating assets of
three different businesses in the following manner:
Total operating assets of the businesses acquired $ -- $ 1,656,875
Less: common stock issued -- (56,875)
----------- -----------
Total cash paid $ 0 $ 1,600,000
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
<PAGE>
CHILDROBICS, INC.
Notes to Consolidated Financial Statements
Note 1 - Description of Business, Certain Considerations relating to the
Business and Summary of Significant Accounting Policies
Description of Business
Childrobics, Inc. (the "Company"), is engaged in the children's recreation and
entertainment business. The Company operates several complementary businesses
which service the recreation and entertainment industry as a distributor of
amusements games, rides and redemption items, a manufacturer which designs and
assembles softplay structures and an operator of video and arcade games at
non-company owned facilities. Businesses in the United States serving the
children's market are characterized by intense and substantial direct
competition. Although the market is generally fragmented, certain of the
companies with which the Company competes are substantially larger and have
substantially greater resources, especially in marketing and sales, than the
Company. It is also likely that other competitors will emerge in the future.
Through June 30, 1996 the Company also owned and operated indoor and
indoor/outdoor recreation and entertainment centers ("Playcenters") through its
subsidiaries and was a franchisor of Playcenters throughout the U.S. In the
first quarter of fiscal 1997, the Company disposed of substantially all of its
recreational Playcenters and in the fourth quarter of 1996 closed its
franchising operation. See Note 4.
The Company was incorporated in the State of New York on May 7, 1993 under the
name Child Playrobics, Inc. and changed its name to Childrobics, Inc. in 1994.
History of Losses, Working Capital Deficit and Need for Additional Capital
During the fiscal years ended June 30, 1996 and 1995, the Company sustained net
losses of $9,873,996 and $1,366,220, respectively. Although the Company recorded
net income from operations prior to its initial public offering in June 1994,
since that time, as the Company commenced its expansion plans, the Company has
not achieved net income and has not generated positive cash flow. At June 30,
1996, the Company had a working capital deficit of $2,531,397. The Company has
significant debts related to a liquidity crisis resulting from its losses from
operations for the fiscal year ended June 30, 1996. The Company has been able to
continue its operations despite its lack of cash resources as a result of the
proceeds received by the Company from a Lender in the form of a $1,500,000 loan,
pursuant to a financing agreement. The Company's ability to continue its
operations is dependent upon its ability to obtain additional financing, take
steps necessary to increase its cash flow, including the sale of certain assets
of the Company, merge with a profitable company and to continue to persuade its
trade creditors not to insist upon strict adherence to normal payment terms. The
Company cannot provide assurances that success of any or all of these factors
will be sufficient to make the Company's operations profitable or will generate
positive cash flows in the future.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
all its subsidiaries through June 30, 1996. The Company owned approximately 51%
of two Florida companies, one of which also owns 100% of another Florida
company. In December 1995, the Company acquired an 80% interest in another
Playcenter located in Florida. In September 1995, the Company purchased
approximately 51% of a Playcenter in Staten Island, N.Y. All other subsidiaries
are 100% owned by the Company. In the first quarter of 1997, the Company
disposed of substantially all of its recreational Playcenters and in the fourth
quarter of 1996 closed its franchising operation and accounted for these
entities as discontinued operations in its June 30, 1996 financial statements.
F-8
<PAGE>
CHILDROBICS, INC.
Notes to Consolidated Financial Statements
Note 1 - Description of Business, Certain Considerations relating to the
Business and Summary of Significant Accounting Policies - continued
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
All material intercompany sales and related profits have been eliminated.
Certain items in the 1995 financial statements have been reclassified, primarily
due to discontinued operations, to conform to the 1996 presentation.
Concentration of Credit Risk
Accounts receivable consists of amounts due from credit sales to customers
principally in North America. It is the Company's policy not to require
collateral for credit sales. The Company performs ongoing credit evaluations of
its customers and maintains allowances for potential credit losses and,
therefore, it believes its exposure is limited by such allowances, however,
these assessments may change in the near term.
Inventories
Inventories are carried at the lower of cost (on a first-in first-out basis) or
market.
