SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark one)
(X) Annual Report Pursuant To Section 13 Or 15(d) Of The Securities
Exchange Act Of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
Or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 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 Identification No.)
incorporation or organization)
13705 FIRST AVENUE NORTH
PLYMOUTH, MINNESOTA 55441
Registrant's telephone number, including area code: (612) 557-1111
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.01 par value)
Check whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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 ___
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements or any
amendment to this Form 10-KSB. |X|
The registrant's revenues for its most recent fiscal year were
$9,888,161.
The aggregate market value of the voting stock held by non-affiliates
of the registrant based on the last reported sale price of the Common Stock as
quoted on the Nasdaq SmallCap Market on March 12, 1997, was approximately
$3,792,412.
As of March 15, 1997, there were 3,293,300 shares of Common Stock of
the registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the documents listed below have been incorporated by
reference into this Form 10-KSB.
Document Incorporated Part of Form 10-KSB
Proxy Statement for 1997 Annual Meeting of Shareholders Part III
FORM 10-KSB INDEX
Page
PART I. .................................................................... 1
Item 1. DESCRIPTION OF BUSINESS................................ 1
Item 2. DESCRIPTION OF PROPERTY................................ 9
Item 3. LEGAL PROCEEDINGS...................................... 10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.... 10
PART II. .................................................................... 11
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.................................... 11
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS................... 12
Item 7. FINANCIAL STATEMENTS................................... 16
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................... 29
PART III..................................................................... 29
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE
SECURITIES EXCHANGE ACT OF 1934........................ 29
Item 10. EXECUTIVE COMPENSATION................................. 30
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................. 30
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......... 30
Item 13. EXHIBITS AND REPORTS ON FORM 8-K....................... 30
"NEW HORIZON KIDS QUEST," "KID QUEST" AND "GRAND CASINO KIDS QUEST" ARE SERVICE
MARKS OF NEW HORIZON KIDS QUEST, INC. "NEW HORIZON" IS A SERVICE MARK OF NEW
HORIZON ENTERPRISES, INC. THIS DOCUMENT MAY CONTAIN TRADEMARKS OF OTHER
COMPANIES.
PART I.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
New Horizon Kids Quest, Inc. (the "Company") develops, owns and
operates supervised children's entertainment facilities under the name Kids
Quest and premium traditional child care centers under the name New Horizon. The
Company currently operates 13 Kids Quest and 13 New Horizon centers. The Company
intends to expand its operations through the development of additional Kids
Quest centers and the acquisition or development of additional New Horizon
centers.
Kids Quest combines supervised, hourly child care with children's
entertainment and recreational facilities. The Kids Quest concept was developed
by the Company in cooperation with Grand Casinos, Inc. (a principal shareholder
of the Company) to provide casino guests with quality child care, and the
Company opened its first Kids Quest at Grand Casino Hinckley in May 1992. Unlike
many "pay for play" providers where parents are required to remain with their
children, Kids Quest allows parents to pursue activities away from the center
while their children are supervised and entertained. Kids Quest is designed
to delight children, encourage repeat visits, and provide parents with the peace
of mind afforded by supervised child care.
Twelve of the Company's 13 Kids Quest centers are operated in
conjunction with casinos, including seven casinos owned or managed by Grand
Casinos, Inc. in Minnesota, Mississippi and Louisiana. In November 1995, the
Company opened a Kids Quest at Boulder Station Casino in Las Vegas. The Company
opened four Kids Quest centers in 1996, including a stand-alone Kids Quest at
Grand Casinos Tunica in Robbinsonville, Mississippi, as well as centers at
Ameristar Casino in Council Bluffs, Iowa, the Mohegan Sun Casino in Uncasville,
Connecticut, and at the Soaring Eagle Casino and Hotel in Mount Pleasant,
Michigan. The Kids Quest center at the Mohegan Sun Casino includes the Company's
first supervised arcade. The Company's thirteenth Kids Quest opened in January
1997 at Station Casino Kansas City, the Company's second location with Station
Casinos, Inc. The Company has entered into agreements or has letters of intent
to develop and operate a Kids Quest center at the Stratosphere in Las Vegas,
Nevada and a stand-alone Kids Quest and arcade adjacent to the Bullwackers and
Silver Hawk Casinos in Black Hawk, Colorado. One of the Company's Kids Quest
centers operates in an enclosed shopping mall in suburban Minneapolis,
Minnesota.
In addition to the development of additional Kids Quest centers, the
Company intends to acquire or develop premium traditional child care centers in
selected metropolitan markets and operate such centers under the New Horizon
tradename. The Company targeted Boise, Idaho and the surrounding metropolitan
area for immediate expansion primarily due to the growth and development in that
region in recent years and now operates 13 premium child care centers in the
Boise area. The Company acquired twelve established centers between September
1995 and March 1996, and opened its thirteenth center in August 1996 in a newly
constructed facility. All of the Company's facilities are leased.
The Company is a licensee of the service mark "New Horizon" pursuant to
a licensing agreement entered into with New Horizon Enterprises, Inc. ("New
Horizon Enterprises"). Three of the Company's principal shareholders are the
principal shareholders and executive officers of New Horizon Enterprises. New
Horizon Enterprises and its affiliates have owned and operated child care
centers since 1971 and currently operate 47 licensed child care centers in
Minnesota under the names New Horizon Child Care, Kinderberry Hill Child
Development and Building Block Child Care. The Company does not have any
ownership interest in these Minnesota centers. Under the licensing agreement,
New Horizon Enterprises has granted the Company the exclusive right to develop
future New Horizon and Kinderberry Hill centers outside of Minnesota.
New Horizon Kids Quest, Inc. was incorporated in Minnesota in March
1992. The Company's principal executive offices are located at 13705 First
Avenue North, Plymouth, Minnesota 55441, and its telephone number at that
location is (612) 557-1111.
KIDS QUEST CENTERS
The Company has designed and developed its Kids Quest concept to create
an environment for children that combines fun with physical activity and
learning. Each activity center is fully staffed with experienced child care
professionals certified in CPR and first aid training.
Kids Quest combines hourly child care with indoor recreational and
educational facilities to entertain children while providing parents with the
peace of mind afforded by supervised child care. Many "pay for play" operators
require parents to remain with their children, providing merely an indoor
playground. Kids Quest creates an entertainment center that allows parents to
pursue activities away from the center while their children are supervised and
entertained.
Each of the Company's Kids Quest centers feature a specially designed,
padded floor-to-ceiling climbing maze and play structure consisting of up to 35
activities, including tunnels, slides, ball baths, ramps, stairs, climbing nets,
periscopes, air hops, bumper bags, talking tubes and other activities allowing
children to crawl, climb, bounce, hop, tumble and slide in the safety of a
secure environment.
Kids Quest offers a wide range of services and activities for children
ranging from six weeks to 12 years of age. Kids Quest offers a broad array of
toy-filled play areas and the latest in custom-designed, interactive media,
electronic entertainment, and computer technology. Some of these activities
include: "Construction Quarry" featuring Duplos and Legos to stimulate
imagination and creative thinking; a mini video arcade featuring carefully
chosen non-violent, interactive games that develop quick reflexes and
hand-to-eye coordination; "Star Stage," an interactive Karaoke stage to help
foster creativity and self-esteem; a movie room equipped with a large-screen
stereo television and child-sized furniture to simulate a movie theater; a
Barbie doll house community filled with props and accessories; Sega, Nintendo
and interactive CD-ROM computers providing a quieter alternative for children;
Fascination Station computers allowing children to create computerized art and
design their own unique creations; and many other areas designed to provide
children with hours of entertainment and variety. The centers also offer
specially designed areas for infants and toddlers which include kitchenettes,
infant swings, padded climbing areas and separate sleeping areas with cribs. The
Company intends to include substantially all of the features described above in
each of its future Kids Quest centers, subject to market demand and space
limitations.
