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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended August 2, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER: 0-16425
SUNRISE EDUCATIONAL SERVICES, INC.
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(Name of small business issuer in its charter)
DELAWARE 86-0532619
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9128 E. SAN SALVADOR, SUITE 200, SCOTTSDALE, ARIZONA 85258
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(Address of principal executive offices, zip code)
Registrant's telephone number:(602) 860-1611
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Series C Preferred Stock, $1.00 par value
Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained herein, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The Registrant's revenues for its most recent fiscal year were: $14,647,287.
The aggregate market value of voting stock held by non-affiliates of the
Registrant, based on the closing price on October 3, 1997, was approximately
$4,726,207. Shares of voting stock held by each officer and director and by each
person who owns 5% or more of the outstanding voting stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily conclusive.
As of October 3, 1997, 4,335,095 shares of Common Stock, $.01 par value, were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
LOCATION OF EXHIBIT INDEX
The index of exhibits is contained in Part IV herein on page number 51.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT: Yes [ ] No [X]
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TABLE OF CONTENTS
Page
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PART I ................................................................ 3
Item 1. Business............................................... 3
Item 2. Properties............................................. 12
Item 3. Legal Proceedings...................................... 12
Item 4. Submission of Matters to a Vote of Security Holders.... 12
PART II ................................................................ 13
Item 5. Market for Registrant's Common Equity and Related
Stockholders Matters.................................. 13
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 14
Item 7. Financial Statements and Supplementary Data............ 20
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................... 41
PART III ................................................................ 41
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of the
Exchange Act.......................................... 41
Item 10. Executive Compensation................................. 43
Item 11. Security Ownership of Certain Beneficial Owners
and Management........................................ 48
Item 12. Certain Relationships and Related Transactions......... 49
PART IV ................................................................ 51
Item 13. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K................................... 51
SIGNATURES............................................................... 56
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PART I
ITEM 1. BUSINESS.
COMPANY PROFILE
The Company was organized under Delaware law in May 1987, and is the
successor to two corporations that initially operated the Company's child care
centers. Venture Educational Programs, Inc. ("Venture"), an Arizona corporation,
was formed in 1980. Venture operated the first two Sunrise Educational Services
child care centers, 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. In January 1997, the shareholders approved a new name for
the Company, Sunrise Educational Services, Inc. The new name reflects the
widened area of services provided by the Company. As used in this Annual Report,
unless the context indicates otherwise, the term "Company" refers to Sunrise
Educational Services, Inc., and its subsidiaries and predecessors.
Effective February 1, 1994, a portion of the Company's operations were
transferred to a Hawaii nonprofit corporation, Preschool Services, Inc. ("PSI").
Because of PSI's nonprofit status, PSI is eligible to receive certain grants and
subsidies. Under a written agreement between the Company and PSI, the Company
provides PSI with management and administrative services and educational
programs in exchange for a management fee. See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."
The Company's principal executive offices are located at 9128 East San
Salvador, Suite 200, Scottsdale, Arizona 85258, and its telephone number is
(602) 860-1611.
The fiscal year of the Company consists of eight four-week periods and
four five-week periods. Each quarter of the Company's fiscal year consists of
two four-week periods and one five-week period. The Company's fiscal year ends
on the Saturday nearest July 31 of each year. However, for clarity of
presentation, all information has been presented as if the fiscal year ended on
July 31.
RECENT DEVELOPMENTS
On September 2, 1997, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Education Alternatives, Inc., a Minnesota
corporation ("EAI"), and Sun Delaware, Inc., a Delaware corporation and a wholly
owned subsidiary of EAI ("SUB"), providing for the merger (the "Merger") of the
Company with and into SUB with SUB remaining as a wholly owned subsidiary of
EAI.
Under the terms of the Merger Agreement, upon consummation of the
Merger each outstanding share of Sunrise Common Stock will be converted into the
right to receive a certain number of shares of Common Stock, par value $.01 per
share, of EAI ("EAI Common Stock") as calculated pursuant to the Merger
Agreement, cash in the amount of $1.92, or a combination thereof, subject to an
aggregate cash consideration limit of 50% of the total consideration paid to the
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holders of Sunrise Common Sock in the Merger. In addition, each outstanding
share of Sunrise Series C Preferred Stock will be converted into the right to
receive a certain number of shares of EAI Common Stock as calculated pursuant to
the Merger Agreement. Cash will be paid in lieu of the issuance of any
fractional shares.
