U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
(Mark One)
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______.
Commission File No. 0-27780
NEW HORIZON KIDS QUEST, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1719363
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13705 First Avenue North, Plymouth, MN 55441
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 557-1111
Check whether the registrant (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 ( )
As of May 7, 1997, the Registrant had outstanding 3,293,300 shares of its Common
Stock, $.01 par value.
NEW HORIZON KIDS QUEST, INC.
FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 1997
INDEX
Page
PART I. FINANCIAL INFORMATION 3
ITEM 1. Condensed Consolidated Financial Statements
a) Condensed Consolidated Balance Sheets --
March 31, 1997 and December 31, 1996 3
b) Condensed Consolidated Statements of
Operations -- Three months ended March 31, 1997
and 1996 5
c) Condensed Consolidated Statements of
Cash Flows -- Three months ended
March 31, 1997 and 1996 6
d) Notes to Condensed Consolidated Financial
Statements 7
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9
PART II. OTHER INFORMATION 12
Signatures 13
PART I. - FINANCIAL INFORMATION
ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
1997 1996
------------- ------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 502,846 $ 150,232
Accounts and notes receivable..................................... 465,384 611,479
Receivable from New Horizon Enterprises, Inc...................... -- 7,557
Prepaid expenses and other current assets......................... 137,583 164,530
Current portion of notes receivable............................... 493,369 470,947
------------ ------------
Total current assets............................................ 1,599,182 1,404,745
------------ ------------
PROPERTY AND EQUIPMENT:
Furniture, fixtures, equipment and leaseholds..................... 4,867,896 4,768,307
Less--Accumulated depreciation and amortization................... (859,115) (647,514)
------------ ------------
Total property and equipment.................................... 4,008,781 4,120,793
OTHER ASSETS:
Goodwill (net of accumulated amortization
of $101,657 and $81,027, respectively)......................... 1,136,121 1,156,751
Notes receivable, net of current portion.......................... 1,133,307 751,930
Noncompete agreements (net of accumulated amortization
of $6,718 and $5,579, respectively)............................. 17,441 18,580
Other............................................................. 128,719 133,347
------------ ------------
$ 8,023,551 $ 7,586,146
============ ============
See accompanying notes which are an integral part of these balance sheets.
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, December 31,
1997 1996
------------ ------------
(UNAUDITED)
CURRENT LIABILITIES:
Current maturities of long-term debt.............................. $ 441,848 $ 677,319
Accounts payable.................................................. 172,115 280,875
Accrued expenses.................................................. 541,923 481,641
Payable to New Horizon Enterprises, Inc........................... 19,921 --
Deferred rent..................................................... 27,667 28,667
------------ ------------
Total current liabilities....................................... 1,203,474 1,468,502
LONG-TERM DEBT, less current maturities.............................. 1,801,912 1,184,628
SHAREHOLDERS' EQUITY:
Undesignated preferred stock, 3,500,000 shares
authorized; no shares issued and outstanding.................... -- --
Series A convertible preferred stock, $.01 par value,
1,500,000 shares authorized; no shares issued and
outstanding .................................................... -- --
Common stock, $.01 par value, 20,000,000 shares
authorized; 3,293,300 shares issued and outstanding............. 32,933 32,933
Additional paid-in capital........................................ 7,171,197 7,171,197
Accumulated deficit............................................... (2,185,965) (2,271,114)
------------ ------------
Total shareholders' equity...................................... 5,018,165 4,933,016
------------ ------------
$ 8,023,551 $ 7,586,146
============ ============
See accompanying notes which are an integral part of these balance sheets.
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31
-----------------------------
1997 1996
------------ ------------
REVENUE.............................................................. $ 3,143,645 $ 1,985,144
COSTS AND EXPENSES:
Direct Expenses................................................... 2,446,380 1,525,165
Depreciation and Amortization..................................... 208,155 110,864
Pre-Opening Expenses.............................................. 47,143 --
-------------- --------------
Total Costs and Expenses........................................ 2,701,678 1,636,029
-------------- --------------
CENTER OPERATING INCOME.............................................. 441,967 349,115
Selling, General and Administrative............................... 327,844 432,669
Amortization...................................................... 24,643 22,504
-------------- --------------
OPERATING INCOME (LOSS).............................................. 89,480 (106,058)
Interest Expense.................................................. (46,377) (20,638)
Interest Income................................................... 42,046 56,850
-------------- --------------
NET INCOME (LOSS).................................................... $ 85,149 (69,846)
============== ==============
Earnings (Loss) Per Share......................................... $ .03 $ (.02)
============== ==============
Weighted Average Shares Outstanding............................... 3,293,300 3,287,500
============== ==============
See accompanying notes which are an integral part of these statements.
