<PAGE> 1
As filed with the Securities and Exchange Commission on December 11, 1995.
REGISTRATION NO. 33-63599
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SUNRISE PRESCHOOLS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 8351 86-0532619
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
9128 EAST SAN SALVADOR, SUITE 200, SCOTTSDALE, ARIZONA 85258, (602) 860-1611
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES AND
PRINCIPAL PLACE OF BUSINESS)
JAMES R. EVANS
CHAIRMAN OF THE BOARD & PRESIDENT
9128 EAST SAN SALVADOR, SUITE 200
SCOTTSDALE, ARIZONA 85258
(602) 860-1611
(NAME, ADDRESS, AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
WITH COPIES TO:
CHRISTOPHER D. JOHNSON, ESQ. WILLIAM L. TWOMEY, ESQ.
SQUIRE, SANDERS & DEMPSEY HEWITT & MCGUIRE
TWO RENAISSANCE SQUARE 19900 MACARTHUR BLVD., SUITE 1050
40 NORTH CENTRAL AVENUE, SUITE 2700 IRVINE, CALIFORNIA 92715
PHOENIX, ARIZONA 85004 TELEPHONE: (714) 798-0712
TELEPHONE: (602) 528-4046 FAX: (714) 798-0511
FAX: (602) 253-8129
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE FROM
TIME TO TIME AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING
PURSUANT TO RULE 462(b) UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND
LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE
REGISTRATION STATEMENT FOR THE SAME OFFERING. / /
------------------------
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(c) UNDER
THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT
FOR THE SAME OFFERING. / /
---------------------------
IF THE DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434,
PLEASE CHECK THE FOLLOWING BOX. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 2
SUNRISE PRESCHOOLS, INC.
CROSS REFERENCE SHEET
(Showing Location in the Prospectus of Information
Required by Items 1 through 23, Part I, of Form SB-2)
<TABLE>
<CAPTION>
Item in Form SB-2 Prospectus Caption
- ----------------- ------------------
<S> <C> <C>
1. Front of Registration Statement and Outside Front
Cover of Prospectus . . . . . . . . . . . . . . . . . . Facing Page of Registration Statement; Outside
Front Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus . . . . . . . . . . . . . . . . . . . . . . . Inside Front Cover Page of Prospectus;
Outside Back Cover Page of Prospectus
3. Summary Information and Risk Factors . . . . . . . . . . Prospectus Summary; Risk Factors
4. Use of Proceeds . . . . . . . . . . . . . . . . . . . . Prospectus Summary; Use of Proceeds
5. Determination of Offering Price . . . . . . . . . . . . Outside Front Cover Page of Prospectus; Risk
Factors; Underwriting
6. Dilution . . . . . . . . . . . . . . . . . . . . . . . . *
7. Selling Stockholders . . . . . . . . . . . . . . . . . . *
8. Plan of Distribution . . . . . . . . . . . . . . . . . . Outside Front Cover Page of Prospectus; Underwriting
9. Legal Proceedings . . . . . . . . . . . . . . . . . . . *
10. Directors, Executive Officers, Promoters and Control
Persons . . . . . . . . . . . . . . . . . . . . . . . . Management
11. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . Principal Stockholders
12. Description of Securities . . . . . . . . . . . . . . . Description of Securities
13. Interest of Named Experts and Counsel . . . . . . . . . Experts; Legal Matters
14. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities . . . . . . . . . . . . . Description of Securities
15. Organization Within Last 5 Years . . . . . . . . . . . . Prospectus Summary
16. Description of Business . . . . . . . . . . . . . . . . Business; Risk Factors
17. Management's Discussion and Analysis or Plan of
Operation . . . . . . . . . . . . . . . . . . . . . . . Management's Discussion and Analysis of
Financial Condition and Results of Operations
18. Description of Property . . . . . . . . . . . . . . . . Properties
19. Certain Relationships and Related Transactions . . . . . Certain Transactions
</TABLE>
ii
<PAGE> 3
<TABLE>
<CAPTION>
Item in Form SB-2 Prospectus Caption
- ----------------- ------------------
<S> <C> <C>
20. Market for Common Equity and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . Outside Front Cover Page of Prospectus;
Prospectus Summary; Dividends; Price Range
of Securities
21. Executive Compensation . . . . . . . . . . . . . . . . . Executive Compensation
22. Financial Statements . . . . . . . . . . . . . . . . . . Prospectus Summary; Selected Historical and
Pro Forma Consolidated Financial Data;
Financial Statements
23. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures . . . . . . . . . . *
</TABLE>
__________________________
* Omitted because Item is not applicable.
iii
<PAGE> 4
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any state in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such state.
SUBJECT TO COMPLETION, DATED DECEMBER 11, 1995
PROSPECTUS
SERIES C PREFERRED STOCK
SUNRISE PRESCHOOLS, INC.
The securities offered hereby are 333,333 shares of Series C Preferred
Stock, $1.00 par value per share (the "Series C Preferred Stock"), which are
being offered by Sunrise Preschools, Inc. (the "Company" or "Sunrise"). The
Series C Preferred Stock may be redeemed by the Company upon 20 days' notice to
the holders of the Series C Preferred Stock, if the average of the closing asked
prices of the common stock, $.01 par value, of the Company (the "Common Stock"),
for a 20 consecutive trading-day period ending within five days prior to the
date redemption notice is given by the Company has equaled or exceeded 150% of
the conversion price of the Series C Preferred Stock. The Series C Preferred
Stock has a 9% cumulative annual dividend, which is payable quarterly. Dividends
payable on the Series C Preferred Stock after the first anniversary of the first
sale of Series C Preferred Stock may, at the option of the Company, be paid in
shares of Common Stock having a fair market value equal to the amount of the
dividend. The Series C Preferred Stock ranks junior to the Company's Series B
Preferred Stock, $1.00 par value (the "Series B Preferred Stock"), in terms of
dividends and liquidation rights, but senior to all other capital stock of the
Company. Each share of Series C Preferred Stock will be initially convertible
into that number of shares of Common Stock determined by dividing the original
purchase price of the Series C Preferred Stock by 120% of the average closing
asked prices of the Common Stock for the twenty (20) consecutive trading-day
period ending five days prior to the effective date of this offering of Series C
Preferred Stock. Except as otherwise provided or required by law, the Series C
Preferred Stock will vote as a single class with the holders of the Company's
Common Stock and Series B Preferred Stock on all matters submitted to a vote of
the stockholders of the Company. If the Company is in arrears on the payment of
dividends on the Series C Preferred Stock for two or more quarters, during the
continuation of such arrearage, the holders of the Series C Preferred Stock
shall be entitled to elect two members to the Company's Board of Directors. For
additional information regarding the rights, preferences and privileges of the
Series C Preferred Stock, see "DESCRIPTION OF SECURITIES."
The Company's Common Stock is quoted in the National Daily Quotation
Service published daily by the National Quotation Bureau, Inc. under the symbol
SUNR. Quotations for the Common Stock are also available through the Electronic
Bulletin Board operated by the National Association of Securities Dealers, Inc.
under the symbol 3SUNR. On December 8, 1995, the bid and asked prices for the
Common Stock were $2.25 and $2.44, respectively. The Company's Common Stock and
the Series C Preferred Stock has been approved for quotation on the Nasdaq
SmallCap Market under the symbols SUNR and SUNRP, respectively.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES AGENCY NOR HAS THE COMMISSION
OR ANY SUCH AGENCY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THESE SECURITIES INVOLVE SUBSTANTIAL RISK. SEE "RISK FACTORS" ON PAGE 10.
<TABLE>
<CAPTION>
================================================================================
UNDERWRITING DISCOUNTS PROCEEDS TO COMPANY
PRICE TO PUBLIC AND COMMISSIONS(1) (2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $15.00 $1.50 $13.50
Total(3) $5,000,000 $500,000 $4,500,000
================================================================================
</TABLE>
(1) Excludes a nonaccountable expense allowance payable by the Company to W.B.
McKee Securities, Inc. and South Coast Financial Securities, Inc. (the
"Representatives") equal to 3% of the aggregate offering price of the
Series C Preferred Stock. The Company has also agreed to (i) issue
warrants to the Representatives (the "Representatives' Warrants") to
purchase up to 38,333 shares of Series C Preferred Stock for $18.00 per
share and (ii) grant to the Representatives certain registration rights
with respect to the securities underlying the Representatives' Warrants.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"UNDERWRITING."
(2) Before deducting expenses payable by the Company estimated at $350,000
($372,500 if the Over-Allotment Option is exercised in full), including
the Representatives' nonaccountable expense allowance.
(3) Assumes no exercise of the Underwriter's option, exercisable within 45
days from the date of this Prospectus, to purchase up to 50,000 additional
shares of Series C Preferred Stock on the same terms, solely to cover
over-allotments (the "Over-Allotment Option"). If the Over-Allotment
Option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $5,750,000,
$575,000 and $5,175,000, respectively. See "UNDERWRITING."
The shares of Series C Preferred Stock are offered by the Underwriters named
herein subject to prior sale when, as and if accepted by the Underwriters and
subject to certain conditions. The Underwriters reserve the right to reject
any order in whole or in part. It is expected that delivery of the
certificates representing the Series C Preferred Stock will be made against
payment therefor in Phoenix, Arizona on or before _________________, 1995.
W.B. MCKEE SECURITIES, INC. SOUTH COAST FINANCIAL SECURITIES, INC.
The date of this Prospectus is December ____, 1995.
<PAGE> 5
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations promulgated thereunder, and in accordance therewith files periodic
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, as well as at the following regional
offices: Northeast Regional Office, 7 World Trade Center, Suite 1300, New York,
New York 10048 and Midwest Regional Office, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material can be obtained from
the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates.
The Company has filed with the Commission a Registration Statement on Form
SB-2 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the securities offered hereby. This Prospectus does not contain
all the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is made to the Registration
Statement and the exhibits thereto, copies of which may be obtained from the
Public Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of the fees prescribed by the Commission.
Statements contained in this Prospectus as to the contents of any contract or
other document are not necessarily complete and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement for a full statement of the provisions thereof; each such
statement contained herein is qualified in its entirety by such reference.
3
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information and consolidated financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Each prospective investor is
urged to read this Prospectus in its entirety, and particularly the information
set forth in "RISK FACTORS." Unless otherwise indicated, all information
related to the Company in this Prospectus assumes no exercise of the
Over-Allotment Option, the Representatives' Warrants or any other presently
outstanding options or warrants.
THE COMPANY
Sunrise Preschools, Inc. operates a chain of premium quality child care
centers that offer comprehensive child care services primarily for children ages
six weeks to twelve years. The Company operates 29 child care centers in
Arizona, Colorado and Hawaii. Enrollment on November 30, 1995 was approximately
2,700 children and the aggregate licensed capacity of the Company's child care
centers was 3,723 children. The licensed capacity of each of the Company's
child care centers can fluctuate from time to time due to changes in the
center's configuration and changes in the age mix of the children enrolled. The
Company offers both full and half-day programs, as well as extended hours at two
of its facilities including 24-hour care at one location.
The Company's strategy is to be a comprehensive provider of high quality
child care services in demographically desirable markets. The Company intends
to pursue this strategy by acquiring individual centers and small chains of
community-based centers, by promoting and developing employer sponsored and
other partnership child care programs and by assuring that its child care
centers have high quality facilities and equipment as well as innovative
learning programs. Due to the fragmented nature of the child care industry, the
Company believes that it has many opportunities to pursue its strategy of
acquiring individual centers and small chains of community-based centers.
The Company differentiates itself from other child care providers by
offering a comprehensive curriculum that incorporates innovative learning
techniques and programs and by offering its patrons modern facilities and
equipment. The Company's education-based programs emphasize the use of learning
centers to enhance the child's development. The programs are designed to appeal
to parents who consider education and development, rather than custodial care,
as being most important in choosing a child care facility. In addition to the
regular learning programs, all of the Company's child care centers offer
computer-based learning programs using state-of-the-art software and a number of
extra-curricular programs such as gymnastics, piano lessons and aquatic
activities. Upon acquisition of new child care centers, the Company intends to
implement its learning programs and curriculum and, if necessary, update and
modernize the equipment and facilities of the acquired centers. The Company
believes that such programs and strategies contribute significantly to
revenues.
4
<PAGE> 7
The Company was organized under Delaware law in May 1987, and is the
successor to two corporations that initially operated the Company's child care
centers. Venture Educational Programs, Inc. ("Venture"), an Arizona
corporation, was formed in 1980. Venture operated the first two Sunrise
Preschools, which opened in September 1982 and September 1984, respectively, and
also operated a child care center under another name until August 1984. An
affiliated company, Sunrise Preschools, Inc., an Arizona corporation ("Sunrise
Arizona"), was formed in November 1985 and operated five child care centers,
which opened from January 1986 to May 1987. On May 27, 1987, Venture was merged
into Sunrise Arizona, and on May 28, 1987, Sunrise Arizona was merged into the
Company. The Company has one wholly owned subsidiary, Sunrise Preschools
Hawaii, Inc., formed in fiscal 1990 to operate child care centers in Hawaii.
Another subsidiary, Sunrise Holdings, Inc., formed in fiscal 1987 to construct
the Company's child care centers, was dissolved effective September 10, 1994. As
used in this Prospectus, unless the context indicates otherwise, the term
"Company" refers to Sunrise Preschools, Inc., and its subsidiaries and
predecessors.
Effective February 1, 1994, a portion of the Company's operations were
transferred to a Hawaii nonprofit corporation, Preschool Services, Inc. ("PSI").
Because of PSI's nonprofit status, PSI is eligible to receive certain grants and
subsidies. Under a written agreement between the Company and PSI, the Company
provides PSI with management and administrative services and educational
programs in exchange for a management fee. See "CERTAIN TRANSACTIONS."
The Company's principal executive offices are located at 9128 East San
Salvador, Suite 200, Scottsdale, Arizona 85258, and its telephone number is
(602) 860-1611.
5
<PAGE> 8
THE OFFERING
Securities Offered . . . . . . . . . 333,333 shares of Series C Preferred
Stock
Terms of Series C Preferred Stock . . DIVIDENDS: Each share of Series C
Preferred Stock bears a cumulative
dividend of 9% per annum, payable
quarterly. After the first anniversary
date of the first sale of Series C
Preferred Stock, dividends on the Series
C Preferred Stock are payable at the
option of the Companyin sharesof Common
Stock having a fair marketvalue equal to
the amount of the dividend. The Series C
Preferred Stockis junior in dividendand
liquidation rights to the Company's
Series B Preferred Stock, but senior to
all other series of preferred stock or
other capital stock of the Company.
CONVERSION: Each share of Series C
Preferred Stock will be initially
convertible into that number of shares of
Common Stock determined by dividing the
original purchase price of the Series C
Preferred Stock by 120% of the average
closing asked prices of the Common Stock
for the twenty (20) consecutive
trading-day period ending five days prior
to the effective date of this offering of
Series C Preferred Stock.
ANTI-DILUTION: The conversion ratio of
the Series C Preferred Stock is subject
to anti-dilutive adjustments to reflect
(i) issuance of shares of Common Stock
(or common stock equivalents) at less
than the then currentconversion price of
the Series C Preferred Stock, (ii) stock
splits, stock dividends and stock
combinations, (iii) distributions of
assets to holders of Common Stock,(iv)
capital reorganizations and
reclassifications, and (v)
consolidations, mergers,or asale of all
or substantially allof the assets of the
Company.
REDEMPTION: Subject to the holders'
rights to convert to Common Stock, the
Company may redeem the Series C Preferred
Stock if the average of the closing asked
prices of the Common Stock for a 20
consecutive trading-day period ending
within five days prior to the date
redemption noticeis given by the Company
has equaled or exceeded 150% of the
conversion price of the Series C
Preferred Stock.
6
<PAGE> 9
VOTING RIGHTS: Except as otherwise
provided or as required by law, the
holders of the Series C Preferred Stock
will vote as a single class with the
holders of the Common Stock and the
Series B Preferred Stock on all matters
submitted to a vote of stockholders of
the Company. The holders of the Series C
Preferred Stock will be entitled to vote
as a separate class with respect to
certain matters, including the approval
of (i) any merger or consolidation ofthe
Company, (ii) any sale of all or
substantially all of the assets of the
Company and (iii) any liquidation or
dissolution of the Company.
BOARD REPRESENTATION: If the Company is
in arrears in the payment of dividends on
the Series C Preferred Stock for two or
more quarters, during the continuation of
such arrearage, the holders of the Series
C Preferred Stock will be entitled to
elect two members to the Company's Board
of Directors.
LIQUIDATION: In the event of a
liquidation or dissolution of the
Company, the holders of the Series C
Preferred Stock will be entitled to a
preferential payment of the original
purchase price of the Series C Preferred
Stock plus accrued but unpaid dividends
prior to any distribution to holders of
the Company's Common Stock, subject to
prior payment of a liquidation preference
to the holders of the Series B Preferred
Stock.
For additional informationon the rights,
privileges and preferences of the Series
C Preferred Stock, see "DESCRIPTION OF
SECURITIES."
Stock Outstanding Before Offering . . 2,982,968 shares of Common Stock(1)
500,000 shares of Series B Preferred
Stock(2)
Stock Outstanding After Offering . . 2,982,968 shares of Common Stock(1)(3)
500,000 shares of Series B Preferred
Stock
333,333 shares of Series C Preferred
Stock(4)
Estimated Net Proceeds . . . . . . . $4,150,000. See "USE OF PROCEEDS."(5)
(Footnotes on following page)
7
<PAGE> 10
Use of Proceeds . . . . . . . . . . The Company intends to use the proceeds
of this offering (i) to acquire, open and
equip additional childcare centers, (ii)
to repay certain indebtedness, (iii) to
pay accrued dividends on the Series B
Preferred Stock and (iv) for general
corporate purposes. See "USE OF
PROCEEDS."
Risk Factors . . . . . . . . . . . . Investment in the Series C Preferred
Stock involves a high degree of risk.
See "RISK FACTORS."
Fiscal Year End . . . . . . . . . . The fiscal year end of the Company
consists of eight four-week periods and
four five-week periods. Each quarter of
the Company's fiscal year consists of two
four-week periods and one five-week
period. The Company's fiscal year ends on
Saturday nearest July 31 of each year.
However, for clarity of presentation, all
information has been presented as if the
fiscal year ended on July 31.
Current Quotation Symbols SUNR(6)
for Common Stock . . . . . . . 3SUNR(7)
Proposed Nasdaq SmallCap
Market
Symbol for Common Stock . . . SUNR
Proposed Nasdaq SmallCap
Market
Symbol for Series C
Preferred Stock . . . . . . . SUNRP
- --------------
(1) As of November 30, 1995. Does not include (i) 755,000 shares of
Common Stock reserved for issuance upon exercise of options and
warrants previously issued by the Company, (ii) Common Stock issuable
in connection with the Series A Preferred Stock and (iii) 500,000
shares of Common Stock issuable upon conversion of the Series B
Preferred Stock. See "EXECUTIVE COMPENSATION -- Stock Option Plans,"
"DESCRIPTION OF SECURITIES" and "UNDERWRITING." See also Note 7 of
Notes to Consolidated Financial Statements.
(2) In connection with a Preferred Share Rights Agreement dated February
10, 1995, the Company authorized a series of 5,000 shares of Series A
Participating Preferred Stock (the "Series A Preferred Stock"). No
shares of Series A Preferred Stock have been issued by the Company. See
"DESCRIPTION OF SECURITIES -- Preferred Stock -- Series A
Participating Preferred Stock."
(3) Does not include Common Stock issuable (i) upon conversion
of the Series C Preferred Stock issued in this offering, (ii) upon
conversion of the Series C Preferred Stock underlying the
Over-Allotment Option, (iii) upon conversion of the Series C Preferred
Stock underlying the Representatives' Warrants, or (iv) upon exercise
of options which have been or may be granted in the future under the
Company's Stock Option Plans. See "EXECUTIVE COMPENSATION -- Stock
Option Plans," "DESCRIPTION OF SECURITIES" and "UNDERWRITING."
(4) Does not include Series C Preferred Stock issuable upon exercise of (i)
the Over-Allotment Option or (ii) the Representatives' Warrants. See
"UNDERWRITING."
(5) Does not include proceeds from exercise of (i) the Over-Allotment
Option or (ii) the Representatives' Warrants. See "UNDERWRITING."
(6) As quoted in the National Daily Quotation Service published by the
National Quotation Bureau, Inc.
(7) As quoted on the Electronic Bulletin Board operated by the National
Association of Securities Dealers, Inc.
8
<PAGE> 11
SUMMARY CONSOLIDATED FINANCIAL, PRO FORMA AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND CHILD CARE CENTER DATA)
<TABLE>
<CAPTION>
For the Three Months
Ended
Year Ended July 31, October 31,
----------------------------------- ----------------------
1995 1994 1993 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
SELECTED STATEMENT OF OPERATIONS DATA:
Operating revenue .................................. $ 9,715 $10,625 $11,042 $ 2,436 $ 2,537
Operating expenses ................................. 9,104 10,147 10,864 2,356 2,287
------- ------- ------- ------- -------
Income from operations ............................. $ 611 $ 478 $ 178 $ 79 $ 250
======= ======= ======= ======= =======
Net income ......................................... $ 807 $ 881 $ 114 $ 71 $ 247
======= ======= ======= ======= =======
Net income available for common stock .............. $ 757 $ 831 $ 64 $ 59 $ 233
======= ======= ======= ======= =======
Net income per share(1)
Primary .......................................... $ .29 $ .33 $ .03 $ .02 $ .10
======= ======= ======= ======= =======
Fully diluted .................................... $ .25 $ .29 $ .03 $ .02 $ .08
======= ======= ======= ======= =======
Weighted average shares outstanding(1)
Primary .......................................... 2,621 2,495 2,436 3,338 2,455
Fully diluted .................................... 3,208 3,045 2,436 3,838 2,955
SELECTED PRO FORMA STATEMENT OF OPERATIONS DATA(2):
Operating revenue .................................. $ 9,663 $ 9,583
Operating expenses ................................. 8,984 9,087
------- -------
Income from operations ............................. $ 679 $ 496
======= =======
Net income ......................................... $ 1,101 $ 450
======= =======
Net income available for common stock .............. $ 1,051 $ 400
======= =======
Net income per share(1)
Primary .......................................... $ .42 $ .16
======= =======
Fully diluted .................................... $ .36 $ .16
======= =======
Weighted average shares outstanding(1)
Primary .......................................... 2,495 2,436
Fully diluted .................................... 3,045 2,436
SELECTED CHILD CARE CENTER DATA:
Number of centers (end of period) .................. 27 27 23 27 27
Approximate licensed center capacity (end of period) 3,485 3,408 3,344 3,485 3,408
Average percentage occupancy(3) .................... 76.7% 78.3% 78.8% 73.6% 79.3%
Average weekly tuition rate(4) ..................... $ 97 $ 94 $ 92 $ 97 $ 94
</TABLE>
<TABLE>
<CAPTION>
October 31, 1995
----------------------------
SELECTED BALANCE SHEET DATA: Actual As Adjusted(5)
------ -----------
<S> <C> <C>
Cash and cash equivalents........................... $ 577 $4,048
Working capital..................................... $ 115 $3,979
Total assets........................................ $3,614 $7,085
Dividends payable on preferred stock................ $ 278 $ -
Notes payable and capital leases.................... $ 605 $ 158
Stockholders' equity................................ $1,443 $5,638
- ----------------
(1) See Note 2 of Notes to Consolidated Financial Statements.
(2) Pro forma information presented as if the PSI Agreement was in effect
as of the beginning of each period presented. The results of fiscal
1995 and the quarters ended October 31, 1995 and 1994, include the
effects of the PSI Agreement. Therefore, no pro forma information is
presented for those periods. See Note 3 of Notes to Consolidated
Financial Statements.
(3) The average percentage occupancy is calculated by dividing operating
revenues for all of the Company's centers (other than centers operated
on a management fee basis) for the respective periods by the product of
(i) the licensed capacity for all of the Company's centers (other than
those operated on a management fee basis) and (ii) the average of the
basic tuition rate for full-time four year old children at all such
centers for the respective periods based on 50 weeks of attendance per
year.
(4) The average weekly tuition rate is the average basic public tuition
rate for full-time four year old children at all centers (other than
centers operated on a management fee basis).
(5) Adjusted to reflect the (i) sale of 333,333 shares of Series C
Preferred Stock hereby, assuming no exercise of the Over-Allotment
Option or the Representatives' Warrants and after deducting
underwriting discounts and commissions and estimated offering expenses
payable by the Company, and (ii) the issuance of 47,074 shares of
Common Stock in November 1995 for $45,689 (net of expenses of $1,385)
in connection with the exercise of certain Warrants to acquire Common
Stock of the Company. See "DESCRIPTION OF SECURITIES -- Common Stock
Purchase Warrants and Options," "USE OF PROCEEDS" and "UNDERWRITING."
</TABLE>
9
<PAGE> 12
RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK
FACTORS, IN ADDITION TO THE OTHER INFORMATION SET FORTH ELSEWHERE IN THIS
PROSPECTUS, INCLUDING THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO,
PRIOR TO MAKING AN INVESTMENT IN THE COMPANY.
1. Competition. The child care industry is highly fragmented and
competitive, and Phoenix, Arizona is one of the most competitive markets in the
United States. The Company competes with child care centers owned by national
chains as well as child care facilities operated by local, community and
church-affiliated profit and non-profit organizations. Some of the non-profit
child care centers that the Company competes with are supported to a large
extent by endowments, charitable contributions and other forms of subsidies, and
consequently charge less for their services than the Company. In addition, the
Company competes with individually owned proprietary child care centers,
licensed and unlicensed child care homes, in-home individual child care
providers, public schools and businesses that provide child care for their
employees. A number of the Company's competitors have substantially greater
resources than the Company. See "BUSINESS -- Competition."
2. Adverse Publicity. Some providers of child care have received
negative publicity concerning alleged child abuse, inadequate supervision and
on-site accidents. Although the Company has not been the subject of any adverse
publicity, any such publicity, whether accurate or not, could result in
decreased enrollment and have a material adverse effect on the Company.
3. Insurance. In addition to general liability insurance, the
Company maintains insurance coverage for child physical and sexual abuse claims,
which is subject to an annual aggregate limitation of $250,000. Recently, some
operators of child care centers, including the Company, have experienced greater
difficulty in obtaining such insurance at reasonable rates. Although the Company
has never had a claim for child physical or sexual abuse, there can be no
assurance that insurance for child physical and sexual abuse will continue to be
available to the Company in the future or that increased premiums for such
insurance will not require the Company to increase the cost of providing child
care services. If such insurance is not available to the Company, or if amounts
of coverage are not adequate, the Company may be materially and adversely
affected. See "BUSINESS -- Insurance."
4. Seasonal Fluctuations. Child care centers, including those of the
Company, experience decreased enrollment, and therefore decreased revenue, in
the summer months and around certain major holidays. There can be no assurance
that Company programs designed to increase enrollment in the summer will be
successful. See "BUSINESS -- Curricula and Programs."
5. Government Regulation. Child care centers must comply with
various state and local statutes and regulations. Centers are periodically
inspected by state agencies to review adherence to child care standards,
including, among other things, staffing, cleanliness and safety standards. The
Company has not experienced any difficulty in complying with various government
regulations. Additional regulations or changes in existing regulations might
impose additional compliance costs on the Company, which could have a material
adverse effect on the Company. In addition, certain tax laws presently provide
for certain credits and other incentives relating to child care costs. Changes
in such tax laws could have a material adverse effect on the Company. See
"BUSINESS -- Government Regulation."
10
<PAGE> 13
6. Geographic Concentration. Currently, all of the child care
centers operated by the Company are located in Arizona, Colorado and Hawaii. The
success of such operations is therefore dependant to some extent on the
economies of such regions. If these geographic areas experience an economic
downturn or recession, the Company's financial condition and business prospects
could be materially and adversely affected.
7. Expansion. The Company intends to continue to open new child care
centers and to acquire individual and community-based chains of child care
centers. In addition, the Company plans to continue to expand its operations
through various partnership and contractual relationships with third parties.
Although the Company's current operations are based primarily in Arizona,
Colorado and Hawaii, the Company's current expansion plans include considering
opportunities in the southwestern United States as well as in other geographic
regions of the country. There can be no assurance that the Company will achieve
its planned expansion or that its expansion will be profitable. The success of
the Company's expansion program will depend on a number of factors, many of
which may be beyond the Company's control, including the availability of
sufficient capital, the identification of appropriate acquisition candidates and
suitable build-to-suit child care center sites, the Company's ability to
attract, train and retain qualified employees and management, the continuing
profitability of existing operations, the successful management of planned
growth and the ability of the Company to operate new child care centers in a
profitable manner. Although the Company currently intends to lease from third
parties newly constructed child care facilities developed for the Company rather
than undertaking its own construction, if the Company were to undertake its own
construction, there can be no assurance that it could construct its child care
centers on a cost-effective basis or that appropriate financing could be
obtained. Construction of child care centers is subject to the risk of delays
and cost overruns, and such occurrences could have a material adverse effect on
the Company. See "BUSINESS -- Expansion."
8. Use of Proceeds; Broad Discretion in Application. The proceeds
allocated to each category under "USE OF PROCEEDS" are estimates only and
Company management will have broad discretion in the application of such funds.
See "USE OF PROCEEDS."
9. Dependence Upon Key Personnel. The success of the Company will be
largely dependent upon the efforts and abilities of James R. Evans, President
and Chairman of the Board, and Barbara L. Owens, Executive Vice President,
Secretary and Treasurer. See "MANAGEMENT." The Company has employment agreements
with Mr. Evans and Ms. Owens. The Company also maintains for its benefit key man
life insurance on Mr. Evans in the amount of $1,000,000. Nevertheless, the loss
of the services of Mr. Evans or Ms. Owens could have a material adverse effect
on the Company. See "EXECUTIVE COMPENSATION -- Employment Contracts." In
addition, the Company's success is also dependent upon its ability to hire
additional qualified personnel, and there can be no assurance that the Company
will be able to hire or retain qualified personnel.
10. Limitation on Director Liability; Control of Company. Among other
matters, certain provisions of the Company's Restated Certificate of
Incorporation and Bylaws limit or eliminate director liability for certain
actions and require approval of greater than 50% of the shares eligible to vote
on certain matters. The Company has also adopted a shareholder rights plan
designed to deter coercive or abusive takeover attempts. These and other
provisions could, under certain circumstances, prevent redress by stockholders
for certain actions taken by the directors and management and make it more
difficult for an outsider to obtain control of the Company. See "DESCRIPTION OF
SECURITIES."
11
<PAGE> 14
11. No Assurance of Public Market; Arbitrary Offering Price. Prior to
this offering there has been no public market for the Series C Preferred Stock
and only a limited market for the Common Stock. There can be no assurance that a
market will develop following this offering for the Series C Preferred Stock or
that, if developed, such market will be sustained. The price at which the shares
of Series C Preferred Stock are being offered to the public has been determined
by negotiation between the Company and the Representatives. Among the factors
considered in determining the price of the Series C Preferred Stock were the
Company's current financial condition and prospects and the general condition of
the securities market. However, the public offering price of the Series C
Preferred Stock does not necessarily bear any relationship to the Company's
assets, book value, earnings or any other established criterion of value.
12. No Dividends; Senior Stock. The Company has not paid any
dividends on its Common Stock since its inception, and it is not anticipated
that any such dividends will be paid in the foreseeable future. In addition, no
dividends have been paid to date on the Series B Preferred Stock of the Company,
which accrues dividends at the rate of $.10 per share per annum. The Series C
Preferred Stock ranks junior in terms of dividends to the Series B Preferred
Stock and all dividends payable on the Series B Preferred Stock must be paid
prior to the payment of dividends on the Series C Preferred Stock. Because the
Company currently has accrued but unpaid dividends payable on the Series B
Preferred Stock totalling approximately $278,333, no dividends may be paid on
the Series C Preferred Stock until such accrued but unpaid dividends are paid to
the holders of the Series B Preferred Stock. The Company plans to use a portion
of the proceeds of this offering to pay the accrued dividends payable on the
Series B Preferred Stock. In addition, certain credit agreements with the
Company's lender restrict the ability of the Company to pay dividends. See
"DIVIDENDS," "USE OF PROCEEDS" and "DESCRIPTION OF SECURITIES."
13. Stock Dividends. Following the first anniversary date of the
first issuance of Series C Preferred Stock, the Company has the option to pay
all future dividends either in cash or in shares of Common Stock of the Company
having a fair market value equal to the amount of the dividend. If the Company
elects to pay dividends on the Series C Preferred Stock in shares of Common
Stock, this will dilute the interests of all of the common stockholders of the
Company. In addition, although the value of the Common Stock distributed to the
holders of the Series C Preferred Stock will initially have a fair market value
equal to the cash amount of the dividend, such market value may fluctuate and
the holders of the Series C Preferred Stock may incur certain transaction costs
in disposing of such shares of Common Stock. See "DIVIDENDS."
14. Relationship with PSI. Certain officers and directors of the
Company also serve as officers and directors of PSI. The Company believes it is
unlikely that any conflicts of interest will arise with PSI; however, any
transaction to which both the Company and PSI are a party that involves a
potential conflict of interest may be approved by the Board of Directors of the
Company only with the approval of a majority of the Company's directors
including the Company's outside directors that are not also officers or
directors of PSI. Currently the Company has one outside director who is not also
an officer or director of PSI. See "CERTAIN TRANSACTIONS."
12
<PAGE> 15
DIVIDENDS
The Company has never paid a dividend on its Common Stock. The Company
presently does not anticipate paying any dividends on its Common Stock in the
foreseeable future. Pursuant to the terms of the Series C Preferred Stock, the
Company is obligated to pay a cumulative annual dividend of 9% to the holders of
the Series C Preferred Stock. One year after the date of the first issuance of
shares of Series C Preferred Stock, the Company may, in its discretion, elect to
pay dividends on the Series C Preferred Stock in shares of Common Stock having a
fair market value equal to the amount of the dividend. The Series C Preferred
Stock ranks junior to the Series B Preferred Stock of the Company and,
consequently, all dividends payable on the Series B Preferred Stock must be
current prior to the payment of any dividends on the Series C Preferred Stock.
The annual dividend rate of the Series B Preferred Stock is $.10 per share,
which currently amounts to $50,000 per year in the aggregate based on 500,000
issued and outstanding shares of Series B Preferred Stock. As of October 31,
1995, accrued but unpaid dividends payable on the Series B Preferred Stock were
$278,333. In addition, the Company has a credit facility with a bank pursuant to
which it may borrow up to $500,000. As of October 31, 1995, approximately
$180,000 had been borrowed under this credit facility and certain other loans
with such bank. Pursuant to the terms of the credit facility and such loans, the
Company may not pay any dividends, including dividends on the Series C Preferred
Stock, without the consent of the bank. Furthermore, under Delaware corporate
law, the Company may be prohibited in certain circumstances from paying
dividends (whether in cash or otherwise). See "RISK FACTORS" and "DESCRIPTION OF
SECURITIES."