The consummation of the Merger is subject to approval by the
shareholders of EAI and the stockholders of the Company and certain other
conditions, all as set forth in the Merger Agreement. The Merger Agreement
contemplates that the Merger will be accounted for through the purchase method
and be tax-free to the stockholders of Sunrise as to the EAI Common Stock that
they receive.
BUSINESS
GENERAL
Sunrise Educational Services, Inc. operates a chain of high quality
child care centers that offer comprehensive educational child care services
primarily for children ages six weeks to twelve years. The Company currently
owns and operates 26 child care centers and manages an additional 7 child care
centers in Arizona, Hawaii, Colorado and Wisconsin. 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 has pursued this strategy by seeking to acquire 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.
The Company differentiates itself from most child care providers by
offering a comprehensive education-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 a 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.
In response to widespread demands for better public education and for
more choice among public schools, a number of state legislatures have authorized
independent legal entities, such as charter schools, to conduct operations
separate from the surrounding public school district. In June 1997, Sunrise was
selected to manage one of the largest charter schools in the State of Arizona.
Sunray Charter Schools opened in September 1997, providing kindergarten through
third grade classes at many of Sunrise's Arizona facilities. Sunray serves as a
catalyst in attracting prospective families seeking alternatives to the public
school system and a high retention of children in current preschool programs.
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THE CHILD CARE INDUSTRY
There are two primary types of child care: center-based and home-based.
Center-based care is provided by churches, non-profit and for-profit entities
that provide a wide variety of services ranging from custodial care to
comprehensive preschool curricula. Home-based care is much less uniform than
center-based care. There is usually greater dependence on the availability of
and training by one or only a few adults, and facilities are less likely to be
customized to the needs of children. Payment for child care services may be made
completely by parents or subsidized in whole or in part by others, including
governmental programs, employers and non-profit churches or community groups.
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 non-profit 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.
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 a positive 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 at the front office. The licensed capacity
of the Company's child care centers ranges from 74 to 249 children.
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 at many of its
centers, including ballet, computer, piano and gymnastics lessons and,
during the summer, swimming and related aquatic activities.
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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. Parents may visit their child's facility at anytime during
operating hours. Each child care facility regularly conducts parents'
nights, during which parents can discuss the progress of their children
with the staff, watch their children perform or hear professionals in
the child care field speak on relevant subjects.
MANAGEMENT. Each child care facility is operated as a unit
under the supervision of a director assigned to that facility. The
director is responsible for hiring teachers, organizing and monitoring
programs, supervising all records and regulatory compliance, collecting
tuition, marketing and corporate office reporting. Directors are paid a
monthly salary plus a bonus based on several factors, including
enrollment levels and profitability of the child care facility.
CURRICULA AND PROGRAMS
The Company believes that a developmental approach to learning, 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 currently 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, math and language. In addition,
the preschool program includes daily individual and group activities
designed to stimulate and enhance motor skills and physical
development.
SCHOOL AGE CHILDREN. The Company provides a before and after
school program for children who are of primary school age. The Company
offers to transport children in Company vans to the neighborhood
schools in the morning, and back to each of the Company's child care
centers in the afternoon. A portion of each day is set aside to help
the children with homework from their schools. In addition, this
program includes arts and crafts projects, field trips, dance and
gymnastics classes, physical activities, group sports and computers.
When neighborhood schools are closed for certain holidays or summers,
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these children can become full-time students. In connection with its
before and after school program, Sunrise opened its first KidSpot
facility in September 1997 in Phoenix, Arizona, a new concept targeted
to kindergartners and primary school age children who prefer to be
away from the traditional school setting. KidSpot offers structured
freedom in a clubhouse design, including computers, a creative arts
area and a library corner. Reference books and tutoring services are
also available.
