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 September 30, 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 November 12, 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 SEPTEMBER 30, 1999
INDEX
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Page
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PART I. FINANCIAL INFORMATION 3
ITEM 1. Condensed Consolidated Financial Statements
a) Condensed Consolidated Balance Sheets --
September 30, 1999 and December 31, 1998 3
b) Condensed Consolidated Statements of Operations -- Three
months and nine months ended September 30, 1999, and 1998 5
c) Condensed Consolidated Statements of
Cash Flows -- Nine months ended
September 30, 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 9
PART II. OTHER INFORMATION 14
ITEM 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
PART I. - FINANCIAL INFORMATION
ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
1999 1998
------------ ------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents ..................... $ 48,188 $ 208,717
Accounts receivable ........................... 721,766 911,750
Current portion of notes receivable ........... 159,124 144,335
Prepaid expenses and other current assets ..... 45,641 132,085
------------ ------------
Total current assets ....................... 974,719 1,396,887
------------ ------------
PROPERTY AND EQUIPMENT:
Furniture, fixtures, equipment, and leaseholds 10,090,750 9,172,698
Less--Accumulated depreciation and amortization (4,485,858) (3,234,207)
------------ ------------
Total property and equipment ............... 5,604,892 5,938,491
OTHER ASSETS:
Goodwill (net of accumulated amortization
of $156,847 and $246,067, respectively) ... 505,438 991,711
Notes receivable, net of current portion ...... 982,169 1,050,222
Other ......................................... 176,847 181,320
------------ ------------
$ 8,244,065 $ 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
September 30, December 31,
1999 1998
----------- -----------
(UNAUDITED)
CURRENT LIABILITIES:
Current maturities of long-term debt ................. $ 1,690,100 $ 1,488,825
Accounts payable ..................................... 536,367 819,027
Accrued expenses ..................................... 902,230 548,769
----------- -----------
Total current liabilities ......................... 3,128,697 2,856,621
LONG-TERM DEBT, less current maturities ................. 1,182,059 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 .................................. (3,295,821) (2,246,951)
----------- -----------
Total shareholders' equity ........................ 3,933,309 4,982,179
----------- -----------
$ 8,244,065 $ 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 Nine Months Ended
September 30 September
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
REVENUE ............................... $ 4,863,992 $ 4,372,368 $ 13,259,711 $ 12,008,499
COSTS AND EXPENSES:
Direct Expenses .................... 3,870,788 3,483,203 10,662,669 9,449,020
Depreciation and Amortization ...... 495,200 407,285 1,420,519 1,059,026
Pre-opening Expenses ............... 74,172 52,860 123,625 179,029
Write-down of Fixed Assets ......... 367,272 -- 367,272 --
------------ ------------ ------------ ------------
Total Costs and Expenses ........ 4,807,432 3,943,348 12,574,085 10,687,075
------------ ------------ ------------ ------------
CENTER OPERATING INCOME ............... 56,560 429,020 685,626 1,321,424
Selling, General, and Administrative 313,668 302,226 1,041,961 750,215
Depreciation and Amortization ...... 21,977 29,674 79,449 88,980
Write-down of Goodwill ............. 431,441 -- 431,441 --
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) ............... (710,526) 97,120 (867,225) 482,229
Interest Expense ................... (102,323) (96,123) (294,766) (266,159)
Interest Income .................... 30,170 33,869 88,729 101,374
Minority Interest .................. 9,545 (9,704) 24,392 (801)
------------ ------------ ------------ ------------
NET INCOME (LOSS) ..................... $ (773,134) $ 25,162 $ (1,048,870) $ 316,643
============ ============ ============ ============
INCOME (LOSS) PER SHARE:
Basic and Diluted .................. $ (.23) $ .01 $ (.32) $ .10
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and Diluted .................. 3,293,300 3,293,300 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)
Nine Months Ended
September 30
---------------------------
1999 1998
----------- -----------
OPERATING ACTIVITIES:
Net income (loss) ............................................. $(1,048,870) $ 316,643
Adjustments to reconcile net income (loss) to net cash provided
by operating activities--
Depreciation and amortization ........................... 1,499,968 1,148,006
Write-down of fixed assets and goodwill ................. 798,713 --
Change in operating assets and liabilities:
Accounts receivable .................................. 189,984 54,475
Prepaid expenses and other ........................... 86,444 67,971
Accounts payable ..................................... (282,660) 324,422
Other assets ......................................... 177 22,638
Accrued expenses ..................................... 211,967 47,624
----------- -----------
Net cash provided by operating activities ......... 1,455,723 1,981,779
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment, net ...................... (1,333,019) (2,471,096)
Payments received on notes receivable ......................... 53,264 143,091
----------- -----------
Net cash used in investing activities ...................... (1,279,755) (2,328,005)
----------- -----------
FINANCING ACTIVITIES:
Payments on line of credit, net ............................... (243,556) --
Payments on long-term obligations ............................. (982,861) (731,290)
Additional borrowings of long-term debt ....................... 889,920 705,001
----------- -----------
Net cash used in financing activities ...................... (336,497) (26,289)
----------- -----------
Net decrease in cash and cash equivalents .................. (160,529) (372,515)
CASH AND CASH EQUIVALENTS,
beginning of period ........................................... 208,717 554,540
----------- -----------
CASH AND CASH EQUIVALENTS,
end of period ................................................. $ 48,188 $ 182,025
=========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period for--
Interest ................................................... $ 302,358 $ 263,679
=========== ===========
NON-CASH ITEMS:
Non-cash payments on notes receivable ......................... $ -- $ 65,606
=========== ===========
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 September 30, 1999,
and the results of its operations for the nine months ended September 30, 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:
Basic earnings per common share is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the year.
