SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended October 31, 1997
----------------
Commission File Number 0-16425
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SUNRISE EDUCATIONAL SERVICES, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 86-0532619
------------------------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification 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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(Registrant's telephone number, including area code)
N/A
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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
-----
NO
-----
THE NUMBER OF SHARES OF THE COMPANY'S COMMON STOCK OUTSTANDING AS OF NOVEMBER
28, 1997 WAS 4,335,095 SHARES.
<PAGE>
SUNRISE EDUCATIONAL SERVICES, INC.
TABLE OF CONTENTS
Page
==============================================================================
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets
October 31, 1997 and July 31, 1997 3
Consolidated Statements of Operations
For the Three Months Ended October 31, 1997 and 1996 4
Consolidated Statements of Cash Flows
For the Three Months Ended October 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders 10
Item 6 Exhibits and Reports on Form 8-K 10
SIGNATURES 11
-2-
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Sunrise Educational Services, Inc. and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
October 31, 1997 July 31, 1997
=======================================================================================
ASSETS (Unaudited)
<S> <C> <C>
Current Assets
Cash and Cash Equivalents $ 1,219,141 $ 1,212,806
Accounts Receivable, net 775,666 746,570
Prepaid Expenses 241,242 542,515
Deferred Tax Asset, current portion 193,358 193,358
Inventory and Other Current Assets 29,461 33,323
- -------------------------------------------------------------------------------------
Total Current Assets 2,458,868 2,728,572
Property and Equipment, net 1,714,887 1,983,694
Property and Equipment Held for Lease, net 313,470 118,378
Deferred Tax Asset, net of current portion 502,000 502,000
Intangible Assets, net 1,244,987 1,252,559
Deposits and Other Assets 472,672 337,968
- -------------------------------------------------------------------------------------
Total Assets $ 6,706,884 $ 6,923,171
=====================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Line of Credit $ 223,754 $ 223,754
Accounts Payable 329,436 297,973
Accrued Expenses 493,305 733,376
Dividends Payable on Preferred Stock 168,310 44,372
Notes Payable and Capital Leases, current portion 248,865 248,865
Accrued Rental Reserve, current portion 176,819 341,808
Deferred Rent, current portion 79,492 73,026
Deferred Gain on Sale and Leaseback of
Preschool Facilities, current portion 45,003 45,003
- -------------------------------------------------------------------------------------
Total Current Liabilities 1,764,984 2,008,177
- -------------------------------------------------------------------------------------
Notes Payable and Capital Leases, net of current portion 823,384 802,696
- -------------------------------------------------------------------------------------
Accrued Rental Reserve, net of current portion 480,000 480,000
- -------------------------------------------------------------------------------------
Deferred Rent, net of current portion 265,427 283,833
- -------------------------------------------------------------------------------------
Deferred Gain on Sale and Leaseback of Preschool
Facilities, net of current portion 38,862 42,645
- -------------------------------------------------------------------------------------
Shareholders' Equity
Preferred Stock, $1 par value - 1,000,000 shares
authorized, 357,333 shares issued and outstanding 357,333 857,333
Common Stock, $.01 par value - 10,000,000 shares
authorized, 4,335,095 shares issued and outstanding 43,350 32,529
Paid-in Capital 8,465,517 7,975,519
Accumulated Deficit (5,531,973) (5,559,561)
- -------------------------------------------------------------------------------------
Total Shareholders' Equity 3,334,227 3,305,820
- -------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 6,706,884 $ 6,923,171
=====================================================================================
The accompanying footnotes are an integral part of these consolidated financial
statements.
