SUNRISE PRESCHOOLS INC/DE/, SB-2, 1995-10-23

SUNRISE PRESCHOOLS INC/DE/
SB-2, 1995-10-23
SOCIAL SERVICES

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<PAGE> 1
As filed with the Securities and Exchange Commission on October 23, 1995.
REGISTRATION NO. 33-______
================================================================================

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM SB-2

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

SUNRISE PRESCHOOLS, INC.
----------------------------------------------
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

<TABLE>
<S> <C> <C>
DELAWARE 8351 86-0532619
- --------------------------------- ---------------------------- -------------------
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>

9128 EAST SAN SALVADOR, SUITE 200, SCOTTSDALE, ARIZONA 85258, (602) 860-1611
- --------------------------------------------------------------------------------
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL
EXECUTIVE OFFICES AND PRINCIPAL PLACE OF BUSINESS)

JAMES R. EVANS
CHAIRMAN OF THE BOARD & PRESIDENT
9128 EAST SAN SALVADOR, SUITE 200
SCOTTSDALE, ARIZONA 85258
(602) 860-1611
- --------------------------------------------------------------------------------
(NAME, ADDRESS, AND TELEPHONE NUMBER OF AGENT FOR SERVICE)

WITH COPIES TO:

CHRISTOPHER D. JOHNSON, ESQ. WILLIAM L. TWOMEY, ESQ.
SQUIRE, SANDERS & DEMPSEY HEWITT & MCGUIRE
TWO RENAISSANCE SQUARE 19900 MACARTHUR BLVD., SUITE 1050
40 NORTH CENTRAL AVENUE, SUITE 2700 IRVINE, CALIFORNIA 92715
PHOENIX, ARIZONA 85004 TELEPHONE: (714) 798-0712
TELEPHONE: (602) 528-4046 FAX: (714) 798-0511
FAX: (602) 253-8129

------------------------------

APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE FROM
TIME TO TIME AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.

IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING PURSUANT
TO RULE 462(b) UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE
SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE
REGISTRATION STATEMENT FOR THE SAME OFFERING. / / __________________

IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(c) UNDER
THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT
FOR THE SAME OFFERING. / / __________________

IF THE DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434,
PLEASE CHECK THE FOLLOWING BOX. / /

<PAGE> 2

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
==========================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH AMOUNT TO BE PRICE PER OFFERING REGISTRATION
CLASS OF SECURITIES TO BE REGISTERED REGISTERED SHARE PRICE FEE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series C Preferred Stock(1) 421,666 $15.00 $6,324,900 $2,181
- --------------------------------------------------------------------------------------------------------------------------
Common Stock issuable on conversion of Series C Preferred 2,108,330 $0 $0 $0
Stock(2)
- --------------------------------------------------------------------------------------------------------------------------
TOTAL ................................................................................................... $2,181
==========================================================================================================================
</TABLE>

1. Includes shares of Series C Preferred Stock purchased to cover
over-allotments, if any, and shares issuable pursuant to the
Representatives' Warrants.

2. Pursuant to Rule 416, there is also being registered hereunder a
presently undeterminable number of shares of Common Stock that may be
issued pursuant to the anti-dilution provisions of the Series C
Preferred Stock.

===============================================================================
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
===============================================================================

ii
<PAGE> 3

SUNRISE PRESCHOOLS, INC.
CROSS REFERENCE SHEET

(Showing Location in the Prospectus of Information
Required by Items 1 through 23, Part I, of Form SB-2)

<TABLE>
<CAPTION>
Item in Form SB-2 Prospectus Caption
- ----------------- ------------------
<S> <C> <C>
1. Front of Registration Statement and Outside Front Cover of
Prospectus ....................................................... Facing Page of Registration Statement; Outside Front
Page of Prospectus

2. Inside Front and Outside Back Cover Pages of Prospectus .......... Inside Front Cover Page of Prospectus; Outside Back
Cover Page of Prospectus

3. Summary Information and Risk Factors ............................. Prospectus Summary; Risk Factors

4. Use of Proceeds .................................................. Prospectus Summary; Use of Proceeds

5. Determination of Offering Price .................................. Outside Front Cover Page of Prospectus; Risk Factors;
Underwriting

6. Dilution ......................................................... *

7. Selling Stockholders ............................................. *

8. Plan of Distribution ............................................. Outside Front Cover Page of Prospectus; Underwriting

9. Legal Proceedings ................................................ *

10. Directors, Executive Officers, Promoters and Control Persons ..... Management

11. Security Ownership of Certain Beneficial Owners and Management ... Principal Stockholders

12. Description of Securities ........................................ Description of Securities

13. Interest of Named Experts and Counsel ............................ Experts; Legal Matters

14. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities ....................................... Description of Securities

15. Organization Within Last 5 Years ................................. Prospectus Summary

16. Description of Business .......................................... Business; Risk Factors

17. Management's Discussion and Analysis or Plan of Operation ........ Management's Discussion and Analysis of Financial
Condition and Results of Operations
</TABLE>

iii
<PAGE> 4

<TABLE>
<CAPTION>
Item in Form SB-2 Prospectus Caption
- ----------------- ------------------
<S> <C> <C>
18. Description of Property .......................................... Properties

19. Certain Relationships and Related Transactions ................... Certain Transactions

20. Market for Common Equity and Related Stockholder Matters ......... Outside Front Cover Page of Prospectus; Prospectus
Summary; Dividends; Price Range of Securities

21. Executive Compensation ........................................... Executive Compensation

22. Financial Statements ............................................. Prospectus Summary; Selected Historical and Pro Forma
Consolidated Financial Data; Financial Statements

23. Changes in and Disagreements with Accountants on Accounting and *
Financial Disclosures ............................................
</TABLE>

- --------------------------

* Omitted because Item is not applicable.

IV
<PAGE> 5

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED OCTOBER 23, 1995
PROSPECTUS
SERIES C PREFERRED STOCK

SUNRISE PRESCHOOLS, INC.

The securities offered hereby are 333,333 shares of Series C Preferred
Stock, $1.00 par value per share (the "Series C Preferred Stock"), which are
being offered by Sunrise Preschools, Inc. (the "Company" or "Sunrise"). The
Series C Preferred Stock may be redeemed by the Company upon 20 days' notice to
the holders of the Series C Preferred Stock, if the average of the closing asked
prices of the common stock, $.01 par value, of the Company (the "Common Stock"),
for a 20 consecutive trading-day period ending within five days prior to the
date redemption notice is given by the Company has equalled or exceeded 150% of
the conversion price of the Series C Preferred Stock. The Series C Preferred
Stock has a 9% cumulative annual dividend, which is payable quarterly. Dividends
payable on the Series C Preferred Stock after the first anniversary of the first
sale of Series C Preferred Stock may, at the option of the Company, be paid in
shares of Common Stock having a fair market value equal to the amount of the
dividend. The Series C Preferred Stock ranks junior to the Company's Series B
Preferred Stock, $1.00 par value (the "Series B Preferred Stock"), in terms of
dividends and liquidation rights, but senior to all other capital stock of the
Company. Each share of Series C Preferred Stock is initially convertible into
five shares of Common Stock at any time at the election of the holder thereof.
Except as otherwise provided or required by law, the Series C Preferred Stock
will vote as a single class with the holders of the Company's Common Stock and
Series B Preferred Stock on all matters submitted to a vote of the stockholders
of the Company. If the Company is in arrears on the payment of dividends on the
Series C Preferred Stock for two or more quarters, during the continuation of
such arrearage, the holders of the Series C Preferred Stock shall be entitled to
elect two members to the Company's Board of Directors. For additional
information regarding the rights, preferences and privileges of the Series C
Preferred Stock, see "DESCRIPTION OF SECURITIES."

The Company's Common Stock is quoted in the National Daily Quotation
Service published daily by the National Quotation Bureau, Inc. under the symbol
SUNR. Quotations for the Common Stock are also available through the Electronic
Bulletin Board operated by the National Association of Securities Dealers, Inc.
under the symbol 3SUNR. On October 20, 1995, the bid and asked prices for the
Common Stock were $2.25 and $2.50, respectively. The Company has applied for the
listing of the Common Stock and the Series C Preferred Stock on the
NASDAQ-National Market System under the symbols SUNR and SUNRP, respectively.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES AGENCY NOR HAS THE COMMISSION
OR ANY SUCH AGENCY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THESE SECURITIES INVOLVE SUBSTANTIAL RISK. SEE "RISK FACTORS" ON PAGE 9.

<TABLE>
<CAPTION>
=======================================================================================
Underwriting Discounts Proceeds to Company
Price to Public and Commissions(1) (2)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $15.00 $1.50 $13.50
=======================================================================================
Total(3) $5,000,000 $500,000 $4,500,000
=======================================================================================
</TABLE>

(1) Excludes a nonaccountable expense allowance payable by the Company to
W.B. McKee Securities, Inc. and South Coast Financial Securities, Inc.
(the "Representatives") equal to 3% of the aggregate offering price of
the Series C Preferred Stock. The Company has also agreed to (i) issue
warrants to the Representatives (the "Representatives' Warrants") to
purchase up to 38,333 shares of Series C Preferred Stock for $18.00 per
share and (ii) grant to the Representatives certain registration rights
with respect to the securities underlying the Representatives'
Warrants. The Company has agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933. See "UNDERWRITING."

(2) Before deducting expenses payable by the Company estimated at $323,000
($345,500 if the Over-Allotment Option is exercised in full), including
the Representatives' nonaccountable expense allowance.

(3) Assumes no exercise of the Underwriter's option, exercisable within 45
days from the date of this Prospectus, to purchase up to 50,000
additional shares of Series C Preferred Stock on the same terms, solely
to cover over-allotments (the "Over-Allotment Option"). If the
Over-Allotment Option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$5,750,000, $575,000 and $5,175,000, respectively. See "UNDERWRITING."

The shares of Series C Preferred Stock are offered by the Underwriters named
herein subject to prior sale when, as and if accepted by the Underwriters and
subject to certain conditions. The Underwriters reserve the right to reject any
order in whole or in part. It is expected that delivery of the certificates
representing the Series C Preferred Stock will be made against payment therefor
in Phoenix, Arizona on or before _________________, 1995.

W.B. MCKEE SECURITIES, INC. SOUTH COAST FINANCIAL SECURITIES, INC.

The date of this Prospectus is _______________, 1995.

<PAGE> 6
OUTSIDE FRONT COVER OF PROSPECTUS

Sunrise Logo, which is a drawing of the sun with sun rays.

INSIDE FRONT COVER OF PROSPECTUS

[TOP CENTERED PHOTO]

This photo shows one of the Sunrise Preschools in Phoenix, Arizona.
Caption: "Sunrise Preschool, Phoenix, Arizona."

[BOTTOM LEFT PHOTO]

This photo shows three children and a teacher in one of the Sunrise
Private Kindergartens.
Caption: "Sunrise Private Kindergarten."

[BOTTOM RIGHT PHOTO]

This photo shows three children in the classroom.
Caption: "Sunrise children in the classroom."

CAPTION ON BOTTOM OF PAGE:

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE PREFERRED
STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

<PAGE> 7

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations promulgated thereunder, and in accordance therewith files
periodic reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, as well as at the following regional
offices: Northeast Regional Office, 7 World Trade Center, Suite 1300, New York,
New York 10048 and Midwest Regional Office, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates.

The Company has filed with the Commission a Registration Statement on
Form SB-2 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the securities offered hereby. This Prospectus does not contain
all the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is made to the Registration
Statement and the exhibits thereto, copies of which may be obtained from the
Public Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of the fees prescribed by the Commission.
Statements contained in this Prospectus as to the contents of any contract or
other document are not necessarily complete and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement for a full statement of the provisions thereof; each such
statement contained herein is qualified in its entirety by such reference.

2
<PAGE> 8

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by reference to the
detailed information and consolidated financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Each prospective investor is
urged to read this Prospectus in its entirety, and particularly the information
set forth in "RISK FACTORS." Unless otherwise indicated, all information related
to the Company in this Prospectus assumes no exercise of the Over-Allotment
Option, the Representatives' Warrants or any other presently outstanding options
or warrants.

THE COMPANY

Sunrise Preschools, Inc. operates a chain of premium quality child care
centers that offer comprehensive child care services primarily for children ages
six weeks to twelve years. The Company operates 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 fragmented nature of the child care industry, the
Company believes that it has many opportunities to pursue its strategy of
acquiring individual centers and small chains of community-based centers.

The Company differentiates itself from other child care providers by
offering a comprehensive curriculum that incorporates innovative learning
techniques and programs and by offering its patrons modern facilities and
equipment. The Company's education-based programs emphasize the use of learning
centers to enhance the child's development. The programs are designed to appeal
to parents who consider education and development, rather than custodial care,
as being most important in choosing a child care facility. In addition to the
regular learning programs, all of the Company's child care centers offer
computer-based learning programs using state-of-the-art software and a number of
extra-curricular programs such as gymnastics, piano lessons and aquatic
activities. Upon acquisition of new child care centers, the Company intends to
implement its learning programs and curriculum and, if necessary, update and
modernize the equipment and facilities of the acquired centers. The Company
believes that such programs and strategies contribute significantly to revenues.

3
<PAGE> 9

The Company was organized under Delaware law in May 1987, and is the
successor to two corporations that initially operated the Company's child care
centers. Venture Educational Programs, Inc. ("Venture"), an Arizona corporation,
was formed in 1980. Venture operated the first two Sunrise Preschools, which
opened in September 1982 and September 1984, respectively, and also operated a
child care center under another name until August 1984. An affiliated company,
Sunrise Preschools, Inc., an Arizona corporation ("Sunrise Arizona"), was formed
in November 1985 and operated five child care centers, which opened from January
1986 to May 1987. On May 27, 1987, Venture was merged into Sunrise Arizona, and
on May 28, 1987, Sunrise Arizona was merged into the Company. The Company has
one wholly owned subsidiary, Sunrise Preschools Hawaii, Inc., formed in fiscal
1990 to operate child care centers in Hawaii. Another subsidiary, Sunrise
Holdings, Inc., formed in fiscal 1987 to construct the Company's child care
centers, was dissolved effective September 10, 1994. As used in this Prospectus,
unless the context indicates otherwise, the term "Company" refers to Sunrise
Preschools, Inc., and its subsidiaries and predecessors.

Effective February 1, 1994, a portion of the Company's operations were
transferred to a Hawaii nonprofit corporation, Preschool Services, Inc. ("PSI").
Because of PSI's nonprofit status, PSI is eligible to receive certain grants and
subsidies. Under a written agreement between the Company and PSI, the Company
provides PSI with management and administrative services and educational
programs in exchange for a management fee. See "CERTAIN TRANSACTIONS."

The Company's principal executive offices are located at 9128 East San
Salvador, Suite 200, Scottsdale, Arizona 85258, and its telephone number is
(602) 860-1611.

4
<PAGE> 10

THE OFFERING

Securities Offered .................. 333,333 shares of Series C Preferred
Stock

Terms of Series C Preferred Stock .. DIVIDENDS: Each share of Series C
Preferred Stock bears a cumulative
dividend of 9% per annum, payable
quarterly. After the first
anniversary date of the first sale of
Series C Preferred Stock, dividends
on the Series C Preferred Stock are
payable at the option of the Company
in shares of Common Stock having a
fair market value equal to the amount
of the dividend. The Series C
Preferred Stock is junior in dividend
and liquidation rights to the
Company's Series B Preferred Stock,
but senior to all other series of
preferred stock or other capital
stock of the Company.

CONVERSION: Each share of Series C
Preferred Stock is convertible into
five shares of Common Stock at the
option of the holder thereof.

ANTI-DILUTION: The conversion ratio
of the Series C Preferred Stock is
subject to anti-dilutive adjustments
to reflect (i) issuance of shares of
Common Stock (or common stock
equivalents) at less than the then
current conversion price of the
Series C Preferred Stock, (ii) stock
splits, stock dividends and stock
combinations, (iii) distributions of
assets to holders of Common Stock,
(iv) capital reorganizations and
reclassifications, and (v)
consolidations, mergers, or a sale of
all or substantially all of the
assets of the Company.

REDEMPTION: Subject to the holders'
rights to convert to Common Stock,
the Company may redeem the Series C
Preferred Stock if the average of the
closing asked prices of the Common
Stock for a 20 consecutive
trading-day period ending within
five days prior to the date
redemption notice is given by the
Company has equalled or exceeded
150% of the conversion price of the
Series C Preferred Stock.

5
<PAGE> 11

VOTING RIGHTS: Except as otherwise
provided or as required by law, the
holders of the Series C Preferred
Stock will vote as a single class
with the holders of the Common Stock
and the Series B Preferred Stock on
all matters submitted to a vote of
stockholders of the Company. The
holders of the Series C Preferred
Stock will be entitled to vote as a
separate class with respect to
certain matters, including the
approval of (i) any merger or
consolidation of the Company, (ii)
any sale of all or substantially all
of the assets of the Company and
(iii) any liquidation or dissolution
of the Company.

BOARD REPRESENTATION: If the Company
is in arrears in the payment of
dividends on the Series C Preferred
Stock for two or more quarters,
during the continuation of such
arrearage, the holders of the Series
C Preferred Stock will be entitled to
elect two members to the Company's
Board of Directors.

LIQUIDATION: In the event of a
liquidation or dissolution of the
Company, the holders of the Series C
Preferred Stock will be entitled to a
preferential payment of the original
purchase price of the Series C
Preferred Stock plus accrued but
unpaid dividends prior to any
distribution to holders of the
Company's Common Stock, subject to
prior payment of a liquidation
preference to the holders of the
Series B Preferred Stock.

For additional information on the
rights, privileges and preferences of
the Series C Preferred Stock, see
"DESCRIPTION OF SECURITIES."

<TABLE>
<S> <C>
Stock Outstanding Before Offering ..... 2,935,894 shares of Common Stock(1)
500,000 shares of Series B Preferred Stock(2)

Stock Outstanding After Offering....... 2,935,894 shares of Common Stock(1)(3)
500,000 shares of Series B Preferred Stock
333,333 shares of Series C Preferred Stock(4)

Estimated Net Proceeds ................ $4,177,000. See "USE OF PROCEEDS."(5)
</TABLE>

(Footnotes on following page.)

6
<PAGE> 12
<TABLE>
<S> <C>
Use of Proceeds ....................... The Company intends to use the
proceeds of this offering (i) to
acquire, open and equip additional
child care centers, (ii) to repay
certain indebtedness, (iii) to pay
accrued dividends on the Series B
Preferred Stock and (iv) for general
corporate purposes. See "USE OF
PROCEEDS."

Risk Factors .......................... Investment in the Series C Preferred
Stock involves a high degree of risk.
See "RISK FACTORS."

Current Quotation Symbols SUNR(6)
for Common Stock ................ 3SUNR(7)

Proposed NASDAQ-NMS Symbol
for Common Stock ................ SUNR

Proposed NASDAQ-NMS Symbol for
Series C Preferred Stock ........ SUNRP

- -----------------
</TABLE>

(1) As of September 30, 1995. Does not include (i) 755,000 shares of Common
Stock reserved for issuance upon exercise of options and warrants
previously issued by the Company, (ii) Common Stock issuable in
connection with the Series A Preferred Stock, (iii) 500,000 shares of
Common Stock issuable upon conversion of the Series B Preferred Stock
and (iv) up to 62,500 shares of Common Stock issuable upon exercise of
Common Stock Purchase Warrants (the "Warrants") issued by the Company.
See "EXECUTIVE COMPENSATION -- Stock Option Plans," "DESCRIPTION OF
SECURITIES" and "UNDERWRITING." See also Note 7 of Notes to
Consolidated Financial Statements.

(2) In connection with a Preferred Share Rights Agreement dated February
10, 1995, the Company authorized a series of 5,000 shares of Series A
Participating Preferred Stock (the "Series A Preferred Stock"). No
shares of Series A Preferred Stock have been issued by the Company. See
"DESCRIPTION OF SECURITIES -- Preferred Stock -- Series A Participating
Preferred Stock."

(3) Does not include Common Stock issuable (i) upon conversion of the
Series C Preferred Stock issued in this offering, (ii) upon conversion
of the Series C Preferred Stock underlying the Over-Allotment Option,
(iii) upon conversion of the Series C Preferred Stock underlying the
Representatives' Warrants, or (vi) upon exercise of options which have
been or may be granted in the future under the Company's Stock Option
Plans. See "EXECUTIVE COMPENSATION -- Stock Option Plans," "DESCRIPTION
OF SECURITIES" and "UNDERWRITING."

(4) Does not include Series C Preferred Stock issuable upon exercise of (i)
the Over-Allotment Option or (ii) the Representatives' Warrants. See
"UNDERWRITING."

(5) Does not include proceeds from exercise of (i) the Over-Allotment
Option or (ii) the Representatives' Warrants. See "UNDERWRITING."

(6) As quoted in the National Daily Quotation Service published by the
National Quotation Bureau, Inc.

(7) As quoted on the Electronic Bulletin Board operated by the National
Association of Securities Dealers, Inc.

7
<PAGE> 13

SUMMARY CONSOLIDATED FINANCIAL, PRO FORMA AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND CHILD CARE CENTER DATA)

<TABLE>
<CAPTION>
Year Ended July 31,
--------------------------------------
1995 1994 1993
------ ------- -------
<S> <C> <C> <C>
SELECTED STATEMENT OF OPERATIONS DATA:
Operating revenue ................................ $9,715 $10,625 $11,042
Operating expenses ............................... 9,104 10,147 10,864
------ ------- -------
Income from operations ........................... $ 611 $ 478 $ 178
====== ======= =======
Net income ....................................... $ 807 $ 881 $ 114
====== ======= =======
Net income available for common stock ............ $ 757 $ 831 $ 64
====== ======= =======
Net income per share(1)
Primary ........................................ $ .29 $ .33 $ .03
====== ======= =======
Fully diluted .................................. $ .25 $ .29 $ .03
====== ======= =======
Weighted average shares outstanding(1)

Primary ........................................ 2,621 2,495 2,436
Fully diluted .................................. 3,208 3,045 2,436
SELECTED PRO FORMA STATEMENT OF OPERATIONS DATA(2):

Operating revenue ................................ $ 9,663 $ 9,583
Operating expenses ............................... 8,984 9,087
------- -------
Income from operations ........................... $ 679 $ 496
======= =======
Net income ....................................... $ 1,101 $ 450
======= =======
Net income available for common stock ............ $ 1,051 $ 400
======= =======
Net income per share(1)
Primary ........................................ $ .42 $ .16
======= =======
Fully diluted .................................. $ .36 $ .16
======= =======
Weighted average shares outstanding(1)
Primary ........................................ 2,495 2,436
Fully diluted .................................. 3,045 2,436
SELECTED CHILD CARE CENTER DATA:
Number of centers (end of year) .................. 27 27 23
Approximate licensed center capacity (end of year) 3,485 3,408 3,344
Average percentage occupancy(3) .................. 76.7% 78.3% 78.8%
Average weekly tuition rate(4) ................... $ 97 $ 94 $ 92
</TABLE>

<TABLE>
<CAPTION>
July 31, 1995
-------------------------
SELECTED BALANCE SHEET DATA: Actual As Adjusted(5)
------ --------------
<S> <C> <C>
Cash and cash equivalents ...................... $ 581 $4,016
Working capital ................................ 211 4,028
Total assets ................................... 3,334 6,769
Dividends payable on preferred stock ........... 266 0
Notes payable and capital leases ............... 566 90
Stockholders' equity ........................... 1,383 5,560
</TABLE>
- ----------

(1) See Note 2 of Notes to Consolidated Financial Statements.

(2) Pro forma information presented as if the PSI Agreement was in effect
as of the beginning of each year presented. The results of fiscal 1995
include the effects of the PSI Agreement. Therefore, no pro forma
information is presented for that year. See Note 3 of Notes to
Consolidated Financial Statements.

(3) The average percentage occupancy is calculated by dividing operating
revenues for all of the Company's centers (other than centers operated
on a management fee basis) for the respective years by the product of
(i) the licensed capacity for all of the Company's centers (other than
those operated on a management fee basis) and (ii) the average of the
basic tuition rate for full-time four year old children at all such
centers for the respective years based on 50 weeks of attendance per
year.

(4) The average weekly tuition rate is the average basic public tuition
rate for full-time four year old children at all centers (other than
centers operated on a management fee basis).

(5) Adjusted to reflect the sale of 333,333 shares of Series C Preferred
Stock hereby, assuming no exercise at the Over-Allotment Option or the
Representatives' Warrants and after deducting underwriting discounts
and commissions and estimated offering expenses payable by the Company.
See "USE OF PROCEEDS" and "UNDERWRITING."

8
<PAGE> 14

RISK FACTORS

AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE
OF RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK
FACTORS, IN ADDITION TO THE OTHER INFORMATION SET FORTH ELSEWHERE IN THIS
PROSPECTUS, INCLUDING THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO,
PRIOR TO MAKING AN INVESTMENT IN THE COMPANY.

1. Competition. The child care industry is highly fragmented and
competitive, and Phoenix, Arizona is one of the most competitive markets in the
United States. The Company competes with child care centers owned by national
chains as well as child care facilities operated by local, community and
church-affiliated profit and non-profit organizations. Some of the non-profit
child care centers that the Company competes with are supported to a large
extent by endowments, charitable contributions and other forms of subsidies, and
consequently charge less for their services than the Company. In addition, the
Company competes with individually owned proprietary child care centers,
licensed and unlicensed child care homes, in-home individual child care
providers, public schools and businesses that provide child care for their
employees. A number of the Company's competitors have substantially greater
resources than the Company. See "BUSINESS -- Competition."

2. Adverse Publicity. Some providers of child care have received
negative publicity concerning alleged child abuse, inadequate supervision and
on-site accidents. Although the Company has not been the subject of any adverse
publicity, any such publicity, whether accurate or not, could result in
decreased enrollment and have a material adverse effect on the Company.

3. Insurance. In addition to general liability insurance, the Company
maintains insurance coverage for child physical and sexual abuse claims, which
is subject to an annual aggregate limitation of $250,000. Recently, some
operators of child care centers, including the Company, have experienced greater
difficulty in obtaining such insurance at reasonable rates. Although the Company
has never had a claim for child physical or sexual abuse, there can be no
assurance that insurance for child physical and sexual abuse will continue to be
available to the Company in the future or that increased premiums for such
insurance will not require the Company to increase the cost of providing child
care services. If such insurance is not available to the Company, or if amounts
of coverage are not adequate, the Company may be materially and adversely
affected. See "BUSINESS -- Insurance."

4. Seasonal Fluctuations. Child care centers, including those of the
Company, experience decreased enrollment, and therefore decreased revenue, in
the summer months and around certain major holidays. There can be no assurance
that Company programs designed to increase enrollment in the summer will be
successful. See "BUSINESS -- Curricula and Programs."

5. Government Regulation. Child care centers must comply with various
state and local statutes and regulations. Centers are periodically inspected by
state agencies to review adherence to child care standards, including, among
other things, staffing, cleanliness and safety standards. The Company has not
experienced any difficulty in complying with various government regulations.
Additional regulations or changes in existing regulations might impose
additional compliance costs on the Company, which could have a material adverse
effect on the Company. In addition, certain tax laws presently provide for
certain credits and other incentives relating to child care costs. Changes in
such tax laws could have a material adverse effect on the Company. See "BUSINESS
- -- Government Regulation."

9
<PAGE> 15

6. Geographic Concentration. Currently, all of the child care centers
operated by the Company are located in Arizona and Hawaii. The success of such
operations is therefore dependant to some extent on the economies of such
regions. If these geographic areas experience an economic downturn or recession,
the Company's financial condition and business prospects could be materially and
adversely affected.

7. Expansion. The Company intends to continue to open new child care
centers and to acquire individual and community-based chains of child care
centers. In addition, the Company plans to continue to expand its operations
through various partnership and contractual relationships with third parties.
Although the Company's current operations are based primarily in Arizona and
Hawaii, the Company's current expansion plans include considering opportunities
in the southwestern United States as well as in other geographic regions of the
country. There can be no assurance that the Company will achieve its planned
expansion or that its expansion will be profitable. The success of the Company's
expansion program will depend on a number of factors, many of which may be
beyond the Company's control, including the availability of sufficient capital,
the identification of appropriate acquisition candidates and suitable
build-to-suit child care center sites, the Company's ability to attract, train
and retain qualified employees and management, the continuing profitability of
existing operations, the successful management of planned growth and the ability
of the Company to operate new child care centers in a profitable manner.
Although the Company currently intends to lease from third parties newly
constructed child care facilities developed for the Company rather than
undertaking its own construction, if the Company were to undertake its own
construction, there can be no assurance that it could construct its child care
centers on a cost-effective basis or that appropriate financing could be
obtained. Construction of child care centers is subject to the risk of delays
and cost overruns, and such occurrences could have a material adverse effect on
the Company. See "BUSINESS -- Expansion."

8. Use of Proceeds; Broad Discretion in Application. The proceeds
allocated to each category under "USE OF PROCEEDS" are estimates only and
Company management will have broad discretion in the application of such funds.
See "USE OF PROCEEDS."

9. Dependence Upon Key Personnel. The success of the Company will be
largely dependent upon the efforts and abilities of James R. Evans, President
and Chairman of the Board, and Barbara L. Owens, Executive Vice President,
Secretary and Treasurer. See "MANAGEMENT." The Company has employment agreements
with Mr. Evans and Ms. Owens. The Company also maintains for its benefit key man
life insurance on Mr. Evans in the amount of $1,000,000. Nevertheless, the loss
of the services of Mr. Evans or Ms. Owens could have a material adverse effect
on the Company. See "EXECUTIVE COMPENSATION -- Employment Contracts." In
addition, the Company's success is also dependent upon its ability to hire
additional qualified personnel, and there can be no assurance that the Company
will be able to hire or retain qualified personnel.

10. Charter and Bylaw Provisions. Among other matters, certain
provisions of the Company's Restated Certificate of Incorporation and Bylaws
limit or eliminate director liability for certain actions and require approval
of greater than 50% of the shares eligible to vote on certain matters. The
Company has also adopted a shareholder rights plan designed to deter coercive or
abusive takeover attempts. These and other provisions could, under certain
circumstances, prevent redress by stockholders for certain actions taken by the
directors and management and make it more difficult for an outsider to obtain
control of the Company. See "DESCRIPTION OF SECURITIES."

