1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to ____________
Commission File Number 0-28270
CHILDREN'S WONDERLAND, INC.
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(Exact name of small business issuer as specified in its charter)
California 95-4455341
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
28310 Roadside Drive, Suite 220, Agoura, California 91301
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(Address of principal executive offices)
(818) 865-1306
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES [ X ] NO [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
As of February 3, 1997, the Registrant had outstanding 3,955,574 shares of
Common Stock, no par value.
This report, including all exhibits and attachments, contains 50 pages.
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CHILDREN'S WONDERLAND, INC.
FORM 10-QSB
For the Quarterly Period Ended December 31, 1996
INDEX
Page
Numbers
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
(a) Balance Sheets as of December 31, 1996 and June 30, 1996 (unaudited) 3
(b) Statements of Operations for the three months and six months ended
December 31, 1996 and 1995 (unaudited) 5
(c) Condensed Statements of Cash Flows for the six months ended
December 31, 1996 and 1995 (unaudited) 6
(d) Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Plan of Operations 11
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Exhibit 10.29 Employment agreement between the Company and
Michael L. Laney 24
Exhibit 10.30 Consulting agreement between the Company and
Kenneth W. Bitticks 31
Exhibit 10.31 Employment agreement between the Company and
Debby S. Bitticks 37
Exhibit 10.32 Consulting agreement between the Company and
Robert M. Wilson 44
Exhibit 27. Financial Data Schedule 50
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CHILDREN'S WONDERLAND, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND JUNE 30, 1996 (UNAUDITED)
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ASSETS
December 31, June 30,
1996 1996
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents (Note 3) $ 498,011 $3,210,418
Marketable Securities (Note 4) 548,000
Accounts Receivable, net of allowance for doubtful
accounts of $55,420 and $42,676 as of December 31,
1996 and June 30, 1996, respectively 76,032 64,667
Prepaid Expenses 385,730 104,979
---------- ----------
Total Current Assets 1,507,773 3,380,064
EQUIPMENT & IMPROVEMENTS, NET 1,740,187 429,325
CAPITALIZED LEASES
(Net of accumulated amortization of $336,463 and
$227,991 as of December 31, 1996 and June 30, 1996,
respectively) 2,128,513 2,120,060
INTANGIBLE ASSETS, NET 759,703 633,415
DEPOSITS AND OTHER 494,223 433,650
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TOTAL ASSETS $6,630,399 $6,996,514
========== ==========
See Notes to Financial Statements
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CHILDREN'S WONDERLAND, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND JUNE 30, 1996 (UNAUDITED)
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LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, June 30,
1996 1996
----------- -----------
CURRENT LIABILITIES:
Accounts Payable $ 1,352,002 $ 480,837
Accrued Expenses 435,521 434,665
Due to Stockholders 370,000 383,000
Short-Term Debt (Note 5) 1,037,500
Current portion of Long-Term Debt (Note 6) 394,921 325,991
Current portion of Capitalized Lease Obligation 309,510 283,103
----------- -----------
Total Current Liabilities 3,899,454 1,907,596
----------- -----------
LONG-TERM DEBT, less current portion (Note 6) 393,678 468,261
----------- -----------
CAPITALIZED LEASE OBLIGATION, less current portion 2,091,115 2,083,483
----------- -----------
COMMITMENTS & CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock, no par value;
20,000,000 shares authorized; 3,951,171 and
3,925,689 shares issued and outstanding as of
December 31, 1996 and June 30, 1996, respectively 9,661,852 9,638,040
Accumulated Deficit (9,415,701) (7,100,866)
----------- -----------
Total Stockholders' Equity 331,151 2,537,174
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TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 6,630,399 $ 6,996,514
=========== ===========
See Notes to Financial Statements
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CHILDREN'S WONDERLAND, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS
ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
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3 Months Ended December 31, 6 Months Ended December 31,
1996 1995 1996 1995
----------- ----------- ----------- -----------
REVENUE $ 1,266,385 $ 1,093,005 $ 2,408,753 $ 2,169,828
----------- ----------- ----------- -----------
OPERATING EXPENSE:
Payroll and Related Costs 740,865 781,690 1,481,314 1,550,853
Center Facilities Costs 256,217 266,474 511,046 513,561
General and Administrative 792,815 340,835 1,448,615 653,459
Development Costs 441,408 37,157 677,162 54,829
Other 114,106 100,278 223,689 190,740
Depreciation & Amortization 119,070 51,774 194,435 88,724
----------- ----------- ----------- -----------
Total 2,464,481 1,578,208 4,536,261 3,052,166
----------- ----------- ----------- -----------
OPERATING LOSS 1,198,096 485,203 2,127,508 882,338
Interest Expense, net 99,360 62,454 181,646 152,406
Other Non-Operating
(Income)/Expense 26,032 (8,333) 5,681 17,356
----------- ----------- ----------- -----------
NET LOSS $ 1,323,488 $ 539,324 $ 2,314,835 $ 1,052,100
=========== =========== =========== ===========
NET LOSS PER SHARE
(See Note 2) $ (0.34) $ (0.59)
=========== ===========
WEIGHTED AVERAGE NUMBER
OF COMMON AND COMMON
EQUIVALENT SHARES 3,948,003 3,938,178
=========== ===========
See Notes to Financial Statements
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CHILDREN'S WONDERLAND, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
DECEMBER 31, 1996 AND 1995 (UNAUDITED)
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6 Months Ended December 31,
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES $(1,442,256) $ (782,941)
CASH FLOWS FROM INVESTING ACTIVITIES (1,587,507) (594,948)
CASH FLOWS FROM FINANCING ACTIVITIES 865,356 1,320,983
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,164,407) (56,906)
CASH AND CASH EQUIVALENTS, Beginning of period 3,210,418 65,072
----------- -----------
CASH AND CASH EQUIVALENTS, End of period $ 1,046,011 $ 8,166
=========== ===========
Non-cash Transactions:
In July 1996, the Company leased several school buses to be used by certain
centers located in Denver, Colorado. The lease transaction has been accounted
for as a capital lease, and accordingly, an asset and a liability in the amount
of $116,924, the net present value of the minimum lease payments, were recorded.
