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, 1997
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
$13,856,238.
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 25, 1998, was approximately
$3,225,450.
As of March 20, 1998, 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 1998 Annual Meeting of Shareholders Part III
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FORM 10-KSB INDEX
Page
PART I. .................................................................... 1
Item 1. DESCRIPTION OF BUSINESS................................ 1
Item 2. DESCRIPTION OF PROPERTY................................ 8
Item 3. LEGAL PROCEEDINGS...................................... 9
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.... 9
PART II. .................................................................... 10
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.................................... 10
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS................... 11
Item 7. FINANCIAL STATEMENTS................................... 15
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................... 30
PART III..................................................................... 30
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE
SECURITIES EXCHANGE ACT OF 1934........................ 30
Item 10. EXECUTIVE COMPENSATION................................. 31
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................. 31
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......... 31
Item 13. EXHIBITS AND REPORTS ON FORM 8-K....................... 31
"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.
<PAGE>
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
Child Care. The Company currently operates 16 Kids Quest and 14 New Horizon
Child Care 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 Child Care 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.
Fifteen of the Company's Kids Quest centers are operated in conjunction
with casinos, including seven casinos owned or managed by Grand Casinos, Inc. in
Minnesota, Mississippi and Louisiana. With the opening of its Sunset Station
Kids Quest in 1997, the Company now operates three 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 four additional Station
Casinos, Inc. properties, including Texas Station in Las Vegas, Nevada and
Station Casino St. Charles in St. Charles, Missouri. The Kids Quest center
opened at the Mohegan Sun Casino in October 1996 included the Company's first
supervised arcade. Four of the Company's Kids Quest centers now include
supervised arcades featuring non-violent video entertainment. One of the
Company's Kids Quest centers operates in an enclosed shopping mall in suburban
Minneapolis, Minnesota. The Company's seventeenth Kids Quest location will open
this year in Knott's Camp Snoopy at the Mall of America. Knott's Camp Snoopy is
the largest indoor theme park in the United States, and the Mall of America is
the largest fully enclosed retail and family entertainment complex in the United
States.
The Company also operates 13 premium, traditional child care centers in
the Boise, Idaho area under the New Horizon Child Care name, and offers
traditional child care services as well as hourly care at its Treasure Island
location in Red Wing, Minnesota. In 1995, the Company targeted Boise and the
surrounding metropolitan area for immediate expansion primarily due to the
recent growth and development in that region. 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. 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 Child Care 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.
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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.
The Company currently operates 16 Kids Quest centers generally ranging
in size from 6,000 to 22,000 square feet. Each center features 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. Pursuant to the terms of some of the Company's
contracts with casino operators, casino operators are entitled to establish a
discounted rate below the fair market value for Kids Quest services to be
charged by Kids Quest to the 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. All
activities such as arcade, video and skill games are included in Kids Quest's
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 or 10:00 a.m. and close at 11:00 p.m. weekdays, and later
on weekends.
Four of the Company's Kids Quest centers also include a supervised
arcade featuring non-violent entertainment. The Company's arcades are designed
for teenagers, rather than children 12 and under, but offer more supervision
than typical arcades. The Company does not charge an hourly fee for the use of
its supervised arcades, but the machines require the purchase of tokens.
<PAGE>
NEW HORIZON CHILD CARE 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 and marketing.
New Horizon Child Care 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 Child Care'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 Child Care also offers optional
enrichment programs that may include field trips, music, dance, gymnastics,
swimming, computer and karate lessons.
New Horizon Child Care 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 Child Care conducts regularly scheduled parent-teacher conferences and
encourages informal or unscheduled conferences as desired by parents.
New Horizon Child Care 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.
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 Child Care centers
includes regular inspections and periodic monitoring of each center's policies
and procedures. Access to a New Horizon Child Care 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.
<PAGE>
GROWTH AND EXPANSION
The Company believes that it is situated to take advantage of expansion
opportunities for both its Kids Quest and New Horizon Child Care 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 this 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 hourly care 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
Sunset Station Casino Henderson, Nevada June 1997
Bullwackers Casino Blackhawk, Colorado June 1997
Treasure Island Resort & Casino Red Wing, Minnesota June 1997
The Company has letters of intent or agreements to develop additional Kids Quest
centers at Stratosphere in Las Vegas, Nevada and the proposed Seven Cedars
Casino in Sequim, Washington; however, for reasons associated with the host
property and unrelated to the Company, the status of both developments is
doubtful. 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 is continuing to target favorable
markets and superior locations to establish a strong market presence for Kids
Quest.
The Company is currently constructing a 17,385 square foot Kids Quest
center in Knott's Camp Snoopy at the Mall of America in Bloomington, Minnesota.
Knott's Camp Snoopy is the largest indoor theme park in the United States with
28 rides and attractions on seven acres, and the Mall of America is the largest
fully enclosed retail and family entertainment complex in the United States. In
addition to Knott's Camp Snoopy, the Mall of America has four anchor tenants and
over 400 specialty stores drawing over 400 million visits per year. The Kids
Quest facility will be located on the perimeter of Camp Snoopy with direct
access from both the theme park and the retail mall. The Company's Knott's Camp
Snoopy/Mall of America location is scheduled to open in April 1998, and will be
the Company's second shopping mall location and seventeenth Kids Quest center.
<PAGE>
NEW HORIZON CHILD CARE CENTERS. In 1995, the Company targeted Boise,
Idaho and the surrounding metropolitan area for its premium traditional child
care services, primarily due to the recent growth and development in that
region. Between September 1995 and March 1996, the Company acquired an aggregate
of twelve established child care centers located throughout Boise and the
surrounding metropolitan area, ranging in size from 4,500 square feet to 10,000
square feet on sites ranging from one to four acres. Extensive physical
renovations and improvements were made to each of the acquired facilities, and
New Horizon Child Care's standardized curriculum, programs and cost controls
were implemented. While the centers suffered enrollment declines following a
rate increase, the Company believes that it is the leading child care provider
in the Boise market, and continues to believe that this market offers great
potential. 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. The Company
opened its thirteenth child care center in the Boise area in August 1996 in a
newly constructed facility.
