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, 1999
___ 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.)
16355 36th Avenue North, Suite 700, Plymouth, MN 55446
(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, 1999, 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, 1999
INDEX
Page
----
PART I. FINANCIAL INFORMATION 3
ITEM 1. Condensed Consolidated Financial Statements
a) Condensed Consolidated Balance Sheets --
March 31, 1999 and December 31, 1998 3
b) Condensed Consolidated Statements of
Operations -- Three months ended March 31, 1999
and 1998 5
c) Condensed Consolidated Statements of
Cash Flows -- Three months ended
March 31, 1999 and 1998 6
d) Notes to Condensed Consolidated Financial
Statements 7
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 8
PART II. OTHER INFORMATION 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12
ITEM 7 FINANCIAL DATA SCHEDULE 12
Signatures 13
2
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,
1999 1998
------------ ------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents ............................... $ 147,515 $ 208,717
Accounts receivable ..................................... 684,454 911,750
Current portion of notes receivable ..................... 148,725 144,335
Prepaid expenses and other current assets ............... 171,227 132,085
------------ ------------
Total current assets ................................. 1,151,921 1,396,887
------------ ------------
PROPERTY AND EQUIPMENT:
Furniture, fixtures, equipment and leaseholds ........... 9,811,633 9,172,698
Less--Accumulated depreciation and amortization ......... (3,699,428) (3,234,207)
------------ ------------
Total property and equipment ......................... 6,112,205 5,938,491
OTHER ASSETS:
Goodwill (net of accumulated amortization
of $266,698 and $246,067, respectively) ............. 971,080 991,711
Notes receivable, net of current portion ................ 1,018,539 1,050,222
Other ................................................... 193,273 181,320
------------ ------------
$ 9,447,018 $ 9,558,631
============ ============
See accompanying notes which are an integral part of these balance sheets.
3
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, December 31,
1999 1998
------------ ------------
(UNAUDITED)
CURRENT LIABILITIES:
Current maturities of long-term debt .................... $ 1,306,177 $ 1,488,825
Accounts payable ........................................ 703,067 819,027
Accrued expenses ........................................ 650,075 548,769
------------ ------------
Total current liabilities ............................ 2,659,319 2,856,621
LONG-TERM DEBT, less current maturities .................... 1,981,524 1,719,831
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 7,196,197
Accumulated deficit ..................................... (2,422,955) (2,246,951)
------------ ------------
Total shareholders' equity ........................... 4,806,175 4,982,179
------------ ------------
$ 9,447,018 $ 9,558,631
============ ============
See accompanying notes which are an integral part of these balance sheets.
4
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31
-----------------------------
1999 1998
------------ ------------
REVENUE .................................................... $ 4,009,072 $ 3,680,879
COSTS AND EXPENSES:
Direct Expenses ......................................... 3,235,910 2,791,810
Depreciation and Amortization ........................... 458,569 296,607
Pre-Opening Expenses .................................... 40,584 23,871
------------ ------------
Total Costs and Expenses ............................. 3,735,063 3,112,288
------------ ------------
CENTER OPERATING INCOME .................................... 274,009 568,591
Selling, General and Administrative ..................... 358,602 249,848
Amortization ............................................ 28,576 29,653
------------ ------------
OPERATING INCOME (LOSS) .................................... (113,169) 289,090
Interest Expense ........................................ (96,858) (72,064)
Interest Income ......................................... 30,190 34,354
Minority Interest ....................................... 3,833 (881)
------------ ------------
NET INCOME (LOSS) .......................................... $ (176,004) $ 250,499
============ ============
INCOME (LOSS) PER SHARE:
Basic and diluted ....................................... $ (.05) $ .08
------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted ....................................... 3,293,300 3,293,300
------------ ------------
See accompanying notes which are an integral part of these statements.
5
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31
---------------------------
1999 1998
----------- -----------
OPERATING ACTIVITIES:
Net income (loss) .................................................. $ (176,004) $ 250,499
Adjustments to reconcile net income (loss) to net cash provided
by operating activities--
Depreciation and amortization ................................ 487,145 326,260
Change in operating assets and liabilities:
Accounts receivable ....................................... 227,296 287,230
Prepaid expenses and other ................................ (39,142) (18,531)
Accounts payable .......................................... (115,960) (14,015)
Other assets .............................................. (13,246) 948
Accrued expenses .......................................... 101,306 87,836
----------- -----------
Net cash provided by operating activities .............. 471,395 920,227
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment ................................ (638,935) (882,834)
Payments received on notes receivable .............................. 27,293 71,582
----------- -----------
Net cash used in investing activities ........................... (611,642) (811,252)
----------- -----------
FINANCING ACTIVITIES:
Payments on line of credit, net .................................... (81,687) --
Payments on long-term obligations .................................. (286,649) (228,152)
Additional borrowings of long-term debt ............................ 447,381 --
----------- -----------
Net cash provided by (used in) financing activities ............. 79,045 (228,152)
----------- -----------
Net decrease in cash and cash equivalents ....................... (61,202) (119,177)
CASH AND CASH EQUIVALENTS,
beginning of period ................................................ 208,717 554,540
----------- -----------
CASH AND CASH EQUIVALENTS,
end of period ...................................................... $ 147,515 $ 435,363
=========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period for--
Interest ........................................................ $ 96,286 $ 73,715
=========== ===========
Taxes ........................................................... $ 31,000 $ --
=========== ===========
See accompanying notes which are an integral part of these statements.
