SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
March 11, 1996
Date of Report (Date of earliest event reported)
NEW HORIZON KIDS QUEST, INC.
(Exact name of registrant as specified in its charter)
Minnesota 0-27780 41-1719363
(State or other jurisdiction (Commission File No.) (IRS Employer ID No.)
of incorporation)
3650 Annapolis Lane North, Suite 101, Plymouth, Minnesota 55447
(Address of principal executive offices)
(612) 557-1111
(Registrant's telephone number, including area code)
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of businesses acquired.
i. Audited financial statements of Cottage Schools, Inc.
as of and for the year ended December 31, 1995
ii. Unaudited financial statements of Educational Child
Care Services, Inc. as of and for the year ended
December 31, 1995
(b) Pro forma financial information.
i. Unaudited pro forma condensed financial statements of
New Horizon Kids Quest, Inc. as of and for the year
ended December 31, 1995.
(c) Exhibits.
i. Asset Purchase Agreement between the Company and
Cottage Schools, Inc.*
ii. Asset Purchase Agreement between the Company and
Educational Child Care Services, Inc.*
iii. Asset Purchase Agreement between the Company and A
Child's Image, Inc.*
iv. Consent of Lund Koehler Cox & Company PLLP
* previously filed
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cottage Schools, Inc.:
We have audited the accompanying balance sheet of Cottage Schools, Inc. as of
December 31, 1995 and the related statements of operations, shareholders' equity
and cash flows for the year 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 audit.
We conducted our audit 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 audit provides 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 Cottage Schools, Inc. as of
December 31, 1995 and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
LUND KOEHLER COX & COMPANY, PLLP
Minneapolis, Minnesota
April 18, 1996
COTTAGE SCHOOLS, INC.
BALANCE SHEET
DECEMBER 31, 1995
ASSETS
CURRENT ASSETS:
Cash $ 203
Other current assets 2,928
---------
Total current assets 3,131
---------
PROPERTY AND EQUIPMENT, AT COST 691,976
Less: accumulated depreciation (194,404)
---------
Total property and equipment, net 497,572
---------
$ 500,703
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 13,678
Accounts payable 2,127
Accrued payroll and payroll taxes 16,850
---------
Total current liabilities 32,655
LONG-TERM DEBT, NET OF CURRENT PORTION 339,002
---------
Total liabilities 371,657
---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $1.00 par value, 1,000 shares authorized,
100 shares issued and outstanding 100
Additional paid-in capital 102,463
Retained earnings 26,483
---------
Total shareholders' equity 129,046
---------
$ 500,703
=========
See accompanying notes to financial statements.
COTTAGE SCHOOLS, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
REVENUE $718,987
DIRECT EXPENSES 514,636
--------
Gross profit 204,351
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 73,061
--------
Income from operations 131,290
INTEREST EXPENSE 42,478
--------
NET INCOME $ 88,812
========
PRO FORMA DATA (UNAUDITED - SEE NOTE 4)
Historical net income $ 88,812
Pro forma provision for income taxes 23,100
--------
Pro forma net income $ 65,712
========
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COTTAGE SCHOOLS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995
COMMON STOCK ADDITIONAL
--------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1994 100 $ 100 $ 102,463 $ 37,362 $ 139,925
Net income -- -- -- 88,812 88,812
Distributions to shareholders -- -- -- (99,691) (99,691)
---- --------- --------- --------- ---------
BALANCE - DECEMBER 31, 1995 100 $ 100 $ 102,463 $ 26,483 $ 129,046
==== ========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
COTTAGE SCHOOLS, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 88,812
Adjustments to reconcile net income to
cash flows from operating activities:
Depreciation 23,069
Changes in operating assets and liabilities -
Accounts payable 320
Accrued payroll and payroll taxes 2,126
---------
Cash flows from operating activities 114,327
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and equipment (7,964)
---------
Cash flows from investing activities (7,964)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (15,253)
Distributions to shareholders (99,691)
---------
Cash flows from financing activities (114,944)
---------
DECREASE IN CASH (8,581)
CASH, BEGINNING 8,784
---------
CASH, ENDING $ 203
=========
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid for interest $ 42,478
See accompanying notes to financial statements.