ELEMENTARY SCHOOL. In response to widespread demands for
better public education and for more choice among public schools, a
number of state legislatures have authorized independent legal
entities, such as charter schools, to conduct operations separate from
the surrounding public school district. In June 1997, Sunrise was
selected to manage one of the largest charter schools in the State of
Arizona. Sunray Charter Schools opened in September 1997, providing
kindergarten through third-grade classes at many of Sunrise's Arizona
facilities.
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.
Sunrise also provides child care to moderately handicapped children in
certain centers under annual contracts with the Arizona Department of
Education, Division of Developmental Disabilities and the Arizona
Department of Economic Security.
GOVERNMENT 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
moderately 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. The Company is currently
operating under a contract that has been extended to December 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.
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MARKETING
The Company targets a market consisting primarily of parents having
above average incomes and education. According to the United States Bureau of
the Census, families earning over $45,000 a year are twice as likely as families
with incomes below $20,000 to enroll their children in child care centers. Based
on a survey by the Company of its participating parents, the Company believes
that over 50% of the families of enrolled children have annual incomes exceeding
$50,000. The Company uses demographic studies to locate its campuses in
geographic areas consistent with the Company's target market. The Company's
primary sources of new enrollments have been from distribution of promotional
material in residential areas surrounding a child care facility in conjunction
with its opening, referrals from satisfied parents, yellow-page advertising and
traffic exposure. For existing child care facilities the Company also advertises
through direct mail, newspaper, telemarketing and by participating in community
child-related events. The advertising campaign focuses primarily on summer
promotion to enhance each fall's enrollment.
EXPANSION
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.
In addition to Sunrise centers, Sunrise also operates the Suncrest
Private School. The Suncrest Private School offers a lower teacher-to-student
ratio using the nationally recognized High Scope teaching method. Sunrise 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 at Sunrise and Suncrest schools. 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, Sunrise
can penetrate three distinct income markets, thus expanding its market
opportunities.
Sunrise manages facilities for Sunray Charter Schools through a
contract with PSI (which does business under the name Sunray Charter). The
charter contract to operate public schools was awarded to PSI in June 1997.
Sunray Charter has opened 16 sites within Sunrise preschool locations, serving
approximately 600 children in kindergarten through third grade.
KidSpot, a new concept facility, also opened in September 1997 in
Phoenix, Arizona. The KidSpot program is designed specifically for the before
and after school market. The program serves ages 5 through 12, providing a
comfortable environment for homework, creative arts, computer interaction, music
and exercise.
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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 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. For the fiscal years ended July 31, 1997 and 1996, revenues from ECC
programs, including revenues received from employers as well as employees,
represented 39% and 43%, 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 located 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 non-profit corporation. Because of PSI's non-profit
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."
During fiscal 1997, the Company operated eight child care centers in
connection with PSI. Subsequent to year-end, PSI closed one center and combined
the operations of that center with another PSI center located nearby. The net
licensed capacity of the seven centers is 690 children.
In June 1997, PSI was selected to operate a charter school program in
the state of Arizona through the Snowflake Unified School District
("Snowflake"). Under the terms of the fifteen (15) year Charter Contract with
Snowflake, PSI has established and will operate kindergarten through third grade
classes at 16 of Sunrise's preschools located in the Phoenix metropolitan area.
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In consideration for the use of certain of Sunrise's preschool facilities and
Sunrise personnel, Sunrise will be reimbursed the facility costs and lease
expense of the occupied space. In addition, Sunrise will benefit from having the
preschoolers of new families attracted to Sunray Charter along with the
retention of the kindergarten and elementary-age children for the Company's
before and after school programs.
CONTRACT CHILD CARE PROGRAMS
In contrast to child care partnership arrangements, which are
characterized by a sharing of profits and operating risks, the Company also
operates child care centers on a contract basis. Pursuant to the contractual
arrangements, the Company is reimbursed for its expenses and paid a
predetermined fee for operating the child care centers. The contract arrangement
typically provides for the Company to operate a child care center at a site
provided by the third party, which requires only a minimal capital investment by
the Company.
