SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended April 30, 1997
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Commission File Number 0-16425
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SUNRISE EDUCATIONAL SERVICES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 86-0532619
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9128 East San Salvador Road, Suite 200, Scottsdale, Arizona 85258
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(Address of principal executive offices)
(602) 860-1611
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(Issuers telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all annual,
quarterly and other reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to filing requirements for the past 90 days.
YES X
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NO
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The number of shares of the Company's Common Stock outstanding as of May 30,
1997 1997 was 3,154,526 shares.
<PAGE>
SUNRISE EDUCATIONAL SERVICES, INC.
TABLE OF CONTENTS
Page
===================================================================
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets
April 30, 1997 and July 31, 1996 3
Consolidated Statements of Operations
For the Nine Months and Three Months Ended
April 30, 1997 and 1996 4
Consolidated Statements of Cash Flows
For the Nine Months Ended
April 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 12
SIGNATURES 13
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<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Sunrise Educational Services, Inc. and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
April 30, 1997 July 31, 1996
==============================================================================================
ASSETS (Unaudited)
<S> <C> <C>
Current Assets
Cash and Cash Equivalents $ 1,807,270 $ 2,630,616
Accounts Receivable, net of allowance for doubtful accounts of
$12,000 at April 30, 1997 and July 31, 1996 621,273 387,775
Prepaid Expenses 268,418 149,458
Deferred Tax Asset, current portion 138,000 138,000
Inventory and Other Current Assets 33,962 27,094
- ----------------------------------------------------------------------------------------------
Total Current Assets 2,868,923 3,332,943
Property and Equipment, net 1,647,053 1,386,687
Property and Equipment Held for Lease, net 382,770 367,292
Deferred Tax Asset, net of current portion 557,000 557,000
Note Receivable from Preschool Services, Inc. 256,251 256,251
Intangible Assets, net 1,298,610 733,519
Deposits and Other Assets 347,599 363,340
- ----------------------------------------------------------------------------------------------
Total Assets $ 7,358,206 $ 6,997,032
==============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Line of Credit $ 161,717 $ 100,000
Accounts Payable 138,500 272,519
Accrued Expenses 645,715 385,036
Dividends Payable on Preferred Stock 44,367 44,367
Notes Payable and Capital Leases, current portion 217,353 133,415
Accrued Rental Reserve, current portion 247,555 292,000
Deferred Rent, current portion 163,000 155,982
Deferred Gain on Sale and Leaseback of Preschool Facilities,
current portion 45,003 45,003
- ----------------------------------------------------------------------------------------------
Total Current Liabilities 1,663,210 1,428,322
- ----------------------------------------------------------------------------------------------
Notes Payable and Capital Leases, net of current portion 765,355 504,654
- ----------------------------------------------------------------------------------------------
Accrued Rental Reserve, net of current portion -- 126,000
- ----------------------------------------------------------------------------------------------
Deferred Rent, net of current portion 252,494 304,058
- ----------------------------------------------------------------------------------------------
Deferred Gain on Sale and Leaseback of Preschool Facilities, net
of current portion 53,896 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,
3,154,526 and 2,982,968 shares issued and outstanding 31,545 29,830
at April 30, 1997 and July 31, 1996 respectively
Paid-in Capital 7,849,031 7,609,553
Accumulated Deficit (4,114,658) (3,950,366)
- ----------------------------------------------------------------------------------------------
Total Shareholders' Equity 4,623,251 4,546,350
- ----------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 7,358,206 $ 6,997,032
==============================================================================================
</TABLE>
The accompanying footnotes are an integral part of these consolidated financial
statements.