COTTAGE SCHOOLS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(1) NATURE OF BUSINESS, SALE OF ASSETS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - Cottage Schools, Inc. was incorporated in the State of
Idaho in 1991. The Company owns and operates three licensed child care centers
in the Boise, Idaho area.
SALE OF ASSETS - In March 1996, the Company entered into an agreement for
Purchase and Sale of Assets with New Horizon Child Care - Idaho, Inc.
("NHCC-Idaho") In that agreement, NHCC-Idaho agreed to purchase substantially
all of the assets (excluding real estate and improvements) owned by the Company
for $470,000, to be paid $100,000 at closing and $370,000 in the form of a
120-month 9% interest promissory note. Further, in consideration of the purchase
agreement, the Company's shareholders entered into a non-compete covenant with
NHCC-Idaho in which they agreed not to compete with NHCC-Idaho within certain
geographical boundaries for a period of five years. NHCC-Idaho also assumed the
leases of the Company - described in Note 5.
DEPRECIATION - Property and equipment are recorded at cost. Vehicles, furniture
and equipment are depreciated using the straight-line method over estimated
useful lives of five and seven years. Real property is depreciated using the
straight-line method over thirty-nine years. Maintenance, repairs and minor
renewals are expensed when incurred.
REVENUE RECOGNITION - Revenue is recognized as child care services are provided.
INCOME TAXES - The Company, with the consent of its shareholders, has elected
under the Internal Revenue Code to be an S Corporation. In lieu of corporation
income taxes, the shareholders of an S Corporation are taxed on their
proportionate share of the Company's taxable income. Therefore, no provision or
liability for Federal or State income taxes has been included in the historical
financial statements. However, the Company has provided unaudited pro forma
information that accounts for income taxes as if the Company had been subject to
Federal and State income taxes at regular marginal corporate tax rates. (See
Note 4)
MANAGEMENT'S USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make 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. Actual results could differ from those estimates.
ACCOUNTING PRONOUNCEMENT - During 1995, the Company adopted Financial Accounting
Standards Board ("FASB") Statement No. 121 "Accounting for the Impairment of
Long-Lived Assets to be Disposed of" ("Statement No. 121"). Statement No. 121
establishes accounting standards for the recognition and measurement of
impairment of long-lived assets, certain identifiable intangibles and goodwill
either to be held or disposed of. The adoption of Statement No. 121 did not have
a material impact on the Company's financial position or results of operations.
(2) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1995:
Land and buildings $ 574,169
Vehicles 51,993
Furniture, fixtures and equipment 65,814
---------
Total property and equipment 691,976
Accumulated depreciation (194,404)
---------
Total property and equipment, net $ 497,572
=========
(3) LONG-TERM DEBT
The Company has a mortgage payable to a bank. The balance at December 31, 1995
was $352,680. Monthly payments are $3,955 including interest at prime plus 1%.
The note matures in September 2014.
Future maturities of long-term debt are as follows for the years ending
December 31:
1996 $ 13,678
1997 15,073
1998 16,610
1999 18,303
2000 20,170
Thereafter 268,846
---------
Total $ 352,680
=========
(4) UNAUDITED PRO FORMA INFORMATION
As discussed in Note 1, the Company has elected under the Internal Revenue Code
to be an S Corporation. The following unaudited pro forma income tax provision
summarizes the estimated income taxes that would have been reported had the
Company been subject to Federal and State income taxes for the year ended
December 31, 1995.
Currently payable:
Federal $ 16,000
State 7,000
Deferred 100
-----------
Unaudited pro forma provision for income taxes $ 23,100
===========
The unaudited pro forma income taxes on adjusted historical income differ from
the amounts computed by applying the applicable Federal statutory rates due to
State income taxes, net of Federal income tax benefit.
Deferred income taxes are the result of differences between financial and income
tax reporting basis of assets and liabilities based on enacted tax rates.
(5) COMMITMENTS AND CONTINGENCIES
LEASES - The Company leases office equipment and vehicles under operating leases
expiring through November 1999. Base rents due under the lease agreements total
$797 per month.
Future minimum lease payments are as follows for the years ended December 31:
1996 $ 9,553
1997 5,296
1998 3,243
1999 2,973
-----------
Total $ 21,065
===========
EDUCATIONAL CHILDCARE SERVICES, INC.
