U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
(Mark One)
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 13, 1999, 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 JUNE 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 --
June 30, 1999 and December 31, 1998 3
b) Condensed Consolidated Statements of
Operations -- Three months and six months
ended June 30, 1999, and 1998 5
c) Condensed Consolidated Statements of
Cash Flows -- Six months ended
June 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 13
ITEM 6. Exhibits and Reports on Form 8-K 13
Signatures 14
2
<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>
June 30, December 31,
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ..................... $ 415,112 $ 208,717
Accounts receivable ........................... 587,020 911,750
Current portion of notes receivable ........... 151,591 144,335
Prepaid expenses and other current assets ..... 60,078 132,085
------------ ------------
Total current assets ....................... 1,213,801 1,396,887
------------ ------------
PROPERTY AND EQUIPMENT:
Furniture, fixtures, equipment and leaseholds . 10,110,921 9,172,698
Less--Accumulated depreciation and amortization (4,169,483) (3,234,207)
------------ ------------
Total property and equipment ............... 5,941,438 5,938,491
OTHER ASSETS:
Goodwill (net of accumulated amortization
of $287,328 and $246,067, respectively) ... 950,450 991,711
Notes receivable, net of current portion ...... 986,130 1,050,222
------------ ------------
Other ......................................... 182,474 181,320
------------ ------------
$ 9,274,293 $ 9,558,631
============ ============
</TABLE>
See accompanying notes which are an integral part of these balance sheets.
3
<PAGE>
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt ................. $ 1,458,544 $ 1,488,825
Accounts payable ..................................... 585,514 819,027
Accrued expenses ..................................... 860,317 548,769
----------- -----------
Total current liabilities ......................... 2,904,375 2,856,621
LONG-TERM DEBT, less current maturities ................. 1,663,475 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 .................................. (2,522,687) (2,246,951)
----------- -----------
Total shareholders' equity ........................ 4,706,443 4,982,179
----------- -----------
$ 9,274,293 $ 9,558,631
=========== ===========
</TABLE>
See accompanying notes which are an integral part of these balance sheets.
4
<PAGE>
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
--------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE .............................. $ 4,386,647 $ 3,955,252 $ 8,395,719 $ 7,636,131
COSTS AND EXPENSES:
Direct Expenses ................... 3,555,971 3,178,501 6,791,881 5,965,818
Depreciation and Amortization ..... 466,750 355,134 925,319 651,741
Pre-Opening Expenses .............. 8,869 97,805 49,453 126,169
----------- ----------- ----------- -----------
Total Costs and Expenses ....... 4,031,590 3,631,440 7,766,653 6,743,728
----------- ----------- ----------- -----------
CENTER OPERATING INCOME .............. 355,057 323,812 629,066 892,403
Selling, General and Administrative 369,691 198,141 728,293 447,989
Depreciation and Amortization ..... 28,896 29,653 57,472 59,306
----------- ----------- ----------- -----------
OPERATING INCOME ..................... (43,530) 96,018 (156,699) 385,108
Interest Expense .................. (95,585) (97,971) (192,443) (170,035)
Interest Income ................... 28,369 33,151 58,559 67,505
Minority Interest ................. 11,014 9,785 14,847 8,904
----------- ----------- ----------- -----------
NET INCOME ........................... $ (99,732) $ 40,983 $ (275,736) $ 291,482
=========== =========== =========== ===========
INCOME PER SHARE:
Basic and Diluted ................. $ (.03) $ .01 $ (.08) $ .09
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic and Diluted ................. 3,293,300 3,293,300 3,293,300 3,293,300
=========== =========== =========== ===========
</TABLE>
See accompanying notes which are an integral part of these statements.