Property and Equipment
The cost of property and equipment is amortized over the estimated useful lives
of the respective assets using the straight-line method with a half year of
depreciation or amortization recorded in the year of acquisition and
disposition. Estimated useful lives were as follows:
Property 5 Years
Equipment 5-7 Years
Leaseholds Over the life of the applicable lease
Furniture and fixtures 5 Years
Maintenance and repair costs are charged to expense as incurred. Renewal and
improvements that extend the useful life of the assets are added to the property
and equipment accounts.
Other Assets
Organization costs are amortized over five years under the straight-line method.
Income Taxes
Deferred income tax assets and liabilities are computed annually for differences
between the financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted tax
laws and rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income tax
expense is the tax payable or refundable for the period plus or minus the change
during the period in deferred tax assets or liabilities.
F-9
<PAGE>
CHILDROBICS, INC.
Notes to Consolidated Financial Statements
Note 1 - Description of Business, Certain Considerations relating to the
Business and Summary of Significant Accounting Policies - continued
Revenue Recognition
Sales of equipment and rides are recognized when shipped. Revenue from video and
arcade operations is recognized when earned. All sales are denominated in U.S.
Dollars.
Earnings per Share
Earnings per share for all periods have been presented based on the weighted
average number of shares outstanding including shares subscribed. Stock options
and warrants have not been included since their effect would have been
anti-dilutive.
Stock Options and Similar Equity Instruments Issued to Employees
The Company uses the intrinsic value method to recognize cost in accordance with
Accounting Principles Board No. 25 (Accounting for Stock Issued to Employees).
Note 2 - Acquisitions
Explorations
In November 1994, the Company acquired approximately 51% of Explorations
Franchise Group, Inc.("EFG"), SJB Investments Corp ("SJB"), and SJB's 100% owned
subsidiary, Explorations Entertainment Group, Inc. ("EEG"), collectively known
as "Explorations". Explorations operates a Playcenter and franchises other
Playcenters on a national basis. Such majority interest was acquired for
$300,000 plus acquisition costs and the Company advanced an additional $300,000
in the form of non- interest bearing notes payable at acquisition date. In
December 1995, the Company acquired an 80% interest in another Playcenter for a
nominal consideration in Boynton Beach, Fl ("Boynton"). In the fourth quarter of
fiscal 1996, the Company shut down EFG, and in the first quarter of fiscal 1997
signed a letter of intent to sell its majority interest in the remaining Florida
operations, SJB, EEG, and Boynton, to the management of Explorations.
Explorations is accounted for as a discontinued operation in fiscal 1996. See
Note 4.
Group Coin and Affiliates
In March 1995, the Company acquired substantially all of the assets of Group
Coin, Replay Amusement Corp., Amusement Associates, Turnpike and Medford
Amusement Corp, now Kids Kingdom. The purchase price of the acquisition was paid
with $1,500,000 of cash, the issuance of 375,000 of common stock at $1.875 per
share and the assumption of $200,000 of liabilities related to the purchase of
Medford Amusement Corp. Included in the $1,500,000 of cash was $1,435,000 for
the acquisition of video, arcade and redemption equipment recorded as fixed
assets, $25,000 related to covenants not to compete and $40,000 for inventory.
The Company may have to issue additional shares depending upon the market price
of the Company's common stock two years after the closing date of the purchase.
Certain restrictions apply to the transfer or sale of the common stock issued
and the Company has made certain pledges related to the registration of these
shares. The Company's Kids Kingdom Playcenter located in Medford, N.Y. was sold
in the first quarter of fiscal 1997 and is accounted for as a discontinued
operation in fiscal 1996. See Note 4.
F-10
<PAGE>
Note 2 - Acquisitions - continued
FZL, Inc.
In April 1995, the Company acquired all of the assets of FZL, Inc., a Playcenter
located in Lynbrook, N.Y. The purchase price was $400,000 paid in cash and the
issuance 65,000 shares of common stock at $1.625 per share. Additional amounts
were paid relating to a security deposit from the landlord of the facility.
Under certain circumstances, additional shares may be issued to the seller
subject to the market price of the Company's common stock two years after the
closing date of the purchase. The Company has retained certain voting rights
related to additional shares which may be issued pursuant to this acquisition.
Certain restrictions apply to the transfer or sale of the common stock issued
related to this acquisition and the Company has made certain pledges related to
the registration of these newly issued shares. The Company sold its interest in
this Playcenter in the first quarter of fiscal 1997 and is accounting for this
entity as a discontinued operation in fiscal 1996. See Notes 3 and 4.
