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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, 2001
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: (763) 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 10, 2001, the Registrant had outstanding 3,293,300 shares of its
Common Stock, $.01 par value.
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NEW HORIZON KIDS QUEST, INC.
FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 2001
INDEX
Page
----
PART I. FINANCIAL INFORMATION 3
ITEM 1. Condensed Consolidated Financial Statements
a) Condensed Consolidated Balance Sheets --
March 31, 2001 and December 31, 2000 3
b) Condensed Consolidated Statements of
Operations -- Three months ended March 31, 2001
and 2000 5
c) Condensed Consolidated Statements of
Cash Flows -- Three months ended
March 31, 2001 and 2000 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 11
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 12
EXHIBIT INDEX
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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,
2001 2000
------------ ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents ....................... $ 940,447 $ 260,445
Accounts receivable ............................. 706,259 1,066,758
Current portion of notes receivable ............. 163,414 162,836
Prepaid expenses and other current assets ....... 223,374 211,202
------------ ------------
Total current assets .......................... 2,033,494 1,701,241
------------ ------------
PROPERTY AND EQUIPMENT:
Furniture, fixtures, equipment and leaseholds.... 9,576,242 10,675,934
Less--Accumulated depreciation and amortization.. (5,709,102) (6,497,054)
------------ ------------
Total property and equipment .................. 3,867,140 4,178,880
OTHER ASSETS:
Goodwill (net of accumulated amortization
of $223,075 and $212,037, respectively) ...... 439,210 450,248
Notes receivable, net of current portion ........ 786,831 820,519
Other ........................................... 91,496 100,947
------------ ------------
$ 7,218,171 $ 7,251,835
============ ============
See accompanying notes which are an integral part of these balance sheets.
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NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, December 31,
2001 2000
----------- -----------
(Unaudited)
CURRENT LIABILITIES:
Current maturities of long-term debt .................. $ 734,913 $ 849,265
Accounts payable ...................................... 502,325 484,446
Accrued expenses ...................................... 1,049,717 899,010
----------- -----------
Total current liabilities ........................... 2,286,955 2,232,721
LONG-TERM DEBT, less current maturities .................. 570,238 749,096
----------- -----------
Total liabilities ................................... 2,857,193 2,981,817
----------- -----------
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 ................................... (2,868,152) (2,959,112)
----------- -----------
Total shareholders' equity .......................... 4,360,978 4,270,018
----------- -----------
$ 7,218,171 $ 7,251,835
=========== ===========
See accompanying notes which are an integral part of these balance sheets.
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NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31
--------------------------------
2001 2000
----------- -----------
REVENUE ................................ $ 4,263,684 $ 4,202,813
COSTS AND EXPENSES:
Direct Expenses ..................... 3,243,514 3,252,328
Depreciation and Amortization ....... 455,311 503,512
Pre-Opening Expenses ................ -- 6,331
----------- -----------
Total Costs and Expenses .......... 3,698,825 3,762,171
----------- -----------
CENTER OPERATING INCOME ................ 564,859 440,642
Selling, General and Administrative.. 417,285 342,101
Amortization ........................ 17,400 22,961
----------- -----------
OPERATING INCOME ....................... 130,174 75,580
Interest Expense .................... (35,159) (69,475)
Interest Income ..................... 24,354 26,507
Minority Interest ................... (11,911) (13,379)
----------- -----------
NET INCOME Before Income Taxes.......... 107,458 19,233
Provision for Income Taxes .......... 16,500 5,400
----------- -----------
NET INCOME ............................. $ 90,958 $ 13,833
=========== ===========
NET INCOME PER SHARE:
Basic and diluted ................... $ .03 $ .00
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ............................... 3,293,300 3,293,300
=========== ===========
Diluted ............................. 3,293,300 3,401,000
=========== ===========
See accompanying notes which are an integral part of these statements.
