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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 27, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER: 0-16425
SUNRISE PRESCHOOLS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 86-0532619
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9128 E. SAN SALVADOR, SUITE 200, SCOTTSDALE, ARIZONA 85258
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code (602) 860-1611
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
SERIES C PREFERRED STOCK, $1.00 PAR VALUE
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained herein, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The Registrant's revenues for its most recent fiscal year were: $10,237,418
The aggregate market value of voting stock held by non-affiliates of the
Registrant, based on the closing price on October 4, 1996, was approximately
$2,021,215. Shares of voting stock held by each officer and director and by each
person who owns 5% or more of the outstanding voting stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily conclusive.
As of October 4, 1996, 2,982,968 shares of Common Stock, $.01 par value, were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
LOCATION OF EXHIBIT INDEX
The index of exhibits is contained in Part III herein on page number 52.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT: YES NO X
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TABLE OF CONTENTS
<TABLE>
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Page
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PART I:
Item 1. Business ........................................................... 3
Item 2. Properties ......................................................... 14
Item 3. Legal Proceedings .................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders ................ 15
PART II:
Item 5. Market for Registrant's Common Equity and Related
Stockholders Matters................................................ 16
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operation................................................ 17
Item 7. Financial Statements and Supplementary Data ........................ 21
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................ 41
PART III:
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act................... 42
Item 10. Executive Compensation ............................................. 44
Item 11. Security Ownership of Certain Beneficial Owners and Management ..... 48
Item 12. Certain Relationships and Related Transactions ..................... 50
PART IV:
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ... 52
SIGNATURES........................................................................... 56
</TABLE>
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PART I
ITEM 1. BUSINESS.
COMPANY PROFILE
The Company was organized under Delaware law in May 1987, and
is the successor to two corporations that initially operated the Company's child
care centers. Venture Educational Programs, Inc. ("Venture"), an Arizona
corporation, was formed in 1980. Venture operated the first two Sunrise
Preschools, which opened in September 1982 and September 1984, respectively, and
also operated a child care center under another name until August 1984. An
affiliated company, Sunrise Preschools, Inc., an Arizona corporation ("Sunrise
Arizona"), was formed in November 1985 and operated five child care centers,
which opened from January 1986 to May 1987. On May 27, 1987, Venture was merged
into Sunrise Arizona, and on May 28, 1987, Sunrise Arizona was merged into the
Company. The Company has one wholly owned subsidiary, Sunrise Preschools Hawaii,
Inc., formed in fiscal 1990 to operate child care centers in Hawaii. Another
subsidiary, Sunrise Holdings, Inc., formed in fiscal 1987 to construct the
Company's child care centers, was dissolved effective September 10, 1994. As
used in this Annual Report, unless the context indicates otherwise, the term
"Company" refers to Sunrise Preschools, Inc., and its subsidiaries and
predecessors.
Effective February 1, 1994, a portion of the Company's
operations were transferred to a Hawaii nonprofit corporation, Preschool
Services, Inc. ("PSI"). Because of PSI's nonprofit status, PSI is eligible to
receive certain grants and subsidies. Under a written agreement between the
Company and PSI, the Company provides PSI with management and administrative
services and educational programs in exchange for a management fee. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
In December 1995, the Company completed a public offering of
333,333 newly issued shares of Series C Preferred Stock at $15 per share. Net
proceeds from the offering were $4,026,475.
In February 1996, the underwriters of the public offering
exercised their option to purchase 24,000 additional shares of Series C
Preferred Stock to cover over-allotments. These shares were sold by the Company
at the same price and same terms as those applicable to the initial offering of
Series C Preferred Stock, and resulted in net proceeds to the Company of
$298,072.
The Company intends to use the proceeds from the public
offering primarily to acquire, open and equip additional child care centers.
During fiscal 1996, the Company acquired or opened six additional centers,
increasing its licensed capacity by approximately 1,011 additional children.
Management is continuing to pursue various expansion and acquisition
opportunities. Subsequent to the end of the fiscal year, the Company acquired
four additional centers and opened one newly constructed center, increasing the
licensed capacity by 702 additional children.
The Company's principal executive offices are located at 9128
East San Salvador, Suite 200, Scottsdale, Arizona 85258, and its telephone
number is (602) 860-1611.
The fiscal year of the Company consists of eight four-week
periods and four five-week periods. Each quarter of the Company's fiscal year
consists of two four-week periods and one five-week period. The Company's fiscal
year ends on the Saturday nearest July 31 of each year. However, for clarity of
presentation, all information has been presented as if the fiscal year ended on
July 31.
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BUSINESS
GENERAL
Sunrise Preschools, Inc. operates a chain of premium quality
child care centers that offer comprehensive educational child care services
primarily for children ages six weeks to twelve years. The Company currently
operates 36 child care centers in Arizona, Hawaii, Colorado and Wisconsin.
Enrollment on September 30, 1996 was approximately 3,600 children and the
aggregate licensed capacity of the Company's child care centers was 5,160
children. The Company offers both full and half-day programs, as well as
extended hours at several of its facilities including 24-hour care at one
location.
The Company's strategy is to be a comprehensive provider of
high quality educationally oriented 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 reflect 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 most child care providers
by offering a comprehensive educationally based curriculum that incorporates
innovative teaching techniques and programs, and by offering its parents and
children modern facilities and equipment. The Company's education-based programs
emphasize, among other things, 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 implements its learning programs and curriculum
and, if necessary, updates and modernizes the equipment and facilities of the
acquired centers. The Company believes that such programs and strategies
contribute significantly to its revenues.
The Company's strategic emphasis on child development and
learning programs are geared toward modern attitudes about child care and early
education. Surveys show that working mothers believe that their children benefit
from center-based child care because it is educational, contributes to child
development and builds social skills. Surveys also show that working mothers
believe that one-on-one child care is of lesser educational value than group
care.
THE CHILD CARE INDUSTRY
There are two primary types of child care: center-based and
home-based. Center-based care is provided by churches, nonprofit and for-profit
entities that provide a wide variety of services ranging from custodial care to
comprehensive preschool curricula. Home-based care is much less uniform than
center-based care. There is usually greater dependence on the availability of
and training by one or only a few adults, and facilities are less likely to be
customized to the needs of children. Payment for child care services may be made
completely by parents or subsidized in whole or in part by others, including
governmental programs, employers and nonprofit churches or community groups.
The for-profit child care market segment is highly fragmented,
due to the large number of facilities offering child care services. Revenues for
the for-profit child care market are estimated to be about $9 billion, based on
a licensed capacity estimated at 3.5 million. The largest 50 for-profit child
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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.
[A PIE CHART DEPICTING THE LARGE AND
FRAGMENTED MARKET SHOWING THE TOP 50
CHAINS ACCOUNT FOR AN 11% SHARE AND
SMALL OPERATORS ACCOUNT FOR AN 89% SHARE.]
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
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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.
[A LINE GRAPH DEPICTING THE LABOR FORCE
PARTICIPATION OF WOMEN OF CHILD-BEARING
AGE FROM 1990 (41 MILLION) THROUGH THE
YEAR 2000 (44 MILLION)]
[A LINE GRAPH DEPICTING THE PERCENTAGE
OF MOTHERS OF PRESCHOOL AGE CHILDREN WHO
WORK FROM 1970 (30%) THROUGH 1990 (59%)]
Source: U.S. Bureau of Labor Statistics
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CHILD CARE CENTER OPERATIONS
Consistent with the Company's strategic emphasis on high
quality child care, the Company's operations are designed to appeal to parents
who want innovative learning programs emphasizing child development offered in
modern facilities. The Company's approach to its operations includes the
following concepts:
FACILITIES -- Facilities are designed with a
number of features that promote an optimal atmosphere for
child development, as well as efficient adult child
interaction and observation. The Company's child care center
design incorporates individual classrooms and provides a quiet
atmosphere within each classroom while still allowing free
movement from activity to activity. An abundance of windows
gives the facility an open, airy and clean appearance. Most of
the Company's child care facilities have observation rooms for
parents to view their children's participation in the daily
activities without interruption. Bathrooms are adjacent to
each classroom for easy access and safe monitoring of
children. Many facilities have video cameras in each classroom
that are monitored on a continual basis at the front office.
Licensed capacity of the Company's child care centers ranges
from 10 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 several 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.
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CURRICULA AND PROGRAMS
The Company believes that a developmental approach to
learning, coupled with a strong early childhood foundation, 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. This program is
offered in an environment that is conducive to learning and
provides stimulation for very young children.
TODDLERS -- The toddler program includes a
variety of developmental activities such as wet and dry
tables, blocks, dolls and art experiences. 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.
PRIVATE KINDERGARTEN AND FIRST GRADE -- The
Company, responding to parents' general desire for more
academics and a longer program at Sunrise, has instituted a
private kindergarten and first grade program. This program
allows the parents of a child who is of public school age the
choice to stay at Sunrise for kindergarten and first grade.
This program has been successful and the Company plans to
continue to enhance these grade levels at many of their
locations. Parents pay additional tuition for these programs.
The Company believes that the higher academic standards, the
lower ratios and the flexibility of the program will continue
to increase enrollments in this area.
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 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.
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The Company also has contracted with an
outside organization, to offer sophisticated, computer-based,
educational classes on site to children ages three and up
utilizing highly trained teachers and state-of-the-art
software. Other various special programs are offered by the
Company including ballet, swimming, piano and karate.
Presently, all of these special programs, for which an
additional fee is charged, account for a small percentage of
the monthly revenue at each child care center; however, the
Company continues to expand and market these programs to seek
additional student participation and increased revenue.
SPECIAL NEEDS PROGRAM -- Since July 1987,
the Company has been awarded an annual contract from the
Division of Developmental Disabilities of the Arizona
Department of Economic Security to provide a goal-oriented
training program for and to integrate mild to severely
handicapped children in child care centers. In September 1991,
the Company was approved to be a private provider of special
education preschool programs and related services by the
Arizona Department of Education. Since June 1991, the Arizona
Department of Economic Security, as administrator of a child
care block grant, has awarded the Company an annual contract
to deliver child care to families with special needs children.
These contracts have been renewed through June 1997.
TUITION
The Company determines tuition charges based upon a number of
factors including age of child, number of days and hours of attendance, location
and competition. Part-time students are charged proportionately higher rates
than full-time students. The Company's charges for service vary, depending on
the location of the center and the age of the child; however, the Company's
rates are generally higher than its competitors. Tuition is generally collected
on a weekly or monthly basis in advance.
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, 1996, 1995 and 1994, the Company's average
percentage occupancy was 72.2%, 76.7%, and 78.3%, 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.
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EXPANSION
The Company has implemented a plan to develop into a hybrid
educational management company. The plan provides growth, both in the number of
centers the Company operates and in the range of services it provides.
This expansion program is being funded, in part, by the
proceeds of the December 1995 public offering. The Company is using a portion of
the proceeds to open new child care centers. In addition, the Company has
actively pursued the acquisition of established child care centers operated in
the southwestern United States, as well as in other geographic areas. Long-term
growth opportunities will also come from build-to-suit opportunities, where
child care facilities are developed as an amenity to an overall project or as
stand-alone facilities constructed for the Company. With regard to build-to-suit
opportunities, the Company contracts with unrelated third parties to develop and
construct child care centers based on the Company's specifications. The Company
then leases the center back 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 this plan, during fiscal 1996, the Company
acquired the assets of two child care centers in the Denver, Colorado
metropolitan area, one center in Colorado Springs, one center in Sierra Vista,
Arizona, and one center in Phoenix, Arizona. In addition, through its contract
with Preschool Services, Inc. ("PSI"), the Company assumed management of a newly
opened center in Hales Corner, Wisconsin. All but two of these additions
occurred during the last four months of the fiscal year.
The expansion activity continued after the end of the 1996
fiscal year. In August 1996, the Company acquired the assets of four additional
centers in the Phoenix metropolitan area, and in October 1996, the Company
opened a newly constructed free-standing center, also in the Phoenix metro area.
Through October 1996, the Company's expansion program has
increased its licensed capacity by 1,713 additional children, a 50% increase
over fiscal 1995. The Company is continuing to evaluate prospective acquisition
candidates and additional build-to-suit opportunities, and will pursue those
that fit its strategy.
In addition to expanding the number of centers it operates,
the Company has also expanded the types of services it provides. The Company has
selectively moved into primary education by adding first grade classes in three
of its Arizona centers in the fall of 1996. In addition, one of the centers it
acquired in the Phoenix area has been converted to a Suncrest Private School.
Suncrest offers a state of the art environment, with smaller class sizes, lower
teacher to student ratios and more degreed teachers than most preschools.
Suncrest uses the nationally known and respected High Scope teaching method, and
currently serves children age 2 through kindergarten, with plans to expand to
include primary grades. The extra services provided by Suncrest allow the
Company to charge a higher tuition rate than at its other preschools.
In addition to Sunrise and Suncrest schools, the Company also
operates three Sunburst Child Care Centers. Sunburst centers were designed to
capitalize on a market segment that cannot afford the higher tuition rates
charged by the Company at Suncrest. These centers provide quality care for lower
tuition rates. Sunburst centers have lower operating costs, allowing for these
lower tuition rates.
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With Suncrest, Sunrise and Sunburst centers, the Company can
penetrate three distinct income markets, thus expanding its market
opportunities.
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 1996, one contract for
two child care centers with a total licensed capacity of 38 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.
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, 1996, 1995 and 1994,
revenues from ECC programs, including revenues received from employers as well
as employees, represented 43%, 45% and 31%, respectively, of the Company's total
operating revenue.
One of the more innovative ECC programs, although not the
largest, is the Child Development and Family Studies Laboratory ("CDFSL") which
is operated under the Company's management agreement with PSI. 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 and uses the High Scope teaching method. The laboratory
provides a program for parents and children to participate in interesting
projects for observational research. As part of their educational training,
students attending ASU West are permitted to observe the interaction of children
in a combined environment of child care and teaching. An advanced program has
been developed using lower teacher to child ratios than is required. The program
is available to faculty, staff and students of ASU West and to the general
public if space permits.
PARTNERSHIP CHILD CARE PROGRAMS
One strategic focus of the Company is to increase its
enrollment levels through various partnership arrangements with third parties,
such as churches. 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, at various rates, 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 and risk.
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Currently, the Company's partnership activities are undertaken
in connection with PSI, a nonprofit corporation. Because of PSI's nonprofit
status, PSI is eligible to receive certain grants and subsidies. PSI typically
enters into agreements with third parties to establish child centers or assume
the operations of existing child care centers and then contracts with the
Company to operate the child care centers in exchange for a management fee.
Profits generated by the entities are shared by PSI and the third party. See
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
Currently, the Company operates eight child care centers in
connection with PSI. The total licensed capacity of these child care centers is
901 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 four child care facilities
in conjunction with a high school district in Phoenix. These centers operate on
a cost reimbursement basis, plus a profit component for the Company. 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. The number of centers operated under this contract has changed from
year to year, depending on the needs of the district. During fiscal 1996, the
Company operated five centers with a total licensed capacity of 63 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 American Child Care Centers, dba Ultra
Child Care/Mary Moppets, Kinder-Care Learning Centers, Inc., Children's World
Learning Centers, Inc., Child Time and La Petite Academy, Inc., as well as child
care centers owned by nonprofit organizations that may be supported to a large
extent by endowments, charitable contributions and other forms of subsidies. In
addition, the Company competes with individually-owned proprietary child care
centers, licensed child care homes, unlicensed child care homes, public schools,
the YMCA, Boys and Girls Clubs, public school programs, and businesses that
provide child care for their employees at the work place.
The Company believes that competition in the child care
industry is based on a variety of factors:
QUALITY OF FACILITIES, STAFF AND PROGRAMS. A
significant competitive factor is the extent to which programs
broader in scope than custodial care are provided. The Company
offers extensive educational and developmental programs which
are broader in scope than those offered by many of its
competitors. See "BUSINESS -- Curricula and Programs."
COSTS. Due to the extensive curriculum and
program offerings, the tuition at Sunrise and Suncrest Schools
is generally higher than that of its competitors. For parents
who choose child care facilities based on cost alone, these
centers have difficulty competing.
12
<PAGE> 13
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
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.