See Notes to Financial Statements
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CHILDREN'S WONDERLAND, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND SIX MONTHS
ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
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NOTE 1 - GENERAL INFORMATION
The interim financial data is unaudited; however, in the opinion of management,
the interim data includes all adjustments, consisting of normal recurring
adjustments necessary for a fair presentation of the results for the interim
periods. The financial statements included herein have been prepared by
Children's Wonderland, Inc. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures included herein are adequate to make the information
presented not misleading.
The accounting policies followed by the Company and other information are
contained in the notes to the Company's financial statements.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Children's Wonderland, Inc. owns and operates full service intergenerational
family care centers. At December 31, 1996, the Company operated thirteen centers
located in California and Colorado.
Basis of Presentation
The accounting policies followed during the interim periods reported on are in
conformity with generally accepted accounting principles and are consistent with
those applied for annual periods. Operational comparisons between the second
quarter of fiscal years 1996 and 1995 are affected by the acquisition of a
center in December 1995 and the start-up of two new centers, one each in March
and September 1996 (see "Management's Discussion and Analysis of Plan of
Operations" which follows).
Net Loss Per Share
The weighted average shares used in the computation of net loss per share was
based upon the weighted average common shares; all common stock equivalents are
determined to be anti-dilutive. Loss per share for the three months and the six
months ended December 31, 1995 have not been presented as such information is
not indicative of the Company's performance on an on-going basis due to the
significant amount of shares issued in May 1996 in connection with the Company's
initial public offering.
For a complete discussion of the Company's accounting policies, refer to the
Company's Annual Report on Form 10-KSB for the year ended June 30, 1996,
previously filed.
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CHILDREN'S WONDERLAND, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND SIX MONTHS
ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
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NOTE 3 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents include checking accounts and certificates of deposit,
$300,000 of which represents a balance held as security for a letter of credit
required by the lease agreement for a certain center facility.
NOTE 4 - MARKETABLE SECURITIES
Marketable securities include short-term investments with original maturities
of less than ninety days, and are stated at cost which approximates market
value. These securities are held as collateral against a promissory note
payable and a revolving promissory note payable to a bank (see Note 5).
NOTE 5 - SHORT-TERM DEBT
Short-term debt consists of the following:
December 31, June 30,
1996 1996
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Promissory note payable to a bank, interest at the bank's prime lending rate
(8.25% at December 31, 1996) plus 1% per annum, payable in monthly installments
through August 2000, at which time the entire balance is due and payable. This
note is collateralized by a compensating cash balance (see Note 3) $ 400,000
Promissory notes payable to individuals, interest rates ranging from
10% to 12% per annum. Principal and interest payable in full at
dates ranging from March 1997 through April 1997 387,500
Promissory notes payable to individuals, interest at 10% per annum.
Principal and interest payable in full upon demand. 150,000
Advances on revolving promissory note payable to a bank, interest at the bank's
prime lending rate (8.25% at December 31, 1996) plus 1% per annum, payable in
monthly installments (currently $796) through August 1997, at which time the
remaining outstanding balance is due and payable. This revolving promissory note
payable is collateralized by the Company's assets. 100,000
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Total Short-Term Debt $1,037,500 --
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CHILDREN'S WONDERLAND, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND SIX MONTHS
ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
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NOTE 6 - LONG-TERM DEBT
Long-term debt consists of the following:
December 31, June 30,
1996 1996
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Convertible notes payable to individuals, interest at 12% per annum,
payable in quarterly installments of $6,300 through May 31, 1997,
at which time the entire principal is due and payable. At December
31, 1996, $210,000 was due to stockholders and directors $210,000 $252,750
Promissory notes payable to individuals, interest at 8% per annum. Principal and
interest payable in equal monthly installments of $2,827 through January 2002,
collateralized by supplies and equipment 162,997 173,201
Promissory notes payable to individuals, interest at 8% per annum. Principal and
interest payable in equal monthly installments of $2,525 through August 2002,
collateralized by supplies and equipment 137,686 147,104
Other notes payable with interest ranging from 7% to 14.9% per annum 168,387 128,366
Deferred operating lease payments 109,529 92,831
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Total 788,599 794,252
Less current portion 394,921 325,991
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Total long-term debt $393,678 $468,261
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CHILDREN'S WONDERLAND, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND SIX MONTHS
ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
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NOTE 7- SUBSEQUENT EVENTS
Subsequent to December 31, 1996, the Company obtained an additional $250,000
through the issuance of short term promissory notes. Such notes are due and
payable in full upon demand and carry interest at 10% per annum. The Company is
currently discussing the possibility of converting such notes, as well as the
$150,000 in short term demand promissory notes issued in December 1996 (see Note
4) into promissory notes with terms similar to the notes to be issued in the
planned private debt placement discussed below.