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<PAGE>
Sunrise Educational Services, Inc. and Subsidiary
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months For the Three Months
Ended April 30, Ended April 30,
------------------------- -------------------------
1997 1996 1997 1996
==========================================================================================
<S> <C> <C> <C> <C>
Operating Revenue $ 9,916,217 $ 7,420,994 $ 3,573,363 $ 2,681,233
Operating Expenses
Payroll 4,912,098 3,612,407 1,694,933 1,287,090
Facilities and Maintenance 3,510,622 2,728,490 1,244,956 941,037
General and Administrative 1,367,432 1,044,280 461,762 387,597
- ------------------------------------------------------------------------------------------
Total Operating Expenses 9,790,152 7,385,177 3,401,651 2,615,724
- ------------------------------------------------------------------------------------------
Income from Operations 126,065 35,817 171,712 65,509
Non-operating Income (Expense)
Interest Income (Expense), net (1,469) 47,684 (10,091) 42,019
Other Income (Expense), net 110,412 2,771 70,786 (329)
- ------------------------------------------------------------------------------------------
Total Non-operating Income 108,943 50,455 60,695 41,690
- ------------------------------------------------------------------------------------------
Net Income $ 235,008 $ 86,272 $ 232,407 $ 107,199
==========================================================================================
Net Income (Loss) Available for
Common Stock $ (164,292) $ (120,466) $ 99,307 $ (24,710)
==========================================================================================
Net Income (Loss) per Common
Share and Common Share
Equivalent (Note 2)
Primary $ (0.05) $ (0.04) $ 0.03 $ (0.01)
==========================================================================================
Weighted Average Number of
Common Shares and Common
Equivalent Shares Outstanding
Primary 3,025,482 2,965,725 3,182,424 2,982,968
==========================================================================================
</TABLE>
The accompanying footnotes are an integral part of these consolidated financial
statements.
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<PAGE>
Sunrise Educational Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended April 30,
---------------------
1997 1996
=================================================================================================
<S> <C> <C>
Cash Flows from Operating Activities
Net Income $ 235,008 $ 86,272
Adjustments to Reconcile Net Income to
Net Cash Provided by (Used in) Operating Activities
Depreciation and Amortization 505,820 243,864
Amortized Gain on Sale of Real Estate (33,752) (33,752)
Deferred Rent (44,546) (53,252)
Provision for Doubtful Accounts 69,527 55,977
Gain on Disposal of Property and Equipment (43,185) (3,100)
Gain on Refinancing (67,227) --
Changes in Assets and Liabilities, net of effect of
businesses acquired:
Increase in Accounts Receivable (303,025) (143,510)
Increase in Prepaid Expenses (118,960) (78,527)
Increase in Inventory and Other Current Assets (6,868) (16,309)
(Increase) Decrease in Deposits and Other Assets 15,741 (257,065)
Increase (Decrease) in Accounts Payable (134,019) 37,566
Increase in Accrued Expenses 260,679 129,092
Decrease in Accrued Rental Reserve (170,445) --
- ----------------------------------------------------------------------------------------------
Total Adjustments (70,260) (119,016)
- ----------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Operating Activities 164,748 (32,744)
- ----------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Acquisition of Child Care Centers (494,264) (537,199)
Registration of New Tradenames (17,555) --
Purchases of Property and Equipment (695,113) (500,623)
Proceeds from Disposal of Property and Equipment 328,362 8,000
- ----------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (878,570) (1,029,822)
- ----------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from Exercise of Warrants -- 40,404
Proceeds from Sale of Preferred Stock -- 4,339,675
Payment of Dividends (158,107) (428,205)
Proceeds from Notes Payable 1,113,658 140,736
Borrowings on Lines of Credit 61,717 --
Payments on Notes Payable and Capital Leases (1,126,792) (111,029)
- ----------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities (109,524) 3,981,581
- -------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (823,346) 2,919,015
Cash and Cash Equivalents, beginning of period 2,630,616 581,311
- ----------------------------------------------------------------------------------------------
Cash and Cash Equivalents, end of period $ 1,807,270 $ 3,500,326
==============================================================================================
Supplemental Disclosure of Cash Flow Information
Cash Paid During the Period for Interest $ 41,222 $ 23,290
Payment of Stock Dividends 241,193 --
Note Payable Issued for Acquisition of Child Care Centers 425,000 --
==============================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
<PAGE>
Sunrise Educational Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
April 30, 1997
(Unaudited)
1. BASIS OF PRESENTATION
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The fiscal year of Sunrise Educational Services, Inc. (the "Company")
consists of eight four-week periods and four five-week periods. Each
quarter of the Company's fiscal year consists of two four-week periods and
one five-week period. The Company's fiscal year ends on the Saturday
nearest July 31 of each year, and the third quarter ends on the Saturday
nearest April 30. However, for clarity of presentation, all information has
been presented as if the third quarter ended on April 30 and the fiscal
year ended on July 31.