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31
-----------------------------
1997 1996
------------ ------------
OPERATING ACTIVITIES:
Net income (loss)................................................. $ 85,149 $ (69,846)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities--
Depreciation and amortization................................. 232,798 133,368
Deferred Rent................................................. (1,000) (1,000)
Change in operating assets and liabilities:
Accounts receivable......................................... 146,095 (86,206)
Prepaid expenses and other.................................. 26,947 (7,041)
Accounts payable............................................ (108,760) (19,628)
Payable to (receivable from) New Horizon Enterprises, Inc... 27,478 15,366
Other assets................................................ 5,200 (35,568)
Accrued expenses............................................ 109,332 141,255
------------ ------------
Net cash provided by operating activities................. 523,239 70,700
------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment............................... (99,589) (251,056)
Purchases of child care centers, net of notes payable............. -- (472,886)
Issuance of note receivable....................................... (480,029) (276,224)
Payments received on note receivable.............................. 27,180 7,190
------------ ------------
Net cash used in investing activities............................. (552,438) (992,976)
------------ ------------
FINANCING ACTIVITIES:
Payments on long-term obligations................................. (554,074) (15,549)
Additional borrowings of long-term debt........................... 935,887 --
------------ ------------
Net cash provided by (used in) financing activities............. 381,813 (15,549)
------------ ------------
Net increase (decrease) in cash and cash equivalents............ 352,614 (937,825)
CASH AND CASH EQUIVALENTS,
beginning of period............................................... 150,232 3,865,018
------------ ------------
CASH AND CASH EQUIVALENTS,
end of period..................................................... $ 502,846 $ 2,927,193
============ ============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period for--
Interest........................................................ $ 86,080 $ 15,384
============ ============
Taxes .......................................................... $ -- $ --
============ ============
NON-CASH ITEMS:
Purchase of child care centers with notes payable................. -- 719,895
============ ============
Non-cash payments on notes receivable............................. 49,050 --
============ ============
See accompanying notes which are an integral part of these statements.
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements included herein have been
prepared by New Horizon Kids Quest, Inc. (the "Company"), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
The Company's business is seasonal and, accordingly, interim results are not
indicative of results for a full year. In the opinion of the Company, all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position of the Company as of March 31, 1997, and
the results of its operations for the three months ended March 31, 1997 and
1996, have been reflected in the accompanying financial statements. Certain
information in 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 provided herein are adequate to make the
information presented not misleading. It is suggested that these consolidated
financial statements be read in conjunction with the financial statements for
the years ended December 31, 1996 and 1995, and the footnotes thereto, included
in the Company's Form 10-KSB, filed with the Securities and Exchange Commission.
1. Basis of Presentation:
Principles of Consolidation -- The consolidated financial statements
include the accounts of New Horizon Kids Quest, Inc. and its wholly owned
subsidiaries (together, the "Company"). All intercompany balances and
transactions have been eliminated in consolidation.
Earnings Per Share -- Weighted average shares include the dilutive effects
of options.
2. Acquisitions:
During February and March 1996, New Horizon Child Care - Idaho, Inc.
acquired six licensed child care centers in Boise, Idaho. The total purchase
price was $1,192,781 (including costs associated with the acquisition). The
purchase price for these six centers consisted of cash payments of $472,886 and
notes payable to three of the sellers in the amounts of $335,000, $370,000 and
$14,895. All of the transactions have been accounted for using the purchase
method of accounting. The following unaudited pro-forma financial information
for the three months ended March 31, 1996, give effect to the acquisitions as if
they had occurred effective January 1, 1996.
Three Months
Ended
----------------
March 31,
----------------
1996
Revenue $ 2,274,402
Loss from operations (56,796)
Net loss (39,081)
Loss per share (.01)
Weighted average shares outstanding 3,287,500
This financial information does not purport to represent results which
would actually have been obtained if the acquisitions had been in effect during
the period covered or any future results which may in fact be realized.
3. Limited Liability Company:
During June 1996, a newly established entity owned 51% by the Company and
49% by Ameristar Casino Council Bluffs, Inc. ("Ameristar") (Kids Quest of
Council Bluffs, LLC ("Kids Quest LLC")) began operating a Kids Quest facility in
Council Bluffs, Iowa. The operating agreement governing Kids Quest LLC provides
for the owners to share in profits and losses of Kids Quest LLC.
4. Reclassifications
Certain 1996 amounts in the accompanying consolidated financial statements
have been reclassified to conform to the first quarter 1997 presentation. Such
reclassification had no effect on previously reported net loss or shareholders'
equity.