Subsequent to December 31, 1996, the Company is in the process of effecting a
private placement of notes and warrants, which is expected to generate gross
proceeds of $800,000 to $1,500,000 before deducting underwriting fees and other
costs of issuance (the Company expects that up to $500,000 of such gross
proceeds will result from the cancellation of demand promissory notes issued by
the Company). The offering includes a minimum of 16 Units to a maximum of 30
Units; each of which consists of an unsecured $50,000 promissory note as well as
25,000 warrants to purchase common stock. Each promissory note carries interest
at 10% per annum and is due at the earlier of the completion of a proposed
secondary public offering or one year from the date of issuance, while each
warrant entitles the holder thereof to purchase one share of the Company's
common stock at $5.00 per share during a period commencing one year from the
completion of the proposed public offering (or January 1, 1998, if such public
offering has not occurred by that date) and expiring May 6, 2001. Assuming the
underlying common stock is registered by the Company, the warrants are subject
to redemption by the Company commencing one year from the registration at $0.05
per warrant upon 30 days' written notice, provided the closing bid price of the
common stock exceeds $9.00 per share for twenty consecutive trading days ending
within five days of the notice of redemption.
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CHILDREN'S WONDERLAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF PLAN OF OPERATIONS
DECEMBER 31, 1996 AND 1995
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ITEM 2:
GENERAL OVERVIEW:
The following discussion should be read in conjunction with the financial
statements and the notes thereto appearing elsewhere in this Form 10-QSB.
Certain statements contained in this Form 10-QSB that are not related to
historical results, including, without limitation, statements regarding the
Company's business strategy and objectives, center development, future financial
position, and estimated cost savings, are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 and involve risks and uncertainties. Although
the Company believes that the assumptions on which these forward-looking
statements are based are reasonable, there can be no assurance that such
assumptions will prove to be accurate, and actual results could differ
materially from those discussed in the forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
competition in the markets in which the Company competes, the Company's ability
to retain key personnel, unanticipated problems and additional costs relating to
center development, regulatory compliance, construction costs and cost overruns,
natural disasters, inability to secure adequate financing, and other factors
discussed herein. All forward-looking statements contained in this Form 10-QSB
are qualified in their entirety by this cautionary statement.
The Company successfully completed its initial public offering during the fourth
quarter of fiscal year 1996. The financial results for the first half of fiscal
year 1997 reflect the Company's continued emphasis on growth, including the
opening of a new center in Woodland Hills, California in September 1996, the
pre-opening activities for the start-up of another new center in West Haven,
Connecticut in January 1997, the investment of funds generated by the initial
public offering into both the refurbishment of existing centers as well as other
new centers at various stages of development, and increased marketing efforts
geared towards increasing attendance levels at all of the Company's centers.
During the first quarter of fiscal year 1997, the Company opened one new
start-up center. The results of operations of the start-up center are included
in the Company's financial statements from the date of opening. Operating
expenses for this start-up center, as well as for the start-up center which was
opened during the third quarter of fiscal year 1996, have been included in
development costs, so as to facilitate comparisons between periods on a
same-center basis. Historically, the Company's operating revenue has followed
the seasonality of the school year, declining in the summer months which
comprise the first quarter, as well as the year-end holiday period.
In addition to the funds generated by the initial public offering, the Company
has financed the ongoing expansion, refurbishment, and other working capital
requirements from private sources, including short term promissory notes to a
bank and to various individuals.
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CHILDREN'S WONDERLAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF PLAN OF OPERATIONS
DECEMBER 31, 1996 AND 1995
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The Company intends to continue its expansion activities in 1997 via the opening
of new centers and the acquisition of existing facilities. In connection with
its acquisition strategy, the Company entered into an agreement to purchase a
child care center in Los Angeles County for $375,000. To fund this and other
acquisitions, the Company has engaged an underwriter in connection with an
$800,000 minimum to $1,500,000 maximum private placement of between 16 and 30
units. The Company anticipates that if the minimum offering is achieved, the
holders of up to $500,000 principal amount demand promissory notes will exchange
their notes for units. Each unit consists of one $50,000 face amount promissory
note (the "Notes") and 25,000 common stock purchase warrants (the "Private
Warrants", collectively with the Notes, the "Units"). The Notes will bear
interest at the rate of 10% per annum and are due at the earlier of the
completion of a secondary public offering or one year from the date of issuance.
The Private Warrants will entitle the holders to purchase one share of common
stock for $5.00 and will expire on May 6, 2001. The net proceeds from the sale
of the Units are expected to be sufficient to fund the Company's operations
through the completion of the proposed secondary public offering described below
(estimated to be completed by March 31, 1997); however, depending upon if and
when such public offering is completed, the Company may require substantial
additional funds to continue to operate its centers and to pursue its expansion
activities.
