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, 1999
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)
16355 36TH AVENUE NORTH, SUITE 700
PLYMOUTH, MINNESOTA 55446
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.
The registrant's revenues for its most recent fiscal year were
$17,098,478.
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 29, 2000, was approximately
$1,887,600.
As of March 20, 2000, 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 2000 Annual Meeting of Shareholders Part III
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FORM 10-KSB INDEX
PART I .......................................................1
Item 1. DESCRIPTION OF BUSINESS................................1
Item 2. DESCRIPTION OF PROPERTY................................8
Item 3. LEGAL PROCEEDINGS......................................8
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.............................................9
PART II .......................................................9
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.........................9
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS..................11
Item 7. FINANCIAL STATEMENTS..................................17
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.............32
PART III ......................................................32
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a) OF THE SECURITIES EXCHANGE ACT OF 1934.......32
Item 10. EXECUTIVE COMPENSATION................................33
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT..............................33
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........33
Item 13. EXHIBITS AND REPORTS ON FORM 8-K......................33
"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.
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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 a total of 29 child care centers: 10
New Horizon Child Care centers in Idaho, a New Horizon Child Care center
providing employee child care in Joliet, Illinois, for employees of Empress
Casino and Mobil Oil Corporation, and 19 Kids Quest centers in nine states,
including two with supervised video entertainment centers, and one (Mall of
America) offering traditional child care. The Company intends to expand its
operations through the development of additional Kids Quest centers and the
acquisition or development of additional traditional and employee child care
centers.
Kids Quest combines supervised, hourly child care with children's
entertainment and recreational facilities. The Kids Quest concept was developed
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.
Two of the Company's Kids Quest centers operate in enclosed shopping
malls, including a 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, and the Mall of America is the largest fully enclosed retail
and family entertainment complex in the United States. Seventeen of the
Company's Kids Quest centers are operated in conjunction with casinos. The
Company operates four centers in casinos owned or managed by Station Casinos,
Inc. in Nevada and Missouri. Station Casinos, Inc. has also agreed to include
Kids Quest centers in three additional Station Casinos, Inc. properties,
including Station Casino St. Charles in St. Charles, Missouri. In addition, the
Company has entered into agreements to develop a Kids Quest hourly and employee
child care center at Jackpot Junction Casino/Hotel in Morton, Minnesota, a Kids
Quest hourly child care center and a supervised non-violent video entertainment
center at Ho-Chunk Casino in Wisconsin Dells, Wisconsin, and an employee child
care center for the employees of the Venetian Resort~Hotel~Casino in Las Vegas,
Nevada.
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 and Kinderberry Hill Child
Development. 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.
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New Horizon Kids Quest, Inc. was incorporated in Minnesota in March
1992. The Company's principal executive offices are located at 16355 36th Avenue
North, Suite 700, Plymouth, Minnesota, 55446, and its telephone number at that
location is (612) 557-1111.
KIDS QUEST CENTERS
The Company has designed and developed its Kids Quest concept to create
an environment for children that combines fun with physical activity and
learning. Each activity center is fully staffed with experienced child care
professionals certified in CPR and first aid training.
Kids Quest combines hourly child care with indoor recreational and
educational facilities to entertain children while providing parents with the
peace of mind afforded by supervised child care. Many "pay for play" operators
require parents to remain with their children, providing merely an indoor
playground. Kids Quest creates an entertainment center that allows parents to
pursue activities away from the center while their children are supervised and
entertained.
The Company currently operates 19 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 entertainment center 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 $3.50 to $7.00 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.
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Two of the Company's Kids Quest centers also include a supervised video
entertainment center featuring non-violent entertainment. The Company's video
entertainment centers are designed for teenagers, rather than children 12 and
under, but offer more supervision than typical video entertainment centers.
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 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. 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.
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
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emergency exits. All outdoor playground areas are fenced. Parents are also
required to sign children in and out of each center.
GROWTH AND EXPANSION
The Company continues to believe 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
Treasure Island
Resort & Casino Red Wing, Minnesota June 1997
Sunset Station Casino Henderson, Nevada June 1997
Knott's Camp Snoopy/Mall
of America Minneapolis, Minnesota April 1998
Texas Station Las Vegas, Nevada February 1999
The Avi Hotel and Casino Laughlin, Nevada July 1999
Cliff Castle Casino Camp Verde, Arizona December 1999
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.
EMPLOYEE CHILD CARE CENTERS. The Company operates a New Horizon Child
Care center in Joliet, Illinois for the employees of Empress Casino and Mobil
Oil Corporation. The Company's first employee child care center at Treasure
Island Resort and Casino in Red Wing, Minnesota was closed during 1999 in
connection with the Company's closure of its Treasure Island Arcade. The
Company's newest employee child care center will open in mid-April of 2000 for
the employees of the Venetian Resort~Hotel~Casino in Las Vegas, Nevada. The
Venetian, a $1.2 billion property, will be the first casino to provide on-site
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child care for its employees on the Las Vegas strip. The employee child care
centers in Joliet and Las Vegas are more substantial and represent significant
entries into the employee child care market for the Company.
NEW HORIZON CHILD CARE CENTERS. The Company continues to analyze sites
in Boise, Idaho for additional New Horizon Child Care centers. Between September
1995 and March 1996, the Company acquired an aggregate of 12 established child
care centers located throughout Boise and the surrounding metropolitan area. The
Company subsequently opened two additional child care centers in newly
constructed facilities. In 1999, the Company closed two of the older child care
centers which had been acquired from other operators as part of a plan to
consolidate and improve the overall performance of the Company's Idaho
operations. Most of the children enrolled at the two centers were successfully
transferred to other New Horizon centers. As the Company's newly constructed
facilities in the Boise area have performed better than the acquired centers, it
is likely that any future expansion in Boise will be through the construction of
new facilities. In January 2000, the Company closed an additional center in
Boise and now operates a total of 10 traditional child care centers in the Boise
market.
