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, 1998
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____ .
Commission File No. 0-27780
NEW HORIZON KIDS QUEST, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1719363
- -------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13705 First Avenue North, Plymouth, MN 55441
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 557-1111
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES (X) NO ( )
As of May 7, 1998, the Registrant had outstanding 3,293,300 shares of its Common
Stock, $.01 par value.
<PAGE>
NEW HORIZON KIDS QUEST, INC.
FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
Page
----
PART I. FINANCIAL INFORMATION 3
ITEM 1. Condensed Consolidated Financial Statements
a) Condensed Consolidated Balance Sheets --
March 31, 1998 and December 31, 1997 3
b) Condensed Consolidated Statements of
Operations -- Three months ended March 31, 1998
and 1997 5
c) Condensed Consolidated Statements of
Cash Flows -- Three months ended
March 31, 1998 and 1997 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 11
Signatures 12
<PAGE>
PART I. - FINANCIAL INFORMATION
ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................................. $ 435,363 $ 554,540
Accounts receivable ....................................... 485,890 773,120
Current portion of notes receivable ....................... 116,314 163,539
Prepaid expenses and other current assets ................. 280,681 262,150
----------- -----------
Total current assets .................................... 1,318,248 1,753,349
----------- -----------
PROPERTY AND EQUIPMENT:
Furniture, fixtures, equipment and leaseholds ............. 7,405,250 6,522,416
Less--Accumulated depreciation and amortization ........... (2,006,162) (1,701,827)
----------- -----------
Total property and equipment ............................ 5,399,088 4,820,589
OTHER ASSETS:
Goodwill (net of accumulated amortization
of $184,177 and $163,547, respectively)................. 1,053,601 1,074,231
Notes receivable, net of current portion .................. 1,177,859 1,202,216
Noncompete agreements (net of accumulated amortization
of $11,273 and $10,135, respectively) ................... 12,886 14,025
Other ..................................................... 171,775 172,879
----------- -----------
$ 9,133,457 $ 9,037,289
=========== ===========
</TABLE>
See accompanying notes which are an integral part of these balance sheets.
<PAGE>
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt ................ $ 851,033 $ 861,645
Accounts payable .................................... 268,058 282,073
Accrued expenses .................................... 683,102 594,266
Deferred rent ....................................... 23,666 24,666
----------- -----------
Total current liabilities ......................... 1,825,859 1,762,650
LONG-TERM DEBT, less current maturities ................ 2,096,428 2,313,968
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 ................................. (2,017,960) (2,268,459)
----------- -----------
Total shareholders' equity ........................ 5,211,170 4,960,671
----------- -----------
$ 9,133,457 $ 9,037,289
=========== ===========
</TABLE>
See accompanying notes which are an integral part of these balance sheets.
<PAGE>
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31
----------------------------
1998 1997
----------- -----------
REVENUE .............................. $ 3,680,879 $ 3,143,645
COSTS AND EXPENSES:
Direct Expenses ................... 2,791,810 2,461,584
Depreciation and Amortization ..... 296,607 208,155
Pre-Opening Expenses .............. 23,871 47,143
----------- -----------
Total Costs and Expenses ........ 3,112,288 2,716,882
----------- -----------
CENTER OPERATING INCOME .............. 568,591 426,763
Selling, General and Administrative 249,848 327,844
Amortization ...................... 29,653 24,643
----------- -----------
OPERATING INCOME ..................... 289,090 74,276
Interest Expense .................. (72,064) (46,377)
Interest Income ................... 34,354 42,046
Minority Interest ................. (881) 15,204
----------- -----------
NET INCOME ........................... $ 250,499 $ 85,149
=========== ===========
INCOME PER SHARE:
Basic and diluted ................. $ .08 $ .03
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted ................. 3,293,300 3,293,300
=========== ===========
See accompanying notes which are an integral part of these statements.