The Company also signed a non-binding letter of intent to purchase the assets of
companies that operate four assisted living care facilities and provide home
health care. The purchase price for this acquisition is $4.6 million. The
Company intends to execute a non-binding letter of intent with an underwriter to
raise net proceeds of approximately $6,000,000 through the sale of between
1,000,000 and 1,200,000 shares of the Company's common stock in order to fund
this acquisition, repay the Notes and for additional working capital. Based upon
the Company's current level of operations, the Company anticipates that if the
maximum number of Units are sold in the private placement and the secondary
public offering is completed by March 31, 1997, the Company's capital resources
are expected to be adequate to fund its current level of operations for the next
twelve months following such public offering. If the proposed acquisitions
described above are consummated or the Company continues its expansion
activities, and the Company does not obtain additional financing, such capital
resources are expected to be adequate to satisfy the Company's capital and
operational needs for the six months following such public offering. See " --
Recent Developments".
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CHILDREN'S WONDERLAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF PLAN OF OPERATIONS
DECEMBER 31, 1996 AND 1995
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RESULTS OF OPERATIONS:
The following table sets forth the percentage of center revenue represented in
the Company's statement of operations for the periods indicated:
3 Months Ended December 31, 6 Months Ended December 31,
1996 1995 1996 1995
------------ ---------- ------------ ----------
REVENUE 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
OPERATING EXPENSE:
Payroll and Related Costs 58.5% 71.5% 61.5% 71.5%
Center Facilities Costs 20.2% 24.4% 21.2% 23.7%
General & Administrative 62.6% 31.2% 60.1% 30.1%
Development Costs 34.9% 3.4% 28.1% 2.5%
Other 9.0% 9.2% 9.3% 8.8%
Depreciation & Amortization 9.4% 4.7% 8.1% 4.1%
----- ----- ----- -----
Total 194.6% 144.4% 188.3% 140.7%
----- ----- ----- -----
OPERATING LOSS 94.6% 44.4% 88.3% 40.7%
Interest Expense, net 7.8% 5.7% 7.5% 7.0%
Other Non-Operating
(Income)/Expense 2.1% (0.8%) 0.2% 0.8%
----- ----- ----- -----
NET LOSS 104.5% 49.3% 96.0% 48.5%
===== ===== ===== =====
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CHILDREN'S WONDERLAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF PLAN OF OPERATIONS
DECEMBER 31, 1996 AND 1995
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COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 1996 TO 1995
Revenues: Revenues increased by 15.9% to $1,266,385 for the second quarter of
fiscal year 1997, as compared to $1,093,005 for the second quarter of fiscal
year 1996. Approximately $208,000 of the increase is attributed to increased
center capacity due to the addition of three centers subsequent to September
1995. This increase in revenue was offset by temporary reductions in capacities
at certain centers for the continued refurbishment of various classrooms and
playgrounds made possible by funds generated by the Company's initial public
offering. Two of the new centers were start-up centers which were opened
directly by the Company subsequent to the second quarter of the prior fiscal
year. The third new center was acquired by the Company in December 1995, so that
the prior year quarter only included one month of revenues for this center. At
December 31, 1995, the Company's state licensed, elder/child capacity for the
eleven centers then in operation was 1,204 persons, as compared to thirteen
centers with a capacity of 1,561 persons at December 31, 1996. The Company
expects revenue to continue to grow as new centers are brought on-line.
Operating Expenses - Payroll & Related Costs: Payroll expense related to center
operations decreased by 5.2% to $740,865 for the second quarter of fiscal year
1997, as compared to $781,690 for the comparable period for fiscal year 1996.
State law for licensed day care facilities requires a specific ratio of teachers
to elders and/or children. With respect to children, the teacher/child ratio
also varies depending on the age of the children. Accordingly, center payroll
expenses generally fluctuate in relationship to attendance levels as well as the
mix of age brackets at each center. Payroll expense as a percent of revenues for
the second quarter of fiscal year 1997 decreased as compared to the second
quarter for the prior year due to increased utilization of center capacities
from higher enrollment levels as well as to continued management emphasis on
labor cost control.
Operating Expenses - Center Facilities Costs: Center facilities expense remained
consistent, decreasing by 3.8% to $256,217 for the three months ended December
31, 1996, as compared to $266,474 for the three months ended December 31, 1995.
This expense consists primarily of rent, repairs and maintenance, utilities, and
other such occupancy costs for the Company's mature centers; the corresponding
expenses related to the start-up centers have been classified as Development
Costs.
Operating Expenses - General and Administrative: General and administrative
expenses increased by 132.6% to $792,815 for the three months ended December 31,
1996, as compared to $340,835 for the three months ended December 31, 1995.
Moreover, general and administrative expenses as a percent of revenue increased
to 62.6% of revenue for the second quarter of fiscal year 1996 from 31.2% of
revenue for the second quarter of the current fiscal year. The increase is due
to increased corporate staffing as well as increased accounting, legal, and
consulting fees in the second quarter of fiscal year 1997. The increase in
corporate staffing reflects the Company's continuing recruitment of professional
personnel required to effectively manage the planned expansion through
acquisition and construction of additional centers. The increase in professional
fees relate primarily to increased exploration of potential acquisitions, the
negotiation and drafting of various equipment and facility leases, compliance
with federal securities laws, and exchange listing fees. General and
administrative expenses are expected to continue to increase somewhat as the
Company continues to install the corporate infrastructure necessitated by the
planned expansion.
