<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from___________________ to ________________________
Commission File Number: 0-25110
CHILDROBICS, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
<TABLE>
<CAPTION>
<S> <C>
NEW YORK 11-3163443
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
1745 Expressway Drive North, Hauppauge, N.Y. 11788
(Address of principal executive offices)
(516)-851-0055
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or 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 practical date. As of June 2, 1997, 15,555,001 shares of
the issuer's Common Stock were outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE> 2
CHILDROBICS, INC
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheet for the period ended March 31, 1997 3
Consolidated Statements of Operations for the six months ended
March 31, 1997 and 1996 4
Consolidated Statements of Operations for the three months ended
March 31, 1997 and 1996 5
Consolidated Statements of Shareholders' Equity for the period ended
March 31, 1997 6
Consolidated Statements of Cash Flows for three months and six months
ended March 31, 1997 and 1996 7
Notes to the Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 14
Item 3 - Defaults Upon Senior Securities 14
Item 5 - Other Information 14
Item 6 - Exhibits and Reports on Form 8-K 14
Signatures 15
<PAGE> 3
CHILDROBICS, INC.,
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
1997
----
(Unaudited)
<S> <C>
ASSETS:
Cash and cash equivalents $ 53,225
Accounts receivable 335,674
Due from officer 18,368
Inventory (Note 3) 323,626
Prepaid expense 26,619
Assets of discontinued operations 113,835
-----------
Total current assets 871,347
-----------
Property and equipment (Note 4) 5,932,030
-----------
Deferred debt expense 2,292,951
Goodwill 2,656,522
Covenant not to compete 229,167
Other 147,105
-----------
Total other assets 5,325,745
-----------
Total assets $12,129,122
===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 2,168,341
Accrued expenses 297,005
Deposits payable 21,996
Notes payable to former officers 450,000
Current portion of capitalized leases 7,519
Current portion of long-term notes payable 1,862,089
-----------
Total current liabilities 4,806,950
LONG-TERM LIABILITIES:
Capitalized leases 2,830
Notes payable 1,341,380
Note payable to current officer 637,500
Long-term debt 1,612,500
-----------
Total long-term liabilities 3,594,210
STOCKHOLDERS' EQUITY (Note 5):
Common stock - $.01 par value, 25,000,000 shares
authorized; 15,555,001-issued and outstanding 155,550
Additional paid-in capital 18,173,025
Retained deficit (14,600,613)
-----------
Total shareholders' equity 3,727,962
-----------
Total liabilities and shareholders' equity $12,129,122
===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
3
<PAGE> 4
CHILDROBICS, INC.,
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
March 31
--------
REVENUES: 1997 1996
- --------- ---- ----
<S> <C> <C>
Route operations $ 2,436,507 $ 1,186,983
Equipment and ride sales 1,394,902 4,787,278
Management fee 31,245
------------ -----------
Total revenues 3,862,654 5,974,261
------------ -----------
COST OF SALES:
Route operations expenses 2,007,048 977,917
Equipment and rides expenses 1,191,592 4,241,424
Route operations depreciation 580,066 330,486
Equipment and rides depreciation 41,038 2,974
------------ -----------
Total cost of sales 3,819,744 5,552,801
------------ -----------
Gross profit (loss) 42,910 421,460
OPERATING EXPENSES:
Selling, general and administrative 1,734,068 1,049,760
Depreciation 31,027 25,934
------------ -----------
Total operating expenses 1,765,095 1,075,694
------------ -----------
Operating loss (1,722,185) (654,234)
------------ -----------
Interest expense 361,350 44,868
Amortization expense 364,935 28,682
------------ -----------
Total interest and amortization 726,285 73,550
------------ -----------
Loss from continuing operations (2,448,470) (727,784)
Loss from discontinued operations -- (650,164)
------------ -----------
Net loss (2,448,470) (1,377,948)
Retained deficit:
Beginning of period (12,152,143) (2,350,751)
------------ -----------
End of period $(14,600,613) $(3,728,699)
============ ===========
PER SHARE DATA:
Weighted average number of shares 15,555,001 4,290,000
============ ===========
(Loss)Earnings per share (.16) (.32)
============ ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
4
<PAGE> 5
CHILDROBICS, INC.,
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
--------
REVENUES: 1997 1996
- --------- ---- ----
<S> <C> <C>
Route operations $ 1,222,598 $ 723,244
Equipment and ride sales 397,051 3,607,540
Management fee 31,245
------------ -----------
Total revenues 1,650,894 4,330,784
COST OF SALES:
Route operations expenses 1,029,355 771,042
Equipment and rides expenses 452,165 3,093,966
Route operations depreciation 287,461 38,801
Equipment and rides depreciation 18,202 (7,485)
------------ -----------
Total cost of sales 1,787,183 3,896,324
------------ -----------
Gross profit (loss) (136,289) 434,460
OPERATING EXPENSES:
Selling, general and administrative 730,639 680,774
Depreciation (8,934) 5,792
------------ -----------
Total operating expenses 721,705 686,566
Operating loss (857,994) (252,106)
------------ -----------
Interest expense 182,790 20,376
Amortization expense 195,252 1,401
------------ -----------
Total interest and amortization 378,042 21,777
------------ -----------
Loss from continuing operations (1,236,036) (273,883)
Loss from discontinued operations - (337,590)
------------ -----------
Net loss (1,236,036) (611,473)
Retained deficit:
Beginning of period (13,364,577) (3,117,226)
------------ -----------
End of period $(14,600,613) $(3,728,699)
============ ===========
PER SHARE DATA:
Weighted average number of shares 15,555,001 4,290,000
============ ===========
(Loss)Earnings per share (.08) (.14)
============ ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
5
<PAGE> 6
CHILDROBICS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
Total
Common Stock Paid-In Retained Shareholders'
Shares Amount Capital Deficit Equity
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
Beginning balance - July 1, 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-July 3, 1996 1,341,000 1,341,000
Net loss - twelve months ended
June 30, 1996 (9,873,159) (9,873,159)
----------- ------------ ------------ ------------ -----------
Balance, June 30, 1996 5,355,000 53,550 12,820,405 (11,851,555) 1,022,400
Merger of Just Kiddie Rides, Inc.-
September 30, 1996 5,000,000 50,000 2,556,000 2,606,000
Inducement to grant $1,500,000 loan
to Company - September 30, 1996 5,000,000 50,000 2,556,000 2,606,000
Net loss - three months ended
September 30, 1996 (300,588) (300,588)
----------- ------------ ------------ ------------ -----------
Balance, September 30, 1996 15,355,000 153,550 17,932,405 (12,152,143) 5,933,812
Payoff of Just Kiddie Equipment
Note - October 3, 1996 200,001 2,000 98,000 -- 100,000
Compensation expense - director's
stock options 208,000 208,000
Legal fees associated with Just Kiddie
Rides, Inc merger and $1,500,000 loan -- -- (65,380) -- (65,380)
Net loss - six months ended
March 31, 1997 -- -- -- (2,448,470) (2,448,470)
----------- ------------ ------------ ------------ -----------
Balance, March 31, 1997 15,555,001 $ 155,550 $ 18,173,025 $(14,600,613) $ 3,727,962
=========== ============ ============ ============ ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
6
<PAGE> 7
CHILDROBICS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1997 1996 1997 1996
--------------------------- -----------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss from continuing operations (1,236,036) (611,473) (2,448,470) (1,377,948)
Adjustments to reconcile net loss to net
cash used by operating activities:
Net loss attributable to minority interest (99,088) (234,040)
Depreciation and amortization 457,374 379,110 982,449 690,727
Director's stock option compensation 208,000
Changes in assets and liabilities:
Restricted cash 100,000 100,000
Accounts receivable 81,531 (73,783) 403,290 100,462
Inventory 52,313 (53,427) (166,930) 500,937
Other current assets 55,037 9,146 61,827 2,360
Prepaid expenses 104,997 85,515 39,937 161,497
Accounts payable and accrued expenses 330,115 317,213 (515,064) 554,117
---------- -------- ---------- ----------
Net cash (used) provided by continuing operations (54,669) (46,787) (1,334,961) 398,112
---------- -------- ---------- ----------
Discontinued operations:
Net loss -- -- (93,395)
Proceeds from sales of discontinued operations -- -- 391,054
----------
Net cash (used) provided by discontinued operations -- 297,659
----------
INVESTING ACTIVITIES:
Purchases of property and equipment (442,410) (507,191) (579,876) (1,801,927)
Sales and retirements of property and equipment 347,260 16,950 540,671 --
Expenditures for other assets (36,484)
---------- -------- ---------- ----------
Net cash (used) provided by investing activities (95,150) (490,241) (39,205) (1,838,411)
---------- -------- ---------- ----------
FINANCING ACTIVITIES:
Proceeds from notes payable 466,275 164,920 496,659 685,047
Repayment of short-term line of credit (136,046) (20,243) (157,961) (25,285)
Additions to capitalized leases -- 3,827 -- 120,827
Repayment of capitalized leases (2,163) (21,100) (3,761) (29,036)
Legal costs of issuing 10,200,001 shares -- -- (65,380) --
Repayment of notes payable (125,022) (136,702) (541,936) (174,796)
Private offering of 1,000,000 units -- 500,000 -- 500,000
Payment of restricted cash -- -- -- (100,000)
---------- -------- ---------- ----------
Net cash (used) provided by financing activities 203,044 490,702 (272,379) 976,757
---------- -------- ---------- ----------
Increase(decrease) in cash balances 53,225 (46,236) (1,348,886) (463,542)
Cash and cash equivalents, beginning of the period -- 46,236 1,402,111 463,542
-------- ---------- ----------
Cash and cash equivalents, end of the period 53,225 -- 53,225 --
========== ======== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
7
<PAGE> 8
CHILDROBICS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31 March 31
-------- --------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Supplemental Disclosures:
Cash paid during the period for:
Interest $92,169 $ -- $220,444 $ --
Income taxes $ -- $ -- $ -- $ --
======= ====== ======== =====
Supplemental Disclosure of Non-Cash
Investing and Financing Activities:
As part of the merger with Just Kiddie Rides, Inc.,
the Company agreed to issue 200,001 shares of
Common Stock and issue a 36 month note payable
with interest at 8.75%
Common stock $ -- $ -- $100,000 $ --
======= ====== ======== =====
Note payable $ -- $ -- $ 62,500 $ --
======= ====== ======== =====
</TABLE>
8
<PAGE> 9
CHILDROBICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying condensed interim financial statements for the six months ended
are unaudited and have been prepared in accordance with generally accepted
accounting principles for the interim financial information and in
accordance with the requirements of Regulation S-B, and therefore, do not
include all information and footnotes required for complete financial
statements; however, in the opinion of management of Childrobics, Inc. (the
"Company"), all adjustments consisting of normal recurring adjustments necessary
for a fair presentation have been made. The results of operations for the
interim periods are not necessarily indicative of the results for the full year.
These unaudited condensed financial statements should be read in conjunction
with the financial statements and notes thereto contained in the annual report
on Form 10-KSB for the year ended June 30, 1996 and Forms 10-QSB for the short
period ended September 30, 1996 and the three months ended December 31, 1996.
The consolidated financial statements include the accounts of the Company and
all of its subsidiaries. All material intercompany sales and related profits
have been eliminated.
Earnings per Share
Earnings per share for all periods have been presented based on the weighted
average number of shares outstanding. Stock options and warrants have not been
included since their effect would have been anti-dilutive.
Reclassifications
Prior year revenues and costs have been reclassified to reflect the gross
proceeds from the Company's route operations. Previously, the Company had
reported such amounts net of the facility owner's charge.
NOTE 3 - INVENTORY
Inventory consisted of the following:
<TABLE>
<CAPTION>
March 31, 1997
--------------
<S> <C>
Equipment $286,189
Parts 37,437
--------
Total $323,626
========
</TABLE>
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
March 31, 1997
--------------
<S> <C>
Equipment $ 7,757,284
Leasehold improvements 61,965
Machinery 611,905
Furniture and fixtures 104,650
sub-total -----------
8,535,804
Accumulated depreciation (2,603,774)
-----------
Net property and equipment $ 5,932,030
===========
</TABLE>
9
<PAGE> 10
CHILDROBICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - ADDITIONAL INVESTMENT IN JUST KIDDIE RIDES, INC.
