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, 1996
-----------------------------
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
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CHILDROBICS, INC.
----------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
New York 11-3163443
---------------- -------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Smith Street, Farmingdale, N.Y. 11735
-----------------------------------------
(Address of principal executive offices)
(516)-694-0999
---------------------
(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 May
13, 1995, 5,290,000 shares of the issuer's Common Stock were outstanding.
Transitional Small Business Disclosure Format: Yes No X
--- ---
Exhibit Index - Page 19
Page 1 of 21 total pages
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets for the periods ended March 31, 1996
and June 30, 1995 3
Consolidated Statements of Operations for the three and nine months
ended March 31, 1996 and 1995 4
Consolidated Statements of Shareholder's Equity for the period ended
March 31, 1996 5
Consolidated Statements of Cash Flows for the three and nine months
ended March 31, 1996 and 1995 6
Notes to the Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 12
PART II - OTHER INFORMATION
Item 5 - Other Information 17
Item 6 - Exhibits and Reports on Form 8-K 17
Signatures 18
2
CHILDROBICS, INC.,
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, June 30,
1996 1995
--------- --------
(Unaudited)
ASSETS:
Cash and cash equivalents $ - $1,467,148
Restricted cash (Note 2) 100,000 -
Accounts receivable, net of allowance for
doubtful accounts of $67,400 1,063,436 690,517
Inventory (Note 3) 585,367 1,166,742
Prepaid expenses 169,464 250,052
---------- -----------
Total current assets 1,918,267 3,574,459
Property and equipment (Note 4) 8,048,824 5,868,343
Goodwill 364,489 377,364
Other 937,276 940,539
---------- -----------
Total other assets 1,301,765 1,317,903
---------- -----------
Total assets $11,268,856 $10,760,705
---------- -----------
---------- -----------
LIABILITIES:
Accounts payable $1,808,944 $732,876
Accrued expenses 426,153 638,800
Deposits payable 28,570 13,995
Officer's loans 77,620 -
Revolving line of credit (Note 2) 174,715 -
Current portion of capitalized leases 121,566 33,997
Current portion of notes payable 516,612 32,478
Current portion of long-term debt 19,423 18,295
---------- -----------
Total current liabilities 3,173,603 1,470,441
LONG-TERM LIABILITIES:
Capitalized leases 24,917 29,078
Notes payable 329,033 -
Long-term debt 158,553 171,655
---------- -----------
Total long-term liabilities 512,503 200,733
Minority interest in consolidated subsidiaries (221,506) 34,975
STOCKHOLDERS' EQUITY (Note 5):
Common stock - $.01 par value, 25,000,000 shares
authorized; 5,290,000- issued and outstanding 52,900 42,900
Common stock - $.01 par value, stock subscribed
and unissued - 65,000 shares 650 650
Additional paid-in capital 11,479,405 10,989,405
Retained deficit (3,728,699) (1,978,396)
---------- -----------
Total shareholders' equity 7,804,256 9,054,559
---------- -----------
Total liabilities and shareholders equity $11,268,856 $10,760,705
---------- -----------
---------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
3
CHILDROBICS, INC.,
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
REVENUES: 1996 1995 1996 1995
---- ---- ---- ----
Playcenters $1,392,126 $491,100 $3,616,443 $938,617
Video & arcade revenue 467,211 116,998 1,255,106 116,998
Equipment and rides 1,848,134 297,041 5,082,321 297,041
Franchises and royalties - 8,643 152,664 39,989
---------- -------- ---------- ---------
Total revenues 3,707,471 913,782 10,106,534 1,392,645
---------- -------- ---------- ---------
COST OF SALES:
Playcenters 1,369,900 388,174 3,760,978 887,100
Video & arcade 319,922 90,612 853,613 90,612
Equipment and rides 1,806,192 292,082 4,492,161 292,082
Franchises and royalties 10,154 21,677 264,341 30,809
---------- -------- ---------- ---------
Total cost of sales 3,506,168 792,545 9,371,093 1,300,603
---------- -------- ---------- ---------
Gross profit 201,303 121,237 735,441 92,042
EXPENSES:
Selling, general and
administrative expenses 866,026 570,739 2,673,428 1,097,341
---------- -------- ---------- ----------
Operating loss (664,723) (449,502) (1,937,987) (1,005,299)
Interest and financing expenses 46,831 - 78,406 -
Interest income (993) (56,492) (9,609) (241,460)
---------- -------- ---------- -----------
Total interest and financing
expenses 45,838 (56,492) 68,797 (241,460)
---------- -------- ---------- -----------
