-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LBy6bsxqcvK3Zr4x6TmVMcrUZogcpjqu1XAKUt8YJTdNcLcW/Oqr7/Cuo4nY51YL epB2vz5+akqfvGUAxVZ/Ng== 0000950148-97-001469.txt : 19970520 0000950148-97-001469.hdr.sgml : 19970520 ACCESSION NUMBER: 0000950148-97-001469 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHILDRENS WONDERLAND INC CENTRAL INDEX KEY: 0000916933 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-CHILD DAY CARE SERVICES [8351] IRS NUMBER: 954455341 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-12121 FILM NUMBER: 97609406 BUSINESS ADDRESS: STREET 1: 28310 ROADSIDE DRIVE STE 220 CITY: AGOURA STATE: CA ZIP: 91301 BUSINESS PHONE: 8188651306 MAIL ADDRESS: STREET 1: 28310 ROADSIDE DRIVE STREET 2: SUITE 220 CITY: AGOURA STATE: CA ZIP: 91301 10QSB 1 FORM 10-QSB 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 March 31, 1997 [ ] 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. - -------------------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) California 95-4455341 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 28310 Roadside Drive, Suite 220, Agoura, California 91301 - -------------------------------------------------------------------------------- (Address of principal executive offices) (818) 865-1306 - -------------------------------------------------------------------------------- (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 May 5, 1997, the Registrant had outstanding 3,985,037 shares of Common Stock, no par value. This report, including all exhibits and attachments, contains 24 pages. 2 CHILDREN'S WONDERLAND, INC. FORM 10-QSB For the Quarterly Period Ended March 31, 1997 INDEX
Page Numbers ------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (a) Balance Sheets as of March 31, 1997 and June 30, 1996 (unaudited) 3 (b) Statements of Operations for the three months and nine months ended March 31, 1997 and 1996 (unaudited) 5 (c) Condensed Statements of Cash Flows for the nine months ended March 31, 1997 and 1996 (unaudited) 6 (d) Notes to Financial Statements 7 Item 2. Management's Discussion and Analysis of Plan of Operations 10 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 22 Signatures 23 Exhibit 27. Financial Data Schedule 24
2 3 CHILDREN'S WONDERLAND, INC. BALANCE SHEETS MARCH 31, 1997 AND JUNE 30, 1996 (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS
March 31, June 30, 1997 1996 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents $ 62,370 $3,210,418 Accounts Receivable, net of allowance for doubtful accounts of $71,731 and $42,676 as of March 31, 1997 and June 30, 1996, respectively 126,403 64,667 Prepaid Expenses 348,264 104,979 ---------- ---------- Total Current Assets 537,037 3,380,064 EQUIPMENT & IMPROVEMENTS, NET 1,729,319 429,325 CAPITALIZED LEASES (Net of accumulated amortization of $392,161 and $227,991 as of March 31, 1997 and June 30, 1996, respectively) 2,116,671 2,120,060 INTANGIBLE ASSETS, NET 1,001,474 633,415 DEPOSITS AND OTHER 707,506 433,650 ---------- ---------- TOTAL ASSETS $6,092,007 $6,996,514 ========== ==========
See Notes to Financial Statements 3 4 CHILDREN'S WONDERLAND, INC. BALANCE SHEETS MARCH 31, 1997 AND JUNE 30, 1996 (UNAUDITED) - -------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, June 30, 1997 1996 ------------ ----------- CURRENT LIABILITIES: Accounts Payable $ 1,318,615 $ 480,837 Accrued Expenses 637,604 434,665 Due to Stockholders 370,000 383,000 Short-Term Debt (Note 3) 1,902,750 Current portion of Long-Term Debt (Note 4) 286,795 325,991 Current portion of Capitalized Lease Obligation 320,479 283,103 ------------ ----------- Total Current Liabilities 4,836,243 1,907,596 ------------ ----------- LONG-TERM DEBT, less current portion (Note 4) 499,448 468,261 ------------ ----------- CAPITALIZED LEASE OBLIGATION, less current portion 2,079,562 2,083,483 ------------ ----------- COMMITMENTS & CONTINGENCIES STOCKHOLDERS' (DEFICIT) EQUITY: Common Stock, no par value; 20,000,000 shares authorized; 3,985,037 and 3,925,689 shares issued and outstanding as of March 31, 1997 and June 30, 1996, respectively 9,749,138 9,638,040 Accumulated Deficit (11,072,384) (7,100,866) ------------ ----------- Total Stockholders' (Deficit) Equity (1,323,246) 2,537,174 ------------ ----------- TOTAL LIABILITIES & STOCKHOLDERS' (DEFICIT) EQUITY $ 6,092,007 $ 6,996,514 ============ ===========
See Notes to Financial Statements 4 5 CHILDREN'S WONDERLAND, INC. STATEMENTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) - --------------------------------------------------------------------------------
3 Months Ended March 31, 9 Months Ended March 31, 1997 1996 1997 1996 ----------- ----------- ---------- ---------- REVENUE $ 1,522,069 $ 1,213,685 $3,930,822 $3,383,513 ----------- ----------- ---------- ---------- OPERATING EXPENSE: Payroll and Related Costs 712,797 733,101 2,194,111 2,283,954 Center Facilities Costs 257,960 270,199 769,005 806,702 General and Administrative 875,207 334,189 2,323,822 987,648 Development Costs 732,152 95,310 1,409,314 150,139 Other 117,452 116,827 341,141 307,566 Depreciation & Amortization 166,188 60,703 360,624 158,678 ----------- ----------- ---------- ---------- Total 2,861,756 1,610,329 7,398,017 4,694,687 ----------- ----------- ---------- ---------- OPERATING LOSS 1,339,687 396,644 3,467,195 1,311,174 Interest Expense, net 136,343 76,341 317,989 196,556 Other Non-Operating Expense 180,653 161,429 186,334 178,805 ----------- ----------- ---------- ---------- NET LOSS $ 1,656,683 $ 634,414 $3,971,518 $1,686,535 =========== =========== ========== ========== NET LOSS PER SHARE (See Note 2) $ (0.42) $ (1.01) =========== ========== WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES 3,967,716 3,946,248 =========== ==========