The consolidated financial statements included herein have been prepared by
the Company without audit pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of Management, the
accompanying interim financial statements reflect all adjustments,
consisting only of normal recurring adjustments, necessary to present
fairly the Company's financial position and its results of operations and
cash flows for the nine month and three month periods ended April 30, 1997
and 1996.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
interim financial statements be read in conjunction with the Company's 1996
Annual Report on Form 10-KSB. The results of operations for the interim
periods are not necessarily indicative of the results to be expected for
the complete fiscal year.
The consolidated financial statements include the accounts of Sunrise
Educational Services, Inc. and Sunrise Preschools Hawaii, Inc.
2. NET INCOME (LOSS) PER COMMON SHARE AND COMMON SHARE EQUIVALENT
- --------------------------------------------------------------------------------
Primary net income (loss) per share is computed by dividing net income
(loss) available for common stock (net income (loss) less dividends accrued
during 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 dilluted net income (loss) per share is not included
because the calculation is antidillutive.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS
128"). SFAS 128 is effective for financial statements for both interim and
annual periods ending after December 15, 1997. SFAS 128 replaces the
current presentation of earnings per share with a dual presentation of
Basic Earnings per share ("Basic EPS") and diluted Earnings per Share
("Diluted EPS"). the company does not believe that the adoption of SFAS 128
will have a material impact on its financial condition or results of
operations.
3. INCOME TAXES
- --------------------------------------------------------------------------------
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes.
As of July 31, 1996, net operating loss carryforwards totaled approximately
$2,177,000, and expire through the year 2011. Accordingly, income taxes on
income generated during the nine month and three month periods ended April
30, 1997 and 1996 have been offset by the available net operating loss
carryforwards.
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<PAGE>
4. Acquisitions
- --------------------------------------------------------------------------------
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 information for the nine month periods ended April 30,
1997 and 1996 follows:
Sunrise Educational Services, Inc. and Subsidiary
Unaudited Pro Forma Condensed Consolidated Income Statements
For the Nine Months Ended April 30, 1997 and 1996
(In thousands, except per share data)
1997 1996
------------------
Operating Revenues 10,030 8,446
Operating Expenses 9,882 8,214
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Income from Operations 148 232
Non-operating Income (Expense) 106 26
------ -----
Net Income 254 258
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Net Income (Loss) Available for
Common Stock (145) 52
====== =====
Net Income (Loss) per Common
Share and Common Share
Equivalent (0.05) 0.02
====== =====
Average Shares Outstanding 3,025 2,966
====== =====
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<PAGE>
Sunrise Educational Services, Inc. and Subsidiary
Unaudited Pro Forma Condensed Consolidated Income Statement
For the Nine Months Ended April 30, 1997
(In thousands, except per share data)
Historical
------------------
Selling Pro Forma Pro Forma
Sunrise Parties Adjustments(1) Combined
------- ------- -------------- --------
Operating Revenues $9,916 $114 $ -- $10,030
Operating Expenses 9,790 100 (8) 9,882
------ ---- ---- -------
Income from Operations 126 14 8 148
Non-operating Income (Expense) 109 -- (3) 106
------ ---- ---- -------
Net Income $ 235 $ 14 $ 5 $ 254
====== ==== ==== =======
Net Income (Loss) Available
for Common Stock $ (164) $ (145)
====== =======
Net Income (Loss) per Common
Share and Common Share
Equivalent $(0.05) $ (0.05)
====== =======
Average Shares Outstanding 3,025 3,025
====== =======
(1) Pro forma adjustments to the unaudited pro forma condensed consolidated
income statements consisted of reducing payroll costs by the amount of
salaries paid to the seller, increasing facilities and maintenance costs
for depreciation and amortization of the acquired assets, and increasing
interest expense for the note payable.
