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 June 30, 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 August 8, 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 JUNE 30, 1997
INDEX
Page
PART I. FINANCIAL INFORMATION 3
ITEM 1. Condensed Consolidated Financial Statements
a) Condensed Consolidated Balance Sheets --
June 30, 1997, and December 31, 1996 3
b) Condensed Consolidated Statements of
Operations -- Three months and six months
ended June 30, 1997, and 1996 5
c) Condensed Consolidated Statements of
Cash Flows -- Six months ended
June 30, 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
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 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
June 30, December 31,
1997 1996
----------- -----------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents ............................ $ 841,789 $ 150,232
Accounts and notes receivable ........................ 339,335 611,479
Receivable from New Horizon Enterprises, Inc. ........ -- 7,557
Prepaid expenses and other current assets ............ 130,908 164,530
Current portion of notes receivable .................. 498,843 470,947
----------- -----------
Total current assets ............................... 1,810,875 1,404,745
----------- -----------
PROPERTY AND EQUIPMENT:
Furniture, fixtures, equipment and leaseholds ........ 5,739,912 4,768,307
Less--Accumulated depreciation and amortization ...... (1,100,224) (647,514)
----------- -----------
Total property and equipment ....................... 4,639,688 4,120,793
OTHER ASSETS:
Goodwill (net of accumulated amortization
of $122,287 and $81,027, respectively) ............ 1,115,491 1,156,751
Notes receivable, net of current portion ............. 1,088,377 751,930
Noncompete agreements (net of accumulated amortization
of $7,857 and $5,579, respectively) ................ 16,302 18,580
Other ................................................ 182,709 133,347
----------- -----------
$ 8,853,442 $ 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
June 30, December 31,
1997 1996
----------- -----------
(UNAUDITED)
CURRENT LIABILITIES:
Current maturities of long-term debt ................ $ 649,436 $ 677,319
Accounts payable .................................... 304,357 280,875
Accrued expenses .................................... 552,333 481,641
Payable to New Horizon Enterprises, Inc. ............ 6,445 --
Deferred rent ....................................... 26,666 28,667
----------- -----------
Total current liabilities ......................... 1,539,237 1,468,502
LONG-TERM DEBT, less current maturities ................ 2,204,074 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 .......................... 7,196,197 7,171,197
Accumulated deficit ................................. (2,118,999) (2,271,114)
----------- -----------
Total shareholders' equity ........................ 5,110,131 4,933,016
----------- -----------
$ 8,853,442 $ 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 Six Months Ended
June 30 June 30
----------------------------- -----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
REVENUE .............................. $ 3,348,092 $ 2,545,133 $ 6,491,737 $ 4,530,277
COSTS AND EXPENSES:
Direct Expenses ................... 2,555,563 2,045,461 5,001,943 3,570,626
Depreciation and Amortization ..... 237,061 127,383 445,216 238,247
Pre-Opening Expenses .............. 123,917 86,279 171,060 86,279
----------- ----------- ----------- -----------
Total Costs and Expenses ........ 2,916,541 2,259,123 5,618,219 3,895,152
----------- ----------- ----------- -----------
CENTER OPERATING INCOME .............. 431,551 286,010 873,518 635,125
Selling, General and Administrative 311,032 298,234 638,876 730,903
Goodwill Amortization ............. 24,643 35,504 49,286 58,008
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) .............. 95,876 (47,728) 185,356 (153,786)
Interest Expense .................. (71,265) (30,486) (117,642) (51,124)
Interest Income ................... 42,355 46,024 84,401 102,874
----------- ----------- ----------- -----------
NET INCOME (LOSS) .................... $ 66,966 $ (32,190) $ 152,115 $ (102,036)
=========== =========== =========== ===========
Earnings (Loss) Per Share ......... $ .02 $ (.01) $ .05 $ (.03)
=========== =========== =========== ===========
Weighted Average Shares Outstanding 3,322,930 3,287,658 3,308,115 3,287,579
=========== =========== =========== ===========
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)
Six Months Ended
June 30
-----------------------------
1997 1996
----------- -----------
OPERATING ACTIVITIES:
Net income (loss) .............................................. $ 152,115 $ (102,036)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities--
Depreciation and amortization .............................. 494,502 295,081
Deferred Rent .............................................. (2,001) (2,000)
Change in operating assets and liabilities:
Accounts receivable ...................................... 272,144 (22,343)
Prepaid expenses and other ............................... 33,622 (13,707)
Accounts payable ......................................... 23,482 71,393
Payable to (receivable from) New Horizon Enterprises, Inc. 14,002 39,468
Other assets ............................................. (22,616) (69,291)
Accrued expenses ......................................... 70,692 40,468
----------- -----------
Net cash provided by operating activities .............. 1,035,942 237,033