Tunnels & Tubes, Inc.
In June 1995, the Company acquired all of the assets of Tunnels & Tubes for Fun,
Inc. The purchase price of the acquisition, paid in cash, was $100,000 for the
business, $70,000 for certain sales contracts, inventory, a covenant not to
compete and a $6,875 for a security deposit. The Company issued 65,000 shares of
common stock related to the acquisition and may have to issue additional shares
depending upon the market price of the Company's Common Stock two years after
the closing date of the purchase . Certain restrictions apply to the transfer or
sale of the common stock issued and the Company has made certain pledges related
to the registration of these shares. See Note 3.
Whitey Ford's Grand Slam of Staten Island, Inc.
In July 1995, the Company agreed to purchase a 51% interest in Whitey Ford's of
Staten Island, Inc., a Playcenter located in Staten Island, N.Y. for $500,000
($300,000 in cash and notes for the acquisition and the Company also agreed to
invest $200,000 to be used for the renovation and expansion of the existing
facility). The Company borrowed an additional $300,000 from a financial
institution to purchase additional rides and games. The Company entered into an
agreement to transfer its interest in this Playcenter in the first quarter of
fiscal 1997 and is accounted for as a discontinued operation in fiscal 1996 and
the outstanding debt associated with this transaction will be assumed by the
acquiring entity. See Note 4.
Note 3 - Related Party Transactions
In April 1995, the Company acquired all of the assets of FZL Inc., a Playcenter
located in Lynbrook, N.Y. A former Officer and Director of the Company held a
partial interest in the company from which the assets were acquired. This
Playcenter was disposed of in the first quarter of fiscal 1997. See Notes 2 and
4.
In June 1995, the company acquired all of the assets of Tunnels & Tubes for Fun,
Inc. The same former Officer and Director owned 100% of this company from which
the assets were acquired. See Note 2.
F-11
<PAGE>
CHILDROBICS, INC.
Notes to Consolidated Financial Statements
Note 4 - Discontinued Operations
Franchise Operation
In the fourth quarter of 1996, the Company shut down Explorations Franchise
Group in which it also owned approximately 51% of the outstanding shares. Sales
of these operations were $151,585 and $124,379 for the twelve months ended June
30, 1996 and 1995, respectively.
Playcenters
As part of the Employment and Option Termination Agreement (See Note 13) the
Company's former Chief Executive Officer received the common stock in the
Playcenters located in Brooklyn, N.Y., Bayside, N.Y., New York, N.Y. and the
assets of its original Playcenter in Brooklyn, N.Y. In addition, the Company's
former Executive Vice President, in conjunction with the Company's former Chief
Executive Officer, will receive the Company's 51% interest in the Playcenter
located in Staten Island, N.Y. Each officer will receive these assets free of
charge, however, all liabilities, with the exception of liabilities owed to
other Childrobics subsidiaries, will be assumed in the transaction by the
Officers. Sales of these operations were $2,184,932 and $1,242,281 for the
twelve months ended June 30, 1996 and 1995, respectively.
On September 25, 1996, the Company sold to an investor the stock in its
Playcenters located in Danbury, Ct. for $350,000, Medford, N.Y. for $400,000 and
Lynbrook, N.Y. for $325,000. The Company received cash at closing of $60,000 and
notes receivable for $490,000 payable to the Company after closing: (1) $115,000
in 30 days; (2) $75,000 in six months; (3) $25,000 in nine months; (4) $75,000
in twelve months, and (5) $200,000 in two years. The Company will also receive,
(1) within six months of the closing, at the sole discretion of the buyer,
either $100,000 by delivery of 25,000 shares of restricted stock of the buyer or
$25,000 in cash; and (2) within twelve months of the closing, at the sole
discretion of the buyer, either $100,000 by delivery of 25,000 shares of
restricted stock of the buyer or $50,000 in cash. The buyer has also agreed to
assume the following debt for each of the respective Playcenters: (1) $150,000
for Lynbrook, N.Y., (2) $50,000 for Danbury, Ct., and (3) 250,000 for Medford,
N.Y. Sales of these operations were $2,803,306 and $477,745 for the twelve
months ended June 30, 1996 and 1995, respectively. As part of the sale of these
Playcenters, the buyer signed a five year contract for the Company's subsidiary,
Group Coin Associates, to be the sole operator of video and arcade games in
these three Playcenters.