See Notes to Financial Statements 5 6 CHILDREN'S WONDERLAND, INC. CONDENSED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) - --------------------------------------------------------------------------------
9 Months Ended March 31, 1997 1996 ----------- ----------- CASH FLOWS USED IN OPERATING ACTIVITIES $(2,662,868) $(1,240,979) CASH FLOWS USED IN INVESTING ACTIVITIES (1,975,206) (323,599) CASH FLOWS FROM FINANCING ACTIVITIES 1,490,026 1,553,796 ----------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS (3,148,048) (10,782) CASH AND CASH EQUIVALENTS, Beginning of period 3,210,418 65,072 ----------- ----------- CASH AND CASH EQUIVALENTS, End of period $ 62,370 $ 54,290 =========== ===========
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. In February 1997, 12,016 shares of common stock were issued in exchange for the cancellation of 19,309 warrants; $55,392 in associated costs was charged to expense. See Notes to Financial Statements 6 7 CHILDREN'S WONDERLAND, INC. NOTES TO FINANCIAL STATEMENTS FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) - -------------------------------------------------------------------------------- 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 March 31, 1997, the Company operated fourteen centers located in California, Colorado, and Connecticut. Basis of Presentation As of March 31, 1997, the Company had a working capital deficit of $4,299,206 and a stockholders' deficit of $1,323,246 and had a year-to-date net loss of $3,971,518 for the nine months ended March 31, 1997. These factors raise substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements have been prepared assuming the Company will continue as a going concern and do not reflect the liquidation value of assets and liabilities. The Company is attempting to raise additional financing for the purpose of opening new full service family day care centers. In addition, the Company is currently exploring various divestiture strategies with respect to some of the Company's unprofitable and/or less profitable centers. However, there can be no assurance that the Company will be successful in these endeavors. The ability of the Company to continue as a going concern is dependent upon, among other things, the Company's ability to obtain additional financing and the success of future operations. 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 third quarter of fiscal years 1997 and 1996 are affected by the start-up of three new centers, one each in March 1996, September 1996, and January 1997 (see "Management's Discussion and Analysis of Plan of Operations" which follows). 7 8 CHILDREN'S WONDERLAND, INC. NOTES TO FINANCIAL STATEMENTS FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) - -------------------------------------------------------------------------------- NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 nine months ended March 31, 1996 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. NOTE 3 - SHORT-TERM DEBT Short-term debt consists of the following:
March 31, June 30, 1997 1996 ---------- -------- Unsecured promissory notes payable to individuals, interest at 10% per annum Principal and interest are due and payable in full upon the earlier to occur of the closing of a secondary public offering of the Company's common stock or March 24, 1998 $1,375,000 Unsecured promissory notes payable to individuals, interest at 12% per annum. Principal and interest are due and payable in full at various dates through April 10, 1997 315,000 Unsecured promissory notes payable to individuals, interest at 10% nominal rate. Principal and interest are due and payable in full at various dates through June 23, 1997 212,750 ---------- -------- Total short-term debt $1,902,750 $ -- ========== ========
In connection with the private placement of the $1,375,000 unsecured 10% promissory notes payable listed above, the Company issued 687,500 Redeemable Common Stock Purchase Warrants. Each warrant entitles the holder thereof to purchase one share of common stock for $5.00 per share during a period commencing one year from the completion of a secondary public offering (or January 1, 1998 if such public offering has not occurred by that date) and expiring on May 6, 2001. The Company is in default on certain of the unsecured 12% promissory notes payable listed above. The Company is currently negotiating extended payment terms with the various lenders, and several of such lenders have agreed to extend the maturity date on such notes for periods of up to three months. 8 9 CHILDREN'S WONDERLAND, INC. NOTES TO FINANCIAL STATEMENTS FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) - -------------------------------------------------------------------------------- NOTE 4 - LONG-TERM DEBT Long-term debt consists of the following:
March 31, June 30, 1997 1996 --------- -------- 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 March 31, 1997, $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. 157,740 173,201 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. 132,832 147,104 Other notes payable with interest ranging from 7% to 14.9% per annum. 158,708 128,366 Deferred operating lease payments 126,963 92,831 -------- -------- Total 786,243 794,252 Less current portion 286,795 325,991 -------- -------- Total long-term debt $499,448 $468,261 ======== ========
The $210,000 in convertible notes payable listed above are convertible into 80,000 shares of the Company's common stock. NOTE 5 - SUBSEQUENT EVENTS As of March 31, 1997, the Company's equity securities were traded on the Nasdaq Small Cap Market as well as on the Boston Stock Exchange. Due to the Company's inability to comply with either the Nasdaq or the Boston Stock Exchange capital and surplus requirements, the Company's securities were delisted from the Nasdaq Small Cap Market effective April 29, 1997, and from the Boston Stock Exchange effective May 2, 1997. The Company's securities are currently being traded on the OTC Bulletin Board. 9 10 CHILDREN'S WONDERLAND, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATIONS MARCH 31, 1997 AND 1996 - -------------------------------------------------------------------------------- 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 three quarters of fiscal year 1997 reflect the Company's continued emphasis on growth, including the opening of two new centers, one in Woodland Hills, California in September 1996, and the other 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. The results of operations of the two start-up centers noted above are included in the Company's financial statements from the date of opening. Operating expenses for these start-up centers, 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. 10 11 CHILDREN'S WONDERLAND, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATIONS MARCH 31, 1997 AND 1996 - -------------------------------------------------------------------------------- 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. On March 21, 1997, the Company completed a private placement of Units, each of which consisted of one $50,000 face amount promissory note and 25,000 common stock purchase warrants. Such notes bear interest at 10% per annum and are due at the earlier of the completion of a secondary public offering or March 1998, while the warrants entitle the holders thereof to purchase one share of common stock for $5.00 per share during a period commencing one year from the completion of a secondary public offering (or January 1, 1998 if such public offering has not occurred by that date) and expiring on May 6, 2001. In connection with the private placement of Units, $600,000 of promissory notes payable previously issued were exchanged for 12 Units under this offering and $150,000 of commissions payable with respect to the private placement were exchanged for three Units under this offering. The net proceeds to the Company from this offering, including the $600,000 in converted promissory notes payable and after deducting costs of issuance, amounted to $1,180,326. The private placement of Units discussed above was intended to provide the Company with adequate working capital until the closing of a proposed secondary public offering of the Company's common stock; such closing date was anticipated to be March 31, 1997. Due to various factors, including but not limited to the delay in closing the private placement of Units, the significant drop in the Company's stock price, and the delisting of the Company's securities from both the Nasdaq Small Cap Market and the Boston Stock Exchange (see " - Recent Developments"), the proposed secondary public offering is no longer under consideration. The Company had intended to reduce, for a specified time, the exercise price of the Company's outstanding publicly traded warrants from their stated exercise price of $5.00 to $1.50 in order to induce the exercise of such warrants. Due to the various factors discussed above, the Company no longer intends to reduce the exercise price of the outstanding warrants. In order to reduce monthly operating costs, management has recently reviewed and reallocated various administrative duties and responsibilities, resulting in the elimination of several administrative positions in May 1997. Following the resignation of Mr. Michael L. Laney as an employee of the Company in April 1997, current employees have assumed the positions of President, Chief Financial Officer, and Secretary (see " - Recent Developments"). In addition, certain management personnel have agreed to defer payments under their respective employment and consulting contracts for the indefinite future in order to reduce the Company's negative cash flows. Company management continues to review center operations in an effort to cut expenses, with an emphasis on increasing enrollment levels at existing centers. The Company is also currently exploring various divestiture strategies with respect to some of the Company's unprofitable and/or less profitable centers. Despite such efforts, the Company's current operations still result in negative cash flows on a monthly basis, and as such, the Company will need to secure additional financing or explore other options to continue operations and/or to effect the planned expansion of operations described below. The Company does not have any commitments from third parties to provide all or any portion of the foregoing financing, and there can be no assurance that the Company will be able to obtain such financing. 