As filed with the Securities and Exchange Commission on June 13, 1997.
Registration No. 333-28307
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
Under
The Securities Act of 1933
SUNRISE EDUCATIONAL SERVICES, INC.
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(Name of small business issuer in its charter)
DELAWARE 8351 86-0532619
- ----------------------------- --------------------------- -------------------
(State or Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
9128 E. San Salvador, Suite 200
Scottsdale, Arizona 85258
(602) 860-1611
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(Address, including zip code, and telephone number,
including area code, of registrant's principal
executive offices and principal place of business)
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James R. Evans
Chairman of the Board and President
9128 E. San Salvador, Suite 200
Scottsdale, Arizona 85258
(602) 860-1611
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(Name, address including zip code, and telephone number, including
area code, of agent for service)
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with copies to:
Christopher D. Johnson, Esq.
Squire, Sanders & Dempsey L.L.P.
Two Renaissance Square
40 North Central Avenue, Suite 2700
Phoenix, Arizona 85004
Telephone: (602) 528-4000
FAX: (602) 253-8129
Approximate date of commencement of proposed sale to the public: As soon as
practicable from time to time after the date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 13, 1997
PROSPECTUS
1,382,229 SHARES OF COMMON STOCK
SUNRISE EDUCATIONAL SERVICES, INC.
All of the 1,382,229 shares of $0.01 par value Common Stock ("Common
Stock") of Sunrise Educational Services, Inc., a Delaware corporation (the
"Company"), offered hereby (the "Offering") are being sold by certain Selling
Securityholders of the Company. See "Selling Securityholders." The number of
shares of Common Stock offered hereby includes such presently indeterminate
number of shares of Common Stock as may be issued on conversion of outstanding
shares of Series B Preferred Stock pursuant to the conversion provisions thereof
and 300,000 shares of Common Stock issuable upon exercise of outstanding
warrants (the "Warrants"). The Company will not receive any of the proceeds from
the sale of shares by the Selling Securityholders.
The shares of Common Stock registered for resale hereby have been
registered pursuant to the Company's obligations contained in written agreements
with certain of the Selling Securityholders. The Selling Securityholders may
elect to sell all, a portion or none of the shares of Common Stock offered by
them hereunder.
The Company's Common Stock is quoted on the Nasdaq SmallCap Market
("Nasdaq") under the symbol "SUNR." On May 27, 1997, the last reported sale
price of the Common Stock on the Nasdaq was $1 3/8 per share. See "Market for
Common Equity and Related Stockholder Matters."
The shares of Common Stock registered for resale hereby may be sold by
the Selling Securityholders from time to time, in ordinary brokers' transactions
through Nasdaq at the price prevailing at the time of such sales. The commission
payable will be the regular commission a broker receives for effecting such
sales. The Common Stock also may be offered in block trades, private
transactions, or otherwise. The net proceeds to the Selling Securityholders will
be the proceeds received by them upon such sales, less brokerage commissions.
All expenses of registration incurred in connection with this Offering are being
borne by the Company, but the Selling Securityholders will pay any brokerage and
other expenses of sale incurred by them. There can be no assurance that the
Selling Securityholders will sell any or all of the shares of Common Stock
registered hereunder.
THE SECURITIES OFFERED HEREBY INVOLVE SUBSTANTIAL RISK. SEE "RISK FACTORS" ON
PAGE 6 OF THIS PROSPECTUS.
EACH SELLING SECURITYHOLDER AND ANY BROKER EXECUTING SELLING ORDERS ON BEHALF OF
THE SELLING SECURITYHOLDER MAY BE DEEMED TO BE AN "UNDERWRITER" WITHIN THE
MEANING OF THE SECURITIES ACT. COMMISSIONS RECEIVED BY ANY SUCH BROKER MAY BE
DEEMED TO BE UNDERWRITING COMMISSIONS UNDER THE SECURITIES ACT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES AGENCY NOR HAS THE COMMISSION OR ANY
SUCH AGENCY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is __________, 1997.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations promulgated thereunder, and in accordance therewith files
periodic reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, as well as at the following regional
offices: Northeast Regional Office, 7 World Trade Center, Suite 1300, New York,
New York 10048 and Midwest Regional Office, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. The Commission maintains a web site
(http://www.sec.gov) that contains reports, proxy, and information statements
and other information regarding registrants, such as the Company, that file
electronically with the Commission.
The Company has filed with the Commission a Registration Statement on
Form SB-2 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the securities offered hereby. This Prospectus does not contain
all the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is made to the Registration
Statement and the exhibits thereto, copies of which may be obtained from the
Public Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of the fees prescribed by the Commission.
Statements contained in this Prospectus as to the contents of any contract or
other document are not necessarily complete and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement for a full statement of the provisions hereof; each such
statement contained herein is qualified in its entirety by such reference.
The Company hereby undertakes to provide without charge to each person
to whom a Prospectus is delivered upon written or oral request of each person, a
copy of any document incorporated herein by reference, (not including exhibits
to the document that have been incorporated herein by reference unless such
exhibits are specifically incorporated by reference in the document which this
Prospectus incorporates). Requests should be directed to President, Sunrise
Educational Services, Inc., 9128 East San Salvador, Suite 200, Scottsdale,
Arizona 85258, telephone (602) 860-1611.
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING
ELSEWHERE IN THIS PROSPECTUS. WHEN USED IN THIS PROSPECTUS, THE TERM "COMMON
STOCK" SHALL REFER TO THE $.01 PAR VALUE COMMON STOCK OF THE COMPANY. SEE
"CAPITALIZATION" AND "DESCRIPTION OF SECURITIES". AS USED IN THIS PROSPECTUS,
UNLESS THE CONTEXT INDICATES OTHERWISE, THE TERM "COMPANY" REFERS TO SUNRISE
EDUCATIONAL SERVICES, INC., AND ITS SUBSIDIARIES AND PREDECESSORS.
THE COMPANY
Sunrise Educational Services, 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 April 30, 1997 was approximately 4,000 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.
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.
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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 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. On January 31, 1997 the
Company amended its Restated Certificate of Incorporation to change its name
from Sunrise Preschools, Inc. to Sunrise Educational Services, Inc.
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. During the
six months ended January 31, 1997, 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.
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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.
This Prospectus contains "forward-looking statements," including
statements regarding, among other items, the Company's growth strategy, future
products, sales, ability to license future software programs and market products
and anticipated trends in the Company's business. Actual results could differ
materially from these forward-looking statements as a result of a number of
factors, including, but not limited to, intense competition in various aspects
of its business, adverse publicity, insurance, the seasonal nature of its
business, government regulation, and other factors described under "Risk
Factors" set forth below and elsewhere herein.
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RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A
HIGH DEGREE OF RISK AND SHOULD ONLY BE MADE BY INVESTORS WHO CAN AFFORD THE LOSS
OF THEIR ENTIRE INVESTMENT. PROSPECTIVE INVESTORS, PRIOR TO MAKING AN INVESTMENT
DECISION, SHOULD GIVE CAREFUL CONSIDERATION, IN ADDITION TO THE OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS, TO THE FOLLOWING RISK FACTORS. THIS
PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS," INCLUDING STATEMENTS
REGARDING, AMONG OTHER ITEMS, THE COMPANY'S GROWTH STRATEGY, FUTURE PRODUCTS,
SALES, ABILITY TO LICENSE FUTURE SOFTWARE PROGRAMS AND MARKET PRODUCTS AND
ANTICIPATED TRENDS IN THE COMPANY'S BUSINESS. ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER OF
FACTORS, INCLUDING, BUT NOT LIMITED TO, INTENSE COMPETITION IN VARIOUS ASPECTS
OF ITS BUSINESS, ADVERSE PUBLICITY, INSURANCE, THE SEASONAL NATURE OF ITS
BUSINESS, GOVERNMENT REGULATION, AND OTHER FACTORS DESCRIBED IN THE RISK FACTORS
SECTIONS SET FORTH BELOW AND ELSEWHERE HEREIN.
NO ASSURANCE OF CONTINUED PROFITABLE OPERATIONS. For the fiscal years
ended July 31, 1996 and July 31, 1995, the Company had a net loss of $(857,308)
($0.40 per share) and net income of $806,852 ($0.29 per share), respectively.
Operating income (loss) for the fiscal years ended July 31, 1996 and July 31,
1995 was $(934,018) and $611,485, respectively. Although the Company expects to
have profitable operations in the future, there can be no assurance that the
Company will, in the future, achieve or sustain profitability.
COMPETITION. The child care industry is highly fragmented and
competitive, and Phoenix, Arizona is one of the most competitive markets in the
United States. The Company competes with child care centers owned by national
chains as well as child care facilities operated by local community and
church-affiliated profit and non-profit organizations. Some of the non-profit
child care centers that the Company competes with are supported to a large
extent by endowments, charitable contributions and other forms of subsidies, and
consequently charge less for their services than the Company. In addition, the
Company competes with individually owned proprietary child care centers,
licensed and unlicensed child care homes, in-home individual child care
providers, public schools and businesses that provide child care for their
employees. A number of the Company's competitors have substantially greater
resources than the Company. See "BUSINESS -- Competition."
ADVERSE PUBLICITY. Some providers of child care have received negative
publicity concerning alleged child abuse, inadequate supervision and on-site
accidents. Although the Company has not been the subject of any adverse
publicity, any such publicity, whether accurate or not, could result in
decreased enrollment and have a material adverse effect on the Company.
INSURANCE. In addition to general liability insurance, the Company
maintains insurance coverage for child physical and sexual abuse claims, which
is subject to an annual aggregate limitation of $2,000,000. Recently, some
operators of child care centers, including the Company, have experienced greater
difficulty in obtaining such insurance at reasonable rates. Although the Company
has never had a claim for child physical or sexual abuse, there can be no
assurance that insurance for child physical and sexual abuse will continue to be
available to the Company in the future or that increased premiums for such
insurance will not require the Company to increase the cost of providing child
care services. If such insurance is not available to the Company, or if amounts
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of coverage are not adequate, the Company may be materially and adversely
affected. See "BUSINESS -- Insurance."
SEASONAL FLUCTUATIONS. Child care centers, including those of the
Company, experience decreased enrollment, and therefore decreased revenue, in
the summer months and around certain major holidays. There can be no assurance
that Company programs designed to increase enrollment in the summer will be
successful. See "BUSINESS -- Curricula and Programs."
GOVERNMENT REGULATION. Child care centers must comply with various
state and local statutes and regulations. Centers are periodically inspected by
state agencies to review adherence to child care standards, including, among
other things, staffing, cleanliness and safety standards. The Company has not
experienced any difficulty in complying with various government regulations.
Additional regulations or changes in existing regulation might impose additional
compliance costs on the Company, which could have a material adverse effect on
the Company. In addition, certain tax laws presently provide for certain credits
and other incentives relating to child care costs. Changes in such tax laws
could have a material adverse effect on the Company. See "BUSINESS -- Government
Regulation."
GEOGRAPHIC CONCENTRATION. Currently, all of the child care centers
operated by the Company are located in Arizona, Colorado, Hawaii and Wisconsin.
The success of such operations is therefore dependant to some extent on the
economies of such regions. If these geographic areas experience an economic
downturn or recession, the Company's financial condition and business prospects
could be materially and adversely affected.
EXPANSION. The Company intends to continue to open new child care
centers and to acquire individual and community-based chains of child care
centers. In addition, the Company plans to continue to expand its operations
through various partnership and contractual relationships with third parties.
Although the Company's current operations are based in Arizona, Colorado, Hawaii
and Wisconsin, the Company's current expansion plans include considering
opportunities in the southwestern United States as well as in other geographic
regions of the country. There can be no assurance that the Company will achieve
its planned expansion or that its expansion will be profitable. The success of
the Company's expansion program will depend on a number of factors, many of
which may be beyond the Company's control, including the availability of
sufficient capital, the identification of appropriate acquisition candidates and
suitable build-to-suit child care center sites, the Company's ability to
attract, train and retain qualified employees and management, the continuing
profitability of existing operations, the successful management of planned
growth and the ability of the Company to operate new child care centers in a
profitable manner. Although the Company currently intends to lease from third
parties newly constructed child care facilities developed for the Company rather
than undertaking its own construction, if the Company were to undertake its own
construction, there can be no assurance that it could construct its child care
centers on a cost-effective basis or that appropriate financing could be
obtained. Construction of child care centers is subject to the risk of delays
and cost overruns, and such occurrences could have a material adverse effect on
the Company. See "BUSINESS -- Expansion."
DEPENDENCE UPON KEY PERSONNEL. The success of the Company will be
largely dependent upon the efforts and abilities of James R. Evans, President
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and Chairman of the Board, and Barbara L. Owens, Executive Vice President,
Secretary and Treasurer. See "MANAGEMENT." The Company has employment agreements
with Mr. Evans and Ms. Owens. The Company also maintains for its benefit key man
life insurance on Mr. Evans in the amount of $1,000,000. See "EXECUTIVE
COMPENSATION -- Employment Contracts." Nevertheless, the loss of the services of
Mr. Evans or Ms. Owens could have a material adverse effect on the Company. In
addition, the Company's success is also dependent upon its ability to hire
additional qualified personnel, and there can be no assurance that the Company
will be able to hire or retain qualified personnel.
LIMITATION ON DIRECTOR LIABILITY; CONTROL OF COMPANY. Among other
matters, certain provisions of the Company's Restated Certificate of
Incorporation and Bylaws limit or eliminate director liability for certain
actions and require approval of greater than 50% of the shares eligible to vote
on certain matters. These and other provisions could, under certain
circumstances, prevent redress by stockholders for certain actions taken by the
directors and management and make it more difficult for an outsider to obtain
control of the Company. See "DESCRIPTION OF SECURITIES."
RELATIONSHIP WITH PSI. Certain officers and directors of the Company
also serve as officers and directors of PSI. The Company believes it is unlikely
that any conflicts of interest will arise with PSI; however, any transaction to
which both the Company and PSI are a party that involves a potential conflict of
interest may be approved by the Board of Directors of the Company only with the
approval of a majority of the Company's directors including the Company's
outside directors that are not also officers or directors of PSI. Currently the
Company has one outside director who is not also an officer or director of PSI.
See "CERTAIN TRANSACTIONS."
FUTURE SALES OF COMMON STOCK. As of the date of this Prospectus, the
Company had outstanding 3,079,491 shares of Common Stock, excluding shares
issuable upon the exercise of convertible stock, warrants and options. Of the
shares of Common Stock currently outstanding 82,229 shares are "restricted
securities" as that term is defined under Rule 144 promulgated under the
Securities Act and under certain circumstances may be sold without registration
pursuant to such rule. The Company is unable to predict the effect that sales
made under Rule 144, or otherwise, may have on the then prevailing, market price
of the Company's securities, although any future sales of substantial amounts of
securities pursuant to Rule 144 could adversely affect prevailing market prices.
See "Principal Stockholders," "Description of Securities--Shares Eligible For
Future Sale" and "Underwriting."
DIVIDENDS UNLIKELY. The Company does not intend to declare or pay cash
dividends on its Common Stock in the foreseeable future. The Company expects
that it will retain all available earnings, if any, to finance and expand its
business. See "Dividends."
STOCK MARKET VOLATILITY. General market price declines or market
volatility in the future could adversely affect the price of the Common Stock.
In certain cases, volatility in the price of a given security can result from
the short-term trading strategies of certain market segments. Such volatility
can distort market value and can be particularly severe in the case of smaller
capitalization stocks and immediately before or after an important corporate
event such as a public offering. In recent years, the stock markets in general
have experienced extreme price fluctuations in response to such occurrences as
quarterly variations in operating results, changes in earnings estimates by
analysts, adverse publicity, strategic relationships or other events or facts.
This pattern of extreme volatility in the stock market,
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which in many cases was unrelated to the operating performance of, or
announcements concerning, the issuers of the affected stock may adversely affect
the market price of the Common Stock.
EFFECT OF OUTSTANDING OPTIONS AND WARRANTS. Certain events, including
the issuance of additional shares of Common Stock upon the exercise or
conversion of outstanding options, warrants and preferred shares of the Company,
could result in substantial dilution of the Common Stock. As of April 30, 1997,
the Company had outstanding (i) 500,000 shares of Series B Preferred Stock; (ii)
357,333 shares of Series C Preferred Stock; (iii) options to purchase an
aggregate of 648,080 shares of Common Stock; (iv) warrants to purchase an
aggregate of 495,000 shares of Common Stock; and (v) warrants to purchase an
aggregate of 33,333 shares of Series C Preferred Stock. The Company has an
additional 183,874 shares of Common Stock reserved for issuance under its
existing stock option plans. For the respective terms of such options, the
holders thereof are given an opportunity to profit from a rise in the market
price of the Company's Common Stock with a resulting dilution in the interests
of the other stockholders. Further, the terms on which the Company may obtain
additional financing during that period may be adversely affected by the
existence of such options. The holders of the options may exercise them at a
time when the Company might be able to obtain additional capital through a new
offering of securities on terms more favorable than those provided therein. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Description of Securities" and "Underwriting."
NON-REGISTRATION IN CERTAIN JURISDICTIONS OF SHARES; NEED FOR CURRENT
PROSPECTUS. Although the Common Stock will not knowingly be sold to purchasers
in jurisdictions in which the Common Stock are not registered or otherwise
qualified for sale, purchasers may buy Common Stock or the components thereof in
the aftermarket. In addition, investors in this Offering will not be able to
purchase their shares, unless at the time of purchase the Company has a current
prospectus covering the shares of Common Stock. No assurances can be given that
the Company will be able to effect any required registration or qualification or
maintain a current prospectus. See "Description of Securities."
POSSIBLE ADVERSE EFFECTS OF AUTHORIZATION OF PREFERRED STOCK;
ANTI-TAKEOVER PROVISIONS. As of April 30, 1997, the Company had outstanding
500,000 and 357,333 shares of Series B Preferred Stock and Series C Preferred
Stock, respectively. The annual dividend rate of the Series B Preferred Stock is
$.10 per share and each share is convertible into one share of Common Stock.
Each holder of the Series C Preferred Stock is entitled to receive a cumulative
dividend of 9% per annum, 7.0588 shares of Common Stock upon conversion, and
certain additional preferences and rights. In addition, the Company's Board of
Directors has the authority to issue up to 142,667 shares of preferred stock,
$1.00 par value ("Preferred Stock"), in one or more series and to determine the
price, rights, preferences and privileges of the shares of each such series
without any further vote or action by the stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any shares of Preferred Stock that may be issued in
the future. The Preferred Stock currently outstanding, as well as the potential
future issuance of additional Preferred Stock could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company, thereby delaying, deferring or preventing a change of
control of the Company. In addition, certain provisions in the Company's
Articles of Incorporation and By-laws creating a staggered-term board and
relating to supermajority stockholder approval of certain business combinations
by the Company, restrictions on calling special meetings of stockholders,
restrictions on
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removal of directors and restrictions on amendments to the By-laws may
discourage or make more difficult any attempt by a person or group of persons to
obtain control of the Company. See "Description of Securities -- Special Voting
and Other Provisions."
RISK OF LOW-PRICED STOCK; PENNY STOCK REGULATIONS. If the Company's
securities were delisted from Nasdaq (See "Risk Factors--Nasdaq Listing and
Maintenance Requirements; Risk of Delisting"), they could become subject to Rule
15g-9 under the Exchange Act, which imposes additional sales practice
requirements on broker-dealers which sell such securities to persons other than
established customers and "accredited investors" (generally, individuals with
net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or
$300,000 together with their spouses). For transactions covered by this rule, a
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. Consequently, such rule may adversely affect the ability of broker-dealers
to sell the Company's securities and may adversely affect the ability of
purchasers in this Offering to sell any of the securities acquired hereby in the
secondary market.
The Commission adopted regulations which generally define a "penny
stock" to be any non-Nasdaq equity security that has a market price (as therein
defined) of less than $5.00 per share or with an exercise price of less than
$5.00 per share, subject to certain exceptions. For any transaction involving a
penny stock, unless exempt, the rules require delivery, prior to any transaction
in a penny stock, of a disclosure schedule prepared by the Commission relating
to the penny stock market. Disclosure is also required to be made about
commissions payable to both the broker-dealer and the registered representative
and current quotations for the securities. Finally, monthly statements are
required to be sent disclosing recent price information for the penny stock held
in the account and information on the limited market in penny stocks.
The foregoing required penny stock restrictions will not apply to the
Company's securities if such securities are listed on Nasdaq and have certain
price and volume information provided on a current and continuing basis or meet
certain minimum net tangible assets or average revenue criteria. There can be no
assurance that the Company's securities will qualify for exemption from these
restrictions. In any event, even if the Company's securities were exempt from
such restrictions, it would remain subject to Section 15(b)(6)of the Exchange
Act, which gives the Commission the authority to prohibit any person that is
engaged in unlawful conduct while participating in a distribution of a penny
stock from associating with a broker-dealer or participating in a distribution
of a penny stock, if the Commission finds that such a restriction would be in
the public interest.
If the Company's securities were subject to the existing or proposed
rules on penny stocks, the market liquidity for the Company's securities could
be severely adversely affected.
NASDAQ LISTING AND MAINTENANCE REQUIREMENTS; RISK OF DELISTING. The
Company's Common Stock is currently quoted on the Nasdaq SmallCap Market. See
"Cover Page." Under the rules for continued listing in the Nasdaq system, a
company is required to maintain at least $2,000,000 in total assets, two
market-makers, a public float of at least $200,000 and a minimum bid price of
$1.00 per share or, if the share price criterion cannot be met, $2,000,000 in
capital and surplus and a public float of $1,000,000. In addition, Nasdaq has
proposed more stringent maintenance criteria for continued listing, including
eliminating the alternative to the $1.00 minimum bid price, establishing minimum
net tangible assets,
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<PAGE>
net income and market capitalization tests, increasing the required amount of
public float shares, the minimum bid price and the number of market makers, and
instituting more stringent corporate governance standards. Adoption of any or
all of the proposals could make it more difficult for the Company to maintain
compliance with the listing criteria, assuming the Company is accepted for
listing on the SmallCap Market. Upon notice of a deficiency in one or more of
the maintenance requirements, the Company would be given 90 days (30 days in the
case of the number of market-makers) to comply with the maintenance standards.
Failure of the Company to meet the maintenance requirements of Nasdaq could
result in the Company's securities being delisted from Nasdaq, with the result
that the Company's securities would trade on the OTC Bulletin Board or in the
"pink sheets" maintained by the National Quotation Bureau Incorporated. As a
consequence of such delisting, an investor could find it more difficult to
dispose of or to obtain accurate quotations as to the market value of the
Company's securities. Among other consequences, delisting from Nasdaq may cause
a decline in the stock price, the loss of news coverage about the Company and
difficulty in obtaining future financing.
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<PAGE>
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of
Common Stock in this Offering.
DIVIDEND POLICY
The Company has never paid a dividend on its Common Stock. The Company
presently does not anticipate paying any dividends on its Common Stock in the
foreseeable future. Pursuant to the terms of the Series C Preferred Stock, the
Company is obligated to pay a cumulative annual dividend of 9% to the holders of
the Series C Preferred Stock, which currently amounts to $32,159 in the
aggregate based on 357,333 issued and outstanding shares of Series B Preferred
Stock. One year after the date of the first issuance of shares of Series C
Preferred Stock (December 22, 1996), the Company may, in its discretion, elect
to pay dividends on the Series C Preferred Stock in shares of Common Stock
having a fair market value equal to the amount of the dividend. The Series C
Preferred Stock ranks junior to the Series B Preferred Stock of the Company and,
consequently, all dividends payable on the Series B Preferred Stock must be
current prior to the payment of any dividends on the Series C Preferred Stock.
The annual dividend rate of the Series B Preferred Stock is $.10 per share,
which currently amounts to $50,000 per year in the aggregate based on 500,000
issued and outstanding shares of Series B Preferred Stock. As of April 30, 1997,
accrued but unpaid dividends payable on the Series B Preferred Stock were
$4,167. In addition, the Company has a credit facility with a bank pursuant to
which it may borrow up to $500,000. As of April 1, 1997, approximately $323,000
had been borrowed under this credit facility and certain other loans with such
bank. Pursuant to the terms of the credit facility and such loans, the Company
may not pay any cash dividends, including dividends on the Series C Preferred
Stock, without the consent of the bank. Furthermore, under Delaware corporate
law, the Company may be prohibited in certain circumstances from paying
dividends (whether in cash or otherwise). See "RISK FACTORS" and "DESCRIPTION OF
SECURITIES."
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<PAGE>
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 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 SUNR. 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).
Fiscal 1997 HIGH LOW
------ ------
First Quarter $1.625 $1.188
Second Quarter 1.375 1.125
Third Quarter (through April 1, 1997) 1.938 1.250
Fiscal 1996 HIGH LOW
------ ------
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
There were approximately 260 record holders and 700 beneficial holders
of the Company's Common Stock as of April 15, 1997. On May 15, 1997, the high
and low sale prices for the Common Stock were $1 3/8 and $1 3/8, respectively.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSIONS SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND NOTES THERETO SET FORTH ELSEWHERE IN THIS PROSPECTUS.
RESULTS OF OPERATIONS. On January 31, 1997, the Company operated 36 child care
centers versus 27 centers as of January 31, 1996. The increase in the number of
centers was the result of the Company purchasing the operations of six centers
in Arizona (five of which were previously operating and one of which was newly
opened) and one center in Colorado, and opening one newly constructed center in
Arizona. In addition, through its contract with Preschool Services, Inc.
("PSI"), 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 1,065 children. The impact of the
acquisitions on the operations of the Company are included in the discussion of
operating revenues and expenses below. During the first six months of fiscal
1996, the Company purchased the operations of two centers in Colorado.
On January 24, 1997, the stockholders of the Company approved a
proposal to change the Company's name from Sunrise Preschools, Inc. to Sunrise
Educational Services, Inc. This change was made to reflect the widened area of
services provided by the Company through its Sunrise Preschools, Suncrest
Private Schools and Sunburst Child Care divisions, and any subsequent direction
the Company takes relative to educational services provided.
SIX MONTHS ENDED JANUARY 31, 1997 (FIRST SIX MONTHS OF FISCAL 1997) COMPARED TO
SIX MONTHS ENDED JANUARY 31, 1996 (FIRST SIX MONTHS OF FISCAL 1996)
Operating revenue for the first six months of fiscal 1997 was
$6,342,854, an increase of $1,603,093, or 33.8% from revenue of $4,739,761 for
the first six months of fiscal 1996. Of this increase, $1,415,120 was due to the
inclusion of revenues of the acquired and newly opened centers, and $187,973 was
due to a 4.0% increase in same-center revenues. The increase in same-center
revenues was due to a moderate tuition increase, but was offset by a large
decrease in child attendance during the Christmas and New Year's holiday
periods. Due to the timing of the holidays this year (both Christmas and New
Year's fell on Wednesdays), many children were absent from the centers for the
entire holiday weeks rather than for just one or two days each week. This
decrease in attendance had a significant negative impact on revenues during the
holiday period. Revenues at three of the acquired centers were negatively
impacted by a change in the regulations for reimbursement for food costs under
the USDA Food Program. This change resulted in Food Program revenues at these
centers being approximately $50,000 lower than they would have been otherwise.
Operating expenses for the first six months of fiscal 1997 were
$6,388,501 (100.7% of operating revenue), an increase of $1,619,048 or 33.9%
from operating expenses of $4,769,453 (100.6% of operating revenue) for the
first six months of fiscal 1996. Of this increase, $1,590,075
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<PAGE>
was due to the acquired and newly opened centers. The remaining increase was due
to increases in payroll and general and administrative costs, partially offset
by a decrease in facilities and maintenance expenses.
Payroll expense for the first six months of fiscal 1997 was $3,217,165
(50.7% of operating revenue), an increase of $891,848 or 38.4% from payroll
expense of $2,325,317 (49.1% of operating revenue) for the first six months of
fiscal 1996. Of this increase, $755,845 was due to the acquired and newly opened
centers, $13,686 was for additional corporate staff added in connection with the
Company's expansion program, and $122,317 was for increased same-center salaries
due to slightly higher average salaries.
Facilities and maintenance costs for the first six months of fiscal
1997 were $2,265,666 (35.7% of operating revenue), an increase of $478,213 or
26.8% from facilities and maintenance costs of $1,787,453 (37.7% of operating
revenue) during the first six months of fiscal 1996. This increase was due to
$524,201 in costs at the acquired and newly opened centers, an increase in
equipment lease expense of $37,776, and an increase in depreciation and
amortization of $32,777. These increases were offset by a $54,831 decrease in
rent expense, a decrease in cleaning and maintenance services costs of $37,817
due to a change in the contractor used by the Company to provide cleaning and
maintenance services, and a decrease in other facilities and maintenance costs
of $23,893.
In the first six months of fiscal 1996, rent expense included $97,581
of deferred sublease payments payable by PSI. In the fourth quarter of fiscal
1996, the Company established a reserve for rental commitments related to the
remaining lease payments due by PSI. Future unpaid sublease payments are offset
against this reserve rather than being charged to rent expense. This resulted in
a decrease in rent expense in the first six months of fiscal 1997 of $97,581,
partially offset by an increase of $42,750 in same-center rents due to moderate
rent increases at several of the centers.
General and administrative expenses for the first six months of fiscal
1997 were $905,670 (14.3%) of operating revenue), an increase of $248,987, or
37.9% from general and administrative expenses of $656,683 (13.9% of operating
revenue) during the first six months of fiscal 1996. Of this increase, $189,646
was attributable to the acquired and newly opened centers. In addition,
advertising costs increased $66,859 due to continuance of a multi-media
advertising program into the Fall, and higher yellow pages costs as a result of
the new centers. This was partially offset by a decrease of $30,770 in insurance
costs. The remaining increase was due to moderate increases in other general and
administrative costs such as office supplies and bank charges.
Net income for the first six months of fiscal 1997 was $2,601 compared
to a net loss of $20,927 for the first six months of fiscal 1996, primarily due
to improved same-center operations and the reduction in rent expense, partially
offset by lower child attendance during the Christmas and New Year's holiday
periods.
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<PAGE>
FISCAL YEAR ENDED JULY 31, 1996, COMPARED TO FISCAL YEAR ENDED JULY 31, 1995
Operating revenue for 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 $9,163,538 (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.
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
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<PAGE>
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.
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
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<PAGE>
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 the first two quarters of fiscal 1997 and for each quarter
of fiscal 1996. The operating results of any quarter are not necessarily
indicative of results of any future period.
<TABLE>
<CAPTION>
Quarter Ended (In Thousands)
-----------------------------------------------------------
Jan. 31, Oct. 31, Jul. 31, Apr. 30, Jan. 31, Oct. 31,
1997 1996 1996 1996 1996 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating revenue $ 3,100 $ 3,243 $ 2,187 $ 2,681 $ 2,304 $ 2,435
Operating expenses (3,264) (3,124) (3,787) (2,615) (2,413) (2,356)
Income (loss) from operations (164) 119 (970) 66 (109) 79
Income (loss) before income taxes $ (134) $ 136 $ (943) $ 107 $ (93) $ 72
</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 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.
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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.
Net cash used in operating activities for the first six months of
fiscal 1997 was $235,555. Cash was sufficient to meet the normal operating
requirements of the Company. Due to the Company's purchase of four child care
centers in August, 1996, and amounts spent to upgrade the existing equipment at
the acquired centers as well as to equip the newly opened centers, working
capital decreased by $700,439, from $1,904,621 at July 31, 1996, to $1,204,182
at January 31, 1997.
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 for the year ended July 31, 1996,
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 used in investing activities for the first six months of
fiscal 1997 was $694,189, consisting of purchases of property and equipment
totaling $496,691, and $494,264 in costs related to the centers acquired by the
Company in August. These uses were partially offset by $296,766 in proceeds from
the sale and leaseback of a portion of the equipment purchased over the past six
months.
Net cash provided by financing activities for the year ended July 31,
1996, 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.
Net cash used in financing activities for the first six months of
fiscal 1997 was $164,378, consisting of additional notes payable of $54,408 for
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the purchase of vehicles and $50,000 in borrowings under the Company's working
capital credit line, offset by repayments of notes payable and capital leases of
$123,182 and payment of dividends on Series B and C Preferred Stock of $145,604.
Dividends payable on Series B and C Preferred Stock as of January 31, 1997, were
$44,367.
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 January 31, 1997) 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.
In April, 1997, the Company received a commitment from a financial
institution for three new lines of credit totaling $3 million to replace the
Company's existing credit facilities. These credit facilities are as follows:
(1) a $500,000 revolving working capital line bearing interest at prime plus
1.5%; (2) a $500,000 nonrevolving line of credit for the purchase of vehicles
and equipment, bearing interest at prime plus 1.75%; (3) a $1,000,000
nonrevolving line of credit for acquisition financing, and; (4) a $1 million
nonrevolving line of credit to refinance the Company's existing notes payable
and capital leases at a more favorable average interest rate. These lines of
credit are renewable each year on April 30, and are secured by the Company's
accounts receivable, inventory, furniture, vehicles and equipment.
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 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 additional centers in the summer
and fall 1997. Under current plans, one of these centers will be an on-site
center at the corporate headquarters of Swift Transportation Company, Inc. The
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<PAGE>
other new centers to be 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.
The Company is also considering various 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.
NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share", which is required to be adopted in
fiscal 1998. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating primary earnings per share, the
dilutive effect of stock options will be excluded. The impact of implementing
the provisions of this new standard has not yet been fully analyzed by
management, but it is not expected to be material to any of the quarters.
IMPACT OF INFLATION
Inflation has had no material effect on the Company's operations or
financial condition.
OUTLOOK
The Company's future operating results and many of the forward looking
statements contained in this document are dependent upon a number of factors,
including competition, government regulations, geographic concentration of the
Company's child care centers, the Company's ability to successfully expand its
operations as well as other factors. See "Risk Factors."
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<PAGE>
BUSINESS
GENERAL
Sunrise Educational Services, 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 April 30, 1997 was approximately 4,000 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.
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 educational-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
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comprehensive preschool curricula. Home-based care is much less uniform than
center-based care. There is usually greater dependence on the availability of
and training by one or only a few adults, and facilities are less likely to be
customized to the needs of children. Payment for child care services may be made
completely by parents or subsidized in whole or in part by others, including
governmental programs, employers and nonprofit churches or community groups.
The for-profit child care market segment is highly fragmented, due to
the large number of facilities offering child care services. Revenues for the
for-profit child care market are estimated to be about $9 billion, based on a
licensed capacity estimated at 3.5 million. The largest 50 for-profit child care
providers are estimated to account for only 11% of industry revenues and it is
estimated that there are more than 76,000 for-profit providers of child care in
the United States. Based on its licensed capacity, the Company believes it ranks
among the largest forty providers of child care services in the country.
[GRAPHIC OMITTED]
[DESCRIPTION]
A pie chart depicting the for-profit child
care market that is large and fregmented
showing that the top 50 chains account for
only 11% of the market, with small operators
accounting for about 89% of the market.
DEMOGRAPHIC TRENDS
The for-profit child care market segment has grown substantially in the
last 20 years. Prior to that time, child care was provided almost exclusively
through in-home care, church-sponsored and other local nonprofit facilities.
Demand has increased for additional child care facilities as the result of
increasing numbers of single parents, dual income families and the increasing
use by many parents of quality child care programs for the educational and
developmental benefit of their children. This demand is somewhat seasonal, with
slightly lower enrollment levels typically experienced during July and August,
as well as around holidays, such as Christmas. National and regional chains and
other independent for-profit child care centers compete to meet these needs.
