Exhibit 1
Just Kiddie Rides, Inc.
Financial Statements
Years ended September 30, 1996 and 1995
Contents
Report of Independent Auditors............................................ 1
Balance Sheets............................................................ 2
Statements of Operations.................................................. 3
Statements of Shareholders' Equity........................................ 4
Statements of Cash Flows.................................................. 5
Notes to Financial Statements............................................. 6
Report of Independent Auditors
To the Shareholders
Just Kiddie Rides, Inc.
We have audited the accompanying balance sheets of Just Kiddie Rides, Inc. (the
"Company") as of September 30, 1996 and 1995, and the related statements of
operations, shareholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company at September 30,
1996 and 1995, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
As more fully described in Note 1, on September 30, 1996 the Company was
acquired in a merger agreement with Childrobics, Inc. whereby the Company became
a wholly-owned subsidiary of Childrobics, Inc. Childrobics, Inc. reported a net
loss of approximately $9.9 million and had a working capital deficiency of $2.5
million at and for the period ended June 30, 1996. These conditions raise
substantial doubt about Childrobics, Inc.'s ability to continue as a going
concern. Because of the aforementioned conditions relating to Childrobics, Inc.,
and the uncertainties surrounding its management's plans to address its
liquidity problems, Childrobics, Inc.'s actions could have a substantial effect
on the Company's assets and, therefore, there is also substantial doubt about
whether the Company will continue as a going concern. The 1996 financial
statements of the Company do not include any adjustments to reflect the possible
future effects on the recoverability and classification of liabilities that may
result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Melville, New York
November 27, 1996
1
Just Kiddie Rides, Inc.
Balance Sheets
September 30
1996 1995
---------------------------
Assets
Current assets:
Cash $ 78,062 $ 53,787
Accounts receivable, less allowance for doubtful accounts
of $25,000 in 1996 399,600 500,862
Receivables from affiliates 265,318 -
Inventory 40,081 123,772
Loan receivable from shareholder 63,362 67,717
Prepaid expenses and other current assets 37,202 50,535
---------------------------
Total current assets 883,625 796,673
Ride equipment, net of accumulated depreciation of $832,000
and $532,000 in 1996 and 1995, respectively 2,748,588 1,683,709
Other fixed assets, net 390,958 255,062
Other assets 35,576 25,044
---------------------------
Total assets $4,058,747 $2,760,488
===========================
Liabilities and shareholders' equity
Current liabilities:
Current portion of notes and loans payable $1,214,842 $ 742,014
Accounts payable to suppliers 38,755 320,033
Accrued commissions 91,162 85,927
Other accrued expenses 597,142 317,452
Customer deposits 60,932 41,643
---------------------------
Total current liabilities 2,002,833 1,507,069
Notes and loans payable, less current portion 1,263,147 419,454
---------------------------
Total liabilities 3,265,980 1,926,523
Commitments (Note 8)
Shareholders' equity:
Common stock, no par value, 200 shares authorized,
issued and outstanding 200 200
Retained earnings 792,567 833,765
---------------------------
Total shareholders' equity 792,767 833,965
---------------------------
Total liabilities and shareholders' equity $4,058,747 $2,760,488
===========================
See accompanying notes.
2
Just Kiddie Rides, Inc.
Statements of Operations
Year ended September 30
1996 1995
----------------------------
Revenues:
Equipment sales, net $3,137,192 $4,482,669
Ride revenue 2,486,656 2,056,746
Management fees 124,987 142,497
Refurbishment fees 52,398 19,034
Leasing fees 26,000 78,040
Commission fees - 70,063
Other 171,026 46,182
----------------------------
Total revenues 5,998,259 6,895,231
Costs of revenues:
Cost of goods sold 1,822,562 3,169,625
Direct ride expenses 1,866,495 1,531,522
Depreciation--ride equipment 302,293 203,404
----------------------------
Total cost of revenues 3,991,350 4,904,551
----------------------------
Gross profit 2,006,909 1,990,680
Selling, general and administrative expenses 1,807,535 1,653,321
Depreciation and amortization--other 76,059 57,093
Interest expense 149,719 84,146
============================
Net (loss) income $ (26,404) $ 196,120
============================
See accompanying notes.
