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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JULY 29, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO
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COMMISSION FILE NUMBER: 0-16425
SUNRISE PRESCHOOLS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 86-0532619
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9128 E. SAN SALVADOR, SUITE 200, SCOTTSDALE, ARIZONA 85258
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (602) 860-1611
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01
PAR VALUE
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. YES /X/ NO / /
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained herein, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. / /
The Registrant's operating revenues for its most recent fiscal year were:
$9,715,023
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The aggregate market value of voting stock held by non-affiliates of the
Registrant, based on the average of the closing bid and asked prices of the
Registrant's Common Stock in the over-the-counter market as reported by the
National Quotation Bureau, Inc. on October 20, 1995, was approximately
$3,565,459. Shares of voting stock held by each officer and director and by
each person who owns 5% or more of the outstanding voting stock have been
excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily conclusive.
As of October 20, 1995, 2,935,894 shares of Common Stock, $.01 par value, were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
LOCATION OF EXHIBIT INDEX
The index of exhibits is contained in Part III herein on page number 53.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT: YES NO X
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TABLE OF CONTENTS
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PART I:
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . 15
PART II:
Item 5. Market for Registrant's Common Equity and Related
Stockholders Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 7. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . 22
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
PART III:
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act . . . . . . . . . . . . . 43
Item 10. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Item 11. Security Ownership of Certain Beneficial Owners and Management . . . . . . 50
Item 12. Certain Relationships and Related Transactions . . . . . . . . . . . . . . 52
PART IV:
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . 53
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
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PART I
ITEM 1. BUSINESS.
COMPANY PROFILE
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 Annual Report, 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
RELATIONSHIPS AND RELATED 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.
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. However, for clarity of
presentation, all information has been presented as if the fiscal year ended on
July 31.
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 27 child care
centers in Arizona and Hawaii. Enrollment on July 31, 1995 was approximately
2,900 children and the aggregate licensed capacity of the Company's child care
centers was 3,485 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
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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.
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.
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[GRAPHIC DESCRIPTION]
A pie chart depicting the for-profit child
care market that is large and fragmented
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.
[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.
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[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. 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
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at least two computers per center, are available to the children.
Field trips in Company 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.
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
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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 various 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.
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 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).
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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 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 years 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 years 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 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, the Company recently entered
into an agreement to purchase 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
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operate the child care center for PSI pursuant to the PSI Agreement. See
"CERTAIN RELATIONSHIPS AND RELATED 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 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, 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.
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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 RELATIONSHIPS AND RELATED 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 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.
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."
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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 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.
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 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.
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.
13
<PAGE> 14
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.
As of July 31, 1995, the Company employed approximately 437 persons,
approximately 11 of which were employed in the corporate office and
approximately 426 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.
ITEM 2. PROPERTIES.
Of the 27 child care centers operated by the Company in Arizona and
Hawaii, 14 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 5 to 25 years at the
Company's discretion and the option to purchase the leased facilities. The
aggregate monthly lease payments on the 14 centers (net of monthly sublease
income of approximately $2,300) total approximately $190,000. 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
14
<PAGE> 15
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.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of security holders
in the fourth quarter of fiscal 1995.
15
<PAGE> 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS.
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 Securities
Exchange Act of 1934 (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
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1995 High Low
------ ------
<S> <C> <C>
First Quarter $1.375 $1.000
Second Quarter 1.688 .938
Third Quarter 1.563 1.125
Fourth Quarter 2.625 1.250
</TABLE>
There were approximately 270 record holders and 660 beneficial holders
of the Company's Common Stock as of September 30, 1995. On October 20, 1995,
the bid and asked prices for the Common Stock were $2.25 and $2.50,
respectively.