</TABLE>
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<PAGE>
Sunrise Educational Services, Inc. and Subsidiary
Consolidated Statements of Income
(Unaudited)
For the Three Months
Ended October 31,
-----------------------------
1997 1996
===========================================================================
Operating Revenue
Tuition and Other $3,846,800 $3,242,628
Government Programs 290,834 257,372
- -------------------------------------------------------------------------
Total Operating Revenue $4,137,634 $3,500,000
- -------------------------------------------------------------------------
Operating Expenses
Payroll 1,832,064 1,614,921
Facilities and Maintenance 1,368,527 1,085,612
General and Administrative 548,125 423,517
Government Programs 228,978 260,950
- -------------------------------------------------------------------------
Total Operating Expenses 3,977,694 3,385,000
- -------------------------------------------------------------------------
Income from Operations 159,940 115,000
Other Income (Expense)
Interest Income (Expense), net (7,573) 8,297
Other Income -- 9,330
- -------------------------------------------------------------------------
Total Other Income (Expense) (7,573) 17,627
- -------------------------------------------------------------------------
Net Income $ 152,367 $ 132,627
=========================================================================
Net Income (Loss) Available
for Common Stock $ 28,429 $ (473)
=========================================================================
Net Income per Common Share
and Common Share Equivalent (Note 2)
Primary $ 0.01 $ (0.00)
=========================================================================
Weighted Average Number of
Common Shares and Common
Share Equivalents Outstanding
Primary 3,853,985 3,015,261
=========================================================================
The accompanying footnotes are an integral part of these consolidated financial
statements.
-4-
<PAGE>
Sunrise Educational Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended October 31,
--------------------
1997 1996
==========================================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 152,367 $ 132,627
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Depreciation and Amortization 196,794 156,379
Amortized Gain on Sale of Real Estate (3,783) (11,251)
Deferred Rent (11,940) (52,043)
Provision for Doubtful Accounts 27,039 15,359
Gain on Disposal of Property and Equipment 0 (9,330)
Changes in Assets and Liabilities, net of
effect of businesses acquired:
Increase in Accounts Receivable (56,135) (171,761)
Decrease (Increase) in Prepaid Expenses 301,273 (102,032)
Decrease (Increase) in Inventory and Other Current Assets 3,862 (7,280)
(Increase) Decrease in Deposits and Other Assets (134,704) 252,487
Increase (Decrease) in Accounts Payable 31,463 (155,097)
(Decrease) Increase in Accrued Expenses (240,071) 188,245
Decrease in Accrued Rental Reserve (164,989) (73,048)
- ------------------------------------------------------------------------------------------
Total Adjustments (51,191) 30,628
- ------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 101,176 163,255
- ------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Child Care Centers -- (494,264)
Purchases of Property and Equipment (115,507) (394,469)
Proceeds from Disposal of Property and Equipment -- 9,330
- ------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (115,507) (879,403)
- ------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of Dividends -- (133,100)
Proceeds from Notes Payable 76,969 54,408
Borrowings on Lines of Credit -- 50,000
Payments on Notes Payable and Capital Leases (56,281) (66,402)
- ------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 20,688 (95,094)
- ------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 6,357 (811,242)
Cash and Cash Equivalents, Beginning of Period 1,212,806 2,630,616
- ------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period $1,219,163 $1,819,374
==========================================================================================
Supplemental Disclosure of Cash Flow Information
Cash Paid During the Period for Interest $ 25,236 $ 18,112
Cash Paid for Income Taxes -- --
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
October 31, 1997
(Unaudited)
1.BASIS OF PRESENTATION
- --------------------------------------------------------------------------------
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 first quarter ends on the Saturday
nearest October 31. However, for clarity of presentation, all information
has been presented as if the first quarter ended on October 31 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 three month periods ended October 31, 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. Certain reclassifications have
been made to amounts previously reported for fiscal 1997 to conform with
the fiscal 1998 presentation. It is suggested that these interim financial
statements be read in conjunction with the Company's 1997 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 PER COMMON SHARE AND COMMON SHARE EQUIVALENT
- --------------------------------------------------------------------------------
Primary net income per share is computed by dividing net income available
for common stock (net income 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
diluted net income per share is not included because the calculation for
that period is antidilutive.
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, 1997, net operating loss carryforwards totaled approximately
$2,095,000, and expire through the year 2011. Accordingly, income taxes on
income generated during the three month periods ended October 31, 1997 and
1996 have been offset by the available net operating loss carryforwards.