In the fourth quarter of fiscal 1996 the Company shut down EFG. As set forth in
the letter of intent which the Company signed in the first quarter of fiscal
1997, the Company agreed to sell its majority interest in the remaining Florida
operations, SJB, EEG, and Boynton, to the management of Explorations.
Explorations is accounted for as a discontinued operation in fiscal 1996. Sales
of these operations were $639,637 and $236,923 for the twelve months ended June
30, 1996 and 1995, respectively. See Note 4.
F-12
<PAGE>
CHILDROBICS, INC.
Notes to Consolidated Financial Statements
Note 4 - Discontinued Operations - continued
Summarized net assets, sales and results of operations for all discontinued
operations are as follows:
1996
----
Net assets of discontinued operations
(Primarily Notes Receivable) $ 525,000
Revenues $5,779,460
Loss from discontinued operations ($1,546,862)
There was no income tax liability or benefit associated with the losses on
discontinued operations.
The disposition of its Playcenters is subject to negotiations and execution of
definitive agreements and there can be no assurance that the Company will be
able to consummate such transactions on acceptance terms or at all. The amounts
the Company will ultimately realize could differ materially in the near term
from the amount assumed in arising at the loss or disposal of the discontinued
operations.
Note 5 - Inventory
Inventory consisted of the following items as of June 30,
1996
----
Equipment $224,866
Parts 10,000
--------
Total $234,866
========
In fiscal 1996, the Company charged to operations approximately $ 273,640 to
provide for obsolescence and net realizable issues related to its equipment
inventory.
Note 6 - Property and Equipment
Property and equipment consisted of the following at June 30,
1996
----
Equipment $4,061,038
Leasehold improvements 35,381
Machinery 26,912
Furniture and fixtures 177,774
----------
sub-total 4,301,105
Accumulated depreciation (809,870)
----------
Net property and equipment $3,491,235
==========
F-13
<PAGE>
CHILDROBICS, INC.
Notes to Consolidated Financial Statements
Note 7 - Other Assets
Other assets consisted of the following at June 30,
1996
----
Security and other deposits $33,431
Organization costs 78,347
--------
Total Other Assets $111,778
========
Note 8 - Accrued Liabilities
Accrued liabilities consisted of the following at June 30,
1996
----
Termination pay $687,500
Professional fees 396,168
Rent 72,562
Insurance 63,707
Claims 49,856
Payroll and taxes 49,126
Other 73,902
----------
Total Accrued Liabilities $1,392,821
==========
Note 9 - Revolving Credit Agreement
In July 1995, the Company obtained a $200,000 revolving line of credit from a
bank which requires the Company to maintain a deposit of $100,000 with the bank
for the duration of the agreement as collateral securing the line of credit.
Such line of credit provides for interest at 1% above the prime lending rate of
the bank. The weighted average interest rate for the twelve months ended June
30, 1996 was 9.25%.
Note 10 - Notes Payable
Notes payable was comprised of the following:
1996
----
Betson Equipment $224,026
Firestone Financial 413,997
-------
Total debt 638,023
Less: current maturities (607,352)
-------
Total long term debt $30,671
F-14
<PAGE>
CHILDROBICS, INC.
Notes to Consolidated Financial Statements
Note 10 - Notes Payable -continued
Notes payable is composed of seven notes, with interest rates varying from 12.6%
to 15.6% and collateralized by equipment with a book value of approximately
$800,000. Current maturities of the above captioned notes are:
1997 $607,352
1998 30,671
Note 11- Capital Leases
The Company entered into an equipment lease which give it the right to purchase
the item for $1 at the termination of the lease. Depreciation recorded on such
lease was $3,525 for twelve months ended June 30, 1996 and 1995. Amounts due
under the lease are as follows:
1997 $9,556
1998 8,820
1999 735
------
sub-total 19,111
Less: amounts representing interest (3,476)
-------
Total $15,635
Note 12 - Fair Value of Financial Instruments
Effective June 30, 1996, the Company adopted Statement of Financial Accounting
Standards No. 107, Disclosure About Fair Value of Financial Instruments which
requires disclosing fair value to the extent practicable for financial
instruments which are recognized or unrecognized in the balance sheet. The fair
value of the financial instruments is not necessarily representative of the
amount that could be realized or settled, nor does the fair value amount
consider the tax consequences of realization or settlement.