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment ............................ (971,605) (1,108,084)
Purchases of child care centers, net of notes payable .......... -- (472,886)
Issuance of note receivable .................................... (500,492) (276,224)
Payments received on note receivable ........................... 136,149 18,901
----------- -----------
Net cash used in investing activities .......................... (1,335,948) (1,838,293)
----------- -----------
FINANCING ACTIVITIES:
Payments on long-term obligations .............................. (744,011) (44,390)
Additional borrowings of long-term debt ........................ 1,735,574 --
Proceeds from Issuance of Stock ................................ -- 2,000
----------- -----------
Net cash provided by (used in) financing activities .......... 991,563 (42,390)
----------- -----------
Net increase (decrease) in cash and cash equivalents ......... 691,557 (1,643,650)
CASH AND CASH EQUIVALENTS, beginning of period .................... 150,232 3,865,018
----------- -----------
CASH AND CASH EQUIVALENTS, end of period .......................... $ 841,789 $ 2,221,368
=========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period for--
Interest ..................................................... $ 113,388 $ 40,871
=========== ===========
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 may not be
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 June 30, 1997, and
the results of its operations for the six months ended June 30, 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 six months ended June 30, 1996, give effect to the acquisitions as if
they had occurred effective January 1, 1996.
Six Months Ended
June 30,
1996
----------------
Revenue $ 4,819,535
Loss from operations (185,825)
Net loss (143,610)
Loss per share (.04)
Weighted average shares outstanding 3,287,579
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 sixteen Kids Quest centers providing hourly
child care and 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. In addition, 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
Sunset Station Las Vegas, NV June 1997
Treasure Island Resort and Casino
(dba New Horizon Hourly Care) Red Wing, MN June 1997
Bullwhackers Casino/Silver Hawk Casino Black Hawk, CO June 1997
During 1995 and 1996, the Company acquired an aggregate of twelve existing
child care centers in Boise, Idaho, which the Company now operates as New
Horizon Child Care centers. The Company opened its thirteenth New Horizon
location in August 1996 in a newly constructed facility.
The Company expanded its product line by opening a supervised video
entertainment center in conjunction with its Kids Quest location at the Mohegan
Sun Casino. The Company has since added supervised video entertainment centers
at its Bullwhackers, Soaring Eagle and Treasure Island locations. 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 plans to
continue to seek opportunities for additional retail and supervised video
entertainment center locations.
The Company has experienced growth through acquisition and expansion. The
Company's business is seasonal with revenues and operating income for Kids Quest
being the highest and New Horizon Child Care being the lowest 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 June 30, 1997, increased $802,959, or
32%, to $3,348,092, from $2,545,133 for the same period in 1996. The increase in
revenue was due primarily to the eight Kids Quest locations which have opened
since the first quarter of 1996, which accounted for $990,531 of additional
revenues. Also, the addition of a new Idaho New Horizon Child Care center
accounted for $94,487 of additional revenues. Revenue for the eight existing
Kids Quest locations open during both periods decreased $198,864, or 12%. The
majority of the decrease is attributable to a decrease in marketing by the host
properties between periods. Revenue for the twelve existing Idaho New Horizon
Child Care centers, which were open during both periods, was down $83,195, or
10%. The Company attributes this decrease to initial decreases in enrollment due
to the Company's restructuring and repricing at the six centers acquired in
1996.
Revenue for the six month period ended June 30, 1997, increased $1,961,460,
or 43%, to $6,491,737 in 1997 compared to $4,530,277 for the same period in
1996. This increase is due primarily to the addition of eight Kids Quest
locations since the beginning of 1996, which accounted for $1,880,776 of the
increase, and revenue from the seven New Horizon Child Care centers which were
acquired or built in 1996, which accounted for an additional $382,866 of the
increase. Existing Kids Quest centers' revenue decreased $256,065, or 13%,
between periods primarily from Grand Casino locations. Revenue from the six
existing Idaho New Horizon Child Care centers decreased $46,117, or 6%, between
periods.
Costs and expenses for the three months ended June 30, 1997, increased
$657,418, or 29%, to $2,916,541 in 1997 from $2,259,123 for the same period in
1996. The Company attributes the increase to the increase in the number of Kids
Quest and New Horizon Child Care centers operating between the two periods. As a
percentage of revenue, costs and expenses decreased to 87% in 1997 from 89% in
1996. Direct expenses before pre-opening costs and depreciation and amortization
decreased to 76% in 1997 from 80% for the same period in 1996.