Diluted earnings per share is computed similarly to the computation of basic
earnings per share except that the denominator is increased by the assumed
exercise of dilutive options and warrants using the treasury stock method. The
shares used in computing basic and diluted earnings per share were the same for
1999 and 1998. Options and warrants totaling 566,100 were excluded from the
computation of diluted earnings per share for both years because their effect is
antidilutive.
3. 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 IDAHO
FOR THE THREE MONTH PERIOD KIDS QUEST, TRADITIONAL
ENDED SEPTEMBER 30, INC. CARE CONSOLIDATED
----------------------------- ----------- ----------- ------------
1999
----
Revenue ..................... $ 3,894,606 $ 969,386 $ 4,863,992
Depreciation and amortization 466,177 51,000 517,177
Interest income ............. 30,170 -- 30,170
Net income (loss) ........... 111,780 (884,914) (773,134)
Capital expenditures ........ 300,314 90,816 391,130
1998
----
Revenue ..................... 3,433,168 939,200 4,372,368
Depreciation and amortization 385,358 51,601 436,959
Interest income ............. 33,750 119 33,869
Net income (loss) ........... 139,412 (114,250) 25,162
Capital expenditures ........ 622,260 24,796 647,056
7
NEW HORIZON IDAHO
FOR THE NINE MONTH PERIOD KIDS QUEST, TRADITIONAL
ENDED SEPTEMBER 30, INC. CARE CONSOLIDATED
------------ ------------ ------------
1999
----
Revenue ..................... $10,270,578 $ 2,989,133 $13,259,711
Depreciation and amortization 1,329,913 170,055 1,499,968
Interest income ............. 88,729 -- 88,729
Net income (loss) ........... 88,606 (1,137,476) (1,048,870)
Capital expenditures ........ 1,105,914 227,105 1,333,019
1998
----
Revenue ..................... 9,104,231 2,904,268 12,008,499
Depreciation and amortization 993,203 154,803 1,148,006
Interest income ............. 99,576 1,798 101,374
Net income (loss) ........... 433,777 (117,134) 316,643
Capital expenditures ........ 2,446,300 24,796 2,471,096
4. Write-Down of Fixed Assets and Goodwill:
During the third quarter of 1999, the Company recorded a write-down of
assets totaling $726,173 associated with four of the New Horizon Child Care
centers acquired in 1995 and 1996 due to poor financial performance. As of this
date, two of these centers remain open, and two of these centers were closed in
August of 1999. Also during the third quarter of 1999, the Company wrote down
assets totaling $72,540 related to its Bullwhackers location in Black Hawk,
Colorado, due to poor financial performance. The write-downs consist of all
tangible and intangible assets of these locations and estimated lease
termination fees.
8
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
eight states, including two with supervised video entertainment centers. The
Company also provides traditional child care at eleven 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. The Mall of America center was recently licensed to
provide traditional care, in addition to hourly care, and began accepting
enrollments in June 1999. Sixteen 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's newest hourly care center opened July 16, 1999, at the Avi Hotel
and Casino in Laughlin, Nevada. The Company has closed its traditional care and
arcade facilities at Treasure Island Hotel and Casino in Red Wing, Minnesota,
and its hourly care and arcade facilities at Bullwhackers in Black Hawk,
Colorado, on October 31, 1999. The closures are primarily the result of poor
financial performance. The Company will continue to operate an hourly child care
facility at Treasure Island. The Company currently has contracts to open three
additional Kids Quest centers within the next twelve months at the Jackpot
Junction Hotel and Casino in Morton, Minnesota, the Cliff Castle Casino in Camp
Verde, Arizona, and Ho-Chunk Casino and Bingo in the Wisconsin Dells. The
Ho-Chunk Center will also include a supervised non-violent video entertainment
center.