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NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31
--------------------------------
2001 2000
----------- -----------
OPERATING ACTIVITIES:
Net income .................................................... $ 90,958 $ 13,833
Adjustments to reconcile net income to net cash provided
by operating activities--
Depreciation and amortization ............................. 472,711 526,473
Change in operating assets and liabilities:
Accounts receivable ..................................... 360,501 56,144
Prepaid expenses and other .............................. (12,172) (585)
Accounts payable ........................................ 17,880 (441,024)
Other assets ............................................ 9,223 30,531
Accrued expenses ........................................ 150,707 122,574
----------- -----------
Net cash provided by operating activities ............. 1,089,808 307,946
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment ........................... (149,705) (4,790)
Payments received on notes receivable ......................... 33,110 30,029
----------- -----------
Net cash used in investing activities ....................... (116,595) 25,239
----------- -----------
FINANCING ACTIVITIES:
Payments on line of credit, net ............................... (100,000) --
Payments on long-term obligations ............................. (193,211) (374,698)
Additional borrowings of long-term debt ....................... -- --
----------- -----------
Net cash used in financing activities ....................... (293,211) (374,698)
----------- -----------
Net increase (decrease) in cash and cash equivalents ........ 680,002 (41,513)
CASH AND CASH EQUIVALENTS,
beginning of period ........................................... 260,445 155,987
----------- -----------
CASH AND CASH EQUIVALENTS,
end of period ................................................. $ 940,447 $ 114,474
=========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period for--
Interest .................................................... $ 36,117 $ 74,915
=========== ===========
Taxes ....................................................... $ 23,936 $ 5,398
=========== ===========
See accompanying notes which are an integral part of these statements.
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NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2001
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, 2001, and
the results of its operations for the three months ended March 31, 2001 and
2000, 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, 2000 and 1999, 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.
Options and warrants totaling 786,025 were excluded from the computation of
diluted earnings per share in 2001 because their effect is antidilutive. A
reconciliation of these amounts is as follows:
Three Months Ended
March 31
---------------------------
2001 2000
--------- ---------
Weighted average common shares outstanding:
Basic ................................ 3,293,300 3,293,300
Dilutive effect of option plan ....... -- 107,700
--------- ---------
Diluted .............................. 3,293,300 3,401,000
========= =========
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3. Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Ultimate results could differ from those estimates.
4. Stock Option Plan:
The Company granted 436,500 options in January of 2000 under a stock option
plan previously approved by the board of directors.
5. 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
KIDS QUEST, TRADITIONAL
FOR THE THREE MONTH PERIOD ENDED MARCH 31, INC. CARE CONSOLIDATED
----------- ----------- ------------
2001
Revenue ........................... $ 3,279,021 $ 984,663 $ 4,263,684
Depreciation and amortization ..... 429,060 43,651 472,711
Interest income ................... 24,354 -- 24,354
Income from continuing operations.. 135,084 (44,126) 90,958
Capital expenditures .............. 126,194 23,511 149,705
2000
Revenue ........................... $ 3,162,210 $ 1,040,603 $ 4,202,813
Depreciation and amortization ..... 478,985 47,488 526,473
Interest income ................... 26,507 -- 26,507
Income from continuing operations.. 5,533 8,300 13,833
Capital expenditures .............. (5,165) 9,955 4,790
6. Subsequent Event:
On March 26 2001, the Board, with Mr. Berman abstaining, approved the
redemption of 875,000 shares of the Company's common stock currently owned by
Lakes Gaming, Inc., subject to the approval by Lakes Gaming, Inc.'s board of
directors. The terms of the redemption are as follows: (1) the parties will
enter into an agreement which will give the Company six (6) months to obtain
financing to redeem the stock at $1.25 per share; (2) during the sixth month
period, the Company will pay Lakes Gaming interest at a rate of 10% per annum on
the unpaid principal balance; and (3) in the event the Company is unable to
obtain financing to redeem the stock within such sixth month period, Mr.