As part of the merger with Just Kiddie Rides, Inc. ("Just Kiddie"), the Company
agreed, on October 3, 1996, to issue 200,001 shares of the Company common stock
to a lender and stock option holder of Just Kiddie and issue a 36 month note
payable with interest at 8.75% for $62,500. Such option was granted by Just
Kiddie in 1993 as an inducement to grant an equipment loan for $300,000. The
issuance of the Company's Common Stock and note payable increased the Company's
investment in Just Kiddie by $162,500 and was accounted for as additional
goodwill in the quarter ended December 31, 1996.
NOTE 6 - DIRECTOR'S COMPENSATION
In July and October 1996, the Company's two independent directors received a
total of 1,400,000 stock options to purchase Common Stock. Such options were
valued at $1,040,000 and vest over a five year period. Pursuant to FAS 123, the
Company will recognize compensation expense for such options as they vest. For
the Six Month Period ended March 31, 1997, the Company recorded compensation
expense of $208,000 for such options.
NOTE 7 - 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
carry forwards. Due to operating losses, any deferred tax asset established
would require a corresponding valuation allowance of the same amount.
Accordingly, no deferred asset is reflected in these consolidated financial
statements.
10
<PAGE> 11
CHILDROBICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL MERGER
On September 30, 1996 the Company completed a merger with Just Kiddie Rides,
Inc. ("Just Kiddie"). The Company issued 5,000,000 restricted shares of Common
Stock, issued a five year $750,000 note payable with interest at 12% annually
for the first two years and principal and interest for the remaining three years
and paid $250,000 related to a covenant not to compete. As part of the merger,
the Company agreed, on October 3, 1996, to issue 200,001 shares of the Company
Common Stock to a lender and stock option holder of Just Kiddie and to issue a
36 month note payable for $62,500 with interest at 8.75%. Such option was
granted by Just Kiddie in 1993 as an inducement to grant an equipment loan for
$300,000. The issuance of the Company's Common Stock and note payable increased
the Company's investment in Just Kiddie by $162,500 and was accounted for as
additional goodwill in the quarter ended December 31, 1996.
A continued amount of management time during the Current Six Month Period (as
defined below under "Results of Operations") has been devoted to merging the
two company's operations together, dealing with problems associated with
discontinued operations and moving into a new 38,000 square foot facility in
Hauppauge, N.Y. With the above problems virtually remedied, management's focus
will be entirely on growing the Company's business by penetrating new markets
and improving the Company's returns, in addition to streamlining operations and
creating cost efficient systems.
As of April 15, due to personal reasons one of the independent directors has
formally resigned. The Company is currently conducting a search.
FINANCING AGREEMENT
On September 30, 1996, the Company entered into a 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 with interest
payable at 12% annually for the first two years and interest and principal for
the remaining three years of the note. The financing agreement closed on October
3, 1996.
In exchange for such financing, the Company granted to the Lender, for nominal
consideration, warrants representing the right to purchase 5,000,000 restricted
shares of Common Stock, at any time on or before September 30, 2003, at an
aggregate exercise price of $100. The warrants were exercised in full and, as a
consequence, the Company recorded a Debt Discount equal to the fair market value
of the shares issued and will amortize such amount over the life of the loan, or
a total of $2,606,000. The Company amortized $299,050 in the six month period
ended March 31, 1997.
DEBT RESTRUCTURING
At the present time the Company is in an illiquid situation with a severely
strained cash flow. The Company is unable to meet its debt obligations in their
current format and is requesting each of its creditors to restructure its debt
in order for the Company to repay its obligations to the greatest extent
possible. A formal restructuring plan is currently being finalized and will be
presented to the various creditors.