Kids Quest centers charge fees ranging from $3.00 to $6.00 per hour
depending on the location. The Company's agreements with Grand Casinos have
included child care rate subsidies of up to $2 per hour. All activities such as
arcade, video and skill games are included in the hourly fees. For an additional
charge, Kids Quest offers nutritionally balanced meals at lunch and dinner time,
as well as a full service snack bar. Kids Quest promotes special events such as
birthdays, club meetings and field trips at special group rates. Although hours
vary by location, Kids Quest centers generally open at 9:00 a.m. and close at
11:00 p.m. weekdays, and later on weekends.
The Company's Kids Quest center in the Mohegan Sun Casino opened in
October 1996 and includes the Company's first supervised arcade. The Company's
arcade is designed for teenagers, rather than children 12 and under, but offers
more supervision than typical arcades. The Company does not charge an hourly fee
for the use of its supervised arcade, but the machines require the purchase of
tokens.
The Company currently operates 13 Kids Quest centers ranging in size
from 6,000 to 22,000 square feet. One of the Kids Quest centers operates in a
large, self-contained shopping mall in Eden Prairie, Minnesota.
NEW HORIZON CENTERS
The focus of the Company's traditional child care business is to
provide premium quality licensed child care services and preschool programs for
children ranging in age from six weeks to 12 years. Management has substantial
experience in the development and operation of child care centers including
analysis of demographics, site selection, building design, construction,
licensing, programming, personnel training, management, marketing and
advertising.
New Horizon offers educational and recreational programs specifically
tailored to meet the needs of each of the age groups served by the Company's
centers. The infant program emphasizes frequent contacts with adult caregivers,
along with participation in the Small Wonder curriculum developed by Johnson &
Johnson. This curriculum offers a variety of activities designed to produce a
challenging and stimulating environment. The toddler curriculum introduces and
emphasizes the value of learning and playing with others, sharing, taking turns,
communicating and expressing wants and needs that are essential to the
development of successful relationships. The preschool curriculum emphasizes
cognitive skills by teaching children numbers, letters, sounds, shapes, colors,
sequencing, listening skills and many other age-appropriate activities. Small
group sizes allow individual attention and curriculum enhancement. New Horizon's
program for school age children offers a wide variety of group and individual
projects that build on the child's developing skills and interests. New Horizon
also offers optional enrichment programs that may include field trips, music,
dance, gymnastics, swimming, computer and karate lessons.
New Horizon emphasizes daily communication and interaction among
parents, teachers and students. The centers provide a daily "highlight" memo
written and posted by each teacher for his or her group. In addition, New
Horizon conducts regularly scheduled parent-teacher conferences and encourages
informal or unscheduled conferences as desired by parents.
New Horizon centers are typically open weekdays from 6:30 a.m. to 6:00
p.m. (except certain holidays). Children are generally enrolled on a weekly
basis for either a full-day or half-day, with drop-ins permitted on an hourly
basis when capacity permits.
NEW INNOVATIONS IN PRODUCTS AND SERVICES
The Company believes that it can continue to enhance the performance of
its New Horizon centers by continuously updating and upgrading its activities
and services. Kids Quest has recently introduced several new and innovative play
and development activities. Although the Company has made a significant
investment in these updated products, management believes that they will serve
as a platform upon which to add inexpensive, but highly visible updates and
changes as new software is developed. The Company's Kids Quest center in the
Mohegan Sun Casino includes the Company's first supervised arcade. The Company
intends to include arcades in some of its future Kids Quest locations, including
its Kids Quest to be developed this year at the Bullwackers and Silver Hawk
Casinos in Black Hawk, Colorado. The Company further believes that continuing
innovations and updating its activities will result in a stimulating environment
that will enhance the likelihood of repeat business.
SAFETY AND SECURITY
The Company's centers and equipment have been designed and tested to
provide a safe and secure environment. Age-appropriate equipment is provided in
areas specially designed for infants, toddlers and older children. Staff members
are trained and positioned throughout a facility to interact with and protect
the children.
In the Kids Quest centers, all climbing equipment and related play
areas are protected with padded cushions. The play structures have been designed
to eliminate sharp edges and exposed nuts and bolts. The Company has also
designed and implemented a security/identification program. Each Kids Quest
center has a check-in and check-out system with security gates that are
monitored to ensure that each child is accounted for and remains in the facility
until picked up by an authorized individual. Adults are not permitted inside the
secure play area unless accompanied by a staff member.
The Company's safety program for its New Horizon centers includes
regular inspections and periodic monitoring of each center's policies and
procedures. Access to a New Horizon center typically is limited to a front
entryway that is generally located near the center director's office. Other
entrances are secured and used only as emergency exits. All outdoor playground
areas are completely fenced.
Parents are also required to sign children in and out of each center.
GROWTH AND EXPANSION
The Company believes that it is situated to take advantage of expansion
opportunities for both its Kids Quest and New Horizon centers. Although there
are many similarities and interrelationships between these two lines of
businesses, they present very separate and distinct market opportunities within
the child care industry.
KIDS QUEST. In 1992, the Company introduced its novel combination of
supervised child care and state-of-the-art children's entertainment facilities.
Casino operators and developers of full service destination resorts have
recognized that the Company's unique child care services are a valuable amenity
enhancing the service provided to their own customers. The Company now operates
the following Kids Quest centers:
Kids Quest Location Date Opened
Grand Casino Hinckley Hinckley, Minnesota May 1992
Grand Casino Mille Lacs Mille Lacs, Minnesota March 1993
Grand Casino Gulfport Gulfport, Mississippi June 1993
Grand Casino Biloxi Biloxi, Mississippi January 1994
Eden Prairie Center Eden Prairie, Minnesota March 1994
Grand Casino Avoyelles Marksville, Louisiana June 1994
Grand Casino Coushatta Kinder, Louisiana January 1995
Boulder Station Casino Las Vegas, Nevada November 1995
Ameristar Casino Council Bluffs, Iowa June 1996
Grand Casino Tunica Robbinsonville, Mississippi August 1996
Mohegan Sun Casino Uncasville, Connecticut October 1996
Soaring Eagle Casino Mount Pleasant, Michigan December 1996
Station Casino Kansas City Kansas City, Kansas January 1997
The Company has entered into a letter of intent to develop and operate
a Kids Quest center at Stratosphere in Las Vegas, Nevada. Although this Kids
Quest was originally scheduled to be developed in 1996, its construction has
been delayed by the financial difficulties experienced by Stratosphere
Corporation. Stratosphere Corporation recently filed for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. The Company believes that a Kids Quest
center in the Stratosphere complex may be developed this year. The Company has
also entered into an agreement with Colorado Gaming and Entertainment Co. to
develop and operate a stand-alone Kids Quest and arcade adjacent to the
Bullwackers and Silver Hawk Casinos in Black Hawk, Colorado. The Company also
has an agreement to develop a Kids Quest center at the proposed Seven Cedars
Casino in Sequim, Washington; however, the status of that casino continues to be
uncertain. The Company believes that its relationships with casino operators
creates a unique opportunity to expand and increase its market share of the
child activity center business. The Company intends to target favorable markets,
secure superior locations and establish a strong market presence by entering
into agreements with casino operators, family resort developers and Native
American tribes. The Company's goal is to make Kids Quest a necessary amenity
for family entertainment destinations.
NEW HORIZON CENTERS. The Company intends to develop its traditional
child care business by identifying specific communities and markets (other than
in Minnesota, where the Company does not have the right to develop or operate
New Horizon centers) that offer positive demographics, favorable business
climates and regulatory environments, and a demonstrable need for premium child
care services. The Company believes such opportunities exist in both rapidly
expanding urban markets that have not yet been saturated by national commercial
providers as well as in newly developing outer rings of more mature populated
communities.
The Company believes that it can successfully penetrate carefully
selected markets by acquiring existing centers in conjunction with the
development of its own New Horizon centers. Upon entry into a market, New
Horizon seeks to establish itself as a premier child care provider appealing to
young upscale families. The Company will seek to enhance the character,
efficiency and community image of acquired centers through physical renovation
and improvement and the conversion to the New Horizon philosophy and programs.