5
<PAGE>
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ............................................. $ (275,736) $ 291,482
Adjustments to reconcile net income (loss) to net cash provided
by operating activities--
Depreciation and amortization ........................... 982,791 711,047
Change in operating assets and liabilities:
Accounts receivable .................................. 324,730 258,319
Prepaid expenses and other ........................... 72,007 114,015
Accounts payable ..................................... (233,513) (146,787)
Other assets ......................................... (3,742) 15,163
Accrued expenses ..................................... 311,548 35,957
----------- -----------
Net cash provided by operating activities ......... 1,178,085 1,279,196
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment, net ...................... (941,889) (1,824,040)
Payments received on notes receivable ......................... 56,836 61,724
----------- -----------
Net cash used in investing activities ...................... (885,053) (1,762,316)
----------- -----------
FINANCING ACTIVITIES:
Payments on line of credit, net ............................... (154,283) --
Payments on long-term obligations ............................. (563,448) (454,681)
Additional borrowings of long-term debt ....................... 631,094 705,001
----------- -----------
Net cash provided by (used in) financing activities ........ (86,637) 250,320
----------- -----------
Net increase (decrease) in cash and cash equivalents ....... 206,395 (234,800)
CASH AND CASH EQUIVALENTS,
beginning of period ........................................... 208,717 554,540
----------- -----------
CASH AND CASH EQUIVALENTS,
end of period ................................................. $ 415,112 $ 319,740
=========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period for--
Interest ................................................... $ 199,448 $ 167,309
=========== ===========
NON-CASH ITEMS:
Non-cash payments on notes receivable ......................... -- 65,606
=========== ===========
</TABLE>
See accompanying notes which are an integral part of these statements.
6
<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 June 30, 1999, and
the results of its operations for the six months ended June 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 1998 and 1997. Options and warrants totaling
471,100 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.
<TABLE>
<CAPTION>
NEW HORIZON IDAHO
KIDS QUEST, TRADITIONAL
FOR THE THREE MONTH PERIOD ENDED JUNE 30, INC. CARE CONSOLIDATED
----------- ----------- ------------
<S> <C> <C> <C>
1999
- ----
Revenue ................................ $ 3,345,643 $ 1,041,004 $ 4,386,647
Depreciation and amortization .......... 1,088,773 61,864 1,150,637
Interest income ........................ 28,369 -- 28,369
Income (loss) from continuing operations 44,231 (143,963) (99,732)
Capital Expenditures ................... 287,628 15,326 302,954
1998
- ----
Revenue ................................ 2,931,494 1,023,758 3,955,252
Depreciation and amortization .......... 333,186 51,601 384,787
Interest income ........................ 32,648 503 33,151
Income (loss) from continuing operations 41,056 (73) 40,983
Capital Expenditures ................... 941,206 -- 941,206
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
NEW HORIZON IDAHO
KIDS QUEST, TRADITIONAL
FOR THE THREE MONTH PERIOD ENDED JUNE 30, INC. CARE CONSOLIDATED
----------- ----------- ------------
<S> <C> <C> <C>
1999
- ----
Revenue ................................ $ 6,375,972 $ 2,019,747 $ 8,395,719
Depreciation and amortization .......... 1,518,727 119,055 1,637,782
Interest income ........................ 58,559 -- 58,559
Loss from continuing operations ........ (23,204) (252,532) (275,736)
Capital Expenditures ................... 805,600 136,289 941,889
1998
- ----
Revenue ................................ 5,671,063 1,965,068 7,636,131
Depreciation and amortization .......... 607,845 103,202 711,047
Interest income ........................ 65,826 1,679 67,505
Income (loss) from continuing operations 294,336 (2,854) 291,482
Capital Expenditures ................... 1,824,040 -- 1,824,040
</TABLE>
4. Subsequent Event:
In the third quarter, the company has discontinued operations at two of
the Company's fourteen child care centers in Boise, Idaho as part of a
plan to consolidate and improve the performance of the Company's Idaho
operations. In addition, the Company is in the process of reviewing the
long-term viability of certain other under performing locations in the
Boise market. The Company expects that its decision will result in a
charge to operations in the third quarter for asset write-downs and lease
termination charges of approximately $800,000. As a result of these
write-offs, depreciation and amortization expense will be reduced by
approximately $40,000 for 1999 and approximately $95,000 in 2000.