Loss before loss attributable
to minority interest (710,561) (393,010) (2,006,784) (763,839)
Loss attributable to minority
interest (Notes 1 and 5) 99,088 114,593 256,481 131,187
---------- -------- ---------- -----------
Net loss (611,473) (278,417) (1,750,303) (632,652)
---------- -------- ---------- -----------
Retained deficit:
Beginning of period (3,117,226) (966,411) (1,978,396) (612,176)
----------- ----------- ----------- -----------
End of period ($3,728,699)($1,244,828) ($3,728,699) ($1,244,828)
=========== =========== =========== ===========
PER SHARE DATA:
Weighted average number of
shares 4,420,934 3,970,833 4,376,818 3,889,690
=========== =========== =========== ===========
Earnings per share ($0.14) ($0.07) ($0.40) ($0.16)
====== ====== ====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
4
CHILDROBICS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD ENDED MARCH 31, 1996
Common Stock Total
---------------- Paid-In Retained Shareholders'
Shares Amount Capital Deficit Equity
------- ------- ----------- ----------- -------------
Issued for cash -
May 7, 1993 (Date of
Inception) 800,000 $8,000 $17,000 $ - $25,000
Issued pursuant to
bridge loans -
March 16, 1994 175,000 1,750 418,250 - 420,000
Issued pursuant to a
Public Offering -
June 21, 1994 2,875,000 28,750 9,693,580 - 9,722,330
Net loss - 1994 - - - (612,176) (612,176)
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
Stock subscribed
pursuant to Asset
Purchase Agreement -
June 26, 1995 65,000 650 56,225 - 56,875
Net loss - 1995 - - - (1,366,220) (1,366,220)
Issuance pursuant to
Private Offering
Agreement of March 26,
1996 1,000,000 10,000 490,000 500,000
Net loss - Nine
months ended
March 31, 1996 - - - (1,750,303) (1,750,303)
--------- ------- ----------- ----------- ----------
5,355,000 $53,550 $11,479,405 ($3,728,699) $7,804,256
========= ======= =========== ============ ==========
The accompanying notes are an integral part of these consolidated financial
statements.
5
CHILDROBICS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended Nine Months Ended
------------------ ------------------
March 31, March 31,
--------- ---------
1996 1995 1996 1995
---- ---- ---- ----
OPERATING ACTIVITIES:
Net loss ($611,473) ($278,417) ($1,750,303) ($632,652)
Adjustments to reconcile
net loss to net cash
used by operating
activities:
Net loss attributable to
minority interest (99,088) (114,593) (256,481) (131,187)
Depreciation and amortization 379,110 34,387 971,090 90,431
Changes in assets and
liabilities:
Accounts receivable (73,783) (141,309) (372,919) (141,309)
Inventory (53,427) (310,229) 581,375 (310,229)
Prepaid expenses 85,515 (33,934) 80,588 (115,223)
Accounts payable and accrued
expenses 317,213 834,041 863,424 871,528
Deposits payable 9,146 (10,555) 14,575 (2,800)
------- ------- ------- --------
Net cash used by operating
activities (46,787) (20,609) 131,349 (371,441)
-------- ------- ------- --------
INVESTING ACTIVITIES:
Investment in and advances to
business acquired - (1,500,000) (300,000) (2,165,000)
Less: cash of business
acquired - - - 305,301
Sales of marketable securities - 703,439 3,610,422
Purchases of property and
equipment (507,191) (1,092,264) (2,741,331) (1,760,720)
Expenditures for additions
to other assets 16,950 (220,935) ( 94,102) (327,445)
-------- ---------- ---------- ----------
Net cash used by investing
activities (490,241) (2,109,760) (3,135,433) (337,442)
-------- ---------- ---------- ----------
FINANCING ACTIVITIES:
Proceeds from notes payable 162,300 (7,667) 980,427 42,200
Proceeds from short-term line
of credit - - 200,000 -
Proceeds from officer loans 2,620 - 87,620 -
Additions to capitalized lease
obligations 3,827 - 120,827 -
Private offering of 1,000,000
units (a) 500,000 - 500,000 -
Payment of restricted cash - - (100,000) -
Repayment of short-term line
of credit (20,243) - (25,285) -
Repayment of officer's loan - (17,250) (10,000) (13,500)
Repayment of capitalized
leases (21,100) - (37,419) -
Repayment of long term debt (3,289) - (11,974) -
Repayment of notes payable (133,413) (167,260) (13,487)
-------- --------- ---------- ---------
Net cash provided by
financing activities 490,702 (24,917) 1,536,936 15,213
-------- ---------- ---------- ---------
Decrease in cash balances (46,326) (2,155,286) (1,467,148) (693,670)
Cash balances, beginning of the
period 46,326 2,919,262 1,467,148 1,457,646
-------- ---------- ---------- ---------
Cash balances, end of the
period $0 $763,976 $0 $763,976
== ======== == ========
The accompanying notes are an integral part of these consolidated financial
statements.