In recent years, a number of national demographic trends have
significantly increased the demand for the Company's services. According to the
United States Bureau of the Census, in 1989 (for the first time since 1964, the
final year of the "baby boom") and again in 1990, 1991 and 1992, the number of
babies born in the United States surpassed four million. From 1980 to 1990, the
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number of children under age five increased 13% and the number of children ages
five through nine increased 7%. In addition, there has been an increase in the
number of mothers in the workforce that have children ages three to five years,
which has increased from 45% in 1978 to 53% in 1992. The number of women of
child-bearing age in the work force has also increased in recent years. In light
of the industry trends, the Company believes that demand for use of center-based
educational and developmental programs of the type provided by the Company will
continue to grow.
[GRAPHIC OMITTED]
[DESCRIPTION]
A graph depicting the labor force
participation of women of child-bearing
age that starts with 41 million in 1990,
increases to an estimated 43 million for
1995 and to an estimated 44 million in
the year 2000.
[GRAPHIC OMITTED]
[DESCRIPTION]
A graph depicting the percent of mothers
of preschool age children who work from
1970 through 1990. In 1970, 30% of mothers
with preschool age children worked, in 1980,
47% worked and in 1990, 59% worked.
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.
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.
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.
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. 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.
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MANAGEMENT -- Each child care facility is operated as a unit
under the supervision of a director assigned to that facility. The
director is responsible for hiring teachers, organizing and monitoring
programs, supervising all records and regulatory compliance, collecting
tuition, marketing and corporate office reporting. Directors are paid a
monthly salary plus a bonus based on several factors, including
enrollment levels and profitability of the child care facility.
CURRICULA AND PROGRAMS
The Company believes that a developmental approach to learning, 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 preschool 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.
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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.
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
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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.
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
Company's 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.
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<PAGE>
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.
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
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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.
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
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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.
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.
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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 $2,000,000 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 a $10,000,000 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 which
would materially affect the Company's business 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.
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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 April 1, 1997, the Company employed approximately 660 persons,
approximately 13 of which were employed in the corporate office and
approximately 647 of which (including 142 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.
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 1997 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."
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The Company's principal executive offices consist of approximately
4,700 square feet of leased space in Scottsdale, Arizona. The Company believes
that its current headquarters facility is adequate for operations for the
foreseeable future.
LEGAL PROCEEDINGS
The Company is not a party to any pending or threatened legal
proceedings that it believes will have a material impact on the Company's
business.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of the
directors and executive officers of the Company as of April 1, 1997. A summary
of the background and experience of each of these individuals is set forth after
the table.
Name Age Position
---- --- --------
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
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 terms of Ms. Owens and Mr. Rice expire in 1997; the term of Dr.
Hinze expires in 1998; and the term of Mr. Evans expires in 1999. 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
35
<PAGE>
faculty. Dr. Hinze was also the treasurer of the National Association for
Education of Young Children from 1976 through 1980. Dr. Hinze has published
several articles in professional publications relating to child care and
education and received his Ed.D from Stanford University.
ROBERT A. RICE has been a Director of the Company since October 1993.
Mr. Rice 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. Until October 1996, Mr. Rice was 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.
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.
36
<PAGE>
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 officers other than the President whose
total annual salary and bonus exceeded $100,000 (collectively, the "Named
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
Name and Fiscal Other Annual Stock Underlying LTIP All Other
Principal Position Year Salary Bonus Compensation Award(s) Option(s) Payouts Compensation(1)
------------------ ---- ------ ----- ------------ -------- --------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James R. Evans 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 and 1995 85,000 52,777 -0- -0- 135,858(2) -0- -0-
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 $2.00 per share, exceeded the current
market price for the Company's Common Stock.
The following table sets forth certain information concerning each
exercise of stock options during the year ended July 31, 1996 by each of the
Named Executive Officers and the aggregated fiscal year-end value of the
unexercised options of each such Named Executive Officer.
37
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
OPTION VALUE AS OF JULY 31, 1996
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money
at Fiscal Year End(#) Options at Fiscal Year End($)
Shares Acquired ------------------------------ -----------------------------
Name on Exercise(#) Value Realized($) 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, which 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
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<PAGE>
Employee's benefits under the Company's benefit plans to which the Employee and
his or her eligible beneficiaries were entitled immediately prior to the date of
termination. If the Employee requests, the Company must also assign to the
Employee any assignable insurance policy on the life of the Employee owned by
the Company at the end of the period of coverage. In addition, all options or
warrants to purchase Common Stock held by the Employee on the date of
termination become exercisable on the date of termination, regardless of any
vesting provisions, and remain exercisable for the longer of one year from the
date of termination or the then remaining unexpired term of such warrants or
options. If the Employee is terminated for cause or if the Employee terminates
his or her employment other than for good reason (as defined in the agreement),
the Company's only obligation is to pay the Employee his or her base salary and
accrued vacation pay through the date of termination.
If the Employee is incapacitated due to physical or mental illness
during the term of his or her employment, the agreements provide that the
Company shall pay to the Employee a lump sum equal to two years of the
Employee's base compensation and all bonuses paid to the Employee in the two
years preceding the date of termination due to illness. If the Employee dies
during his or her employment, the only benefits payable to his or her estate
under the agreements are those payable pursuant to the Company's survivor's
benefits insurance and other applicable programs and plans then in effect.
If the Employee's employment is terminated, the Company has agreed to
indemnify the Employee for claims and expenses associated with certain personal
guarantees made by the Employee. See "CERTAIN 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 April 30,1997, options to purchase
231,954 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
39
<PAGE>
the case of incentive stock options). Incentive stock options granted to persons
who have voting control over 10% or more of the Company's capital stock are
granted at 110% of the fair market value of the underlying shares on the date of
grant and expire five years after the date of grant.
The 1987 Plan provides the Board of Directors with the discretion to
determine when options granted thereunder shall become exercisable. Generally,
such options may be exercised after a period of time specified by the Board of
Directors at any time prior to expiration, so long as the optionee remains
employed by the Company. No option granted under the 1987 Plan is transferable
by the optionee other than by will or the laws of descent and distribution, and
each option is exercisable during the lifetime of the optionee only by the
optionee.
1995 STOCK OPTION PLAN
The Company's 1995 Stock Option Plan (the "1995 Plan") authorizes the
Board to grant options to employees of the Company to purchase up to an
aggregate of 500,000 shares of Common Stock. Officers and other employees of the
Company who, in the opinion of the Board of Directors, are responsible for the
continued growth and development and the financial success of the Company are
eligible to be granted options under the 1995 Plan. Options may be non-qualified
options, incentive stock options, or any combination of the foregoing. In
general, options granted under the 1995 Plan are not transferable and expire
eleven years after the date of grant (ten years in the case of incentive stock
options). The per share exercise price of an incentive stock option granted
under the 1995 Plan may not be less than the fair market value of the Common
Stock on the date of grant. Incentive stock options granted to persons who have
voting control over 10% or more of the Company's capital stock are granted at
110% of the fair market value of the underlying shares on the date of grant and
expire five years after the date of grant. No option may be granted after May 2,
2005.
The 1995 Plan provides the Board of Directors with the discretion to
determine when options granted thereunder will become exercisable. Generally,
such options may be exercised after a period of time specified by the Board of
Directors at any time prior to expiration, so long as the optionee remains
employed by the Company. No option granted under the 1995 Plan is transferable
by the 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 April 30,1997, under the 1995 Plan, options to purchase 376,126
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 April 30,1997, options to
purchase 40,000 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
40
<PAGE>
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.
CLASSIFIED BOARD
Pursuant to the Company's Restated Certificate of Incorporation and
Bylaws, the Board of Directors is divided into three classes, as nearly equal in
number as is feasible. Each class serves for a term of three years, and election
of the classes is staggered so that one class is elected each year.
INDEMNIFICATION AND LIMITATION OF LIABILITY
The Company's Restated Certificate of Incorporation and Bylaws require
the Company to indemnify each of its officers and Directors against liabilities
and reasonable expenses incurred in any action or proceeding, including
stockholders' derivative actions, by reason of such person being or having been
an officer or Director of the Company, or of any other corporation for which he
or she serves as such at the request of the Company, to the fullest extent
permitted by Delaware law. Pursuant to Delaware law, the Company has adopted
provisions in its Restated Certificate of Incorporation and Bylaws that
eliminate, to the fullest extent available under Delaware law, the personal
liability of its Directors and Officers of the Company or its stockholders for
monetary damages incurred as a result of the breach of their duty of care. These
provisions neither limit the availability of equitable remedies nor eliminate
Directors' or Officers' liability for engaging in intentional misconduct or
fraud, knowingly violating a law or unlawfully paying a distribution.
The Company has been advised that it is the position of the Commission
that insofar as the foregoing provision may be invoked to disclaim liability for
damages arising under the Securities Act, such provision is against public
policy as expressed in the Securities Act and is therefore unenforceable.
41
<PAGE>
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
April 30, 1997, the aggregate amounts of lease payments and other obligations
guaranteed by Mr. Evans and Ms. Owens were approximately $3,527,000 and
$999,000, 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.
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.
All transactions between the Company and its officers, directors,
principal stockholders, or other affiliates have been and will be on terms no
less favorable to the Company than could be obtained from unaffiliated third
parties on an arms-length basis and, in the future, will be approved by a
majority of the Company's disinterested directors.
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<PAGE>
PRINCIPAL AND SELLING SECURITYHOLDERS
The following table sets forth, as of April 30, 1997, certain
information concerning the beneficial ownership of the Company's Common Stock,
Series B Preferred Stock and Series C Preferred Stock, on a combined basis, by
(i) each stockholder known by the Company to own beneficially 5% or more of the
outstanding Common Stock of the Company, (ii) each Director, (iii) the Named
Officers, (iv) all executive officers and Directors of the Company as a group,
and (v) each other Selling Securityholder. Each share of Series C Preferred
Stock is convertible into 7.0588 shares of Common Stock. See "Description of
Securities" for a discussion of the voting and other rights of holders of the
Company's Common Stock and Series C Preferred Stock.
<TABLE>
<CAPTION>
Beneficial Ownership Shares to Beneficial Ownership
Before Offering (2) Be Sold After Offering (2)
--------------------- in the --------------------
Name (1) Shares Percent Offering Shares Percent
- ----------------------------------------- ------ ------- -------- ------ -------
<S> <C> <C> <C> <C> <C>
James R. Evans(3) 813,211 25.1% -- 813,211 25.1%
Barbara L. Owens(4) 152,993 4.7% -- 152,993 4.7%
Ronald J. O'Connor(5) 11,000 * -- 11,000 0.4%
Robert A. Rice(6) 27,187 * -- 27,187 0.9%
Dr. Richard H. Hinze(7) 26,000 * -- 26,000 0.8%
John Rutkowski 165,433 5.4% -- 165,433 5.4%
2828 N. Central Ave., Ste. 1100
Phoenix, AZ 85004
Private Opportunity Partners II, Ltd.(8)(9) 901,490 27.1% 291,116 610,374 16.5%
Herman and Rose Goodman, JTWROS(9)(10) 58,223 1.9% 58,223 0 0%
Rajesh and Indu Soin, JTWROS(9)(11) 29,111 * 29,111 0 0%
Ronald Fieldstone Profit Sharing
Trust f/b/o Ronald Fieldstone,
dated February 1, 1984 (9)(12) 29,111 * 29,111 0 0%
Alvin Katz (9)(13) 40,756 1.3% 40,756 0 0%
Leslie Reagin (9)(14) 58,223 1.9% 58,223 0 0%
Mark Allen Llano and Suzane Llano, JTWROS(9)(15) 29,111 * 29,111 0 0%
Bruce C. Barber and Karen Eva Barber, JTWROS(9)(16) 29,111 * 29,111 0 0%
Marwin S. Cassel and Leslie Cassel, JTWROS(9)(17) 8,734 * 8,734 0 0%
Martin R. Elkin and Dolores Elkin, TBE(9)(18) 8,233 * 8,233 0 0%
Steven N. Bronson(9)(19) 181,800 5.6% 181,800 0 0%
James and Mindy Cassel, TBE(9)(19) 92,400 * 92,400 0 0%
Eric Elliott(9)(19) 6,600 * 6,600 0 0%
Bruce Barber(9)(19) 6,600 * 6,600 0 0%
Scott Salpeter(9)(19) 3,000 * 3,000 0 0%
Barry Steiner(9)(19) 3,000 * 3,000 0 0%
All directors and executive officers as a group 1,030,391 29.9% -- 1,030,391 29.9%
(5 persons)(20)
</TABLE>
- ----------
* Less than one percent.
43
<PAGE>
(1) Unless otherwise noted, each of the executive officers and directors has an
address at c/o The Company, 9128 East San Salvador, Suite 200, Scottsdale,
Arizona 85258.
(2) As used in this table, "beneficial ownership" means the sole or shared
power to vote or direct the voting or to dispose or direct the disposition
of any security. A person is deemed as of any date to have "beneficial
ownership" of any security that such person has a right to acquire within
60 days after such date pursuant to options, warrants and the conversion of
Series B Preferred Stock and Series C Preferred Stock. Any security that
any person named above has the right to acquire within 60 days of the date
set forth above is deemed to be outstanding for purposes of calculating the
ownership percentage of such person, but is not deemed to be outstanding
for purposes of calculating the ownership percentage of any other person.
(3) Includes immediately exercisable options to purchase 158,713 shares of
Common Stock.
(4) Includes immediately exercisable options to purchase 147,550 shares of
Common Stock.
(5) Includes immediately exercisable options to purchase 10,000 shares of
Common Stock.
(6) Includes immediately exercisable options to purchase 25,000 shares of
Common Stock.
(7) Includes immediately exercisable options to purchase 25,000 shares of
Common Stock.
(8) Includes 250,000 shares of Common Stock issuable upon conversion of shares
of the Company's Series B Preferred Stock.
(9) The address for this Selling Securityholder is c/o BC Capital Corp., 201 S.
Biscayne Blvd., Suite 2950, Miami, Florida 33131
(10) Includes 50,000 shares of Common Stock issuable upon conversion of shares
of the Company's Series B Preferred Stock.
(11) Includes 25,000 shares of Common Stock issuable upon conversion of the
Company's Series B Preferred Stock.
(12) Includes 25,000 shares of Common Stock issuable upon conversion of the
Company's Series B Preferred Stock.
(13) Includes 35,000 shares of Common Stock issuable upon conversion of the
Company's Series B Preferred Stock.
(14) Includes 50,000 shares of Common Stock issuable upon conversion of the
Company's Series B Preferred Stock.
(15) Includes 25,000 shares of Common Stock issuable upon conversion of the
Company's Series B Preferred Stock.
(16) Includes 25,000 shares of Common Stock issuable upon conversion of the
Company's Series B Preferred Stock.
(17) Includes 7,500 shares of Common Stock issuable upon conversion of the
Company's Series B Preferred Stock.
(18) Includes 7,500 shares of Common Stock issuable upon conversion of the
Company's Series B Preferred Stock.
44
<PAGE>
(19) All of these shares are issuable upon exercise of outstanding warrants
originally issued to BC Capital Corp. and subsequently transferred to the
listed Selling Securityholder. These warrants may be exercised at a price
of $1.375 per share with respect to 50% of the listed shares of Common
Stock and at $2.00 per share with respect to the remaining shares. All of
the warrants expire on November 4, 2001.
(20) Includes immediately exercisable options to purchase 366,263 shares of
Common Stock.
On November 4, 1996, the Company entered into a two-year Financial
Consulting Agreement with BC Capital Corp. Pursuant to such agreement, BC
Capital Corp. is required to provide certain financial consulting services in
exchange for a monthly fee of $3,000 and the issuance, for $100 in consideration
of five-year warrants to purchase an aggregate of 300,000 shares of the
Company's Common Stock. Other than such agreement with BC Capital Corp., there
are no material relationships between the Company and the Selling
Securityholders, nor have any such material relationships existed within the
past three years.
45
<PAGE>
PLAN OF DISTRIBUTION
The Offered Securities may be sold from time to time by the Selling
Securityholders, or by pledgees, donees, transferees or other successors in
interest, in either underwritten public offerings, in transactions pursuant to
Rule 144 under the Securities Act, in privately negotiated transactions, through
the facilities of the Nasdaq, or otherwise, at market prices prevailing at the
time of such sale, at prices relating to such prevailing market prices, or at
negotiated prices. The Offered Securities may be sold by one or more of the
following: (a) a block trade in which the broker-dealer so engaged will attempt
to sell the Offered Securities as agent but may position and resell a portion of
the block as principal to facilitate the transaction; (b) purchases by a
broker-dealer as principal and resale by such broker-dealer for its account
pursuant to this Prospectus; (c) an exchange distribution in accordance with the
rules of such exchange; and (d) ordinary brokerage transactions and transactions
in which the broker solicits purchasers. In effecting sales, broker-dealers
engaged by the Selling Shareholders may arrange for other broker-dealers to
participate in the resales.
In connection with distributions of their securities or otherwise, the
Selling Securityholders may enter into hedging transactions with broker-dealers.
In connection with such transactions, broker-dealers may engage in short sales
of the securities in the course of hedging the positions they assume with
Selling Securityholders. The Selling Securityholders may also sell securities
short and redeliver the securities to close out such short positions. The
Selling Securityholders may also enter into option or other transactions with
broker-dealers which require the delivery to the broker-dealer of their
securities, which the broker-dealer may resell or otherwise transfer pursuant to
this Prospectus. The Selling Securityholders may also loan or pledge securities
to a broker-dealer and the broker-dealer may sell the Securities so loaned or,
upon a default, the broker-dealer may effect sales of the pledged securities
pursuant to this Prospectus.
Broker-dealers or agents may receive compensation in the form of
commissions, discounts or concessions from Selling Securityholders and/or the
purchasers from whom such broker-dealer may act as agents or to whom they may
sell as principals or otherwise (which compensation as to a particular
broker-dealer may exceed customary commissions) amounts to be negotiated in
connection with the sale. Such broker-dealers and any other participating
broker-dealers may be deemed to be "underwriters" within the meaning of the
Securities Act in connection with such sales and any such commission, discount
or concession may be deemed to be underwriting discounts or commissions under
the Securities Act. In addition, each Selling Securityholder desiring to sell
securities will be subject to the applicable provisions of the Exchange Act and
the rules and regulations thereunder, including without limitation Rules 10b-6
and 10b-7, which provisions may limit the timing of the purchases and sales of
shares of the Company's securities by such Selling Securityholders.
All costs, expenses and fees in connection with the registration of the
shares will be borne by the Company. Commissions and discounts, if any,
attributable to the sales of the Offered Securities will be borne by the Selling
Securityholders. The Selling Securityholders may agree to indemnify any
broker-dealer or agent that participates in transactions involving sales of the
Offered Securities against certain liabilities, including liabilities arising
under the Securities Act. The Selling Securityholders may elect to sell all, a
portion or none of the share of Common Stock offered by them hereunder.
46
<PAGE>
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company's Certificate authorizes the issuance of 10,000,000 shares
of Common Stock. Each share of Common Stock entitles the holder thereof to one
vote in the election of directors and all other matters submitted to a vote of
the Company's stockholders. Common stockholders do not have cumulative voting
rights. Holders of Common Stock are entitled to share ratably in all dividends
declared by the Board of Directors and in all assets available for distribution
upon liquidation. Except for holders of Series B and Series C Preferred Stock,
no holder of the Company's capital stock has any preemptive right to subscribe
for or purchase additional shares of the Company's capital stock.
COMMON STOCK PURCHASE WARRANTS AND OPTIONS
In 1987, in connection with its initial public offering, the Company
issued warrants (the "Warrants") to purchase 1,000,000 shares of the Company's
Common Stock at an exercise price of $5.00 per share. The Warrants were
originally scheduled to expire in 1989, and the Company extended the expiration
date of the Warrants on several occasions since their original expiration date.
On September 21, 1995, the Company announced that it was extending the Warrant
expiration one final time, through November 6, 1995, and reducing the exercise
price of the Warrants to $1.00 per share. As a condition to the extension of the
Warrants and a reduction of their exercise price, the Company provided that each
holder of Warrants could exercise only one of every sixteen Warrants held. Upon
termination of the extension period, in November 1995, Warrants representing the
right to purchase 47,074 shares of Common Stock were exercised, and the Company
issued 47,074 shares of Common Stock in exchange for an aggregate consideration
of $47,074. For a discussion of other options and warrants granted by the
Company see "EXECUTIVE COMPENSATION -- Stock Option Plans" and Note 13 of Notes
to Consolidated Financial Statements.
On November 4, 1996, the Company entered into a two-year Financial
Consulting Agreement with BC Capital Corp. for the provision of certain
financial consulting services in exchange for a monthly fee of $3,000 and the
issuance, for $100, of five-year warrants to purchase an aggregate of 300,000
shares of Common Stock at a per share purchase price of $1.375 with respect to
150,000 shares and a per share purchase price of $2.00 for the remaining 150,000
shares. Such Warrants expire on November 30, 2001. The exercise price and number
of shares purchasable upon exercise of the Warrants are subject to adjustment
upon the occurrence of certain events.
PREFERRED STOCK
The Company's Certificate authorizes the issuance of 1,000,000 shares
of Preferred Stock, par value $1.00 per share. The Company's Board of Directors,
without further action by the Company's stockholders, may issue Preferred Stock
in series and may, at the time of issuance, determine the rights, preferences
and privileges of each series. Satisfaction of any dividend preferences of
outstanding Preferred Stock would reduce the amount of funds available for the
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<PAGE>
payment of dividends on Common Stock. Also, holders of Preferred Stock would
normally be entitled to receive a preference payment in the event of any
liquidation, dissolution or winding-up of the Company before any payment is made
to the holders of Common Stock. The issuance of Preferred Stock may be for the
purpose of, or have the effect of, delaying, deferring or preventing a change in
control of the Company without further action by the stockholders. The issuance
of Preferred Stock with voting and conversion rights may adversely affect the
voting powers of the holders of Common Stock, including the loss of voting
control to others.
SERIES A PARTICIPATING PREFERRED STOCK
On March 2, 1995, the Company paid a distribution of a right to
purchase one one-thousandth of a share of Series A Participating Preferred Stock
(a "Right") for each share of Common Stock of the Company outstanding on such
date. Each Right entitled the registered holder to purchase from the Company one
one-thousandth of a share of Series A Participating Preferred Stock, $1.00 par
value, of the Company, subject to adjustment, at a price of $8.00 per one
one-thousandth of a share, subject to adjustment. The description and terms of
the Rights are set forth in a Preferred Shares Rights Agreement (the "Rights
Agreement") dated as of February 10, 1995 between the Company and American
Securities Transfer, Incorporated, as Rights Agent (the "Rights Agent"). None of
the Rights have been exercised.
SERIES B PREFERRED STOCK
The Board of Directors of the Company has authorized the issuance of
500,000 shares of Series B Preferred Stock, all of which were issued and
outstanding on April 1, 1997.
The Series B Preferred Stock ranks senior in dividend rights and
liquidation preference to all other series of Preferred Stock and the Common
Stock of the Company. The holders of the Series B Preferred Stock are entitled
to receive, out of any assets of the Company legally available therefor,
cumulative dividends at a rate of $.10 per share per annum, payable quarterly on
March 31, June 30, September 30 and December 31 of each year. Upon any
liquidation, dissolution or winding up of the Company, the Company may not make
any distribution to the holders of any series of Preferred Stock or the Common
Stock unless prior thereto, the holders of Series B Preferred Stock have
received an amount equal to $1.00 per share, plus an amount equal to the accrued
and unpaid dividends and distributions thereon.
At any time, the holders of the Series B Preferred Stock have the
right, at their option, to convert each share of Series B Preferred Stock into
one share of Common Stock. The conversion price of the Series B Preferred Stock
is subject to adjustment from time to time if the Company issues additional
shares of Common Stock, convertible securities, options, warrants or similar
rights at prices less than the conversion price for the Series B Preferred
Stock. In addition, the conversion price for the Series B Preferred Stock may be
adjusted for certain stock splits, stock dividends, combinations,
reclassifications and similar events.
48
<PAGE>
Generally, the holders of shares of Series B Preferred Stock together
with the holders of the Common Stock and Series C Preferred Stock will vote as
one class on all matters submitted to a vote of stockholders of the Company.
Without the advance consent of the holders of two-thirds of the Series B
Preferred Stock, the Company may not amend its Certificate in any manner that
would materially alter or change the powers, preferences or special rights of
the Series B Preferred Stock.
Unless previously converted, all or any portion of the Series B
Preferred Stock may be redeemed on a pro rata basis by the Company at its
election from the holders of such Series B Preferred Stock at any time;
provided, however, that the Company may not redeem the Series B Preferred Stock
unless the average of the closing bid prices per share of Common Stock have
equaled or exceeded $3.00 or more for any twenty (20) consecutive trading days
ending two days prior to the date on which a redemption notice is given by the
Company. The price at which the Series B Preferred Stock may be redeemed is
$1.00 per share together with all dividends accrued but unpaid thereon, but
computed without interest, through the date of such redemption. Each holder of
Series B Preferred Stock has the right to require the Company to redeem the
shares of Series B Preferred Stock held by such holder together with all
dividends accrued and accumulated but unpaid thereon if, among other things,
there is a sale or merger of the Company or if the Company (i) defaults on the
payment of any dividends on the Series B Preferred Stock and such default has
continued for a period of ten days, (ii) defaults on the payment of its
indebtedness or certain other obligations, (iii) is unable to pay its debts as
they become due or (iv) files a petition in bankruptcy.
SERIES C PREFERRED STOCK
The Series C Preferred Stock ranks junior in dividend rights and
liquidation preference to the Company's Series B Preferred Stock, but senior to
all other series of Preferred Stock and the Common Stock of the Company. Subject
to the superior rights of the Series B Preferred Stock, the holders of the
Series C Preferred Stock are entitled to receive, out of any assets of the
Company legally available therefor, cumulative dividends at a rate of 9% per
annum (the "Dividend Rate") on the total dollar amount of the consideration paid
(the "Original Purchase Price") to the Company for each share of Series C
Preferred Stock (the "Dividend Amount"). Such dividends are payable quarterly on
the Quarterly Dividend Payment Date (as hereinafter defined), commencing on the
first Quarterly Dividend Payment Date after the first issuance of a share of
Series C Preferred Stock. Dividends on each share of Series C Preferred Stock
accrue and are cumulative from the date of issuance thereof to the redemption
date or the conversion date of each such share, as applicable and whichever
first occurs, whether or not there are any profits, surplus or other funds of
the Company legally available for the payment of such dividends at the time such
dividends accrue and whether or not such dividends are declared. Dividends are
payable on each share of Series C Preferred Stock on the last day of each
September, December, March and June of each year (the "Quarterly Dividend
Payment Date") to the holders of record on the date thirty (30) days prior to
such Quarterly Dividend Payment Date. During the first year following the first
issuance of a share of Series C Preferred Stock (the "Original Issue Date"),
dividends on the Series C Preferred Stock will be paid in cash. Following the
first anniversary of the Original Issue Date, the Company has the option to pay
all future dividends either in cash or in shares of Common Stock of the Company
having a "Fair Market Value" equal to the Dividend Amount. "Fair Market Value"
49
<PAGE>
means the average closing bid prices of the Common Stock of the Company as
reported in the WALL STREET JOURNAL for the ten (10) trading days ending five
(5) trading days prior to the Quarterly Dividend Payment Date (or, if not so
reported, as otherwise reported by the National Association of Securities
Dealers Automated Quotation System or other principal market for the Common
Stock) or, in the event the Common Stock is listed on a stock exchange, the Fair
Market Value shall be the average of the closing prices of the Common Stock of
the Company on such exchange as reported in the WALL STREET JOURNAL for the ten
(10) trading days ending five (5) trading days prior to the Quarterly Dividend
Payment Date.
Generally, the holders of shares of Series C Preferred Stock together
with the holders of the Common Stock and Series B Preferred Stock vote as one
class on all matters submitted to a vote of stockholders of the Company. Without
the advance consent of the holders of a majority of the Series C Preferred
Stock, the Company may not (i) alter or change any rights, privileges or
preferences of the Series C Preferred Stock, (ii) increase or decrease the
authorized number of shares of Series C Preferred Stock, (iii) authorize, issue
or create (by reclassification or otherwise) shares of any class or series of
stock equal in priority to or having any preference over the Series C Preferred
Stock with respect to dividends or liquidation payments, (iv) amend or waive any
provision of the Certificate or Bylaws of the Company relative to the Series C
Preferred Stock, (v) authorize or approve any liquidation or dissolution of the
Company, (vi) authorize or approve any merger or consolidation of the Company,
or (vii) authorize or approve any sale or transfer of all or substantially all
of the assets of the Company. Each share of Series C Preferred Stock issued and
outstanding has that number of votes equal to the number of shares of Common
Stock into which each share of Series C Preferred Stock is convertible, as of
the record date set by the Board of Directors for the determination of any
holders of any class of securities entitled to vote on such matter.
Whenever quarterly dividends or other dividends or distributions
payable on the Series C Preferred Stock are in arrears, thereafter and until all
accrued and unpaid dividends and distributions, whether or not declared, on
shares of Series C Preferred Stock outstanding shall have been paid in full or
set aside for payment, the Company may not (i) declare or pay dividends on, make
any other distributions on, or redeem or purchase or otherwise acquire for
consideration any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series C Preferred Stock, (ii)
declare or pay dividends on, or make any other distributions on any shares of
stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series C Preferred Stock, except dividends
paid ratably on the Series C Preferred Stock and all such parity stock on which
dividends are payable or in arrears in proportion to the total amounts to which
the holders of all such shares are then entitled, (iii) redeem or purchase or
otherwise acquire for consideration shares of any stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up) with the
Series C Preferred Stock, provided that the Company may at any time redeem,
purchase or otherwise acquire shares of any such parity stock in exchange for
shares of any stock of the Company ranking junior (either as to dividends or
upon dissolution, liquidation or winding up) to the Series C Preferred Stock or
(iv) purchase or otherwise acquire for consideration any shares of Series C
Preferred Stock, or any shares of stock ranking on a parity with the Series C
Preferred Stock, except in accordance with a purchase offer made in writing or
50
<PAGE>
by publication (as determined by the Board of Directors) to all holders of such
shares upon such terms as the Board of Directors, after consideration of the
respective annual dividend rates and other relative rights and preferences of
the respective series and classes, shall determine in good faith will result in
fair and equitable treatment among the respective series or classes.
Whenever quarterly dividends or other dividends or distributions
payable on the Series C Preferred Stock have been in arrears for two or more
quarters, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series C Preferred Stock
outstanding shall have been paid in full or set aside for payment, and so long
as no less than 100,000 shares of Series C Preferred Stock are outstanding
(appropriately adjusted for any recapitalizations, stock splits, stock
combinations, stock dividends and the like), the holders of a majority of the
outstanding shares of Series C Preferred Stock shall be entitled to elect two
(2) directors to the Company's Board of Directors.
At any time, the holders of the Series C Preferred Stock have the
right, at their option, to convert any number of shares of Series C Preferred
Stock into shares of Common Stock in an amount determined by dividing the
Original Purchase Price of the Series C Preferred Stock by $2.125 (the
"Conversion Price"). The Conversion Price is subject to adjustment from time to
time if the Company issues additional shares of Common Stock, convertible
securities, options, warrants or similar rights at prices less than the
Conversion Price. In addition, the Conversion Price may be adjusted for certain
stock splits, stock dividends, combinations, reclassifications and similar
events.
Subject to the superior rights of the holders of the Series B Preferred
Stock, upon any voluntary liquidation, dissolution or winding up of the Company,
the Company may not make any distribution to the holders of shares of stock
ranking junior (either as to payment of dividends or with respect to
distributions upon liquidation, dissolution or winding up) to the Series C
Preferred Stock unless, prior thereto, the holders of Series C Preferred Stock
have receive an amount equal to the Original Purchase Price of the shares of
Series C Preferred Stock purchased, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date of
such payment (the "Series C Preferred Stock Liquidation Preference"). Following
the payment of the full amount of the Series C Preferred Stock Liquidation
Preference, no additional distributions may be made to the holders of Series C
Preferred Stock. If there are not sufficient assets available to permit payment
in full of the Series C Preferred Stock Liquidation Preference and the
liquidation preferences of all other classes and/or series of Preferred Stock,
if any, which rank on a parity with the Series C Preferred Stock, then such
remaining assets shall be distributed ratably to the holders of such parity
shares in proportion to their respective liquidation preferences.
In the event of any consolidation or merger of the Company with or into
another corporation, or of any sale or conveyance to another corporation of all
or substantially all the property of the Company, in any of which transactions
the holders of Common Stock receive shares of stock, other securities, cash or
property receivable upon such consolidation, merger, sale or conveyance other
than Common Stock, each holder of Series C Preferred Stock then outstanding and
thereafter remaining outstanding has the right to convert each share of Series C
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<PAGE>
Preferred Stock held by him into the kind and amount of shares of stock, other
securities, cash or property receivable upon such consolidation, merger, sale or
conveyance by a holder of the number of shares of Common Stock into which such
share of Series C Preferred Stock could have been converted immediately prior to
the record date applicable to such consolidation, merger, sale or conveyance,
and shall have no other conversion rights. In any such event, the Company will
make effective provision for the protection of the conversion rights of the
holders of the Series C Preferred Stock that are not so converted, which will
thereafter be applicable to any such other shares of stock, other securities,
cash or property deliverable upon conversion of the shares of the Series C
Preferred Stock remaining outstanding or other convertible stock or securities
received by the holders in place thereof.
Unless previously converted, all or any portion of the Series C
Preferred Stock together with all dividends accrued but unpaid on such Series C
Preferred Stock computed to the redemption date may be redeemed on a pro rata
basis by the Company at its election from the holders of such Series C Preferred
Stock at any time and from time to time; provided, however, that the Company may
not redeem the Series C Preferred Stock unless the average of the closing asked
prices per share of Common Stock has equaled or exceeded 150% or more of the
Conversion Price of the Series C Preferred Stock for any twenty (20) consecutive
trading days ending within five days immediately prior to the date on which a
redemption notice is given by the Company. Notwithstanding the foregoing, the
holders of the Series C Preferred Stock will have the right to convert the
Series C Preferred Stock to Common Stock for a period of thirty (30) days
following notice of redemption.
CERTAIN CHARTER PROVISIONS AND EFFECTS OF DELAWARE LAW
Stockholders' rights and related matters are governed by the Delaware
corporate laws, the Certificate and the Bylaws of the Company. Certain
provisions of the Certificate and Bylaws which are summarized below may affect
potential changes in control of the Company. The Board of Directors believes
that these provisions are in the best interests of stockholders because they
will encourage a potential acquiror to negotiate with the Board of Directors,
which will be able to consider the interest of all stockholders in a
change-in-control situation. However, the cumulative effect of these terms may
be to make it more difficult to acquire and exercise control of the Company and
to make changes in management more difficult.
The Certificate provides for the approval of the holders of 66 2/3% of
the outstanding voting stock of the Company for a merger or a consolidation
with, or a sale by the Company of all or substantially all of its assets to, any
person, firm or corporation, or any group thereof, which owns, directly or
indirectly, 5% or more of any class of voting securities of the Company (an
"Interested Person"). In addition, such 66 2/3% approval is required with
respect to other transactions involving any such Interested Person, including,
among other things, purchases by the Company or any of its subsidiaries of all
or substantially all of the assets or stock of an Interested Person and any
other transaction with an Interested Person which requires stockholder approval
under Delaware law. The 66 2/3% voting requirement is not applicable to any
transaction approved by the Company's Board of Directors if a majority of the
members of the Board of Directors voting to approve such transaction were
elected prior to the date on which the other party became an Interested Person.