GUARANTY OF SUBSIDIARY DEBT
Pursuant to the Company's agreement in September 1996 to guaranty the debt of
Just Kiddie as a condition of EAB's consent to the merger of the Company and
Just Kiddie, in May 1997 the Company executed a guaranty of all of the debt of
Just Kiddie to EAB. Just Kiddie is presently indebted to EAB in the approximate
aggregate amount of $1,500,000, all of which is now due and owing. The Company
is presently attempting to restructure the debt owed to EAB and its other
creditors. There can be no assurances, however, that the Company will be
successful in such attempt. In the event the Company is unable to restructure
its debt, such inability will have a material adverse effect on the financial
condition and results of operations of the Company.
11
<PAGE> 12
Management continues to believe that the Company has long term
viability. Given the time to restructure its outstanding liabilities and
expenses and maximize the revenues from its existing businesses, management's
expectation is that substantial cash flow will be generated and value developed
to repay the creditors and provide value to the shareholders. However, there
can be no assurances that the Company will be successful in its attempt to
restructure its debt, or, even if it is successful, that it will be able to
achieve sufficient cash flow to achieve such objectives.
RESULTS OF OPERATIONS
Total revenues for the three month period ended March 31, 1997 (the "Current
Three Month Period") were $1,650,894 compared to $4,330,784 for the Three Month
Period ended March 31, 1996 (the "Prior Three Month Period") which represents a
$2,679,890 or 62% decrease. Total revenues for the Six Month Period ended March
31, 1997 (the"Current Six Month Period") were $3,862,654 compared to $5,974,261
for the Six Month Period ended March 31, 1996(the "Prior Six Month Period")
which represents a $2,111,607 or 35% decrease.
The decrease was due primarily to a decrease in the sale of equipment and rides
which were $3,607,540 and $4,787,278 for the Prior Three and Six Month Periods
compared to $397,051 and $1,394, 902 for the Current Three and Six Month
Periods.
Such sales were below historical levels due to a hurricane in Puerto Rico which
shut down the Company's only producer of kiddie rides for approximately one and
one half months. The Company estimates that it lost approximately $300,000 in
kiddie ride sales as a result of this hurricane and as a result of the loss of
the Company's then largest customer (pre-merger) which historically had
contributed approximately 45% of total Company sales over the previous two year
period. Also, in January 1997, the Company's factor discontinued financing the
purchase of equipment from its primary production line in Puerto Rico, making
purchases for resale difficult. To remedy this situation the Company has
contracted with various manufacturers to produce components which will be
assembled in-house by the Company. The plan will be complete by July 1997 and
will not only reestablish a supply sufficient to meet the Compmany's demand
but increase its gross margins.
The loss from sales of equipment and rides was offset by sales in the Company's
route operations which were $1,222,598 and $2,436,507 for the Current Three and
Six Month Period compared to $723,244 and $1,186,983 for the Prior Three and
Six Month Period, or an increase of $499,354 or 69% and $1,249,524 or 105%,
respectively. Sales contributed by Just Kiddie in this segment were $1,114,748
due to a greater number of machines in place at revenue-sharing locations in
the Current Three and Six Month Periods compared to the Prior Three and Six
Month Periods.
Total Company gross profits (loss) for the Current Three Month Period were
($136,289) compared to a gross profit of $434,460 for the Prior Three Month
Period. Gross profits for the Current Six Month Period are $42,910 compared to
$421,460 for the Prior Six Month Period. It should be noted that these gross
profit figures and the segmented gross profits presented in the following two
paragraphs reflect the charge for non cash depreciation.
For the Current Three Month Period the Company's route operations incurred a
gross loss of ($94,218) compared to a gross loss of ($86,599) for the Prior
Three Month Period. For the Current Six Month Period the Company's route
operations incurred a gross loss of ($150,607) compared to a gross loss of
($121,420). Emphasis has been placed on this segment and the results reflect
this continuing emphasis on route operations.
12
<PAGE> 13
Gross losses for the Current Three Month Period in the Company's equipment and
rides segment were ($73,316) compared to a gross profit of $521,059 for the
Prior Three Month Period. For the Current Six Month Period the Company's
equipment and rides segment incurred a gross profit of $162,272 compared to a
gross profit of $542,880 for Prior Three Month Period.