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, Tutor
Time, 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 non-profit 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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INSURANCE
The Company has not had any material claims against its liability
insurance; however, the Company, as well as other child care providers, has had
difficulty obtaining liability insurance coverage at reasonable rates for child
physical and sexual abuse. The Company has comprehensive general liability
insurance with a limit of $1,000,000 per occurrence and $2,000,000 aggregate per
location, including $1,000,000 coverage for child physical and sexual abuse. It
also has insurance coverage for automobile liability, with a per occurrence
limitation of $1,000,000. In addition, the Company has 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. Compliance with government
regulations, including changes in the minimum wage, increase the Company's
operating costs; however, these costs are generally offset by increases in
tuition. No significant changes in government regulations are expected in the
next twelve months.
CHILD CARE INCOME TAX BENEFIT
The Internal Revenue Code of 1986, as amended, provides an income tax
credit ranging from 20% to 30% for parents for certain child care expenses,
subject to certain maximum limitations and income levels. Under present law, the
fees paid to the Company by working parents qualify for the federal tax credit.
In addition, many families also benefit from flexible spending plans that permit
families to pay a portion of their child care expenses with pre-tax income.
SERVICE MARK
"Sunrise Preschools" and the logo associated with the name are
federally registered service marks of the Company that expire in February 2007.
The Company also has pending service mark applications for the following marks
and related logos: "Suncrest Private School," "Sunburst Child Care," "Sunray
Charter Schools," and "KidSpot." Management believes that the Company's service
marks provide adequate protection against unauthorized use of its name and logo.
EMPLOYEES
Individual child care centers are staffed with a director, one 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.
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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 September 1, 1997, the Company employed approximately 675
persons, of which approximately 660 (including 160 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.
None of the Company's employees are represented by a union, and the
Company does not anticipate any union organization activities among its
employees.
ITEM 2. PROPERTIES.
Of the 33 child care centers operated by the Company in Arizona,
Hawaii, Colorado and Wisconsin, 26 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 current monthly lease payments
on the 26 centers total approximately $211,000. 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 5 facilities are operated
pursuant to various agreements with outside agencies. The Company pays no rent
at any of these facilities. See "BUSINESS -- Employer Child Care Programs,"
"--Partnership Child Care Programs" and "--Contract Child Care Programs."
The Company's principal executive offices consist of approximately
4,700 square feet of leased space in Scottsdale, Arizona. The Company believes
that its headquarters facility is adequate for operations for the foreseeable
future.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of security holders in
the fourth quarter of fiscal 1997.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS.
The Common Stock was registered under Section 12(g) of the Securities
Exchange Act of 1934 in 1987. From September 11, 1987 until January 27, 1991,
when the National Association of Securities Dealers Automated Quotation System
("Nasdaq") changed its listing requirements, the Common Stock was listed on
Nasdaq under the symbol SUNR. From January 28, 1991 until December 19, 1995, the
Common Stock was quoted in the National Daily Quotation Service ("Pink Sheets")
published daily by the National Quotation Bureau, Inc. under the symbol SUNR.
Quotations were also available through the Electronic Bulletin Board operated by
the National Association of Securities Dealers, Inc. under the symbol 3SUNR.
Beginning December 20, 1995, the Company's Common Stock has been quoted on the
Nasdaq Small Cap Market under the symbol SUNR. The following table sets forth
the high and low bid prices for the Common Stock based on closing transactions
during each specified period as reported by Nasdaq.
Fiscal 1997 High Low
----------- ---- ---
First Quarter $1.63 $1.19
Second Quarter 1.38 1.13
Third Quarter 1.94 1.25
Fourth Quarter 1.63 1.19
Fiscal 1996 High Low
----------- ---- ---
First Quarter $3.31 $2.13
Second Quarter 2.50 1.81
Third Quarter 2.06 1.25
Fourth Quarter 1.94 1.38
There were approximately 271 record holders and 700 beneficial holders
of the Company's Common Stock as of October 3, 1997. On October 3, 1997, the
high and low sale prices for the Common Stock were both $1.50.