6
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, 1999, and
the results of its operations for the three months ended March 31, 1999 and
1998, 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, 1998 and 1997, 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.
2. Earnings Per Share:
The shares used for computing basic and diluted earnings per share were
the same for the three months ended March 31, 1999 and 1998. Options and
warrants were excluded from the computation of diluted earnings per share for
both years because their effect would be anti-dilutive.
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. Segment Disclosures:
The Company has two segments reportable under the guidelines of SFAS No.
131: Idaho Traditional Care and New Horizon Kids Quest, Inc.
NEW HORIZON KIDS IDAHO
FOR THE THREE MONTH PERIOD ENDED MARCH 31, QUEST, INC. TRADITIONAL CARE CONSOLIDATED
---------------- ---------------- ------------
1999
- ----
Revenue .......................................... $ 3,030,329 $ 978,743 $ 4,009,072
Depreciation and amortization .................... 429,954 57,191 487,145
Interest income .................................. 30,190 -- 30,190
Loss from continuing operations .................. (67,435) (108,569) (176,004)
Capital Expenditures ............................. 517,972 120,963 638,935
1998
- ----
Revenue .......................................... 2,739,569 941,310 3,680,879
Depreciation and amortization .................... 274,659 51,601 326,260
Interest income .................................. 33,178 1,176 34,354
Income (loss) from continuing operations ......... 253,280 (2,781) 250,499
Capital Expenditures ............................. 882,834 -- 882,834
7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company currently provides hourly child care at eighteen locations in
nine states, including four with supervised video entertainment centers. The
Company also provides traditional child care at fourteen New Horizon Child Care
Centers in Idaho and one location in Joliet, Illinois.
Two of the Company's Kids Quest centers operate in enclosed shopping
malls, including a center in Knott's Camp Snoopy at Mall of America in
Bloomington, Minnesota. Fifteen of the Company's Kids Quest centers are operated
in conjunction with casinos. With the opening of its Texas Station Kids Quest in
February 1999, the Company now operates four centers in casinos owned or managed
by Station Casinos, Inc. in Nevada and Missouri. Station Casinos, Inc. has also
agreed to include Kids Quest centers in three additional Station Casinos, Inc.
properties. Seven of the Company's Kids Quest centers were previously operated
in conjunction with casinos owned or managed by Grand Casinos, Inc. in
Minnesota, Mississippi and Louisiana. In 1998, Grand Casinos, Inc. concluded its
management of casinos in Mille Lacs and Hinckley, Minnesota, with the Mille Lacs
Band of Ojibwe assuming management of the casinos. In December 1998, Grand
Casinos, Inc. transferred the management contracts for the two Louisiana casinos
to newly formed Lakes Gaming, Inc., now a publicly held corporation, and Grand
Casinos, Inc. merged into Park Place Entertainment Corporation, combining Grand
Casinos, Inc.'s Mississippi properties with the gaming operations previously
held by Hilton Hotels. As a result of these transactions, the Company now
operates two Kids Quest centers in Minnesota casinos owned and managed by the
Mille Lacs Band, two Kids Quest centers in Louisiana casinos managed by Lakes
Gaming, Inc., and three Kids Quest centers in Mississippi casinos owned and
managed by Park Place Entertainment Corporation. The Company currently has
contracts to open two additional Kids Quest centers. One center at the AVI Hotel
and Casino in Laughlin, Nevada, is scheduled to open in the second quarter of
1999. The second, at Cliff Castle Casino in Camp Verde, Arizona, is currently
scheduled to open in December 1999.
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 has subsequently opened two additional
facilities in August of 1996 and January of 1999.
The Company also operates an employee child care center in Joliet,
Illinois, for the employees of Empress Casino and Mobil Oil Corporation. In
addition, the Company has entered into an agreement to develop a New Horizon
Child Care Center providing employee child care at The Venetian
Resort~Hotel~Casino in Las Vegas, Nevada. The Venetian, a $1.2 billion property,
will be the first casino to provide on-site child care for its employees on the
Las Vegas strip.