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The Certificate provides that each director will serve for a three-year
term and that approximately one-third of the directors are to be elected
annually. The Company may have three to nine directors as determined from time
to time by the Board, which currently consists of four members. Between
stockholder meetings, the Board may appoint new directors to fill vacancies or
newly created directorships. A director may be removed from office only for
cause and only by the affirmative vote of 50% of the combined voting power of
the then outstanding shares of stock entitled to vote generally in the election
of directors.
The Certificate further provides that stockholder action must be taken
at a meeting of stockholders and may not be effected by any consent in writing.
Special meetings of stockholders may be called only by the President or a
majority of the Board of Directors. If a stockholder wishes to propose an agenda
item for consideration, he must give a brief description of each item and
written notice to the Company not less than 60 nor more than 90 days prior to
the meeting unless less than 70 days prior notice of a stockholders meeting is
given to stockholders, in which case stockholders have ten days from the date of
notice of such meeting to be considered for inclusion in the agenda of such
meeting.
The Certificate generally provides that the foregoing provisions of the
Certificate and Bylaws may be amended or repealed only with the affirmative vote
of at least 66 2/3% of the shares entitled to vote. These provisions exceed the
usual majority vote requirement of Delaware law and are intended to prevent the
holders of less than 66 2/3% of the voting power from circumventing the
foregoing terms by amending the Certificate or Bylaws. These provisions,
however, enable the holders of more than 33 1/3% of the voting power to prevent
amendments to the Certificate or Bylaws even if they were favored by the holders
of a majority of the voting power.
The effect of such provisions of the Company's Certificate and Bylaws
may be to make more difficult the accomplishment of a merger or other takeover
or change in control of the Company. To the extent that these provisions have
this effect, removal of the Company's incumbent Board of Directors and
management may be rendered more difficult. Furthermore, these provisions may
make it more difficult for stockholders to participate in a tender or exchange
offer for Common Stock and in so doing may diminish the market value of the
Common Stock. The Company is not aware of any proposed takeover attempt or any
proposed attempt to acquire a large block of Common Stock.
DIRECTOR AND OFFICER INDEMNIFICATION
Section 12 of the Company's Certificate limits, to the fullest extent
permitted by the Delaware General Corporation Law ("DGCL"), as amended,
directors' personal liability to the Company or its stockholders for monetary
damages or breach of fiduciary duty. Section 145 of DGCL enables a corporation
to eliminate or limit personal liability of members of its board of directors
for violations of their fiduciary duty of care. However, Delaware law does not
permit the elimination of a director's liability for engaging in intentional
misconduct or fraud, knowingly violating a law, for any transaction from which
the director derived an improper personal benefit or for unlawfully paying a
distribution. The statute has no effect on the availability of equitable
remedies, such as an injunction or rescission, for breach of fiduciary duty.
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Section 12 of the Company's Certificate and Article V of the Company's
Bylaws require indemnification of directors and officers of the Company to the
fullest extent permitted by the DGCL for claims against them in their official
capacities, including stockholders' derivative actions.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
TRANSFER AGENT
The Transfer Agent for the Common Stock and Series B and Series C
Preferred Stock is American Securities Transfer, Incorporated.
LEGAL MATTERS
Certain legal matters with respect to the Company and the validity of
the securities offered hereby will be passed upon for the Company by Squire,
Sanders & Dempsey L.L.P., Phoenix, Arizona.
EXPERTS
The Consolidated Financial Statements of Sunrise Preschools, Inc. (now
Sunrise Educational Services, Inc.) at July 31, 1996, and for the year then
ended, appearing in the Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The Consolidated Financial Statements of the Company for the fiscal
year ended July 31, 1995 have been audited by Arthur Andersen LLP, independent
public accountants, as stated in their report appearing herein and have been so
included in reliance upon the report of Arthur Andersen LLP given upon their
authority as experts in accounting and auditing.
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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
As reported on Form 8-K dated May 1, 1996 (the "Form 8-K"), the Company
engaged Ernst & Young LLP as its independent auditors 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.
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SUNRISE EDUCATIONAL SERVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report............................................... F-2
Report of Independent Public Accountants................................... F-3
Consolidated Financial Statements
Consolidated Balance Sheets as of January 31, 1997 (unaudited),
and July 31, 1996...................................................... F-4
Consolidated Statements of Operations for the years ended
July 31, 1996 and 1995, and the six months ended
January 31, 1997 and 1996 (unaudited).................................. F-5
Consolidated Statements of Shareholders' Equity for the
years ended July 31, 1996 and 1995..................................... F-7
Consolidated Statements of Cash Flows for the years ended
July 31, 1996 and 1995, and the six months ended
January 31, 1997 and 1996 (unaudited).................................. F-8
Notes to Consolidated Financial Statements................................. F-10
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
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
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Sunrise Preschools, Inc.:
We have audited the accompanying consolidated balance sheet of Sunrise
Preschools, Inc. (a Delaware corporation) and subsidiary as of July 31, 1995,
and the related consolidated statements of income, shareholders' equity and cash
flows for each of the two years in the period ended July 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sunrise Preschools, Inc. and
subsidiary as of July 31, 1995, and the results of their operations and their
cash flows for each of the two years in the period ended July 31, 1995 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Phoenix, Arizona
October 2, 1995
F-3
<PAGE>
Sunrise Educational Services, Inc. and Subsidiary
(formerly Sunrise Preschools, Inc.)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
January 31, 1997 July 31, 1996
(Unaudited)
---------------- -------------
ASSETS
Current Assets
<S> <C> <C>
Cash and Cash Equivalents $ 1,536,494 $ 2,630,616
Accounts Receivable, net of allowance for doubtful accounts of
$8,000 at January 31, 1997 and $12,000 at July 31, 1996 600,777 387,775
Prepaid Expenses 272,418 149,458
Deferred Tax Asset, current portion 138,000 138,000
Inventory and Other Current Assets 34,579 27,094
----------- ------------
Total Current Assets 2,582,268 3,332,943
Property and Equipment, net 1,654,700 1,386,687
Property and Equipment Held for Lease, net 358,845 367,292
Deferred Tax Asset, net of current portion 557,000 557,000
Note Receivable from Preschool Services, Inc. 256,251 256,251
Intangible Assets, net 1,309,552 733,519
Deposits and Other Assets 272,729 363,340
----------- ------------
Total Assets $ 6,991,345 $ 6,997,032
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Line of Credit $ 150,000 $ 100,000
Accounts Payable 149,092 272,519
Accrued Expenses 455,398 385,036
Dividends Payable on Preferred Stock 44,367 44,367
Notes Payable and Capital Leases, current portion 236,682 133,415
Accrued Rental Reserve, current portion 145,904 292,000
Deferred Rent, current portion 151,640 155,982
Deferred Gain on Sale and Leaseback of Preschool Facilities,
current portion 45,003 45,003
----------- -----------
Total Current Liabilities 1,378,086 1,428,322
----------- -----------
Notes Payable and Capital Leases, net of current portion 757,613 504,654
----------- -----------
Accrued Rental Reserve, net of current portion 126,000 126,000
----------- -----------
Deferred Rent, net of current portion 261,152 304,058
----------- -----------
Deferred Gain on Sale and Leaseback of Preschool Facilities, net
of current portion 65,147 87,648
----------- -----------
Shareholders' Equity
Preferred Stock, $1 par value - 1,000,000 shares authorized,
857,333 shares issued and outstanding 857,333 857,333
Common Stock, $.01 par value - 10,000,000 shares authorized,
3,075,871 and 2,982,968 shares issued and outstanding 30,759 29,830
Paid-in Capital 7,729,220 7,609,553
Accumulated Deficit (4,213,965) (3,950,366)
----------- -----------
Total Shareholders' Equity 4,403,347 4,546,350
----------- -----------
Total Liabilities and Shareholders' Equity $ 6,991,345 $ 6,997,032
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-4
<PAGE>
Sunrise Educational Services, Inc. and Subsidiary
(formerly Sunrise Preschools, Inc.)
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
==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-5
<PAGE>
Sunrise Educational Services, Inc. and Subsidiary
(formerly Sunrise Preschools, Inc.)
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended January 31,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
OPERATING REVENUE $6,342,854 $4,739,761
OPERATING EXPENSES
Payroll 3,217,165 2,325,317
Facilities and Maintenance 2,265,666 1,787,453
General and Administrative 905,670 656,683
Total Operating Expenses 6,388,501 4,769,453
---------- ----------
LOSS FROM OPERATIONS (45,647) (29,692)
NON-OPERATING INCOME
Interest Income (Expense), net 8,622 5,665
Other Income 39,626 3,100
---------- ----------
Total Non-operating Income 48,248 8,765
---------- ----------
NET INCOME (LOSS) $ 2,601 $ (20,927)
========== ==========
NET LOSS AVAILABLE FOR COMMON STOCK $ (263,599) $ (95,927)
========== ==========
NET LOSS PER COMMON SHARE AND
COMMON SHARE EQUIVALENT
Primary $ (0.09) $ (0.03)
========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND COMMON
EQUIVALENT SHARES OUTSTANDING
Primary 3,021,268 2,935,894
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-6
<PAGE>
Sunrise Educational Services, Inc. and Subsidiary
(formerly Sunrise Preschools, Inc.)
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
======= ======== ========= ======= ========== =========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-7
<PAGE>
Sunrise Educational Services, Inc. and Subsidiary
(formerly Sunrise Preschools, Inc.)
Consolidated Statements Of Cash Flows
For The Years Ended July 31, 1996 And 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
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
=========== =========
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.
F-8
</TABLE>
<PAGE>
Sunrise Educational Services, Inc. and Subsidiary
(formerly Sunrise Preschools, Inc.)
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended January 31,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities
Net Income (Loss) $ 2,601 $ (20,927)
Adjustments to Reconcile Net Income (Loss) to
Net Cash Used in Operating Activities
Depreciation and Amortization 323,216 160,450
Amortized Gain on Sale of Real Estate (22,501) (22,501)
Deferred Rent (47,248) (35,501)
Provision for Doubtful Accounts 40,538 18,579
Gain on Disposal of Property and Equipment (39,626) (3,100)
changes in Assets and Liabilities, net of effect
of businesses acquired:
Increase in Accounts Receivable (253,540) (53,058)
Increase in Prepaid Expenses (122,960) (115,725)
Increase in Inventory and Other Current Assets (7,485) (14,227)
(Increase) Decrease in Deposits and Other Assets 90,611 (98,559)
Increase (Decrease) in Accounts Payable (123,427) 143,251
Increase in Accrued Expenses 70,362 19,142
Decrease in Accrued Rental Reserve (146,096) --
---------- ----------
Total Adjustments (238,156) (1,249)
---------- ----------
Net Cash Used in Operating Activities (235,555) (22,176)
---------- ----------
Cash Flows from Investing Activities
Acquisition of Child Care Centers (494,264) (65,000)
Escrow Deposit for Purchase of Child Care Center -- (310,000)
Purchases of Property and Equipment (496,691) (366,209)
Proceeds from Disposal of Property and Equipment 296,766 8,000
---------- ----------
Net Cash Used in Investing Activities (694,189) (733,209)
---------- ----------
Cash Flows from Financing Activities
Proceeds from Exercise of Warrants -- 40,404
Proceeds from Sale of Preferred Stock -- 4,026,475
Payment of Dividends (145,604) (286,666)
Proceeds from Notes Payable 54,408 88,886
Borrowings on Lines of Credit 50,000 --
Payments on Notes Payable and Capital Leases (123,182) (74,823)
---------- ----------
Net Cash Provided by (Used in) Financing Activities (164,378) 3,794,276
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents (1,094,122) 3,038,891
Cash and Cash Equivalents, beginning of period 2,630,616 581,311
---------- ----------
Cash and Cash Equivalents, end of period $1,536,494 $3,620,202
========== ==========
Supplemental Disclosure of Cash Flow Information
Cash Paid During the Period for Interest $ 41,222 $ 23,290
Payment of Stock Dividends 120,596 --
Note Payable Issued for Acquisition of Child Care Centers 425,000 --
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-9
<PAGE>
Sunrise Educational Services, Inc. and Subsidiary
(formerly Sunrise Preschools, Inc.)
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.
(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.
F-10
<PAGE>
(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.
(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.
F-11
<PAGE>
(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.
(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.
F-12
<PAGE>
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.
Revenues $11,517,994
Net loss (691,533)
Net loss per common share and common share equivalent (0.35)
(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.
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.
F-13
<PAGE>
(5) PROPERTY AND EQUIPMENT:
Property and equipment and property and equipment leased to PSI consist of the
following:
Property and
Property Equipment
and Equipment Leased to PSI
------------- -------------
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
and amortization -- (184,000)
----------- ----------
$ 1,386,687 $ 367,292
=========== ==========
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.
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.
F-14
<PAGE>
(7) NOTES PAYABLE AND CAPITAL LEASES:
Notes payable and capital leases consist of the following:
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
========
Repayments of notes payable and capital lease obligations are scheduled as
follows:
Year Ended
July 31, Notes Capital
-------- ----- -------
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
========
(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).
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.
F-15
<PAGE>
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:
Year Ending
July 31,
-----------
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
===========
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 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.
F-16
<PAGE>
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.
Upon exercise, each Right will entitle the holder (other than the party seeking
to acquire control of the Company) to acquire shares of the common stock of the
Company or, in certain circumstances, such acquiring person at a 50% discount
from market value. The Rights may be terminated by the Board of Directors at any
time prior to the date they become exercisable; thereafter, they may be redeemed
for a specified period of time at $0.001 per Right.
F-17
<PAGE>
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.
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.
F-18
<PAGE>
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:
Current Long-Term Total
------- --------- -----
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
========= ========= =========
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:
2004 $ 443,399
2005 861,342
2006 564,007
2011 308,463
----------
$2,177,211
==========
The Company's net operating loss carryforwards for state income tax purposes
totaled approximately $300,000, which expire in 2001.
F-19
<PAGE>
A reconciliation of the federal income tax rate to the Company's effective tax
rate is as follows at July 31, 1996:
1996 1995
---- ----
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)%
=== ===
(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 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.
F-20
<PAGE>
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 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.
F-21
<PAGE>
The following summarizes the activity for the plans for the fiscal year ended
July 31, 1996:
Exercise Price
Total per Share
----- ---------
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
=======
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 the
Company 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 purchase of these centers was accounted for as a purchase in
accordance with Accounting Principles Board Opinion No. 16.
Pro forma (unaudited) information for the six month periods ended January 31,
1997 and 1996 follows:
Sunrise Educational Services, Inc. and Subsidiary
Unaudited Pro Forma Condensed Consolidated Income Statement
For the Six Months Ended January 31, 1997 and 1996
(In thousands, except per share data)
1997 1996
------- -------
Operating Revenues $ 6,457 $ 5,422
Operating Expenses 6,480 5,322
------- -------
Income from Operations (23) 100
Non-operating Income (Expense) 45 (7)
------- -------
Net Income $ 22 $ 93
======= =======
Net Income Available for
Common Stock $ (244) $ 18
======= =======
Net Income per Common
Share and Common Share
Equivalent $ (0.08) $ 0.01
======= =======
Average Shares Outstanding 3,021 2,957
======= =======
F-22
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS WITH RESPECT TO THE
OFFERING MADE HEREBY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL ANY
OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO
WHOM, IT IS UNLAWFUL TO MAKE SUCH AN OFFER. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR
IN THE BUSINESS OF THE COMPANY SINCE THE DATE HEREOF.
----------------------
TABLE OF CONTENTS PAGE
----
Available Information................................. 2
Prospectus Summary.................................... 3
Risk Factors.......................................... 6
Use of Proceeds....................................... 12
Dividend Policy....................................... 12
Market for Registrant's Common Equity
and Related Stockholders Matters................... 13
Management's Discussion and Analysis of
Financial Condition and Results of Operations....... 14
Business.............................................. 22
Management............................................ 35
Executive Compensation................................ 37
Certain Relationships and Related Transactions........ 42
Principal and Selling Securityholders................. 43
Plan of Distribution.................................. 46
Description of Securities............................. 47
Legal Matters......................................... 54
Experts............................................... 54
Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.............. 55
Financial Statements.................................. F-1
1,382,229 SHARES
OF COMMON STOCK
SUNRISE EDUCATIONAL
SERVICES, INC.
[LOGO]
-----------------
PROSPECTUS
-----------------
_________________, 1997
<PAGE>
PART II TO FORM SB-2
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Restated Certificate of Incorporation and Bylaws require
the Company to indemnify each of its officers and Directors against liabilities
and reasonable expenses incurred in any action or proceeding, including
stockholders' derivative actions, by reason of such person being or having been
an officer or Director of the Company, or of any other corporation for which he
or she serves as such at the request of the Company, to the fullest extent
permitted by Delaware law. Pursuant to Delaware law, the Company has adopted
provisions in its Restated Certificate of Incorporation and Bylaws that
eliminate, to the fullest extent available under Delaware law, the personal
liability of its Directors and Officers of the Company or its stockholders for
monetary damages incurred as a result of the breach of their duty of care. These
provisions neither limit the availability of equitable remedies nor eliminate
Directors' or Officers' liability for engaging in intentional misconduct or
fraud, knowingly violating a law or unlawfully paying a distribution.
The Company has been advised that it is the position of the Commission
that insofar as the foregoing provision may be invoked to disclaim liability for
damages arising under the Securities Act, such provision is against public
policy as expressed in the Securities Act and is therefore unenforceable.
Section 78.751 of the NGCL enables a corporation to eliminate or limit
personal liability of members of its board of directors for violations of their
fiduciary duties. However, Nevada law does not permit the elimination of a
director's liability for engaging in any transaction from which the director
derived an improper personal benefit or for unlawfully paying a distribution.
The statute has no effect on the availability of equitable remedies, such as an
injunction or rescission, for breach of fiduciary duty.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated costs and expenses of the
Company in connection with the Offering other than underwriting discounts.
SEC Registration Fee......................................... $ 576.00
Legal Fees and Expenses*..................................... 10,000.00
Accounting Fees and Expenses*................................ 5,000.00
Printing Expenses*........................................... 5,000.00
Blue Sky Fees and Expenses*.................................. 2,000.00
Miscellaneous*............................................... 2,000.00
----------
Total........................................................ $24,576.00
==========
- --------------------
* Estimated.
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
During the three year period ending May 30, 1997, the Company has not
sold any securities without registration under the Securities Act.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Exhibit Page Number or
Number Description Method Of Filing
- ------ ----------- ----------------
3.1 Restated Certificate of Incorporation of Registrant (1)
3.2 Certificate of Amendment to Restated Certificate of (14)
Incorporation
3.3 Second Certificate of Amendment to Restated Certificate (18)
of Incorporation
3.4 Certificate of Designation of Series B Preferred Stock of (7)
Sunrise Preschools, Inc., dated November 21, 1991
3.5(a) Certificate of Designation of Series C Preferred Stock *
of Sunrise Preschools, Inc. dated November 3, 1995
3.5(b) First Certificate of Amendment to Certificate of Designation *
of Series C Preferred Stock, dated December 15, 1995
3.5(c) Second Certificate of Amendment to Certificate of Designation *
of Series C Preferred Stock, dated December 19, 1995
3.6 Bylaws of Registrant, as amended (1)
5 Opinion of Squire, Sanders & Dempsey L.L.P. as to the *
legality of the securities being registered
10.1 Lease Agreement dated January 31, 1983 between Earl H. (1)
Jones and Venture Educational Programs, Inc.
10.2 Lease Agreement dated April 1, 1984 between (1)
McClintock Associates Limited Partnership, an Arizona
limited partnership, and Venture Educational Programs,
Inc.
10.3 Lease Agreement dated October 24, 1986 between Peoria (1)
Investment Company, Inc. an Arizona corporation, and
Sunrise Preschools, Inc., an Arizona corporation
10.4 Lease Agreement dated October 16, 1986 between Sun (1)
School I Limited Partnership, an Arizona limited
partnership, and Sunrise Preschools, Inc., an Arizona
corporation
II-2
<PAGE>
10.5 Lease Agreement dated April 1, 1986, between Sunrise (1)
Partners, an Arizona corporation, and Sunrise Preschools,
Inc., an Arizona corporation
10.6 Lease Agreement dated February 5, 1987, between Sun (1)
School II Limited Partnership, an Arizona limited
partnership, and Sunrise Preschools, Inc., an Arizona
corporation
10.7 Lease Agreement dated June 26, 1987, between Huber (1)
Farm Service of Phoenix, Inc., an Arizona corporation,
and Sunrise Preschools, Inc., a Delaware corporation
10.8 Lease Agreement dated June 26, 1987, between Huber (1)
Farm Service of Phoenix, Inc., an Arizona corporation,
and Sunrise Preschools, Inc., a Delaware corporation
10.9 Equipment Lease between James R. Evans and Sunrise (1)
Preschools, Inc.
10.10 Lease Agreement, dated July 29, 1988, between Sunrise (2)
Preschools, Inc. and Investad, Inc.
10.11 Lease Agreement, dated July 25, 1988, between Sunrise (2)
Preschools, Inc., and LV Properties, an Arizona general
partnership
10.12 Lease Agreement, dated May 12, 1988, between Sunrise (2)
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, between Sunrise (2)
Preschools, Inc. and Kailua Beach Center, Inc.
10.14 Lease Agreement, dated January 11, 1988, between (3)
Sunrise Preschools, Inc. and Mercado Developers
II-3
<PAGE>
10.15 Amendment of Lease Agreement dated March 8, 1990 (4)
between Sunrise Preschools, Inc. and Jaymark Komer
and Komer Family Trust dated May 12, 1988
10.16 Purchase Agreement and Registration Rights Agreement (5)
dated April 6, 1990, between Sunrise Preschools, Inc. and
Lepercq Capital Management, Inc.
10.17 Vehicle Use Agreement dated February 14, 1991 between (6)
Sunrise Preschools, Inc. and James R. Evans
10.18 Vehicle Use Agreement dated February 14, 1991 between (6)
Sunrise Preschools, Inc. and Barbara L. Owens
10.19 Lease Agreement, dated July 1, 1991, between Sunrise (6)
Preschools, Inc., and Maruni Arizona, Inc.
10.20 Purchase Agreement, dated November 18, 1991, between (7)
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, between (8)
Sunrise Preschools, Inc. and Jaymark Komer and Komer
Family Trust
10.22 Management Agreement, dated November 14, 1993, (11)
between United Church of Christ and Sunrise Preschools,
Inc.
10.23 Vehicle Use Agreement dated June 15, 1993 between (9)
Sunrise Preschools, Inc. and James R. Evans
10.24 Vehicle Use Agreement dated June 15, 1993 between (9)
Sunrise Preschools, Inc. and Barbara L. Owens
10.25 Term Sheet Agreement, dated December 7, 1992, (9)
between Joy of Christ Lutheran Church and Sunrise
Preschools, Inc.
II-4
<PAGE>
10.26 Agreement between Lutheran Church of Honolulu and (9)
Sunrise Preschools, Inc., dated May 19, 1993
10.27 Employment Agreement between Sunrise Preschools, (10)
Inc. and James R. Evans, dated October 15, 1993
10.28 Employment Agreement between Sunrise Preschools, (10)
Inc. and Barbara L. Owens, dated October 15, 1993
10.29 Administrative Services Agreement, License, and (11)
Equipment Lease, dated February 1, 1994, between
Sunrise Preschools, Inc. and Preschool Services, Inc.
10.30 Preferred Shares Rights Agreement, dated February 10, (12)
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.
10.31 First Amendment to Employment Agreement between (13)
Sunrise Preschools, Inc. and James R. Evans, dated
September 16, 1994
10.32 First Amendment to Employment Agreement between (13)
Sunrise Preschools, Inc. and Barbara L. Owens, dated
September 16, 1994
10.33 Loan Agreement dated January 24, 1995 between Sunrise (13)
Preschools, Inc. and Bank One, Arizona, NA for the
purchase of equipment
10.34 Loan Agreement dated January 24, 1995 between Sunrise (13)
Preschools, Inc. and Bank One, Arizona, NA for the
purchase of vehicles
II-5
<PAGE>
10.35 Revolving Line of Credit Note and Loan Agreement (13)
dated January 24, 1995 between Sunrise Preschools, Inc.
and Bank One, Arizona, NA
10.36 Acquisition Consulting and Investor Relations (14)
Agreement between Sunrise Preschools, Inc. and Miller
Capital Corporation, dated April 14, 1995
10.37 Second Amendment to Employment Agreement between (14)
Sunrise Preschools, Inc. and James R. Evans, dated
May 4, 1995
10.38 Second Amendment to Employment Agreement between (14)
Sunrise Preschools, Inc. and Barbara L. Owens, dated
May 4, 1995
10.39 Asset Purchase Agreement between Children's Choice (15)
Learning Center, Inc. and Sunrise Preschool, Inc. dated
June 26, 1996, with one amendment dated June 28, 1996
10.40 Business Loan Agreement between Bank of America (16)
Arizona and Sunrise Preschools, Inc. dated March 15,
1996
10.41 Form of Credit and Security Agreement between Imperial *
Bank and Sunrise Educational Services, Inc. dated April, 1997
11 Computation of Per Share Earnings (19)
16 Letter from Arthur Andersen LLP on Change in (17)
Certifying Accountants
21 List of Subsidiaries (16)
23.1 Consent of Ernst & Young LLP **
23.2 Consent of Arthur Andersen LLP **
23.3 Consent of Squire, Sanders & Dempsey L.L.P. See Exhibit 5
27 Financial Data Schedule (19)
- ----------
* Filed herewith.
** Previously filed.
(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.
II-6
<PAGE>
(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
(16) Incorporated by reference to exhibits to Form 10-KSB for the fiscal year
ended July 27, 1996.
(17) Incorporated by reference to exhibits to Form 8-K filed on or about May 1,
1996.
(18) Incorporated by reference to exhibit to Form 8-K filed on or about February
18, 1997.
(19) Incorporated by reference to exhibits to Form 10-QSB filed March 11, 1997
(b) 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.
II-7
<PAGE>
ITEM 28. UNDERTAKINGS
1. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission ("SEC") such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the small business issuer of expenses
incurred or paid by a director, officer or controlling person of the small
business issuer in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the small business issuer will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act, and will
be governed by the final adjudication of such issue.
2. The undersigned small business issuer will: (i) for determining any
liability under the Act, treat the information omitted from the form of
prospectus filed as a part of this Registration Statement in reliance upon Rule
430A and contained in a form or prospectus filed by the small business issuer
under Rule 424(b)(1), or (4) or 497(h) under the Act as part of this
Registration Statement as of the time the SEC declared it effective and (ii) for
determining any liability under the Act, treat each post-effective amendment
that contains a form of prospectus as a new registration statement, and that
offering of the securities at that time as the initial bona fide offering of
those securities.
3. The undersigned small business issuer will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar volume of
securities offered would not exceed that which was
registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the
form of prospectus filed with the SEC pursuant to Rule
424(b) if, in the aggregate, the changes in the volume and
price represent no more that a 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement;
(iii) Include any additional or changed material information on
the plan of distribution.
II-8
<PAGE>
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that
time to be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
II-9
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this amendment to the
registration statement to be signed on its behalf by the undersigned, in the
City of Scottsdale and State of Arizona on June 13, 1997.
SUNRISE EDUCATIONAL SERVICES, INC.,
a Delaware corporation
By /s/ James R. Evans
----------------------------------------
James R. Evans
Chairman of the Board and President
In accordance with the requirements of the Securities Act of 1933, this
amendment to the registration statement was signed below by the following
persons in the capacities and on the dates stated.
Signature Title Date
- --------- ----- ----
/s/ James R. Evans
- ------------------------------ Chairman of the Board and June 13, 1997
James R. Evans President (Principal Executive
Officer)
/s/ Barbara L. Owens
- ------------------------------ Director and Acting Controller June 13, 1997
Barbara L. Owens (Principal Financial and
Accounting Officer)
/s/ *
- ------------------------------ Director June 13, 1997
Robert A. Rice
/s/ *
- ------------------------------ Director June 13, 1997
Richard H. Hinze
By /s/ James R. Evans
---------------------------- June 13, 1997
James R. Evans
Attorney-in-Fact
II-10
EXHIBIT 3.5(a)
CERTIFICATE OF DESIGNATION OF RIGHTS, PREFERENCES
AND PRIVILEGES OF
SERIES C PREFERRED STOCK
OF
SUNRISE PRESCHOOLS, INC.
Pursuant to Section 151 of the General Corporation Law of the State of
Delaware:
We, James R. Evans, the President, and Barbara L. Owens, the Secretary,
respectively, of Sunrise Preschools, Inc., a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
in accordance with the provisions of Section 103 thereof, DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by
the Restated Certificate of Incorporation of the Corporation, as amended, the
said Board of Directors on October 13, 1995 adopted the following resolution
creating a series of shares of Preferred Stock designated as Series C Preferred
Stock:
"RESOLVED, that pursuant to the authority vested in the Board
of Directors of the Corporation by the Restated Certificate of
Incorporation, as amended (the "Amended Certificate"), the Board of
Directors does hereby provide for the issuance of a series of Preferred
Stock, $1.00 par value, of the Corporation, to be designated "Series C
Preferred Stock", consisting of 421,666 shares and, to the extent that
the designations, powers, preferences and relative and other special
rights and the qualifications, limitations and restrictions of the
Series C Preferred Stock are not stated and expressed in the Amended
Certificate, does hereby fix and herein state and express such
designations, powers, preferences and relative and other special rights
and the qualifications, limitations and restrictions thereof, as
follows:
1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as
"Series C Preferred Stock", par value $1.00 per share (hereinafter referred to
as the "Series C Preferred"), and the number of shares constituting such series
shall be 421,666.
2. RANKING. The Series C Preferred shall rank junior in dividend rights and
liquidation preference to the Corporation's Series B Preferred Stock (the
"Series B Preferred"), but senior to all other series of preferred stock
("Preferred Stock") or common stock ("Common Stock") of the Corporation.
<PAGE>
3. DIVIDENDS. Subject to the superior rights of the holders of any class or
series of Preferred Stock ranking superior to the Series C Preferred with
respect to dividends and distributions:
3.1 DIVIDEND AMOUNT. The holders of the Series C Preferred shall be
entitled to receive, out of any assets of the Corporation legally available
therefor, cumulative dividends at a rate of 9% per annum (the "Dividend Rate")
on the total dollar amount of the consideration paid (the "Original Purchase
Price") to the Corporation for each share of Series C Preferred (the "Dividend
Amount"). Such dividends shall be payable quarterly on the Quarterly Dividend
Payment Date (as hereinafter defined), commencing on the first Quarterly
Dividend Payment Date after the first issuance of a share of Series C Preferred.
Dividends on each share of Series C Preferred shall accrue and be cumulative
from the date of issuance thereof to the Redemption Date (as hereinafter
defined) or the Conversion Date (as hereinafter defined) of each such share, as
applicable and whichever first occurs, whether or not there shall be profits,
surplus or other funds of the Corporation legally available for the payment of
such dividends at the time such dividends shall accrue or become due and whether
or not such dividends are declared.
3.2 QUARTERLY DIVIDEND PAYMENT DATE. Dividends shall be payable on each
share of Series C Preferred on the last day of each September, December, March
and June of each year (the "Quarterly Dividend Payment Date") to the holder of
record on the date thirty (30) days prior to such Quarterly Dividend Payment
Date.
3.3 METHOD OF PAYMENT. During the first year following the first
issuance of a share of Series C Preferred (the "Original Issue Date"), dividends
on the Series C Preferred shall be paid in cash. Following the first anniversary
of the Original Issue Date, the Corporation shall have the option of paying all
future dividends either in cash or in shares of Common Stock of the Corporation
having a "Fair Market Value" equal to the Dividend Amount. "Fair Market Value"
shall mean the average closing bid prices of the Common Stock of the Corporation
as reported in the WALL STREET JOURNAL for the ten (10) trading days ending five
(5) trading days prior to the Quarterly Dividend Payment Date (or, if not so
reported, as otherwise reported by the National Association of Securities
Dealers Automated Quotation System or other principal market for the Common
Stock) or, in the event the Common Stock is listed on a stock exchange, the Fair
Market Value shall be the average of the closing prices of the Common Stock of
the Corporation on such exchange as reported in the WALL STREET JOURNAL for the
ten (10) trading days ending five (5) trading days prior to the Quarterly
Dividend Payment Date.
4. VOTING RIGHTS. The holders of Series C Preferred shall have the
following voting rights:
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<PAGE>
4.1 ONE CLASS VOTING. Except as otherwise provided herein or required by
law, the holders of shares of Series C Preferred, of Common Stock and Series B
Preferred shall vote together as one class on all matters submitted to a vote of
stockholders of the Corporation.
4.2 SEPARATE CLASS VOTING. The Corporation shall not, without first
obtaining the affirmative vote or written consent of the holders of not less
than a majority of the outstanding shares of the Series C Preferred voting as a
separate class:
(a) alter or change any rights, privileges or preferences of the
Series C Preferred;
(b) increase or decrease the authorized number of shares of
Series C Preferred;
(c) authorize, issue or create (by reclassification or
otherwise) shares of any class or series of stock equal in priority to or having
any preference over the Series C Preferred with respect to dividends or
liquidation payments;
(d) amend or waive any provision of the Amended Certificate or
Bylaws of the Corporation relative to the Series C Preferred;
(e) authorize or approve any liquidation or dissolution of the
Corporation;
(f) authorize or approve any merger or consolidation of the
Corporation; or
(g) authorize or approve any sale or transfer of all or
substantially all of the assets of the Corporation.
4.3 OTHER VOTING RIGHTS. Except as set forth herein and except where
voting rights are required by law, holders of Series C Preferred shall have no
voting rights and their consent shall not be required for taking any corporate
action.
4.4 NUMBER OF VOTES. Each share of Series C Preferred issued and
outstanding shall have that number of votes equal to the number of shares of
Common Stock into which each share of Series C Preferred is convertible which
shall be calculated in accordance with the formula set forth in Section 8
hereof, as of the record date set by the Board of Directors for the
determination of any holders of any class of securities entitled to vote on such
matter. Fractional shares shall not, however, be permitted, and any fractional
voting rights resulting from this formula (after aggregating all shares of
Common Stock into which shares of Series C Preferred held by each holder could
be converted) shall be rounded to the nearest whole number (with one-half being
rounded upward).
3
<PAGE>
5. CERTAIN RESTRICTIONS. Whenever quarterly dividends or other dividends or
distributions payable on the Series C Preferred as provided in Section 3 are in
arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series C Preferred
outstanding shall have been paid in full or set aside for payment, the
Corporation shall not:
(a) declare or pay dividends on, make any other distributions
on, or redeem or purchase or otherwise acquire for consideration any shares of
stock ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series C Preferred;
(b) declare or pay dividends on, make any other distributions on
any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series C Preferred, except
dividends paid ratably on the Series C Preferred and all such parity stock on
which dividends are payable or in arrears in proportion to the total amounts to
which the holders of all such shares are then entitled;
(c) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series C Preferred, provided
that the Corporation may at any time redeem, purchase or otherwise acquire
shares of any such parity stock in exchange for shares of any stock of the
Corporation ranking junior (either as to dividends or upon dissolution,
liquidation or winding up) to the Series C Preferred;
(d) purchase or otherwise acquire for consideration any shares
of Series C Preferred, or any shares of stock ranking on a parity with the
Series C Preferred, except in accordance with a purchase offer made in writing
or by publication (as determined by the Board of Directors) to all holders of
such shares upon such terms as the Board of Directors, after consideration of
the respective annual dividend rates and other relative rights and preferences
of the respective series and classes, shall determine in good faith will result
in fair and equitable treatment among the respective series or classes.