10
<PAGE> 16

11. No Assurance of Public Market; Arbitrary Offering Price. Prior to
this offering there has been no public market for the Series C Preferred Stock
and only a limited market for the Common Stock. There can be no assurance that a
market will develop following this offering for the Series C Preferred Stock or
that, if developed, such market will be sustained. The price at which the shares
of Series C Preferred Stock are being offered to the public has been determined
by negotiation between the Company and the Representatives. Among the factors
considered in determining the price of the Series C Preferred Stock were the
Company's current financial condition and prospects and the general condition of
the securities market. However, the public offering price of the Series C
Preferred Stock does not necessarily bear any relationship to the Company's
assets, book value, earnings or any other established criterion of value.

12. No Dividends. The Company has not paid any dividends on its Common
Stock since its inception, and it is not anticipated that any such dividends
will be paid in the foreseeable future. In addition, no dividends have been paid
to date on the Series B Preferred Stock of the Company, which accrues dividends
at the rate of $.10 per share per annum. The Series C Preferred Stock ranks
junior in terms of dividends to the Series B Preferred Stock and all dividends
payable on the Series B Preferred Stock must be paid prior to the payment of
dividends on the Series C Preferred Stock. Because the Company currently has
accrued but unpaid dividends payable on the Series B Preferred Stock totalling
approximately $265,833, no dividends may be paid on the Series C Preferred Stock
until such accrued but unpaid dividends are paid to the holders of the Series B
Preferred Stock. The Company plans to use a portion of the proceeds of this
offering to pay the accrued dividends payable on the Series C Preferred Stock.
In addition, certain credit agreements with the Company's lender restrict the
ability of the Company to pay dividends. See "DIVIDENDS," "USE OF PROCEEDS" and
"DESCRIPTION OF SECURITIES."

DIVIDENDS

The Company has never paid a dividend on its Common Stock. The Company
presently does not anticipate paying any dividends on its Common Stock in the
foreseeable future. Pursuant to the terms of the Series C Preferred Stock, the
Company is obligated to pay a cumulative annual dividend of 9% to the holders of
the Series C Preferred Stock. One year after the date of the first issuance of
shares of Series C Preferred Stock, the Company may, in its discretion, elect to
pay dividends on the Series C Preferred Stock in shares of Common Stock having a
fair market value equal to the amount of the dividend. The Series C Preferred
Stock ranks junior to the Series B Preferred Stock of the Company and,
consequently, all dividends payable on the Series B Preferred Stock must be
current prior to the payment of any dividends on the Series C Preferred Stock.
The annual dividend rate of the Series B Preferred Stock is $.10 per share,
which currently amounts to $50,000 per year in the aggregate based on 500,000
issued and outstanding shares of Series B Preferred Stock. As of 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 of the credit facility, the Company may not pay
any dividends, including dividends on the Series C Preferred Stock, without the
consent of the bank. Furthermore, under Delaware corporate law, the Company may
be prohibited in certain circumstances from paying dividends (whether in cash or
otherwise). See "RISK FACTORS" and "DESCRIPTION OF SECURITIES."

11
<PAGE> 17

PRICE RANGE OF SECURITIES

Trading activity with respect to the Company's Common Stock has been
limited. A public trading market having the characteristics of depth, liquidity
and orderliness depends upon the existence of market makers as well as the
presence of willing buyers and sellers, which are circumstances over which the
Company does not have control.

The Common Stock was registered under Section 12(g) of the Exchange Act
in 1987. From September 11, 1987 until January 27, 1991, when the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") changed
its listing requirements, the Common Stock was listed on NASDAQ under the symbol
SUNR. Subsequent to such date, the Common Stock has been quoted in the National
Daily Quotation Service ("Pink Sheets") published daily by the National
Quotation Bureau, Inc. under the symbol SUNR. Quotations are also available
through the Electronic Bulletin Board operated by the National Association of
Securities Dealers, Inc. under the symbol 3SUNR. The following table sets forth
the high and low bid prices for the Common Stock based on closing transactions
during each specified period as reported by the National Quotation Bureau, Inc.,
which prices reflect inter-dealer prices without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions:

<TABLE>
<CAPTION>
Fiscal 1994 High Low
------ -----
<S> <C> <C>
First Quarter $1.000 $.750
Second Quarter 1.250 .875
Third Quarter 1.500 .750
Fourth Quarter 1.625 1.250

Fiscal 1995 High Low
------ ------
First Quarter $1.375 $1.000
Second Quarter 1.688 .938
Third Quarter 1.563 1.125
Fourth Quarter 2.625 1.250
</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 applied to the NASDAQ-National Market System for
listing of the Series C Preferred Stock and the Common Stock upon completion of
this offering.

12
<PAGE> 18

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 333,333 shares of
Series C Preferred Stock offered hereby, assuming an offering price of $15 per
share, and after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company, are estimated to be $4,177,000
($4,829,500 if the Over-Allotment Option is exercised in full). The Company
intends to use approximately $3,358,000 of the proceeds to acquire, open
and equip additional child care centers. The exact number of additional child
care centers will necessarily vary depending on the opportunities available to
the Company. See "BUSINESS -- Expansion." The Company expects to use
approximately $476,000 to repay outstanding indebtedness that was incurred for
the purchase of vehicles and equipment (which indebtedness, as of July 31, 1995,
had a weighted average interest rate of approximately 11.9% and a weighted
average maturity of approximately 5.3 years). The Company will also use
approximately $266,000 of the proceeds to pay the dividends payable on the
Series B Preferred Stock. See "RISK FACTORS" and "DIVIDENDS". The balance of the
net proceeds will be added to working capital for general corporate purposes.
Until applied as set forth above, all proceeds will be invested in short-term
investment grade instruments or bank certificates of deposit. Investment of the
net proceeds in short-term securities rather than operations could adversely
affect the Company's overall return on its capital.

The foregoing represents the Company's present intentions with respect
to the allocation of the proceeds of this offering based upon its present plans
and business conditions. However, there is no assurance that unforeseen events
or changed business conditions will not result in the application of the
proceeds of this offering in a manner other than as described in this
Prospectus. See "RISK FACTORS."

13
<PAGE> 19

CAPITALIZATION

The following table sets forth the capitalization of the Company as of July
31, 1995, and as adjusted to give effect to the sale of the 333,333 shares of
Series C Preferred Stock offered hereby at an assumed offering price of $15 per
share and after deducting underwriting discounts and commissions, offering
expenses payable by the Company and the application of the estimated net
proceeds therefrom.

<TABLE>
<CAPTION>
July 31, 1995
-----------------------------
Actual As Adjusted(1)
----------- --------------
<S> <C> <C>
Dividends payable on Series B Preferred Stock ............................ $ 265,833 $ -
Current portion of notes payable and capital leases ...................... 136,618 21,042
----------- -----------
$ 402,451 $ 21,042
=========== ===========
Notes payable and capital leases, net of current portion ................. $ 429,402 $ 68,978
----------- -----------
Stockholders' Equity:
Preferred Stock, $1.00 par value, 1,000,000 shares authorized
Series A Participating Preferred Stock, $1.00 par value,
5,000 shares authorized, no shares issued or outstanding ............... - -
Series B Preferred Stock, $1.00 par value,
500,000 shares authorized, 500,000 shares issued and outstanding ....... 500,000 500,000
Series C Preferred Stock, $1.00 par value,
421,666 shares authorized, 333,333 outstanding as adjusted for
this offering .......................................................... - 333,333
Common Stock, $.01 par value, 10,000,000 shares authorized,
2,935,894 shares issued and outstanding(2) ............................. 29,359 29,359
Paid-In Capital .......................................................... 3,602,406 7,445,073
Accumulated Deficit ...................................................... (2,748,441) (2,748,441)
----------- -----------
Total Stockholders' Equity ........................................... 1,383,324 5,559,324
----------- -----------
Total Capitalization ................................................. $ 1,812,726 $ 5,628,302
=========== ===========
</TABLE>
- ----------

(1) Adjusted to reflect the sale of 333,333 shares of Series C Preferred
Stock hereby, assuming no exercise of the Over-Allotment Option or the
Representatives' Warrants and after deducting the underwriting discount
and estimated offering expenses payable by the Company. See "USE OF
PROCEEDS" and "UNDERWRITING."

(2) As of September 30, 1995. Does not include (i) 755,000 shares of Common
Stock reserved for issuance upon exercise of options and warrants
previously issued by the Company, (ii) Common Stock issuable in
connection with the Series A Preferred Stock, (iii) 500,000 shares of
Common Stock issuable upon conversion of the Series B Preferred Stock
and (iv) up to 62,500 shares of Common Stock issuable upon exercise of
the Warrants. See "EXECUTIVE COMPENSATION -- Stock Option Plans,
" "DESCRIPTION OF SECURITIES" and "UNDERWRITING." See also Note 7
of Notes to Consolidated Financial Statements.

14
<PAGE> 20

SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA

The following table presents selected historical and pro forma
consolidated financial data for the fiscal years ended July 31, 1995 and 1994.
The historical financial data is derived from the consolidated financial
statements of the Company which have been audited by Arthur Andersen LLP,
independent public accountants, and should be read in conjunction with
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and the consolidated financial statements of the Company and related
notes included in this Prospectus. The selected financial information for the
fiscal year ended July 31, 1993 is derived from audited consolidated financial
statements that are not included in this Prospectus.

<TABLE>
<CAPTION>
Year Ended July 31,
----------------------------------------------
1995 1994 1993
----------- ------------ -----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenue .................................. $ 9,715,023 $ 10,625,044 $11,041,811
----------- ------------ -----------
Operating expenses
Payroll ......................................... 4,730,962 5,443,665 5,796,838
Facilities and maintenance ...................... 2,975,916 3,303,949 3,661,277
General and administrative ...................... 1,396,660 1,399,790 1,406,206
----------- ------------ -----------
Total operating expenses ........................... 9,103,538 10,147,404 10,864,321
----------- ------------ -----------
Income from operations ............................. 611,485 477,640 177,490
Other income (expense) (24,633) (72,349) (63,771)
----------- ------------ -----------
Income before income taxes ......................... 586,852 405,291 113,719
Income tax benefit ................................. 220,000 475,358 -
----------- ------------ -----------
Net income ......................................... $ 806,852 $ 880,649 $ 113,719
=========== ============ ===========
Net income available for common stock .............. $ 756,852 $ 830,649 $ 63,719
=========== ============ ===========
Primary earnings per share(1) ...................... $ .29 $ .33 $ .03
=========== ============ ===========
Fully diluted earnings per share(1) ................ $ .25 $ .29 $ .03
=========== ============ ===========
PRO FORMA STATEMENT OF OPERATIONS DATA(2):
Operating revenue .................................. $ 9,662,959 $ 9,582,979
------------ -----------
Operating expenses
Payroll ......................................... 4,869,501 5,030,113
Facilities and maintenance ...................... 2,825,368 2,819,942
General and administrative ...................... 1,288,940 1,237,106
------------ -----------
Total operating expenses ........................... 8,983,809 9,087,161
------------ -----------
Income from operations ............................. 679,150 495,818
Other income (expense) ............................. (53,273) (45,771)
------------ -----------
Income before income taxes ......................... 625,877 450,047
Income tax benefit ................................. 475,358 -
------------ -----------
Net income ......................................... $ 1,101,235 $ 450,047
============ ===========
Net income available for common stock .............. $ 1,051,235 $ 400,047
============ ===========
Primary earnings per share(1) ...................... $ .42 $ .16
============ ===========
Fully diluted earnings per share(1) ................ $ .36 $ .16
============ ===========
SELECTED CHILD CARE CENTER DATA:
Number of centers (end of year) .................. 27 27 23
Approximate licensed center capacity (end of year) 3,485 3,408 3,334
Average percentage occupancy(3) .................. 76.7% 78.3% 78.8%
Average weekly tuition rate(4) ................... $97 $94 $92
</TABLE>

(Footnotes on following page.)

15
<PAGE> 21
- ----------
(1) See Note 2 of Notes to Consolidated Financial Statements.

(2) Pro forma information is presented as if the PSI Agreement was in
effect as of the beginning of each year presented. The results of
fiscal 1995 include the effects of the PSI Agreement. Therefore, no pro
forma information is presented for that year. See Note 3 of Notes to
Consolidated Financial Statements.

(4) The average weekly tuition rate is the average basic public tuition
rate for full-time four year old children at all centers (other than
centers operated on a management fee basis).

16
<PAGE> 22

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

During fiscal 1994, a portion of the Company's operations were
transferred to PSI, a Hawaii nonprofit corporation. See "CERTAIN TRANSACTIONS."
The Company provides PSI with management, administration and educational
programs for PSI's child care centers and leases substantially all of the
equipment and other property necessary for the operation of the related child
care centers to PSI under an Administrative Services Agreement, License and
Equipment Lease (the "PSI Agreement"). For fiscal 1995 and 1994, the
administrative fees totalled $42,000 and $25,000, respectively. 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.

<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

17
<PAGE> 23

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 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

18
<PAGE> 24

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.

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.

19
<PAGE> 25

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.

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 in principle to
purchase the operations of two child care centers in Colorado, which have an
aggregate licensed capacity of 238 children. The

20
<PAGE> 26

transaction is subject to certain conditions, including the negotiation of a
definitive agreement and renegotiation of leases at the two centers.

Management believes the Company's operations will generate sufficient
cash flow to satisfy the needs at its existing schools for the next twelve
months. However, alternative sources of capital 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> 27

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 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.

22
<PAGE> 28
The for-profit child care market segment is highly fragmented, due to
the large number of facilities offering child care services. Revenues for the
for-profit child care market are estimated to be about $9 billion, based on a
licensed capacity estimated at 3.5 million. The largest 50 for-profit child care
providers are estimated to account for only 11% of industry revenues and it is
estimated that there are more than 76,000 for-profit providers of child care in
the United States. Based on its licensed capacity, the Company believes it ranks
among the largest forty providers of child care services in the country.

[GRAPHIC DESCRIPTION]

A pie chart depicting the for-profit child
care market that is large and 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.

<PAGE> 29

[GRAPHIC DESCRIPTION]

A graph depicting the percent of mothers of
preschool age children who work from 1970
through 1990. In 1970, 30% of mothers with
preschool age children worked, in 1980, 47%
worked and in 1990, 59% worked.

[GRAPHIC DESCRIPTION]

A graph depicting the labor force participation
of women of child-bearing age that starts with
41 million in 1990, increases to an estimated
43 million for 1995 and to an estimated 44 million
in the year 2000.

Source: U.S. Bureau of Labor Statistics

CHILD CARE CENTER OPERATIONS

Consistent with the Company's strategic emphasis on high quality child
care, the Company's operations are designed to appeal to parents who want
innovative learning programs emphasizing child development offered in modern
facilities. The Company's approach to its operations includes the following
concepts:

FACILITIES -- Facilities are designed with a number of
features that promote an optimal atmosphere for child development, as
well as efficient adult child interaction and observation. The
Company's child care center design incorporates individual classrooms
and provides a quiet atmosphere within each classroom while still
allowing free movement from activity to

<PAGE> 30

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 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.

<PAGE> 31

TODDLERS -- The toddler program includes a variety of
developmental activities such as wet and dry tables, blocks and dolls.
Development of social skills, gross motor skills and language skills
is emphasized in the toddler program.

PRESCHOOLERS -- The curriculum features pre-reading skills and
other activities to prepare children for school. Learning centers are
available in each classroom to expose children to art, music, science,
sensory development, woodworking, math and language. In addition, the
program includes daily individual and group activities designed to
stimulate and enhance motor skills and physical development.

SCHOOL AGE CHILDREN -- The Company provides a before and after
school program for children who are of primary school age. The
Company offers to transport children in Company vans to the
neighborhood schools in the morning, and back to each of the Company's
child care centers in the afternoon. A portion of each day is set
aside to help the children with homework from their schools. In
addition, this program includes arts and crafts projects, field trips,
dance and gymnastics classes, physical activities, group sports and
computers. When neighborhood schools are closed for certain holidays
or summers, these children can become full-time students.

SUMMER -- In an effort to increase enrollment in the summer
months, the Company modifies its preschooler and school-age programs
during the summer. The programs are enhanced with additional field
trips and other optional activities. Historically, the Company has
experienced a decrease in revenues during the summer months, which the
Company believes is typical in the child care industry.

OPTIONAL PROGRAMS -- The Company offers special programs for
children whose parents seek more specialized activities. Through
cooperative efforts with outside organizations, such as the
internationally recognized Desert Devils Gymnastic Club, in the
Phoenix metropolitan area, the Company offers special gymnastics and
other classes for children ages three and up. Specialized gymnastics
equipment has been installed on site at most of the Company's Arizona
child care centers, and all of the classes are taught by
professionally trained staff.

The Company also has contracted with Whiz Kids Computer
Academy, an Arizona corporation, to offer sophisticated,
computer-based, educational classes on site to children ages three and
up utilizing highly trained teachers and state-of-the-art software.
Other 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

<PAGE> 32

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 the 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).

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

<PAGE> 33

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 in principle to purchase the operations of two child care
centers in Colorado, which have an aggregate licensed capacity of 238 children.
The transaction is subject to certain conditions, including the negotiation of a
definitive agreement and renegotiation of leases at the two centers. PSI also
recently entered into a partnership child care arrangement with a church in the
Milwaukee, Wisconsin area pursuant to which PSI will assume the operations of a
child care center with a licensed capacity of approximately 100 children for the
church. The Company will operate the child care center for PSI pursuant to the
PSI Agreement. See "CERTAIN TRANSACTIONS."

From time to time, the Company may decide to close one or more child
care centers and contracts relating to centers operated for third parties may
expire or be terminated by the third party. In fiscal 1995, one contract for a
child care center with a licensed capacity of 24 children expired and was not
renewed. The Company continually monitors the enrollment levels at its child
care centers and the long-term prospects of the geographic areas in which its
child care centers operate. If the Company determines that the operations of
two or more child care centers could be consolidated to operate more
efficiently, it may from time to time consolidate the operations of two or more
child care centers, which may result in the closing of one or more child care
centers.

EMPLOYER CHILD CARE PROGRAMS

Increasing numbers of employers are offering child care benefits to
their employees. To increase enrollment, the Company has capitalized on this
trend by actively pursuing contracts with various employers through its Employer
Child Care ("ECC") programs. The Company's ECC programs are tailored to meet
each employer's particular needs. The Company may also contract to operate a
child care center constructed by an employer for its exclusive or semi-exclusive
use. The Company also offers assistance to employers in marketing their
programs to employees and encourages the employers to subsidize tuition costs
and to implement programs that enable their employees to realize available
federal tax benefits. The Company instituted its first ECC program in May 1987
and has consistently added employer participants since that time. Among the
corporations that have ECC programs with the Company are America West Airlines
and American Express. For the 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, although not the largest ECC program, 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

<PAGE> 34

program has been developed using lower teacher to child ratios than is
required. The program is available to faculty, staff and students of ASU West
and to the general public if space permits.

PARTNERSHIP CHILD CARE PROGRAMS

One strategic focus of the Company is to increase its enrollment
levels through various partnership arrangements with third parties, including
churches and health clubs. Typically, these partnership arrangements involve
an agreement by the Company to operate a child care center at facilities owned
by the third party. The Company and the third party share the operating risks
of the child care centers and share any profits generated by the centers. The
child care centers are open to the general public. Because the third party
provides the facilities for the child care center, these partnership programs
provide the Company with an opportunity to increase its enrollment with only a
minimal capital investment.

Some of the Company's partnership activities are undertaken in
connection with PSI, a nonprofit corporation. Because of PSI's nonprofit
status, PSI is eligible to receive certain grants and subsidies. PSI typically
enters into agreements with third parties to establish child centers or assume
the operations of existing child care centers and then contracts with the
Company to operate the child care centers in exchange for a management fee.
Profits generated by the entities are shared by PSI and the third party. See
"CERTAIN TRANSACTIONS."

Currently, the Company operates five child care centers based on
partnership arrangements with various third parties, including PSI. The total
licensed capacity of these child care centers is 396 children.

CONTRACT CHILD CARE PROGRAMS

In contrast to child care partnership arrangements, which are
characterized by a sharing of profits and operating risks, the Company also
operates child care centers on a contract basis. Pursuant to the contractual
arrangements, the Company is reimbursed for its expenses and paid a
predetermined fee for operating the child care centers. The contract
arrangement typically provides for the Company to operate a child care center at
a site provided by the third party, which requires only a minimal capital
investment by the Company.

In January 1993, the Company opened its first four contract child care
facilities in conjunction with a high school district in Phoenix. The child
care centers are located on various high school campuses and provide child care
services for the children of at-risk teen parents enrolled in the district's
schools. During fiscal 1994, this contract with the district was expanded to
cover three additional centers. The total licensed capacity of the seven
centers is 101 children.

COMPETITION

The child care industry is highly competitive, with Phoenix, Arizona
being one of the most competitive markets in the United States. In the
geographic areas in which the Company operates, the Company competes with
centers owned by national chains such as Ultra Child Care/Mary Moppets,
Kinder-Care Learning Centers, Inc., Children's World Learning Centers, Inc.,
Palo Alto Preschools/Child Time and La Petite Academy, Inc., as well as child
care centers owned by nonprofit 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

<PAGE> 35

child care centers, licensed child care homes, unlicensed child care homes,
public schools, the YMCA and businesses that provide child care for their
employees at the work place. See "RISK FACTORS."

The Company believes that competition in the child care industry is
based on a variety of factors:

QUALITY OF FACILITIES, STAFF AND PROGRAMS. A significant
competitive factor is the extent to which programs broader in scope
than custodial care are provided. The Company offers extensive
educational and developmental programs which are broader in scope than
those offered by many of its competitors. See "BUSINESS -- Curricula
and Programs."

COSTS. Due to the extensive curriculum and program offerings, the
Company's tuition is generally higher than that of its competitors. For
parents who choose child care facilities based on cost alone, the
Company has difficulty competing.

LOCATION. The location and convenience of the child care center to
the parent is very important. The Company's child care centers are
generally located in or near middle to upper income residential areas,
and are intended to be convenient for the market segment targeted for
enrollment.

OTHER FACTORS. Other competitive factors include size and design
of the facilities, parents' religious preferences, availability of
in-home or school-sponsored services, hours of operation and operating
and educational philosophies.

The Company competes favorably within the industry and is one of the
largest providers of child care in both Arizona 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, have had
difficulty obtaining adequate liability insurance coverage at reasonable rates
for child physical and sexual abuse. The Company has comprehensive general
liability insurance with a limit of $1,000,000 per occurrence and $2,000,000
aggregate per location, including $250,000 coverage for child physical and
sexual abuse. It also has insurance coverage for automobile liability, with a
per occurrence limitation of $1,000,000. In addition, the Company has a
$5,000,000 umbrella policy to cover claims in excess of the per occurrence
limitation on the general liability policy. See "RISK FACTORS."

GOVERNMENT REGULATION

Operators of child care centers are subject to a wide variety of state
and local regulations and licensing requirements, including site inspection for
safety and compliance with building codes, review of programs and facilities,
ratio of staff to the number of attending children, health standards (including
food service) and zoning. Each child care center must be licensed by the
appropriate state and local authorities before it may begin operations. The
Company believes that each of its child care centers is in compliance, in all
material respects, with such requirements. No proceedings to suspend or revoke
any of the Company's licenses have been instituted. Compliance with government
regulations increases the Company's operating costs; however, these costs are
generally offset by

<PAGE> 36

increases in tuition. No significant changes in government regulations are
expected in the next twelve months. See "RISK FACTORS."

CHILD CARE INCOME TAX BENEFIT

The Internal Revenue Code of 1986, as amended, provides an income tax
credit ranging from 20% to 30% for parents for certain child care expenses,
subject to certain maximum limitations and income levels. Under present law,
the fees paid to the Company by working parents qualify for the federal tax
credit. In addition, many families also benefit from flexible spending plans
that permit families to pay a portion of their child care expenses with pre-tax
income.

SERVICE MARK

"Sunrise Preschools" and the logo associated with the name are
federally registered service marks of the Company that expire in February 2007.
Management believes that the Company's service marks provide adequate
protection against unauthorized use of its name and logo.

EMPLOYEES

Individual child care centers are staffed with a director, one
assistant director, teachers and teacher assistants. All personnel participate
in periodic in-service and external training programs and are required to meet
applicable state and local regulatory standards.

Each of the Company's child care centers is operated as a unit under
the supervision of a director assigned to that child care center. The director
is responsible for hiring teachers, organizing and monitoring programs,
supervising all records and regulatory compliance, collecting tuition,
marketing and corporate office reporting. The Company conducts an in-house
"LIT" (Leadership-in-Training) program designed to instruct and motivate
existing personnel for a future management position at a Sunrise Preschool.

All center personnel are carefully monitored to ensure compliance with
current state regulations regarding age, experience and educational
requirements. The background check of prospective employees includes a
fingerprint check with the Federal Bureau of Investigation. To date, the
Company has not experienced any difficulty in attracting and retaining
qualified personnel, but there can be no assurance that the Company will be
able to continue to attract and retain qualified personnel. See "RISK FACTORS
- -- Dependence on Key Personnel".

As of 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.

<PAGE> 37

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 facilities. See "BUSINESS -- Employer Child Care
Programs," "Partnership Child Care Programs" and "Contract Child Care
Programs."

The Company's principal executive offices are leased and located in
approximately 4,700 square feet in Scottsdale, Arizona. The Company believes
that its headquarters facility is adequate for operations for the foreseeable
future.

The following page sets forth certain information regarding the
location and opening dates of the Company's child care centers.

<PAGE> 38
SUNRISE PRESCHOOL LOCATIONS

Listed by Year Opened:
<TABLE>
<CAPTION>
<S> <C> <C>
1982 1988 1994

Mesa, Arizona Chandler, Arizona Phoenix, Arizona(2)
2045 South Pennington 550 West Warner Road 3333 West Roosevelt
602-839-2091 602-899-8661
[GRAPHIC DESCRIPTION]
1984 Gilbert, Arizona
1540 North Burk Street A graphic depicting the State of
Tempe, Arizona 602-497-5260 Hawaii and showing a total of five
5301 South McClintock centers on the island of Oahu.
602-820-1861 1989
1995
1986 Phoenix, Arizona
4111 East Ray Road Flagstaff, Arizona(1)
Peoria, Arizona 602-759-4098 3475 East Soliere Avenue
6702 West Cholla 520-527-3900
602-878-6556 Phoenix, Arizona
642 East Monroe, Suite F-1 1996
Mesa, Arizona 602-253-0381
759 North Lindsay (Proposed Acquisitions)(3)
602-830-5500 Pearl City, Hawaii(1)
98-425 Kamehameha Highway Lakewood, Colorado
Phoenix, Arizona 808-488-9377 1950 SouthCarr
13449 North Tatum Boulevard 303-988-1835
602-996-2299 Kailua, Hawaii(1)
130 Kailua Road, #103 Lakewood, Colorado
[GRAPHIC DESCRIPTION] 808-262-2331 3150 Youngfield
303-238-5722
A graphic of the State of Arizona 1991
showing one center in Flagstaff [GRAPHIC DESCRIPTION]
and a total of 21 centers in the Phoenix, Arizona(1)
Phoenix metropolitan area. Arizona State University A graphic depicting the Denver
West Campus metropolitan area showing a
1987 602-543-5437 total of two centers.

Phoenix, Arizona 1993 (Opening Spring 1996)
16044 North 35th Avenue Hales Corners, Wisconsin(3)
602-978-9545 Phoenix, Arizona 10627 West Forest Home Avenue
8221 North 23rd Avenue 414-425-1515
Phoenix, Arizona 602-864-0474
1819 West Osborn Road
602-263-0985 Pearl City, Hawaii(1)
784 Kamehameha Highway
Scottsdale, Arizona 808-455-3330
9128 East San Salvador Drive
602-860-1464 Honolulu, Hawaii(1)
1730 North Punahou
808-951-5833

Honolulu, Hawaii(1)
467 North Judd
808-523-6495

Phoenix, Arizona(2)
512 East Pierce

Phoenix, Arizona
3415 North 59th Avenue

Phoenix, Arizona(2)
4612 North 28th Street

(1) Operated under management agreements.
(2) Locations with two preschool centers.
(3) See "BUSINESS--Expansion."
</TABLE>
33

<PAGE> 39

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth the names, ages and positions of the
directors and executive officers of the Company as of 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. See "DESCRIPTION OF
SECURITIES -- Special Voting and Other Provisions."

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 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

<PAGE> 40

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.

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.

<PAGE> 41
SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
Long Term Compensation
---------------------------------
Annual Compensation Awards Payouts
--------------------------------- ----------------------- -------
Restricted Securities All Other
Name and Fiscal Other Annual Stock Underlying LTIP Compensation(1)
Principal Position Year Salary Bonus Compensation Award(s) Option(s) Payouts
------------------ ------ -------- ------- ------------ ---------- ---------- ------- ---------------
<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 and Treasurer 1994 $56,632 $62,792 $-0- $-0- 0 $-0- $-0-

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.

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'
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.

<PAGE> 42

The following table sets forth certain information concerning each
exercise of stock options during the year ended July 31, 1995 by each of the
Named Executive Officers and the aggregated fiscal year-end value of the
unexercised options of each such Named Executive Officer.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
OPTION VALUE AS OF JULY 31, 1995

<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised Options In-the-Money
at Fiscal Year End (#) Options at Fiscal Year End ($)
----------------------------- ------------------------------
Shares Acquired Value Realized
Name on Exercise (#) ($) Exercisable Unexerciseable Exercisable Unexerciseable
---- --------------- -------------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
James R. Evans -0- $-0- 94,032 290,473 $95,758 $250,533

Barbara L. Owens -0- $-0- 147,550 -0- $155,605 $-0-
</TABLE>

COMPENSATION OF DIRECTORS

Directors who are not employees of the Company are entitled to receive
$500 per meeting attended, plus reimbursement of reasonable expenses; directors
who are employees of the Company do not receive compensation for such services.
Directors who are not employees of the Company also participate in the
Company's Non-Employee Directors Stock Option Plan.