INSURANCE
The Company has not had any material claims against its
liability insurance; however, the Company, as well as other child care
providers, has had difficulty obtaining 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 $1,000,000 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 an $8,000,000 umbrella policy to cover claims in
excess of the per occurrence limitation on the general liability policy.
GOVERNMENT REGULATION
Operators of child care centers are subject to a wide variety
of state and local regulations and licensing requirements, including site
inspection for safety and compliance with building codes, review of programs and
facilities, ratio of staff to the number of attending children, health standards
(including food service) and zoning. Each child care center must be licensed by
the appropriate state and local authorities before it may begin operations. The
Company believes that each of its child care centers is in compliance, in all
material respects, with such requirements. No proceedings to suspend or revoke
any of the Company's licenses have ever been instituted. Compliance with
government regulations, including changes in the minimum wage, increase the
Company's operating costs; however, these costs are generally offset by
increases in tuition. No significant changes in government regulations are
expected in the next twelve months.
CHILD CARE INCOME TAX BENEFIT
The Internal Revenue Code of 1986, as amended, provides an
income tax credit ranging from 20% to 30% for parents for certain child care
expenses, subject to certain maximum limitations and income levels. Under
present law, the fees paid to the Company by working parents qualify for the
federal tax credit. In addition, many families also benefit from flexible
spending plans that permit families to pay a portion of their child care
expenses with pre-tax income.
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.
13
<PAGE> 14
EMPLOYEES
Individual child care centers are staffed with a director, one
or more assistant directors, 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 in one of its centers.
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 been able to attract and retain qualified personnel, but there can
be no assurance that the Company will be able to continue to do so in the future
without incurring additional payroll costs.
As of July 31, 1996, the Company employed approximately 730
persons, approximately 12 of which were employed in the corporate office and
approximately 718 of which (including 179 part-time employees), were employed at
the Company's child care centers. All management and supervisory personnel are
salaried; substantially all other employees are paid on an hourly basis. The
Company provides partial child care benefits for its employees in addition to
partial payment of medical and dental insurance premiums.
None of the Company's employees are represented by a union,
and the Company does not anticipate any union organization activities among its
employees.
ITEM 2. PROPERTIES.
Of the 36 child care centers operated by the Company in
Arizona, Hawaii, Colorado and Wisconsin, 25 are leased with terms expiring on
various dates between 1996 and 2011. 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. The aggregate monthly lease
payments on the 25 centers (net of monthly sublease income of approximately
$2,300) total approximately $250,000. 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 11 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.
14
<PAGE> 15
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of security
holders in the fourth quarter of fiscal 1996.
15
<PAGE> 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS.
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. From January 28, 1991 until December 19, 1995, the Common Stock
was quoted in the National Daily Quotation Service ("Pink Sheets") published
daily by the National Quotation Bureau, Inc. under the symbol SUNR. Quotations
were also available through the Electronic Bulletin Board operated by the
National Association of Securities Dealers, Inc. under the symbol 3SUNR.
Beginning December 20, 1995, the Company's Common Stock has been quoted on the
Nasdaq Small Cap Market under the symbol SUNR. 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.,
(through December 19, 1995, which prices reflect inter-dealer prices without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions), and the high and low sales prices as reported by Nasdaq
(subsequent to December 19, 1995).
<TABLE>
<CAPTION>
Fiscal 1996 High Low
---- ---
<S> <C> <C> <C>
First Quarter $3.313 $2.125
Second Quarter 2.500 1.813
Third Quarter 2.063 1.250
Fourth Quarter 1.938 1.375
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 260 record holders and 700 beneficial
holders of the Company's Common Stock as of October 4, 1996. On October 4, 1996,
the high and low sale prices for the Common Stock were $1.25 and $1.375,
respectively.
The Company has never paid a dividend on its Common Stock. The
Company presently does not anticipate paying any dividends on its Common Stock
in the foreseeable future. The Company may not pay any dividends on its Common
Stock unless all cumulative dividends on its Series B and Series C Preferred
Stock are paid. The annual dividend rate of the Series B Preferred Stock is $.10
per share, which currently amounts to $50,000 per year in the aggregate based on
500,000 issued and outstanding shares. The annual rate of the Series C Preferred
Stock is $1.35 per share, which currently amounts to $482,400 in the aggregate
based on 357,333 issued and outstanding shares. After December 22, 1996,
dividends on the Series C Preferred Stock may, at the option of the Company, be
paid in shares of common stock. As of July 31, 1996, accrued but unpaid
dividends payable on the Series B and Series C Preferred Stock were $44,367. 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, 1996, approximately $180,000 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 on its common stock without the consent of the bank.
16
<PAGE> 17
Furthermore, under Delaware corporate law, the Company may be prohibited in
certain circumstances from paying dividends (whether in cash or otherwise).
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
During fiscal 1996, the Company purchased the operations of
the following five child care centers: two child care centers in the Denver,
Colorado metropolitan area on November 1, 1995, one center in Colorado Springs,
Colorado on April 5, 1996, one center in Sierra Vista, Arizona on April 16,
1996, and one center in Phoenix, Arizona on June 28, 1996. In addition, through
its contract with Preschool Services, Inc. ("PSI"), on May 1, 1996, the Company
assumed management of a newly opened center in Hales Corner, Wisconsin. These
additional centers increased the total licensed capacity of the Company's
centers by 1,011 children. The impact of the acquisitions on the operations of
the Company are included in the discussion of operating revenues and expenses
below.
FISCAL YEAR ENDED JULY 31, 1996, COMPARED TO FISCAL YEAR ENDED JULY 31, 1995
Operating revenue for the fiscal 1996 was $10,237,418, an
increase of $462,395, or 4.7% from revenue of $9,775,023 for fiscal 1995. This
increase was due to the inclusion of revenues of the acquired centers of
$599,163. This increase was partially offset by the transfer of one of the
Company's child care centers to PSI as of August 1, 1995. The Company continues
to manage this child care center under a management agreement with PSI, for
which the Company earns a management fee; however, the consolidated financial
statements for fiscal 1996 no longer include the revenues or expenses of this
center. As a result of this transfer, operating revenue decreased by $257,409
and operating expenses decreased by $239,409 from fiscal 1995. The impact of
this transfer on net income for fiscal 1996 was a reduction of $18,000. In
addition, revenues decreased $42,000 due to the deferral of administrative fees
from PSI.
Excluding the items discussed above, operating revenues
increased $120,641 from fiscal 1995. Due to increased enrollments at certain of
the Company's centers and a moderate tuition increase in January, revenues
increased $386,222. This was offset by a decrease of $181,705 in revenues
received under one of the Company's employer child care contracts as a result of
large layoffs by the employer and a decrease of $83,876 in revenue at one of the
Company's centers due to lower enrollment levels.
Operating expenses for fiscal 1996 were $11,171,436 (109.1% of
operating revenue), an increase of $2,007,898 or 21.9% from operating expenses
of $9,103,538 (93.7% of operating revenue) for fiscal 1995. Of this increase,
$655,519 was due to the inclusion of the acquired centers and $602,000 was due
to the establishment of a reserve for impaired assets and rental commitments in
connection with the Company's agreement with PSI which is included in facilities
and maintenance costs. The remaining increase was due to an increase in other
facilities and maintenance costs and general and administrative expenses,
partially offset by a decrease in payroll expense.
17
<PAGE> 18
Payroll expense for fiscal 1996 was $5,055,138 (49.4% of
operating revenue), an increase of $264,176 or 5.5% from payroll expense of
$4,790,962 (49.0% of operating revenue) for fiscal 1995. This increase was due
to $341,906 in salaries at the acquired centers, an $88,572 increase in
corporate salaries due to staff added in connection with the Company's expansion
program, and a $221,594 increase in other salaries. These increases were
partially offset by a decrease of $210,843 due to the transfer of one of the
Company's centers to PSI, as discussed above. In addition, payroll expense
decreased $177,053 due to the Company's decision, in May 1995, to outsource its
maintenance operations. Accordingly, the Company now pays a monthly fee for
maintenance services, which is included in facilities and maintenance costs,
rather than paying for staffing directly as part of payroll expense.
Facilities and maintenance costs for fiscal 1996 were
$4,478,373 (43.7% of operating revenue), an increase of $1,502,457 or 50.5% from
facilities and maintenance costs of $2,975,916 (30.4% of operating revenue)
during fiscal 1995. Of this increase, $231,579 is attributable to the acquired
centers and $602,000 was due to the establishment of a reserve for impaired
assets and rental commitments in connection with the Company's agreement with
PSI. The remaining increase is due to an increase of $279,715 in rent expense, a
$219,060 increase in maintenance costs and a $179,103 increase in depreciation
and amortization expense, partially offset by a decrease of $9,000 in other
facilities and maintenance costs.
Due to continued operating losses incurred during 1996, PSI
approved a plan to close two of its schools upon the expiration of the leases.
Since the estimated cash flows will not be sufficient to recover the leasehold
improvements related to these two schools, the Company recorded an impairment
reserve for these assets which totaled approximately $184,000 which is included
in facilities and maintenance expenses in fiscal 1996.
Also, since the Company is the lessee for two of the leases,
they are contingently liable for the lease payments to third parties. Since the
estimated future cash flows of PSI will not be sufficient to make the scheduled
lease payments, the Company recorded a contingent liability of approximately
$418,000 related to the remaining lease payments which is included in facilities
and maintenance expenses in fiscal 1996.
The increase in rent expense was due to moderate rent
increases at several of the centers, and to the deferral of $228,971 in sublease
payments payable by PSI under the PSI Agreement. Maintenance costs increased
$177,053 due to the Company's decision, in May 1995, to outsource its
maintenance operations (see Payroll above for discussion of corresponding
decrease in payroll costs). The remaining increase in maintenance costs is
primarily due to increased cleaning and maintenance supplies costs. The increase
in depreciation and amortization expense is primarily due to the deferral of
$134,612 in lease payments payable under the PSI Agreement, and to $11,568 in
amortization of intangible acquisition costs. These increases were partially
offset by decreases in other costs, such as auto expenses and taxes.
General and administrative expenses for fiscal 1996 were
$1,637,925 (16.0% of operating revenue), an increase of $241,265, or 17.3% from
general and administrative expenses of $1,396,660 (14.3% of operating revenue)
during fiscal 1995. Of this increase, $82,034 was attributable to the acquired
centers. In addition, advertising costs increased $105,267 due to the
implementation of a new advertising program. The remaining increase was due to
$70,859 in preopening expenses for new centers and $57,600 in expenditures
related to developing the Company's strategic growth and acquisition plans, and
moderate increases in other general and administrative costs such as office
supplies, licenses and fees. These increases were partially offset by a $103,816
decrease bad debt expense.
18
<PAGE> 19
Other income for fiscal 1996 decreased $8,386 from fiscal 1995 due to reduced
gain on sale of fixed assets, primarily vans, traded in during the year. Net
interest income increased $109,729 due to interest income on the invested
proceeds of the December 1995 public offering.
Net loss for the year ended July 31, 1996 was $857,308 ($0.40
per share) compared to net income of $806,852 ($0.29 per share) for the year
ended July 31, 1995 which was the second most profitable year in the Company's
history. This decrease is primarily due to the allowance provided of
approximately $406,000 for amounts receivable under the PSI Agreement; the
establishment of a $602,000 reserve for impaired assets and rental commitments
in connection with the Company's agreement with PSI; the inclusion of an income
tax benefit of $220,000 in fiscal 1995; $70,859 in preopening costs for new
centers; and a decrease in enrollments under one of the Company's employer child
care contracts due to layoffs by the employer. In addition, costs incurred in
connection with the Company's advertising and expansion programs, and in
developing the Company's strategic growth plan have, in the current period,
decreased net income.
SEASONALITY AND QUARTERLY RESULTS
The following table reflects certain selected unaudited
quarterly operating results for each quarter of fiscal 1996 and 1995. The
operating results of any quarter are not necessarily indicative of results of
any future period.
<TABLE>
<CAPTION>
Quarter Ended (in thousands)
-------------------------------------------------------------------------------------------
July. 31, Apr. 30 Jan. 31, Oct. 31, Jul. 31, Apr. 30, Jan. 31, Oct. 31,
1996 1996 1996 1995 1995 1995 1995 1994
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue $ 2,817 $ 2,681 $ 2,304 $ 2,435 $ 2,382 $ 2,530 $ 2,326 $ 2,537
Operating expenses (3,787) (2,615) (2,413) (2,356) (2,495) (2,229) (2,153) (2,287)
Income (loss) from
operations (970) 66 (109) 79 (113) 301 173 250
Income (loss) before
income taxes $ (943) $ 107 $ (93) $ 72 $ (127) $ 293 $ 174 $ 247
</TABLE>
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
School enrollments, (excluding acquisitions) while remaining
strong, were lower during the first ten months of fiscal 1996 than in the
corresponding months of fiscal 1995. To boost enrollment levels, the Company
implemented a new multi-media advertising program in January. This program
continued during the third quarter. During June and July, the last two months of
the fiscal year, enrollment levels equaled or exceeded those from June and July
of 1995. Management believes that the advertising program, which will be
continued during the first quarter of fiscal 1997, coupled with moderate tuition
increases, should continue to have a positive effect on the Company. The
establishment of a reserve for impaired assets and rental commitments in
connection with the Company's agreement with PSI should also have a significant
positive impact on the Company's future operations.
The Company's expansion program, funded with the proceeds of
the December, 1995 public offering, resulted in the addition of six centers
during fiscal 1996. In addition, on August 22, 1996, the
19
<PAGE> 20
Company acquired four centers in the Phoenix metropolitan area, and, on October
14, 1996, opened a newly constructed free-standing center in Gilbert, Arizona.
It is anticipated that the costs incurred by the Company in connection with
developing its strategic growth plan and implementing its expansion program will
benefit the Company in the future; however, there can be no assurance in this
regard.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the year ended
July 31, 1996 was $91,595. Cash was sufficient to meet the normal operating
requirements of the Company. Due to the Company's public offering of preferred
stock in December 1995, working capital increased by $1,986,021, from $210,600
at July 31, 1995 to $2,196,621 at July 31, 1996.
In December 1995, the Company completed a $5 million public
offering of a new series of convertible preferred stock. Net proceeds from the
offering were $4,026,475, a portion of which has been used primarily for
expansion of the Company's operations, both through the opening of additional
Company facilities and the acquisition of other existing child care centers. In
February 1996, the underwriters of the offering exercised their option to
purchase 24,000 additional shares of preferred stock to cover over-allotments.
These shares were sold by the Company at the same price and same terms as those
applicable to the initial offering of the preferred stock resulting in net
proceeds to the Company of $298,072.
On November 6, 1995, holders of warrants representing the
right to purchase 47,074 shares of the Company's common stock were exercised.
Net proceeds from this exercise were $40,404.
Net cash used in investing activities was $2,013,207,
consisting of purchases of property and equipment totaling $916,886 and
$1,107,121 in costs related to acquisitions. These uses were partially offset by
$10,800 in proceeds from disposals of property and equipment.
Net cash provided by financing activities was $3,970,917,
consisting of proceeds from the exercise of warrants and the sale of preferred
stock of $4,364,951 and additional borrowings of $319,360, offset by repayments
of notes payable and capital leases of $147,311 and payment of dividends on
Series B and C Preferred Stock of $566,083. The additional borrowings consisted
of notes payable for the purchase of vehicles and $100,000 borrowed under the
Company's working capital line of credit.
Dividends payable on Series B and C Preferred Stock as of July
31, 1996 were $44,367, 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. The Company has two lines of credit
with a financial institution totaling $500,000: 1) a $250,000 revolving working
capital line, bearing interest at prime (8.25% at July 31, 1996) plus 1.00%,
and; 2) a $250,000 nonrevolving line of credit for the purchase of vehicles and
equipment, bearing interest at prime plus 1.25%. These lines of credit are
renewable each year on January 31, and are secured by the Company's accounts
receivable, inventory, furniture, vehicles and equipment. At July 31, 1996,
borrowings under the working capital line totaled $100,000. Borrowings under the
vehicle and equipment line consisted of $106,000 in drawdowns which were then
converted into 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 the
lines of credit are not renewed, there is no assurance that they
20
<PAGE> 21
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.