<PAGE>
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31
------------------------
1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ............................................. $ 250,499 $ 85,149
Adjustments to reconcile net income to net cash provided
by operating activities--
Depreciation and amortization ...................... 326,260 232,798
Deferred Rent ...................................... (1,000) (1,000)
Change in operating assets and liabilities:
Accounts receivable .............................. 287,230 153,652
Prepaid expenses and other ....................... (18,531) 26,947
Accounts payable ................................. (14,015) (88,839)
Other assets ..................................... 948 5,200
Accrued expenses ................................. 88,836 109,332
--------- ---------
Net cash provided by operating activities ...... 920,227 523,239
--------- ---------
INVESTING ACTIVITIES:
Purchases of property and equipment .................... (882,834) (99,589)
Issuance of note receivable ............................ -- (480,029)
Payments received on notes receivable .................. 71,582 27,180
--------- ---------
Net cash used in investing activities ................ (811,252) (552,438)
--------- ---------
FINANCING ACTIVITIES:
Payments on long-term obligations ...................... (228,152) (554,074)
Additional borrowings of long-term debt ................ -- 935,887
--------- ---------
Net cash provided by (used in) financing activities .. (228,152) 381,813
--------- ---------
Net increase (decrease) in cash and cash equivalents . (119,177) 352,614
CASH AND CASH EQUIVALENTS,
beginning of period .................................... 554,540 150,232
--------- ---------
CASH AND CASH EQUIVALENTS,
end of period .......................................... $ 435,363 $ 502,846
========= =========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period for--
Interest ............................................. $ 73,715 $ 86,080
========= =========
Taxes ................................................ $ -- $ --
========= =========
NON-CASH ITEMS:
Non-cash payments on notes receivable .................. $ 45,607 $ 49,050
========= =========
</TABLE>
See accompanying notes which are an integral part of these statements.
<PAGE>
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, 1998, and
the results of its operations for the three months ended March 31, 1998 and
1997, 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, 1997 and 1996, 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:
In 1997 the Company adopted SFAS No. 128, "Earnings Per Share." As a
result, the Company's reported earnings per share for the three months ended
March 31, 1997, were restated. The shares used for computing basic and diluted
earnings per share were the same for the three months ended March 31, 1998 and
1997. 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. Recently Issued Accounting Pronouncements:
During June 1997, the Financial Accounting Standards Board released SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
effective for fiscal years beginning after December 15, 1997. SFAS No. 131
requires disclosure of business and geographic segments in the consolidated
financial statements of the Company. The Company will adopt SFAS No. 131 at the
end of 1998 and is currently analyzing the impact it will have on the
disclosures in its financial statements.
5. Reclassifications:
Certain 1997 amounts in the accompanying consolidated financial statements
have been reclassified to conform to the first quarter 1998 presentation. Such
reclassifications had no effect on previously reported net income or
shareholders' equity.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company currently operates seventeen Kids Quest centers providing
hourly child care and fourteen New Horizon Child Care centers providing
traditional child care services. The first Kids Quest center opened in May 1992
in Grand Casino Hinckley. Since that time, the Company has opened six additional
Kids Quests at locations owned or managed by Grand Casinos, Inc. in Minnesota,
Mississippi and Louisiana. In addition, the Company has opened three Kids Quests
at casinos owned by Station Casinos, Inc. in Nevada and Missouri, as well as
five additional locations with various other casino operators in Iowa,
Connecticut, Michigan and Minnesota. The Company opened its first Kids Quest
shopping mall location at Eden Prairie Center in Eden Prairie, Minnesota, in
March 1994 and recently opened its second shopping mall location at Mall of
America in Bloomington, Minnesota, in April 1998. The Kids Quest locations
opened since 1996 include the following:
Station Casino Kansas City Kansas City, MO January 1997
Sunset Station Las Vegas, NV June 1997
Treasure Island Resort and Casino
(dba New Horizon Hourly Care) Red Wing, MN June 1997
Bullwhackers Casino/Silver Hawk Casino Black Hawk, CO June 1997
Mall of America Bloomington, MN April 1998
During 1995 and 1996, the Company acquired an aggregate of twelve existing
child care centers in Boise, Idaho, which the Company now operates as New
Horizon Child Care centers. The Company opened its thirteenth New Horizon
location in August 1996 in a newly constructed facility.