The Company continues to analyze sites for additional New Horizon Child
Care centers. However, the Company believes that opportunities for the expansion
of its traditional child care services exist in both rapidly expanding urban
markets that have not yet been saturated by national providers as well as in
newly developing outer rings of more mature populated communities. In addition,
the Company's location at Treasure Island Resort & Casino in Red Wing, Minnesota
features a combination hourly care and employee care center, providing hourly
care to casino patrons and full-time care for employees of Treasure Island as
well as other members of the community. This combination of the Company's
services and expansion into employee care represents another area of potential
growth for the Company.
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 Child Care 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
Child Care 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
<PAGE>
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 Child Care 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 Child Care 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
<PAGE>
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.
Many 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 Child Care 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.
Many of the Company's Kids Quest centers are also 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 557 employees, including 15
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, one or 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 Child Care 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.
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.
<PAGE>
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 is currently evaluating alternatives including a new lease for its
current executive offices. The Company has entered into an office sharing
arrangement and will continue to share facilities with New Horizon Enterprises.
See "Certain Transactions."
The Company's Kids Quest centers generally range in size from
approximately 6,000 to 22,000 square feet. Fifteen Kids Quest centers operate in
or adjacent to casinos pursuant to the terms of various financial services or
lease agreements. Eight of these agreements have terms expiring between April
1998 and December 2001. The Company's lease for its Mille Lacs location expires
in October 1998, and the Company has begun discussions regarding a new lease at
this location. 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 its Kids Quest center and
pays a percentage of the center'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 casino consent to changes in the Company's rates charged for
its child care services. Since each of the agreements provides that the casino
can terminate the agreement at any time, the Company can provide no assurance
that these agreements will not be terminated prior to their respective
expiration dates, in which case, however, the casino could not offer a
children's activity center for the remainder of the contract term. The Company
also leases approximately 11,150 square feet for its Kids Quest center in the
Eden Prairie Center shopping mall, and has entered into a lease for its Knott's
Camp Snoopy/Mall of America location to open in April 1998. The Company believes
that its leased Kids Quest properties are generally in good condition.
The Company leases 13 New Horizon Child Care 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 six 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.
<PAGE>
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, together with 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 is vigorously contesting the
allegations. The parties are currently conducting discovery. While there can be
no assurance as to the ultimate outcome of this litigation, the Company believes
that it will not have a materially adverse effect on its financial position or
future operating results.
During 1996 and early 1997, Atrox Systems, Inc. d/b/a Tenderfun Soft
Playgrounds ("Tenderfun") supplied large indoor play structures for five new
Kids Quest facilities. In December 1996, Tenderfun filed for reorganization
protection under Chapter 11 of the U.S. Bankruptcy Code in the State of Texas,
and the case was subsequently converted to a Chapter 7 liquidation. The assets
of Tenderfun are now in the process of being liquidated. Due to the extensive
nature of problems with the various play structures provided by Tenderfun, the
Company has commenced an action against F. William Boedeker and Laura M.
Boedeker in Hennepin County District Court, State of Minnesota, based upon
personal guaranties seeking damages in excess of $50,000. William M. Boedeker
was an officer and principal shareholder of Tenderfun and Laura M. Boedeker is
his wife. On September 15, 1997, the Company obtained a judgment against the
Boedekers. That judgment has subsequently been vacated, however, and the parties
are proceeding with discovery. The Company has also filed a proof of claim
seeking in excess of $50,000 against Tenderfun's estate.
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.
<PAGE>
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
-------------- ---------- ----------
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
1997
----
First Quarter.......................... 4 1/2 2 1/2
Second Quarter......................... 5 1/4 2 1/4
Third Quarter.......................... 5 1/4 3 3/8
Fourth Quarter......................... 3 3/4 1 9/16
As of March 15, 1998, the Company had 42 shareholders of record. The
Company estimates there were approximately 1,000 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.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company currently operates sixteen Kids Quest centers providing
hourly child care and 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. In addition, 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 Robinsonville, 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
Sunset Station Las Vegas, NV June 1997
Treasure Island Resort and Casino Red Wing, MN June 1997
Bullwhackers Casino/Silver Hawk Casino Black Hawk, CO June 1997
During 1995 and 1996, the Company acquired an aggregate of twelve
existing child care centers in Boise, Idaho, which the Company now operates as
New Horizon Child Care centers. The Company opened its thirteenth New Horizon
Child Care location in August 1996 in a newly constructed facility.
The Company expanded its product line by opening a supervised video
entertainment center adjacent to its Kids Quest location at the Mohegan Sun
Casino. The Company has since added supervised video entertainment centers at
its Bullwhackers, Soaring Eagle and Treasure Island locations. In August 1997,
the Company opened an employee child care center in connection with its hourly
child care location at Treasure Island Resort and Casino. The Company plans to
continue to seek opportunities for additional employee child care and supervised
video entertainment center locations.
The Company has experienced growth through acquisition and expansion.
The Company's business is seasonal with revenues and operating income for Kids
Quest being the highest and New Horizon Child Care being the lowest in the
summer months. Therefore, results of operations described below may not be
indicative of results to be achieved in any future period.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as
a percentage of total revenues for the periods indicated.