The Company targeted Boise, Idaho and the surrounding metropolitan area
for immediate expansion primarily due to the growth and development in that
region in recent years. Boise, Idaho's capital, is the most populated area in
the state. The Boise metropolitan area is the business, financial, professional,
transportation and cultural center of Idaho. The city's low cost of living, low
crime rate, low commercial utility costs and general high quality of life
relative to other western metropolitan areas has attracted new businesses and
residents. Its economic base includes manufacturing, corporate headquarters,
transportation, financial services, utilities, health care, wholesale
distribution and governmental agencies. In addition, the Boise child care market
has historically been fragmented and dominated by small, individually-owned, or
in-home day care facilities. There are no national competitors in the Boise
market.
In September 1995, the Company acquired six established child care
centers located throughout Boise and the surrounding metropolitan area. The
facilities range in size from 4,500 square feet to 10,000 square feet on sites
ranging from one to four acres. In March 1996, the Company acquired six
additional established centers. The Company opened its thirteenth child care
center in the Boise area in August 1996 in a newly constructed facility. The
Company is currently pursuing the acquisition of a vacant site in the Boise
metropolitan area for the future construction and development of an additional
New Horizon center. This site would complement the Company's existing centers
and allow further market penetration into areas surrounded by upscale
residential neighborhoods and commercial centers with a high demand for premium
child care.
Extensive physical renovations and improvements have been made to each
of the acquired facilities, and New Horizon's standardized curriculum, programs
and cost controls are being implemented. While the centers suffered enrollment
declines after a rate increase, the Company believes that it is positioned as
the leading child care service provider in the Boise premium child care market
through the acquisition and construction of these centers.
MARKETING AND PROMOTION
The Company's marketing efforts are intended to position the Company as
an innovative leader in the premium child care and children's entertainment
facilities markets. Historically, a primary source of new enrollment for
traditional child care services has been word-of-mouth recommendations from
satisfied parents in communities in which centers operate. The Company believes
that it can increase enrollment in its New Horizon centers by employing various
community-based advertising and promotional techniques such as: direct mailings,
distribution of promotional material in residential areas surrounding local
centers, newspaper advertisements in local and regional newspapers, Yellow Pages
listings, community events, participation in or sponsorship of special events
such as carnivals, fairs, parents' expo, women's expo and Kids Jam, and to a
lesser extent, local radio and television ads.
The Company may also attempt to increase enrollment at its New Horizon
centers through the use of various corporate referral and voucher programs.
Under these programs, the Company may offer discounts to the employees of
participating employers, thereby increasing enrollment and enhancing the
Company's image through its affiliation with prominent employers within the
community.
The Company implements many of the same types of community-based
marketing strategies for the promotion of its Kids Quest centers. In addition,
the Company relies upon cross promotional opportunities and special events with
various casinos, Native American Tribes and facility owners or developers. The
Company also seeks to increase its enrollment through various discounts,
promotions and the following marketing techniques: direct mailings to local
residents and child care centers, database mailings, special events, guest
appearances, mall advertising, volume user discount programs, field trip
packages, concession discounts and free care for children on their birthday.
COMPETITION
The Company's New Horizon centers provide traditional child care
services. The traditional child care industry is highly fragmented and extremely
competitive. Child care services are generally provided by many different types
of providers including large national or regional chains, small unlicensed
in-home providers, state and federal government agencies, church-based centers,
hospital centers, employer programs, college and university facilities, and
community-based service organizations such as YMCAs and YWCAs. Providers consist
of both non-profit organizations and for-profit entities. In most geographic
areas, the Company expects to compete with large national and regional providers
with an established presence in major metropolitan markets. Several national
competitors enjoy greater national name recognition and have significantly
greater resources than the Company. The Company also competes with unregulated
in-home child care providers who typically provide services at a significantly
lower cost. Unregulated, in-home child care providers generally benefit from
lower overhead, pay little or no rent, and maintain lower operating costs
because they frequently are not required to incur the costs associated with
regulatory compliance, licensing and insurance. Many church-affiliated and other
non-profit child care centers may also offer services at rates lower than the
Company's because such organizations often have lower rental costs, and may
receive donations or other funding to cover operating expenses.
The financial performance of individual child care centers may also be
affected by factors such as center location, inflation, labor and employee
benefit costs, as well as the availability of experienced management and hourly
child care workers. Child care center operating costs are further affected by
increases in the minimum hourly wage, unemployment taxes, increased insurance
costs and similar matters over which the Company has no control.
In addition to competing in the traditional child care industry, the
Company's Kids Quest centers compete in the emerging business of children's
indoor recreational facilities. Viewed in the broadest sense, competition in
this industry includes a variety of children's entertainment activities such as
indoor playgrounds, video arcades, laser tag facilities, indoor amusement
centers, virtual reality games and other forms of indoor children's
entertainment.
Among indoor "pay for play" facilities, competition is also extremely
fragmented. There are large national and regional "pay for play" chains offering
entertainment and fitness facilities. There are also several smaller children's
entertainment facilities with soft activity zones similar to Kids Quest in many
major metropolitan areas throughout the United States. The Company principally
competes by providing innovative services in well-equipped facilities that are
staffed with trained, experienced child care professionals.
GOVERNMENT REGULATION
Each New Horizon center must be licensed under applicable state or
local licensing laws and is subject to a variety of state and local regulations.
Although these regulations vary greatly from jurisdiction to jurisdiction,
governmental agencies generally review the safety, fitness and adequacy of the
buildings and equipment, the ratio of staff to children, the dietary program,
the daily curriculum and compliance with health standards. In most
jurisdictions, these agencies conduct scheduled and unscheduled inspections of
the centers, and licenses must be renewed periodically. Repeated failures of a
center to comply with applicable regulations can subject it to sanctions, which
include probation or, in more serious cases, suspension or revocation of the
center's license to operate. The Company believes that each of its centers is in
substantial compliance with such requirements.
Most of the Company's Kids Quest centers are licensed child care
providers under applicable state, local or tribal licensing laws and, as such,
are subject to licensing and operational requirements similar to the Company's
New Horizon centers. Some licensing statutes provide exemptions from licensing
requirements for child care providers offering hourly care or where parents
remain on the premises, and Kids Quest qualifies for certain of these
exemptions. The Company intends to license as many of its Kids Quest centers as
is practical and intends to meet or exceed relevant licensing standards at each
Kids Quest, including staff-to-student ratio and teacher training requirements.
The Company operates a Kids Quest at Ameristar Casino in Council
Bluffs, Iowa. In connection with the Company's licensure as a child care
facility, the Company was granted temporary exemptions from certain Iowa
licensing requirements. These temporary exemptions expire on June 1, 1997. While
the Company will request further exemptions from such requirements, there can be
no assurance that further exemptions will be granted. If such requests are
denied, the Company may attempt to modify its procedures at that location to the
extent necessary to operate in compliance with Iowa law. There can be no
assurance, however, that the Company will be able to satisfy Iowa legal
requirements or that it can operate profitably in compliance with such
requirements. Alternatively, the Company may seek to operate in Iowa as an
unlicensed activity center.
Six of the Company's Kids Quest centers are located on Indian tribal
land and are operated in proximity to casinos. Each of the casinos operates
pursuant to a tribal-state compact between the applicable tribe and state, and
each compact provides for a term and an automatic renewal term, unless either
party delivers notice of non-renewal. There can be no assurance that any of
these compacts will be renewed, and any interference with or termination of the
casino's operations would have an adverse effect on the Company's
operations at that location.
EMPLOYEES
The Company currently has approximately 462 employees, including 13
administrative employees at its corporate headquarters. The Company does not
have an agreement with any labor union and the Company believes that its
relations with its employees are good.
Each Kids Quest center is staffed with a Director, two Assistant
Directors and an appropriate number of floor monitors and associates sufficient
to comply with state-mandated staff-to-student ratio requirements. Each Kids
Quest staff member receives initial and ongoing training in various child care
disciplines such as special needs children, recognition of child abuse and
customer relations. All Kids Quest staff members are fully certified in CPR and
first aid.