Since its inception as an hourly children's entertainment and recreational
facility, Kids Quest has expanded its product line to include supervised video
arcades, traditional child care and employee child care. The Company plans to
continue to seek opportunities for additional venues for all of its product
lines.
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. Consequently, results of operations for any interim period may
not be indicative of results to be achieved for a full fiscal year.
Results of Operations
Revenue for the three months ended March 31, 1999, increased $328,193, or
9%, to $4,009,072 from $3,680,879 for the same period in 1998. The Company
opened two new Kids Quest centers, an employee child care center, and a New
Horizon Child Care center since the beginning of 1998, which accounted for
$341,016 of additional revenue. Revenue for the Kids Quest centers open during
both periods decreased $3,649, or .1%, to $2,735,920 for the three months ended
March 31, 1999, from $2,739,569 for the same period in 1998. The Company
attributes this decrease primarily to a $61,161 decrease in revenue at its
Boulder Station location, which was due in part to the opening of the Company's
Sunset Station location within five miles of Boulder Station and the opening of
the Company's Texas Station location in February 1999 which is approximately
nine miles from Boulder Station. However, combined revenues at the Boulder,
Sunset and Texas locations increased $54,033 over the revenues at the Boulder
and Sunset locations for the same period in 1998.
8
Revenues for the Idaho New Horizon Child Care centers open during both periods
decreased $9,174, or 1%, to $932,136 for the three month period ended March 31,
1999, from $941,310 for the same period in 1998. For the quarter, six centers
experienced a combined revenue increase of $69,636, or 14%, due primarily to new
enrollments and rate increases implemented in 1998. These increases were
negatively impacted by three centers whose combined revenues decreased $72,045,
or 32%. Management attributes these decreases to management turnover and
increased competition.
Costs and expenses for the three months ended March 31, 1999, increased
$622,775, or 20%, to $3,735,063 from $3,112,288 for the same period in 1998.
This increase was due in part to the addition of two new Kids Quest locations,
an employee child care center, and a New Horizon Child Care center since the
beginning of 1998, which accounted for $460,099 of the increase. Costs and
expenses from existing Kids Quest locations increased $124,391, or 6%, to
$2,342,855 for the three month period ended March 31, 1999, from $2,218,464 for
the same period in 1998. Costs and expenses as a percent of revenue were 86% for
existing Kids Quest locations for the three month period ended March 31, 1999,
up from 81% for the same period in 1998. The cost increases were due primarily
to increased equipment rent and depreciation associated with the center upgrade
program, increased legal expenses and increased maintenance costs. Costs and
expenses for the Idaho New Horizon Child Care centers open during both periods
increased $38,285, or 4%, to $901,460 for the three months ended March 31, 1999,
compared to $863,175 for the same period in 1998. As a percent of revenue, costs
and expenses for existing New Horizon centers were 97% for the three months
ended March 31, 1999, up from 92% for the same period in 1998. The cost
increases were due primarily to increased staff training, upgrade of the
centers' operating supplies and increased legal expenses.
Selling, general and administrative expenses increased $108,754, or 44%,
to $358,602 for the three month period ended March 31, 1999, from $249,848 for
the same period in 1998. The increase was due primarily to an increase in
development expenses of $35,086 and an increase in administrative salaries of
$23,370. Management expects selling, general and administrative expenses to
increase with the addition of and negotiation for new locations; however, such
expenses should decrease as a percentage of revenue with the continued expansion
of the Company's business.
Pursuant to the terms of the Company's contracts with casino operators,
casino operators are entitled to establish a discounted rate below the fair
market value for Kids Quest's services to be charged by Kids Quest to the public
in order to attract customers to Kids Quest and ultimately to their casinos. The
casino operator must reimburse the Company for the difference between such
amount charged and the fair market value. The Company received $267,815 of
reimbursements for rate discounts for the three month period ended March 31,
1999, versus $288,622 for the same period in 1998, a decrease of $20,807, or 7%.
The majority of these rate discount reimbursements were from three casinos owned
by Park Place Entertainment Corporation and four Indian casinos currently or
previously managed by Lakes Gaming, Inc. (formerly Grand Casinos, Inc.) There
can be no assurance that such discounts and reimbursements will not be modified
or be discontinued altogether or that future Kids Quest agreements will provide
for a discounted rate to the public. In the event that casino operators choose
not to provide for a discounted hourly rate, the Company may charge higher
hourly rates. While this may cause patronage to decline and ultimately result in
lower revenues, the Company currently has ten locations that operated without
any rate discount and has found no evidence to conclude that higher
non-discounted rates to customers have a significant impact on a location's
patronage and resulting revenue.