<PAGE>
Year Ended December 31
----------------------
1997 1996
---- ----
REVENUE 100% 100%
COSTS AND EXPENSES
Direct Expenses 80% 79%
Depreciation and Amortization 7% 6%
Pre-Opening Expenses 2% 4%
Write-down of Fixed Assets -- 7%
---- ----
Total Costs and Expenses 89% 96%
---- ----
CENTER OPERATING INCOME 11% 4%
Selling, General and Administrative 9% 15%
Amortization 1% 1%
Write-down of Goodwill -- 6%
---- ----
OPERATING INCOME (LOSS) 1% (18%)
Interest Expense (2%) (1%)
Interest Income 1% 2%
Minority Interest -- 1%
---- ----
NET INCOME (LOSS) 0% (16%)
==== =====
Revenues increased $3,968,077, or 40%, to $13,856,238 in 1997 from
$9,888,161 in 1996. The addition of eight new Kids Quest locations opened during
1996 and 1997 contributed $4,161,048 of additional revenue between 1996 and
1997. Further, the addition of seven New Horizon Child Care centers in Idaho
during 1996 contributed $476,413 of increased revenue. The Company had seven
Kids Quest locations open for the entire twelve month periods ended December 31,
1997 and 1996. Revenues from the Company's two Minnesota Kids Quest casino
locations were down $38,193, or 3%, in 1997 from 1996. Revenues from the
Company's locations in Gulfport and Biloxi, Mississippi, were down $244,112, or
14%, and revenues for the Company's two Louisiana locations were down $204,907,
or 15%, in 1997 from 1996. The Company attributes the decrease in revenue at
these properties in part to a decrease in marketing efforts by each of the host
casino properties. In addition, the Company has had significant management
turnover at many of these locations. The Company also experienced a $95,867, or
7%, decrease in revenue at its Boulder Station location in 1997 versus 1996. The
Company attributes this decrease in revenue to the fact that it opened a new
Kids Quest location within five miles of the Boulder Station location. In spite
of this decrease in revenue at Boulder Station, the combined revenue of the
Boulder Station location and the new location (Sunset Station) resulted in an
increase in revenue of $486,051, or 36%, over the revenue at Boulder Station
alone in 1996. The Company's Eden Prairie Center location showed a decrease in
revenue of $42,529, or 9%, in 1997 from 1996. The Company attributes this
decrease in revenue to the lack of traffic at the mall in which the location is
located as well as management turnover during the year. The Company also
experienced a $43,776, or 3%, decrease in revenue at its six New Horizon Child
Care centers in Boise, Idaho, which were open during the entire years of 1997
and 1996. This decrease occurred primarily at two of these six locations where,
during 1996, the Company reduced the carrying value of its assets at those
locations pursuant to Statement of Financial Standards No. 121.
Total costs and expenses increased $2,817,297, or 30%, to $12,352,341
in 1997 from $9,535,044 in 1996. Included in 1996 costs and expenses, however,
is a write-down of fixed assets of $684,573. Without taking into account the
write-down of fixed assets in 1996, costs and expenses increased
<PAGE>
$3,501,870, or 40%, in 1997 from 1996. As a percent of revenue, costs and
expenses were 89% of revenue in 1997 and 1996 before taking into account the
write-down of fixed assets. Included in the increase was $3,498,691 relating to
the new Kids Quest locations added during 1996 and 1997. In addition, $419,197
related to the seven New Horizon Child Care centers added in 1996. Costs and
expenses for existing Kids Quest locations were down $425,182, or 9%, in 1997
versus 1996. Costs and expenses at existing New Horizon Child Care centers
increased $9,164, or 1%, in 1997 versus 1996. These decreases were due to their
variable nature and resulted from the decreases in revenue at those locations.
Selling, general and administrative expenses decreased $157,701, or
12%, to $1,277,537 in 1997 from $1,435,238 for the same period in 1996. Selling,
general and administrative expenses as a percentage of revenue decreased to 9%
of revenue in 1997 compared to 15% in 1996. The Company attributes the decrease
to cost savings efforts implemented by management. Despite the decrease in
expenses between 1997 and 1996, management expects selling, general and
administrative expenses to increase with the addition of and negotiation for new
locations. However, such expenses will further decrease as a percentage 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 $997,682, 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 of 1996, the Company 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
opened in 1994. The Company is currently in negotiations with the landlord of
this location regarding a reduction in rent or the possibility of closing the
location. The Company, however, 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 the Company's contracts with casino operators,
casino operators are entitled to establish a discounted rate below the fair
market value for Kids Quest services to be charged by Kids Quest to the 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. In 1997, the Company received
$1,129,726 of reimbursements for rate discounts versus $1,346,814 in 1996, a
decrease of $217,088, or 19%. The majority of these rate discount reimbursements
were from three casinos owned by Grand Casinos, Inc. and four Indian casinos
managed by Grand Casinos, Inc. Due to a price increase to the public at these
Grand Casinos locations, such rate discount reimbursements were reduced
beginning in the third quarter of 1996. There can be no assurance that such
discounts and reimbursements will not be further modified or be discontinued
altogether or that future Kids Quest agreements with Grand Casinos or other
casinos will provide for a discounted rate to the public. In the event that
casino operators choose not to provide for a discounted hourly rate, the Company
may charge higher hourly rates. While this may cause patronage to decline and
ultimately result in lower revenues, the Company currently has eight locations
that operate without any rate discount and has found no evidence to conclude
that higher non-discounted hourly rates to customers have a significant impact
on a location's patronage and resulting revenue.
Interest expense for 1997 increased $186,830, or 264%, to $300,998 in
1997 from $114,168 in 1996. The increase in interest expense is due to
borrowings made by the Company to fund its expansion efforts.
<PAGE>
The Company had net income of $2,655 in 1997 compared to a loss of
$1,600,958 for 1996. The Company's net income for 1997 increased $328,266 as
compared to the 1996 loss before write-offs of fixed assets and goodwill of
$1,275,067 in 1996. The Company attributes the increase in profitability to
profits generated from new Kids Quest locations opened during 1996 and 1997 as
well as modest improved operating results at the Idaho New Horizon Child Care
centers. The Company's profitability was also affected by pre-opening costs of
$214,611 in 1997 and $407,070 in 1996.
LIQUIDITY AND CAPITAL RESOURCES
During 1997, the Company generated $1,180,497 from operations, invested
$1,754,109 in property and equipment, loaned subsidiaries of Station Casinos,
Inc. $945,600 to fund leasehold improvements at Station Casino Kansas City and
Sunset Station, and received payments on notes receivable of $609,854 including
complete repayment of the note from Mohegan Sun Casino. The Company added
long-term debt of $2,384,405 and made payments of $1,070,739 on long-term
obligations. The Company ended the year with a cash balance of $554,540.
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 $363,385 (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 1996 with a cash balance of
$150,232.
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's Camp Snoopy/Mall of
America location is currently under construction. The Company believes it has
adequate financing and capital available to complete this project. The Company
will, however, require additional financing in 1998 as it adds additional Kids
Quest or New Horizon Child Care locations or if the Company were to pursue
additional acquisitions during the year. The Company currently has no
arrangements for such additional financing. The Company believes that it will be
able to arrange such additional financing and will be able to fund additional
expansion with the additional financing and with cash flow from operations.
PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forwardlooking 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.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
Consolidated Financial Statements
As of
December 31, 1997 and 1996
CONTENTS
Report of Independent Public Accountants............................16
Consolidated Balance Sheets.........................................17
Consolidated Statements of Operations...............................18
Consolidated Statements of Shareholders' Equity.....................19
Consolidated Statements of Cash Flows...............................20
Notes to Consolidated Financial Statements..........................21
<PAGE>
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, 1997
and 1996, 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, 1997 and 1996, 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 13, 1998
<PAGE>
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31
<TABLE>
<CAPTION>
1997 1996
----------- -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 554,540 $ 150,232
Accounts receivable 773,120 611,479
Current portion of notes receivable 163,539 470,947
Prepaid expenses and other 262,150 172,087
----------- -----------
Total current assets 1,753,349 1,404,745
----------- -----------
PROPERTY AND EQUIPMENT:
Furniture, fixtures, equipment and leaseholds 6,522,416 4,768,307
Less- Accumulated depreciation and amortization (1,701,827) (647,514)
----------- -----------
Property and equipment, net 4,820,589 4,120,793
OTHER ASSETS:
Goodwill (net of accumulated amortization of $163,547 and $81,027, respectively) 1,074,231 1,156,751
Notes receivable, net of current portion 1,202,216 751,930
Noncompete agreements (net of accumulated amortization of $10,135 and $5,579,
respectively) 14,025 18,580
Other 172,879 133,347
----------- -----------
$ 9,037,289 $ 7,586,146
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 861,645 $ 677,319
Accounts payable 282,073 280,875
Accrued expenses 594,266 481,641
Deferred rent 24,666 28,667
----------- -----------
Total current liabilities 1,762,650 1,468,502
LONG-TERM DEBT, less current maturities 2,313,968 1,184,628
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 7)
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 1997 and 1996 32,933 32,933
Paid-in capital 7,196,197 7,171,197
Accumulated deficit (2,268,459) (2,271,114)
----------- -----------
Total shareholders' equity 4,960,671 4,933,016
----------- -----------
$ 9,037,289 $ 7,586,146
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
<PAGE>
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31
1997 1996
------------ ------------
REVENUE $ 13,856,238 $ 9,888,161
------------ ------------
COSTS AND EXPENSES:
Direct expenses 11,101,441 7,845,490
Depreciation and amortization 1,036,289 597,911
Preopening expenses 214,611 407,070
Write-down of fixed assets (Note 10) -- 684,573
------------ ------------
Total costs and expenses 12,352,341 9,535,044
------------ ------------
Center operating income 1,503,897 353,117
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,277,537 1,435,238
AMORTIZATION 106,522 128,523
WRITE-DOWN OF GOODWILL (Note 10) -- 590,774
------------ ------------
Income (loss) from operations 119,838 (1,801,418)
INTEREST EXPENSE (300,998) (114,168)
INTEREST INCOME 151,953 167,064
MINORITY INTEREST 31,862 147,564
------------ ------------
Net income (loss) $ 2,655 $ (1,600,958)
============ ============
INCOME (LOSS) PER SHARE:
Basic and diluted $ .00 $ (.49)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and Diluted 3,293,300 3,289,007
============ ============
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Common Stock Total
------------------------- Paid-In Accumulated Shareholders'
Shares Amount Capital Deficit Equity
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
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
Net income -- -- -- 2,655 2,655
Warrants issued for consulting services -- -- 25,000 -- 25,000
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1997 3,293,300 $ 32,933 $ 7,196,197 $(2,268,459) $ 4,960,671
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 2,655 $(1,600,958)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities-
Write-down of fixed assets and goodwill -- 1,275,347
Depreciation and amortization 1,142,811 726,434
Deferred rent (4,001) (4,000)
Change in operating assets and liabilities:
Accounts receivable (161,641) (419,315)
Prepaid expenses and other current assets (90,063) (78,052)
Accounts payable 1,198 (32,096)
Other assets (40,955) (99,382)
Accrued expenses 330,493 280,007
----------- -----------
Net cash provided by operating activities 1,180,497 47,985
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (1,754,109) (2,950,015)
Purchase of child care centers, net -- (472,886)
Increases in note receivable (945,600) (863,385)
Collection of notes receivable 609,854 32,190
----------- -----------
Net cash used in investing activities (2,089,855) (4,254,096)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from long-term debt (1,070,739) 569,046
Payments on long-term debt 2,384,405 (106,721)
Proceeds from the issuance of stock -- 29,000
----------- -----------
Net cash provided by financing activities 1,313,666 491,325
----------- -----------
Net increase (decrease) in cash and cash equivalents 404,308 (3,714,786)
CASH AND CASH EQUIVALENTS, beginning of year 150,232 3,865,018
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 554,540 $ 150,232
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest $ 280,669 $ 109,063
=========== ===========
Income taxes $ -- $ --
=========== ===========
NONCASH ITEMS:
Purchase of child care centers with note payable $ -- $ 719,895
Noncash reductions of notes receivable 192,868 104,911
Warrants issued for consulting services 25,000 --
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
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, including New Horizon Child
Care-Idaho, Inc. (the Company). All intercompany balances and transactions have
been eliminated in consolidation. As of December 31, 1997, the Company operated
16 Kids Quest Centers providing hourly child care, as well as 14 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. Ameristar's portion of net
losses generated to date are presented as minority interest in the consolidated
statements of operations.
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
<PAGE>
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. Rate and compensatory reimbursements received from Grand
Casinos, Inc. for the years ended December 31, 1997 and 1996 were approximately
$1,393,000 and $1,565,000, 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.
The Company follows Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," which 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.
EARNINGS PER SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings per Share." As a result,
the Company's reported earnings per share (EPS) for 1996 was restated. The
shares used in computing basic and diluted earnings per share were the same for
1997 and 1996. Options and warrants were excluded from the computation of
diluted earnings per share for both years because their effect would be
antidilutive.
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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During June 1997, the Financial Accounting Standards Board released SFAS No.
130, "Reporting Comprehensive Income," effective for fiscal years beginning
after December 15, 1997. SFAS No. 130 establishes standards for reporting and
display in the financial statements of total net income and the components of
all other nonowner changes in equity, referred to as
<PAGE>
comprehensive income. The Company will adopt SFAS No. 130 in 1998 and is
currently analyzing the impact it will have on the disclosures in the financial
statements.
During June 1997, the Financial Accounting Standards Board released SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
effective for fiscal years beginning after December 15, 1997. SFAS No. 131
requires disclosure of business and geographic segments in the consolidated
financial statements of the Company. The Company will adopt SFAS No. 131 in 1998
and is currently analyzing the impact it will have on the disclosures in its
financial statements.