MARKETING AND PROMOTION
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. However, the Company proactively utilizes
various types of community-based marketing strategies for the promotion of its
New Horizon centers as well as its Kids Quest centers. In addition, the Company
relies upon cross promotional opportunities and special events with various
casinos, Native American Tribes and facility owners or developers. The Company
also seeks to increase its enrollment through various discounts, promotions and
the following marketing techniques: direct mailings to local residents and child
care centers, database mailings, special events, guest appearances, mall
advertising, volume user discount programs, field trip packages, concession
discounts and free care for children on their birthday.
COMPETITION
The Company's New Horizon 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.
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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 entertainment centers, 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 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.
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EMPLOYEES
The Company currently has approximately 536 employees, including 17
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, assistant 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.
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.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company's corporate headquarters are located in Plymouth, Minnesota
in offices shared with New Horizon Enterprises, Inc. 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. Seventeen Kids Quest centers operate
in or adjacent to casinos. Although certain centers are being operated without a
written agreement, most are operated pursuant to the terms of various written
financial services or lease agreements. Although the precise terms of the
operation of each of the Company's centers vary by location, the Kids Quest
centers are generally operated pursuant to 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, and, in most cases, operating losses, if any, are reimbursed by the
property owner. 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.
The casinos have the right, subject to certain non-compete restrictions, to
terminate their agreement with the Company at any time. The Company also leases
approximately 11,150 square feet for its Kids Quest center in the Eden Prairie
Center shopping mall, and 17,385 square feet for its Knott's Camp Snoopy/Mall of
America center. The Company believes that its leased Kids Quest properties are
generally in good condition.
The Company leases 10 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. With one exception, the leases range from seven
to fifteen years with consecutive multiple-year renewal options. All of such
leases have a minimum of at least four 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. The Company also operates a New Horizon Child Care center in
Joliet, Illinois for employees of Empress Casino and Mobil Oil Corporation. This
center has been opened and is being operated without a definitive lease or other
operating agreement.
ITEM 3. LEGAL PROCEEDINGS
In November 1996, Ms. Christa Nejezchleba, 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 was named as a
defendant in this lawsuit. The lawsuit was settled in 1999 without expense to
the Company.
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
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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. This case, which was originally scheduled for trial in 1999, was
rescheduled and is proceeding to trial later this year.
The Company is subject to certain claims from time to time and is
currently involved in litigation that has arisen in the ordinary course of its
business. The Company believes that it either has adequate legal defenses to the
claims of which it is currently aware or that any liability that might be
incurred due to such claims will not, in the aggregate, exceed the limits of the
Company's insurance policies or otherwise result in any material adverse effect
on the Company's operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders through the
solicitation of proxies or otherwise during the fourth quarter of the Company's
most recently completed fiscal year.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock of the Company has traded on the Nasdaq SmallCap
Market under the symbol "KIDQ" since November 14, 1995. The following table sets
forth the high and low bid prices for the Common Stock for the periods indicated
and is based upon information from NASDAQ.
BID
PERIOD HIGH LOW
- ------
1998
- ----
First Quarter 3 1/4 1 1/2
Second Quarter 4 1/8 2
Third Quarter 2 3/4 1 1/2
Fourth Quarter 2 5/8 1 1/2
1999
- ----
First Quarter 2 5/8 1 1/2
Second Quarter 2 3/4
Third Quarter 1 5/8 1 1/8
Fourth Quarter 1 1/4 3/8
In December and January, the Company received notices from NASDAQ that
the Company's Common Stock had failed to maintain certain bid price and minimum
market value of public float requirements and stating that the Company's Common
Stock may be de-listed. In March 2000, the
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Company submitted its position to NASDAQ that its Common Stock had met NASDAQ's
requirements for continued NASDAQ trading and, in a letter dated March 15, 2000,
NASDAQ confirmed and agreed that Company's Common Stock had met the required bid
price and public float tests and indicated that the matter was closed.
Therefore, the Company's Common Stock is no longer the subject of threatened
de-listing action. As of March 15, 2000, 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.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company currently provides hourly child care at nineteen locations
in nine states, including two with supervised video entertainment centers. The
Company also provides traditional child care at ten New Horizon Child Care
centers in Boise, Idaho, one location in Joliet, Illinois, and at its Mall of
America location in Bloomington, Minnesota.