For certain financial instruments, including cash and cash equivalents, trade
receivables and payables, it was estimated that the carrying amount approximated
fair value because of the near term maturities of such obligations. It is not
practicable to estimate a fair value for the Company's long-term debt as the
Company cannot currently obtain conventional financing. See Note 20.
The Company does not believe it is practicable to estimate the fair value of the
guarantee and does not believe exposure to loss is likely. See Note 13.
F-15
<PAGE>
CHILDROBICS, INC.
Notes to Consolidated Financial Statements
Note 13 - Commitments and Contingencies
Operating Leases
The Company is obligated under operating leases for its facilities. Rental
expense under the current leases for continuing operations for the period June
30, 1996 and 1995 were $83,500 and $46,982, respectively. Rental expense under
leases for discontinued operations for the period ended June 30, 1996 and 1995
was $1,416,112 and $380,289. Future minimum lease payments under current
non-cancelable leases for the remaining years of the leases subsequent to June
30, 1996 for continuing operations are as follows:
1997 $84,583
1998 57,500
--------
Total $142,083
========
The Company is contingently liable in the amount of $1,720,860 for the remaining
lease payments for the Danbury, Ct Playcenter which was sold in the first
quarter of 1997 and is shown as a discontinued operation. In addition, the
Company is liable to the remaining lease payments for the Funnyone, Stafer
Island. Such amount is approximately $1,500,000. This Playcenter was disposed of
during the first quarter of 1997. All other leases pertaining to discontinued
operations have been assumed by the acquiring entities.
Employment Agreements
In September 1995, the Company entered into employment agreements with three
officers and directors (the "Officers"). Such agreements were to expire July 10,
2000. The annual salaries under the agreements for each Officer were $150,000
and annual bonuses equal to 50 percent of the salary provided under their
respective agreements. Bonuses for the previous two years, amounting to
$400,000, have been accrued but remain unpaid.
Pursuant to an Employment and Option Termination Agreement (the "Termination
Agreement") as approved by the two independent members of the Company's Board of
directors, dated July 3, 1996, and amended in September 1996, between the
Officers and the Company, each officer has agreed to resign their respective
positions with the Company and forfeit all unpaid bonuses and stock options
awarded to them subject to the Company obtaining financing in the form of a
$1,500,000 loan (the "Financing Agreement") and the completion of the merger
with Just Kiddie Rides, Inc., which closed on September 30, 1996. See Notes 4
and 20.
As provided for in the Termination Agreement, each Officer will receive:
(1) $200,000, of which $50,000 is to be paid at the closing of the Financing
Agreement and the balance to be paid in short term notes, all of which will be
satisfied not later than the earlier of one year from the date of closing of the
financing agreement or the completion of a secondary offering of the Company's
common stock. Such amounts have been collateralized by a pledge of the assets of
the Company's subsidiary, Group Coin Associates, Inc.; (2) Options to purchase
300,000 shares of the Company's common stock for $.01 per share. The Company
charged to operations and credited to
F-16
<PAGE>
CHILDROBICS, INC.
Notes to Consolidated Financial Statements
Note 13 - Commitments and Contingencies- continued
Additional Paid in Capital $1,341,000 related compensation for such below market
stock options; (3) each Officer will be reimbursed for any out of pocket
expenses incurred on behalf of the Company up to a specified amount; (4) two of
the Officers will receive the Company's 51% interest in its Staten Island, N.Y.
Playcenter; and, (5) one of the Officers will receive 100% of the Company's
common stock of the Playcenters located in Brooklyn, N.Y., Bayside, N.Y. and
N.Y., N.Y. and will also assume all outstanding liabilities with the exception
of liabilities owed to other subsidiaries of the Company. In addition, due to
the Company's cash shortage, each Officer agreed to defer any salary from July
1, 1996 through the closing of the Financing Agreement. The Company has provided
$87,500 in fiscal 1996 for such event. As of June 30, 1996, one Officer loaned
to the Company approximately $87,620 and will be repaid from the proceeds of the
Financing Agreement.
Legal Proceedings
A judgement in the amount of $156,000 has been awarded against the Company
resulting from an action brought by Creative Engineering for non-payment of
trade obligations. The full amount of the judgement has been recorded in these
financial statements.