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CHILDREN'S WONDERLAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF PLAN OF OPERATIONS
DECEMBER 31, 1996 AND 1995
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Operating Expenses - Development Costs: Development costs increased to $441,408
for the three months ended December 31, 1996, as compared to $37,157 for the
comparable period in the prior fiscal year. This expense category includes the
costs related to personnel out in the field working with centers currently under
various stages of development, the cost of Company-wide marketing activities,
and the costs associated with start-up centers. For the second quarter of fiscal
year 1997, the Company has two centers in the start-up phase, one each in
Woodland Hills and Gold River, California, whereas there were no centers in the
start-up phase for the comparable period in the prior year. Moreover,
pre-opening costs related to construction and promotional activities geared up
during the current quarter in preparation for the opening of a third start-up
center in West Haven, Connecticut in January 1997. The Company expects this
expense category to increase in the future, as the Company continues to
emphasize growth through the acquisition and start-up of additional centers.
Operating Expenses - Other: Other expense increased by 13.8% to $114,106 for the
second quarter of fiscal year 1997, as compared to $100,278 for the comparable
period in fiscal year 1996. This expense category includes costs related to
center activities and programs, as well as the cost of food for lunches and
snacks served at the centers, and as such, the expense increases as total
enrollment increases.
Operating Expenses - Depreciation & Amortization: Depreciation and amortization
increased by 130.0% to $119,070 for the three months ended December 31, 1996, as
compared to $51,774 for the three months ended December 31, 1995. The noted
increase is due to the timing of center acquisitions; a center was acquired in
Denver, Colorado in December 1995, and new centers in California commenced
operations in March and September 1996, respectively. Thus, three additional
centers exist for the second quarter of fiscal year 1997 which did not exist
during the second quarter of the prior year. In addition, the Company entered
into new long-term leases for equipment maintained at various centers. These
leases have been accounted for as capital leases, and as such, an asset was
recorded by the Company for the equipment, thus increasing amortization expense.
Interest Expense, net: Net interest expense increased by 59.1% to $99,360 for
the three months ended December 31, 1996, as compared to $62,454 for the three
months ended December 31, 1995. The increase was the result of increased
short-term borrowings during the current quarter, which were required to
maintain the Company's construction and development plans as well as to provide
adequate working capital.
Other Non-Operating Income/Expense: Other non-operating income/expense
fluctuated by $34,365, from a net other income balance of $8,333 for the second
quarter of fiscal year 1996 to an expense balance of $26,032 for the second
quarter of fiscal year 1997. The net other income balance for the prior year was
due to the recovery of funds previously paid to certain vendors in connection
with various construction projects. No such income items were received during
the current quarter to offset the other expense items.
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CHILDREN'S WONDERLAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF PLAN OF OPERATIONS
DECEMBER 31, 1996 AND 1995
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COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 1996 TO 1995
Revenues: Revenues increased by 11.0% to $2,408,753 for the first half of fiscal
year 1997, as compared to $2,169,828 for the first half of fiscal year 1996.
Approximately $300,000 of the increase is attributed to increased center
capacity due to the addition of three centers subsequent to September 1995; such
increase was offset by temporary reductions in capacities at certain centers
during the summer months for the refurbishment of various classrooms and
playgrounds made possible by funds generated by the Company's initial public
offering. Two of the three new centers were start-up centers which were opened
directly by the Company, one each in March 1996 and September 1996, while the
third new center was a mature center acquired by the Company from an outside
party in December 1995. Thus, the revenue contribution from these three new
centers for the comparable prior year period was minimal. At December 31, 1995,
the Company's state licensed, elder/child capacity for the eleven centers then
in operation was 1,204 persons, as compared to thirteen centers with a capacity
of 1,561 persons at December 31, 1996. The Company expects revenue to continue
to grow as new centers are brought on-line.
Operating Expenses - Payroll & Related Costs: Payroll expense related to center
operations decreased by 4.5% to $1,481,314 for the first six months of fiscal
year 1997, as compared to $1,550,853 for the comparable period for fiscal year
1996. State law for licensed day care facilities requires a specific ratio of
teachers to elders and/or children. With respect to children, the teacher/child
ratio also varies depending on the age of the children. Accordingly, center
payroll expenses generally fluctuate in relationship to attendance levels as
well as the mix of age brackets at each center. Payroll expense as a percent of
revenues for the first half of fiscal year 1997 decreased as compared to the
first half of the prior year due to increased utilization of center capacities
from higher enrollment levels as well as to continued management emphasis on
labor cost control.
Operating Expenses - Center Facilities Costs: Center facilities expense remained
consistent, decreasing by 0.5% to $511,046 for the six months ended December 31,
1996, as compared to $513,561 for the six months ended December 31, 1995. This
expense consists primarily of rent, repairs and maintenance, utilities, and
other such occupancy costs for the Company's mature centers; the corresponding
expenses related to the start-up centers have been classified as Development
Costs.
Operating Expenses - General and Administrative: General and administrative
expenses increased by 121.7% to $1,448,615 for the six months ended December 31,
1996, as compared to $653,459 for the six months ended December 31, 1995.
Moreover, general and administrative expenses increased to 60.1% of revenue for
the first half of fiscal year 1996 from 30.1% of revenue for the comparable
period of the current fiscal year. The increase is due to increased corporate
staffing as well as increased accounting, legal, and consulting fees for the
first half of fiscal year 1997. The increase in corporate staffing reflects the
Company's continuing recruitment of professional personnel required to
effectively manage the planned expansion through acquisition and construction of
additional centers. The noted increase in professional fees relate primarily to
increased exploration of potential acquisitions, the negotiation and drafting of
various equipment and facility leases, compliance with federal securities laws,
and exchange listing fees. Management expects general and administrative
expenses to continue to increase somewhat as the Company continues to install
the corporate infrastructure necessitated by the planned expansion.