RECLASSIFICATIONS
Certain 1996 amounts in the accompanying consolidated financial statements have
been reclassified to conform to the 1997 presentation. Such reclassifications
have no effect on previously reported net loss or shareholders' equity.
2. NOTES RECEIVABLE:
Long-term notes receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Demand promissory note from owner of a building leased by the Company for
amounts advanced for initial center acquisition costs, at prime plus 2%
(10.25% at December 31, 1997); payable on demand; collateralized $ 65,606 $ 258,474
Note receivable from casino operator at reference rate (8.75% at December 31,
1997) for amounts advanced for the cost of construction, initial improvements
and fixtures; payable in monthly installments of $6,266 through 2005;
collateralized by rents or other payments owed by the Company pursuant to
lease agreement 428,421 464,403
Note receivable from casino operator at reference rate plus 2% (10.25% at
December 31, 1996) for amounts advanced for the cost of construction, initial
improvements and fixtures; repaid in 1997 - 500,000
Note receivable from casino operator at 10% for amounts advanced for the cost of
construction, initial improvements and fixtures; payable in monthly
installments of $6,567 through 2007; collateralized by rents or other
payments owed by the Company pursuant to lease agreement 466,442 -
Note receivable from casino operator at 10% for amounts advanced for the cost of
construction, initial improvements and fixtures; payable in monthly
installments of $5,999 through 2007; collateralized by rents or other
payments owed by the Company pursuant to child care services agreement 405,286 -
---------- ----------
Total long-term notes receivable 1,365,755 1,222,877
Less- Current maturities (163,539) (470,947)
---------- ----------
Long-term notes receivable, net of current maturities $1,202,216 $ 751,930
========== ==========
</TABLE>
<PAGE>
3. LONG-TERM DEBT:
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<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 $ 544,707 $ 615,260
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 294,823 318,500
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 326,689 352,267
Notes payable to leasing company at 12% through 2000; collateralized by
equipment 1,991,766 -
Other 17,628 61,410
---------- ----------
Total long-term debt 3,175,613 1,861,947
Less- Current maturities (861,645) (677,319)
---------- ----------
Long-term debt, net of current maturities $2,313,968 $1,184,628
========== ==========
</TABLE>
Future maturities of long-term debt as of December 31, 1997 are as follows:
1998 $ 861,645
1999 955,396
2000 622,659
2001 170,826
2002 186,671
Thereafter 378,416
----------
$3,175,613
==========
4. SHAREHOLDERS' EQUITY:
In connection with the Company's initial 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.
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
<PAGE>
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.
In addition, the Company granted 25,000 warrants to purchase common stock at
$4.00 in 1997 in exchange for services. The Company has recorded expense for the
fair market value of the services received in the accompanying consolidated
statement of operations.
5. 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 750,000 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.
The Company has previously granted 37,500 stock options exercisable at $4.00 per
share to certain members of management. All of these options were outstanding
and 100% vested at December 31, 1997, and expire on November 13, 2000.
Stock option activity is summarized as follows:
Weighted
Incentive Average
Stock Exercise
Options Price
------- -----
Balance, December 31, 1995 289,500 $4.87
Options granted 62,000 7.73
Options exercised (5,800) 5.00
Options forfeited (21,600) 5.00
------- -----
Balance, December 31, 1996 324,100 5.41
Options granted 117,000 4.01
Options forfeited (24,000) 5.00
------- -----
Balance, December 31, 1997 417,100 $5.04
======= =====
Options exercisable at:
December 31, 1996 154,140
=======
December 31, 1997 208,400
=======
<PAGE>
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 income (loss) and net income (loss) per common share would
have been reported as follows:
1997 1996
-------- ----------
Net income (loss):
As reported $ 2,655 $(1,600,958)
Pro forma (160,001) (1,768,820)
Income (loss) per share--basic and diluted:
As reported .00 (.49)
Pro forma (.05) (.53)
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 1997 and 1996 was $2.05 and $3.38,
respectively. The weighted average exercise price was $3.97 and $7.49,
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% to 6.8% for 1997 and 5.8% to
6.9% for 1996; no expected dividends; expected lives of 5 years for 1997 and 2
to 5 years for 1996; and expected volatility of 49% for 1997 grants and 44% to
65% for 1996 grants.
6. INCOME TAXES:
The Company utilizes the liability method of accounting for income taxes. As of
December 31, 1997, the Company had operating loss carryforwards of approximately
$1,662,000. 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 are as follows:
1997 1996
-------- --------
Net operating loss carryforwards, expiring
beginning in 2009 $665,000 $539,000
Write-down of assets 201,000 241,000
Write-down of goodwill 203,000 236,000
Other, primarily depreciation (143,000) (183,000)
Valuation allowance (926,000) (833,000)
-------- --------
$ - $ -
======== ========
<PAGE>
7. 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 $1,998,000 and $1,595,000 for the years ended December 31, 1997
and 1996.
Future minimum lease payments under noncancelable operating leases entered into
prior to December 31, 1997 are as follows:
1998 $ 711,800
1999 711,800
2000 711,800
2001 711,800
2002 711,800
Thereafter 1,757,700
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
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, together with 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 is vigorously contesting the
allegations. The parties are currently conducting discovery, and there can be no
assurance, however, as to the outcome of this 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.
<PAGE>
8. 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:
1997 1996
-------- --------
Law firm, providing certain legal services $322,878 $389,303
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 operating income, as defined in the individual agreements, generally
ranging from 40% to 60%. The Company paid $504,000 for the year ended December
31, 1997 and $879,000 for the year ended December 31, 1996 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.
9. ACQUISITIONS:
In February and March 1996, New Horizon Child Care-Idaho, Inc. acquired six
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 purchase price was allocated to noncompetes for $15,000,
vehicles and equipment for $273,000, consumable supplies for $5,000 and goodwill
for $900,000. The following unaudited pro forma financial information for the
year ended 1996 gives effect to the acquisition as if it had occurred effective
January 1, 1996:
1996
-----------
Revenue $10,177,419
Loss from operations (1,613,805)
Net loss (1,570,443)
Loss per share - basic and diluted (.47)
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.
10. 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.