During fiscal 1996, the Company purchased the operations of
the following five child care centers: two child care centers in the Denver,
Colorado metropolitan area on November 1, 1995, one center in Colorado Springs,
Colorado on April 5, 1995, one center in Sierra Vista, Arizona on April 16,
1996, and one center in Phoenix, Arizona on June 28, 1996. On August 22, 1996,
the Company purchased the operations of four child care centers in the Phoenix
metropolitan area, which have an aggregate licensed capacity of 504. The Company
is also considering additional acquisitions of established child care centers
operated in the southwestern United States, as well as in other geographic
areas. The Company intends to finance these acquisitions through a combination
of cash and long-term notes.
The Company also plans to open several centers during fiscal
1997. Under current plans, new centers opened by the Company will be constructed
by a third party and the Company will then enter into long term leases for the
land and buildings. Preopening costs of a center normally range between $90,000
and $110,000 per center. Management expects cash generated from operations and
cash on hand as a result of the public offering to be sufficient to satisfy the
needs at its existing schools for the next 12 months and to open the new centers
as planned.
IMPACT OF INFLATION
Inflation has had no material effect on the Company's
operations or financial condition.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
21
<PAGE> 22
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, 1996,
and the related consolidated statements of operations, shareholders' equity and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sunrise Preschools, Inc. and
subsidiary as of July 31, 1996, and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Phoenix, Arizona
October 9, 1996
22
<PAGE> 23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Sunrise Preschools, Inc.:
We have audited the accompanying consolidated balance sheet of Sunrise
Preschools, Inc. (a Delaware corporation) and subsidiary as of July 31, 1995,
and the related consolidated statements of income, shareholders' equity and cash
flows for each of the two years in the period ended July 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sunrise Preschools, Inc. and
subsidiary as of July 31, 1995, and the results of their operations and their
cash flows for each of the two years in the period ended July 31, 1995 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Phoenix, Arizona
October 2, 1995
23
<PAGE> 24
SUNRISE PRESCHOOLS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JULY 31, 1996
<TABLE>
<CAPTION>
ASSETS
CURRENT ASSETS:
<S> <C>
Cash and cash equivalents (Note 2) $ 2,630,616
Accounts receivable, net of allowance for doubtful accounts of $12,000 387,775
Prepaid expenses (Note 2) 149,458
Deferred tax asset, current portion (Note 11) 138,000
Inventory and supplies 27,094
-----------
Total current assets 3,332,943
Property and equipment, net (Note 5) 1,386,687
Property and equipment leased to PSI, net (Notes 4 and 5) 367,292
Deferred tax asset, net of current portion (Note 11) 557,000
Note receivable from PSI (Note 4) 256,251
Intangible assets, net (Note 3) 733,519
Deposits and other assets 363,340
-----------
Total assets $ 6,997,032
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit (Note 6) $ 100,000
Accounts payable 272,519
Accrued expenses (Note 2) 385,036
Dividends payable on preferred stock (Note 10) 44,367
Notes payable and capital leases, current portion (Notes 6 and 7) 133,415
Accrued rental reserve, current portion (Note 4) 292,000
Deferred rent, current portion (Note 8) 155,982
Deferred gain on sale and leaseback of preschool facilities,
current portion (Note 9) 45,003
-----------
Total current liabilities 1,428,322
-----------
NOTES PAYABLE AND CAPITAL LEASES, net of current
portion (Notes 2, 6 and 7) 504,654
-----------
ACCRUED RENTAL RESERVE, net of current portion (Note 4) 126,000
-----------
DEFERRED RENT, net of current portion (Note 8) 304,058
-----------
DEFERRED GAIN ON SALE AND LEASEBACK OF PRESCHOOL FACILITIES,
net of current portion (Note 9) 87,648
-----------
COMMITMENTS AND CONTINGENCIES (Notes 8, 13 and 14)
SHAREHOLDERS' EQUITY (Notes 8, 10, and 13):
Preferred stock, $1 par value - 1,000,000 shares authorized, 857,333
857,333 shares issued and outstanding
Common stock, $.01 par value 10,000,000 shares authorized, 29,830
2,982,968 shares issued and outstanding
Paid-in capital 7,609,553
Accumulated deficit (3,950,366)
-----------
Total shareholders' equity 4,546,350
-----------
Total liabilities and shareholders' equity $ 6,997,032
===========
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet
24
<PAGE> 25
SUNRISE PRESCHOOLS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JULY 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
OPERATING REVENUE $ 10,237,418 $ 9,775,023
------------ -----------
OPERATING EXPENSES:
Payroll 5,055,138 4,790,962
Facilities and maintenance 4,478,373 2,975,916
General and administrative 1,637,925 1,396,660
------------ -----------
Total operating expenses 11,171,436 9,163,538
------------ -----------
INCOME (LOSS) FROM OPERATIONS (934,018) 611,485
------------ -----------
OTHER INCOME (EXPENSE):
Interest income (expense), net 70,810 (38,919)
Other income 5,900 14,286
------------ -----------
Total other income (expense) 76,710 (24,633)
------------ -----------
INCOME (LOSS) BEFORE INCOME TAXES (857,308) 586,852
INCOME TAX BENEFIT (Note 11) -- 220,000
------------ -----------
NET INCOME (LOSS) $ (857,308) $ 806,852
============ ===========
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK
(Note 2)
$ (1,201,925) $ 756,852
============ ===========
NET INCOME (LOSS) PER COMMON SHARE AND
COMMON SHARE EQUIVALENT (Note 2):
Primary $ (.40) $ .29
============ ===========
Fully diluted $ .25
===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND COMMON
SHARE EQUIVALENTS OUTSTANDING:
Primary $ 2,970,294 $ 2,620,632
============ ===========
Fully diluted $ 3,208,075
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE> 26
SUNRISE PRESCHOOLS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1996 AND 1995
<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, 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
Exercise of warrants - - 47,074 471 39,933 - 40,404
Issuance of preferred stock 357,333 357,333 - - 3,967,214 - 4,324,547
Dividends payable on preferred stock - - - - - (344,617) (344,617)
Net loss - - - - - (857,308) (857,308)
------- -------- --------- -------- ---------- ----------- ----------
BALANCE AT JULY 31, 1996 857,333 $857,333 2,982,968 $ 29,830 $7,609,553 $(3,950,366) $4,546,350
======= ======== ========= ======== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE> 27
SUNRISE PRESCHOOLS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
=========== =========
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (857,308) $ 806,852
----------- ---------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities-
Depreciation and amortization 384,574 295,955
Amortized gain on sale of real estate (45,003) (45,003)
Income tax benefit -- (220,000)
Amortization of deferred rent (52,988) (74,188)
Provision for doubtful accounts 139,296 242,633
Impaired asset and rental reserves 602,000 --
Gain on disposal of property and equipment (5,900) (14,286)
Changes in assets and liabilities-
Increase in accounts receivable (147,818) (141,024)
Increase in prepaid expenses (53,216) (69,053)
(Increase) decrease in inventory and supplies (10,718) 13,646
Increase in deposits and other assets (90,992) (66,787)
Increase (decrease) in accounts payable 146,891 (13,555)
Increase (decrease) in accrued expenses 82,777 (59,652)
----------- ---------
Total adjustments 948,903 (151,314)
----------- ---------
Net cash provided by operating activities 91,595 655,538
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of child care centers (1,107,121) --
Purchases of property and equipment (916,886) (354,308)
Proceeds from disposal of property and equipment 10,800 53,322
----------- ---------
Net cash used in investing activities (2,013,207) (300,986)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of warrants 40,404 466,185
Proceeds from sale of preferred stock 4,324,547 --
Payment of dividends (566,083) --
Proceeds from notes payable 219,360 254,192
Net borrowings (payments) on lines of credit 100,000 (100,000)
Increase in note receivable from Preschool Services, Inc. -- (335,253)
Payments on notes payable and capital leases (147,311) (160,146)
----------- ---------
Net cash provided by financing activities 3,970,917 124,978
----------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,049,305 479,530
CASH AND CASH EQUIVALENTS, beginning of year 581,311 101,781
----------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 2,630,616 $ 581,311
=========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 42,150 $ 38,919
=========== =========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Capital lease obligations of $-0- and $22,234 during fiscal 1996 and 1995,
respectively, were incurred when the Company entered into lease
agreements for equipment.
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE> 28
SUNRISE PRESCHOOLS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1996
(1) ORGANIZATION AND OPERATIONS:
Sunrise Preschools, Inc. (the Company) was incorporated in the State of Delaware
in May 1987. As of July 31, 1996, the Company operates 31 child care centers in
Arizona, Hawaii, Colorado and Wisconsin (see Note 4).
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 4). The results of
operations of the schools transferred to PSI are not included in the
accompanying consolidated financial statements.
In December 1995, the Company completed a public offering of 333,333 newly
issued shares of Series C Preferred Stock at $15 per share. Net proceeds from
the offering were $4,026,475, which will be used primarily for expansion of the
Company's operations, both through the opening of additional Company facilities
and the acquisition of existing child care centers.
In February 1996, the underwriters of the public offering exercised their option
to purchase 24,000 additional shares of Series C Preferred Stock to cover
over-allotments. These shares were sold by the Company at the same price and
same terms as those applicable to the initial offering of Series C Preferred
Stock.
The Company intends to use the proceeds from the public offering primarily to
acquire, open and equip additional child care centers. During fiscal 1996, the
Company acquired or opened six additional centers, increasing its licensed
capacity by approximately 1,011 additional children (see Note 3). Management is
continuing to pursue various expansion and acquisition opportunities.
28
<PAGE> 29
(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.
(b) USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(c) 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 $2,027,054 at July 31,
1996.
(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) INTANGIBLE ASSETS
Intangible assets represent the unamortized excess of the cost of acquisitions
of existing child care centers, over the fair values of the centers' net
tangible assets at the dates of acquisition. The intangible assets are being
amortized using a straight-line method over various periods up to 20 years.
Accumulated amortization at July 31, 1996 was $11,568. The recoverability of
goodwill attributable to the Company's acquisition is continually assessed based
on actual and projected levels of profitability and cash flows of the centers
acquired on an undiscounted basis.
(f) PRE-OPENING COSTS
Pre-opening costs are expensed as incurred.
(g) ACCRUED EXPENSES
Accrued expenses include compensation and related benefits of $255,534.
29
<PAGE> 30
(h) ADVERTISING EXPENSES
Advertising costs are expensed when incurred which is generally when the
advertising first takes place. Advertising expenses were approximately $161,000
and $53,000 in 1996 and 1995, respectively.
(i) NET INCOME (LOSS) PER SHARE
Primary net income (loss) per share is computed by dividing net income available
for common stock (net income less accrued dividends for the period on Series B
and Series C 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 for fiscal 1995 assumes the conversion of the
Series B Preferred Stock into 500,000 shares of common stock.
(j) 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 1995 to conform with the fiscal 1996 presentation.
(k) 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 in mutual funds. The Company believes it is not exposed
to any significant credit risk on cash and cash equivalents.
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, 1996, the Company does not consider itself to have any
significant concentrations of credit risk with respect to accounts receivable
(see Note 4).
(l) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments" requires that the Company disclose estimated
fair values of financial instruments. Cash and cash equivalents, accounts
receivable, note receivable and notes payable are carried at amounts that
reasonably approximate their fair values.
(m) RECENTLY ISSUED ACCOUNTING STANDARD
The Financial Accounting Standards Board's Statement No. 123, "Accounting for
Stock Based Compensation" becomes effective in fiscal 1997. The Company intends
to adopt the pro forma disclosure provisions of Statement No. 123.
30
<PAGE> 31
(3) ACQUISITIONS
During fiscal 1996, the Company purchased, for cash, the assets of the following
five child care centers: two child care centers in the Denver, Colorado
metropolitan area on November 1, 1995, one center in Colorado Springs, Colorado
on April 5, 1996, one center in Sierra Vista, Arizona on April 16, 1996, and one
center in Phoenix, Arizona on June 28, 1996. These acquisitions increased the
Company's licensed capacity by 791. The total aggregate purchase price for these
acquisitions was $850,000. Additional acquisition costs totaled $137,817.
The acquisitions were accounted for as purchases. The amount of each purchase
price in excess of net tangible assets acquired was allocated among the
following intangible assets: goodwill - $584,087; noncompete agreements -
$105,000, and; customer base - $56,000.
Summarized below are the unaudited pro forma consolidated results of operations
of the Company for the fiscal year ended July 31, 1996 assuming the acquisitions
were consummated as of August 1, 1995. The unaudited pro forma consolidated
results of operations have been prepared for comparative purposes only and are
not necessarily indicative of what would have occurred had these transactions
been made at August 1, 1995 or of results which may occur in the future.
<TABLE>
<S> <C>
Revenues $11,517,994
Net loss (691,533)
Net loss per common share and common share equivalent (0.35)
</TABLE>
(4) 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, the Administrative Fee totaled $42,000. 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 is to
receive 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, were converted
to a promissory note equal to the present value of the expected future payments
to be received from PSI related to the balance of the receivable outstanding at
July 31, 1995, over a period of seven years. This resulted in a reduction in the
outstanding receivable balance, through a charge to the provision for bad debts
of $176,500 in fiscal 1995. The promissory note bears interest at 8.0%, with
monthly payments due beginning January 1998 through July 2002. During 1996, an
allowance was provided for all lease payments not paid by PSI to the Company
which totaled approximately $374,000 and all administrative fees were deferred
which totaled $42,000. At July 31, 1996 and 1995, the note receivable from PSI
totaled $256,251.
31
<PAGE> 32
Due to continued operating losses incurred during 1996, PSI approved a plan to
close two of its schools upon the expiration of the leases. Since the estimated
cash flows will not be sufficient to recover the leasehold improvements related
to these two schools, the Company recorded an impairment reserve for these
assets which totaled approximately $184,000 which is included in facilities and
maintenance expenses in fiscal 1996.
Also, since the Company is the lessee for two these leases, it is contingently
liable for the lease payments to third-parties. Since the estimated future cash
flows of PSI will not be sufficient to make the scheduled lease payments, the
Company recorded a contingent liability of approximately $418,000 related to the
remaining lease payments which is included in facilities management and
maintenance expenses in fiscal 1996.
(5) 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 $ 644,820 $ 79,791
Equipment 1,296,939 277,907
Vehicles 631,627 84,142
Leasehold improvements 681,162 978,558
----------- -----------
3,254,548 1,420,398
Less-Accumulated depreciation and
amortization (1,867,861) (869,106)
Less-Impaired asset reserve -- (184,000)
----------- -----------
$ 1,386,687 $ 367,292
=========== ===========
</TABLE>
The Company held leasehold improvements and equipment under capital lease
obligations with a carrying value of approximately $208,000 at July 31, 1996.
(6) LINES OF CREDIT:
The Company currently has two bank lines of credit: (i) a $250,000 working
capital line, which bears interest at prime (8.25% at July 31, 1996) plus 1.00%
and; (ii) a $250,000 line of credit for the purchase of equipment, which bears
interest at prime plus 1.25%. The lines of credit are secured by all of the
Company's equipment, receivables and inventory. The amount available under the
working capital line was $150,000 at July 31, 1996.
The Company is required to meet certain covenants under these lines of credit,
including maintaining certain minimum net working capital balances and meeting
certain net worth, 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, 1996, the Company was in compliance with all
covenants of the line of credit agreements except for its debt and interest
coverage ratio which it obtained a waiver as of July 31, 1996.
32
<PAGE> 33
These lines of credit are renewable each year on January 31. As of July 31,
1996, borrowings under the working capital line totaled $100,000. Borrowings
under the equipment line consisted of drawdowns of $106,000, which were
converted to five-year notes payable.
During fiscal 1996, the weighted average interest rate on the working capital
line of credit was 9.25%. 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.