In October 1996, the Company expanded its product line by opening a
supervised video entertainment center in conjunction with its Kids Quest
location at the Mohegan Sun Casino. The Company has since added supervised video
entertainment centers at its Bullwhackers, Soaring Eagle and Treasure Island
locations. In August 1997, the Company opened an employee child care center in
connection with its hourly child care location at Treasure Island Resort and
Casino. The Company plans to continue to seek opportunities for additional
employee child care, retail and supervised video entertainment center locations.
The Company has experienced growth through acquisition and expansion. The
Company's business is seasonal with revenues and operating income for Kids Quest
being the highest and New Horizon Child Care being the lowest in the summer
months. Therefore, results of operations described below may not be indicative
of results to be achieved in any future period.
Results of Operations
Revenue for the three months ended March 31, 1998, increased $537,234, or
17%, to $3,680,879 from $3,143,645 for the same period in 1997. The Company
opened four new Kids Quest centers and a supervised video entertainment center
since the beginning of 1997, which accounted for $493,629 of additional revenue.
Revenue for the Kids Quest centers open during both periods decreased $21,960,
or 1%, to $2,008,735 for the three months ended March 31, 1998, from $2,030,695
for the same period in 1997. The Company attributes this decrease primarily to a
$96,630 decrease in revenue at its Boulder Station location, which was due to
the opening of the Company's Sunset Station location within five miles of
Boulder Station. However, the combined revenues at the Boulder Station and
Sunset Station locations increased $129,491, or 35%, over the revenues at
Boulder Station alone in 1997. Revenues for the Idaho New Horizon Child Care
centers increased $65,565, or 7%, to $941,310 for the three month period ended
March 31, 1998, from $875,745 for the same period in 1997.
<PAGE>
Costs and expenses for the three months ended March 31, 1998, increased
$395,406, or 15%, to $3,112,288 from $2,716,882 for the same period in 1997.
This increase was due in part to the addition of four new Kids Quest locations
in 1997, which accounted for $429,963 of increase. Costs and expenses from
existing Kids Quest locations decreased $67,171, or 4%, to $1,605,415 for the
three month period ended March 31, 1998, from $1,672,586 for the same period in
1997. Costs and expenses as a percent of revenue were 80% for existing Kids
Quest locations for the three month period ended March 31, 1998, down from 82%
for the same period in 1997. Costs and expenses for the Idaho New Horizon Child
Care centers increased $32,615, or 4%, to $863,212 for the three months ended
March 31, 1998, compared to $830,597 for the same period in 1997. As a percent
of revenue, costs and expenses from the New Horizon centers were 92% for the
three months ended March 31, 1998, down from 95% for the same period in 1997.
Selling, general and administrative expenses decreased $77,996, or 24%, to
$249,848 for the three month period ended March 31, 1998, from $327,844 for the
same period in 1997. The decrease was due in part to a reduction in development
expenses of $41,575 and a reduction in administrative salaries of $25,603.
Despite the decrease in selling, general and administrative expenses, management
expects such expenses to increase with the addition of and negotiation for new
locations, but such expenses 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 $288,622 of
reimbursements for rate discounts for the three month period ended March 31,
1998, versus $271,144 for the same period in 1997, an increase of $17,478, or
6%. The majority of these rate discount reimbursements were from three casinos
owned by Grand Casinos, Inc. and four Indian casinos managed by 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 agreement
with Grand Casinos or other casinos 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 eight locations that operated 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, 1998, increased
$25,687, or 55%, to $72,064 from $46,377 for the same period in 1997. This
increase relates to debt incurred for the expansion of Kids Quest centers.