Interest expense for the three month period ended March 31, 1999,
increased $24,794, or 34%, to $96,858 from $72,064 for the same period in 1998.
The increase in interest expense is due to borrowing made by the Company to fund
its expansion efforts.
Net loss for the three month period ended March 31, 1999, was $176,004
compared to net income of $250,499 for the same period in 1998. The Company's
earnings were negatively impacted by a loss of $111,946 for the quarter at its
Mall of America location. The Company was further impacted by a loss of $108,569
from its Idaho New Horizon Child Care centers of which $45,995 is attributable
to start up losses from the Company's newest center which opened in January
1999. In addition, the Company experienced a decline in operating income at its
Nevada locations due to pre-opening expense of $39,523 and start up costs at
Texas Station which opened in February 1999. The Company also experienced a 44%
increase in selling, general and administrative expenses as compared to the same
period in 1998. The increase is attributable primarily to increased development
expenses and administrative salaries. The Company has been successful in
negotiating more favorable lease terms with Knott's Camp Snoopy for its Mall of
America location. The new terms were effective as of March 1, 1999.
9
Liquidity and Capital Resources
During the three month period ended March 31, 1999, the Company generated
$471,395 from operations, invested $638,935 in property and equipment, and
received payments on notes receivable of $27,293. Additionally, the Company made
payments on long-term obligations of $286,649. The Company ended the period with
a cash balance of $147,515. During the same period in 1998, the Company
generated $920,227 from operations, invested $882,834 in property and equipment,
and received payments on notes receivable of $71,582. The Company ended the
period with a cash balance of $435,363.
The Company's capital needs depend upon the Company's expansion efforts.
The Company incurs pre-opening expenses in connection with each of its Kids
Quest centers as well as acquisition or development expenses to add traditional
child care centers. The Company is actively seeking additional Kids Quest
contracts and has engaged in site analysis for the construction of additional
New Horizon Child Care centers. The Company will require additional financing in
1999 as it adds Kids Quest or New Horizon Child Care locations or if the Company
were to pursue additional acquisitions during the year. In addition, the Company
is currently obligated to loan Station Casinos, Inc. up to $500,000 for
leasehold improvements in connection with the Kids Quest location at Texas
Station in Las Vegas, Nevada, which opened in February of 1999. The Company is
currently seeking financing. The Company believes that it will be able to
arrange such additional financing and will be able to fund additional expansion
with the additional financing and with cash flow from operations. There can be
no assurance, however, that such financing will be obtained as the Company
currently has no arrangements for such financing.
Year 2000 Compliance
Beginning in early 1998, the Company began evaluating its year 2000
readiness. The Company began testing its various information systems to
determine if they would correctly recognize and process information beyond the
year 1999. The evaluation performed included in-house testing of systems by
Company employees, use of various purchased evaluation software, and discussions
with material software vendors. The Company's evaluations resulted in the
conclusion that much of the Company's software, as well as the imbedded
technology of some of the Company's hardware equipment, was not year 2000
compliant. The Company has been upgrading its systems with software and hardware
that is year 2000 compatible. Many of these upgrades had been previously planned
in the normal course of business without regard to the year 2000 issue. A
significant portion of the upgrades are being provided by vendors pursuant to
previously existing software development and service agreements with the
remaining upgrades requiring expenditure by the Company. The costs incurred to
date by the Company have been $18,500. The Company currently estimates that its
total expenditures will be less than $30,000 to complete system upgrades to year
2000 compliance. The Company completed the majority of the upgrades, primarily
related to revenue recognition and internal accounting, in January of 1999.
The Company will continue its evaluation effort through 1999 and into the year
2000 to identify any previously unanticipated or unidentified year 2000 issues.
If any additional issues or complications arise that may potentially cause any
business interruption, the Company believes it can effectively rely on manual
systems to assure minimal business interruption as a result of year 2000 system
failures.
The Company's reliance on third party vendors is not considered material and
would cause only minor disruption to the Company due to year 2000 non-compliance
by such vendor. In any case, the Company has been in the process of evaluating
the potential of any third parties that could have an effect on the Company. To
accomplish this the Company has begun surveying those entities to determine
their year 2000 readiness.
Based on the information the Company currently has available, the Company does
not believe that the year 2000 should pose a significant threat to the Company's
business.
10
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, access to
sources for additional capital, 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, year 2000 compliance, as well as all other risks and uncertainties
described in the Company's filings.
11
PART II. - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits List
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
There were no Reports on Form 8-K filed during the quarter ended March
31, 1999.
12
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/ Patrick R. Cruzen
-----------------------------------
Patrick R. Cruzen
Chief Financial Officer
Date: May 7, 1999
13