Each of the New Horizon centers is staffed with a Director, Assistant
Director and an appropriate number of teachers and aides sufficient to comply
with state-mandated staff-to-student ratio requirements. All employees
participate in periodic training programs and are required to meet applicable
state and local regulatory requirements. All Idaho child care employees are
individually licensed and finger-printed, and those working within the city of
Boise undergo background checks as part of the city's licensing process. The
Boise locations are supervised by a District Manager.
Persons desiring to become a director of a Kids Quest or New Horizon
center must complete the Company's extensive training program.
SERVICE MARKS
The Company maintains the federally registered service marks "New
Horizon Kids Quest," "Kid Quest" and "Grand Casino Kids Quest". In addition, the
Company has entered into a licensing agreement with New Horizon Enterprises,
Inc., pursuant to which the Company is a licensee of the service mark "New
Horizon." A federally registered service mark is effective for ten years and may
be renewed. Even though the Company has either registered or become the licensee
of certain service marks, there can be no assurance as to the extent of the
protection afforded to the Company as a result of having such service marks and
licensing agreements, nor is there any assurance that the Company will be able
to afford the expenses of any complex litigation that might be necessary to
enforce the Company's proprietary rights.
On April 24, 1995, an unrelated Texas corporation named KidQuest, Inc.
filed a lawsuit against the Company's licensor, New Horizon Enterprises, Inc.,
in the United States District Court for the Northern District of Texas. The
plaintiff sought a declaratory judgment that plaintiff's use of the mark
"KidQuest" as a trademark for the sale of videotape products does not infringe
on the defendant's use of its federally registered service mark "Kid Quest" (New
Horizon Enterprises, Inc. owned the "Kid Quest" mark prior to its transfer to
the Company). Defendant, New Horizon Enterprises, Inc., counterclaimed alleging
that the plaintiff willfully infringed upon and otherwise diluted defendant's
service mark rights. The parties entered into a settlement agreement in 1996 and
their respective claims were dismissed. In the settlement agreement, KidQuest,
Inc. agreed to withdraw its trademark registration applications involving the
use of "KidQuest" and agreed to cease using "KidQuest" or any confusingly
similar mark, by December 31, 1997, on any products, or as a service mark in
connection with any services, offered for sale or sold.
INSURANCE
The Company maintains comprehensive general liability insurance that
provides coverage for both bodily injury and property damage claims up to a
total of $11,000,000. The primary liability policy has a limit of $1,000,000 per
occurrence, and an excess umbrella liability policy provides coverage for an
additional $10,000,000. Although the umbrella policy specifically excludes
coverage for claims of sexual abuse, an endorsement to the primary liability
policy provides coverage in the aggregate amount of $500,000 for such claims.
The Company's comprehensive insurance program also includes worker's
compensation, comprehensive general liability coverage and automobile and
property coverage. The specific policies provide a variety of coverages that are
subject to various limits and deductibles, some of which are outlined above.
Management believes that the Company's insurance coverage is adequate to meet
the Company's needs. There can, however, be no assurance that claims in excess
of policy limits or that are not included within the Company's coverage will not
be asserted.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's corporate headquarters are located in Plymouth, Minnesota
in offices shared with New Horizon Enterprises, Inc. New Horizon Enterprises,
Inc. subleases the office space of approximately 18,000 square feet from Grand
Casinos, Inc. pursuant to a sublease which expires September 30, 1998. The
Company has entered into an office sharing arrangement and will continue to
share facilities with New Horizon Enterprises. See "Certain Transactions."
The Company currently operates 13 Kids Quest centers ranging in size
from approximately 6,000 to 22,000 square feet. The Company believes that all of
these Kids Quest centers are in good condition. Twelve of these centers operate
in casinos pursuant to the terms of various financial services or lease
agreements. Eight of these agreements have a five-year term with expiration
dates ranging from April 1998 to December 2001; however, these agreements can be
canceled by the casino at any time, in which case the casino could not offer a
children's activity center for the remainder of the five-year term. Although the
precise terms of each of the Company's agreements vary by location, the
agreements generally provide for a profit sharing arrangement in which the
Company manages and operates Kids Quest centers and pays a percentage of each
Kids Quest's pretax gross operating profits to the property owner. The Company
also typically receives a minimum guaranteed management fee, which also varies
by location. There is no assurance that the Company will continue to receive any
such guaranteed fees in the future. Most of the agreements require the casinos'
consent to any child care rate increases or decreases proposed by the Company.
Each of the agreements provides that the casino can terminate the agreement at
any time. Accordingly, the Company can provide no assurance that the casinos
will not terminate the agreements prior to their respective expiration dates.
The Company leases approximately 11,150 square feet for its Kids Quest
center in the Eden Prairie, Minnesota shopping mall pursuant to a lease that
obligates the Company to pay annual lease payments equal to the greater of
$140,000 or 21% of the Company's revenues (as defined in the lease agreement)
from operations at the location.
The Company leases 13 New Horizon centers in Boise, Idaho, which range
in size from 4,500 square feet to 10,000 square feet on sites ranging from one
to four acres. The leases range from seven to fifteen years with consecutive
multiple-year renewal options. All of the leases have a minimum of at least
seven years remaining on the primary term of each lease. The leases generally
require the Company to pay utility expenses, taxes, insurance, repairs and
maintenance and other operating expenses relating to the properties. Twelve of
these facilities have recently undergone extensive renovation, remodeling and
updating, and the facilities are in very good condition. The thirteenth facility
was constructed in 1996.
ITEM 3. LEGAL PROCEEDINGS
In November 1996, a minority shareholder of New Horizon Enterprises,
Inc. commenced an action asserting both individual and derivative claims against
New Horizon Enterprises, Inc. and other Minnesota corporations and real estate
partnerships through which child care centers in Minnesota are owned or
operated. Although the Company does not have any ownership interest in these
Minnesota centers, the Company, as well as William M. Dunkley, Susan K. Dunkley,
and Jay L. Bennett, were also named as defendants in this lawsuit. Mr. and Mrs.
Dunkley are executive officers, directors and principal shareholders of the
Company and of New Horizon Enterprises, Inc. Mr. Bennett is a director and
principal shareholder of the Company and of New Horizon Enterprises, Inc. The
plaintiff is seeking damages in excess of $50,000 based upon allegations that
include misappropriation of corporate opportunity and breach of fiduciary duty.
The Company has joined in an answer and intends to contest the allegations.
There can be no assurance, however, as to the outcome of this litigation.
The Company is subject to certain claims from time to time and is
currently involved in litigation that has arisen in the ordinary course of its
business. The Company believes that it either has adequate legal defenses to the
claims of which it is currently aware or that any liability that might be
incurred due to such claims will not, in the aggregate, exceed the limits of the
Company's insurance policies or otherwise result in any material adverse effect
on the Company's operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders through the
solicitation of proxies or otherwise during the fourth quarter of the Company's
most recently completed fiscal year.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock of the Company has traded on the Nasdaq SmallCap
Market under the symbol "KIDQ" since November 14, 1995. The following table sets
forth the high and low bid prices for the Common Stock for the periods indicated
and is based upon monthly reports provided by Nasdaq.
BID
Period High Low
1995
Fourth Quarter.................................. 8 1/2 6 1/2
1996
First Quarter................................... 8 3/4 7
Second Quarter.................................. 12 1/4 7 5/8
Third Quarter................................... 10 1/2 6
Fourth Quarter.................................. 6 5/8 4 1/8
As of March 15, 1997, the Company had 35 shareholders of record. The
Company estimates there were approximately 1,036 beneficial owners as of such
date.
The Company has never paid or declared any cash dividends on its Common
Stock and does not intend to pay dividends on its Common Stock in the
foreseeable future. The Company presently expects to retain its earnings to
finance the development and expansion of its business. The payment by the
Company of dividends, if any, on its Common Stock in the future is subject to
the discretion of the Board of Directors and will depend on the Company's
earnings, financial condition, capital requirements and other relevant factors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company currently operates thirteen Kids Quest centers providing
hourly child care, as well as thirteen 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 Grand Casino locations in Minnesota, Mississippi and Louisiana.