Costs and expenses for the six months ended June 30, 1997, increased
$1,723,067, or 44%, to $5,618,219 in 1997 from $3,895,152 for the same period in
1996. As a percentage of revenue, direct expenses increased to 87% in 1997 from
86% in 1996. However, direct expenses before pre-opening costs and depreciation
and amortization decreased to 77% in 1997 from 79% for the same period in 1996.
Selling, general and administrative (SG&A) expenses increased $12,798, or
4%, to $311,032 for the three month period ended June 30, 1997, from $298,234
for the same period in 1996. As a percent of revenue, SG&A expenses decreased to
9% of revenue for the three month period in 1997 versus 12% for the same period
in 1996. Administrative salaries (excluding New Horizon Child Care - Idaho,
Inc.) decreased $24,817, or 22%, to $86,987 for the three month period in 1997
versus $111,804 for the same period in 1996. The Company expects SG&A expenses
to increase with the addition of and negotiation for new locations, but such
expenses will continue decrease as a percentage of revenue with the continued
expansion of the Company's business.
SG&A expenses decreased $92,027, or 13%, for the six month period ended
June 30, 1997, to $638,876 from $730,903 for the same period in 1996.
Administrative salaries (excluding New Horizon Child Care - Idaho, Inc.)
decreased $42,182, or 20%, to $173,082 in 1997 from $215,264 for the same period
in 1996.
Pursuant to the terms of many of its contracts with casino operators, the
Company receives certain child care rate subsidies. The Company received
$284,317 for the three month period ended June 30, 1997, versus $388,411 for the
same period in 1996, which amounts are reflected in total revenue. For the six
month period ended June 30, 1997, the Company received $555,461 versus $745,841
for the same period in 1996. 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 June 30, 1997, increased
$40,779, or 134%, to $71,265 from $30,486 for the same period in 1996. Of the
$71,265 of interest expense incurred in 1997, $27,917 relates to acquisition
indebtedness for Idaho New Horizon Child Care centers. The remainder relates to
debt incurred for the expansion of Kids Quest centers.
Interest expense for the six month period ended June 30, 1997, increased
$66,518, or 130%, to $117,642 from $51,124 for the same period in 1996. $56,501
of the 1997 interest was acquisition indebtedness for Idaho New Horizon Child
Care centers with the remainder incurred for the expansion of Kids Quest
centers.
Net income for the three month period ended June 30, 1997, was $66,966
compared to a net loss $32,190 for the same period in 1996. Net income for the
six month period ended June 30, 1997, was $152,115, compared to a loss of
$102,036 for the same period in 1996. Management attributes the improved
operating results to the addition of eight 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 six months ended June 30, 1997, the Company generated $1,035,942
from operations, invested $971,605 in property and equipment, issued a note
receivable to Station Casinos, Inc. for $500,492 relating to the Kansas City
Kids Quest location, as well as received payment on notes receivable of
$136,149. The Company borrowed $1,735,574 to fund expansion, as well as to pay
off its bank line of credit of $514,509 and other principal payments of
$229,502. During the same period in 1996, the Company generated $237,033 from
operations, invested $1,108,084 for the purchase of 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 $18,901.
Additionally, in 1996, the Company made payments on long-term obligations of
$44,390 and received $2,000 from the issuance of stock.
Based upon current commitments, 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 through the end of 1997. 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
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote of security holders at the
Company's annual meeting held on June 5, 1997.
1. The election of five directors to serve for the ensuing year and until
their successors shall be qualified and duly elected.
DIRECTOR FOR WITHHOLD BROKER
NOMINEE NAME NOMINEE AUTHORITY NON-VOTES
------------ ------- --------- ---------
William M. Dunkley 3,054,785 8,000 0
Susan K. Dunkley 3,054,785 8,000 0
Jay L. Bennett 3,054,785 8,000 0
Lyle Berman 3,054,285 8,000 0
Stanley M. Taube 3,054,785 8,000 0
2. Proposal to approve an amendment to the New Horizon Kids Quest, Inc.
1994 Long-Term Incentive and Stock Option Plan to increase the number
of shares of Common Stock reserved for issuance pursuant to the plan to
750,000 shares.
2,169,470 Votes for the proposal
99,009 Votes against the proposal
8,450 Votes abstained on the proposal
785,856 Broker non-votes
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
7registrant 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: August 13, 1997