Two of the Company's Kids Quest centers operate in enclosed shopping
malls, including a center in Knott's Camp Snoopy at Mall of America in
Bloomington, Minnesota. 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. Seventeen of the
Company's Kids Quest centers are operated in conjunction with casinos. With the
opening of its Texas Station Kids Quest in February 1999, the Company now
operates four centers in casinos owned or managed by Station Casinos, Inc. in
Nevada and Missouri. Station Casinos, Inc. has also agreed to include Kids Quest
centers in three additional Station Casinos, Inc. properties, including Station
Casino St. Charles in St. Charles, Missouri. Seven of the Company's Kids Quest
centers were previously operated in conjunction with casinos owned or managed by
Grand Casino, Inc. in Minnesota, Mississippi, and Louisiana. In 1998, Grand
Casinos, Inc. concluded its management of casinos in Mille Lacs and Hinckley,
Minnesota, with the Mille Lacs Band of Ojibwe assuming management of the
casinos. In December 1998, Grand Casinos, Inc. transferred its two Louisiana
casinos to newly formed Lakes Gaming, Inc., now a publicly held corporation, and
Grand Casinos, Inc. was then merged into Park Place Entertainment Corporation,
combining Grand Casinos, Inc.'s remaining properties with the gaming operations
previously held by Hilton Hotels. As a result of these transactions, the Company
now operates two Kids Quest centers in Minnesota casinos owned and managed by
the Mille Lacs Band, two Kids Quest centers in Louisiana casinos owned and
operated by Lakes Gaming, Inc., and three Kids Quest centers in Mississippi
casinos owned and managed by Park Place Entertainment Corporation. The Company's
newest hourly care center opened December 22, 1999, at the Cliff Castle Casino
in Camp Verde, Arizona. In addition, the Company opened an hourly care facility
at the Avi Hotel and Casino in Laughlin, Nevada, on July 16, 1999. The Company
closed its traditional care and arcade facilities at Treasure Island Hotel and
Casino in Red Wing, Minnesota on April 2, 1999, and its hourly care and arcade
facilities at Bullwhackers Casino in Black Hawk, Colorado, on October 31, 1999.
The closures are primarily the result of poor financial performance. The Company
will continue to operate an hourly child care facility at Treasure Island. The
Company currently has contracts to open two additional Kids Quest centers within
the next six months at the Jackpot Junction Hotel and Casino in Morton,
Minnesota, and Ho-Chunk Casino and Bingo in the Wisconsin Dells. The Ho-Chunk
center will also include a supervised non-violent video entertainment center.
During 1995 and 1996, the Company acquired an aggregate of twelve
existing child care centers in Boise, Idaho, which the Company operates as New
Horizon Child Care centers. The Company has subsequently opened two additional
new facilities in August of 1996 and January of 1999. In July and August of
1999, the Company closed two of its centers in Boise, Idaho. The centers did not
meet the Company's quality standards and were located in areas where an over
supply of child care facilities existed. In August of 1999, one of the Company's
centers was partially destroyed by fire. The fire occurred after hours, and the
Company's loss from destroyed property is fully covered by insurance. The
11
<PAGE>
Company does not anticipate resuming child care at this location. In January
2000, the Company closed an additional center in Boise and now operates a total
of 10 traditional child care centers in the Boise market.
The Company also operates an employee child care center in Joliet,
Illinois, for the employees of Empress Casino and Mobil Oil Corporation and
began offering traditional care in conjunction with its hourly child care
facility at its Mall of America location in June of 1999. In addition, the
Company has entered into an agreement to develop a New Horizon Child Care center
to provide employee child care at The Venetian Resort~Hotel~Casino in Las Vegas,
Nevada. The Venetian, a $1.2 billion property, will be the first casino to
provide on-site child care for its employees on the Las Vegas strip. The center
is anticipated to open in mid-April of this year.
Since its inception as an hourly children's entertainment and
recreational facility, Kids Quest has expanded its product line to include
supervised video entertainment centers, traditional child care, and employee
child care. The Company plans to continue to seek opportunities for additional
venues for all of its product lines.
The Company's business is seasonal with revenues and operating income
for Kids Quest being the highest and New Horizon Child Care being the lowest in
the summer months. Therefore, results of operations for any interim period may
not be indicative of results to be achieved for a full fiscal year.
RESULTS OF OPERATIONS
The following table sets forth certain statements of operations data as
a percentage of total revenues for the periods indicated.
Year Ended December 31
----------------------
1999 1998
---- ----
REVENUE 100% 100%
COSTS AND EXPENSES
Direct Expenses 80% 80%
Depreciation and Amortization 11% 10%
Pre-Opening Expenses 1% 1%
Write-Down of Fixed Assets/Goodwill 2% --
--- ---
Total Costs and Expenses 94% 91%
--- ---
CENTER OPERATING INCOME 6% 9%
Selling, General and Administrative 7% 7%
Amortization 1% 1%
Write-Down of Fixed Assets/Goodwill 3% --
--- ---
12
<PAGE>
OPERATING INCOME (LOSS) (5%) 1%
Interest Expense (2%) (2%)
Interest Income 1% 1%
Minority Interest -- --
--- ---
NET INCOME (LOSS) (6%) 0%
=== ===
Revenues increased $1,498,608, or 10%, to $17,098,478 in 1999 from
$15,599,870 in 1998. The addition of three new Kids Quest locations in 1999
contributed $845,302 of additional revenue between 1998 and 1999. Further, the
addition of a Kids Quest location at the Mall of America in Bloomington,
Minnesota, and an employee child care facility in Joliet, Illinois, during 1998
contributed $568,675 to the revenue increase. The centers at Treasure Island and
Bullwhackers that were closed in 1999 resulted in a decrease in revenue of
$186,682 between 1999 and 1998.
The Company's fifteen Kids Quest locations that were open for the
entire twelve month periods ended December 31, 1999 and 1998, contributed
$130,897 of additional revenue in 1999. Revenues from the Company's Soaring
Eagle location in Mt. Pleasant, Michigan, increased $307,592, or 40%, in 1999
versus 1998 primarily due to the opening of a 512 room hotel at the property in
August of 1998. Revenues from the Company's locations in Gulfport and Tunica,
Mississippi, were up $181,484, or 13%. Management attributes these increases to
the opening of additional hotel rooms at both properties and rate increases.
Revenues at the Company's location in Kinder, Louisiana, were up $71,198, or
10%, primarily as a result of moving Kids Quest to a larger and more prominent
location in November of 1998. Revenue at the Company's Eden Prairie Center
location decreased $60,808, or 16%, in 1999 from 1998. The Company attributes
the decrease to significant construction at the host mall during 1999. The
Company will close the Eden Prairie location in the third quarter of 2000.