11 12 CHILDREN'S WONDERLAND, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATIONS MARCH 31, 1997 AND 1996 - -------------------------------------------------------------------------------- Provided that the Company can raise additional financing, management 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 has 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. This acquisition is conditioned on the Company obtaining adequate financing. Thus far, the Company has been unable to obtain such financing, and there can be no assurance that such financing can be obtained prior to the time deadline under the letter of intent, which is May 31, 1997. In addition, in March 1997 the Company terminated the escrow agreement to purchase the assets of a child care center in Los Angeles County, California for $375,000. 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 March 31, 9 Months Ended March 31, 1997 1996 1997 1996 ----- ----- ----- ----- REVENUE 100.0% 100.0% 100.0% 100.0% ----- ----- ----- ----- OPERATING EXPENSE: Payroll and Related Costs 46.8% 60.4% 55.8% 67.5% Center Facilities Costs 16.9% 22.3% 19.6% 23.8% General & Administrative 57.5% 27.5% 59.1% 29.2% Development Costs 48.1% 7.9% 35.9% 4.4% Other 7.7% 9.6% 8.7% 9.1% Depreciation & Amortization 10.9% 5.0% 9.2% 4.7% ----- ----- ----- ----- Total 187.9% 132.7% 188.3% 138.7% ----- ----- ----- ----- OPERATING LOSS 87.9% 32.7% 88.3% 38.7% Interest Expense, net 9.0% 6.3% 8.1% 5.8% Other Non-Operating Expense 11.9% 13.3% 4.7% 5.3% ----- ----- ----- ----- NET LOSS 108.8% 52.3% 101.1% 49.8% ===== ===== ===== =====
12 13 CHILDREN'S WONDERLAND, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATIONS MARCH 31, 1997 AND 1996 - -------------------------------------------------------------------------------- COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1997 TO 1996 Revenues: Revenues increased by 25.4% to $1,522,069 for the third quarter of fiscal year 1997, as compared to $1,213,685 for the third quarter of fiscal year 1996. Approximately $410,000 of the increase is attributable to increased center capacity due to the addition of three centers subsequent to February 1996. 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 three new start-up centers were opened during the current fiscal year, while the third new start-up center was opened in March 1996; thus, the current quarter includes three new centers, one of which was open for only one month for the comparable quarter of the prior fiscal year. At March 31, 1996, the Company's state licensed, elder/child capacity for the twelve centers then in operation was 1,394 persons, as compared to fourteen centers with a capacity of 1,786 persons at March 31, 1997. Operating Expenses - Payroll & Related Costs: Payroll expense related to center operations decreased by 2.8% to $712,797 for the third quarter of fiscal year 1997, as compared to $733,101 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 third quarter of fiscal year 1997 decreased as compared to the third 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 decreased by 4.5% to $257,960 for the three months ended March 31, 1997, as compared to $270,199 for the three months ended March 31, 1996. This expense category 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 161.9% to $875,207 for the three months ended March 31, 1997, as compared to $334,189 for the three months ended March 31, 1996. Moreover, general and administrative expenses as a percent of revenue increased to 57.5% of revenue for the third quarter of the current fiscal year from 27.5% of revenue for the third quarter of the prior fiscal year. The increase is due primarily to increased corporate payroll as a result of increased corporate staffing and various changes in executive personnel, as well as to increased accounting, legal, and consulting fees in the third quarter of fiscal year 1997. The increase in corporate staffing reflects the Company's continuing recruitment of professional personnel required to manage the planned expansion through acquisition and construction of additional centers, as well as the administrative, filing and reporting requirements of a public company. In anticipation of the Company's ability to secure sufficient funding to allow these expansion activities to continue as planned, certain changes were made in the Company's executive personnel and their terms of employment (see "-- Recent Developments"). As a result of such changes, the Company accrued executive bonuses of $110,000, of which $67,500 have been paid. 13 14 CHILDREN'S WONDERLAND, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATIONS MARCH 31, 1997 AND 1996 - -------------------------------------------------------------------------------- The increase in professional fees relate primarily to legal fees incurred in the negotiation and drafting of a series of proposed financing offerings, as well as various equipment and facility leases, legal fees related to compliance with federal securities laws, consulting fees related to the increased exploration of potential acquisitions, and exchange listing fees. Operating Expenses - Development Costs: Development costs increased by 668.2% to $732,152 for the three months ended March 31, 1997, as compared to $95,310 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 $531,612 in costs associated with start-up centers. For the third quarter of fiscal year 1997, the Company has three centers in the start-up phase, one each in Woodland Hills and Gold River, California, and another in West Haven, Connecticut, whereas there was only one center in the start-up phase for only one month during the comparable period in the prior year. Operating Expenses - Other: Other expense remained consistent, increasing by 0.5% to $117,452 for the third quarter of fiscal year 1997, as compared to $116,827 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 173.8% to $166,188 for the three months ended Month 31, 1997, as compared to $60,703 for the three months ended Month 31, 1996. The noted increase is due to the timing of center start-ups; new centers in California commenced operations in March and September 1996, respectively, and an additional center in Connecticut commenced operations in January 1997. Thus, three additional centers exist for the third quarter of fiscal year 1997 which did not exist during the third 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 78.6% to $136,343 for the three months ended March 31, 1997, as compared to $76,341 for the three months ended March 31, 1996. The increase was due to the significant increase in short-term borrowings during the current quarter, which were required to provide the Company with adequate working capital, as well as to maintain the Company's construction and development plans. Other Non-Operating Expense: Other non-operating expense increased by 11.9% to $180,653 for the three months ended March 31, 1997, as compared to $161,429 for the three months ended march 31, 1996. The current quarter balance includes a $98,000 charge related to the write off of certain notes receivable which were deemed to be uncollectible, as well as $55,392 in costs associated with the cashless exercise of certain warrants. 14 15 CHILDREN'S WONDERLAND, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATIONS MARCH 31, 1997 AND 1996 - -------------------------------------------------------------------------------- COMPARISON OF THE NINE MONTHS ENDED MARCH 31, 1997 TO 1996 Revenues: Revenues increased by 16.2% to $3,930,822 for the first three quarters of fiscal year 1997, as compared to $3,383,513 for the first three quarters of fiscal year 1996. Approximately $710,000 of the increase is attributable to increased center capacity due to the addition of three centers subsequent to February 1996; such increase 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 three new start-up centers were opened during the current fiscal year, while the third new start-up center was opened in March 1996; thus, the current fiscal year includes three new centers, one of which was open for only four months for the comparable period of the prior fiscal year. At March 31, 1996, the Company's state licensed, elder/child capacity for the twelve centers then in operation was 1,394 persons, as compared to fourteen centers with a capacity of 1,786 persons at March 31, 1997. Operating Expenses - Payroll & Related Costs: Payroll expense related to center operations decreased by 3.9% to $2,194,111 for the first nine months of fiscal year 1997, as compared to $2,283,954 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 three quarters of fiscal year 1997 decreased as compared to the first three quarters 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 decreased by 4.7% to $769,005 for the nine months ended March 31, 1997, as compared to $806,702 for the nine months ended March 31, 1996. This expense category 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 135.3% to $2,323,822 for the nine months ended March 31, 1997, as compared to $987,648 for the nine months ended March 31, 1996. Moreover, general and administrative expenses increased to 59.1% of revenue for the first three quarters of fiscal year 1997 from 29.2% of revenue for the comparable period of the prior fiscal year. The increase is due primarily to increased corporate payroll as a result of increased corporate staffing and changes in executive personnel, as well as to increased accounting, legal, and consulting fees during the current fiscal year. 15 16 CHILDREN'S