Dunkley, the Company's Chairman and Chief Executive Officer, has agreed to
personally guarantee the obligations of the Company. In the event Mr. Dunkley's
obligations are triggered under the personal guarantee, the Company will be
obligated to reimburse Mr. Dunkley for any payments paid to Lakes Gaming, Inc.,
on terms which have not yet been determined. Lakes Gaming, Inc.'s Board of
Directors subsequently approved the terms of the redemption. The shares redeemed
will be canceled and returned to the Company's authorized capital stock. The
parties have not executed the definitive redemption agreement and there can be
no assurance that the agreement will be executed.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company currently provides hourly child care at twenty locations in ten
states, including three with supervised non-violent video entertainment centers.
The Company also provides traditional child care at ten New Horizon Child Care
centers in Idaho; one location in Joliet, Illinois; one at its Mall of America
location in Bloomington, Minnesota; one at The Venetian Resort~Hotel~Casino in
Las Vegas, Nevada; one in Morton, Minnesota, at Jackpot Junction Casino Hotel in
conjunction with its hourly care facility; and one in Marksville, Louisiana, at
Grand Casino Avoyelles also in conjunction with an hourly care facility. The
Company will open a Kids Quest hourly care center for the Seven Clans Casino,
Hotel, and Indoor Water Park in Thief River Falls on May 25, 2001, and has
signed an agreement with the Palms Casino Resort in Las Vegas, Nevada, to
provide an hourly child care center at their new facility which is expected to
open in the fourth quarter of 2001.
Since its inception as a hourly children's entertainment and recreational
facility, Kids Quest has expanded its product line to include supervised
non-violent 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.
Results of Operations
Revenues for the three-month period ended March 31, 2001, increased
$60,871, or 1%, to $4,263,684 from $4,202,813 for the same period in 2000. The
addition of two new Kids Quest hourly care centers and an employee child care
facility since the second quarter of 2000 contributed $235,680 of additional
revenues. A Kids Quest center that was closed in 2000 resulted in a decrease in
revenue of $69,711 between 2001 and 2000.
The Company's Kids Quest locations that were open for the entire
three-month period ended March 31, 2001 and 2000, experienced a decline in
revenue of $49,155. This decline is principally related to the temporary
relocation of the Company's Mohegan Sun center. In November of 1999, the
Company's hourly child care center and video entertainment center at Mohegan Sun
were relocated to a significantly smaller space resulting in a decrease in
revenue of $44,764 between 2001 and 2000. The move was necessary to allow for
the construction of Mohegan's $800 million hotel addition and casino expansion,
which is scheduled to open in August 2001 and will include a new 15,075 square
foot Kids Quest and non-violent video entertainment center. All relocation costs
were paid by Mohegan Sun. Mohegan Sun is also obligated to reimburse the Company
for all lost profits during the relocation period. The calculation of lost
profits is based on prior year results adjusted for CPI increases.
The Company's ten New Horizon Child Care centers in Idaho which were open
for the entire three month periods ended March 31, 2001 and 2000, experienced a
decline in revenue of $50,459, or 5%. Management attributes this decline
primarily to enrollment declines at several of its centers due to increased
competition. The Idaho center that was closed in the first quarter of 2000
resulted in a revenue decrease of $5,484 between 2001 and 2000.
Costs and expenses decreased $63,346, or 2%, to $3,698,825 from $3,762,171
in 2000. Kids Quest locations opened during 2000 added costs and expenses of
$180,364. These increases were offset by a decrease in costs and expenses for
existing Kids Quest locations of $179,734 and reductions of $64,015 relating to
the Kids Quest location closed during 2000. The decrease in costs and expenses
for existing Kids Quest centers was primarily the result of the Mohegan Sun
relocation in November of 1999 that resulted in a decrease of $55,334 in costs
and expenses during 2001 as compared to the same period in 2000. The decreases
were also the result of improved operating efficiencies at several existing Kids
Quest centers. Costs and expenses for the Idaho New Horizon Child Care centers
were flat versus the same period in 2000.