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

<PAGE> 43

Employee's benefits under the Company's benefit plans to which the Employee and
his or her eligible beneficiaries were entitled immediately prior to the date
of termination. If the Employee requests, the Company must also assign to the
Employee any assignable insurance policy on the life of the Employee owned by
the Company at the end of the period of coverage. In addition, all options or
warrants to purchase Common Stock held by the Employee on the date of
termination become exercisable on the date of termination, regardless of any
vesting provisions, and remain exercisable for the longer of one year from the
date of termination or the then remaining unexpired term of such warrants or
options. If the Employee is terminated for cause or if the Employee terminates
his or her employment other than for good reason (as defined in the agreement),
the Company's only obligation is to pay the Employee his or her base salary and
accrued vacation pay through the date of termination.

If the Employee is incapacitated due to physical or mental illness
during the term of his or her employment, the agreements provide that the
Company shall pay to the Employee a lump sum equal to two years of the
Employee's base compensation and all bonuses paid to the Employee in the two
years preceding the date of termination due to illness. If the Employee dies
during his or her employment, the only benefits payable to his or her estate
under the agreements are those payable pursuant to the Company's survivor's
benefits insurance and other applicable programs and plans then in effect.

If the Employee's employment is terminated, the Company has agreed to
indemnify the Employee for claims and expenses associated with certain personal
guarantees made by the Employee. See "CERTAIN TRANSACTIONS." In addition, the
Company has agreed to use its best efforts to secure the release of such
personal guarantees.

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.

<PAGE> 44

The 1987 Plan provides the Board of Directors with the discretion to
determine when options granted thereunder shall become exercisable. Generally,
such options may be exercised after a period of time specified by the Board of
Directors at any time prior to expiration, so long as the optionee remains
employed by the Company. No option granted under the 1987 Plan is transferable
by the optionee other than by will or the laws of descent and distribution, and
each option is exercisable during the lifetime of the optionee only by the
optionee.

1995 STOCK OPTION PLAN

The Company's 1995 Stock Option Plan (the "1995 Plan") authorizes the
Board to grant options to employees of the Company to purchase up to an
aggregate of 500,000 shares of Common Stock. Officers and other employees of
the Company who, in the opinion of the Board of Directors, are responsible for
the continued growth and development and the financial success of the Company
are eligible to be granted options under the 1995 Plan. Options may be
non-qualified options, incentive stock options, or any combination of the
foregoing. In general, options granted under the 1995 Plan are not
transferable and expire eleven years after the date of grant (ten years in the
case of incentive stock options). The per share exercise price of an incentive
stock option granted under the 1995 Plan may not be less than the fair market
value of the Common Stock on the date of grant. Incentive stock options
granted to persons who have voting control over 10% or more of the Company's
capital stock are granted at 110% of the fair market value of the underlying
shares on the date of grant and expire five years after the date of grant. No
option may be granted after May 2, 2005.

The 1995 Plan provides the Board of Directors with the discretion to
determine when options granted thereunder will become exercisable. Generally,
such options may be exercised after a period of time specified by the Board of
Directors at any time prior to expiration, so long as the optionee remains
employed by the Company. No option granted under the 1995 Plan is transferable
by the 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. 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.

<PAGE> 45

Directors approved the plan will likewise receive an option to acquire 10,000
shares of the Company's Common Stock. In addition to the foregoing option
grants, each year every non-employee director automatically receives an option
to acquire 5,000 shares of the Company's Common Stock on the third business day
following the date the Company publicly announces its annual financial results;
provided that such director has attended at least 75% of the meetings of the
Board of Directors and of the Board Committees of which such non-employee
director is a member in the preceding fiscal year.

No option granted under the Directors Plan is transferable by the
optionee other than by will or the laws of descent and distribution, and each
option is exercisable during the lifetime of the optionee only by the optionee.

INDEMNIFICATION AND LIMITATION OF LIABILITY

Delaware law authorizes a Delaware corporation to eliminate or limit
the personal liability of a director to the corporation and its stockholders
for monetary damages for breaches of certain fiduciary duties as a director.
The Company believes that such a provision is beneficial in attracting and
retaining qualified directors, and accordingly the Company's Certificate
includes a provision eliminating liability for monetary damages for any breach
of fiduciary duty as a director, except (i) for any breach of the duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, or (iii) for any transaction for which the director derived an improper
personal benefit or certain other actions. Pursuant to Delaware law, directors
of the Company are not insulated from liability for breach of their duty of
loyalty or for claims arising under the federal securities laws. The foregoing
provisions of the Certificate may reduce the likelihood of derivative
litigation against directors and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breaches of their
fiduciary duties, even though such an action, if successful, might otherwise
have benefitted the Company and its stockholders.

CERTAIN TRANSACTIONS

James R. Evans and Barbara L. Owens have personally guaranteed various
child care facility lease payments and other obligations to third parties. As
of July 31, 1995, the aggregate amounts of lease payments and other obligations
guaranteed by Mr. Evans and Mrs. 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 the PSI's child care centers. Barbara L. Owens
is the President and James R. Evans is the Vice President of

40
<PAGE> 46

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.

PRINCIPAL STOCKHOLDERS

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.

<PAGE> 47

<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 947,091 29.4%

All directors and executive officers as a group
(5 persons)
</TABLE>

- --------------------------

(1) Includes presently exercisable options as follows: James R. Evans -
94,032; Barbara L Owens - 147,550; Robert A. Rice - 20,000; Dr.
Richard H. Hinze - 20,000; Ronald J. O'Connor - 5,000; 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.
(Footnotes continued on following page)

<PAGE> 48

(footnotes to table on preceding page)

(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.

DESCRIPTION OF SECURITIES

COMMON STOCK

The Company's Certificate authorizes the issuance of 10,000,000 shares
of Common Stock, par value of $.01 per share. Each share of Common Stock
entitles the holder thereof to one vote in the election of directors and all
other matters submitted to a vote of the Company's stockholders. Common
stockholders do not have cumulative voting rights. Holders of Common Stock are
entitled to share ratably in all dividends declared by the Board of Directors
and in all assets available for distribution upon liquidation. Except for
holders of Series B Preferred Stock, no holder of the Company's capital stock
has any preemptive right to subscribe for or purchase additional shares of the
Company's stock.

COMMON STOCK PURCHASE WARRANTS AND OPTIONS

In 1987, in connection with its initial public offering, the Company
issued Warrants to purchase 1,000,000 shares of the Company's Common Stock at
an exercise price of $5.00 per share. The Warrants were originally scheduled
to expire in 1989, and the Company has extended the expiration date of the
Warrants on several occasions since their original expiration date. On
September 21, 1995, the Company announced that it was extending the Warrant
expiration one final time, through November 6, 1995, and reducing the exercise
price of the Warrants to $1.00 per share. As a condition to the extension of
the Warrants and a reduction of their exercise price, the Company provided that
each holder of Warrants may exercise only one of every sixteen Warrants held.
Accordingly, assuming all of the Warrants are exercised, the Company will be
required to issue 62,500 shares of Common Stock to the holders of the Warrants.
For a discussion of other options and warrants granted by the Company see
"EXECUTIVE COMPENSATION -- Stock Option Plans" and Note 7 of Notes to
Consolidated Financial Statements.

<PAGE> 49

PREFERRED STOCK

The Company's Certificate authorizes the issuance of 1,000,000 shares
of Preferred Stock, par value $1.00 per share. The Company's Board of
Directors, without further action by the Company's stockholders, may issue
Preferred Stock in series and may, at the time of issuance, determine the
rights, preferences and privileges of each series. Satisfaction of any
dividend preferences of outstanding Preferred Stock would reduce the amount of
funds available for the payment of dividends on Common Stock. Also, holders of
Preferred Stock would normally be entitled to receive a preference payment in
the event of any liquidation, dissolution or winding-up of the Company before
any payment is made to the holders of Common Stock. The issuance of Preferred
Stock may be for the purpose of, or have the effect of, delaying, deferring or
preventing a change in control of the Company without further action by the
stockholders. The issuance of Preferred Stock with voting and conversion
rights may adversely affect the voting powers of the holders of Common Stock,
including the loss of voting control to others.

SERIES A PARTICIPATING PREFERRED STOCK

On March 2, 1995, the Company paid a distribution of a right to
purchase one one-thousandth of a share of Series A Participating Preferred
Stock (a "Right") for each share of Common Stock of the Company outstanding on
such date (the "Record Date"). Each Right entitles the registered holder to
purchase from the Company one one-thousandth of a share of Series A
Participating Preferred Stock, $1.00 par value, of the Company (the "Series A
Preferred Stock"), subject to adjustment, at a price of $8.00 per one
one-thousandth of a share, subject to adjustment (the "Purchase Price"). The
description and terms of the Rights are set forth in a Preferred Shares Rights
Agreement (the "Rights Agreement") dated as of February 10, 1995 between the
Company and American Securities Transfer, Incorporated, as Rights Agent (the
"Rights Agent").

The Rights approved by the Board are designed to protect and maximize
the value of the outstanding equity interests in the Company in the event of an
unsolicited attempt by an acquiror to take over the Company in a manner or on
terms not approved by the Board of Directors. Takeover attempts frequently
include coercive tactics to deprive a corporation's board of directors and its
stockholders of any real opportunity to determine the destiny of the
corporation. The Rights have been declared by the Board in order to deter such
tactics, including a gradual accumulation of shares in the open market of a 15%
or greater position to be followed by a merger or a partial or two-tier tender
offer that does not treat all stockholders equally.

The Rights are not intended to prevent a takeover of the Company and
will not do so; however, the Rights may have the effect of rendering more
difficult or discouraging an acquisition of the Company deemed undesirable by
the Board of Directors. The Rights may cause substantial dilution to a person
or group that attempts to acquire the Company on terms or in a manner not
approved by the Company's Board of Directors, except pursuant to an offer
conditioned upon the negation, purchase or redemption of the Rights.

The Rights will become exercisable upon the earlier of: (i) 10 days (or
such later date as may be determined by a majority of the Board of Directors,
excluding directors affiliated with the Acquiring Person, as defined below (the
"Continuing Directors")) following a public announcement that a person or group
of affiliated or associated persons has acquired, or obtained the right to
acquire, beneficial ownership of 15% or more of the outstanding Common Stock of
the Company (an "Acquiring Person") or (ii) 10 business days (or such later
date as may be determined by a majority

<PAGE> 50

of the Continuing Directors) following the commencement of, or announcement of
an intention to make, a tender offer or exchange offer, the consummation of
which would result in the beneficial ownership by a person or group of 15% or
more of the outstanding Common Stock of the Company. The earlier of such dates
is referred to as the "Distribution Date."

All Common Stock issued prior to the Distribution Date will be issued
with Rights. Common Stock issued after the Distribution Date may be issued
with Rights if such shares are issued (i) upon the conversion of securities
issued after adoption of the Rights Agreement, including shares of Common Stock
issued upon conversion of the Series C Preferred Stock offered hereby or (ii)
pursuant to the exercise of stock options or under employee benefit plans
unless such issuance would result in (or create a risk that) such options or
plans would not qualify for otherwise available special tax treatment. Except
as otherwise determined by the Board of Directors, no other shares of Common
Stock issued after the Distribution Date will be issued with Rights. The
Rights will expire on March 2, 2005 (the "Final Expiration Date"), unless the
Final Expiration Date is extended or unless the Rights are earlier redeemed or
exchanged by the Company or expire upon consummation of certain mergers,
consolidations or sales of assets. Following the Distribution Date, and until
the occurrence of one of the subsequent events described below, holders of the
Rights will be entitled to receive, upon exercise and the payment of $8.00 per
Right, one one-thousandth of a share of Series A Preferred Stock.

At any time after an event triggering the rights to acquire stock
described below and prior to the acquisition by such Acquiring Person of 50% or
more of the outstanding shares of Common Stock, the Board of Directors of the
Company may exchange the Rights (other than Rights owned by the Acquiring
Person or its affiliates), in whole or in part, at an exchange ratio of one
share of Common Stock per Right (subject to adjustment). Unless the Rights are
earlier redeemed or exchanged, in the event that an Acquiring Person becomes
such, other than pursuant to a tender offer which is made for all of the
outstanding Common Stock of the Company and approved by a majority of the
Continuing Directors after determining that the offer is both adequate and
otherwise in the best interests of the Company and its stockholders (a
"Permitted Offer"), then proper provision will be made so that each holder of a
Right which has not theretofore been exercised (other than Rights beneficially
owned by the Acquiring Person, which will thereafter be void) will thereafter
have the right to receive, upon exercise, shares of Common Stock having a value
equal to two times the Purchase Price. Rights are not exercisable following
the occurrence of an event described above until such time as the Rights are no
longer redeemable by the Company as set forth below. In the event that the
Company does not have sufficient Common Stock available for all Rights to be
exercised, or the Board decides that such action is necessary and not contrary
to the interests of Rights holders, the Company may instead substitute cash,
assets or other securities for the Common Stock into which the Rights would
have otherwise been exercisable.

Similarly, unless the Rights are earlier redeemed or exchanged, in the
event that, after the Shares Acquisition Date (as defined below), (i) the
Company is acquired in a merger or other business combination transaction in
which the Company is not the surviving corporation or in which the Company's
outstanding Common Stock is changed or exchanged for stock or assets of another
person or (ii) 50% or more of the Company's consolidated assets or earning
power are sold (other than through transactions in the ordinary course of
business), proper provision must be made so that each holder of a Right which
has not theretofore been exercised (other than Rights beneficially owned by the
Acquiring Person, which will thereafter be void) will thereafter have the right
to receive, upon exercise, shares of common stock of the acquiring company
having a value equal to two times the

<PAGE> 51

Purchase Price (unless the transaction satisfies certain conditions and is
consummated with a person who acquired shares pursuant to a Permitted Offer, in
which case the Rights will expire).

Series A Preferred Stock purchasable upon exercise of the Rights will
not be redeemable. Each share of Series A Preferred Stock will be entitled to
an aggregate dividend of 1,000 times the dividend declared per each share of
Common Stock. In the event of liquidation, the holders of the Series A
Preferred Stock will be entitled to a minimum preferential liquidation payment
of $1,000 per share and, depending upon the amount of proceeds to be
distributed, will share with the holders of the Common Stock in such
distribution. Each share of Series A Preferred Stock will have 1,000 votes,
voting together with the Common Stock. In the event of any merger,
consolidation or other transaction in which Common Stock is changed or
exchanged, each share of Series A Preferred Stock will be entitled to receive
1,000 times the amount received per share. These rights are protected by
customary anti-dilution provisions.

At any time on or prior to the close of business on the earlier of (i)
the 10th day following the acquisition by an Acquiring Person (the "Shares
Acquisition Date") of 15% or more of the Company's outstanding Common Stock or
such later date as may be determined by a majority of the Continuing Directors
and publicly announced by the Company or (ii) the Final Expiration Date of the
Rights, the Company may redeem the Rights in whole, but not in part, at a price
of $0.001 per Right ("Redemption Price").

SERIES B PREFERRED STOCK

The Board of Directors of the Company has authorized the issuance of
500,000 shares of Series B Preferred Stock, all of which were issued and
outstanding on September 30, 1995.

The Series B Preferred Stock ranks senior in dividend rights and
liquidation preference to all other series of Preferred Stock and the Common
Stock of the Company. The holders of the Series B Preferred Stock are entitled
to receive, out of any assets of the Company legally available therefor,
cumulative dividends at a rate of $.10 per share per annum, payable quarterly
on March 31, June 30, September 30 and December 31 of each year. Upon any
liquidation, dissolution or winding up of the Company, the Company may not make
any distribution to the holders of any series of Preferred Stock or the Common
Stock unless prior thereto, the holders of Series B Preferred Stock have
received an amount equal to $1.00 per share, plus an amount equal to the
accrued and unpaid dividends and distributions thereon.

At any time, the holders of the Series B Preferred Stock have the
right, at their option, to convert each share of Series B Preferred Stock into
one share of Common Stock. The conversion price of the Series B Preferred
Stock is subject to adjustment from time to time if the Company issues
additional shares of Common Stock, convertible securities, options, warrants or
similar rights at prices less than the conversion price for the Series B
Preferred Stock. In addition, the conversion price for the Series B Preferred
Stock may be adjusted for certain stock splits, stock dividends, combinations,
reclassifications and similar events.

Generally, the holders of shares of Series B Preferred Stock together
with the holders of the Common Stock and Series C Preferred Stock will vote as
one class on all matters submitted to a vote of stockholders of the Company.
Without the advance consent of the holders of two-thirds of the Series B
Preferred Stock, the Company may not amend its Certificate in any manner

<PAGE> 52

that would materially alter or change the powers, preferences or special rights
of the Series B Preferred Stock.

Unless previously converted, all or any portion of the Series B
Preferred Stock may be redeemed on a pro rata basis by the Company at its
election from the holders of such Series B Preferred Stock at any time;
provided, however, that the Company may not redeem the Series B Preferred Stock
unless the average of the closing bid prices per share of Common Stock have
equaled or exceeded $3.00 or more for any twenty (20) consecutive trading days
ending two days prior to the date on which a redemption notice is given by the
Company. The price at which the Series B Preferred Stock may be redeemed is
$1.00 per share together with all dividends accrued but unpaid thereon, but
computed without interest, through the date of such redemption. Each holder of
Series B Preferred Stock has the right to require the Company to redeem the
shares of Series B Preferred Stock held by such holder together with all
dividends accrued and accumulated but unpaid thereon if, among other things,
there is a sale or merger of the Company or if the Company (i) defaults on the
payment of any dividends on the Series B Preferred Stock and such default has
continued for a period of ten days, (ii) defaults on the payment of its
indebtedness or certain other obligations, (iii) is unable to pay its debts as
they become due or (iv) files a petition in bankruptcy.

Pursuant to an agreement with the holders of the Series B Preferred
Stock, as long as at least 125,000 shares of Common Stock (assuming conversion
of the Series B Preferred Stock) is held by such holders, the Company has
agreed to use its reasonable best efforts to cause the Board of Directors of
the Company to include at least one designee of such holders if the Board of
Directors consists of less than five members, and two designees if the Board of
Directors consists of five or more members. At present, the holders of the
Company's Series B Stock have not requested that the Company include their
designee on the Board or Directors. In addition to the foregoing rights, the
Company has also granted to the holders of the Series B Stock a right to
purchase a pro rata portion of any securities privately placed by the Company
as well as certain demand and piggyback registration rights.

SERIES C PREFERRED STOCK

The Series C Preferred Stock ranks junior in dividend rights and
liquidation preference to the Company's Series B Preferred Stock, but senior to
all other series of Preferred Stock and the Common Stock of the Company.
Subject to the superior rights of the Series B Preferred Stock, the holders of
the Series C Preferred Stock are entitled to receive, out of any assets of the
Company legally available therefor, cumulative dividends at a rate of 9% per
annum (the "Dividend Rate") on the total dollar amount of the consideration
paid (the "Original Purchase Price") to the Company for each share of Series C
Preferred Stock (the "Dividend Amount"). Such dividends are payable quarterly
on the Quarterly Dividend Payment Date (as hereinafter defined), commencing on
the first Quarterly Dividend Payment Date after the first issuance of a share
of Series C Preferred Stock. Dividends on each share of Series C Preferred
Stock accrue and are cumulative from the date of issuance thereof to the
redemption date or the conversion date of each such share, as applicable and
whichever first occurs, whether or not there are any profits, surplus or other
funds of the Company legally available for the payment of such dividends at the
time such dividends accrue and whether or not such dividends are declared.
Dividends are payable on each share of Series C Preferred Stock on the last day
of each September, December, March and June of each year (the "Quarterly
Dividend Payment Date") to the holder of record on the date thirty (30) days
prior to such Quarterly Dividend Payment Date. During the first year following
the first issuance of a share of Series C Preferred Stock (the "Original Issue
Date"), dividends on the Series C Preferred Stock will be paid in cash.
Following the first anniversary of the Original Issue Date, the Company has the
option to pay all future dividends either in cash or

<PAGE> 53

in shares of Common Stock of the Company having a "Fair Market Value" equal to
the Dividend Amount. "Fair Market Value" means the average closing bid prices
of the Common Stock of the Company as reported in the Wall Street Journal for
the ten (10) trading days ending five (5) trading days prior to the Quarterly
Dividend Payment Date (or, if not so reported, as otherwise reported by the
National Association of Securities Dealers Automated Quotation System or other
principal market for the Common Stock) or, in the event the Common Stock is
listed on a stock exchange, the Fair Market Value shall be the average of the
closing prices of the Common Stock of the Company on such exchange as reported
in the Wall Street Journal for the ten (10) trading days ending five (5)
trading days prior to the Quarterly Dividend Payment Date.

Generally, the holders of shares of Series C Preferred Stock together
with the holders of the Common Stock and Series B Preferred Stock vote as one
class on all matters submitted to a vote of stockholders of the Company.
Without the advance consent of the holders of a majority of the Series C
Preferred Stock, the Company may not (i) alter or change any rights, privileges
or preferences of the Series C Preferred Stock, (ii) increase or decrease the
authorized number of shares of Series C Preferred Stock, (iii) authorize, issue
or create (by reclassification or otherwise) shares of any class or series of
stock equal in priority to or having any preference over the Series C Preferred
Stock with respect to dividends or liquidation payments, (iv) amend or waive
any provision of the Certificate or Bylaws of the Company relative to the
Series C Preferred Stock, (v) authorize or approve any liquidation or
dissolution of the Company, (vi) authorize or approve any merger or
consolidation of the Company, or (vii) authorize or approve any sale or
transfer of all or substantially all of the assets of the Company. Each share
of Series C Preferred Stock issued and outstanding has that number of votes
equal to the number of shares of Common Stock into which each share of Series C
Preferred Stock is convertible, as of the record date set by the Board of
Directors for the determination of any holders of any class of securities
entitled to vote on such matter.

Whenever quarterly dividends or other dividends or distributions
payable on the Series C Preferred Stock are in arrears, thereafter and until all
accrued and unpaid dividends and distributions, whether or not declared, on
shares of Series C Preferred Stock outstanding shall have been paid in full or
set aside for payment, the Company may not (i) declare or pay dividends on, make
any other distributions on, or redeem or purchase or otherwise acquire for
consideration any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series C Preferred Stock, (ii)
declare or pay dividends on, make any other distributions on any shares of stock
ranking on a parity (either as to dividends or upon liquidation, dissolution or
winding up) with the Series C Preferred Stock, except dividends paid ratably on
the Series C Preferred Stock and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which the holders of
all such shares are then entitled, (iii) redeem or purchase or otherwise acquire
for consideration shares of any stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series C
Preferred Stock, provided that the Company may at any time redeem, purchase or
otherwise acquire shares of any such parity stock in exchange for shares of any
stock of the Company ranking junior (either as to dividends or upon dissolution,
liquidation or winding up) to the Series C Preferred Stock or (iv) purchase or
otherwise acquire for consideration any shares of Series C Preferred Stock, or
any shares of stock ranking on a parity with the Series C Preferred Stock,
except in accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of such shares upon such
terms as the Board of Directors, after consideration of the respective annual
dividend rates and other relative rights and preferences of the respective
series and classes, shall determine in good faith will result in fair and
equitable treatment among the respective series or classes.

<PAGE> 54

Whenever quarterly dividends or other dividends or distributions
payable on the Series C Preferred Stock have been in arrears for two or more
quarters, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series C Preferred Stock
outstanding shall have been paid in full or set aside for payment, and so long
as no less than 100,000 shares of Series C Preferred Stock are outstanding
(appropriately adjusted for any recapitalizations, stock splits, stock
combinations, stock dividends and the like), the holders of a majority of the
outstanding shares of Series C Preferred Stock shall be entitled to elect two
(2) directors to the Company's Board of Directors.

At any time, the holders of the Series C Preferred Stock have the
right, at their option, to convert any number of shares of Series C Preferred
Stock into shares of Common Stock in an amount determined by dividing the
Original Purchase Price of the Series C Preferred Stock by $3.00 (the
"Conversion Price"). The Conversion Price is subject to adjustment from time
to time if the Company issues additional shares of Common Stock, convertible
securities, options, warrants or similar rights at prices less than the
Conversion Price. In addition, the Conversion Price may be adjusted for
certain stock splits, stock dividends, combinations, reclassifications and
similar events.

Subject to the superior rights of the holders of the Series B Preferred
Stock, upon any voluntary liquidation, dissolution or winding up of the
Company, the Company may not make any distribution to the holders of shares of
stock ranking junior (either as to payment of dividends or with respect to
distributions upon liquidation, dissolution or winding up) to the Series C
Preferred Stock unless, prior thereto, the holders of Series C Preferred Stock
have received an amount equal to the Original Purchase Price of the shares of
Series C Preferred Stock purchased, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date of
such payment (the "Series C Preferred Stock Liquidation Preference").
Following the payment of the full amount of the Series C Preferred Stock
Liquidation Preference, no additional distributions may be made to the holders
of Series C Preferred Stock. If there are not sufficient assets available to
permit payment in full of the Series C Preferred Stock Liquidation Preference
and the liquidation preferences of all other classes and/or series of Preferred
Stock, if any, which rank on a parity with the Series C Preferred Stock, then
such remaining assets shall be distributed ratably to the holders of such
parity shares in proportion to their respective liquidation preferences.

In the event of any consolidation or merger of the Company with or into
another corporation, or of any sale or conveyance to another corporation of all
or substantially all the property of the Company, in any of which transactions
the holders of Common Stock receive shares of stock, other securities, cash or
property receivable upon such consolidation, merger, sale or conveyance other
than Common Stock, each holder of Series C Preferred Stock then outstanding and
thereafter remaining outstanding has the right to convert each share of Series
C Preferred Stock held by him into the kind and amount of shares of stock,
other securities, cash or property receivable upon such consolidation, merger,
sale or conveyance by a holder of the number of shares of Common Stock into
which such share of Series C Preferred Stock could have been converted
immediately prior to the record date applicable to such consolidation, merger,
sale or conveyance, and shall have no other conversion rights. In any such
event, the Company will make effective provision for the protection of the
conversion rights of the holders of the Series C Preferred Stock that are not
so converted, which will thereafter be applicable to any such other shares of
stock, other securities, cash or property deliverable upon conversion of the
shares of the Series C Preferred Stock remaining outstanding or other
convertible stock or securities received by the holders in place thereof.

<PAGE> 55

Unless previously converted, all or any portion of the Series C
Preferred Stock together with all dividends accrued but unpaid on such Series C
Preferred Stock computed to the redemption date may be redeemed on a pro rata
basis by the Company at its election from the holders of such Series C
Preferred Stock at any time and from time to time; provided, however, that the
Company may not redeem the Series C Preferred Stock unless the average of the
closing asked prices per share of Common Stock has equaled or exceeded 150% or
more of the Conversion Price of the Series C Preferred Stock for any twenty
(20) consecutive trading days ending within five days immediately prior to the
date on which a redemption notice is given by the Company. Notwithstanding the
foregoing, the holders of the Series C Preferred Stock will have the right to
convert the Series C Preferred to Common Stock for a period of thirty (30) days
following notice of redemption.

SPECIAL VOTING AND OTHER PROVISIONS

Stockholders' rights and related matters are governed by the Delaware
corporate laws, the Certificate and the Bylaws of the Company. Certain
provisions of the Certificate and Bylaws which are summarized below may affect
potential changes in control of the Company. The Board of Directors believes
that these provisions are in the best interests of stockholders because they
will encourage a potential acquiror to negotiate with the Board of Directors,
which will be able to consider the interests of all stockholders in a
change-in-control situation. However, the cumulative effect of these terms may
be to make it more difficult to acquire and exercise control of the Company and
to make changes in management more difficult.

The Certificate provides for the approval of the holders of 66 2/3% of
the outstanding voting stock of the Company for a merger or a consolidation
with, or a sale by the Company of all or substantially all of its assets to,
any person, firm or corporation, or any group thereof, which owns, directly or
indirectly, 5% or more of any class of voting securities of the Company (an
"Interested Person"). In addition, such 66 2/3% approval is required with
respect to other transactions involving any such Interested Person, including,
among other things, purchases by the Company or any of its subsidiaries of all
or substantially all of the assets or stock of an Interested Person and any
other transaction with an Interested Person which requires stockholder approval
under Delaware law. The 66 2/3% voting requirement is not applicable to any
transaction approved by the Company's Board of Directors if a majority of the
members of the Board of Directors voting to approve such transaction were
elected prior to the date on which the other party became an Interested Person.

The Certificate provides that each director will serve for a three-year
term and that approximately one-third of the directors are to be elected
annually. The Company may have three to nine directors as determined from time
to time by the Board, which currently consists of four members. Between
stockholder meetings, the Board may appoint new directors to fill vacancies or
newly created directorships. A director may be removed from office only for
cause and only by the affirmative vote of 50% of the combined voting power of
the then outstanding shares of stock entitled to vote generally in the election
of directors.

The Certificate further provides that stockholder action must be taken
at a meeting of stockholders and may not be effected by any consent in writing.
Special meetings of stockholders may be called only by the President or a
majority of the Board of Directors. If a stockholder wishes to propose an
agenda item for consideration, he must give a brief description of each item
and written notice to the Company not less than 60 nor more than 90 days prior
to the meeting unless less than 70-days prior notice of a stockholders meeting
is given to stockholders, in which case stockholders have

<PAGE> 56
ten days from the date of notice of such meeting to be considered for inclusion
in the agenda of such meeting.

The Certificate generally provides that the foregoing provisions of the
Certificate and Bylaws may be amended or repealed only with the affirmative
vote of at least 66 2/3% of the shares entitled to vote. These provisions
exceed the usual majority vote requirement of Delaware law and are intended to
prevent the holders of less than 66 2/3% of the voting power from circumventing
the foregoing terms by amending the Certificate or Bylaws. These provisions,
however, enable the holders of more than 33 1/3% of the voting power to prevent
amendments to the Certificate or Bylaws even if there were favored by the
holders of a majority of the voting power.

The effect of such provisions of the Company's Certificate and Bylaws
may be to make more difficult the accomplishment of a merger or other takeover
or change in control of the Company. To the extent that these provisions have
this effect, removal of the Company's incumbent Board of Directors and
management may be rendered more difficult. Furthermore, these provisions may
make it more difficult for stockholders to participate in a tender or exchange
offer for Common Stock and in so doing may diminish the market value of the
Common Stock. The Company is not aware of any proposed takeover attempt or any
proposed attempt to acquire a large block of Common Stock.