3
Just Kiddie Rides, Inc.
Statements of Shareholders' Equity
Years ended September 30, 1996 and 1995
Common Retained
Shares Stock Earnings Total
------------------------------------------------
Balance at October 1, 1994 200 $200 $637,645 $637,845
Net income - - 196,120 196,120
------------------------------------------------
Balance at September 30, 1995 200 200 833,765 833,965
Net loss - - (26,404) (26,404)
Shareholder distributions - - (14,794) (14,794)
------------------------------------------------
Balance at September 30, 1996 200 $200 $792,567 $792,767
================================================
See accompanying notes.
4
Just Kiddie Rides, Inc.
Statements of Cash Flows
Year ended September 30
1996 1995
-------------------------
Cash flows from operating activities
Net (loss) income $ (26,404) $ 196,120
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 378,352 260,497
Amortization of deferred financing costs 3,388 1,769
Loss (gain) on disposal of fixed assets 5,785 (5,177)
Provision for doubtful accounts 25,000 -
Changes in operating assets and liabilities:
Accounts receivable 76,262 (42,894)
Receivables from affiliates (265,318) -
Inventory 182,057 399,828
Prepaid expenses and other current assets 9,945 (26,519)
Other assets (10,532) (17,570)
Accounts payable to suppliers (281,278) (250,463)
Accrued commissions 5,235 -
Other accrued expenses 279,690 70,398
Customer deposits 19,289 21,095
---------------------------
Net cash provided by operating activities 401,471 607,084
Cash flows from investing activities
Proceeds from sale of fixed assets 1,200 17,301
Purchases of fixed assets (218,940) (123,419)
Purchases of ride equipment (594,472) (395,511)
---------------------------
Net cash used in investing activities (812,212) (501,629)
Cash flows from financing activities
Proceeds from notes and loans payable 1,115,504 29,394
Repayments of notes and loans payable (1,096,125) (216,523)
Net borrowings under line of credit agreements 426,076 73,000
Loan to shareholder, net 4,355 (4,430)
Distributions to shareholders (14,794) -
---------------------------
Net cash provided by financing activities 435,016 (118,559)
---------------------------
Increase (decrease) in cash 24,275 (13,104)
Cash at beginning of year 53,787 66,891
---------------------------
Cash at end of year $ 78,062 $ 53,787
===========================
Supplemental cash flow information
Interest paid $ 146,000 $ 82,000
===========================
Income taxes paid $ - $ 11,000
==========================
See accompanying notes.
5
Just Kiddie Rides, Inc.
Notes to Financial Statements
September 30, 1996
1. Description of Business and Basis of Presentation
Just Kiddie Rides, Inc. (the "Company") was incorporated on February 24, 1989 in
the State of New York and began operations during 1989. The Company operates in
one business segment which is to own, operate and sell children's coin-operated
amusement rides.
On September 30, 1996, the Company was acquired in a merger agreement between
the Company and Childrobics, Inc. ("Childrobics") whereby the Company's
shareholders received 5,000,000 restricted shares of Childrobics common stock,
and a note receivable from Childrobics for $750,000 in exchange for all of the
issued and outstanding shares of the Company. In addition, the Company's
principal shareholder received $250,000 in cash for a covenant not-to-compete
for a period of six years. Upon completion of the merger, the Company's founder
and President became a director, President and Chief Executive Officer of
Childrobics. The accompanying financial statements reflect the Company's
financial position and results of operations immediately preceding the merger.
Childrobics, Inc. reported a net loss of approximately $9.9 million and had a
working capital deficiency of $2.5 million at and for the period ended June 30,
1996. These conditions raise substantial doubt about Childrobics, Inc.'s ability
to continue as a going concern. Because of the aforementioned conditions
relating to Childrobics, Inc., and the uncertainties surrounding its plans to
address its liquidity problems, Childrobics, Inc.'s actions could have a
substantial effect on the Company's assets and, therefore, there is also
substantial doubt about whether the Company will continue as a going concern.
The 1996 financial statements of the Company do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
2. Summary of Significant Accounting Policies
Concentration of Credit Risk
The Company maintains cash balances at an institution insured up to $100,000 by
the Federal Deposit Insurance Corporation (FDIC). At times during 1996 and 1995,
these balances exceeded insured levels.