(7) 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 17.0%, maturing through October
2000, secured by vehicles (carrying value of approximately $518,000 at
July 31, 1996) $401,974
Capitalized lease obligations, payable monthly at interest rates ranging
from 10.4% to 20.3%, maturing through December 2002 236,095
--------
638,069
Less-current portion (133,415)
--------
Long-term portion $504,654
========
</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>
1997 $86,977 $70,527
1998 102,774 51,398
1999 101,361 45,185
2000 65,988 45,185
2001 27,615 45,185
Thereafter 17,259 64,012
-------- --------
$401,974 321,492
Less - Amounts representing interest ======== (85,397)
-------
$236,095
========
</TABLE>
(8) COMMITMENTS AND CONTINGENCIES:
The Company leases 20 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 4).
33
<PAGE> 34
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 $460,040 at July 31, 1996. The liability will be satisfied through future
rental payments.
The Company pays no rent at 11 of its child care centers. However, profit
sharing arrangements exist with the owners of five of these facilities, all of
which are managed for PSI. Amounts paid to the owners of these facilities are
paid by PSI. The arrangements with the remaining six 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>
1997 $ 2,658,798
1998 2,395,511
1999 1,924,866
2000 1,606,254
2001 1,390,206
Thereafter 3,165,411
-----------
$13,141,046
===========
</TABLE>
During fiscal 1996 and 1995, 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 1996 and 1995 from officers/stockholders with
aggregate monthly payments of $2,023 per month through April 1996, $1,641 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 $242,982 and
$503,534 and including amounts paid to related parties of $51,256 and $48,290
for fiscal years 1996 and 1995, was $2,296,455 and $1,916,896 for fiscal years
1996 and 1995, respectively.
The Company has employment agreements with two of its principal officers (the
Employee). These agreements, which have been amended from time-to-time, provide
for minimum salary levels, cost of living changes, as well as for the payment of
incentive bonuses, at the discretion of the Compensation Committee of the
Company's Board of Directors, in accordance with Company bonus plans in effect.
Each of the agreements has a perpetual three-year term, such that on any given
date each agreement has a three-year remaining term. The agreements provide that
the employees' salaries will be reviewed annually, but such salaries may not be
decreased.
Each of the agreements provide that if the Employee is terminated by the Company
other than for cause of disability, or by the Employee for good reason (as
defined in the agreements), the Company shall pay to the Employee (i) his or her
salary through the termination date plus any accrued but unpaid bonuses, and
(ii) a lump sum payment equal to the sum of three years of the Employee's annual
salary and an amount equal to all bonuses paid to the Employee in the three
years immediately preceding termination. In addition, the Company must maintain
until the first to occur of (i) the Employee's attainment of alternative
employment or (ii) three years from the date of termination, the Employee's
benefits under the Company's benefit plans to which the Employee and his or her
eligible beneficiaries were entitled immediately prior to the date of
termination. In addition, all options or warrants to purchase common
34
<PAGE> 35
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 as well as internal financial matters. The
agreement calls for monthly payments of $3,000 for investor relations services
until December 31, 1995, increasing 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.
(9) 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 $132,651 at July 31, 1996.
(10) 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 issued 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 had 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 were able to exercise only one of every 16 warrants held or a
total of 62,500 warrants. On November 6, 1995, warrants representing the right
to purchase 47,074 shares of common stock were exercised, and the Company issued
47,074 shares of common stock in exchange for net proceeds of $40,404.
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.
35
<PAGE> 36
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, 1996 were $4,167.
SERIES C PREFERRED STOCK:
In December 1995, the Company completed a public offering of 333,333 newly
issued shares of Series C Convertible Preferred Stock ("Series C") at $15 per
share. Net proceeds from the offering were $4,026,475.
In February 1996, the underwriters of the public offering exercised their option
to purchase 24,000 additional shares of Series C Preferred Stock to cover
over-allotments. These shares were sold by the Company at the same price and
same terms as those applicable to the initial offering of Series C Preferred
Stock.
Each share of Series C carries a 9% annual cumulative dividend and is
convertible into 7.0588 shares of the Company's common stock. Dividends payable
after the first anniversary of the sale of the Series C 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. Cumulative dividends payable on the Series C as
of July 31, 1996 were $40,200.
The Series C ranks junior to the Company's Series B in terms of dividends and
liquidation rights, but senior to all other capital stock of the Company.
(11) INCOME TAXES:
Statement of Financial Accounting Standards No. 109 (SFAS 109), Accounting for
Income Taxes, 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.
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<PAGE> 37
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.
At July 31, 1995, it was determined that the valuation allowance should be
reduced by $220,000. Since management believed that it is more likely than not
that the Company would 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 in the year ended July 31, 1995.
This determination was based primarily on the improvement in the Company's net
income during fiscal 1995 and 1994.
At July 31, 1996, it was determined that the valuation allowance should be
increased by $244,000 to $732,000. The increase is due to additional deferred
tax assets incurred during fiscal 1996 that, based on the weight of available
evidence, more likely than not will not be realized.
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, 1996:
<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 -- (4,000) (4,000)
--------- --------- -----------
-- (72,000) (72,000)
--------- --------- -----------
Deferred Tax Assets
Tax effect of net operating loss carryforward -- 775,000 775,000
Allowance for doubtful accounts 5,000 -- 5,000
Accelerated tax depreciation -- 164,000 164,000
Deferred revenue 25,000 -- 25,000
Accrued vacation and sick leave 52,000 -- 52,000
Deferred rent 38,000 146,000 184,000
Deferred gain on sale of real estate 18,000 35,000 53,000
Asset impairment and rental reserve -- 241,000 241,000
Valuation allowance -- (732,000) (732,000)
--------- --------- -----------
138,000 629,000 767,000
--------- --------- -----------
$ 138,000 $ 557,000 $ 695,000
========= ========= ===========
</TABLE>
37
<PAGE> 38
The Company's net operating loss carryforwards for federal income tax purposes,
which comprise 62% of total deferred tax assets, at July 31, 1996, expire as
follows:
<TABLE>
<S> <C>
2004 $ 443,399
2005 861,342
2006 564,007
2011 308,463
-------------
$ 2,177,211
=============
</TABLE>
The Company's net operating loss carryforwards for state income tax purposes
totaled approximately $300,000, which expire in 2001.
A reconciliation of the federal income tax rate to the Company's effective tax
rate is as follows at July 31, 1996:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Statutory federal rate (34)% 34 %
State taxes, net of federal benefit (6) 6
Benefit of net operating loss carryforwards - (28)
Benefit due to reduction in valuation allowance - (50)
Increase in valuation allowance 40 -
---- ----
- % (38)%
==== ====
</TABLE>
(12) RELATED PARTY TRANSACTIONS:
Certain officers of the Company have personally guaranteed child care facility
lease payments to nonrelated parties. In addition, certain officers of the
Company have personally guaranteed the Company's outstanding debt. As of July
31, 1996, the aggregate amounts of lease payments and other obligations
guaranteed by these officers totaled approximately $5,317,000. See Note 8.
(13) EMPLOYEE BENEFIT PLANS:
1987 STOCK OPTION PLAN
The Company's Stock Option Plan (the 1987 Plan) was adopted by the
Board of Directors and approved by the stockholders in July 1987. Only employees
(including officers and directors, subject to certain limitations) are eligible
to receive options under the 1987 Plan, under which 240,000 shares of common
stock are authorized for issuance. To date, options to purchase 237,937 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
38
<PAGE> 39
stock options). Incentive stock options granted to persons who have voting
control over ten percent or more of the Company's capital stock are granted at
110% of the fair market value of the underlying shares on the date of grant and
expire five years after the date of grant.
The 1987 Plan provides the Board of Directors with the discretion to
determine when options granted thereunder shall become exercisable. Generally,
such options may be exercised after a period of time specified by the Board of
Directors at any time prior to expiration, so long as the optionee remains
employed by the Company. No option granted under the 1987 Plan is transferable
by the optionee other than by will or the laws of descent and distribution, and
each option is exercisable during the lifetime of the optionee only by the
optionee.
1995 STOCK OPTION PLAN
The Company's 1995 Stock Option Plan (the 1995 Plan) authorizes the
Board to grant options to employees of the Company to purchase up to an
aggregate of 500,000 shares of common stock. Officers and other employees of the
Company who, in the opinion of the Board of Directors, are responsible for the
continued growth and development and the financial success of the Company are
eligible to be granted options under the 1995 Plan. To date options to purchase
362,063 of such shares have been granted, with exercise prices of $1.375 to
$2.25, per share. Options may be non-qualified options, incentive stock options,
or any combination of the foregoing. In general, options granted under the 1995
Plan are not transferable and expire eleven years after the date of grant (ten
years in the case of incentive stock options). The per share exercise price of
an incentive stock option granted under the 1995 Plan may not be less than the
fair market value of the common stock on the date of grant. Incentive stock
options granted to persons who have voting control over 10% or more of the
Company's capital stock are granted at 110% of the fair market value of the
underlying shares on the date of grant and expire five years after the date of
grant.
The 1995 Plan provides the Board of Directors with the discretion to
determine when options granted thereunder will become exercisable. Generally,
such options may be exercised after a period of time specified by the Board of
Directors at any time prior to expiration, so long as the optionee remains
employed by the Company. No option granted under the 1995 Plan is transferable
by the optionee other than by will or the laws of descent and distribution, and
each option is exercisable during the lifetime of the optionee only by the
optionee. No option may be granted after May 2, 2005.
NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
The Company's Non-Employee Directors Stock Option Plan (the Directors'
Plan) was adopted by the Board of Directors in May 1995. Only non-employee
directors are eligible to receive options under the Directors' Plan, under which
100,000 shares are authorized for issuance. To date, options to purchase 30,000
shares of common stock have been granted; such options have a term of six years
with an exercise price of $1.375 to $2.1875 per share, which was the fair market
value of the underlying shares on the date of grant. Except for options granted
on the effective date of the Directors' Plan, which are fully vested, all
options granted under the Directors' Plan will be subject to a one-year vesting
schedule. All options granted or to be granted under the Directors' Plan are
non-qualified stock options.
On the date the Directors' Plan was adopted by the Company's Board of
Directors, each non-employee director was granted an option to acquire 10,000
shares of the Company's common stock. Each non-employee director who joins the
Board of Directors after the date the Company's Board of Directors approved the
plan will likewise receive an option to acquire 10,000 shares of the Company's
common stock. In addition to the foregoing option grants, each year every
non-employee director automatically receives an option to acquire 5,000 shares
of the Company's common stock on the third business day following the date the
Company publicly announces its annual financial results; provided
39
<PAGE> 40
that such director has attended at least 75% of the meetings of the Board of
Directors and of the Board Committees of which such non-employee director is a
member in the preceding fiscal year.
No option granted under the Directors Plan is transferable by the
optionee other than by will or the laws of descent and distribution, and each
option is exercisable during the lifetime of the optionee only by the optionee.
The following summarizes the activity for the plans for the fiscal year ended
July 31, 1996:
<TABLE>
<CAPTION>
Exercise Price
Total per Share
----- --------------
<S> <C> <C>
Options outstanding at beginning of year 610,000 $ .50 - $2.375
Granted 26,189 $3.75 - $2.25
Canceled (6,189) $1.375
Exercised -
-------
Options outstanding at end of year 630,000 $ .50 - $2.375
======= ==============
Exercisable at end of year 396,480 $ .50 - $2.375
======= ==============
Options available for grant at end of year 210,000
=======
</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.
(14) SUBSEQUENT EVENTS:
On August 22, 1996, the Company purchased the operations of four preschool
centers in the Phoenix, Arizona metropolitan area.
The consideration paid by Sunrise in connection with this acquisition was
$775,000, of which $350,000 was paid at the closing of the purchase on August
22, 1996, and $425,000 was a note payable.
The acquisition will be accounted for as a purchase in accordance with
Accounting Principles Board Opinion No. 16.
40
<PAGE> 41
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
As reported on Form 8-K dated May 1, 1996, the Company has engaged Ernst & Young
LLP as its independent auditors for the fiscal year ended July 31, 1996 to
replace the firm of Arthur Andersen LLP, who was dismissed at the same time. The
decision to change accountants was approved by the Board of Directors of the
Company.
The reports of Arthur Andersen LLP on the Company's financial statements for the
past two fiscal years did not contain an adverse opinion or a disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope, or
accounting principles.
In connection with the audits of the Company's financial statements for each of
the two fiscal years ended July 31, 1995 and 1994, and in subsequent interim
periods, there were no disagreements with Arthur Andersen LLP on any matters of
accounting principles of practices, financial statement disclosure, or auditing
scope and procedures which, if not resolved to the satisfaction of Arthur
Andersen LLP, would have caused Arthur Andersen LLP not to respond fully to any
inquiries from Ernst & Young LLP.
The Company requested Arthur Andersen LLP to furnish it a letter addressed to
the Securities and Exchange commission stating whether it agrees with the above
statements. A copy of that letter, dated May 1, 1996, was filed as Exhibit 1 the
Form 8-K.
41
<PAGE> 42
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of the
directors and executive officers of the Company as of September 30, 1996. 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 49 Chairman of the Board, President
Dr. Richard H. Hinze 75 Director
Robert A. Rice 41 Director
Barbara L. Owens 48 Director, Executive Vice President,
Secretary & Treasurer
Ronald J. O'Connor 38 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 Mr. Evans expires at the 1996 Annual Meeting of
Stockholders; the terms of Ms. Owens and Mr. Rice expire in 1997; and the term
of Dr. Hinze expires in 1998. Under the Company's Restated Certificate of
Incorporation (the "Certificate"), the number of directors may be increased to
nine. The Certificate limits the liability of directors and restricts the
removal of board members under certain circumstances.
Mr. Evans and Ms. Owens have employment agreements with the Company,
and Mr. O'Connor serves at the pleasure of the Board of Directors. See
"EXECUTIVE COMPENSATION -- Employment Contracts." There are no family
relationships among the directors and executive officers.
James R. Evans has been the President and a Director of the Company
since its inception. Prior to that time, Mr. Evans was an executive with
Smitty's Super Value, Inc., a large retail food and general merchandise chain.
During his twenty years at Smitty's Super Value, Inc., Mr. Evans was responsible
at various times for marketing strategy, designing store layouts, development of
financial models and budgets and store management. Mr. Evans is a member of the
Arizona Child Care Licensure Advisory Committee and has been a national
presenter at various child care conventions on diverse child care topics.
Dr. Richard H. Hinze has been a Director of the Company since August
1987. Since September 1984, Dr. Hinze has been the president and chairman of
Flying H Enterprises, Inc., a family-owned Hawaii corporation focusing on
consulting and development of child care programs for public and private
entities, which has been inactive since 1994. From 1972 until his retirement in
April 1987, Dr. Hinze was a researcher for the Curriculum Research and
Development Group at the University of Hawaii-Manoa studying gifted children and
early childhood education. He has also served from October 1985 through April
1987 as the director for all campuses of the University of Hawaii Child Care
Project, where he developed a system for offering child care for students and
faculty. Dr. Hinze was also the
42
<PAGE> 43
treasurer of the National Association for Education of Young Children from 1976
through 1980. Dr. Hinze has published several articles in professional
publications relating to child care and education and received his Ed.D from
Stanford University.
Robert A. Rice has been a Director of the Company since October 1993.
Mr. Rice is a director of Firstmark Corp., which is listed for trading on
Nasdaq, and is a Vice-President of two subsidiaries of Firstmark Corp.,
Firstmark Investment Corp. and Firstmark Capital Corp. Firstmark Corp. and its
subsidiaries are engaged in financial services and real estate and timber
operations. Mr. Rice has been the President and Chairman of Prime Discount
Securities, Inc., a National Association of Securities Dealers registered
investment broker-dealer, since he founded the entity in 1983. Mr. Rice has also
been the President of Prime Securities Corp., an investment management company,
since he founded the entity in 1990. Mr. Rice is a general partner of BR
Partners, a partnership that owns and operates commercial and residential real
estate in Maine.
Barbara L. Owens was a consultant to the Company beginning in February
1987, and became a full-time employee, Vice President-Operations, in June 1987.
Ms. Owens became a Director in March 1988, Secretary in August 1988, Treasurer
in May 1989 and Executive Vice President in September 1989. Ms. Owens has
substantial experience in the child care industry, including employment for 13
years at Palo Alto Educational Systems, Inc., which had approximately 30 child
care centers in four states when it was sold to Gerber Children's Center, Inc.
in October 1984. Ms. Owens' positions at Palo Alto Educational Systems, Inc.
included President and Chief Operating Officer. After that time, Ms. Owens
provided child care consulting services to various organizations in the United
States. Ms. Owens currently serves on an editorial panel of the Child Care
Information Exchange, a national child care publication. Ms. Owens has also
given presentations at various annual conferences of the National Association of
Early Childhood Professionals.