<PAGE>
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 and resulted
from each individual location generating negative cash flow. The Company
periodically reviews the carrying value of all tangible and intangible assets
for impairment. There were no impairments during 1997.
<PAGE>
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 Company's 1998 annual meeting of
shareholders (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 49 Chairman of the Board and Chief Executive Officer
Susan K. Dunkley 48 President and Director
Kevin M. Greer 41 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.
<PAGE>
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
<TABLE>
<CAPTION>
No. Description
- --- -----------
<S> <C>
3.1 Articles of Incorporation of the Company, as amended *
3.2 Restated Bylaws of the Company *
10.1 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
</TABLE>
- --------------------------
* Incorporated by reference from the Company's Registration Statement on
Form SB-2 (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.
<PAGE>
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 30 1998 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 30, 1998
- ---------------------------- Chief Executive Officer
William M. Dunkley (principal executive officer)
/s/ Kevin Greer Chief Financial Officer March 30, 1998
- ---------------------------- (principal financial and
Kevin M. Greer accounting officer)
/s/ Susan K. Dunkley President and Director March 30, 1998
- ----------------------------
Susan K. Dunkley
/s/ Jay L. Bennett Director March 30, 1998
- ----------------------------
Jay L. Bennett
/s/ Lyle Berman Director March 30, 1998
- ----------------------------
Lyle Berman
/s/ Kenneth Brimmer Director March 30, 1998
- ----------------------------
Kenneth Brimmer
<PAGE>
NEW HORIZON KIDS QUEST, INC.
ANNUAL REPORT ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.4 1994 Long-Term Incentive and Stock Option Plan, as amended
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
Exhibit 10.4
NEW HORIZON KIDS QUEST, INC.
1994 LONG-TERM INCENTIVE
AND
STOCK OPTION PLAN
1. Purpose of Plan.
This Plan shall be known as the "NEW HORIZON KIDS QUEST, INC. 1994
LONG-TERM INCENTIVE AND STOCK OPTION PLAN" and is hereinafter referred to as the
"Plan". The purpose of the Plan is to aid in maintaining and developing
personnel capable of assuring the future success of New Horizon Kids Quest,
Inc., a Minnesota corporation (the "Company"), to offer such personnel
additional incentives to put forth maximum efforts for the success of the
business, and to afford them an opportunity to acquire a proprietary interest in
the Company through stock options and performance awards as provided herein.
Options granted under this Plan may be either incentive stock options
("Incentive Stock Options") within the meaning of Section 422 of the Internal
Revenue Code of 1986 (the "Code'), or options which do not qualify as Incentive
Stock Options.
2. Stock Subject to Plan.
Subject to the provisions of Section 13 hereof, the stock to be subject
to options or other awards under the Plan shall be the Company's authorized
Common Stock, par value $.Ol per share. Such shares may be either authorized but
unissued shares, or issued shares which have been reacquired by the Company.
Subject to adjustment as provided in Section 13 hereof, the maximum number of
shares on which options may be exercised or other awards issued under this Plan
shall be 750,000 shares. If an option or award under the Plan expires, or for
any reason is terminated or unexercised with respect to any shares, such shares
shall again be available for options or awards thereafter granted during the
term of the Plan.
3. Administration of Plan.
(a) The Plan shall be administered by the Board of Directors or a
committee appointed by the Board of Directors (the "Committee") of the Company.
(b) The Committee shall have plenary authority in its discretion, but
subject to the express provisions of the Plan: (i) to determine the purchase
price of the Common Stock covered by each option or award, (ii) to determine the
employees to whom and the time or times at which such options and awards shall
be granted and the number of shares to be subject to each, (iii) to determine
the form of payment to be made in connection with performance awards, either
cash, Common Stock of the Company or a combination thereof, (iv) to determine
the terms of exercise of each option and award, (v) to accelerate the time at
which all or any part of an option or award may be exercised, (vi) to amend or
modify the terms of any option or award with the consent of the optionee, (vii)
to interpret the Plan, (viii) to prescribe, amend and rescind rules and
regulations relating to the Plan, (ix) to determine the terms and provisions of
each option and award agreement under the Plan (which agreements need not be
identical), including the designation of those options intended to be Incentive
Stock Options, and (x) to make all other determinations necessary or advisable
for the administration of the Plan, subject to the exclusive authority of the
Board of Directors under Section 14 herein to amend or terminate the Plan.
(c) All determinations of the Committee shall be made by not less than
a majority of its members, provided that if the Committee is comprised of no
more than two members, such determinations may not be made by less than all of
its members. Any decision or determination reduced
<PAGE>
to writing and signed by all of the members of the Committee shall be fully
effective as if it had been made by a majority vote at a meeting duly called and
held. The grant of an option or award shall be effective only if a written
agreement shall have been duly executed and delivered by and on behalf of the
Company following such grant. The Committee may appoint a Secretary and may make
such rules and regulations for the conduct of its business as it shall deem
advisable.
4. Eligibility.
Incentive Stock Options may only be granted under this Plan to any full
or part-time employee (which term as used herein includes, but is not limited
to, officers and directors who are also employees) of the Company and of its
present and future subsidiary corporations within the meaning of Section 424(f)
of the Code (herein called "subsidiaries"). Full or part-time employees,
directors, consultants or independent contractors to the Company or one of its
subsidiaries, shall be eligible to receive options which do not qualify as
Incentive Stock Options and awards. In determining the persons to whom options
and awards shall be granted and the number of shares subject to each, the
Committee may take into account the nature of services rendered by the
respective employees or consultants, their present and potential contributions
to the success of the Company and such other factors as the Committee in its
discretion shall deem relevant. A person who has been granted an option or award
under this Plan may be granted additional options or awards under the Plan if
the Committee shall so determine provided, however, that for Incentive Stock
Options granted after December 31, 1986, to the extent the aggregate Fair Market
Value (as defined in Section 5 below) (determined at the time the Incentive
Stock Option is granted) of the Common Stock with respect to which all Incentive
Stock Options are exercisable for the first time by an employee during any
calendar year (under all plans described in subsection (d) of Section 422 of the
Code of his employer corporation and its parent and subsidiary corporations)
exceeds $100,000, such options shall be treated as options which do not quality
as Incentive Stock Options. Nothing in the Plan or in any agreement thereunder
shall confer on any employee any right to continue in the employ of the Company
or any of its subsidiaries or affect, in any way, the right of the Company or
any of its subsidiaries to terminate his or her employment at any time.