6
Just Kiddie Rides, Inc.
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
The Company sells its products to various companies located throughout the
United States. Collateral is generally not required and credit losses have
generally been within management's expectations.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Inventory
Inventory, consisting of ride equipment held for sale and parts, is stated at
the lower of cost (first-in, first-out) or market.
Ride Equipment and Other Fixed Assets
Depreciation and amortization are provided for by the straight-line method over
the estimated useful lives of the related assets ranging from five to ten years.
Revenue Recognition Policy
The Company recognizes revenue from equipment sales when products are shipped.
The Company recognizes ride revenue based on collection of coins from the
coin-operated amusement rides.
Income Taxes
The Company, with the consent of its shareholders, has elected under the
Internal Revenue Code, to be a Subchapter "S" corporation, effective April 1,
1991. In lieu of corporation income taxes, the shareholders of an S corporation
are taxed on their proportionate share of the Company's taxable income.
Therefore, no provision or liability for Federal income taxes has been included
in the accompanying financial statements.
7
Just Kiddie Rides, Inc.
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Impairment of Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. Statement 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Company will adopt
the provisions of Statement 121 in fiscal 1997 and, based on current
circumstances, does not believe the adoption will have a material effect on the
financial statements.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense for the
years ended September 30, 1996 and 1995 was approximately $33,000 and $61,000,
respectively.
Reclassification
Certain prior year balances have been reclassified to conform to the current
year's presentation.
3. Other Fixed Assets
Fixed assets are recorded at cost and consist of the following:
September 30
1996 1995
----------------------------
Furniture and fixtures $ 44,126 $ 43,189
Autos and trucks 271,616 126,266
Computers and peripherals 165,062 118,830
Leasehold improvements and equipment 74,770 68,354
---------------------------
555,574 356,639
Less accumulated depreciation and amortization (164,616) (101,577)
---------------------------
$ 390,958 $ 255,062
============================
8
Just Kiddie Rides, Inc.
Notes to Financial Statements (continued)
4. Loan Receivable from Shareholder
During 1994, the majority shareholder borrowed $60,000 from the Company.
This loan bears interest at 7% and is payable upon demand.
5. Related Party Transactions
Receivables from affiliates included amounts due from the following entities:
September 30 1996
------------------
Childrobics, Inc. $150,593
Turnpike Amusement 114,725
---------------
$265,318
===============
The receivable from Childrobics consists of fees and expenses that the Company
incurred in connection with the merger and are to be reimbursed by Childrobics
(see Note 1).
The receivable from Turnpike Amusement (a wholly-owned subsidiary of
Childrobics, Inc.) is a result of equipment sales made during the year.
6. Major Supplier
During the years ended September 30, 1996 and 1995, the Company purchased the
majority of its coin-operated amusement rides from two sources. In 1996, it
discontinued purchasing from one of these vendors and currently purchases the
majority of its coin-operated amusement rides from one manufacturer located in
Puerto Rico. The Company's outstanding obligations on these purchases amounted
to approximately $39,000 and $320,000 at September 30, 1996 and 1995,
respectively.
9
Just Kiddie Rides, Inc.
Notes to Financial Statements (continued)
7. Notes and Loans Payable
The Company's outstanding notes and loan balances were as follows:
September 30
1996 1995
-----------------------------
Term loans--bank (A) $1,162,167 $ 461,250
Line of credit--bank (B) 499,076 73,000
Other short term notes payable (C) 171,634 444,416
Term loan--Fun Vending, Inc. (D) 56,753 127,333
Loans payable--finance companies (E) 123,774 -
Loans payable--acquisition (F) 411,947 -
Notes--trucks (G) 52,638 55,469
-----------------------------
2,477,989 1,161,468
Less current portion
1,214,842 742,014
-----------------------------
Long-term portion $1,263,147 $ 419,454
=============================
At September 30, 1996, the scheduled principal maturities of notes, the line of
credit and long-term debt in each of the next five years are as follows:
1997 $1,214,842
1998 522,938
1999 339,176
2000 196,927
2001 190,757
Thereafter 13,349
--------------
$2,477,989
==============
(A) At September 30, 1995, the Company had a term loan agreement to borrow
$675,000 from a bank. The note was payable over a five year term in 60
consecutive monthly principal installments of $11,250, plus interest
applied during the note payable period at a fixed annual rate of 9%.