Ronald J. O'Connor joined the Company in September 1994 as the
Controller. From 1988 until joining the Company, Mr. O'Connor was the Deputy
City Controller for the City of Phoenix, Arizona. Prior to that time, Mr.
O'Connor was the Corporate Controller at El Pollo Asado, Inc., an operator of a
chain of fast food restaurants. Mr. O'Connor has also been an audit manager at
Touche Ross & Co. (now Deloitte & Touche) and has been a Certified Public
Accountant since 1981. Mr. O'Connor is a member of the American Institute of
Certified Public Accountants and the Arizona Society of Certified Public
Accountants.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act requires the Company's
officers and directors, and persons who beneficially own more than 10% of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the SEC. Officers, directors and greater
than 10% shareholders are required by Exchange Act regulations to furnish the
Company with copies of all Section 16(a) forms they file.
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<PAGE> 44
Based solely on its review of the copies of such forms received by it,
or written representations from certain reporting persons that no Form 5 was
required for such persons, the Company believes that during the fiscal year
ending July 31, 1996, all filing requirements applicable to its officers,
directors and greater than 10% beneficial owners were complied with.
ITEM 10. EXECUTIVE COMPENSATION.
The following table summarizes all compensation paid to the Company's
President (the Chief Executive Officer of the Company) and to the Company's
other most highly compensated executive officer other than the President whose
total annual salary and bonus exceeded $100,000 (collectively, the "Named
Executive Officers"), for services rendered in all capacities to the Company
during the fiscal years ended July 31, 1996, 1995 and 1994.
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 1996 $154,500 $45,746 $-0- $-0- $-0- $-0- $-0-
Chairman of the
Board and President 1995 $150,000 $65,151 $-0- $-0- 373,200 $-0- $-0-
1994 $105,007 $53,494 $-0- $-0- -0- $-0- $-0-
- --------------------------------------------------------------------------------------------------------------------------------
Barbara L. Owens 1996 $87,550 $45,746 $-0- $-0- $-0- $-0- $-0-
Executive Vice
President, Secretary 1995 $85,000 $52,777 $-0- $-0- 135,858(2) $-0- $-0-
and Treasurer
1994 $56,632 $62,792 $-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 $2.00 per share, exceeded
the current market price for the Company's Common Stock.
44
<PAGE> 45
The following table sets forth certain information concerning each exercise of
stock options during the year ended July 31, 1996 by each of the Named Executive
Officers and the aggregated fiscal year-end value of the unexercised options of
each such Named Executive Officer.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
OPTION VALUE AS OF JULY 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Value of Unexercised
Number of Unexercised Options In-the-Money
at Fiscal Year End (#) Options at Fiscal Year End ($)
- --------------------------------------------------------------------------------------------------------------------------------
Shares Acquired on Value Realized
Name Exercise (#) ($) Exercisable Unexerciseable Exercisable Unexerciseable
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
James R. Evans -0- $-0- 166,759 217,746 $ 17,740 $ 4,028
- ----------------------------------------------------------------------------------------------------------------------------------
Barbara L. Owens -0- $-0- 147,550 -0- $ 31,073 $ -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, may be increased on August 1 of
each year to reflect increases in the National Consumer Price Index of the
preceding year. The Employee is entitled to receive bonuses in the discretion of
the Compensation Committee to be paid in accordance with Company bonus plans in
effect from time to time. Each of the agreements has a perpetual three-year
term, such that on any given date each agreement has a three-year remaining
term. The agreements may not be terminated unilaterally by the Company, except
for cause, which includes (i) conviction of a felony that impairs the ability of
the Employee to perform his or her duties with the Company or (ii) failure of
performance as determined by the Board. The agreements provide that the salaries
of Mr. Evans and Ms. Owens will be reviewed annually, but such salaries may not
be decreased.
Each of the agreements provides that if the Employee is terminated by
the Company other than for cause or disability, or by the Employee for good
reason (as defined in the agreements), the Company shall pay to the Employee (i)
his or her salary through the termination date plus any accrued but unpaid
bonuses, and (ii) a lump sum payment equal to the sum of three years of the
Employee's annual salary and an amount equal to all bonuses paid to the Employee
in the three years immediately preceding termination. In addition, the Company
must maintain until the first to occur of (i) the Employee's attainment of
alternative employment or (ii) three years from the date of termination, the
Employee's benefits under the Company's benefit plans to which the Employee and
his or her eligible beneficiaries were entitled immediately prior to the date of
termination. If the Employee requests, the Company must
45
<PAGE> 46
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 RELATIONSHIPS AND RELATED
TRANSACTIONS." In addition, the Company has agreed to use its best efforts to
secure the release of such personal guarantees.
STOCK OPTION PLANS
1987 STOCK OPTION PLAN
The Company's Stock Option Plan (the "1987 Plan") was adopted by the
Board of Directors and approved by the stockholders in July 1987. Only employees
(including officers and directors, subject to certain limitations) are eligible
to receive options under the 1987 Plan, under which 240,000 shares of Common
Stock are authorized for issuance. As of September 30, 1996, options to purchase
237,937 of such shares have been granted; such options have terms of five to ten
years, with exercise prices of $0.50 to $2.375 per share, which is generally the
fair market value of the underlying shares as of the date of grant. Options are
generally subject to a three or five-year vesting schedule.
The 1987 Plan provides for the granting to employees of either
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or non-qualified stock options.
The 1987 Plan is administered by the Board of Directors of the Company, or a
committee of the Board, which determines the terms of options granted under the
1987 Plan, including the exercise price and the number of shares subject to the
option. Generally, the exercise price of options granted under the 1987 Plan
must be not less than the fair market value of the underlying shares on the date
of grant, and the term of each option may not exceed eleven years (ten years in
the case of incentive stock options). Incentive stock options granted to persons
who have voting control over 10% or more of the Company's capital stock are
granted at 110% of the fair market value of the underlying shares on the date of
grant and expire five years after the date of grant.
The 1987 Plan provides the Board of Directors with the discretion to
determine when options granted thereunder shall become exercisable. Generally,
such options may be exercised after a period of time specified by the Board of
Directors at any time prior to expiration, so long as the optionee remains
employed by the Company. No option granted under the 1987 Plan is transferable
by the optionee other than by will or the laws of descent and distribution, and
each option is exercisable during the lifetime of the optionee only by the
optionee.
46
<PAGE> 47
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, 1996, under the 1995 Plan, options to purchase 362,063
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 $2.25
per share.
NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
The Company's Non-Employee Directors Stock Option Plan (the "Directors'
Plan") was adopted by the Board of Directors in May 1995. Only non-employee
directors are eligible to receive options under the Directors' Plan, under which
100,000 shares are authorized for issuance. As of September 30, 1996, options to
purchase 30,000 shares of Common Stock have been granted; such options have a
term of six years with an exercise price of $1.375 to $2.1875 per share, which
was the fair market value of the underlying shares on the date of grant. Except
for options granted on the effective date of the Directors' Plan, which are
fully vested, all options granted under the Directors' Plan will be subject to a
one-year vesting schedule. All options granted or to be granted under the
Directors' Plan are non-qualified stock options.
On the date the Directors' Plan was adopted by the Company's Board of
Directors, each non-employee director was granted an option to acquire 10,000
shares of the Company's common stock. Each non-employee director who joins the
Board of Directors after the date the Company's Board of Directors approved the
plan will likewise receive an option to acquire 10,000 shares of the Company's
Common Stock. In addition to the foregoing option grants, each year every
non-employee director automatically receives an option to acquire 5,000 shares
of the Company's Common Stock on the third business day following the date the
Company publicly announces its annual financial results; provided that such
director has attended at least 75% of the meetings of the Board of Directors and
of the Board Committees of which such non-employee director is a member in the
preceding fiscal year.
No option granted under the Directors Plan is transferable by the
optionee other than by will or the laws of descent and distribution, and each
option is exercisable during the lifetime of the optionee only by the optionee.
47
<PAGE> 48
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the beneficial ownership of shares of
Common Stock and Series B and Series C Preferred Stock of the Company on
September 30, 1996 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, Series B and Series C Preferred Stock on a combined basis. Each share of
Series B Preferred Stock is convertible into one share of Common Stock. Each
share of Series C Preferred Stock is convertible into 7.0588 shares of Common
Stock.
48
<PAGE> 49
The percentage ownership information set forth in the right hand column
of the following table has been computed in accordance with Securities and
Exchange Commission ("SEC") guidelines as described in note (3). In accordance
with such guidelines, the percentage ownership information shown for Michael J.
Connelly, LN Investment Capital Limited Partnership and Lepercq Investment
Limited Partnership - II reflects the outstanding voting power of holders of
Series B Preferred Stock, which generally votes with the Common Stock on matters
submitted for stockholder vote. See also note (4) to the table below.
<TABLE>
<CAPTION>
Shares of Common and Series B and Series C
Preferred Stock Beneficially Owned
------------------------------------------
Number of Shares Percent of
Name and Address Beneficially Held(1) Ownership(2)
- --------------- -------------------- -----------
<S> <C> <C>
James R. Evans 817,637 26.0%
9128 East San Salvador, Suite 200
Scottsdale, Arizona 85258
Barbara L. Owens 152,993 4.9%
9128 East San Salvador, Suite 200
Scottsdale, Arizona 85258
Ronald J. O'Connor 6,000 0.2%
9128 East San Salvador, Suite 200
Scottsdale, Arizona 85258
Robert A. Rice 22,187 0.7%
c/o Prime Discount Securities, Inc.
559 Congress Street
Portland, Maine 04112
Dr. Richard H. Hinze 21,000 0.7%
215 F. River Trail
Morganton, North Carolina 28655
Michael J. Connelly(3) 1,040,055 29.9%
LN Investment Capital Limited Partnership(3) 605,017 18.5%
Lepercq Investment Limited Partnership - II(3) 435,038 13.6%
John Rutkowski 165,433 5.5%
2828 North Central, Suite 1100
Phoenix, Arizona 85004
All directors and executive officers as a group 1,019,817 30.5%
(5 persons)
</TABLE>
49
<PAGE> 50
- -----------------------------
(1) Includes presently exercisable options as follows: James R. Evans -
166,759; 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 - 359,309.
(2) The percentages shown include the shares of Common Stock actually owned
as of September 30, 1996, 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 and Series C Preferred Stock. All shares of
Common Stock that the identified person had the right to acquire within
60 days of September 30, 1996 upon the exercise of options or Warrants,
or the conversion of the Series B and Series C 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.
(3) Michael J. Connelly does not directly own any shares of Common Stock;
however, Mr. Connelly is the managing general partner of (i) LN
Investment Capital Limited Partnership ("LNIC"), which owns 313,567
shares of Common Stock and 291,450 shares of Series B Preferred Stock
and (ii) Lepercq Investment Limited Partnership - II ("LIP-II"), which
owns 226,488 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 4 filed with the
SEC on January 9, 1996. 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.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
James R. Evans and Barbara L. Owens have personally guaranteed various
child care facility lease payments and other obligations to third parties. As of
July 31, 1995, the aggregate amounts of lease payments and other obligations
guaranteed by Mr. Evans and Ms. Owens were approximately $4,233,000 and
$1,084,000, 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 1996 were approximately $3,061 and $962, respectively. The
prescribed lease rates reflected fair rental value at the time the leases were
entered into.
Both James R. Evans and Barbara L. Owens have employment agreements
with the Company. See "EXECUTIVE COMPENSATION -- Employment Contracts."
In early 1994, the Board of Directors approved the transfer to PSI of a
portion of the Company's operations. Because of PSI's nonprofit status, PSI is
eligible to receive certain grants and subsidies. Pursuant to the PSI Agreement,
the Company provides PSI with management, administrative and operational
services and educational programs. Additionally, pursuant to the PSI Agreement,
the Company leases to PSI all of the equipment and other property necessary for
the operation of PSI's child care centers. Barbara L. Owens is the President and
James R. Evans is the Vice President of PSI. Dr. Richard Hinze, Ms. Owens and
Mr. Evans are directors of PSI. No directors or officers of the Company are
members of PSI and none of them receive any compensation from PSI.
The PSI Agreement stipulates that the Company is to receive an
administrative services fee for providing the services described above. During
fiscal 1995, the Company agreed to defer future administrative fees and lease
payments due from PSI (which in the aggregate are approximately $170,000
annually) until such time as PSI's cash flow is adequate to fund these fees,
which the Company estimates will occur no sooner than 1998. In connection with
this deferral, the accumulated amounts due from PSI at July 31, 1995 were
converted to a promissory note equal to the present value of the expected future
payments to be received from PSI related to the balance of the receivable
outstanding at July 31, 1995, over a period of seven years. This resulted in a
reduction in the outstanding receivable balances through a charge to the
provision for bad debts of $176,500. The promissory note bears interest at 8.0%,
with monthly payments due beginning January 1998 through July 2002.
50
<PAGE> 51
Due to continued operating losses incurred during 1996, PSI approved a
plan to close two of their schools upon the expiration of the leases. Since the
estimated cash flows will not be sufficient to recover the leasehold
improvements related to these two school schools, the Company recorded an
impairment reserve for these assets which totaled approximately $184,000 which
is included in facilities and maintenance expenses in fiscal 1996.
Also, since the Company is the lessee for two of the leases, they are
contingently liable for the lease payments to third parties. Since the estimated
future cash flows of PSI will not be sufficient to make the scheduled lease
payments, the Company recorded a contingent liability of approximately $418,000
related to the remaining lease payments which is included in facilities and
maintenance expenses in fiscal 1996.
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.
51
<PAGE> 52
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
<TABLE>
<CAPTION>
Exhibit Page Number or
Number Description Method of Filing
- ------ ----------- ----------------
<S> <C> <C>
3.1 Restated Certificate of Incorporation of (1)
Registrant
3.2 Certificate of Amendment to Restated (14)
Certificate of Incorporation
3.3 Certificate of Designation of Series B (7)
Preferred Stock of Sunrise Preschools,
Inc., dated November 21, 1991
3.4 Bylaws of Registrant, as amended (1)
10.1 Lease Agreement dated January 31, 1983 (1)
between Earl H. Jones and Venture
Educational Programs, Inc.
10.2 Lease Agreement dated April 1, 1984 (1)
between McClintock Associates Limited
Partnership, an Arizona limited
partnership, and Venture Educational
Programs, Inc.
10.3 Lease Agreement dated October 24, 1986 (1)
between Peoria Investment Company, Inc. an
Arizona corporation, and Sunrise
Preschools, Inc., an Arizona corporation
10.4 Lease Agreement dated October 16, 1986 (1)
between Sun School I Limited Partnership,
an Arizona limited partnership, and
Sunrise Preschools, Inc., an Arizona
corporation
10.5 Lease Agreement dated April 1, 1986, (1)
between Sunrise Partners, an Arizona
corporation, and Sunrise Preschools, Inc.,
an Arizona corporation
10.6 Lease Agreement dated February 5, 1987, (1)
between Sun School II Limited Partnership,
an Arizona limited partnership, and
Sunrise Preschools, Inc., an Arizona
corporation
10.7 Lease Agreement dated June 26, 1987, (1)
between Huber Farm Service of Phoenix,
Inc., an Arizona corporation, and Sunrise
Preschools, Inc., a Delaware corporation
10.8 Lease Agreement dated June 26, 1987, (1)
between Huber Farm Service of Phoenix,
Inc., an Arizona corporation, and Sunrise
Preschools, Inc., a Delaware corporation
10.9 Equipment Lease between James R. Evans and (1)
Sunrise Preschools, Inc.
10.10 Lease Agreement, dated July 29, 1988, (2)
between Sunrise Preschools, Inc. and
Investad, Inc.