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. The Company may not pay any dividends on its Common
Stock unless all cumulative dividends on its Series B Preferred Stock are
paid. 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 July
31, 1995, accrued but unpaid dividends payable on the Series B Preferred Stock
were $265,833. In addition, the Company has a credit facility with a bank
pursuant to which it may borrow up to $500,000. As of September 30, 1995,
approximately $80,000 had been borrowed under the working capital line portion
of this credit facility. Pursuant to the terms
16
<PAGE> 17
of the credit facility, the Company may not pay any dividends 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).
ITEM 6. 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 RELATIONSHIPS
AND RELATED 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. The Company has 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 have been
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. See Note 3 of Notes to Consolidated Financial
Statements.
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.
17
<PAGE> 18
<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 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 revenue),
an increase of $119,729 or 1.3% from pro forma operating expenses of $8,983,809
(92.9% of 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 revenue), a
decrease of $138,539 or 2.9% from pro forma payroll expense of $4,869,501
(50.4% of 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 revenue), an increase of $150,548 or 5.3% from pro forma facilities
and maintenance costs of $2,825,368 (29.2% of 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 revenue), an increase of $107,720 or 8.4% from pro forma general and
administrative expense of $1,288,940 (13.3% of revenue) during fiscal 1994.
The increase is primarily the result of the $176,500 writedown
18
<PAGE> 19
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 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.
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.
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.
19
<PAGE> 20
SEASONALITY AND QUARTERLY RESULTS
The following table reflects certain selected unaudited quarterly
operating results for 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.
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------------------------
Jul. 31, Apr. 30 Jan. 31, Oct. 31, Jul. 31, Apr. 30, Jan. 31, Oct. 31,
1995(1) 1995 1995 1994 1994 1994 1994 1993
-------- ------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue . . . . $ 2,367 $ 2,515 $ 2,311 $ 2,522 $ 2,372 $ 2,559 $ 2,252 $ 2,480
Operating expenses . . . (2,480) (2,214) (2,138) (2,272) (2,208) (2,190) (2,198) (2,388)
Income (loss)
from operations . . . . (113) 301 173 250 164 369 54 92
Income (loss) before
income taxes . . . . . $ (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 fiscal 1995 continue a trend that began in the
third quarter of fiscal 1994. School enrollments, which repeatedly achieved
record levels during the last half of fiscal 1994, remain strong. Management
believes that the combination of strong enrollments, the continuing impact of
expense reductions implemented in the third quarter of fiscal 1994 and
increased margins at the school level 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 year ended July 31,
1995 was $655,538, which was sufficient to meet the normal operating
requirements of the Company. 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 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.
20
<PAGE> 21
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 July 31, 1995 were
$265,833, as reflected in the accompanying Consolidated Balance Sheet.
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 July
31, 1995, there were no borrowings outstanding under the working capital line
or the equipment line. The amount available under the working capital line was
$200,000 at July 31, 1995. Borrowings under the vehicle line consisted of
$51,000 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. The offering is presently scheduled to be completed in late
November 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.
Recently, the Company entered into an agreement to purchase the
operations of two child care centers in Colorado, which have an aggregate
licensed capacity of 238 children.
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 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.
21
<PAGE> 22
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
22
<PAGE> 23
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 22, 1995.