-6-
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
================================================================================
THREE MONTHS ENDED OCTOBER 31, 1997 (FIRST QUARTER OF FISCAL 1998) COMPARED TO
THREE MONTHS ENDED OCTOBER 31, 1996 (FIRST QUARTER OF FISCAL 1997)
- --------------------------------------------------------------------------------
On October 31, 1997, the Company operated 33 child care centers versus 31
centers as of October 31, 1996 due to the opening of two new centers over the
past 12 months. In addition, fiscal 1998 results include a full quarter of
operations for four centers acquired during the first quarter of fiscal 1997.
Operating revenue - Operating revenue for the first quarter of fiscal 1998 was
$4,137,634, an increase of $637,634., or 18%, from revenue of $3,500,000 for the
first quarter of fiscal 1997. This increase was primarily due to the inclusion
of revenues of the acquired and newly opened centers. In addition, lease revenue
increased $58,940 due to the leasing of space at several centers to Sunray
Charter Schools.
Operating expenses - Operating expenses for the first quarter of fiscal 1998
were $3,977,694 (96.1% of operating revenue), an increase of $592,694, or 18%,
from operating expenses of $3,385,000 (97% of operating revenue) for the first
quarter of fiscal 1997. This increase was primarily due to the acquired and
newly opened centers.
Payroll - Payroll expense for the first quarter of fiscal 1998 was
$1,832,064 (44.3% of operating revenue), an increase of $217,143 from
payroll expense of $1,614,921 (46% of operating revenue) for the first
quarter of fiscal 1997. This increase was due to the acquired and newly
opened centers, along with slightly higher average salaries at existing
centers.
Facilities and maintenance - Facilities and maintenance costs for the first
quarter of fiscal 1998 were $1,368,527 (33.1% of operating revenue), an
increase of $282,915 or 26.1% from facilities and maintenance costs of
$1,085,612 (31% of operating revenue) during the first quarter of fiscal
1997. This increase was due to the acquired and newly opened centers, along
with slightly higher same-center rents due to moderate rent increases at
several of the centers.
General and administrative - General and administrative expenses for the
first quarter of fiscal 1998 were $548,125 (13.2% of operating revenue), an
increase of $124,608, or 29.4%, from general and administrative expenses of
$423,517 (12% of operating revenue) during the first quarter of fiscal
1997. This increase was primarily due to the acquired and newly opened
centers. The remaining increase was due to moderate increases in other
general and administrative costs such as advertising, investor relations
and bank charges.
Government Programs - Government program expenses for the first quarter of
fiscal 1998 were $228,978 (5.5% of operating revenue), a decrease of
$31,972, or 12%, from government program expenses of $260,950 (7% of
operating revenue) during the first quarter of fiscal 1997. This decrease
was primarily due to the tighter management of the government program
expenses.
-7-
<PAGE>
THREE MONTHS ENDED OCTOBER 31, 1997 (FIRST QUARTER OF FISCAL 1998) COMPARED TO
THREE MONTHS ENDED OCTOBER 31, 1996 (FIRST QUARTER OF FISCAL 1997) (CONTINUED)
- --------------------------------------------------------------------------------
Net Income - Net income for the first quarter of fiscal 1998 was $152,367
compared to $132,627 for the first quarter of fiscal 1997, primarily due to the
acquired and newly opened centers, along with the increase in lease revenue.
TRENDS
- --------------------------------------------------------------------------------
Same-center operating results remained stable from last year. Operations at the
two newly opened centers continue to improve as these centers move through their
initial "ramp-up" phase.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
Net cash provided by operating activities for the first quarter of fiscal 1998
was $101,154. Cash was sufficient to meet the normal operating requirements of
the Company. Due to amounts spent to equip the newly opened centers and to
upgrade equipment at existing centers, working capital decreased by $168,742,
from $720,395 at July 31, 1997 to $551,653 at October 31, 1997.
Net cash used in investing activities was $115,507, consisting of purchases of
property and equipment.