6. ELECTION OF SERIES C PREFERRED DIRECTORS. Whenever quarterly dividends
or other dividends or distributions payable on the Series C Preferred as
provided in Section 3 shall have been in arrears for two or more quarters,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series C Preferred outstanding shall have been
paid in full or set aside for payment, and so long as no less than one hundred
thousand (100,000) shares of Series C Preferred are outstanding (appropriately
adjusted for any recapitalizations, stock splits, stock combinations, stock
dividends and the like), the holders of a majority of the outstanding shares of
Series C Preferred shall be entitled to elect two (2) directors to the
Corporation's Board of Directors. Whenever quarterly dividends or other
dividends or distributions payable on the Series C Preferred shall have been in
4
<PAGE>
arrears for two or more quarters, the Corporation shall, as soon as practicable
thereafter, expand the Board of Directors by two members and hold an election at
which a majority of the holders of the Series C Preferred shall be entitled to
elect two (2) directors to the Corporation's Board of Directors.
7. REACQUIRED SHARES. Any shares of Series C Preferred purchased or
otherwise acquired by the Corporation in any manner whatsoever shall be retired
and canceled promptly after the acquisition thereof. All such shares shall upon
their cancellation become authorized but unissued shares of the Corporation's
Preferred Stock and may be reissued as part of a new series of Preferred Stock
to be created by resolution or resolutions of the Board of Directors, subject to
the conditions and restrictions on issuance set forth herein.
8. CONVERSION
8.1 RIGHT TO CONVERT. The holders of the Series C Preferred shall have
the right, at their option, to convert any number of shares of Series C
Preferred into shares of Common Stock, in accordance with the procedures set
forth in this Section 8 and subject to the terms and conditions of this Section
8 at any time.
8.2 CONVERSION RATIO. Each share of Series C Preferred to be converted
shall be convertible at the office of the transfer agent of the Corporation, as
designated from time to time by the Corporation (the "Transfer Agent"), and at
such other office or offices, if any, as the Board of Directors of the
Corporation may designate, into the number of fully paid and nonassessable
shares of Common Stock determined by dividing the Original Purchase Price (plus
accrued but unpaid dividends) by $3.00 (the "Conversion Price").
8.3 CONVERSION NOTICE. In order to convert shares of the Series C
Preferred, the holder thereof shall deliver to the Corporation?s Transfer Agent
a notice of intention to convert such shares and dividends together with the
certificate or certificates for the Series C Preferred to be converted, duly
endorsed to the Corporation or in blank, or with stock power(s) attached. Shares
of the Series C Preferred shall be deemed to have been converted on the day on
which notice of intention to convert (including all required accompanying
materials as set forth above) was delivered to the Transfer Agent (the
"Conversion Date") and the person or persons entitled to receive the Common
Stock issuable upon such conversion shall be treated for all purposes, including
voting such Common Stock, as the record holder or holders of such Common Stock
at such time. As promptly as practicable on or after the Conversion Date, the
Corporation?s Transfer Agent shall issue and deliver to the record holder or
holders of such Series C Preferred a certificate or certificates for the number
of shares of Common Stock issuable upon such conversion, together with cash in
lieu of any fraction of a share, as hereinafter provided, to the person or
persons entitled to receive the same.
5
<PAGE>
8.4 ADJUSTMENTS TO CONVERSION PRICE. The Conversion Price shall be
subject to adjustment from time to time as follows:
(a) For purposes of this Section 8, the following definitions
shall apply:
(1) "Options" shall mean rights, options or warrants to
subscribe for, purchase or otherwise acquire either Common Stock, Preferred
Stock or Convertible Securities (defined below).
(2) "Convertible Securities" shall mean securities
convertible into or exchangeable for Common Stock.
(3) "Additional Shares of Common Stock" shall mean all
shares of Common Stock issued (or, pursuant to Section 8.4(c), deemed to be
issued) by the Corporation after the Original Issue Date other than shares of
Common Stock issued (or, pursuant to Section 8.4(c), deemed to be issued):
(i) in connection with the Series A
Participating Preferred Stock;
(ii) upon conversion of shares of the Series B
Preferred and Series C Preferred;
(iii) to officers, directors and employees of,
and consultants to, the Corporation pursuant to a written stock option plan
whether now existing or hereafter approved by the Corporation's Board of
Directors;
(iv) pursuant to clause (f), (g) or (h) of this
Section 8.4;
(v) upon the exercise of Options issued on or
prior to the Original Issue Date; or
(vi) by way of dividend or other distributions
on securities referred to in clauses (i), (ii), (iii), (iv) and (v) hereof.
(b) No adjustment in the Conversion Price shall be made in
respect of the issuance of Additional Shares of Common Stock unless the
consideration per share for an Additional Share of Common Stock issued or deemed
to be issued by the Corporation is less than the Conversion Price in effect on
the date of, and immediately prior to such issue, for such share of Series C
Preferred.
(c) Additional Shares of Common Stock shall be deemed to have
been issued under the following conditions:
6
<PAGE>
(1) Except as otherwise provided in Sections
8.4(a)(3)(i)-(vi) and 8.4(b), in the event the Corporation at any time or from
time to time after the Original Issue Date shall issue any Options or
Convertible Securities or shall fix a record date for the determination of any
holders of any class of securities entitled to receive any such Options or
Convertible Securities, then the maximum number of shares (as set forth in the
instrument relating thereto without regard to any provision contained therein
for a subsequent adjustment of such number) of Common Stock issuable upon the
exercise of such Options or, in the case of Convertible Securities and Options
therefor, the conversion or exchange of such Convertible Securities, shall be
deemed to be Additional Shares of Common Stock issued as of the time of such
issue or, in case such a record date shall have been fixed for any such
exchange, as of the close of business on such record date, provided that in any
such case in which Additional Shares of Common Stock are deemed to be issued:
(i) no further adjustment in the Conversion
Price shall be made upon the subsequent issue of Convertible Securities or
shares of Common Stock upon the exercise of such Options or conversion or
exchange of such Convertible Securities;
(ii) if such Options or Convertible Securities
by their terms provide, with the passage of time or otherwise, for any increase
or decrease in the consideration payable to the Corporation, or increase or
decrease in the number of shares of Common Stock issuable, upon the exercise,
conversion or exchange thereof, the Conversion Price computed upon the original
issue thereof (or upon the occurrence of a record date with respect thereto),
and any subsequent adjustments based thereon, shall, upon any such increase or
decrease becoming effective, be recomputed to reflect such increase or decrease
insofar as it affects such Options or the rights of conversion or exchange under
such Convertible Securities;
(iii) upon the expiration of any such Options or
any rights of conversion or exchange under such Convertible Securities which
shall not have been exercised, the Conversion Price computed upon the original
issue thereof (or upon the occurrence of a record date with respect thereto),
and any subsequent adjustments based thereon, shall, upon such expiration, be
recomputed as if:
(A) in the case of Convertible
Securities or Options for Common Stock, the only Additional Shares of Common
Stock issued were shares of Common Stock, if any, actually issued upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities, and the consideration received therefor was the consideration
actually received by the Corporation for the issue of all such Options, whether
or not exercised, plus the consideration actually received by the Corporation
upon such exercise, or for the issue of all such Convertible Securities which
were actually converted or exchanged, plus the additional consideration, if any,
actually received by the Corporation upon such conversion or exchange, and
7
<PAGE>
(B) in the case of Options for
Convertible Securities, only the Convertible Securities, if any, actually issued
upon the exercise thereof were issued at the time of issue of such Options and
the consideration by the Corporation for the Additional Shares of Common Stock
deemed to have been then issued was the consideration actually received by the
Corporation for the issue of all such Options, whether or not exercised, plus
the consideration received by the Corporation upon the issue of the Convertible
Securities with respect to which such Options were actually exercised;
(iv) no readjustment pursuant to clause (ii) or
(iii) above shall have the effect of increasing the Conversion Price to a price
that is greater than (a) the Conversion Price on the original adjustment date,
or (b) the Conversion Price that would have resulted from any issuance of
Additional Shares of Common Stock between the original adjustment date and such
readjustment date; and
(v) in the case of any Options which expire by
their terms not more than thirty (30) days after the date of issue thereof, no
adjustment of the Conversion Price shall be made until the expiration or
exercise of all such Options.
(d) In the event the Corporation shall issue Additional Shares
of Common Stock (including Additional Shares of Common Stock deemed to be issued
pursuant to Section 8.4(c) without consideration or for a consideration per
share less than an amount equal to the Conversion Price for a share of Series C
Preferred in effect on the date of, and immediately prior to such issue) then
and in such event, the Conversion Price shall be decreased, concurrently with
such issue, to a price determined by dividing (1) an amount equal to the sum of
(i) the total number of shares of Common Stock outstanding (including any
Additional Shares of Common Stock deemed to be outstanding) immediately prior to
such issuance multiplied by the Conversion Price in effect immediately prior to
such issuance, plus (ii) the consideration received by the Corporation upon such
issuance, by (2) the total number of shares of Common Stock outstanding
(including any Additional Shares of Common Stock deemed to be outstanding)
immediately after the issuance of such Common Stock.
(e) For purposes of this Section 8.4, the consideration received
by the Corporation for the issue of any Additional Shares of Common Stock shall
be computed as follows:
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<PAGE>
(1) Such consideration shall:
(i) insofar as it consists of cash, be computed
at the aggregate amount of cash received by the Corporation prior to amounts
paid or payable for accrued interest or accrued dividends and prior to any
commissions or expenses paid by the Corporation;
(ii) insofar as it consists of property other
than cash, be computed at the fair value thereof at the time of such issue, as
determined in good faith by the Board of Directors; and
(iii) in the event Additional Shares of Common
Stock are issued together with other shares or securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (1) and (2) above, as
determined in good faith by the Board of Directors.
(2) The consideration per share received by the
Corporation for Additional Shares of Common Stock deemed to have been issued
pursuant to Section 8.4(c)(1), relating to Options and Convertible Securities,
shall be determined by dividing:
(i) the total amount, if any, received or
receivable by the Corporation as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such
consideration) payable to the Corporation upon the exercise of such Option or
the conversion or exchange of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible Securities by
(ii) the maximum number of shares of Common
Stock (as set forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such number) issuable
upon the exercise of such Options or the conversion or exchange of such
Convertible Securities.
(f) In the event the outstanding shares of Common Stock shall be
subdivided by stock split, stock dividends or otherwise, into a greater number
of shares of Common Stock, the Conversion Price then in effect shall,
concurrently with the effectiveness of such subdivision, be proportionately
decreased. In the event the outstanding shares of Common Stock shall be combined
or consolidated, by reclassification or otherwise, into a lesser number of
shares of Common Stock, the Conversion Price then in effect shall, concurrently
with the effectiveness of such combination or consolidation, be proportionately
increased. 9
<PAGE>
(g) In the event that the Corporation from time to time makes or
fixes a record date for the determination of holders of Common Stock entitled to
receive any distribution (excluding any repurchases of securities by the
Corporation not made on a pro rata basis from all holders of any class of the
Corporation's securities) payable in property or in securities of the
Corporation other than shares of Common Stock, and other than as otherwise
adjusted in this Section 8 or as provided in Section 3, then and in each such
event the holders of Series C Preferred shall receive at the time of such
distribution, the amount of property or the number of securities of the
Corporation that they would have received had their Series C Preferred been
converted into Common Stock on the date of such event.
(h) Except as provided in this Section 8, upon any liquidation,
dissolution or winding up of the Corporation, if the Common Stock issuable upon
conversion of the Series C Preferred shall be changed into the same or a
different number of shares of any other class or classes of stock, whether by
capital reorganization, reclassification or otherwise (other than a subdivision
or combination of shares provided for above), each share of Series C Preferred
and all accrued but unpaid dividends shall thereafter be convertible into the
number of shares of stock or other securities or property to which a holder of
the number of shares of Common Stock deliverable upon such conversion shall have
been entitled upon such reorganization or reclassification. In any such event,
effective provision shall be made, in the certificate or articles of
incorporation of the resulting or surviving corporation or otherwise, so that
the provisions set forth herein for the protection of the conversion rights of
the Series C Preferred shall thereafter be applicable to any such other shares
of stock, other securities, cash or property deliverable upon conversion of the
shares of the Series C Preferred remaining outstanding or other convertible
stock or securities received by the holders in place thereof, and any such
resulting or surviving corporation shall expressly assume the obligation to
deliver, upon the exercise of the conversion privilege, such shares, other
securities, cash or property as the holders of the Series C Preferred remaining
outstanding, or other convertible stock or securities received by the holders in
place thereof, shall be entitled to receive pursuant to the provisions hereof,
and to make provision for the protection of the conversion right as above
provided.
(i) The Corporation will not, by amendment of this Certificate
of Designation or its Amended Certificate or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Corporation but will at all times in good faith assist in the carrying out of
all the provisions of this Section 8 and in the taking of all such action as may
be necessary or appropriate in order to protect the conversion rights of the
holders of the Series C Preferred against impairment.
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<PAGE>
(j) No adjustment in the number of shares of Common Stock into
which the shares of Series C Preferred are convertible shall be required unless
such adjustment would require an increase or decrease of at least 1/10th of a
share; provided, however, that any adjustment which by reason hereof is not
required to be made shall be carried forward and taken into account in any
subsequent adjustment.
8.5 NOTICE OF ADJUSTMENT. Whenever any adjustment is required to be made
as provided in Section 8.4, the Corporation shall promptly notify each record
holder of Series C Preferred thereof, describing in reasonable detail the
adjustment and method of calculation used.
8.6 RESERVATION OF SHARES. The Corporation shall at all times reserve
and keep available free from preemptive rights, out of its authorized but
unissued Common Stock, for the purpose of effecting the conversion of the Series
C Preferred, the full number of shares of Common Stock then deliverable upon the
conversion of all shares of Series C Preferred then outstanding.
8.7 FRACTIONAL SHARES. In the sole discretion of the Corporation,
instead of any fraction of a share which would otherwise be issuable upon
conversion of shares of the Series C Preferred or accrued dividends, or interest
thereon, the Corporation may pay a cash adjustment in respect of such fraction
in an amount equal to the same fraction of the Fair Market Value per share of
Common Stock at the close of business on the date of conversion.
8.8 ACCRUED BUT UNPAID DIVIDENDS. Upon the receipt of a Conversion
Notice, the Corporation may in its discretion, either pay to the holder of the
Series C Preferred submitting such Conversion Notice all accrued but unpaid
dividends on the Series C Preferred such holder has elected to convert through
the date of the Conversion Notice or convert the dollar amount of any accrued
but unpaid dividends on such shares of Series C Preferred Stock into Common
Stock at the Conversion Price.
9. LIQUIDATION, DISSOLUTION OR WINDING UP. Subject to the superior rights
of the holders of any class or series of Preferred Stock ranking superior to the
Series C Preferred with respect to any liquidation, dissolution or winding up of
the Corporation:
9.1 LIQUIDATION PREFERENCE. Upon any voluntary liquidation, dissolution
or winding up of the Corporation, no distribution shall be made to the holders
of shares of stock ranking junior (either as to payment of dividends or with
respect to distributions upon liquidation, dissolution or winding up) to the
Series C Preferred unless, prior thereto, the holders of Series C Preferred
shall have received an amount equal to the Original Purchase Price of the shares
of Series C Preferred purchased, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date of
such payment (the "Series C Preferred Liquidation Preference"). Following the
payment of the full amount of the Series C Preferred Liquidation Preference, no
additional distributions shall be made to the holders of Series C Preferred.
11
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9.2 PARTIAL DISTRIBUTION. In the event, however, that there are not
sufficient assets available to permit payment in full of the Series C Preferred
Liquidation Preference and the liquidation preferences of all other classes
and/or series of Preferred Stock, if any, which rank on a parity with the Series
C Preferred, then such remaining assets shall be distributed ratably to the
holders of such parity shares in proportion to their respective liquidation
preferences.
10. CONSOLIDATION, MERGER, ETC. In the event of any consolidation or
merger of the Corporation with or into another corporation, or of any sale or
conveyance to another corporation of all or substantially all the property of
the Corporation, in any of which transactions the holders of Common Stock
receive shares of stock, other securities, cash or property receivable upon such
consolidation, merger, sale or conveyance other than Common Stock, each holder
of Series C Preferred then outstanding and thereafter remaining outstanding
shall have the right to convert each share of Series C Preferred held by him
into the kind and amount of shares of stock, other securities, cash or property
receivable upon such consolidation, merger, sale or conveyance by a holder of
the number of shares of Common Stock into which such share of Series C Preferred
could have been converted immediately prior to the record date applicable to
such consolidation, merger, sale or conveyance, and shall have no other
conversion rights. In any such event, effective provision shall be made, in the
certificate of incorporation of the resulting or surviving corporation or
otherwise, so that the provisions set forth herein for the protection of the
conversion rights of the holders of the Series C Preferred shall thereafter be
applicable to any such other shares of stock, other securities, cash or property
deliverable upon conversion of the shares of the Series C Preferred remaining
outstanding or other convertible stock or securities received by the holders in
place thereof, and any such resulting or surviving corporation shall expressly
assume the obligation to deliver, upon the exercise of the conversion privilege,
such shares, other securities, cash or property as the holders of the Series C
Preferred remaining outstanding, or other convertible stock or securities
received by the holders in place thereof, shall be entitled to receive pursuant
to the provisions hereof, and to make provision for the protection of the
conversion rights as above provided.
11. REDEMPTION.
11.1 REDEMPTION RIGHT. Unless previously converted, all or any portion
of the Series C Preferred together with all dividends accrued but unpaid on such
Series C Preferred computed to the Redemption Date (as defined below) may be
redeemed on a pro rata basis by the Corporation at its election from the holders
of such Series C Preferred at any time and from time to time; provided, however,
that the Company may not redeem the Series C Preferred unless the average of the
closing asked prices per share of Common Stock have equaled or exceeded 150% or
more of the Conversion Price of the Series C Preferred for any twenty (20)
consecutive trading days ending within five (5) days immediately prior to the
date on which a Redemption Notice (as defined below) is given by the Company.
Notwithstanding the foregoing, the holders of the Series C Preferred will have
the right to convert the Series C Preferred to Common Stock for a period of
thirty (30) days following notice of redemption.
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11.2 REDEMPTION NOTICE. Before redeeming the Series C Preferred as
provided in Section 11.1, the Corporation shall mail by certified or registered
mail to each record holder thereof at least thirty (30) days prior to the
Redemption Date (as defined below), at the address shown on the Corporation's
records, a written notice (a "Redemption Notice") stating:
(a) the number of shares of Series C Preferred held by
such holder which the Corporation proposes to redeem, including the amount of
any accrued but unpaid dividends;
(b) the price at which such shares may be redeemed,
which shall be an amount equal to the Series C Preferred Liquidation Preference
computed to the Redemption Date (the "Redemption Price");
(c) the date on which the Corporation will pay the
Redemption Price (the "Redemption Date"); and
(d) the place at which the shares of Series C Preferred
to be redeemed must be surrendered in exchange for the Redemption Price.
Each holder of shares of the Series C Preferred to whom an Redemption Notice is
mailed shall be entitled to receive in cash on the Redemption Date the full
Redemption Price for each share of Series C Preferred to be redeemed upon
surrender by such holder at the place designated in such Redemption Notice of
the certificate representing such Series C Preferred duly endorsed in blank or
accompanied by an appropriate form of assignment duly endorsed in blank with
signature guaranteed. In case less than the total number of securities
represented by any certificate are redeemed on the Redemption Rate, a new
certificate representing the number of unredeemed securities will be issued to
the holder thereof without cost to the holder immediately upon surrender of the
certificate representing the redeemed securities. If the Corporation fails to
pay the Redemption Price on the Redemption Date for any reason other than the
failure of a holder to surrender his Series C Preferred certificate as required,
then the Redemption Date shall be the date on which the Corporation actually
pays the Redemption Price. All rights arising hereunder, other than the right to
receive the Redemption Price, shall terminate on the Redemption Date.
11.3 If the Corporation shall pay less than the aggregate redemption
price due on such date for all shares of all series of Preferred Stock being
redeemed having the same priority on liquidation as the Series C Preferred, then
shares shall be redeemed from, and payment shall be distributed among, the
holders of the shares of all such series on the same pro rata basis that such
holders would share in payments of the aggregate redemption price due on such
date for all shares of Preferred Stock being redeemed.
12. OTHER NOTICES. If at any time:
(a) The Corporation shall declare any dividend on the
Common Stock payable in shares of capital stock of the Corporation, cash or
other property; or
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(b) The Corporation shall authorize the issue of any
options, warrants or rights pro rata to all holders of Common Stock entitling
them to subscribe for or purchase any shares of stock of the Corporation or to
receive any other rights; or
(c) The Corporation shall authorize the distribution
pro rata to all holders of Common Stock of a cash dividend payable otherwise
than out of earnings of surplus legally available therefor under the laws of the
State of Delaware, shares of its capital stock (other than Common Stock), stock
or other securities of other persons, evidences of indebtedness issued by the
Corporation or other persons, assets (excluding cash dividends) or options or
rights (excluding options to purchase and rights to subscribe for Common Stock
or other securities of the Corporation convertible into or exchangeable for
Common Stock); or
(d) There shall occur any reclassification of the
Common Stock, or any consolidation or merger of the Corporation with or into
another Corporation or a sale, conveyance or other disposition to another entity
of all or substantially all of the properties of the Corporation; or
(e) There shall occur the voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation;
then, and in each of such cases, the Corporation shall deliver to each holder of
Series C Preferred at its last address appearing on the books of the Corporation
as promptly as practicable but in any event at least twenty (20) days prior to
the applicable record date (or determination date) mentioned below, a notice
stating, to the extent such information is available, (i) the date on which a
record is to be taken for the purpose of such dividend, distribution or rights,
or, if a record is not to be taken, the date as of which the holders of Common
Stock of record to be entitled to such dividend, distribution or rights are to
be determined, or (ii) the date on which such reclassification, consolidation,
merger, sale, transfer, liquidation, dissolution or winding up is expected to
become effective and the date as of which it is expected that holders of Common
Stock of record shall be entitled to exchange their Common Stock for securities
or other property deliverable upon such reclassification, consolidation, merger,
sale, transfer, liquidation, dissolution or winding up."
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IN WITNESS WHEREOF, we have executed and subscribed this Certificate
and do affirm the foregoing as true under the penalties of perjury this 3rd day
of November, 1995.
/s/ James R. Evans
------------------------------------
JAMES R. EVANS, President
ATTEST:
/s/ Barbara L. Owens
- ------------------------------------
BARBARA L. OWENS, Secretary
15
EXHIBIT 3.5(b)
AMENDED
CERTIFICATE OF DESIGNATION OF RIGHTS, PREFERENCES
AND PRIVILEGES OF
SERIES C PREFERRED STOCK
OF
SUNRISE PRESCHOOLS, INC.
Pursuant to Section 151 of the General Corporation Law of the State of
Delaware:
We, James R. Evans, the President, and Ronald J. O'Connor, the Assistant
Secretary, respectively, of Sunrise Preschools, Inc., a corporation organized
and existing under the General Corporation Law of the State of Delaware (the
"Corporation"), in accordance with the provisions of Section 103 thereof, DO
HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors
by the Restated Certificate of Incorporation of the Corporation, as
amended, the said Board of Directors on October 13, 1995 designated a
series of shares of Preferred Stock as Series C Preferred Stock;
That the Certificate of Designation of Rights, Preferences and
Privileges of Series C Preferred Stock (the "Original Certificate") was
filed with the Delaware Secretary of State on November 8, 1995;
That as of the date hereof, the Corporation has issued no shares of
the Series C Preferred Stock;
That pursuant to the authority conferred upon the Board of Directors
by the Restated Certificate of Incorporation of the Corporation, as
amended, and pursuant to the provisions of Section 151 of the General
Corporation Law, the said Board of Directors on December 15, 1995 adopted
the following resolutions, which amend and restate the Original Certificate
in its entirety, without changing the original designation of the Series C
Preferred Stock.
<PAGE>
"RESOLVED, that pursuant to the authority vested in the Board of
Directors of the Corporation by the Restated Certificate of Incorporation,
as amended (the "Amended Certificate"), the Board of Directors does hereby
provide for the issuance of a series of Preferred Stock, $1.00 par value,
of the Corporation, to be designated "Series C Preferred Stock", consisting
of 421,666 shares and, to the extent that the designations, powers,
preferences and relative and other special rights and the qualifications,
limitations and restrictions of the Series C Preferred Stock are not stated
and expressed in the Amended Certificate, does hereby fix and herein state
and express such designations, powers, preferences and relative and other
special rights and the qualifications, limitations and restrictions
thereof, as follows:
DESIGNATION AND AMOUNT. The shares of such series shall be designated
as "Series C Preferred Stock", par value $1.00 per share (hereinafter referred
to as the "Series C Preferred"), and the number of shares constituting such
series shall be 421,666.
1. RANKING. The Series C Preferred shall rank junior in dividend rights
and liquidation preference to the Corporation's Series B Preferred Stock (the
"Series B Preferred"), but senior to all other series of preferred stock
("Preferred Stock") or common stock ("Common Stock") of the Corporation.
2. DIVIDENDS. Subject to the superior rights of the holders of any
class or series of Preferred Stock ranking superior to the Series C Preferred
with respect to dividends and distributions:
2.1 DIVIDEND AMOUNT. The holders of the Series C Preferred shall be
entitled to receive, out of any assets of the Corporation legally available
therefor, cumulative dividends at a rate of 9% per annum (the "Dividend Rate")
on the total dollar amount of the consideration paid (the "Original Purchase
Price") to the Corporation for each share of Series C Preferred (the "Dividend
Amount"). Such dividends shall be payable quarterly on the Quarterly Dividend
Payment Date (as hereinafter defined), commencing on the first Quarterly
Dividend Payment Date after the first issuance of a share of Series C Preferred.
Dividends on each share of Series C Preferred shall accrue and be cumulative
from the date of issuance thereof to the Redemption Date (as hereinafter
defined) or the Conversion Date (as hereinafter defined) of each such share, as
applicable and whichever first occurs, whether or not there shall be profits,
surplus or other funds of the Corporation legally available for the payment of
such dividends at the time such dividends shall accrue or become due and whether
or not such dividends are declared.
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2.2 QUARTERLY DIVIDEND PAYMENT DATE. Dividends shall be payable on
each share of Series C Preferred on the last day of each September, December,
March and June of each year (the "Quarterly Dividend Payment Date") to the
holder of record on the date thirty (30) days prior to such Quarterly Dividend
Payment Date.
2.3 METHOD OF PAYMENT. During the first year following the first
issuance of a share of Series C Preferred (the "Original Issue Date"), dividends
on the Series C Preferred shall be paid in cash. Following the first anniversary
of the Original Issue Date, the Corporation shall have the option of paying all
future dividends either in cash or in shares of Common Stock of the Corporation
having a "Fair Market Value" equal to the Dividend Amount. "Fair Market Value"
shall mean the average closing bid prices of the Common Stock of the Corporation
as reported in the Wall Street Journal for the ten (10) trading days ending five
(5) trading days prior to the Quarterly Dividend Payment Date (or, if not so
reported, as otherwise reported by the National Association of Securities
Dealers Automated Quotation System or other principal market for the Common
Stock) or, in the event the Common Stock is listed on a stock exchange, the Fair
Market Value shall be the average of the closing prices of the Common Stock of
the Corporation on such exchange as reported in the Wall Street Journal for the
ten (10) trading days ending five (5) trading days prior to the Quarterly
Dividend Payment Date.
3. VOTING RIGHTS. The holders of Series C Preferred shall have the
following voting rights:
3.1 ONE CLASS VOTING. Except as otherwise provided herein or
required by law, the holders of shares of Series C Preferred, of Common Stock
and Series B Preferred shall vote together as one class on all matters submitted
to a vote of stockholders of the Corporation.
3.2 SEPARATE CLASS VOTING. The Corporation shall not, without first
obtaining the affirmative vote or written consent of the holders of not less
than a majority of the outstanding shares of the Series C Preferred voting as a
separate class:
(a) alter or change any rights, privileges or preferences of the
Series C Preferred;
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<PAGE>
(b) increase or decrease the authorized number of shares of
Series C Preferred;
(c) authorize, issue or create (by reclassification or otherwise)
shares of any class or series of stock equal in priority to or having any
preference over the Series C Preferred with respect to dividends or liquidation
payments;
(d) amend or waive any provision of the Amended Certificate or
Bylaws of the Corporation relative to the Series C Preferred;
(e) authorize or approve any liquidation or dissolution of the
Corporation;
(f) authorize or approve any merger or consolidation of the
Corporation; or
(g) authorize or approve any sale or transfer of all or
substantially all of the assets of the Corporation.
3.3 OTHER VOTING RIGHTS. Except as set forth herein and except where
voting rights are required by law, holders of Series C Preferred shall have no
voting rights and their consent shall not be required for taking any corporate
action.
3.4 NUMBER OF VOTES. Each share of Series C Preferred issued and
outstanding shall have that number of votes equal to the number of shares of
Common Stock into which each share of Series C Preferred is convertible which
shall be calculated in accordance with the formula set forth in Section 8
hereof, as of the record date set by the Board of Directors for the
determination of any holders of any class of securities entitled to vote on such
matter. Fractional shares shall not, however, be permitted, and any fractional
voting rights resulting from this formula (after aggregating all shares of
Common Stock into which shares of Series C Preferred held by each holder could
be converted) shall be rounded to the nearest whole number (with one-half being
rounded upward).
4. CERTAIN RESTRICTIONS. Whenever quarterly dividends or other dividends
or distributions payable on the Series C Preferred as provided in Section 3 are
in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series C Preferred
outstanding shall have been paid in full or set aside for payment, the
Corporation shall not:
(a) declare or pay dividends on, make any other distributions on,
or redeem or purchase or otherwise acquire for consideration any shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series C Preferred;
4
<PAGE>
(b) declare or pay dividends on, make any other distributions on
any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series C Preferred, except
dividends paid ratably on the Series C Preferred and all such parity stock on
which dividends are payable or in arrears in proportion to the total amounts to
which the holders of all such shares are then entitled;
(c) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series C Preferred, provided
that the Corporation may at any time redeem, purchase or otherwise acquire
shares of any such parity stock in exchange for shares of any stock of the
Corporation ranking junior (either as to dividends or upon dissolution,
liquidation or winding up) to the Series C Preferred;
(d) purchase or otherwise acquire for consideration any shares of
Series C Preferred, or any shares of stock ranking on a parity with the Series C
Preferred, except in accordance with a purchase offer made in writing or by
publication (as determined by the Board of Directors) to all holders of such
shares upon such terms as the Board of Directors, after consideration of the
respective annual dividend rates and other relative rights and preferences of
the respective series and classes, shall determine in good faith will result in
fair and equitable treatment among the respective series or classes.
5. ELECTION OF SERIES C PREFERRED DIRECTORS. Whenever quarterly dividends
or other dividends or distributions payable on the Series C Preferred as
provided in Section 3 shall have been in arrears for two or more quarters,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series C Preferred outstanding shall have been
paid in full or set aside for payment, and so long as no less than one hundred
thousand (100,000) shares of Series C Preferred are outstanding (appropriately
adjusted for any recapitalizations, stock splits, stock combinations, stock
dividends and the like), the holders of a majority of the outstanding shares of
Series C Preferred shall be entitled to elect two (2) directors to the
Corporation's Board of Directors. Whenever quarterly dividends or other
dividends or distributions payable on the Series C Preferred shall have been in
arrears for two or more quarters, the Corporation shall, as soon as practicable
thereafter, expand the Board of Directors by two members and hold an election at
which a majority of the holders of the Series C Preferred shall be entitled to
elect two (2) directors to the Corporation's Board of Directors.
5
<PAGE>
6. REACQUIRED SHARES. Any shares of Series C Preferred purchased or
otherwise acquired by the Corporation in any manner whatsoever shall be retired
and canceled promptly after the acquisition thereof. All such shares shall upon
their cancellation become authorized but unissued shares of the Corporation's
Preferred Stock and may be reissued as part of a new series of Preferred Stock
to be created by resolution or resolutions of the Board of Directors, subject to
the conditions and restrictions on issuance set forth herein.
7. CONVERSION
7.1 RIGHT TO CONVERT. The holders of the Series C Preferred shall
have the right, at their option, to convert any number of shares of Series C
Preferred into shares of Common Stock, in accordance with the procedures set
forth in this Section 8 and subject to the terms and conditions of this Section
8 at any time.
7.2 CONVERSION RATIO. Each share of Series C Preferred to be
converted shall be convertible at the office of the transfer agent of the
Corporation, as designated from time to time by the Corporation (the "Transfer
Agent"), and at such other office or offices, if any, as the Board of Directors
of the Corporation may designate, into the number of fully paid and
nonassessable shares of Common Stock determined by dividing the Original
Purchase Price (plus accrued but unpaid dividends) by $2.90 (the "Conversion
Price").
7.3 CONVERSION NOTICE. In order to convert shares of the Series C
Preferred, the holder thereof shall deliver to the Corporation's Transfer Agent
a notice of intention to convert such shares and dividends together with the
certificate or certificates for the Series C Preferred to be converted, duly
endorsed to the Corporation or in blank, or with stock power(s) attached. Shares
of the Series C Preferred shall be deemed to have been converted on the day on
which notice of intention to convert (including all required accompanying
materials as set forth above) was delivered to the Transfer Agent (the
"Conversion Date") and the person or persons entitled to receive the Common
Stock issuable upon such conversion shall be treated for all purposes, including
voting such Common Stock, as the record holder or holders of such Common Stock
at such time. As promptly as practicable on or after the Conversion Date, the
Corporation's Transfer Agent shall issue and deliver to the record holder or
holders of such Series C Preferred a certificate or certificates for the number
of shares of Common Stock issuable upon such conversion, together with cash in
lieu of any fraction of a share, as hereinafter provided, to the person or
persons entitled to receive the same.
7.4 ADJUSTMENTS TO CONVERSION PRICE. The Conversion Price shall
be subject to adjustment from time to time as follows:
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<PAGE>
(a) For purposes of this Section 8, the following definitions
shall apply:
(1) "Options" shall mean rights, options or warrants to
subscribe for, purchase or otherwise acquire either Common Stock, Preferred
Stock or Convertible Securities (defined below).
(2) "Convertible Securities" shall mean securities
convertible into or exchangeable for Common Stock.
(3) "Additional Shares of Common Stock" shall mean all
shares of Common Stock issued (or, pursuant to Section 8.4(c), deemed to be
issued) by the Corporation after the Original Issue Date other than shares of
Common Stock issued (or, pursuant to Section 8.4(c), deemed to be issued):
(i) in connection with the Series A Participating
Preferred Stock;
(ii) upon conversion of shares of the Series B
Preferred and Series C Preferred;
(iii) to officers, directors and employees of, and
consultants to, the Corporation pursuant to a written stock option plan whether
now existing or hereafter approved by the Corporation's Board of Directors;
(iv) pursuant to clause (f), (g) or (h) of this Section
8.4;
(v) upon the exercise of Options issued on or prior to
the Original Issue Date; or
(vi) by way of dividend or other distributions on
securities referred to in clauses (i), (ii), (iii), (iv) and (v) hereof.