10.11 Lease Agreement, dated July 25, 1988, (2)
between Sunrise
</TABLE>
52
<PAGE> 53
<TABLE>
<CAPTION>
Exhibit Page Number or
Number Description Method of Filing
- ------ ----------- ---------------
<S> <C> <C>
Preschools, Inc., and LV (2)
Properties, an Arizona general partnership
10.12 Lease Agreement, dated May 12, 1988,
between Sunrise Preschools, Inc. and
Jaymark Komer and Eugene Victor Komer and
Ruth Lena Komer, as Trustees of the Komer
Family Trust dated December 30, 1980
10.13 Lease Agreement, dated July 29, 1988, (2)
between Sunrise Preschools, Inc. and
Kailua Beach Center, Inc.
10.14 Lease Agreement, dated January 11, 1988, (3)
between Sunrise Preschools, Inc. and
Mercado Developers
10.15 Amendment of Lease Agreement dated March (4)
8, 1990 between Sunrise Preschools, Inc.
and Jaymark Komer and Komer Family Trust
dated May 12, 1988
10.16 Purchase Agreement and Registration Rights (5)
Agreement dated April 6, 1990, between
Sunrise Preschools, Inc. and Lepercq
Capital Management, Inc.
10.17 Vehicle Use Agreement dated February 14, (6)
1991 between Sunrise Preschools, Inc. and
James R. Evans
10.18 Vehicle Use Agreement dated February 14, (6)
1991 between Sunrise Preschools, Inc. and
Barbara L. Owens
10.19 Lease Agreement, dated July 1, 1991, (6)
between Sunrise Preschools, Inc., and
Maruni Arizona, Inc.
10.20 Purchase Agreement, dated November 18, (7)
1991, between Sunrise Preschools, Inc., LN
Investment Capital Limited Partnership,
Lepercq Investment Limited Partnership II
and LN Investment Capital Limited
Partnership II
10.21 Amendment of Lease, dated July 22, 1992, (8)
between Sunrise Preschools, Inc. and
Jaymark Komer and Komer Family Trust
10.22 Management Agreement, dated November 14, (11)
1993, between United Church of Christ and
Sunrise Preschools, Inc.
10.23 Vehicle Use Agreement dated June 15, 1993 (9)
between Sunrise Preschools, Inc. and James
R. Evans
10.24 Vehicle Use Agreement dated June 15, 1993 (9)
between Sunrise Preschools, Inc. and
Barbara L. Owens
10.25 Management Contract Agreement, dated (9)
January 4, 1993, between Charlie Siddle, a
general partnership doing business as the
La Mancha Racquet Club, and Sunrise
Preschools, Inc.
10.26 Term Sheet Agreement, dated December 7, (9)
1992, between Joy of Christ Lutheran
Church and Sunrise Preschools, Inc.
</TABLE>
53
<PAGE> 54
<TABLE>
<CAPTION>
Exhibit Page Number or
Number Description Method of Filing
- ------ ----------- ---------------
<S> <C> <C>
10.27 Agreement between Lutheran Church of (9)
Honolulu and Sunrise Preschools, Inc.,
dated May 19, 1993
10.28 Contract Agreement, dated November 19, (9)
1992, between Phoenix Union High School
District No. 210 and Sunrise Preschools,
Inc.
10.29 Contract Renewal Agreement, dated July 1, (9)
1993, between Phoenix Union High School
District No. 210 and Sunrise Preschools,
Inc.
10.30 Employment Agreement between Sunrise (10)
Preschools, Inc. and James R. Evans, dated
October 15, 1993
10.31 Employment Agreement between Sunrise (10)
Preschools, Inc. and Barbara L. Owens,
dated October 15, 1993
10.32 Administrative Services Agreement, (11)
License, and Equipment Lease, dated
February 1, 1994, between Sunrise
Preschools, Inc. and Preschool Services,
Inc.
10.33 Contract Renewal Agreement, dated June 20, (11)
1994, between Sunrise Preschools, Inc. and
Phoenix Union High School District #210
10.34 Contract Agreement, dated December 1, (11)
1993, between Sunrise Preschools, Inc. and
the State of Hawaii Department of Human
Services
10.35 Preferred Shares Rights Agreement, dated (12)
February 10, 1995, between Sunrise
Preschools, Inc. and American Securities
Transfer, Incorporated, including the
Certificate of Designation of Rights,
Preferences and Privileges of Series A
Participating Preferred Stock, the form of
Rights Certificate and the Summary of
Rights attached thereto as Exhibits A,
B and C, respectively.
10.36 First Amendment to Employment Agreement (13)
between Sunrise Preschools, Inc. and James
R. Evans, dated September 16, 1994
10.37 First Amendment to Employment Agreement (13)
between Sunrise Preschools, Inc. and
Barbara L. Owens, dated September 16, 1994
10.38 Loan Agreement dated January 24, 1995 (13)
between Sunrise Preschools, Inc. and Bank
One, Arizona, NA for the purchase of
equipment
10.39 Loan Agreement dated January 24, 1995 (13)
between Sunrise Preschools, Inc. and Bank
One, Arizona, NA for the purchase of
vehicles
10.40 Revolving Line of Credit Note and Loan (13)
Agreement dated
</TABLE>
54
<PAGE> 55
<TABLE>
<CAPTION>
Exhibit Page Number or
Number Description Method of Filing
- ------ ----------- ---------------
<S> <C> <C>
January 24, 1995 between Sunrise Preschools,
Inc. and Bank One, Arizona NA
10.41 Acquisition Consulting and Investor (14)
Relations Agreement between Sunrise
Preschools, Inc. and Miller Capital
Corporation, dated April 14, 1995
10.42 Second Amendment to Employment Agreement (14)
between Sunrise Preschools, Inc. and James
R. Evans, dated May 4, 1995
10.43 Second Amendment to Employment Agreement (14)
between Sunrise Preschools, Inc. and
Barbara L. Owens, dated May 4, 1995
10.44 Asset Purchase Agreement between (15)
Children's Choice Learning Center, Inc.
and Sunrise Preschool, Inc. dated June 26,
1996, with one amendment dated June 28,
1996
10.45 Business Loan Agreement between Bank of *
America Arizona and Sunrise Preschools,
Inc. dated March 15, 1996
11 Computation of Per Share Earnings *
21 List of Subsidiaries *
23 Consent of Ernst & Young LLP *
24 Consent of Arthur Andersen & Co. LLP *
</TABLE>
- -----------------
* Filed herewith.
(1) Incorporated by reference to exhibits to Form S-1 filed July 10, 1987.
(2) Incorporated by reference to exhibits to Form 10-K filed on or about
October 31, 1988.
(3) Incorporated by reference to exhibits to Form 10-K filed on or about
October 30, 1989.
(4) Incorporated by reference to exhibits to Form 10-Q filed on or about
January 31, 1990.
(5) Incorporated by reference to exhibits to Form 8-K filed on or about April
20, 1990.
(6) Incorporated by reference to exhibits to Form 10-K filed on or about
October 28, 1991.
(7) Incorporated by reference to exhibits to Form 10-Q filed on or about
December 16, 1991.
(8) Incorporated by reference to exhibits to Form 10-K filed on or about
October 21, 1992.
(9) Incorporated by reference to exhibits to Form 10-KSB filed on or about
October 8, 1993.
(10) Incorporated by reference to exhibits to Form 10-QSB filed on or about
March 14, 1994.
(11) Incorporated by reference to exhibits to Form 10-KSB for the fiscal year
ended July 31, 1994.
(12) Incorporated by reference to exhibits to Form 8-K filed on or about
February 10, 1995.
(13) Incorporated by reference to exhibits to Form 10-QSB filed on or about
March 10, 1995.
(14) Incorporated by reference to exhibits to Form SB-2 filed October 23,
1995.
(15) Incorporated by reference to exhibits to Form 8-K filed on or about
September 9, 1996
55
<PAGE> 56
(b) REPORTS ON FORM 8-K.
Form 8-K was filed on May 1, 1996 reporting a change in independent
auditors.
(c) FINANCIAL STATEMENTS
(1) Independent Auditors Reports
Ernst & Young LLP Page 22
Arthur Andersen LLP Page 23
(2) Consolidated Financial Statements and Notes
to Consolidated Financial Statements of the
Company for the fiscal years ended July 31, 1996
and 1995 Page 24
(d) FINANCIAL STATEMENT SCHEDULES.
Financial Statement Schedules have been omitted because of the absence
of conditions under which they are required or because the required material
information is included in the Financial Statements or Notes to the Financial
Statements included herein.
56
<PAGE> 57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SUNRISE PRESCHOOLS, INC.
a Delaware corporation
Date: October 25, 1996 By /s/ James R. Evans
---------------------------------
James R. Evans, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ James R. Evans Chairman of the Board, and October 25, 1996
- ------------------ President (Principal
James R. Evans Executive Officer)
/s/ Ronald J. O'Connor Controller (Principal October 25, 1996
- ---------------------- Financial Officer; Principal
Ronald J. O'Connor Accounting Officer)
/s/ Robert A. Rice Director October 25, 1996
- ------------------
Robert A. Rice
/s/ Richard H. Hinze Director October 25, 1996
- --------------------
Richard H. Hinze
/s/ Barbara L. Owens Director October 25, 1996
- --------------------
Barbara L. Owens
</TABLE>
58
<PAGE> 1
EXHIBIT 10.45
[LOGO] BANK OF AMERICA BUSINESS LOAN AGREEMENT
This Agreement dated as of March 15, 1996 is between Bank of America Arizona
(the "Bank") and Sunrise Preschools, Inc. (the "Borrower").
1. FACILITY NO. 1 LINE OF CREDIT AMOUNT AND TERMS
1.1 LINE OF CREDIT AMOUNT.
(a) During the availability period described below, the Bank will provide a
line of credit to the Borrower. The amount of the line of credit (the
"Facility No.1 Commitment") is Two Hundred Fifty Thousand and No/100
Dollars ($250,000.00).
(b) This is a revolving line of credit. During the availability period, the
Borrower may repay principal amounts and reborrow them.
(d) The Borrower agrees not to permit the outstanding principal balance
of the line of credit to exceed the Facility No.1 Commitment.
1.2 AVAILABILITY PERIOD. The line of credit is available between the date
of this Agreement and January 31, 1997 (the "Expiration Date") unless
the Borrower is in default.
1.3 INTEREST RATE.
(a) The interest rate is the Reference Rate plus 1.00 percentage point(s).
(b) The Reference Rate is the rate of interest publicly announced from time
to time by Bank of America National Trust and Savings Association
("BofA California") as its "reference rate". The Reference Rate is set
by BofA California based on various factors, including BofA
California's costs and desired return, general economic conditions and
other factors, and is used as a reference point for pricing some loans.
The Bank and BofA California may price loans to its customers at,
above, or below the Reference Rate. Any change in the Reference Rate
will take effect at the opening of business on the day specified in the
public announcement of a change in BofA California's Reference Rate.
1.4 REPAYMENT TERMS.
(a) The Borrower will pay interest on April 1, 1996 and on the first day
of each month thereafter until payment in full of any principal
outstanding under this line of credit.
(b) The Borrower will repay in full all principal and any unpaid interest
or other charges outstanding under this line of credit no later than
the Expiration Date.
(c) The Borrower may prepay the loan in full or in part at any time.
2. FACILITY NO. 2 LINE OF CREDIT AMOUNT AND TERMS
2.1 LINE OF CREDIT AMOUNT.
(a) During the availability period described below, the Bank will provide a
line of credit to the Borrower. The amount of the line of credit (the
"Facility No.2 Commitment") is Two Hundred Fifty Thousand and No/100
Dollars ($250,000.00).
(b) This is a non-revolving line of credit with a term repayment option.
Any amount of credit extended, even if repaid before the end of the
availability period, permanently reduces the remaining available line
of credit.
1
<PAGE> 2
(c) The Borrower agrees not to permit the outstanding principal balance of
the line of credit to exceed the Facility No.2 Commitment.
2.2 AVAILABILITY PERIOD. The line of credit is available between the date
of this Agreement and January 31, 1997 (the "Expiration Date") unless the
Borrower is in default.
2.3 INTEREST RATE.
(a) The interest rate is the Reference Rate plus 1.25 percentage point(s).
2.4 REPAYMENT TERMS.
(a) The Borrower will pay interest on April 1, 1996 and on the first day of
each month thereafter until payment in full of any principal
outstanding under this line of credit.
(b) The Borrower will repay the principal amount outstanding on the
Expiration Date in Sixty (60) successive equal monthly installments
starting April 1, 1997. On March 1, 2002, the Borrower will repay the
remaining principal balance plus any interest then due.
(c) The Borrower may prepay the loan in full or in part at any time. The
prepayment will be applied to the most remote installment of principal
due under this Agreement.
3. Section 3 is intentionally omitted.
2
<PAGE> 3
4. FEES AND EXPENSES
4.1 FEES.
(a) UNUSED COMMITMENT FEE. The Borrower agrees to pay a fee on any
difference between the Commitment and the amount of credit it actually
uses, determined by the weighted average loan balance maintained during
the specified period. The fee will be calculated at 1/8% per year.
This fee is due July 1, 1996 and quarterly thereafter until January 1,
2002.
4.2 EXPENSES. The Borrower agrees to immediately repay the Bank for
expenses that include, but are not limited to, filing, recording and search
fees, appraisal fees, title report fees, and documentation fees.
4.3 REIMBURSEMENT COSTS.
(a) The Borrower agrees to reimburse the Bank for any expenses it incurs in
the preparation of this Agreement and any agreement or instrument
required by this Agreement. Expenses include, but are not limited to,
reasonable attorneys' fees, including any allocated costs of the Bank's
in-house counsel.
(b) The Borrower agrees to reimburse the Bank for the cost of periodic
audits and appraisals of the personal property collateral securing this
Agreement, at such intervals as the Bank may reasonably require. The
audits and appraisals may be performed by employees of the Bank or by
independent appraisers.
3
<PAGE> 4
5. COLLATERAL
5.1 PERSONAL PROPERTY. The Borrower's obligations to the Bank under this
Agreement will be secured by personal property the Borrower now owns or will own
in the future as listed below. The collateral is further defined in security
agreement(s) executed by the Borrower.
(a) Machinery, equipment, and fixtures.
(b) Inventory.
(c) Receivables.
(f) Patents, trademarks and other general intangibles.
(h) Motor Vehicle Department lien filings.
In addition, all personal property collateral securing this Agreement shall also
secure all other present and future obligations of the Borrower to the Bank
(excluding any consumer credit covered by the federal Truth in Lending law,
unless the Borrower has otherwise agreed in writing). All personal property
collateral securing any other present or future obligations of the Borrower to
the Bank shall also secure this Agreement.
6. DISBURSEMENTS, PAYMENTS AND COSTS
6.1 REQUESTS FOR CREDIT. Each request for an extension of credit will be
made in writing in a manner acceptable to the Bank, or by another means
acceptable to the Bank.
6.2 DISBURSEMENTS AND PAYMENTS. Each disbursement by the Bank and each
payment by the Borrower will be:
(a) made at the Bank's branch (or other location) selected by the Bank from
time to time;
(b) made for the account of the Bank's branch selected by the Bank from
time to time;
(c) made in immediately available funds, or such other type of funds
selected by the Bank;
(d) evidenced by records kept by the Bank. In addition, the Bank may, at
its discretion, require the Borrower to sign one or more promissory
notes.
6.3 TELEPHONE AND TELEFAX AUTHORIZATION.
(a) The Bank may honor telephone or telefax instructions for advances or
repayments or for the designation of optional interest rates given by
any one of the individual signer(s) of this Agreement or a person or
persons authorized in writing by any one of the signer(s) of this
Agreement.
(b) Advances will be deposited in and repayments will be withdrawn from the
Borrower's account, or such other of the Borrower's accounts with the
Bank as designated in writing by the Borrower.
(c) The Borrower indemnifies and excuses the Bank (including its officers,
employees, and agents) from all liability, loss, and costs in
connection with any act resulting from telephone or telefax
instructions it reasonably believes are made by any individual
authorized by the Borrower to give such instructions. This indemnity
and excuse will survive this Agreement's termination.