BALANCE SHEET
DECEMBER 31, 1995
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $30,524
Other current assets 320
-------
Total current assets 30,844
-------
$30,844
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued payroll and payroll taxes $13,349
-------
Total current liabilities 13,349
-------
SHAREHOLDERS' EQUITY:
Common stock 1,000
Retained earnings 16,495
-------
Total shareholders' equity 17,495
-------
$30,844
=======
EDUCATIONAL CHILDCARE SERVICES, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
REVENUE $862,408
DIRECT EXPENSES 619,711
--------
Gross profit 242,697
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 193,081
--------
Income from operations 49,616
INTEREST INCOME 467
--------
NET INCOME $ 50,083
========
PRO FORMA DATA
Historical net income $ 50,083
Pro forma provision for income taxes 11,000
--------
Pro forma net income $ 39,083
========
EDUCATIONAL CHILDCARE SERVICES, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 50,083
Adjustments to reconcile net income to
cash flows from operating activities:
Changes in operating assets and liabilities -
Other current assets 51
Accrued payroll and payroll taxes 1,533
--------
Cash flows from operating activities 51,667
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (3,000)
Distributions to shareholder (31,977)
--------
Cash flows from financing activities (34,977)
--------
INCREASE IN CASH 16,690
CASH, BEGINNING 13,834
--------
CASH, ENDING $ 30,524
========
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid for interest $ 0
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
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 $1,192,781 (including costs associated with the acquisition). The
purchase price for these six centers consisted of cash payments of $472,886 and
notes payable to three of the sellers in the amounts of $335,000, $370,000 and
$14,895. All of the transactions have been accounted for using the purchase
method of accounting. The following unaudited pro forma condensed statements of
operations for the year ended December 31, 1995, give effect to the acquisitions
as if the transactions occurred effective January 1, 1995. The unaudited pro
forma condensed balance sheet gives effect to the acquisitions as if they had
occurred on December 31, 1995.
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. This
information should be read in conjunction with the accompanying notes and with
the separate historical financial statements and notes thereto of New Horizon
Kids Quest, Inc. and Subsidiaries included in the Company's 1995 Form 10-KSB on
file with the Securities and Exchange Commission, the audited financial
statements of Cottage Schools, Inc., and the unaudited financial statements of
Educational Child Care Services, Inc. included herein.
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
Educational Pro Forma
Cottage Childcare Adjustments
Company Schools, Inc. Services, Inc. (Note 2) Pro Forma
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................... $ 3,865,018 $ 203 $ 30,524 $ (472,886)(a) $ 3,292,132
(100,000)(b)
(203)(a)
(30,524)(a)
Accounts receivable ......................... 225,141 -- -- 225,141
Receivable from New Horizon Enterprises, Inc. 8,963 -- -- 8,963
Prepaid expenses and other .................. 80,072 2,928 320 5,000(a) 85,072
(2,928)(a)
(320)(a)
----------- ----------- ----------- ----------- -----------
Total current assets ...................... 4,179,194 3,131 30,844 (601,861) 3,611,308
----------- ----------- ----------- ----------- -----------
PROPERTY AND EQUIPMENT:
Furniture, fixtures, equipment and leaseholds 2,340,168 691,976 -- 130,000(a) 2,712,668
117,500(a)
25,000(a)
100,000(b)
(691,976)(a)
Less- Accumulated depreciation .............. (239,300) (194,404) -- 194,404(a) (239,300)
----------- ----------- ----------- ----------- -----------
Total property and equipment .............. 2,100,868 497,572 -- (125,072) 2,473,368
OTHER ASSETS:
Goodwill .................................... 934,197 -- -- 900,281(a) 1,834,478
Notes receivable ............................ 463,616 -- -- 463,616
Noncompete agreements ....................... 43,050 -- -- 15,000(a) 58,050
Other ....................................... 33,871 -- -- 33,871
----------- ----------- ----------- ----------- -----------
$ 7,754,796 $ 500,703 $ 30,844 $ 188,348 $ 8,474,691
=========== =========== =========== =========== ===========
CURRENT LIABILITIES:
Current maturities of long-term debt ........ $ 64,500 $ 13,678 -- $ (13,678)(a) $ 64,500
Accounts Payable ............................ 312,971 2,127 -- (2,127)(a) 312,971
Accrued expenses ............................ 224,457 16,850 13,349 (16,850)(a) 224,457
(13,349)(a)
Deferred rent ............................... 32,667 -- -- 32,667
----------- ----------- ----------- ----------- -----------
Total current liabilities ................. 634,595 32,655 13,349 (46,004) 634,595
LONG-TERM DEBT, less current maturities .......... 615,227 339,002 -- 719,895(a) 1,335,122
(339,002)(a)
SHAREHOLDERS' EQUITY ............................. 6,504,974 129,046 17,495 (129,046)(a) 6,504,974
(17,495)(a)
----------- ----------- ----------- ----------- -----------
$ 7,754,796 $ 500,703 $ 30,844 $ 188,348 $ 8,474,691
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
NEW HORIZON KIDS QUEST, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Educational Pro Forma
Cottage Childcare Adjustments
Company Schools, Inc. Services, Inc. (Note 2) Pro Forma
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
REVENUE ................................ $ 5,639,314 $ 718,987 $ 862,408 $ 7,220,709
DIRECT EXPENSE ......................... 4,895,082 514,636 619,711 11,500(d) 6,040,929
----------- ----------- ----------- ----------- -----------
Gross profit ...................... 744,232 204,351 242,697 (11,500) 1,179,780
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ................ 1,053,428 73,061 193,081 61,524(c) 1,381,094
----------- ----------- ----------- ----------- -----------
Income (loss) from operations ..... (309,196) 131,290 49,616 (73,024) (201,314)
INTEREST EXPENSE ....................... (87,738) (42,478) -- 42,478(a) (150,738)
(63,000)(e)
INTEREST INCOME ........................ 27,901 -- 467 (467)(a) 27,901
----------- ----------- ----------- ----------- -----------
Net income (loss) before taxes .... (369,033) 88,812 50,083 (94,013) (324,151)
PROVISION (BENEFIT) FOR INCOME
TAXES .............................. -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income(loss) .................. ($ 369,033) $ 88,812 $ 50,083 ($ 94,013) ($ 324,151)
=========== =========== =========== =========== ===========
Loss per share .................... ($ 0.14)
===========
Weighted average shares outstanding 2,281,223
===========
</TABLE>
The accompanying notes are an integral part of this statement.
NOTES TO UNAUDITED PRO FORMA CONDENSED
FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1995
1. In February and March 1996, New Horizon Child Care - Idaho, Inc.
acquired six licensed child care centers in Boise, Idaho. The unaudited
pro forma condensed financial statements give effect to the
acquisitions as if they occurred effective January 1, 1995, as related
to the statements of operations and on December 31, 1995, as related to
the balance sheet.
2. Pro forma adjustments reflect the effects of the following items:
(a) To reflect the purchase price of $1,192,781, consisting of
$480,324 for two Educational Child Care Services, Inc.
centers, $532,365 for three Cottage Schools, Inc. centers and
$180,092 for one A Child's Image, Inc. center. Tangible assets
acquired from Cottage Schools, Inc. totaled $122,500, tangible
assets acquired from Educational Child Care Services, Inc.
totaled $130,000 and tangible assets from A Child's Image
totaled $25,000. The purchase price was payable in cash of
$472,886 and notes payable to three of the sellers in the
amounts of $335,000, $370,000 and $14,895. A covenant not to
compete has been valued at $15,000.
(b) To reflect expenditures of $100,000 to upgrade and refurbish
the facilities.
(c) To reflect amortization of goodwill over an estimated life of
fifteen years and the covenant not to compete over ten years.
(d) To reflect amortization of leasehold improvements over ten
years and new equipment purchases over seven years.
(e) To reflect interest expense on borrowings utilized to fund the
acquisition at an average interest rate of 8.7%.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NEW HORIZON KIDS QUEST, INC.
Dated: May 22, 1996 By: /s/ Kevin M. Greer
----------------------
Kevin M. Greer
Chief Financial Officer
EXHIBIT INDEX
Exhibit Page
Exhibit 23 Consent of Lund Koehler Cox & Company PLLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and to all references to our Firm included in, or made part of, this Form
8-K.
LUND KOEHLER COX & COMPANY, PLLP
Minneapolis, Minnesota
May 20, 1996