(b) No adjustment in the Conversion Price shall be made in
respect of the issuance of Additional Shares of Common Stock unless the
consideration per share for an Additional Share of Common Stock issued or deemed
to be issued by the Corporation is less than the Conversion Price in effect on
the date of, and immediately prior to such issue, for such share of Series C
Preferred.
(c) Additional Shares of Common Stock shall be deemed to have
been issued under the following conditions:
7
<PAGE>
(1) Except as otherwise provided in Sections
8.4(a)(3)(i)-(vi) and 8.4(b), in the event the Corporation at any time or from
time to time after the Original Issue Date shall issue any Options or
Convertible Securities or shall fix a record date for the determination of any
holders of any class of securities entitled to receive any such Options or
Convertible Securities, then the maximum number of shares (as set forth in the
instrument relating thereto without regard to any provision contained therein
for a subsequent adjustment of such number) of Common Stock issuable upon the
exercise of such Options or, in the case of Convertible Securities and Options
therefor, the conversion or exchange of such Convertible Securities, shall be
deemed to be Additional Shares of Common Stock issued as of the time of such
issue or, in case such a record date shall have been fixed for any such
exchange, as of the close of business on such record date, provided that in any
such case in which Additional Shares of Common Stock are deemed to be issued:
(i) no further adjustment in the Conversion Price shall
be made upon the subsequent issue of Convertible Securities or shares of Common
Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(ii) if such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for any increase or
decrease in the consideration payable to the Corporation, or increase or
decrease in the number of shares of Common Stock issuable, upon the exercise,
conversion or exchange thereof, the Conversion Price computed upon the original
issue thereof (or upon the occurrence of a record date with respect thereto),
and any subsequent adjustments based thereon, shall, upon any such increase or
decrease becoming effective, be recomputed to reflect such increase or decrease
insofar as it affects such Options or the rights of conversion or exchange under
such Convertible Securities;
(iii) upon the expiration of any such Options or any
rights of conversion or exchange under such Convertible Securities which shall
not have been exercised, the Conversion Price computed upon the original issue
thereof (or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon such expiration, be recomputed
as if:
(A) in the case of Convertible Securities or
Options for Common Stock, the only Additional Shares of Common Stock issued were
shares of Common Stock, if any, actually issued upon the exercise of such
Options or the conversion or exchange of such Convertible Securities, and the
consideration received therefor was the consideration actually received by the
Corporation for the issue of all such Options, whether or not exercised, plus
the consideration actually received by the Corporation upon such exercise, or
for the issue of all such Convertible Securities which were actually converted
or exchanged, plus the additional consideration, if any, actually received by
the Corporation upon such conversion or exchange, and
8
<PAGE>
(B) in the case of Options for Convertible
Securities, only the Convertible Securities, if any, actually issued upon the
exercise thereof were issued at the time of issue of such Options and the
consideration by the Corporation for the Additional Shares of Common Stock
deemed to have been then issued was the consideration actually received by the
Corporation for the issue of all such Options, whether or not exercised, plus
the consideration received by the Corporation upon the issue of the Convertible
Securities with respect to which such Options were actually exercised;
(iv) no readjustment pursuant to clause (ii) or (iii)
above shall have the effect of increasing the Conversion Price to a price that
is greater than (a) the Conversion Price on the original adjustment date, or (b)
the Conversion Price that would have resulted from any issuance of Additional
Shares of Common Stock between the original adjustment date and such
readjustment date; and
(v) in the case of any Options which expire by their
terms not more than thirty (30) days after the date of issue thereof, no
adjustment of the Conversion Price shall be made until the expiration or
exercise of all such Options.
(d) In the event the Corporation shall issue Additional Shares of
Common Stock (including Additional Shares of Common Stock deemed to be issued
pursuant to Section 8.4(c) without consideration or for a consideration per
share less than an amount equal to the Conversion Price for a share of Series C
Preferred in effect on the date of, and immediately prior to such issue) then
and in such event, the Conversion Price shall be decreased, concurrently with
such issue, to a price determined by dividing (1) an amount equal to the sum of
(i) the total number of shares of Common Stock outstanding (including any
Additional Shares of Common Stock deemed to be outstanding) immediately prior to
such issuance multiplied by the Conversion Price in effect immediately prior to
such issuance, plus (ii) the consideration received by the Corporation upon such
issuance, by (2) the total number of shares of Common Stock outstanding
(including any Additional Shares of Common Stock deemed to be outstanding)
immediately after the issuance of such Common Stock.
(e) For purposes of this Section 8.4, the consideration received
by the Corporation for the issue of any Additional Shares of Common Stock shall
be computed as follows:
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(1) Such consideration shall:
(i) insofar as it consists of cash, be computed at the
aggregate amount of cash received by the Corporation prior to amounts paid or
payable for accrued interest or accrued dividends and prior to any commissions
or expenses paid by the Corporation;
(ii) insofar as it consists of property other than
cash, be computed at the fair value thereof at the time of such issue, as
determined in good faith by the Board of Directors; and
(iii) in the event Additional Shares of Common Stock
are issued together with other shares or securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (1) and (2) above, as
determined in good faith by the Board of Directors.
(2) The consideration per share received by the Corporation
for Additional Shares of Common Stock deemed to have been issued pursuant to
Section 8.4(c)(1), relating to Options and Convertible Securities, shall be
determined by dividing:
(i) the total amount, if any, received or receivable by
the Corporation as consideration for the issue of such Options or Convertible
Securities, plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such consideration) payable to
the Corporation upon the exercise of such Option or the conversion or exchange
of such Convertible Securities, or in the case of Options for Convertible
Securities, the exercise of such Options for Convertible Securities and the
conversion or exchange of such Convertible Securities by
(ii) the maximum number of shares of Common Stock (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such number) issuable upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities.
(f) In the event the outstanding shares of Common Stock shall be
subdivided by stock split, stock dividends or otherwise, into a greater number
of shares of Common Stock, the Conversion Price then in effect shall,
concurrently with the effectiveness of such subdivision, be proportionately
decreased. In the event the outstanding shares of Common Stock shall be combined
or consolidated, by reclassification or otherwise, into a lesser number of
shares of Common Stock, the Conversion Price then in effect shall, concurrently
with the effectiveness of such combination or consolidation, be proportionately
increased. (g) In the event that the Corporation from time to time makes or
fixes a record date for the determination of holders of Common Stock entitled to
receive any distribution (excluding any repurchases of securities by the
Corporation not made on a pro rata basis from all holders of any class of the
Corporation's securities) payable in property or in securities of the
Corporation other than shares of Common Stock, and other than as otherwise
adjusted in this Section 8 or as provided in Section 3, then and in each such
event the holders of Series C Preferred shall receive at the time of such
distribution, the amount of property or the number of securities of the
Corporation that they would have received had their Series C Preferred been
converted into Common Stock on the date of such event.
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(h) Except as provided in this Section 8, upon any liquidation,
dissolution or winding up of the Corporation, if the Common Stock issuable upon
conversion of the Series C Preferred shall be changed into the same or a
different number of shares of any other class or classes of stock, whether by
capital reorganization, reclassification or otherwise (other than a subdivision
or combination of shares provided for above), each share of Series C Preferred
and all accrued but unpaid dividends shall thereafter be convertible into the
number of shares of stock or other securities or property to which a holder of
the number of shares of Common Stock deliverable upon such conversion shall have
been entitled upon such reorganization or reclassification. In any such event,
effective provision shall be made, in the certificate or articles of
incorporation of the resulting or surviving corporation or otherwise, so that
the provisions set forth herein for the protection of the conversion rights of
the Series C Preferred shall thereafter be applicable to any such other shares
of stock, other securities, cash or property deliverable upon conversion of the
shares of the Series C Preferred remaining outstanding or other convertible
stock or securities received by the holders in place thereof, and any such
resulting or surviving corporation shall expressly assume the obligation to
deliver, upon the exercise of the conversion privilege, such shares, other
securities, cash or property as the holders of the Series C Preferred remaining
outstanding, or other convertible stock or securities received by the holders in
place thereof, shall be entitled to receive pursuant to the provisions hereof,
and to make provision for the protection of the conversion right as above
provided.
(i) The Corporation will not, by amendment of this Certificate of
Designation or its Amended Certificate or through any reorganization, transfer
of assets, consolidation, merger, dissolution, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms to be observed or performed hereunder by the Corporation but
will at all times in good faith assist in the carrying out of all the provisions
of this Section 8 and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the holders of the
Series C Preferred against impairment.
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(j) No adjustment in the number of shares of Common Stock into
which the shares of Series C Preferred are convertible shall be required unless
such adjustment would require an increase or decrease of at least 1/10th of a
share; provided, however, that any adjustment which by reason hereof is not
required to be made shall be carried forward and taken into account in any
subsequent adjustment.
7.5 NOTICE OF ADJUSTMENT. Whenever any adjustment is required to be
made as provided in Section 8.4, the Corporation shall promptly notify each
record holder of Series C Preferred thereof, describing in reasonable detail the
adjustment and method of calculation used.
7.6 RESERVATION OF SHARES. The Corporation shall at all times
reserve and keep available free from preemptive rights, out of its authorized
but unissued Common Stock, for the purpose of effecting the conversion of the
Series C Preferred, the full number of shares of Common Stock then deliverable
upon the conversion of all shares of Series C Preferred then outstanding.
7.7 FRACTIONAL SHARES. In the sole discretion of the Corporation,
instead of any fraction of a share which would otherwise be issuable upon
conversion of shares of the Series C Preferred or accrued dividends, or interest
thereon, the Corporation may pay a cash adjustment in respect of such fraction
in an amount equal to the same fraction of the Fair Market Value per share of
Common Stock at the close of business on the date of conversion.
7.8 ACCRUED BUT UNPAID DIVIDENDS. Upon the receipt of a Conversion
Notice, the Corporation may in its discretion, either pay to the holder of the
Series C Preferred submitting such Conversion Notice all accrued but unpaid
dividends on the Series C Preferred such holder has elected to convert through
the date of the Conversion Notice or convert the dollar amount of any accrued
but unpaid dividends on such shares of Series C Preferred Stock into Common
Stock at the Conversion Price.
8. LIQUIDATION, DISSOLUTION OR WINDING UP. Subject to the superior rights
of the holders of any class or series of Preferred Stock ranking superior to the
Series C Preferred with respect to any liquidation, dissolution or winding up of
the Corporation:
8.1 LIQUIDATION PREFERENCE. Upon any voluntary liquidation,
dissolution or winding up of the Corporation, no distribution shall be made to
the holders of shares of stock ranking junior (either as to payment of dividends
or with respect to distributions upon liquidation, dissolution or winding up) to
the Series C Preferred unless, prior thereto, the holders of Series C Preferred
shall have received an amount equal to the Original Purchase Price of the shares
of Series C Preferred purchased, plus an amount equal to accrued and unpaid
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dividends and distributions thereon, whether or not declared, to the date of
such payment (the "Series C Preferred Liquidation Preference"). Following the
payment of the full amount of the Series C Preferred Liquidation Preference, no
additional distributions shall be made to the holders of Series C Preferred.
8.2 PARTIAL DISTRIBUTION. In the event, however, that there are not
sufficient assets available to permit payment in full of the Series C Preferred
Liquidation Preference and the liquidation preferences of all other classes
and/or series of Preferred Stock, if any, which rank on a parity with the Series
C Preferred, then such remaining assets shall be distributed ratably to the
holders of such parity shares in proportion to their respective liquidation
preferences.
9. CONSOLIDATION, MERGER, ETC. In the event of any consolidation or
merger of the Corporation with or into another corporation, or of any sale or
conveyance to another corporation of all or substantially all the property of
the Corporation, in any of which transactions the holders of Common Stock
receive shares of stock, other securities, cash or property receivable upon such
consolidation, merger, sale or conveyance other than Common Stock, each holder
of Series C Preferred then outstanding and thereafter remaining outstanding
shall have the right to convert each share of Series C Preferred held by him
into the kind and amount of shares of stock, other securities, cash or property
receivable upon such consolidation, merger, sale or conveyance by a holder of
the number of shares of Common Stock into which such share of Series C Preferred
could have been converted immediately prior to the record date applicable to
such consolidation, merger, sale or conveyance, and shall have no other
conversion rights. In any such event, effective provision shall be made, in the
certificate of incorporation of the resulting or surviving corporation or
otherwise, so that the provisions set forth herein for the protection of the
conversion rights of the holders of the Series C Preferred shall thereafter be
applicable to any such other shares of stock, other securities, cash or property
deliverable upon conversion of the shares of the Series C Preferred remaining
outstanding or other convertible stock or securities received by the holders in
place thereof, and any such resulting or surviving corporation shall expressly
assume the obligation to deliver, upon the exercise of the conversion privilege,
such shares, other securities, cash or property as the holders of the Series C
Preferred remaining outstanding, or other convertible stock or securities
received by the holders in place thereof, shall be entitled to receive pursuant
to the provisions hereof, and to make provision for the protection of the
conversion rights as above provided.
10. REDEMPTION.
10.1 REDEMPTION RIGHT. Unless previously converted, all or any
portion of the Series C Preferred together with all dividends accrued but unpaid
on such Series C Preferred computed to the Redemption Date (as defined below)
may be redeemed on a pro rata basis by the Corporation at its election from the
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holders of such Series C Preferred at any time and from time to time; provided,
however, that the Company may not redeem the Series C Preferred unless the
average of the closing asked prices per share of Common Stock have equaled or
exceeded 150% or more of the Conversion Price of the Series C Preferred for any
twenty (20) consecutive trading days ending within five (5) days immediately
prior to the date on which a Redemption Notice (as defined below) is given by
the Company. Notwithstanding the foregoing, the holders of the Series C
Preferred will have the right to convert the Series C Preferred to Common Stock
for a period of thirty (30) days following notice of redemption.
10.2 REDEMPTION NOTICE. Before redeeming the Series C Preferred as
provided in Section 11.1, the Corporation shall mail by certified or registered
mail to each record holder thereof at least thirty (30) days prior to the
Redemption Date (as defined below), at the address shown on the Corporation's
records, a written notice (a "Redemption Notice") stating:
(a) the number of shares of Series C Preferred held by such
holder which the Corporation proposes to redeem, including the amount of any
accrued but unpaid dividends;
(b) the price at which such shares may be redeemed, which shall
be an amount equal to the Series C Preferred Liquidation Preference computed to
the Redemption Date (the "Redemption Price");
(c) the date on which the Corporation will pay the Redemption
Price (the "Redemption Date"); and
(d) the place at which the shares of Series C Preferred to be
redeemed must be surrendered in exchange for the Redemption Price.
Each holder of shares of the Series C Preferred to whom an Redemption Notice is
mailed shall be entitled to receive in cash on the Redemption Date the full
Redemption Price for each share of Series C Preferred to be redeemed upon
surrender by such holder at the place designated in such Redemption Notice of
the certificate representing such Series C Preferred duly endorsed in blank or
accompanied by an appropriate form of assignment duly endorsed in blank with
signature guaranteed. In case less than the total number of securities
represented by any certificate are redeemed on the Redemption Rate, a new
certificate representing the number of unredeemed securities will be issued to
the holder thereof without cost to the holder immediately upon surrender of the
certificate representing the redeemed securities. If the Corporation fails to
pay the Redemption Price on the Redemption Date for any reason other than the
failure of a holder to surrender his Series C Preferred certificate as required,
then the Redemption Date shall be the date on which the Corporation actually
pays the Redemption Price. All rights arising hereunder, other than the right to
receive the Redemption Price, shall terminate on the Redemption Date.
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10.3 If the Corporation shall pay less than the aggregate redemption
price due on such date for all shares of all series of Preferred Stock being
redeemed having the same priority on liquidation as the Series C Preferred, then
shares shall be redeemed from, and payment shall be distributed among, the
holders of the shares of all such series on the same pro rata basis that such
holders would share in payments of the aggregate redemption price due on such
date for all shares of Preferred Stock being redeemed.
11. OTHER NOTICES. If at any time:
(a) The Corporation shall declare any dividend on the Common
Stock payable in shares of capital stock of the Corporation, cash or other
property; or
(b) The Corporation shall authorize the issue of any options,
warrants or rights pro rata to all holders of Common Stock entitling them to
subscribe for or purchase any shares of stock of the Corporation or to receive
any other rights; or
(c) The Corporation shall authorize the distribution pro rata to
all holders of Common Stock of a cash dividend payable otherwise than out of
earnings of surplus legally available therefor under the laws of the State of
Delaware, shares of its capital stock (other than Common Stock), stock or other
securities of other persons, evidences of indebtedness issued by the Corporation
or other persons, assets (excluding cash dividends) or options or rights
(excluding options to purchase and rights to subscribe for Common Stock or other
securities of the Corporation convertible into or exchangeable for Common
Stock); or
(d) There shall occur any reclassification of the Common Stock,
or any consolidation or merger of the Corporation with or into another
Corporation or a sale, conveyance or other disposition to another entity of all
or substantially all of the properties of the Corporation; or
(e) There shall occur the voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation;
then, and in each of such cases, the Corporation shall deliver to each holder of
Series C Preferred at its last address appearing on the books of the Corporation
as promptly as practicable but in any event at least twenty (20) days prior to
the applicable record date (or determination date) mentioned below, a notice
stating, to the extent such information is available, (i) the date on which a
record is to be taken for the purpose of such dividend, distribution or rights,
or, if a record is not to be taken, the date as of which the holders of Common
Stock of record to be entitled to such dividend, distribution or rights are to
be determined, or (ii) the date on which such reclassification, consolidation,
merger, sale, transfer, liquidation, dissolution or winding up is expected to
become effective and the date as of which it is expected that holders of Common
Stock of record shall be entitled to exchange their Common Stock for securities
or other property deliverable upon such reclassification, consolidation, merger,
sale, transfer, liquidation, dissolution or winding up."
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IN WITNESS WHEREOF, we have executed and subscribed this Certificate and do
affirm the foregoing as true under the penalties of perjury this 15th day of
December, 1995.
/s/ James R. Evans
---------------------------------------
JAMES R. EVANS, President
ATTEST:
/s/ Ronald J. O'Connor
- ---------------------------------------
RONALD J. O'CONNOR, Assistant Secretary
16
EXHIBIT 3.5(c)
AMENDED
CERTIFICATE OF DESIGNATION OF RIGHTS, PREFERENCES
AND PRIVILEGES OF
SERIES C PREFERRED STOCK
OF
SUNRISE PRESCHOOLS, INC.
Pursuant to Section 151 of the General Corporation Law of the State of
Delaware:
We, James R. Evans, the President, and Ronald J. O'Connor, the Assistant
Secretary, respectively, of Sunrise Preschools, Inc., a corporation organized
and existing under the General Corporation Law of the State of Delaware (the
"Corporation"), in accordance with the provisions of Section 103 thereof, DO
HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors
by the Restated Certificate of Incorporation of the Corporation, as
amended, the said Board of Directors on October 13, 1995 designated a
series of shares of Preferred Stock as Series C Preferred Stock;
That the Certificate of Designation of Rights, Preferences and
Privileges of Series C Preferred Stock (the "Original Certificate") was
filed with the Delaware Secretary of State on November 8, 1995;
That the Board of Directors at a meeting on December 15, 1995 approved
a reduction in the conversion rate of the Series C Preferred Stock and the
said Board of Directors adopted an Amended Certificate of Designation of
Rights, Preferences and Privileges of Series C Preferred Stock (the "First
Amended Certificate"), which amended the Original Certificate in its
entirety, without changing original the designation of the Series C
Preferred Stock;
That the First Amended Certificate was filed with the Delaware
Secretary of State on December 15, 1995;
That as of the date hereof, the Corporation has issued no shares of
the Series C Preferred Stock;
That pursuant to the authority conferred upon the Board of Directors
by the Restated Certificate of Incorporation of the Corporation, as
amended, and pursuant to the provisions of Section 151 of the General
Corporation Law, the said Board of Directors on December 19, 1995 adopted
the following resolutions and authorized the filing in Delaware of this
<PAGE>
Amended Certificate (the "Second Amended Certificate"), which amends and
restates the First Amended Certificate in its entirety to further reduce
the conversion rate, without changing the original designation of the
Series C Preferred Stock:
"RESOLVED, that pursuant to the authority vested in the Board of
Directors of the Corporation by the Restated Certificate of Incorporation,
as amended (the "Amended Certificate"), the Board of Directors does hereby
provide for the issuance of a series of Preferred Stock, $1.00 par value,
of the Corporation, to be designated "Series C Preferred Stock", consisting
of 421,666 shares and, to the extent that the designations, powers,
preferences and relative and other special rights and the qualifications,
limitations and restrictions of the Series C Preferred Stock are not stated
and expressed in the Amended Certificate, does hereby fix and herein state
and express such designations, powers, preferences and relative and other
special rights and the qualifications, limitations and restrictions
thereof, as follows:
DESIGNATION AND AMOUNT. The shares of such series shall be designated
as "Series C Preferred Stock", par value $1.00 per share (hereinafter referred
to as the "Series C Preferred"), and the number of shares constituting such
series shall be 421,666.
1. RANKING. The Series C Preferred shall rank junior in dividend rights
and liquidation preference to the Corporation's Series B Preferred Stock (the
"Series B Preferred"), but senior to all other series of preferred stock
("Preferred Stock") or common stock ("Common Stock") of the Corporation.
2. DIVIDENDS. Subject to the superior rights of the holders of any class
or series of Preferred Stock ranking superior to the Series C Preferred with
respect to dividends and distributions:
2.1 DIVIDEND AMOUNT. The holders of the Series C Preferred shall be
entitled to receive, out of any assets of the Corporation legally available
therefor, cumulative dividends at a rate of 9% per annum (the "Dividend Rate")
on the total dollar amount of the consideration paid (the "Original Purchase
Price") to the Corporation for each share of Series C Preferred (the "Dividend
Amount"). Such dividends shall be payable quarterly on the Quarterly Dividend
Payment Date (as hereinafter defined), commencing on the first Quarterly
Dividend Payment Date after the first issuance of a share of Series C Preferred.
Dividends on each share of Series C Preferred shall accrue and be cumulative
from the date of issuance thereof to the Redemption Date (as hereinafter
defined) or the Conversion Date (as hereinafter defined) of each such share, as
applicable and whichever first occurs, whether or not there shall be profits,
surplus or other funds of the Corporation legally available for the payment of
such dividends at the time such dividends shall accrue or become due and whether
or not such dividends are declared.
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2.2 QUARTERLY DIVIDEND PAYMENT DATE. Dividends shall be payable on
each share of Series C Preferred on the last day of each September, December,
March and June of each year (the "Quarterly Dividend Payment Date") to the
holder of record on the date thirty (30) days prior to such Quarterly Dividend
Payment Date.
2.3 METHOD OF PAYMENT. During the first year following the first
issuance of a share of Series C Preferred (the "Original Issue Date"), dividends
on the Series C Preferred shall be paid in cash. Following the first anniversary
of the Original Issue Date, the Corporation shall have the option of paying all
future dividends either in cash or in shares of Common Stock of the Corporation
having a "Fair Market Value" equal to the Dividend Amount. "Fair Market Value"
shall mean the average closing bid prices of the Common Stock of the Corporation
as reported in the Wall Street Journal for the ten (10) trading days ending five
(5) trading days prior to the Quarterly Dividend Payment Date (or, if not so
reported, as otherwise reported by the National Association of Securities
Dealers Automated Quotation System or other principal market for the Common
Stock) or, in the event the Common Stock is listed on a stock exchange, the Fair
Market Value shall be the average of the closing prices of the Common Stock of
the Corporation on such exchange as reported in the Wall Street Journal for the
ten (10) trading days ending five (5) trading days prior to the Quarterly
Dividend Payment Date.
3. VOTING RIGHTS. The holders of Series C Preferred shall have the
following voting rights:
3.1 ONE CLASS VOTING. Except as otherwise provided herein or
required by law, the holders of shares of Series C Preferred, of Common Stock
and Series B Preferred shall vote together as one class on all matters submitted
to a vote of stockholders of the Corporation.
3.2 SEPARATE CLASS VOTING. The Corporation shall not, without first
obtaining the affirmative vote or written consent of the holders of not less
than a majority of the outstanding shares of the Series C Preferred voting as a
separate class:
(a) alter or change any rights, privileges or preferences of the
Series C Preferred;
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(b) increase or decrease the authorized number of shares of
Series C Preferred;
(c) authorize, issue or create (by reclassification or otherwise)
shares of any class or series of stock equal in priority to or having any
preference over the Series C Preferred with respect to dividends or liquidation
payments;
(d) amend or waive any provision of the Amended Certificate or
Bylaws of the Corporation relative to the Series C Preferred;
(e) authorize or approve any liquidation or dissolution of the
Corporation;
(f) authorize or approve any merger or consolidation of the
Corporation; or
(g) authorize or approve any sale or transfer of all or
substantially all of the assets of the Corporation.
3.3 OTHER VOTING RIGHTS. Except as set forth herein and except where
voting rights are required by law, holders of Series C Preferred shall have no
voting rights and their consent shall not be required for taking any corporate
action.
3.4 NUMBER OF VOTES. Each share of Series C Preferred issued and
outstanding shall have that number of votes equal to the number of shares of
Common Stock into which each share of Series C Preferred is convertible which
shall be calculated in accordance with the formula set forth in Section 8
hereof, as of the record date set by the Board of Directors for the
determination of any holders of any class of securities entitled to vote on such
matter. Fractional shares shall not, however, be permitted, and any fractional
voting rights resulting from this formula (after aggregating all shares of
Common Stock into which shares of Series C Preferred held by each holder could
be converted) shall be rounded to the nearest whole number (with one-half being
rounded upward).
4. CERTAIN RESTRICTIONS. Whenever quarterly dividends or other dividends
or distributions payable on the Series C Preferred as provided in Section 3 are
in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series C Preferred
outstanding shall have been paid in full or set aside for payment, the
Corporation shall not:
(a) declare or pay dividends on, make any other distributions on,
or redeem or purchase or otherwise acquire for consideration any shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series C Preferred;
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(b) declare or pay dividends on, make any other distributions on
any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series C Preferred, except
dividends paid ratably on the Series C Preferred and all such parity stock on
which dividends are payable or in arrears in proportion to the total amounts to
which the holders of all such shares are then entitled;
(c) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series C Preferred, provided
that the Corporation may at any time redeem, purchase or otherwise acquire
shares of any such parity stock in exchange for shares of any stock of the
Corporation ranking junior (either as to dividends or upon dissolution,
liquidation or winding up) to the Series C Preferred;
(d) purchase or otherwise acquire for consideration any shares of
Series C Preferred, or any shares of stock ranking on a parity with the Series C
Preferred, except in accordance with a purchase offer made in writing or by
publication (as determined by the Board of Directors) to all holders of such
shares upon such terms as the Board of Directors, after consideration of the
respective annual dividend rates and other relative rights and preferences of
the respective series and classes, shall determine in good faith will result in
fair and equitable treatment among the respective series or classes.
5. ELECTION OF SERIES C PREFERRED DIRECTORS. Whenever quarterly dividends
or other dividends or distributions payable on the Series C Preferred as
provided in Section 3 shall have been in arrears for two or more quarters,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series C Preferred outstanding shall have been
paid in full or set aside for payment, and so long as no less than one hundred
thousand (100,000) shares of Series C Preferred are outstanding (appropriately
adjusted for any recapitalizations, stock splits, stock combinations, stock
dividends and the like), the holders of a majority of the outstanding shares of
Series C Preferred shall be entitled to elect two (2) directors to the
Corporation's Board of Directors. Whenever quarterly dividends or other
dividends or distributions payable on the Series C Preferred shall have been in
arrears for two or more quarters, the Corporation shall, as soon as practicable
thereafter, expand the Board of Directors by two members and hold an election at
which a majority of the holders of the Series C Preferred shall be entitled to
elect two (2) directors to the Corporation's Board of Directors.
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<PAGE>
6. REACQUIRED SHARES. Any shares of Series C Preferred purchased or
otherwise acquired by the Corporation in any manner whatsoever shall be retired
and canceled promptly after the acquisition thereof. All such shares shall upon
their cancellation become authorized but unissued shares of the Corporation's
Preferred Stock and may be reissued as part of a new series of Preferred Stock
to be created by resolution or resolutions of the Board of Directors, subject to
the conditions and restrictions on issuance set forth herein.
7. CONVERSION
7.1 RIGHT TO CONVERT. The holders of the Series C Preferred shall
have the right, at their option, to convert any number of shares of Series C
Preferred into shares of Common Stock, in accordance with the procedures set
forth in this Section 8 and subject to the terms and conditions of this Section
8 at any time.
7.2 CONVERSION RATIO. Each share of Series C Preferred to be
converted shall be convertible at the office of the transfer agent of the
Corporation, as designated from time to time by the Corporation (the "Transfer
Agent"), and at such other office or offices, if any, as the Board of Directors
of the Corporation may designate, into the number of fully paid and
nonassessable shares of Common Stock determined by dividing the Original
Purchase Price (plus accrued but unpaid dividends) by $2.125 (the "Conversion
Price").
7.3 CONVERSION NOTICE. In order to convert shares of the Series C
Preferred, the holder thereof shall deliver to the Corporation's Transfer Agent
a notice of intention to convert such shares and dividends together with the
certificate or certificates for the Series C Preferred to be converted, duly
endorsed to the Corporation or in blank, or with stock power(s) attached. Shares
of the Series C Preferred shall be deemed to have been converted on the day on
which notice of intention to convert (including all required accompanying
materials as set forth above) was delivered to the Transfer Agent (the
"Conversion Date") and the person or persons entitled to receive the Common
Stock issuable upon such conversion shall be treated for all purposes, including
voting such Common Stock, as the record holder or holders of such Common Stock
at such time. As promptly as practicable on or after the Conversion Date, the
Corporation's Transfer Agent shall issue and deliver to the record holder or
holders of such Series C Preferred a certificate or certificates for the number
of shares of Common Stock issuable upon such conversion, together with cash in
lieu of any fraction of a share, as hereinafter provided, to the person or
persons entitled to receive the same.
7.4 ADJUSTMENTS TO CONVERSION PRICE. The Conversion Price shall
be subject to adjustment from time to time as follows:
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(a) For purposes of this Section 8, the following definitions
shall apply:
(1) "Options" shall mean rights, options or warrants to
subscribe for, purchase or otherwise acquire either Common Stock, Preferred
Stock or Convertible Securities (defined below).
(2) "Convertible Securities" shall mean securities
convertible into or exchangeable for Common Stock.
(3) "Additional Shares of Common Stock" shall mean all
shares of Common Stock issued (or, pursuant to Section 8.4(c), deemed to be
issued) by the Corporation after the Original Issue Date other than shares of
Common Stock issued (or, pursuant to Section 8.4(c), deemed to be issued):
(i) in connection with the Series A Participating
Preferred Stock;
(ii) upon conversion of shares of the Series B
Preferred and Series C Preferred;
(iii) to officers, directors and employees of, and
consultants to, the Corporation pursuant to a written stock option plan whether
now existing or hereafter approved by the Corporation's Board of Directors;
(iv) pursuant to clause (f), (g) or (h) of this Section
8.4;
(v) upon the exercise of Options issued on or prior to
the Original Issue Date; or
(vi) by way of dividend or other distributions on
securities referred to in clauses (i), (ii), (iii), (iv) and (v) hereof.
(b) No adjustment in the Conversion Price shall be made in
respect of the issuance of Additional Shares of Common Stock unless the
consideration per share for an Additional Share of Common Stock issued or deemed
to be issued by the Corporation is less than the Conversion Price in effect on
the date of, and immediately prior to such issue, for such share of Series C
Preferred.
(c) Additional Shares of Common Stock shall be deemed to have
been issued under the following conditions:
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(1) Except as otherwise provided in Sections
8.4(a)(3)(i)-(vi) and 8.4(b), in the event the Corporation at any time or from
time to time after the Original Issue Date shall issue any Options or
Convertible Securities or shall fix a record date for the determination of any
holders of any class of securities entitled to receive any such Options or
Convertible Securities, then the maximum number of shares (as set forth in the
instrument relating thereto without regard to any provision contained therein
for a subsequent adjustment of such number) of Common Stock issuable upon the
exercise of such Options or, in the case of Convertible Securities and Options
therefor, the conversion or exchange of such Convertible Securities, shall be
deemed to be Additional Shares of Common Stock issued as of the time of such
issue or, in case such a record date shall have been fixed for any such
exchange, as of the close of business on such record date, provided that in any
such case in which Additional Shares of Common Stock are deemed to be issued:
(i) no further adjustment in the Conversion Price shall
be made upon the subsequent issue of Convertible Securities or shares of Common
Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(ii) if such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for any increase or
decrease in the consideration payable to the Corporation, or increase or
decrease in the number of shares of Common Stock issuable, upon the exercise,
conversion or exchange thereof, the Conversion Price computed upon the original
issue thereof (or upon the occurrence of a record date with respect thereto),
and any subsequent adjustments based thereon, shall, upon any such increase or
decrease becoming effective, be recomputed to reflect such increase or decrease
insofar as it affects such Options or the rights of conversion or exchange under
such Convertible Securities;
(iii) upon the expiration of any such Options or any
rights of conversion or exchange under such Convertible Securities which shall
not have been exercised, the Conversion Price computed upon the original issue
thereof (or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon such expiration, be recomputed
as if:
(A) in the case of Convertible Securities or
Options for Common Stock, the only Additional Shares of Common Stock issued were
shares of Common Stock, if any, actually issued upon the exercise of such
Options or the conversion or exchange of such Convertible Securities, and the
consideration received therefor was the consideration actually received by the
Corporation for the issue of all such Options, whether or not exercised, plus
the consideration actually received by the Corporation upon such exercise, or
for the issue of all such Convertible Securities which were actually converted
or exchanged, plus the additional consideration, if any, actually received by
the Corporation upon such conversion or exchange, and
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(B) in the case of Options for Convertible
Securities, only the Convertible Securities, if any, actually issued upon the
exercise thereof were issued at the time of issue of such Options and the
consideration by the Corporation for the Additional Shares of Common Stock
deemed to have been then issued was the consideration actually received by the
Corporation for the issue of all such Options, whether or not exercised, plus
the consideration received by the Corporation upon the issue of the Convertible
Securities with respect to which such Options were actually exercised;
(iv) no readjustment pursuant to clause (ii) or (iii)
above shall have the effect of increasing the Conversion Price to a price that
is greater than (a) the Conversion Price on the original adjustment date, or (b)
the Conversion Price that would have resulted from any issuance of Additional
Shares of Common Stock between the original adjustment date and such
readjustment date; and
(v) in the case of any Options which expire by their
terms not more than thirty (30) days after the date of issue thereof, no
adjustment of the Conversion Price shall be made until the expiration or
exercise of all such Options.
(d) In the event the Corporation shall issue Additional Shares of
Common Stock (including Additional Shares of Common Stock deemed to be issued
pursuant to Section 8.4(c) without consideration or for a consideration per
share less than an amount equal to the Conversion Price for a share of Series C
Preferred in effect on the date of, and immediately prior to such issue) then
and in such event, the Conversion Price shall be decreased, concurrently with
such issue, to a price determined by dividing (1) an amount equal to the sum of
(i) the total number of shares of Common Stock outstanding (including any
Additional Shares of Common Stock deemed to be outstanding) immediately prior to
such issuance multiplied by the Conversion Price in effect immediately prior to
such issuance, plus (ii) the consideration received by the Corporation upon such
issuance, by (2) the total number of shares of Common Stock outstanding
(including any Additional Shares of Common Stock deemed to be outstanding)
immediately after the issuance of such Common Stock.