6.4 DIRECT DEBIT (PRE-BILLING).
(a) The Borrower agrees that the Bank will debit the Borrower's account, or
such other of the Borrower's account with the Bank as designated in
writing by the Borrower (the "Designated Account") on the date each
payment of principal and interest and any fees from the Borrower
becomes due (the "Due Date"). If the Due Date is not a banking day, the
Designated Account will be debited on the next banking day.
4
<PAGE> 5
(b) Approximately 10 days prior to each Due Date, the Bank will mail to the
Borrower a statement of the amounts that will be due on that Due Date
(the "Billed Amount"). The calculation will be made on the assumption
that no new extensions of credit or payments will be made between the
date of the billing statement and the Due Date, and that there will be
no changes in the applicable interest rate.
(c) The Bank will debit the Designated Account for the Billed Amount,
regardless of the actual amount due on that date (the "Accrued
Amount"). If the Billed Amount debited to the Designated Account
differs from the Accrued Amount, the discrepancy will be treated as
follows:
(i) If the Billed Amount is less than the Accrued Amount, the
Billed Amount for the following Due Date will be increased by
the amount of the discrepancy. The Borrower will not be in
default by reason of any such discrepancy.
(ii) If the Billed Amount is more than the Accrued Amount, the
Billed Amount for the following Due Date will be decreased by
the amount of the discrepancy.
Regardless of any such discrepancy, interest will continue to accrue
based on the actual amount of principal outstanding without
compounding. The Bank will not pay the Borrower interest on any
overpayment.
(d) The Borrower will maintain sufficient funds in the Designated Account
to cover each debit. If there are insufficient funds in the Designated
Account on the date the Bank enters any debit authorized by this
Agreement, the debit will be reversed.
6.5 BANKING DAYS. Unless otherwise provided in this Agreement, a banking
day is a day other than a Saturday or a Sunday on which the Bank is open for
business in Arizona. All payments and disbursements which would be due on a day
which is not a banking day will be due on the next banking day. All payments
received on a day which is not a banking day will be applied to the credit on
the next banking day.
6.6 TAXES. The Borrower will not deduct any taxes from any payments it
makes to the Bank. If any government authority imposes any taxes on any payments
made by the Borrower, the Borrower will pay the taxes and will also pay to the
Bank, at the time interest is paid, any additional amount which the Bank
specifies as necessary to preserve the after-tax yield the Bank would have
received if such taxes had not been imposed. Upon request by the Bank, the
Borrower will confirm that it has paid the taxes by giving the Bank official tax
receipts (or notarized copies) within 30 days after the due date. However, the
Borrower will not pay the Bank's net income taxes.
6.7 ADDITIONAL COSTS. The Borrower will pay the Bank, on demand, for the
Bank's costs or losses arising from any statute or regulation, or any request or
requirement of a regulatory agency. The costs and losses will be allocated to
the loan in a manner determined by the Bank, using any reasonable method. The
costs include the following:
(a) any reserve or deposit requirements; and
(b) any capital requirements relating to the Bank's assets and commitments
for credit.
6.8 INTEREST CALCULATION. Except as otherwise stated in this Agreement, all
interest and fees, if any, will be computed on the basis of a 360 day year and
the actual number of days elapsed. This results in more interest or a higher fee
than if a 365-day year is used.
6.9 INTEREST ON LATE PAYMENTS. At the Bank's sole option in each instance,
any amount not paid when due under this Agreement (including interest) shall
bear interest from the due date at the Reference Rate plus 2.00 percentage
points. This may result in compounding of interest.
6.10 DEFAULT RATE. Upon the occurrence and during the continuation of any
default under this Agreement, advances under this Agreement will at the option
of the Bank bear interest at a rate per annum which is 2.00 percentage point(s)
higher than the rate of interest otherwise provided under this Agreement. This
will not constitute a waiver of any default.
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<PAGE> 6
7. CONDITIONS The Bank must receive the following items, in form and
content acceptable to the Bank, before it is required to extend any credit to
the Borrower under this Agreement:
7.1 AUTHORIZATIONS. Evidence that the execution, delivery and performance
by the Borrower of this Agreement and any instrument or agreement required under
this Agreement have been duly authorized.
7.2 GOVERNING DOCUMENTS. A copy of the Borrower's articles of
incorporation.
7.3 SECURITY AGREEMENTS. Signed original security agreements, assignments,
financing statements and fixture filings (together with collateral in which the
Bank requires a possessory security interest), which the Bank requires.
7.4 EVIDENCE OF PRIORITY. Evidence that security interests and liens in
favor of the Bank are valid, enforceable, and prior to all others' rights and
interests, except those the Bank consents to in writing. All title documents for
motor vehicles must show the Bank's interest.
7.5 INSURANCE. Evidence of insurance coverage, as required in the
"Covenants" section of this Agreement.
7.6 Section 7.6 is intentionally omitted.
7.7 OTHER INSURANCE. Evidence of General Liability and insurance coverage
for child physical and sexual abuse claims with an insurer acceptable to the
Bank and with the Bank named as an additional loss payee.
7.8 SUBORDINATION AGREEMENTS. Subordination agreements in form and
substance satisfactory to the Bank, in favor of the Bank when requested by the
Bank for additional funded debt.
7.9 Section 7.9 is intentionally omitted.
7.10 OTHER ITEMS. Any other items that the Bank reasonably requires.
8. REPRESENTATIONS AND WARRANTIES When the Borrower signs this Agreement,
and until the Bank is repaid in full, the Borrower makes the following
representations and warranties. Each request for an extension of credit
constitutes a renewed representation.
8.1 ORGANIZATION OF BORROWER. The Borrower is a corporation duly formed and
existing under the laws of the state where organized.
8.2 AUTHORIZATION. This Agreement, and any instrument or agreement required
hereunder, are within the Borrower's powers, have been duly authorized, and do
not conflict with any of its organizational papers.
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<PAGE> 7
8.3 ENFORCEABLE AGREEMENT. This Agreement, and each other agreement or
document executed and delivered to the Bank in connection with this Agreement,
is a legal, valid and binding agreement of the Borrower, enforceable against the
Borrower in accordance with its terms, and any instrument or agreement required
hereunder, when executed and delivered, will be similarly legal, valid, binding
and enforceable.
8.4 GOOD STANDING. In each state in which the Borrower does business, it is
properly licensed, in good standing, and, where required, in compliance with
fictitious name statutes.
8.5 NO CONFLICTS. This Agreement does not conflict with any law, agreement,
or obligation by which the Borrower is bound.
8.6 FINANCIAL INFORMATION. All financial and other information that has
been or will be supplied to the Bank is:
(a) sufficiently complete to give the Bank accurate knowledge of the
Borrower's financial condition.
(b) in form and content required by the Bank.
(c) in compliance with all government regulations that apply.
8.7 LAWSUITS. There is no lawsuit, tax claim or other dispute pending or
threatened against the Borrower, which, if lost, would impair the Borrower's
financial condition or ability to repay the loan, except as have been disclosed
in writing to the Bank prior to the date of this Agreement.
8.8 COLLATERAL. All collateral required in this Agreement is owned by the
grantor of the security interest free of any title defects or any liens or
interests of others.
8.9 PERMITS, FRANCHISES. The Borrower possesses all permits, memberships,
franchises, contracts and licenses required and all trademark rights, trade name
rights, patent rights and fictitious name rights necessary to enable it to
conduct the business in which it is now engaged.
8.10 OTHER OBLIGATIONS. The Borrower is not in default on any obligation for
borrowed money, any purchase money obligation or any other material lease,
commitment, contract, instrument or obligation.
8.11 INCOME TAX RETURNS. The Borrower has no knowledge of any pending
assessments or adjustments of its income tax for any year.
8.12 NO EVENT OF DEFAULT. There is no event which is, or with notice or
lapse of time or both would be, a default under this Agreement.
8.13 ERISA PLANS.
(a) The Borrower has fulfilled its obligations, if any, under the minimum
funding standards of ERISA and the Code with respect to each Plan and
is in compliance in all material respects with the presently applicable
provisions of ERISA and the Code, and has not incurred any liability
with respect to any Plan under Title IV of ERISA.
(b) No reportable event has occurred under Section 4043(b) of ERISA for
which the PBGC requires 30 day notice.
(c) No action by the Borrower to terminate or withdraw from any Plan has
been taken and no notice of intent to terminate a Plan has been filed
under Section 4041 of ERISA.
(d) No proceeding has been commenced with respect to a Plan under Section
4042 of ERISA, and no event has occurred or condition exists which
might constitute grounds for the commencement of such a proceeding.
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<PAGE> 8
(e) The following terms have the meanings indicated for purposes of this
Agreement:
(i) "Code" means the Internal Revenue Code of 1986, as amended
from time to time.
(ii) "ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time.
(iii) "PBGC" means the Pension Benefit Guaranty Corporation
established pursuant to Subtitle A of Title IV of ERISA.
(iv) "Plan" means any employee pension benefit plan maintained or
contributed to by the Borrower and insured by the Pension
Benefit Guaranty Corporation under Title IV of ERISA.
8.14 LOCATION OF BORROWER. The Borrower's place of business (or, if the
Borrower has more than one place of business, its chief executive office) is
located at the address listed under the Borrower's signature on this Agreement.
9. COVENANTS The Borrower agrees, so long as credit is available under
this Agreement and until the Bank is repaid in full:
9.1 USE OF PROCEEDS. To use the proceeds of the credit only for:
Facility No. 1: Working capital advances.
Facility No. 2: Vehicle and fixed asset purchases, excluding acquisitions and
start up financing.
9.2 FINANCIAL INFORMATION. To provide the following financial information
and statements and such additional information as requested by the Bank from
time to time:
(a) Within 120 days of the Borrower's fiscal year end, the Borrower's
annual financial statements and Borrower's Form 10-K Annual Report.
These financial statements must be audited by a Certified Public
Accountant ("CPA") acceptable to the Bank.
(b) Within 45 days of the period's end, the Borrower's quarterly financial
statements. These financial statements may be Borrower prepared.
(c) Copies of the Borrower's Form 10-Q Quarterly Report within 45 days of
period end and Form 8-K Current Report within 10 days after the date of
filing with the Securities and Exchange Commission.
(d) Within 120 days of the Borrower's fiscal year end, the Borrower's
annual financial statement projections for the next five fiscal years,
to include income statement, balance sheet and cash flow statements,
monthly for the first year and at least quarterly thereafter.
9.3 CURRENT RATIO. To maintain a ratio of current assets to current
liabilities of at least the amounts indicated for each period specified below
(measured quarterly):
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
From the date hereof through
July 31, 1996 1.50:1.0
August 1, 1996 through
July 30, 1998 1.25:1.0
July 31, 1998 and thereafter 1.50:1.0
</TABLE>
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<PAGE> 9
9.4 TOTAL LIABILITIES TO TANGIBLE NET WORTH RATIO. To maintain a ratio of
Total Liabilities to Tangible Net Worth not exceeding the amounts indicated for
each period specified below:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
From the date hereof through
July 31, 1996 2.00:1.0
August 1, 1996 through
January 30, 1998 3.00:1.0
January 31, 1998 through
July 30, 1998 2.75:1.0
July 31, 1998 and thereafter 2.00:1.00
</TABLE>
"Total Liabilities" means the sum of current liabilities plus long term
liabilities.
"Tangible net worth" means the gross book value of the Borrower's assets
(excluding goodwill, patents, trademarks, trade names, organization expense,
treasury stock, unamortized debt discount and expense, deferred research and
development costs, deferred marketing expenses, and other like intangibles) less
total liabilities, including but not limited to accrued and deferred income
taxes, and any reserves against assets.
To be measured quarterly.
9.5 ADJUSTED EBITDA DEBT COVERAGE RATIO. To maintain an adjusted EBITDA
Debt Coverage Ratio of at least 1.50:1.0.
"Adjusted EBITDA Debt Coverage Ratio" means the ratio of Adjusted EBITDA to the
sum of interest expense and taxes paid plus dividends paid during the current
fiscal year (excluding those dividends accrued during or prior to the fiscal
year ending July 31, 1995 and actually paid on or before December 31, 1995 from
the proceeds of the Series C Preferred Stock Offering dated December 19, 1995)
and the current portion of long-term debt. "Adjusted EBITDA" means the sum of
net income before taxes, interest expense, amortization and depreciation.
This ratio will be calculated at the end of each fiscal quarter, using fiscal
year-to-date results on an annualized basis. The current portion of long term
debt will be measured as of the last day of the preceding fiscal year.
9.6 OTHER DEBTS. Not to have outstanding or incur any direct or contingent
debts (other than those to the Bank), or become liable for the debts of others
without the Bank's written consent. This does not prohibit:
(a) Acquiring goods, supplies, or merchandise on normal trade credit.
(b) Endorsing negotiable instruments received in the usual course of
business.
(c) Obtaining surety bonds in the usual course of business.
(d) Additional debts for acquisitions of new and existing preschools which
do not exceed a total principal amount of Five Million and No/100
Dollars ($5,000,000.00) in fiscal year 1996. A further limitation for
additional debts for fiscal year 1997 and beyond will be subject to
review of the Borrower's revised annual projections and financial
statements, and in an amount acceptable to the Bank.
(e) Additional debts for business purposes which do not exceed a total
principal amount of One Hundred Thousand and No/100 Dollars
($100,000.00) outstanding at any one time.
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<PAGE> 10
9.7 OTHER LIENS. Not to create, assume, or allow any security interest or
lien (including judicial liens) on property the Borrower now or later owns,
except:
(a) Deeds of trust and security agreements in favor of the Bank.
(b) Liens for taxes not yet due.
(c) Additional liens which secure obligations for acquisitions of new and
existing preschools in a total principal amount not exceeding Five
Million and No/100 Dollars ($5,000,000.00) in fiscal year 1996. A
further limitation for additional liens for fiscal year 1997 and beyond
will be subject to review of the Borrower's revised annual projections
and financial statements, and in an amount acceptable to the Bank.
(d) Additional purchase money security interests in personal or real
property acquired after the date of this Agreement, if the total
principal amount of debts secured by such liens does not exceed One
Hundred Thousand and No/100 Dollars ($100,000.00) at any one time.
9.8 DIVIDENDS. Not to declare or pay any dividends on any of its shares
(excluding accrued dividends of $286,666.56 through December 31, 1995) in excess
of Three Hundred Thousand and No/100 Dollars ($300,000.00) during the period
from January 1, 1996 through July 31, 1996 and during the fiscal year ending
July 31, 1997. Notwithstanding the fore going, no dividends will be allowed if
the borrower is in default or the payment of such dividends would result in an
event of default or in the violation of any covenants. No additional cash
dividends will be allowed after fiscal year 1997 without the Bank's prior
written consent.
9.9 LOANS TO OFFICERS AND AFFILIATES. Not to make any loans, advances or
other extensions of credit to any of the Borrower's executives, officers,
directors or shareholders (or any relatives of any of the foregoing) or
affiliates without the prior written consent of the Bank.
9.10 OUT OF DEBT PERIOD (FACILITY NO. 1). To repay any advances in full, and
not to draw any additional advances on its revolving line of credit, for a
period of at least 30 consecutive days in each line-year. "Line-year" means the
period between the date of this Agreement and the expiration date, and each
subsequent one-year period (if any).
9.11 NOTICES TO BANK. To promptly notify the Bank in writing of:
(a) any lawsuit over Fifty Thousand and No/100 Dollars ($50,000.00) against
the Borrower.
(b) any substantial dispute between the Borrower and any government
authority.
(c) any failure to comply with this Agreement.
(d) any material adverse change in the Borrower's financial condition or
operations.
(e) any change in the Borrower's name, legal structure, place of business,
or chief executive office if the Borrower has more than one place of
business.
9.12 BOOKS AND RECORDS. To maintain adequate books and records.
9.13 AUDITS. To allow the Bank and its agents to inspect the Borrower's
properties and examine, audit, and make copies of books and records at any
reasonable time. If any of the Borrower's properties, books or records are in
the possession of a third party, the Borrower authorizes that third party to
permit the Bank or its agents to have access to perform inspections or audits
and to respond to the Bank's requests for information concerning such
properties, books and records.
9.14 COMPLIANCE WITH LAWS. To comply with the laws, (including any
fictitious name statute), regulations, and orders of any government body with
authority over the Borrower's business.