8
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company currently provides hourly child care at nineteen 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. The Mall of America center was recently licensed to
provide traditional care, in addition to hourly care, and began accepting
enrollments in June 1999. Seventeen 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 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 include the Company's fifth 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.
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 fourth quarter of
1999.
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.
Results of Operations
Revenue for the three months ended June 30, 1999, increased $431,395, or
11%, to $4,386,647 from $3,955,252 for the same period in 1998. The Company
opened one Kids Quest hourly care center, one employee child care center, and
one New Horizon Child Care center since the second quarter of 1998, which
accounted for $402,307 of additional revenue. Revenue for the Kids Quest centers
open during both periods increased $99,048, or 3%, to $3,030,542 for the three
months ended June 30, 1999, from $2,931,494 for the same period in 1998.
Revenues for the Idaho New Horizon Child Care
9
<PAGE>
centers open during both periods decreased $69,960, or 7%, to $953,798 for the
three months ended June 30, 1999, from $1,023,758 for the same period in 1998.
For the quarter, four centers experienced a combined revenue loss of $110,396,
or 34%. Management attributes this decline to increased competition and
management turnover.
Revenue for the six months ended June 30, 1999, increased $759,588, or
10%, to $8,395,719 from $7,636,131 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
$769,708 of additional revenue. Revenue for the Kids Quest centers open during
both periods increased $69,060, or 1%, to $5,659,416 for the six month period
ended June 30, 1999, from $5,590,356 for the same period in 1998. Revenues for
the Idaho New Horizon Child Care centers open during both periods decreased
$79,180, or 4%, to $1,885,933 for the six month period ended June 30, 1999, from
$1,965,113 for the same period in 1998.
Costs and expenses for the three months ended June 30, 1999, increased
$400,150, or 11%, to $4,031,590 from $3,631,440 for the same period in 1998. The
increase is attributable primarily to the new locations added since the second
quarter of 1998, which accounted for $367,355 of the increase. Costs and
expenses for existing Kids Quest locations increased $19,345, or 1%, to
$2,707,277 from $2,687,932 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. The increase was
partially offset by an $88,936 reduction in pre-opening expenses as compared to
the same quarter in the prior year. Costs and expenses for the existing Idaho
New Horizon Child Care centers increased $13,450, or 1%, to $956,732 from
$943,282 for the same period in 1998.
Costs and expenses for the six months ended June, 30, 1999, increased
$1,022,925, or 15%, to $7,766,653 from $6,743,728 for the same period in 1998.
Of the increase, $743,095 is the result of new locations opened since the
beginning of 1998. Costs and expenses for existing Kids Quest locations
increased $228,067, or 5%, to $4,849,485 from $4,621,418 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 existing Idaho New Horizon
Child Care centers increased $51,763, or 3%, to $1,858,219 from $1,806,456 for
the same period in 1998. The cost increases were due primarily to increased
staff training, upgrade of the centers' operating supplies and increased
advertising.
Selling, general and administrative expenses increased $171,550 to
$369,691 for the three-month period ended June 30, 1999, from $198,141 for the
same period in 1998. Selling, general and administrative expenses for the
six-month period ended June 30, 1999, increased $280,304 to $728,293 from
$447,989 for the same period in 1998. Increases for the three and six 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 $286,093 of
reimbursements for rate discounts for the three-month period ended June 30,
1999, versus $303,464 for the same period in 1998, a decrease of $17,371, or 6%.
For the six-month period ended June 30, 1999, the Company received $553,908
versus $592,086 for the same period in 1998, a decrease of $38,178, 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 June 30, 1999, decreased
$2,386, or 2%, to $95,585 from $97,971 for the same period in 1998. Interest
expense for the six months ended June 30, 1999, increased $22,408, or 13%, to
$192,443 from $170,035 for the same period in 1998. The increase in interest
expense is due to borrowing made by the Company to fund its expansion efforts.