-8-
<PAGE>
4. ACQUISITIONS (CONTINUED)
================================================================================
Sunrise Educational Services, Inc. and Subsidiary
Unaudited Pro Forma Condensed Consolidated Income Statement
For the Nine Months Ended April 30, 1996
(In thousands, except per share data)
Historical
-------------------
Selling Pro Forma Pro Forma
Sunrise Parties Adjustments(1) Combined
------- ------- -------------- --------
Operating Revenues $7,421 $1,025 $ -- $8,446
Operating Expenses 7,385 904 (75) 8,214
------ ------ ---- ------
Income from Operations 36 121 75 232
Non-operating Income (Expense) 50 -- (24) 26
------ ----- ---- ------
Net Income $ 86 $ 121 $ 51 $ 258
====== ===== ==== ======
Net Income Available for
Common Stock $ (120) $ 52
====== ======
Net Income per Common
Share and Common Share
Equivalent (0.04) 0.02
======= =======
Average Shares Outstanding 2,966 2,966
======= =======
(1) Pro forma adjustments to the unaudited pro forma condensed consolidated
income statements consisted of reducing payroll costs by the amount of
salaries paid to the seller, increasing facilities and maintenance costs
for depreciation and amortization of the acquired assets, and increasing
interest expense for the note payable.
-9-
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
================================================================================
On April 30, 1997, the Company operated 36 child care centers versus 29 centers
as of April 30, 1997, 1996. The increase in the number of centers was the result
of the Company purchasing the operations of five centers in Arizona (four of
which were previously operating and one of which was newly opened), opening one
newly constructed center in Arizona, and assuming management of one newly opened
center in Wisconsin. During the first nine months of fiscal 1996, the Company
purchased the operations of three centers in Colorado and one center in Arizona.
NINE MONTHS ENDED APRIL 30, 1997 (FIRST NINE MONTHS OF FISCAL 1997) COMPARED TO
NINE MONTHS ENDED APRIL 30, 1996 (FIRST NINE MONTHS OF FISCAL 1996)
- --------------------------------------------------------------------------------
OPERATING REVENUE -- Operating revenue for the first nine months of fiscal 1997
was $9,916,217 an increase of $2,495,223, or 33.6% from revenue of $7,420,994
for the first nine months of fiscal 1996. Of this increase, $2,262,818 was due
to the inclusion of revenues of the acquired and newly opened centers, and
$232,405 was due to a 3.2% 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 $75,000 lower than they would have been otherwise.
OPERATING EXPENSES -- Operating expenses for the first nine months of fiscal
1997 were $9,790,152 (98.7% of operating revenue), an increase of $2,404,975 or
32.6% from operating expenses of $7,385,177 (99.5% of operating revenue) for the
first nine months of fiscal 1996. Of this increase, $2,257,007 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 -- Payroll expense for the first nine months of fiscal 1997 was
$4,912,098 (49.5% of operating the acquired and newly opened centers,
$51,052 was for additional corporate staff added in connection with the
Company's expansion program, and $92,981 was for increased same-center
salaries due to slightly higher average salaries.
FACILITIES AND MAINTENANCE -- Facilities and maintenance costs for the
first nine months of fiscal 1997 were $3,510,622 (35.4% of operating
revenue), an increase of $782,132 or 28.7% from facilities and maintenance
costs of $2,728,490 (36.8% of operating revenue) during the first nine
months of fiscal 1996. This increase was due to $820,308 in additional
costs at the acquired and newly opened centers, an increase in equipment
lease expense of $70,763, and an increase in amortization of $81,108. These
increases were offset by a $121,620 decrease in rent expense, a decrease in
cleaning and maintenance services costs of $57,740 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
$10,687.
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<PAGE>
NINE MONTHS ENDED APRIL 30, 1997 (FIRST NINE MONTHS OF FISCAL 1997) COMPARED TO
NINE MONTHS ENDED APRIL 30, 1996 (FIRST NINE MONTHS OF FISCAL 1996) (CONTINUED)
- --------------------------------------------------------------------------------
In the first nine months of fiscal 1996, rent expense included $140,007 of
deferred sublease payments payable by Preschool Services, Inc. ("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 nine months of fiscal 1997 of $140,007, partially offset by an
increase of $18,387 in same-center rents due to moderate rent increases at
several of the centers.
GENERAL AND ADMINISTRATIVE -- General and administrative expenses for the
first nine months of fiscal 1997 were $1,367,432 (13.8% of operating
revenue), an increase of $323,152, or 30.9%, from general and
administrative expenses of $1,044,280 (14.1% of operating revenue) during
the first nine months of fiscal 1996. Of this increase, $281,041 was
attributable to the acquired and newly opened centers. In addition,
advertising costs increased $67,805 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
$57,660 in insurance costs. The remaining increase was due to moderate
increases in other general and administrative costs such as office
supplies, professional fees and bank charges.