Revenues declined $142,275, or 9%, at the Company's Mohegan Sun location in
Uncasville, Connecticut. The decrease was primarily due to construction
disruptions as the Kids Quest location was moved to a temporary location in
anticipation of a major expansion of the Mohegan Sun property. The Company also
experienced a $188,125, or 19%, decline in revenue at its Boulder Station
location in 1999 versus 1998. The Company attributes this decrease to the fact
that it opened new Kids Quest locations at Sunset Station, which is within five
miles of Boulder Station, and at Texas Station, which is within nine miles of
Boulder Station. These centers were opened in June of 1997 and February of 1999,
respectively. In spite of this decrease in revenue at Boulder Station, the
combined revenue of the Boulder, Sunset and Texas Station locations resulted in
an increase in revenue of $547,987, or 29%, over the revenue at Boulder and
Sunset Station for 1998.
The Company's ten New Horizon Child Care centers in Idaho which were
open for the entire twelve month periods ended December 31, 1999 and 1998,
experienced revenue growth of $94,574, or 3%. Management attributes this growth
primarily to enrollment transfers from the three centers that were closed in the
third quarter of 1999. The closed centers resulted in a revenue decrease of
$358,576 between 1999 and 1998. The Company's newest center, which opened in
January of 1999, contributed $404,418 of additional revenue between 1998 and
1999.
During the third quarter of 1999, the Company recorded a charge to
operations of $798,713, or $.24 per share. The charge included a write-down of
assets and lease termination costs of $367,272 and a write-off of goodwill of
$431,441. The charge reflects the costs associated with four of the Company's
centers in
13
<PAGE>
Boise, Idaho, and one of its Kids Quest locations. As of this date, two of the
four centers in Boise, Idaho, remain open while two were closed in August of
1999. The Kids Quest location at Bullwhackers in Black Hawk, Colorado, was
closed on October 31, 1999. In addition, the Company has closed its traditional
care and arcade facilities at Treasure Island Hotel and Casino in Red Wing,
Minnesota. The Company will maintain an hourly care facility at the location.
There are no anticipated charges associated with these closings. The Idaho
centers that were closed were of lower quality and were in areas with an over
capacity of child care centers. In excess of 80% of the enrollment from the
closed centers transferred to other New Horizon Kids Quest centers. The centers
in Black Hawk, Colorado, and Red Wing, Minnesota, were closed primarily due to
poor financial performance.
Costs and expenses, without taking into account the asset write-down,
increased $1,572,734, or 11%, to $15,708,660 from $14,135,926 in 1998. Included
in the increase was $672,923 relating to the new Kids Quest locations added in
1998. Also included in the increase was $416,338 related to the addition of a
Kids Quest facility at the Mall of America and an employee child care facility
in Joliet, Illinois, during 1998. Costs and expenses for existing Kids Quest
locations were up $346,167. The cost increases were due primarily to increased
equipment rent and depreciation associated with the center upgrade program and
direct costs associated with increased revenues. Expenses for the centers closed
in 1999 decreased $168,084 as compared to 1998. Costs and expenses at existing
New Horizon Child Care centers increased $212,145 in 1999 versus 1998. The
Company attributes the increases in costs and expenses related to existing
locations primarily to direct costs associated with additional revenues at these
locations. An expense increase of $433,007 is attributable to the Company's
newest location which opened in January of 1999. Expenses for the three centers
closed in 1999 decreased $339,762 as compared to 1998.
Selling, general, and administrative expenses increased $196,594, or
19%, to $1,250,698 in 1999 from $1,054,104 for the same period in 1998. The
increase is due to increased office rent as the result of the relocation of the
home office in Plymouth, Minnesota, in March 1999 and additional staffing in the
areas of marketing, development, administration, and training. Management
expects selling, general and administrative expenses to increase with the
addition of and negotiation for new locations. However, such expenses should
decrease as a percentage of revenues with the continued growth of the Company's
revenues.
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 general
public in order to attract customers to Kids Quest and ultimately to their
casinos. The casino operator must reimburse the Company for the difference
between such amounts charged and the fair market value. In 1999 the Company
received $1,107,778 of reimbursements for rate discounts versus $1,168,807 in
1998, a decrease of $61,029, or 5%. The majority of these rate discount
reimbursements were from three casinos owned by Park Place Entertainment and
four Indian casinos currently or previously managed by Grand Casinos, Inc. There
can be no assurance that such discounts and reimbursements will not be modified
or discontinued altogether or that future agreements with other casinos will
provide for a discounted hourly 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 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 1999 increased $28,101, or 8%, to $390,996 in 1999
from $362,895 in 1998. The increase in interest expense is due to borrowing made
by the Company to fund its expansion efforts.
14
<PAGE>
The Company had a net loss, before accounting for the write-down, of
$284,831 in 1999, compared to net income of $21,508 in 1998. The three new Kids
Quest centers opened in 1999 accounted for an increase in center operating
income of $172,411. Further, the Kids Quest location at the Mall of America and
the employee child care facility in Joliet, Illinois, which were opened in 1998,
improved center operating income by $152,311. Center operating income for the
Kids Quest centers open during both periods decreased $215,273 as compared to
the same period in 1998. The decrease at existing Kids Quest locations was due
primarily to a decrease in center operating income at the Company's Boulder
Station location of $132,604, increased depreciation and equipment rent
associated with the center upgrade program, and increased training and staff
development costs. Center operating loss for the twelve months ended December
31, 1999, was $25,167 as compared to center operating income of $139,807 for the
same period in 1998, a decrease of $164,974. Management attributes this decrease
to increased competition and an over capacity of New Horizon centers in several
areas. Three New Horizon Child Care centers were closed during the third quarter
of 1999, and a fourth center was closed in January 2000. As a result of the 1999
closures, center operating income in Idaho for the fourth quarter of 1999 was
$66,899 as compared to break even results for the comparable quarter in 1998.