13
<PAGE> 16
PRICE RANGE OF SECURITIES
Trading activity with respect to the Company's Common Stock has been
limited. A public trading market having the characteristics of depth, liquidity
and orderliness depends upon the existence of market makers as well as the
presence of willing buyers and sellers, which are circumstances over which the
Company does not have control.
The Common Stock was registered under Section 12(g) of the Exchange Act
in 1987. From September 11, 1987 until January 27, 1991, when the National
Association of Securities Dealers Automated Quotation System ("Nasdaq") changed
its listing requirements, the Common Stock was listed on Nasdaq under the symbol
SUNR. Subsequent to such date, the Common Stock has been quoted in the National
Daily Quotation Service ("Pink Sheets") published daily by the National
Quotation Bureau, Inc. under the symbol SUNR. Quotations are also available
through the Electronic Bulletin Board operated by the National Association of
Securities Dealers, Inc. under the symbol 3SUNR. The following table sets forth
the high and low bid prices for the Common Stock based on closing transactions
during each specified period as reported by the National Quotation Bureau, Inc.,
which prices reflect inter-dealer prices without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions:
<TABLE>
<CAPTION>
Fiscal 1994 High Low
---- ---
<S> <C> <C>
First Quarter $ 1.000 $ .750
Second Quarter 1.250 .875
Third Quarter 1.500 .750
Fourth Quarter 1.625 1.250
Fiscal 1995 High Low
---- ---
First Quarter $ 1.375 $ 1.000
Second Quarter 1.688 .938
Third Quarter 1.563 1.125
Fourth Quarter 2.625 1.250
Fiscal 1996 High Low
---- ---
First Quarter $ 3.313 $ 2.125
</TABLE>
There were approximately 270 record holders and 660 beneficial holders of
the Company's Common Stock as of November 30, 1995. On December 8, 1995, the bid
and asked prices for the Common Stock were $2.25 and $2.44, respectively.
The Company's Common Stock and the Series C Preferred Stock has been
approved for quotation on the Nasdaq SmallCap Market under the symbols SUNR and
SUNRP, respectively.
14
<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 333,333 shares of
Series C Preferred Stock offered hereby, assuming an offering price of $15 per
share, and after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company, are estimated to be $4,150,000
($4,802,500 if the Over-Allotment Option is exercised in full). The Company
intends to use approximately $3,358,000 of the proceeds to acquire, open and
equip additional child care centers. The exact number of additional child care
centers will necessarily vary depending on the opportunities available to the
Company. See "BUSINESS -- Expansion." The Company expects to use approximately
$447,000 to repay outstanding indebtedness that was incurred for the purchase of
vehicles and equipment (which indebtedness, as of October 31, 1995, had a
weighted average interest rate of approximately 11.7% and a weighted average
maturity of approximately 5.4 years). The Company will also use approximately
$278,000 of the proceeds to pay the dividends payable on the Series B Preferred
Stock. See "RISK FACTORS" and "DIVIDENDS". The balance of the net proceeds will
be added to working capital for general corporate purposes. Until applied as set
forth above, all proceeds will be invested in short-term investment grade
instruments or bank certificates of deposit. Investment of the net proceeds in
short-term securities rather than operations could adversely affect the
Company's overall return on its capital.
The foregoing represents the Company's present intentions with respect to
the allocation of the proceeds of this offering based upon its present plans and
business conditions. However, there is no assurance that unforeseen events or
changed business conditions, including a lack of suitable acquisition
candidates, will not result in the application of the proceeds of this offering
in a manner other than as described in this Prospectus. To the extent the
Company is unable to apply the proceeds as described above, the proceeds will be
added to working capital for general corporate purposes. See "RISK FACTORS."
15
<PAGE> 18
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
October 31, 1995, and as adjusted to give effect to the sale of the 333,333
shares of Series C Preferred Stock offered hereby at an assumed offering price
of $15 per share and after deducting underwriting discounts and commissions,
offering expenses payable by the Company and the application of the estimated
net proceeds therefrom.
<TABLE>
<CAPTION>
October 31, 1995
----------------------------
Actual As Adjusted(1)
----------- -------------
<S> <C> <C>
Dividends payable on Series B Preferred Stock ............... $ 278,333 $ --
Current portion of notes payable and capital leases ......... 153,988 38,988
----------- -----------
$ 432,321 $ 38,988
=========== ===========
Notes payable and capital leases, net of current portion .... $ 451,394 $ 119,394
----------- -----------
Stockholders' Equity:
Preferred Stock, $1.00 par value, 1,000,000 shares authorized
Series A Participating Preferred Stock, $1.00 par value,
5,000 shares authorized, no shares issued or outstanding . -- --
Series B Preferred Stock, $1.00 par value,
500,000 shares authorized, 500,000 shares
issued and outstanding ................................... 500,000 500,000
Series C Preferred Stock, $1.00 par value,
421,666 shares authorized, 333,333 outstanding as adjusted
for this offering ........................................ -- 333,333
Common Stock, $.01 par value, 10,000,000 shares authorized,
2,935,894 shares issued and outstanding(2) ............... 29,359 29,830
Paid-In Capital ............................................. 3,602,406 7,464,291
Accumulated Deficit ......................................... (2,689,241) (2,689,241)
----------- -----------
Total Stockholders' Equity ............................. 1,442,524 5,638,213
----------- -----------
Total Capitalization ................................... $ 1,893,918 $ 5,757,607
=========== ===========
</TABLE>
- ----------
(1) Adjusted to reflect (i) the sale of 333,333 shares of Series C Preferred
Stock hereby, assuming no exercise of the Over-Allotment Option or the
Representatives' Warrants and after deducting the underwriting discount
and estimated offering expenses payable by the Company, and (ii) the
issuance of 47,074 shares of Common Stock in November 1995 for $45,689
(net of offering expenses of $1,385) in connection with the exercise of
certain Warrants to acquire Common Stock of the Company. See
"DESCRIPTION OF SECURITIES--Common Stock Purchase Warrants and Options,"
"USE OF PROCEEDS" and "UNDERWRITING."
(2) Does not include (i) 755,000 shares of Common Stock reserved for issuance
upon exercise of options and warrants previously issued by the Company,
(ii) Common Stock issuable in connection with the Series A Preferred
Stock and (iii) 500,000 shares of Common Stock issuable upon conversion
of the Series B Preferred Stock. See "EXECUTIVE COMPENSATION -- Stock
Option Plans," "DESCRIPTION OF SECURITIES" and "UNDERWRITING." See also
Note 7 of Notes to Consolidated Financial Statements.
16
<PAGE> 19
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table presents selected historical and pro forma
consolidated financial data for the fiscal years ended July 31, 1995, 1994 and
1993, and for the quarters ended October 31, 1995 and 1994. The historical
financial data for the fiscal years ended July 31, 1995 and 1994 is derived from
the consolidated financial statements of the Company which have been audited by
Arthur Andersen LLP, independent public accountants and are included in this
Prospectus. The selected financial information for the fiscal year ended July
31, 1993 is derived from audited consolidated financial statements that are not
included in this Prospectus. The historical financial data for the three-month
periods ended October 31, 1995 and 1994 is derived from the consolidated
financial statements of the Company which have not been subject to audit, but
which have been prepared on a basis consistent with the audited financial
statements. In the opinion of management, the unaudited consolidated financial
statements include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair statement of the consolidated financial
position and results of operations for those periods. The results of
operations for the three months ended October 31, 1995 are not necessarily
indicative of the results of operations for a full fiscal year. The historical
financial data should be read in conjunction with "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and the consolidated
financial statements of the Company and related notes included in this
Prospectus.
<TABLE>
<CAPTION>
Three Months Ended
Year Ended July 31, October 31, 1995
--------------------------------------------- ---------------------------
1995 1994 1993 1995 1994
----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenue ................................ $ 9,715,023 $ 10,625,044 $ 11,041,811 $ 2,435,546 $ 2,536,615
----------- ------------ ------------ ----------- -----------
Operating expenses
Payroll ....................................... 4,730,962 5,443,665 5,796,838 1,137,410 1,242,316
Facilities and maintenance .................... 2,975,916 3,303,949 3,661,277 907,537 751,872
General and administrative .................... 1,396,660 1,399,790 1,406,206 311,451 292,411
----------- ------------ ------------ ----------- -----------
Total operating expenses ..................... 9,103,538 10,147,404 10,864,321 2,356,398 2,286,599
----------- ------------ ------------ ----------- -----------
Income from operations ........................... 611,485 477,640 177,490 79,148 250,016
Other income (expense) ........................... (24,633) (72,349) (63,771) (7,448) (2,795)
----------- ------------ ------------ ----------- -----------
Income before income taxes ....................... 586,852 405,291 113,719 71,700 247,221
Income tax benefit ............................... 220,000 475,358 -- -- 1,500
----------- ------------ ------------ ----------- -----------
Net income ....................................... $ 806,852 $ 880,649 $ 113,719 $ 71,700 $ 245,721
=========== ============ ============ =========== ===========
Net income available for common stock ............ $ 756,852 $ 830,649 $ 63,719 $ 59,200 $ 233,221
=========== ============ ============ =========== ===========
Primary earnings per share(1) ................ $ .29 $ .33 $ .03 $ .02 $ .10
=========== ============ ============ =========== ===========
Fully diluted earnings per share(1) .......... $ .25 $ .29 $ .03 $ .02 $ .08
=========== ============ ============ =========== ===========
PRO FORMA STATEMENT OF OPERATIONS DATA(2):
Operating revenue ............................ $ 9,662,959 $ 9,582,979
------------ ------------
Operating expenses
Payroll ................................... 4,869,501 5,030,113
Facilities and maintenance ................ 2,825,368 2,819,942
General and administrative ................ 1,288,940 1,237,106
------------ ------------
Total operating expenses ................. 8,983,809 9,087,161
------------ ------------
Income from operations ....................... 679,150 495,818
Other income (expense) ....................... (53,273) (45,771)
------------ ------------
Income before income taxes ................... 625,877 450,047
Income tax benefit ........................... 475,358 --
------------ ------------
Net income ................................... $ 1,101,235 $ 450,047
============ ============
Net income available for common stock ........ $ 1,051,235 $ 400,047
============ ============
Primary earnings per share(1) ................ $ .42 $ .16
============ ============
Fully diluted earnings per share(1) .......... $ .36 $ .16
============ ============
</TABLE>
(Footnotes on the following page)
17
<PAGE> 20
<TABLE>
<CAPTION>
Three Months Ended
Year Ended July 31, October 31, 1995
--------------------------------------------- ---------------------------
1995 1994 1993 1995 1994
----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
SELECTED CHILD CARE CENTER DATA:
Number of centers (end of period) ............ 27 27 23 27 27
Approximate licensed center capacity
(end of period) ............................ 3,485 3,408 3,334 3,485 3,408
Average percentage occupancy(3) .............. 76.7% 78.3% 78.8% 73.6% 79.3%
Average weekly tuition rate(4) ............... $ 97 $ 94 $ 92 $ 97 $ 94
</TABLE>
- ----------------
(1) See Note 2 of Notes to Consolidated Financial Statements.
(2) Pro forma information is presented as if the PSI Agreement was in effect
as of the beginning of each period presented. The results of fiscal 1995
and the quarters ended October 31, 1995 and 1994 include the effects of
the PSI Agreement. Therefore, no pro forma information is presented for
those periods. See Note 3 of Notes to Consolidated Financial Statements.
(3) The average percentage occupancy is calculated by dividing operating
revenues for all of the Company's centers (other than centers operated on
a management fee basis) for the respective periods by the product of (i)
the licensed capacity for all of the Company's centers (other than those
operated on a management fee basis) and (ii) the average of the basic
tuition rate for full-time four year old children at all such centers for
the respective periods based on 50 weeks of attendance per year.
(4) The average weekly tuition rate is the average basic public tuition rate
for full-time four year old children at all centers (other than centers
operated on a management fee basis).
18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
During fiscal 1994, a portion of the Company's operations were
transferred to PSI, a Hawaii nonprofit corporation. See "CERTAIN TRANSACTIONS."
The Company provides PSI with management, administration and educational
programs for PSI's child care centers and leases substantially all of the
equipment and other property necessary for the operation of the related child
care centers to PSI under an Administrative Services Agreement, License and
Equipment Lease (the "PSI Agreement"). For fiscal 1995 and 1994, the
administrative fees totalled $42,000 and $25,000, respectively. During fiscal
1995, the Company agreed to defer future administrative fees and lease payments
due from PSI (which in the aggregate are approximately $170,000 annually) until
such time as PSI's cash flow is adequate to fund these fees, which the Company
estimates will occur no sooner than 1998. In connection with this deferral, the
accumulated amounts due from PSI at July 31, 1995 were converted to a promissory
note equal to the present value of the expected future payments to be received.
This resulted in a reduction in the outstanding receivable balance, through a
charge to the provision for bad debts of $176,500. The promissory note bears
interest at 8%, with monthly payments due beginning January 1998 through July
2002. In addition, no administrative fees payable under the PSI Agreement were
recognized in the quarter ended October 31, 1995. See Note 3 of Notes to
Consolidated Financial Statements.
19
<PAGE> 22
THREE MONTHS ENDED OCTOBER 31, 1995 (FIRST QUARTER OF FISCAL 1996) COMPARED TO
THREE MONTHS ENDED OCTOBER 31, 1994 (FIRST QUARTER OF FISCAL 1995)
For purposes of the following discussion, the table below sets forth
various items from the Company's unaudited consolidated Statements of Income
for the quarters ended October 31, 1995 and 1994, respectively, including
various items expressed as a percentage of operating revenues for those
periods.
<TABLE>
<CAPTION>
Three Months Ended
October 31,
-----------------------------------------------
1995 1994
----------------------- ----------------------
% of % of
Dollars Revenue Dollars Revenue
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
Operating revenue .............. $ 2,435,546 100.0% 2,536,615 100.0%
----------- ----- ----------- -----
Operating expenses:
Payroll ..................... 1,137,410 46.7 1,242,316 49.0
Facilities and maintenance .. 907,537 37.3 751,872 29.6
General and administrative .. 311,451 12.8 292,411 11.5
----------- ----- ----------- -----
Total operating expenses ....... 2,356,398 96.8 2,286,599 90.1
----------- ----- ----------- -----
Income from operations ......... 79,148 3.2 250,016 9.9
Other income (expense) ......... (7,448) (0.3) (2,795) (0.1)
----------- ----- ----------- -----
Income before income taxes ..... 71,700 2.9 247,221 9.8
Income tax benefit ............. -- -- 1,500 0.1
----------- ----- ----------- -----
Net income ..................... $ 71,700 2.9% $ 245,721 9.7%
=========== ===== =========== =====
</TABLE>
Operating revenue for the first quarter of fiscal 1996 was $2,435,546, a
decrease of $101,069, or 4.0% from revenue of $2,536,615 for the first quarter
of fiscal 1995. Of this decrease, $66,449 was due to the transfer of one of the
Company's child care centers to PSI as of August 1, 1995. The Company continues
to manage this child care center under a management agreement with PSI, for
which the Company receives a management fee; however, the consolidated financial
statements for the quarter ended October 31, 1995 no longer include the revenues
or expenses of this center. As a result of this transfer, operating expenses
decreased by $61,949 as discussed more fully below. The impact of this transfer
on net income for the quarter and ended October 31, 1995 was a reduction of
$4,500. See "CERTAIN TRANSACTIONS." The remaining $34,620 decrease in revenues
is due to the deferral of $12,500 in administrative fees from PSI and a $60,255
decrease in revenue at one of the Company's child care centers due to lower
enrollment levels, partially offset by a net increase of $38,135 at the other
child care centers.
Operating expenses for the first quarter of fiscal 1996 were $2,356,398
(96.8% of operating revenue), an increase of $69,799 or 3.1% from operating
expenses of $2,286,599 (90.1% of operating revenue) for the first quarter of
fiscal 1995. This increase was due to an increase in facilities and maintenance
costs and general and administrative expenses, partially offset by a decrease in
payroll expense.
Payroll expense for the first quarter of fiscal 1996 was $1,137,410
(46.7% of operating revenue), a decrease of $104,906 from payroll expense of
$1,242,316 (49.0% of operating revenue) for the first quarter of fiscal 1995. Of
this decrease, $58,186 is due to the transfer of one of the Company's centers to
PSI. In addition, payroll expense decreased $57,025 due to the Company's
decision, in May 1995, to outsource its maintenance operations. Accordingly, the
Company now pays a monthly fee for maintenance services, which is included in
facilities and maintenance costs, rather than paying for staffing directly as
part of payroll expense. These decreases were offset by small increases in other
salaries.
Facilities and maintenance costs for the first quarter of fiscal 1996
were $907,537 (37.3% of operating revenue), an increase of $155,665 or 20.7%
from facilities and maintenance costs of $751,872 (29.6% of operating revenue)
during the first quarter of fiscal 1995. This increase is primarily due to an
increase of $65,316 in rent expense, a $56,131 increase in maintenance costs and
a $35,372 increase in depreciation expense. The increase in rent expense was due
to moderate rent increases at several of the centers, and to the deferral of
$49,196 in sublease payments payable by PSI under the PSI Agreement. Maintenance
costs increased $57,025 due to the Company's decision, in May 1995, to outsource
its maintenance operations. This was partially offset by a decrease of $894 due
to the transfer of one of the Company's child care centers to PSI, as discussed
above. The increase in depreciation expense is primarily due to the deferral of
$33,477 in lease payments payable under the PSI Agreement. These increases were
partially offset by decreases in other costs, such as auto expenses and taxes.
General and administrative expenses for the first quarter of fiscal 1996
were $311,451 (12.8% of operating revenue), an increase of $19,040, or 6.5%,
from general and administrative expenses of $292,411 (11.5% of operating
revenue) during the first quarter of fiscal 1995. This increase was due in part
to expenditures related to developing the Company's strategic growth and
acquisition plans, as well as small increases in other general and
administrative costs; partially offset by a decrease of $7,639 due to the
transfer of one of the Company's child care centers to PSI.
Net income for the first quarter of fiscal 1996 was $71,700 ($0.02 per
share) compared to $245,721 ($0.10 per share) for the first quarter of fiscal
1995, which was the most profitable first quarter in the Company's history. This
decrease
20
<PAGE> 23
is primarily due to the deferral of approximately $95,000 in payments payable
under the PSI Agreement and a decrease in the enrollments and operating results
at one of the Company's centers.
FISCAL YEAR ENDED JULY 31, 1995, COMPARED TO FISCAL YEAR ENDED JULY 31, 1994
As a result of the transfer of a portion of the Company's operations to
PSI effective February 1, 1994, the Company has used the pro forma financial
statements set forth below for fiscal 1994, as adjusted as if the PSI Agreement
was in effect as of August 1, 1993, as the basis for the comparison of operating
results. See Note 3 of Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
Year Ended July 31,
------------------------------------------------
1995 1994 (Pro forma)
----------------------- -----------------------
% of % of
Dollars Revenue Dollars Revenue
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
Operating revenue .............. $ 9,715,023 100.0% $ 9,662,959 100.0%
----------- ----- ----------- -----
Operating expenses:
Payroll ..................... 4,730,962 48.7 4,869,501 50.4
Facilities and maintenance .. 2,975,916 30.6 2,825,368 29.2
General and administrative .. 1,396,660 14.4 1,288,940 13.3
----------- ----- ----------- -----
Total operating expenses ....... 9,103,538 93.7 8,983,809 92.9
----------- ----- ----------- -----
Income from operations ......... 611,485 6.3 679,150 7.1
Other income (expense) ......... (24,633) (0.3) (53,273) (0.6)
----------- ----- ----------- -----
Income before income taxes ..... 586,852 6.0 625,877 6.5
Income tax benefit ............. 220,000 2.3 475,358 4.9
----------- ----- ----------- -----
Net income ..................... $ 806,852 8.3% $ 1,101,235 11.4%
=========== ===== =========== =====
</TABLE>
Operating revenue for fiscal 1995 was $9,715,023, an increase of $52,064
or .5% over pro forma operating revenue of $9,662,959 during fiscal 1994. The
increase was due primarily to a moderate tuition increase during the year,
along with slightly higher enrollment levels during fiscal 1995.
Operating expenses for fiscal 1995 were $9,103,538 (93.7% of operating
revenue), an increase of $119,729 or 1.3% from pro forma operating expenses of
$8,983,809 (92.9% of operating revenue) during fiscal 1994. This increase was
due to an increase in facilities and maintenance costs and general and
administrative expenses, partially offset by a decrease in payroll expense.
Payroll expense for fiscal 1995 was $4,730,962 (48.7% of operating
revenue), a decrease of $138,539 or 2.9% from pro forma payroll expense of
$4,869,501 (50.4% of operating revenue) during fiscal 1994. This decrease
reflects the continuing benefit of changes made during the third quarter of
fiscal 1994 which included more efficient scheduling of personnel at the
schools, attrition and the elimination of several positions at the corporate
level. This decrease also reflects the Company's decision, in May 1995, to
outsource its maintenance operations. Accordingly, the Company now pays a
monthly fee for maintenance services, which is included in facilities and
maintenance costs, rather than paying for staffing directly as part of payroll
expense. This resulted in a decrease in maintenance department salaries of
approximately $14,000.
Facilities and maintenance costs for fiscal 1995 were $2,975,916 (30.6%
of operating revenue), an increase of $150,548 or 5.3% from pro forma facilities
and maintenance costs of $2,825,368 (29.2% of operating revenue) during fiscal
1994. This increase is primarily due to an increase of $75,775 in depreciation
expense as a result of the purchase of additional assets (primarily vans) during
the year. The other significant increases in facilities and maintenance costs
were in rent expense, which increased $72,832 due to moderate rent increases at
several schools; and in maintenance service costs, which increased $14,000 due
to the Company's decision, in May 1995, to outsource its maintenance operations.
These increases were partially offset by small decreases in other costs, such as
utilities, security services and auto leases.
General and administrative expenses for fiscal 1995 were $1,396,660
(14.4% of operating revenue), an increase of $107,720 or 8.4% from pro forma
general and administrative expense of $1,288,940 (13.3% of operating revenue)
during fiscal 1994. The increase is primarily the result of the $176,500
writedown of amounts receivable from PSI discussed above, the write-off of a
receivable on building space subleased by the Company to an unrelated third
party and slightly higher write-offs of receivables at certain schools. These
increases were offset by decreases in the following areas: professional fees
decreased $45,386 due to nonrecurring costs incurred in fiscal 1994 such as
legal fees incurred as a result of pursuing additional business opportunities,
temporary professional help and computer consulting fees related to a computer
conversion; advertising (including yellow pages, promotions and media costs)
decreased by $32,818, travel and entertainment expenses decreased by $18,119,
and other areas, such as supplies and bank charges, experienced moderate
declines.
Other income for fiscal 1995 increased $13,231 from fiscal 1994 due to
gain on sale of fixed assets, primarily vans, traded in during the year. Net
interest expense decreased $15,409, partially
21
<PAGE> 24
due to higher interest income and partially due to lower interest expense
resulting from lower average interest rates on the Company's notes payable and
capital leases.
Net income for the year ended July 31, 1995 was $806,852 ($0.29 per
share) compared to pro forma net income of $1,101,235 ($0.42 per share) for the
year ended July 31, 1994. This decrease is due to a reduction in the income tax
benefit, from $475,358 in fiscal 1994 to $220,000 in fiscal 1995, as well as a
slight decline in income from operations due to a $176,500 write-down of the
receivable due from PSI.
DEFERRED TAXES
SFAS 109 requires that deferred tax assets and liabilities be recorded to
reflect the differences between the financial statement and tax bases of assets
and liabilities at the tax rates in effect when these differences are expected
to reverse. Deferred tax assets are reduced by a valuation allowance if, based
on the weight of available evidence, it is more likely than not that the
deferred tax assets will not be realized.
At July 31, 1994, it was determined that the valuation allowance should
be reduced by $475,358. At July 31, 1995, it was determined that the valuation
allowance should be reduced by an additional $220,000. These determinations were
based primarily on the improvement in the Company's net income over the past
four fiscal years, particularly during fiscal 1994 and 1995. In addition, the
Company's net operating loss carryforwards, which comprise 64% of the Company's
total deferred tax assets at July 31, 1995, do not expire until 2004-06.
Accordingly, management believes that it is more likely than not that the
Company will generate sufficient taxable income to realize these future tax
benefits. The changes in the valuation allowance resulted in the Company
realizing an additional deferred tax asset of $220,000 at July 31, 1995, and
income tax benefits totaling $220,000 during fiscal 1995. The Company did not
record any additional income tax benefit in the quarter ended October 31, 1995.
If the Company is unable to generate sufficient taxable income in the
future through operating results, increases in the valuation allowance will be
required through a charge to expense. If, however, the Company achieves
sufficient profitability to use all of the deferred tax assets, the valuation
allowance will continue to be reduced and reflected as an income tax benefit in
future periods.
SEASONALITY AND QUARTERLY RESULTS
The following table reflects certain selected unaudited quarterly
operating results for the first quarter of fiscal 1996, each quarter of fiscal
1995 and certain selected unaudited pro forma quarterly operating results for
each quarter of fiscal 1994. The operating results of any quarter are not
necessarily indicative of results of any future period.
22
<PAGE> 25
<TABLE>
<CAPTION>
Quarter Ended
Oct. 31 Jul. 31, Apr. 30 Jan. 31, Oct. 31, Jul. 31, Apr. 30, Jan. 31, Oct. 31,
1995 1995(1) 1995 1995 1994 1994 1994 1994 1993
------- -------- ------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue...... $ 2,436 $ 2,367 $ 2,515 $ 2,311 $ 2,522 $ 2,372 $ 2,559 $ 2,252 $ 2,480
Operating expenses..... (2,356) (2,480) (2,214) (2,138) (2,272) (2,208) (2,190) (2,198) (2,388)
Income (loss)
from operations...... 79 (113) 301 173 250 164 369 54 92
Income (loss) before
income taxes......... $ 71 $ (127) $ 293 $ 174 $ 247 $ 146 $ 360 $ 41 $ 79
</TABLE>
__________________
(1) The loss in the fourth quarter of fiscal 1995 is due to a $176,500
write-down of the receivable due from PSI. See Note 3 of Notes to
Consolidated Financial Statements.
The Company's operations are subject to seasonal fluctuations in
summer months and around certain major holidays. These fluctuations have
resulted in lower occupancy levels and lower operating results in the second
and fourth fiscal quarters and higher occupancy levels and operating results in
the first and third fiscal quarters.
TRENDS
The Company reported its fourth consecutive profitable year in fiscal
1995. The operating results in the first quarter of 1996 and in fiscal 1995
continue a trend that began in the third quarter of fiscal 1994. The first
quarter of fiscal 1996 was the second most profitable first quarter in the
Company's history (based on historical operating results). School enrollments,
while remaining strong, were slightly lower in the first quarter of fiscal 1996
than in the first quarter of fiscal 1995. Management believes that continuing
strong enrollments should continue to have a positive effect on the Company.
However, there can be no assurance that such trends will continue.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the three months ended
October 31, 1995 and for the year ended July 31, 1995 was $151,645 and $655,538,
respectively, which was sufficient in each period to meet the normal operating
requirements of the Company. Due to the purchase of $208,200 in property and
equipment during the first quarter of fiscal 1996 for cash, working capital
decreased by $95,641, from $210,600 at July 31, 1995 to $114,959 at October 31,
1995. Due to the Company's continuing profitable operations and the proceeds
from the exercise of warrants for the purchase of 500,000 shares of the
Company's common stock, working capital at July 31, 1995 was $210,600, a
$711,484 improvement from a deficiency of $500,884 at July 31, 1994.
Net cash used in investing activities for the first quarter of fiscal
1996 was $275,103, consisting of purchases of property and equipment totaling
$283,103, offset by $8,000 in proceeds from disposals of property and
equipment. Net cash used in investing activities for the year ended July 31,
1995 was $300,986, consisting of purchases of property and equipment totaling
$354,308, offset by $53,322 in proceeds from disposals of property and
equipment.
[/R]
23
<PAGE> 26
Net cash provided by financing activities for the three months ended
October 31, 1995 was $119,362, consisting of additional borrowings of $154,903
offset by repayments of notes payable and capital leases of $35,541. Notes
payable and capital leases increased from $566,020 at July 31, 1995 to $605,382
at October 31, 1995, an increase of 7.0%. The additional borrowings consisted of
notes payable for the purchase of three vehicles and an $80,000 drawdown on the
Company's working capital line of credit. Net cash provided by financing
activities for the year ended July 31, 1995 was $124,978, consisting of $466,185
net proceeds from the exercise of warrants to purchase the Company's common
stock and additional borrowings of $254,192, offset by an increase of $335,253
in the receivable from PSI, and repayments of notes payable, capital leases and
the working capital line of credit. Notes payable and capital leases increased
from $449,740 at July 31, 1994 to $566,020 at July 31, 1995, an increase of 25%.
The additional borrowings consisted of notes payable for the purchase of ten
vehicles and capital leases for equipment.
Dividends payable on preferred stock as of October 31, 1995 and July
31, 1995 were $278,333 and $265,333, respectively, as reflected in the
accompanying Consolidated Balance Sheets.
The Company is current on all principal and interest payments on its
notes payable and capital leases. In January 1995, the Company replaced its
$50,000 bank line of credit and its $50,000 line of credit from the Company's
president with three new bank lines of credit: (i) a $200,000 working capital
line secured by the Company's accounts receivable, which bears interest at
prime plus 1.75%, (ii) a $200,000 line of credit for the purchase of equipment
secured by the Company's equipment, which bears interest at prime plus 2% and
(iii) a $100,000 revolving line of credit for the purchase of vehicles secured
by the vehicles financed through this line, which bears interest at prime plus
2%. These lines of credit are renewable each year on December 31. As of
October 31, 1995, the balance on the working capital line was $80,000. As of
October 31, 1995 there were no borrowings under the equipment line. Borrowings
under the vehicle line consisted of $100,000 in drawdowns which were then
converted to five year notes payable.
The Company currently expects that it will be able to renew the lines
of credit under similar terms upon their maturity. However, if these lines of
credit are not renewed, there is no assurance that they can be replaced. If
the Company were unable to renew or replace these lines of credit and was then
unable to repay any outstanding balance, the bank could foreclose on the
collateral.
The Company entered into a letter of intent for a $5 million, firm
commitment public offering of a new series of convertible preferred stock in
October 1995, which is the subject of this Prospectus. The offering is
presently scheduled to be completed in December 1995. The primary purpose
of the offering is to provide funds for the expansion of the Company's
preschool operations, both through the opening of additional Company facilities
and the possible acquisition of other child care centers.
Management believes the Company's operations will generate sufficient
cash flow to satisfy the needs at its existing schools for the next twelve
months. However, alternative sources of capital
24
<PAGE> 27
will be necessary in order for the Company to finance its current expansion
plans. See "BUSINESS -- Expansion" for discussion of the Company's expansion
plans.
IMPACT OF INFLATION
Inflation has had no material effect on the Company's operations or
financial condition.
25
<PAGE> 28
BUSINESS
GENERAL
Sunrise Preschools, Inc. operates a chain of premium quality child
care centers that offer comprehensive child care services primarily for
children ages six weeks to twelve years. The Company operates 29 child care
centers in Arizona, Colorado and Hawaii. Enrollment on November 30, 1995 was
approximately 2,700 children and the aggregate licensed capacity of the
Company's child care centers was 3,723 children. The licensed capacity of each
of the Company's child care centers can fluctuate from time to time due to
changes in the center's configuration and changes in the age mix of the
children enrolled. The Company offers both full and half-day programs, as well
as extended hours at two of its facilities including 24-hour care at one
location.
The Company's strategy is to be a comprehensive provider of high
quality child care services in demographically desirable markets. The Company
intends to pursue this strategy by acquiring individual centers and small
chains of community-based centers, by promoting and developing employer
sponsored and other partnership child care programs and by assuring that its
child care centers have high quality facilities and equipment as well as
innovative learning programs. Due to the fragmented nature of the child care
industry, the Company believes that it has many opportunities to pursue its
strategy of acquiring individual centers and small chains of community-based
centers.
The Company differentiates itself from other child care providers by
offering a comprehensive curriculum that incorporates innovative learning
techniques and programs and by offering its patrons modern facilities and
equipment. The Company's education-based programs emphasize the use of
learning centers to enhance the child's development. The programs are designed
to appeal to parents who consider education and development, rather than
custodial care, as being most important in choosing a child care facility. In
addition to the regular learning programs, all of the Company's child care
centers offer computer-based learning programs using state-of-the-art software
and a number of extra-curricular programs such as gymnastics, piano lessons and
aquatic activities. Upon acquisition of new child care centers, the Company
intends to implement its learning programs and curriculum and, if necessary,
update and modernize the equipment and facilities of the acquired centers. The
Company believes that such programs and strategies contribute significantly to
its revenues.
The Company's strategic emphasis on child development and learning
programs are geared toward modern attitudes about child care. Surveys show
that working mothers believe that their children benefit from center-based
child care because it is educational, contributes to child development and
builds social skills. Surveys also show that working mothers believe that
one-on-one child care is of lesser educational value than group care.
THE CHILD CARE INDUSTRY
There are two primary types of child care: center-based and
home-based. Center-based care is provided by churches, nonprofit and
for-profit entities that provide a wide variety of services ranging from
custodial care to comprehensive preschool curricula. Home-based care is much
less uniform than center-based care. There is usually greater dependence on
the availability of and training by one or only a few adults, and facilities
are less likely to be customized to the needs of children. Payment for child
care services may be made completely by parents or subsidized in whole or in
part by others, including governmental programs, employers and nonprofit
churches or community groups.
26
<PAGE> 29
The for-profit child care market segment is highly fragmented, due to
the large number of facilities offering child care services. Revenues for the
for-profit child care market are estimated to be about $9 billion, based on a
licensed capacity estimated at 3.5 million. The largest 50 for-profit child
care providers are estimated to account for only 11% of industry revenues and
it is estimated that there are more than 76,000 for-profit providers of child
care in the United States. Based on its licensed capacity, the Company
believes it ranks among the largest forty providers of child care services in
the country.
[GRAPHIC DESCRIPTION]
A pie chart depicting the for-profit child
care market that is large and fregmented
showing that the top 50 chains account for
only 11% of the market, with small operators
accounting for about 89% of the market.
DEMOGRAPHIC TRENDS
The for-profit child care market segment has grown substantially in
the last 20 years. Prior to that time, child care was provided almost
exclusively through in-home care, church-sponsored and other local nonprofit
facilities. Demand has increased for additional child care facilities as the
result of increasing numbers of single parents, dual income families and the
increasing use by many parents of quality child care programs for the
educational and developmental benefit of their children. This demand is
somewhat seasonal, with slightly lower enrollment levels typically experienced
during July and August, as well as around holidays, such as Christmas.
National and regional chains and other independent for-profit child care
centers compete to meet these needs.