DIRECTOR AND OFFICER INDEMNIFICATION

Section 12 of the Company's Certificate limits, to the fullest extent
permitted by the Delaware General Corporation Law ("DGCL"), as amended,
directors' personal liability to the Company or its stockholders for monetary
damages or breach of fiduciary duty. Section 145 of the DGCL enables a
corporation to eliminate or limit personal liability of members of its board of
directors for violations of their fiduciary duty of care. However, Delaware
law does not permit the elimination of a director's liability for engaging in
intentional misconduct or fraud, knowingly violating a law, for any transaction
from which the director derived an improper personal benefit or for unlawfully
paying a distribution. The statute has no effect on the availability of
equitable remedies, such as an injunction or rescission, for breach of
fiduciary duty.

Section 12 of the Company's Certificate and Article V of the Company's
Bylaws require indemnification of directors and officers of the Company to the
fullest extent permitted by the DGCL for claims against them in their official
capacities, including stockholders' derivative actions.

Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable.

TRANSFER AGENT

The Transfer Agent for the Common Stock and Series C Preferred Stock is
American Securities Transfer, Incorporated.

51
<PAGE> 57
REGISTRATION RIGHTS

The Representatives have certain registration rights with respect to
the securities underlying the Representatives' Warrants. Any exercise of such
registration rights by the Representatives may result in dilution of the
interest in the Company of then present stockholders, hinder efforts by the
Company to arrange future financings of the Company and have an adverse effect
on the market price of the Company's Common Stock and Series C Preferred Stock.

UNDERWRITING

The Underwriters named below have severally agreed, subject to the
terms and conditions of the Underwriting Agreement, to purchase from the
Company the number of shares of Series C Preferred Stock set forth opposite
their names below.

<TABLE>
<CAPTION>
Number of
Underwriter Shares
- ----------- ---------
<S> <C>
W. B. McKee Securities, Inc. . . . . . . . . . . . . . . . . . . .
South Coast Financial Securities, Inc. . . . . . . . . . . . . . .

</TABLE>

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters have agreed to purchase from the Company, and the Company has
agreed to sell to the Underwriters, 333,333 shares of the Company's Series C
Preferred Stock and an additional 50,000 shares of Series C Preferred Stock to
cover Over-Allotments, if any.

The nature of the Underwriters' obligations are such that all of the
Series C Preferred Stock must be purchased if any shares of Series C Preferred
Stock are purchased (exclusive of the shares of Series C Preferred Stock
subject to the Over-Allotment Option described below). Such obligation is
subject, however, to various conditions, including the approval of certain
legal matters by counsel.

The Underwriters propose to offer part of the shares of Series C
Preferred Stock directly to the public at the price set forth on the cover page
of the Prospectus. They may allow a concession of up to __% of the public
offering price of the Series C Preferred Stock to selected dealers who are
members of the National Association of Securities Dealers, Inc. and to certain
foreign dealers. Such dealers will be permitted to sell the Series C Preferred
Stock directly to the public, but not to other dealers or brokers without the
consent of the Underwriters. The Underwriters do not intend to confirm sales
to any account over which they have discretionary authority.

The Company has agreed to indemnify the Underwriters against certain
liabilities that may be incurred in connection with this offering, including
certain civil liabilities under the Securities Act.

The Company has granted to the Underwriters the option, exercisable at
any time within 45 days after the date of this Prospectus, to purchase from the
Company up to 50,000 additional shares of Series C Preferred Stock solely for
the purpose of covering over-allotments in the sale of 333,333 shares of Series
C Preferred Stock initially offered hereby. To the extent that the option is
exercised, the Underwriters will be committed, subject to certain conditions,
to purchase the additional shares of Series C Preferred Stock and to offer such
additional shares of Series C Preferred Stock to the public, all at the same
prices and on the same terms as those applicable to the 333,333 shares of
Series C Preferred Stock initially offered hereby.

52
<PAGE> 58

The Company has agreed, upon completion of this offering, to sell to
the Representatives, for an aggregate price of $100, warrants to purchase up to
38,333 shares of Series C Preferred Stock (the "Representatives' Warrants").
The Representatives' Warrants will be exercisable for a five-year term
commencing one year after the date of this Prospectus at an exercise price of
$18.00 per share. The Representatives' Warrants will be transferable to the
extent permitted under the rules of the NASD and applicable federal and state
law. If the Company files a registration statement under the provisions of the
Securities Act relating to an offering of securities, the holders of the
Representatives' Warrants or underlying securities will have the right, subject
to certain conditions, to include in such registration statement, at the
Company's expense, all or part of the Series C Preferred Stock underlying the
Representatives' Warrants or the Common Stock into which the Series C Preferred
Stock is converted. Additionally, at any time after the one-year period
following the effective date of the Registration Statement and within the
following four-year period, the holders of a majority of the Representatives'
Warrants and the shares underlying such Representatives' Warrant may require
the Company to register or qualify the issued or issuable Series C Preferred
Stock or Common Stock underlying the Representatives' Warrants at the Company's
expense. The number of shares of Series C Preferred Stock covered by the
Representatives' Warrants and the exercise price thereof are subject to
adjustment upon certain events to prevent dilution.

For the life of the Representatives' Warrants, the holders will have
the opportunity to profit from a rise in the market price of the Company's
Series C Preferred Stock above the exercise price of the Representatives'
Warrants. Any profit realized by the holders upon the sale of the
Representatives' Warrants or the securities issuable thereunder may be deemed
additional underwriting compensation. If the Representatives' Warrants are
exercised, the voting and equity interests of the Company's stockholders will
be diluted. The Company may find that the terms on which it could obtain
additional capital may be adversely affected while the Representatives'
Warrants are outstanding.

The Company has agreed to pay the Representatives a non-accountable
expense allowance equal to 3% of the aggregate public offering price of the
Series C Preferred Stock, including Series C Preferred Stock sold pursuant to
the Over-Allotment Option, of which $25,000 has been paid.

The Underwriting Agreement also (i) obligates the Company, for a
three-year period, to advise the Representatives of any intention to publicly
offer or privately place any securities, and (ii) grants to South Coast
Financial Securities, Inc. a three-year right of first refusal to participate,
as the managing underwriter, co-managing underwriter or placement agent, on
terms available to the Company from others, in any public offering or private
placement of the Company's securities.

The Company has agreed not to offer or sell any of its securities for a
period of one year from the date of this Prospectus, without the prior written
consent of the Representatives. Each of the directors and officers of the
Company have agreed not to sell, grant any option for sale, or otherwise
dispose of, directly or indirectly, any shares of the Company's Common Stock or
any security convertible into Common Stock for a period of one year from the
date of this Prospectus, without the prior written consent of the
Representatives.

The price at which the shares of Series C Preferred Stock are being
offered to the public has been determined by negotiation between the Company
and the Representatives. Among the factors

53
<PAGE> 59
considered in determining the price of the Series C Preferred Stock were the
Company's current financial condition and prospects and the general condition
of the securities market. However, the public offering price of the Series C
Preferred Stock does not necessarily bear any relationship to the Company's
assets, book value, earnings or any other established criterion of value.

The foregoing is a brief summary of certain provisions of the
Underwriting Agreement and does not purport to be a complete statement of its
terms and conditions. A copy of the Underwriting Agreement is on file with the
Securities and Exchange Commission as an exhibit to the Registration Statement
of which this Prospectus forms a part. See "AVAILABLE INFORMATION."

LEGAL MATTERS

Certain legal matters will be passed upon for the Company by Squire,
Sanders & Dempsey, of Phoenix, Arizona. Certain legal matters will be passed
upon for the Underwriters by Hewitt & McGuire, of Irvine, California.

EXPERTS

The financial statements included in this prospectus and elsewhere in
the registration statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports.

54
<PAGE> 60
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of
Sunrise Preschools, Inc.:

We have audited the accompanying consolidated balance sheet of Sunrise
Preschools, Inc. (a Delaware corporation) and subsidiary as of July 31, 1995,
and the related consolidated statements of income, shareholders' equity and
cash flows for each of the two years in the period ended July 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sunrise Preschools, Inc. and
subsidiary as of July 31, 1995, and the results of their operations and their
cash flows for each of the two years in the period ended July 31, 1995 in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Phoenix, Arizona,
October 2, 1995.

F-1
<PAGE> 61

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.

F-2
<PAGE> 62
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 (38,919) (73,404)
Other income 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.

F-3
<PAGE> 63
SUNRISE PRESCHOOLS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE YEARS ENDED JULY 31, 1995 AND 1994

<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.

F-4
<PAGE> 64
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
========= =========

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.

</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-5
<PAGE> 65
SUNRISE PRESCHOOLS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JULY 31, 1995

(1) ORGANIZATION AND OPERATIONS:

Sunrise Preschools, Inc. (the Company) was incorporated in the State of
Delaware in May 1987, and currently operates 27 child care centers in Arizona
and Hawaii (see Note 3).

The Company is successor to Venture Educational Programs, Inc., an Arizona
corporation formed in 1980, and Sunrise Preschools, Inc., an Arizona
corporation, formed in 1985. The Company has one wholly owned subsidiary,
Sunrise Preschools Hawaii, Inc., formed in fiscal 1990. Another subsidiary,
Sunrise Holdings, Inc., formed in fiscal 1987, was dissolved effective
September 10, 1994.

Effective February 1, 1994, a portion of the Company's operations were
transferred to a Hawaii nonprofit corporation, Preschool Services, Inc. (PSI).
Because of PSI's nonprofit status, PSI is eligible to receive certain grants
and subsidies. The Company provides PSI with management, administration,
educational programs and operation of PSI's preschools (see Note 3). The
results of operations of the schools transferred to PSI subsequent to
February 1, 1994 are not included in the accompanying consolidated financial
statements.

During fiscal 1994, the Company expanded its child care operations by opening
four additional sites through cooperative efforts with various outside parties.
One additional site was also opened in fiscal 1995. These ventures required a
minimal capital investment by the Company while expanding its licensed capacity
by approximately 165 children. Management is continuing to pursue various
expansion opportunities, including these types of cooperative ventures.

In fiscal 1995, cash flow from the operations of the child care centers
operated by Sunrise was sufficient to meet normal operating requirements of
these child care centers plus the corporate office expenses. Should the
Company decide to pursue additional expansion, alternative sources of capital
would be necessary (see Note 13).

The Company's operations are subject to certain risks inherent in a business
enterprise. See a description of these risks in RISK FACTORS in this
Prospectus.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

(a) BASIS OF CONSOLIDATION

The consolidated financial statements include the accounts of Sunrise
Preschools, Inc. and Sunrise Preschools Hawaii, Inc. All intercompany accounts
and transactions have been eliminated in consolidation.

F-6

<PAGE> 66

(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.

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.

The Company has entered into a letter of intent for the sale of up to 333,333
shares of Series C Preferred Stock (Series C); see Note 13. Each share of
Series C is convertible into five shares of the Company's common stock. If the
Series C had been issued and converted as of the beginning of fiscal 1995,
fully diluted net income per share would have been $.17.

(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.

F-7
<PAGE> 67

(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.

F-8
<PAGE> 68
Following is the unaudited pro forma condensed consolidated statement of income
for the year ended July 31, 1994, as if the PSI Agreement was in effect as of
August 1, 1993:

<TABLE>
<CAPTION>
As Reported Adjustments Pro forma
------------ -------------- ----------
<S> <C> <C> <C>

Operating revenue $10,625,044 $(987,085)(1) 9,662,959
25,000 (2)
Operating expenses 10,147,404 (1,103,095)(3) 8,983,809
(60,500)(4)
---------- ----------
Income from operations 477,640 679,150

Other income (expense), net (72,349) 19,076 (4) (53,273)
---------- ----------
Income before income taxes 405,291 625,877

Income tax benefit 475,358 475,358
---------- ----------

Net income $ 880,649 $1,101,235
========== ==========

Net income available $ 830,649 $1,051,235
for common stock ========== ==========

Net income per common
share and common
share equivalent
Primary $ .33 $ .42
========== ==========
Fully Diluted $ .29 $ .36
========== ==========
</TABLE>

(1) To adjust consolidated revenue to exclude tuition revenue related to
PSI's child care centers.

(2) To adjust consolidated revenue to include the Administrative Fee under
the PSI Agreement ($50,000 annually).

(3) To adjust consolidated operating expenses to exclude those operating
expenses related to PSI's child care centers.

(4) To adjust consolidated expenses to exclude costs associated with
leasehold improvements, equipment, and furniture and fixtures that the
Company is reimbursed for by PSI pursuant to the Agreement.

F-9
<PAGE> 69
(4) PROPERTY AND EQUIPMENT:

Property and equipment and property and equipment leased to PSI consist of the
following:

<TABLE>
<CAPTION>
Property and
Property Equipment
and Equipment Leased to PSI
------------- -------------
<S> <C> <C>
Furniture and fixtures $ 520,132 $ 79,371
Equipment 951,990 179,459
Vehicles 478,086 --
Leasehold improvements 385,986 963,884
----------- -----------
2,336,194 1,222,714

Less-Accumulated depreciation and amortization (1,694,051) (708,588)
----------- -----------

$ 642,143 $ 514,126
=========== ===========
</TABLE>

(5) LINES OF CREDIT:

In January 1995, the Company replaced its $50,000 bank line of credit and its
$50,000 line of credit from the Company's president with three new bank lines
of credit: (i) a $200,000 working capital line secured by the Company's
accounts receivable, which bears interest at prime (8.75% at July 31, 1995)
plus 1.75%; (ii) a $200,000 line of credit for the purchase of equipment
secured by the Company's equipment, which bears interest at prime plus 2%, and;
(iii) a $100,000 revolving line of credit for the purchase of vehicles, which
bears interest at prime plus 2%. The bank lines of credit are guaranteed by
an officer of the Company. The amount available under the working capital line
was $200,000 at July 31, 1995.

The Company is required to meet certain covenants under these lines of credit,
including maintaining certain minimum net working capital balances and meeting
certain debt and interest coverage ratios. The terms of the lines of credit
also limit the ability of the Company to pay dividends without the consent of
the bank. At July 31, 1995, the Company was in compliance with all covenants of
the line of credit agreements.

These lines of credit are renewable each year on December 31. As of July 31,
1995, there were no borrowings under the working capital line or the equipment
line. Borrowings under the vehicle line consisted of drawdowns of $51,000
which were converted to a five-year notes payable.

During fiscal 1995, the weighted average interest rate under these lines of
credit was 9.5%. The Company expects to be able to renew the lines of credit
under similar terms in the future. However, if the credit lines are not
renewed, there is no assurance that they can be replaced.

F-10
<PAGE> 70
(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).

F-11
<PAGE> 71

For those leases that require fixed rental escalations during their lease terms,
rent expense is recognized on a straight-line basis resulting in deferred rent
of $513,028 at July 31, 1995. The liability will be satisfied through future
rental payments.

The Company pays no rent at 13 of its child care centers. However, profit
sharing arrangements exist with the owners of five of these facilities, four of
which are managed for PSI. Amounts paid by the Company during fiscal 1995 and
1994 relating to these agreements totaled $9,925 and $54,013, respectively, and
are included in facilities and maintenance in the accompanying consolidated
statements of income. The 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

F-12
<PAGE> 72
to which the Employee and his or her eligible beneficiaries were entitled
immediately prior to the date of termination. In addition, all options or
warrants to purchase common stock held by the Employee on the date of
termination become exercisable on the date of termination, regardless of any
vesting provisions, and remain exercisable for the longer of one year from the
date of termination or the then remaining unexpired term of such warrants or
options.

On April 14, 1995, the Company entered into an acquisition consulting and
investor relations agreement with a consultant. Pursuant to the agreement, the
consultant will provide various acquisition consulting and investor relations
services to the Company, including consulting with the Company on matters
involving the financial community. The agreement calls for monthly payments of
$3,000 for investor relations services until December 31, 1995, which increase
to $5,700 through December 31, 1996. The consultant also is to be paid an
acquisition consulting fee of $15,000 for each child care center acquired by
the Company during the term of the agreement. Pursuant to the agreement, the
Company granted the consultant, as additional consideration for consulting
services, a warrant to purchase 145,000 shares of the Company's common stock at
a price of $1.21875 per share and has agreed to reimburse the consultant for
certain expenses. The agreement terminates on December 31, 1996; however, the
agreement may be terminated for cause (as defined in the agreement) upon ten
days notice to the consultant.

(8) DEFERRED GAIN ON SALE AND LEASEBACK OF PRESCHOOL FACILITIES:

In 1988, the Company entered into sale and leaseback agreements for three
preschool facilities. The aggregate gain of $490,939 is being amortized as a
reduction of rent expense over the lease terms of ten and fifteen years. The
unamortized deferred gain on the sale and leaseback of these preschool
facilities was $177,654 at July 31, 1995.

(9) SHAREHOLDERS' EQUITY:

The Company's authorized capital stock consists of 10,000,000 shares of common
stock, par value $.01, and 1,000,000 shares of preferred stock par value $1.00.

SALE OF COMMON STOCK AND WARRANTS:

At July 31, 1995, the Company had warrants to purchase 1,000,000 shares of the
Company's common stock outstanding. The warrants were issued as part of the
Company's initial public offering in September 1987, and have an exercise price
of $5.00 per share. On September 20, 1995, the expiration date of the warrants
was extended until November 6, 1995 and the exercise price was reduced to $1.00
per share. As a condition of this extension and change in exercise price,
warrant holders will be able to exercise only one of every 16 warrants held or
a total of 62,500 warrants. No warrants have been exercised.

SERIES A PREFERRED STOCK:

On February 10, 1995, the Board of Directors adopted a shareholder rights plan
(the "Plan"), which authorized the distribution of one right to purchase one
one-thousandth of a share of $1.00 par value Series A Participating Preferred
Stock (a "Right") for each share of common stock of the Company. Rights will
become exercisable following the tenth day (or such later date as may be
determined by a majority of the Directors not affiliated with an acquiring
person or group) after a person or group (a) acquires beneficial ownership of
15% or more of the Company's common stock or (b) announces a tender or exchange
offer, the consummation of which would result in ownership by a person or group
of 15% or more of the Company's common stock.

F-13
<PAGE> 73

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.

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.

F-14
<PAGE> 74

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.

In addition, the Company's net operating loss carryforwards, which comprise 64%
of total deferred tax assets, at July 31, 1995, expire as follows:

<TABLE>
<S> <C>
2004 $ 561,982
2005 861,342
2006 564,007
------------

$ 1,987,331
============
</TABLE>

F-15
<PAGE> 75
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. See also
Note 7.

(12) EMPLOYEE BENEFIT PLANS:

1987 STOCK OPTION PLAN

The Company's Stock Option Plan (the 1987 Plan) was adopted by the
Board of Directors and approved by the stockholders in July 1987. Only
employees (including officers and directors, subject to certain limitations)
are eligible to receive options under the 1987 Plan, under which 240,000 shares
of

F-16
<PAGE> 76
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.

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.

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

F-17
<PAGE> 77
$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.

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
at end of year 610,000 $ .50 - $2.375
======== ================
Exercisable at end of year 316,641 $ .50 - $2.375
======== ================
Options available for
grant at end of year 230,000
========
</TABLE>

401(k) PLAN

In June 1995, the Company implemented a contributory retirement plan (the
401(k) Plan) for the majority of its employees with at least one year of
service. The 401(k) Plan is designed to provide tax-deferred income to the
Company's employees in accordance with the provisions of Section 401(k) of the
Code.

The 401(k) Plan provides that each participant may contribute up to 17% of their
salary, not to exceed the statutory limit. The Company will make a
fixed-matching contribution equal to 25% of each participant's contribution, up
to a maximum of 2% of total annual cash compensation received by respective
participants. Under the terms of the 401(k) Plan, the Company may also make
discretionary year-end contributions. Each participant has the right to direct
the investment of his or her funds among certain named plans.

F-18
<PAGE> 78
(13) SUBSEQUENT EVENTS:

The Company entered into a letter of intent for a $5 million, firm commitment
public offering of a new series of convertible preferred stock in October 1995.
The offering is presently scheduled to be completed in late November 1995. The
purpose of the offering is to provide funds for the expansion of the Company's
operations, both through the opening of additional Company facilities and the
possible acquisition of other child care centers.

In September 1995, the Company entered into an agreement in principle to
purchase the operations of two child care centers in Colorado. The transaction
is subject to certain conditions, including the negotiation of a definitive
agreement and renegotiation of the leases at the two centers. The acquisition
will be accounted for as a purchase in accordance with Accounting Principles
Board Opinion No. 16.

F-19
<PAGE> 79
INSIDE BACK COVER OF PROSPECTUS

[TOP PHOTO]

This photo shows a small girl playing with building blocks.
Caption: "Fostering learning through creativity."

[MIDDLE PHOTO]

This photo shows a Sunrise Preschool during construction.
Caption: "Early marketing during new school construction."

[LOWER PHOTO]

This photo shows a sign in front of a Sunrise Preschool
that depicts a corporate partnership child care program.
Caption: "Cooperative relationships at Sunrise."

[SUNRISE LOGO]

The logo of Sunrise Preschools is a drawing of the sun with sun rays.

TEXT ON INSIDE UPPER RIGHT HAND CORNER OF BACK COVER

"At Sunrise, children are encouraged to maximize their potential through a
well-planned curriculum developed to meet each child's individual needs.
Children gain feelings of positive self-worth and become active learners
through play in an environment which offers opportunity for problem solving,
challenges, and successes. Children at Sunrise also learn to better understand
and respect the feelings of others, as their own opinions and ideas are shared
and respected by caring, educated staff. Sunrise offers children exciting,
educational experiences that are a valuable supplement to the primary parental
education given at home.

Sunrise Preschools is a leader in providing specially designed spaces for
young children to feel welcome and comfortable. Equally important is our
staff's commitment to the Sunrise program and to the families of Sunrise. With
recognition and understanding of different cultural values, life patterns and
individual backgrounds, Sunrise Preschools is a valuable extension of the
family."

<PAGE> 80
================================================================================

NO DEALER, SALESMAN OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS WITH RESPECT TO THE
OFFERING MADE HEREBY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL ANY
OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO
WHOM, IT IS UNLAWFUL TO MAKE SUCH AN OFFER. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR
IN THE BUSINESS OF THE COMPANY SINCE THE DATE HEREOF.

______________________

<TABLE>
<CAPTION>
TABLE OF CONTENTS Page
----
<S> <C>
Available Information . . . . . . . . . . . . 2
Prospectus Summary . . . . . . . . . . . . . 3
Risk Factors . . . . . . . . . . . . . . . . 9
Dividends . . . . . . . . . . . . . . . . . . 11
Price Range of Securities . . . . . . . . . . 12
Use of Proceeds . . . . . . . . . . . . . . . 13
Capitalization . . . . . . . . . . . . . . . 14
Selected Historical and Pro Forma
Consolidated Financial Data . . . . . . . 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations . . . . . . . . . . . . . . 17
Business . . . . . . . . . . . . . . . . . . 22
Properties . . . . . . . . . . . . . . . . . 32
Management . . . . . . . . . . . . . . . . . 34
Executive Compensation . . . . . . . . . . . 35
Certain Transactions . . . . . . . . . . . . 40
Principal Stockholders . . . . . . . . . . . 41
Description of Securities . . . . . . . . . . 43
Underwriting . . . . . . . . . . . . . . . . 52
Legal Matters . . . . . . . . . . . . . . . . 54
Experts . . . . . . . . . . . . . . . . . . . 54
Financial Statements . . . . . . . . . . . . F-1
</TABLE>

================================================================================

333,333 SHARES OF SERIES C
PREFERRED STOCK

SUNRISE PRESCHOOLS, INC.

________________________________

PROSPECTUS

_______________________________

_________________, 1995

W.B. MCKEE SECURITIES, INC.

SOUTH COAST FINANCIAL
SECURITIES, INC.

================================================================================
<PAGE> 81
PART II TO FORM SB-2
INFORMATION NOT REQUIRED IN THE PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the estimated costs and expenses of the
Company in connection with the Offering other than underwriting discounts.

<TABLE>
<S> <C>
SEC Registration Fee . . . . . . . . . . . . . . . . . . . . . . $ 2,181
NASD Filing Fee . . . . . . . . . . . . . . . . . . . . . . . . . 1,132
NASD Listing Fee* . . . . . . . . . . . . . . . . . . . . . . . . 21,787
Legal Fees and Expenses* . . . . . . . . . . . . . . . . . . . . 85,000
Accounting Fees and Expenses* . . . . . . . . . . . . . . . . . . 35,000
Representative's Nonaccountable Expense Allowance . . . . . . . . 150,000**
Printing and Engraving Expenses* . . . . . . . . . . . . . . . . 10,000
Blue Sky Fees and Expenses* . . . . . . . . . . . . . . . . . . . 10,000
Miscellaneous* . . . . . . . . . . . . . . . . . . . . . . . . . 7,900
--------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $323,000***
========
</TABLE>
____________________

* Estimated
** $172,500 if Over-Allotment Option is exercised in full.
*** $345,500 if Over-Allotment Option is exercised in full.

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.

On April 14, 1995, the Company agreed to grant to its investor
relations agent, Miller Capital Corporation (d/b/a The Miller Group) ("TMG"), a
warrant to purchase 145,000 shares of Common

II-1

<PAGE> 82
Stock at a price of $1.21875 per share (the "Warrant"). The Warrant was granted
in consideration of investor relations services that TMG agreed to render to the
Company. The Warrant was issued in reliance on Section 4(2) of the Securities
Act.

ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) EXHIBITS.

Exhibit Page Number or
Number Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
1.1 Form of Underwriting Agreement *

1.2 Form of Agreement Among Underwriters *

3.1 Restated Certificate of Incorporation of Registrant Incorporated by reference
to exhibits to Form S-1
filed July 10, 1995

3.2 Certificate of Amendment to Restated Certificate *
of Incorporation

3.3 Certificate of Designation of Series B Preferred Incorporated by reference
Stock of Sunrise Preschools, Inc., dated to exhibits to Form 10-Q
November 21, 1991 filed on or about
December 16, 1991

3.4 Certificate of Designation of Series C Preferred **
Stock of Sunrise Preschools, Inc.

3.5 Bylaws of Registrant, as amended Incorporated by reference
to exhibits to Form S-1
filed July 10, 1987

4 Form of Certificate for Series C Preferred Stock **

5 Opinion and Consent of Squire, Sanders & Dempsey **

10.1 Lease Agreement dated January 31, 1983 between Incorporated by reference
Earl H. Jones and Venture Educational Programs, to exhibits to Form S-1
Inc. filed July 1, 1987

10.2 Lease Agreement dated April 1, 1984 between Incorporated by reference
McClintock Associates Limited Partnership, an to exhibits to Form S-1
Arizona limited partnership, and Venture filed July 10, 1987
Educational Programs, Inc.