Kids Quest opened its shopping mall location in the Eden Prairie Center in Eden
Prairie, Minnesota, in March 1994. Since the beginning of 1995, the Company has
opened Kids Quest centers at the following locations:
Grand Casino Coushatta Kinder, LA January 1995
Boulder Station Hotel & Casino Las Vegas, NV November 1995
Ameristar Casino Council Bluffs Council Bluffs, IA June 1996
Grand Casino Tunica Robbinsonville, MS August 1996
Mohegan Sun Casino Uncasville, CT October 1996
Soaring Eagle Casino and Hotel Mt. Pleasant, MI December 1996
Station Casino Kansas City Kansas City, MO January 1997
In the third quarter of 1995, the Company acquired substantially all
the assets of A Small World, Inc. (five centers) for $1,021,170 and A Child's
Dream (one center) for $89,722. In February 1996, the Company acquired the
assets of A Child's Image, Inc. (one center) for $180,092, and in March 1996,
purchased the assets of Educational Child Care Services, Inc. d\b\a Teach-A-Tot
Schools (two centers) for $480,324 and Cottage Schools, Inc. (three centers) for
$532,365. The Company opened its thirteenth New Horizon location in August 1996
in a newly constructed facility.
With the opening of the Tunica, Mississippi, Kids Quest location, the
Company introduced a retail area which features developmentally-appropriate
educational products and Kids Quest logo merchandise. The Company has since
added similar retail areas at its Eden Prairie and Kansas City locations. The
Company has also opened its first supervised arcade in conjunction with its Kids
Quest location at the Mohegan Sun Casino. The Company plans to continue to seek
opportunities for additional retail and supervised arcade locations.
The Company has experienced growth through acquisition and expansion.
The business of the Company's Kids Quest centers is seasonal, with revenues and
operating income being the highest in the summer months.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as
a percentage of total revenues for the periods indicated.
Year Ended December 31,
1996 1995
REVENUE 100% 100%
COSTS AND EXPENSES
Direct Expenses 78% 81%
Depreciation and Amortization 6% 4%
Pre-Opening Expenses 4% 2%
Total Costs and Expenses 88% 87%
CENTER OPERATING INCOME 12% 13%
Selling, General and Administrative 15% 18%
Amortization 1% 1%
Writedown of Fixed Assets and Goodwill 13% -
OPERATING INCOME (LOSS) (17%) (6%)
Interest Expense (1%) (1%)
Interest Income 2% -
NET INCOME (LOSS) (16%) (7%)
Revenues increased $4,248,847, or 75%, to $9,888,161 in 1996 from
$5,639,314 in 1995. Of the increase, $2,505,478 was due to the addition of seven
New Horizon Child Care centers in Boise, Idaho, during 1996, as well as the
operation of the six centers acquired during 1995 for an entire year rather than
a partial year. In addition, $1,907,433 of the revenue increase was due to the
addition of four new Kids Quest locations during 1996. The Company had six Kids
Quest locations open for the entire twelve month periods ended December 31, 1996
and 1995. Revenues for the Company's two Minnesota Kids Quest casino locations
were down $29,614, or 3%, in 1996 from 1995, revenues for the Company's
locations in Gulfport and Biloxi, Mississippi, were down $84,901 or 5%, and
revenues for the Company's fifth location, located in Avoyelles, Louisiana, was
down $45,198, or 8%, in 1996 from 1995. The Company attributes the decrease in
revenues at these properties, which occurred primarily in the fourth quarter of
1996, to a decrease in marketing efforts by each of the location's host casino
properties. The Company's Eden Prairie Center location, however, showed an
increase in revenue of $17,420, or 4%, to $496,993 in 1996 from $479,573 in
1995.
Total costs and expenses increased $3,807,825, or 78%, to $8,702,907 in
1996 from $4,895,082 for the same period in 1995. Included in this increase was
$2,434,536 of expenses related to the Idaho New Horizon Child Care centers,
which increased to $3,136,212 from $701,676 in 1995. Total costs and expenses
for the Idaho centers represented 98% of revenue in 1996, down from 102% in
1995. Total costs and expenses for the Kids Quest centers accounted for
$1,395,060 of the increase, as total costs and expenses for Kids Quest centers
totaled $5,566,695 in 1996 compared to $4,171,635 in 1995. Total costs and
expenses for Kids Quest centers accounted for 83% of revenue in 1996, compared
to 85% in 1995. Total costs and expenses for 1996 were negatively impacted by
pre-opening expenses which totaled $407,070 in 1996 compared to $96,739 in 1995.
Selling, general and administrative expenses increased $420,164, or
41%, to $1,435,238 in 1996 compared to $1,015,074 in 1995. Selling, general and
administrative expenses as a percentage of revenue decreased to 15% in 1996
compared to 18% in 1995. The increase in selling, general and administrative
expenses is attributable to the Company's growth and expansion efforts.
Management expects selling, general and administrative expenses to continue to
increase with the addition of and negotiation for new locations. However, such
expenses will further decrease as a percent of revenues with the continued
growth of the Company's revenues.
During the fourth quarter of 1996, the Company recorded a write-off of
assets (primarily goodwill) of $997,962, or $0.30 per share, relating to four of
the Company's New Horizon Child Care centers acquired in 1995. Despite the
Company's restructuring of the acquired centers' operations to provide higher
quality child care at those locations, there was resistance to price increases
implemented at those locations. Subsequent to the price increase in the third
quarter 1996, the Company has suffered significant enrollment declines resulting
in losses at those locations in 1996. The Company also wrote off fixed assets of
$277,385 for its Kids Quest facility located within Eden Prairie Center. The
Company has been unable to achieve profitability at this location since it was
opened in 1994 and believes that the center will not become profitable absent a
change in the retail composition of the shopping center. The Company is
continuing its efforts to increase revenues at both the Idaho New Horizon Child
Care centers and the Eden Prairie Center Kids Quest location.
Pursuant to the terms of its contracts with casino operators, the
Company received subsidies of $1,706,077 in 1996 and $1,648,035 in 1995, which
amounts are included in total revenue. The majority of theses subsidies were
from Grand Casinos, Inc. Due to a price increase to the public at Grand Casino
locations, such subsidies were reduced beginning in the third quarter of 1996.
There can be no assurance that such subsidies will not be further modified or
discontinued altogether, or that the Company will obtain such subsidies in
future Kids Quest agreements with Grand Casinos or other casinos. In the event
that subsidies are not provided or are lower than currently received, the
Company may charge higher hourly rates. While this may cause patronage to
decline and ultimately result in lower revenues, the Company currently has five
locations that operate without any subsidy and has found no evidence to conclude
that higher, non-subsidized hourly rates to customers have a significant impact
on a location's patronage. The Company's Boulder Station location, for example,
has been operating without any subsidy from the casino and occupancy at the
Boulder Station location in 1996 exceeded each of the other Kids Quest locations
despite higher rates.
Interest expense for 1996 increased $26,430, or 30%, to $114,168 in
1996 from $87,738 in 1995. Substantially all of the interest expense incurred by
the Company during 1996 relates to debt incurred in connection with the
acquisition of the Idaho New Horizon Child Care centers.
The Company's net loss for 1996 was $1,600,958 compared to a loss of
$369,033 for 1995. Net loss for 1996 before the write-off of assets described
above was $325,611. The net loss for 1996, excluding the write-offs, and for
1995 were due primarily to losses from the Idaho New Horizon Child Care centers,
which totaled $368,368 in 1996 and $284,214 in 1995. Operating losses were also
affected by pre-opening costs in each period.
LIQUIDITY AND CAPITAL RESOURCES
During 1996, the Company generated $47,985 from operations, invested
$2,950,015 in property and equipment, used $472,886 for the purchase of six
existing child care centers in Boise, Idaho, loaned $500,000 to Mohegan Sun
Casino to fund leasehold improvements at that location, and loaned $364,385 (net
of repayments) to a third party to finance the purchase of land in Boise, Idaho,
and for the construction of a new child care facility which was leased back to
the Company. The Company added long-term debt of $569,046 and made payments of
$106,721 on long-term obligations. The Company ended the year with a cash
balance of $150,232.