Outstanding borrowings under this facility amounted to $461,250 at
September 30, 1995.
10
Just Kiddie Rides, Inc.
Notes to Financial Statements (continued)
7. Notes and Loans Payable (continued)
In February 1996, the Company refinanced the aforementioned loan with
another bank in the form of a term loan for $449,587. The note is payable
over a three year term in 36 consecutive monthly principal installments of
$12,489, plus interest applied during the note payable period at a fixed
annual rate of 8.47%. This loan matures in February 1999 and is
collateralized by substantially all of the Company's tangible assets and
is personally guaranteed by the Company's majority shareholder.
Outstanding borrowings under this facility amounted to approximately
$362,000 at September 30, 1996.
In addition, in February 1996, the company entered into a second term loan
in the amount of $800,000 with the same bank. The note is payable in 35
consecutive monthly principal installments of $13,333, commencing October
1996, plus a final payment of $333,333, plus interest applied during the
note payable period at a fixed annual rate of 9.6%. This loan matures on
September 30, 1999 and is collateralized by substantially all of the
Company's tangible assets and is personally guaranteed by the Company's
majority shareholder. Outstanding borrowings under this facility amounted
to $800,000 at September 30, 1996.
(B) At September 30, 1995, the Company had a line of credit agreement with a
bank which provided maximum borrowings of $500,000. Borrowings of $73,000
were outstanding under this facility at September 30, 1995, and the line
of credit expired on January 31, 1996.
In February 1996, the Company refinanced its existing line of credit with
another bank. The new line of credit agreement, which expires on January
31, 1997, provides for maximum borrowings of $500,000. Such borrowings are
limited to 80% of eligible accounts receivable, as defined, and 50% of
eligible inventory, as defined, with an inventory sublimit of $150,000.
Borrowings under this agreement bear interest at the prime rate (8.25% at
September 30, 1996) plus .75% and are collateralized by substantially all
the Company's tangible assets, and are guaranteed by the majority
shareholder. The agreement and term loan agreements described in (A) above
contain certain restrictive covenants, which, among other things, impose
limitations with respect to the payment of dividends, advances to
shareholders or affiliates, and consummation of
11
Just Kiddie Rides, Inc.
Notes to Financial Statements (continued)
7. Notes and Loans Payable (continued)
acquisitions. The Company is also required to maintain certain financial
ratios. The Company was not in compliance with certain of the financial
ratios at September 30, 1996, and the bank has waived compliance with such
covenants through the 1997 fiscal year.
Borrowings of $499,076 were outstanding under this facility at
September 30, 1996.
(C) During each of the years ended September 30, 1996 and 1995, the Company
signed several short-term note payable agreements with two financing
companies for the purchase of inventory and ride equipment. The Company
received purchase discounts on these purchases ranging from 3 to 5
percent. The financing companies remitted payment for such purchases
directly to the manufacturer at the discounted price. The Company's notes
payable to the financing companies consist of the undiscounted purchase
price for such inventory, broken down into two or three equal monthly
payments. The notes payable outstanding at September 30, 1996 are
scheduled to mature in October 1996.
(D) On June 10, 1994, the Company executed a note agreement for $208,000 with
Fun Vending, Inc. for the acquisition of ride equipment. The note is
payable in 36 monthly installments of approximately $6,500, including
interest at a fixed rate of 8% per year.
(E) In July 1996, the Company borrowed $85,665 from a finance company in the
form of a note payable to finance the purchase of certain equipment. The
note bears interest at a fixed rate of 9% per year and is payable in 60
consecutive monthly installments of $1,778. The loan is collateralized by
certain equipment with a net book value of $91,740 and matures in July
2001. Outstanding borrowings under this facility amounted to $83,385 at
September 30, 1996.