The company reported a loss of $1,236,036 or $.08 per share for the Current
Three Month Period compared to a loss of $611,473 or $.14 per share for the
Prior Three Month Period. For the Current Six Month Period the company lost
$2,484,470 or $.16 per share compared to $1,377,948 or $.31 per share for Prior
Six Month Period.
Total operating expenses were $721,705, or 44% of gross sales, in the Current
Three Month Period compared to $686,566 or 19% of gross sales for the Prior
Three Month Period. For the Current Six Month Period total operating expenses
were $1,765,095 or 46% compared to $1,075,694 or 20% of gross sales for the
Prior Six Month Period. These increases for the Current Three Month Period and
Six Month Periods were attributable to : directors stock option compensation of
$208,000, additional rent, utilities and facility costs relating to moving
facilities, professional fees pertaining to the merger and sales of
discontinued operations.
The Company has reduced its overhead from a run rate of approximately $3,200,000
at the time of the merger to approximately $2,200,000 currently. Within overhead
expense, personnel related expense has been reduced from approximately
$1,900,000 to approximately $1,200,000. Management anticipates that there are
additional overhead expense savings that may be achieved.
The Company incurred interest expense of $182,790 and $361,350 respectively in
the Current Three and Six Month Period related to certain equipment notes, lines
of credit from banks and a capitalized lease. Interest expense for the Prior
Three and Six Month Periods was $23,178 and $44,868, respectively. Amortization
expense for the Current Three and Six Month Periods respectively totaled
$364,935 and $195,262 which was composed of amortization related to organization
expenses for the Group Coin acquisition in March 1995 of $10,448 a non-compete
agreement issued in the Just Kiddie merger of $20,833, goodwill of $34,607 and
amortization of deferred debt of $299,047 related to the 5,000,000 restricted
shares of Common Stock given to the Lender of the $1,500,000 loan the Company
received on October 3, 1996. For the Prior Three and Six Month Periods the total
amortization was $1,401 and $28,682, respectively.
No provision for income taxes has been made because of the Company's net loss
position.
LIQUIDITY AND FINANCIAL CONDITION
The Company used $1,334,961 from continuing operations principally to fund a net
loss of $2,488,470, offset by non-cash charges of $982,449 for depreciation and
amortization, $208,000 related to director's stock option compensation and the
pay down of $515,064 in trade payables. In addition, the Company incurred a loss
from discontinued operations of $93,395 offset by proceeds received from the
sales of discontinued operations of $391,054.
The Company received net proceeds of $193,411 by disposing of old equipment used
on its routes which it then used to purchase $137,466 of new and updated
equipment which the Company anticipates will produce higher returns in the
future.
13
<PAGE> 14
PART II OTHER INFORMATION
Item 1 - Legal Proceedings
In April and May of 1997 Firestone Financial Corp. commenced actions in the
Massachusetts Superior Court and Supreme Court, State of New York,
respectively, against the Company, Just Kiddie Rides, Inc., Turnpike Amusement
Distributing, Inc., Amusement Associates Distributing, Inc., and Gerard Reda,
the President and Chief Executive Officer of the Company, seeking damages in
the amount of $874,445. The plaintiff's complaint alleges default under one
note made by Childrobics to Firestone, five notes made by Just Kiddie Rides to
Firestone that were guaranteed by Gerard Reda, and various other agreements
between Just Kiddie Rides, Gerard Reda and Firestone. These suits are at an
early procedural stage. The Company has filed an answer to the Massachusetts
action and is preparing an answer to the New York action in which it intends to
deny liability and to interpose counterclaims based on Firestone's alleged
fraud and breach of contract.
In May 1997, Salvatore Casaccio, a former president of Childrobics, filed an
action in Supreme Court, State of New York against, among other parties,
Childrobics, Inc. and Group Coin Associates, Inc. a wholly-owned subsidiary of
the Company, seeking damages in the amount of $374,251. The action is based on
allegations of default under a promissory note in the amount of $150,000 made
by Childrobics to plaintiff in connection with the termination of his
employment, breach of contract, failure to properly withhold taxes, and failure
to pay taxes owed by an entity acquired by plaintiff from Childrobics. The
Company beleives that it has valid defenses to each of plaintiff's claims and
intends to vigorously defend itself in this action.