</TABLE>

II-2

Exhibit Page Number or
Number Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
10.3 Lease Agreement dated October 24, 1986 between Incorporated by reference
Peoria Investment Company, Inc. an Arizona to exhibits to Form S-1
corporation, and Sunrise Preschools, Inc., an filed July 10, 1987
Arizona corporation

10.4 Lease Agreement dated October 16, 1986 between Sun Incorporated by reference
School I Limited Partnership, an Arizona limited to exhibits to Form S-1
partnership, and Sunrise Preschools, Inc., an filed July 10, 1987
Arizona corporation

10.5 Lease Agreement dated April 1, 1986, between Incorporated by reference
Sunrise Partners, an Arizona corporation, and to exhibits to Form S-1
Sunrise Preschools, Inc., an Arizona corporation filed July 10, 1987

10.6 Lease Agreement dated February 5, 1987, between Incorporated by reference
Sun School II Limited Partnership, an Arizona to exhibits to Form S-1
limited partnership, and Sunrise Preschools, Inc., filed July 10, 1987
an Arizona corporation

10.7 Lease Agreement dated June 26, 1987, between Huber Incorporated by reference
Farm Service of Phoenix, Inc., an Arizona to exhibits to Form S-1
corporation, and Sunrise Preschools, Inc., a filed July 10, 1987
Delaware corporation

10.8 Lease Agreement dated June 26, 1987, between Huber Incorporated by reference
Farm Service of Phoenix, Inc., an Arizona to exhibits to Form S-1
corporation, and Sunrise Preschools, Inc., a filed July 10, 1987
Delaware corporation

10.9 Equipment Lease between James R. Evans and Sunrise Incorporated by reference
Preschools, Inc. to exhibits to Form S-1
filed July 10, 1987

10.10 Lease Agreement, dated July 29, 1988, between Incorporated by reference
Sunrise Preschools, Inc. and Investad, Inc. to exhibits to Form 10-K
filed on or about October
31, 1988

10.11 Lease Agreement, dated July 25, 1988, between Incorporated by reference
Sunrise Preschools, Inc., and LV Properties, an to exhibits to Form 10-K
Arizona general partnership filed on or about October
31, 1988

</TABLE>
II-3
<PAGE> 84
<TABLE>
<CAPTION>
Exhibit Page Number or
Number Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
10.12 Lease Agreement, dated May 12, 1988, between Incorporated by reference
Sunrise Preschools, Inc. and Jaymark Komer and to exhibits to Form 10-K
Eugene Victor Komer and Ruth Lena Komer, as filed on or about October
Trustees of the Komer Family Trust dated December 31, 1988
30, 1980

10.13 Lease Agreement, dated July 29, 1988, between Incorporated by reference
Sunrise Preschools, Inc. and Kailua Beach Center, to exhibits to Form 10-K
Inc. filed on or about October
31, 1988

10.14 Lease Agreement, dated January 11, 1988, between Incorporated by reference
Sunrise Preschools, Inc. and Mercado Developers to exhibits to Form 10-K
filed on or about October
30, 1989

10.15 Amendment of Lease Agreement dated March 8, 1990 Incorporated by reference
between Sunrise Preschools, Inc. and Jaymark Komer to exhibits to Form 10-Q
and Komer Family Trust dated May 12, 1988 filed on or about January
31, 1990

10.16 Purchase Agreement and Registration Rights Incorporated by reference
Agreement dated April 6, 1990, between Sunrise to exhibits to Form 8-K
Preschools, Inc. and Lepercq Capital Management, filed on or about April
Inc. 20, 1990

10.17 Vehicle Use Agreement dated February 14, 1991 Incorporated by reference
between Sunrise Preschools, Inc. and James R. to exhibits to Form 10-K
Evans filed on or about October
28, 1991

10.18 Vehicle Use Agreement dated February 14, 1991 Incorporated by reference
between Sunrise Preschools, Inc. and Barbara L. to exhibits to Form 10-K
Owens filed on or about October
28, 1991

</TABLE>

II-4
<PAGE> 85

<TABLE>
<CAPTION>
Exhibit Page Number or
Number Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
10.19 Lease Agreement, dated July 1, 1991, between Incorporated by reference
Sunrise Preschools, Inc., and Maruni Arizona, Inc. to exhibits to Form 10-K
filed on or about
October 28, 1991

10.20 Purchase Agreement, dated November 18, 1991, Incorporated by reference
between Sunrise Preschools, Inc., LN Investment to exhibits to Form 10-Q
Capital Limited Partnership, Lepercq Investment filed on or about
Limited Partnership II and LN Investment Capital December 16, 1991
Limited Partnership II

10.21 Amendment of Lease, dated July 22, 1992, between Incorporated by reference
Sunrise Preschools, Inc. and Jaymark Komer and to exhibits to Form 10-K
Komer Family Trust filed on or about October
21, 1992

10.22 Management Agreement, dated November 14, 1993, Incorporated by reference
between United Church of Christ and Sunrise to exhibits to Form 10-KSB
Preschools, Inc. filed for the fiscal
year ended July 31, 1994

10.23 Vehicle Use Agreement dated June 15, 1993 between Incorporated by reference
Sunrise Preschools, Inc. and James R. Evans to exhibits to Form 10-KSB
filed on or about
October 8, 1993

10.24 Vehicle Use Agreement dated June 15, 1993 between Incorporated by reference
Sunrise Preschools, Inc. and Barbara L. Owens to exhibits to Form 10-KSB
filed on or about
October 8, 1993

10.25 Management Contract Agreement, dated January 4, Incorporated by reference
1993, between Charlie Siddle, a general to exhibits to Form 10-KSB
partnership doing business as the La Mancha filed on or about
Racquet Club, and Sunrise Preschools, Inc. October 8, 1993

10.26 Term Sheet Agreement, dated December 7, 1992, Incorporated by reference
between Joy of Christ Lutheran Church and Sunrise to exhibits to Form 10-KSB
Preschools, Inc. filed on or about
October 8, 1993

</TABLE>
II-5
<PAGE> 86

<TABLE>
<CAPTION>
Exhibit Page Number or
Number Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
10.27 Agreement between Lutheran Church of Honolulu and Incorporated by reference
Sunrise Preschools, Inc., dated May 19, 1993 to exhibits to Form 10-KSB
filed on or about
October 8, 1993

10.28 Contract Agreement, dated November 19, 1992, Incorporated by reference
between Phoenix Union High School District No. 210 to exhibits to Form 10-KSB
and Sunrise Preschools, Inc. filed on or about
October 8, 1993

10.29 Contract Renewal Agreement, dated July 1, 1993, Incorporated by reference
between Phoenix Union High School District No. 210 to exhibits to Form 10-KSB
and Sunrise Preschools, Inc. filed on or about
October 8, 1993

10.30 Employment Agreement between Sunrise Preschools, Incorporated by reference
Inc. and James R. Evans, dated October 15, 1993 to exhibits to Form 10-QSB
filed on or about
March 14, 1994

10.31 Employment Agreement between Sunrise Preschools, Incorporated by reference
Inc. and Barbara L. Owens, dated October 15, 1993 to exhibits to Form 10 QSB
filed on or about
March 14, 1994

10.32 Administrative Services Agreement, License, and Incorporated by reference
Equipment Lease, dated February 1, 1994, between to the exhibits to Form
Sunrise Preschools, Inc. and Preschool Services, 10-KSB for the fiscal
Inc. year ended July 31, 1994

10.33 Contract Renewal Agreement, dated June 20, 1994, Incorporated by reference
between Sunrise Preschools, Inc. and Phoenix Union to the exhibits to Form
High School District #210 10-KSB for the fiscal
year ended July 31, 1994

10.34 Contract Agreement, dated December 1, 1993, Incorporated by reference
between Sunrise Preschools, Inc. and the State of to the exhibits to Form
Hawaii Department of Human Services 10-KSB for the fiscal
year ended July 31, 1994
</TABLE>

II-6
<PAGE> 87
<TABLE>
<CAPTION>
Exhibit Page Number or
Number Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
10.35 Preferred Shares Rights Agreement, dated February Incorporated by reference
10, 1995, between Sunrise Preschools, Inc. and to exhibits to Form 8-K
American Securities Transfer, Incorporated, filed on or about
including the Certificate of Designation of February 10, 1995
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 Incorporated by reference
Sunrise Preschools, Inc. and James R. Evans, dated to the exhibits to Form
September 16, 1994 10-QSB filed on or about
March 10, 1995

10.37 First Amendment to Employment Agreement between Incorporated by reference
Sunrise Preschools, Inc. and Barbara L. Owens, to the exhibits to Form
dated September 16, 1994 10-QSB filed on or about
March 10, 1995

10.38 Loan Agreement dated January 24, 1995 between Incorporated by reference
Sunrise Preschools, Inc. and Bank One, Arizona, NA to the exhibits to Form
for the purchase of equipment 10-QSB filed on or about
March 10, 1995

10.39 Loan Agreement dated January 24, 1995 between Incorporated by reference
Sunrise Preschools, Inc. and Bank One, Arizona, NA to the exhibits to Form
for the purchase of vehicles 10-QSB filed on or about
March 10, 1995

10.40 Revolving Line of Credit Note and Loan Agreement Incorporated by reference
dated January 24, 1995 between Sunrise Preschools, to the exhibits to Form
Inc. and Bank One, Arizona, NA 10-QSB filed on or about
March 10, 1995

10.41 Acquisition Consulting and Investor Relations *
Agreement between Sunrise Preschools, Inc. and
Miller Capital Corporation, dated April 14, 1995

10.42 Second Amendment to Employment Agreement between *
Sunrise Preschools, Inc. and James R. Evans, dated
May 4, 1995

10.43 Second Amendment to Employment Agreement between *
Sunrise Preschools, Inc. and Barbara L. Owens,
dated May 4, 1995

</TABLE>

II-7
<PAGE> 88
<TABLE>
<CAPTION>
Exhibit Page Number or
Number Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
10.45 Form of Representatives' Warrants **

11 Computation of Per Share Earnings *

21 List of Subsidiaries *

23.1 Consent of Arthur Andersen LLP *

23.2 Consent of Squire, Sanders & Dempsey Included in Exhibit 5

24 Power of Attorney See Signature Page
</TABLE>

__________________

*Filed herewith.
**To be filed by Amendment.

ITEM 28. UNDERTAKINGS

1. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such indemnification by it
is against public policy as expressed in the Securities Act, and will be
governed by the final adjudication of such issue.

2. The undersigned small business issuer will: (i) for
determining any liability under the Securities Act, treat the information
omitted from the form of prospectus filed as a part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the small business issuer under Rule 424(b)(1), or (4) or 497(h) under
the Securities Act as part of this registration statement as of the time the
Commission declared it effective, and (ii) for determining any liability under
the Securities Act, treat each post-effective amendment that contains a form of
prospectus as a new registration statement, and that offering of the securities
at that time as the initial bona fide offering of those securities.

II-8

<PAGE> 89
SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Scottsdale and State of Arizona on October 23, 1995.

SUNRISE PRESCHOOLS, INC.
a Delaware corporation

By /s/ James R. Evans
-------------------------
James R. Evans, President

SPECIAL POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned,
constitutes and appoints JAMES R. EVANS and BARBARA L. OWENS, and each of them,
his or her true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Form SB-2 Registration Statement, and to file
the same with all exhibits thereto, and all documents in connection therewith,
with the Securities and Exchange Commission, granting such attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as he or she might or could
do in person, hereby ratifying and confirming all that such attorneys-in-fact
and agents, or each them, may lawfully do or cause to be done by virtue hereof.

In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed below by the following persons in the
capacities and on the dates stated.

<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ James R. Evans Chairman of the Board, and President October 23, 1995
- ---------------------- (Principal Executive Officer)
James R. Evans

/s/ Ronald J. O'Connor Controller (Principal Financial October 23, 1995
- ---------------------- Officer; Principal Accounting Officer)
Ronald J. O'Connor

/s/ Robert A. Rice Director October 23, 1995
- ----------------------
Robert A. Rice

/s/ Richard H. Hinze Director October 23, 1995
- ----------------------
Richard H. Hinze

/s/ Barbara L. Owens Director October 23, 1995
- ----------------------
Barbara L. Owens
</TABLE>

S-1
<PAGE> 90
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>

Exhibit Page Number or
Number Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
1.1 Form of Underwriting Agreement *

1.2 Form of Agreement Among Underwriters *

3.1 Restated Certificate of Incorporation of Registrant Incorporated by reference
to exhibits to Form S-1
filed July 10, 1995

3.2 Certificate of Amendment to Restated Certificate *
of Incorporation

3.3 Certificate of Designation of Series B Preferred Incorporated by reference
Stock of Sunrise Preschools, Inc., dated to exhibits to Form 10-Q
November 21, 1991 filed on or about
December 16, 1991

3.4 Certificate of Designation of Series C Preferred **
Stock of Sunrise Preschools, Inc.

3.5 Bylaws of Registrant, as amended Incorporated by reference
to exhibits to Form S-1
filed July 10, 1987

4 Form of Certificate for Series C Preferred Stock **

5 Opinion and Consent of Squire, Sanders & Dempsey **

10.1 Lease Agreement dated January 31, 1983 between Incorporated by reference
Earl H. Jones and Venture Educational Programs, to exhibits to Form S-1
Inc. filed July 1, 1987

</TABLE>

10.9 Equipment Lease between James R. Evans and Sunrise Incorporated by reference
Preschools, Inc. to exhibits to Form S-1
filed July 10, 1987

10.10 Lease Agreement, dated July 29, 1988, between Incorporated by reference
Sunrise Preschools, Inc. and Investad, Inc. to exhibits to Form 10-K
filed on or about October
31, 1988

</TABLE>
<PAGE> 92
<TABLE>
<CAPTION>
Exhibit Page Number or
Number Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
10.12 Lease Agreement, dated May 12, 1988, between Incorporated by reference
Sunrise Preschools, Inc. and Jaymark Komer and to exhibits to Form 10-K
Eugene Victor Komer and Ruth Lena Komer, as filed on or about October
Trustees of the Komer Family Trust dated December 31, 1988
30, 1980

10.13 Lease Agreement, dated July 29, 1988, between Incorporated by reference
Sunrise Preschools, Inc. and Kailua Beach Center, to exhibits to Form 10-K
Inc. filed on or about October
31, 1988

10.14 Lease Agreement, dated January 11, 1988, between Incorporated by reference
Sunrise Preschools, Inc. and Mercado Developers to exhibits to Form 10-K
filed on or about October
30, 1989

10.17 Vehicle Use Agreement dated February 14, 1991 Incorporated by reference
between Sunrise Preschools, Inc. and James R. to exhibits to Form 10-K
Evans filed on or about October
28, 1991

10.18 Vehicle Use Agreement dated February 14, 1991 Incorporated by reference
between Sunrise Preschools, Inc. and Barbara L. to exhibits to Form 10-K
Owens filed on or about October
28, 1991

</TABLE>

<PAGE> 93
<TABLE>
<CAPTION>
Exhibit Page Number or
Number Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
10.19 Lease Agreement, dated July 1, 1991, between Incorporated by reference
Sunrise Preschools, Inc., and Maruni Arizona, Inc. to exhibits to Form 10-K
filed on or about
October 28, 1991

10.23 Vehicle Use Agreement dated June 15, 1993 between Incorporated by reference
Sunrise Preschools, Inc. and James R. Evans to exhibits to Form 10-KSB
filed on or about
October 8, 1993

10.24 Vehicle Use Agreement dated June 15, 1993 between Incorporated by reference
Sunrise Preschools, Inc. and Barbara L. Owens to exhibits to Form 10-KSB
filed on or about
October 8, 1993

</TABLE>
<PAGE> 94
<TABLE>
<CAPTION>
Exhibit Page Number or
Number Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
10.27 Agreement between Lutheran Church of Honolulu and Incorporated by reference
Sunrise Preschools, Inc., dated May 19, 1993 to exhibits to Form 10-KSB
filed on or about
October 8, 1993

10.30 Employment Agreement between Sunrise Preschools, Incorporated by reference
Inc. and James R. Evans, dated October 15, 1993 to exhibits to Form 10-QSB
filed on or about
March 14, 1994

10.31 Employment Agreement between Sunrise Preschools, Incorporated by reference
Inc. and Barbara L. Owens, dated October 15, 1993 to exhibits to Form 10 QSB
filed on or about
March 14, 1994

<PAGE> 95
<TABLE>
<CAPTION>
Exhibit Page Number or
Number Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
10.35 Preferred Shares Rights Agreement, dated February Incorporated by reference
10, 1995, between Sunrise Preschools, Inc. and to exhibits to Form 8-K
American Securities Transfer, Incorporated, filed on or about
including the Certificate of Designation of February 10, 1995
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.

10.41 Acquisition Consulting and Investor Relations *
Agreement between Sunrise Preschools, Inc. and
Miller Capital Corporation, dated April 14, 1995

10.42 Second Amendment to Employment Agreement between *
Sunrise Preschools, Inc. and James R. Evans, dated
May 4, 1995

10.43 Second Amendment to Employment Agreement between *
Sunrise Preschools, Inc. and Barbara L. Owens,
dated May 4, 1995

</TABLE>

<PAGE> 96
<TABLE>
<CAPTION>
Exhibit Page Number or
Number Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
10.45 Form of Representatives' Warrants **

11 Computation of Per Share Earnings *

21 List of Subsidiaries *

23.1 Consent of Arthur Andersen LLP *

23.2 Consent of Squire, Sanders & Dempsey Included in Exhibit 5

24 Power of Attorney See Signature Page
</TABLE>

__________________

*Filed herewith.
**To be filed by Amendment.

<PAGE> 1

SUNRISE PRESCHOOLS, INC.

333,333 SHARES

UNDERWRITING AGREEMENT

____________________, 1995

W.B. McKee Securities, Inc.
South Coast Financial Securities, Inc.
(As Representatives of the several
Underwriters named in Schedule 1 hereto)
c/o W.B. McKee Securities, Inc.
3003 North Central Avenue, Suite 100
Phoenix, Arizona 85012

Dear Sirs:

Sunrise Preschools, Inc., a Delaware corporation (the "Company"),
hereby confirms its agreement (this "Agreement") with the several underwriters
named in Schedule 1 hereto (the "Underwriters"), for whom you have been duly
authorized to act as representatives (in such capacity, the "Representatives"),
as set forth below.

1. Securities. Subject to the terms and conditions herein contained, the
Company proposes to issue and sell to the Underwriters an aggregate of 333,333
shares (the "Firm Shares") of Series C Preferred Stock of the Company. The
Company also proposes to issue and sell to the several Underwriters not more
than 50,000 additional Shares if requested by the Representatives as provided in
Section 3.2 of this Agreement. Any and all Shares to be purchased by the
Underwriters pursuant to Section 3.2 of this Agreement are referred to herein as
the "Option Shares," and the Firm Shares and any Option Shares are collectively
referred to herein as the "Shares."

2. Representations and Warranties of the Company.

2.1 Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, each of the several Underwriters
that:

2.1.1 A registration statement on Form SB-2 (File No.
33-________) with respect to the Shares, including a prospectus subject to
completion, has been filed by the Company in conformity with the requirements of
the Securities and Exchange Commission (the "Commission") under the Securities
Act of 1933, as amended (the "Act"), and one or more amendments to such
registration statement may have been so filed. After the execution of this
Agreement, the Company will file with the Commission either (i) if such
registration statement,

EXHIBIT 1.1
<PAGE> 2
as it may have been amended, has been declared by the Commission to be effective
under the Act, a prospectus in the form most recently included in an amendment
to such registration statement (or, if no such amendment shall have been filed,
in such registration statement), with such changes or insertions as are required
by Rule 430A under the Act or permitted by Rule 424(b) under the Act and as have
been provided to and approved by the Representatives prior to the execution of
this Agreement, or (ii) if such registration statement, as it may have been
amended, has not been declared by the Commission to be effective under the Act,
an amendment to such registration statement, including a form of prospectus, a
copy of which amendment has been furnished to and approved by the
Representatives prior to the execution of this Agreement. As used in this
Agreement, the term "Registration Statement" means such registration statement,
as amended at the time when it was or is declared effective, including all
financial schedules and exhibits thereto and including any information omitted
therefrom pursuant to Rule 430A under the Act and included in the Prospectus (as
hereinafter defined); the term "Preliminary Prospectus" means each prospectus
subject to completion filed with such registration statement or any amendment
thereto (including the prospectus subject to completion, if any, included in the
Registration Statement or any amendment thereto at the time it was or is
declared effective); and the term "Prospectus" means the prospectus first filed
with the Commission pursuant to Rule 424(b) under the Act or, if no prospectus
is required to be filed pursuant to said Rule 424(b), such term means the
prospectus included in the Registration Statement.

2.1.2 Neither the Commission nor the "blue sky" or securities
authority of any jurisdiction has issued any order preventing or suspending the
use of any Preliminary Prospectus. When any Preliminary Prospectus was filed
with the Commission it (i) contained all statements required to be stated
therein in accordance with, and complied in all material respects with the
requirements of, the Act and the rules and regulations of the Commission
thereunder and (ii) did not include any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. When the Registration Statement or any amendment thereto was or is
declared effective, it (i) contained or will contain all statements required to
be stated therein in accordance with, and complied or will comply in all
material respects with the requirements of, the Act and the rules and
regulations of the Commission thereunder and (ii) did not or will not include
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading. When the Prospectus or
any amendment or supplement thereto is filed with the Commission pursuant to
Rule 424(b) (or, if the Prospectus or such amendment or supplement is not
required to be so filed, when the Registration Statement or the amendment
thereto containing such amendment or supplement to the Prospectus was or is
declared effective) and on the Closing Date the Prospectus, as amended or
supplemented at any such time, (i) contained or will contain all statements
required to be stated therein in accordance with, and complied or will comply
in all material respects with the requirements of, the Act and the rules and
regulations of the Commission thereunder and (ii) did not or will not include
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The foregoing
provisions of this Section 2.1.2 do not apply to statements or omissions made
in any Preliminary Prospectus, the Registration Statement or any amendment
thereto or the Prospectus or any

2
<PAGE> 3

amendment or supplement thereto in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through the
Representatives specifically for use therein.

2.1.3 Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the state of its jurisdiction of incorporation and is duly qualified to
transact business as a foreign corporation and is in good standing under the
laws of all other jurisdictions where the ownership or leasing of its properties
or the conduct of its business requires such qualification, except where the
failure to be so qualified does not amount to a material liability or disability
to it.

2.1.4 Each of the Company and its subsidiaries has full power
(corporate and other) to own or lease its properties and conduct its business as
described in the Registration Statement and the Prospectus or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus; and the Company has
full power (corporate and other) to enter into this Agreement and to carry out
all the terms and provisions hereof to be carried out by it.

2.1.5 Other than the subsidiaries of the Company listed in
Exhibit 21 to the Registration Statement, the Company has no subsidiaries and
does not own any shares of stock or any other equity interest in any firm,
partnership, association or other entity.

2.1.6 The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus. All of the issued shares of
capital stock of the Company have been duly authorized and validly issued and
are fully paid and nonassessable. The Shares have been duly authorized and at
the Closing Date after payment therefor in accordance herewith will be validly
issued, fully paid and nonassessable. No person is entitled to have such
securities registered under the Registration Statement.

2.1.7 The capital stock of the Company conforms to the
description thereof contained in the Prospectus or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus.

2.1.8 The Company is the lawful owner of the Shares to be
offered and sold by the Company hereunder and upon sale and delivery of, and
payment for, such Shares, as provided herein, the Company will convey to the
purchasers thereof good and marketable title to such Shares, free and clear of
any security interests, liens, encumbrances, equities, claims or other defects.

2.1.9 The Company has not taken and will not take, directly or
indirectly, any action designed to cause or result in, or which has constituted
or might reasonably be expected to cause or result in the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Shares or Common Stock of the Company (the "Common Stock").

3
<PAGE> 4

2.1.10 The Company has not since the filing of the Registration
Statement (i) sold, bid for, purchased, attempted to induce any person to
purchase, or paid anyone any compensation for soliciting purchases of, the
Shares or (ii) paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Company (except for
the sale of Shares by the Company under this Agreement).

2.1.11 The financial statements and schedules of the Company
included in the Registration Statement and the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus) fairly present the
financial position of the Company and the results of operations and changes in
financial condition as of the dates and periods therein specified. Such
financial statements and schedules have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved (except as otherwise noted therein) and include all financial
information required to be included by the Act. The selected financial data set
forth under the captions "Summary Financial Data," "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations" in the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus) fairly present, on the
basis stated in the Prospectus (or such Preliminary Prospectus), the information
included therein.

2.1.12 Arthur Andersen LLP, who have certified certain of the
financial statements of the Company and delivered their report with respect to
the audited financial statements and schedules included in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus), are independent public accountants as
required by the Act and the applicable rules and regulations thereunder.

2.1.13 The execution and delivery of this Agreement and
consummation of the transactions contemplated herein have been duly authorized
by the Company and this Agreement has been duly executed and delivered by the
Company and constitutes the legal, valid and binding obligations of the Company,
enforceable against it in accordance with the terms thereof, except as may be
limited by public policy considerations.

2.1.14 No legal or governmental proceedings are pending to which
the Company or any of its subsidiaries is a party or to which the property of
the Company or any of its subsidiaries is subject that are required to be
described in the Registration Statement or the Prospectus and are not described
therein (or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus), and, to the best knowledge of the Company, after due inquiry, no
such proceedings have been threatened against the Company or any of its
subsidiaries or with respect to any of their respective properties; and no
contract or other document is required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the Registration
Statement that is not described therein (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) or filed as required.

2.1.15 The issuance, offering and sale of the Shares by the
Company pursuant to this Agreement, the compliance by the Company with the other
provisions of this Agreement and the consummation of the other transactions
herein contemplated do not (i) require

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<PAGE> 5

the consent, approval, authorization, registration or qualification of or with
any governmental authority, except such as have been obtained, such as may be
required under state securities or blue sky laws and, if the registration
statement filed with respect to the Shares (as amended) is not effective under
the Act as of the time of execution hereof, such as may be required (and shall
be obtained as provided in this Agreement) under the Act, or (ii) conflict with
or result in a breach or violation of any of the terms and provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, lease or
other agreement or instrument to which the Company or any of its subsidiaries is
a party or by which the Company or any of its subsidiaries or any of their
properties is bound, or the charter documents or bylaws of the Company, or any
statute or any judgment, decree, order, rule or regulation of any court or other
governmental authority or any arbitrator applicable to the Company or any of its
subsidiaries.

2.1.16 Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus), (i)
the Company has not incurred any material liability or obligation, direct or
contingent, nor entered into any material transaction not in the ordinary course
of business; (ii) the Company has not purchased any of its outstanding capital
stock, nor declared, paid or otherwise made any dividend or distribution of any
kind on its capital stock; and (iii) there has not been any material change in
the capital stock, short-term debt or long-term debt of the Company, except in
each case as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).

2.1.17 The Company owns the trademarks described in the
Prospectus (or if the Prospectus is not in existence, the most recent
Preliminary Prospectus). The Company owns or possesses, or can acquire on
reasonable terms, all material patents, patent applications, trademarks (other
than those referred to above), service marks, trade names, licenses, copyrights
and proprietary or other confidential information currently employed by it in
connection with its business and the Company has not received any notice of
infringement of or conflict with asserted rights of any third party with respect
to any of the foregoing trademarks which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding would result in a material
adverse change in the condition (financial or otherwise), business prospects,
net worth or results of operations of the Company, except as described in or
contemplated by the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).

2.1.18 The Company possesses all certificates, authorizations
and permits issued by the appropriate federal, state or foreign regulatory
authorities necessary to conduct its business, and the Company has not received
any notice of proceedings relating to the revocation or modification of any such
certificate, authorization or permit which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in a
material adverse change in the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company, except as
described in or contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).

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<PAGE> 6

2.1.19 Except as described in the Registration Statement and in
the Prospectus or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus, there are no outstanding (i) securities or obligations
of the Company convertible into or exchangeable for any capital stock of the
Company, (ii) warrants, rights or options to subscribe for or purchase from the
Company any such capital stock or any such convertible or exchangeable
securities or obligations, or (iii) obligations of the Company to issue such
shares, any such convertible or exchangeable securities or obligations, or any
such warrants, rights or obligations.

2.1.20 The Company is not in breach of any term or provision of
its Certificate of Incorporation or Bylaws; no default exists, and no event has
occurred which with notice or lapse of time or both, would constitute a default,
in the due performance and observance of any term, covenant or condition of any
indenture, mortgage, deed of trust, lease, note, bank loan or credit agreement
or any other agreement or instrument to which the Company or its properties may
be bound or affected in any respect which would have a material adverse effect
on the condition (financial or otherwise), business, properties, prospects, net
worth or result of operations of the Company.

2.1.21 Except as disclosed in the Registration Statement and in
the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), the Company has no knowledge that it or any of its
subsidiaries is in violation of any laws, ordinances, governmental rules or
regulations to which it is subject which would have a material adverse effect on
the condition (financial or otherwise), business, properties, prospects, net
worth or results of operations of the Company.

2.1.22 The Company and each of its subsidiaries has good and
marketable title to all items of personal property owned by it, free and clear
of any security interest, liens, encumbrances, equities, claims and other
defects, except such as do not materially and adversely effect the value of such
property and do not interfere with the use made or proposed use to be made of
such property by the Company or its subsidiaries, and any real property and
buildings held under lease by the Company or any of its subsidiaries are held
under valid, subsisting and enforceable leases, with such exceptions as are not
material and do not interfere with the use made or proposed to be made of such
property and buildings by the Company or its subsidiaries, except as described
in or contemplated by the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus).

2.1.23 Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), and
except as may otherwise be indicated or contemplated herein or therein, (i) the
Company has not entered into any transaction with an affiliate of the Company or
declared, paid or made any dividend or distribution of any kind on or in
connection with any class of its capital stock, and (ii) the Company has no
knowledge of any transaction between any affiliate of the Company and any
significant customer or supplier of the Company, except in its ordinary course
of business.

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<PAGE> 7

2.1.24 The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.

2.1.25 The Company knows of no outstanding claims for services
in the nature of a finder's fee or origination fee or other compensation on
account of the employment of a broker or finder in connection with the
transactions contemplated by this Agreement.

2.1.26 The Company conducts its operations in a manner that does
not subject it to registration as an investment company under the Investment
Company Act of 1940, as amended, and the transactions contemplated by this
Agreement will not cause the Company to become an investment company subject to
registration under the Investment Company Act of 1940, as amended.

2.1.27 The Company and each of its subsidiaries is insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as are prudent and customary in the business in which it is
engaged; the Company and each of its subsidiaries has not been refused any
insurance coverage sought or applied for; and the Company has no reason to
believe that it or its subsidiaries will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its business at a
cost that would not materially and adversely affect the condition (financial or
otherwise), business prospects, net worth or results of operations of the
Company and its subsidiaries, except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).

2.1.28 The Company has filed all foreign, federal, state and
local tax returns that are required to be filed or has requested extensions
thereof (except in any case in which the failure so to file would not have a
material adverse effect on the Company (and has paid all taxes required to be
paid by it and any other assessment, fine or penalty levied against it, to the
extent that any of the foregoing is due and payable, except for any such
assessment, fine or penalty that is currently being contested in good faith or
as described in or contemplated by the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus).

2.1.29 The Company has obtained from each of its directors and
officers his or her enforceable written agreement that for a period of one year
from the date of the Prospectus he or she will not, without the Representatives'
prior written consent, offer, pledge, sell, contract to sell, grant any option
for the sale or otherwise dispose of, directly or indirectly, any shares of
Common Stock or any security which by its terms is convertible into, exercisable
or exchangeable for shares of Common Stock of the Company.

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<PAGE> 8

2.1.30 The Company is current in all of its filings required
under the Securities and Exchange Act of 1934, as amended (the "Exchange Act").

2.1.31 Each certificate signed by any officer of the Company and
delivered to the Representatives or counsel for the Underwriters shall be deemed
to be a representation and warranty by the Company to each Underwriter as to the
matters covered thereby.

3. Purchase Sale and Delivery of the Shares.

3.1 On the basis of the representations, warranties, agreements and
covenants herein contained and subject to the terms and conditions herein set
forth, the Company agrees to issue and sell to each of the Underwriters, and
each of the Underwriters, severally and not jointly, agrees to purchase from the
Company, at a purchase price of $__________ per Share, the number of Firm Shares
set forth opposite the name of such Underwriter in Schedule 1 hereto. One or
more certificates in definitive form for the Firm Shares that the several
Underwriters have agreed to purchase hereunder, and in such denomination or
denominations and registered in such name or names as the Representatives shall
request upon notice to the Company at least 48 hours prior to the Firm Closing
Date, shall be delivered by or on behalf of the Company to the Representatives
for the respective accounts of the Underwriters, against payment by or on behalf
of the Underwriters of the purchase price therefor by either wire transfer of
immediately available funds or certified or official bank check or checks drawn
upon or by a California Clearing House bank and payable in next day funds to the
order of the Company. Delivery of the documents, certificates and opinions
described in Section 8 of this Agreement and payment for the Firm Shares and
delivery of the Firm Shares shall be made at the offices of W.B. McKee
Securities, Inc., 3003 North Central Avenue, Suite 100, Phoenix, Arizona 85012,
at 6:30 a.m., California time, on the [fifth] full business day following the
date hereof, or at such other places, time or date as the Representatives and
the Company may agree upon or as the Representatives may determine pursuant to
Section 8 hereof, such time and date of delivery against payment being herein
referred to as the "Firm Closing Date." The Company will make such certificate
or certificates for the Firm Shares available for checking and packaging by the
Representatives at the offices of the Company's transfer agent or registrar (or
the correspondent or the agent of the Company's transfer agent or registrar) at
least 24 hours prior to the Firm Closing Date.