5. Price.
The option price for all Incentive Stock Options granted under the Plan
shall be determined by the Committee but shall not be less than 100% of the Fair
Market Value of the Common Stock at the date of grant of such option. The option
price for options granted under the Plan which do not qualify as Incentive Stock
Options and, if applicable, the price for all awards shall also be determined by
the Committee. For purposes of the preceding sentence and for all other
valuation purposes under the Plan, the "Fair Market Value" of shares of Common
Stock shall be (i) the closing price of the Common Stock as reported for
composite transactions if the Common Stock is then traded on a national
securities exchange, (ii) the last sale price if the Common Stock is then quoted
on the Nasdaq National Market, or (iii) the average of the closing
representative bid and asked prices of the Common Stock as reported on Nasdaq on
the date as of which the Fair Market Value is being determined. If on the date
of grant of any option or award hereunder the Common Stock is not traded on an
established securities market, the Committee shall make a good faith attempt to
satisfy the requirements of this Section 5 and in connection therewith shall
take such action as it deems necessary or advisable.
6. Term.
Each option and award and all rights and obligations thereunder shall
expire on the date determined by the Committee and specified in the option or
award agreement. The Committee shall be under no duty to provide terms of like
duration for options or awards granted under the Plan, but the term of an
Incentive Stock Option may not extend more than ten (10) years from the date of
grant of such
<PAGE>
option and the term of options granted under the Plan which do not qualify as
Incentive Stock Options may not extend more than fifteen (15) years from the
date of grant of such option.
7. Exercise of Option or Award.
(a) The Committee shall have full and complete authority to determine
whether an option or award will be exercisable in full at any time or from time
to time during the term thereof, or to provide for the exercise thereof in such
installments, upon the occurrence of such events (such as termination of
employment for any reason) and at such times during the term of the option as
the Committee may determine and specify in the option or award agreement.
(b) The exercise of any option or award granted hereunder shall only be
effective at such time that the sale of Common Stock pursuant to such exercise
will not violate any state or federal securities or other laws.
(c) An optionee or grantee electing to exercise an option or award
shall give written notice to the Company of such election and of the number of
shares to such exercise. The full purchase price of such shares shall be
tendered with such notice of exercise. Payment shall be made to the Company in
cash (including bank check, certified check, personal check, or money order),
or, at the discretion of the Committee and as specified by the Committee (i) by
delivering certificates for the Company's Common Stock already owned by the
optionee or grantee having a Fair Market Value as of the date of grant equal to
the full purchase price of the shares, or (ii) by delivering the optionee's or
grantee's promissory note, which shall provide for interest at a rate not less
than the minimum rate required to avoid the imputation of income, original issue
discount or a below-market-rate loan pursuant to Sections 483,1274 or 7872 of
the Code or any successor provisions thereto, or (iii) a combination of cash and
such shares. The Fair Market Value of such tendered shares shall be determined
as provided in Section 5 herein. Until such person has been issued the shares
subject to such exercise, he or she shall possess no rights as a shareholder
with respect to such shares.
8. Restricted Stock Awards.
Awards of Common Stock subject to forfeiture and transfer restrictions
may be granted by the Committee. Any restricted stock award shall be evidenced
by an agreement in such form as the Committee shall from time to time approve,
which agreement shall comply, with and be subject to the following terms and
conditions and any additional terms and conditions established by the Committee
that are consistent with the terms of the Plan:
(a) Grant of Restricted Stock Awards. Each restricted stock award made
under the Plan shall be for such number of shares of Common Stock as shall be
determined by the Committee and set forth in the agreement containing the terms
of such restricted stock award. Such agreement shall set forth a period of time
during which the grantee must remain in the continuous employment of the Company
in order for the forfeiture and transfer restrictions to lapse. If the Committee
so determines, the restrictions may lapse during such restricted period in
installments with respect to specified portions of the shares covered by the
restricted stock award. The agreement may also, in the discretion of the
Committee, set forth performance or other conditions that will subject the
Common Stock to forfeiture and transfer restrictions. The Committee may, at its
discretion, waive all or any part of the restrictions applicable to any or all
outstanding restricted stock awards.
(b) Delivery of Common Stock and Restrictions. At the time of a
restricted stock award, a certificate representing the number of shares of
Common Stock awarded thereunder shall be registered in the name of the grantee.
Such certificate shall be held by the Company or any custodian appointed
<PAGE>
by the Company for the account of the grantee subject to the terms and
conditions of the Plan, and shall bear such a legend setting forth the
restrictions imposed thereon as the Committee, in its discretion, may determine.
The grantee shall have all rights of a shareholder with respect to the Common
Stock, including the right to receive dividends and the right to vote such
shares, subject to the following restrictions: (i) the grantee shall not be
entitled to delivery of the stock certificate until the expiration of the
restricted period and the fulfillment of any other restrictive conditions set
forth in the restricted stock agreement with respect to such Common Stock; (ii)
none of the shares of Common Stock may be sold, assigned, transferred, pledged,
hypothecated or otherwise encumbered or disposed of during such restricted
period or until after the fulfillment of any such other restrictive conditions;
and (iii) except as otherwise determined by the Committee, all of the Common
Stock shall be forfeited and all rights of the grantee to such Common Stock
shall terminate, without further obligation on the part of the Company, unless
the grantee remains in the continuous employment of the Company for the entire
restricted period in relation to which such shares of Common Stock were granted
and unless any other restrictive conditions relating to the restricted stock
award are met. Any Common Stock, any other securities of the Company and any
other property (except for cash dividends) distributed with respect to the
Common Stock subject to restricted stock awards shall be subject to the same
restrictions, terms and conditions as such restricted Common Stock.
(c) Termination of Restrictions. At the end of the restricted period
and provided that any other restrictive conditions of the restricted stock award
are met, or at such earlier time as otherwise determined by the Committee, all
restrictions set forth in the agreement relating to the restricted stock award
or in the Plan shall lapse as to the restricted Common Stock subject thereto,
and a stock certificate for the appropriate number of shares of Common Stock,
free of the restrictions and the restricted stock legend, shall be delivered to
the grantee or his beneficiary or estate, as the case may be.