16
17
CHILDREN'S WONDERLAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF PLAN OF OPERATIONS
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
Operating Expenses - Development Costs: Development costs increased to $677,162
for the six months ended December 31, 1996, as compared to $54,829 for the
comparable period in the prior fiscal year. This expense category includes the
costs related to personnel out in the field working with centers currently under
various stages of development, the cost of Company-wide marketing activities,
and the costs associated with start-up centers. For the first half of fiscal
year 1997, the Company has two centers in the start-up phase, one each in
Woodland Hills and Gold River, California, whereas there were no centers in the
start-up phase for the comparable period in the prior year. Moreover,
pre-opening costs related to construction and promotional activities geared up
during the current quarter in preparation for the opening of a third start-up
center in West Haven, Connecticut in January 1997. The Company expects this
expense category to increase in the future, as the Company continues to
emphasize growth through the acquisition and start-up of additional centers.
Operating Expenses - Other: Other expense increased by 17.3% to $223,689 for the
first half of fiscal year 1997, as compared to $190,740 for the comparable
period in fiscal year 1996. This expense category includes costs related to
center activities and programs, as well as the cost of food for lunches and
snacks served at the centers, and as such, the expense increases as total
enrollment increases.
Operating Expenses - Depreciation & Amortization: Depreciation and amortization
increased by 119.2% to $194,435 for the six months ended December 31, 1996, as
compared to $88,724 for the six months ended December 31, 1995. The noted
increase is due to the timing of center acquisitions; a center was acquired in
Denver, Colorado in December 1995, and new centers in California commenced
operations in March and September 1996, respectively. Thus, three additional
centers exist for the first half of the current fiscal year which did not exist
during the comparable period of the prior year. In addition, the Company entered
into new long-term leases for equipment maintained at various centers. These
leases have been accounted for as capital leases, and as such, an asset was
recorded by the Company for the equipment, thus increasing amortization expense.
Interest Expense, net: Net interest expense increased by 19.2% to $181,646 for
the six months ended December 31, 1996, as compared to $152,406 for the six
months ended December 31, 1995. The increase was primarily due to increased
short-term borrowings during the second quarter, which were required to maintain
the Company's construction and development plans as well as to provide adequate
working capital.
Other Non-Operating Income/Expense: Other non-operating income/expense decreased
by $11,675, from $17,356 for the first half of fiscal year 1996 to $5,681 for
the first half of fiscal year 1997. The current year to date balance represents
expenses net of the first quarter receipt of insurance funds for the loss of
certain equipment which was maintained in storage facilities.
17
18
CHILDREN'S WONDERLAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF PLAN OF OPERATIONS
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES:
The Company's operations resulted in a net cash outflow of $1,442,256 for the
six months ended December 31, 1996. Moreover, an additional $1,587,507 of cash
was used for investment purposes, primarily for the development of two new
start-up centers in California plus an additional start-up center in
Connecticut, the expansion and refurbishment of existing center facilities, and
the purchase of fixed assets for new and existing centers.
To date, the Company has financed its operating cash needs primarily from vendor
credit, the sale of equity securities, loans from certain stockholders, the
private placement of promissory notes and convertible promissory notes, and the
delivery of promissory notes to the sellers of certain acquired centers. In May
1996, the Company successfully completed an initial public offering of common
stock and warrants to purchase common stock. The offering resulted in gross
proceeds of $8,050,000 before deducting underwriters' fees and other costs of
the offering. In addition, the Company negotiated a $100,000 line of credit and
a $400,000 multiple disbursement term promissory note agreement with a bank in
August 1996. As of February 1997, the entire $500,000 has been drawn down, and
no additional funds are available under these two note agreements.
In addition to planned expansion, funds generated from the sources discussed
above have enabled the Company to increase spending on marketing and advertising
campaigns which are geared towards increasing enrollment levels at the existing
centers, as reflected in the increased development costs for the first half of
the current fiscal year. Prior to the Company's initial public offering,
spending on advertising was limited due to a lack of adequate resources. Under
the direction of the Company's new President, the Company plans to modify center
capacities and instigate changes in the product mix to increase profitability at
existing centers. Management believes that the increased advertising efforts
combined with the planned modifications will increase center profitability
levels for the existing centers. However, there can be no assurance that either
the increased advertising efforts or the modifications will be successful or
that they will result in increased profitability levels.
The Company intends to maintain its aggressive growth strategy, although
continued expansion, be it through acquisition or otherwise, will require the
Company to raise additional cash. To that end, the Company has engaged an
underwriter in connection with an $800,000 minimum - $1,500,000 maximum private
placement of between 16 and 30 units. The Company anticipates that if the
minimum offering is achieved, the holders of up to $500,000 principal amount
demand promissory notes will exchange their notes for units. Each unit consists
of one $50,000 face amount promissory note (the "Notes") and 25,000 common stock
purchase warrants (the "Private Warrants", collectively with the Notes, the
"Units"). The Notes will bear interest at the rate of 10% per annum and are due
at the earlier of the completion of a secondary public offering or one year from
the date of issuance. The Private Warrants will entitle the holders to purchase
one share of common stock for $5.00 per share during a period commencing one
year from the completion of the proposed public offering (or January 1, 1998 if
such public offering has not occurred by that date) and expiring May 6, 2001.