23
<PAGE> 24
SUNRISE PRESCHOOLS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JULY 31, 1995
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 581,311
Accounts receivable, net of allowance for doubtful accounts of $20,000 379,253
Prepaid expenses (Note 2) 96,242
Deferred tax asset, current portion (Note 10) 109,000
Inventory and supplies 16,376
-----------
Total current assets 1,182,182
Property and equipment, net (Note 4) 642,143
Property and equipment leased to PSI, net (Notes 3 and 4) 514,126
Deferred tax asset, net of current portion (Note 10) 586,000
Note receivable from PSI (Note 3) 256,251
Deposits and other assets 153,044
-----------
Total assets $ 3,333,746
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 125,628
Accrued expenses (Note 2) 302,259
Dividends payable on preferred stock (Note 9) 265,833
Notes payable and capital leases, current portion (Notes 5 and 6) 136,618
Deferred rent, current portion (Note 7) 96,241
Deferred gain on sale and leaseback of preschool facilities, current portion (Note 8) 45,003
-----------
Total current liabilities 971,582
-----------
NOTES PAYABLE AND CAPITAL LEASES, net of current portion (Notes 2, 5 and 6) 429,402
-----------
DEFERRED RENT, net of current portion (Note 7) 416,787
-----------
DEFERRED GAIN ON SALE AND LEASEBACK OF PRESCHOOL FACILITIES,
net of current portion (Note 8) 132,651
-----------
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 500,000
Common stock, $.01 par value 10,000,000 shares authorized,
2,935,894 shares issued and outstanding 29,359
Paid-in capital 3,602,406
Accumulated deficit (2,748,441)
-----------
Total shareholders' equity 1,383,324
-----------
Total liabilities and shareholders' equity $ 3,333,746
===========
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
24
<PAGE> 25
SUNRISE PRESCHOOLS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JULY 31, 1995 AND 1994
(SEE NOTE 3)
<TABLE>
<CAPTION>
1995 1994
---------- -----------
<S> <C> <C>
OPERATING REVENUE $9,715,023 $10,625,044
---------- -----------
OPERATING EXPENSES:
Payroll 4,730,962 5,443,665
Facilities and maintenance 2,975,916 3,303,949
General and administrative 1,396,660 1,399,790
---------- -----------
Total operating expenses 9,103,538 10,147,404
---------- -----------
INCOME FROM OPERATIONS 611,485 477,640
---------- -----------
OTHER INCOME (EXPENSE):
Interest expense, net
Other income (38,919) (73,404)
14,286 1,055
---------- -----------
Total other income (expense) (24,633) (72,349)
---------- -----------
INCOME BEFORE INCOME TAXES 586,852 405,291
INCOME TAX BENEFIT (Note 10) 220,000 475,358
---------- -----------
NET INCOME $ 806,852 $ 880,649
========== ===========
NET INCOME AVAILABLE FOR COMMON STOCK (Note 2) $ 756,852 $ 830,649
========== ===========
NET INCOME PER COMMON SHARE AND
COMMON SHARE EQUIVALENT (Note 2):
Primary $ .29 $ .33
========== ===========
Fully diluted $ .25 $ .29
========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND COMMON
SHARE EQUIVALENTS OUTSTANDING:
Primary 2,620,632 2,495,015
========== ===========
Fully diluted 3,208,075 3,045,093
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE> 26
SUNRISE PRESCHOOLS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1995 AND 1994
(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
======= ======== ========= ======= ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE> 27
SUNRISE PRESCHOOLS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 806,852 $ 880,649
--------- ---------
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation and amortization 295,955 290,582
Amortized gain on sale of real estate (45,003) (45,003)
Income tax benefit (220,000) (475,358)
Amortization of deferred rent (74,188) (82,704)
Provision for doubtful accounts 242,633 46,487
Gain on disposal of property and equipment (14,286) (1,055)
Changes in assets and liabilities-
Increase in accounts receivable (141,024) (42,793)
(Increase) decrease in prepaid expenses (69,053) 57,013
Decrease in inventory and supplies 13,646 42,846
(Increase) decrease in deposits and other assets (66,787) 433
Decrease in accounts payable (13,555) (125,857)
Decrease in accrued expenses (59,652) (58,009)
--------- ---------
Total adjustments (151,314) (393,418)
--------- ---------
Net cash provided by operating activities 655,538 487,231
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (354,308) (82,544)
Proceeds from disposal of property and equipment 53,322 5,308
--------- ---------
Net cash used in investing activities (300,986) (77,236)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of warrants 466,185 -
Proceeds from notes payable 254,192 -
Payments on lines of credit (100,000) -
Increase in note receivable from Preschool Services, Inc. (335,253) (97,498)
Payments on notes payable and capital leases (160,146) (231,169)
--------- ---------
Net cash provided by (used in) financing activities 124,978 (328,667)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 479,530 81,328
CASH AND CASH EQUIVALENTS, beginning of year 101,781 20,453
--------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 581,311 $ 101,781
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 38,919 $ 73,438
========= =========
</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.