5. New Accounting Pronouncements
During March 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earning per
Share", which requires the disclosure of basic earnings per share and diluted
earnings per share. The Company expects to adopt SFAS 128 at the end of fiscal
1997 and anticipates it will not have a material impact on previously reported
earnings per share.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company currently operates thirteen Kids Quest centers providing hourly
child care, as well as thirteen New Horizon Child Care centers providing
traditional child care services. The first Kids Quest center opened in May 1992
in Grand Casino Hinckley. Since that time, the Company has opened six additional
Kids Quests at Grand Casino locations in Minnesota, Mississippi and Louisiana.
Kids Quest opened its shopping mall location in the Eden Prairie Center in Eden
Prairie, Minnesota, in March 1994. Since the beginning of 1995, the Company has
opened Kids Quest centers at the following locations:
Grand Casino Coushatta Kinder, LA January 1995
Boulder Station Hotel & Casino Las Vegas, NV November 1995
Ameristar Casino Council Bluffs Council Bluffs, IA June 1996
Grand Casino Tunica Robinsonville, MS August 1996
Mohegan Sun Casino Uncasville, CT October 1996
Soaring Eagle Casino and Hotel Mt. Pleasant, MI December 1996
Station Casino Kansas City Kansas City, MO January 1997
In the third quarter of 1995, New Horizon Child Care - Idaho, Inc. (NHCC -
Idaho) acquired six existing child care centers in Boise, Idaho. In February
1996, NHCC - Idaho made an additional acquisition of the assets of A Child's
Image, Inc. (one center) for $180,092, and in March 1996, purchased the assets
of Educational Child Care Services, Inc. dba Teach-A-Tot Schools (two centers)
for $480,324 and Cottage Schools, Inc. (three centers) for $532,365. The Company
opened its thirteenth New Horizon location in August 1996 in a newly constructed
facility.
With the opening of the Tunica, Mississippi, Kids Quest location, the
Company introduced a retail area which features developmentally-appropriate
educational products and Kids Quest logo merchandise. The Company has since
added similar retail areas at its Eden Prairie and Kansas City locations. The
Company has also opened its first supervised arcade in conjunction with its Kids
Quest location at the Mohegan Sun Casino. The Company plans to continue to seek
opportunities for additional retail and supervised arcade locations.
The Company has experienced growth through acquisition and expansion. The
business of the Company's Kids Quest centers is seasonal with revenues and
operating income being the highest in the summer months. Therefore, results of
operations described below may not be indicative of results to be achieved in
any future period.
Results of Operations
Revenue for the three months ended March 31, 1997, increased 58% to
$3,143,645 from $1,985,144 for the same period in 1996. This increase was due in
part to the addition of seven New Horizon Child Care centers in Boise, Idaho,
six of which were acquired in the first quarter of 1996, but were operated by
the Company for less than the full quarter, and a seventh which was constructed
and opened in the third quarter of 1996. These additional centers combined
accounted for $358,227 additional revenue. The Company also opened five new Kids
Quest centers since the first quarter of 1996, which accounted for $861,571 of
additional revenue. Revenue for the Kids Quest centers open during both periods
decreased $28,529, or 2%, to $1,406,329 for the three months ended March 31,
1997, from $1,434,858 for the same period in 1996. The Company attributes this
decrease to decreased marketing efforts by many of the casino host properties.
Revenues for the six New Horizon Child Care centers open during both periods
decreased $32,769 or 8% to $394,562 for the three month period ended March 31,
1997, from $427,331 for the same period in 1996. This decrease is due primarily
to declining enrollment at four of the six child care centers originally
acquired by the Company in 1995. The Company wrote off all tangible and
intangible assets related to these four centers in the fourth quarter of 1996.
Costs and expenses for the three months ended March 31, 1997, increased
$1,065,649, or 65%, to $2,701,678 from $1,636,029 for the same period in 1996.
This increase was due in part to the addition of the Idaho New Horizon Child
Care centers, which accounted for $338,741 of the increase, and from the five
new Kids Quest locations, which accounted for $739,982 of the increase. Included
in costs and expenses for the period were $47,143 of pre-opening expenses due
primarily to the opening of the Kansas City Kids Quest location. Costs and
expenses from continuing operations decreased $13,074, or 1%, to $1,505,538 for
the three month period ended March 31, 1997, from $1,518,612 for the same period
in 1996. Pursuant to the terms of its contracts for the Tunica, Soaring Eagle
and Council Bluffs locations, the Company is entitled to reimbursement on a
monthly basis for all or a portion of any cumulative operating deficits in
excess of profits on a calendar year basis. The Company is entitled to receive
an aggregate of $53,570 under the terms of these agreements for the first
quarter of 1997 and has recorded the same as a reduction in direct expenses.