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<PAGE> 11
9.15 PRESERVATION OF RIGHTS. To maintain and preserve all rights,
privileges, and franchises the Borrower now has.
9.16 MAINTENANCE OF PROPERTIES. To make any repairs, renewals, or
replacements to keep the Borrower's properties in good working condition.
9.17 PERFECTION OF LIENS. To help the Bank perfect and protect its security
interests and liens, and reimburse it for related costs it incurs to protect its
security interests and liens.
9.18 COOPERATION. To take any action requested by the Bank to carry out the
intent of this Agreement.
9.19 INSURANCE.
(a) INSURANCE COVERING COLLATERAL. To maintain all risk property damage
insurance policies covering the tangible property comprising the
collateral. Each insurance policy must be in an amount acceptable to
the Bank. The insurance must be issued by an insurance company
acceptable to the Bank and must include a lender's loss payable
endorsement in favor of the Bank in a form acceptable to the Bank.
(b) GENERAL BUSINESS INSURANCE. To maintain insurance satisfactory to the
Bank as to amount, nature and carrier covering property damage
(including loss of use and occupancy) to any of the Borrower's
properties, public liability insurance including coverage for
contractual liability, product liability and workers' compensation, and
any other insurance which is usual for the Borrower's business.
(c) EVIDENCE OF INSURANCE. Upon the request of the Bank, to deliver to the
Bank a copy of each insurance policy or, if permitted by the Bank, a
certificate of insurance listing all insurance in force.
9.20 ADDITIONAL NEGATIVE COVENANTS. Not to, without the Bank's written
consent:
(a) engage in any business activities substantially different from the
Borrower's present business.
(b) liquidate or dissolve the Borrower's business.
(c) enter into any consolidation, merger, pool, joint venture, syndicate,
or other combination.
(d) lease, or dispose of all or a substantial part of the Borrower's
business or the Borrower's assets.
(e) acquire or purchase a business or its assets for a consideration,
including assumption of debt, in excess of Ten Million and No/100
Dollars ($10,000,000.00) in the aggregate.
(f) Open more than nine new schools in fiscal years 1996 and 1997 combined.
(g) sell or otherwise dispose of any assets for less than fair market value
or enter into any sale and leaseback agreement covering any of its
fixed or capital assets.
(h) voluntarily suspend its business for more than 30 days in any one year
period.
9.21 ERISA PLANS. To give prompt written notice to the Bank of:
(a) The occurrence of any reportable event under Section 4043(b) of ERISA
for which the PBGC requires 30 day notice.
(b) Any action by the Borrower to terminate or withdraw from a Plan or the
filing of any notice of intent to terminate under Section 4041 of
ERISA.
(c) Any notice of noncompliance made with respect to a Plan under Section
4041(b) of ERISA.
(d) The commencement of any proceeding with respect to a Plan under Section
4042 of ERISA.
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<PAGE> 12
10. DEFAULT If any of the following events occur, the Bank may do one or
more of the following: declare the Borrower in default, stop making any
additional credit available to the Borrower, and require the Borrower to repay
its entire debt immediately and without prior notice. If an event of default
occurs under the paragraph entitled "Bankruptcy" below with respect to the
Borrower, the entire debt outstanding under this Agreement will automatically be
due immediately.
10.1 FAILURE TO PAY. The Borrower fails to make a payment under this
Agreement when due.
10.2 LIEN PRIORITY. The Bank fails to have an enforceable first lien (except
for any prior liens to which the Bank has consented in writing) on or security
interest in any property given as security for the extensions of credit under
this Agreement.
10.3 FALSE INFORMATION. The Borrower has given the Bank false or misleading
information or representations.
10.4 DEATH. If the Borrower is a corporation, any principal officer or
majority stockholder dies.
10.5 BANKRUPTCY. The Borrower files a bankruptcy petition, a bankruptcy
petition is filed against the Borrower, or the Borrower makes a general
assignment for the benefit of creditors.
10.6 RECEIVERS. A receiver or similar official is appointed for the
Borrower's business, or the business is terminated.
10.7 LAWSUITS. Any lawsuit or lawsuits are filed on behalf of one or more
trade creditors against the Borrower in an aggregate amount of Fifty Thousand
and No/100 Dollars ($50,000.00) or more in excess of any insurance coverage.
10.8 JUDGMENTS. Any judgments or arbitration awards are entered against the
Borrower, or the Borrower enters into any settlement agreements with respect to
any litigation or arbitration, in an aggregate amount of Fifty Thousand and
No/100 Dollars ($50,000.00) or more in excess of any insurance coverage.
10.9 GOVERNMENT ACTION. Any government authority takes action that the Bank
believes materially adversely affects the Borrower's financial condition or
ability to repay.
10.10 MATERIAL ADVERSE CHANGE. A material adverse change occurs in the
Borrower's financial condition, properties or prospects, or ability to repay the
extensions of credit under this Agreement.
10.11 CROSS-DEFAULT. Any default occurs under any agreement in connection
with any credit the Borrower has obtained from anyone else or which the Borrower
has guaranteed.
10.12 DEFAULT UNDER RELATED DOCUMENTS. Any guaranty, subordination agreement,
security agreement, deed of trust, or other document required by this Agreement
is violated or no longer in effect.
10.13 OTHER BANK AGREEMENTS. The Borrower fails to meet the conditions of, or
fails to perform any obligation under any other agreement the Borrower has with
the Bank or any affiliate of the Bank.
10.14 ERISA PLANS. The occurrence of any one or more of the following events
with respect to the Borrower, provided such event or events could reasonably be
expected, in the judgment of the Bank, to subject the Borrower to any tax,
penalty or liability (or any combination of the foregoing) which, in the
aggregate, could have a material adverse effect on the financial condition of
the Borrower with respect to a Plan:
(a) A reportable event shall occur with respect to a Plan which is, in the
reasonable judgment of the Bank, likely to result in the termination of
such Plan for purposes of Title IV of ERISA.
(b) Any Plan termination (or commencement of proceedings to terminate a
Plan) or the Borrower's full or partial withdrawal from a Plan.
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<PAGE> 13
10.15 OTHER BREACH UNDER AGREEMENT. The Borrower fails to meet the conditions
of, or fails to perform any obligation under, any term of this Agreement not
specifically referred to in this Article.
11. ENFORCING THIS AGREEMENT; MISCELLANEOUS
11.1 GAAP. Except as otherwise stated in this Agreement, all financial
information provided to the Bank and all financial covenants will be made under
generally accepted accounting principles, consistently applied.
11.2 ARIZONA LAW. This Agreement is governed by Arizona law.
11.3 SUCCESSORS AND ASSIGNS. This Agreement is binding on the Borrower's and
the Bank's successors and assignees. The Borrower agrees that it may not assign
this Agreement without the Bank's prior consent. The Bank may sell
participations in or assign this loan, and may exchange financial information
about the Borrower with actual or potential participants or assignees. If a
participation is sold or the loan is assigned, the purchaser will have the right
of set-off against the Borrower.
11.4 ARBITRATION.
(a) This paragraph concerns the resolution of any controversies or claims
between the Borrower and the Bank, including but not limited to those
that arise from:
(i) This Agreement (including any renewals, extensions or
modifications of this Agreement);
(ii) Any document, agreement or procedure related to or delivered
in connection with this Agreement;
(iii) Any violation of this Agreement; or
(iv) Any claims for damages resulting from any business conducted
between the Borrower and the Bank, including claims for injury
to persons, property or business interests (torts).
(b) At the request of the Borrower or the Bank, any such controversies or
claims will be settled by arbitration in accordance with the United
States Arbitration Act. The United States Arbitration Act will apply
even though this Agreement provides that it is governed by Arizona law.
(c) Arbitration proceedings will be administered by the American
Arbitration Association and will be subject to its commercial rules of
arbitration.
(d) For purposes of the application of the statute of limitations, the
filing of an arbitration pursuant to this paragraph is the equivalent
of the filing of a lawsuit, and any claim or controversy which may be
arbitrated under this paragraph is subject to any applicable statute of
limitations. The arbitrators will have the authority to decide whether
any such claim or controversy is barred by the statute of limitations
and, if so, to dismiss the arbitration on that basis.
(e) If there is a dispute as to whether an issue is arbitrable, the
arbitrators will have the authority to resolve any such dispute.
(f) The decision that results from an arbitration proceeding may be
submitted to any authorized court of law to be confirmed and enforced.
(g) This provision does not limit the right of the Borrower or the Bank to:
(i) exercise self-help remedies such as setoff;
(ii) foreclose against or sell any real or personal property
collateral; or
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<PAGE> 14
(iii) act in a court of law, before, during or after the arbitration
proceeding to obtain:
(A) an interim remedy; and/or
(B) additional or supplementary remedies.
(h) The pursuit of or a successful action for interim, additional or
supplementary remedies, or the filing of a court action, does not
constitute a waiver of the right of the Borrower or the Bank, including
the suing party, to submit the controversy or claim to arbitration if
the other party contests the lawsuit.
(i) If the Bank forecloses against any real property securing this
Agreement, the Bank has the option to exercise the power of sale under
the deed of trust or mortgage, or to proceed by judicial foreclosure.
11.5 SEVERABILITY; WAIVERS. If any part of this Agreement is not
enforceable, the rest of the Agreement may be enforced. The Bank retains all
rights, even if it makes a loan after default. If the Bank waives a default, it
may enforce a later default. Any consent or waiver under this Agreement must be
in writing.
11.6 ADMINISTRATION COSTS. The Borrower shall pay the Bank for all
reasonable costs incurred by the Bank in connection with administering this
Agreement.
11.7 ATTORNEYS' FEES. The Borrower shall reimburse the Bank for any
reasonable costs and attorneys' fees incurred by the Bank in connection with the
enforcement or preservation of any rights or remedies under this Agreement and
any other documents executed in connection with this Agreement, and including
any amendment, waiver, "workout" or restructuring under this Agreement. In the
event of a lawsuit or arbitration proceeding, the prevailing party is entitled
to recover costs and reasonable attorneys' fees incurred in connection with the
lawsuit or arbitration proceeding, as determined by the court or arbitrator. As
used in this paragraph, "attorneys' fees" includes the allocated costs of
in-house counsel.
11.8 ONE AGREEMENT. This Agreement and any related security or other
agreements required by this Agreement, collectively:
(a) represent the sum of the understandings and agreements between the Bank
and the Borrower concerning this credit; and
(b) replace any prior oral or written agreements between the Bank and the
Borrower concerning this credit; and
(c) are intended by the Bank and the Borrower as the final, complete and
exclusive statement of the terms agreed to by them.
In the event of any conflict between this Agreement and any other agreements
required by this Agreement, this Agreement will prevail.
11.9 EXCHANGE OF INFORMATION. The Borrower agrees that the Bank may exchange
financial information about the Borrower with BankAmerica Corporation affiliates
and other related entities.
11.10 USURY LAWS. This paragraph covers the transactions described in this
Agreement and any other agreements with the Bank or its affiliates executed in
connection with this Agreement, to the extent they are subject to the Arizona
usury laws (the "Transactions"). The Borrower understands and believes that the
Transactions comply with the Arizona usury laws. However, if any interest or
other charges paid or payable in connection with the Transactions are ever
determined to exceed the maximum amount permitted by law, the Borrower agrees
that:
(a) the amount of interest or other charges payable by the Borrower
pursuant to the Transactions shall be reduced to the maximum amount
permitted by law; and
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<PAGE> 15
(b) any excess amount previously collected from the Borrower in connection
with the Transactions which exceeded the maximum amount permitted by
law will be credited against the then outstanding principal balance. If
the outstanding principal balance has been repaid in full, the excess
amount paid will be refunded to the Borrower.
All fees, charges, goods, things in action or any other sums or things of value,
other than interest at the interest rate described in this Agreement, paid or
payable by the Borrower (collectively the "Additional Sums"), that may be deemed
to be interest with respect to the Transactions, shall, for the purpose of any
laws of the State of Arizona that may limit the maximum amount of interest to be
charged with respect to the Transactions, be payable by Borrower as, and shall
be deemed to be, additional interest. For such purposes only, the agreed upon
and "contracted for rate of interest" of the Transactions shall be deemed to be
increased by the rate of interest resulting from the Additional Sums.
11.11 NOTICES. All notices required under this Agreement shall be personally
delivered or sent by first class mail, postage prepaid, to the addresses on the
signature page of this Agreement, or to such other addresses as the Bank and the
Borrower may specify from time to time in writing.
11.12 HEADINGS. Article and paragraph headings are for reference only and
shall not affect the interpretation or meaning of any provisions of this
Agreement.
This Agreement is executed as of the date stated at the top of the first page.
BANK OF AMERICA ARIZONA SUNRISE PRESCHOOLS, INC.
/s/ Craig Miller /s/ James R. Evans
- --------------------------------- ----------------------------------------
By: Craig Miller, Vice President By: James R. Evans, Chairman & President
Address where notices to the Bank Address where notices to the Borrower
are to be sent: are to be sent:
Commercial Banking Division #8211 9128 East San Salvador, Suite 200
101 North First Avenue Scottsdale, Arizona 85258
Phoenix, Arizona 85003
15
<PAGE> 1
EXHIBIT 11
SUNRISE PRESCHOOLS, INC. AND SUBSIDIARY
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
FOR THE YEARS ENDED JULY 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
PRIMARY:
Common Shares Outstanding,
Beginning of Year 2,935,894 2,435,894
Effective of weighting shares:
Employee stock options outstanding -- 18,072
Exercise of Warrants 34,400 166,066
----------- -----------
Weighted Average Number of Common Shares
and Common Share Equivalents Outstanding 2,970,294 2,620,632
=========== ===========
Net Income (Loss) Available for Common Stock $(1,201,925) $ 756,852
=========== ===========
Net Income (Loss) per Common Share and
Common Share Equivalent $ (.40) $ 0.29
=========== ===========
FULLY DILUTED:
Common Shares Outstanding,
Beginning of Year 2,435,894
Effect of Weighting Shares:
Employee Stock Options Outstanding 85,907
Exercise of Warrants 186,274
Assumed Conversion of Preferred Stock 500,000
-----------
Weighted Average Number of Common Shares and
Common Share Equivalents Outstanding 3,208,075
===========
Net Income Available for Common Stock $ 806,852
===========
Net Income per Common Share and Common Share Equivalent $ 0.25
===========
</TABLE>
<PAGE> 1
EXHIBIT 21
SUNRISE PRESCHOOLS, INC. AND SUBSIDIARY
LIST OF SUBSIDIARIES
Sunrise Preschools Hawaii, Inc., a Hawaii corporation
<PAGE> 1
EXHIBIT 23
CONSENT
We consent to the use of our report dated October 9, 1996, included in the
Annual Report on Form 10-KSB of Sunrise Preschools, Inc. for the year ended July
31, 1996, with respect to the consolidated financial statements.
ERNST & YOUNG LLP
Phoenix, Arizona
October 24, 1996
<PAGE> 1
EXHIBIT 24
[LETTERHEAD OF 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 or made a part of this Form
10-KSB.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
October 23, 1996.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY FOR THE FISCAL YEAR ENDED JULY
31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10KSB FOR
THE FISCAL YEAR ENDED JULY 31, 1996.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> JUL-31-1996
<EXCHANGE-RATE> 1
<CASH> 2,630,616
<SECURITIES> 0
<RECEIVABLES> 399,775
<ALLOWANCES> 12,000
<INVENTORY> 27,094
<CURRENT-ASSETS> 3,332,943
<PP&E> 4,674,946
<DEPRECIATION> 2,736,967
<TOTAL-ASSETS> 6,997,032
<CURRENT-LIABILITIES> 1,428,322
<BONDS> 0
857,333
0
<COMMON> 29,830
<OTHER-SE> 3,659,187
<TOTAL-LIABILITY-AND-EQUITY> 6,997,032
<SALES> 0
<TOTAL-REVENUES> 10,237,418
<CGS> 0
<TOTAL-COSTS> 11,171,436
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (70,810)
<INCOME-PRETAX> (857,308)
<INCOME-TAX> 0
<INCOME-CONTINUING> (857,308)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (857,308)
<EPS-PRIMARY> (0.40)
<EPS-DILUTED> 0
</TABLE>