The Company's earnings were also impacted by an increase in selling, general,
and administrative, expenses in 1999 of $196,594. The increase was primarily due
to increased office rent and additional staffing in the areas of marketing,
development, administration, and training.
LIQUIDITY AND CAPITAL RESOURCES
During 1999, the Company generated $1,814,787 from operations, invested
$1,552,664 in property and equipment related to new locations and equipment
upgrades and received payments on notes receivable of $86,350. The Company made
payments on long-term debt of $1,362,987 and borrowed an additional $955,340.
The Company also took advances on its credit line of $6,444 to fund short-term
working capital needs. The Company ended the year with a cash balance of
$155,987.
During 1998, the Company generated $2,165,824 from operations, invested
$2,650,282 in property and equipment, and received payments on notes receivable
of $105,592. The Company made payments of $1,070,739 on long-term obligations
and borrowed an additional $757,925 related to the Mall of America location
opened during the second quarter of 1998. The Company also took advances on its
credit line of $234,556 to fund short-term working capital needs. The Company
ended the year with a cash balance of $208,717.
The Company's capital needs depend upon the Company's expansion
efforts. The Company incurs pre-opening expenses in connection with each of its
Kids Quest centers as well as acquisition or development expenses to add
traditional child care centers. The Company is actively seeking additional Kids
Quest contracts and has engaged in site analysis for the construction of
additional New Horizon Child Care centers. The Company will require additional
financing in 2000 as it adds Kids Quest or New Horizon Child Care locations or
if the Company were to pursue additional acquisitions during the year. In
addition, the Company is currently obligated to loan Station Casinos, Inc. up to
$500,000 for leasehold improvements in connection with the Kids Quest location
at Texas Station in Las Vegas, Nevada which opened in February of 1999. The
Company is currently seeking financing. The Company believes that it will be
able to arrange such additional financing and will be able to fund additional
expansion with the additional financing and with cash flow from operations.
However, if financing is not obtained, the Company will be required to reduce
expenditures planned for 2000.
15
<PAGE>
YEAR 2000 COMPLIANCE
Beginning in early 1998, the Company began evaluating its year 2000
readiness. The Company began testing its various information systems to
determine if they would correctly recognize and process data information beyond
the year 1999. The evaluation performed included in-house testing of systems by
Company employees, use of various purchased evaluation software, and discussions
with material software vendors. The results of the Company's evaluations
resulted in the conclusion that much of the Company's software, as well as the
imbedded technology of some of the Company's hardware equipment, was not year
2000 compliant. During 1999, the Company upgraded its systems with software and
hardware that is year 2000 compatible. Many of these upgrades had been
previously planned in the normal course of business without regard to the year
2000 issue. A significant portion of the upgrades were provided by vendors
pursuant to previously existing software development and service agreements with
the remaining upgrades requiring expenditure by the Company. The Company
completed the majority of the upgrades, primarily related to revenue recognition
and internal accounting, in January of 1999. The Company's total expenditures
for these upgrades were less than $30,000 to complete system upgrades to year
2000 compliance.
To date, the Company has experienced no business interruption due to
year 2000 issues. The Company will continue its evaluation effort into the year
2000 to identify any previously unanticipated or unidentified year 2000 issues.
If any additional issues or complications arise that may potentially cause any
business interruption, the Company believes it can effectively rely on manual
systems to assure minimal business interruption as a result of year 2000 system
failures.
PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Form 10-QSB (as well as information included in oral statements or other written
statements made or to be made by the Company) may contain statements that are
forward-looking, such as statements relating to plans for future expansion and
other business development activities, as well as other capital spending,
financial sources and the effects of regulation and competition. Such
forward-looking information involves important risks and uncertainties that
could significantly affect future results and, accordingly, such results may
differ from those expressed in any forward-looking statement made by or on
behalf of the Company. These risks and uncertainties include, but are not
limited to, those relating to development and construction activities,
dependence on existing management and third party contracts, domestic or global
economic conditions, changes in federal or state laws or the administration or
enforcement of such laws, litigation or claims, as well as all other risks and
uncertainties described in the Company's filings.