(e) For purposes of this Section 8.4, the consideration received
by the Corporation for the issue of any Additional Shares of Common Stock shall
be computed as follows:
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(1) Such consideration shall:
(i) insofar as it consists of cash, be computed at the
aggregate amount of cash received by the Corporation prior to amounts paid or
payable for accrued interest or accrued dividends and prior to any commissions
or expenses paid by the Corporation;
(ii) insofar as it consists of property other than
cash, be computed at the fair value thereof at the time of such issue, as
determined in good faith by the Board of Directors; and
(iii) in the event Additional Shares of Common Stock
are issued together with other shares or securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (1) and (2) above, as
determined in good faith by the Board of Directors.
(2) The consideration per share received by the Corporation
for Additional Shares of Common Stock deemed to have been issued pursuant to
Section 8.4(c)(1), relating to Options and Convertible Securities, shall be
determined by dividing:
(i) the total amount, if any, received or receivable by
the Corporation as consideration for the issue of such Options or Convertible
Securities, plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such consideration) payable to
the Corporation upon the exercise of such Option or the conversion or exchange
of such Convertible Securities, or in the case of Options for Convertible
Securities, the exercise of such Options for Convertible Securities and the
conversion or exchange of such Convertible Securities by
(ii) the maximum number of shares of Common Stock (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such number) issuable upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities.
(f) In the event the outstanding shares of Common Stock shall be
subdivided by stock split, stock dividends or otherwise, into a greater number
of shares of Common Stock, the Conversion Price then in effect shall,
concurrently with the effectiveness of such subdivision, be proportionately
decreased. In the event the outstanding shares of Common Stock shall be combined
or consolidated, by reclassification or otherwise, into a lesser number of
shares of Common Stock, the Conversion Price then in effect shall, concurrently
with the effectiveness of such combination or consolidation, be proportionately
increased. (g) In the event that the Corporation from time to time makes or
fixes a record date for the determination of holders of Common Stock entitled to
receive any distribution (excluding any repurchases of securities by the
Corporation not made on a pro rata basis from all holders of any class of the
Corporation's securities) payable in property or in securities of the
Corporation other than shares of Common Stock, and other than as otherwise
adjusted in this Section 8 or as provided in Section 3, then and in each such
event the holders of Series C Preferred shall receive at the time of such
distribution, the amount of property or the number of securities of the
Corporation that they would have received had their Series C Preferred been
converted into Common Stock on the date of such event.
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(h) Except as provided in this Section 8, upon any liquidation,
dissolution or winding up of the Corporation, if the Common Stock issuable upon
conversion of the Series C Preferred shall be changed into the same or a
different number of shares of any other class or classes of stock, whether by
capital reorganization, reclassification or otherwise (other than a subdivision
or combination of shares provided for above), each share of Series C Preferred
and all accrued but unpaid dividends shall thereafter be convertible into the
number of shares of stock or other securities or property to which a holder of
the number of shares of Common Stock deliverable upon such conversion shall have
been entitled upon such reorganization or reclassification. In any such event,
effective provision shall be made, in the certificate or articles of
incorporation of the resulting or surviving corporation or otherwise, so that
the provisions set forth herein for the protection of the conversion rights of
the Series C Preferred shall thereafter be applicable to any such other shares
of stock, other securities, cash or property deliverable upon conversion of the
shares of the Series C Preferred remaining outstanding or other convertible
stock or securities received by the holders in place thereof, and any such
resulting or surviving corporation shall expressly assume the obligation to
deliver, upon the exercise of the conversion privilege, such shares, other
securities, cash or property as the holders of the Series C Preferred remaining
outstanding, or other convertible stock or securities received by the holders in
place thereof, shall be entitled to receive pursuant to the provisions hereof,
and to make provision for the protection of the conversion right as above
provided.
(i) The Corporation will not, by amendment of this Certificate of
Designation or its Amended Certificate or through any reorganization, transfer
of assets, consolidation, merger, dissolution, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms to be observed or performed hereunder by the Corporation but
will at all times in good faith assist in the carrying out of all the provisions
of this Section 8 and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the holders of the
Series C Preferred against impairment.
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(j) No adjustment in the number of shares of Common Stock into
which the shares of Series C Preferred are convertible shall be required unless
such adjustment would require an increase or decrease of at least 1/10th of a
share; provided, however, that any adjustment which by reason hereof is not
required to be made shall be carried forward and taken into account in any
subsequent adjustment.
7.5 NOTICE OF ADJUSTMENT. Whenever any adjustment is required to be
made as provided in Section 8.4, the Corporation shall promptly notify each
record holder of Series C Preferred thereof, describing in reasonable detail the
adjustment and method of calculation used.
7.6 RESERVATION OF SHARES. The Corporation shall at all times
reserve and keep available free from preemptive rights, out of its authorized
but unissued Common Stock, for the purpose of effecting the conversion of the
Series C Preferred, the full number of shares of Common Stock then deliverable
upon the conversion of all shares of Series C Preferred then outstanding.
7.7 FRACTIONAL SHARES. In the sole discretion of the Corporation,
instead of any fraction of a share which would otherwise be issuable upon
conversion of shares of the Series C Preferred or accrued dividends, or interest
thereon, the Corporation may pay a cash adjustment in respect of such fraction
in an amount equal to the same fraction of the Fair Market Value per share of
Common Stock at the close of business on the date of conversion.
7.8 ACCRUED BUT UNPAID DIVIDENDS. Upon the receipt of a Conversion
Notice, the Corporation may in its discretion, either pay to the holder of the
Series C Preferred submitting such Conversion Notice all accrued but unpaid
dividends on the Series C Preferred such holder has elected to convert through
the date of the Conversion Notice or convert the dollar amount of any accrued
but unpaid dividends on such shares of Series C Preferred Stock into Common
Stock at the Conversion Price.
8. LIQUIDATION, DISSOLUTION OR WINDING UP. Subject to the superior rights
of the holders of any class or series of Preferred Stock ranking superior to the
Series C Preferred with respect to any liquidation, dissolution or winding up of
the Corporation:
8.1 LIQUIDATION PREFERENCE. Upon any voluntary liquidation,
dissolution or winding up of the Corporation, no distribution shall be made to
the holders of shares of stock ranking junior (either as to payment of dividends
or with respect to distributions upon liquidation, dissolution or winding up) to
the Series C Preferred unless, prior thereto, the holders of Series C Preferred
shall have received an amount equal to the Original Purchase Price of the shares
of Series C Preferred purchased, plus an amount equal to accrued and unpaid
12
<PAGE>
dividends and distributions thereon, whether or not declared, to the date of
such payment (the "Series C Preferred Liquidation Preference"). Following the
payment of the full amount of the Series C Preferred Liquidation Preference, no
additional distributions shall be made to the holders of Series C Preferred.
8.2 PARTIAL DISTRIBUTION. In the event, however, that there are not
sufficient assets available to permit payment in full of the Series C Preferred
Liquidation Preference and the liquidation preferences of all other classes
and/or series of Preferred Stock, if any, which rank on a parity with the Series
C Preferred, then such remaining assets shall be distributed ratably to the
holders of such parity shares in proportion to their respective liquidation
preferences.
9. CONSOLIDATION, MERGER, ETC. In the event of any consolidation or
merger of the Corporation with or into another corporation, or of any sale or
conveyance to another corporation of all or substantially all the property of
the Corporation, in any of which transactions the holders of Common Stock
receive shares of stock, other securities, cash or property receivable upon such
consolidation, merger, sale or conveyance other than Common Stock, each holder
of Series C Preferred then outstanding and thereafter remaining outstanding
shall have the right to convert each share of Series C Preferred held by him
into the kind and amount of shares of stock, other securities, cash or property
receivable upon such consolidation, merger, sale or conveyance by a holder of
the number of shares of Common Stock into which such share of Series C Preferred
could have been converted immediately prior to the record date applicable to
such consolidation, merger, sale or conveyance, and shall have no other
conversion rights. In any such event, effective provision shall be made, in the
certificate of incorporation of the resulting or surviving corporation or
otherwise, so that the provisions set forth herein for the protection of the
conversion rights of the holders of the Series C Preferred shall thereafter be
applicable to any such other shares of stock, other securities, cash or property
deliverable upon conversion of the shares of the Series C Preferred remaining
outstanding or other convertible stock or securities received by the holders in
place thereof, and any such resulting or surviving corporation shall expressly
assume the obligation to deliver, upon the exercise of the conversion privilege,
such shares, other securities, cash or property as the holders of the Series C
Preferred remaining outstanding, or other convertible stock or securities
received by the holders in place thereof, shall be entitled to receive pursuant
to the provisions hereof, and to make provision for the protection of the
conversion rights as above provided.
10. REDEMPTION.
10.1 REDEMPTION RIGHT. Unless previously converted, all or any
portion of the Series C Preferred together with all dividends accrued but unpaid
on such Series C Preferred computed to the Redemption Date (as defined below)
may be redeemed on a pro rata basis by the Corporation at its election from the
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<PAGE>
holders of such Series C Preferred at any time and from time to time; provided,
however, that the Company may not redeem the Series C Preferred unless the
average of the closing asked prices per share of Common Stock have equaled or
exceeded 150% or more of the Conversion Price of the Series C Preferred for any
twenty (20) consecutive trading days ending within five (5) days immediately
prior to the date on which a Redemption Notice (as defined below) is given by
the Company. Notwithstanding the foregoing, the holders of the Series C
Preferred will have the right to convert the Series C Preferred to Common Stock
for a period of thirty (30) days following notice of redemption.
10.2 REDEMPTION NOTICE. Before redeeming the Series C Preferred as
provided in Section 11.1, the Corporation shall mail by certified or registered
mail to each record holder thereof at least thirty (30) days prior to the
Redemption Date (as defined below), at the address shown on the Corporation's
records, a written notice (a "Redemption Notice") stating:
(a) the number of shares of Series C Preferred held by such
holder which the Corporation proposes to redeem, including the amount of any
accrued but unpaid dividends;
(b) the price at which such shares may be redeemed, which shall
be an amount equal to the Series C Preferred Liquidation Preference computed to
the Redemption Date (the "Redemption Price");
(c) the date on which the Corporation will pay the Redemption
Price (the "Redemption Date"); and
(d) the place at which the shares of Series C Preferred to be
redeemed must be surrendered in exchange for the Redemption Price.
Each holder of shares of the Series C Preferred to whom an Redemption Notice is
mailed shall be entitled to receive in cash on the Redemption Date the full
Redemption Price for each share of Series C Preferred to be redeemed upon
surrender by such holder at the place designated in such Redemption Notice of
the certificate representing such Series C Preferred duly endorsed in blank or
accompanied by an appropriate form of assignment duly endorsed in blank with
signature guaranteed. In case less than the total number of securities
represented by any certificate are redeemed on the Redemption Rate, a new
certificate representing the number of unredeemed securities will be issued to
the holder thereof without cost to the holder immediately upon surrender of the
certificate representing the redeemed securities. If the Corporation fails to
pay the Redemption Price on the Redemption Date for any reason other than the
failure of a holder to surrender his Series C Preferred certificate as required,
then the Redemption Date shall be the date on which the Corporation actually
pays the Redemption Price. All rights arising hereunder, other than the right to
receive the Redemption Price, shall terminate on the Redemption Date.
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<PAGE>
10.3 If the Corporation shall pay less than the aggregate redemption
price due on such date for all shares of all series of Preferred Stock being
redeemed having the same priority on liquidation as the Series C Preferred, then
shares shall be redeemed from, and payment shall be distributed among, the
holders of the shares of all such series on the same pro rata basis that such
holders would share in payments of the aggregate redemption price due on such
date for all shares of Preferred Stock being redeemed.
11. OTHER NOTICES. If at any time:
(a) The Corporation shall declare any dividend on the Common
Stock payable in shares of capital stock of the Corporation, cash or other
property; or
(b) The Corporation shall authorize the issue of any options,
warrants or rights pro rata to all holders of Common Stock entitling them to
subscribe for or purchase any shares of stock of the Corporation or to receive
any other rights; or
(c) The Corporation shall authorize the distribution pro rata to
all holders of Common Stock of a cash dividend payable otherwise than out of
earnings of surplus legally available therefor under the laws of the State of
Delaware, shares of its capital stock (other than Common Stock), stock or other
securities of other persons, evidences of indebtedness issued by the Corporation
or other persons, assets (excluding cash dividends) or options or rights
(excluding options to purchase and rights to subscribe for Common Stock or other
securities of the Corporation convertible into or exchangeable for Common
Stock); or
(d) There shall occur any reclassification of the Common Stock,
or any consolidation or merger of the Corporation with or into another
Corporation or a sale, conveyance or other disposition to another entity of all
or substantially all of the properties of the Corporation; or
(e) There shall occur the voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation;
then, and in each of such cases, the Corporation shall deliver to each holder of
Series C Preferred at its last address appearing on the books of the Corporation
as promptly as practicable but in any event at least twenty (20) days prior to
the applicable record date (or determination date) mentioned below, a notice
stating, to the extent such information is available, (i) the date on which a
record is to be taken for the purpose of such dividend, distribution or rights,
or, if a record is not to be taken, the date as of which the holders of Common
Stock of record to be entitled to such dividend, distribution or rights are to
be determined, or (ii) the date on which such reclassification, consolidation,
merger, sale, transfer, liquidation, dissolution or winding up is expected to
become effective and the date as of which it is expected that holders of Common
Stock of record shall be entitled to exchange their Common Stock for securities
or other property deliverable upon such reclassification, consolidation, merger,
sale, transfer, liquidation, dissolution or winding up."
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IN WITNESS WHEREOF, we have executed and subscribed this Certificate and do
affirm the foregoing as true under the penalties of perjury this 19th day of
December, 1995.
/s/ James R. Evans
---------------------------------------
JAMES R. EVANS, President
ATTEST:
/s/ Ronald J. O'Connor
- ---------------------------------------
RONALD J. O'CONNOR, Assistant Secretary
16
EXHIBIT 5
[LETTERHEAD OF SQUIRE, SANDERS & DEMPSEY L.L.P.]
(602) 528-4000
June 12, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: SUNRISE EDUCATIONAL SERVICES, INC.
Ladies and Gentlemen:
This firm is counsel for Sunrise Educational Services, Inc., a
Delaware corporation (the "Company"), with respect to the sale of up to
1,382,229 of the Company's $.01 par value Common Stock to be sold by certain
selling securityholders of the Company and which are the subject of a Form SB-2
Registration Statement under the Securities Act of 1933, as amended. The number
of shares of Common Stock includes such presently indeterminate number of shares
of Common Stock as may be issued on conversion of outstanding shares of Series B
Preferred Stock pursuant to the conversion provisions thereof and 300,000 shares
of Common Stock issuable upon exercise of outstanding warrants (the "Warrants").
In such capacity, we are familiar with the Articles of Incorporation and Bylaws
of the Company, as well as resolutions adopted by its Board of Directors
authorizing the issuance and sale of such securities. In addition, we have
examined such documents and undertaken such further inquiry as we consider
necessary for rendering the opinions set forth below:
Based upon the foregoing, it is our opinion that:
1. The Company is a corporation duly organized and validly
existing under the laws of the State of Delaware.
2. The securities underlying the Series B Preferred Stock and
Warrants when issued and paid for in accordance with the
terms of such securities, will be duly and validly issued,
fully paid and nonassessable.
<PAGE>
Securities and Exchange Commission
June 12, 1997
Page 2
We acknowledge that we are referred to under the heading "Legal
Matters" of the Prospectus which is part of the Company's Form SB-2 Registration
Statement relating to the Common Stock and we hereby consent to such use of our
name in such Registration Statement and to the filing of this opinion with state
regulatory agencies in such states as may require such filing in connection with
the registration of the shares of Common Stock underlying the Series B Preferred
Stock and the Warrants for offer and sale in such states.
Very truly yours,
SQUIRE, SANDERS & DEMPSEY L.L.P.
Exhibit 10.41
CREDIT AND SECURITY AGREEMENT
Dated as of April ___, 1997
SUNRISE EDUCATIONAL SERVICES, INC., a Delaware corporation formerly
known as Sunrise Preschools, Inc. (the "Borrower"), and IMPERIAL BANK, a
California banking corporation (the "Lender"), hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 DEFINITIONS. For all purposes of this Agreement, except as
otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned to
them in this Article, and include the plural as well as the singular; and
(b) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted accounting
principles.
"Accounts" means the aggregate unpaid obligations of customers
and other account debtors to the Borrower arising out of the sale or
lease of goods or rendition of services by the Borrower on an open
account or deferred payment basis.
"Advance" means an advance to the Borrower by the Lender under
Facility One, Facility Two, Facility Three, Facility Four or otherwise
under the Credit Facilities.
"Affiliate" or "Affiliates" means any Person controlled by,
controlling or under common control with the Borrower. For purposes of
this definition, "control," when used with respect to any specified
Person, means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise.
"Agreement" means this Credit and Security Agreement.
"Banking Day" means a day other than a Saturday or a Sunday on
which banks are generally open for business in Inglewood, California.
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"Cash Flow Coverage Ratio" means a rolling ratio based on the
prior four quarters (the prior 12 months) determined by dividing EBITDA
for such prior period by the current portion of the Borrower's long
term debt for the prior period plus interest expenses for the prior
period. All components of the Cash Flow Coverage Ratio are to be
determined in accordance with generally accepted accounting principles
consistent with those used in preparing Borrower's most recent
consolidating and consolidated audited financial statement.
"Collateral" means all of the Fixtures, Equipment, Vehicles,
General Intangibles, Inventory, Receivables, and fixed assets, all sums
on deposit in any collateral account, together with all substitutions
and replacements for and products of any of the foregoing Collateral
and together with proceeds of any and all of the foregoing Collateral
and together with (i) all accessories thereto, (ii) all accessories,
attachments, parts, equipment and repairs now or hereafter attached or
affixed to or used in connection with any such collateral, and (ii) all
warehouse receipts, bills of lading and other documents of title now or
hereafter covering such collateral.
"Credit Facility" means the credit facilities being made
available to the Borrower by the Lender as Facility One, Facility Two,
Facility Three and Facility Four pursuant to Article II hereof.
"Current Ratio" means the Borrower's total current assets
divided by the Borrower's total current liabilities. All components of
the Current Ratio are to be determined in accordance with generally
accepted accounting principles consistent with those used in preparing
Borrower's most recent consolidating and consolidated audited financial
statement.
"Debt to EBIDTA Ratio" means the ratio of Borrower's
capitalized debt (all non-subordinated, interest bearing liabilities of
Borrower) to Borrower's EBIDTA, all components of which are to be
determined in accordance with generally accepted accounting principles
consistent with those used in preparing Borrower's most recent
consolidating and consolidated audited financial statement.
"Debt to Worth Ratio" means the Borrower's total liabilities
less Subordinated Debt divided by the Borrower's total equity plus
Subordinated Debt. All components of the Debt to Worth Ratio are to be
determined in accordance with generally accepted accounting principles
consistent with those used in preparing Borrower's most recent
consolidating and consolidated audited financial statement.
"Default" means an event that, with giving of notice or
passage of time or both, would constitute an Event of Default.
"Default Period" means the period following the occurrence of
a Default or Event of Default which period shall continue until and
unless the Lender shall thereafter waive such Default or Event of
Default in writing.
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"Default Rate" means at any time five percent (5%) over the
Floating Rate, which Default Rate shall change when and as the Floating
Rate changes.
"EBIDTA" means earnings before interest, depreciation, taxes
and amortization for the applicable time period (the four prior quarters or, in
the case of pro-forma projections, the subsequent four quarters) plus, with
respect to the quarters ending January 31, 1997 and April 30, 1997 the total
amount of $1,008,000. In addition, in calculating EBIDTA for purposes of
advances under Facility One, EBIDTA shall be adjusted for any negative cash flow
from the acquisition in question.
"Environmental Laws" has the meaning specified in Section 5.12
hereof.
"Equipment" means all of the Borrower's equipment, as such
term is defined in the UCC, whether now owned or hereafter acquired, including
but not limited to all present and future machinery, furniture, day care center
equipment, fixed assets, plant assets, office and recordkeeping equipment,
parts, tools, supplies, and including specifically (without limitation) the
goods described in any equipment schedule or list herewith or hereafter
furnished to the Lender by the Borrower, but excluding any equipment leased from
non-Affiliate third parties.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"Event of Default" has the meaning specified in Section 8.1
hereof.
"Floating Rate" means an annual rate of interest equal to the
sum of the Prime Rate plus a margin percentage as listed, with respect to each
Credit Facility in Article II below. The Floating Rate shall change if and when
the Prime Rate changes.
"General Intangibles" means all of the Borrower's general
intangibles, as such term is defined in the UCC, whether now owned or hereafter
acquired, including (without limitation) all present and future patents, patent
applications, copyrights, trademarks, trade names (including without limitation
the trade names and trademarks "SUNRISE PRESCHOOLS" and "SUNRISE EDUCATIONAL
SERVICES"), trade secrets, customer or supplier lists and contracts, manuals,
operating instructions, permits, franchises, the right to use the Borrower's
name and the goodwill of the Borrower's business.
"Fixtures" means all tangible personal property owned or
hereafter acquired by Borrower which is attached or affixed to real property,
including Borrower's interest in leasehold improvements.
"Inventory" means all of the Borrower's inventory, as such
term is defined in the UCC, whether now owned or hereafter acquired, whether
consisting of whole goods, spare parts or components, supplies or materials,
whether acquired, held or furnished for sale, for lease or under service
contracts or for manufacture or processing, and wherever located.
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"Landlord Waiver Requirement" has the meaning given that term
in Section 4.3 of this Agreement.
"Late Charge" means five percent (5%) of the amount of any
installment which is past due in excess of ten (10) days, as provided in Section
2.6 of this Agreement and in the Note.
"Loan Documents" means this Agreement, the Notes and the
Security Documents and all other documents relating to any of the foregoing.
"Net Loss" means an after tax net loss for the Borrower from
continuing operations determined on a consolidating and consolidated basis, to
be determined in accordance with generally accepted accounting principles
consistent with those used in preparing Borrower's most recent consolidating and
consolidated audited financial statement.
"Notes" mean the promissory notes of the Borrower for each
separate Credit Facility payable to the order of the Lender in substantially the
form attached hereto as EXHIBIT A-1, A-2, A-3 and A-4
"Obligations" has the meaning specified in Section 3.1 hereof.
"Person" means any individual, corporation, partnership, joint
venture, limited liability company, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Plan" means an employee benefit plan or other plan maintained
for employees of the Borrower and covered by Title IV of ERISA.
"Premises" means all premises where the Borrower conducts its
business and has any rights of possession, including (without limitation) each
of the child care facilities listed on EXHIBIT E attached hereto.
"Prime Rate" means the rate of interest publicly announced
from time to time by Imperial Bank, a California banking corporation, in
Inglewood, California as its prime rate for lending (the "Prime Rate") (the
Prime Rate is not intended to be the lowest rate of interest charged by Lender
in connection with extensions of credit to borrowers) or, if such bank ceases to
announce a rate so designated, any similar successor rate designated by the
Lender;
"Pro Forma Cash Flow Coverage Ratio" means a rolling ratio for
the subsequent four quarters (the subsequent 12 months) determined by dividing
projected EBITA from such period (reduced by any negative cash flow anticipated
form the Facility being acquired) by the current portion of long term debt for
such period plus interest expense for such period (including debt and interest
on the Facility to be acquired).
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"Receivables" means each and every right of the Borrower to
the payment of money, whether such right to payment now exists or hereafter
arises, whether such right to payment arises out of a sale, lease or other
disposition of goods or other property, out of a rendering of services or
services to be rendered, out of a loan, out of the overpayment of taxes or other
liabilities, or otherwise arises under any contract or agreement, whether such
right to payment is created, generated or earned by the Borrower or by some
other person who subsequently transfers such person's interest to the Borrower,
whether such right to payment is or is not already earned by performance, and
howsoever such right to payment may be evidenced, together with all other rights
and interests (including all liens and security interests) which the Borrower
may at any time have by law or agreement against any account debtor or other
obligor obligated to make any such payment or against any property of such
account debtor or other obligor; all including but not limited to all present
and future accounts, accounts receivable, contract rights, loans and obligations
receivable, chattel papers, bonds, notes, drafts, acceptances, and other debt
instruments, purchase orders, tax refunds and rights to payment in the nature of
general intangibles and other forms of obligations and receivables.
"Reportable Event" shall have the meaning assigned to that
term in Title IV of ERISA.
"Security Documents" means all documents relating to the
security interest in the Collateral being given to Lender.
"Security Interest" has the meaning specified in Section 3.1
hereof.
"Stock Warrant" has the meanings specified in Section 4.4
hereof.
"Subordinated Debt" means debt which is junior in all respects
to amounts due to Lender pursuant to subordination agreements approved by
Lender.
"Term Out Date" means the date which is one year from the date
of this Agreement.
"UCC" means the Uniform Commercial Code as in effect from time
to time in the state designated in Section 9.12 hereof as the state whose laws
shall govern this Agreement, or in any other state whose laws are held to govern
this Agreement or any portion hereof.
"Vehicles" means all right, title and interest of Borrower now
held or hereafter acquired in all automobiles, busses, vans, trucks and other
motor vehicles, other than motor vehicles leased from non-Affiliate third
parties.
"Warrant Requirement" has the meaning given in Section 4.4 of
this Agreement.
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ARTICLE II
Section 2.1 FACILITY ONE. The Lender agrees, as "Facility One" and on
the terms and subject to the conditions herein set forth, to make Advances to
the Borrower from the date of the satisfaction of the Landlord Waiver
Requirement and Warrant Requirement to the Term Out Date (one year from the date
hereof) or the earlier date of termination of this Facility One pursuant to
Sections 2.7 or 8.2 hereof, in the aggregate amount at anytime outstanding not
to exceed $1,000,000, which Advances shall be secured by the Collateral as
provided in Article III hereof. Facility One shall be a non-revolving term
facility. The aggregate amount of all advances under Facility One shall not
exceed $1,000,000. Advances under Facility One are limited for use by the
Borrower in paying up to 80% of the purchase price of established child care
centers. Each request for an Advance under Facility One shall be made in writing
specifying the date upon which the Advance is requested, the amount thereof, the
designation of the child care center to be acquired, a copy of the purchase
contract with respect to the center being acquired and such other information as
Lender may request concerning the acquisition, including, without limitation,
the operating history and financial performance of the center to be acquired.
Lender may condition any Facility One Advance on amendments to this Agreement or
any of the Security Instruments in order to encumber or perfect the lien of
Lender on the Collateral to be acquired in connection with the acquisition and
the payment of reasonable attorneys fees reasonably incurred in connection with
such amendments. The following shall apply to Facility One:
(a) Each Advance made by Lender under Facility One shall be
evidenced by and repayable with interest in accordance with a separate Facility
One Note to be executed by Borrower at the time of each Facility One advance in
the form attached hereto as EXHIBIT A-1.
(b) The interest rate payable for Facility One advances shall
be a Floating Rate equal to the Prime Rate plus 2.5 percentage points or, at the
election of Borrower made at the Term Out Date at the fixed rate quoted to
Borrower by Lender at such time.
(c) No further advances under Facility One shall be made after
the Term Out Date.
(d) As further specified in the Facility One Note, prior to
the Term Out Date, interest on Facility One Advance shall be payable monthly and
principal shall be payable monthly in an amount equal to 3% of the principal
balance of the Facility One Advances outstanding as of the last day of the prior
month.
(e) From and after the Term Out Date principal and interest on
the then outstanding balance of the Facility One Note shall be payable monthly
in an amount necessary to fully amortize principal, at the interests rate
specified above, in equal monthly payments over three years from the Term Out
Date. Such amortized payments may change corresponding to changes in the Prime
Rate.
(f) A Commitment Fee of .25% of the total amount available
under Facility One is payable at closing.
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(g) An Origination Fee of 2% of amounts advanced under
Facility One shall be payable upon each such Facility One Advance.
Section 2.2 FACILITY TWO. The Lender agrees as "Facility Two" and, on
the terms and subject to the conditions herein set forth, to make Advances to
the Borrower from time to time from the date hereof to and including one year
from the date hereof, (or the earlier date of termination of this facility
pursuant to Sections 2.7 or 8.2 hereof), in the aggregate amount at any time
outstanding not to exceed $500,000, which advances shall be secured by the
Collateral as provided in Article III hereof. Facilities Two shall be a
revolving facility and it is contemplated that the Borrower will request
advances, make prepayments and request additional Advances. If the aggregate
amount of outstanding Advances made under Facility Two exceeds $500,000,
Borrower shall immediately repay the excess to Lender. Advances under Facility
Two are to provide temporary working capital to the Borrower and the following
apply to Facility Two:
(a) All Advances made by Lender under Facility Two shall be
evidenced by and repayable with interest in accordance with the Facility Two
Note to be executed by Borrower at closing in the form attached hereto as
EXHIBIT A-2.
(b) The interest rate payable on Facility Two Advances shall
be a Floating Rate equal to the Prime Rate plus 1.5 percentage points.
(c) Interest under the Facility Two shall be payable monthly
and all outstanding principal and any accrued interest shall be due and payable
one year from the date hereof.
(d) A Commitment Fee of .5% of the total amount available
under Facility Two is payable at closing.
Section 2.3 FACILITY THREE. The Lender agrees, as Facility Three and
upon the terms and subject to the conditions herein set forth, to make advances
to the Borrower from time to time during the period from the date hereof to one
year from the date hereof (or the earlier date of termination of the facility
pursuant to Section 2.7 or 8.2 hereof) in an aggregate amount not to exceed
$500,000, which advances shall be secured by the Collateral as provided in
Article III hereof. Facility Three shall be used by the Borrower in acquiring
new and used Vehicles or Equipment used in Borrower's business. The advances
under Facility Three shall not be revolving advances but shall constitute
separate term loans payable monthly, as provided below, on a full amortization
schedule based upon a 60 month amortization for new Vehicles or 36 month
amortization for used Vehicles and Equipment. Each request for an Advance under
Facility Three shall be accompanied by an invoice showing the cost of the item
to be acquired with the Advance and, in the case of Vehicles, with title
documents with respect to the Vehicles. Lender may condition any Facility Three
Advances on amendments to this Agreement or any of the Security Instruments in
order to encumber or perfect the lien of Lender on the Collateral to be acquired
in connection with the acquisition and the payment of reasonable attorneys fees
reasonably incurred in connection with such amendment. The aggregate amount of
all advances under Facility Three shall not exceed $500,000. The following apply
to Facility Three:
(a) All Advances made by Lender under Facility Three shall be
evidenced by and repayable with interest in accordance with the Facility Three
Notes, with a separate Facility Three Note to be executed by Borrower at the
time of each Facility Three Advance in the form attached hereto as EXHIBIT A-3.
Each Facility Three Note shall be repayable monthly on a full amortization
schedule based upon a 60 month amortization for new Vehicles or 36 month
amortization for used Vehicles and Equipment.
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(b) The interest rate payable on Facility Three Advances shall
be a Floating Rate equal to the Prime Rate plus 1.75 percentage points, or at
the election of Borrower made at the time of the applicable advance at a Fixed
Rate quoted to Borrower by Lender at such time.
(c) An Origination Fee of .5% the total amount available under
Facility Three is payable at closing.
Section 2.4 FACILITY FOUR. The Lender agrees, as Facility Four and on
the terms and subject to the conditions herein set forth, to make Advances to
the Borrower at the closing hereunder in the aggregate amount not to exceed
$1,000,000 for the purpose of refinancing existing equipment loans, existing
improvement loans, and other existing loans approved for refinancing by Lender
and for refinancing existing debt owed by Borrower to sellers of day care
facilities. Facility Four is not a revolving facility and is payable as a fully
amortized loan with a 48 month term. The following apply to Facility Four.
(a) Facility Four shall be evidenced by and repayable with
interest in accordance with the Facility Four Note to be executed by Borrower at
closing in the form of EXHIBIT A-4 attached hereto.
(b) The interest rate payable on Facility Four Advances shall
be a Floating Rate equal to the Prime Rate plus one percentage point or, at the
election of Borrower made at Closing, at a Fixed Rate quoted to Borrower by
Lender at Closing.
An Origination Fee of .25% of the total amount available under Facility Four is
payable at closing.
Section 2.5 ADVANCES. The Borrower agrees to comply with the following
procedures in requesting Advances under Sections 2.1, 2.2, 2.3, and 2.4
(a) The Borrower will not request any Advance if, after giving
effect to such requested Advance, the sum of the outstanding and unpaid Advances
under the applicable facility would exceed the applicable maximum amounts
specified in Sections 2.1, 2.2, 2.3 and 2.4 above.
(b) Each request for an Advance shall be made to the Lender
prior to 12:00 noon (Phoenix, Arizona time) at least two (2) Banking Days prior
to the day of the Advance in the case of Facility One and Facility Four
Advances, at least two (2) Banking Days prior to the day of the Advance in the
case of Facility Three Advances and of at least one (1) Banking Day prior to the
day of the Advance in the case of Facility Two Advances. Each request for an
Advance shall be made in writing, specifying (i) the Banking Day on which the
Advance is to be made is requested, (ii) the amount thereof, (iii) the
application of the proceeds thereof and shall be by (i) any officer of the
Borrower; or (ii) any person designated as the Borrower's agent by any officer
of the Borrower in a writing delivered to the Lender; or (iii) any person
reasonably believed by the Lender to be an officer of the Borrower or such a
designated agent.
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(c) Upon fulfillment of the applicable conditions of this
Agreement, the Lender shall disburse loan proceeds in accordance with the
Borrower's written instructions. The Borrower shall be obligated to repay all
Advances notwithstanding the fact that the person requesting the same was not in
fact authorized to do so, provided however that all requests for an Advance
shall be made in writing as provided in subsection (b) above. Any request for an
Advance shall be deemed to be a representation by the Borrower that (i) the
condition set forth in in this Article II have been met, and (ii) the conditions
set forth in Section 4.2 hereof have been met as of the time of the request.
Section 2.6 INTEREST.
(a) The principal of the Advances outstanding from time to
time during any month shall bear interest (computed on the basis of actual days
elapsed in a 360-day year) at the applicable rate set forth in Sections 2.1,
2.2, 2.3 and 2.4 above; PROVIDED, HOWEVER, that from the first day of any month
during which any Default or Event of Default occurs or exists at any time, in
the Lender's discretion and without waiving any of its other rights and
remedies, the principal of the Advances under all of the Notes outstanding from
time to time shall bear interest at the Default Rate during the entire Default
Period; PROVIDED FURTHER that if any payment of interest and/or principal is not
received by the holder of the Notes when such payment is due, then in addition
to the remedies conferred upon the holder and the other loan documents, a late
charge of five percent (5%) of the amount of the installment due and unpaid will
be added to the delinquent amount to compensate the holder for the expense of
handling the delinquency for any payment past due in excess of ten (10) days,
regardless of any notice and cure period; and PROVIDED, FURTHER, that in any
event no rate change shall be put into effect which would result in a rate
greater than the highest rate permitted by law. Interest accruing on the
principal balance of such Advances outstanding from time to time shall be
payable on the fifteenth (15th) day of each succeeding month and on the
applicable maturity date set forth in Section 2.1, 2.2, 2.3 or 2.4 above, or
earlier demand made in accordance with the provisions of this Agreement or
prepayment in full. The Borrower agrees that the interest rate contracted for
includes the interest rate set forth herein plus any other charges or fees set
forth herein and costs and expenses incident to this transaction paid by the
Borrower to the extent same are deemed interest under applicable law.