The Company is involved in legal proceedings from time to time involving alleged
personal injury which are generally considered routine and incidental to its
business. The Company believes that legal proceedings presently pending are
adequately covered by insurance and any potential liability in connection with
these proceedings will not have a material adverse effect on the financial
condition and results of operations and cash flows of the Company. If a claim
was partially or completely uninsured, if successful and of sufficient
magnitude, such claim may have a material adverse effect on the Company and its
financial condition.
The Company is also involved in other legal proceedings which are considered
routine and incidental to its business. The Company believes that the legal
proceedings which are presently pending have no potentia liability which would
have a material adverse effect on the financial condition and results of
operations and cash flows of the Company.
The Company's assessment of its potential liability with respect to any of the
above legal matters may change in the near term.
Guarantees
During 1996 the Company made two sales to an unrelated party of soft play
structures through its Tunnels & Tubes subsidiary with recourse. The unrelated
party financed the sale through a financial institution in which the Company
guaranteed payment of the unpaid balance in the event the unrelated party fails
to satisfy the financing. As of June 30, 1996 the remaining liability on the two
sales contracts was approximately $130,500. If all payments are made on a timely
basis the liability will cease in July 1999.
F-17
<PAGE>
CHILDROBICS, INC.
Notes to Consolidated Financial Statements
Note 13 - Commitments and Contingencies - continued
Tax Defaults
The Company has not paid quarterly New York State sales tax in the last two
quarters in the aggregate amount of approximately $175,000 (which has been
recorded by the Company but has not been paid), although the Company has entered
into negotiations with the State of New York to resolve the outstanding
liabilities. In addition, the Company and its subsidiaries have failed to file
(i) a New York City Rent Tax Return with respect to one of its subsidiaries
located in New York, New York, which was due June 20, 1996, in the amount of
approximately $10,000, which liability was assumed by the Company's former Chief
Executive Officer (ii) Florida State Personal Property Tax returns with respect
to the Company's subsidiaries located in Florida which were due in December
1995, and (iii) a New York State estimated quarterly franchise tax return for
the quarter ended June 30, 1996 in the amount of $6,150. The Company's June 1995
New York State Franchise Tax payment in the amount of $9,966 was returned by the
State of New York due to an error by the State. The Company may also be subject
to certain fines and penalties with respect to such unpaid taxes which could
have a material adverse effect on the Company.
As action was commenced against the Company as maker of a series of promissory
notes in the amount of $200,000 (which has been recorded by the Company but has
not been paid) related to one of its discontinued operations. Acceleration of
the total amount due of $200,000 has been requested by plaintiff and accrued
unpaid interest of approximately $9,000 and court costs. The Company is
presently negotiating a settlement with plaintiff. However, resolution has not
been reached as of October 14, 1996.
Note 14 - Common Stock
In March 1994, the Company borrowed $500,000 in a bridge loan from four persons,
such loans were repaid at the closing of the Company's initial public offering
("IPO") on June 21, 1994. In further consideration of the bridge loan, the
Company issued 175,000 shares of common stock and 175,000 Class A warrants and
175,000 Class B warrants of the Company to such persons. The Class A Warrants
entitle the holder to purchase 1 share of common stock at $4.50 per share during
the four year period commencing one year from the effective date of the
offering, June 14, 1994. The Class B Warrants, which were not registered as part
of the offering, are identical to the Class A Warrants except the exercise price
is $9.00 per share.
In connection with the Company's IPO, the Company sold to the Underwriter, for
nominal consideration, warrants to purchase an aggregate of 250,000 shares of
common stock which are exercisable through June 1998, at an exercise price of
$6.60 per unit.
On March 26, 1996, the Company completed a private offering of 1,000,000 units,
each unit consisting of one share of Common Stock, one Class C Common Stock
Purchase Warrant and one Class D Common Stock Purchase Warrant, from which the
Company derived gross proceeds of $500,000. Each Class C Warrant and Class D
Warrant entitles the holder to purchase one share of Common Stock at an exercise
price of $.70 and $.90 per share, respectively. The principal purpose of the
offering was to raise working capital. The securities offered have not been
registered under the Securities Act of 1933 or any applicable state securities
laws.
F-18
<PAGE>
CHILDROBICS, INC.