In recent years, a number of national demographic trends have
significantly increased the demand for the Company's services. According to
the United States Bureau of the Census, in 1989 (for the first time since 1964,
the final year of the "baby boom") and again in 1990, 1991 and 1992, the number
of babies born in the United States surpassed four million. From 1980 to 1990,
the number of children under age five increased 13% and the number of children
ages five through nine increased 7%. In addition, there has been an increase
in the number of mothers in the workforce that have children ages three to five
years, which has increased from 45% in 1978 to 53% in 1992. The number of
women of child-bearing age in the work force has also increased in recent
years. In light of the industry trends, the Company believes that demand for
use of center-based educational and developmental programs of the type provided
by the Company will continue to grow.
27
<PAGE> 30
[GRAPHIC DESCRIPTION]
A graph depicting the percent of mothers of
preschool age children who work from 1970
through 1990. In 1970, 30% of mothers with
preschool age children worked, in 1980, 47%
worked and in 1990, 59% worked.
[GRAPHIC DESCRIPTION]
A graph depicting the labor force participation
of women of child-bearing age that starts with
41 million in 1990, increases to an estimated
43 million for 1995 and to an estimated 44 million
in the year 2000.
Source: U.S. Bureau of Labor Statistics
CHILD CARE CENTER OPERATIONS
Consistent with the Company's strategic emphasis on high quality child
care, the Company's operations are designed to appeal to parents who want
innovative learning programs emphasizing child development offered in modern
facilities. The Company's approach to its operations includes the following
concepts:
FACILITIES -- Facilities are designed with a number of
features that promote an optimal atmosphere for child development, as
well as efficient adult child interaction and observation. The
Company's child care center design incorporates individual classrooms
and provides a quiet atmosphere within each classroom while still
allowing free movement from activity to activity.
28
<PAGE> 31
An abundance of windows gives the facility an open, airy and clean
appearance. Most of the Company's child care facilities have
observation rooms for parents to view their children's participation
in the daily activities without interruption. Bathrooms are adjacent
to each classroom for easy access and safe monitoring of children.
Many facilities have video cameras in each classroom that are
monitored on a continual basis at the front office. Licensed capacity
of the Company's child care centers ranges from 12 to 249 children,
although in some centers actual enrollment may be higher because some
children are enrolled on a part-time basis.
PLAYGROUNDS -- All playgrounds consist of areas with equipment
such as wheeled toys and climbing apparatus to help children develop
their large muscle skills. Playgrounds are divided between younger
and older children. Sandy areas are available, as are swings, slides,
balancing and other play equipment.
PROGRAMS -- The Company believes in a developmental approach
to learning in which each classroom is arranged with learning
stations, or centers, that are designed to help children think,
communicate and create. A wide variety of learning materials and
equipment, including at least two computers per center, are available
to the children. Field trips in the Company's vans are used to
enhance the programs. The Company also provides various full-day and
half-day programs, including ballet, computer, piano and gymnastics
lessons and, during the summer, swimming and related aquatic
activities.
AVAILABILITY -- The Company recognizes that the parents of
enrolled children have varying child care needs. Parents may enroll
their children for any mix of days per week with a minimum of two days
per week. Most of the Company's child care centers are open from 6:00
a.m. to 6:30 p.m., five days per week, all year, except on major
holidays. The Company also offers extended care at two of its
facilities, including 24-hour, seven days a week service at one
facility. Parents may visit their child's facility at anytime during
operating hours. Each child care facility regularly conducts parents'
nights, during which parents can discuss the progress of their
children with the staff, watch their children perform or hear
professionals in the child care field speak on relevant subjects.
MANAGEMENT -- Each child care facility is operated as a unit
under the supervision of a director assigned to that facility. The
director is responsible for hiring teachers, organizing and monitoring
programs, supervising all records and regulatory compliance,
collecting tuition, marketing and corporate office reporting.
Directors are paid a monthly salary plus a bonus based on several
factors, including enrollment levels and profitability of the child
care facility.
CURRICULA AND PROGRAMS
The Company believes that a developmental approach to learning is
essential to positive growth in children. Children are grouped within each
center by age and developmental level. The following programs are offered by
the Company:
INFANTS -- The infant program is available on a full-time and,
in some cases, a part-time basis, and includes various developmental
activities designed to foster visual perception and motor development.
29
<PAGE> 32
TODDLERS -- The toddler program includes a variety of
developmental activities such as wet and dry tables, blocks and dolls.
Development of social skills, gross motor skills and language skills
is emphasized in the toddler program.
PRESCHOOLERS -- The curriculum features pre-reading skills and
other activities to prepare children for school. Learning centers are
available in each classroom to expose children to art, music, science,
sensory development, woodworking, math and language. In addition, the
program includes daily individual and group activities designed to
stimulate and enhance motor skills and physical development.
SCHOOL AGE CHILDREN -- The Company provides a before and after
school program for children who are of primary school age. The
Company offers to transport children in Company vans to the
neighborhood schools in the morning, and back to each of the Company's
child care centers in the afternoon. A portion of each day is set
aside to help the children with homework from their schools. In
addition, this program includes arts and crafts projects, field trips,
dance and gymnastics classes, physical activities, group sports and
computers. When neighborhood schools are closed for certain holidays
or summers, these children can become full-time students.
SUMMER -- In an effort to increase enrollment in the summer
months, the Company modifies its preschooler and school-age programs
during the summer. The programs are enhanced with additional field
trips and other optional activities. Historically, the Company has
experienced a decrease in revenues during the summer months, which the
Company believes is typical in the child care industry.
OPTIONAL PROGRAMS -- The Company offers special programs for
children whose parents seek more specialized activities. Through
cooperative efforts with outside organizations, such as the
internationally recognized Desert Devils Gymnastic Club, in the
Phoenix metropolitan area, the Company offers special gymnastics and
other classes for children ages three and up. Specialized gymnastics
equipment has been installed on site at most of the Company's Arizona
child care centers, and all of the classes are taught by
professionally trained staff.
The Company also has contracted with Whiz Kids Computer
Academy, an Arizona corporation, to offer sophisticated,
computer-based, educational classes on site to children ages three and
up utilizing highly trained teachers and state-of-the-art software.
Other special programs are offered by the Company including ballet,
swimming, piano and karate. Presently, all of these special programs,
for which an additional fee is charged, account for a small percentage
of the monthly revenue at each child care center; however, the Company
continues to expand and market these programs to seek additional
student participation and increased revenue.
SPECIAL NEEDS PROGRAM -- Since July 1987, the Company has been
awarded an annual contract from the Division of Developmental
Disabilities of the Arizona Department of Economic Security to provide
a goal-oriented training program for and to integrate mild to severely
handicapped children in child care centers. In September 1991, the
Company was approved to be a private provider of special education
preschool programs and related services by the Arizona Department of
Education. Since June 1991, the Arizona Department of Economic
Security, as administrator of a child care block grant, has awarded
the Company an annual contract to deliver child care to families with
special needs children. These contracts have been renewed through
June 1996.
30
<PAGE> 33
TUITION
The Company determines tuition charges based upon a number of
factors including age of child, number of days and hours of
attendance, location and competition. Part-time students are charged
proportionately higher rates than full-time students. The Company's
current weekly charges for full-day service range from $85 to $142 per
child, depending on the location of the center and the age of the
child. Tuition is generally collected on a weekly or monthly basis in
advance. For the first quarter of fiscal 1996, the Company's average
weekly tuition rate was $97. For the fiscal years ended July 31,
1995, 1994 and 1993, the Company's average weekly tuition rate was
$97, $94 and $92, respectively. The average weekly tuition rate is
the average basic public tuition rate for full-time four year old
children at all centers (other than centers operated on a management
fee basis).
MARKETING
The Company targets a market consisting primarily of parents having
above average incomes and education. According to the United States Bureau of
the Census, families earning over $45,000 a year are twice as likely as
families with incomes below $20,000 to enroll their children in child care
centers. Based on a survey by the Company of its participating parents, the
Company believes that over 50% of the families of enrolled children have annual
incomes exceeding $50,000. The Company uses demographic studies to locate its
campuses in geographic areas consistent with the Company's target market. The
Company's primary sources of new enrollments have been from distribution of
promotional material in residential areas surrounding a child care facility in
conjunction with its opening, referrals from satisfied parents, yellow-page
advertising and traffic exposure. For existing child care facilities the
Company also advertises through direct mail, newspaper, telemarketing and by
participating in community child- related events. The advertising campaign
focuses primarily on summer promotion to enhance each fall's enrollment. For
the first quarter of fiscal 1996, the Company's average percentage occupancy
was 73.6%. For the fiscal years ended July 31, 1995, 1994 and 1993, the
Company's average percentage occupancy was 76.7%, 78.3% and 78.8%,
respectively. The average percentage occupancy is calculated by dividing the
operating revenues for all of the Company's centers (other than centers
operated on a management fee basis) for the respective periods by the product
of (i) licensed capacity for all of the Company's centers (other than those
operated on a management fee basis) and (ii) the average of the basic tuition
rate for full-time four year old children at all such centers for the
respective periods based on 50 weeks of attendance per year.
EXPANSION
The Company's initial growth was achieved primarily through developing
and constructing its own facilities. During fiscal 1994, the Company expanded
its child care operations by opening four additional sites through cooperative
efforts with various outside parties. One additional site was also opened in
fiscal 1995. These ventures required a minimal capital investment by the
Company while expanding its licensed capacity by approximately 165 children.
The Company intends to use a portion of the proceeds of this offering
to open new child care centers. In addition, the Company will actively
consider acquiring established child care centers operated in the southwestern
United States, as well as in other geographic areas. The Company intends to
acquire established child care centers by purchasing the assets of such centers
from third parties and paying the purchase price of such assets in a
combination of cash and notes. Long-term growth opportunities will also come
from build-to-suit opportunities, where child care facilities can be developed
as an amenity to an overall project or as stand-alone facilities constructed by
the Company. With regard
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<PAGE> 34
to build-to-suit opportunities, the Company currently intends to contract with
an unrelated third party to develop and construct child care centers based on
the Company's specifications. The Company will then lease such child care
centers from the third party. Additional long-term growth opportunities will
continue to come from partnership and contract child care programs that provide
relatively low risk expansion opportunities. The Company will also continue to
evaluate opportunities related to employer centers and developer-assisted
programs as they arise.
Consistent with its acquisition strategy, on November 1, 1995, the
Company acquired the operations of two child care centers in Colorado, which
have an aggregate licensed capacity of 238 children. PSI also recently entered
into a partnership child care arrangement with a church in the Milwaukee,
Wisconsin area pursuant to which PSI will assume the operations of a child care
center with a licensed capacity of approximately 100 children for the church.
The Company will operate the child care center for PSI pursuant to the PSI
Agreement. See "CERTAIN TRANSACTIONS."
From time to time, the Company may decide to close one or more child
care centers and contracts relating to centers operated for third parties may
expire or be terminated by the third party. In fiscal 1995, one contract for a
child care center with a licensed capacity of 24 children expired and was not
renewed. The Company continually monitors the enrollment levels at its child
care centers and the long-term prospects of the geographic areas in which its
child care centers operate. If the Company determines that the operations of
two or more child care centers could be consolidated to operate more
efficiently, it may from time to time consolidate the operations of two or more
child care centers, which may result in the closing of one or more child care
centers.
EMPLOYER CHILD CARE PROGRAMS
Increasing numbers of employers are offering child care benefits to
their employees. To increase enrollment, the Company has capitalized on this
trend by actively pursuing contracts with various employers through its
Employer Child Care ("ECC") programs. The Company's ECC programs are tailored
to meet each employer's particular needs. The Company may also contract to
operate a child care center constructed by an employer for its exclusive or
semi-exclusive use. The Company also offers assistance to employers in
marketing their programs to employees and encourages the employers to subsidize
tuition costs and to implement programs that enable their employees to realize
available federal tax benefits. The Company instituted its first ECC program
in May 1987 and has consistently added employer participants since that time.
Among the corporations that have ECC programs with the Company are America West
Airlines and American Express. For the first quarter of fiscal 1996, revenues
received from ECC programs, including revenues received from employers, as well
as employees, represented 44% of the Company's total operating revenues.
For the fiscal years ended July 31, 1995, 1994 and 1993, revenues from ECC
programs, including revenues received from employers as well as employees,
represented 45%, 41% and 35%, respectively, of the Company's total operating
revenue.
One of the more innovative ECC programs, although not the largest, is
the Child Development and Family Studies Laboratory ("CDFSL"). The CDFSL is a
research, teaching and community service facility at the Arizona State
University West Campus ("ASU West") in Phoenix, Arizona, which has a licensed
capacity of 58 children. The laboratory provides a program for parents and
children to participate in interesting projects for observational research. As
part of their educational training,
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<PAGE> 35
students attending ASU West are permitted to observe the interaction of children
in a combined environment of child care and teaching. An advanced program has
been developed using lower teacher to child ratios than is required. The
program is available to faculty, staff and students of ASU West and to the
general public if space permits.
PARTNERSHIP CHILD CARE PROGRAMS
One strategic focus of the Company is to increase its enrollment
levels through various partnership arrangements with third parties, including
churches and health clubs. Typically, these partnership arrangements involve
an agreement by the Company to operate a child care center at facilities owned
by the third party. The Company and the third party share the operating risks
of the child care centers and share any profits generated by the centers. The
child care centers are open to the general public. Because the third party
provides the facilities for the child care center, these partnership programs
provide the Company with an opportunity to increase its enrollment with only a
minimal capital investment.
Some of the Company's partnership activities are undertaken in
connection with PSI, a nonprofit corporation. Because of PSI's nonprofit
status, PSI is eligible to receive certain grants and subsidies. PSI typically
enters into agreements with third parties to establish child centers or assume
the operations of existing child care centers and then contracts with the
Company to operate the child care centers in exchange for a management fee.
Profits generated by the entities are shared by PSI and the third party. See
"CERTAIN TRANSACTIONS."
Currently, the Company operates five child care centers based on
partnership arrangements with various third parties, including PSI. The total
licensed capacity of these child care centers is 396 children.
CONTRACT CHILD CARE PROGRAMS
In contrast to child care partnership arrangements, which are
characterized by a sharing of profits and operating risks, the Company also
operates child care centers on a contract basis. Pursuant to the contractual
arrangements, the Company is reimbursed for its expenses and paid a
predetermined fee for operating the child care centers. The contract
arrangement typically provides for the Company to operate a child care center
at a site provided by the third party, which requires only a minimal capital
investment by the Company.
In January 1993, the Company opened its first four contract child care
facilities in conjunction with a high school district in Phoenix. The child
care centers are located on various high school campuses and provide child care
services for the children of at-risk teen parents enrolled in the district's
schools. During fiscal 1994, this contract with the district was expanded to
cover three additional centers. The total licensed capacity of the seven
centers is 101 children.
COMPETITION
The child care industry is highly competitive, with Phoenix, Arizona
being one of the most competitive markets in the United States. In the
geographic areas in which the Company operates, the Company competes with
centers owned by national chains such as Ultra Child Care/Mary Moppets,
Kinder-Care Learning Centers, Inc., Children's World Learning Centers, Inc.,
Palo Alto Preschools/Child Time and La Petite Academy, Inc., as well as child
care centers owned by nonprofit
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<PAGE> 36
organizations that may be supported to a large extent by endowments, charitable
contributions and other forms of subsidies. In addition, the Company competes
with individually owned proprietary child care centers, licensed child care
homes, unlicensed child care homes, public schools, the YMCA and businesses that
provide child care for their employees at the work place. See "RISK FACTORS."
The Company believes that competition in the child care industry is
based on a variety of factors:
QUALITY OF FACILITIES, STAFF AND PROGRAMS. A significant
competitive factor is the extent to which programs broader in scope
than custodial care are provided. The Company offers extensive
educational and developmental programs which are broader in scope than
those offered by many of its competitors. See "BUSINESS -- Curricula
and Programs."
COSTS. Due to the extensive curriculum and program offerings,
the Company's tuition is generally higher than that of its
competitors. For parents who choose child care facilities based on
cost alone, the Company has difficulty competing.
LOCATION. The location and convenience of the child care
center to the parent is very important. The Company's child care
centers are generally located in or near middle to upper income
residential areas, and are intended to be convenient for the market
segment targeted for enrollment.
OTHER FACTORS. Other competitive factors include size and
design of the facilities, parents' religious preferences, availability
of in-home or school-sponsored services, hours of operation and
operating and educational philosophies.
The Company competes favorably within the industry and is one of the
largest providers of child care in both Arizona, Colorado and Hawaii. The
Company's enrollment levels are at or above industry averages.
INSURANCE
The Company has not had any material claims against its liability
insurance; however, the Company, as well as other child care providers, has had
difficulty obtaining adequate liability insurance coverage at reasonable rates
for child physical and sexual abuse. The Company has comprehensive general
liability insurance with a limit of $1,000,000 per occurrence and $2,000,000
aggregate per location, including $250,000 coverage for child physical and
sexual abuse. It also has insurance coverage for automobile liability, with a
per occurrence limitation of $1,000,000. In addition, the Company has a
$5,000,000 umbrella policy to cover claims in excess of the per occurrence
limitation on the general liability policy. See "RISK FACTORS."
GOVERNMENT REGULATION
Operators of child care centers are subject to a wide variety of state
and local regulations and licensing requirements, including site inspection for
safety and compliance with building codes, review of programs and facilities,
ratio of staff to the number of attending children, health standards (including
food service) and zoning. Each child care center must be licensed by the
appropriate state and local authorities before it may begin operations. The
Company believes that each of its child care centers is in compliance, in all
material respects, with such requirements. No proceedings to suspend or revoke
any of the Company's licenses have been instituted. Compliance with government
regulations increases
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<PAGE> 37
the Company's operating costs; however, these costs are generally offset by
increases in tuition. No significant changes in government regulations are
expected in the next twelve months. See "RISK FACTORS."
CHILD CARE INCOME TAX BENEFIT
The Internal Revenue Code of 1986, as amended, provides an income tax
credit ranging from 20% to 30% for parents for certain child care expenses,
subject to certain maximum limitations and income levels. Under present law, the
fees paid to the Company by working parents qualify for the federal tax credit.
In addition, many families also benefit from flexible spending plans that permit
families to pay a portion of their child care expenses with pre-tax income.
SERVICE MARK
"Sunrise Preschools" and the logo associated with the name are
federally registered service marks of the Company that expire in February 2007.
Management believes that the Company's service marks provide adequate
protection against unauthorized use of its name and logo.
EMPLOYEES
Individual child care centers are staffed with a director, one
assistant director, teachers and teacher assistants. All personnel participate
in periodic in-service and external training programs and are required to meet
applicable state and local regulatory standards.
Each of the Company's child care centers is operated as a unit under
the supervision of a director assigned to that child care center. The director
is responsible for hiring teachers, organizing and monitoring programs,
supervising all records and regulatory compliance, collecting tuition,
marketing and corporate office reporting. The Company conducts an in-house
"LIT" (Leadership-in-Training) program designed to instruct and motivate
existing personnel for a future management position at a Sunrise Preschool.
All center personnel are carefully monitored to ensure compliance with
current state regulations regarding age, experience and educational
requirements. The background check of prospective employees includes a
fingerprint check with the Federal Bureau of Investigation. To date, the
Company has not experienced any difficulty in attracting and retaining
qualified personnel, but there can be no assurance that the Company will be
able to continue to attract and retain qualified personnel. See "RISK FACTORS
- -- Dependence on Key Personnel".
As of November 11, 1995, the Company employed approximately 463
persons, approximately 11 of which were employed in the corporate office and
approximately 452 of which (including 72 part-time employees), were employed at
the Company's child care centers. All management and supervisory personnel are
salaried; substantially all other employees are paid on an hourly basis. The
Company provides partial child care benefits for its employees in addition to
partial payment of medical and dental insurance premiums.
None of the Company's employees are represented by a union, and the
Company does not anticipate any union organization activities among its
employees.
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<PAGE> 38
PROPERTIES
Of the 29 child care centers operated by the Company in Arizona, Colorado
and Hawaii, 16 are leased with terms expiring on various dates between 1995 and
2009. Two of these centers, in turn, are subleased to PSI. The building leases
generally include option renewal periods of 3 to 25 years at the Company's
discretion and the option to purchase the leased facilities. The aggregate
monthly lease payments on the 16 centers (net of monthly sublease income of
approximately $2,300) total approximately $195,000. Each of the leases contains
provisions for lease payment increases based on the Consumer Price Index or
other similar formulas. The Company is generally responsible for taxes,
insurance, maintenance and other expenses related to the operation of the leased
facilities. The lessors are unaffiliated third parties who purchased the centers
either from affiliates of the Company or from its former wholly owned
subsidiary, Sunrise Holdings, Inc. The remaining 13 facilities are operated
pursuant to various agreements with outside agencies. The Company pays no rent
at any of these facilities. See "BUSINESS -- Employer Child Care Programs,"
"Partnership Child Care Programs" and "Contract Child Care Programs."
The Company's principal executive offices are leased and located in
approximately 4,700 square feet in Scottsdale, Arizona. The Company believes
that its headquarters facility is adequate for operations for the foreseeable
future.
The following page sets forth certain information regarding the location
and opening dates of the Company's child care centers.
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<PAGE> 39
SUNRISE PRESCHOOL LOCATIONS
Listed by Year Opened:
<TABLE>
<CAPTION>
<S> <C> <C>
1982 1988 1994
Mesa, Arizona Chandler, Arizona Phoenix, Arizona(2)
2045 South Pennington 550 West Warner Road 3333 West Roosevelt
602-839-2091 602-899-8661
[GRAPHIC DESCRIPTION]
1984 Gilbert, Arizona
1540 North Burk Street A graphic depicting the State of
Tempe, Arizona 602-497-5260 Hawaii and showing a total of five
5301 South McClintock centers on the island of Oahu.
602-820-1861 1989
1995
1986 Phoenix, Arizona
4111 East Ray Road Flagstaff, Arizona(1)
Peoria, Arizona 602-759-4098 3475 East Soliere Avenue
6702 West Cholla 520-527-3900
602-878-6556 Phoenix, Arizona
642 East Monroe, Suite F-1 1996
Mesa, Arizona 602-253-0381
759 North Lindsay Lakewood, Colorado
602-830-5500 Pearl City, Hawaii(1) 1950 SouthCarr
98-425 Kamehameha Highway 303-988-1835
Phoenix, Arizona 808-488-9377
13449 North Tatum Boulevard Lakewood, Colorado
602-996-2299 Kailua, Hawaii(1) 3150 Youngfield
130 Kailua Road, #103 303-238-5722
[GRAPHIC DESCRIPTION] 808-262-2331
A graphic of the State of Arizona 1991
showing one center in Flagstaff [GRAPHIC DESCRIPTION]
and a total of 21 centers in the Phoenix, Arizona(1)
Phoenix metropolitan area. Arizona State University A graphic depicting the Denver
West Campus metropolitan area showing a
1987 602-543-5437 total of two centers.
Phoenix, Arizona 1993 (Opening Spring 1996)
16044 North 35th Avenue Hales Corners, Wisconsin(3)
602-978-9545 Phoenix, Arizona 10627 West Forest Home Avenue
8221 North 23rd Avenue 414-425-1515
Phoenix, Arizona 602-864-0474
1819 West Osborn Road
602-263-0985 Pearl City, Hawaii(1)
784 Kamehameha Highway
Scottsdale, Arizona 808-455-3330
9128 East San Salvador Drive
602-860-1464 Honolulu, Hawaii(1)
1730 North Punahou
808-951-5833
Honolulu, Hawaii(1)
467 North Judd
808-523-6495
Phoenix, Arizona(2)
512 East Pierce
Phoenix, Arizona
3415 North 59th Avenue
Phoenix, Arizona(2)
4612 North 28th Street
(1) Operated under management agreements.
(2) Locations with two preschool centers.
(3) See "BUSINESS--Expansion."
</TABLE>
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<PAGE> 40
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of the
directors and executive officers of the Company as of November 30, 1995. A
summary of the background and experience of each of these individuals is set
forth after the table.
The directors and executive officers of the Company are:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James R. Evans 48 Chairman of the Board, President
Dr. Richard H. Hinze 74 Director
Robert A. Rice 40 Director
Barbara L. Owens 47 Director, Executive Vice President,
Secretary & Treasurer
Ronald J. O'Connor 37 Controller
Ruby G. Kelly 41 General Manager
</TABLE>
The Board of Directors currently consists of four members and is
classified into three classes with each class holding office for a three-year
period. The term of Dr. Hinze expires at the 1995 Annual Meeting of
Stockholders; the term of Mr. Evans expires in 1996; and the terms of Ms. Owens
and Mr. Rice expire in 1997. Under the Company's Restated Certificate of
Incorporation (the "Certificate"), the number of directors may be increased to
nine. The Certificate limits the liability of directors and restricts the
removal of board members under certain circumstances. See "DESCRIPTION OF
SECURITIES -- Special Voting and Other Provisions."
Mr. Evans and Ms. Owens have employment agreements with the Company, and
Mr. O'Connor and Ms. Kelly serve at the pleasure of the Board of Directors. See
"EXECUTIVE COMPENSATION -- Employment Contracts." There are no family
relationships among the directors and executive officers.
James R. Evans has been the President and a Director of the Company since
its inception. Prior to that time, Mr. Evans was an executive with Smitty's
Super Value, Inc., a large retail food and general merchandise chain. During his
twenty years at Smitty's Super Value, Inc., Mr. Evans was responsible at various
times for marketing strategy, designing store layouts, development of financial
models and budgets and store management. Mr. Evans is a member of the Arizona
Child Care Licensure Advisory Committee and has been a national presenter at
various child care conventions on diverse child care topics.
Dr. Richard H. Hinze has been a Director of the Company since August 1987.
Since September 1984, Dr. Hinze has been the president and chairman of Flying H
Enterprises, Inc., a family owned Hawaii corporation focusing on consulting and
development of child care programs for public and private entities, which has
been inactive since 1994. From 1972 until his retirement in
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<PAGE> 41
April 1987, Dr. Hinze was a researcher for the Curriculum Research and
Development Group at the University of Hawaii-Manoa studying gifted children and
early childhood education. He has also served from October 1985 through April
1987 as the director for all campuses of the University of Hawaii Child Care
Project, where he developed a system for offering child care for students and
faculty. Dr. Hinze was also the treasurer of the National Association for
Education of Young Children from 1976 through 1980. Dr. Hinze has published
several articles in professional publications relating to child care and
education and received his Ed.D from Stanford University.
Robert A. Rice has been a Director of the Company since October 1993. Mr.
Rice is a director of Firstmark Corp., which is listed for trading on Nasdaq,
and is a Vice-President of two subsidiaries of Firstmark Corp., Firstmark
Investment Corp. and Firstmark Capital Corp. Firstmark Corp. and its
subsidiaries are engaged in financial services and real estate and timber
operations. Mr. Rice has been the President and Chairman of Prime Discount
Securities, Inc., a National Association of Securities Dealers registered
investment broker-dealer, since he founded the entity in 1983. Mr. Rice has also
been the President of Prime Securities Corp., an investment management company,
since he founded the entity in 1990. Mr. Rice is a general partner of BR
Partners, a partnership that owns and operates commercial and residential real
estate in Maine.
Barbara L. Owens was a consultant to the Company beginning in February
1987, and became a full-time employee, Vice President-Operations, in June 1987.
Ms. Owens became a Director in March 1988, Secretary in August 1988, Treasurer
in May 1989 and Executive Vice President in September 1989. Ms. Owens has
substantial experience in the child care industry, including employment for 13
years at Palo Alto Educational Systems, Inc., which had approximately 30 child
care centers in four states when it was sold to Gerber Children's Center, Inc.
in October 1984. Ms. Owens' positions at Palo Alto Educational Systems, Inc.
included President and Chief Operating Officer. After that time, Ms. Owens
provided child care consulting services to various organizations in the United
States. Ms. Owens currently serves on an editorial panel of the Child Care
Information Exchange, a national child care publication. Ms. Owens has also
given presentations at various annual conferences of the National Association of
Early Childhood Professionals.
Ronald J. O'Connor joined the Company in September 1994 as the Controller.
From 1988 until joining the Company, Mr. O'Connor was the Deputy City Controller
for the City of Phoenix, Arizona. Prior to that time, Mr. O'Connor was the
Corporate Controller at El Pollo Asado, Inc., an operator of a chain of fast
food restaurants. Mr. O'Connor has also been an audit manager at Touche Ross &
Co. (now Deloitte & Touche) and has been a Certified Public Accountant since
1981. Mr. O'Connor is a member of the American Institute of Certified Public
Accountants and the Arizona Society of Certified Public Accountants.
Ruby G. Kelly joined the Company as its General Manager in November 1995.
From 1981 until joining the Company in 1995, Ms. Kelly was employed by LaPetite
Academy, one of the largest child care providers in the United States with more
than 800 child care centers located in 35 states. Ms. Kelly served in various
capacities at LaPetite Academy, including most recently as a Divisional
Director, a position in which she had responsibility for the operations of more
than 50 child care centers. Ms. Kelly is a member of the National Association
For the Education of Young Children (the "NAEYC") and serves on a panel that
evaluates child care centers to determine whether they are eligible for the
accreditation designation which is a nationally recognized designation
established by the NAEYC. Ms. Kelly is also an active member of the Phoenix,
Arizona chapter of the NAEYC and serves on its Public Policy Committee. In
addition, Ms. Kelly is on the Board of Directors of the Colorado Child Care
Association.
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<PAGE> 42
COMPENSATION COMMITTEE
The Company has a Compensation Committee of the Board of Directors that
consists of the Company's two outside directors, Messrs. Hinze and Rice. The
Compensation Committee administers the Company's stock option plans and
addresses matters relating to executive compensation.
EXECUTIVE COMPENSATION
The following table summarizes all compensation paid to the Company's
President (the Chief Executive Officer of the Company) and to the Company's
other most highly compensated executive officer other than the President whose
total annual salary and bonus exceeded $100,000 (collectively, the "Named
Executive Officers"), for services rendered in all capacities to the Company
during the fiscal years ended July 31, 1995, 1994 and 1993.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Long Term Compensation
---------------------------------------
Annual Compensation Awards Payouts
---------------------------------------------------------------------------
Restricted Securities All Other
Name and Fiscal Other Annual Stock Underlying LTIP Compensation
Principal Position Year Salary Bonus Compensation Award(s) Option(s) Payouts (1)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James R. Evans 1995 $150,000 $65,151 $-0- $-0- 373,200 $-0- $-0-
Chairman of
the Board and 1994 $105,007 $53,494 $-0- $-0- -0- $-0- $-0-
President
1993 $105,007 $62,227 $-0- $-0- -0- $-0- $-0-
- ---------------------------------------------------------------------------------------------------------------------------------
Barbara L. 1995 $ 85,000 $52,777 $-0- $-0- 135,858(2) $-0- $-0-
Owens
Executive Vice 1994 $ 56,632 $62,792 $-0- $-0- -0- $-0- $-0-
President,
Secretary and 1993 $ 56,632 $65,877 $-0- $-0- -0- $-0- $-0-
Treasurer
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) See the discussion under the caption "EXECUTIVE COMPENSATION -- Employment
Contracts" regarding certain other compensation the named officer may be
entitled to upon certain specified events.
(2) Of the stock options granted to Ms. Owens, 75,858 were options that were
granted by the Company in 1995 to replace 84,558 options that were granted
to Ms. Owens in prior years and canceled in 1995. The Board of Directors
of the Company determined that the options that were canceled no longer
provided the intended incentives to Ms. Owens because their exercise
prices, which ranged from $1.38 to $2.00 per share, exceeded the current
market price for the Company's Common Stock.
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<PAGE> 43
The following table sets forth certain information concerning individual
grants of stock options during the fiscal year ended July 31, 1995 to each of
the Named Executive Officers.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Individual Grants
----------------------------------------------------------------------------------
% of Total
Number of Securities Options/SARs
Underlying Granted To Exercise or
Option/SARs Employees Base Price Expiration
Name Granted (#) in Fiscal Year ($/Share) Date
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James R. Evans 363,200(1) 62% $1.5125 May 4, 2000
10,000 2% $1.00 December 31, 1997
- ------------------------------------------------------------------------------------------------------
Barbara L. Owens 125,858(2) 21% $1.375 May 4, 2005
10,000 2% $1.00 December 31, 1997
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) A portion of the options granted to Mr. Evans were granted under the
Company's 1995 Stock Option Plan as incentive stock options, which qualify
for special treatment under United States tax laws. As required by such
tax laws, the options were granted at 110% of the fair market value of the
Company's Common Stock on the date of grant. The 1995 Stock Option Plan
has been approved by the Board of Directors of the Company; however, it
has not been submitted to the Company's stockholders for approval. The
Company intends to submit the 1995 Stock Option Plan to the Company's
stockholders for approval at its 1995 Annual Meeting. If the 1995 Stock
Option Plan is not approved by the Company's stockholders, the terms of
Mr. Evans' option grant provide that his incentive stock options may be
reclassified to non-statutory options in which case the option exercise
price will be reduced to the fair market value of the Company's Common
Stock on the date of grant, which was $1.375 per share, and the term of
such options will be extended from five years to ten years.
(2) Of the stock options granted to Ms. Owens, 75,858 were options that were
granted by the Company in 1995 to replace 84,558 options that were granted
to Ms. Owens in prior years and canceled in 1995. The Board of Directors
of the Company determined that the options that were canceled no longer
provided the intended incentives to Ms. Owens because their exercise
prices, which ranged from $1.38 to $2.00 per share, exceeded the current
market price for the Company's Common Stock.
The following table sets forth certain information concerning each
exercise of stock options during the year ended July 31, 1995 by each of the
Named Executive Officers and the aggregated fiscal year-end value of the
unexercised options of each such Named Executive Officer.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
OPTION VALUE AS OF JULY 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Value of Unexercised
Number of Unexercised Options In-the-Money
at Fiscal Year End (#) Options at Fiscal Year End ($)
- --------------------------------------------------------------------------------------------------------------------------
Shares Acquired Value Realized
Name on Exercise (#) ($) Exercisable Unexerciseable Exercisable Unexerciseable
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
James R. Evans -0- $-0- 94,032 290,473 $ 95,758 $250,533
- --------------------------------------------------------------------------------------------------------------------------
Barbara L. Owens -0- $-0- 147,550 -0- $155,605 $ -0-
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company are entitled to receive
$500 per meeting attended, plus reimbursement of reasonable expenses; directors
who are employees of the Company do not receive compensation for such services.
Directors who are not employees of the Company also participate in the Company's
Non-Employee Directors Stock Option Plan.
41
<PAGE> 44
EMPLOYMENT CONTRACTS
On October 15, 1993, the Compensation Committee approved employment
agreements with James R. Evans for services as President and with Barbara L.
Owens for services as Executive Vice President, Secretary and Treasurer (Mr.