6
CHILDROBICS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Unaudited)
Three Months Ended Nine Months Ended
------------------ ------------------
March 31, March 31,
--------- ---------
1996 1995 1996 1995
---- ---- ---- ----
Supplemental Disclosures:
Cash paid during the period
for:
Interest $78,406 $ - $46,831 $ -
======= ======== ======= ========
Income taxes $ - $ - $ - $ -
======= ======== ======= ========
375,000 Shares of Common
Stock issued
for assets acquired and
assumed liabilities $ - $903,125 $ - $903,125
======= ======== ======= ========
(a) The Company closed 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 $500,000. Each Class C Warrant and Class D Warrant
entitles a holder to purchase one share of Common Stock at an exercise
price of $.70 and $.90 per share, respectively. The purpose of the
offering was to raise working capital.
The accompanying notes are an integral part of these consolidated financial
statements.
7
CHILDROBICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying condensed interim financial statements for the three and nine
months ended are unaudited and have been prepared in accordance with generally
accepted accounting principles for the interim financial information and with
the requirements of Regulation S-B and Form 10-QSB and, therefore, do not
include all information and footnotes required by generally accepted accounting
principles 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, 1995.
The consolidated financial statements include the accounts of the Company and
all of its majority owned subsidiaries. The Company owns approximately 51% of
two Florida companies one of which also owns 100% of another Florida company and
the Company also owns approximately 51% of a company located in Staten Island,
N.Y.. The Company consolidates these four entities and eliminates the
approximately 49% minority interest which it does not own. All other
subsidiaries are 100% owned by the Company. 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.
NOTE 2 - REVOLVING CREDIT AGREEMENT
In July 1995 the Company obtained a $200,000 revolving credit line from a bank
which requires the Company to maintain a compensating balance of $100,000 with
the bank for the duration of the agreement. Such line of credit provides for
interest at 1% above the bank's prime lending rate.
NOTE 3 - INVENTORY
Inventory consisted of the following:
March 31, June 30,
1996 1995
--------- --------
Equipment $540,644 $906,740
Plush 4,723 223,386
Parts 40,000 36,616
-------- ----------
Total $585,367 $1,166,742
======== ==========
8
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
March 31, June 30,
1996 1995
---------- ----------
Equipment $6,073,946 $3,654,030
Leasehold improvements 2,363,336 1,874,389
Machinery 721,435 639,671
Furniture and fixtures 348,040 297,336
sub-total 9,506,757 6,465,426
Accumulated depreciation (1,457,933) (597,083)
---------- ----------
Net property and
equipment $8,048,824 $5,868,343
========== ==========
NOTE 5 - COMMON STOCK
In June 1994, the Company completed the initial public offering of 2,875,000
units (including the 375,000 underwriter's over-allotment units) at $4.00 per
unit resulting in net proceeds to the Company of $9,722,330. Each unit consists
of 1 share of common stock and 1 Redeemable Class A Purchase Warrant. 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. In addition, the Company also issued 175,000 Class
A Warrants and 175,000 Class B Warrants to the bridge loanholders. 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 offering, the Company sold to the Underwriter, for
nominal consideration, warrants to purchase an aggregate of 250,000 units
("Underwriter's Unit Purchase Option"). The Underwriter's Unit Purchase Option
is exercisable during the four year period commencing one year from the
effective date of the offering, 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 a 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.