Notes to Consolidated Financial Statements
Note 15 - Income Taxes
No provision for income taxes has been made because of the Company's net loss
position. Income tax accounting standards require the establishment of a
deferred tax asset for all deductible temporary differences and operating loss
carryforwards. The Company has recorded a deferred tax asset of approximately
$4,000,000. Due to operating losses the Company has also recorded a valuation
allowance in the amount of $4,000,000.
As of June 30, 1996, the Company had approximately $11,800,000 of net operating
loss carryforwards available to offset future taxable income expiring between
2009 and 2011. Pursuant to Section 382 of the Internal Revenue Code, the future
availability of such net operating tax loss carryforwards may be significantly
limited due to its merger with Just Kiddie Rides and certain provisions of its
Financing Agreement dated September 30, 1996.
Note 16 - Fourth Quarter Adjustments
In the fourth quarter of fiscal 1996, the Company charged to operations
approximately $1,728,500 related to Officer's compensation expense (see Note
13), approximately $653,300 related to uncollectible accounts receivable and
approximately $273,600 related to inventory obsolescence charges.
Note 17 - Major Customers
The Company had sales to one customer located in Brazil, South America
representing approximately 46% and 44% of total continuing sales in 1996 and
1995 and 40% of outstanding accounts receivable as of June 30, 1995. No amounts
were due as June 30, 1996 from this customer. The loss of this customer resulted
in a material adverse effect on the Company.
Note 18 - New Authoritative Pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity, including goodwill, be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. As the Company's remaining property and equipment
relates to its profitable operations the Company does not believe that SFAS No.
121 will have any material adverse effect on the Company's financial statements.
The FASB has also issued Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock Based Compensation", in October 1995. SFAS No. 123
uses a fair value based method of recognition for stock options and similar
equity instruments issued to employees as contrasted to the intrinsic valued
based method of accounting prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees." The recognition requirements of SFAS No. 123 are
effective for transactions entered into in fiscal years that begin after
December 15, 1995. The Company will continue to apply Opinion No. 25 in
recognizing its stock based employee arrangements. The disclosure requirements
of SFAS No. 123 are effective for financial statements beginning after December
15, 1995. The Company
F-19
<PAGE>
CHILDROBICS, INC.
Notes to Consolidated Financial Statements
Note 18 - New Authoritative Pronouncements - continued
adopted the disclosure requirements on July 1, 1996. SFAS No. 123 also applies
to transactions in which an entity issues its equity instruments to acquire
goods or services from non-employees. Those transactions must be accounted for
based on the fair value of the consideration received or the fair value of the
equity instrument issued, whichever is more reliably measurable. This
requirement is effective for transactions entered into after December 15, 1995.
Note 19 - Segment Data
The following data includes that of non-affiliated continuing operations as June
30:
<TABLE>
<CAPTION>
Video & Equipment
Arcade Sales Corporate Eliminations Consolidated
------ ----- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue
1996 $1,672,340 $5,507,618 $ - $ - $7,179,958
========== ========== ============ ============ ==========
1995 397,032 1,577,909 $ - $ - 1,974,941
========== ========== ============ ============ ==========
Income (Loss)
1996 90,186 (618,250) (4,235,207) (20,000) (4,783,271)
========== ========== ============ ============ ==========
1995 7,265 95,728 (892,763) - (789,770)
========== ========== ============ ============ ==========
Identifiable
Assets
1996 6,213,717 5,579,058 21,175,611 (28,351,743) 4,616,643
========== ========== ============ ============ ==========
1995 2,930,023 3,677,802 39,831 (3,168,557) 3,479,099
========== ========== ============ ============ ==========
Depreciation
&
Amortization
1996 674,696 7,392 37,437 - 719,525
========== ========== ============ ============ ==========
1995 130,347 3,245 - - 133,592
========== ========== ============ ============ ==========
Capital
Expenditures
1996 574,789 47,410 17,628 - 639,827
========== ========== ============ ============ ==========
1995 $85,278 $40,517 $92,805 - $218,600
========== ========== ============ ============ ==========
</TABLE>
F-20
<PAGE>
CHILDROBICS, INC.