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. In July and August of 1999,
the Company closed two of its centers in Boise, Idaho. The centers did not meet
the Company's quality standards and were located in areas where an over supply
of child care facilities existed. In August of 1999, one of the Company's
centers was partially destroyed by fire. The fire occurred after hours, and the
Company's loss from destroyed property is fully covered by insurance. The
Company will not resume providing child care at this location.
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. The center is anticipated to open in the first quarter of 2000.
Since its inception as an hourly children's entertainment and recreational
facility, Kids Quest has expanded its product line to include supervised video
entertainment centers, 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.
9
Results of Operations
Revenue for the three months ended September 30, 1999, increased $491,624,
or 11%, to $4,863,992 from $4,372,368 for the same period in 1998. The Company
opened two Kids Quest hourly care centers, one employee child care center, and
one New Horizon Child Care center since the third quarter of 1998, which
accounted for $487,946 of additional revenue. Revenue for the Kids Quest centers
open during both periods increased $124,715, or 4%, to $3,505,092 for the three
months ended September 30, 1999, from $3,380,377 for the same period in 1998.
Revenues for the Idaho New Horizon Child Care centers open during both periods
increased $19,070, or 2%, to $786,838 for the three months ended September 30,
1999, from $767,768 for the same period in 1998. The Kids Quest and Idaho
centers that were closed since the third quarter of 1998 accounted for revenue
declines of $140,107 for the three month period ended September 30, 1999, as
compared to the same period in 1998.
Revenue for the nine months ended September 30, 1999, increased
$1,251,212, or 10%, to $13,259,711 from $12,008,499 for the same period in 1998.
Since the beginning of 1998, the Company opened three new Kids Quest centers, an
employee child care center, and a New Horizon Child Care center, which accounted
for $1,317,695 of additional revenue. Revenue for the Kids Quest centers open
during both periods increased $187,047, or 2%, to $8,950,582 for the nine month
period ended September 30, 1999, from $8,763,535 for the same period in 1998.
Revenues for the Idaho New Horizon Child Care centers open during both periods
increased $21,592, or 1%, to $2,380,279 for the nine month period ended
September 30, 1999, from $2,358,687 for the same period in 1998. The Kids Quest
and Idaho centers that were closed since the beginning of 1998 accounted for
revenue declines of $275,122 for the nine month period ended September 30, 1999,
as compared to the same period in 1998.
During the third quarter of 1999, the Company recorded a charge to
operations of $798,713, or $.24 per share. The charge included a write-down of
assets and lease termination costs of $367,272 and a write-off of goodwill of
$431,441. The charge reflects the costs associated with four of the Company's
centers in Boise, Idaho, and one of its Kids Quest locations. As of this date,
two of the four centers in Boise, Idaho, remain open while two were closed in
August of 1999. The Kids Quest location at Bullwhackers in Black Hawk, Colorado,
was closed on October 31, 1999. In addition, the Company has closed its
traditional care and arcade facilities at Treasure Island Hotel and Casino in
Red Wing, Minnesota. The Company will maintain an hourly care facility at the
location. There are no anticipated charges associated with these closings. The
Idaho centers that were closed were of lower quality and were in areas with an
over capacity of child care centers. In excess of 80% of the enrollment from the
closed centers transferred to other New Horizon Kids Quest centers. The centers
in Black Hawk, Colorado, and Red Wing, Minnesota, were closed primarily due to
poor financial performance.
Costs and expenses for the three months ended September 30, 1999, without
taking into account the asset write-down, increased $496,812, or 13%, to
$4,440,160 from $3,943,348 for the same period in 1998. The increase is due
primarily to the centers added since the second quarter of 1998, which accounted
for $414,671 of the increase. Costs and expenses for existing Kids Quest
locations increased $162,870, or 6%, to $3,095,782 from $2,932,912 for the same
period in 1998. The increase in costs and expenses at existing centers was due
primarily to increased equipment rent and depreciation associated with the
center upgrade program. Costs and expenses for the Idaho centers open during
both periods increased $66,321, or 9%, to $815,633 from $749,312 for the same
period in 1998. The increase was due primarily to increased operating expenses
at several of the centers as the result of enrollment transfers from the three
closed centers. Costs and expenses for the Kids Quest and Idaho centers that
were closed since the third quarter of 1998 decreased $147,050 for the three
month period ended September 30, 1999, as compared to the same period in 1998.