Evans and Ms. Owens are sometimes collectively referred to herein as the
"Employee"). These agreements were subsequently amended on September 16, 1994
and May 4, 1995. As amended, the agreements require Mr. Evans and Ms. Owens to
devote their full-time to the Company and provide for a base salary, currently
$154,500 and $87,550 per year, respectively, which is increased on August 1 of
each year to reflect increases in the National Consumer Price Index of the
preceding year. The Employee is entitled to receive bonuses in the discretion of
the Compensation Committee to be paid in accordance with Company bonus plans in
effect from time to time. Each of the agreements has a perpetual three-year
term, such that on any given date each agreement has a three-year remaining
term. The agreements may not be terminated unilaterally by the Company, except
for cause, which includes (i) conviction of a felony that impairs the ability of
the Employee to perform his or her duties with the Company or (ii) failure of
performance as determined by the Board. The agreements provide that the salaries
of Mr. Evans and Ms. Owens will be reviewed annually, but such salaries may not
be decreased.
Each of the agreements provides that if the Employee is terminated by the
Company other than for cause or disability, or by the Employee for good reason
(as defined in the agreements), the Company shall pay to the Employee (i) his or
her salary through the termination date plus any accrued but unpaid bonuses, and
(ii) a lump sum payment equal to the sum of three years of the Employee's annual
salary and an amount equal to all bonuses paid to the Employee in the three
years immediately preceding termination. In addition, the Company must maintain
until the first to occur of (i) the Employee's attainment of alternative
employment or (ii) three years from the date of termination, the Employee's
benefits under the Company's benefit plans to which the Employee and his or her
eligible beneficiaries were entitled immediately prior to the date of
termination. If the Employee requests, the Company must also assign to the
Employee any assignable insurance policy on the life of the Employee owned by
the Company at the end of the period of coverage. In addition, all options or
warrants to purchase Common Stock held by the Employee on the date of
termination become exercisable on the date of termination, regardless of any
vesting provisions, and remain exercisable for the longer of one year from the
date of termination or the then remaining unexpired term of such warrants or
options. If the Employee is terminated for cause or if the Employee terminates
his or her employment other than for good reason (as defined in the agreement),
the Company's only obligation is to pay the Employee his or her base salary and
accrued vacation pay through the date of termination.
If the Employee is incapacitated due to physical or mental illness during
the term of his or her employment, the agreements provide that the Company shall
pay to the Employee a lump sum equal to two years of the Employee's base
compensation and all bonuses paid to the Employee in the two years preceding the
date of termination due to illness. If the Employee dies during his or her
employment, the only benefits payable to his or her estate under the agreements
are those payable pursuant to the Company's survivor's benefits insurance and
other applicable programs and plans then in effect.
If the Employee's employment is terminated, the Company has agreed to
indemnify the Employee for claims and expenses associated with certain personal
guarantees made by the Employee. See "CERTAIN TRANSACTIONS." In addition, the
Company has agreed to use its best efforts to secure the release of such
personal guarantees.
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<PAGE> 45
STOCK OPTION PLANS
1987 STOCK OPTION PLAN
The Company's Stock Option Plan (the "1987 Plan") was adopted by the Board
of Directors and approved by the stockholders in July 1987. Only employees
(including officers and directors, subject to certain limitations) are eligible
to receive options under the 1987 Plan, under which 240,000 shares of Common
Stock are authorized for issuance. As of November 30, 1995, options to purchase
all of such shares have been granted; such options have terms of five to ten
years, with exercise prices of $0.50 to $2.375 per share, which is generally the
fair market value of the underlying shares as of the date of grant. Options are
generally subject to a three or five-year vesting schedule.
The 1987 Plan provides for the granting to employees of either "incentive
stock options" within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), or non-qualified stock options. The 1987 Plan is
administered by the Board of Directors of the Company, or a committee of the
Board, which determines the terms of options granted under the 1987 Plan,
including the exercise price and the number of shares subject to the option.
Generally, the exercise price of options granted under the 1987 Plan must be not
less than the fair market value of the underlying shares on the date of grant,
and the term of each option may not exceed eleven years (ten years in the case
of incentive stock options). Incentive stock options granted to persons who have
voting control over 10% or more of the Company's capital stock are granted at
110% of the fair market value of the underlying shares on the date of grant and
expire five years after the date of grant.
The 1987 Plan provides the Board of Directors with the discretion to
determine when options granted thereunder shall become exercisable. Generally,
such options may be exercised after a period of time specified by the Board of
Directors at any time prior to expiration, so long as the optionee remains
employed by the Company. No option granted under the 1987 Plan is transferable
by the optionee other than by will or the laws of descent and distribution, and
each option is exercisable during the lifetime of the optionee only by the
optionee.
1995 STOCK OPTION PLAN
The Company's 1995 Stock Option Plan (the "1995 Plan") authorizes the
Board to grant options to employees of the Company to purchase up to an
aggregate of 500,000 shares of Common Stock. Officers and other employees of the
Company who, in the opinion of the Board of Directors, are responsible for the
continued growth and development and the financial success of the Company are
eligible to be granted options under the 1995 Plan. Options may be non-qualified
options, incentive stock options, or any combination of the foregoing. In
general, options granted under the 1995 Plan are not transferable and expire
eleven years after the date of grant (ten years in the case of incentive stock
options). The per share exercise price of an incentive stock option granted
under the 1995 Plan may not be less than the fair market value of the Common
Stock on the date of grant. Incentive stock options granted to persons who have
voting control over 10% or more of the Company's capital stock are granted at
110% of the fair market value of the underlying shares on the date of grant and
expire five years after the date of grant. No option may be granted after May 2,
2005.
The 1995 Plan provides the Board of Directors with the discretion to
determine when options granted thereunder will become exercisable. Generally,
such options may be exercised after a period of time specified by the Board of
Directors at any time prior to expiration, so long as the optionee remains
employed by the Company. No option granted under the 1995 Plan is transferable
by the
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<PAGE> 46
optionee other than by will or the laws of descent and distribution, and each
option is exercisable during the lifetime of the optionee only by the optionee.
At November 30, 1995, under the 1995 Plan, options to purchase 360,000
shares of Common Stock were issued and outstanding, with terms ranging from five
to ten years. The exercise prices of all such options range from $1.375 to
$1.5125 per share.
NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
The Company's Non-Employee Directors Stock Option Plan (the "Directors'
Plan") was adopted by the Board of Directors in May 1995. Only non-employee
directors are eligible to receive options under the Directors' Plan, under which
100,000 shares are authorized for issuance. To date, options to purchase 30,000
shares of Common Stock have been granted; such options have a term of six years
with exercise prices of $1.375 to $2.1875 per share, which was the fair market
value of the underlying shares on the date of grant. Except for options granted
on the effective date of the Directors' Plan, which are fully vested, all
options granted under the Directors' Plan will be subject to a one-year vesting
schedule. All options granted or to be granted under the Directors' Plan are
non-qualified stock options.
On the date the Directors' Plan was adopted by the Company's Board of
Directors, each non-employee director was granted an option to acquire 10,000
shares of the Company's common stock. Each non-employee director who joins the
Board of Directors after the date the Company's Board of Directors approved the
plan will likewise receive an option to acquire 10,000 shares of the Company's
Common Stock. In addition to the foregoing option grants, each year every
non-employee director automatically receives an option to acquire 5,000 shares
of the Company's Common Stock on the third business day following the date the
Company publicly announces its annual financial results; provided that such
director has attended at least 75% of the meetings of the Board of Directors and
of the Board Committees of which such non-employee director is a member in the
preceding fiscal year.
No option granted under the Directors Plan is transferable by the optionee
other than by will or the laws of descent and distribution, and each option is
exercisable during the lifetime of the optionee only by the optionee.
INDEMNIFICATION AND LIMITATION OF LIABILITY
Delaware law authorizes a Delaware corporation to eliminate or limit the
personal liability of a director to the corporation and its stockholders for
monetary damages for breaches of certain fiduciary duties as a director. The
Company believes that such a provision is beneficial in attracting and retaining
qualified directors, and accordingly the Company's Certificate includes a
provision eliminating liability for monetary damages for any breach of fiduciary
duty as a director, except (i) for any breach of the duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, or (iii) for
any transaction for which the director derived an improper personal benefit or
certain other actions. Pursuant to Delaware law, directors of the Company are
not insulated from liability for breach of their duty of loyalty or for claims
arising under the federal securities laws. The foregoing provisions of the
Certificate may reduce the likelihood of derivative litigation against directors
and may discourage or deter stockholders or management from bringing a lawsuit
against directors for breaches of their fiduciary duties, even though such an
action, if successful, might otherwise have benefitted the Company and its
stockholders.
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<PAGE> 47
CERTAIN TRANSACTIONS
James R. Evans and Barbara L. Owens have personally guaranteed various
child care facility lease payments and other obligations to third parties. As of
July 31, 1995 and 1994, the aggregate amounts of lease payments and other
obligations guaranteed by Mr. Evans were approximately $5,000,000 and
$5,500,000, respectively. The aggregate amount of lease payments and other
obligations guaranteed by Ms. Owens were approximately $1,000,000 as of July 31,
1995 and 1994.
Both James R. Evans and Barbara L. Owens have employment agreements with
the Company. See "EXECUTIVE COMPENSATION -- Employment Contracts."
In early 1994, the Board of Directors approved the transfer to PSI of a
portion of the Company's operations. Because of PSI's nonprofit status, PSI is
eligible to receive certain grants and subsidies. Pursuant to the PSI Agreement,
the Company provides PSI with management, administrative and operational
services and educational programs. Additionally, pursuant to the PSI Agreement,
the Company leases to PSI all of the equipment and other property necessary for
the operation of PSI's child care centers. Barbara L. Owens is the President and
James R. Evans is the Vice President of PSI. Dr. Richard Hinze, Ms. Owens and
Mr. Evans are directors of PSI. No directors or officers of the Company are
members of PSI and none of them receive any compensation from PSI.
The PSI Agreement stipulates that the Company is to receive an
administrative services fee for providing the services described above. For
fiscal 1995 and 1994, the administrative fees totaled $42,000 and $25,000,
respectively. Pursuant to the PSI Agreement, the administrative fee equals 9% of
PSI's adjusted gross revenues each month, subject to certain limitations. In
addition, the Company receives lease payments of approximately $120,000
annually. During fiscal 1995, the Company agreed to defer future administrative
fees and lease payments due from PSI (which in the aggregate are approximately
$170,000 annually) until such time as PSI's cash flow is adequate to fund these
fees, which the Company estimates will occur no sooner than 1998. In connection
with this deferral, the accumulated amounts due from PSI at July 31, 1995 were
converted to a promissory note equal to the present value of the expected future
payments to be received from PSI related to the balance of the receivable
outstanding at July 31, 1995, over a period of seven years. This resulted in a
reduction in the outstanding receivable balances through a charge to the
provision for bad debts of $176,500. The promissory note bears interest at 8.0%,
with monthly payments due beginning January 1998 through July 2002. In addition,
no administrative fees payable under the PSI Agreement were recognized in the
quarter ended October 31, 1995.
All transactions between the Company and its officers, directors,
principal stockholders, or other affiliates have been and will be on terms no
less favorable to the Company than could be obtained from unaffiliated third
parties on an arms-length basis and, in the future, will be approved by a
majority of the Company's disinterested directors.
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<PAGE> 48
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of share of Common
Stock and Series B Preferred Stock of the Company on November 30, 1995 by each
director and Named Executive Officer, by all directors and executive officers as
a group and by all persons known by the Company to be the beneficial owners of
more than 5% of the Company's Common Stock and Series B Preferred Stock on a
combined basis. Each share of Series B Preferred Stock is convertible into one
share of Common Stock.
The percentage ownership information set forth in the right hand column of
the following table has been computed in accordance with Securities and Exchange
Commission ("SEC") guidelines as described in note (2). In accordance with such
guidelines, the percentage ownership information shown for Michael J. Connelly,
LN Investment Capital Limited Partnership and Lepercq Investment Limited
Partnership - II reflects the outstanding voting power of holders of Series B
Preferred Stock, which generally votes with the Common Stock on matters
submitted for stockholder vote. See also note (3) to the table below.
<TABLE>
<CAPTION>
Shares of Common and Series B
Preferred Stock Beneficially Owned
-------------------------------------------
Number of Shares Percent of
Name and Address Beneficially Held(1) Ownership(2)
- ---------------- -------------------- ------------
<S> <C> <C>
James R. Evans 744,910 24.2%
9128 East San Salvador, Suite 200
Scottsdale, Arizona 85258
Barbara L. Owens 152,993 4.9%
9128 East San Salvador, Suite 200
Scottsdale, Arizona 85258
Ronald J. O'Connor 6,000 0.2%
9128 East San Salvador, Suite 200
Scottsdale, Arizona 85258
Ruby G. Kelly 17,500 0.6%
9128 East San Salvador, Suite 200
Scottsdale, Arizona 85258
Robert A. Rice 22,188 0.7%
c/o Prime Discount Securities, Inc.
559 Congress Street
Portland, Maine 04112
Dr. Richard H. Hinze 21,000 0.7%
215 F. River Trail
Morganton, North Carolina 28655
Michael J. Connelly(3) 1,088,055 31.2%
LN Investment Capital Limited Partnership(3) 633,817 19.4%
Lepercq Investment Limited Partnership - II(3) 454,238 14.2%
</TABLE>
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<PAGE> 49
<TABLE>
<CAPTION>
Shares of Common and Series B
Preferred Stock Beneficially Owned
-------------------------------------------
Number of Shares Percent of
Name and Address Beneficially Held(1) Ownership(2)
- ---------------- -------------------- ------------
<S> <C> <C>
James Alexander 157,325 5.3%
P.O. Box 5583
Virginia Beach, Virginia 23455
John Rutkowski 165,563 5.6%
2828 North Central, Suite 1100
Phoenix, Arizona 85004
All directors and executive officers as a group 964,590 29.4%
(6 persons)
</TABLE>
_____________________________
(1) Includes presently exercisable options as follows: James R. Evans -
94,032; Barbara L Owens - 147,550; Robert A. Rice - 20,000; Dr. Richard H.
Hinze - 20,000; Ronald J. O'Connor - 5,000; Ruby G. Kelly - 10,000; and
all directors and executive officers as a group - 296,582.
(2) The percentages shown include the shares of Common Stock actually owned as
of November 30, 1995, and the shares of Common Stock with respect to which
the person had the right to acquire beneficial ownership within 60 days of
such date pursuant to options and the conversion of the Series B Preferred
Stock. All shares of Common Stock that the identified person had the right
to acquire within 60 days of November 30, 1995 upon the exercise of
options or the conversion of the Series B Preferred Stock, are deemed to
be outstanding when computing the percentage of the securities owned by
such person, but are not deemed to be outstanding when computing the
percentage of the securities owned by any other person.
(3) Michael J. Connelly does not directly own any shares of Common Stock;
however, Mr. Connelly is the managing general partner of (i) LN Investment
Capital Limited Partnership ("LNIC"), which owns 342,367 shares of Common
Stock and 291,450 shares of Series B Preferred Stock and (ii) Lepercq
Investment Limited Partnership - II ("LIP-II"), which owns 245,688 shares
of Common Stock and 208,550 shares of Series B Preferred Stock. As a
result, Mr. Connelly may be deemed to have beneficial ownership of the
securities beneficially owned by such partnerships. Mr. Connelly disclaims
beneficial ownership of such securities. LNIC and LIP-II collectively own
all of the issued and outstanding Series B Preferred Stock. The number of
shares disclosed as beneficially owned are amounts as reported in a Form 5
filed with the SEC in September 1995 and a Form 4 filed with the SEC in
October 1995. The address of each of Mr. Connelly, LNIC and LIP-II is c/o
Lepercq Capital Management, Inc., 1675 Broadway, 16th Floor, New York, New
York 10019.
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<PAGE> 50
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company's Certificate authorizes the issuance of 10,000,000 shares of
Common Stock, par value of $.01 per share. Each share of Common Stock entitles
the holder thereof to one vote in the election of directors and all other
matters submitted to a vote of the Company's stockholders. Common stockholders
do not have cumulative voting rights. Holders of Common Stock are entitled to
share ratably in all dividends declared by the Board of Directors and in all
assets available for distribution upon liquidation. Except for holders of
Series B Preferred Stock, no holder of the Company's capital stock has any
preemptive right to subscribe for or purchase additional shares of the Company's
stock.
COMMON STOCK PURCHASE WARRANTS AND OPTIONS
In 1987, in connection with its initial public offering, the Company
issued warrants (the "Warrants") to purchase 1,000,000 shares of the Company's
Common Stock at an exercise price of $5.00 per share. The Warrants were
originally scheduled to expire in 1989, and the Company has extended the
expiration date of the Warrants on several occasions since their original
expiration date. On September 21, 1995, the Company announced that it was
extending the Warrant expiration one final time, through November 6, 1995, and
reducing the exercise price of the Warrants to $1.00 per share. As a condition
to the extension of the Warrants and a reduction of their exercise price, the
Company provided that each holder of Warrants may exercise only one of every
sixteen Warrants held. Upon termination of the extension period, in November
1995, Warrants representing the right to purchase 47,074 shares of Common Stock
were exercised, and the Company issued 47,074 shares of Common Stock in exchange
for an aggregate consideration of $47,074. For a discussion of other options
and warrants granted by the Company see "EXECUTIVE COMPENSATION -- Stock Option
Plans" and Note 7 of Notes to Consolidated Financial Statements.
PREFERRED STOCK
The Company's Certificate authorizes the issuance of 1,000,000 shares of
Preferred Stock, par value $1.00 per share. The Company's Board of Directors,
without further action by the Company's stockholders, may issue Preferred Stock
in series and may, at the time of issuance, determine the rights, preferences
and privileges of each series. Satisfaction of any dividend preferences of
outstanding Preferred Stock would reduce the amount of funds available for the
payment of dividends on Common Stock. Also, holders of Preferred Stock would
normally be entitled to receive a preference payment in the event of any
liquidation, dissolution or winding-up of the Company before any payment is made
to the holders of Common Stock. The issuance of Preferred Stock may be for the
purpose of, or have the effect of, delaying, deferring or preventing a change in
control of the Company without further action by the stockholders. The issuance
of Preferred Stock with voting and conversion rights may adversely affect the
voting powers of the holders of Common Stock, including the loss of voting
control to others.
SERIES A PARTICIPATING PREFERRED STOCK
On March 2, 1995, the Company paid a distribution of a right to purchase
one one-thousandth of a share of Series A Participating Preferred Stock (a
"Right") for each share of Common Stock of the Company outstanding on such date
(the "Record Date"). Each Right entitles the registered holder
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<PAGE> 51
to purchase from the Company one one-thousandth of a share of Series A
Participating Preferred Stock, $1.00 par value, of the Company (the "Series A
Preferred Stock"), subject to adjustment, at a price of $8.00 per one
one-thousandth of a share, subject to adjustment (the "Purchase Price"). The
description and terms of the Rights are set forth in a Preferred Shares Rights
Agreement (the "Rights Agreement") dated as of February 10, 1995 between the
Company and American Securities Transfer, Incorporated, as Rights Agent (the
"Rights Agent").
The Rights approved by the Board are designed to protect and maximize the
value of the outstanding equity interests in the Company in the event of an
unsolicited attempt by an acquiror to take over the Company in a manner or on
terms not approved by the Board of Directors. Takeover attempts frequently
include coercive tactics to deprive a corporation's board of directors and its
stockholders of any real opportunity to determine the destiny of the
corporation. The Rights have been declared by the Board in order to deter such
tactics, including a gradual accumulation of shares in the open market of a 15%
or greater position to be followed by a merger or a partial or two-tier tender
offer that does not treat all stockholders equally.
The Rights are not intended to prevent a takeover of the Company and will
not do so; however, the Rights may have the effect of rendering more difficult
or discouraging an acquisition of the Company deemed undesirable by the Board of
Directors. The Rights may cause substantial dilution to a person or group that
attempts to acquire the Company on terms or in a manner not approved by the
Company's Board of Directors, except pursuant to an offer conditioned upon the
negation, purchase or redemption of the Rights.
The Rights will become exercisable upon the earlier of: (i) 10 days (or
such later date as may be determined by a majority of the Board of Directors,
excluding directors affiliated with the Acquiring Person, as defined below (the
"Continuing Directors")) following a public announcement that a person or group
of affiliated or associated persons has acquired, or obtained the right to
acquire, beneficial ownership of 15% or more of the outstanding Common Stock of
the Company (an "Acquiring Person") or (ii) 10 business days (or such later date
as may be determined by a majority of the Continuing Directors) following the
commencement of, or announcement of an intention to make, a tender offer or
exchange offer, the consummation of which would result in the beneficial
ownership by a person or group of 15% or more of the outstanding Common Stock of
the Company. The earlier of such dates is referred to as the "Distribution
Date."
All Common Stock issued prior to the Distribution Date will be issued with
Rights. Common Stock issued after the Distribution Date may be issued with
Rights if such shares are issued (i) upon the conversion of securities issued
after adoption of the Rights Agreement, including shares of Common Stock issued
upon conversion of the Series C Preferred Stock offered hereby or (ii) pursuant
to the exercise of stock options or under employee benefit plans unless such
issuance would result in (or create a risk that) such options or plans would not
qualify for otherwise available special tax treatment. Except as otherwise
determined by the Board of Directors, no other shares of Common Stock issued
after the Distribution Date will be issued with Rights. The Rights will expire
on March 2, 2005 (the "Final Expiration Date"), unless the Final Expiration Date
is extended or unless the Rights are earlier redeemed or exchanged by the
Company or expire upon consummation of certain mergers, consolidations or sales
of assets. Following the Distribution Date, and until the occurrence of one of
the subsequent events described below, holders of the Rights will be entitled to
receive, upon exercise and the payment of $8.00 per Right, one one-thousandth of
a share of Series A Preferred Stock.
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<PAGE> 52
At any time after an event triggering the rights to acquire stock
described below and prior to the acquisition by such Acquiring Person of 50% or
more of the outstanding shares of Common Stock, the Board of Directors of the
Company may exchange the Rights (other than Rights owned by the Acquiring Person
or its affiliates), in whole or in part, at an exchange ratio of one share of
Common Stock per Right (subject to adjustment). Unless the Rights are earlier
redeemed or exchanged, in the event that an Acquiring Person becomes such, other
than pursuant to a tender offer which is made for all of the outstanding Common
Stock of the Company and approved by a majority of the Continuing Directors
after determining that the offer is both adequate and otherwise in the best
interests of the Company and its stockholders (a "Permitted Offer"), then proper
provision will be made so that each holder of a Right which has not theretofore
been exercised (other than Rights beneficially owned by the Acquiring Person,
which will thereafter be void) will thereafter have the right to receive, upon
exercise, shares of Common Stock having a value equal to two times the Purchase
Price. Rights are not exercisable following the occurrence of an event
described above until such time as the Rights are no longer redeemable by the
Company as set forth below. In the event that the Company does not have
sufficient Common Stock available for all Rights to be exercised, or the Board
decides that such action is necessary and not contrary to the interests of
Rights holders, the Company may instead substitute cash, assets or other
securities for the Common Stock into which the Rights would have otherwise been
exercisable.
Similarly, unless the Rights are earlier redeemed or exchanged, in the
event that, after the Shares Acquisition Date (as defined below), (i) the
Company is acquired in a merger or other business combination transaction in
which the Company is not the surviving corporation or in which the Company's
outstanding Common Stock is changed or exchanged for stock or assets of another
person or (ii) 50% or more of the Company's consolidated assets or earning power
are sold (other than through transactions in the ordinary course of business),
proper provision must be made so that each holder of a Right which has not
theretofore been exercised (other than Rights beneficially owned by the
Acquiring Person, which will thereafter be void) will thereafter have the right
to receive, upon exercise, shares of common stock of the acquiring company
having a value equal to two times the Purchase Price (unless the transaction
satisfies certain conditions and is consummated with a person who acquired
shares pursuant to a Permitted Offer, in which case the Rights will expire).
Series A Preferred Stock purchasable upon exercise of the Rights will not
be redeemable. Each share of Series A Preferred Stock will be entitled to an
aggregate dividend of 1,000 times the dividend declared per each share of Common
Stock. In the event of liquidation, the holders of the Series A Preferred Stock
will be entitled to a minimum preferential liquidation payment of $1,000 per
share and, depending upon the amount of proceeds to be distributed, will share
with the holders of the Common Stock in such distribution. Each share of Series
A Preferred Stock will have 1,000 votes, voting together with the Common Stock.
In the event of any merger, consolidation or other transaction in which Common
Stock is changed or exchanged, each share of Series A Preferred Stock will be
entitled to receive 1,000 times the amount received per share. These rights are
protected by customary anti-dilution provisions.
At any time on or prior to the close of business on the earlier of (i) the
10th day following the acquisition by an Acquiring Person (the "Shares
Acquisition Date") of 15% or more of the Company's outstanding Common Stock or
such later date as may be determined by a majority of the Continuing Directors
and publicly announced by the Company or (ii) the Final Expiration Date of the
Rights, the Company may redeem the Rights in whole, but not in part, at a price
of $0.001 per Right ("Redemption Price").
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<PAGE> 53
SERIES B PREFERRED STOCK
The Board of Directors of the Company has authorized the issuance of
500,000 shares of Series B Preferred Stock, all of which were issued and
outstanding on November 30, 1995.
The Series B Preferred Stock ranks senior in dividend rights and
liquidation preference to all other series of Preferred Stock and the Common
Stock of the Company. The holders of the Series B Preferred Stock are entitled
to receive, out of any assets of the Company legally available therefor,
cumulative dividends at a rate of $.10 per share per annum, payable quarterly on
March 31, June 30, September 30 and December 31 of each year. Upon any
liquidation, dissolution or winding up of the Company, the Company may not make
any distribution to the holders of any series of Preferred Stock or the Common
Stock unless prior thereto, the holders of Series B Preferred Stock have
received an amount equal to $1.00 per share, plus an amount equal to the accrued
and unpaid dividends and distributions thereon.
At any time, the holders of the Series B Preferred Stock have the right,
at their option, to convert each share of Series B Preferred Stock into one
share of Common Stock. The conversion price of the Series B Preferred Stock is
subject to adjustment from time to time if the Company issues additional shares
of Common Stock, convertible securities, options, warrants or similar rights at
prices less than the conversion price for the Series B Preferred Stock. In
addition, the conversion price for the Series B Preferred Stock may be adjusted
for certain stock splits, stock dividends, combinations, reclassifications and
similar events.
Generally, the holders of shares of Series B Preferred Stock together with
the holders of the Common Stock and Series C Preferred Stock will vote as one
class on all matters submitted to a vote of stockholders of the Company. Without
the advance consent of the holders of two-thirds of the Series B Preferred
Stock, the Company may not amend its Certificate in any manner that would
materially alter or change the powers, preferences or special rights of the
Series B Preferred Stock.
Unless previously converted, all or any portion of the Series B Preferred
Stock may be redeemed on a pro rata basis by the Company at its election from
the holders of such Series B Preferred Stock at any time; provided, however,
that the Company may not redeem the Series B Preferred Stock unless the average
of the closing bid prices per share of Common Stock have equaled or exceeded
$3.00 or more for any twenty (20) consecutive trading days ending two days prior
to the date on which a redemption notice is given by the Company. The price at
which the Series B Preferred Stock may be redeemed is $1.00 per share together
with all dividends accrued but unpaid thereon, but computed without interest,
through the date of such redemption. Each holder of Series B Preferred Stock
has the right to require the Company to redeem the shares of Series B Preferred
Stock held by such holder together with all dividends accrued and accumulated
but unpaid thereon if, among other things, there is a sale or merger of the
Company or if the Company (i) defaults on the payment of any dividends on the
Series B Preferred Stock and such default has continued for a period of ten
days, (ii) defaults on the payment of its indebtedness or certain other
obligations, (iii) is unable to pay its debts as they become due or (iv) files a
petition in bankruptcy.
Pursuant to an agreement with the holders of the Series B Preferred Stock,
as long as at least 125,000 shares of Common Stock (assuming conversion of the
Series B Preferred Stock) is held by such holders, the Company has agreed to use
its reasonable best efforts to cause the Board of Directors of the Company to
include at least one designee of such holders if the Board of Directors consists
of less than five members, and two designees if the Board of Directors consists
of five or more members.
51
<PAGE> 54
At present, the holders of the Company's Series B Stock have not requested that
the Company include their designee on the Board or Directors. In addition to
the foregoing rights, the Company has also granted to the holders of the Series
B Stock a right to purchase a pro rata portion of any securities privately
placed by the Company as well as certain demand and piggyback registration
rights.
SERIES C PREFERRED STOCK
The Series C Preferred Stock ranks junior in dividend rights and
liquidation preference to the Company's Series B Preferred Stock, but senior to
all other series of Preferred Stock and the Common Stock of the Company. Subject
to the superior rights of the Series B Preferred Stock, the holders of the
Series C Preferred Stock are entitled to receive, out of any assets of the
Company legally available therefor, cumulative dividends at a rate of 9% per
annum (the "Dividend Rate") on the total dollar amount of the consideration paid
(the "Original Purchase Price") to the Company for each share of Series C
Preferred Stock (the "Dividend Amount"). Such dividends are payable quarterly
on the Quarterly Dividend Payment Date (as hereinafter defined), commencing on
the first Quarterly Dividend Payment Date after the first issuance of a share of
Series C Preferred Stock. Dividends on each share of Series C Preferred Stock
accrue and are cumulative from the date of issuance thereof to the redemption
date or the conversion date of each such share, as applicable and whichever
first occurs, whether or not there are any profits, surplus or other funds of
the Company legally available for the payment of such dividends at the time such
dividends accrue and whether or not such dividends are declared. Dividends are
payable on each share of Series C Preferred Stock on the last day of each
September, December, March and June of each year (the "Quarterly Dividend
Payment Date") to the holder of record on the date thirty (30) days prior to
such Quarterly Dividend Payment Date. During the first year following the first
issuance of a share of Series C Preferred Stock (the "Original Issue Date"),
dividends on the Series C Preferred Stock will be paid in cash. Following the
first anniversary of the Original Issue Date, the Company has the option to pay
all future dividends either in cash or in shares of Common Stock of the Company
having a "Fair Market Value" equal to the Dividend Amount. "Fair Market Value"
means the average closing bid prices of the Common Stock of the Company as
reported in the Wall Street Journal for the ten (10) trading days ending five
(5) trading days prior to the Quarterly Dividend Payment Date (or, if not so
reported, as otherwise reported by the National Association of Securities
Dealers Automated Quotation System or other principal market for the Common
Stock) or, in the event the Common Stock is listed on a stock exchange, the Fair
Market Value shall be the average of the closing prices of the Common Stock of
the Company on such exchange as reported in the Wall Street Journal for the ten
(10) trading days ending five (5) trading days prior to the Quarterly Dividend
Payment Date.
Generally, the holders of shares of Series C Preferred Stock together with
the holders of the Common Stock and Series B Preferred Stock vote as one class
on all matters submitted to a vote of stockholders of the Company. Without the
advance consent of the holders of a majority of the Series C Preferred Stock,
the Company may not (i) alter or change any rights, privileges or preferences of
the Series C Preferred Stock, (ii) increase or decrease the authorized number of
shares of Series C Preferred Stock, (iii) authorize, issue or create (by
reclassification or otherwise) shares of any class or series of stock equal in
priority to or having any preference over the Series C Preferred Stock with
respect to dividends or liquidation payments, (iv) amend or waive any provision
of the Certificate or Bylaws of the Company relative to the Series C Preferred
Stock, (v) authorize or approve any liquidation or dissolution of the Company,
(vi) authorize or approve any merger or consolidation of the Company, or (vii)
authorize or approve any sale or transfer of all or substantially all of the
assets of the Company. Each share of Series C Preferred Stock issued and
outstanding has that number of votes equal to the number of shares of Common
Stock into which each share of Series C Preferred
52
<PAGE> 55
Stock is convertible, as of the record date set by the Board of Directors for
the determination of any holders of any class of securities entitled to vote on
such matter.
Whenever quarterly dividends or other dividends or distributions payable
on the Series C Preferred Stock are in arrears, thereafter and until all accrued
and unpaid dividends and distributions, whether or not declared, on shares of
Series C Preferred Stock outstanding shall have been paid in full or set aside
for payment, the Company may not (i) declare or pay dividends on, make any other
distributions on, or redeem or purchase or otherwise acquire for consideration
any shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series C Preferred Stock, (ii) declare or pay
dividends on, make any other distributions on any shares of stock ranking on a
parity (either as to dividends or upon liquidation, dissolution or winding up)
with the Series C Preferred Stock, except dividends paid ratably on the Series C
Preferred Stock and all such parity stock on which dividends are payable or in
arrears in proportion to the total amounts to which the holders of all such
shares are then entitled, (iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Series C Preferred Stock,
provided that the Company may at any time redeem, purchase or otherwise acquire
shares of any such parity stock in exchange for shares of any stock of the
Company ranking junior (either as to dividends or upon dissolution, liquidation
or winding up) to the Series C Preferred Stock or (iv) purchase or otherwise
acquire for consideration any shares of Series C Preferred Stock, or any shares
of stock ranking on a parity with the Series C Preferred Stock, except in
accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of such shares upon such
terms as the Board of Directors, after consideration of the respective annual
dividend rates and other relative rights and preferences of the respective
series and classes, shall determine in good faith will result in fair and
equitable treatment among the respective series or classes.
Whenever quarterly dividends or other dividends or distributions payable
on the Series C Preferred Stock have been in arrears for two or more quarters,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series C Preferred Stock outstanding shall have
been paid in full or set aside for payment, and so long as no less than 100,000
shares of Series C Preferred Stock are outstanding (appropriately adjusted for
any recapitalizations, stock splits, stock combinations, stock dividends and the
like), the holders of a majority of the outstanding shares of Series C Preferred
Stock shall be entitled to elect two (2) directors to the Company's Board of
Directors.
At any time, the holders of the Series C Preferred Stock have the right,
at their option, to convert any number of shares of Series C Preferred Stock
into that number of shares of Common Stock determined by dividing the Original
Purchase Price of the Series C Preferred Stock by 120% of the average closing
asked prices of the Common Stock for the twenty (20) consecutive trading-day
period ending five days prior to the effective date of this offering of Series C
Preferred Stock (the "Conversion Price"). The Conversion Price is subject to
adjustment from time to time if the Company issues additional shares of Common
Stock, convertible securities, options, warrants or similar rights at prices
less than the Conversion Price. In addition, the Conversion Price may be
adjusted for certain stock splits, stock dividends, combinations,
reclassifications and similar events.
Subject to the superior rights of the holders of the Series B Preferred
Stock, upon any voluntary liquidation, dissolution or winding up of the Company,
the Company may not make any distribution to the holders of shares of stock
ranking junior (either as to payment of dividends or with respect to
distributions upon liquidation, dissolution or winding up) to the Series C
Preferred Stock unless, prior
53
<PAGE> 56
thereto, the holders of Series C Preferred Stock have received an amount equal
to the Original Purchase Price of the shares of Series C Preferred Stock
purchased, plus an amount equal to accrued and unpaid dividends and
distributions thereon, whether or not declared, to the date of such payment
(the "Series C Preferred Stock Liquidation Preference"). Following the payment
of the full amount of the Series C Preferred Stock Liquidation Preference, no
additional distributions may be made to the holders of Series C Preferred
Stock. If there are not sufficient assets available to permit payment in full
of the Series C Preferred Stock Liquidation Preference and the liquidation
preferences of all other classes and/or series of Preferred Stock, if any,
which rank on a parity with the Series C Preferred Stock, then such remaining
assets shall be distributed ratably to the holders of such parity shares in
proportion to their respective liquidation preferences.