WONDERLAND, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATIONS MARCH 31, 1997 AND 1996 - -------------------------------------------------------------------------------- The increase in corporate staffing reflects the Company's continuing recruitment of professional personnel required to manage the planned expansion through acquisition and construction of additional centers, as well as the administrative, filing and reporting requirements of a public company. In anticipation of the Company's ability to secure sufficient funding to allow these expansion activities to continue as planned, certain changes were made in the Company's executive personnel and their terms of employment (see "-- Recent Developments"). As a result of such changes, the Company accrued executive bonuses of $110,000, of which $67,500 have been paid. The increase in professional fees relate primarily to legal fees incurred in the negotiation and drafting of a series of proposed financing offerings, as well as various equipment and facility leases, legal fees related to compliance with federal securities laws, consulting fees related to the increased exploration of potential acquisitions, and exchange listing fees. Operating Expenses - Development Costs: Development costs increased by 838.7% to $1,409,314 for the nine months ended March 31, 1997, as compared to $150,139 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 $1,020,280 in costs associated with start-up centers. For the first three quarters of fiscal year 1997, the Company has three centers in the start-up phase, one each in Woodland Hills and Gold River, California, and another in West Haven, Connecticut, whereas there was only one center in the start-up phase for four months of the comparable period in the prior year. 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 10.9% to $341,141 for the first three quarters of fiscal year 1997, as compared to $307,566 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 127.3% to $360,624 for the nine months ended March 31, 1997, as compared to $158,678 for the nine months ended March 31, 1996. The noted increase is due to the timing of center start-ups; new centers commenced operations in March 1996, September 1996, and January 1997, respectively. Thus, three additional centers exist for the first three quarters 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. 16 17 CHILDREN'S WONDERLAND, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATIONS MARCH 31, 1997 AND 1996 - -------------------------------------------------------------------------------- Interest Expense, net: Net interest expense increased by 61.8% to $317,989 for the nine months ended March 31, 1997, as compared to $196,556 for the nine months ended March 31, 1996. The increase was primarily due to increased short-term borrowings during the current fiscal year, which were required to provide adequate working capital, as well as to maintain the Company's construction and development plans. Other Non-Operating Expense: Other non-operating expense increased by 4.2%, from $178,805 for the first three quarters of fiscal year 1996 to $186,334 for the first three quarters of fiscal year 1997. The current year to date balance includes a $98,000 charge for the write off of certain notes receivable which were deemed to be uncollectible, as well as $55,392 in costs associated with the cashless exercise of certain warrants, net of the first quarter receipt of insurance funds for the loss of certain equipment which was maintained in storage facilities. LIQUIDITY AND CAPITAL RESOURCES: The Company's operations resulted in a net cash outflow of $2,662,868 for the nine months ended March 31, 1997. Moreover, an additional $1,975,206 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 and others, 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. Prior to the Company's initial public offering, spending on advertising was limited due to a lack of adequate resources. In addition to the expansion activity discussed above, 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 three quarters of the current fiscal year. The Company completed a private placement of Units in March 1997; each Unit consisted of one $50,000 face amount promissory note and 25,000 common stock purchase warrants. Such notes bear interest at 10% per annum and are due at the earlier of the completion of the proposed secondary public offering or March 1998, while the warrants entitle the holders thereof to purchase one share of common stock for $5.00 per share during a period commencing one year from the completion of the proposed secondary public offering (or January 1, 1998 if such public offering has not occurred by that date) and expiring on May 6, 2001. In connection with such offering, $600,000 of notes previously issued were exchanged for 12 Units under this offering, and $150,000 of commissions payable with respect to the private placement were exchanged for three Units under this offering. The net proceeds to the Company from this offering, including the $600,000 in converted notes and after deducting costs of issuance, amounted to $1,180,326. 