During 1995, the Company generated $57,120 from operations, invested
$1,641,493 in property and equipment, used $410,892 for the purchase of six
existing child care centers in Boise, Idaho, and loaned $496,593 to Boulder
Station to fund leasehold improvements at that location. Also in 1995, the
Company received $1,379,727 from the issuance of long-term debt (net of
repayments) and $4,825,411 as proceeds from the issuance of stock in the
Company's initial public offering.
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.
In March 1997, the Company closed on approximately $1,000,000 of
equipment financing. The proceeds of this loan were used in part to pay off an
existing bank line of credit with a balance of approximately $500,000. The
Company is actively seeking additional Kids Quest contracts and is engaged in
site analysis for the construction of additional New Horizon centers. The
Company will require additional financing in 1997 as it secures additional Kids
Quest contracts or if the Company pursues additional acquisitions during the
year. The Company currently has no arrangements for such additional financing.
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 and other materials filed or to be filed by the Company with the
Securities and Exchange Commission (as well as information included in oral
statements or other written statements made or to be made by the Company)
contains 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, domestic or global economic conditions,
changes in federal or state laws or the administration of such laws, as well as
all other risks and uncertainties described in the Company's filings.
ITEM 7. FINANCIAL STATEMENTS
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
Consolidated Financial Statements
As of
December 31, 1996 and 1995
CONTENTS
Report of Independent Public Accountants.................................17
Audited Financial Statements
Consolidated Balance Sheets..............................................18
Consolidated Statements of Operations....................................19
Consolidated Statements of Shareholders' Equity..........................20
Consolidated Statements of Cash Flows....................................21
Notes to Consolidated Financial Statements...............................22
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
Consolidated Financial Statements
As of December 31, 1996 and 1995
Together With Report of
Independent Public Accountants
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To New Horizon Kids Quest, Inc.:
We have audited the accompanying consolidated balance sheets of New Horizon Kids
Quest, Inc. (a Minnesota corporation) and Subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of operations, shareholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of New Horizon Kids Quest, Inc.
and Subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
February 7, 1997
<TABLE>
<CAPTION>
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31
1996 1995
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 150,232 $ 3,865,018
Accounts receivable 611,479 192,164
Receivable from New Horizon Enterprises, Inc. 7,557 8,963
Prepaid expenses and other 164,530 80,072
Current portion of notes receivable 470,947 32,977
Total current assets 1,404,745 4,179,194
PROPERTY AND EQUIPMENT:
Furniture, fixtures, equipment and leaseholds 4,768,307 2,340,168
Less- Accumulated depreciation and amortization (647,514) (239,300)
Property and equipment, net 4,120,793 2,100,868
OTHER ASSETS:
Goodwill (net of amortization of $81,027 and $26,694, respectively) 1,156,751 934,197
Notes receivable, net of current portion 751,930 463,616
Noncompete agreements (net of amortization of $5,579 and $6,950, respectively) 18,580 43,050
Other 133,347 33,871
$ 7,586,146 $ 7,754,796
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 677,319 $ 64,500
Accounts payable 280,875 312,971
Accrued expenses 481,641 224,457
Deferred rent 28,667 32,667
Total current liabilities 1,468,502 634,595
LONG-TERM DEBT, less current maturities 1,184,628 615,227
COMMITMENTS AND CONTINGENCIES (Note 6)
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 in 1996 and 3,287,500 shares in 1995 32,933 32,875
Paid-in capital 7,171,197 7,142,255
Accumulated deficit (2,271,114) (670,156)
Total shareholders' equity 4,933,016 6,504,974
$ 7,586,146 $ 7,754,796
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
<TABLE>
<CAPTION>
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31
1996 1995
<S> <C> <C>
REVENUE $ 9,888,161 $ 5,639,314
COSTS AND EXPENSES:
Direct expenses 7,697,926 4,582,592
Depreciation and amortization 597,911 215,751
Preopening expenses 407,070 96,739
Total costs and expenses 8,702,907 4,895,082
Center operating income 1,185,254 744,232
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,435,238 1,015,074
AMORTIZATION 128,523 38,354
WRITEDOWN OF FIXED ASSETS AND GOODWILL (Note 9) 1,275,347 -
Loss from operations (1,653,854) (309,196)
INTEREST EXPENSE (114,168) (87,738)
INTEREST INCOME 167,064 27,901
Net loss $(1,600,958) $ (369,033)
LOSS PER SHARE $ (.48) $ (.16)
WEIGHTED AVERAGE SHARES OUTSTANDING 3,323,723 2,281,223
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<TABLE>
<CAPTION>
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Total
Common Stock Paid-In Accumulated Shareholders'
Shares Amount Capital Deficit Equity
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 1,762,500 $17,625 $ 832,094 $ (301,123) $ 548,596
Net loss - - - (369,033) (369,033)
Conversion of senior subordinated debt 375,000 3,750 1,496,250 - 1,500,000
Initial public offering of common stock 1,150,000 11,500 4,813,911 - 4,825,411
BALANCE, December 31, 1995 3,287,500 32,875 7,142,255 (670,156) 6,504,974
Net loss - - - (1,600,958) (1,600,958)
Stock issued under stock option plans 5,800 58 28,942 - 29,000
BALANCE, December 31, 1996 3,293,300 $32,933 $7,171,197 $(2,271,114) $ 4,933,016
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<TABLE>
<CAPTION>
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31
1996 1995
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(1,600,958) $ (369,033)
Adjustments to reconcile net loss to net cash provided by operating activities-
Write-down of fixed assets and goodwill 1,275,347 -
Depreciation and amortization 726,434 253,945
Deferred rent (4,000) 2,667
Change in operating assets and liabilities:
Accounts receivable (419,315) (106,896)
Prepaid expenses and other current assets (79,458) 30,555
Accounts payable (32,096) 151,516
Receivable from New Horizon Enterprises, Inc. 1,406 27,482
Other assets (99,382) (23,871)
Accrued expenses 280,007 90,755
Net cash provided by operating activities 47,985 57,120
INVESTING ACTIVITIES:
Purchases of property and equipment (2,950,015) (1,641,493)
Purchase of child care centers, net (Note 8) (472,886) (410,892)
Increases in note receivable (863,385) (500,000)
Payments received on notes receivable 32,190 3,407
Net cash used in investing activities (4,254,096) (2,548,978)
FINANCING ACTIVITIES:
Proceeds from long-term debt 569,046 1,900,000
Payments on long-term debt (106,721) (520,273)
Proceeds from the issuance of stock (Note 3) 29,000 4,825,411
Net cash provided by financing activities 491,325 6,205,138
Net increase (decrease) in cash and cash equivalents (3,714,786) 3,713,280
CASH AND CASH EQUIVALENTS, beginning of year 3,865,018 151,738
CASH AND CASH EQUIVALENTS, end of year $ 150,232 $ 3,865,018
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest $ 109,063 $ 82,738
Taxes $ - $ -
NONCASH ITEMS:
Conversion of preferred stock into common stock $ - $ 1,000,000
Conversion of debentures into common stock - 1,500,000
Purchase of child care centers with note payable 719,895 700,000
Noncash reductions of notes receivable 104,911 -
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION AND BUSINESS
The consolidated financial statements include the accounts of New Horizon Kids
Quest, Inc. and its wholly owned subsidiaries (the Company). All intercompany
balances and transactions have been eliminated in consolidation. The
consolidated financial statements also include the results of operations of New
Horizon Child Care-Idaho, Inc. from the acquisition date, August 2, 1995. As of
December 31, 1996, the Company operated 12 Kids Quest Centers providing hourly
child care, as well as 13 New Horizon child care centers providing traditional
child care services.
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.
CASH AND CASH EQUIVALENTS
The Company considers all short-term, highly liquid investments, primarily money
market accounts that are readily convertible into known amounts of cash and have
original maturities of three months or less to be cash equivalents.
ACCOUNTS AND NOTES RECEIVABLE
Accounts receivable represent uncollected subsidies from various
casinos and amounts due from customers for child care services. Balances are due
monthly. Notes receivable represent amounts due from casino operators to
reimburse the Company for construction expenditures and amounts advanced to the
owner of a building leased by the Company.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, less accumulated depreciation.