(b) If any Person shall acquire a participation in Advances
under this Agreement, the Borrower shall be obligated to the Lender to pay the
full amount of all interest calculated under this Article II and the Note, along
with all other fees, charges and other amounts due under this Agreement,
regardless if such Person elects to accept interest with respect to its
participation at a lower rate than the applicable Floating Rate, or otherwise
elects to accept less than its pro rata share of such fees, charges and other
amounts due under this Agreement. The Lender shall not be obligated to request,
induce or permit any Person to acquire or to retain any participation at all or
in any particular amount or at any particular rate of interest or on any
particular terms.
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Section 2.7 VOLUNTARY PREPAYMENT; TERMINATION OF AGREEMENT BY THE
BORROWER; PERMANENT REDUCTION OF COMMITMENT.
(a) Except as otherwise provided herein, the Borrower may, in
its discretion, upon at least three (3) Banking Days irrevocable notice to the
Lender, prepay on any Banking Day the Advances in whole at any time or from time
to time in part. The notice of prepayment shall specify the date and amount of
the prepayment, and the loan to which the prepayment applies. Other than with
respect to the prepayment of any fixed rate obligation which is subject to the
prepayment fee provisions of Section 2.7(c) below, any such prepayment shall be
without any fee. Notice of prepayment having been delivered as aforesaid, the
principal amount of the prepayment specified in such notice shall become due and
payable on the prepayment date set forth in such notice. All payments of
principal under this section shall be accompanied by accrued but unpaid interest
on the amount being prepaid through the date of such prepayment and, with
respect to any prepayment of a fixed rate obligation, by the applicable
prepayment fee specified in Section 2.7(c) below. Subject to the foregoing
provisions, the Borrower may terminate this Agreement at any time and, subject
to payment and performance of all the Borrower's obligations to the Lender, may
obtain any release or termination of the Security Interest to which the Borrower
is otherwise entitled by law by giving at least 30 days' prior written notice to
the Lender of the Borrower's intention to terminate this Agreement.
(b) The Borrower may at any time and from time to time, upon
at least 30 days' prior written notice to the Lender, permanently reduce the
Commitment in whole or in part, without payment of any fee or penalty; provided,
however, that no reduction shall reduce the Commitment to an amount less than
the then-aggregate amount of the Advances.
(c) PREPAYMENT OF FIXED RATE LOANS. If Borrower prepays any
Advance which has a fixed interest rate Borrower shall pay a prepayment premium.
The prepayment premium shall be computed as follows: 1% of the amount prepaid if
the amount prepaid is under $50,000, and if the amount prepaid is $50,000 or
over, the result of [the present value of the remaining cash flows calculated at
the interest rate on the Advance being prepaid discounted at the Treasury
Constant Yield (TCY) + 100 basis points] minus the [principal amount being
prepaid]. The TCY is calculated as the interpolated constant maturity Treasury
rate with a maturity matching the remaining average life of the Advance being
prepaid. Rate date is obtained, at the time of prepayment, from the most recent
Federal Reserve H-15 Report using data from the most recent week ending column.
Section 2.8 MANDATORY PREPAYMENT. Without notice or demand, if the sum
of the outstanding principal balance of the Advances under any Facility shall at
any time exceed the applicable maximum amounts specified in Section 2.1, 2.2,
2.3 or 2.4 , the Borrower shall immediately prepay the Advances to the extent
necessary to reduce the sum of the outstanding principal balance of the Advances
to the applicable maximum amounts specified in Section 2.1, 2.2, 2.3 or 2.4. Any
payment received by the Lender after an Event of Default may be applied to the
Advances, including interest thereon and any fees, commissions, costs and
expenses hereunder and under the Security Documents, in such order and in such
amounts as the Lender, in its sole discretion, may from time to time determine.
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Section 2.9 PAYMENT. All payments of principal of and interest on the
Advances shall be made to the Lender in immediately available funds. The
Borrower hereby authorizes the Lender, in its discretion at any time or from
time to time and without request by the Borrower, but upon 5 days prior notice
to Borrower, to make an Advance or Advances in such amount as shall be necessary
to pay principal and accrued interest amounts and any fees, costs or expenses
from time to time due to the Lender hereunder or under the Security Documents.
Section 2.10 PAYMENT ON NON-BANKING DAYS. Whenever any payment to be
made hereunder shall be stated to be due on a day which is not a Banking Day,
such payment may be made on the next succeeding Banking Day, and such extension
of time shall in such case be included in the computation of interest on the
Advances or the fees hereunder, as the case may be.
Section 2.11 USE OF PROCEEDS. The proceeds of Advances under each
Facility shall be used by the Borrower for applicable purposes set forth in
Sections 2.1, 2.2, 2.3 and 2.4 above.
Section 2.12 LIABILITY RECORDS. The Lender may maintain from time to
time, at its discretion, liability records as to any and all Advances made or
repaid and interest accrued or paid under this Agreement. All entries made on
any such record shall be presumed correct unless Borrower gives notice of its
exception to the same within 30 days after receipt by the Borrower of copies of
any of such records. On demand by the Lender, the Borrower will admit and
certify in writing the exact principal balance that the Borrower then asserts to
be outstanding to the Lender for Advances under this Agreement. Any billing
statement or accounting rendered by the Lender shall be conclusive and binding
on the Borrower unless specific written notice of exception is given to the
Lender by the Borrower within 30 days after receipt by the Borrower of said
billing statement or accounting.
Section 2.13 SETOFF. The Borrower agrees that the Lender may at any
time or from time to time, at its sole discretion and without demand and without
notice to anyone, setoff any liability owed to the Borrower by the Lender,
against any indebtedness owed to the Lender by the Borrower (for Advances or for
any other Obligations). In addition, each other Person holding a participating
interest in any Advances made to the Borrower by the Lender shall have the right
to appropriate or setoff any deposit or other liability then owed by such Person
to the Borrower, whether or not due, and apply the same to the payment of said
participating interest, as fully as if such Person had lent directly to the
Borrower the amount of such participating interest.
Section 2.14 FEES.
(a) The Borrower hereby agrees to timely pay the Lender the
fully earned and non-refundable origination and commitment fees specified in
Sections 2.1, 2.2, 2.3 and 2.4 above.
(b) The Borrower hereby agrees to pay the Lender, on demand,
audit fees not to exceed $2,500 per audit and $5,000 per year in connection with
any audits or inspections by the Lender of any collateral or the operations or
business of the Borrower in connection with the Collateral, together with all
actual out-of-pocket costs and expenses incurred in conducting any such audit or
inspection. Lender shall give at least one day's prior notice of any such audit;
provided that no prior notice is required if there is pending Event of Default.
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Section 2.15 CAPITAL ADEQUACY. If the Lender shall determine that the
adoption after the date hereof of any applicable law, rule or regulation
regarding capital adequacy, or any change therein after the date hereof, any
change after the date hereof in the interpretation or administration thereof by
any governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by the Lender or its
parent corporation with any guideline or request issued after the date hereof
regarding capital adequacy (whether nor not having the force of law) of any such
authority, central bank or comparable agency, has or would have the effect of
reducing the rate of return on the Lender's or the Lender's parent corporation's
capital as a consequence of the Lender's obligations hereunder to a level below
that which the Lender or its parent corporation could have achieved but for such
adoption, change or compliance (taking into consideration the Lender's policies
with respect to capital adequacy and those of the Lender's parent corporation by
an amount deemed to the Lender or its parent corporation to be material, then
from time to time on demand by the Lender, the Borrower shall pay to the Lender
such additional amount or amounts as will compensate the Lender or its parent
corporation for such reduction. Certificates of the Lender sent to the Borrower
from time to time claiming compensation under this Section, stating the reason
therefor and setting forth in reasonable detail the calculation of the
additional amount or amounts to be paid to the Lender hereunder shall be
conclusive absent manifest error. In determining such amounts, the Lender or its
parent corporation may use any reasonable averaging and attribution methods.
ARTICLE III
SECURITY INTEREST
Section 3.1 GRANT OF SECURITY INTEREST. The Borrower hereby assigns and
grants to the Lender a security interest (collectively referred to as the
"Security Interests") in the Collateral, as security for the payment and
performance of each and every debt, liability and obligation of every type and
description which the Borrower may now or at any time hereafter owe to the
Lender (whether such debt, liability or obligation now exists or is hereafter
created or incurred, whether it arises in a transaction involving the Lender
alone or with the Lender as a participant with other lenders, and whether it is
direct or indirect, due or to become due, absolute or contingent, primary or
secondary, liquidated or unliquidated, or sole, joint, several or joint and
several, and including specifically, but not limited to, all indebtedness of the
Borrower arising under this Agreement or any other loan or credit agreement or
guaranty between the Borrower and the Lender, whether now in effect or hereafter
entered into; all such debts, liabilities and obligations are herein
collectively referred to as the "Obligations").
Section 3.2 NOTIFICATION OF ACCOUNT DEBTORS AND OTHER OBLIGORS. In
addition to the rights of the Lender under Section 6.10 hereof, with respect to
any and all rights to payment constituting Collateral the Lender may at any time
(after the occurrence of an Event of Default) notify any account debtor or other
person obligated to pay the amount due that such right to payment has been
assigned or transferred to the Lender for security and shall be paid directly to
the Lender. The Borrower will join in giving such notice if the Lender so
requests. At any time after the Borrower or the Lender gives such notice to an
account debtor or other obligor, the Lender may, but need not, in the Lender's
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name or in the Borrower's name, (a) demand, sue for, collect or receive any
money or property at any time payable or receivable on account of, or securing,
any such right to payment, or grant any extension to, make any compromise or
settlement with or otherwise agree to waive, modify, amend or change the
obligations (including collateral obligations) of any such account debtor or
other obligor; and (b) as agent and attorney in fact of the Borrower, notify the
United States Postal Service to change the address for delivery of the
Borrower's mail to any address designated by the Lender, otherwise intercept the
Borrower's mail, and receive and, open Borrower's mail, applying all Collateral
as permitted under this Agreement and holding all other mail for the Borrower's
account or forwarding such mail to the Borrower's last known address.
Section 3.3 ASSIGNMENT OF INSURANCE. As additional security for the
payment and performance of the Obligations, the Borrower hereby assigns to the
Lender any and all monies (including, without limitation, proceeds of insurance
and refunds of unearned premiums) due or to become due under, and all other
rights of the Borrower with respect to, any and all policies of insurance now or
at any time hereafter covering the Collateral or any evidence thereof or any
business records or valuable papers pertaining thereto, and the Borrower hereby
directs the issuer of any such policy to pay all such monies directly to the
Lender. At any time after the occurrence of any Event of Default, the Lender may
(but need not), in the Lender's name or in the Borrower's name, execute and
deliver proof of claim, receive all such monies, endorse checks and other
instruments representing payment of such monies, and adjust, litigate,
compromise or release any claim against the issuer of any such policy.
Section 3.4 OCCUPANCY. Subject to provisions of any leases of the
Premise:
(a) The Borrower hereby irrevocably grants to the Lender the
right to take possession of the Premises at any time after the occurrence and
during the continuance of an Event of Default.
(b) The Lender may use the Premises only to hold, process,
manufacture, sell, use, store, liquidate, realize upon or otherwise dispose of
goods that are Collateral and for other purposes that the Lender may in good
faith deem to be related or incidental purposes.
(c) The right of the Lender to hold the Premises shall cease
and terminate upon the earlier of (i) payment in full and discharge of all
Obligations, and (ii) final sale or disposition of all goods constituting
Collateral and delivery of all such goods to purchasers.
(d) The Lender shall not be obligated to pay or account for
any rent or other compensation for the possession, occupancy or use of any of
the Premises; provided, however, in the event that the Lender does pay or
account for any rent or other compensation for the possession, occupancy or use
of any of the Premises, the Borrower shall reimburse the Lender promptly for the
full amount thereof. In addition, the Borrower will pay, or reimburse the Lender
for, all taxes, fees, duties, imposts, charges and expenses at any time incurred
by or imposed upon the Lender by reason of the execution, delivery, existence,
recordation, performance or enforcement of this Agreement or the provisions of
this Section 3.4.
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Section 3.5 LICENSE. The Borrower hereby grants to the Lender a
non-exclusive, worldwide and royalty-free license to use or otherwise exploit
all trademarks, franchises, trade names, copyrights and patents of the Borrower
for the purpose of selling, leasing or otherwise disposing of any or all
Collateral following an Event of Default.
Section 3.6 VEHICLE TITLES. The Borrower represents and warrants that
it has delivered to Lender all title documents with respect to the portion of
the Collateral consisting of Vehicles and Borrower will execute such documents
as Lender may reasonably require so that Lender's lien is shown on such title
documents.
ARTICLE IV
CONDITIONS OF LENDING
Section 4.1 CONDITIONS PRECEDENT TO THE INITIAL ADVANCE.
The obligation of the Lender to make the initial Advance under the
Credit Facility shall be subject to the condition precedent that the Lender
shall have received all of the following, each in form and substance
satisfactory to the Lender:
(a) This Agreement, properly executed on behalf of the
Borrower.
(b) The Notes, properly executed on behalf of the Borrower.
(c) A true and correct copy of any and all leases pursuant to
which the Borrower is leasing the Premises.
(d) Title documents with respect to all of Borrower's Vehicles
and documentation executed by Borrower so that Lender's lien will be shown on
such titles..
(e) Current searches of appropriate filing offices showing
that (i) no state or federal tax liens have been filed and remain in effect
against the Borrower, (ii) no financing statements have been filed and remain in
effect against the Borrower, except those financing statements relating to liens
permitted pursuant to Section 7.1 hereof and those financing statements filed by
the Lender, and (iii) the Lender has duly filed all financing statements
necessary to perfect the Security Interests granted hereunder, to the extent the
Security Interests are capable of being perfected by filing.
(f) Current searches of appropriate filing offices showing
that (i) no mortgages, deeds of trust, collateral assignments or other security
interests have been filed and remain in effect against the Borrower's interest
in the Fixtures or the General Intangibles, except those filed by the Lender.
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(g) A Corporate Resolution Regarding Credit executed by the
Secretary of the Borrower, certifying as to (i) the resolutions of the directors
and, if required, the shareholders of the Borrower, authorizing the execution,
delivery and performance of this Agreement and the Security Documents, (ii) the
articles of incorporation and bylaws of the Borrower, and (iii) the signatures
of the officers or agents of the Borrower authorized to execute and deliver this
Agreement, the Security Documents and other instruments, agreements and
certificates, including Advance requests, on behalf of the Borrower.
(h) A current certificate issued by the Secretary of State of
the state of the Borrower's incorporation, certifying that the Borrower is in
compliance with all corporate organizational requirements of such state.
(i) Evidence that the Borrower is duly licensed or qualified
to transact business in all jurisdictions where the character of the property
owned or leased or the nature of the business transacted by it makes such
licensing or qualification necessary.
(j) A certificate of an officer of the Borrower confirming,
after due investigation, the representations and warranties set forth in Article
V hereof.
(k) An opinion of counsel to the Borrower, addressed to the
Lender, together with the results of a litigation search or searches showing all
actions and proceedings where the Borrower is a defendant or involving a claim
against the Borrower.
(l) Certificates of the insurance required hereunder, with all
hazard insurance containing a loss payee endorsement in favor of the Lender ( to
the extent of its interest in the Collateral) and with all liability insurance
naming the Lender as an additional insured.
(m) Payment of the fees due through the date of the initial
Advance under Article II hereof and expenses incurred by the Lender through such
date and required to be paid by the Borrower under Section 9.7 hereof (including
without limitation the Lender's attorneys' fees as provided in Section 9.7);
provided that the attorneys fees of Lender through the date of the initial
Advance hereunder shall be limited to $6,000;
(n) Such other documents as the Lender in its reasonable
discretion may require, including without limitation such documents as are
necessary to perfect any and all registered trademarks or trade names (including
without limitation the trade names and trademarks "Sunrise Preschools" and
"Sunrise Educational Services).
Section 4.2 CONDITIONS PRECEDENT TO ALL ADVANCES. The obligation of the
Lender to make each Advance shall be subject to the further conditions precedent
that on such date:
(a) the representations and warranties contained in Article V
hereof are correct on and as of the date of such Advance as though made on and
as of such date, except to the extent that such representations and warranties
relate solely to an earlier date; and
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(b) no event has occurred and is continuing, or would result
from such Advance which constitutes a Default or an Event of Default.
Section 4.3 SPECIAL CONDITIONS/LANDLORD WAIVER REQUIREMENT. Prior to
any advance under Facility One, and in any event within ninety (90) days of the
date of this Agreement, Borrower shall have obtained from the landlords of at
least 75% of the child care facilities operated by Borrower an executed
landlord's waiver of lien right in the form provided by Lender (referred to
herein as the "Landlord Waiver Requirement").
Section 4.4 STOCK WARRANT/WARRANT REQUIREMENT. Prior to any advance
under Facility One, and in any event within ninety (90) days from the date of
this Agreement, Borrower shall issue to Lender a Stock Warrant with respect to
10,000 shares of the Common Stock of Borrower (the "Stock Warrant") in a form
prepared by Lender (the "Warrant Requirement"). The price in the Warrant shall
be the average bid price for such stock for the five days prior to the closing
hereunder. The Warrant shall contain anti-dilution provisions.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lender as follows:
Section 5.1 CORPORATE EXISTENCE AND POWER; NAME; CHIEF EXECUTIVE
OFFICE; INVENTORY AND EQUIPMENT LOCATIONS. The Borrower is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware, and is duly licensed or qualified to transact business in all
jurisdictions where the character of the property owned or leased or the nature
of the business transacted by it makes such licensing or qualification
necessary. The Borrower has all requisite power and authority, corporate or
otherwise, to conduct its business, to own its properties and to execute and
deliver, and to perform all of its obligations under, the Loan Documents. During
its corporate existence, the Borrower has done business solely under the names
set forth in EXHIBIT B hereto. The chief executive office and principal place of
business of the Borrower is located at the address set forth in EXHIBIT B
hereto, and all of the Borrower's records relating to its business or the
Collateral are kept at that location. All Inventory and Equipment is located at
that location or at one of the other locations set forth in EXHIBIT B hereto.
Section 5.2 AUTHORIZATION OF BORROWING; NO CONFLICT AS TO LAW OR
AGREEMENTS. The execution, delivery and performance by the Borrower of the Loan
Documents and the borrowings from time to time hereunder have been duly
authorized by all necessary corporate action and do not and will not (a) require
any consent or approval of the stockholders of the Borrower, (b) require any
authorization, consent or approval by, or registration, declaration or filing
with, or notice to, any governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, or any third party, except such
authorization, consent, approval, registration, declaration, filing or notice as
has been obtained, accomplished or given prior to the date hereof, (c) violate
any provision of any law, rule or regulation (including, without limitation,
Regulation X of the Board of Governors of the Federal Reserve System) or of any
order, writ, injunction or decree presently in effect having applicability to
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the Borrower or of the Articles of Incorporation or Bylaws of the Borrower, (d)
result in a breach of or constitute a default under any indenture or loan or
credit agreement or any other material agreement, lease or instrument to which
the Borrower is a party or by which it or its properties may be bound or
affected, or (e) result in, or require, the creation or imposition of any
mortgage, deed of trust, pledge, lien, security interest or other charge or
encumbrance of any nature (other than the Security Interests) upon or with
respect to any of the properties now owned or hereafter acquired by the
Borrower.
Section 5.3 LEGAL AGREEMENTS. This Agreement constitutes and, upon due
execution by the Borrower, the other Loan Documents will constitute the legal,
valid and binding obligations of the Borrower, enforceable against the Borrower
in accordance with their respective terms.
Section 5.4 SUBSIDIARIES. The Borrower has no Subsidiaries other than
Sunrise Preschools Hawaii, Inc. which subsidiary holds no assets. Borrower shall
notify Lender in advance of creating any other Subsidiaries.
Section 5.5 FINANCIAL CONDITION; NO ADVERSE CHANGE. The Borrower has
heretofore furnished to the Lender audited financial statements of the Borrower
for its fiscal year ended and unaudited financial statements of the Borrower for
the month ended, and those statements fairly present the financial condition of
the Borrower on the dates thereof and the results of its operations and cash
flows for the periods then ended and were prepared in accordance with generally
accepted accounting principles. Since the date of the most recent financial
statements, there has been no material adverse change in the business,
properties or condition (financial or otherwise) of the Borrower.
Section 5.6 LITIGATION. There are no actions, suits or proceedings
pending or, to the knowledge of the Borrower, threatened against or affecting
the Borrower or any of its Affiliates or the properties of the Borrower or any
of its Affiliates before any court or governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, which, if
determined adversely to the Borrower or any of its Affiliates, would have a
material adverse effect on the financial condition, properties or operations of
the Borrower or any of its Affiliates.
Section 5.7 REGULATION U. The Borrower is not engaged in the business
of extending credit for the purpose of purchasing or carrying margin stock
(within the meaning of Regulation U of the Board of Governors of the Federal
Reserve System), and no part of the proceeds of any Advance will be used to
purchase or carry any margin stock or to extend credit to others for the purpose
of purchasing or carrying any margin stock.
Section 5.8 TAXES. The Borrower and its Affiliates have paid or caused
to be paid to the proper authorities when due all federal, state and local taxes
required to be withheld by each of them. The Borrower and its Affiliates have
filed all federal, state and local tax returns which to the knowledge of the
officers of the Borrower or any Affiliate, as the case may be, are required to
be filed, and the Borrower and its Affiliates have paid or caused to be paid to
the respective taxing authorities all taxes as shown on said returns or on any
assessment received by any of them to the extent such taxes have become due.
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Section 5.9 TITLES AND LIENS. The Borrower has marketable title to all
Collateral described in the collateral reports provided to the Lender and all
other Collateral, properties and assets reflected in the latest balance sheet
referred to in Section 5.5 hereof and all proceeds thereof, free and clear of
all mortgages, security interests, liens and encumbrances, except in the case of
any such property which is not Collateral, covenants, restrictions, rights,
easements and minor irregularities in title which do not materially interfere
with the business or operations of the Borrower as presently conducted. No
financing statement naming the Borrower as debtor is on file in any office.
Section 5.10 PLANS. Except as disclosed to the Lender in writing prior
to the date hereof, neither the Borrower nor any of its Affiliates maintains or
has maintained any Plan. Neither the Borrower nor any Affiliate has received any
notice or has any knowledge to the effect that it is not in full compliance with
any of the requirements of ERISA. No Reportable Event or other fact or
circumstance which may have an adverse effect on the Plan's tax qualified status
exists in connection with any Plan. Neither the Borrower nor any of its
Affiliates has:
(a) Any accumulated funding deficiency within the meaning of
ERISA; or
(b) Any liability or knows of any fact or circumstances which
could result in any liability to the Pension Benefit Guaranty Corporation, the
Internal Revenue Service, the Department of Labor or any participant in
connection with any Plan (other than accrued benefits which or which may become
payable to participants or beneficiaries of any such Plan).
Section 5.11 DEFAULT. The Borrower is in compliance with all provisions
of all agreements, instruments, decrees and orders to which it is a party or by
which it or its property is bound or affected, the breach or default of which
could have a material adverse effect on the financial condition, properties or
operations of the Borrower.
Section 5.12 ENVIRONMENTAL PROTECTION. The Borrower has obtained all
permits, licenses and other authorizations which are required under federal,
state and local laws and regulations relating to emissions, discharges, releases
of pollutants, contaminants, hazardous or toxic materials, or wastes into
ambient air, surface water, ground water or land, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants or hazardous or toxic
materials or wastes ("Environmental Laws") at the Borrower's facilities or in
connection with the operation of its facilities. The Borrower shall provide
copies of all such permits, licenses and other authorizations to the Lender upon
the Lender's request. The Borrower also shall provide to the Lender copies of
all environmental investigation and inspection reports available to the Borrower
that pertain to the Borrower's facilities, upon the Lender's request. Except as
previously disclosed to the Lender in writing, the Borrower and all activities
of the Borrower at its facilities comply in all material respects with all
Environmental Laws and with all terms and conditions of any required permits,
licenses and authorizations applicable to the Borrower with respect thereto.
Except as previously disclosed to the Lender in writing, the Borrower is also in
compliance with all limitations, restrictions, conditions, standards,
prohibitions, requirements, obligations, schedules and timetables contained in
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Environmental Laws or contained in any plan, order, decree, judgment or notice
of which the Borrower is aware. Except as previously disclosed to the Lender in
writing, the Borrower is not aware of, nor has the Borrower received notice of,
any events, conditions, circumstances, activities, practices, incidents, actions
or plans which may interfere with or prevent continued compliance with, or which
may give rise to any liability under, any Environmental Laws. Except as
previously disclosed to the Lender in writing, the Borrower has received no
inquiry from any federal, state or local agency concerning the Borrower's
facilities or any adjacent properties involving possible environmental
contamination or violations of any Environmental Laws, and has no knowledge of
any such inquiry to any party concerning the Borrower's facilities or any
adjacent properties. The Borrower agrees to notify the Lender promptly in
writing of any inquiries by third parties or regulatory agencies concerning the
possible presence of environmental contamination on the Borrower's facilities or
any adjacent properties or concerning any possible violations of Environmental
Laws involving the Borrower's facilities or any adjacent properties. The Lender
shall have the right to enter the Borrower's facilities for the purpose of
conducting environmental investigations, including taking soil and water
samples, during the Borrower's normal business hours of operation.
Section 5.13 SUBMISSIONS TO THE LENDER. All financial and other
information provided to the Lender by or on behalf of the Borrower in connection
with the Borrower's request for the credit facilities contemplated hereby is
true and correct in all material respects and, as to projections, valuations or
proforma financial statements, present a good faith opinion as to such
projections, valuations and proforma condition and results.
Section 5.14 FINANCING STATEMENTS. The Borrower has provided to the
Lender signed financing statement(s) (and in the case of vehicles, signed title
documents) sufficient when filed to perfect the Security Interests and the other
security interests created by the Security Documents. When such financing
statements (or title documents with respect to Vehicles) are filed in the
offices noted therein, the Lender will have a valid and perfected security
interest in all Collateral and all other collateral described in the Security
Documents which is capable of being perfected by filing financing statements.
None of the Collateral or other collateral covered by the Security Documents is
or will become a fixture on real estate, unless a sufficient fixture filing is
in effect with respect thereto.
Section 5.15 RIGHTS TO PAYMENT. Each instrument, document, chattel
paper and other agreement constituting or evidencing Collateral or other
collateral covered by the Security Documents and each obligation thereunder is
(or, in the case of all future Collateral or such other collateral, will be when
arising or issued) the valid, genuine and legally enforceable obligation,
subject to no defense, setoff or counterclaim, of the account debtor or other
obligor named therein or in the Borrower's records pertaining thereto as being
obligated to pay such obligation.
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ARTICLE VI
AFFIRMATIVE COVENANTS OF THE BORROWER
So long as the Note shall remain unpaid or the Credit Facility shall be
outstanding, the Borrower will comply with the following requirements, unless
the Lender shall otherwise consent in writing:
Section 6.1 REPORTING REQUIREMENTS. The Borrower will deliver, or cause
to be delivered, to the Lender each of the following, which shall be in form and
detail acceptable to the Lender:
(a) as soon as available, and in any event within 120 days
after the end of each fiscal year of the Borrower, audited financial statements
of the Borrower with the unqualified opinion of independent certified public
accountants selected by the Borrower and acceptable to the Lender, which annual
financial statements shall include the balance sheet of the Borrower as at the
end of such fiscal year and the related statements of income, retained earnings
and cash flows of the Borrower for the fiscal year then ended, prepared, if the
Lender so requests, on a consolidating and consolidated basis to include any
Affiliates, all in reasonable detail and prepared in accordance with generally
accepted accounting principles applied on a basis consistent with the accounting
practices applied in the financial statements referred to in Section 5.5 hereof,
including a note signed by such accountants stating that in making the
investigations necessary for said opinion they obtained no knowledge, except as
specifically stated, of any Default or Event of Default hereunder and all
relevant facts in reasonable detail to evidence, and the computations as to,
whether or not the Borrower is in compliance with the requirements set forth in
Sections 6.12 through 6.15 and Section 7.10 hereof and including a certificate
of the chief financial officer of the Borrower stating that such financial
statements have been prepared in accordance with generally accepted accounting
principles applied on a basis consistent with the accounting practices reflected
in the annual financial statements referred to in Section 5.5 hereof and whether
or not such officer has knowledge of the occurrence of any Default or Event of
Default hereunder and, if so, stating in reasonable detail the facts with
respect thereto;
(b) as soon as available and in any event within 45 days after
the end of each quarter, an unaudited internal balance sheet and statements of
income and retained earnings of the Borrower as at the end of and for such
quarter month and for the year to date period then ended, prepared, if the
Lender so requests, on a consolidating and consolidated basis to include any
Affiliates, in reasonable detail and stating in comparative form the figures for
the corresponding date and periods in the previous year, all prepared in
accordance with generally accepted accounting principles applied on a basis
consistent with the accounting practices reflected in the financial statements
referred to in Section 5.5 hereof, subject to year-end audit adjustments; and
accompanied by a certificate of the chief financial officer of the Borrower,
substantially in the form of Exhibit D hereto stating (i) that such financial
statements have been prepared in accordance with generally accepted accounting
principles applied on a basis consistent with the accounting practices reflected
in the financial statements referred to in Section 5.5 hereof, subject to
year-end audit adjustments, (ii) whether or not such officer has knowledge of
the occurrence of any Default or Event of Default hereunder not theretofore
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reported and remedied and, if so, stating in reasonable detail the facts with
respect thereto, and (iii) all relevant facts in reasonable detail to evidence,
and the computations as to, whether or not the Borrower is in compliance with
the requirements set forth in Sections 6.12 through 6.15 and Section 7.10
hereof;
(c) within 30 days after the end of each month, agings of the
Borrower's accounts receivable and its accounts payable and an inventory
certification report as at the end of such month;
(d) at least 30 days before the beginning of each year of the
Borrower, the projected balance sheets and income statements for the ensuing
twelve months, each in reasonable detail, representing the good faith
projections of the Borrower and certified by the Borrower's chief financial
officer as being identical to the projections used by the Borrower for internal
planning purposes, together with such supporting schedules and information as
the Lender may in its discretion require;
(e) immediately after the commencement thereof, notice in
writing of all litigation and of all proceedings before any governmental or
regulatory agency affecting the Borrower of the type described in Section 5.6
hereof or which seek a monetary recovery against the Borrower in excess of
$25,000;
(f) as promptly as practicable (but in any event not later
than five (5) business days) after an officer of the Borrower obtains knowledge
of the occurrence of any breach, default or event of default under any Security
Document or any event which constitutes a Default or Event of Default hereunder,
notice of such occurrence, together with a detailed statement by a responsible
officer of the Borrower of the steps being taken by the Borrower to cure the
effect of such breach, default or event;
(g) as soon as possible and in any event within 30 days after
the Borrower knows or has reason to know that any Reportable Event with respect
to any Plan has occurred, the statement of the chief financial officer of the
Borrower setting forth details as to such Reportable Event and the action which
the Borrower proposes to take with respect thereto, together with a copy of the
notice of such Reportable Event to the Pension Benefit Guaranty Corporation;
(h) as soon as possible, and in any event within 10 days after
the Borrower fails to make any quarterly contribution required with respect to
any Plan under Section 412(m) of the Internal Revenue Code of 1986, as amended,
the statement of the chief financial officer of the Borrower setting forth
details as to such failure and the action which the Borrower proposes to take
with respect thereto, together with a copy of any notice of such failure
required to be provided to the Pension Benefit Guaranty Corporation;
(i) promptly upon knowledge thereof, notice of (i) any
disputes or claims by customers of the Borrower of a material nature; and (ii)
any change in the persons constituting the officers and directors of the
Borrower;
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(j) promptly upon knowledge thereof, notice of any material
loss of or material damage to any Collateral or other collateral covered by the
Security Documents or of any substantial adverse change in any Collateral or
such other collateral or the prospect of payment thereof;
(k) promptly upon their distribution, copies of all financial
statements, reports and proxy statements which the Borrower shall have sent to
its stockholders;
(l) promptly after the sending or filing thereof, copies of
all regular and periodic financial reports which the Borrower shall file with
the Securities and Exchange Commission or any national securities exchange,
including without limitation the Borrower's Quarterly 10Q Reports no later that
45 days after the quarterly period ending and the Borrower's Annual 10K Report
no later than 90 days after the fiscal year period ending;
(m) promptly upon knowledge thereof, notice of the violation
by the Borrower of any law, rule or regulation, the non-compliance with which
could materially and adversely affect its business or its financial condition;
and
(n) from time to time, with reasonable promptness, any and all
receivables schedules, collection reports, deposit records, equipment schedules,
copies of invoices to account debtors, shipment documents and delivery receipts
for goods sold, and such other material, reports, records or information as the
Lender may reasonably request.
(o) at the time of a requested Advance under Facility One a
report showing the Pro Forma Cash Flow Coverage Ratio taking into account the
Advance and the acquisition for which the request is made.
Section 6.2 BOOKS AND RECORDS; INSPECTION AND EXAMINATION. The Borrower
will keep accurate books of record and account for itself pertaining to the
Collateral and pertaining to the Borrower's business and financial condition and
such other matters as the Lender may from time to time request in which true and
complete entries will be made in accordance with generally accepted accounting
principles consistently applied and, upon request of the Lender, will permit any
officer, employee, attorney or accountant for the Lender to audit, review, make
extracts from or copy any and all corporate and financial books and records of
the Borrower at all times during ordinary business hours, to send and discuss
with account debtors and other obligors requests for verification of amounts
owed to the Borrower, and to discuss the affairs of the Borrower with any of its
directors, officers, employees or agents. The Borrower will permit the Lender,
or its employees, accountants, attorneys or agents, to examine and inspect any
Collateral, other collateral covered by the Security Documents or any other
property of the Borrower at any time during ordinary business hours.
Section 6.3 ACCOUNT VERIFICATION. The Borrower will at any time and
from time to time as Lender may reasonably request, send requests for
verification of accounts or notices of assignment to account debtors and other
obligors.
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Section 6.4 COMPLIANCE WITH LAWS; ENVIRONMENTAL INDEMNITY. The Borrower
will (a) comply with the requirements of applicable laws and regulations, the
non-compliance with which would materially and adversely affect its business or
its financial condition, (b) comply with all applicable Environmental Laws and
obtain any permits, licenses or similar approvals required by any such
Environmental Laws, and (c) use and keep the Collateral, and will require that
others use and keep the Collateral, only for lawful purposes, without violation
of any federal, state or local law, statute or ordinance. The Borrower will
indemnify, defend and hold the Lender harmless from and against any claims, loss
or damage to which the Lender may be subjected as a result of any past, present
or future existence, use, handling, storage, transportation or disposal of any
hazardous waste or substance or toxic substance by the Borrower or on property
owned, leased or controlled by the Borrower. This indemnification agreement
shall survive the termination of this Agreement and payment of the indebtedness
hereunder.
Section 6.5 PAYMENT OF TAXES AND OTHER CLAIMS. The Borrower will pay or
discharge, when due, (a) all taxes, assessments and governmental charges levied
or imposed upon it or upon its income or profits, upon any properties belonging
to it (including, without limitation, the Collateral) or upon or against the
creation, perfection or continuance of the Security Interests, prior to the date
on which penalties attach thereto, (b) all federal, state and local taxes
required to be withheld by it, and (c) all lawful claims for labor, materials
and supplies which, if unpaid, might by law become a lien or charge upon any
properties of the Borrower; provided, that the Borrower shall not be required to
pay any such tax, assessment, charge or claim whose amount, applicability or
validity is being contested in good faith by appropriate proceedings and so long
as the Collateral and the Lender's lien thereon is not in any manner impaired by
any enforcement remedy available to the tax levying entity during the period of
such contest.