In the event of any consolidation or merger of the Company with or into
another corporation, or of any sale or conveyance to another corporation of all
or substantially all the property of the Company, in any of which transactions
the holders of Common Stock receive shares of stock, other securities, cash or
property receivable upon such consolidation, merger, sale or conveyance other
than Common Stock, each holder of Series C Preferred Stock then outstanding and
thereafter remaining outstanding has the right to convert each share of Series C
Preferred Stock held by him into the kind and amount of shares of stock, other
securities, cash or property receivable upon such consolidation, merger, sale or
conveyance by a holder of the number of shares of Common Stock into which such
share of Series C Preferred Stock could have been converted immediately prior to
the record date applicable to such consolidation, merger, sale or conveyance,
and shall have no other conversion rights. In any such event, the Company will
make effective provision for the protection of the conversion rights of the
holders of the Series C Preferred Stock that are not so converted, which will
thereafter be applicable to any such other shares of stock, other securities,
cash or property deliverable upon conversion of the shares of the Series C
Preferred Stock remaining outstanding or other convertible stock or securities
received by the holders in place thereof.
Unless previously converted, all or any portion of the Series C Preferred
Stock together with all dividends accrued but unpaid on such Series C Preferred
Stock computed to the redemption date may be redeemed on a pro rata basis by the
Company at its election from the holders of such Series C Preferred Stock at any
time and from time to time; provided, however, that the Company may not redeem
the Series C Preferred Stock unless the average of the closing asked prices per
share of Common Stock has equaled or exceeded 150% or more of the Conversion
Price of the Series C Preferred Stock for any twenty (20) consecutive trading
days ending within five days immediately prior to the date on which a redemption
notice is given by the Company. Notwithstanding the foregoing, the holders of
the Series C Preferred Stock will have the right to convert the Series C
Preferred to Common Stock for a period of thirty (30) days following notice of
redemption.
SPECIAL VOTING AND OTHER PROVISIONS
Stockholders' rights and related matters are governed by the Delaware
corporate laws, the Certificate and the Bylaws of the Company. Certain
provisions of the Certificate and Bylaws which are summarized below may affect
potential changes in control of the Company. The Board of Directors believes
that these provisions are in the best interests of stockholders because they
will encourage a potential acquiror to negotiate with the Board of Directors,
which will be able to consider the interests of all stockholders in a
change-in-control situation. However, the cumulative effect of these terms may
be to make it more difficult to acquire and exercise control of the Company and
to make changes in management more difficult.
54
<PAGE> 57
The Certificate provides for the approval of the holders of 66 2/3% of the
outstanding voting stock of the Company for a merger or a consolidation with, or
a sale by the Company of all or substantially all of its assets to, any person,
firm or corporation, or any group thereof, which owns, directly or indirectly,
5% or more of any class of voting securities of the Company (an "Interested
Person"). In addition, such 66 2/3% approval is required with respect to other
transactions involving any such Interested Person, including, among other
things, purchases by the Company or any of its subsidiaries of all or
substantially all of the assets or stock of an Interested Person and any other
transaction with an Interested Person which requires stockholder approval under
Delaware law. The 66 2/3% voting requirement is not applicable to any
transaction approved by the Company's Board of Directors if a majority of the
members of the Board of Directors voting to approve such transaction were
elected prior to the date on which the other party became an Interested Person.
The Certificate provides that each director will serve for a three-year
term and that approximately one-third of the directors are to be elected
annually. The Company may have three to nine directors as determined from time
to time by the Board, which currently consists of four members. Between
stockholder meetings, the Board may appoint new directors to fill vacancies or
newly created directorships. A director may be removed from office only for
cause and only by the affirmative vote of 50% of the combined voting power of
the then outstanding shares of stock entitled to vote generally in the election
of directors.
The Certificate further provides that stockholder action must be taken at
a meeting of stockholders and may not be effected by any consent in writing.
Special meetings of stockholders may be called only by the President or a
majority of the Board of Directors. If a stockholder wishes to propose an
agenda item for consideration, he must give a brief description of each item and
written notice to the Company not less than 60 nor more than 90 days prior to
the meeting unless less than 70-days prior notice of a stockholders meeting is
given to stockholders, in which case stockholders have ten days from the date of
notice of such meeting to be considered for inclusion in the agenda of such
meeting.
The Certificate generally provides that the foregoing provisions of the
Certificate and Bylaws may be amended or repealed only with the affirmative vote
of at least 66 2/3% of the shares entitled to vote. These provisions exceed the
usual majority vote requirement of Delaware law and are intended to prevent the
holders of less than 66 2/3% of the voting power from circumventing the
foregoing terms by amending the Certificate or Bylaws. These provisions,
however, enable the holders of more than 33 1/3% of the voting power to prevent
amendments to the Certificate or Bylaws even if there were favored by the
holders of a majority of the voting power.
The effect of such provisions of the Company's Certificate and Bylaws may
be to make more difficult the accomplishment of a merger or other takeover or
change in control of the Company. To the extent that these provisions have this
effect, removal of the Company's incumbent Board of Directors and management may
be rendered more difficult. Furthermore, these provisions may make it more
difficult for stockholders to participate in a tender or exchange offer for
Common Stock and in so doing may diminish the market value of the Common Stock.
The Company is not aware of any proposed takeover attempt or any proposed
attempt to acquire a large block of Common Stock.
DIRECTOR AND OFFICER INDEMNIFICATION
Section 12 of the Company's Certificate limits, to the fullest extent
permitted by the Delaware General Corporation Law ("DGCL"), as amended,
directors' personal liability to the Company or its
55
<PAGE> 58
stockholders for monetary damages or breach of fiduciary duty. Section 145 of
the DGCL enables a corporation to eliminate or limit personal liability of
members of its board of directors for violations of their fiduciary duty of
care. However, Delaware law does not permit the elimination of a director's
liability for engaging in intentional misconduct or fraud, knowingly violating
a law, for any transaction from which the director derived an improper personal
benefit or for unlawfully paying a distribution. The statute has no effect on
the availability of equitable remedies, such as an injunction or rescission,
for breach of fiduciary duty.
Section 12 of the Company's Certificate and Article V of the Company's
Bylaws require indemnification of directors and officers of the Company to the
fullest extent permitted by the DGCL for claims against them in their official
capacities, including stockholders' derivative actions.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
TRANSFER AGENT
The Transfer Agent for the Common Stock and Series C Preferred Stock is
American Securities Transfer, Incorporated.
REGISTRATION RIGHTS
The Representatives have certain registration rights with respect to the
securities underlying the Representatives' Warrants. Any exercise of such
registration rights by the Representatives may result in dilution of the
interest in the Company of then present stockholders, hinder efforts by the
Company to arrange future financings of the Company and have an adverse effect
on the market price of the Company's Common Stock and Series C Preferred Stock.
UNDERWRITING
The Underwriters named below have severally agreed, subject to the terms
and conditions of the Underwriting Agreement, to purchase from the Company the
number of shares of Series C Preferred Stock set forth opposite their names
below.
<TABLE>
<CAPTION>
Number of
Underwriter Shares
- -----------
<S> <C>
W. B. McKee Securities, Inc. . . . . . . . . . . . . . .
South Coast Financial Securities, Inc. . . . . . . . . .
</TABLE>
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters have agreed to purchase from the Company, and the Company has
agreed to sell to the Underwriters, 333,333 shares of the Company's Series C
Preferred Stock and an additional 50,000 shares of Series C Preferred Stock to
cover Over-Allotments, if any.
56
<PAGE> 59
The nature of the Underwriters' obligations are such that all of the
Series C Preferred Stock must be purchased if any shares of Series C Preferred
Stock are purchased (exclusive of the shares of Series C Preferred Stock subject
to the Over-Allotment Option described below). Such obligation is subject,
however, to various conditions, including the approval of certain legal matters
by counsel.
The Underwriters propose to offer part of the shares of Series C Preferred
Stock directly to the public at the price set forth on the cover page of the
Prospectus. They may allow a concession of up to 5% of the public offering
price of the Series C Preferred Stock to selected dealers who are members of the
National Association of Securities Dealers, Inc. and to certain foreign dealers.
Such dealers will be permitted to sell the Series C Preferred Stock directly to
the public, but not to other dealers or brokers without the consent of the
Underwriters. The Underwriters do not intend to confirm sales to any account
over which they have discretionary authority.
The Company has agreed to indemnify the Underwriters against certain
liabilities that may be incurred in connection with this offering, including
certain civil liabilities under the Securities Act.
The Company has granted to the Underwriters the option, exercisable at any
time within 45 days after the date of this Prospectus, to purchase from the
Company up to 50,000 additional shares of Series C Preferred Stock solely for
the purpose of covering over-allotments in the sale of 333,333 shares of Series
C Preferred Stock initially offered hereby. To the extent that the option is
exercised, the Underwriters will be committed, subject to certain conditions, to
purchase the additional shares of Series C Preferred Stock and to offer such
additional shares of Series C Preferred Stock to the public, all at the same
prices and on the same terms as those applicable to the 333,333 shares of Series
C Preferred Stock initially offered hereby.
The Company has agreed, upon completion of this offering, to sell to the
Representatives, for an aggregate price of $100, warrants to purchase up to
38,333 shares of Series C Preferred Stock (the "Representatives' Warrants"). The
Representatives' Warrants will be exercisable for a four-year term commencing
one year after the date of this Prospectus at an exercise price of $18.00 per
share. The Representatives' Warrants will be transferable to the extent
permitted under the rules of the NASD and applicable federal and state law. If
the Company files a registration statement under the provisions of the
Securities Act relating to an offering of securities, the holders of the
Representatives' Warrants or underlying securities will have the right, subject
to certain conditions, to include in such registration statement, at the
Company's expense, all or part of the Series C Preferred Stock underlying the
Representatives' Warrants or the Common Stock into which the Series C Preferred
Stock is converted. Additionally, at any time after the one-year period
following the effective date of the Registration Statement and within the
following four-year period, the holders of a majority of the Representatives'
Warrants and the shares underlying such Representatives' Warrant may require the
Company to register or qualify the issued or issuable Series C Preferred Stock
or Common Stock underlying the Representatives' Warrants at the Company's
expense. The number of shares of Series C Preferred Stock covered by the
Representatives' Warrants and the exercise price thereof are subject to
adjustment upon certain events to prevent dilution.
For the life of the Representatives' Warrants, the holders will have the
opportunity to profit from a rise in the market price of the Company's Series C
Preferred Stock above the exercise price of the Representatives' Warrants. Any
profit realized by the holders upon the sale of the Representatives' Warrants or
the securities issuable thereunder may be deemed additional underwriting
compensation. If the Representatives' Warrants are exercised, the voting and
equity interests of the Company's stockholders will be diluted. The Company may
find that the terms on which it could
57
<PAGE> 60
obtain additional capital may be adversely affected while the Representatives'
Warrants are outstanding.
The Company has agreed to pay the Representatives a non-accountable
expense allowance equal to 3% of the aggregate public offering price of the
Series C Preferred Stock, including Series C Preferred Stock sold pursuant to
the Over-Allotment Option, of which $25,000 has been paid.
The Underwriting Agreement also (i) obligates the Company, for a
three-year period, to advise the Representatives of any intention to publicly
offer or privately place any securities, and (ii) grants to South Coast
Financial Securities, Inc. a three- year right of first refusal to participate,
as the managing underwriter, co-managing underwriter or placement agent, on
terms available to the Company from others, in any public offering or private
placement of the Company's securities.
The Company has agreed not to offer or sell any of its securities for a
period of one year from the date of this Prospectus, without the prior written
consent of the Representatives. Each of the directors and officers of the
Company have agreed not to sell, grant any option for sale, or otherwise dispose
of, directly or indirectly, any shares of the Company's Common Stock or any
security convertible into Common Stock for a period of one year from the date of
this Prospectus, without the prior written consent of the Representatives.
The price at which the shares of Series C Preferred Stock are being
offered to the public has been determined by negotiation between the Company and
the Representatives. Among the factors considered in determining the price of
the Series C Preferred Stock were the Company's current financial condition and
prospects and the general condition of the securities market. However, the
public offering price of the Series C Preferred Stock does not necessarily bear
any relationship to the Company's assets, book value, earnings or any other
established criterion of value.
The foregoing is a brief summary of certain provisions of the Underwriting
Agreement and does not purport to be a complete statement of its terms and
conditions. A copy of the Underwriting Agreement is on file with the Securities
and Exchange Commission as an exhibit to the Registration Statement of which
this Prospectus forms a part. See "AVAILABLE INFORMATION."
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Squire,
Sanders & Dempsey, of Phoenix, Arizona. Certain legal matters will be passed
upon for the Underwriters by Hewitt & McGuire, of Irvine, California.
EXPERTS
The financial statements included in this prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports.
58
<PAGE> 61
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Sunrise Preschools, Inc.:
We have audited the accompanying consolidated balance sheet of Sunrise
Preschools, Inc. (a Delaware corporation) and subsidiary as of July 31, 1995,
and the related consolidated statements of income, shareholders' equity and
cash flows for each of the two years in the period ended July 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sunrise Preschools, Inc. and
subsidiary as of July 31, 1995, and the results of their operations and their
cash flows for each of the two years in the period ended July 31, 1995 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
October 2, 1995.
F-1
<PAGE> 62
SUNRISE PRESCHOOLS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS July 31, 1995 October 31, 1995
------------- ----------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 581,311 $ 577,215
Accounts receivable, net of allowance for doubtful
accounts of $20,000 at July 31, 1995 and
$17,000 at October 31, 1995 379,253 378,963
Prepaid expenses (Note 2) 96,242 115,381
Deferred tax asset, current portion (Note 10) 109,000 109,000
Inventory and supplies 16,376 148,492
----------- -----------
Total current assets 1,182,182 1,329,051
Property and equipment, net (Note 4) 642,143 824,600
Property and equipment leased to PSI, net (Notes 3 and 4) 514,126 531,147
Deferred tax asset, net of current portion (Note 10) 586,000 586,000
Note receivable from PSI (Note 3) 256,251 256,251
Deposits and other assets 153,044 91,259
----------- -----------
Total assets $ 3,333,746 $ 3,618,308
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of Credit (Note 5) $ -- $ 80,000
Accounts payable 125,628 195,166
Accrued expenses (Note 2) 302,259 355,221
Dividends payable on preferred stock (Note 9) 265,833 278,333
Notes payable and capital leases, current portion (Notes 5 136,618 153,988
and 6)
Deferred rent, current portion (Note 7) 96,241 106,381
Deferred gain on sale and leaseback of preschool facilities,
current portion (Note 8) 45,003 45,003
----------- -----------
Total current liabilities 971,582 1,214,092
----------- -----------
NOTES PAYABLE AND CAPITAL LEASES,
net of current portion (Notes 2, 5 and 6) 429,402 451,394
----------- -----------
DEFERRED RENT, net of current portion (Note 7) 416,787 388,897
----------- -----------
DEFERRED GAIN ON SALE AND LEASEBACK OF
PRESCHOOL FACILITIES, net of current portion (Note 8) 132,651 121,401
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 7, 12 and 13)
SHAREHOLDERS' EQUITY (Notes 7, 9, 12 and 13):
Preferred stock, $1 par value - 1,000,000 shares authorized,
500,000 shares issued and outstanding at July 31, 1995
and October 31, 1995, respectively 500,000 500,000
Common stock, $.01 par value 10,000,000 shares authorized,
2,935,894 shares issued and outstanding at July 31, 1995
and October 31, 1995, respectively 29,359 29,359
Paid-in capital 3,602,406 3,602,406
Accumulated deficit (2,748,441) (2,689,241)
----------- -----------
Total shareholders' equity 1,383,324 1,442,524
----------- -----------
Total liabilities and shareholders' equity $ 3,333,746 $ 3,618,308
=========== ===========
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-2
<PAGE> 63
SUNRISE PRESCHOOLS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(SEE NOTE 3)
<TABLE>
<CAPTION>
For the Years Ended Three Months Ended
July 31, October 31,
-------------------------------- --------------------------------
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATING REVENUE $ 9,715,023 $ 10,625,044 $ 2,435,546 $ 2,536,615
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Payroll 4,730,962 5,443,665 1,137,410 1,242,316
Facilities and maintenance 2,975,916 3,303,949 907,537 751,872
General and administrative 1,396,660 1,399,790 311,451 292,411
------------ ------------ ------------ ------------
Total operating expenses 9,103,538 10,147,404 2,356,398 2,286,599
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 611,485 477,640 79,148 250,016
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense, net (38,919) (73,404) (10,548) (11,076)
Other income 14,286 1,055 3,100 8,281
------------ ------------ ------------ ------------
Total other income (expense) (24,633) (72,349) (7,448) (2,795)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 586,852 405,291 71,700 247,221
INCOME TAX BENEFIT (EXPENSE) (Note 10) 220,000 475,358 -- (1,500)
------------ ------------ ------------ ------------
NET INCOME $ 806,852 $ 880,649 $ 71,700 $ 245,721
============ ============ ============ ============
NET INCOME AVAILABLE FOR
COMMON STOCK (Note 2) $ 756,852 $ 830,649 $ 59,200 $ 233,221
============ ============ ============ ============
NET INCOME PER COMMON SHARE
AND COMMON SHARE
EQUIVALENT (Note 2):
Primary $ .29 $ .33 $ .02 $ .10
============ ============ ============ =============
Fully diluted $ .25 $ .29 $ .02 $ .08
============ ============ ============ =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND COMMON
SHARE EQUIVALENTS
OUTSTANDING:
Primary 2,620,632 2,495,015 3,337,796 2,454,715
============ ============ =========== =============
Fully diluted 3,208,075 3,045,093 3,837,796 2,954,715
============ ============ =========== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-3
<PAGE> 64
SUNRISE PRESCHOOLS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(SEE NOTE 9)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
---------------------- ----------------------
Outstanding Outstanding Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
----------- -------- ----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 31, 1993 500,000 $500,000 2,435,894 $ 24,359 $ 3,141,221 $(4,335,942) $ (670,362)
Dividends payable on preferred stock -- -- -- -- -- (50,000) (50,000)
Net income -- -- -- -- -- 880,649 880,649
------- -------- --------- --------- ----------- ----------- -----------
BALANCE AT JULY 31, 1994 500,000 500,000 2,435,894 24,359 3,141,221 (3,505,293) 160,287
Exercise of warrants -- -- 500,000 5,000 461,185 -- 466,185
Dividends payable on preferred stock -- -- -- -- -- (50,000) (50,000)
Net income -- -- -- -- -- 806,852 806,852
------- -------- --------- --------- ----------- ----------- -----------
BALANCE AT JULY 31, 1995 500,000 $500,000 2,935,894 $ 29,359 $ 3,602,406 $(2,748,441) $ 1,383,324
Dividends payable on preferred stock -- -- -- -- -- (12,500) (12,500)
Net income -- -- -- -- -- 71,700 71,700
------- -------- --------- --------- ----------- ----------- -----------
BALANCE AT OCTOBER 31, 1995 500,000 $500,000 2,938,894 $ 29,359 $ 3,602,406 $(2,689,241) $ 1,442,524
======= ======== ========= ========= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 65
SUNRISE PRESCHOOLS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Fiscal Years Ended Three Months Ended
July 31, October 31,
-------------------------- ----------------------
1995 1994 1995 1994
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 806,852 $ 880,649 $ 71,700 $ 245,721
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation and amortization 295,955 290,582 78,725 73,859
Amortized gain on sale of real estate (45,003) (45,003) (11,250) (11,250)
Income tax benefit (220,000) (475,358) -- --
Amortization of deferred rent (74,188) (82,704) (17,750) (18,356)
Provision for doubtful accounts 242,633 46,487 18,579 13,215
Gain on disposal of property and equipment (14,286) (1,055) (3,100) (8,281)
Changes in assets and liabilities-
Increase in accounts receivable (141,024) (42,793) (18,289) (76,358)
(Increase) decrease in prepaid expenses (69,053) 57,013 (19,139) (34,427)
(Increase) decrease in inventory and supplies 13,646 42,846 (132,116) 11,004
(Increase) decrease in deposits and other (66,787) 433 61,785 4,138
assets
Increase (decrease) in accounts payable (13,555) (125,857) 69,538 (4,679)
Increase (decrease) in accrued expenses (59,652) (58,009) 52,962 109,436
--------- --------- --------- ---------
Total adjustments (151,314) (393,418) 79,945 58,301
--------- --------- --------- ---------
Net cash provided by operating
activities 655,538 487,231 151,645 304,022
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (354,308) (82,544) (283,103) (189,888)
Proceeds from disposal of property and equipment 53,322 5,308 8,000 20,527
--------- --------- --------- ---------
Net cash used in investing activities (300,986) (77,236) (275,103) (169,361)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of warrants 466,185 -- -- --
Proceeds from notes payable 254,192 -- 74,903 167,052
Payments on lines of credit (100,000) -- 80,000 --
Increase in note receivable from Preschool
Services, Inc. (335,253) (97,498) -- (85,291)
Payments on notes payable and capital leases (160,146) (231,169) (35,541) (49,952)
--------- --------- --------- ---------
Net cash provided by (used in) financing
activities 124,978 (328,667) 119,362 31,809
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 479,530 81,328 (4,096) 166,470
CASH AND CASH EQUIVALENTS, beginning of year 101,781 20,453 581,311 101,781
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 581,311 $ 101,781 $ 577,215 $ 268,251
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for interest $ 38,919 $ 73,438 $ 10,548 $ 11,076
========= ========= ========= =========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Capital lease obligations of $22,234 and $47,134 during fiscal 1995 and
1994, respectively, were incurred when the Company entered into lease
agreements for equipment.
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 66
SUNRISE PRESCHOOLS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1995
(1) ORGANIZATION AND OPERATIONS:
Sunrise Preschools, Inc. (the Company) was incorporated in the State of Delaware
in May 1987, and currently operates 27 child care centers in Arizona and Hawaii
(see Note 3).
The Company is successor to Venture Educational Programs, Inc., an Arizona
corporation formed in 1980, and Sunrise Preschools, Inc., an Arizona
corporation, formed in 1985. The Company has one wholly owned subsidiary,
Sunrise Preschools Hawaii, Inc., formed in fiscal 1990. Another subsidiary,
Sunrise Holdings, Inc., formed in fiscal 1987, was dissolved effective September
10, 1994.
Effective February 1, 1994, a portion of the Company's operations were
transferred to a Hawaii nonprofit corporation, Preschool Services, Inc. (PSI).
Because of PSI's nonprofit status, PSI is eligible to receive certain grants and
subsidies. The Company provides PSI with management, administration, educational
programs and operation of PSI's preschools (see Note 3). The results of
operations of the schools transferred to PSI subsequent to February 1, 1994 are
not included in the accompanying consolidated financial statements.
During fiscal 1994, the Company expanded its child care operations by opening
four additional sites through cooperative efforts with various outside parties.
One additional site was also opened in fiscal 1995. These ventures required a
minimal capital investment by the Company while expanding its licensed capacity
by approximately 165 children. Management is continuing to pursue various
expansion opportunities, including these types of cooperative ventures.
In fiscal 1995, cash flow from the operations of the child care centers operated
by Sunrise was sufficient to meet normal operating requirements of these child
care centers plus the corporate office expenses. Should the Company decide to
pursue additional expansion, alternative sources of capital would be necessary
(see Note 13).
The Company's operations are subject to certain risks inherent in a business
enterprise. See a description of these risks in RISK FACTORS in this Prospectus.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Sunrise
Preschools, Inc. and Sunrise Preschools Hawaii, Inc. All intercompany accounts
and transactions have been eliminated in consolidation.
F-6
<PAGE> 67
(b) CASH AND CASH EQUIVALENTS
All short-term investments with a maturity of three months or less when
purchased are considered to be cash equivalents. Cash equivalents, which consist
primarily of government securities and other short-term investments, are stated
at the lower of aggregate cost or market and totaled $508,518 at July 31, 1995.
(c) PREPAID EXPENSES
Prepaid expenses include prepaid insurance of $61,751 at July 31, 1995.
(d) DEPRECIATION AND AMORTIZATION
Property and equipment are recorded at cost and depreciated over the estimated
useful lives of the related assets, which range from three to twelve years.
Leasehold improvements are amortized over the shorter of either the asset's
useful life or the related lease term. Depreciation is computed on the
straight-line method for financial reporting purposes and on the modified
accelerated cost recovery system (MACRS) for income tax purposes.
(e) ACCRUED EXPENSES
Accrued expenses include compensation and related benefits of $174,587 at July
31, 1995.
(f) NET INCOME PER SHARE
Primary net income per share is computed by dividing net income available for
common stock (net income less accrued dividends for the period on Series B
Preferred Stock) by the weighted average number of common shares and common
share equivalents outstanding during the period. Shares issuable upon the
exercise of warrants and employee stock options that are considered antidilutive
are not included in the weighted average number of common shares and common
share equivalents outstanding.
Fully diluted net income per share assumes the conversion of the Series B
Preferred Stock into 500,000 shares of common stock.
(g) BASIS OF PRESENTATION
The fiscal year of the Company consists of eight four-week periods and four
five-week periods. Each quarter of the Company's fiscal year consists of two
four-week periods and one five-week period. The Company's fiscal year ends on
the Saturday nearest July 31 of each year and the first quarter ends on the
Saturday nearest October 31. However, for clarity of presentation, all
information has been presented as if the fiscal year ended on July 31 and the
first quarter ended on October 31.
Certain reclassifications have been made to amounts previously reported to
conform with the presentation for the year ended July 31, 1995 and quarter
ended October 31, 1995, respectively.
(h) CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash and cash equivalents and accounts
receivable. The Company places its cash and cash
F-7
<PAGE> 68
equivalents with federally insured institutions and limits the amount of credit
exposure to any one institution.
Concentrations of credit risk with respect to accounts receivable is limited due
to the large number of customers comprising the Company's customer base. As a
result, at July 31, 1995, the Company does not consider itself to have any
significant concentrations of credit risk with respect to accounts receivable
(see Note 3).
(3) PRESCHOOL SERVICES, INC.:
In January 1994, the Board of Directors approved the transfer of a portion of
the Company s operations to Preschool Services, Inc. (PSI), a Hawaii nonprofit
corporation. Because of PSI's nonprofit status, PSI is eligible to receive
certain grants and subsidies. The Company provides PSI with management,
administration and educational programs for PSI's child care centers and leases
substantially all of the equipment and other property necessary for the
operation of the related child care centers to PSI under an Administrative
Services Agreement, License and Equipment Lease (the PSI Agreement). The PSI
Agreement stipulates that the Company is to receive an administrative services
fee (the Administrative Fee) for providing the services described above. For
fiscal 1995 and 1994, the Administrative Fee totaled $42,000 and $25,000,
respectively. Pursuant to the PSI Agreement, the Administrative Fee equals 9% of
PSI's adjusted gross revenues each month, subject to certain limitations. In
addition, the Company receives lease payments of approximately $120,000
annually. During fiscal 1995, the Company agreed to defer future Administrative
Fees and lease payments due from PSI (which are an aggregate of approximately
$170,000 annually) until such time as PSI's cash flow is adequate to fund these
fees, which the Company estimates will be no sooner than 1998. In connection
with this deferral, the accumulated amounts due from PSI at July 31, 1995, have
been converted to a promissory note equal to the present value of the expected
future payments to be received from PSI related to the balance of the receivable
outstanding at July 31, 1995, over a period of seven years. This resulted in a
reduction in the outstanding receivable balance, through a charge to the
provision for bad debts of $176,500 in the accompanying financial statements.
The promissory note bears interest at 8.0%, with monthly payments due beginning
January 1998 through July 2002. At July 31, 1995, the net receivable from PSI
totaled $256,251.
F-8
<PAGE> 69
Following is the unaudited pro forma condensed consolidated statement of income
for the year ended July 31, 1994, as if the PSI Agreement was in effect as of
August 1, 1993:
<TABLE>
<CAPTION>
As Reported Adjustments Pro forma
----------- ----------- ---------
<S> <C> <C> <C>
Operating revenue $10,625,044 $ (987,085) (1) $9,662,959
25,000 (2)
Operating expenses 10,147,404 (1,103,095) (3) 8,983,809
(60,500) (4)
----------- ----------
Income from operations 477,640 679,150
Other income (expense), net (72,349) 19,076 (4) (53,273)
----------- ----------
Income before income taxes 405,291 625,877
Income tax benefit 475,358 475,358
----------- ----------
Net income $ 880,649 $1,101,235
=========== ==========
Net income available $ 830,649 $1,051,235
for common stock =========== ==========
Net income per common
share and common
share equivalent
Primary $ .33 $ .42
=========== ==========
Fully Diluted $ .29 $ .36
=========== ==========
</TABLE>
(1) To adjust consolidated revenue to exclude tuition revenue
related to PSI's child care centers.
(2) To adjust consolidated revenue to include the Administrative
Fee under the PSI Agreement ($50,000 annually).
(3) To adjust consolidated operating expenses to exclude those
operating expenses related to PSI's child care centers.
(4) To adjust consolidated expenses to exclude costs associated
with leasehold improvements, equipment, and furniture and
fixtures that the Company is reimbursed for by PSI pursuant to
the PSI Agreement.
F-9
<PAGE> 70
(4) PROPERTY AND EQUIPMENT:
Property and equipment and property and equipment leased to PSI consist of the
following at July 31, 1995:
<TABLE>
<CAPTION>
Property and
Property Equipment
and Equipment Leased to PSI
------------- -------------
<S> <C> <C>
Furniture and fixtures $ 520,132 $ 79,371
Equipment 951,990 179,459
Vehicles 478,086 -
Leasehold improvements 385,986 963,884
----------- ----------
2,336,194 1,222,714
Less-Accumulated depreciation (1,694,051) (708,588)
and amortization ----------- ----------
$ 642,143 $ 514,126
=========== ==========
</TABLE>
The Company held leasehold improvements and equipment under capital lease
obligations with a carrying value of approximately $253,000 at July 31, 1995.
(5) LINES OF CREDIT:
In January 1995, the Company replaced its $50,000 bank line of credit and its
$50,000 line of credit from the Company's president with three new bank lines of
credit: (i) a $200,000 working capital line secured by the Company's accounts
receivable, which bears interest at prime (8.75% at July 31, 1995) plus 1.75%;
(ii) a $200,000 line of credit for the purchase of equipment secured by the
Company's equipment, which bears interest at prime plus 2%, and; (iii) a
$100,000 revolving line of credit for the purchase of vehicles, which bears
interest at prime plus 2%. The bank lines of credit are guaranteed by an officer
of the Company. The amount available under the working capital line was $200,000
at July 31, 1995.
The Company is required to meet certain covenants under these lines of credit,
including maintaining certain minimum net working capital balances and meeting
certain debt and interest coverage ratios. The terms of the lines of credit also
limit the ability of the Company to pay dividends without the consent of the
bank. At July 31, 1995, the Company was in compliance with all covenants of the
line of credit agreements.
These lines of credit are renewable each year on December 31. As of July 31,
1995, there were no borrowings under the working capital line or the equipment
line. Borrowings under the vehicle line consisted of drawdowns of $51,000 which
were converted to a five-year notes payable.
During fiscal 1995, the weighted average interest rate under these lines of
credit was 9.5%. The Company expects to be able to renew the lines of credit
under similar terms in the future. However, if the credit lines are not renewed,
there is no assurance that they can be replaced.
F-10
<PAGE> 71
(6) NOTES PAYABLE AND CAPITAL LEASES:
Notes payable and capital leases consist of the following at July 31, 1995:
<TABLE>
<S> <C>
Installment notes payable to financial institutions, payable monthly with
interest rates ranging from 7.2% to 17%, maturing through June 2000,
secured by vehicles $ 252,055
Capitalized lease obligations, payable monthly at interest rates ranging
from 10.4% to 20.3%, maturing through December 2002 313,965
---------
566,020
Less-current portion (136,618)
---------
Long-term portion $ 429,402
=========
</TABLE>
Repayments of notes payable and capital lease obligations are scheduled as
follows at July 31, 1995:
<TABLE>
<CAPTION>
Year Ended Notes Capital
July 31, Payable Leases
---------- ------- -------
<S> <C> <C>
1996 $ 57,142 $ 109,170
1997 59,794 69,806
1998 60,763 51,128
1999 54,963 45,185
2000 19,393 45,185
Thereafter - 109,196
-------- ---------
$252,055 429,670
========
Less - Amounts representing interest (115,705)
---------
$ 313,965
=========
</TABLE>
(7) COMMITMENTS AND CONTINGENCIES:
The Company leases 14 of its child care facilities and certain vehicles and
equipment under agreements which have been classified as operating leases for
financial reporting purposes. Under these agreements, the Company generally has
responsibility for maintenance, utilities, taxes and insurance expenses. Certain
agreements provide for the escalation of future rents based on the Consumer
Price Index or other formulas. Renewal of the agreements are for periods of 5 to
25 years at the Company's discretion. Two of these child care facilities have
been subleased to PSI (see Note 3).
For those leases that require fixed rental escalations during their lease terms,
rent expense is recognized on a straight-line basis resulting in deferred rent
of $513,028 at July 31, 1995. The liability will be satisfied through future
rental payments.
The Company pays no rent at 13 of its child care centers. However, profit
sharing arrangements exist with the owners of five of these facilities, four of
which are managed for PSI. Amounts paid by the Company during fiscal 1995 and
1994 relating to these agreements totaled $9,925 and $54,013, respectively, and
are included in facilities and maintenance in the accompanying consolidated
statements of income. The
F-11
<PAGE> 72
arrangements with the remaining eight child care centers provide for the Company
to be reimbursed for expenses and paid a predetermined fee for operating the
child care centers.
Future lease commitments under noncancelable operating leases are as follows at
July 31, 1995:
<TABLE>
<CAPTION>
Year Ending
July 31,
-----------
<S> <C>
1996 $ 2,334,587
1997 2,329,713
1998 2,092,549
1999 1,655,119
2000 1,333,844
Thereafter 3,144,543
-----------
$12,890,355
===========
</TABLE>
During fiscal 1995 and 1994, the Company leased equipment used in two preschool
facilities from an officer/stockholder for $2,000 per month. This lease expires
in November 1996. The Company also leased four vehicles used at its preschool
facilities during fiscal years 1995 and 1994 from officers/stockholders with
aggregate monthly payments of $2,023 per month through March 1997 and $1,190 per
month thereafter through June 1998.
Total rent expense for operating leases, net of sublease income of $503,534 and
$254,637 and including amounts paid to related parties of $48,290 and $48,290
for fiscal years 1995 and 1994, was $1,916,896 and $2,071,737 for fiscal years
1995 and 1994, respectively.