3.2 For the purpose of covering any over-allotments in connection
with the distribution and sale of the Firm Shares as contemplated by the
Prospectus, the Company hereby grants to the several Underwriters an option to
purchase, severally and not jointly, the Option Shares. The purchase price to be
paid for any Option Shares shall be the same price per share as the price per
share for the Firm Shares set forth above in Section 3.1, plus, if the purchase
and sale of any Option Shares take place after the Firm Closing Date and after
the Firm Shares are trading "ex-dividend," an amount equal to the dividends
payable on such Option Shares. The option granted hereby may be exercised as to
all or any part of the Option Shares from time to time within forty-five days
after the date of the Prospectus. The Underwriters shall not be under any
obligation to purchase any of the Option Shares prior to the exercise of such
option.

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<PAGE> 9

The Representatives may from time to time exercise the option granted hereby by
giving notice in writing or by telephone (confirmed in writing) to the Company
setting forth the aggregate number of Option Shares as to which the several
Underwriters are then exercising the option and the date and time for delivery
of and payment for such Option Shares. Any such date of delivery shall be
determined by the Representatives but shall not be earlier than two business
days or later than seven business days after such exercise of the option and, in
any event, shall not be earlier than the Firm Closing Date. The time and date
set forth in such notice, or such other time on such other dates as the
Representatives and the Company may agree upon or as the Representatives may
determine pursuant to Section 9 hereof, is herein called the "Option Closing
Date" with respect to such Option Shares. Upon each exercise of the option as
provided herein, the Company shall become obligated to sell to each of the
several Underwriters, and, subject to the terms and conditions herein set forth,
each of the Underwriters (severally and not jointly) shall become obligated to
purchase from the Company, the same percentage of the total number of the Option
Shares as to which the several Underwriters are then exercising the option as
such Underwriter is obligated to purchase of the aggregate number of Firm
Shares, as adjusted by the Representatives in such manner as it deems advisable
to avoid fractional shares. If the option is exercised as to all or any portion
of the Option Shares, one or more certificates in definitive form for such
Option Shares, and payment therefor, shall be delivered on the related Option
Closing Date in the manner, and upon the terms and conditions, set forth in
Section 3.1, except that reference therein to the Firm Shares and the Firm
Closing Date shall be deemed, for purposes of this Section 3.2, to refer to such
Option Shares and Option Closing Date, respectively,

3.3 It is understood that you, individually and not as the
Representatives, may (but shall not be obligated to) make payment on behalf of
any Underwriter or Underwriters for any of the Shares to be purchased by such
Underwriter or Underwriters. No such payment shall relieve such Underwriter or
Underwriters from any of its of their obligations hereunder.

4. Offering by the Underwriters. Upon the Company's authorization of the
release of the Firm Shares the several Underwriters propose to offer such Shares
for sale to the public upon the terms set forth in the Prospectus. If the option
set forth in Section 3.2 of this Agreement is exercised, then upon the Company's
authorization of the release of the Option Shares the several Underwriters
propose to offer such Shares for sale to the public upon the terms set forth in
the Prospectus.

5. Covenants of the Company. Except as otherwise stated below, the
Company covenants and agrees with each of the Underwriters that:

5.1 The Company will use its best efforts to cause the Registration
Statement, if not effective at the time of execution of this Agreement, and any
amendments thereto, to become effective as promptly as possible. If required,
the Company will file the Prospectus and any amendment or supplement thereto
with the Commission in the manner and within the time period required by Rule
424(b) under the Act. During any time when a prospectus relating to the Shares
is required to be delivered under the Act, the Company (i) will comply with all
requirements imposed upon it by the Act and the rules and regulations of the
Commission

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<PAGE> 10

thereunder to the extent necessary to permit the continuance of sales of or
dealings in the Shares in accordance with the provisions hereof and of the
Prospectus, as then amended or supplemented, and (ii) will not file with the
Commission the prospectus or the amendment referred to in the second sentence of
Section 2.1.1 hereof, any amendment or supplement to such prospectus or any
amendment to the Registration Statement of which the Representatives shall not
previously have been advised and furnished with a copy for a reasonable period
of time prior to the proposed filing and as to which filing the Representatives
shall not have given their consent. The Company will prepare and file with the
Commission, in accordance with the rules and regulations of the Commission,
promptly upon request by the Representatives or counsel for the Underwriters,
any amendments to the Registration Statement or amendments or supplements to the
Prospectus that may be necessary or advisable in connection with the
distribution of the Shares by the several Underwriters, and the Company will use
its best efforts to cause any such amendment to the Registration Statement to be
declared effective by the Commission as promptly as possible. The Company will
advise the Representatives, promptly after receiving notice thereof, of the time
when the Registration Statement or any amendment thereto has been filed or
declared effective or the Prospectus or any amendment or supplement thereto has
been filed and will provide evidence satisfactory to the Representatives of each
such filing or effectiveness.

5.2 The Company will advise the Representatives, promptly after
receiving notice of obtaining knowledge thereof, of (i) the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or any amendment thereto or any order preventing or suspending the use
of any Preliminary Prospectus of the Prospectus or any amendment or supplement
thereto, (ii) the suspension of the qualification of the Shares for offering or
sale in any jurisdiction, (iii) the institution, threatening or contemplation of
any proceeding for any such purpose or (iv) any request made by the Commission
for amending the Registration Statement, for amending or supplementing the
Prospectus or for additional information. The Company will use its best efforts
to prevent the issuance of any such stop order and, if any such stop order is
issued to obtain the withdrawal thereof as promptly as possible.

5.3 The Company will arrange for the qualification of the Shares for
offering and sale under the securities or blue sky laws of such jurisdictions as
the Representatives may designate and will continue such qualifications in
effect for as long as may be necessary to complete the distribution of the
Shares; provided, however, that in connection therewith the Company shall not be
required to qualify as a foreign corporation or to execute a general consent to
service of process in any jurisdiction.

5.4 If, at any time when a prospectus relating to the Shares is
required to be delivered under the Act, any event occurs as a result of which
the Prospectus, as then amended or supplemented, would include any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, or if for any other reason it is necessary at
any time to amend or supplement the Prospectus to comply with the Act or the
rules or regulations of the Commission thereunder, the Company will promptly
notify the Representatives thereof and, subject to Section 6.1 hereof, will
prepare and file with the Commission, at the Company's

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<PAGE> 11

expense, an amendment to the Registration Statement or an amendment or
supplement to the Prospectus that corrects such statement or omission or effects
such compliance.

5.5 The Company will, without charge, provide (i) to the
Representatives and to counsel for the Underwriters a signed copy of the
Registration Statement originally filed with respect to the Shares and each
amendment thereto (in each case including exhibits thereto), (ii) to each other
Underwriter, a conformed copy of such Registration Statement and each amendment
thereto (in each case without exhibits thereto) and (iii) so long as a
prospectus relating to the Shares is required to be delivered under the Act, as
many copies of each Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto as the Representatives may reasonably request. The Company
will provide or cause to be provided to the Representatives, and to each
Underwriter that so requests in writing a copy of each report on Form SR filed
by the Company from time to time as required by Rule 463 under the Act.

5.6 The Company will, as soon as practicable but in any event no
later than 90 days after the period covered thereby, make generally available to
its security holders and to the Representatives a consolidated earnings
statement of the Company and its subsidiaries that satisfies the provisions of
Section 11(a) of the Act and Rule 158 thereunder covering a twelve-month period
beginning not later than the first day of the Company's fiscal quarter next
following the effective date of the Registration Statement.

5.7 The Company will apply the net proceeds from the sale of the
Shares as set forth in the Prospectus and Registration Statement and will not
take any action that would cause it to become an investment company under the
Investment Company Act of 1940, as amended.

5.8 The Company will retain an investor relations firm, approved by
the Representatives, for a minimum of 12 months from the date hereof.

5.9 The Company will cause the Shares to be duly included for
quotation on the [National Association of Securities Dealers Automated
Quotations National Market System] prior to the Closing Date. The Company will
use its best efforts to ensure that the Shares remain included for quotation on
the [National Association of Securities Dealers Automated Quotation National
Market System] following the Closing Date.

5.10 So long as any Common Stock or Preferred Stock is outstanding
until five years after the Closing Date the Company will furnish to the
Representatives (i) as soon as available a copy of each report of the Company
mailed to shareholders and filed with the Commission and (ii) from time to time
such other information concerning the Company as the Representatives may
reasonably request.

5.11 At or prior to the Closing, the Company will deliver to the
Representatives true and correct copies of the Certificate of Incorporation of
the Company and all amendments thereto, all such copies to be certified by the
Secretary of State of the State of Delaware; a good standing certificate from
the Secretary of State of Delaware dated no more than two business

11
<PAGE> 12

days prior to the Closing Date; true and correct copies of the bylaws of the
Company, as amended, certified by the Secretary of the Company and true and
correct copies of the minutes of all meetings of the directors and stockholders
of the Company held prior to the Closing Date which in any way relate to the
subject matter of this Agreement.

5.12 On or prior to the Closing Date, the Company will sell to the
Representatives, individually and not as representatives of the Underwriters,
warrants (the "Underwriters' Warrant") to purchase __________ Shares upon the
terms set forth in the Warrant Agreement to be entered into between the Company
and the Representatives on or prior to the Closing Date (the "Underwriters'
Warrant Agreement") for [$100.00].

5.13 At all times prior to the Closing Date, the Company will
cooperate with the Representatives in such investigation as the Representatives
may make or cause to be made of all the properties, business and operations of
the Company in connection with the purchase and public offering of the Shares
and the Company will make available to the Representatives in connection
therewith such information in its possession as the Representatives may
reasonably request.

5.14 No offering, sale or other disposition of any Preferred Stock,
Common Stock, equity or long-term debt (other than the issuance of any shares of
Common Stock upon exercise of options granted under the Company's stock plans or
conversion of the Series B Preferred Stock and Series C Preferred Stock, and
exercise of the Underwriter's Warrant as described in the Registration
Statement), and no purchase of any Common Stock or equity security of Company
will be made within the one year period after the effective date of the
Registration Statement, directly or indirectly, by the Company, otherwise than
hereunder or with the Representatives' consent.

5.15 The Company has appointed American Securities Transfer,
Incorporated as Transfer Agent for the Shares. The Company will not change or
terminate such appointment for a period of two years from the effective date
without first obtaining the written consent of the Representatives, which
consent shall not be unreasonably withheld.

5.16 Prior to the Closing Date, the Company shall not issue any press
release or other communication directly or indirectly and shall hold no press
conference with respect to the Company, its financial condition, results of
operations, business, properties, assets, liabilities and any of them, or this
offering, without the prior written consent of the Representatives.

6. Right of First Refusal.

6.1 Consultation with Representatives. For a period of three years
from the date of the definitive prospectus, the Company agrees to consult with
the Representatives in respect of any prospective or actual public or private
offering of securities of the Company for cash other than to employees.

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<PAGE> 13

6.2 Right of First Refusal. For a period of three years from the date
of this Agreement, the Company will not enter into an agreement for any public
or private offering for cash (other than to employees) of any debt or equity
securities of the Company to or through any person, firm or corporation other
than South Coast Financial Securities, Inc. ("South Coast") unless and until the
Company shall have first negotiated for the sale of the Company's securities
with or offered to sell its securities to South Coast. The Company shall notify
South Coast in writing of the Company's intention to offer its securities in a
covered offering and the terms (including the price to South Coast or other
method of determining the underwriting discount or fee) and conditions of the
proposed offering. South Coast shall then have 10 days from the date it receives
such written notice from the Company to decide whether it wishes to participate
as manager, co-manager, or otherwise, as determined by it in the proposed
offering. If South Coast determines that it does not wish to participate in the
proposed offering, then it shall so notify the Company of its intention in
writing not later than 30 days from the receipt of notice from the Company, and
then the Company may within a period of 90 days from the date of receipt of such
notice from South Coast enter into a letter of intent for the public sale or, as
appropriate, a contract for the private sale, of any of its securities through
any other person, firm or corporation on the same general terms and conditions
as those which were tendered to South Coast; provided, however, as to a public
offering, if a definitive underwriting agreement with a firm commitment is not
executed by the Company with such third party within 180 days thereafter, all
the rights of South Coast hereunder shall be reinstated. Nothing in this
Agreement shall be construed as granting the continuation of such preferential
right on the part of South Coast beyond such three-year period. The Company
shall not be required to consult with South Coast concerning any borrowings from
banks and institutional lenders or concerning financing under any equipment
leasing or similar arrangements.

7. Expenses. The Company will pay upon demand all costs and expenses
incident to the performance of the Company's obligations under this Agreement,
whether or not the transactions contemplated herein are consummated or this
Agreement is terminated pursuant to Section 11 hereof, including all costs and
expenses incident to (i) the printing or other production of documents with
respect to the transactions, including any costs of printing the Registration
Statement originally filed with respect to the Shares and any amendment thereto,
any Preliminary Prospectus and the Prospectus and any amendment or supplement
thereto, this Agreement, the Agreement Among Underwriters among the
Representatives, the Underwriters and certain other parties thereto, the
Selected Dealer Agreement among the Representatives, the Underwriters and
certain other parties thereto, and any blue sky memoranda, (ii) all arrangements
relating to the delivery to the Underwriters of copies of the foregoing
documents, (iii) the fees and disbursements of the counsel, the accountants and
any other experts or advisors retained by the Company, (h) preparation, issuance
and delivery to the Underwriters of any certificates evidencing the Shares,
including transfer agent's and registrar's fees, (v) the qualification of the
Shares under state securities and blue sky laws, including filing fees and fees
and disbursements of counsel for the Underwriters relating thereto, (vi) the
filing fees of the Commission and the National Association of Securities
Dealers, Inc. relating to the Shares, (vii) any quotation of the Shares on the
[National Association of Securities Dealers Automated Quotation National Market
System], (viii) any meetings with prospective investors in the Shares (other
than as shall have been specifically approved in writing by the Representatives
to be paid

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<PAGE> 14

for by the Underwriters) and the cost of "tombstone" advertisements in
publications designated by you, (ix) all other advertising relating to the
offering of the Shares (other than as shall have been specifically approved in
writing by the Representatives to be paid for by the Underwriters). In
addition to the foregoing, the Company shall pay the Representatives a
non-accountable expense allowance equal to 3.0% of the gross sales price of the
Shares to the public set forth on the cover page of the Prospectus. This
non-accountable expense allowance with respect to the Firm Shares shall be paid
to the Representatives on the Firm Closing Date and the non-accountable
expenses with respect to the Option Shares shall be paid to the Representatives
on the Option Closing Date. If the sale of the Shares provided for herein is
not consummated because any condition to the obligations of the Underwriters
set forth in Section 8 hereof is not satisfied, because this Agreement is
terminated pursuant to Section 11 hereof or because of any failure, refusal or
inability on the part of the Company to perform all obligations and satisfy all
conditions on its part to be performed or satisfied hereunder other than by
reason of a default by any of the Underwriters, the Company will reimburse the
Underwriters severally upon demand for all out-of-pocket expenses (including
counsel fees and disbursements) that shall have been incurred by them in
connection with the proposed purchase and sale of the Shares. The Company
shall in no event be liable to any of the Underwriters for the loss of
anticipated profits from the transactions covered by this Agreement.

8. Conditions of the Underwriters' Obligations. Your obligations
to use your best efforts to sell the Shares is provided herein shall be
subject, in the Representatives' sole discretion, to the accuracy of the
representations and warranties of the Company contained herein as of the date
hereof and as of the Closing Date as if made on and as of the Closing Date, to
the accuracy of the statements of the Company's officers made pursuant to the
provisions hereof, to the performance by the Company of its covenants and
agreements hereunder and to the following additional conditions:

8.1 If the Registration Statement or any amendment
thereto filed prior to the Closing Date has not been declared effective as of
the time of execution hereof, the Registration Statement or such amendment
shall have been declared effective not later than 11:00 a.m., Arizona time, on
the date on which the amendment to the Registration Statement originally filed
with respect to the Shares or to the Registration Statement, as the case may
be, containing information regarding the initial public offering price of the
Shares has been filed with the Commission, or such later time and date as shall
have been consented to by the Representatives; if required, the Prospectus and
any amendment or supplement thereto shall have been filed with the Commission
in the manner and within the time period required by Rule 424(b) under the Act;
no stop order suspending the effectiveness of the Registration Statement or any
amendment thereto shall have been issued, and no proceedings for that purpose
shall have been instituted or threatened or, to the knowledge of the Company or
the Representatives, shall be contemplated by the Commission; and the Company
shall have complied with any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectus or
otherwise).

8.2 The Representatives shall have received an opinion,
dated the Closing Date, of Squire, Sanders & Dempsey, counsel for the Company,
to the effect that:

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<PAGE> 15

8.2.1 the Company and each of its subsidiaries has
been duly organized and is validly existing as a corporation in good standing
under the laws of the state of its jurisdiction of incorporation, and is duly
qualified to transact business as a foreign corporation and is in good standing
under the laws of all other jurisdictions where the ownership or leasing of its
properties or the conduct of its business requires such qualification, except
where the failure to be so qualified does not amount to a material liability or
disability to the Company;

8.2.2 the Company has the corporate power to own or
lease its properties; the Company has the corporate power to conduct its
business as described in the Registration Statement and the Prospectus; the
Company has the corporate power to enter into this Agreement and to carry out
all of the terms and provisions hereof to be carried out by it;

8.2.3 the Company has an authorized capitalization
as set forth in the Prospectus; all of the issued shares of capital stock of
the Company have been duly authorized and validly issued and are fully paid and
nonassessable; the Common Stock underlying the Shares has been duly authorized
by all necessary corporate action of the Company, and, when issued and
delivered to and paid for pursuant to this Agreement, will be validly issued,
fully paid and nonassessable; the Shares have been duly authorized for
quotation on the National Association of Securities Dealers Automated Quotation
National Market System; no holders of outstanding shares of capital stock of
the Company are entitled as such to any preemptive or other rights to subscribe
for any of the Shares; and no holders of securities of the Company are entitled
to have such securities registered under the Registration Statement;

8.2.4 the statements set forth under the heading
"DESCRIPTION OF SECURITIES" in the Prospectus, insofar as such statements
purport to summarize certain provisions of the capital stock of the Company,
provide a fair summary of such provisions;

8.2.5 the execution and delivery of this Agreement
has been duly authorized by all necessary corporate action of the Company and
this Agreement is a valid and binding obligation of the Company enforceable in
accordance with its terms except as the enforceability thereof may be limited
by applicable bankruptcy, insolvency, reorganization or other similar laws
affecting creditors' rights generally and by general equitable principles;

8.2.6 no legal or governmental proceedings are
pending to which the Company or any of its subsidiaries is a party or to which
the property of the Company or any of its subsidiaries is subject that are
required to be described in the Registration Statement or the Prospectus and
are not described therein, and, to the best knowledge of such counsel, no such
proceedings have been threatened against the Company or any of its subsidiaries
or with respect to any of their properties;

8.2.7 no contract or other documents is required to
be described in the Registration Statement or the Prospectus or to be filed as
an exhibit to the Registration Statement that is not described therein or filed
as required;

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<PAGE> 16

8.2.8 the issuance, offering and sale of the Shares
by the Company pursuant to this Agreement, the compliance by the Company with
the other provisions of this Agreement and the consummation of the other
transactions herein contemplated do not require the consent, approval,
authorization, registration or qualification of or with any governmental
authority, except such as have been obtained and such as may be required under
state securities or blue sky laws, or conflict with or result in a breach or
violation of any of the terms and provisions of, or constitute a default under,
any indenture, mortgage, deed of trust, lease or other agreement or instrument,
known to such counsel, to which the Company or any of its subsidiaries is a
party or by which the Company or any of its subsidiaries or any of their
properties are bound, or the charter documents or bylaws of the Company, or any
statute or any judgment, decree, order, rule or regulation of any court or
other governmental authority or any arbitrator known to such counsel and
applicable to the Company or any of its subsidiaries;

8.2.9 The Registration Statement is effective under
the Act; any required filing of the Prospectus pursuant to Rule 424(b) has been
made in the manner and within the time period required by Rule 424(b); and no
stop order suspending the effectiveness of the Registration Statement or any
amendment thereto has been issued, and no proceedings for that purpose have
been instituted or, to the best knowledge of such counsel are threatened or
contemplated by the Commission;

8.2.10 the Registration Statement originally filed
with respect to the Shares and each amendment thereto and the Prospectus (in
each case, other than the financial statements and other financial and
statistical information contained therein, as to which such counsel need
express no opinion) comply as to form in all material respects with the
applicable requirements of the Act and the rules and regulations of the
Commission thereunder; and

8.2.11 the Company is not an investment company
within the meaning of the Investment Company Act of 1940, as amended, and, if
the Company uses the proceeds of the sale of the Shares solely as described in
the Prospectus, will not as a result of the sale of such Shares become an
investment company within the meaning of the Investment Company Act of 1940, as
amended.

8.2.12 such counsel shall also state that they have
no reason to believe that the Registration Statement, as of its effective date,
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus, as of its date or the date of
such opinion, included or includes any untrue statement of a material fact or
omitted or omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading; provided that in each case such counsel need not express any
opinion as to the financial statements and other financial and statistical
information contained therein.

In rendering any such opinion, such counsel may rely as to matters of fact, to
the extent such counsel deems proper, on certificates of responsible officers
of the Company and public officials.

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<PAGE> 17

References to the Registration Statement and the Prospectus in this Section 8
shall include any amendment or supplement thereto at the date of such opinion.

8.3 The Representatives shall have received an opinion,
dated the Closing Date, of Hewitt & McGuire, counsel for the Underwriters, with
respect to the issuance and sale of the Shares, the Registration Statement and
the Prospectus, and such other related matters as the Representatives may
reasonably require, and the Company shall have furnished to such counsel such
documents and certificates as they may reasonably request for the purpose of
enabling them to pass upon such matters.

8.4 The Representatives shall have received from Arthur
Andersen LLP a letter or letters dated, respectively, the date hereof and the
Closing Date, in form and substance satisfactory to the Representatives, to the
effect that:

8.4.1 they are independent accountants with respect
to the Company within the meaning of the Act and the applicable rules and
regulations thereunder;

8.4.2 in their opinion, the audited financial
statement and schedules examined by them and included in the Registration
Statement and the Prospectus comply in form in all material respects with the
applicable accounting requirements of the Act and the related published rules
and regulations;

8.4.3 on the basis of a reading of the latest
interim unaudited financial statements of the Company, carrying out certain
specified procedures (which do not constitute an examination made in accordance
with generally accepted auditing standards) that would not necessarily reveal
matters of significance with respect to the comments set forth in this
paragraph, a reading of the minute books of the shareholders, the board of
directors and any committees thereof of the Company, and inquiries of certain
officials of the Company who have responsibility for financial and accounting
matters, nothing came to their attention that caused them to believe that:

(A) the unaudited consolidated financial
statements of the Company included in the Registration Statement and
the Prospectus do not comply in form in all material respects with the
applicable accounting requirements of the Act and the related
published rules and regulations thereunder or are not in conformity
with generally accepted accounting principles applied on a basis
substantially consistent with that of the audited consolidated
financial statements included in the Registration Statement and the
Prospectus; and

(B) at a specific date not more than
five business days prior to the date of such letter, there were any
changes in the capital stock or long-term debt of the Company or any
decreases in net current assets or stockholders' equity of the
Company, in each case compared with amounts shown on the July 31, 1995
consolidated balance sheet included in the Registration Statement and
the Prospectus, or for the period from July 31, 1995, to such
specified date there were any decreases, as compared with

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<PAGE> 18

the corresponding period in the preceding year, in operating revenues,
operating expenses, other income, net income before income taxes,
income tax benefits, net income (loss) or net income (loss) per share
of the Company, except in all instances for changes, decreases or
increases set forth in such letter;

8.4.4 they have carried out certain specified
procedures, not constituting an audit, with respect to certain amounts,
percentages and financial information that are derived from the general
accounting records of the Company and are included in the Registration
Statement and the Prospectus and have compared such amounts, percentages and
financial information with such records of the Company and with information
derived from such records and have found them to be in agreement, excluding any
questions of legal interpretation.

In the event that the letters referred to above set forth any such
changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that (i) such letters shall be accompanied by a
written explanation of the Company as to the significance thereof, unless the
representatives deem such explanation unnecessary, and (ii) such changes,
decreases or increases do not, in the sole judgment of the Representatives,
make it impractical or inadvisable to proceed with the purchase and delivery of
the Shares as contemplated by the Registration Statement, as amended as of the
date hereof.

References to the Registration Statement and the Prospectus in this
Section 8 with respect to either letter referred to above shall include any
amendment or supplement thereto at the date of such letter.

8.5 The Representatives shall have received a
certificate, dated the Closing Date, of the president and the principal
financial or accounting officers of the Company to the effect that:

8.5.1 the representations and warranties of the
Company in this Agreement are true and correct as if made on and as of the
Closing Date; the Registration Statement, as amended as of the Closing Date,
does not include any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein not misleading, and the
Prospectus, as amended or supplemented as of the Closing Date, does not include
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and the Company has
performed all covenants and agreements and satisfied all conditions on its part
to be performed or satisfied at or prior to the Closing Date;

8.5.2 no stop order suspending the effectiveness of
the Registration Statement or any amendment thereto has been issued, and no
proceedings for that purpose have been instituted or threatened or, to the best
of their knowledge, are contemplated by the Commission; and

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<PAGE> 19

8.5.3 subsequent to the respective dates as of
which information is given in the Registration Statement and the Prospectus,
the Company has not sustained any material loss or interference with its
business or properties from fire, flood, hurricane, accident or other calamity,
whether or not covered by insurance, or from any labor dispute or any legal or
governmental proceeding, and there has not been any material adverse change, or
any development involving a prospective material adverse change, in the
condition (financial or otherwise), business prospects, net worth or results of
operations of the Company, except in each case as described in or contemplated
by the Prospectus (exclusive of any amendment or supplement thereto).

8.6 The NASD, upon review of the terms of the public
offering of the Shares shall not have objected to the Underwriters'
participation in such offering.

8.7 The counsel to the Representatives and other persons
retained by the Representatives to conduct a due diligence investigation with
respect to the offering shall be satisfied with the results of their respective
due diligence investigations.

8.8 The Shares shall be qualified in such states as the
Representatives may reasonably request pursuant to Section 5.3, and each such
qualification shall be in effect and not subject to any stop order or other
proceeding on the Closing Date.

8.9 The Representatives shall have received from each
person who is a director or officer of the Company an agreement to the effect
that such person will not, without the prior written consent of the
Representatives, offer, pledge, sell, contract to sell, grant any option for
the sale or otherwise dispose of, directly or indirectly, any shares of Common
Stock or any security which by its terms is convertible into, exercisable or
exchangeable for shares of Common Stock of the Company.

8.10 On or before the Closing Date, the Representatives
and counsel for the Underwriters shall have received such further certificates,
documents or other information as they may have reasonably requested from the
Company.

All opinions, certificates, letters and documents delivered pursuant
to this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representatives and
counsel for the Underwriters. The Company shall furnish to the Representatives
such conformed copies of such opinions, certificates, letters and documents in
such quantities as the Representatives and counsel for the Underwriters shall
reasonably request.

9. Indemnification and Contribution.

9.1 The Company agrees to indemnify and hold harmless
each Underwriter and each person, if any, who controls any Underwriter within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act against
any losses, claims, damages or liabilities, joint or several to which such
Underwriter or such controlling person may become subject under the

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<PAGE> 20

Act, the Exchange Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon:

(a) any untrue statement or alleged untrue
statement made by the Company in Section 2 of this Agreement,

(b) any untrue statement or alleged untrue
statement of any material fact contained in (i) the registration
statement originally filed with respect to the Shares or any amendment
thereto or any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or (ii) any application or other
document, or any amendment or supplement thereto, executed by the
Company or based upon written information furnished by or on behalf of
the Company filed in any jurisdiction in order to qualify the Shares
under the securities or blue sky laws thereof or filed with the
Commission or any securities association or securities exchange (each
an "Application"), or

(c) the omission or alleged omission to state in
such registration statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto,
or any Application a material fact required to be stated therein or
necessary to make the statements therein not misleading;

and will reimburse, as incurred, each Underwriter and each such controlling
person for any legal or other expenses reasonably incurred by such Underwriter
or such controlling person in connection with investigating, defending against
or appearing as a third-party witness in connection with any such loss, claim,
damage, liability or action; provided, however, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon any untrue statement or alleged untrue
statement or omission or alleged omission made in such registration statement
or any amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or any Application in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through the Representatives specifically for use therein; and provided further,
that the Company will not be liable to any Underwriter or any person
controlling such Underwriter with respect to any such untrue statement or
omission made in any Preliminary Prospectus that is corrected in the Prospectus
(or any amendment or supplement thereto) if the person asserting any such loss,
claim, damage or liability purchased Shares from such Underwriter but was not
sent or given a copy of the Prospectus (as amended or supplemented), other than
the documents incorporated by reference therein at or prior to the written
confirmation of the sale of such Shares to such person in any case where such
delivery of the Prospectus (as amended or supplemented) is required by the Act,
unless such failure to deliver the Prospectus (as amended or supplemented) was
a result of noncompliance by the Company with Section 5.5 of this Agreement.
This indemnity agreement will be in addition to any liability which the Company
may otherwise have. The Company will not, without the prior written consent of
each Underwriter, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action, suit or proceeding in respect of
which indemnification may be sought hereunder (whether or not such Underwriter
or any person who

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<PAGE> 21

controls such Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act is a party to such claim, action, suit or
proceeding), unless such settlement, compromise or consent includes an
unconditional release of such Underwriter and each such controlling person from
all liability arising out of such claim, action, suit or proceeding.