17 18 CHILDREN'S WONDERLAND, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATIONS MARCH 31, 1997 AND 1996 - -------------------------------------------------------------------------------- As previously disclosed in the Company's Quarterly Report on Form 10-QSB for the Quarter Ended December 31, 1996, the private placement of Units discussed above was intended to provide the Company with adequate working capital until the closing of a proposed secondary public offering of the Company's common stock, which was anticipated to be March 31, 1997. Due to various factors, including but not limited to the delay in closing the private placement of Units, the significant drop in the Company's stock price, and the delisting of the Company's securities from both the Nasdaq Small Cap Market and the Boston Stock Exchange (see " -- Recent Developments"), the proposed secondary public offering is no longer under consideration. The Company had intended to reduce, for a specified time, the exercise price of the Company's outstanding publicly traded warrants from their stated exercise price of $5.00 to $1.50 in order to induce the exercise of such warrants. Due to the various factors discussed above, the Company no longer intends to reduce the exercise price of the outstanding warrants. In anticipation of securing either of the funding vehicles discussed above, the Company made certain changes in its executive personnel (see " -- Recent Developments"). These changes were intended to provide management expertise in order to manage the Company's planned expansion. In order to reduce monthly operating costs, management has recently reviewed and reallocated various administrative duties and responsibilities, resulting in the elimination of several administrative positions in May 1997. Following the resignation of Mr. Michael L. Laney as an employee of the Company in April 1997, current employees have assumed the positions of President, Chief Financial Officer, and Secretary (see " - Recent Developments"). In addition, certain management personnel have agreed to defer payments under their respective employment and consulting contracts for the indefinite future in order to reduce the Company's negative cash flows. Company management continues to review center operations in an effort to cut expenses, with an emphasis on increasing enrollment levels at existing centers. The Company is also currently exploring various divestiture strategies with respect to some of the Company's unprofitable and/or less profitable centers. Despite such efforts, the Company's current operations still result in negative cash flows on a monthly basis, and as such, the Company will be unable to continue to operate at current levels or to effect its planned expansion unless additional funds can be secured. However, the Company does not have any commitments from third parties to provide all or any portion of the foregoing financing, and there can be no assurance that the Company will be able to obtain such funds, nor any additional financing in the future. RECENT DEVELOPMENTS: Delisting of Securities As of March 31, 1997, the Company's equity securities were traded on the Nasdaq Small Cap Market as well as on the Boston Stock Exchange. Due to the Company's continued losses and delays in planned equity funding, the Company was unable to comply with either the Nasdaq Small Cap Market or the Boston Stock Exchange capital and surplus requirements. As such, the Company's securities were delisted from the Nasdaq Small Cap Market effective April 29, 1997, and from the Boston Stock Exchange effective May 2, 1997. The Company's securities are currently being traded on the OTC Bulletin Board. 18 19 CHILDREN'S WONDERLAND, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATIONS MARCH 31, 1997 AND 1996 - -------------------------------------------------------------------------------- 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, of which $42,500 has been paid, and an initial salary of $160,000 per year. 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. Effective April 21, 1997, Mr. Laney resigned as an employee, as the Company's President, Chief Financial Officer, and member of the Company's Board of Directors. Ms. Debby S. Bitticks has assumed the position of President, while Mr. William M. Popok, the Company's Controller, has assumed the position of Acting Chief Financial Officer. The Company has not yet named a replacement on its Board of Directors. On January 6, 1997, the Company 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. In order to reduce the Company's negative monthly cash flow, Mr. Bitticks has agreed to temporarily defer the monthly payments provided for in the contract. 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. On January 6, 1997, 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' salary will increase to $190,000 if the Company's annualized revenues are reasonably expected to exceed $10,000,000. In order to reduce the Company's negative monthly cash flow, Ms. Bitticks has agreed to temporarily defer the salary payments provided for in the contract. 