Net cash provided by financing activities was $20,688, consisting of additional
notes payable of $76,969. offset by repayments of notes payable and capital
leases of $56,281. Dividends payable on Series B and C Preferred Stock as of
October 31, 1997 were $168,310
The Company is current on all principal and interest payments on its notes
payable.
The Company has four credit facilities with a financial institution totaling
$3,000,000: 1) a $500,000 revolving working capital line, bearing interest at
prime plus 1.50%; 2) a $1,000,000 nonrevolving line of credit for acquisition
financing, bearing interest at prime plus 2.5%; (3) a $500,000 note for the
purchase of vehicles and equipment bearing interest at prime plus 1.75%, and;
(4) a $1,000,000 term loan which was used to refinance the Company's existing
notes payable and capital leases, bearing interest at 10.42% annually. These
credit facilities 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 credit facilities 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 over the next 12 months.
Under current plans, these centers 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.
-8-
<PAGE>
THREE MONTHS ENDED OCTOBER 31, 1997 (FIRST QUARTER OF FISCAL 1998) COMPARED TO
THREE Months Ended October 31, 1996 (First Quarter of Fiscal 1997) (Continued)
- --------------------------------------------------------------------------------
On September 2, 1997, the Company announced it had signed a definitive agreement
to combine with Education Alternatives, Inc. (EAI). Under the agreement, Sunrise
will operate as a wholly owned subsidiary of EAI. EAI is to acquire the Company
for approximately $13.5 million in cash and stock, subject to adjustments. EAI,
based out of Minneapolis, operates private schools and has been awarded a
contract to operate 12 charter schools in Arizona. It is expected that the
exchange of stock will be tax-free to Sunrise stockholders and that the merger,
which is subject to the approval of stockholders of both companies and certain
other conditions, will be completed by late December 1997.
During fiscal 1997, PSI was selected to operate charter schools in the State of
Arizona. In September 1997, PSI opened several schools as Sunray Charter
Schools. The Company has agreed to manage and lease space to Sunray Charter
Schools.
-9-
<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
None
-10-
<PAGE>
SIGNATURES
Pursuant to 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: December 12, 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 December 12, 1997
- ------------------------ (Principal Financial Officer,
Barbara L. Owens Principal Accounting Officer)
-11-
EXHIBIT 11
SUNRISE EDUCATIONAL SERVICES, INC. AND SUBSIDIARY
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Three Months Ended
October 31,
-------------------------
1997 1996
================================================================================
PRIMARY:
Average Common Shares Outstanding, 3,794,005 2,982,968
Effect of weighting shares:
Issuance of Common Stock 0 0
Employee stock options outstanding 17,369 18,315
Assumed Exercise of Warrants 42,611 13,978
- --------------------------------------------------------------------------------
Weighted Average Number of Common
Shares and Common Share
Equivalents Outstanding 3,853,985 3,015,261
================================================================================
Net Income Available for
Common Stock $ 28,429 $ (473)
================================================================================
Net Income per Common Share
and Common Share Equivalent $ 0.01 $ (0.00)
================================================================================
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY FOR THE THREE MONTHS
ENDED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FORM 10-QSB FOR THE QUARTER ENDED OCTOBER 31, 1997.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<CASH> 1,219,141
<SECURITIES> 0
<RECEIVABLES> 775,566
<ALLOWANCES> 13,466
<INVENTORY> 29,461
<CURRENT-ASSETS> 2,458,868
<PP&E> 2,028,357
<DEPRECIATION> 3,556,321
<TOTAL-ASSETS> 6,706,884
<CURRENT-LIABILITIES> 1,764,984
<BONDS> 0
357,333
0
<COMMON> 43,350
<OTHER-SE> (5,531,973)
<TOTAL-LIABILITY-AND-EQUITY> 6,706,884
<SALES> 0
<TOTAL-REVENUES> 4,137,634
<CGS> 0
<TOTAL-COSTS> 3,977,694
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 27,039
<INTEREST-EXPENSE> 7,573
<INCOME-PRETAX> 152,367
<INCOME-TAX> 0
<INCOME-CONTINUING> 152,367
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 152,367
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