16
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
Consolidated Financial Statements
As of
December 31, 1999 and 1998
CONTENTS
Report of Independent Public Accountants...............................18
Consolidated Balance Sheets............................................19
Consolidated Statements of Operations..................................20
Consolidated Statements of Shareholders' Equity........................21
Consolidated Statements of Cash Flows..................................22
Notes to Consolidated Financial Statements.............................23
17
<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, 1999
and 1998, 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
February 24, 2000
18
<PAGE>
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31
<TABLE>
<CAPTION>
1999 1998
------------ ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 155,987 $ 208,717
Accounts receivable 864,146 911,750
Current portion of notes receivable 156,747 144,335
Prepaid expenses and other 98,016 132,085
------------ ------------
Total current assets 1,274,896 1,396,887
------------ ------------
PROPERTY AND EQUIPMENT:
Furniture, fixtures, equipment and leaseholds 10,023,548 9,172,698
Less- Accumulated depreciation and amortization (4,662,433) (3,234,207)
------------ ------------
Property and equipment, net 5,361,115 5,938,491
OTHER ASSETS:
Goodwill, net of accumulated amortization of $167,885
and $246,047 494,400 991,711
Notes receivable, net of current portion 951,460 1,050,222
Other long-term assets 167,731 181,320
------------ ------------
$ 8,249,602 $ 9,558,631
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,425,490 $ 1,488,825
Accounts payable 834,460 819,027
Accrued expenses 709,054 548,769
------------ ------------
Total current liabilities 2,969,004 2,856,621
LONG-TERM DEBT, less current maturities 1,381,963 1,719,831
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 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 1999 and 1998 32,933 32,933
Paid-in capital 7,196,197 7,196,197
Accumulated deficit (3,330,495) (2,246,951)
------------ ------------
Total shareholders' equity 3,898,635 4,982,179
------------ ------------
$ 8,249,602 $ 9,558,631
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
19
<PAGE>
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
REVENUE $ 17,098,478 $ 15,599,870
------------ ------------
COSTS AND EXPENSES:
Direct expenses 13,700,082 12,430,033
Depreciation and amortization 1,876,099 1,501,426
Preopening expenses 132,479 204,467
Write-down of fixed assets 367,272 -
------------ ------------
Total costs and expenses 16,075,932 14,135,926
------------ ------------
Center operating income 1,022,546 1,463,944
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,250,698 1,054,104
DEPRECIATION AND AMORTIZATION 98,712 118,654
WRITE-DOWN OF GOODWILL 431,441 -
------------ ------------
Income (loss) from operations (758,305) 291,186
INTEREST EXPENSE (390,996) (362,895)
INTEREST INCOME 118,562 134,377
MINORITY INTEREST 11,695 12,840
------------ ------------
Income (loss) before income taxes (1,019,044) 75,508
PROVISION FOR INCOME TAXES 64,500 54,000
------------ ------------
Net income (loss) $ (1,083,544) $ 21,508
============ ============
NET INCOME (LOSS) PER SHARE:
Basic and diluted $ (.33) $ .01
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted 3,293,300 3,293,300
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
20
<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, 1997 3,293,300 $32,933 $7,196,197 $(2,268,459) $4,960,671
Net income - - - 21,508 21,508
--------- ------- ---------- ----------- ----------
BALANCE,
December 31, 1998 3,293,300 32,933 7,196,197 (2,246,951) 4,982,179
Net loss - - - (1,083,544) (1,083,544)
--------- ------- ---------- ----------- ----------
BALANCE,
December 31, 1999 3,293,300 $32,933 $7,196,197 $(3,330,495) $3,898,635
========= ======= ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
21
<PAGE>
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(1,083,544) $ 21,508
Adjustments to reconcile net income (loss) to net cash provided by
operating activities-
Depreciation and amortization 1,974,811 1,620,080
Write-down of impaired assets 798,713 -
Change in operating assets and liabilities:
Accounts receivable 47,604 (138,630)
Prepaid expenses and other current assets 34,069 130,065
Accounts payable 15,433 536,954
Other assets 8,910 404
Accrued expenses 18,791 (4,557)
----------- -----------
Net cash provided by operating activities 1,814,787 2,165,824
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (1,552,664) (2,650,282)
Collection of notes receivable 86,350 105,592
----------- -----------
Net cash used in investing activities (1,466,314) (2,544,690)
----------- -----------
FINANCING ACTIVITIES:
Advances on line of credit, net 6,444 243,556
Proceeds from long-term debt 955,340 748,925
Payments on long-term debt (1,362,987) (959,438)
----------- -----------
Net cash provided by (used in) financing activities (401,203) 33,043
----------- -----------
Net decrease in cash and cash equivalents (52,730) (345,823)
CASH AND CASH EQUIVALENTS, beginning of year 208,717 554,540
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 155,987 $ 208,717
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the year for-
Interest $ 400,720 $ 359,057
Income taxes 64,558 47,613
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
22
<PAGE>
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
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. (together, the Company). All intercompany balances and
transactions have been eliminated in consolidation. As of December 31, 1999, the
Company operated 19 Kids Quest centers providing hourly child care and 13 New
Horizon child care centers providing traditional child care services, as well as
2 video arcades in casino locations.
Kids Quest of Council Bluffs, LLC (Kids Quest LLC) is owned 51% by the Company
and 49% by Ameristar Casino Council Bluffs, Inc. (Ameristar). 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.
Future revenues and results from operations will depend upon various factors,
including market acceptance of the Company's offerings and general economic
conditions. The Company's ability to expand operations depends on its ability to
obtain substantial financing for the development of additional units. There are
no assurances that such financing will be available on terms acceptable or
favorable to the Company.
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 reimbursements 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.
23
<PAGE>
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 using the straight-line method for financial
reporting purposes and the accelerated methods for income tax purposes. For
financial reporting purposes, depreciation is provided over the following
estimated useful lives:
Furniture, fixtures and equipment 5-7 years
Leasehold improvements 7-10 years or the term of the lease
REVENUE RECOGNITION
Revenue is recognized as child care services are rendered. Amounts collected in
advance for which the service has not yet been provided are deferred and
classified as a component of accrued expenses in the accompanying consolidated
balance sheets. Rate and compensatory reimbursements received from casino
operators for the years ended December 31, 1999 and 1998 were approximately
$2,168,000 and $2,076,000, 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.