Net income for the three month period ended March 31, 1998, was $250,499
compared to $85,149 for the same period in 1997. Management attributes the
improved operating results to the additional four Kids Quest locations added in
1997, a 13% increase in profitability at existing Kids Quest locations, a
$41,210 improvement in operating results from the Company's New Horizon Child
Care centers, and the decrease in selling, general and administrative expense.
Liquidity and Capital Resources
During the three month period ended March 31, 1998, the Company generated
$920,227 from operations, invested $882,834 in property and equipment, and
received payments on notes receivable of $71,582. Additionally, the Company made
payments on long-term obligations of $228,152. The Company ended the period with
a cash balance of $435,363. During the same period in 1997, the Company
generated $523,239 from operations, invested $99,589 in property and equipment,
issued a note receivable to Station Casinos, Inc. for $480,029 relating to the
Kansas City Kids Quest location, as well as received payment on notes receivable
of $27,180. The Company borrowed $935,887 to fund expansion, as well as to pay
off its bank line of credit of $514,509 and other principal payments of $39,565.
The Company ended the period with a cash balance of $502,846.
<PAGE>
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 has funded its recent expansion
through additional borrowings and with cash flow from operations. As of March
31, 1998, the Company had a working capital deficit of $507,611. The Company
believes that cash flow from operations will be sufficient to fund ongoing
operations. However, the Company will require additional financing in 1998 as it
adds additional Kids Quest or New Horizon Child Care locations or if the Company
were to pursue additional acquisitions during the year. The Company currently
has no arrangements for such additional financing. The Company believes that it
will be able to arrange such additional financing to fund additional expansion.
Private Securities Litigation Reform Act
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Form 10-QSB (as well as information included in oral statements or other written
statements made or to be made by the company) may contain statements that are
forward-looking, such as statements relating to plans for future expansion and
other business development activities, as well as other capital spending,
financial sources and the effects of regulation and competition. Such
forward-looking information involves important risks and uncertainties that
could significantly affect future results and, accordingly, such results may
differ from those expressed in any forward-looking statement made by or on
behalf of the company. These risks and uncertainties include, but are not
limited to, those relating to development and construction activities,
dependence on existing management and third party contracts, domestic or global
economic conditions, changes in federal or state laws or the administration or
enforcement of such laws, litigation or claims, as well as all other risks and
uncertainties described in the company's filings.
<PAGE>
PART II. - OTHER INFORMATION
All items under Part II. have been omitted since they are inapplicable or
the answers are negative.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NEW HORIZON KIDS QUEST, INC.
By: /s/ William M. Dunkley
-----------------------------------
William M. Dunkley
Chief Executive Officer
By: /s/ Kevin M. Greer
-----------------------------------
Kevin M. Greer
Chief Financial Officer
Date: May 12, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 435,363
<SECURITIES> 1414
<RECEIVABLES> 515,532
<ALLOWANCES> 29,642
<INVENTORY> 57,906
<CURRENT-ASSETS> 1,318,248
<PP&E> 7,405,250
<DEPRECIATION> 2,006,162
<TOTAL-ASSETS> 9,133,457
<CURRENT-LIABILITIES> 1,825,859
<BONDS> 0
0
0
<COMMON> 32,933
<OTHER-SE> 5,178,237
<TOTAL-LIABILITY-AND-EQUITY> 9,133,457
<SALES> 226,672
<TOTAL-REVENUES> 3,680,879
<CGS> 122,384
<TOTAL-COSTS> 122,384
<OTHER-EXPENSES> 3,771,284
<LOSS-PROVISION> (6,596)
<INTEREST-EXPENSE> 72,064
<INCOME-PRETAX> 250,499
<INCOME-TAX> 0
<INCOME-CONTINUING> 250,499
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 250,499
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