Acquisitions
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 owns and operates a Playcenter in Boca
Raton, Florida 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. Such advances total $701,371 at March 31,
1996.
9
NOTE 5 - COMMON STOCK (CONTINUED)
In March 1995, the Company acquired substantially all of the assets of Group
Coin Inc., Replay Amusement Corp., Amusement Associates, Inc., Turnpike
Amusement Distributing, Inc. and Medford Amusement Corp, collectively the
"Arcade Companies". The purchase price of the acquisition was paid with
$1,500,000 of cash, the issuance of 375,000 of the Company's 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 which
the Company recorded as fixed assets, $25,000 related to covenants not to
compete and $40,000 for inventory. In addition, 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 made certain commitments related to the
registration of these newly issued shares.
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. Additional amounts were paid
relating to a security deposit to 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 retained certain voting rights related to the
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 made certain commitments related to the
registration of the newly issued shares.
In June 1995, the Company acquired all of the assets of Tunnels & Tubes for Fun,
Inc. The purchase price of the acquisition was paid with $176,875 in cash for
certain sales contracts, inventory, a covenant not to compete and a security
deposit. In addition, the Company will issue 65,000 shares of common stock
related to the acquisition. Such issuance is currently shown as stock
subscribed on the December 31, 1995 balance sheet. The stock subscribed was
recorded at $.875 per share. In addition, 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 made certain
commitments related to the registration of these newly issued shares.
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
($100,000 in cash and $200,000 in 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 also borrowed an additional $283,051 to
purchase additional rides and games. During the renovation period, August 1
through October 31, 1995, the seller continued to receive all income and was
responsible for all expenses of the existing business for the period up to and
including one month before the rent under the new lease was payable, November
1, 1995, after which the Company assumed all obligations and received all income
related to the business.
10
NOTE 6 - 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. 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.
NOTE 7 - SUBSEQUENT EVENTS - DISPOSITION OF EXPLORATIONS
The Company is currently negotiating the disposition of its operations in
Florida, collectively known as Explorations. It is anticipated that such
disposition will be concluded in the quarter ended September 30, 1996. The
Company has not provided for any gain or loss associated with the disposition
since terms of the sale have not yet been finalized.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
History of Operations (see Note 5)
The Company commenced operations in November 1993 with one Playcenter, a 6,000
square foot indoor fitness and entertainment center in Brooklyn, N.Y. This was
the Company's only operating Playcenter until December 1994 when the company
completed the purchase of a 51% controlling interest in a Playcenter and
Franchising operation in Boca Raton, Florida. In December 1994 the Company
completed the construction of its second Playcenter in Bayside, New York. In
March 1995, the Company acquired substantially all of the assets of Group Coin
Amusements, Inc and Replay Amusements, Inc., operators of video and arcade games
at Company-owned and non-company owned facilities; Amusement Associates, a
leasing company of video and arcade games, Turnpike Amusements Distributing,
Inc., a distributor of video and arcade games and rides; and Medford Amusement
Corp., an owner and operator of an indoor/outdoor amusement park-type Playcenter
in Medford, N.Y. All of the companies acquired in March 1995 are collectively
known as the "Group Coin" operations. In April 1995, the company acquired all
of the assets of FZL, Inc., a Playcenter located in Lynbrook, N.Y. In May 1995,
the Company completed the construction of a Nathan's Famous restaurant at the
Lynbrook facility and in June 1995 acquired the Nathan's Famous restaurant at
the Company's indoor/outdoor Playcenter located in Medford, N.Y. In June 1995,
the Company acquired all of the assets of Tunnels and Tubes for Fun, Inc., a
manufacturer and assembler of softplay structures installed in Company-owned and
non-company owned facilities. In June 1995, the Company leased and occupied a
28,000 square foot facility in Farmingdale, N.Y. to support its distribution and
manufacturing businesses. This facility also provides a 5,000 square foot
showroom and office space for the Company's executive offices. The Company
completed its seventh Playcenter in New York City, in August 1995, purchased a
51% interest in its eighth Playcenter in August 1995 which opened in December
1995 and opened its latest Playcenter in Boynton Beach, Florida in February
1996.