Additions and improvements to property and equipment are capitalized at cost,
while maintenance and repair expenditures are charged to operations as incurred.
Depreciation is calculated by the straight-line method for financial reporting
purposes and by accelerated methods for income tax purposes. For financial
reporting purposes, depreciation is provided over the following estimated useful
lives:
Furniture, fixtures and equipment 5-7 years
Leasehold improvements 7-10 years or the term of the lease
REVENUE RECOGNITION
Revenue is recognized as child care services are rendered. Amounts collected in
advance for which the service has not yet been provided are deferred and
classified as a component of accrued expenses in the accompanying consolidated
balance sheets. Subsidies received from Grand Casinos, Inc. for the years ended
December 31, 1996 and 1995, were approximately $1,565,000 and $1,647,000,
respectively.
GOODWILL
Goodwill represents the amounts paid for child care centers in excess of the
identifiable assets. The goodwill amounts are being amortized over their
estimated lives, which do not exceed 15 years, using the straight-line method.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement
establishes accounting standards for the recognition and measurement of
impairment of long-lived assets, certain identifiable intangibles and goodwill
either to be held or disposed of. The Company adopted SFAS No. 121 on January 1,
1996. The effects of adoption were not material to the financial position or
results of operations of the Company.
EARNINGS PER SHARE
Weighted average shares include the dilutive effects of options and the effect
of conversion of senior subordinated debt into shares of common stock, which are
assumed to be converted at the beginning of the year.
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.
RECLASSIFICATIONS
Certain 1995 amounts in the accompanying consolidated financial statements have
been reclassified to conform to the 1996 presentation. Such reclassifications
have no effect on previously reported net loss or shareholders' equity.
2. LONG-TERM DEBT:
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Note payable to sellers of six child care centers in Boise, Idaho, at 9%,
payable in monthly installments of $10,255, with final payment due in 2003;
all assets of the six centers are pledged as collateral $ 615,260 $679,727
Line of credit at reference rate plus 1.00% (9.25% at December 31, 1996),
interest payable monthly with principal balance due on June 30, 1997;
collateralized by all tangible and intangible property 514,510 -
Note payable to seller of child care centers in Boise, Idaho, at 8.5%, payable
in monthly installments of $4,154 through 2007; collateralized by assets of
the acquired centers 318,500 -
Note payable to seller of child care centers in Boise, Idaho, at 9%, payable in
monthly installments of $4,687 through 2006; collateralized by assets of the
acquired centers 352,267 -
Other 61,410 -
Total long-term debt 1,861,947 679,727
Less- Current maturities (677,319) (64,500)
Long-term debt, net of current maturities $1,184,628 $615,227
Future maturities of long-term debt as of December 31, 1996 are as follows:
1997 $ 677,319
1998 149,300
1999 143,063
2000 156,329
2001 170,829
Thereafter 565,107
$1,861,947
</TABLE>
3. SHAREHOLDERS' EQUITY:
During 1995, the Company completed an initial public offering of 1,150,000
shares of common stock for net proceeds to the Company of $4,825,411. In
connection with the public offering of common stock, the Company sold the
underwriter a five-year warrant to purchase up to 100,000 shares of the
Company's common stock at $6.00 per share. The proceeds were used for expansion
of the Company, repayment of debt and acquisition of additional centers. In
conjunction with the offering, the Company converted a portion of a debenture
totaling $1,500,000 into common stock at $4.00 per share. Additionally, the
Company converted 1,000,000 shares of its $.01 par value Series A Convertible
Preferred Stock into 500,000 shares of common stock. The conversion of the
Preferred Stock has been retroactively recorded in the accompanying financial
statements.
During September 1995, the Company granted 100,000 stock options exercisable at
$5.00 to New Horizon Enterprises, Inc. in exchange for a license agreement to
use a service mark. The license agreement has a term of five years which can be
extended year to year by either party. The option grant represented full payment
to New Horizon Enterprises, Inc. for use of the service mark. The license
agreement also provides the Company with a first right of refusal in connection
with the pursuit of child care opportunities outside of Minnesota.
4. STOCK OPTION PLAN:
The Company has a long-term incentive and stock option plan (the Plan). The Plan
provides for the grants of up to 300,000 incentive stock options or nonstatutory
stock options to key employees, directors and consultants. The exercise price of
options granted under the Plan is determined by the compensation committee of
the board of directors but will not be less than 100% of the fair market value
of the shares on the date of grant. Both the incentive stock options and the
nonstatutory stock options expire ten years from the date of grant.
In September 1995, the Company adopted the New Horizon Kids Quest, Inc. 1995
Directors' Stock Option Plan (the Directors' Plan). The Directors' Plan provides
for automatic grants of 5,000 nonqualified stock options to nonemployee
directors of the Company as of the date such individuals become directors of the
Company and on each subsequent annual shareholder meeting date. The Company has
reserved 50,000 shares of common stock for issuance under the Directors' Plan.
The option price will be the market price of the common stock as of the date of
each grant. Stock option activity is summarized as follows:
Weighted
Average
Incentive Exercise
Stock Options Price
Balance, December 31, 1994 - $ -
Options granted 252,000 5.00
Balance, December 31, 1995 252,000 5.00
Options granted 62,000 7.49
Options exercised (5,800) 5.00
Options forfeited (21,600) 5.00
Balance, December 31, 1996 286,600 $5.77
Options exerciseable at:
December 31, 1995 87,900
December 31, 1996 142,800
During 1994, the Company granted 37,500 stock options exercisable at $4.00 per
share to certain members of management. Of these options, 37,500 were
outstanding at December 31, 1996, are 100% vested and expire on November 13,
2000.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
stock option plans. Accordingly, no compensation cost has been recognized in the
accompanying consolidated statements of operations. Had compensation cost been
recognized based on the fair values of options at the grant dates consistent
with the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company's net loss and net loss per common share would have been increased
to the following pro forma amounts:
1996 1995
Net loss:
As reported $(1,600,958) $(369,033)
Pro forma (1,768,820) (783,533)
Loss per share:
As reported (.48) (.16)
Pro forma (.53) (.34)
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years. The weighted
average fair value of options granted in 1996 and 1995 was $3.38 and $2.50,
respectively. The weighted average exercise price was $7.49 and $5.00,
respectively.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used: risk-free interest rates of 6.5% for 1995 and 5.8% to 6.9% for
1996; no expected dividends; expected lives of 5 years for 1995 and 2 to 5 years
for 1996; and expected volatility of 48% for 1995 grants and 44% to 65% for 1996
grants.
5. INCOME TAXES:
The Company utilizes the liability method of accounting for income taxes. As of
December 31, 1996, the Company had operating loss carryforwards of approximately
$1,347,000. These operating loss carryforwards expire beginning in the year
2009. Because realization of the related tax benefits is uncertain, a valuation
allowance has been recorded against the related tax asset.
The components of the deferred tax assets as of December 31, 1996 and 1995 are
as follows:
1996 1995
Net operating loss carryforwards, expiring
beginning in 2009 $539,000 $343,000
Write-down of assets 241,000 -
Other 53,000 (82,000)
Valuation allowance (833,000) (261,000)
$ - $ -
6. COMMITMENTS AND CONTINGENCIES:
LEASES
A portion of the Company's operations are conducted using leased equipment and
facilities. The leases are noncancelable and renewable. One of the leases
contains percentage of revenue rents in excess of base rents. Several of the
leases contain percentage of profit rents with no base rents. Total rental
expense included in the accompanying consolidated statements of operations was
approximately $1,595,000 and $1,625,000 for the years ended December 31, 1996
and 1995.
Future minimum lease payments under noncancelable operating leases entered into
prior to December 31, 1996 are as follows:
1997 $ 825,900
1998 814,600
1999 812,000
2000 791,400
2001 778,800
Thereafter 3,677,500
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with two members of
management. Under these employment agreements, each officer will receive
compensation equal to 2.5% of the Company's pretax earnings.