27
<PAGE> 28
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).
(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.
28
<PAGE> 29
(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.
(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.
(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. However, for clarity of
presentation, all information has been presented as if the fiscal year ended on
July 31.
Certain reclassifications have been made to amounts previously reported for
fiscal 1994 to conform with the fiscal 1995 presentation.
29
<PAGE> 30
(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 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.
30
<PAGE> 31
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
for common stock $ 830,649 $1,051,235
=========== ==========
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.
31
<PAGE> 32
(4) PROPERTY AND EQUIPMENT:
Property and equipment and property and equipment leased to PSI consist of the
following:
<TABLE>
<CAPTION>
Property Property and
and Equipment
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
and amortization (1,694,051) (708,588)
----------- ----------
$ 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.
32
<PAGE> 33
(6) NOTES PAYABLE AND CAPITAL LEASES:
Notes payable and capital leases consist of the following:
<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:
<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
33
<PAGE> 34
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 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:
<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,
34
<PAGE> 35
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 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
35
<PAGE> 36
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.
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.
36
<PAGE> 37
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.
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.
37
<PAGE> 38
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>
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.
38
<PAGE> 39
(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 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
39
<PAGE> 40
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 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 181,589 $ .50 - $2.375
beginning of year
Granted 585,003 $1.00 - $1.5125
Canceled (156,592) $1.19 - $2.00
Exercised --
--------
Options outstanding $ .50 - $2.375
===============
at end of year 610,000
========
Exercisable at end of year 316,641 $ .50 - $2.375
======== ===============
Options available for
grant at end of year 230,000
========
</TABLE>
40
<PAGE> 41
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.
(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 to purchase the
operations of two child care centers in Colorado. The acquisition will be
accounted for as a purchase in accordance with Accounting Principles Board
Opinion No. 16.
41
<PAGE> 42
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
42
<PAGE> 43
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
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 September 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
</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.
Mr. Evans and Ms. Owens have employment agreements with the Company,
and Mr. O'Connor serves 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
43
<PAGE> 44
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.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who beneficially own more than 10% of a registered class
of the Company's equity securities, to file reports of ownership and changes in
ownership with the SEC. Officers, directors and greater than 10% shareholders
are required by Exchange Act regulations to furnish the Company with copies of
all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it,
or written representations from certain reporting persons that no Form 5 was
required for such persons, the Company believes
44
<PAGE> 45
that, other than as disclosed below, during the fiscal year ending July 31,
1995, all filing requirements applicable to its officers, directors and greater
than 10% beneficial owners were complied with.
Ronald J. O'Connor failed to report timely that he had become the
Company's Controller and Principal Accounting Officer on a Form 3. Mr.
O'Connor also reported the grant by the Company of options to acquire 5,000
shares of Common Stock and the acquisition of 1,000 shares of the Company's
Common Stock on a Form 3, rather than a Form 4. Mr. O'Connor intends to file an
amended Form 3 reporting his appointment as the Company's Controller and
Principal Accounting Officer and a Form 4 reporting the acquisition of options
to acquire 5,000 shares of Common Stock and the acquisition of 1,000 shares of
Common Stock.
ITEM 10. 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
Name and Fiscal Other Annual Stock Underlying LTIP All Other
Principal Position Year Salary Bonus Compensation Award(s) Option(s) Payouts Compensation(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 President 1994 $105,007 $53,494 $-0- $-0- -0- $-0- $-0-
1993 $105,007 $62,227 $-0- $-0- -0- $-0- $-0-
- ----------------------------------------------------------------------------------------------------------------------------
Barbara L. Owens 1995 $ 85,000 $52,777 $-0- $-0- 135,858(2) $-0- $-0-
Executive Vice
President, Secretary 1994 $ 56,632 $62,792 $-0- $-0- -0- $-0- $-0-
and Treasurer
1993 $ 56,632 $65,877 $-0- $-0- -0- $-0- $-0-
</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 $2.00 per
share, exceeded the current market price for the Company's Common
Stock.