9.2 Each Underwriter will indemnify and hold harmless the
Company, each of its directors, each of its officers who signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act against
any losses, claims, damages or liabilities to which the Company, any such
director or officer of the Company or any such controlling person of the
Company may become subject under the Act, the Exchange Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon (i) any untrue statement or alleged
untrue statement of any material fact contained in the Registration Statement
or any amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or any Application or (ii) the omission or the
alleged omission to state therein a material fact required to be stated in the
Registration Statement or any amendment thereto, any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or any Application or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through the Representatives specifically for use therein; and, subject to the
limitation set forth immediately preceding this clause, will reimburse, as
incurred, any legal or other expenses reasonably incurred by the Company or any
director, officer or controlling person of the Company in connection with
investigation or defending any such loss, claim, damage, liability or any
action in respect thereof. This indemnity agreement will be in addition to any
liability which such Underwriter may otherwise have.

9.3 Promptly after receipt by an indemnified party under
this Section 9 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section 9, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under this Section 9. In case any such action is brought
against any indemnified party, and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party; provided, however, that if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be one or more legal defenses available to it and/or other
indemnified parties which are different from or additional to those available
to the indemnifying party, the indemnifying party shall not have the right to
direct the defense of such action on behalf of such indemnified party or
parties and such indemnified party or parties shall have the right to select
separate counsel to defend such action on behalf of such indemnified party or
parties. After notice from the indemnifying party to such indemnified party of
its election so

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<PAGE> 22

to assume the defense thereof and approval by such indemnified party of counsel
appointed to defend such action, the indemnifying party will not be liable to
such indemnified party under this Section 9 for any legal or other expenses,
other than reasonable costs of investigation, subsequently incurred by such
indemnified party in connection with the defense thereof, unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that in
connection with such action the indemnifying party shall not be liable for the
expenses of more than one separate counsel at any one time (in addition to
local counsel) in any one action or separate but substantially similar actions
in the same jurisdiction arising out of the same general allegations or
circumstances, designated by the Representatives in the case of Section 9.1,
representing the indemnified parties under such Section 9.1 who are parties to
such action or actions) or (ii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. After such notice from the indemnifying party to such
indemnified party, the indemnifying party will not be liable for the costs and
expenses of any settlement of such action effected by such indemnified party
without the consent of the indemnifying party, unless such indemnified party
waived its rights under this Section 9 in which case the indemnified party may
effect such a settlement without such consent.

9.4 In circumstances in which the indemnity agreement
provided for in the preceding paragraphs of this Section 9 is unavailable or
insufficient to hold harmless an indemnified party in respect of any losses,
claims, damages or liability (or actions in respect thereof, each indemnifying
party, in order to provide for just and equitable contribution, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities (or actions in respect thereof)
in such proportion as is appropriate to reflect (i) the relative benefits
received by the indemnifying party or parties on the one hand and the
indemnified party on the other from the offering of the Shares or (ii) if the
allocation provided by the foregoing clause (i) is not permitted by applicable
law, not only such relative benefits but also the relative fault of the
indemnifying party or parties on the one hand and the indemnified party on the
other in connection with the statements or omissions or alleged statements or
omissions that resulted in such losses, claims, damages or liability (or action
in respect thereof). The relative benefits received by the Company on the one
hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total proceeds from the offering (before deducting expenses)
received by the Company bear to the total underwriting discounts and
commissions received by the Underwriters. The relative fault of the parties
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or the
Underwriters, the parties' relative intents, knowledge, access to information
and opportunity to correct or prevent such statement or omission, and any other
equitable considerations appropriate in the circumstances. The Company and the
Underwriters agree that it would not be equitable if the amount of such
contribution were determined by pro rata or per capita allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other
method of allocation that does not take into account the equitable
consideration referred to in the first sentence of this Section 9.4.
Notwithstanding any other provision of this Section 9.4, no Underwriter shall
be obligated to make contributions hereunder that in the aggregate exceed the
total public offering price of the

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<PAGE> 23

Shares sold by such Underwriter under this Agreement, less the aggregate amount
of any damages that such Underwriter has otherwise been required to pay in
respect of the same or any substantially similar claim, and no person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
hereunder are several in proportion to their respective underwriting
obligations and not joint. For purposes of this Section 9.4, each person, if
any, who controls an Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act shall have the same rights to contribution as
such Underwriter, and each director of the Company, each officer of the Company
who signed the Registration Statement and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, shall have the same right to contribution as the Company as the
case may be.

10. Survival. The respective representations, warranties,
agreements, covenants, indemnities and other statements of the Company, its
officers and directors, and the several Underwriters set forth in this
Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement shall remain in full force and effect, regardless of (i) any
investigation made by or on behalf of the Company, any of its officers or
directors, any Underwriter or any controlling person referred to in Section 9
hereof and (ii) delivery of and payment for the Shares. The respective
agreements, covenants, indemnities and other statements set forth in Sections
6, 7 and 9 hereof shall remain in full force and effect, regardless of any
termination or cancellation this Agreement.

11. Termination.

11.1 This Agreement may be terminated in the sole
discretion of the Representatives by notice to the Company given prior to the
Closing Date in the event that the Company shall have failed, refused or been
unable to perform all obligations and satisfy all conditions on its part to be
performed or satisfied hereunder at or prior thereto or, if at or prior to the
Closing Date:

11.1.1 The Company shall have sustained any material
loss or interference with its business or properties from fire, flood,
hurricane, accident or other calamity, whether or not covered by insurance, or
from any labor dispute or any legal or governmental proceeding or there shall
have been any material adverse change, or any development involving a
prospective material adverse change (including without limitation a change in
management or control of the Company), in the condition (financial or
otherwise), business prospects, net worth or results of operations of the
Company, except in each case as described in or contemplated by the Prospectus
(exclusive of any amendment or supplement thereto);

11.1.2 trading in the Preferred Stock shall have
been suspended by the Commission or the [National Association of Securities
Dealers Automated Quotation National Market System] or trading in securities
generally on the New York Stock Exchange or the American Stock Exchange or the
National Association of Securities Dealers Automated

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<PAGE> 24

Quotation National Market System shall have been suspended or minimum or
maximum prices shall have been established on any such exchange or market
system;

11.1.3 a banking moratorium shall have been declared
by New York, California or United States authorities; or

11.1.4 there shall have been (i) an outbreak or
escalation of hostilities between the United States and any foreign power, (ii)
an outbreak or escalation of any other insurrection or armed conflict involving
the United States or (iii) any other calamity or crisis having an effect on the
financial markets that, in the sole judgment of the Representatives, makes it
impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares as contemplated by the Registration Statement, as
amended as of the date hereof.

11.2 Termination of this Agreement pursuant to this
Section 11 shall be without liability of any party to any other party.

12. Information Supplied by Underwriters. The statements set
forth in the last paragraph on the front cover page and under the heading
"Underwriting" in any Preliminary Prospectus or the Prospectus, to the extent
such statements relate to the Underwriters, constitute the only information
furnished by any Underwriter through the Representatives to the Company for the
purposes of Section 2.1.2 and 9.2 hereof. The Underwriters confirm that such
statements, to such extent are correct.

13. Notices. All communications hereunder shall be in writing
and, if sent to any of the Underwriters, shall be mailed (certified or
registered mail, postage prepaid, return receipt requested) or delivered or
sent by facsimile transmission and confirmed in writing to W.B. McKee
Securities, Inc., 3003 North Central Avenue, Suite 100, Phoenix, Arizona 85012,
Attention: Mr. William B. McKee, President (with a copy to William L. Twomey,
Esq., Hewitt & McGuire, 19900 MacArthur Boulevard, Suite 1050, Irvine,
California 92715), if sent to the Company, shall be mailed (certified or
registered mail, postage prepaid, return receipt requested), delivered or
telegraphed and confirmed in writing to the Company at Sunrise Preschools,
Inc., 9128 East San Salvador Drive, Suite 200, Scottsdale, Arizona 85258,
Attention: Mr. James Evans, President (with a copy to Christopher D. Johnson,
Esq., Squire, Sanders & Dempsey, Two Renaissance Square, 40 North Central
Avenue, Suite 2700, Phoenix, Arizona 85004). Notices shall be effective if
mailed, 48 hours after deposit in the mail properly addressed, sent by
facsimile, upon receipt and in any other instance, when delivered. The failure
to deliver a copy of any communication to any copy party shall not affect the
effectiveness of such communication.

14. Successors. This Agreement shall inure to the benefit of and
shall be binding upon the several Underwriters, the Company, and their
respective successors and legal representatives, and nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any other
person any legal or equitable right, remedy or claim under or in respect of
this Agreement, or any provisions herein contained, this Agreement and all
conditions and provisions hereof being intended to be and being for the sole
and exclusive benefit of such

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<PAGE> 25

persons and for the benefit of no other person except that (i) the indemnities
of the Company contained in Section 9 of this Agreement shall also be for the
benefit of any person or persons who control any Underwriter within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act and (ii) the
indemnities of the Underwriters contained in Section 9 of this Agreement shall
also be for the benefit of the directors of the Company, the officers of the
Company who have signed the Registration Statement and any person or persons
who control the Company within the meaning of Section 15 of the Act or Section
20 of the Exchange Act. No purchaser of Shares through any Underwriter shall
be deemed a successor because of such purchase.

15. Applicable Law. The validity and interpretation of this
Agreement, and the terms and conditions set forth herein, shall be governed by
and construed in accordance with the laws of the State of California without
giving effect to any provisions relating to conflicts of laws.

16. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.

If the foregoing correctly sets forth our understanding,
please indicate your acceptance thereof in the space provided below for that
purpose, whereupon this letter shall constitute an agreement binding the
Company and each of the several Underwriters.

Very truly yours,

SUNRISE PRESCHOOLS, INC.

By: /s/ James R. Evans
-------------------------------
James R. Evans, President

The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.

W.B. McKee Securities, Inc.
South Coast Financial Securities, Inc.
(As Representatives of the several
Underwriters named in Schedule 1 hereto)

By: W.B. McKee Securities, Inc.

By: /s/ William B. McKee
----------------------------
William B. McKee, President

25
<PAGE> 26

SCHEDULE 1

UNDERWRITERS

<TABLE>
<CAPTION>
Number of Shares
Underwriter to be sold
- ----------- ----------------
<S> <C>

Total ----------------
</TABLE>

<PAGE> 1

AGREEMENT AMONG UNDERWRITERS

333,333 SHARES OF
SERIES C PREFERRED STOCK

SUNRISE PRESCHOOLS, INC.

____________________, 1995

W.B. McKee Securities, Inc.
South Coast Financial Securities, Inc.
c/o W.B. McKee Securities, Inc.
3003 North Central Avenue
Suite 100
Phoenix, Arizona 85012
(As Representatives of the several Underwriters Named in Schedule 1 to Exhibit A
annexed hereto)

Dear Sirs:

We understand that Sunrise Preschools, Inc., a Delaware corporation
(the "Company"), desires to enter into an agreement, substantially in the form
of Exhibit A hereto (the "Underwriting Agreement"). The Underwriting Agreement
provides for (a) the sale, on behalf of the Company, by you and the other
prospective Underwriters named in Schedule 1 to the Underwriting Agreement,
severally and not jointly, of 333,333 shares of Series C Preferred Stock (the
"Preferred Stock") of the Company (the "Firm Shares") and (b) the grant by the
Company to the Underwriters, as provided in Section 3.2 of the Underwriting
Agreement, of rights to purchase up to an additional 50,000 additional shares of
Series C Preferred Stock of the Company (the "Option Shares") at the option of
the Underwriters, for the purpose of covering overallotments in the sale of the
Firm Shares (the Firm Shares and the Option Shares are collectively referred to
in this Agreement as the "Shares").

We understand that changes may be made in those who are to be
Underwriters and in the respective number of Shares to be sold by them, but that
the number of Shares to be sold by us as set forth in said Schedule 1 will not
be changed without our consent except as provided herein or in the Underwriting
Agreement. The parties on whose behalf you execute the Underwriting Agreement
are herein called the "Underwriters."

We desire to confirm the agreement among you, the undersigned and
the other Underwriters with respect to the sale of the Shares by the
Underwriters, severally and not jointly, on behalf of the Company. The aggregate
number of Shares which any Underwriter will be obligated to sell on behalf of
the Company pursuant to the terms of the Underwriting Agreement is herein called
the "Underwriting Obligation" of that Underwriter.

EXHIBIT 1.2

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<PAGE> 2

1. Authority and Compensation of Representative. We hereby
authorize you, as our representatives (the "Representatives") and on our behalf,
(i) to enter into an agreement with the Company, in substantially the form
attached hereto as Exhibit A, but with such changes therein as in your judgement
will not be materially adverse to the Underwriters, providing for the sale by
us, severally and not jointly, for the account of the Company, at the purchase
price per Share set forth in said Exhibit A, of the number of Shares set forth
opposite our name in Schedule 1 to said Exhibit A, (ii) to exercise all the
authority and discretion vested in the Underwriters and in you by the provisions
of the Underwriting Agreement, including whether the Underwriters shall purchase
any Option Shares and the amount, if any, of Option Shares to be so purchased,
(iii) to take all such action as you in your discretion may deem necessary or
advisable in order to carry out the provisions of the Underwriting Agreement and
of this Agreement, and the sale and distribution of the Shares and (iv) to
determine all matters relating to the public advertisement of the Shares. As our
share of the compensation for your services hereunder, we will pay to you, and
we authorize you to charge to our account on the Closing Date referred to in the
Underwriting Agreement, $_____ per Share in respect of the aggregate number of
Shares which we shall sell pursuant to the Underwriting Agreement.

2. Public Offering of Shares. The sale of the Shares to the public
is to be made, as herein provided, as soon after the registration statement
relating to the Shares becomes effective as in your judgement is advisable. The
purchase price to be paid by the Underwriters for the Shares and the public
offering price are to be determined by agreement between you and the Company.
You will advise us by telegraph or telephone when the Shares shall be released
for offering, when the registration statement relating to the Shares shall
become effective and the price at which the Shares are initially to be offered.
We agree not to sell any of the Shares until you have released them for that
purpose. We authorize you, after the initial public offering, to change the
public offering price, the concession and the re-allowance if, in your sole
discretion, such action becomes desirable by reason of changes in general market
conditions or otherwise. As used herein, the terms "Registration Statement,
"Preliminary Prospectus" and "Prospectus" shall have the meanings ascribed
thereto in the Underwriting Agreement. The public offering price at the time in
effect is herein called the "Offering Price." After notice from you that the
Shares are released for public sale, we will offer to the public in conformity
with the provisions hereof and with the terms of offering set forth in the
Prospectus such of our Shares as you advise us are not reserved. We agree not to
offer or sell any of the Shares to persons over whose accounts we exercise
investment discretion without their specific advance consent.

3. Offering to Dealers and Retail Sales.

3.1. We authorize you to reserve for offering and sale, and on
our behalf to sell to retail purchasers (such sales being herein called "Retail
Sales") and to dealers selected by you (such dealers, among whom any Underwriter
may be included, being herein called "Selected Dealers") all or any part of our
Shares as you, in your sole discretion, shall determine. Such sales, if any,
shall be made (a) in the case of Retail Sales, at the Offering Price, and (b) in
the case of sales to Selected Dealers, at the Offering Price less such
concession or concessions as you, in your sole discretion, shall determine.
Except for such sales as are

2
<PAGE> 3

designated by a purchaser to be for the account of a particular Underwriter or
Selected Dealer, any sales to Selected Dealers made for our account shall be as
nearly as practicable in the ratio that the Shares reserved for our account for
offering to Selected Dealers bears to the aggregate of all Shares of all
Underwriters so reserved.

3.2. You agree to notify us promptly on the date of the public
offering as to the number of Shares, if any, which we may retain for direct sale
by us. Prior to the termination of the provisions referred to in Section 12
hereof, you may reserve for offering and sale as hereinbefore provided any
Shares theretofore retained by us remaining unsold and we may, with your
consent, retain any Shares theretofore reserved by you remaining unsold.

3.3. We agree that, from time to time prior to the termination
of the provisions referred to in Section 12 hereof, we shall furnish to you such
information as you may request in order to determine the number of Shares
allocated to us under the Underwriting Agreement which then remain unsold, and
we shall upon your request sell to you for the account of any Underwriter as
many of such unsold Shares as you may designate at the Offering Price, less all
or any part of the concession to Selected Dealers as you, in your sole
discretion, shall determine. The provisions of Section 4 hereof shall not be
applicable in respect of any such sale.

3.4. We authorize you to determine the form and manner of any
communications or agreements with the Selected Dealers. In the event that there
shall be any agreements with Selected Dealers, you are authorized to act as
manager thereunder and we agree, in such event, to be governed by the terms and
conditions of such agreements. The form of Selected Dealer Agreement attached
hereto as Exhibit B is satisfactory to us.

3.5. It is understood that any Selected Dealer to whom an offer
may be made as hereinbefore provided shall be actually engaged in the investment
banking or securities business and shall be either (a) a member in good standing
of the National Association of Securities Dealers, Inc (the "NASD") or (b) a
dealer with its principal place of business located outside the United States,
its territories and its possessions and not registered as a broker or dealer
under the Securities Exchange Act of 1934, as amended (the "1934 Act"), who
agrees not to make any sales within the United States, its territories or its
possessions or to persons who are nationals thereof or residents therein. Each
Selected Dealer shall agree to comply with the provisions of Section 24 of
Article III of the Rules of Fair Practice of the NASD, and each foreign Selected
Dealer who is not a member of the NASD also shall agree to comply with the
NASD's interpretation with respect to free-riding and withholding, to comply, as
though it were a member of the NASD, with the provisions of Sections 8 and 36 of
Article III of such Rules of Fair Practice, and to comply with Section 25 of
Article III thereof as that Section applies to a non-member foreign dealer. The
several Underwriters may allow, and the Selected Dealers, if any, may re-allow
such concession or concessions as you may determine from time to time on sales
of Shares to any qualified dealer, all subject to the Rules of Fair Practice of
the NASD.

3
<PAGE> 4

3.6. Upon your request, we will advise you of the identity of
any dealer to whom we allow such a discount and any Underwriter or Selected
Dealer from whom we receive such a discount.

4. Repurchases in the Open Market. Any Shares sold by us (other
than through you) which shall be contracted for or purchased in the open market
by you on behalf of any Underwriter or Underwriters shall be repurchased by us
on demand at a price equal to the cost of such purchase plus commissions and
taxes on redelivery. Any Shares delivered on such repurchase need not be the
identical Shares originally sold by us. In lieu of delivery of such Shares to
us, you may sell such Shares in any manner for our account and charge us with
the amount of any loss or expense or credit us with the amount of any profit,
less any expense, resulting from such sale, or charge our account with an amount
not in excess of the concession to Selected Dealers.

5. Delivery and Payment.

5.1. Upon your request, we shall deliver to you payment for the
Shares to be sold by us under the Underwriting Agreement in an amount equal to
the initial Offering Price for such Shares less the concession to Selected
Dealers. Such payment shall be made in such form and at such time and place as
may be specified in the Underwriting Agreement against delivery of the Shares.
If we are a member of or clear through a member of The Depository Trust Company
("DTC"), you may, in your discretion, deliver our Shares through the facilities
of DTC.

5.2. You shall remit to us, as promptly as practicable, the
amounts received by you from Selected Dealers and retail purchasers as payment
in respect of Shares sold by you for our account pursuant to Section 3 hereof
for which payment has been received. Shares purchased by us under the
Underwriting Agreement and not reserved or sold by you for our account pursuant
to Section 3 hereof shall be delivered to us as promptly as practicable after
receipt by you. Any Shares purchased by us and so reserved which remain unsold
at any time prior to the settlement of accounts hereunder may, in your
discretion, and shall, upon your request, be delivered to us, but such delivery
shall be for carrying purposes only. In case any Shares reserved for sale in
Retail Sales or to Selected Dealers shall not be purchased and paid for in due
course as contemplated hereby, we agree (a) to accept delivery when tendered by
you of any Shares reserved for our account and not so purchased and paid for,
and (b) in case we shall have received payment from you in respect of any such
Shares, to reimburse you on demand for the full amount which you shall have paid
us in respect for such Shares.

5.3. In the event of our failure to sell the Shares as provided
in the Underwriting Agreement, you shall have the right under the provisions
thereof to arrange for other persons, who may include you and any other
Underwriter, to sell such Shares which we had agreed to sell, but without
relieving us from liability for our default.

4
<PAGE> 5

6. Allocation of Expenses and Liability. We authorize you to
charge our account with and we agree to pay (a) all transfer taxes on sales made
by you for our account, except as herein otherwise provided, and (b) our
proportionate share (based on our Underwriting Obligation) of all expenses
incurred by you in connection with the carrying, sale and distribution of the
Shares and all other expenses arising under the terms of the Underwriting
Agreement or this Agreement. Your determination of all such expenses and your
allocation thereof shall be final and conclusive. You may at any time make
partial distributions of credit balances or call for payment of debit balances.
Funds for our account at any time in your hands may be held in your general
funds without accountability for interest. As soon as practicable after the
termination of this Agreement, the net credit or debit balance in our account,
after proper charge and credit for all interim payments and receipts, shall be
paid to or paid by us, provided that you may establish such reserves as you, in
your sole discretion, shall deem advisable to cover possible additional expenses
chargeable to the several Underwriters. Notwithstanding any settlement, we will
remain liable for any taxes on transfers for our account and for our
proportionate share (based on our Underwriting Obligation) of all expenses and
liabilities that may be incurred for the accounts of the Underwriters.

7. Liability for Future Claims. Neither any statement by you of
any credit or debit balance in our account nor any reservation from distribution
to cover possible additional expenses relating to the Shares shall constitute
any representation by you as to the existence or non-existence of possible
unforeseen expenses or liabilities of or charges against the several
Underwriters. Notwithstanding the distribution of any net credit balance to us
or the termination of this Agreement or both, we shall be and remain liable for,
and will pay on demand, (a) our proportionate share (based on our Underwriting
Obligation) of all expenses and liabilities which may be incurred by or for the
accounts of the Underwriters, or any of them, including any liability which may
be incurred by or for the accounts of the Underwriters, or any of them, based on
the claim that the Underwriters constitute an association, unincorporated
business, partnership or any separate entity, and (b) any transfer taxes paid
after such settlement on account of any sale or transfer for our account.

8. Stabilization. We authorize W.B. McKee Securities, Inc., in its
discretion, to buy and sell shares of the Preferred Stock and Common Stock of
the Company (the "Common Stock") in the open market or otherwise, for either
long or short account, at such prices and on such terms as it may determine, and
to overallot in arranging for sales of Shares. We authorize W.B. McKee
Securities, Inc., in its discretion, to cover any short position incurred for
the accounts of the several Underwriters pursuant to this Section by exercising
the overallotment option referred to in Section 3.2 of the Underwriting
Agreement and by buying shares of the Preferred Stock, and, in lieu of
delivering to the several Underwriters any of the Shares held for their
respective accounts pursuant to this Section, to sell such Shares for the
accounts of each of the Underwriters, in each case at such prices and on such
terms as W.B. McKee Securities, Inc. may determine. All purchases, sales and
overallotments made pursuant to this Section shall be for the accounts of the
several Underwriters as nearly as practicable in proportion to their respective
underwriting obligations, and at no time shall our net commitment under the
foregoing provisions of this Section, either for long or short account, exceed
fifteen percent of our original underwriting obligation. We shall, on demand,
take any of the Shares sold or overallotted for

5
<PAGE> 6

our account. In the event of default by one or more Underwriters in respect of
their obligations under this Section, each non-defaulting Underwriter shall
assume its proportionate share of the obligations of each defaulting Underwriter
without relieving the defaulting Underwriter of its obligations under this
Section. The existence of this provision is no assurance that the price of the
Preferred Stock will be stabilized or that stabilizing, if commenced, will not
be discontinued at any time.

We agree to advise you, from time to time upon your request, of the
number of Shares retained by or released to us and remaining unsold, and shall,
upon your request, release to you for the accounts of one or more of the several
Underwriters such number of those Shares as you may designate at such price, not
less than the net price to Selected Dealers nor more than the Offering Price, as
you may determine.

You will notify us promptly if you engage in any transactions
hereunder which in your judgment may be deemed to be a "stabilizing purchase"
within the meaning of the applicable Rules and Regulations of the Securities and
Exchange Commission. If we effect a "stabilizing purchase," we will notify you
not later than the third full business day following such purchase of the
information specified in Rule 17a-2(d) under the 1934 Act.

9. Open Market Transactions. We agree that we will not make bids
or offers, or make or induce purchases or sales for our own account or the
accounts of customers, in the open market or otherwise, either before or after
the purchase of the Shares and for either long or short account, of any Common
Stock or Preferred Stock of the Company, warrants or any security of the same
class and series, or any right to purchase any such security except: (a) as
provided in this Agreement, the Underwriting Agreement and the Selected Dealer
Agreements or otherwise approved by you and (b) in brokerage transactions not
involving solicitation of the customer's order. We further agree that we will
not lend, either before or after the purchase of the Shares, to any customer,
Underwriter, Selected Dealer or to any other securities broker or dealer any
Shares, Common Stock, Preferred Stock or warrants. Prior to the completion (as
defined in Rule 10b-6 under the 1934 Act) of our participation in the
distribution, we will otherwise comply with Rule 10b-6.

10. Blue Sky. Prior to the initial offering by the Underwriters,
you will inform us as to the states and other jurisdictions under the respective
securities or blue sky laws of which it is believed that the Shares have been
qualified for sale or are exempt from such qualification, but you do not assume
any responsibility or obligation as to the accuracy of such information or as to
the right of any Underwriter or dealer to offer or sell the Shares in any state
or other jurisdiction.

11. Default by Underwriters. Default by one or more Underwriters in
respect of their obligations under the Underwriting Agreement shall not release
us from any of our obligations or in any way affect the liability of any
defaulting Underwriter to the other Underwriters for damages resulting from such
default.

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<PAGE> 7

12. Termination. Section 2, the second paragraph and the first
sentence of the third paragraph of Section 3, Section 4, the first sentence of
section 9 (other than clause (c) thereof) and Section 10 hereof will terminate
at the close of business on the 30th calendar day after the effective date of
the Registration Statement, unless extended or sooner terminated as hereinafter
provided. You may extend such provisions, or any of them, for a period not to
exceed 60 additional calendar days by notice to us to such effect. You may
terminate any of such provisions at any time by notice to us, and you may
terminate all such provisions at any time by notice to us to the effect that the
offering provisions of this Agreement are terminated.

13. General Position of the Representative. In taking action under
this Agreement, you shall act only as agent of the several Underwriters. Your
authority shall include the taking of such action as you may deem advisable in
respect of all matters pertaining to any and all offers and sales of the Shares,
including the right to make any modifications which you consider necessary or
desirable in the arrangements with Selected Dealers or others. You shall be
under no liability for or in respect of the value of the Shares or the validity
or the form thereof, the Registration Statement, the Prospectus or agreements or
other instruments executed by the Company or others; or for or in respect of the
delivery of the Shares; or for the performance by the Company or others of any
agreement on its or their part; nor shall you as Representatives or otherwise be
liable under any of the provisions hereof or for any matters connected herewith,
except for want of good faith, and except for any liability arising under the
Securities Act of 1933, as amended (the " 1933 Act"); and only obligations
expressly assumed by you as Representatives herein shall be implied from this
Agreement. In representing the Underwriters hereunder, you shall act as the
Representatives of each of them respectively. Nothing herein contained shall
constitute the several Underwriters partners with you or with each other, or
render any Underwriter liable for the commitments of any other Underwriter,
except as otherwise provided in Section 13 hereof and in the Underwriting
Agreement. If the Underwriters shall be deemed to constitute a partnership for
Federal income tax purposes, it is the intent of each Underwriter to be excluded
from the application of Subchapter X, Chapter 1, Subtitle A, of the Internal
Revenue Code of 1986, as amended. Each Underwriter elects to be so excluded and
agrees not to take any position inconsistent with such election. Each
Underwriter authorizes you, in your discretion, to execute and file on behalf of
the Underwriters such evidence of election as may be required by the Internal
Revenue Service. The commitments and liabilities of each of the several
Underwriters are several in accordance with their respective Underwriting
Obligations and are not joint.

14. Acknowledgment of Receipt of Registration Statement, etc. We
hereby confirm that we have examined the Registration Statement relating to the
Shares as heretofore filed by the Company with the Commission and each amendment
thereto, if any, filed through the date hereof, including any documents filed
under the 1934 Act through the date hereof and incorporated by reference into
the Prospectus, that we are willing to be named as an underwriter therein and to
accept the responsibilities of an underwriter thereunder, and that we are
willing to proceed as therein contemplated. We confirm that we have authorized
you to advise the Company on our behalf (a) as to the statements to be included
in any Preliminary Prospectus and in the Prospectus under the heading
"Underwriting" insofar as they relate to us, and (b) that there is no other
information about us required to be stated in the Registration Statement or

7
<PAGE> 8

Prospectus. We understand that the aforementioned documents are subject to
further change and that we will be supplied with copies of any further
amendments or supplements to the Registration Statement, of any document filed
under the 1934 Act after the effective date of the Registration Statement and
before termination of the offering of the Shares by the Underwriters if such
document is deemed to be incorporated by reference into the Prospectus and of
any amended or supplemented Prospectus promptly, if and when received by you,
but the making of such changes, amendments and supplements shall not release us
or affect our obligations hereunder or under the Underwriting Agreement.

15. Indemnity.

15.1. General. We agree to indemnify and hold harmless each
other Underwriter and any person who controls any such Underwriter within the
meaning of Section 15 of the 1933 Act, to the extent that, and upon the terms on
which, we agree to indemnify and hold harmless the Company and other specified
persons as set forth in the Underwriting Agreement. Our indemnity agreement
contained in this Section 15 shall remain in full force and effect regardless of
any investigation made by or on behalf of such other Underwriter or controlling
person and shall survive the delivery of and payment for the Shares and the
termination of this Agreement and the similar agreements entered into with the
other Underwriters.