Results of Operations
Total revenues for the three month period ended March 31, 1996 (the "Current
Three Month Period") were $3,707,471 compared to $913,782 for the three month
period ended March 31, 1995 (the "Prior Three Month Period ") which represents a
$2,793,689 increase, or more than 300%. Total revenues for the nine month
period ended March 31, 1996 (the "Current Nine Month Period") were $10,106,534
compared to $1,392,645 for the nine month period ended March 31, 1995 (the
"Prior Nine Month Period"). The increased sales in both periods reflects the
acquisition and construction of additional Playcenters and related amusement
businesses begun in late 1994 (see History of Operations above).
The Company reported a loss of $611,473, or $.14 per share, for the Current
Three Month Period compared to a loss of $278,417, or $.07 per share, for the
Prior Three Month Period. For the Current Nine Month period the Company lost
$1,750,303, or $.40 per share, compared to $632,652, or $.16, for the Prior Nine
Month Period.
The Company had nine operating Playcenters as of March 31, 1996 with sales of
$3,616,443 compared to four operating Playcenters for the Prior Nine Month
Period with sales of $938,617. Sales from the Company's Playcenters in the
Current and Prior Three Month Periods were $1,157,249 and $491,100.
12
The Company had revenues from its distribution and manufacturing businesses in
the Current Three and Nine Month Periods of $1,848,134 and $5,082,321,
respectively. Revenues for both the Prior Three and Nine Month periods were
$297,041 since this industry segment was acquired in the Prior Three Month
Period. Revenues for the Current Three and Nine Month Periods from the
Company's
video and arcade business were $702,088 and $1,255,106, respectively. Revenues
for both the Prior Three and Nine Month Periods were $116,998 since this
industry segment was also acquired in the Prior Three Month Period. Revenues
from the Company's franchising operation were $152,664 for the Current Nine
Month Periods. The Company's franchising operations made no sales during the
Current Three Month Period. The Company purchased its Florida Franchising
operation (and its Florida Playcenter) in December 1994. Revenues for the Prior
Year Three and Nine Month Periods were $8,643 and $39,989.
Total Company gross margins for the Current Three and Nine Month Periods were
5.4% and 7.3% compared to 13.3% and 6.6% for the Prior Three and Nine Month
Periods. The Company's Playcenters had gross margins for the Current Three and
Nine Month Periods, respectively, of 1.6% and negative 4.0% compared to 21.0%
and 5.5% in the Prior Three and Nine Month Periods, respectively. Four of the
Company's nine Playcenters posted substantial losses for the Current Three and
Nine Month Periods. The Company's only indoor/outdoor Playcenter began a major
renovation project in the Company's first quarter of fiscal 1996 and
consequently performed very poorly posting substantial losses for the Current
Nine Month Period. Sales were also impacted in the current quarter at this
location due to closure of the outdoor portion of the park for winter. The
Company's Lynbrook, N.Y. facility was also renovated during the Current Nine
Month Period which severely impacted sales and a competitor opened a store in
the vicinity. The Company's new Staten Island, N.Y. facility also incurred a
loss for the Current Three Month Period due to lower sales volumes caused by the
longer than anticipated expansion program recently completed. All of the
Company's New York area Playcenters were impacted by the severe winter
experienced in the Northeast part of the country. The New York area endured 22
snow storms many of which occurred during the busy weekend periods. The
Company's Florida Playcenter also continued to perform extremely poorly in the
Current Three and Nine Month Periods due to lower sales volumes and higher
direct costs.
Gross margins in the Company's Video and Arcade business were 31.5% and 32.0%
for the Current Three and Nine Month Periods, respectively. Margins for the
Current Three and Nine Month periods were substantially improved over the Prior
Year Three and Nine Month Periods of 22.6% due to the greater number of
locations in service in the Current Period compared to the Prior Year Period.
The Prior Year Periods reflect only one month of business as these businesses
were purchased in March 1995.
Gross margins for the Current Three and Nine Month Periods for equipment and
rides were 2.3% and 11.9% compared to 1.7% for the Prior Three and Nine Month
Periods. Margins were improved in this segment due to higher unit sales of
video and arcade games and rides in the Current Periods compared to the Prior
Year Periods. The Prior Year Period also consisted of one month of business due
to their acquisition in March 1995.