45
<PAGE> 46
The following table sets forth certain information concerning
individual grants of stock options during the fiscal year ended July 31, 1995
to each of the Named Executive Officers.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------------------------------------------------
% of Total
Number of Securities Options/SARs
Underlying Granted To Exercise or
Option/SARs Employees Base Price Expiration
Name Granted (#) in Fiscal Year ($/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 $2.00 per
share, exceeded the current market price for the Company's Common
Stock.
The following table sets forth certain information concerning each
exercise of stock options during the year ended July 31, 1995 by each of the
Named Executive Officers and the aggregated fiscal year-end value of the
unexercised options of each such Named Executive Officer.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
OPTION VALUE AS OF JULY 31, 1995
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options In-the-Money
at Fiscal Year End (#) Options at Fiscal Year End ($)
- -----------------------------------------------------------------------------------------------------------------------------
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>
46
<PAGE> 47
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.
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
47
<PAGE> 48
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 RELATIONSHIPS AND RELATED
TRANSACTIONS." In addition, the Company has agreed to use its best efforts to
secure the release of such personal guarantees.
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. 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 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
48
<PAGE> 49
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 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 September 30, 1995, under the 1995 Plan, options to purchase
350,000 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. As of September
30, 1995, 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 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.
49
<PAGE> 50
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the beneficial ownership of share of
Common Stock and Series B Preferred Stock of the Company on September 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 (3). 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 (4) 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)(2) Ownership(3)
- ---------------- ----------------------- ------------
<S> <C> <C>
James R. Evans 744,910 24.6%
9128 East San Salvador, Suite 200
Scottsdale, Arizona 85258
Barbara L. Owens 152,993 5.0%
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
Robert A. Rice 22,188 0.8%
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(4) 1,112,055 32.4%
LN Investment Capital Limited
Partnership(4) 648,217 20.1%
Lepercq Investment Limited
Partnership - II(4) 463,838 14.8%
James Alexander 157,325 5.4%
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 5 persons) 947,091 29.4%
</TABLE>
(footnotes on following page)
50
<PAGE> 51
_____________________________
(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; and all
directors and executive officers as a group - 286,582.
(2) Includes presently exercisable Warrants as follows: James R. Evans -
1,018 (18 of such Warrants being held in a trust, of which Mr. Evans
is the trustee, for the benefit of his children); Barbara L. Owens -
143 (9 of such Warrants being held in a trust, of which Ms. Owens is
the trustee, for the benefit of her children); Robert A. Rice - 2,188;
James Alexander - 5,625; John Rutkowski - 130; and all directors and
executive officers as a group - 3,349.
(3) The percentages shown include the shares of Common Stock actually
owned as of September 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, Warrants
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 September 30, 1995 upon the exercise of options or
Warrants, or the conversion of the Series B Preferred Stock, are
deemed to be outstanding when computing the percentage of the shares
of Common Stock owned by such person, but are not deemed to be
outstanding when computing the percentage of the shares of Common
Stock owned by any other person.
(4) 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 356,767
shares of Common Stock and 291,450 shares of Series B Preferred Stock
and (ii) Lepercq Investment Limited Partnership - II ("LIP-II"), which
owns 255,288 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 on September 12, 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.
51
<PAGE> 52
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED 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, the aggregate amounts of lease payments and other obligations
guaranteed by Mr. Evans and Ms. Owens were approximately $5,021,893 and
$1,027,553, respectively. In addition, the Company leases equipment used in
two child care centers and two vehicles from Mr. Evans and Ms. Owens. Monthly
lease payments made by the Company under such leases to Mr. Evans and Ms. Owens
in fiscal year 1995 were approximately $3,061 and $962, respectively. The
prescribed lease rates reflected fair rental value at the time the leases were
entered into.