10
<PAGE>
Net loss for the three month period ended June 30, 1999, was $99,732
compared to net income of $40,983 for the same period in 1998, a decrease of
$140,715. Centers added since the second quarter of 1998 accounted for an
increase in operating income of $34,951. Operating income for Kids Quest centers
in operation during both periods increased $79,703, or 33%, to $323,265 from
$243,562 for the same period in 1998. The increase was due primarily to a
reduction in the loss at the Mall of America for the quarter of $110,699 as a
result of $88,936 less in pre-opening expenses for the period. The increase was
partially offset by a $29,011 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 Company's Texas Station location in February of 1999, which is approximately
nine miles from Boulder Station. Results for the quarter were also negatively
impacted by increases in selling, general and administrative expenses. Operating
income for the Idaho New Horizon Child Care centers in operation during both
periods decreased $83,410 to a loss of $2,934 from net income of $80,476 for the
same period in 1998. Four centers accounted for $80,191 of the decrease due
primarily to a combined revenue loss of 34% for the period. Management
attributes the decline primarily to increased competition and management
turnover.
Net loss for the six month period ended June 30, 1999, was $275,736
compared to net income of $291,482 for the same period in 1998, a decrease of
$567,218. Centers added since the beginning of 1998 accounted for an increase in
center operating income of $26,613. Operating income for the Kids Quest centers
open during both periods declined $155,896 from $968,938 to $813,042 for the
same period in 1998. The decrease at existing Kids Quest locations was due
primarily to a decrease in operating income at the Company's Boulder and Sunset
Station locations of $86,875. Results for the six-month period were also
negatively impacted by increases in selling, general and administrative
expenses. Operating income for the Idaho New Horizon Child Care centers open
during both periods decreased $130,944 from $158,657 to $27,713 for the same
period in 1998 due primarily to significant revenue declines at four of the
Company's Idaho centers.
Liquidity and Capital Resources
During the six month period ended June 30, 1999, the Company generated
$1,178,085 from operations, invested $941,889 in property and equipment, and
received payments on notes receivable of $56,836. Additionally, the Company made
payments on its line of credit of $154,283 and payments on long-term obligations
of $563,448. The Company ended the period with a cash balance of $415,112.
During the period, the Company borrowed $631,094 for new equipment including the
opening of Columbia Village in Idaho and Texas Station in Nevada. During the
same period in 1998, the Company generated $1,277,196 from operations, invested
$1,824,040 in property and equipment, and received payments on notes receivable
of $61,724. The Company made payments on long term debt of $454,681 and borrowed
an additional $705,001 related to the Mall of America location. The Company
ended the period with a cash balance of $319,740.
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
11
<PAGE>
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.
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.
12
<PAGE>
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
June 30, 1999.
13
<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/ Patrick R. Cruzen
------------------------------------
Patrick R. Cruzen
Chief Financial Officer
Date: August 13, 1999
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 415,112
<SECURITIES> 1,414
<RECEIVABLES> 638,702
<ALLOWANCES> 51,682
<INVENTORY> 39,209
<CURRENT-ASSETS> 1,213,801
<PP&E> 10,110,921
<DEPRECIATION> 4,169,483
<TOTAL-ASSETS> 9,274,293
<CURRENT-LIABILITIES> 2,904,375
<BONDS> 0
0
0
<COMMON> 32,933
<OTHER-SE> 4,673,510
<TOTAL-LIABILITY-AND-EQUITY> 9,274,293
<SALES> 461,953
<TOTAL-REVENUES> 8,395,719
<CGS> 265,679
<TOTAL-COSTS> 265,679
<OTHER-EXPENSES> 8,271,892
<LOSS-PROVISION> (145)
<INTEREST-EXPENSE> 192,443
<INCOME-PRETAX> (275,736)
<INCOME-TAX> 0
<INCOME-CONTINUING> (275,736)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (275,736)
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