Section 6.6 MAINTENANCE OF PROPERTIES.
(a) The Borrower will keep and maintain the Collateral, the
other collateral covered by the Security Documents and all of its other
properties necessary or useful in its business in good condition, repair and
working order (normal wear and tear excepted) and will from time to time replace
or repair any worn, defective or broken parts; provided, however, that nothing
in this Section 6.6 shall prevent the Borrower from discontinuing the operation
and maintenance of any of its properties if such discontinuance is, in the
judgment of the Lender, desirable in the conduct of the Borrower's business and
not disadvantageous in any material respect to the Lender.
(b) The Borrower will defend the Collateral against all claims
or demands of all persons (other than the Lender) claiming the Collateral or any
interest therein.
(c) The Borrower will keep all Collateral and other collateral
covered by the Security Documents free and clear of all security interests,
liens and encumbrances except the Security Interests and other security
interests permitted by Section 7.1 hereof.
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Section 6.7 INSURANCE. The Borrower will obtain and at all times
maintain insurance with insurers believed by the Borrower to be responsible and
reputable, in such amounts and against such risks as may from time to time be
required by the Lender, but in all events in such amounts and against such risks
as is usually carried by companies engaged in similar business and owning
similar properties in the same general areas in which the Borrower operates.
Without limiting the generality of the foregoing, the Borrower will at all times
keep all tangible Collateral insured against risks of fire (including so-called
extended coverage), theft, collision (for Collateral consisting of motor
vehicles) and such other risks and in such amounts as the Lender may reasonably
request, with any loss payable to the Lender to the extent of its interest, and
all policies of such insurance shall contain a lender's loss payable endorsement
for the benefit of the Lender. All policies of liability insurance required
hereunder shall name the Lender as an additional insured and liability insurance
shall be maintained in the following minimum amounts: $1,000,000 per occurrence,
$2,000,000 in aggregate and $10,000,000 in umbrella coverage.
Section 6.8 PRESERVATION OF CORPORATE EXISTENCE. The Borrower will
preserve and maintain its corporate existence and all of its rights, privileges
and franchises necessary or desirable in the normal conduct of its business and
shall conduct its business in an orderly, efficient and regular manner.
Section 6.9 DELIVERY OF INSTRUMENTS, ETC. Upon request by the Lender,
the Borrower will promptly deliver to the Lender in pledge all instruments,
documents and chattel papers constituting Collateral, duly endorsed or assigned
by the Borrower.
Section 6.10 PERFORMANCE BY THE LENDER. If the Borrower at any time
fails to perform or observe any of the foregoing covenants contained in this
Article VI or elsewhere herein, and if such failure shall continue for a period
of ten (10) calendar days after the Lender gives the Borrower written notice
thereof (or in the case of the agreements contained in Sections 6.5, 6.7 and
6.10 hereof, immediately upon the occurrence of such failure, without notice or
lapse of time), the Lender may, but need not, perform or observe such covenant
on behalf and in the name, place and stead of the Borrower (or, at the Lender's
option, in the Lender's name) and may, but need not, take any and all other
actions which the Lender may reasonably deem necessary to cure or correct such
failure (including, without limitation, the payment of taxes, the satisfaction
of security interests, liens or encumbrances, the performance of obligations
owed to account debtors or other obligors, the procurement and maintenance of
insurance, the execution of assignments, security agreements and financing
statements, and the endorsement of instruments); and the Borrower shall
thereupon pay to the Lender on demand the amount of all monies expended and all
costs and expenses (including reasonable attorneys' fees and legal expenses)
incurred by the Lender in connection with or as a result of the performance or
observance of such agreements or the taking of such action by the Lender,
together with interest thereon from the date expended or incurred at the
Floating Rate. To facilitate the performance or observance by the Lender of such
covenants of the Borrower, the Borrower hereby irrevocably appoints the Lender,
or the delegate of the Lender, acting alone, as the attorney in fact of the
Borrower (which appointment is coupled with an interest) with the right (but not
the duty) from time to time to create, prepare, complete, execute, deliver,
endorse or file in the name and on behalf of the Borrower any and all
instruments, documents, assignments, security agreements, financing statements,
applications for insurance and other agreements and writings required to be
obtained, executed, delivered or endorsed by the Borrower under this Section
6.11.
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Section 6.11 CURRENT RATIO. The Borrower will at all times maintain a
Current Ratio of not less than 1.25 to 1.00 measured on a quarterly basis.
Section 6.12 DEBT TO WORTH RATIO. The Borrower will at all times
maintain a Debt to Worth Ratio of not more than 1.50 to 1.00 measured on a
quarterly basis.
Section 6.13 CASH FLOW COVERAGE RATIO. The Borrower will at all times
maintain a Cash Flow Ratio of not less than 1.50 to 1.00 measured on rolling
basis for the prior four quarters.
Section 6.14 DEBT TO EBIDTA RATIO. The Borrower will at all times
maintain a Debt to EBIDTA Ratio of not more than 3.00 to 1.00 measured on a
quarterly basis.
Section 6.15 PRO FORMA CASH FLOW COVERAGE RATIO. Each Pro Forma Report
required hereunder shall show that Borrower will maintain a Cash Flow Coverage
Ratio of not more than 1.50 to 1.00 for the applicable period.
Section 6.16 SALES PROCEEDS. All proceeds from the sale of the
collateral or any other assets of Borrower shall be payable directly to Lender
to reduce the amount of the Credit Facilities. Notwithstanding the foregoing, so
long as no Event of Default has occurred and pending and so long as the sale in
question would not result in an Event of Default, Borrower may retain:
(i) sales proceeds which are used to replace the Collateral
or other property sold with property of a similar type;
(ii) the proceeds of the sale of up to four (4) child care
centers in any twelve month period not to exceed eight
(8) child care centers in total; and
(iii) the proceeds of the sale of any assets not covered
under (i) or (ii) above to Lender to the extent of 20%
of all such other assets (based on their book value)
sold in any twelve month period.
Section 6.17 WARRANT. Borrower shall timely and fully comply with the
provisions of the Stock Warrant.
ARTICLE VII
NEGATIVE COVENANTS
So long as the Note shall remain unpaid or the Credit Facility shall
be outstanding, the Borrower agrees that, without the prior written consent of
the Lender:
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Section 7.1 LIENS. Unless approved in writing by Lender, the Borrower
will not create, incur or suffer to exist any mortgage, deed of trust, pledge,
lien, security interest, assignment or transfer upon or of any of its assets,
now owned or hereafter acquired, to secure any indebtedness, other than leases
of Vehicles from non-Affiliated third party lessors and other than liens
securing loans approved by Lender under Section 7.2(d) below. This limitation is
specifically intended to extend to any assignment (as collateral or otherwise)
of any of Borrower's interest in any leases of any of the Premises.
Section 7.2 INDEBTEDNESS. The Borrower will not incur, create, assume
or permit to exist any indebtedness or liability on account of deposits or
advances or any indebtedness for borrowed money, or any other indebtedness or
liability evidenced by notes, bonds, debentures or similar obligations, except:
(a) indebtedness arising hereunder;
(b) indebtedness of the Borrower in existence on the date
hereof and listed in EXHIBIT C hereto;
(c) Subordinated Debt; and
(d) other indebtedness approved, in advance and in writing by
Lender, which approval shall not be unreasonable withheld.
Section 7.3 GUARANTIES. The Borrower will not assume, guarantee,
endorse or otherwise become directly or contingently liable in connection with
any obligations of any other Person, except the endorsement of negotiable
instruments by the Borrower for deposit or collection or similar transactions in
the ordinary course of business; and
Section 7.4 INVESTMENTS AND SUBSIDIARIES.
(a) The Borrower will not purchase or hold beneficially any
stock or other securities or evidences of indebtedness of, make or permit to
exist any loans or advances to, or make any investment or acquire any interest
whatsoever in, any other Person, including specifically but without limitation
any partnership or joint venture, except:
(1) investments in direct obligations of the United
States of America or any agency or instrumentality thereof whose obligations
constitute full faith and credit obligations of the United States of America
having a maturity of one year or less, commercial paper issued by U.S.
corporations rated "A-1" or "A-2" by Standard & Poors Corporation or "P-1" or
"P-2" by Moody's Investors Service or certificates of deposit or bankers'
acceptances having a maturity of one year or less issued by members of the
Federal Reserve System having deposits in excess of $100,000,000 (which
certificates of deposit or bankers' acceptances are fully insured by the Federal
Deposit Insurance Corporation);
(2) advances in the form of progress payments, prepaid
rent or security deposits.
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(3) up to $500,000 in the Eaton Vance Floating Rate
Fund.
(4) regular bank checking and savings accounts.
(b) The Borrower will not create or permit to exist any
Subsidiary, other than any Subsidiary in existence on the date hereof and listed
in EXHIBIT B hereto.
Section 7.5 DIVIDENDS. The Borrower will not declare or pay any
dividends on any class of its stock or make any payment on account of the
purchase, redemption or other retirement of any shares of such stock or make any
distribution in respect thereof, either directly or indirectly, during the
pendency of any Event of Default if the effect of the same would result in
Borrower failing to satisfy any of the financial covenants of this Agreement.
Section 7.6 SALE OR TRANSFER OF ASSETS; SUSPENSION OF BUSINESS
OPERATIONS. The Borrower will not sell, lease, assign, transfer or otherwise
dispose of: the stock of any Subsidiary, or any of the Collateral or other of
its assets. Notwithstanding the foregoing, so long as no Event of Default exists
or would result from the sale, Borrower may
(i) sell tangible assets so long as the same is immediately
replaced with assets of a similar type of equal or
greater value;
(ii) sell up to four (4) child care centers in any twelve
month period not to exceed a total of eight (8) child
care centers;
(iii) sell assets not included in (i) or (ii) above to the
extent of not more than 20% of all such other assets
(based on book value) in any twelve month period.
Borrower will not liquidate, dissolve or suspend business operations. The
Borrower will not in any manner transfer any property without prior or present
receipt of full and adequate consideration.
Section 7.7 CONSOLIDATION AND MERGER; ASSET ACQUISITIONS. The Borrower
will not consolidate with or merge into any Person, or permit any other Person
to merge into it, or acquire in a transaction analogous in purpose or effect to
a consolidation or merger all or substantially all the assets of any other
Person.
Section 7.8 SALE AND LEASEBACK. The Borrower will not enter into any
arrangement, directly or indirectly, with any other Person whereby the Borrower
shall sell or transfer any real or personal property, whether now owned or
hereafter acquired, and then or thereafter rent or lease as lessee such property
or any part thereof or any other property which the Borrower intends to use for
substantially the same purpose or purposes as the property being sold or
transferred.
Section 7.9 RESTRICTIONS ON NATURE OF BUSINESS. The Borrower will not
engage in any line of business materially different from that presently engaged
in by the Borrower and will not purchase, lease or otherwise acquire assets not
related to its business.
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Section 7.10 ACCOUNTING. The Borrower will not adopt any material
change in accounting principles other than as required by generally accepted
accounting principles. The Borrower will not adopt, permit or consent to any
change in its fiscal year.
Section 7.11 DEFINED BENEFIT PENSION PLANS. The Borrower will not
adopt, create, assume or become a party to any defined benefit pension plan,
unless disclosed to the Lender pursuant to Section 5.10 hereof.
Section 7.12 OTHER DEFAULTS. The Borrower will not permit any breach,
default or event of default by the Borrower to occur under any note, loan
agreement, indenture, lease, mortgage, contract for deed, security agreement or
other contractual obligation binding upon the Borrower.
Section 7.13 PLACE OF BUSINESS; NAME. The Borrower shall give Lender at
least thirty (30) days prior written notice of any transfer of its chief
executive office or principal place of business, or of any move, relocation, or
closing of any business location. Borrower will not sell any business location
except as permitted in Section 7.6 above. The Borrower will not permit any
tangible Collateral or any records pertaining to the Collateral to be located in
any state or area in which, in the event of such location, a financing statement
covering such Collateral would be required to be, but has not in fact been,
filed in order to perfect the Security Interests. The Borrower, shall give
Lender at least thirty (30) days prior written notice of any change of its name.
Section 7.14 ORGANIZATIONAL DOCUMENTS. The Borrower will not amend its
certificate of incorporation, articles of incorporation or bylaws in any manner
which could adversely affect the obligations to Lender or the validity,
perfection or priority of any liens in favor of Lender, without the Lender's
prior written consent. The Borrower will not become an S Corporation within the
meaning of the Internal Revenue Code of 1986, as amended, or, if the Borrower
already is such an S Corporation, it shall not change or rescind its status as
an S Corporation.
ARTICLE VIII
EVENTS OF DEFAULT, RIGHTS AND REMEDIES
Section 8.1 EVENTS OF DEFAULT. "Event of Default", wherever used
herein, means any one of the following events:
(a) Default in the payment of any interest on or principal
under any of the Notes if not paid within ten (10) days of the date when the
same becomes due and payable; or
(b) Default in the payment of any fees, commissions, costs or
expenses required to be paid by the Borrower under this Agreement if not paid
within ten (10) days of its due date; or
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(c) Default in the performance, or breach, of any other
covenant or agreement of the Borrower contained in this Agreement not cured
within twenty (20) days of written notice thereof from Lender to Borrower; or
(d) The Borrower or any Guarantor shall be or become
insolvent, or admit in writing its inability to pay its or his debts as they
mature, or make an assignment for the benefit of creditors; or the Borrower or
any Guarantor shall apply for or consent to the appointment of any receiver,
trustee, or similar officer for it or him or for all or any substantial part of
its or his property; or such receiver, trustee or similar officer shall be
appointed without the application or consent of the Borrower or such Guarantor,
as the case may be and not dismissed within forty-five (45) days; or the
Borrower or any Guarantor shall institute (by petition, application, answer,
consent or otherwise) any bankruptcy, insolvency, reorganization, arrangement,
readjustment of debt, dissolution, liquidation or similar proceeding relating to
it or him under the laws of any jurisdiction; or any such proceeding shall be
instituted (by petition, application or otherwise) against the Borrower or any
such Guarantor and not dismissed within sixty (60) days; or any judgment, writ,
warrant of attachment, garnishment or execution or similar process shall be
issued or levied against a substantial part of the property of the Borrower or
any Guarantor and not dismissed within thirty (30) days; or
(e) A petition shall be filed by or against the Borrower or
any Guarantor under the United States Bankruptcy Code naming the Borrower or
such Guarantor as debtor (and in the case of an involuntary petition the same is
not dismissed in sixty (60) days); or
(f) Any representation or warranty made by the Borrower in
this Agreement, by any Guarantor in any guaranty delivered to the Lender or by
the Borrower (or any of its officers) or any Guarantor in any agreement,
certificate, instrument or financial statement or other statement contemplated
by or made or delivered pursuant to or in connection with this Agreement or any
such guaranty shall prove to have been incorrect in any material respect when
made or deemed hereunder to be remade; or
(g) The rendering against the Borrower of a final judgment,
decree or order for the payment of money in excess of $50,000.00 and the
continuance of such judgment, decree or order unsatisfied and in effect for any
period of thirty (30) consecutive days without a stay of execution; or
(h) A default under any bond, debenture, note or other
evidence of indebtedness of the Borrower owed to any Person other than the
Lender, or under any indenture or other instrument under which any such evidence
of indebtedness has been issued or by which it is governed, or under any lease
of any of the Premises, and the expiration of the applicable period of grace, if
any, specified in such evidence of indebtedness, indenture, other instrument or
lease; or
(i) Any Reportable Event, which the Lender determines in good
faith might constitute grounds for the termination of any Plan or for the
appointment by the appropriate United States District Court of a trustee to
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administer any Plan, shall have occurred and be continuing 30 days after written
notice to such effect shall have been given to the Borrower by the Lender; or a
trustee shall have been appointed by an appropriate United States District Court
to administer any Plan; or the Pension Benefit Guaranty Corporation shall have
instituted proceedings to terminate any Plan or to appoint a trustee to
administer any Plan; or the Borrower shall have filed for a distress termination
of any Plan under Title IV of ERISA; or the Borrower shall have failed to make
any quarterly contribution required with respect to any Plan under Section
412(m) of the Internal Revenue Code of 1986, as amended, which the Lender
determines in good faith may by itself, or in combination with any such failures
that the Lender may determine are likely to occur in the future, result in the
imposition of a lien on the assets of the Borrower in favor of the Plan; or
(j) An event of default shall occur under any Security
Document or under any other security agreement, mortgage, deed of trust,
assignment or other instrument or agreement securing any obligations of the
Borrower hereunder or under any note; or
(k) The Borrower shall liquidate, dissolve, terminate or
suspend its business operations or otherwise fail to operate its business in the
ordinary course, or sell all or substantially all of its assets, without the
prior written consent of the Lender; or
(l) The Borrower shall fail to pay, withhold, collect or remit
any tax or tax deficiency when assessed or due (other than any tax deficiency
which is being contested in good faith and by proper proceedings and for which
it shall have set aside on its books adequate reserves therefor) except as
allowed by Section 6.5 or notice of any state or federal tax liens shall be
filed or issued; or
(m) Default in the payment of any amount owed by the Borrower
to the Lender other than any indebtedness arising hereunder; or
Section 8.2 RIGHTS AND REMEDIES. Upon the occurrence of an Event of
Default or at any time thereafter, the Lender may exercise any or all of the
following rights and remedies:
(a) The Lender may, by notice to the Borrower, declare the
Credit Facility to be terminated, whereupon the same shall forthwith terminate;
(b) The Lender may, by notice to the Borrower, declare to be
forthwith due and payable the entire unpaid principal amounts of the Notes then
outstanding, all interest accrued and unpaid thereon, all amounts payable under
this Agreement and any other Obligations, whereupon the Notes, all such accrued
interest and all such amounts and Obligations shall become and be forthwith due
and payable, without presentment, notice of dishonor, protest or further notice
of any kind, all of which are hereby expressly waived by the Borrower;
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(c) The Lender may, without notice to the Borrower and without
further action, apply any and all money owing by the Lender to the Borrower,
including without limitation any funds on deposit with the Lender, whether or
not matured, to the payment of the Advances, including interest accrued thereon,
and of all other sums then owing by the Borrower hereunder;
(d) The Lender may, exercise and enforce any and all rights
and remedies available upon default to a secured party under the UCC, including,
without limitation, the right to take possession of Collateral, or any evidence
thereof, proceeding without judicial process or by judicial process (without a
prior hearing or notice thereof, which the Borrower hereby expressly waives) and
the right to sell, lease or otherwise dispose of any or all of the Collateral,
and, in connection therewith, the Borrower will on demand assemble the
Collateral and make it available to the Lender at a place to be designated by
the Lender which is reasonably convenient to both parties;
(e) The Lender may exercise and enforce its rights and
remedies under the Loan Documents; and
(f) The Lender may exercise any other rights and remedies
available to it by law or agreement.
Notwithstanding the foregoing, upon the occurrence of an Event of Default
described in Section 8.1(e) hereof, the entire unpaid principal amounts of the
Notes (whether contingent or funded), all interest accrued and unpaid thereon,
all other amounts payable under this Agreement and any other Obligations shall
be immediately due and payable automatically without presentment, demand,
protest or notice of any kind.
Section 8.3 CERTAIN NOTICES. If notice to the Borrower of any intended
disposition of Collateral, such notice shall be deemed commercially reasonable
if given (in the manner specified in Section 9.3) at least five (5) calendar
days prior to the date of intended disposition or other action.
ARTICLE IX
MISCELLANEOUS
Section 9.1 NO WAIVER; CUMULATIVE REMEDIES. No failure or delay on the
part of the Lender in exercising any right, power or remedy under the Loan
Documents shall operate as a waiver thereof; nor shall any single or partial
exercise of any such right, power or remedy preclude any other or further
exercise thereof or the exercise of any other right, power or remedy under the
Loan Documents. The remedies provided in the Loan Documents are cumulative and
not exclusive of any remedies provided by law.
Section 9.2 AMENDMENTS, ETC. No amendment, modification, termination or
waiver of any provision of any Loan Document or consent to any departure by the
Borrower therefrom or any release of a Security Interest shall be effective
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unless the same shall be in writing and signed by the Lender, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given. No notice to or demand on the Borrower in any
case shall entitle the Borrower to any other or further notice or demand in
similar or other circumstances.
Section 9.3 ADDRESSES FOR NOTICES, ETC. Except as otherwise expressly
provided herein, all notices, requests, demands and other communications
provided for under the Loan Documents shall be in writing and shall be (a)
personally delivered, (b) sent by first class United States mail, (c) sent by
overnight courier of national reputation, or (d) transmitted by telecopy, in
each case addressed to the party to whom notice is being given at its address as
set forth below and, if telecopied, transmitted to that party at its telecopier
number set forth below:
If to the Borrower:
Sunrise Educational Services, Inc.
9128 East San Salvidor Drive
Scottsdale, Arizona 85258
Attention: Ron O'Connor
Telecopier: (602) 860-4314
With a copy to:
Streich Lang
Two North Central Avenue
Phoenix, Arizona 85004-2391
Attention: Neil Irwin
Telecopier: (602) 229-5690
If to the Lender:
Imperial Bank
9920 South La Cienega Boulevard
Suite 636
Inglewood, California 90301
Attention: General Counsel
Telecopier: (310) 417-5695
With a copy to:
Imperial Bank
4343 East Camelback Road
Suite 444
Phoenix, Arizona 85018
Attention: Scott Spillman
Telecopier:(602) 952-8643
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or, as to each party, at such other address or telecopier number as may
hereafter be designated by such party in a written notice to the other party
complying as to delivery with the terms of this Section. All such notices,
requests, demands and other communications shall be deemed to have been given on
(a) the date received if personally delivered, (b) when deposited in the mail if
delivered by mail, (c) the date sent if sent by overnight courier, or (d) the
date of transmission if delivered by telecopy, except that notices or requests
to the Lender pursuant to any of the provisions of Article II hereof shall not
be effective until received by the Lender.
Section 9.4 FINANCING STATEMENT. A carbon, photographic or other
reproduction of this Agreement or of any financing statements signed by the
Borrower is sufficient as a financing statement and may be filed as a financing
statement in any state to perfect the security interests granted hereby. For
this purpose, the following information is set forth:
Name and address of Debtor:
Sunrise Educational Services, Inc.
9128 San Salvador Drive
Scottsdale, Arizona 85258
Federal Tax Identification No. 86-0532619
Name and address of Secured Party:
Imperial Bank, a California banking corporation
Lending Services
9920 South La Cienega Boulevard
Inglewood, California 90301
Attention: General Counsel
Section 9.5 FURTHER DOCUMENTS. The Borrower will from time to time
execute and deliver or endorse any and all instruments, documents, conveyances,
assignments, security agreements, financing statements and other agreements and
writings that the Lender may reasonably request in order to secure, protect,
perfect or enforce the Security Interests or the rights of the Lender under this
Agreement (but any failure to request or assure that the Borrower executes,
delivers or endorses any such item shall not affect or impair the validity,
sufficiency or enforceability of this Agreement and the Security Interests,
regardless of whether any such item was or was not executed, delivered or
endorsed in a similar context or on a prior occasion).
Section 9.6 COLLATERAL. This Agreement does not contemplate a sale of
accounts, contract rights or chattel paper, and, as provided by law, the
Borrower is entitled to any surplus and shall remain liable for any deficiency.
The Lender's duty of care with respect to Collateral in its possession (as
imposed by law) shall be deemed fulfilled if it exercises reasonable care in
physically keeping such Collateral, or in the case of Collateral in the custody
or possession of a bailee or other third person, exercises reasonable care in
the selection of the bailee or other third person, and the Lender need not
otherwise preserve, protect, insure or care for any Collateral. The Lender shall
not be obligated to preserve any rights the Borrower may have against prior
parties, to realize on the Collateral at all or in any particular manner or
order or to apply any cash proceeds of the Collateral in any particular order of
application.
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Section 9.7 COSTS AND EXPENSES. The Borrower agrees to pay on demand
all costs and expenses, including (without limitation) attorneys' fees, incurred
by the Lender in connection with the Obligations, this Agreement, the Loan
Documents and any other document or agreement related hereto or thereto, and the
transactions contemplated hereby, including without limitation all such costs,
expenses and fees incurred in connection with the negotiation, preparation,
execution, amendment, administration, performance, collection and enforcement of
the Obligations and all such documents and agreements and the creation,
perfection, protection, satisfaction, foreclosure or enforcement of the Security
Interests.
Section 9.8 INDEMNITY. In addition to the payment of expenses pursuant
to Section 9.7 hereof and the environmental indemnity pursuant to Section 6.4
hereof, the Borrower agrees to indemnify, defend and hold harmless the Lender,
and any of its participants, parent corporations, subsidiary corporations,
affiliated corporations, successor corporations, and all present and future
officers, directors, employees and agents of the foregoing (the "Indemnitees"),
from and against (i) any and all transfer taxes, documentary taxes, assessments
or charges made by any governmental authority by reason of the execution and
delivery of this Agreement and the other Loan Documents or the making of the
Advances, and (ii) any and all liabilities, losses, damages, penalties,
judgments, suits, claims, costs and expenses of any kind or nature whatsoever
(including, without limitation, the reasonable fees and disbursements of
counsel) in connection with any investigative, administrative or judicial
proceedings, whether or not such Indemnitee shall be designated a party thereto,
which may be imposed on, incurred by or asserted against such Indemnitee, in any
manner relating to or arising out of or in connection with the making of the
Advances, this Agreement and all other Loan Documents or the use or intended use
of the proceeds of the Advances (the "Indemnified Liabilities"). If any
investigative, judicial or administrative proceeding arising from any of the
foregoing is brought against any Indemnitee, upon request of such Indemnitee,
the Borrower, or counsel designated by the Borrower and satisfactory to the
Indemnitee, will resist and defend such action, suit or proceeding to the extent
and in the manner directed by the Indemnitee, at the Borrower's sole cost and
expense. Each Indemnitee will use its best efforts to cooperate in the defense
of any such action, suit or proceeding. If the foregoing undertaking to
indemnify, defend and hold harmless may be held to be unenforceable because it
violates any law or public policy, the Borrower shall nevertheless make the
maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law. The obligation of the
Borrower under this Section 9.8 shall survive the termination of this Agreement
and the discharge of the Borrower's other Obligations.
Section 9.9 PARTICIPANTS. The Lender and its participants, if any, are
not partners or joint venturers, and the Lender shall not have any liability or
responsibility for any obligation, act or omission of any of its participants.
All rights and powers specifically conferred upon the Lender may be transferred
or delegated to any of the participants, successors or assigns of the Lender.
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Section 9.10 EXECUTION IN COUNTERPARTS. This Agreement and other Loan
Documents may be executed in any number of counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of which
counterparts, taken together, shall constitute but one and the same instrument.
Section 9.11 BINDING EFFECT; ASSIGNMENT; COMPLETE AGREEMENT; SHARING OF
INFORMATION. The Loan Documents shall be binding upon and inure to the benefit
of the Borrower and the Lender and their respective successors and assigns,
except that the Borrower shall not have the right to assign its rights
thereunder or any interest therein without the prior written consent of the
Lender. This Agreement, together with the Loan Documents, comprises the complete
and integrated agreement of the parties on the subject matter hereof and
supersedes all prior agreements, written or oral, on the subject matter hereof.
Without limitation of the Lender's right to share information regarding the
Borrower and its Affiliates with Lender's participants, accountants, lawyers and
other advisors, the Lender may share at any time with Imperial Bancorp. and all
direct and indirect subsidiaries of Imperial Bancorp. any and all information
the Lender may have in its possession regarding the Borrower and its Affiliates,
and the Borrower waives any right of confidentiality it may have with respect to
such sharing of such information.
Section 9.12 GOVERNING LAW; JURISDICTION, VENUE; WAIVER OF JURY TRIAL.
The Loan Documents shall be governed by and construed in accordance with the
substantive laws (other than conflict laws) of the State of California, except
to the extent Lender has greater rights or remedies under Federal law, whether
as a national bank or otherwise, in which case such choice of California law
shall not be deemed to deprive Lender of any such rights and remedies as may be
available under Federal law. Subject to the provisions of Section 9.15 hereof,
each party consents to the personal jurisdiction and venue of the state courts
located in Los Angeles, State of California in connection with any controversy
related to this Agreement, waives any argument that venue in any such forum is
not convenient and agrees that any litigation initiated by any of them in
connection with this Agreement shall be venued in the Superior Court of Los
Angeles County, California. The parties waive any right to trial by jury in any
action or proceeding based on or pertaining to this Agreement or any of the Loan
Documents.
Section 9.13 SEVERABILITY OF PROVISIONS. Any provision of this
Agreement which is prohibited or unenforceable shall be ineffective to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof.
Section 9.14 HEADINGS. Article and Section headings in this Agreement
are included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.
Section 9.15 REFERENCE PROVISION. a. Each controversy, dispute or claim
("Claim") between the parties arising out of or relating to this Agreement
and/or any of the Loan Documents which is not settled in writing within ten days
after the "Claim Date" (defined as the date on which a party gives written
notice to all other parties that a controversy, dispute or claim exists), will
be settled by a reference proceeding in Los Angeles, California, in accordance
with the provisions of Section 638 ET SEQ. of the California Code of Civil
Procedure, or their successor section ("CCP"), which shall constitute the
exclusive remedy for the settlement of any Claim,
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including whether such Claim is subject to the reference proceeding and the
parties waive their rights to initiate any legal proceedings against each other
in any court or jurisdiction other than the Superior Court of Los Angeles (the
"Court"). The referee shall be a retired Judge selected by mutual agreement of
the parties, and if they cannot so agree within thirty days (30) after the Claim
Date, the referee shall be selected by the Presiding Judge of the Court. The
referee shall be appointed to sit as a temporary judge, as authorized by law.
The referee shall (a) be requested to set the matter for hearing within sixty
(60) days after the Claim Date and (b) try any and all issues of law or fact and
report a statement of decision upon them, if possible, within ninety (90) days
of the Claim Date. Any decision rendered by the referee will be final, binding
and conclusive and judgment shall be entered pursuant to CCP 644 in the Court.
All discovery permitted by this Agreement shall be completed no later than
fifteen (15) days before the first hearing date established by the referee. The
referee may extend such period in the event of a party's refusal to provide
requested discovery for any reason whatsoever, including, without limitation,
legal objections raised to such discovery or unavailability of a witness due to
absence or illness. No party shall be entitled to "priority" in conducing
discovery. Depositions may be taken by either party upon seven (7) days written
notice, and, request for production of inspection of documents shall be
responded to within ten (10) days after service. All disputes relating to
discovery which cannot be resolved by the parties shall be submitted to the
referee whose decision shall be final and binding upon the parties.
b. The referee shall be required to determine all issues in accordance
with existing case law and the statutory laws of the State of California. The
rules of evidence applicable to proceedings at law in the State of California
will be applicable to the reference proceeding. The referee shall be empowered
to enter equitable as well as legal relief, to provide all temporary and/or
provisional remedies and to enter equitable orders that will be binding upon the
parties. The prevailing party shall be entitled to an award of reasonable
attorneys' fees and other costs incurred, pursuant to California Civil Code
Section 1717, as amended. The referee shall issue a single judgment at the close
of the reference proceeding which shall dispose of all of the claims of the
parties that are the subject to the reference. The parties hereto expressly
reserve the right to contest or appeal from the final judgment or any appealable
order or appealable judgment entered by the referee. The parties expressly
reserve the right to findings of fact, conclusions of law, a written statement
of decision, and the right to move for a new trial or a different judgment,
which new trial, if granted, is also to be a reference proceeding under this
provision.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first above written.
SUNRISE EDUCATIONAL SERVICES, INC.
By:
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Name:
-----------------------------------------
Title:
-----------------------------------------
IMPERIAL BANK, A CALIFORNIA BANKING CORPORATION
By:
--------------------------------------------
Name:
-----------------------------------------
Title:
-----------------------------------------
36
<PAGE>
EXHIBIT B TO CREDIT AND SECURITY AGREEMENT
NAMES
Sunrise Educational Services, Inc.
Sunrise Preschools, Inc.
Suncrest Private Schools
Sunburst Child Care
CHIEF EXECUTIVE OFFICE/PRINCIPAL PLACE OF BUSINESS
9128 San Salvador Drive
Scottsdale, Arizona 85258
OTHER INVENTORY AND EQUIPMENT LOCATIONS
See Exhibit E
SUBSIDIARIES
Sunrise Preschools, Hawaii, Inc.
37
<PAGE>
EXHIBIT C TO CREDIT AND SECURITY AGREEMENT
PERMITTED LIENS, INDEBTEDNESS AND GUARANTIES
38
<PAGE>
EXHIBIT D
COMPLIANCE CERTIFICATE
To: Imperial Bank, a California banking corporation
---------------------------------------------------------
Date:
Subject: Financial Statements
----------------------------------------------------
In accordance with our Credit and Security Agreement dated as of
(the "Credit Agreement"), attached are the financial statements of ___________
(the "Borrower") for the period ending and the year-to-date period then ended
(the "Current Financials"). All terms in this certificate have the meanings
given in the Credit Agreement and are given on behalf of the Borrower.
On behalf of the Borrower, I certify that the Current Financials
have been prepared in accordance with GAAP, subject to year-end audit
adjustments, and fairly present the financial condition of the Borrower as of
the date thereof.
EVENTS OF DEFAULT. (Check one):
___ The undersigned does not have knowledge of the
occurrence of a Default or Event of Default under the Credit
Agreement.
___ The undersigned has knowledge of the occurrence
of a Default or Event of Default under the Credit Agreement and
attached hereto is a statement of the facts with respect to thereto.
FINANCIAL COVENANTS. On behalf of the Borrower, I further hereby
certify as follows:
A. CURRENT RATIO. Pursuant to Section 6.11 of the Credit
Agreement, as of the Reporting Date, the Borrower's Current Ratio was ___ to
1.00, which ____ satisfies ____ does not satisfy the requirement that such ratio
be no less than 1.25 to 1.00 for the Applicable Period ending on the Reporting
Date.
B. DEBT TO WORTH RATIO. Pursuant to Section 6.12 of the Credit
Agreement, as of the Reporting Date, the Borrower's Debt to Worth Ratio was ____
to 1.00, which ____ satisfies ____ does not satisfy the requirement that such
ratio be no more than 1.50 to 1.00 for the Applicable Period ending on the
Reporting Date.
C. CASH FLOW COVERAGE RATIO. Pursuant to Section 6.13 of the
Credit Agreement, as of the Reporting Date, the Borrower's Cash Flow Coverage
Ratio was ____ to 1.00, which ____ satisfies ____ does not satisfy the
requirement that such ratio be no less than 1.5 to 1.00 for the Applicable
Period ending on the Reporting Date.
<PAGE>
D. DEBT EBIDTA RATIO. Pursuant to Section 6.14 of the Credit
Agreement, as of the Reporting Date, the Borrower's Cash Flow Ratio was ____ to
1.00, which ____ satisfies ____ does not satisfy the requirement that such ratio
be no more than 3.0 to 1.00 for the Applicable Period ending on the Reporting
Date
Attached hereto are all relevant facts in reasonable detail to
evidence, and the computations of the financial covenants referred to above.
These computations were made in accordance with GAAP.
By:
--------------------------------------
Printed Name:
----------------------------
Title:
-----------------------------------
<PAGE>
EXHIBIT E TO CREDIT AND SECURITY AGREEMENT
PREMISES
The Premises referred to in the Credit and Security Agreement are
located at the addresses specified in the attachment hereto.