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, Mrs. 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 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 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.
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.
52
<PAGE> 53
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K.
(a) EXHIBITS.
<TABLE>
<CAPTION>
Exhibit Page Number or
Number Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
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 Bylaws of Registrant, as amended (1)
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
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
</TABLE>
53
<PAGE> 54
<TABLE>
<CAPTION>
Exhibit Page Number or
Number Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
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
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.
</TABLE>
54
<PAGE> 55
<TABLE>
<CAPTION>
Exhibit Page Number or
Number Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
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>
55
<PAGE> 56
<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
</TABLE>
56
<PAGE> 57
<TABLE>
<CAPTION>
Exhibit Page Number or
Number Description Method of Filing
------- ----------- ----------------
<S> <C> <C>
11 Computation of Per Share Earnings (14)
21 List of Subsidiaries (14)
23 Consent of Arthur Andersen LLP *
- -----------------
</TABLE>
<TABLE>
<S> <C>
* 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.
</TABLE>
(b) REPORTS ON FORM 8-K.
None.
(c) FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
(1) Independent Auditors Report Page 23
(2) Consolidated Financial Statements and Notes
to Consolidated Financial Statements of the
Company for the fiscal years ended July 31, 1995
and 1994 Page 24
</TABLE>
(d) FINANCIAL STATEMENT SCHEDULES.
Financial Statement Schedules have been omitted because of the absence
of conditions under which they are required or because the required material
information is included in the Financial Statements or Notes to the Financial
Statements included herein.
57
<PAGE> 58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SUNRISE PRESCHOOLS, INC.
a Delaware corporation
Date: October 27, 1995 By /s/ James R. Evans
--------------------------------
James R. Evans, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ James R. Evans Chairman of the Board, and President October 27, 1995
- ---------------------- (Principal Executive Officer)
James R. Evans
/s/ Ronald J. O'Connor Controller (Principal Financial October 27, 1995
- ---------------------- Officer; Principal Accounting
Ronald J. O'Connor Officer)
/s/ Robert A. Rice Director October 27, 1995
- ----------------------
Robert A. Rice
/s/ Richard H. Hinze Director October 27, 1995
- ----------------------
Richard H. Hinze
/s/ Barbara L. Owens Director October 27, 1995
- ----------------------
Barbara L. Owens
</TABLE>
S-1
<PAGE> 1
[ARTHUR ANDERSEN LLP LETTERHEAD]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-KSB, into the Company's previously filed
Registration Statements File Nos. 33-63303, 33-95440 and 33-95250.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
October 24, 1995.
EXHIBIT 23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY FOR THE YEAR ENDED JULY 29,
1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FORM 10-KSB FOR
FISCAL 1995.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-29-1995
<PERIOD-START> JUL-31-1994
<PERIOD-END> JUL-29-1995
<EXCHANGE-RATE> 1
<CASH> 581,311
<SECURITIES> 0
<RECEIVABLES> 399,253
<ALLOWANCES> 20,000
<INVENTORY> 16,376
<CURRENT-ASSETS> 1,182,182
<PP&E> 3,558,908
<DEPRECIATION> 2,402,639
<TOTAL-ASSETS> 3,333,746
<CURRENT-LIABILITIES> 971,582
<BONDS> 0
<COMMON> 29,359
500,000
0
<OTHER-SE> 853,965
<TOTAL-LIABILITY-AND-EQUITY> 3,333,746
<SALES> 0
<TOTAL-REVENUES> 9,715,023
<CGS> 0
<TOTAL-COSTS> 9,103,538
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,919
<INCOME-PRETAX> 586,852
<INCOME-TAX> (220,000)
<INCOME-CONTINUING> 806,852
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 806,852
<EPS-PRIMARY> .29
<EPS-DILUTED> .25
</TABLE>