LITIGATION
The Company is exposed to a number of asserted and unasserted potential claims
encountered in the normal course of business. In the opinion of management,
based on consultation with outside legal counsel, the resolution of these
matters will not have a material adverse effect on the Company's financial
position or results of operations.
7. RELATED-PARTY TRANSACTIONS:
The Company has had transactions with other companies having certain officers,
directors and/or owners in common with the Company as follows for the years
ended December 31:
1996 1995
Law firm, providing certain legal services $389,303 $260,842
Contractor, providing construction
services for site buildout - 205,552
Management believes these transactions were consummated at terms substantially
the same as could have been obtained with unrelated parties.
The Company conducts a portion of its operations in facilities owned or operated
by a shareholder. The Company pays rent to the shareholder based on a percentage
of pretax income of the operations, as defined. The Company paid $879,000 for
the year ended December 31, 1996 and $1,353,000 for the year ended December 31,
1995 under the rental agreement.
The Company has entered into an office-sharing agreement with a related party
which commenced upon the closing of the initial public offering. The term of the
agreement extends through December 2000 or 180 days after notice from either
party of election to terminate. Rental is paid based on the Company's pro rata
share of office space occupied (based on square footage) applied to allocable
rental expenses including taxes, insurance, utilities and maintenance.
8. ACQUISITIONS:
During the third quarter of 1995, New Horizon Child Care--Idaho, Inc. acquired
the net assets of six licensed child care centers located in Boise, Idaho, for a
total purchase price of $1,111,000 (including costs associated with the
acquisitions). The purchase price consisted of cash payments for $385,000 and a
note payable to one of the sellers in the amount of $700,000. In February and
March 1996, New Horizon Child Care--Idaho, Inc. acquired six additional licensed
child care centers in Boise, Idaho. The total purchase price was $1,193,000
(including costs associated with the acquisition). The purchase price for these
six centers consisted of cash payments of $473,000 and notes payable to three of
the sellers in the amounts of $335,000, $370,000 and $15,000. All of the
transactions have been accounted for using the purchase method of accounting.
The following unaudited pro forma financial information for the years ended 1996
and 1995, give effect to the acquisitions as if they had occurred effective
January 1, 1995.
1996 1995
Revenue $10,177,419 $8,067,380
Loss from operations $(1,613,805) $ (309,039)
Net loss $(1,570,443) $ (468,514)
Loss per share $ (.47) $ (.21)
This financial information does not purport to represent results which would
actually have been obtained if the acquisitions had been in effect during the
period covered or any future results which may in fact be realized.
9. WRITE-DOWN OF FIXED ASSETS AND GOODWILL:
During 1996, the Company recorded a write-off of assets totaling $997,962,
consisting primarily of goodwill, associated with four of the New Horizon Child
Care Centers acquired in 1995. Also during 1996, the Company wrote off assets
totaling $277,385 related to its Kids Quest facility located in a self-contained
shopping mall. The write-offs consist of all tangible and intangible assets of
these locations. These locations generated negative cash flow in 1996 and while
the Company has responded by adjusting pricing and cost structure, there can be
no assurance that such actions will improve operations to result in positive
cash flow in the future.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Information regarding the directors of the Company is incorporated
herein by reference to the descriptions set forth under the caption "Election of
Directors" in the Proxy Statement for the annual meeting of shareholders to be
held on May 20, 1997 (the "Proxy Statement"). Set forth below are the names,
ages and positions of the executive officers of the Company.
NAME AGE POSITION
William M. Dunkley 48 Chairman of the Board and Chief Executive Officer
Susan K. Dunkley 47 President and Director
Kevin M. Greer 40 Chief Financial Officer
BACKGROUND OF EXECUTIVE OFFICERS
WILLIAM M. DUNKLEY has been Chief Executive Officer and Chairman of the
Board for the Company since its inception in 1992 and is a shareholder of New
Horizon Enterprises, Inc., which he co-founded in 1971. Mr. Dunkley is also the
Chief Executive Officer and Chairman of the Board of Building Block Child Care,
Inc., Kinderberry Hill Child Development centers and New Horizon Child Care,
Inc. Mr. Dunkley is concurrently a Senior Partner in the Minneapolis law firm of
Dunkley, Bennett & Christensen, PA. and serves on the Board of Directors of
Rasmussen College System, Inc. Mr. Dunkley devotes no less than 50% of his time
to the affairs of the Company.
SUSAN K. DUNKLEY has been the President and a director of the Company
since its inception in 1992 and is a shareholder in New Horizon Enterprises,
Inc., which she co-founded in 1971. She is also a board member and President of
Building Block Child Care, Inc., Kinderberry Hill Child Development centers and
New Horizon Child Care, Inc. Ms. Dunkley serves on the boards of the National
Child Care Association, Success at Six, Rule 17 Advisory Committee, Rule 3 Task
Force, Early Childhood News, Boys and Girls Club of Minneapolis and the
Minnesota Child Care Advocates. Ms. Dunkley is on the Advisory Board of
Rasmussen Business College's Child Care Specialist Program. Ms. Dunkley devotes
no less than 50% of her time to the affairs of the Company.
KEVIN M. GREER has been the Chief Financial Officer of the Company
since its inception in 1992. He has also been employed by New Horizon
Enterprises, Inc., Building Block Child Care, Inc., Kinderberry Hill Child
Development centers and New Horizon Child Care, Inc. since 1986, and has served
as Chief Financial Officer of those companies since August 1987. He was a
principal in Greer Financial Services, Inc., which provided financial,
accounting and consulting services to the Company, New Horizon Enterprises, Inc.
and others prior to the Company's initial public offering in November 1995. Mr.
Greer served as a Manager with the public accounting firm of Arthur Andersen &
Co. from 1985 to 1986 and was an Associate with such firm from 1980 to 1985. Mr.
Greer devotes no less than 50% of his time to the affairs of the Company.
ITEM 10. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated herein by
reference from the information set forth under the caption "Executive
Compensation" in the Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management is incorporated herein by reference from the information set
forth under the caption "Principal Shareholders" in the Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
incorporated herein by reference from the information set forth under the
caption "Certain Transactions" in the Proxy Statement.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
No. Description
3.1 Articles of Incorporation of the Company, as amended *
3.2 Restated Bylaws of the Company *
10.1 Form of License Agreement between the Company and New
Horizon Enterprises, Inc. *
10.2 Employment Agreement with William M. Dunkley *
10.3 Employment Agreement with Susan K. Dunkley *
10.4 1994 Long-Term Incentive and Stock Option Plan, as amended *
10.5 1995 Directors' Stock Option Plan *
10.6 Form of Underwriter's Warrant issued in the Company's initial
Public Offering *
21 List of Subsidiaries ***
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
- --------------------------
* Incorporated by reference from the Company's Registration Statement on
Form SB-2 (Registration No. 33-97186C)
** Incorporated by reference from the Company's Form 8-K filed March 1996.
*** Incorporated by reference from the Company's Form 10-KSB filed
March 1996.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
last quarter of the fiscal year covered by this report.
SIGNATURES
In accordance with Section 13 or 15(d) 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.
Date: March 27, 1997 By /S/ WILLIAM M. DUNKLEY
------------------------
William M. Dunkley
Chairman of the Board and
Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant, and in
the capacities and on the date indicated.
Signature Title Date
/S/ WILLIAM M. DUNKLEY Chairman of the Board and March 27, 1997
William M. Dunkley Chief Executive Officer
(principal executive officer)
/S/ KEVIN M. GREER Chief Financial Officer March 27, 1997
Kevin M. Greer (principal financial and
accounting officer)
/S/ SUSAN K. DUNKLEY President and Director March 27, 1997
Susan K. Dunkley
/S/ JAY L. BENNETT Director March 27, 1997
Jay L. Bennett
/S/ LYLE BERMAN Director March 27, 1997
Lyle Berman
/S/ STANLEY M. TAUBE Director March 27, 1997
Stanley M. Taube
NEW HORIZON KIDS QUEST, INC.
ANNUAL REPORT ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
EXHIBIT INDEX
Exhibit No. Description
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-KSB into the Company's previously filed
Registration Statement File No. 33-04384
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 31, 1997
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