Notes to Consolidated Financial Statements
Note 20 - Subsequent Events
Financing Agreement
On September 30, 1996, the Company entered into a Financing Agreement (the
"Financing Agreement") with three financial institutions (the "Lender") pursuant
to which the Lender agreed to provide the Company with financing in the amount
of $1,500,000. In exchange for such financing the Company granted to the Lender,
for nominal consideration, warrants (the "Financing Warrants") representing the
right to purchase 5,000,000 shares of Common Stock for $100. On October 4, 1996
the Lender exercised the Financing Warrants. The Company paid a $15,000
processing fee, agreed to certain covenants such as prepayment penalties and
agreed to register the underlying shares pursuant to a pre-established time
table. Terms of the Financing Agreement were a five year note, payable with
interest only at 12% annually for the first two years and principal and interest
thereafter through maturity. In accordance with Accounting Principles Board No.
14- Accounting for Convertible Debt and Debt Issues with Stock Purchase
Warrants, the Company will record a debt discount of over $1 million, which will
be amortized to interest expense over the life of the loan, which will
significantly increase the Company's effective cost of capital.
Merger with Just Kiddie Rides, Inc.
On September 30, 1996, a Merger Agreement between Just Kiddie Rides, Inc. ("Just
Kiddie") and the Company was completed. The Company issued 5,000,000 shares of
Common Stock, paid $250,000 cash related to a covenant not to compete and issued
a note payable for $750,000 under the same terms as the aforementioned Financing
Agreement. Upon completion of the merger, Just Kiddie's founder and president
became a director, President and Chief Executive Officer of Childrobics, Inc.
The Company's new president signed a five year employment contract with the
Company commencing on September 30, 1996 which, in addition to certain employee
benefits, grants an annual salary of $250,000 and bonuses paid in Common Stock
subject to the Company meeting certain performance goals.
Pursuant to the Merger Agreement, the Company acquired all of the assets of Just
Kiddie. This acquisition may potentially subject the Company to a number of
risks, including, but not limited to, diversion of management's attention,
adverse effects on the Company's operating results and hiring of additional
personnel and there can be no assurance that the Company can successfully
integrate Just Kiddie into the Company without substantial costs, delays or
other problems. There can be no assurance that the acquisition of Just Kiddie
will prove beneficial to the Company.
F-21
<PAGE>
CHILDROBICS, INC.
Notes to Consolidated Financial Statements
Note 20 - Subsequent Events - continued
Options Granted to New Directors
On July 3, 1996 the Company approved the following options:
(a) Each of Messrs. Gunther and Fox were granted options, subject to
shareholder approval, to purchase 100,000 shares of common stock of the Company,
exercisable at $.10 per share, such options to vest in three installments,
50,000 of which shall vest on the date of election to the Board and the next two
installments of 25,000 options to vest on the next two anniversaries thereof,
provided, however all such options shall immediately vest under certain
circumstances (The shares issuable upon exercise of such options are also
subject to restriction on sale without the consent of the Company for a period
of two years); and
(b) The Company agreed to grant to each of Messrs. Gunther and Fox, at a
later date, subject to shareholder approval, options to purchase an additional
100,000 shares of common stock of the Company, exercisable at $.10 per share,
such options to vest in three installments, 50,000 of which shall vest on the
date of grant of such options and the next two installments of 25,000 options to
vest on the next two anniversaries thereof, provided, however all such options
shall immediately vest under certain circumstances (The shares issuable upon
exercise of such options are also subject to restriction on sale without the
consent of the Company for a period of two years).
Note 21 - Going Concern
The Company has a working capital deficit of $2,541,347 as of June 30, 1996. The
Company's financial statements for the year ended June 30, 1996, have been
prepared on a going concern basis which contemplates the realization of assets
and the settlement of liabilities and commitments in the normal course of
business. The continuation of the Company as a going concern is dependent upon
its ability to generate sufficient cash from operations and financing
activities. The Company's working capital deficit raises substantial doubt about
the entity's ability to continue as a going concern. Management's plans include
the following: (1) to generate additional financing through a $1,500,000 private
placement of the Company's Common Stock (See Note 20), (2) to merge with Just
Kiddie Rides, Inc., a profitable privately held company in the same industry
which will complement and supplement the Company's continuing profitable
operations (See Note 20), and (3) to shut down or otherwise divest itself of
unprofitable operations. Management believes that these plans can be effectively
implemented in the next twelve months. There can be no assurances that
management will be successful in these endeavors. The Company's ability to
continue as a going concern is dependent on the implementation and success of
these plans. The financial statements do not include any adjustments that might
result in the event the Company is unable to continue as a going concern.
F-22