9. Performance Awards.
(a) The Committee is further authorized to grant performance awards
("Performance Awards"). Subject to the terms of this Plan and any applicable
award agreement, a Performance Award granted under the Plan (i) may be
denominated or payable in cash, Common Stock (including without limitation
restricted stock), other securities, other awards, or other property and (ii)
shall confer on the holder thereof rights valued as determined by the Committee
in its discretion, and payable to, or exercisable by, the holder of the
Performance Award, in whole or in part, upon the achievement of such performance
goals during such performance periods as the Committee in its discretion, shall
establish. Subject to the terms of this Plan and any applicable award agreement,
the performance goals to be achieved during any performance period, the length
of any performance period, the amount of any Performance Award granted, and the
amount of any payment or transfer to be made by the grantee and by the Company
under any Performance Award shall be determined by the Committee.
(b) For purposes of this Section 9, (i) if a Performance Award entitles
the holder thereof to receive or purchase the Company's Common Stock, the number
of shares covered by such Performance Award or to which such Performance Award
relates shall be counted on the date of grant of such Performance Award against
the aggregate number of shares available for granting, Performance Awards under
the Plan, and (ii) if a Performance Award entitles the holder to receive cash
payments but the amount of such payments are denominated in or based on a number
of shares of the Company's Common Stock, such number of shares shall be counted
on the date of grant of such Performance Award against the aggregate number of
shares available for granting Performance Awards under the Plan; provided,
however, that Performance Awards that operate in tandem with (whether granted
simultaneously with or at a different time from), or that are substituted for,
other Performance Awards may be counted or not counted under procedures adopted
by the Committee in order to avoid double counting.
<PAGE>
10. Income Tax Withholding and Tax Bonuses.
(a) In order to comply with all applicable federal or state income tax
laws or regulations, the Company may take such action as it deems appropriate to
ensure that all applicable federal or state payroll, withholding income or other
taxes, which are the sole and absolute responsibility of an optionee or grantee
under the Plan, are withheld or collected from such optionee or grantee. In
order to assist an optionee or grantee in paying all federal and state taxes to
be withheld or collected upon exercise of an option or award which does not
qualify as an Incentive Stock Option hereunder, the Committee in its absolute
discretion and subject to such additional terms and conditions as it may adopt,
shall permit the optionee or grantee to satisfy such tax obligation by (i)
electing to have the Company withhold a portion of the shares otherwise to be
delivered upon exercise of such option or award with a Fair Market Value,
determined in accordance with Section 5 herein, equal to such taxes or (ii)
delivering to the Company Common Stock other than the shares issuable upon
exercise of such option or award with a Fair Market Value, determined in
accordance with Section 5, equal to such taxes.
(b) The Committee shall have the authority, at the time of grant of an
option under the Plan or at any time thereafter, to approve tax bonuses to
designated optionees or grantees to be paid upon their exercise of options or
awards granted hereunder. The amount of any such payments shall be determined by
the Committee. The Committee shall have full authority in its absolute
discretion to determine the amount of any such tax bonus and the terms and
conditions affecting the vesting and payment thereafter.
11. Additional Restrictions.
The Committee shall have full and complete authority to determine
whether all or any part of the Common Stock of the Company acquired upon
exercise of any of the options or awards granted under the Plan shall be subject
to restrictions on the transferability thereof or any other restrictions
affecting in any manner the optionee's or grantee's rights with respect thereto,
but any such restriction shall be contained in the agreement relating to such
options or awards.
12. Ten Percent Shareholder Rule.
Notwithstanding any other provision in the Plan, if at the time an
option is otherwise to be granted pursuant to the Plan the optionee owns
directly or indirectly (within the meaning of Section 424(d) of the Code) Common
Stock of the Company possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or its parent or
subsidiary corporations, if any (within the meaning, of Section 422(b)(6) of the
Code), then any Incentive Stock Option to be granted to such optionee pursuant
to the Plan shall satisfy the requirements of Section 422(c)(5) of the Code, and
the option price shall be not less than 110% of the Fair Market Value of the
Common Stock of the Company determined as described herein, and such option by
its terms shall not be exercisable after the expiration of five (5) years from
the date such option is granted.
13. Non-Transferability.
No option or award granted under the Plan shall be transferable by an
optionee or grantee, otherwise than by will or the laws of descent or
distribution. Except as otherwise provided in an option or award agreement,
during the lifetime of an optionee or grantee, the option shall be exercisable
only by such optionee or grantee.
<PAGE>
14. Dilution or Other Adjustments.
If there shall be any change in the Common Stock through merger,
consolidation, reorganization, recapitalization, dividend in the form of stock
(of whatever amount), stock split or other change in the corporate structure,
appropriate adjustments in the Plan and outstanding options and awards shall be
made by the Committee. In the event of any such changes, adjustments shall
include, where appropriate, changes in the aggregate number of shares subject to
the Plan, the number of shares and the price per share subject to outstanding
options and awards and the amount payable upon exercise of outstanding awards,
in order to prevent dilution or enlargement of option or award rights.
15. Amendment or Discontinuance of Plan.
The Board of Directors may amend or discontinue the Plan at any time.
Subject to the provisions of Section 14 no amendment of the Plan, however, shall
without shareholder approval: (i) increase the maximum number of shares under
the Plan as provided in Section 2 herein, (ii) decrease the minimum price
provided in Section 5 herein, (iii) extend the maximum term under Section 6, or
(iv) modify the eligibility requirements for participation in the Plan. The
Board of Directors shall not alter or impair any option or award theretofore
granted under the Plan without the consent of the holder of the option.
16. Time of Granting.
Nothing contained in the Plan or in any resolution adopted or to be
adopted by the Board of Directors or by the shareholders of the Company, and no
action taken by the Committee or the Board of Directors (other than the
execution and delivery of an option or award agreement), shall constitute the
granting of an option or award hereunder.
17. Effective Date and Termination of Plan.
(a) The Plan was approved by the Board of Directors and shareholders of
the Company on May 13, 1994.
(b) Unless the Plan shall have been discontinued as provided in Section
15 hereof, the Plan shall terminate May 13, 2004. No option or award may be
granted after such termination, but termination of the Plan shall not, without
the consent of the optionee or grantee, alter or impair any rights or
obligations under any option or award theretofore granted.
Exhibit 23
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.
/s/ ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 30, 1998
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