OTHER INCOME -- Other income included a gain of $67,227 as a result of the
Company's refinancing of debt.
NET INCOME -- Net income for the first nine months of fiscal 1997 was $235,008
compared to net income of $86,272 for the first nine 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.
THREE MONTHS ENDED APRIL 30, 1997 (THIRD QUARTER OF FISCAL 1997) COMPARED TO
THREE MONTHS ENDED APRIL 30, 1996 (THIRD QUARTER OF FISCAL 1996)
- --------------------------------------------------------------------------------
OPERATING REVENUE -- Operating revenue for the third quarter of fiscal 1997 was
$3,573,363, an increase of $892,130 or 33.3% from revenue of $2,681,233 for the
third quarter of fiscal 1996. Of this increase, $847,698 was due to the
inclusion of revenues of the acquired and newly opened centers, and $44,432 was
due to a 1.8% increase in same-center revenues due to a moderate tuition
increase. 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 $25,000 lower than they would have been otherwise.
OPERATING EXPENSES -- Operating expenses for the third quarter of fiscal 1997
were $3,401,651 (95.2% of operating revenue), an increase of $785,927 or 30.0%
from operating expenses of $2,615,724 (97.6% of operating revenue) for the third
quarter of fiscal 1996. This increase was due to $787,315 at the acquired and
newly opened centers. This was partially offset by a decrease in general and
administrative costs.
PAYROLL -- Payroll expense for the third quarter of fiscal 1997 was
$1,694,933 (47.4% of operating revenue), an increase of $407,843 from
payroll expense of $1,287,090 (48.0% of operating revenue) for the third
quarter of fiscal 1996. Of this increase, $399,813 was due to the acquired
and newly opened centers. The remaining $8,030 increase was due to slightly
higher average salaries and higher corporate costs due to the Company's
expansion program.
-11-
<PAGE>
THREE MONTHS ENDED APRIL 30, 1997 (THIRD QUARTER OF FISCAL 1997) COMPARED TO
THREE MONTHS ENDED APRIL 30, 1996 (THIRD QUARTER OF FISCAL 1996) (CONTINUED)
- --------------------------------------------------------------------------------
FACILITIES AND MAINTENANCE -- Facilities and maintenance costs for the
third quarter of fiscal 1997 were $1,244,956 (34.8% of operating revenue),
an increase of $303,919 or 32.3% from facilities and maintenance costs of
$941,037 (35.1% of operating revenue) during the third quarter of fiscal
1996. This increase was due to $296,107 in increased costs at the acquired
and newly opened centers, an increase in equipment lease expense of
$32,987, and an increase in amortization of $28,497. These increases were
partially offset by a $32,229 decrease in rent expense and a decrease in
other facilities and maintenance costs (primarily building maintenance and
cleaning expenses) of $21,443.
In the third quarter of fiscal 1996, rent expense included $42,426 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 third quarter of fiscal
1997 of $42,426, partially offset by an increase of $10,197 in same-center
rents due to moderate rent increases at several of the centers.
GENERAL AND ADMINSTRATIVE -- General and administrative expenses for the
third quarter of fiscal 1997 were $461,762 (12.9% of operating revenue), an
increase of $74,165 or 19.1% from general and administrative expenses of
$387,597 (14.5% of operating revenue) during the first three months of
fiscal 1996. This increase was attributable to $91,395 at the acquired and
newly opened centers, partially offset by decreases in other general and
administrative costs such as insurance.
OTHER INCOME -- Other income included a gain of $67,227 as a result of the
Company's refinancing of debt.
NET INCOME -- Net income for the third quarter of fiscal 1997 was $232,407
compared to net income of $107,199 for the third quarter of fiscal 1996,
primarily due to the profitability of the acquired and newly opened centers.
TRENDS
- --------------------------------------------------------------------------------
Due to a moderate October tuition increase and continued tight management of
costs, same-center operating results continued to improve over last year.
Operations at the company's two newly opened centers continue to improve as
these centers move through their initial "ramp-up" phase. In addition,
profitability should improve as the acquired centers become more fully
integrated into the Company.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
Net cash provided by operating activities for first nine months of fiscal 1997
was $164,748. 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 $739,713, from $1,904,621 at July 31, 1996 to $1,205,713 at April 30, 1997.