The net proceeds from the sale of the Units are expected to be sufficient to
fund the Company's operations through the completion of the proposed secondary
public offering described below (estimated to be completed by March 31, 1997);
however, depending upon if and when such public offering is completed, the
Company may require substantial additional funds to continue to operate its
centers and to pursue its expansion activities.
18
19
CHILDREN'S WONDERLAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF PLAN OF OPERATIONS
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
The Company also intends to execute a non-binding letter of intent with an
underwriter to raise net proceeds of approximately $6,000,000 through the sale
of between 1,000,000 and 1,200,000 shares of the Company's common stock in order
to fund acquisitions, repay the Notes, and for additional working capital (See
"--Recent Developments").
Based upon the Company's current level of operations, the Company anticipates
that if the maximum number of Units are sold in the private placement and the
secondary public offering described below is completed by March 31, 1997, the
Company's capital resources are expected to be adequate to fund its current
level of operations for the next twelve months following such public offering.
If the proposed acquisitions described below are consummated or the Company
continues its expansion activities and the Company does not obtain additional
financing, such capital resources are expected to be adequate to satisfy the
Company's capital and operational needs for the six months following such public
offering. However, there can be no assurance that the Company will be able to
obtain such funds, nor any additional financing in the future.
RECENT DEVELOPMENTS:
Planned Acquisitions
The Company is in escrow to purchase a child care center in Los Angeles County,
California. The center is currently operating at approximately fifty percent of
its licensed capacity of 156 children. The purchase price is $375,000, payable
$175,000 in cash and the balance pursuant to a promissory note payable over nine
years with interest at eight percent per annum. The Company is in the process of
completing its due diligence review of the center. If the review is satisfactory
to the Company, the Company expects to complete the purchase within a few weeks
of the completion of the private placement described below and will use a
portion of the proceeds from the private placement for the purchase. However,
there can be no assurance that the Company will complete the purchase of this
center due to numerous reasons, including, but not limited to, the Company's
decision not to proceed with the purchase, the Company being unable to complete
the private placement or the Company not having sufficient funds to complete the
purchase.
The Company also has entered into a non-binding letter of intent to purchase the
assets of companies engaged in operating four assisted living care facilities
and in providing home health care. These companies have combined annual revenues
in excess of $14 million. The Company is in the process of conducting its due
diligence review of these companies and preparing definitive purchase documents.
The purchase price is $4.6 million, payable in a combination of cash, promissory
notes and the Company's Common Stock. If the Company desires to proceed with the
purchase, neither the funds on hand nor the proceeds from the private placement
will be sufficient to enable the Company to complete such purchase. However, as
described below, the Company intends, if the private placement is completed, to
file a registration statement for a secondary offering of its common stock, a
portion of the proceeds of which would be used to complete such acquisition.
There can be no assurance that the Company will complete this purchase due to
numerous reasons, including, but not limited to, the Company's decision not to
proceed with the purchase, the Company not being able to enter into binding
agreements for the purchase of the assets, or the Company being unable to
complete the secondary offering necessary to fund this purchase.
19
20
CHILDREN'S WONDERLAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF PLAN OF OPERATIONS
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
Private Placement of Units
The Company has engaged an underwriter in connection with an $800,000 minimum -
$1,500,000 maximum private placement of between 16 and 30 units. The Company
anticipates that if the minimum offering is achieved, the holders of up to
$500,000 principal amount demand promissory notes will exchange their notes for
units. Each unit consists of one $50,000 face amount promissory note (the
"Notes") and 25,000 common stock purchase warrants (the "Private Warrants",
collectively with the Notes, the "Units"). The Notes will bear interest at the
rate of 10% per annum and are due at the earlier of the completion of a
secondary public offering or one year from the date of issuance. The Private
Warrants will entitle the holders to purchase one share of common stock for
$5.00 and will expire on May 6, 2001. It is anticipated that the private
placement will be completed by March 3, 1997. However, there can be no assurance
that the Company will sell all or any part of the foregoing Units due to
numerous reasons, including, but not limited to, the underwriter's inability to
sell the Units due to a lack of demand or a decline in general market conditions
or a decision by the underwriter, the Company, or both, to terminate the private
placement.
Secondary Offering
The Company intends to execute a non-binding letter of intent with an
underwriter to raise net proceeds of approximately $6,000,000 through the sale
of between 1,000,000 and 1,200,000 shares of the Company's common stock in order
to fund acquisitions, repay the Notes and for additional working capital. Based
upon the Company's current level of operations, the Company anticipates that if
the maximum number of Units are sold in the private placement and the secondary
public offering is completed by March 31, 1997, the Company's capital resources
are expected to be adequate to fund its current level of operations for the next
twelve months following such public offering. If the proposed acquisitions
described below are consummated or the Company continues its expansion
activities, and the Company does not obtain additional financing, such capital
resources are expected to be adequate to satisfy the Company's capital and
operational needs for the six months following such public offering.
Additionally, there can be no assurance that the secondary offering will be
completed, or that sufficient cash will be raised to meet the Company's cash
requirements, due to numerous contingencies, including, but not limited to, the
inability of the Company and the underwriter to agree on terms of the secondary
offering, general market conditions, failure to execute a binding agreement with
respect to the $4.6 million acquisition discussed above, and the performance of
the Company and its common stock.