The Company has employment agreements with two of its principal officers (the
Employee). These agreements, which have been revised from time-to-time, provide
for minimum salary levels, adjusted annually for cost of living changes, as well
as for the payment of incentive bonuses, at the discretion of the Compensation
Committee of the Company's Board of Directors, in accordance with Company bonus
plans in effect. Each of the agreements has a perpetual three-year term, such
that on any given date each agreement has a three-year remaining term. The
agreements provide that the employees' salaries will be reviewed annually, but
such salaries may not be decreased.
Each of the agreements provide that if the Employee is terminated by the Company
other than for cause of disability, or by the Employee for good reason (as
defined in the agreements), the Company shall pay to the Employee (i) his or her
salary through the termination date plus any accrued but unpaid bonuses, and
(ii) a lump sum payment equal to the sum of three years of the Employee's annual
salary and an amount equal to all bonuses paid to the Employee in the three
years immediately preceding termination. In addition, the Company must maintain
until the first to occur of (i) the Employee's attainment of alternative
employment or (ii) three years from the date of termination, the Employee's
benefits under the Company's benefit plans to which the Employee and his or her
eligible beneficiaries were entitled immediately prior to the date of
termination. In addition, all options or warrants to purchase common stock held
by the Employee on the date of termination become exercisable on the date of
termination, regardless of any vesting provisions, and remain exercisable for
the longer of one year from the date of termination or the then remaining
unexpired term of such warrants or options.
On April 14, 1995, the Company entered into an acquisition consulting and
investor relations agreement with a consultant. Pursuant to the agreement, the
consultant will provide various acquisition consulting and investor relations
services to the Company, including consulting with the Company on matters
involving the
F-12
<PAGE> 73
financial community. The agreement calls for monthly payments of $3,000 for
investor relations services until December 31, 1995, which increase to $5,700
through December 31, 1996. The consultant also is to be paid an acquisition
consulting fee of $15,000 for each child care center acquired by the Company
during the term of the agreement. Pursuant to the agreement, the Company granted
the consultant, as additional consideration for consulting services, a warrant
to purchase 145,000 shares of the Company's common stock at a price of $1.21875
per share and has agreed to reimburse the consultant for certain expenses. The
agreement terminates on December 31, 1996; however, the agreement may be
terminated for cause (as defined in the agreement) upon ten days notice to the
consultant.
(8) DEFERRED GAIN ON SALE AND LEASEBACK OF PRESCHOOL FACILITIES:
In 1988, the Company entered into sale and leaseback agreements for three
preschool facilities. The aggregate gain of $490,939 is being amortized as a
reduction of rent expense over the lease terms of ten and fifteen years. The
unamortized deferred gain on the sale and leaseback of these preschool
facilities was $177,654 at July 31, 1995.
(9) SHAREHOLDERS' EQUITY:
The Company's authorized capital stock consists of 10,000,000 shares of common
stock, par value $.01, and 1,000,000 shares of preferred stock par value $1.00.
SALE OF COMMON STOCK AND WARRANTS:
At July 31, 1995, the Company had warrants to purchase 1,000,000 shares of the
Company's common stock outstanding. The warrants were issued as part of the
Company's initial public offering in September 1987, and have an exercise price
of $5.00 per share. On September 20, 1995, the expiration date of the warrants
was extended until November 6, 1995 and the exercise price was reduced to $1.00
per share. As a condition of this extension and change in exercise price,
warrant holders will be able to exercise only one of every 16 warrants held or a
total of 62,500 warrants. No warrants have been exercised.
SERIES A PREFERRED STOCK:
On February 10, 1995, the Board of Directors adopted a shareholder rights plan
(the "Plan"), which authorized the distribution of one right to purchase one
one-thousandth of a share of $1.00 par value Series A Participating Preferred
Stock (a "Right") for each share of common stock of the Company. Rights will
become exercisable following the tenth day (or such later date as may be
determined by a majority of the Directors not affiliated with an acquiring
person or group) after a person or group (a) acquires beneficial ownership of
15% or more of the Company's common stock or (b) announces a tender or exchange
offer, the consummation of which would result in ownership by a person or group
of 15% or more of the Company's common stock.
Upon exercise, each Right will entitle the holder (other than the party seeking
to acquire control of the Company) to acquire shares of the common stock of the
Company or, in certain circumstances, such acquiring person at a 50% discount
from market value. The Rights may be terminated by the Board of Directors at any
time prior to the date they become exercisable; thereafter, they may be redeemed
for a specified period of time at $0.001 per Right.
F-13
<PAGE> 74
SERIES B PREFERRED STOCK AND WARRANTS:
On April 6, 1990, the Company completed the sale of 500,000 shares of $1.00 par
value Series A Preferred Stock for $500,000. On November 22, 1991, the Company
issued 500,000 shares of its Series B Preferred Stock ("Series B") in exchange
for its formerly issued Series A Preferred Stock and the Series A Preferred
Stock was retired. The transaction also included the issuance of warrants to
purchase up to 500,000 shares of the Company's common stock at any time during
the period from April 6, 1990 to April 6, 1995 at $1.00 per share, subject to
adjustment. On April 6, 1995, all 500,000 warrants were exercised. Proceeds from
this issuance of common stock, net of issuance and registration costs of
$33,815, were $466,185. Each share of Series B has a $1.00 per share liquidation
preference, carries a $.10 per share annual cumulative dividend and is
convertible into one share of the Company's common stock, subject to adjustment.
Cumulative dividends payable on the Series B as of July 31, 1995 were $265,833.
(10) INCOME TAXES:
Effective August 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109 (SFAS 109), Accounting for Income Taxes. SFAS 109 requires the
use of an asset and liability approach in accounting for income taxes. Deferred
tax assets and liabilities are recorded based on differences between the
financial statement and tax bases of assets and liabilities at the tax rates in
effect when these differences are expected to reverse.
Deferred tax assets are reduced by a valuation allowance if, based on the weight
of available evidence, it is more likely than not that all or some portion of
the deferred tax assets will not be realized. The ultimate realization of the
deferred tax asset depends on the Company's ability to generate sufficient
taxable income in the future.
Deferred tax assets are reduced by a valuation allowance if, based on the weight
of available evidence, it is more likely than not that all or some portions of
the deferred tax assets will not be realized. The ultimate realization of the
deferred tax asset depends on the Company's ability to generate sufficient
taxable income in the future. While management believes that the total deferred
tax asset will eventually be fully realized by future operations, as a result of
the losses experienced prior to fiscal 1992, management recorded a valuation
allowance equal to 100% of the deferred tax asset upon adoption of SFAS 109 on
August 1, 1993. As a result, the initial adoption of SFAS 109 has no impact on
the Company's consolidated financial statements.
At July 31, 1995 and 1994, it was determined that the valuation allowance should
be reduced by $220,000 and $475,358, respectively. This determination was based
primarily on the improvement in the Company's net income over the past four
fiscal years, particularly during fiscal 1995 and 1994.
Accordingly, management believes that it is more likely than not that the
Company will generate sufficient taxable income to realize these future tax
benefits. The changes in the valuation allowance resulted in the recording of an
income tax benefit of $220,000 and $475,358 in the years ended July 31, 1995 and
1994, respectively.
If the Company is unable to generate sufficient taxable income in the future,
increases in the valuation allowance will be required through a charge to
expense. If, however, the Company achieves sufficient profitability to realize
all of the deferred tax assets, the valuation allowance will be further reduced
and reflected as an income tax benefit in future periods.
F-14
<PAGE> 75
The components of the net deferred tax asset are as follows at July 31, 1995:
<TABLE>
<CAPTION>
Current Long-Term Total
------- --------- -----
<S> <C> <C> <C>
Deferred Tax Liabilities
Excess of book basis over tax
basis in fixed assets $ - $ (68,000) $ (68,000)
Other - (6,000) (6,000)
-------- --------- ---------
- (74,000) (74,000)
-------- --------- ---------
Deferred Tax Assets
Tax effect of net operating loss
carryforward - 800,000 800,000
Allowance for doubtful accounts 8,000 - 8,000
Accelerated tax depreciation - 117,000 117,000
Deferred revenue 17,000 - 17,000
Accrued vacation and sick leave 39,000 - 39,000
Deferred rent 27,000 178,000 205,000
Deferred gain on sale of real estate 18,000 53,000 71,000
Valuation allowance - (488,000) (488,000)
-------- --------- ---------
109,000 660,000 769,000
-------- --------- ---------
$109,000 $ 586,000 $ 695,000
======== ========= =========
</TABLE>
In fiscal 1995 and 1994, the Company utilized net operating loss carryforwards
of $415,000 and $309,000, respectively. Accordingly, there is no income tax
expense in 1995 or 1994.
In addition, the Company's net operating loss carryforwards, which comprise 64%
of total deferred tax assets, at July 31, 1995, expire as follows:
<TABLE>
<S> <C>
2004 $ 561,982
2005 861,342
2006 564,007
----------
$1,987,331
==========
</TABLE>
F-15
<PAGE> 76
The income tax benefit consists of the following for the years ended July 31,
1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Current, net of operating loss carryforwards:
Federal $ - $ -
State - -
--------- ---------
- -
--------- ---------
Deferred 237,000 (39,615)
Utilization of net operating loss carryforward (166,000) (125,189)
Change in valuation allowance due to net
operating loss carryforward recognition 166,000 125,189
Reduction of valuation allowance (457,000) (435,743)
--------- ---------
Income tax benefit $(220,000) $(475,358)
========= =========
</TABLE>
A reconciliation of the federal income tax rate to the Company's effective tax
rate is as follows at July 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Statutory federal rate 34% 34%
State taxes, net of federal benefit 6 6
Benefit of net operating loss carryforwards (28) (30)
Benefit due to reduction in valuation allowance (50) (127)
--- ----
(38)% (117)%
=== ====
</TABLE>
(11) RELATED PARTY TRANSACTIONS:
Certain officers of the Company have personally guaranteed child care facility
lease payments to nonrelated parties. In addition, certain officers of the
Company have personally guaranteed the Company's outstanding debt. As of July
31, 1995, the aggregate amounts of lease payments and other obligations
guaranteed by these officers totalled approximately $6,049,000. See also Note 7.
(12) EMPLOYEE BENEFIT PLANS:
1987 STOCK OPTION PLAN
The Company's Stock Option Plan (the 1987 Plan) was adopted by the
Board of Directors and approved by the stockholders in July 1987. Only employees
(including officers and directors, subject to certain limitations) are eligible
to receive options under the 1987 Plan, under which 240,000 shares of common
stock are authorized for issuance. To date, options to purchase all of such
shares have been granted; such options have terms of five to ten years, with
exercise prices of $0.50 to $2.375 per share, which is generally the fair market
value of the underlying shares as of the date of grant. Options are generally
subject to a three or five-year vesting schedule.
The 1987 Plan provides for the granting to employees of either
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or non-qualified
F-16
<PAGE> 77
stock options. The 1987 Plan is administered by the Board of Directors of the
Company, or a committee of the Board, which determines the terms of options
granted under the 1987 Plan, including the exercise price and the number of
shares subject to the option. Generally, the exercise price of options granted
under the 1987 Plan must be not less than the fair market value of the
underlying shares on the date of grant, and the term of each option may not
exceed eleven years (ten years in the case of incentive stock options).
Incentive stock options granted to persons who have voting control over ten
percent or more of the Company's capital stock are granted at 110% of the fair
market value of the underlying shares on the date of grant and expire five years
after the date of grant.
The 1987 Plan provides the Board of Directors with the discretion to
determine when options granted thereunder shall become exercisable. Generally,
such options may be exercised after a period of time specified by the Board of
Directors at any time prior to expiration, so long as the optionee remains
employed by the Company. No option granted under the 1987 Plan is transferable
by the optionee other than by will or the laws of descent and distribution, and
each option is exercisable during the lifetime of the optionee only by the
optionee.
1995 STOCK OPTION PLAN
The Company's 1995 Stock Option Plan (the 1995 Plan) authorizes the
Board to grant options to employees of the Company to purchase up to an
aggregate of 500,000 shares of common stock. Officers and other employees of the
Company who, in the opinion of the Board of Directors, are responsible for the
continued growth and development and the financial success of the Company are
eligible to be granted options under the 1995 Plan. Options may be non-qualified
options, incentive stock options, or any combination of the foregoing. In
general, options granted under the 1995 Plan are not transferable and expire
eleven years after the date of grant (ten years in the case of incentive stock
options). The per share exercise price of an incentive stock option granted
under the 1995 Plan may not be less than the fair market value of the common
stock on the date of grant. Incentive stock options granted to persons who have
voting control over 10% or more of the Company's capital stock are granted at
110% of the fair market value of the underlying shares on the date of grant and
expire five years after the date of grant.
The 1995 Plan provides the Board of Directors with the discretion to
determine when options granted thereunder will become exercisable. Generally,
such options may be exercised after a period of time specified by the Board of
Directors at any time prior to expiration, so long as the optionee remains
employed by the Company. No option granted under the 1995 Plan is transferable
by the optionee other than by will or the laws of descent and distribution, and
each option is exercisable during the lifetime of the optionee only by the
optionee. No option may be granted after May 2, 2005.
NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
The Company's Non-Employee Directors Stock Option Plan (the Directors'
Plan) was adopted by the Board of Directors in May 1995. Only non-employee
directors are eligible to receive options under the Directors' Plan, under which
100,000 shares are authorized for issuance. To date, options to purchase 20,000
shares of common stock have been granted; such options have a term of six years
with an exercise price of $1.375 per share, which was the fair market value of
the underlying shares on the date of grant. Except for options granted on the
effective date of the Directors' Plan, which are fully vested, all options
granted under the Directors' Plan will be subject to a one-year vesting
schedule. All options granted or to be granted under the Directors' Plan are
non-qualified stock options.
On the date the Directors' Plan was adopted by the Company's Board of
Directors, each non-employee director was granted an option to acquire 10,000
shares of the Company's common stock. Each non-employee director who joins the
Board of Directors after the date the Company's Board of Directors
F-17
<PAGE> 78
approved the plan will likewise receive an option to acquire 10,000 shares of
the Company's common stock. In addition to the foregoing option grants, each
year every non-employee director automatically receives an option to acquire
5,000 shares of the Company's common stock on the third business day following
the date the Company publicly announces its annual financial results; provided
that such director has attended at least 75% of the meetings of the Board of
Directors and of the Board Committees of which such non-employee director is a
member in the preceding fiscal year.
No option granted under the Directors Plan is transferable by the
optionee other than by will or the laws of descent and distribution, and each
option is exercisable during the lifetime of the optionee only by the optionee.
The following summarizes the activity for the plans for the fiscal year ended
July 31, 1995:
<TABLE>
<CAPTION>
Exercise
Price
Total Per Share
--------- ---------------
<S> <C> <C>
Options outstanding at
beginning of year 181,589 $ .50 - $2.375
Granted 585,003 $1.00 - $1.5125
Canceled (156,592) $1.19 - $2.00
Exercised -
--------
Options outstanding
at end of year 610,000 $ .50 - $2.375
========
Exercisable at end of year 316,641 $ .50 - $2.375
========
Options available for
grant at end of year 230,000
========
</TABLE>
401(K) PLAN
In June 1995, the Company implemented a contributory retirement plan (the 401(k)
Plan) for the majority of its employees with at least one year of service. The
401(k) Plan is designed to provide tax-deferred income to the Company's
employees in accordance with the provisions of Section 401(k) of the Code.
The 401(k) Plan provides that each participant may contribute up to 17% of their
salary, not to exceed the statutory limit. The Company will make a
fixed-matching contribution equal to 25% of each participant's contribution, up
to a maximum of 2% of total annual cash compensation received by respective
participants. Under the terms of the 401(k) Plan, the Company may also make
discretionary year-end contributions. Each participant has the right to direct
the investment of his or her funds among certain named plans.
F-18
<PAGE> 79
(13) SUBSEQUENT EVENTS:
The Company entered into a letter of intent for a $5 million, firm commitment
public offering of a new series of convertible preferred stock in October 1995.
The offering is presently scheduled to be completed in late November 1995. The
purpose of the offering is to provide funds for the expansion of the Company's
operations, both through the opening of additional Company facilities and the
possible acquisition of other child care centers.
In September 1995, the Company entered into an agreement in principle to
purchase the operations of two child care centers in Colorado. The transaction
is subject to certain conditions, including the negotiation of a definitive
agreement and renegotiation of the leases at the two centers. The acquisition
will be accounted for as a purchase in accordance with Accounting Principles
Board Opinion No. 16.
F-19
<PAGE> 80
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS WITH RESPECT TO THE
OFFERING MADE HEREBY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL ANY
OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO
WHOM, IT IS UNLAWFUL TO MAKE SUCH AN OFFER. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR
IN THE BUSINESS OF THE COMPANY SINCE THE DATE HEREOF.
----------------------
<TABLE>
<CAPTION>
TABLE OF CONTENTS Page
----
<S> <C>
Available Information . . . . . . . . . . . . . . . . . . . . . . . . . 3
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Price Range of Securities . . . . . . . . . . . . . . . . . . . . . . . 13
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Selected Historical and Pro Forma
Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . 16
Management's Discussion and Analysis
of Financial Condition and Results of Operations . . . . . . . . .. 18
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . 36
Certain Transactions . . . . . . . . . . . . . . . . . . . . . . . . . 41
Principal Stockholders . . . . . . . . . . . . . . . . . . . . . . . . 42
Description of Securities . . . . . . . . . . . . . . . . . . . . . . . 44
Underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
333,333 SHARES OF SERIES C
PREFERRED STOCK
SUNRISE PRESCHOOLS, INC.
-------------------------------
PROSPECTUS
-------------------------------
, 1995
-----------------
W.B. MCKEE SECURITIES, INC.
SOUTH COAST FINANCIAL
SECURITIES, INC.
- --------------------------------------------------------------------------------
<PAGE> 81
PART II TO FORM SB-2
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 12 of the Company's Certificate limits, to the fullest extent
permitted by the Delaware General Corporation Law ("DGCL"), as amended,
directors' personal liability to the Company or its stockholders for monetary
damages or breach of fiduciary duty. Section 145 of the DGCL enables a
corporation to eliminate or limit personal liability of members of its board of
directors for violations of their fiduciary duty of care. However, Delaware law
does not permit the elimination of a director's liability for engaging in
intentional misconduct or fraud, knowingly violating a law, for any transaction
from which the director derived an improper personal benefit or for unlawfully
paying a distribution. The statute has no effect on the availability of
equitable remedies, such as an injunction or rescission, for breach of fiduciary
duty.
Section 12 of the Company's Certificate and Article V of the Company's
Bylaws require indemnification of directors and officers of the Company to the
fullest extent permitted by the DGCL for claims against them in their official
capacities, including stockholders' derivative actions.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated costs and expenses of the
Company in connection with the Offering other than underwriting discounts.
<TABLE>
<S> <C>
SEC Registration Fee ........................ $ 2,181
NASD Filing Fee ............................. 1,132
NASD Listing Fee* ........................... 21,787
Legal Fees and Expenses* .................... 95,000
Accounting Fees and Expenses* ............... 35,000
Representative's Nonaccountable Expense
Allowance ................................ 150,000**
Printing and Engraving Expenses* ............ 10,000
Blue Sky Fees and Expenses* ................. 30,000
Miscellaneous* .............................. 4,900
--------
Total ....................................... $350,000***
========
</TABLE>
- --------------------
* Estimated
** $172,500 if Over-Allotment Option is exercised in full.
*** $372,500 if Over-Allotment Option is exercised in full.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
On April 14, 1995, the Company agreed to grant to its investor relations
agent, Miller Capital Corporation (d/b/a The Miller Group) ("TMG"), a warrant to
purchase 145,000 shares of Common
II-1
<PAGE> 82
Stock at a price of $1.21875 per share (the "Warrant"). The Warrant was granted
in consideration of investor relations services that TMG agreed to render to the
Company. The Warrant was issued in reliance on Section 4(2) of the Securities
Act.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<CAPTION>
Exhibit Page Number or
Number Description Method of Filing
------- ----------- ----------------
<S> <C> <C>
1.1 Form of Underwriting Agreement (14)
1.2 Form of Agreement Among Underwriters (14)
3.1 Restated Certificate of Incorporation of Registrant (1)
3.2 Certificate of Amendment to Restated Certificate of Incorporation (14)
3.3 Certificate of Designation of Series B Preferred Stock of Sunrise (7)
Preschools, Inc., dated November 21, 1991
3.4 Certificate of Designation of Series C Preferred Stock of Sunrise *
Preschools, Inc.
3.5 Bylaws of Registrant, as amended (1)
3.6 Form of Representative's Warrant *
4 Form of Certificate for Series C Preferred Stock *
5 Opinion and Consent of Squire, Sanders & Dempsey *
10.1 Lease Agreement dated January 31, 1983 between Earl H. Jones and (1)
Venture Educational Programs, Inc.
10.2 Lease Agreement dated April 1, 1984 between McClintock Associates (1)
Limited Partnership, an Arizona limited partnership, and Venture
Educational Programs, Inc.
10.3 Lease Agreement dated October 24, 1986 between Peoria Investment (1)
Company, Inc. an Arizona corporation, and Sunrise Preschools,
Inc., an Arizona corporation
10.4 Lease Agreement dated October 16, 1986 between Sun School I (1)
Limited Partnership, an Arizona limited partnership, and Sunrise
Preschools, Inc., an Arizona corporation
10.5 Lease Agreement dated April 1, 1986, between Sunrise Partners, an (1)
Arizona corporation, and Sunrise Preschools, Inc., an Arizona
corporation
10.6 Lease Agreement dated February 5, 1987, between Sun School II (1)
Limited Partnership, an Arizona limited partnership, and Sunrise
Preschools, Inc., an Arizona corporation
</TABLE>
II-2
<PAGE> 83
<TABLE>
<CAPTION>
Exhibit Page Number or
Number Description Method of Filing
------- ----------- ----------------
<S> <C> <C>
10.7 Lease Agreement dated June 26, 1987, between Huber Farm Service (1)
of Phoenix, Inc., an Arizona corporation, and Sunrise Preschools,
Inc., a Delaware corporation
10.8 Lease Agreement dated June 26, 1987, between Huber Farm Service (1)
of Phoenix, Inc., an Arizona corporation, and Sunrise Preschools,
Inc., a Delaware corporation
10.9 Equipment Lease between James R. Evans and Sunrise Preschools, (1)
Inc.
10.10 Lease Agreement, dated July 29, 1988, between Sunrise Preschools, (2)
Inc. and Investad, Inc.
10.11 Lease Agreement, dated July 25, 1988, between Sunrise Preschools, (2)
Inc., and LV Properties, an Arizona general partnership
10.12 Lease Agreement, dated May 12, 1988, between Sunrise Preschools, (2)
Inc. and Jaymark Komer and Eugene Victor Komer and Ruth Lena
Komer, as Trustees of the Komer Family Trust dated December 30,
1980
10.13 Lease Agreement, dated July 29, 1988, between Sunrise Preschools, (2)
Inc. and Kailua Beach Center, Inc.
10.14 Lease Agreement, dated January 11, 1988, between Sunrise (3)
Preschools, Inc. and Mercado Developers
10.15 Amendment of Lease Agreement dated March 8, 1990 between Sunrise (4)
Preschools, Inc. and Jaymark Komer and Komer Family Trust dated
May 12, 1988
10.16 Purchase Agreement and Registration Rights Agreement dated April (5)
6, 1990, between Sunrise Preschools, Inc. and Lepercq Capital
Management, Inc.
10.17 Vehicle Use Agreement dated February 14, 1991 between Sunrise (6)
Preschools, Inc. and James R. Evans
10.18 Vehicle Use Agreement dated February 14, 1991 between Sunrise (6)
Preschools, Inc. and Barbara L. Owens
10.19 Lease Agreement, dated July 1, 1991, between Sunrise Preschools, (6)
Inc., and Maruni Arizona, Inc.
10.20 Purchase Agreement, dated November 18, 1991, between Sunrise (7)
Preschools, Inc., LN Investment Capital Limited Partnership,
Lepercq Investment Limited Partnership II and LN Investment
Capital Limited Partnership II
</TABLE>
II-3
<PAGE> 84
<TABLE>
<CAPTION>
Exhibit Page Number or
Number Description Method of Filing
------- ----------- ----------------
<S> <C> <C>
10.21 Amendment of Lease, dated July 22, 1992, between Sunrise (8)
Preschools, Inc. and Jaymark Komer and Komer Family Trust
10.22 Management Agreement, dated November 14, 1993, between United (11)
Church of Christ and Sunrise Preschools, Inc.
10.23 Vehicle Use Agreement dated June 15, 1993 between Sunrise (9)
Preschools, Inc. and James R. Evans
10.24 Vehicle Use Agreement dated June 15, 1993 between Sunrise (9)
Preschools, Inc. and Barbara L. Owens
10.25 Management Contract Agreement, dated January 4, 1993, between (9)
Charlie Siddle, a general partnership doing business as the La
Mancha Racquet Club, and Sunrise Preschools, Inc.
10.26 Term Sheet Agreement, dated December 7, 1992, between Joy of (9)
Christ Lutheran Church and Sunrise Preschools, Inc.
10.27 Agreement between Lutheran Church of Honolulu and Sunrise (9)
Preschools, Inc., dated May 19, 1993
10.28 Contract Agreement, dated November 19, 1992, between Phoenix (9)
Union High School District No. 210 and Sunrise Preschools, Inc.
10.29 Contract Renewal Agreement, dated July 1, 1993, between Phoenix (9)
Union High School District No. 210 and Sunrise Preschools, Inc.
10.30 Employment Agreement between Sunrise Preschools, Inc. and James (10)
R. Evans, dated October 15, 1993
10.31 Employment Agreement between Sunrise Preschools, Inc. and Barbara (10)
L. Owens, dated October 15, 1993
10.32 Administrative Services Agreement, License, and Equipment Lease, (11)
dated February 1, 1994, between Sunrise Preschools, Inc. and
Preschool Services, Inc.
10.33 Contract Renewal Agreement, dated June 20, 1994, between Sunrise (11)
Preschools, Inc. and Phoenix Union High School District #210
10.34 Contract Agreement, dated December 1, 1993, between Sunrise (11)
Preschools, Inc. and the State of Hawaii Department of Human
Services
</TABLE>
II-4
<PAGE> 85
<TABLE>
<CAPTION>
Exhibit Page Number or
Number Description Method of Filing
------- ----------- ----------------
<S> <C> <C>
10.35 Preferred Shares Rights Agreement, dated February 10, 1995, (12)
between Sunrise Preschools, Inc. and American Securities
Transfer, Incorporated, including the Certificate of Designation
of Rights, Preferences and Privileges of Series A Participating
Preferred Stock, the form of Rights Certificate and the Summary
of Rights attached thereto as Exhibits A, B and C, respectively.
10.36 First Amendment to Employment Agreement between Sunrise (13)
Preschools, Inc. and James R. Evans, dated September 16, 1994
10.37 First Amendment to Employment Agreement between Sunrise (13)
Preschools, Inc. and Barbara L. Owens, dated September 16, 1994
10.38 Loan Agreement dated January 24, 1995 between Sunrise Preschools, (13)
Inc. and Bank One, Arizona, NA for the purchase of equipment
10.39 Loan Agreement dated January 24, 1995 between Sunrise Preschools, (13)
Inc. and Bank One, Arizona, NA for the purchase of vehicles
10.40 Revolving Line of Credit Note and Loan Agreement dated January (13)
24, 1995 between Sunrise Preschools, Inc. and Bank One, Arizona,
NA
10.41 Acquisition Consulting and Investor Relations Agreement between (14)
Sunrise Preschools, Inc. and Miller Capital Corporation, dated
April 14, 1995
10.42 Second Amendment to Employment Agreement between Sunrise (14)
Preschools, Inc. and James R. Evans, dated May 4, 1995
10.43 Second Amendment to Employment Agreement between Sunrise (14)
Preschools, Inc. and Barbara L. Owens, dated May 4, 1995
11 Computation of Per Share Earnings (14)
21 List of Subsidiaries (14)
23.1 Consent of Arthur Andersen LLP *
</TABLE>
II-5
<PAGE> 86
<TABLE>
<CAPTION>
Exhibit Page Number or
Number Description Method of Filing
------- ----------- ----------------
<S> <C> <C>
23.2 Consent of Squire, Sanders & Dempsey Included in Exhibit 5
24 Power of Attorney See Signature Page
</TABLE>
- -----------------
* Filed herewith.
(1) Incorporated by reference to exhibits to Form S-1 filed July 10, 1987.
(2) Incorporated by reference to exhibits to Form 10-K filed on or about
October 31, 1988.
(3) Incorporated by reference to exhibits to Form 10-K filed on or about
October 30, 1989.
(4) Incorporated by reference to exhibits to Form 10-Q filed on or about
January 31, 1990.
(5) Incorporated by reference to exhibits to Form 8-K filed on or about April
20, 1990.
(6) Incorporated by reference to exhibits to Form 10-K filed on or about
October 28, 1991.
(7) Incorporated by reference to exhibits to Form 10-Q filed on or about
December 16, 1991.
(8) Incorporated by reference to exhibits to Form 10-K filed on or about
October 21, 1992.
(9) Incorporated by reference to exhibits to Form 10-KSB filed on or about
October 8, 1993.
(10) Incorporated by reference to exhibits to Form 10-QSB filed on or about
March 14, 1994.
(11) Incorporated by reference to exhibits to Form 10-KSB for the fiscal year
ended July 31, 1994.
(12) Incorporated by reference to exhibits to Form 8-K filed on or about
February 10, 1995.
(13) Incorporated by reference to exhibits to Form 10-QSB filed on or about
March 10, 1995.
(14) Incorporated by reference to exhibits to Form SB-2 filed October 23, 1995.
ITEM 28. UNDERTAKINGS
1. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act, and will be governed by the final adjudication
of such issue.
2. The undersigned small business issuer will: (i) for determining any
liability under the Securities Act, treat the information omitted from the form
of prospectus filed as a part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the small business
issuer under Rule 424(b)(1), or (4) or 497(h) under the Securities Act as part
of this registration statement as of the time the Commission declared it
effective, and (ii) for determining any liability under the Securities Act,
treat each post-effective amendment that contains a form of prospectus as a new
registration statement, and that offering of the securities at that time as the
initial bona fide offering of those securities.
II-6
<PAGE> 87
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this amendment to
registration statement to be signed on its behalf by the undersigned, in the
City of Scottsdale and State of Arizona on December 11, 1995.
SUNRISE PRESCHOOLS, INC.
a Delaware corporation
By /s/ James R. Evans
--------------------------------
James R. Evans, President
In accordance with the requirements of the Securities Act of 1933, this
amendment to registration statement was signed below by the following persons in
the capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ James R. Evans Chairman of the Board, and President December 11, 1995
------------------------------- (Principal Executive Officer)
James R. Evans
/s/ Ronald J. O'Connor Controller (Principal Financial December 11, 1995
------------------------------- Officer; Principal Accounting
Ronald J. O'Connor Officer)
* Director December 11, 1995
-------------------------------
Robert A. Rice
* Director December 11, 1995
-------------------------------
Richard H. Hinze
* Director December 11, 1995
-------------------------------
Barbara L. Owens
*By /s/ James R. Evans
----------------------------
James R. Evans
Attorney-In-Fact
</TABLE>
S-1
<PAGE> 88
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page Number or
Number Description Method of Filing
------- ----------- ----------------
<S> <C> <C>
1.1 Form of Underwriting Agreement (14)
1.2 Form of Agreement Among Underwriters (14)
3.1 Restated Certificate of Incorporation of Registrant (1)
3.2 Certificate of Amendment to Restated Certificate of Incorporation (14)
3.3 Certificate of Designation of Series B Preferred Stock of Sunrise (7)
Preschools, Inc., dated November 21, 1991
3.4 Certificate of Designation of Series C Preferred Stock of Sunrise *
Preschools, Inc.
3.5 Bylaws of Registrant, as amended (1)
3.6 Form of Representative's Warrant *
4 Form of Certificate for Series C Preferred Stock *
5 Opinion and Consent of Squire, Sanders & Dempsey *
10.1 Lease Agreement dated January 31, 1983 between Earl H. Jones and (1)
Venture Educational Programs, Inc.
10.2 Lease Agreement dated April 1, 1984 between McClintock Associates (1)
Limited Partnership, an Arizona limited partnership, and Venture
Educational Programs, Inc.
10.3 Lease Agreement dated October 24, 1986 between Peoria Investment (1)
Company, Inc. an Arizona corporation, and Sunrise Preschools,
Inc., an Arizona corporation
10.4 Lease Agreement dated October 16, 1986 between Sun School I (1)
Limited Partnership, an Arizona limited partnership, and Sunrise
Preschools, Inc., an Arizona corporation
10.5 Lease Agreement dated April 1, 1986, between Sunrise Partners, an (1)
Arizona corporation, and Sunrise Preschools, Inc., an Arizona
corporation
10.6 Lease Agreement dated February 5, 1987, between Sun School II (1)
Limited Partnership, an Arizona limited partnership, and Sunrise
Preschools, Inc., an Arizona corporation
</TABLE>
<PAGE> 89
<TABLE>
<CAPTION>
Exhibit Page Number or
Number Description Method of Filing
------- ----------- ----------------
<S> <C> <C>
10.7 Lease Agreement dated June 26, 1987, between Huber Farm Service (1)
of Phoenix, Inc., an Arizona corporation, and Sunrise Preschools,
Inc., a Delaware corporation
10.8 Lease Agreement dated June 26, 1987, between Huber Farm Service (1)
of Phoenix, Inc., an Arizona corporation, and Sunrise Preschools,
Inc., a Delaware corporation
10.9 Equipment Lease between James R. Evans and Sunrise Preschools, (1)
Inc.
10.10 Lease Agreement, dated July 29, 1988, between Sunrise Preschools, (2)
Inc. and Investad, Inc.
10.11 Lease Agreement, dated July 25, 1988, between Sunrise Preschools, (2)
Inc., and LV Properties, an Arizona general partnership
10.12 Lease Agreement, dated May 12, 1988, between Sunrise Preschools, (2)
Inc. and Jaymark Komer and Eugene Victor Komer and Ruth Lena
Komer, as Trustees of the Komer Family Trust dated December 30,
1980
10.13 Lease Agreement, dated July 29, 1988, between Sunrise Preschools, (2)
Inc. and Kailua Beach Center, Inc.
10.14 Lease Agreement, dated January 11, 1988, between Sunrise (3)
Preschools, Inc. and Mercado Developers
10.15 Amendment of Lease Agreement dated March 8, 1990 between Sunrise (4)
Preschools, Inc. and Jaymark Komer and Komer Family Trust dated
May 12, 1988
10.16 Purchase Agreement and Registration Rights Agreement dated April (5)
6, 1990, between Sunrise Preschools, Inc. and Lepercq Capital
Management, Inc.
10.17 Vehicle Use Agreement dated February 14, 1991 between Sunrise (6)
Preschools, Inc. and James R. Evans
10.18 Vehicle Use Agreement dated February 14, 1991 between Sunrise (6)
Preschools, Inc. and Barbara L. Owens
10.19 Lease Agreement, dated July 1, 1991, between Sunrise Preschools, (6)
Inc., and Maruni Arizona, Inc.