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Selling, general, and administrative expenses increased $75,182, or 22%, to
$417,285 in 2001 from $342,103 for the same period in 2000. The increase is due
primarily to additional staffing in the areas of marketing, development,
administration, and training. Management expects selling, general and
administrative expenses to increase with the addition of new locations. However,
such expenses are anticipated to decrease as a percentage of revenues with the
continued growth of the Company's revenues.
Pursuant to some of 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 services to be charged by Kids Quest to the
general 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 amounts charged and the fair market value. In the first quarter of
2001, the Company received $257,043 of reimbursements for rate discounts versus
$280,244 for the same period in 2000, a decrease of $23,201, or 8%. The majority
of these rate discount reimbursements were from three casinos owned by Park
Place Entertainment and four Indian casinos currently or previously managed by
Grand Casinos, Inc. The Company is currently renegotiating the contract terms
with Park Place Entertainment. There can be no assurance that such discounts and
reimbursements will not be modified or discontinued altogether or that future
agreements with other casinos will provide for reimbursements for discounted
hourly rates 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 locations that operate without any rate
discount and has found no evidence to conclude that higher non-discounted hourly
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, 2001 decreased
$34,316, or 49%, to $35,159 in 2001 from $69,475 in 2000. The decrease in
interest expense is due to the expiration of five equipment leases.
The Company had a net profit of $90,958 for the three-month period ended
March 31, 2001, compared to net profit of $13,833 in 2000. The new Kids Quest
centers opened in 2000 accounted for an increase in center operating income of
$55,316. Center operating income for the Kids Quest centers open during both
periods increased $130,577 as compared to the same period in 2000. Center
operating income for the Kids Quest center closed during 2000 resulted in an
increase of operating losses of $5,696. Center operating income for the
Company's Idaho operations for the three months ended March 31, 2001, was
$29,841 as compared to center operating income of $85,821 for the same period in
2000, a decrease of $55,980. Center operating income was negatively impacted by
a loss of enrollment at several centers due to increased competition.
Liquidity and Capital Resources
During the three-month period ended March 31, 2001, the Company generated
$1,089,808 from operations, invested $149,705 in property and equipment related
to new locations and equipment upgrades and received payments on notes
receivable of $33,110. The Company made payments on long-term debt of
$193,211 and also made payments on its credit line of $100,000. The Company
ended the quarter with a cash balance of $940,447.
During the same period in 2000, the Company generated $307,946 from
operations, invested $4,790 in property and equipment, and received payments on
notes receivable of $30,029. The Company made payments of $374,698 on long-term
obligations. The Company ended the quarter with a cash balance of $114,474.
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
2001 as it adds Kids Quest or New Horizon Child Care locations or if the Company
were to pursue additional acquisitions during the year. Also, on March 26 2001,
the Board, with Mr. Berman abstaining, approved the redemption of 875,000 shares
of its stock at $1.25 per share (see Note 6 to the Financial Statements) which
will require the Company to obtain financing. The Company must redeem the stock
within six months of the execution of the definitive stock redemption agreement.
To date, the agreement has not been executed. However, should the agreement be
executed the Company will have to seek financing which may cause a delay in
funding additional expansion. In addition, the Company is currently obligated to
loan Station Casinos, Inc. up to $250,000 for leasehold improvements in
connection with the Kids Quest location at Texas Station in Las Vegas, Nevada,
which opened in February of 1999. To date, Station Casino has not requested any
leasehold improvement loans from Kids Quest. However, if Station Casinos should
make a request, the
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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.
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-KSB (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 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities.
a. Not applicable.
b. Not applicable.
c. Not applicable.
d. Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Securities Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
Not applicable.
b. Current Reports on Form 8-K.
The Company filed the following Current Report on Form 8-K with the
Commission during the quarter for which this report is filed:
1. The Company's Current Report on Form 8-K filed on January 23, 2001
relating to the delisting of the Company's common stock from the Nasdaq Small
Cap Market to the over the counter bulletin board.
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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: May 14, 2001
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