Net cash used in investing activities was $878,570, consisting of purchases of
property and equipment totaling $695,113, $494,264 in costs related to the
centers acquired by the Company in August, and $17,555 spent to register the
Company's new trade name. These uses were partially offset by $328,362 in
proceeds, primarily from the sale and leaseback of a portion of the equipment
purchased over the past nine months.
-12-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
- --------------------------------------------------------------------------------
Net cash used in financing activities was $109,524. As a result of new credit
facilities with its bank, the Company refinanced all of its outstanding capital
leases and notes payable to obtain a more favorable average interest rate. As a
result, proceeds from notes payable totaled $1,113,658, offset by $1,126,792 in
repayments to retire the Company's previously outstanding debt. Net borrowings
on the Company's seasonal working capital credit facility totaled $61,717, and
payment of dividends on Series B and C Preferred Stock were $158,107. Dividends
payable on Series B and C Preferred Stock as of April 30, 1997 were $44,367.
The Company is current on all principal and interest payments on its notes
payable and capital leases. The Company has four lines of credit with a
financial institution totaling $3,000,000: 1) a $500,000 revolving working
capital line, bearing interest at prime (8.25% at April 30, 1997) plus 1.50%; 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 $1,000,000 term loan 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 in April of 1998. 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.
The Company 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 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 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.
-13-
<PAGE>
PART II OTHER INFORMATION
Items 1 - 5 Not applicable
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 - Statement Re: Computation of per share earnings
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter
ended April 30, 1997.
-14-
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SUNRISE EDUCATIONAL SERVICES, INC.
Date: May 30, 1997 By: /s/ James R. Evans
-------------- -----------------------------------
James R. Evans
Chairman of the Board of Directors
and President (Principal Executive
Officer)
Signature Capacity Date
--------- -------- ----
/s/ Barbara L. Owens Executive Vice President May 30, 1997
- --------------------------- (Principal Financial Officer,
Barbara L. Owens Principal Accounting Officer)
-15-
EXHIBIT 11
SUNRISE EDUCATIONAL SERVICES, INC. AND SUBSIDIARY
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
April 30, April 30,
----------------------- ---------------------
1997 1996 1997 1996
=======================================================================================
PRIMARY:
<S> <C> <C> <C> <C>
Common Shares Outstanding,
Beginning of Year 2,982,968 2,935,894 2,982,968 2,935,894
Effect of weighting shares:
Issuance of Common Stock 42,514 -- 109,167 --
Exercise of Warrants -- 29,831 -- 47,074
Employee stock options outstanding -- -- 42,124 --
Assumed Exercise of Warrants -- -- 48,165 --
- ----------------------------------------------------------------------------------------
Weighted Average Number of Common
Shares and Common Share
Equivalents Outstanding 3,025,482 2,965,725 3,182,424 2,982,968
========================================================================================
Net Income (Loss) Available for
Common Stock $ (164,292) $ (120,466) $ 99,307 $ (24,710)
========================================================================================
Net Income (Loss) per Common Share
and Common Share Equivalent $ (0.05) $ (0.04) $ 0.03 $ (0.01)
========================================================================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY FOR THE NINE MONTHS
ENDED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM
10-QSB FOR THE QUARTER ENDED APRIL 30, 1997.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> APR-30-1997
<EXCHANGE-RATE> 1
<CASH> 1,807,270
<SECURITIES> 0
<RECEIVABLES> 633,273
<ALLOWANCES> 12,000
<INVENTORY> 33,962
<CURRENT-ASSETS> 2,868,923
<PP&E> 5,122,545
<DEPRECIATION> 3,092,722
<TOTAL-ASSETS> 7,358,206
<CURRENT-LIABILITIES> 1,663,210
<BONDS> 0
857,333
0
<COMMON> 31,545
<OTHER-SE> 3,734,373
<TOTAL-LIABILITY-AND-EQUITY> 7,358,206
<SALES> 0
<TOTAL-REVENUES> 9,916,217
<CGS> 0
<TOTAL-COSTS> 9,790,152
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 69,527
<INTEREST-EXPENSE> 1,469
<INCOME-PRETAX> 235,008
<INCOME-TAX> 0
<INCOME-CONTINUING> 235,008
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 235,008
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> 0
</TABLE>