Selling, general and administrative expenses decreased $104,825, or 24%, to
$327,844 for the three month period ended March 31, 1997, from $432,669 for the
same period in 1996. The decrease was contributed to by a reduction in corporate
legal expenses and development expenses of $111,756. Administrative salaries
(excluding New Horizon Child Care - Idaho, Inc.) decreased $17,365, or 17%, to
$86,095 in 1997 from $103,460 for the same period in 1996. In spite of the
decrease in selling, general and administrative expenses, management expects
such expenses to increase with the addition of and negotiation for new
locations, but such expenses will decrease as a percentage of revenue with the
continued expansion of the Company's business.
Pursuant to the terms of many of its contracts with casino operators, the
Company receives certain child care rate subsidies. The Company received
$271,144 for the three month period ended March 31, 1997, and $357,430 for the
same period in 1996, which amounts are reflected in total revenue. The majority
of theses subsidies were from Grand Casinos, Inc. Due to a price increase to the
public at the Grand Casino locations, such subsidies were reduced beginning in
the third quarter of 1996. There can be no assurance that such subsidies will
not be additionally modified or discontinued, or that the Company will obtain
such subsidies in future Kids Quest arrangements with Grand Casinos or other
casinos. The Company has executed agreements to develop Kids Quest centers that
do not provide any subsidy payment from the related casinos.
Interest expense for the three month period ended March 31, 1997, increased
$25,739 to $46,377 from $20,638 for the same period in 1996. Of the $46,377 of
interest expense incurred in 1997, $28,584 relates to acquisition indebtedness
for Idaho New Horizon Child Care centers. The remainder relates to debt incurred
for the expansion of Kids Quest centers.
Net income for the three month period ended March 31, 1997, was $85,149
compared to a net loss $69,846 for the same period in 1996. Management
attributes the improved operating results to the addition of five Kids Quest
locations since the first quarter of 1996 as well as improved operating results
for its New Horizon Child Care centers.
Liquidity and Capital Resources
During the three months ended March 31, 1997, the Company generated
$523,239 from operations, invested $99,589 in property and equipment, issued a
note receivable to Station Casinos, Inc. for $480,029 relating to the Kansas
City Kids Quest location, as well as received payment on notes receivable of
$27,180. The Company borrowed $935,887 to fund expansion, as well as to pay off
its bank line of credit of $514,509 and other principal payments of $39,565.
During the same period in 1996, the Company generated $70,700 from operations,
invested $251,056 in property and equipment and purchased child care centers
(net of notes payable) for $472,886. The Company issued a note receivable for
$276,224 and received payments of $7,190. Additionally the Company made payments
on long-term obligations of $15,549.
In addition to the borrowings the Company made during the first quarter
of 1997, the Company has since closed on additional equipment financing of
approximately $425,000. Based upon current commitments (including the
anticipated opening of a Kids Quest at Bullwhackers and Silver Hawk casinos in
Blackhawk, Colorado, this summer), the Company believes that its current cash
funds from operations and the availability of credit facilities will be adequate
to fund the Company's capital needs. If, however, the Company secures additional
Kids Quest contracts or otherwise commits to acquire or develop additional child
care centers, the Company will require additional financing. The Company
currently has no commitments for such financing.
Private Securities Litigation Reform Act
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Form 10-QSB (as well as information included in oral statements or other written
statements made or to be made by the company) may contain statements that are
forward-looking, such as statements relating to plans for future expansion and
other business development activities, as well as other capital spending,
financial sources and the effects of regulation and competition. Such
forward-looking information involves important risks and uncertainties that
could significantly affect future results and, accordingly, such results may
differ from those expressed in any forward-looking statement made by or on
behalf of the company. These risks and uncertainties include, but are not
limited to, those relating to development and construction activities,
dependence on existing management and third party contracts, domestic or global
economic conditions, changes in federal or state laws or the administration or
enforcement of such laws, litigation or claims, as well as all other risks and
uncertainties described in the company's filings.
PART II. - OTHER INFORMATION
All items under Part II. have been omitted since they are inapplicable or
the answers are negative.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NEW HORIZON KIDS QUEST, INC.
By: /s/ William M. Dunkley
----------------------------------
William M. Dunkley
Chief Executive Officer
By: /s/ Kevin M. Greer
----------------------------------
Kevin M. Greer
Chief Financial Officer
Date: May 13, 1997