The Company's franchise business sold no franchises during the Current Three
Month Period while maintaining the staff and office expenses associated with
this operation although several people were laid off in the Current Three Month
Period due to the lack of business. This business lost $10,154 and $111,677 in
the Current Three and Nine Month
13
Periods compared to a loss of $13,034 and a
profit of $9,180, respectively, for the Prior Three and Nine Month Periods.
Selling, general and administrative expenses were $866,026 and $2,673,428, or
23.4% and 26.5% of gross sales, in the Current Three and Nine Month Periods
compared to $570,739 and $1,097,341, or 62.5% and 78.8% of gross sales, in the
Prior Period, respectively. Since the acquisition and construction of the new
businesses, the Company has had to add additional overhead to manage its various
businesses. For the Current Three and Nine Month Periods, selling and general
administrative costs were principally composed of personnel costs including the
addition of a new vice president, clerical and accounting staff of
approximately $307,700 and $881,300, respectively, advertising and travel
related to attending various trade shows to promote the Company's businesses of
$81,200 and $433,700, respectively, professional fees of $27,100 and $189,800,
respectively, rent and facility costs related to a corporate office shared by
its distribution and manufacturing businesses of $90,600 and $256,100,
respectively, depreciation and amortization of $41,100 and $116,100,
respectively, and insurance on the related facilities of $156,300 and $404,300,
respectively. In the Prior Three and Nine Month Periods respectively selling,
general and administrative costs were principally composed of personnel costs of
approximately $214,600 and $440,100, respectively, professional fees of $33,600
and $188,900, respectively, advertising and travel of $239,500 and $312,700,
respectively, and insurance of $44,600 and $89,900, respectively.
The Company incurred interest expense of $46,831 and $78,406 in the Current
Three and Nine Month Periods related to certain equipment notes and capitalized
leases, long term debt assumed upon acquisition of the Medford indoor/outdoor
Playcenter in March 1995, a line of credit from a bank and a credit card. The
Company did not have any interest expense in the Prior Periods. The Company
received interest income of $993 and $9,609 in the Current Three and Nine Month
Periods and $56,500 and $241,500 in the Prior Three and Nine Month Periods,
respectively, related to its investment in U.S. Treasury bills. Such
investments were made with the remaining proceeds from the Company's June 1994
initial public offering. At March 31, 1995 the Company had approximately
$4,245,900 of such funds remaining. As of September 30, 1995 the Company had
utilized all remaining funds.
The loss attributable to minority interest in the Current Three and Nine Month
Periods reflects the elimination of the portion of the loss reported by
Explorations and its Staten Island, N.Y. Playcenter in the Company's
consolidated financial statements attributed to the 49% minority interest not
owned by the Company.
No provision for income taxes has been made because of the Company's net loss
position. For the Current Three and Nine Month Periods the Company provided for
$16,300 and $49,100 of minimum income taxes related to New York State and New
York City, which were included as part of selling, general and administrative
expenses. The Company was not required to provide for any minimum taxes in the
Prior Period.
Liquidity and Financial Condition
As of March 31, 1996 the Company had utilized all cash generated from current
operations and the balance of cash and cash equivalents of $1,467,148 which it
had on hand as of June 30, 1995 and is in a severe liquidity crisis. The
Company reported a net loss of $611,473 and $1,750,303 for the Current Three and
Nine Months Periods, respectively, which included non-cash charges of $379,110
and $971,090 for the Current Three and Nine Month Periods
14
related to
depreciation of fixed assets and amortization of intangibles such as goodwill,
organization costs and covenants not to compete. The principal uses of cash are
described below.
As of March 31, 1996 and June 30 1995, the Company had accounts receivable of
$1,063,436 $690,517 related to sales of equipment and rides from its
distribution business, sales of softplay units from its manufacturing business
and amounts owed from its video and arcade customers where the Company shares in
the revenues. The increase of $372,919 is principally due to sales of equipment
and rides in the Company's distribution business. Inventory at March 31, 1996
was composed of $540,644 of equipment and rides, $40,000 of parts inventory for
the repair of equipment and rides and $4,723 of plush items such as stuffed
animals given as redemption prizes. As of June 30, 1995 the Company had total
inventory of $1,166,742 composed of equipment and rides of $906,740, $36,616 for
parts and $223,386 for plush items. Prepaid expenses as of March 31, 1996 and
June 30, 1995 were $169,464 and $250,052, respectively. Such amounts are
principally due to insurance premiums which were prepaid and are expensed over
the life of the policy. Property and equipment as of March 31, 1996 and June
30, 1995 was $8,048,824 and $5,868,343, respectively. The $2,741,331 increase
was due to purchases of $2,441,331 of equipment for its video and arcade
business and equipment and machinery for the Company's Playcenters, $300,000 of
equipment and renovations paid by the issuance of $100,000 in cash and a
$200,000 note provided to Whitey Ford's of Staten Island offset by depreciation
and amortization of fixed assets of $860,850. Other assets as of March 31,
1996 and June 30, 1995 were $937,276 and $940,539, respectively. The decrease
was due principally to amortization of intangible assets such as goodwill,
organization expenses and covenants not to compete offset by expenditures for
security deposits for the new Staten Island location.