Impairment losses are recorded on goodwill and other long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Impairment losses are measured by comparing the fair value of
the assets, as determined by discounting the future cash flows at a market rate
of interest, to their carrying amounts. During the third quarter of 1999, the
Company recorded a write-down of assets totaling $726,173 associated with four
of the New Horizon Child Care centers acquired in 1995 and 1996 due to poor
financial performance. As of December 31, 1999, two of these centers remain
open, and two of these centers were closed during 1999. The Company also wrote
down assets totaling $72,540 related to its Bullwhackers location in Black Hawk,
Colorado, due to poor financial performance. The write-downs consist of all
tangible and intangible assets of these locations and estimated lease
termination fees. There were no impairments recognized during 1998.
EARNINGS PER SHARE
Basic earnings per common share is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the year.
Diluted earnings per share is computed similarly to the computation of basic
earnings per share except that the denominator is increased by the assumed
exercise of dilutive options and warrants using the treasury stock method. The
shares used in computing basic and diluted earnings per share were the same for
1999 and 1998. Options and warrants were excluded from the computation of
diluted earnings per share for both years because their effect is antidilutive.
24
<PAGE>
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.
2. NOTES RECEIVABLE:
Long-term notes receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Note receivable from casino operator at reference rate (8.75% at December 31,
1999) 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 $ 346,327 $ 389,163
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 2006; collateralized by rents or other
payments owed by the Company pursuant to lease agreement 395,550 432,769
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 366,330 372,625
---------- ----------
Total long-term notes receivable 1,108,207 1,194,557
Less- Current maturities (156,747) (144,335)
---------- ----------
Long-term notes receivable, net of current maturities $ 951,460 $1,050,222
========== ==========
</TABLE>
In connection with the opening of a Kids Quest center in February 1999, the
Company agreed to advance up to $500,000 to a casino operator for the cost of
construction, initial improvements and fixtures. The terms of the note
receivable are expected to be the same as existing casino notes receivable.
25
<PAGE>
3. LONG-TERM DEBT:
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Line of credit (see below) $ 250,000 $ 243,556
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 383,117 467,529
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 241,019 269,066
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 268,109 298,711
Notes payable to leasing company at 10% to 12% through 2003;
collateralized by equipment 1,665,208 1,929,794
---------- ----------
Total long-term debt 2,807,453 3,208,656
Less- Current maturities (1,425,490) (1,488,825)
---------- ----------
Long-term debt, net of current maturities $1,381,963 $1,719,831
========== ==========
</TABLE>
In November 1998, the Company established a $250,000 line of credit. The
agreement calls for interest at the bank reference rate (8.50% at December 31,
1999). The line of credit is collateralized by the Company's tangible and
intangible assets and expires in November 2000.
The Company and its leasing company are currently in dispute as to the
application of payments on its leases during the construction phase of certain
projects. As a result, the leasing company has indicated that an additional
$200,000 of principal balance is outstanding and owing as of December 31, 1999.
The Company and its legal counsel believe that no additional amounts are due and
intend to contest the leasing company's claim. An unfavorable resolution of this
claim could have an adverse impact on the Company's financial position.
Future maturities of long-term debt as of December 31, 1999 are as follows:
2000 $1,425,490
2001 652,933
2002 350,610
2003 161,780
2004 90,749
Thereafter 125,891
----------
$2,807,453
==========
26
<PAGE>
4. SHAREHOLDERS' EQUITY:
In connection with the Company's initial public offering of common stock, the
Company sold the underwriter a five-year warrant which expires in November 2000
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 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. The Company
also has outstanding 25,000 warrants to purchase common stock at $4.00, which
are exercisable through August 2002.
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.
The Company also has 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 outside of these plans. All of these
options were outstanding and 100% vested at December 31, 1999 and expire on
November 13, 2000.
27
<PAGE>
Stock option activity is summarized as follows:
Weighted
Incentive Average
Stock Exercise
Option Price
------- --------
Balance, December 31, 1997 417,100 $5.04
Options granted 25,000 2.40
Options forfeited (22,000) (6.44)
-------
Balance, December 31, 1998 420,100 4.81
Options granted 15,000 1.81
Options forfeited (21,000) 4.77
-------
Balance, December 31, 1999 414,100 4.70
=======
Options exercisable at:
December 31, 1998 270,700
=======
December 31, 1999 318,800
=======
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 Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation," the Company's net income (loss)
and net income (loss) per share would have been reported as follows:
<TABLE>
<CAPTION>
1999 1998
----------- --------
<S> <C> <C>
Net income (loss):
As reported $(1,083,544) $ 21,508
Pro forma (1,280,750) (176,712)
Net income (loss) per share--basic and diluted:
As reported $ (.33) $ .01
Pro forma (.39) (.05)
</TABLE>
The weighted average fair value of options granted in 1999 and 1998 was $.77 and
$.97, respectively. The weighted average exercise price in 1999 and 1998 was
$1.81 and $2.40, 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 5.4%
for 1999 and 4.5% to 5.5% for 1998, no expected dividends, expected lives of two
years for 1999 and five years for 1998, and expected volatility of 73% for 1999
grants and 68% for 1998 grants.
28
<PAGE>
6. INCOME TAXES:
The Company utilizes the liability method of accounting for income taxes. As of
December 31, 1999, the Company had operating loss carryforwards of approximately
$2,400,000. These operating loss carryforwards expire beginning in 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:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Net operating loss carryforwards and credits, expiring
beginning in 2009 $775,000 $680,000
Goodwill and assets previously written off 300,000 335,000
Other, primarily depreciation (115,000) (93,000)
Valuation allowance (960,000) (922,000)
-------- --------
$ - $ -
======== ========
</TABLE>
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 $2,130,000 and $2,160,000 for the years ended December 31, 1999
and 1998, respectively.
Future minimum lease payments under noncancelable operating leases entered into
prior to December 31, 1999 are as follows:
2000 $ 743,000
2001 767,000
2002 767,000
2003 642,000
2004 605,000
Thereafter 1,675,000
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.