Costs and expenses for the nine months ended September 30, 1999, without
taking into account the asset write-down, increased $1,519,738, or 14%, to
$12,206,813 from $10,687,075 for the same period in 1998. The increase is due
primarily to the centers added since the beginning of 1998, which accounted for
$1,188,519 of the increase. Costs and expenses for existing Kids Quest locations
increased $394,667, or 5%, to $7,655,224 from $7,260,557 for the same period in
1998. This increase was due primarily to increased equipment rent and
depreciation associated with the center upgrade program and increased training
and staff development costs. Costs and expenses for the Idaho New Horizon Child
Care centers open during both periods increased $153,592, or 7%, to $2,299,179
from $2,145,587 for the same period in 1998. This increase was due primarily to
increased advertising costs and higher operating costs at several centers as a
result of enrollment transfers from the three closed centers. Costs and expenses
for the Kids Quest and Idaho centers that were closed since the beginning of
1998 decreased $217,040 for the nine month period ended September 30, 1999, as
compared to the same period in 1998.
10
Selling, general, and administrative expenses increased $11,442, or 4%, to
$313,668 for the three month period ended September 30, 1999, from $302,226 for
the same period in 1998. Selling, general, and administrative expenses for the
nine month period ended September 30, 1999, increased $291,746 to $1,041,961
from $750,215 for the same period in 1998. Increases for the three and nine
month periods were due to increased office rent as the result of the relocation
of the home office in Plymouth, Minnesota, in March of 1999 and additional
staffing in the areas of marketing, development, administration, and training.
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 $310,931 of
reimbursements for rate discounts for the three month period ended September 30,
1999, versus $331,515 for the same period in 1998, a decrease of $20,584, or 6%.
For the nine month period ended September 30, 1999, the Company received
$864,839 versus $923,601 for the same period in 1998, a decrease of $58,762, or
6%. 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 operate
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 September 30, 1999,
increased $6,200, or 6%, to $102,323 from $96,123 for the same period in 1998.
Interest expense for the nine months ended September 30, 1999, increased
$28,607, or 11%, to $294,766 from $266,159 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 income for the three month period ended September 30, 1999, before
accounting for the write-down, was $25,579 compared to net income of $25,162 for
the same period in 1998. Centers added since the second quarter of 1998
accounted for an increase of $73,275 in center operating income. Center
operating income for Kids Quest centers in operation during both periods
decreased $38,156, or 9%, from $447,466 to $409,310 for the same period in 1998.
The decrease was due primarily to a $40,281 reduction in operating income at the
Company's 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 Texas Station location in February of 1999, which is
approximately nine miles from Boulder Station. Results for the quarter were also
negatively impacted by a $20,728 reduction in operating income at the Company's
Biloxi location. These decreases were partially offset by a reduction in the
center operating loss at the Company's Mall of America location of $29,287.
Center operating income for the Idaho New Horizon Child Care centers open during
both periods decreased $47,250 to a loss of $28,794 as compared to center
operating income of $18,456 for the same period in 1998. The decrease is due
primarily to reduced enrollment at several centers. Management attributes the
decreases primarily to increased competition and management turnover. Center
operating loss for the Kids Quest and New Horizon centers closed since the third
quarter of 1998 decreased $6,941 for the three month period ended September 30,
1999, as compared to the same period in 1998 as expenses were reduced in
anticipation of closing.
Net loss for the nine month period ended September 30, 1999, before
accounting for the write-down, was $250,157 compared to net income of $316,643
for the same period in 1998, a decrease of $566,800. Centers added since the
beginning of 1998 accounted for an increase in center operating income of
$129,176. Center operating income for the Kids Quest centers open during both
periods decreased $207,620 from $1,502,978 to $1,295,358 for the same period in
1998. The decrease at existing Kids Quest locations was due primarily to a
decrease in center operating income at the Company's Boulder Station location of
$113,217, increased equipment rent and depreciation associated with the center
upgrade program, and increased training and staff development costs. Operating
income for the Idaho New Horizon Child Care centers open during both periods
decreased $132,000 to $81,100 from $213,100 for the same period in 1998. The
decrease is due primarily to reduced enrollment at several centers. Management
attributes the decreases primarily to increased competition and management
turnover. Operating loss for the Kids Quest and New Horizon centers closed since
the beginning of 1998 increased $58,082 for the nine month period ended
September 30, 1999, as compared to the same period in 1998.
11
Liquidity and Capital Resources
During the nine month period ended September 30, 1999, the Company
generated $1,455,723 from operations, invested $1,333,019 in property and
equipment, and received payments on notes receivable of $53,264. Additionally,
the Company made payments on its line of credit of $243,556 and payments on
long-term obligations of $982,861. The Company ended the period with a cash
balance of $48,188. During the period, the Company borrowed $889,920 for new
equipment including the opening of Columbia Village in Idaho and Texas Station
and Avi in Nevada. During the same period in 1998, the Company generated
$1,981,779 from operations, invested $2,471,096 in property and equipment
related to new locations and equipment upgrades, and received payments on notes
receivable of $143,091. The Company made payments on long term debt of $731,290
and borrowed an additional $705,001 related to the Mall of America location. The
Company ended the period with a cash balance of $182,025.
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.
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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.
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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 September 30, 1999.
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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: November 12, 1999
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