Accounts payable and accrued expenses increased by $863,424 in the Current Nine
Month Period principally as a result of Company's inability to meet its vendor
obligations and to fund its rapid expansion of its Playcenters and purchases of
additional equipment for its video and arcade business over the previous year.
The company utilized a $200,000 revolving credit agreement obtained from a bank
to fund expansion offset by a payment to the bank of $100,000 as collateral
against such loan, obtained $980,427 in equipment notes for its distribution
business, purchased additional equipment financed through capitalized leases of
$120,827, agreed to a $200,000 note related to the acquisition of 51% of the
Company's new location in Staten Island, N.Y. and received loans of $87,620
from one of its principal executive officers. In addition, the Company received
$500,000 on March 26, 1996 from a private offering of 1,000,000 shares of its
Common Stock. Also included in the private offering was a like number of Class
C and Class D Stock Purchase Warrants entitling the holder to purchase the
Company's Common Stock for $.70 and $.90 per share, respectively. If all
warrants are exercised the Company will receive an additional $1,600,000,
however, no assurance can be provided that this will occur since the Company
must first register all shares related to this private offering. The Company
made payments in the Current Nine Month Period against its current obligations
for notes payable, capitalized leases and long term debt in the amount of
$251,938.
The Company is currently seeking a second equity financing with similar
provisions as the private equity offering completed in March 1996. It was
anticipated that $500,000 of the second equity financing would have been
completed in early April 1996, however, unanticipated developments have caused
the Company to experience delays in obtaining such financing. As of March 31,
1996 the Company had a working capital deficit of
15
$1,255,336, and no cash on
hand, and continues to experience a severe liquidity crisis. The Company, over
the past five months, has been able to continue to operate through cash
generated from its operations, its $500,000 equity financing in March 1996 and
because its creditors have not insisted on strict adherence to credit terms.
The Company's ability to continue its operations is dependent upon its ability
to obtain additional financing, take steps necessary to increase cash flow and
to continue to persuade its trade creditors to not insist upon strict adherence
to payment terms granted. The Company is also actively exploring the sale of
certain of its assets, including a portion of its Explorations operations
located in Florida and most of its other remaining Playcenters in the New York
metropolitan area, to increase cash flow and provide necessary working capital.
Although, to date, the Company's trade creditors have been willing to work with
the Company, there can be no assurance that such cooperation will be continuing.
If the Company is unable to obtain additional financing or sell some of its
assets in the immediate future to increase its cash flow and persuade its trade
creditors to continue to not insist upon strict adherence to trade terms granted
the Company may be forced to consider other alternatives such as a complete
restructuring of its operations, including salary deferrals and layoffs and the
discontinuance of a substantial portion of the Company's operations.
16
PART II. OTHER INFORMATION
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports on form 8-K.
(a) Exhibits.
11. Statement Regarding Computation of Earnings (Loss) Per Share
27. Financial Data Schedule - March 31, 1996
(b) Reports on Form 8-K
1. On March 28, 1996 the Company filed a Form 8-K in which it
reported under Item 5. - Other Events, that it had closed 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.
17
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)
May 13, 1996 /s/ A. Joseph Melnick
A. Joseph Melnick
President and Principal
Financial Officer
May 13, 1996 /s/ Michael P. Sable
Michael P. Sable
Controller and Principal
Accounting Officer
18
CHILDROBICS, INC.
AND SUBSIDIARIES
Exhibit Index
- -------------
11. Statement regarding computation of Earnings (Loss) per Share.
27. Financial Data Schedule
19