In October 1996, Creative Engineering, Inc. commenced an action in Florida for
the sum of $140,000 alleging that Childrobics purchased and leased certain
equipment from it and has failed to make payments due. The Company has filed an
answer alleging various affirmative defenses and intends to vigorously defend
itself against this claim.
In May of 1997, Roger Pratt commenced an action by motion for summary judgement
against the Company in Supreme Court, Nassau County alleging the Company's
default under a promissory note in the amount of $112,500. The motion is
returnable on July 10, 1997. The Company intends to vigorously defend itslf
against this action and to assert various counterclaims against the plaintiff.
In April 1997, CPC Services Inc. brought an action seeking damages of $154,00
for failure to pay amounts due under a promissory note made by the Company in
favor of the plaintiff. The Company has filed a response to the plaintiff's
claim contesting the amount claimed to be due and has requested a hearing on
such issue.
Item 3 - Default upon Senior Securities
The Company's wholly-owned subsidiary, Just Kiddie, had a credit line with
European American Bank ("EAB") that matured on January 31,1997. Just Kiddie was
unable to either pay or renew this line when it matured, and Just Kiddie is
therefore indebted to EAB under this line in the approximate amount of
$499,000. In addition, Just Kiddie is in default under two term loan agreements
with EAB. As a result of defaults in the monthly payments that were due in
March, April and May 1997, the entire amounts due under these term loans,
$287,000 and $733,000, respectively, were accelerated.
In connection with the merger of the Company with Just Kiddie in September
1996, the Company and its subsidiaries executed promissory notes to Norwood
Venture Corp. in the amount of $800,000 ("Norwood Note"); to Vega CApital Corp.
in the amount of $150,000 ("Vega Note"); and to Sterling Commercial Capital
Inc. in the amount of $550,000 ("Sterling Note" and together with the Norwood
Note and the Vega Note herein referred to as the "Notes"). The Notes are
payable interest only until November 1998 and then interest and principal from
December 1, 1998 until November 1, 2001. The Company and its subsidiaries
defaulted in making interest payments due under such Notes for payments due on
March 1, April 1, May 1 and June 1, 1997. The respective monthly interest
payments that were due were $8,000 under the Norwood Note, $5,500 under the
Sterling note, and $1,500 under the Vega Note. The aggregate amount due under
the Norwood Note is $32,000, under the Sterling Note is $22,000 and under the
Vega Note is $6,000, together with applicable overdue interest and penalty.
As a result of the company's failure to make payments of principal and interest
under a certain note held by First National Bank of Alachua beginning in
January 1997, Just Kiddie has received notice of default and acceleration of
the entire principal balance due under such note. The total amount claimed to
be due is approximately $39,000. The company is investigating whether it has a
right of offset against payments due under such note resulting from payments
due to the Company from the party that assigned such note to the holder.
14
<PAGE> 15
Various other parties have claimed that the Company is in default under other
instruments and financial agreements. The Company believes that it has valid
defenses to these claims, except that it is contesting only the amount claimed
to be due in the case of one of such claims. See Item 1 of this Form 10-QSB
"Legal Proceedings".
The Company is currently attempting to restructure certain of its debt and the
debt of its wholly-owned subsidiaries with its and their respective creditors
and intends to present a plan of debt restructure to such creditors within the
next 30 days. There can be no assurance that the company will be successful in
its attempts to restructure such debt. In the event the company is unable to
reach an agreement with the creditors, such inability will have a material
adverse effect upon the Company's financial position and results of
operations.
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHILDROBICS, INC.
(Registrant)
June 6, 1997 /s/ Gerard A. Reda
-----------------------------------------
Gerard A. Reda
President and Chief Executive Officer
June 6, 1997 /s/ Marie Cerulli
-----------------------------------------
Marie Cerulli
Controller
15
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