10.20 Purchase Agreement, dated November 18, 1991, between Sunrise (7)
Preschools, Inc., LN Investment Capital Limited Partnership,
Lepercq Investment Limited Partnership II and LN Investment
Capital Limited Partnership II
</TABLE>
<PAGE> 90
<TABLE>
<CAPTION>
Exhibit Page Number or
Number Description Method of Filing
------- ----------- ----------------
<S> <C> <C>
10.21 Amendment of Lease, dated July 22, 1992, between Sunrise (8)
Preschools, Inc. and Jaymark Komer and Komer Family Trust
10.22 Management Agreement, dated November 14, 1993, between United (11)
Church of Christ and Sunrise Preschools, Inc.
10.23 Vehicle Use Agreement dated June 15, 1993 between Sunrise (9)
Preschools, Inc. and James R. Evans
10.24 Vehicle Use Agreement dated June 15, 1993 between Sunrise (9)
Preschools, Inc. and Barbara L. Owens
10.25 Management Contract Agreement, dated January 4, 1993, between (9)
Charlie Siddle, a general partnership doing business as the La
Mancha Racquet Club, and Sunrise Preschools, Inc.
10.26 Term Sheet Agreement, dated December 7, 1992, between Joy of (9)
Christ Lutheran Church and Sunrise Preschools, Inc.
10.27 Agreement between Lutheran Church of Honolulu and Sunrise (9)
Preschools, Inc., dated May 19, 1993
10.28 Contract Agreement, dated November 19, 1992, between Phoenix (9)
Union High School District No. 210 and Sunrise Preschools, Inc.
10.29 Contract Renewal Agreement, dated July 1, 1993, between Phoenix (9)
Union High School District No. 210 and Sunrise Preschools, Inc.
10.30 Employment Agreement between Sunrise Preschools, Inc. and James (10)
R. Evans, dated October 15, 1993
10.31 Employment Agreement between Sunrise Preschools, Inc. and Barbara (10)
L. Owens, dated October 15, 1993
10.32 Administrative Services Agreement, License, and Equipment Lease, (11)
dated February 1, 1994, between Sunrise Preschools, Inc. and
Preschool Services, Inc.
10.33 Contract Renewal Agreement, dated June 20, 1994, between Sunrise (11)
Preschools, Inc. and Phoenix Union High School District #210
10.34 Contract Agreement, dated December 1, 1993, between Sunrise (11)
Preschools, Inc. and the State of Hawaii Department of Human
Services
</TABLE>
<PAGE> 91
<TABLE>
<CAPTION>
Exhibit Page Number or
Number Description Method of Filing
------- ----------- ----------------
<S> <C> <C>
10.35 Preferred Shares Rights Agreement, dated February 10, 1995, (12)
between Sunrise Preschools, Inc. and American Securities
Transfer, Incorporated, including the Certificate of Designation
of Rights, Preferences and Privileges of Series A Participating
Preferred Stock, the form of Rights Certificate and the Summary
of Rights attached thereto as Exhibits A, B and C, respectively.
10.36 First Amendment to Employment Agreement between Sunrise (13)
Preschools, Inc. and James R. Evans, dated September 16, 1994
10.37 First Amendment to Employment Agreement between Sunrise (13)
Preschools, Inc. and Barbara L. Owens, dated September 16, 1994
10.38 Loan Agreement dated January 24, 1995 between Sunrise Preschools, (13)
Inc. and Bank One, Arizona, NA for the purchase of equipment
10.39 Loan Agreement dated January 24, 1995 between Sunrise Preschools, (13)
Inc. and Bank One, Arizona, NA for the purchase of vehicles
10.40 Revolving Line of Credit Note and Loan Agreement dated January (13)
24, 1995 between Sunrise Preschools, Inc. and Bank One, Arizona,
NA
10.41 Acquisition Consulting and Investor Relations Agreement between (14)
Sunrise Preschools, Inc. and Miller Capital Corporation, dated
April 14, 1995
10.42 Second Amendment to Employment Agreement between Sunrise (14)
Preschools, Inc. and James R. Evans, dated May 4, 1995
10.43 Second Amendment to Employment Agreement between Sunrise (14)
Preschools, Inc. and Barbara L. Owens, dated May 4, 1995
11 Computation of Per Share Earnings (14)
21 List of Subsidiaries (14)
23.1 Consent of Arthur Andersen LLP *
</TABLE>
<PAGE> 92
<TABLE>
<CAPTION>
Exhibit Page Number or
Number Description Method of Filing
------- ----------- ----------------
<S> <C> <C>
23.2 Consent of Squire, Sanders & Dempsey Included in Exhibit 5
24 Power of Attorney See Signature Page
</TABLE>
- -----------------
* Filed herewith.
(1) Incorporated by reference to exhibits to Form S-1 filed July 10, 1987.
(2) Incorporated by reference to exhibits to Form 10-K filed on or about
October 31, 1988.
(3) Incorporated by reference to exhibits to Form 10-K filed on or about
October 30, 1989.
(4) Incorporated by reference to exhibits to Form 10-Q filed on or about
January 31, 1990.
(5) Incorporated by reference to exhibits to Form 8-K filed on or about April
20, 1990.
(6) Incorporated by reference to exhibits to Form 10-K filed on or about
October 28, 1991.
(7) Incorporated by reference to exhibits to Form 10-Q filed on or about
December 16, 1991.
(8) Incorporated by reference to exhibits to Form 10-K filed on or about
October 21, 1992.
(9) Incorporated by reference to exhibits to Form 10-KSB filed on or about
October 8, 1993.
(10) Incorporated by reference to exhibits to Form 10-QSB filed on or about
March 14, 1994.
(11) Incorporated by reference to exhibits to Form 10-KSB for the fiscal year
ended July 31, 1994.
(12) Incorporated by reference to exhibits to Form 8-K filed on or about
February 10, 1995.
(13) Incorporated by reference to exhibits to Form 10-QSB filed on or about
March 10, 1995.
(14) Incorporated by reference to exhibits to Form SB-2 filed October 23, 1995.
<PAGE> 1
EXHIBIT 3.4
CERTIFICATE OF DESIGNATION OF RIGHTS, PREFERENCES
AND PRIVILEGES OF
SERIES C PREFERRED STOCK
OF
SUNRISE PRESCHOOLS, INC.
Pursuant to Section 151 of the General Corporation Law of the State of
Delaware:
We, James R. Evans, the President, and Barbara L. Owens, the
Secretary, respectively, of Sunrise Preschools, Inc., a corporation organized
and existing under the General Corporation Law of the State of Delaware (the
"Corporation"), in accordance with the provisions of Section 103 thereof, DO
HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors
by the Restated Certificate of Incorporation of the Corporation, as amended,
the said Board of Directors on October 13, 1995 adopted the following
resolution creating a series of shares of Preferred Stock designated as Series
C Preferred Stock:
"RESOLVED, that pursuant to the authority vested in the Board of
Directors of the Corporation by the Restated Certificate of
Incorporation, as amended (the "Amended Certificate"), the Board
of Directors does hereby provide for the issuance of a series of
Preferred Stock, $1.00 par value, of the Corporation, to be
designated "Series C Preferred Stock", consisting of 421,666
shares and, to the extent that the designations, powers,
preferences and relative and other special rights and the
qualifications, limitations and restrictions of the Series C
Preferred Stock are not stated and expressed in the Amended
Certificate, does hereby fix and herein state and express such
designations, powers, preferences and relative and other special
rights and the qualifications, limitations and restrictions thereof,
as follows:
1. Designation and Amount. The shares of such series shall be
designated as "Series C Preferred Stock", par value $1.00
per share (hereinafter referred to as the "Series C
Preferred"), and the number of shares constituting such
series shall be 421,666.
2. Ranking. The Series C Preferred shall rank junior in dividend
rights and liquidation preference to the Corporation's Series
B Preferred Stock (the "Series B Preferred"), but senior to
all other series of preferred stock ("Preferred Stock") or
common stock ("Common Stock") of the Corporation.
<PAGE> 2
3. Dividends. Subject to the superior rights of the holders of
any class or series of Preferred Stock ranking superior to the Series C
Preferred with respect to dividends and distributions:
3.1 Dividend Amount. The holders of the Series C
Preferred shall be entitled to receive, out of any assets of the Corporation
legally available therefor, cumulative dividends at a rate of 9% per annum (the
"Dividend Rate") on the total dollar amount of the consideration paid (the
"Original Purchase Price") to the Corporation for each share of Series C
Preferred (the "Dividend Amount"). Such dividends shall be payable quarterly
on the Quarterly Dividend Payment Date (as hereinafter defined), commencing on
the first Quarterly Dividend Payment Date after the first issuance of a share
of Series C Preferred. Dividends on each share of Series C Preferred shall
accrue and be cumulative from the date of issuance thereof to the Redemption
Date (as hereinafter defined) or the Conversion Date (as hereinafter defined)
of each such share, as applicable and whichever first occurs, whether or not
there shall be profits, surplus or other funds of the Corporation legally
available for the payment of such dividends at the time such dividends shall
accrue or become due and whether or not such dividends are declared.
3.2 Quarterly Dividend Payment Date. Dividends shall be
payable on each share of Series C Preferred on the last day of each September,
December, March and June of each year (the "Quarterly Dividend Payment Date")
to the holder of record on the date thirty (30) days prior to such Quarterly
Dividend Payment Date.
3.3 Method of Payment. During the first year following
the first issuance of a share of Series C Preferred (the "Original Issue
Date"), dividends on the Series C Preferred shall be paid in cash. Following
the first anniversary of the Original Issue Date, the Corporation shall have
the option of paying all future dividends either in cash or in shares of Common
Stock of the Corporation having a "Fair Market Value" equal to the Dividend
Amount. "Fair Market Value" shall mean the average closing bid prices of the
Common Stock of the Corporation as reported in the Wall Street Journal for the
ten (10) trading days ending five (5) trading days prior to the Quarterly
Dividend Payment Date (or, if not so reported, as otherwise reported by the
National Association of Securities Dealers Automated Quotation System or other
principal market for the Common Stock) or, in the event the Common Stock is
listed on a stock exchange, the Fair Market Value shall be the average of the
closing prices of the Common Stock of the Corporation on such exchange as
reported in the Wall Street Journal for the ten (10) trading days ending five
(5) trading days prior to the Quarterly Dividend Payment Date.
4. Voting Rights. The holders of Series C Preferred shall have
the following voting rights:
2
<PAGE> 3
4.1 One Class Voting. Except as otherwise provided
herein or required by law, the holders of shares of Series C Preferred, of
Common Stock and Series B Preferred shall vote together as one class on all
matters submitted to a vote of stockholders of the Corporation.
4.2 Separate Class Voting. The Corporation shall not,
without first obtaining the affirmative vote or written consent of the holders
of not less than a majority of the outstanding shares of the Series C Preferred
voting as a separate class:
(a) alter or change any rights, privileges or
preferences of the Series C Preferred;
(b) increase or decrease the authorized number of
shares of Series C Preferred;
(c) authorize, issue or create (by
reclassification or otherwise) shares of any class or series of stock equal in
priority to or having any preference over the Series C Preferred with respect to
dividends or liquidation payments;
(d) amend or waive any provision of the Amended
Certificate or Bylaws of the Corporation relative to the Series C Preferred;
(e) authorize or approve any liquidation or
dissolution of the Corporation;
(f) authorize or approve any merger or
consolidation of the Corporation; or
(g) authorize or approve any sale or transfer of
all or substantially all of the assets of the Corporation.
4.3 Other Voting Rights. Except as set forth herein and
except where voting rights are required by law, holders of Series C Preferred
shall have no voting rights and their consent shall not be required for taking
any corporate action.
4.4 Number of Votes. Each share of Series C Preferred
issued and outstanding shall have that number of votes equal to the number of
shares of Common Stock into which each share of Series C Preferred is
convertible which shall be calculated in accordance with the formula set forth
in Section 8 hereof, as of the record date set by the Board of Directors for
the determination of any holders of any class of securities entitled to vote on
such matter. Fractional shares shall not, however, be permitted, and any
fractional voting rights resulting from this formula (after aggregating all
shares of Common Stock into which
3
<PAGE> 4
shares of Series C Preferred held by each holder could be converted) shall be
rounded to the nearest whole number (with one-half being rounded upward).
5. Certain Restrictions. Whenever quarterly dividends or other
dividends or distributions payable on the Series C Preferred as provided in
Section 3 are in arrears, thereafter and until all accrued and unpaid dividends
and distributions, whether or not declared, on shares of Series C Preferred
outstanding shall have been paid in full or set aside for payment, the
Corporation shall not:
(a) declare or pay dividends on, make any other
distributions on, or redeem or purchase or otherwise acquire for consideration
any shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series C Preferred;
(b) declare or pay dividends on, make any other
distributions on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series C
Preferred, except dividends paid ratably on the Series C Preferred and all such
parity stock on which dividends are payable or in arrears in proportion to the
total amounts to which the holders of all such shares are then entitled;
(c) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as to dividends
or upon liquidation, dissolution or winding up) with the Series C Preferred,
provided that the Corporation may at any time redeem, purchase or otherwise
acquire shares of any such parity stock in exchange for shares of any stock of
the Corporation ranking junior (either as to dividends or upon dissolution,
liquidation or winding up) to the Series C Preferred;
(d) purchase or otherwise acquire for
consideration any shares of Series C Preferred, or any shares of stock ranking
on a parity with the Series C Preferred, except in accordance with a purchase
offer made in writing or by publication (as determined by the Board of
Directors) to all holders of such shares upon such terms as the Board of
Directors, after consideration of the respective annual dividend rates and
other relative rights and preferences of the respective series and classes,
shall determine in good faith will result in fair and equitable treatment among
the respective series or classes.
6. Election of Series C Preferred Directors. Whenever quarterly
dividends or other dividends or distributions payable on the Series C Preferred
as provided in Section 3 shall have been in arrears for two or more quarters,
thereafter and until all accrued and unpaid dividends and distributions,
whether or not declared, on shares of Series C Preferred outstanding shall have
been paid in full or set aside for payment, and so long as no less than one
hundred thousand (100,000) shares of Series C Preferred are outstanding
(appropriately adjusted for any recapitalizations, stock splits, stock
combinations, stock dividends and the
4
<PAGE> 5
like), the holders of a majority of the outstanding shares of Series C
Preferred shall be entitled to elect two (2) directors to the Corporation's
Board of Directors. Whenever quarterly dividends or other dividends or
distributions payable on the Series C Preferred shall have been in arrears for
two or more quarters, the Corporation shall, as soon as practicable thereafter,
expand the Board of Directors by two members and hold an election at which a
majority of the holders of the Series C Preferred shall be entitled to elect
two (2) directors to the Corporation's Board of Directors.
7. Reacquired Shares. Any shares of Series C Preferred purchased
or otherwise acquired by the Corporation in any manner whatsoever shall be
retired and canceled promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but unissued shares of the
Corporation's Preferred Stock and may be reissued as part of a new series of
Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein.
8. Conversion
8.1 Right to Convert. The holders of the Series C
Preferred shall have the right, at their option, to convert any number of
shares of Series C Preferred into shares of Common Stock, in accordance with
the procedures set forth in this Section 8 and subject to the terms and
conditions of this Section 8 at any time.
8.2 Conversion Ratio. Each share of Series C Preferred
to be converted shall be convertible at the office of the transfer agent of the
Corporation, as designated from time to time by the Corporation (the "Transfer
Agent"), and at such other office or offices, if any, as the Board of Directors
of the Corporation may designate, into the number of fully paid and
nonassessable shares of Common Stock determined by dividing the Original
Purchase Price (plus accrued but unpaid dividends) by $_____ (the "Conversion
Price").
8.3 Conversion Notice. In order to convert shares of the
Series C Preferred, the holder thereof shall deliver to the Corporation's
Transfer Agent a notice of intention to convert such shares and dividends
together with the certificate or certificates for the Series C Preferred to be
converted, duly endorsed to the Corporation or in blank, or with stock power(s)
attached. Shares of the Series C Preferred shall be deemed to have been
converted on the day on which notice of intention to convert (including all
required accompanying materials as set forth above) was delivered to the
Transfer Agent (the "Conversion Date") and the person or persons entitled to
receive the Common Stock issuable upon such conversion shall be treated for all
purposes, including voting such Common Stock, as the record holder or holders
of such Common Stock at such time. As promptly as practicable on or after the
Conversion Date, the Corporation's Transfer Agent shall issue and deliver to
the record holder or holders of such Series C Preferred a certificate or
certificates for the number of
5
<PAGE> 6
shares of Common Stock issuable upon such conversion, together with cash in
lieu of any fraction of a share, as hereinafter provided, to the person or
persons entitled to receive the same.
8.4 Adjustments to Conversion Price. The Conversion
Price shall be subject to adjustment from time to time as follows:
(a) For purposes of this Section 8, the
following definitions shall apply:
(1) "Options" shall mean rights, options or warrants
to subscribe for, purchase or otherwise acquire either Common Stock, Preferred
Stock or Convertible Securities (defined below).
(2) "Convertible Securities" shall mean securities
convertible into or exchangeable for Common Stock.
(3) "Additional Shares of Common Stock" shall mean all
shares of Common Stock issued (or, pursuant to Section 8.4(c), deemed to be
issued) by the Corporation after the Original Issue Date other than shares of
Common Stock issued (or, pursuant to Section 8.4(c), deemed to be issued):
(i) in connection with the Series A
Participating Preferred Stock;
(ii) upon conversion of shares of the
Series B Preferred and Series C Preferred;
(iii) to officers, directors and employees
of, and consultants to, the Corporation pursuant to a written stock option plan
whether now existing or hereafter approved by the Corporation's Board of
Directors;
(iv) pursuant to clause (f), (g) or (h) of
this Section 8.4;
(v) upon the exercise of Options issued
on or prior to the Original Issue Date; or
(vi) by way of dividend or other
distributions on securities referred to in clauses (i), (ii), (iii), (iv) and
(v) hereof.
(b) No adjustment in the Conversion Price shall be
made in respect of the issuance of Additional Shares of Common Stock unless
the consideration per share for an Additional Share of Common Stock issued or
deemed to be issued by the Corporation is less than the Conversion Price
in effect
6
<PAGE> 7
on the date of, and immediately prior to such issue, for such share of Series C
Preferred.
(c) Additional Shares of Common Stock shall be deemed to have been
issued under the following conditions:
(1) Except as otherwise provided in Sections 8.4(a)(3)(i)
- -(vi) and 8.4(b), in the event the Corporation at any time or from time to
time after the Original Issue Date shall issue any Options or Convertible
Securities or shall fix a record date for the determination of any holders of
any class of securities entitled to receive any such Options or Convertible
Securities, then the maximum number of shares (as set forth in the instrument
relating thereto without regard to any provision contained therein for a
subsequent adjustment of such number) of Common Stock issuable upon the
exercise of such Options or, in the case of Convertible Securities and Options
therefor, the conversion or exchange of such Convertible Securities, shall be
deemed to be Additional Shares of Common Stock issued as of the time of such
issue or, in case such a record date shall have been fixed for any such
exchange, as of the close of business on such record date, provided that in any
such case in which Additional Shares of Common Stock are deemed to be issued:
(i) no further adjustment in the Conversion Price shall
be made upon the subsequent issue of Convertible Securities or shares of
Common Stock upon the exercise of such Options or conversion or exchange of
such Convertible Securities;
(ii) if such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for any increase or
decrease in the consideration payable to the Corporation, or increase or
decrease in the number of shares of Common Stock issuable, upon the exercise,
conversion or exchange thereof, the Conversion Price computed upon the
original issue thereof (or upon the occurrence of a record date with respect
thereto), and any subsequent adjustments based thereon, shall, upon any such
increase or decrease becoming effective, be recomputed to reflect such
increase or decrease insofar as it affects such Options or the rights of
conversion or exchange under such Convertible Securities;
(iii) upon the expiration of any such Options or any
rights of conversion or exchange under such Convertible Securities which shall
not have been exercised, the Conversion Price computed upon the original
issue thereof (or upon the occurrence of a record date with respect thereto),
and any subsequent adjustments based thereon, shall, upon such expiration, be
recomputed as if:
(A) in the case of Convertible Securities or
Options for Common Stock, the only Additional Shares of Common Stock issued
were shares of Common Stock, if any, actually issued upon the
7
<PAGE> 8
exercise of such Options or the conversion or exchange of such Convertible
Securities, and the consideration received therefor was the consideration
actually received by the Corporation for the issue of all such Options, whether
or not exercised, plus the consideration actually received by the Corporation
upon such exercise, or for the issue of all such Convertible Securities which
were actually converted or exchanged, plus the additional consideration, if
any, actually received by the Corporation upon such conversion or exchange, and
(B) in the case of Options for
Convertible Securities, only the Convertible Securities, if any, actually
issued upon the exercise thereof were issued at the time of issue of such
Options and the consideration by the Corporation for the Additional Shares of
Common Stock deemed to have been then issued was the consideration actually
received by the Corporation for the issue of all such Options, whether or not
exercised, plus the consideration received by the Corporation upon the issue of
the Convertible Securities with respect to which such Options were actually
exercised;
(iv) no readjustment pursuant to
clause (ii) or (iii) above shall have the effect of increasing the Conversion
Price to a price that is greater than (a) the Conversion Price on the original
adjustment date, or (b) the Conversion Price that would have resulted from any
issuance of Additional Shares of Common Stock between the original adjustment
date and such readjustment date; and
(v) in the case of any Options
which expire by their terms not more than thirty (30) days after the date of
issue thereof, no adjustment of the Conversion Price shall be made until the
expiration or exercise of all such Options.
(d) In the event the Corporation shall issue
Additional Shares of Common Stock (including Additional Shares of Common Stock
deemed to be issued pursuant to Section 8.4(c) without consideration or for a
consideration per share less than an amount equal to the Conversion Price for a
share of Series C Preferred in effect on the date of, and immediately prior to
such issue) then and in such event, the Conversion Price shall be decreased,
concurrently with such issue, to a price determined by dividing (1) an amount
equal to the sum of (i) the total number of shares of Common Stock outstanding
(including any Additional Shares of Common Stock deemed to be outstanding)
immediately prior to such issuance multiplied by the Conversion Price in effect
immediately prior to such issuance, plus (ii) the consideration received by the
Corporation upon such issuance, by (2) the total number of shares of Common
Stock outstanding (including any Additional Shares of Common Stock deemed to be
outstanding) immediately after the issuance of such Common Stock.
(e) For purposes of this Section 8.4, the
consideration received by the Corporation for the issue of any Additional
Shares of Common Stock shall be computed as follows:
8
<PAGE> 9
(1) Such consideration shall:
(i) insofar as it consists of cash,
be computed at the aggregate amount of cash received by the Corporation prior
to amounts paid or payable for accrued interest or accrued dividends and prior
to any commissions or expenses paid by the Corporation;
(ii) insofar as it consists of
property other than cash, be computed at the fair value thereof at the time of
such issue, as determined in good faith by the Board of Directors; and
(iii) in the event Additional Shares
of Common Stock are issued together with other shares or securities or other
assets of the Corporation for consideration which covers both, be the
proportion of such consideration so received, computed as provided in clauses
(1) and (2) above, as determined in good faith by the Board of Directors.
(2) The consideration per share received
by the Corporation for Additional Shares of Common Stock deemed to have been
issued pursuant to Section 8.4(c)(1), relating to Options and Convertible
Securities, shall be determined by dividing:
(i) the total amount, if any,
received or receivable by the Corporation as consideration for the issue of
such Options or Convertible Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments relating thereto,
without regard to any provision contained therein for a subsequent adjustment
of such consideration) payable to the Corporation upon the exercise of such
Option or the conversion or exchange of such Convertible Securities, or in the
case of Options for Convertible Securities, the exercise of such Options for
Convertible Securities and the conversion or exchange of such Convertible
Securities by
(ii) the maximum number of shares of
Common Stock (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such number)
issuable upon the exercise of such Options or the conversion or exchange of
such Convertible Securities.
(f) In the event the outstanding shares of Common
Stock shall be subdivided by stock split, stock dividends or otherwise, into a
greater number of shares of Common Stock, the Conversion Price then in effect
shall, concurrently with the effectiveness of such subdivision, be
proportionately decreased. In the event the outstanding shares of Common Stock
shall be combined or consolidated, by reclassification or otherwise, into a
lesser number of shares of Common Stock, the Conversion Price then in effect
shall, concurrently with the effectiveness of such combination or
consolidation, be proportionately increased.
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(g) In the event that the Corporation from time
to time makes or fixes a record date for the determination of holders of Common
Stock entitled to receive any distribution (excluding any repurchases of
securities by the Corporation not made on a pro rata basis from all holders of
any class of the Corporation's securities) payable in property or in securities
of the Corporation other than shares of Common Stock, and other than as
otherwise adjusted in this Section 8 or as provided in Section 3, then and in
each such event the holders of Series C Preferred shall receive at the time of
such distribution, the amount of property or the number of securities of the
Corporation that they would have received had their Series C Preferred been
converted into Common Stock on the date of such event.
(h) Except as provided in this Section 8, upon
any liquidation, dissolution or winding up of the Corporation, if the Common
Stock issuable upon conversion of the Series C Preferred shall be changed into
the same or a different number of shares of any other class or classes of
stock, whether by capital reorganization, reclassification or otherwise (other
than a subdivision or combination of shares provided for above), each share of
Series C Preferred and all accrued but unpaid dividends shall thereafter be
convertible into the number of shares of stock or other securities or property
to which a holder of the number of shares of Common Stock deliverable upon such
conversion shall have been entitled upon such reorganization or
reclassification. In any such event, effective provision shall be made, in the
certificate or articles of incorporation of the resulting or surviving
corporation or otherwise, so that the provisions set forth herein for the
protection of the conversion rights of the Series C Preferred shall thereafter
be applicable to any such other shares of stock, other securities, cash or
property deliverable upon conversion of the shares of the Series C Preferred
remaining outstanding or other convertible stock or securities received by the
holders in place thereof, and any such resulting or surviving corporation shall
expressly assume the obligation to deliver, upon the exercise of the conversion
privilege, such shares, other securities, cash or property as the holders of
the Series C Preferred remaining outstanding, or other convertible stock or
securities received by the holders in place thereof, shall be entitled to
receive pursuant to the provisions hereof, and to make provision for the
protection of the conversion right as above provided.
(i) The Corporation will not, by amendment of
this Certificate of Designation or its Amended Certificate or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation but will at all times in good faith assist in the
carrying out of all the provisions of this Section 8 and in the taking of all
such action as may be necessary or appropriate in order to protect the
conversion rights of the holders of the Series C Preferred against impairment.
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(j) No adjustment in the number of shares of
Common Stock into which the shares of Series C Preferred are convertible shall
be required unless such adjustment would require an increase or decrease of at
least 1/10th of a share; provided, however, that any adjustment which by reason
hereof is not required to be made shall be carried forward and taken into
account in any subsequent adjustment.
8.5 Notice of Adjustment. Whenever any adjustment is
required to be made as provided in Section 8.4, the Corporation shall promptly
notify each record holder of Series C Preferred thereof, describing in
reasonable detail the adjustment and method of calculation used.
8.6 Reservation of Shares. The Corporation shall at all
times reserve and keep available free from preemptive rights, out of its
authorized but unissued Common Stock, for the purpose of effecting the
conversion of the Series C Preferred, the full number of shares of Common Stock
then deliverable upon the conversion of all shares of Series C Preferred then
outstanding.
8.7 Fractional Shares. In the sole discretion of the
Corporation, instead of any fraction of a share which would otherwise be
issuable upon conversion of shares of the Series C Preferred or accrued
dividends, or interest thereon, the Corporation may pay a cash adjustment in
respect of such fraction in an amount equal to the same fraction of the Fair
Market Value per share of Common Stock at the close of business on the date of
conversion.
8.8 Accrued But Unpaid Dividends. Upon the receipt of a
Conversion Notice, the Corporation may in its discretion, either pay to the
holder of the Series C Preferred submitting such Conversion Notice all accrued
but unpaid dividends on the Series C Preferred such holder has elected to
convert through the date of the Conversion Notice or convert the dollar amount
of any accrued but unpaid dividends on such shares of Series C Preferred Stock
into Common Stock at the Conversion Price.
9. Liquidation, Dissolution or Winding Up. Subject to the
superior rights of the holders of any class or series of Preferred Stock
ranking superior to the Series C Preferred with respect to any liquidation,
dissolution or winding up of the Corporation:
9.1 Liquidation Preference. Upon any voluntary
liquidation, dissolution or winding up of the Corporation, no distribution
shall be made to the holders of shares of stock ranking junior (either as to
payment of dividends or with respect to distributions upon liquidation,
dissolution or winding up) to the Series C Preferred unless, prior thereto, the
holders of Series C Preferred shall have received an amount equal to the
Original Purchase Price of the shares of Series C Preferred purchased, plus an
amount equal to accrued and unpaid dividends and distributions thereon, whether
or not declared, to the date of such payment (the "Series C Preferred
Liquidation Preference"). Following the
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payment of the full amount of the Series C Preferred Liquidation Preference, no
additional distributions shall be made to the holders of Series C Preferred.
9.2 Partial Distribution. In the event, however, that
there are not sufficient assets available to permit payment in full of the
Series C Preferred Liquidation Preference and the liquidation preferences of
all other classes and/or series of Preferred Stock, if any, which rank on a
parity with the Series C Preferred, then such remaining assets shall be
distributed ratably to the holders of such parity shares in proportion to their
respective liquidation preferences.
10. Consolidation, Merger, etc. In the event of any consolidation
or merger of the Corporation with or into another corporation, or of any sale
or conveyance to another corporation of all or substantially all the property
of the Corporation, in any of which transactions the holders of Common Stock
receive shares of stock, other securities, cash or property receivable upon
such consolidation, merger, sale or conveyance other than Common Stock, each
holder of Series C Preferred then outstanding and thereafter remaining
outstanding shall have the right to convert each share of Series C Preferred
held by him into the kind and amount of shares of stock, other securities, cash
or property receivable upon such consolidation, merger, sale or conveyance by a
holder of the number of shares of Common Stock into which such share of Series
C Preferred could have been converted immediately prior to the record date
applicable to such consolidation, merger, sale or conveyance, and shall have no
other conversion rights. In any such event, effective provision shall be made,
in the certificate of incorporation of the resulting or surviving corporation
or otherwise, so that the provisions set forth herein for the protection of the
conversion rights of the holders of the Series C Preferred shall thereafter be
applicable to any such other shares of stock, other securities, cash or
property deliverable upon conversion of the shares of the Series C Preferred
remaining outstanding or other convertible stock or securities received by the
holders in place thereof, and any such resulting or surviving corporation shall
expressly assume the obligation to deliver, upon the exercise of the conversion
privilege, such shares, other securities, cash or property as the holders of
the Series C Preferred remaining outstanding, or other convertible stock or
securities received by the holders in place thereof, shall be entitled to
receive pursuant to the provisions hereof, and to make provision for the
protection of the conversion rights as above provided.
11. Redemption.
11.1 Redemption Right. Unless previously converted, all
or any portion of the Series C Preferred together with all dividends accrued
but unpaid on such Series C Preferred computed to the Redemption Date (as
defined below) may be redeemed on a pro rata basis by the Corporation at its
election from the holders of such Series C Preferred at any time and from time
to time; provided, however, that the Company may not redeem the Series C
Preferred unless the average of the closing asked prices per share of Common
Stock have equaled or exceeded 150% or more of the Conversion Price of the
Series C Preferred for
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<PAGE> 13
any twenty (20) consecutive trading days ending within five (5) days
immediately prior to the date on which a Redemption Notice (as defined below)
is given by the Company. Notwithstanding the foregoing, the holders of the
Series C Preferred will have the right to convert the Series C Preferred to
Common Stock for a period of thirty (30) days following notice of redemption.
11.2 Redemption Notice. Before redeeming the Series C
Preferred as provided in Section 11.1, the Corporation shall mail by certified
or registered mail to each record holder thereof at least thirty (30) days
prior to the Redemption Date (as defined below), at the address shown on the
Corporation's records, a written notice (a "Redemption Notice") stating:
(a) the number of shares of Series C Preferred
held by such holder which the Corporation proposes to redeem, including the
amount of any accrued but unpaid dividends;
(b) the price at which such shares may be
redeemed, which shall be an amount equal to the Series C Preferred Liquidation
Preference computed to the Redemption Date (the "Redemption Price");
(c) the date on which the Corporation will pay the
Redemption Price (the "Redemption Date"); and
(d) the place at which the shares of Series C
Preferred to be redeemed must be surrendered in exchange for the Redemption
Price.
Each holder of shares of the Series C Preferred to whom an Redemption Notice is
mailed shall be entitled to receive in cash on the Redemption Date the full
Redemption Price for each share of Series C Preferred to be redeemed upon
surrender by such holder at the place designated in such Redemption Notice of
the certificate representing such Series C Preferred duly endorsed in blank or
accompanied by an appropriate form of assignment duly endorsed in blank with
signature guaranteed. In case less than the total number of securities
represented by any certificate are redeemed on the Redemption Rate, a new
certificate representing the number of unredeemed securities will be issued to
the holder thereof without cost to the holder immediately upon surrender of the
certificate representing the redeemed securities. If the Corporation fails to
pay the Redemption Price on the Redemption Date for any reason other than the
failure of a holder to surrender his Series C Preferred certificate as
required, then the Redemption Date shall be the date on which the Corporation
actually pays the Redemption Price. All rights arising hereunder, other than
the right to receive the Redemption Price, shall terminate on the Redemption
Date.
11.3 If the Corporation shall pay less than the aggregate
redemption price due on such date for all shares of all series of Preferred
Stock being redeemed having the same priority on liquidation as the Series C
Preferred, then shares shall be redeemed from, and payment shall be distributed
among, the
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<PAGE> 14
holders of the shares of all such series on the same pro rata basis that such
holders would share in payments of the aggregate redemption price due on such
date for all shares of Preferred Stock being redeemed.
12. Other Notices. If at any time:
(a) The Corporation shall declare any dividend on
the Common Stock payable in shares of capital stock of the Corporation, cash or
other property; or
(b) The Corporation shall authorize the issue of
any options, warrants or rights pro rata to all holders of Common Stock
entitling them to subscribe for or purchase any shares of stock of the
Corporation or to receive any other rights; or
(c) The Corporation shall authorize the
distribution pro rata to all holders of Common Stock of a cash dividend payable
otherwise than out of earnings of surplus legally available therefor under the
laws of the State of Delaware, shares of its capital stock (other than Common
Stock), stock or other securities of other persons, evidences of indebtedness
issued by the Corporation or other persons, assets (excluding cash dividends)
or options or rights (excluding options to purchase and rights to subscribe for
Common Stock or other securities of the Corporation convertible into or
exchangeable for Common Stock); or
(d) There shall occur any reclassification of the
Common Stock, or any consolidation or merger of the Corporation with or into
another Corporation or a sale, conveyance or other disposition to another
entity of all or substantially all of the properties of the Corporation; or
(e) There shall occur the voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation;
then, and in each of such cases, the Corporation shall deliver to each holder
of Series C Preferred at its last address appearing on the books of the
Corporation as promptly as practicable but in any event at least twenty (20)
days prior to the applicable record date (or determination date) mentioned
below, a notice stating, to the extent such information is available, (i) the
date on which a record is to be taken for the purpose of such dividend,
distribution or rights, or, if a record is not to be taken, the date as of
which the holders of Common Stock of record to be entitled to such dividend,
distribution or rights are to be determined, or (ii) the date on which such
reclassification, consolidation, merger, sale, transfer, liquidation,
dissolution or winding up is expected to become effective and the date as of
which it is expected that holders of Common Stock of record shall be entitled
to exchange their Common Stock for securities or other property deliverable
upon such reclassification, consolidation, merger, sale, transfer, liquidation,
dissolution or winding up."