In August 1996, the Company borrowed $40,389 from the same finance company
in the form of a note payable to finance the purchase of certain
equipment. The note bears interest at a fixed rate of 9.05% per year and
is payable in 60 consecutive monthly installments of $839. The loan is
collateralized by certain equipment with a net book value of $44,276, and
matures in September 2001. Outstanding borrowings under this note amounted
to $40,389 at September 30, 1996.
12
Just Kiddie Rides, Inc.
Notes to Financial Statements (continued)
7. Notes and Loans Payable (continued)
(F) In connection with the acquisition of KiddieRide Corporation (see Note 9),
the Company assumed the following debt instruments:
(i) A note payable to a financing company in the amount of $205,078.
The note bears interest at a fixed rate of 12.5% per year and is
payable in 36 consecutive monthly installments of $6,861. The loan
is collateralized by certain equipment with a net book value of
$197,148, is guaranteed by the majority shareholder, and matures
in February 1999. Outstanding borrowings under this facility
amounted to $170,956 at September 30, 1996.
(ii) A note payable to a financing company in the amount of $114,901.
The note bears interest at a fixed rate of 12.5% per year and is
payable in 36 consecutive monthly installments of $3,844. The loan
is collateralized by certain equipment with a net book value of
$108,056, is guaranteed by the majority shareholder, and matures
in February 1999. Outstanding borrowings under this facility
amounted to $95,783 at September 30, 1996.
(iii) A note payable to a financing company in the amount of $173,093.
The note bears interest at a fixed rate of 15% per year and is
payable in 36 consecutive monthly installments of $6,000. The loan
is collateralized by certain equipment with a net book value of
$160,219, is guaranteed by the majority shareholder, and matures
in April 1999. Outstanding borrowings under this facility amounted
to $145,208 at September 30, 1996.
(G) The Company has entered into several agreements to finance the acquisition
of trucks. The related notes are payable in monthly installments with
varying rates of interest.
The weighted average interest rate on short-term borrowings (i.e., the
line of credit agreement) was 9%.
The carrying amounts of the Company's borrowings under its notes payable, loans
payable and line of credit approximate their fair value at September 30, 1996
and 1995.
13
Just Kiddie Rides, Inc.
Notes to Financial Statements (continued)
8. Commitments
Leases
The Company leases its office and warehouse space under an operating lease. Rent
expense for the years ended September 30, 1996 and 1995 was approximately
$59,000 and $74,000, respectively. Subsequent to September 30, 1996, the Company
terminated its existing lease agreement at a cost of $2,500 and signed a new
lease agreement for a new office and warehouse. The future minimum annual lease
payments under the new lease agreement at September 30, 1996 are as follows:
1997 $ 97,000
1998 193,000
1999 199,000
2000 206,000
2001 212,000
Thereafter 2,668,000
==============
$3,575,000
==============
Guarantees
Certain customers of the Company obtain financing for the purchase of equipment
from a third party financial institution. The Company guarantees payment of the
unpaid balance in the event the customers fail to satisfy the financing. As of
September 30, 1996, the remaining liability under these financing arrangements
aggregated approximately $700,000.
Legal Matters
The Company is a defendant in litigation matters arising out of the normal
conduct of its business. The Company maintains insurance coverage for such
claims and management believes that settlements of these claims, if any, and
litigation costs are covered by insurance and that the outcome of such matters
will not have a material adverse effect on the Company's position or results of
operations.
9. Acquisition
In February 1996, the Company purchased certain ride equipment, existing
customers and routes and assumed certain debt of KiddieRide Corporation. The
fair market value of the ride equipment acquired of $772,700 approximated the
debt assumed by the Company. The acquisition has been accounted for as a
purchase and operations resulting from the acquired assets and liabilities have
been included in the Company's statement of operations since the acquisition
date.
14
Just Kiddie Rides, Inc.
Notes to Financial Statements (continued)
9. Acquisition
The following presents unaudited pro forma operating results for the years ended
September 30, 1996 and 1995, as if the acquisition had taken place on October 1,
1994. These pro forma results have been prepared for comparative purposes only
and do not purport to be indicative of what would have occurred had the
acquisition been made at the beginning of the periods noted, or of results which
may occur in the future:
September 30
1996 1995
--------------------------
Total revenues $6,219,80 $7,426,935
Net loss (100,136) (40,839)
15