20
21
EMPLOYMENT AGREEMENTS
On January 6, 1997, the Company made certain changes in its executive personnel
and their terms of employment. Mr. Michael L. Laney, a director of the Company,
was appointed President and Chief Financial Officer. Mr. Laney also entered into
an employment agreement that provided for a signing bonus of $85,000, which has
not yet been paid, and an initial salary of $160,000 per year. At July 1, 1997,
Mr. Laney's salary will increase to $175,000 if the Company's annualized
revenues are reasonably expected to exceed $10,000,000. Mr. Laney also received
options to purchase 175,000 shares of common stock, 50,000 of which vested
immediately and the balance will vest equally in January 1998, 1999, and 2000
provided that the employment agreement is still in effect. The options have a
$7.00 exercise price. The agreement expires January 5, 2000 but can be
terminated earlier pursuant to certain thresholds. Ms. Sandra Goldstein, a vice
president of the Company, was appointed the Company's Secretary. The Company
also entered into a consulting agreement with Mr. Kenneth W. Bitticks, the
Company's Chairman. The consulting agreement provides for the payment of $15,000
per month and expires on January 5, 2000. Mr. Bitticks also received options to
purchase 75,000 shares of common stock, 25,000 of which vested immediately and
the balance will vest equally in January 1998, 1999, and 2000 provided that the
consulting agreement is still in effect. The options have a $7.00 exercise
price. The agreement expires January 5, 2000 but can be terminated earlier
pursuant to certain thresholds. The Company also modified the employment
agreement of Ms. Debby S. Bitticks, the Company's Chief Executive Officer. Ms.
Bitticks will receive an annual salary of $165,000. At July 1, 1997, Ms.
Bitticks will increase to $190,000 if the Company's annualized revenues are
reasonably expected to exceed $10,000,000. Ms. Bitticks also received options to
purchase 125,000 shares of common stock, 50,000 of which vested immediately and
the balance will vest equally in January 1998, 1999, and 2000 provided that the
employment agreement is still in effect. The options have a $7.00 exercise
price. The agreement expires January 5, 2000 but can be terminated earlier
pursuant to certain thresholds. Mr. Robert M. Wilson, a director of the Company,
resigned as its President, Chief Financial Officer and Secretary of the Company.
He also entered into a consulting agreement that provides for the payment of a
one-time $25,000 bonus, of which $5,000 has been paid, and $9,000 per month,
and a commission based upon the value of acquisitions that Mr. Wilson
negotiates on behalf of the Company. The agreement expires in January 1999
but commencing October 1, 1997, either Mr. Wilson or the Company may terminate
the agreement on three months notice.
21
22
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual meeting of the stockholders of the Company was held on December 11,
1996 for the purpose of electing five directors to hold office until the next
annual meeting of stockholders, to approve the Company's 1996 Stock Option Plan
and to authorize 400,000 shares of common stock for issuance under such plan,
to ratify the selection of Deloitte & Touche LLP as the Company's independent
accountants for the Company's fiscal year ending June 30, 1997, and to transact
such other business as may properly come before the annual meeting.
Each of the Company's five directors were reelected to board of directors. The
names of the five directors and the votes received by each director are as
follows:
Name For Withheld
---- -------- --------
Debby S. Bitticks 3,584,913 21,350
Kenneth W. Bitticks 3,577,413 28,850
James W. Gott 3,578,413 28,850
Michael L. Laney 3,578,913 27,350
Robert M. Wilson 3,584,413 21,850
With respect to the motion for the approval of the 1996 Stock Option Plan and
the authorization of 400,000 shares of common stock for issuance under such
plan, of the 3,606,263 shares represented at the meeting, 948,263 shares voted
in favor or the motion, 265,490 shares voted against, 23,900 abstained and the
balance of 2,368,637 consisted of broker non-votes. As a majority of the
shares represented (including abstentions and non-votes) did not vote in favor
of the motion, the motion did not pass.
With respect to the motion for the ratification of Deloitte & Touche LLP as the
Company's accountants, of the 3,606,263 shares represented at the meeting,
3,560,463 shares voted in favor of the motion, 34,900 shares voted against and
10,900 abstained. As a majority of the shares represented (including
abstentions) voted in favor of the motion, the motion passed.
ITEM 6. EXHIBITS
10.29 Employment agreement between the Company and Michael L.
Laney dated January 6, 1997
10.30 Consulting agreement between the Company and Kenneth W.
Bitticks dated January 6, 1997
10.31 Employment agreement between the Company and Debby S.
Bitticks dated January 6, 1997
10.32 Consulting agreement between the Company and Robert M.
Wilson dated January 6, 1997
27. Financial Data Schedule
REPORTS ON FORM 8-K
None
22
23
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
CHILDREN'S WONDERLAND, INC.
(Registrant)
/s/ Michael L. Laney February 12, 1996
- -------------------------------------------------
Mr. Michael L. Laney
President & Chief Financial Officer
23
24
EXHIBIT INDEX
EXHIBITS
10.29 Employment agreement between the Company and Michael L.
Laney dated January 6, 1997
10.30 Consulting agreement between the Company and Kenneth W.
Bitticks dated January 6, 1997
10.31 Employment agreement between the Company and Debby S.
Bitticks dated January 6, 1997
10.32 Consulting agreement between the Company and Robert M.
Wilson dated January 6, 1997
27. Financial Data Schedule
REPORTS ON FORM 8-K
None