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. On January 6, 1997, Mr. Robert M. Wilson, a Director of the Company, resigned as its President, Chief Financial Officer and Secretary. He also entered into a consulting agreement that provides for the payment of $9,000 per month plus a one-time bonus of $25,000, which has been paid in full. In addition, the contract provides for the payment of commissions to Mr. Wilson 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. Ms. Sandra Goldstein, a Vice President of the Company, was appointed the Company's Secretary. 19 20 CHILDREN'S WONDERLAND, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATIONS MARCH 31, 1997 AND 1996 - -------------------------------------------------------------------------------- Effective May 13, 1997, Mr. James Gott resigned as a Director of the Company. The Company has not as yet named a replacement on its Board of Directors. Effective May 12, 1997, the Company has entered into a consulting arrangement with Mr. Jeffrey Kahn, a management consultant. Mr. Kahn's initial assignment is to assist the Company in an in-depth analysis of all aspects of the Company's operations with the objective of developing and implementing a refined corporate and financing strategy to appropriately position the Company to move forward. The Company has also retained Los Angeles-based Ambient Capital Group, Inc., an independent investment banking firm, which will be exploring financing and strategic alliance options for the Company. Sitrick And Company, an investor relations firm, has been engaged to assist the Company with its strategic communications. Litigation On May 14, 1997, the Company filed a complaint in the United States District Court for the Central District of California charging its underwriters, Royce Investment Group, Inc. and First Cambridge Securities Corporation, with fraud, intentional interference with prospective economic relationship, breach of fiduciary duty, breach of contract and violation of California Business and Professional Code S 17200 in connection with various fundings and proposed financings for the Company. Also named in the complaint are Mr. John Higgins, Mr. Paul LaRosa, Mr. John Marciano, officers and directors of Royce Investment Group, Inc., and Mr. Kenneth Orr, Chief Executive Officer and Chairman of First Cambridge Securities Corporation. Planned Acquisitions The Company 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. The purchase price for this acquisition is $4.6 million, and the acquisition is conditioned on the Company obtaining adequate financing. Thus far, the Company has been unable to obtain such financing, and there can be no assurance that such financing can be obtained prior to the time deadline under the letter of intent, which is May 31, 1997. As previously disclosed in the Company's Quarterly Report on Form 10-QSB for the Quarter Ended December 31, 1996, the Company had entered escrow to purchase a child care center in Los Angeles County, California for $375,000. In March 1997, the Company terminated the escrow agreement. In connection with this termination, the Company forfeited a $10,000 escrow deposit which had been provided to the seller. 20 21 CHILDREN'S WONDERLAND, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATIONS MARCH 31, 1997 AND 1996 - ------------------------------------------------------------------------------ Secondary Offering As previously disclosed in the Company's Quarterly Report on Form 10-QSB for the Quarter Ended December 31, 1996, the Company had executed 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 to provide additional working capital. Due to delays in closing the private placement of Units discussed above, as well as the significant decline in the Company's stock price subsequent to March 31, 1997, and other factors, the secondary public offering is no longer under consideration. Liquidity Considerations As previously indicated (see "--Liquidity and Capital Resources"), the Company's operations currently are producing negative cash flows. The Company does not have a cash reserve. As a consequence, the Company is seeking funding sources or other business arrangements. As a result of the Company's adverse financial position, the borrowing opportunities being presented to and considered by the Company are at above-market rates and also could result in potential significant dilution to current shareholders. 21 22 ITEM 6. EXHIBITS 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/ Debby S. Bitticks May 15, 1997 - --------------------------------------- Ms. Debby S. Bitticks Chief Executive Officer and President /s/ William M. Popok May 15, 1997 - --------------------------------------- Mr. William M. Popok Acting Chief Financial Officer 23 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S BALANCE SHEETS AND STATEMENTS OF OPERATIONS AS OF AND FOR THE QUARTER ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS JUN-30-1997 JAN-01-1997 MAR-31-1997 $62,370 0 $198,134 $71,731 0 $537,037 $2,133,216 $403,897 $6,092,007 $4,836,243 0 0 0 $9,749,138 0 $6,092,007 $1,522,069 $1,522,069 0 $2,861,756 $180,653 $16,376 $136,343 ($1,656,683) 0 ($1,656,683) 0 0 0 ($1,656,683) (0.42) 0
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