401(k) PLAN
The Company implemented the Kids Quest 401(k) Retirement Savings Plan (the
401(k) Plan) effective January 1, 1998. Employees are eligible for participation
in the 401(k) Plan after reaching the age of 21
29
<PAGE>
and completing one year of service, as defined. The 401(k) Plan allows for a
discretionary employer match. There were no company contributions to the 401(k)
Plan for 1999 and 1998.
LITIGATION
The Company is exposed to a number of asserted and unasserted potential claims
encountered in the normal course of 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.
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:
1999 1998
---- ----
Law firm, providing certain legal services $365,102 $337,692
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 $177,500 for the year ended December
31, 1999 and $681,000 for the year ended December 31, 1998 under the rental
agreement. In addition, the Company received rate and compensatory
reimbursements totalling approximately $383,000 and $1,390,000 for the year
ended December 31, 1999 and 1998 from casinos operated by a shareholder.
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. Rent 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.
The Company has entered into a lease guarantee agreement with certain officers
of the Company. Beginning in 2000, the officers have agreed to personally
guarantee lease payments to the owner of a building in Idaho in which the
Company conducts operations. In consideration for the personal guarantee, the
officers are to receive a personal guaranty fee equal to .5% of the rent
payments to the landlord.
Management believes these transactions were consummated at terms substantially
the same as could have been obtained with unrelated parties.
30
<PAGE>
9. SEGMENT DISCLOSURES:
The Company has two segments reportable under the guidelines of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information": Idaho
Traditional Care and New Horizon Kids Quest, Inc.
<TABLE>
<CAPTION>
New Horizon Idaho
Kids Quest, Traditional
Inc. Care Consolidated
----------- ---------- -----------
<S> <C> <C> <C>
1999
Revenue $13,083,357 $4,015,121 $17,098,478
Depreciation and amortization 1,824,551 150,260 1,974,811
Interest income 118,562 - 118,562
Income (loss) 61,905 (1,145,449) (1,083,544)
Segment assets 7,052,058 1,197,544 8,249,602
Capital expenditures 1,291,469 261,175 1,552,644
1998
Revenue 11,725,167 3,874,703 15,599,870
Depreciation and amortization 1,403,517 216,563 1,620,080
Interest income 132,379 1,998 134,377
Income (loss) 221,805 (200,297) 21,508
Segment assets 7,773,854 1,784,777 9,558,631
Capital expenditures 2,531,975 118,307 2,650,282
</TABLE>
31
<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 2000 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 51 Chairman of the Board and Chief
Executive Officer
Susan K. Dunkley 50 President and Director
Patrick R. Cruzen 53 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.
PATRICK R. CRUZEN has served as the Company's Chief Financial Officer
since March 1999. Mr. Cruzen previously served as the President and Chief
Operating Officer of Grand Casinos, Inc. Prior to joining Grand Casinos, Inc.,
Mr. Cruzen served as the Senior Vice President of Finance and Administration at
MGM Grand and as President of MGM Grand's marketing division. Prior thereto, Mr.
Cruzen served as President of the Flamingo Hilton in Reno, Nevada, as President
of The Sands Hotel and Casino in Las Vegas, as Chief Financial Officer, Vice
President of Administration and Vice President of Hotel Operations for Caesars
Palace, and as Controller for the Las Vegas Hilton.
32
<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> <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, as amended *
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>
33
<PAGE>
* Incorporated by reference from the Company's Registration Statement on
Form SB-2 (No. 33-97186C)
** Incorporated by reference from the Company's Form 10-KSB filed March
1998.
*** 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.
34
<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, 2000 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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ William M. Dunkley Chairman of the Board and March 30, 2000
- ------------------------------------------ Chief Executive Officer
William M. Dunkley (principal executive officer)
/s/ Patrick R. Cruzen Chief Financial Officer and Director March 30, 2000
- ------------------------------------------- (principal financial and
Patrick R. Cruzen accounting officer)
/s/ Susan K. Dunkley President and Director March 30, 2000
- --------------------------------------------
Susan K. Dunkley
/s/Lyle Berman Director March 30, 2000
- ---------------------------------------------
Lyle Berman
/s/ Kenneth Brimmer Director March 30, 2000
- -------------------------------------------
Kenneth Brimmer
</TABLE>
35
<PAGE>
NEW HORIZON KIDS QUEST, INC.
ANNUAL REPORT ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
36
EXHIBIT 23 B CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
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 Nos. 33-04384 and 333-49785.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 155,987
<SECURITIES> 1,414
<RECEIVABLES> 926,961
<ALLOWANCES> 62,815
<INVENTORY> 31,348
<CURRENT-ASSETS> 1,274,896
<PP&E> 10,023,548
<DEPRECIATION> 4,662,433
<TOTAL-ASSETS> 8,249,602
<CURRENT-LIABILITIES> 2,969,004
<BONDS> 0
0
0
<COMMON> 32,933
<OTHER-SE> 3,865,702
<TOTAL-LIABILITY-AND-EQUITY> 8,249,602
<SALES> 955,082
<TOTAL-REVENUES> 17,098,478
<CGS> 513,510
<TOTAL-COSTS> 513,510
<OTHER-EXPENSES> 17,331,578
<LOSS-PROVISION> 10,308
<INTEREST-EXPENSE> 390,966
<INCOME-PRETAX> (1,019,044)
<INCOME-TAX> 64,500
<INCOME-CONTINUING> (1,083,544)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,083,544)
<EPS-BASIC> (.33)
<EPS-DILUTED> (.33)
</TABLE>