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IN WITNESS WHEREOF, we have executed and subscribed this Certificate
and do affirm the foregoing as true under the penalties of perjury this 3rd day
of November, 1995.
/s/ James R. Evans
----------------------------------
JAMES R. EVANS, President
ATTEST:
/s/ Barbara L. Owens
- -------------------------------
BARBARA L. OWENS, Secretary
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<PAGE> 1
EXHIBIT 3.6
THESE SECURITIES MAY NOT BE PUBLICLY OFFERED OR SOLD UNLESS AT THE TIME OF SUCH
OR SALE, THE PERSON MAKING SUCH OFFER OR SALE DELIVERS A PROSPECTUS MEETING THE
REQUIREMENTS OF SECTION 10 OF THE SECURITIES ACT OF 1933 FORMING A PART OF A
REGISTRATION STATEMENT, OR POST-EFFECTIVE AMENDMENT THERETO, WHICH IS EFFECTIVE
UNDER SAID ACT, UNLESS IN THE OPINION OF COUNSEL TO THE CORPORATION, SUCH OFFER
AND SALE IS EXEMPT FROM THE PROVISIONS OF SECTION 5 OF SAID ACT.
WARRANT
FOR THE PURCHASE OF COMMON STOCK, $1.00 PAR VALUE, OF
SUNRISE PRESCHOOLS, INC.
(INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE)
VOID AFTER 5:00 P.M. ____________________, 2000
NO. ___ WARRANT TO PURCHASE
[THIRTY-EIGHT THOUSAND THREE HUNDRED THIRTY-THREE (38,333)] SHARES
THIS IS TO CERTIFY, that, for value received, _________________________
(the "Representative") or registered assigns, is entitled, subject to the terms
and conditions hereinafter set forth, on or after ____________________, 1996 and
at any time prior to 5:00 P.M., Phoenix, Arizona Time, on ____________________,
2000 but not thereafter, to purchase the number of shares (the "Shares") of
Series C Preferred Stock, par value $1.00 per share (the "Preferred Stock"), of
SUNRISE PRESCHOOLS, INC., a Delaware corporation (the "Company"), from the
Company as is set forth above and upon payment to the Company of $18.00 per
share (the "Purchase Price") if and to the extent this Warrant is exercised, in
whole or in part, during the period this Warrant remains in force, subject in
all cases to adjustment as provided in Article II hereof, and to receive a
certificate or certificates representing the Shares so purchased, upon
presentation and surrender to the Company of this Warrant, with the form of
subscription attached hereto duly executed, and accompanied by payment of the
Purchase Price of each Share purchased.
1. TERMS OF THE WARRANT
1.1 Time of Exercise. Subject to the provisions of Sections 1.5
and 3.1 hereof, this Warrant may be exercised at any time and from time to time
after 9:00 A.M., Phoenix, Arizona time, on ____________________, 1996 (the
"Exercise Commencement Date"), but no later than 5:00 P.M., __________________,
2000 (the "Expiration Time") at which it shall become void, and all rights
hereunder shall thereupon cease.
<PAGE> 2
1.2 Manner of Exercise.
1.2.1 The holder of this Warrant (the "Holder") may
exercise this Warrant, in whole or in part, upon surrender of this Warrant with
the form of subscription attached hereto duly executed, to the Company at its
corporate office in Scottsdale, Arizona together with the full Purchase Price
for each Share to be purchased in lawful money of the United States, or by
certified check, bank draft or postal or express money order payable in United
States Dollars to the order of the Company, and upon compliance with and
subject to the conditions set forth herein.
1.2.2 Upon receipt of this Warrant with the form of
subscription duly executed and accompanied by payment of the aggregate Purchase
Price for the Shares for which this Warrant is then being exercised, the
Company shall cause to be issued certificates for the total number of whole
Shares for which this Warrant is being exercised in such denominations as are
required for delivery to the Holder, and the Company shall thereupon deliver
such certificates to the Holder or its nominee.
1.2.3 In case the Holder shall exercise this Warrant with
respect to less than all of the Shares that may be purchased under this
Warrant, the Company shall execute a new Warrant for the balance of the Shares
that may be purchased upon exercise of this Warrant and deliver such new
Warrant to the Holder.
1.2.4 The Company covenants and agrees that it will pay
when due and payable any and all taxes which may be payable in respect of the
issue of this Warrant, or the issue of any Shares upon the exercise of this
Warrant. The Company shall not, however, be required to pay any tax which may
be payable in respect of any transfer involved in the issuance or delivery of
this Warrant or of the Shares in a name other than that of the Holder at the
time of surrender, and until the payment of such tax the Company shall not be
required to issue such Shares.
1.3 Exchange of Warrant. This Warrant may be split-up, combined
or exchanged for another Warrant or Warrants of like tenor to purchase a like
aggregate number of Shares. If the Holder desires to split-up, combine or
exchange this Warrant, he shall make such request in writing delivered to the
Company at its corporate office and shall surrender this Warrant and any other
Warrants to be so split-up, combined or exchange at such office. Upon any such
surrender in connection with a split-up, combination or exchange, the Company
shall execute and deliver to the person entitled thereto a Warrant or Warrants,
as the case may be, as so requested. The Company shall not be required to
effect any split-up, combination or exchange which will result in the issuance
of a Warrant entitling the Holder to purchase upon exercise a fraction of a
Share. The Company may require the Holder to pay a sum sufficient to cover any
tax or governmental charge that may be imposed in connection with any split-up,
combination or exchange of Warrants.
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<PAGE> 3
1.4 Holder as Owner. Prior to due presentment for registration of
transfer of this Warrant, the Company may deem and treat the Holder as the
absolute owner of this Warrant (notwithstanding any notation of ownership or
other writing hereon) for the purpose of any exercise hereof and for all other
purposes, and the Company shall not be affected by any notice to the contrary.
1.5 Transfer and Assignment. Prior to ____________________, 1996,
this Warrant may not be sold, hypothecated, exercised, assigned or transferred,
except to any member of the National Association of Securities Dealers, Inc.
participating in the offering covered by the Registration Statement referred to
in Section 3.1 hereof and to individuals who are officers of the Representative
or such members, or any successor to their respective businesses or pursuant to
the laws of descent and distribution, and thereafter and until its expiration
shall be assignable and transferable in accordance with and subject to the
provisions of the Securities Act of 1933, as amended (the "Act"); provided,
however, that if not exercised immediately upon such transfer, the Warrant
shall lapse.
1.6 Method for Assignment. Any assignment permitted hereunder
shall be made by surrender of this Warrant to the Company at its principal
office with the form of assignment attached hereto duly executed and funds
sufficient to pay any transfer tax. In such event, the Company shall, without
charge, execute and deliver a new Warrant in the name of the assignee named in
such instrument of assignment and this Warrant shall promptly be canceled.
This Warrant may be divided or combined with other Warrants which carry the
same rights upon presentation thereof at the corporate office of the Company
together with a written notice signed by the Holder, specifying the names and
denominations in which such new Warrants are to be issued.
1.7 Rights of Holder. Nothing contained in this Warrant shall be
construed as conferring upon the Holder the right to vote or to consent or to
receive notice as a stockholder in respect of any meetings of stockholders for
the election of directors or any other matter, or as having any rights
whatsoever as a stockholder of the Company. If, however, at any time prior to
the expiration of this Warrant and prior to its exercise, any of the following
shall occur:
1.7.1 the Company shall take a record of the holders of its
shares of Common Stock for the purpose of entitling them to receive a dividend
or distribution payable otherwise than in cash, or a cash dividend or
distribution payable otherwise than out of current or retained earnings, as
indicated by the accounting treatment of such dividend or distribution on the
books of the Company; or
1.7.2 the Company shall offer to the holders of its
Preferred Stock or Common Stock any additional shares of capital stock of the
Company or securities convertible into or exchangeable for shares of capital
stock of the Company, or any option, right or warrant to subscribe therefor; or
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<PAGE> 4
1.7.3 there shall be proposed any capital reorganization or
reclassification of the Preferred Stock or Common Stock, or a sale of all or
substantially all of the assets of the Company, or a consolidation or merger of
the Company with another entity; or
1.7.4 there shall be proposed a voluntary or involuntary
dissolution, liquidation or winding up of the Company;
then, in any one or more of said cases, the Company shall cause to be mailed to
the Holder, at the earliest practicable time (and, in any event, not less than
thirty (30) days before any record date or other date set for definitive
action), written notice of the date on which the books of the Company shall
close or a record shall be taken to determine the stockholders entitled to such
dividend, distribution, convertible or exchangeable securities or subscription
rights, or entitled to vote on such reorganization, reclassification, sale,
consolidation, merger, dissolution, liquidation or winding up, as the case may
be. Such notice shall also set forth such facts as shall indicate the effect
of such action (to the extent such effect may be known at the date of such
notice) on the Purchase Price and the kind and amount of the Preferred Stock
and other securities and property deliverable upon exercise of this Warrant.
Such notice shall also specify the date as of which the holders of the
Preferred Stock or Common Stock of record shall participate in said
distribution or subscription rights or shall be entitled to exchange their
Preferred Stock or Common Stock for securities or other property deliverable
upon such reorganization, reclassification, sale, consolidation, merger,
dissolution, liquidation or winding up, as the case may be (on which date, in
the event of voluntary or involuntary dissolution, liquidation or winding up of
the Company, the right to exercise this Warrant shall terminate). Without
limiting the obligation of the Company to provide notice to the holder of
actions hereunder, it is agreed that failure of the Company to give notice
shall not invalidate such action of the Company.
1.8 Lost Certificates. If this Warrant is lost, stolen, mutilated
or destroyed, the Company shall, on such reasonable terms as to indemnity or
otherwise as it may impose (which shall, in the case of a mutilated Warrant,
include the surrender thereof), issue a new Warrant of like denomination and
tenor as, and in substitution for, this Warrant, which shall thereupon become
void. Any such new Warrant shall constitute an additional contractual
obligation of the Company, whether or not the Warrant so lost, stolen,
destroyed or mutilated shall be at any time enforceable by anyone.
1.9 Covenants of the Company. The Company covenants and agrees as
follows:
1.9.1 at all times it shall reserve and keep available for
the exercise of this Warrant such number of authorized Shares and shares of
Common Stock as are sufficient to permit the exercise in full of this Warrant
and conversion of the Shares, as the case may be;
1.9.2 prior to the issuance of any shares of Common Stock,
upon exercise of this Warrant and conversion of the underlying Shares, the
Company shall secure the listing of such shares upon any securities exchange or
automated quotation system upon which the shares of the Company's Common Stock
are listed for trading; and
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<PAGE> 5
1.9.3 all Shares and underlying shares of Common Stock when
issued upon the exercise of this Warrant or conversion of the underlying
Shares, as the case may be, will be validly issued, fully paid, non-assessable
and free of preemptive rights.
2. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES PURCHASABLE UPON
EXERCISE
2.1 Recapitalization. In case the Company shall, while this
Warrant remains unexercised, in whole or in part, and in force effect a
recapitalization of such character that the Shares purchasable hereunder or the
Shares of Common Stock issuable upon conversion of the Shares shall be changed
into or become exchangeable for a larger or smaller number of shares, then,
after the date of record for effecting such recapitalization, the number of
Shares which the Holder hereof shall be entitled to purchase hereunder shall be
increased or decreased, as the case may be, in direct proportion to the
increase or decrease in the number of shares of Preferred Stock or Common Stock
by reason of such recapitalization, and the Purchase Price, per share, whether
or not in effect immediately prior to the time of such recapitalization, of
such recapitalized Preferred Stock shall in the case of an increase in the
number of such Shares be proportionately reduced, and in the case of a decrease
in the number of such Shares shall be proportionately increased. For the
purposes of this Section 2.1, a stock dividend, stock split-up or reverse split
shall be considered as a recapitalization and as an exchange for a larger or
smaller number of shares, as the case may be.
2.2 Merger or Consolidation. In case of any consolidation of the
Company with, or merger of the Company into, any other corporation, or in case
of any sale or conveyance of all or substantially all of the assets of the
Company other than in connection with a plan of complete liquidation of the
Company, then, as a condition of such consolidation, merger or sale or
conveyance, adequate provision shall be made whereby the Holder shall
thereafter have the right to purchase and receive, upon the basis and upon the
terms and conditions specified in this Warrant and in lieu of Shares of
Preferred Stock immediately theretofore purchasable and receivable upon the
exercise of the rights represented hereby, such shares of stock or securities
as may be issued in connection with such consolidation, merger or sale or
conveyance, with respect to or in exchange for the number of outstanding shares
of Preferred Stock or Common Stock equal to the number of shares of Preferred
Stock or underlying Common Stock immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby had such
consolidation, merger or sale or conveyance not taken place, and in any such
case appropriate provision shall be made with respect to the rights and
interests of the Holder of this Warrant to the end that the provisions hereof
shall be applicable as nearly as may be in relation to any shares of stock or
securities thereafter deliverable upon the exercise hereof.
2.3 Dilution. It is the intent of the parties that the Shares of
Preferred Stock issuable upon exercise of this Warrant shall be entitled to the
same price-based antidilution protection as all other shares of Preferred Stock
issued by the Company as if such Shares were issued and outstanding as of the
date of this Warrant. Any adjustment to the conversion price of the Series C
Preferred Stock of the Company as a result of the price-based antidilution
protection provisions of the Company's Certificate of Incorporation shall also
be made to the conversion
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<PAGE> 6
price for the Shares issuable upon exercise of this Warrant, whether or not
such Shares are issued and outstanding as of the date of the issuance causing
such adjustment.
2.4 Notice of Dissolution or Liquidation. Except as otherwise
provided in Section 2.2 above, in the case of any sale or conveyance of all or
substantially all of the assets of the Company in connection with a plan of
complete liquidation of the Company, in the case of the dissolution,
liquidation or winding-up of the Company, all rights under this Warrant shall
terminate on a date fixed by the Company, such date so fixed to be not earlier
than the date of the commencement of the proceedings for such dissolution,
liquidation or winding-up and not later than thirty (30) days after such
commencement date. Notice of such termination of purchase rights shall be
given to the Holder at least thirty (30) days prior to such termination date.
2.5 Statement of Adjustment. Any adjustment pursuant to the
provisions of this Section 2 shall be made on the basis of the number of Shares
of Preferred Stock which the Holder would have been entitled to acquire by
exercise of this Warrant immediately prior to the event giving rise to such
adjustment and, as to the Purchase Price per share in effect immediately prior
to the rise to such adjustment. Whenever any such adjustment is required to be
made, the Company shall forthwith determine the new number of Shares of
Preferred Stock which the Holder hereof shall be entitled to purchase hereunder
and/or such new Purchase Price per share and shall prepare, retain on file and
transmit to the Holder within 10 days after such preparation a statement
describing in reasonable detail the method used in calculating such adjustment.
2.6 No Fractional Shares. Anything contained herein to the
contrary notwithstanding, the Company shall not be required to issue any
fraction of a Share in connection with the exercise of this Warrant, and in any
case where the Holder would, except for the provisions of this Section 2.6, be
entitled under the terms of this Warrant to receive a fraction of a Share upon
such exercise, the Company shall upon the exercise and receipt of the Purchase
Price, issue the largest number of whole Shares purchasable upon exercise of
this Warrant. The Company shall not be required to make any cash or other
adjustment in respect of such fraction of a Share to which the Holder would
otherwise be entitled. The Holder, by the acceptance of this Warrant,
expressly waives his right to receive a certificate for any fraction of a Share
upon exercise hereof.
2.7 No Change in Form Required. The form of Warrant need not be
changed because of any change pursuant to this Section in the Purchase Price or
in the number of Shares purchasable upon the exercise of a Warrant, and
Warrants issued after such change may state the same Purchase Price and the
same number of shares of Preferred Stock as are stated in the Warrants
initially issued pursuant to the Agreement.
3. REGISTRATION UNDER THE SECURITIES ACT OF 1933
3.1 Registration and Legends. This Warrant has not been
registered under the Act. The Shares of Preferred Stock issuable upon exercise
of this Warrant and the shares of Common
6
<PAGE> 7
Stock issuable upon conversion of the Shares (collectively, the "Securities")
have been registered under the Act on Form SB-2, SEC File No. __________ (the
"Registration Statement"). Upon exercise, in part or in whole, of this
Warrant, the Securities shall bear the following legend:
The shares represented by the certificate have been registered
under the Securities Act of 1933, as amended, solely for sale to the
holder of a warrant to purchase, which holder may be deemed to be an
underwriter of such shares within the provisions and for purposes only
of the Securities Act of 1933, as amended. The issuer of these shares
will agree to a transfer hereof only if: (1) an amended or
supplemented prospectus setting forth the terms of the offer has been
filed as part of a post-effective amendment to the Registration
Statement under which these shares are registered or as part of a new
registration statement under which these shares are registered, if
then required, and such post-effective registration statement or new
registration statement has become effective under the Securities Act
of 1933, as amended, or (2) counsel to the issuer is reasonably
satisfied that no such post-effective amendment or new registration
statement is required.
3.2 No-Action Letter. The Company agrees that it shall be
satisfied that no post-effective amendment or new registration is required for
the public sale of the Shares if it shall be presented with a letter from the
Staff of the Securities and Exchange Commission (the "Commission") stating in
effect that, based upon stated facts which the Company shall have no reason to
believe are not true in any material respect, the Staff will not recommend any
action to the Commission if such Shares are offered and sold without delivery
of a prospectus, and that, therefore, no post-effective amendment to the
Registration Statement under which such shares are to be registered or new
registration statement is required to be filed.
3.3 Registration Rights. The Company agrees and undertakes that,
upon written request of the then holder(s) of Warrants representing the right
to acquire not less than 50% of the total number of Shares, to register the
Securities, to file all necessary post-effective amendments to the Registration
Statement or a new registration statement, if then required, and to file all
necessary undertakings with the Commission so as to permit the Representative,
or any assignee of the Representative, the right to sell publicly the
Securities, on one occasion at any time within the period following the
effective date of the Registration Statement and ending five (5) years from the
effective date of the Registration Statement.
3.4 Inclusion in Company Registration Statement. In the event
that the Holders do not exercise their right to demand that the Securities be
registered, the Company agrees that if at any time within five (5) years from
the effective date of the Registration Statement it should file a registration
statement under the Act for a public offering of equity securities, the Company
will offer to the Holders the opportunity to include in that registration
statement all or any portion of the Securities. This paragraph is not
applicable to a registration statement filed with the Commission on Form S-4 or
S-8, or any successor forms, and shall apply only if at least 25% of the Shares
underlying this Warrant or shares of Common Stock issuable upon conversion of
the Shares are so presented for sale.
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<PAGE> 8
3.5 Covenants regarding Registration. In connection with any
registration under Section 3.3 or 3.4 hereof, the Company covenants and agrees
as follows:
3.5.1 The Company shall use its best efforts to have any
post-effective amendment or new registration statement declared effective at
the earliest possible time, and shall furnish such number of prospectuses as
shall be reasonably requested.
3.5.2 The Company shall pay all costs, fees, and expenses
in connection with all post-effective amendments or new registration statements
under Section 3.2 and Section 3.3 hereof including, without limitation, the
Company's legal and accounting fees, printing expenses, blue sky fees and
expenses, except that the Holders requesting registration shall pay 50% of the
Company's legal expenses and the Company shall not pay for any of the following
costs and expenses: (a) underwriting discounts and commissions allocable to
the Shares, (b) state transfer taxes, (c) brokerage commissions, (d) fees and
expenses of counsel and accountants for the holders of the Warrants or
underlying Securities.
3.5.3 The Company will take all necessary action which may
be required in qualifying or registering the underlying Securities included in
any registration statement or post-effective amendment or new registration
statement for offering and sale under the securities or blue sky laws of such
states as are requested by the holders of such underlying Securities, provided
that the Company shall not be obligated to execute or file any general consent
to service or process or to qualify as a foreign corporation to do business
under the laws of any such jurisdiction.
3.5.4 The Company shall not be required to ensure the
availability of a prospectus meeting the requirements of the Act in connection
with any such registration for a period greater than is required to complete
the marketing arrangements with respect to the Securities covered by such
registration statement, and in no event for a period ending on the earlier of
(a) the date that all Securities have been sold or (b) the expiration of ninety
(90) days from the effective date of the registration statement (or such
greater period as may be required by law for the delivery of such a
prospectus).
3.5.5 The Holder shall be entitled to pay the Purchase
Price for the Shares purchasable upon the exercise of this Warrant out of the
proceeds of any sale of the Shares purchasable upon its exercise or of the
underlying Common Stock, provided such exercise and sale occur simultaneously.
3.6 Indemnity.
3.6.1 The Company shall indemnify and hold harmless each
person registering securities pursuant to this Section (the "Seller") and each
underwriter, within the meaning of the Act, who may purchase from or sell for
any Seller any of the Warrants or Securities from and against any and all
losses, claims, damages, and liabilities caused by any untrue statement or
alleged untrue statement of a material fact contained in any post-effective
amendment or new registration statement or any supplemented prospectus under
the Act included therein required
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<PAGE> 9
to be filed or furnished by reason of this Section, or caused by any omission
or alleged omission to state therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims, damages or
liabilities are caused by any untrue statement or alleged untrue statement or
omission or alleged omission based upon information furnished or required to be
furnished in writing to the Company by such Seller or underwriter within the
meaning of such Act; provided, however, that the indemnity agreement set forth
in the Section 3.6 with respect to any prospectus which shall be subsequently
amended prior to the written confirmation of sale of any Securities shall not
inure to the benefit of any Seller or underwriter from whom the person
asserting any such losses, claims, damages or liabilities purchased such
Securities which are the subject thereof (or to the benefit of any person
controlling such Seller or underwriter), if such Seller or underwriter failed
to send or give a copy of the prospectus as amended to such person at or prior
to the written confirmation of the sale of such Securities and if such amended
prospectus did not contain any untrue statement or alleged untrue statement or
omission or alleged omission giving rise to such cause, claim, damage, or
liability.
3.6.2 Each Seller which avails itself of the procedures
under Section 3 shall indemnify and secure the agreement of any underwriter
which the Seller employs to indemnify the Company, its directors, each officer
signing the related post-effective amendment or registration statement and each
person, if any, who controls the Company, within the meaning of the Act from
and against any losses, claims, damages, and liabilities caused by any untrue
statement or alleged untrue statement of a material fact contained in any
post-effective amendment or registration statement or any prospectus required
to be filed or furnished by reason of this Section or caused by any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, insofar as such
losses, claims, damages, or liabilities are caused by any untrue statement or
alleged untrue statement or omission or alleged omission based upon information
furnished in writing to the Company by any such Seller or underwriter expressly
for use therein.
3.7 Agreements. The agreements in this Section shall continue in
effect regardless of the exercise and surrender of this Warrant.
4. OTHER MATTERS
4.1 Payment of Taxes. The Company will from time to time promptly
pay, subject to the provisions of Section 1.2.4 hereof, all taxes and charges
that may be imposed upon the Company in respect of the issuance or delivery of
this Warrant or the Shares purchasable upon the exercise of this Warrant.
4.2 Binding Effect. All the covenants and provisions of this
Warrant by or for the benefit of the Company shall bind and inure to the
benefit of its successors and assigns hereunder.
4.3 Notices. Notices or demands pursuant to this Warrant to be
given or made by the Holder to or on the Company shall be sufficiently given or
made if sent by certified or
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<PAGE> 10
registered mail, return receipt requested, postage prepaid, and addressed,
until another address is designated in writing by the Company, as follows:
Sunrise Preschools, Inc.
9128 East San Salvador Drive, Suite 200
Scottsdale, AZ 85258
Notices to the Holder provided for in this Warrant shall be deemed given or
made by the Company if sent by certified or registered mail, return receipt
requested, postage prepaid, and addressed to the Holder at his last known
address as it shall appear on the books of the Company.
4.4 Governing Law. The validity, interpretation and performance
of this Warrant shall be governed by the laws of the State of California.
4.5 Parties Bound and Benefitted. Nothing in this Warrant
expressed and nothing that may be implied from any of the provisions hereof is
intended, or shall be construed, to confer upon, or give to, any person or
corporation other than the Company and the Holder any right, remedy or claim
under promise or agreement hereof, and all covenants, conditions, stipulations,
promises and agreements contained in this Warrant shall be for the sole and
exclusive benefit of the Company and its successors and of the Holder, its
successors and, if permitted, its assignees.
4.6 Headings. The Article headings herein are for convenience
only and are not part of this Warrant and shall not affect the interpretation
thereof.
IN WITNESS WHEREOF, this Warrant has been duly executed by the Company
under its corporate seal as of the _____ day of __________, 1995.
SUNRISE PRESCHOOLS, INC.
By:______________________________________
James R. Evans, President
[Corporate Seal]
Attest:
__________________________________
Barbara L. Owens, Secretary
10
<PAGE> 11
SUNRISE PRESCHOOLS, INC.
ASSIGNMENT
FOR VALUE RECEIVED, ______________________________ hereby sells,
assigns and transfers unto _______________________________________________ the
within Warrant and the rights represented thereby, and does hereby irrevocably
constitute and appoint __________________________________________ Attorney, to
transfer said Warrant on the books of the Company, with full power of
substitution.
Dated:____________________
Signed:______________________________
Signature guaranteed:
_______________________________________
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<PAGE> 12
SUBSCRIPTION FORM
SUNRISE PRESCHOOLS, INC.
9128 EAST SAN SALVADOR DRIVE, SUITE 200
SCOTTSDALE, AZ 85258
The undersigned hereby irrevocably subscribes for the purchase of
shares of your Preferred Stock pursuant to and in accordance with the terms and
conditions of this Warrant, and herewith makes payment, covering such shares of
Preferred Stock which should be delivered to the undersigned at the address
stated below, and, if said number of shares shall not be all of the shares
purchasable hereunder, that a new Warrant of like tenor for the balance of the
remaining shares purchasable hereunder be delivered to the undersigned at the
address stated below.
The undersigned agrees that: (1) the undersigned will not offer,
sell, transfer or otherwise dispose of any such shares of Preferred Stock or
the underlying Common Stock (the "Securities") unless either (a) a registration
statement, or post-effective amendment thereto, covering such Securities has
been filed with the Securities and Exchange Commission pursuant to the
Securities Act if 1933, as amended (the "Act"), and such sale, transfer or
other disposition is accompanied by a prospectus meeting the requirements of
Section 10 of the act forming a part of such registration statement, or
post-effective amendment thereto, which is in effect under the Act covering the
Securities to be so sold, transferred or otherwise disposed of, or (b) counsel
to SUNRISE PRESCHOOLS, INC. satisfactory to the undersigned has rendered an
opinion in writing and addressed to SUNRISE PRESCHOOLS, INC. that such proposed
offer, sale, transfer or other disposition of the Securities is exempt from the
provisions of Section 5 of the Act in view of the circumstances of such
proposed offer, sale, transfer or other disposition; (2) SUNRISE PRESCHOOLS,
INC. may notify the transfer agent for its Securities that the certificates for
the Securities acquired by the undersigned are not to be transferred unless the
transfer agent receives advice from SUNRISE PRESCHOOLS, INC. that one or both
of the conditions referred to in (1)(a) and (1)(b) above have been satisfied;
and (3) SUNRISE PRESCHOOLS, INC. may affix the legend set forth in Section 3.1
of this Warrant to the certificates for shares of Preferred Stock hereby
subscribed for, if such legend is applicable.
Dated:___________________________ Signed:_________________________________
Address:________________________________
________________________________________
Signature Guaranteed:
_______________________________________
12
<PAGE> 1
EXHIBIT 4
Sunrise Preschools, Inc.
NUMBER a Delaware corporation SHARES
SP-C SERIES C PREFERRED STOCK
SEE REVERSE FOR
CERTAIN DEFINITIONS
CUSIP 857593 30 1
THIS CERTIFIES THAT
SPECIMEN
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF THE SERIES C PREFERRED STOCK (PAR VALUE
$1.00)
OF
SUNRISE PRESCHOOLS, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
Corporate
- --------------------------- Seal ------------------------------
Secretary President
COUNTERSIGNED AND REGISTERED
AMERICAN SECURITIES TRANSFER INCORPORATED
1825 Lawrence Street, Suite 444
Denver, CO 80202-1817
<PAGE> 2
The restated certificate of incorporation of this corporation, as amended,
authorizes the issuance of a class of preferred stock and empowers the board of
directors to issue preferred stock in series and to determine the powers,
designations, preferences and relative participating, optional or other special
rights of the shares of any series of such class and the qualifications,
limitations or restrictions of such preferences or rights, or both. Each series
of preferred stock issued by the corporation will have such preferences as shall
be declared by the resolution or resolutions of the board of directors
establishing such series. The corporation will mail to any shareholder, without
charge, within five days after receipt of written request therefor at its
principal place of business or registered office, a full statement of the
powers, designations, preferences and relative, participating, optional or other
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences or rights, or both.
The corporation will mail to the record holder of the shares of series c
preferred stock represented by this certificate, without charge, within five
days after receipt of written request therefor at its principal place of
business or registered office, a copy of the express terms of the shares
represented by this certificate set forth in the "certificate of designation,
preferences and rights of series c preferred stock" filed with the Delaware
secretary of state on November 8, 1995, and of the other classes and series of
shares which the corporation is authorized to issue. The holder hereof, by
accepting this certificate, assents to and is bound by all of the express terms
of the classes of stock of the corporation. This certificate and the securities
represented hereby are subject to the laws of the state of Delaware and to the
restated certificate of incorporation and bylaws of the corporation as now or
hereafter amended.
The following abbreviations, when used in the inscription on the fact
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations. Additional abbreviations may also
be used though not in the list.
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- _______ Custodian
__________(Minor)
TEN ENT -- as tenants by the entireties under Uniform Gifts to Minors
Act ___________(State)
JT TEN -- as joint tenants with right of survivorship
and not as tenants in common
For value received, the undersigned hereby sells, assigns and transfers unto
_______________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_____________________________________________
_____________________________________________
_______________________________________________________________________________
________________________________________________________________________ Shares
of Series C Preferred Stock represented by the within Certificate, and hereby
irrevocably constitutes and appoints __________________________________________
Attorney to transfer the said shares on the books of the within-named
Corporation with full power of substitution in the premises.
Dated: _____________________
____________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT,
OR ANY CHANGE WHATEVER, AND SHOULD BE
GUARANTEED BY A COMMERCIAL BANK OR TRUST
COMPANY HAVING AN OFFICE OR CORRESPONDENT
IN THE UNITED STATES OR BY A MEMBER FIRM
OF A REGISTERED NATIONAL SECURITIES EXCHANGE
OR OF THE NATIONAL ASSOCIATION OF SECURITIES
DEALERS, INC.
SIGNATURE GUARANTEED:
___________________________________________
<PAGE> 1
EXHIBIT 5
Squire, Sanders & Dempsey
40 North Central Ave., Suite 2600
Phoenix, Arizona 85004
December 11, 1995
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: SUNRISE PRESCHOOLS, INC.
Ladies and Gentlemen:
This firm is counsel for Sunrise Preschools, Inc., a Delaware corporation (the
"Company"). As such, we are familiar with the Restated Certificate of
Incorporation and Bylaws of the Company, as well as resolutions adopted by its
Board of Directors authorizing the issuance and sale of up to 421,666 shares of
the Company's $1.00 par value Series C Preferred Stock (the "Preferred Stock"),
which are the subject of a Form SB-2 Registration Statement under the
Securities Act of 1933. We have also acted as counsel for the Company with
respect to certain matters in connection with the sale of the Preferred Stock
and in preparation of the required filings with the Securities and Exchange
Commission. In addition, we have examined such documents and undertaken such
further inquiry as we consider necessary for rendering the opinion hereinafter
set forth below.
Based upon the foregoing, it is our opinion that:
1. The Company is a corporation duly organized and validly existing under
the laws of the State of Delaware.
2. The Preferred Stock, when issued, will be duly and validly issued,
fully paid and nonassessable.
We acknowledge that we are referred to under the heading "Legal Matters" of the
Prospectus which is part of the Company's Form SB-2 Registration Statement
relating to the Preferred Stock, and we hereby consent to such use of our name
in such Registration Statement and to the filing of this opinion with state
regulatory agencies in such states as may require such filing in connection
with the registration of the Preferred Stock for offer and sale in such states.
Very truly yours,
s/s SQUIRE, SANDERS & DEMPSEY
<PAGE> 1
EXHIBIT 11
SUNRISE PRESCHOOLS, INC. AND SUBSIDIARY
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended
Year Ended July 31, October 31, 1995
------------------------------ --------------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C>
PRIMARY:
Common shares outstanding, beginning
of year ................................. 2,435,894 2,435,894 2,935,894 2,435,894
Effect of weighting shares:
Employee stock options outstanding ...... 18,072 5,550 283,893 5,771
Effect of warrant exercise .............. 166,666 -- -- --
Assumed exercise of warrants ............ -- 53,571 118,009 13,050
---------- ---------- ---------- ----------
Weighted average number of common
shares and common share equivalents
outstanding ............................. 2,620,632 2,495,015 3,337,796 2,454,715
========== ========== ========== ==========
Net income available for common stock ...... $ 756,852 $ 830,649 $ 59,200 $ 233,221
========== ========== ========== ==========
Net income per common share and
common share equivalent ................. $ .29 $ .33 $ .02 $ .10
========== ========== ========== ==========
FULLY DILUTED:
Common shares outstanding, beginning
of year ................................. 2,435,894 2,435,894 2,935,894 2,435,894
Effect of weighting shares:
Employee stock options outstanding ...... 85,907 9,199 283,893 5,771
Effect of warrant exercise .............. 186,274 -- -- --
Assumed exercise of warrants ............ -- 100,000 118,009 13,050
Assumed conversion of preferred stock ... 500,000 500,000 500,000 500,000
---------- ---------- ---------- ----------
Weighted average number of common
shares and common share equivalents
outstanding ............................. 3,208,075 3,045,093 3,837,796 2,954,715
========== ========== ========== ==========
Net income available for common stock ...... $ 806,852 $ 880,649 $ 71,700 $ 245,721
========== ========== ========== ==========
Net income per common share and
common share equivalent ................. $ .25 $ .29 $ .02 $ .08
========== ========== ========== ==========
</TABLE>
<PAGE> 1
EXHIBIT 23.1
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all reference to our firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
December 8, 1995.