15.2. Claims Against Underwriters. Each Underwriter (including
you) will pay, upon your request, as contribution, its proportionate share,
based upon its Underwriting Obligation, of any loss, claim, damage or liability,
joint or several, paid or incurred by any Underwriter (including you) to any
person other than an Underwriter, arising out of or based upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement, the Prospectus, any amendment or supplement thereto or
any preliminary Prospectus or any other selling or advertising material approved
by you for use by the Underwriters in connection with the sale of the Shares, or
the omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading (other
than an untrue statement or alleged untrue statement or omission or alleged
omission made in conformity with written information furnished to the Company
through you by or on behalf of an Underwriter expressly for use therein) or
relating to any transaction contemplated by this Agreement; and will pay such
proportionate share of any legal or other expense reasonably incurred by you or
with your consent in connection with investigating or defending against any such
loss, claim, damage or liability, or any action in respect thereof. In
determining the amount of our obligation under this paragraph, appropriate
adjustment may be made by you to reflect any amounts received by any one or more
Underwriters in respect of such claim from the Company pursuant to Section 9 of
the Underwriting Agreement or otherwise. There shall be credited against any
amount paid or payable by us pursuant to this paragraph any loss, claim, damage,
liability or expense which is incurred by us as a result of any such claim
asserted against us, and if such loss, claim, damage, liability or expense is
incurred by us subsequent to any payment by us pursuant to this paragraph,
appropriate provision shall be made to effect such credit, by refund or
otherwise. If any such claim is asserted, you may take such action in connection
therewith as you deem

8
<PAGE> 9

necessary or desirable, including retention of counsel for the Underwriters, and
in your discretion separate counsel for any particular Underwriter or group of
Underwriters, and the fees and disbursements of any counsel so retained by you
shall be included in the amounts payable pursuant to this paragraph. In
determining amounts payable pursuant to this paragraph, any loss, claim, damage,
liability or expense incurred by any person who controls any Underwriter within
the meaning of Section 15 of the 1933 Act which has been incurred by reason of
such control relationship shall be deemed to have been incurred by such
Underwriter. Any Underwriter may elect to retain, at its own expense, its own
counsel. You may settle or consent to the settlement of any such claim on advice
of counsel retained by you. Whenever you receive notice of the assertion of any
claim to which the provisions of this paragraph would be applicable, you will
give prompt notice thereof to each Underwriter. If any Underwriter or
Underwriters defaults in its or their obligation to make any payments under this
paragraph, each non-defaulting Underwriter shall be obligated to pay its
proportionate share of all defaulted payments, based upon the proportion such
non-defaulting Underwriter's Underwriting Obligation bears to the Underwriting
Obligations of all non-defaulting Underwriters. Nothing therein shall relieve a
defaulting Underwriter from liability for its default.

16. Capital Requirements. We confirm that the incurrence by us of
our obligations under this Agreement and under the Underwriting Agreement will
not place us in violation of the net capital requirements of Rule 15c3-1 under
the 1934 Act or of any applicable rules relating to capital requirements of any
securities exchange to which we are subject.

17. Undertaking to Mail Prospectuses. We represent to you that we
have taken all action on our part required to have been taken to satisfy the
policy set forth in Release No. 4968 of the Commission under the 1933 Act,
including the distribution in the manner and at or prior to the time set forth
in such Release, of copies of the Preliminary Prospectus relating to the Shares
(or, if you have so requested, copies of any revised Preliminary Prospectus) to
all persons to whom we expect to mail confirmation of sale. As contemplated by
Rule 15c2-8 under the 1934 Act, you agree to mail a copy of the Prospectus
mentioned in the Underwriting Agreement to any person making a written request
therefor during the period referred to in said Rule, the mailing to be made to
the address given in the request. We confirm that we have delivered all
Preliminary Prospectuses and revised Preliminary Prospectuses, if any, required
to be delivered under the provisions of Rule 15c2-8 and agree to deliver all
Prospectuses required to be delivered thereunder. We acknowledge that the copies
of the Preliminary Prospectus furnished to us have been distributed to dealers
who have been notified of the foregoing requirements pertaining to the delivery
of Preliminary Prospectuses and Prospectuses. You have heretofore delivered to
us such number of copies of Preliminary Prospectuses as have been reasonably
requested by us, receipt of which is hereby acknowledged, and will deliver such
number of copies of Prospectuses as will be reasonably requested by us.

18. Miscellaneous.

18.1. Any notice hereunder from you to us or from us to you
shall be deemed to have been duly given if sent by registered mail, telegram or
teletype, to us at our address as set forth in our Underwriters' Questionnaire
previously delivered to you, or to you

9
<PAGE> 10

c/o W.B. McKee Securities, Inc. at 3003 North Central Avenue, Suite 100,
Phoenix, Arizona, 85012, fax no. (602) 266-5778.

18.2. We understand that you are a member in good standing of
the NASD. We hereby confirm that we are actually engaged in the investment
banking or securities business and are either (a) a member in good standing of
the NASD or (b) a dealer with its principal place of business located outside
the United States, its territories and its possessions and not registered as a
broker or dealer under the 1934 Act who agrees not to make any sales within the
United States, its territories or its possessions or to persons who are
nationals thereof or residents therein (except that we may participate in sales
to Selected Dealers and others under Section 3 of this Agreement). We hereby
agree to comply with the provisions of Section 24 of Article III of the Rules of
Fair Practice of the NASD, and, if we are a foreign dealer and not a member of
the NASD, we also hereby agree to comply with the NASD's interpretation with
respect to free-riding and withholding and to comply, as though we were a member
of the NASD, with the provisions of Sections 8, 24 and 36 of Article III of such
Rules of Fair Practice, and to comply with Section 25 of Article III thereof as
that Section applies to a non-member foreign dealer. In connection with sales
and offers to sell Shares made by us outside the United States, its territories
and possessions (i) we will either furnish to each person to whom any such sale
or offer is made a copy of the then current Preliminary Prospectus or the
Prospectus, as the case may be, or inform such person that such Preliminary
Prospectus or Prospectus will be available upon request, and (ii) we will
furnish to each person to whom any such sale or offer is made such prospectus,
advertisement or other offering document containing information relating to the
Shares or the Company as may be required under the law of the jurisdiction in
which such sale or offer is made. Any prospectus, advertisement or other
offering document furnished by us to any person in accordance with the preceding
sentence and any such additional offering material as we may furnish to any
person (x) shall comply in all respects with the law of the jurisdiction in
which it is so furnished, (y) shall be prepared and so furnished at our sole
risk and expense and (z) shall not contain information relating to the Shares or
the Company which is inconsistent in any respect with the information contained
in the then current Preliminary Prospectus or in the Prospectus, as the case may
be.

18.3. This instrument may be signed by or on behalf of the
Underwriters in one or more counterparts each of which shall constitute an
original and all of which together shall constitute one and the same agreement
among all the Underwriters and shall become effective at such time as all the
Underwriters shall have signed or have had signed on their behalf such
counterparts and you shall have confirmed all such counterparts. You may confirm
such counterparts by facsimile signature.

18.4. This Agreement shall be governed by and construed in
accordance with the laws of the State of California without giving effect to the
choice of law or conflicts of laws principles thereof.

10
<PAGE> 11

Please confirm that the foregoing correctly states the
understanding between us by signing and returning to us a counterpart hereof.

Very truly yours,

-------------------------------------------
As Attorney-in-Fact for each of the several
Underwriters named in Schedule 1 to the
Underwriting Agreement

Confirmed as of the date
first above written:

W.B. McKee Securities, Inc.
South Coast Financial Securities, Inc.

By: W.B. McKee Securities, Inc.

By:
---------------------------
William B. McKee, President

<PAGE> 1

CERTIFICATE OF AMENDMENT

CERTIFICATE OF INCORPORATION

SUNRISE PRESCHOOLS, INC., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware, DOES
HEREBY CERTIFY:

FIRST: That at a meeting of the Board of Directors of Sunrise
Preschools, Inc., a Delaware corporation (the "Corporation") on February 1,
1991, resolutions were duly adopted setting forth a proposed amendment to the
Certificate of Incorporation of the Corporation, declaring said amendment to be
advisable and directing that said amendment be considered at the next annual
meeting of the stockholders of the Corporation. The resolutions setting forth
the proposed amendment are as follows:

RESOLVED, that the first paragraph of Article 5 of the Corporation's
Certificate of Incorporation be, and hereby is, amended in its
entirety to read as follows:

5. Authorized Capital. The total number of shares of
stock which the Company shall have authority to issue is
11,000,000 shares, consisting of 10,000,000 shares of common
stock having a par value of $.01 per share (the "Common
Stock") and 1,000,000 shares of preferred stock having a par
value of $1.00 per share (the "Preferred Stock").

SECOND: That thereafter, pursuant to resolution of its Board of
Directors, an annual meeting of the stockholders of the Corporation was duly
called and held on March 28, 1991, upon notice in accordance with Section 222
of the General Corporation Law of the State of Delaware at which meeting the
necessary number of shares as required by statute were voted in favor of the
amendment.

EXHIBIT 3.2

<PAGE> 2

THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.

IN WITNESS WHEREOF, Sunrise Preschools, Inc. has caused this
certificate to be signed by James R. Evans, its President, this 9th day of
June, 1995.

SUNRISE PRESCHOOLS, INC., a Delaware
corporation

By /s/ James R. Evans
---------------------------------
James R. Evans, President

<PAGE> 1

ACQUISITION CONSULTING AND INVESTOR RELATIONS AGREEMENT

THIS ACQUISITION CONSULTING AND INVESTOR RELATIONS AGREEMENT (the
"Agreement") is entered into as of the 14th day of April, 1995 (the "Effective
Date") by and between SUNRISE PRESCHOOLS, INC., a Delaware corporation
("Sunrise"), and MILLER CAPITAL CORPORATION, an Arizona corporation d/b/a The
Miller Group ("TMG").

In consideration of the mutual premises, covenants and undertakings
set forth herein, the parties hereby agree as follows:

I. RESPONSIBILITIES OF TMG.

1.1 Subject to the terms and conditions hereof, Sunrise hereby
retains TMG to provide investor relations and acquisitions consulting services
to Sunrise and TMG agrees to provide such services to Sunrise. The services to
be provided to Sunrise by TMG shall consist of the following: (i) assisting
Sunrise with the identification of acquisition candidates and with negotiating
and structuring acquisitions all in accordance with Sunrise's expansion plans
as may be in effect from time to time (the "Acquisition Consulting Services")
and (ii) preparing and disseminating financial information and annual and
interim reports to Sunrise's stockholders and the financial community,
consulting with management of Sunrise on issues relating to the financial
community, preparing, reviewing and disseminating press releases and assisting
Sunrise in all necessary or appropriate ways with regard to its communications
with its stockholders (the "Investor Relations Services").

1.2 Information to be released by TMG will be disseminated to
general, financial and trade media, the investment banking community, banks and
statistical organizations, all as recommended by TMG and approved by Sunrise.
All information to be disseminated through TMG will be based upon material
furnished by Sunrise and will be released only after receipt by TMG of final
approval from Sunrise.

1.3 Sunrise recognizes that TMG may have, either at the present
time or in the future, obligations imposed upon it by the Federal securities
laws to independently verify certain of the information contained in releases
being made through TMG. Accordingly, Sunrise agrees that TMG shall have the
right to make such reasonable inquiries as TMG shall deem necessary or
appropriate of officers and employees of Sunrise and Sunrise's legal counsel
and auditors with respect to information to be released by TMG. Sunrise
recognizes that the accuracy and completeness of all information contained in
releases ultimately rests with Sunrise. Accordingly, Sunrise agrees to
indemnify and hold harmless TMG from and against any loss or expense arising
out of a claim that any information released by TMG is inaccurate or
incomplete, provided that the release of such information received the prior
approval of Sunrise.

EXHIBIT 10.41

<PAGE> 2
1.4 Sunrise acknowledges and understands that TMG, in order to
perform its services effectively under this Agreement, and to satisfy such
obligations as may be imposed upon it by the Federal securities laws, requires
the prompt receipt of all material information with respect to Sunrise, its
operations and prospects. Accordingly, Sunrise agrees to furnish promptly to
TMG copies of all publicly available reports and filings made with the
Securities and Exchange Commission (the "SEC"), all communications with
stockholders (in the stockholders' capacity as a stockholder) and all reports
received from Sunrise's auditors that have significance to the scope of TMG's
services hereunder; provided, however, Sunrise shall have no obligation to
provide TMG with any information that Sunrise deems confidential. Sunrise
recognizes the necessity of promptly notifying TMG of all material developments
concerning Sunrise, its business and prospects and to supply TMG with
sufficient information necessary for TMG to make a determination as to its
compliance with its own procedures as well as any legal requirements. TMG
agrees that it shall keep confidential all information received from Sunrise
until such time that TMG is authorized to release such information.

II. COMPENSATION TO TMG.

2.1 Unless this Agreement is terminated pursuant to Section 6,
Sunrise shall pay to TMG the following compensation:

(a) As compensation for the Acquisition Consulting
Services, Sunrise shall pay to TMG a consulting fee of $15,000 per
school for each of the schools acquired during the Acquisition
Consulting Services portion of the term of this Agreement. The fee
set forth in this Section 2.1(a) shall be paid to TMG as follows: (i)
$50,000 in the form of a non-refundable retainer, which shall be
applied at a rate of $10,000 per school to the first five schools
acquired by Sunrise during the Acquisition Consulting Services portion
of the term of this Agreement; (ii) an additional $5,000 upon the
closing of each of the first five school acquisitions during the
Acquisition Consulting Services portion of the term of this Agreement;
and (iii) $15,000 per school for each additional school acquired by
Sunrise during the Acquisition Consulting Services portion of the term
of this Agreement.

(b) As compensation for the Investor Relations Services,
Sunrise shall pay to TMG a fee of (i) $3,000 per month from the
Effective Date of this Agreement through December 31, 1995 and (ii)
$5,700 per month from January 1, 1996 until the expiration of the term
of this Agreement pursuant to Section 6.1. As additional compensation
for Investor Relations Services, Sunrise hereby grants to TMG (or its
assigns acceptable to Sunrise) a warrant (the "Warrant") to purchase
145,000 shares of Sunrise's common stock at a price of $1.21875 per
share, which was the closing price of Sunrise's common stock on April
13, 1995. The number of shares subject to the Warrant shall be
adjusted in the event of (i) a subdivision or combination of Sunrise's
outstanding common stock or (ii) any distributions by Sunrise of a
stock dividend to the holders of Sunrise's common stock. The Warrant
shall be in a form mutually acceptable to the parties.

<PAGE> 3

III. EXPENSE REIMBURSEMENT

Sunrise agrees to reimburse TMG all amounts due and owing TMG under
the terms of this Agreement, no later than fifteen (15) days after receiving an
invoice for all customary and reasonable out-of-pocket expenses including but
not limited to, the cost of telephone calls, travel, facsimile transmissions,
translation, interpretation, paper duplication, postage and delivery services,
or fees of counsel incurred in connection with the performance by TMG of its
duties in accordance with the terms of this Agreement. TMG shall also provide
Sunrise with copies of all receipts relating to expenses to be reimbursed by
Sunrise. All travel, counsel or third party consultant fees, and other
significant expenses over $250 dollars, must be approved by Sunrise in advance.
If TMG must file a lawsuit to collect any outstanding fees, out-of-pocket
expenses, or other expenses due from Sunrise, and is successful, Sunrise agrees
to pay reasonable costs and attorneys fees for such action.

IV. EXCLUSIVITY

During the term of this Agreement, Sunrise will not engage any other
person or entity to serve as its investor relations agent without the prior
written consent of TMG.

V. ASSIGNMENT AND TRANSFER OF OBLIGATIONS

In the event that Sunrise transfers or otherwise conveys all or
substantially all of its assets (including without limitation the assets of its
subsidiaries) or grants the authority to operate its business(es) or affiliated
business(es) to a new entity, whether a corporation, partnership, or natural
person ("New Entity") all of Sunrise's obligations under this Agreement will be
binding upon such New Entity and Sunrise will not enter into or create an
agreement, undertaking or legal obligation with a New Entity without requiring
such New Entity to accept and satisfy Sunrise's obligations under this
Agreement. Notwithstanding anything to the contrary contained in this Article
V, this Article V shall not be applicable and will be of no force or effect if
compliance with this Article V would result in the violation of any law or
statute, the breach of any Agreement to which Sunrise or its affiliates is a
party, or the inability of Sunrise to operate in accordance with its usual and
customary practices; including but not limited to (i) all forms of public or
private grants or similar fundings which Sunrise currently receives or may
receive in the future, and (ii) any transaction or funding arising out of or
related to Sunrise's relationship with Preschool Services, Inc.

VI. TERMINATION

6.1 Unless extended by a writing signed by both parties, this
Agreement shall terminate on December 31, 1996; provided, however, that Sunrise
may terminate the Acquisition Consulting Services portion of this Agreement
immediately upon written notice to TMG in which case TMG shall have no further
obligation to perform Acquisition Consulting Services for Sunrise and Sunrise
shall have no obligation to pay TMG the fees specified in Section 2.1(a)(ii)
and (iii) with respect to any schools acquired thereafter. TMG shall be paid by
Sunrise all fees

<PAGE> 4

earned through the date of termination together with reimbursement of all
expenses due. All such fees and reimbursements due TMG shall be paid on or
before the date of termination.

6.2 Sunrise shall have the right to terminate this Agreement at
any time, upon ten (10) days written notice, "for cause." During the ten (10)
day period following such notice, TMG shall have the opportunity to correct, if
possible and to Sunrise's reasonable satisfaction, all of the issues raised in
the termination notice. "For cause" shall mean (i) TMG's breach of this
Agreement, which TMG fails to cure within ten days of the receipt of the
termination notice describing such breach, (ii) fraud, (iii) conviction of
criminal acts, or (iv) behavior by TMG or its employees that is materially
injurious to Sunrise's business; provided, however, that actions by TMG
occurring prior to the date of this Agreement shall not give rise to
termination for cause. Upon termination pursuant to this Section 6.2, this
Agreement shall be of no further force or effect.

6.3 No amounts paid by Sunrise to TMG hereunder shall be subject
to reimbursement in the event of termination of this Agreement.

VII. INDEMNIFICATION

7.1 In connection with the terms and agreements set forth herein,
Sunrise agrees to indemnify and hold harmless TMG, its officers, directors,
employees, agents and legal counsel (collectively, the "TMG Parties"), against
any and all losses, claims, damages, liabilities or costs (and any reasonable
legal or other expenses in giving testimony or furnishing documents in response
to a subpoena or otherwise), including the costs of investigation, preparing or
defending any action or claim, directly or indirectly, caused by, relating to,
based upon or arising out of this Agreement; provided, however, such
indemnification shall not apply to any such loss, claim, damage, liability or
cost to the extent it is found to have resulted from the gross negligence or
wilful misconduct of a TMG Party. Sunrise also agrees that the TMG Parties
shall not have any liability (whether direct or indirect, in contract, tort or
otherwise) to Sunrise for or in connection with the engagement of TMG, except
for any such liability for losses, claims, damages, liabilities, costs that are
found to have resulted from a TMG Party's gross negligence or wilful
misconduct.

7.2 TMG agrees to indemnify Sunrise and hold harmless Sunrise, its
officers, directors, employees, agents and legal counsel (collectively, the
"Sunrise Parties") against any and all liabilities, expenses, costs and damages
(including the cost of defense) alleged against or incurred by any Sunrise
Party in connection with this Agreement to the extent that such liability,
expense, cost, or damage was incurred or is alleged to have been incurred in
whole or in part, directly or indirectly, due to any action or omission to act
by TMG, which action or omission is determined to be the result of TMG's gross
negligence or wilful misconduct.

7.3 If any action, proceeding, or investigation is commenced or
claim is made as to which either a TMG Party or a Sunrise Party proposes to
demand indemnification, the party claiming indemnification (the "Indemnified
Party") will notify the party against whom

<PAGE> 5

indemnification is claimed (the "Indemnifying Party") with reasonable
promptness. The Indemnifying Party reserves the right to assume the defense of
the Indemnified Party with counsel of its choosing, which counsel shall be
reasonably acceptable to the Indemnified Party. The Indemnifying Party will
not be liable for any settlement of any claim against any Indemnified Party
made without the Indemnifying Party's written consent.

VIII. NOTICES.

8.1 All notices and other written communications required to be
given under this Agreement shall be in writing and shall be deemed to have been
duly given if delivered to the addressee in person or mailed by registered or
certified mail, return receipt requested, to the following addresses:

If to TMG: Mr. Rudy R. Miller
Chairman, President and CEO
The Miller Group
4909 East McDowell Road
Phoenix, Arizona 85008

If to Sunrise: Mr. James R. Evans
President
Sunrise Preschools, Inc.
9128 Ease San Salvador Drive, Suite 200
Scottsdale, Arizona 85258

Either party may change the address at which notice is to be given by notifying
the other party in writing. Notices shall be deemed delivered upon delivery,
if personally delivered, or, if mailed, three (3) days after deposit in the
United States mail.

IX. APPLICABLE LAW.

This Agreement shall be governed in all respects by the laws of the
State of Arizona as such laws are applied to agreements between Arizona
residents entered into and to be performed entirely within Arizona.

X. MISCELLANEOUS.

10.1 Assignment. TMG shall not assign this Agreement to a third
party without the prior written consent of a duly authorized representative of
Sunrise, which consent shall not be unreasonably withheld.

10.2 Entire Agreement. This Agreement constitutes the full and
entire understanding and agreement between the parties with regard to the
subject hereof and this Agreement

<PAGE> 6

supersedes, merges and renders void every other prior written and/or oral
understanding or Agreement relating to the subject hereof among or between the
parties hereto.

10.3 Amendment. This Agreement shall not be altered or amended
except by a written Agreement signed by the parties hereto.

10.4 Severability. In the event any term or provision of this
Agreement is declared to be invalid or illegal for any reason, this Agreement
shall remain in full force and effect and the same shall be interpreted as
though such invalid and illegal provision were not a part hereof. The
remaining provisions shall be construed to preserve the intent and purpose of
this Agreement and the parties shall negotiate in good faith to modify the
provisions held to be invalid or illegal to preserve each party's anticipated
benefits thereunder.

10.5 Titles and Subtitles. The titles of articles and sections of
this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.

10.6 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.

10.7 Delays or Omissions. No delay or omission to exercise any
right, power or remedy accruing to any party shall impair any such right, power
or remedy of such party, nor shall it be construed to be a waiver of any breach
or default under this Agreement, or an acquiescence therein, or in any similar
breach or default thereafter occurring; nor shall any delay or omission to
exercise any right, power or remedy or any waiver of any single breach or
default be deemed a waiver of any other right, power or remedy or breach or
default theretofore or thereafter occurring.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.

SUNRISE PRESCHOOLS, INC.

By /s/ James R. Evans
--------------------------------
James R. Evans,
Chairman & President

MILLER CAPITAL CORPORATION

By /s/ Rudy R. Miller
--------------------------------
Rudy R. Miller
Chairman, President & CEO

<PAGE> 1

May 4, 1995

Mr. James R. Evans
11773 E. Terra Drive
Scottsdale, Arizona 85259

RE: SECOND AMENDMENT TO EMPLOYMENT AGREEMENT

Dear Mr. Evans:

Reference is made to that certain Employment Agreement dated October
15, 1993 between Sunrise Preschools, Inc. (the "Corporation") and yourself (the
"Employment Agreement"), as amended on September 16, 1994 (the "First
Amendment"). In recognition of your continued contribution to the growth and
success of the Corporation, the Corporation desires to amend the Employment
Agreement as set forth below. Accordingly, and in consideration of the promises
hereafter set forth, the Corporation and you agree as follows:

A. Section 2 of the Employment Agreement is hereby amended in its
entirety as follows:

"2. Term of Agreement. This Agreement will commence on the Effective
Date (as defined in Subsection 12(c)) and shall have a perpetual term of three
years, such that on any given date, this Agreement will have a remaining term of
three years from such date."

B. Sections 6(d), (e) and (f) shall be amended in their entirety as
follows:

"6. Compensation Upon Termination or During Disability.

d. If your employment is terminated (i) by the
Corporation other than for Cause or Disability or (ii) by you for Good Reason,
then you shall be entitled to the following benefits:

EXHIBIT 10.42

<PAGE> 2

Mr. James R. Evans
May 4, 1995
Page 2

(1) the Corporation shall pay you your full Base
Salary together with any bonuses that have accrued but have not been paid
through the Date of Termination at the rate in effect at the time Notice of
Termination is given, or the Date of Termination where no Notice of Termination
is required;

(2) in lieu of any further salary payment to you
for periods subsequent to the Date of Termination, the Corporation shall pay you
a lump sum payment equal to the sum of three years of your annual Base Salary as
in effect immediately prior to the occurrence of the circumstances giving rise
to your termination and an amount equal to all bonuses paid to you in addition
to your Base Salary in the three-year period preceding the Date of Termination;

(3) the Corporation shall maintain in full force
and effect for your continued benefit and the benefit of your eligible
dependents and beneficiaries, until the first to occur of (i) your attainment of
alternative employment or (ii) three years from the Date of Termination, the
employee benefits under the Corporation's benefit plans that you or they were
eligible to receive immediately prior to the Date of Termination, subject to the
terms and conditions of the benefit plans; provided that your continued
participation or the participation of such eligible dependents or beneficiaries
is possible under the general terms and provisions of such benefit plans. In
the event that your participation or the participation of such eligible
dependents or beneficiaries in any such benefit plan is barred, the Corporation
shall arrange to provide you and such eligible dependents or beneficiaries with
benefits substantially similar to those to which you and such eligible
dependents or beneficiaries are entitled under such benefit plans for the period
stated above. At the end of the period of coverage, you shall have the option
to have assigned to you, at no cost and with no apportionment of prepaid
premiums, any assignable insurance policy owned by the corporation and relating
specifically to you; and

(4) notwithstanding any term to the contrary in
any options or warrants purchase Common Stock of the Corporation which have been
granted to you by the Corporation, or in any agreement or plan relating thereto,
any such options or warrants shall become immediately exercisable and shall
remain exercisable for the longer of (A) one year or (B) the then remaining
unexpired term of such options or warrants.

e. Section 6(e) is deleted in its entirety.

f. The payments provided for in Subsections (6)(d)(1)
and (2) shall be made by the Corporation to you not later than the fifth day
following the Date of Termination."

<PAGE> 3

Mr. James R. Evans
May 4, 1995
Page 3

C. Limited Effect. The Employment Agreement and the First
Amendment shall be deemed amended only to the extent set forth herein. This
Second Amendment shall be limited precisely as written and shall not be deemed a
modification of other terms or conditions of the Employment Agreement and the
First Amendment.

D. Definitions. As used in the Employment Agreement, the term
"Board" shall mean the Board of Directors of the Corporation. Terms used herein
and not otherwise defined shall have the meanings ascribed to such terms in the
Employment Agreement.

E. Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Arizona.

F. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.

If this letter sets forth our agreement on the subject matter hereof,
kindly sign and return to the Corporation the enclosed copy of this letter which
will then constitute or agreement on this subject.

Sincerely,

SUNRISE PRESCHOOLS, INC.

By /s/ Dr. Richard H. Hinze
--------------------------------
Dr. Richard H. Hinze,
Director

Agreed and accepted as of the
4th day of May, 1995

By /s/ James R. Evans
------------------------------------
James R. Evans

<PAGE> 1

May 4, 1995

Ms. Barbara L. Owens
1280 W. Caroline Lane
Tempe, Arizona 85284

RE: SECOND AMENDMENT TO EMPLOYMENT AGREEMENT

Dear Ms. Owens:

A. Section 2 of the Employment Agreement is hereby amended in its
entirety as follows:

B. Sections 6(d), (e) and (f) shall be amended in their entirety as
follows:

"6. Compensation Upon Termination or During Disability.

d. If your employment is terminated (i) by the
Corporation other than for Cause or Disability or (ii) by you for Good Reason,
then you shall be entitled to the following benefits:

EXHIBIT 10.43

<PAGE> 2

Ms. Barbara L. Owens
May 4, 1995
Page 2

(4) notwithstanding any term to the contrary in
any options or warrants to purchase Common Stock of the Corporation which have
been granted to you by the Corporation, or in any agreement or plan relating
thereto, any such options or warrants shall become immediately exercisable and
shall remain exercisable for the longer of (A) one year or (B) the then
remaining unexpired term of such options or warrants.

e. Section 6(e) is deleted in its entirety.

f. The payments provided for in Subsections (6)(d)(1)
and (2) shall be made by the Corporation to you not later than the fifth day
following the Date of Termination."

<PAGE> 3

Ms. Barbara L. Owens
May 4, 1995
Page 3

E. Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Arizona.

F. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.

Sincerely,

SUNRISE PRESCHOOLS, INC.

By /s/ Dr. Richard H. Hinze
--------------------------------
Dr. Richard H. Hinze,
Director

Agreed and accepted as of the
4th day of May, 1995

By /s/ Barbara L. Owens
------------------------------------
Barbara L. Owens

<PAGE> 1

EXHIBIT 11

SUNRISE PRESCHOOLS, INC. AND SUBSIDIARY

STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS

<TABLE>
<CAPTION>
Year Ended July 31,
--------------------------
1995 1994
---------- ----------
<S> <C> <C>
PRIMARY:
Common shares outstanding, beginning of year 2,435,894 2,435,894
Effect of weighting shares:
Employee stock options outstanding 18,072 5,550
Effect of warrant exercise 166,666 -
Assumed exercise of warrants - 53,571
---------- ----------
Weighted average number of common shares and
common share equivalents outstanding 2,620,632 2,495,015
========== ==========
Net income available for common stock $ 756,852 $ 830,649
========== ==========
Net income per common share and common
share equivalent $ .29 $ .33
========== ==========
FULLY DILUTED:
Common shares outstanding, beginning of year 2,435,894 2,435,894
Effect of weighting shares:
Employee stock options outstanding 85,907 9,199
Effect of warrant exercise 186,274 -
Assumed exercise of warrants - 100,000
Assumed conversion of preferred stock 500,000 500,000
---------- ----------
Weighted average number of common shares and
common share equivalents outstanding 3,208,075 3,045,093
========== ==========
Net income available for common stock $ 806,852 $ 880,649
========== ==========
Net income per common share and common
share equivalent $ .25 $ .29
========== ==========
</TABLE>

<PAGE> 1
SUNRISE PRESCHOOLS, INC.

LIST OF SUBSIDIARIES

Sunrise Preschools Hawaii, Inc.,
a Hawaii Corporation

Exhibit 21

<PAGE> 1
ARTHUR ANDERSEN LLP

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our report
(and to all references to our firm) included in or made a part of this
registration statement.

Phoenix, Arizona,
October 18, 1995.

EXHIBIT 23.1