The Company has never paid a dividend on its Common Stock. The Company
presently does not anticipate paying any dividends on its Common Stock in the
foreseeable future. The Company may not pay any dividends on its Common Stock
unless all cumulative dividends on its Series B and Series C Preferred Stock are
paid. In September 1997, all of the outstanding shares of Series B Preferred
Stock were converted into shares of Common Stock. The annual dividend rate of
the Series B Preferred Stock was $.10 per share, which amounted to $50,000 per
year in the aggregate based on 500,000 previously issued and outstanding Series
B Preferred Shares. The annual rate of the Series C Preferred Stock is $1.35 per
share, which currently amounts to $482,400 in the aggregate based on 357,333
issued and outstanding shares. After December 22, 1996, dividends on the Series
C Preferred Stock became payable, at the option of the Company, in shares of
Common Stock. As of July 31, 1997, accrued but unpaid dividends payable on the
Series B and Series C Preferred Stock were $44,372. Further, under Delaware
corporate law, the Company may be prohibited in certain circumstances from
paying dividends (whether in cash or otherwise).
13
<PAGE>
On May 16, 1997, the Board of Directors of the Company authorized the
redemption of all outstanding Preferred Share purchase rights (the "Rights") of
the Company at a redemption price of $.001 per Right (the "Redemption Price").
The Board fixed the close of business on May 19, 1997, as the record date for
the determination of holders of Common Stock entitled to receive notice of the
redemption and a check from the Company in payment of the applicable Redemption
Price. The original distribution of the Rights occurred in February 1995 when
the Board authorized and declared a distribution of one Right for (i) each share
of Common Stock outstanding on 5:00 p.m., Phoenix, Arizona time on March 2,
1995, and (ii) each share of Common Stock that became outstanding between March
2, 1995 and, among other events, the time at which the Board ordered redemption
of the Rights pursuant to the Rights Agreement, dated February 10, 1995, between
the Company and American Securities Transfer Incorporated, as Rights Agent. The
Company is presently effecting the redemption of the Rights.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
During fiscal 1996, the Company acquired the assets of two child care
centers in the Denver, Colorado metropolitan area, one center in Colorado
Springs, Colorado, one center in Sierra Vista, Arizona, and one center in
Phoenix, Arizona. In addition, through its contract with PSI, the Company
assumed the 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. During fiscal 1997, the Company acquired the assets of four additional
centers in the Phoenix metropolitan area, and opened two newly constructed
free-standing centers, also in the Phoenix metropolitan area. Through October
1997, the Company's expansion program has increased its licensed capacity by
1825 additional children, a 52% increase since it began in fiscal 1996. Total
children enrolled at the newly acquired and opened centers was approximately
1300 as of October 3, 1997, representing 33% of the Company's total enrollment
of approximately 3900 children.
FISCAL YEAR ENDED JULY 31, 1997, COMPARED TO FISCAL YEAR ENDED JULY 31, 1996
Operating revenue for fiscal 1997 was $14,647,000, an increase of
$3,671,000, or 33% from revenue of $10,976,000 for fiscal 1996. Of this
increase, $3,016,000 was attributable to the revenues of the acquired and newly
opened child care centers described above, and $284,000 was due to a 3% increase
in same-center revenues. The increase in same-center revenues was due to a
moderate tuition increase, which was partially offset by a large decrease in
child attendance during the Christmas and New Year's holiday periods. Due to the
timing of the holidays in 1996 (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.
Government program revenue, primarily related to the Company's
contracts to provide services to children with special needs, increased $288,000
in fiscal 1997 over fiscal 1996 levels.
14
<PAGE>
Operating expenses for fiscal 1997 totaled $15,821,000, an increase of
$3,911,000 or 33% from operating expenses of $11,910,000 for fiscal 1996.
Included in operating expenses were unusual charges (further described below)
totaling $1,114,000 and $602,000 in fiscal 1997 and 1996, respectively.
Excluding unusual charges, operating expense increased $3,399,000, or 30% in
fiscal 1997. This increase in operating expenses was primarily attributable to
the expenses associated with the acquired and newly opened centers during this
period.
Payroll expense for fiscal 1997 was $6,766,000 (50% of tuition and
other revenue), an increase of $1,711,000 or 34% from payroll expense of
$5,055,000 (49% of tuition and other revenue) for fiscal 1996. This increase was
due to $1,531,000 in salaries at the acquired and newly opened centers, and a
$180,000 increase in other salaries at existing centers. Payroll expense
remained consistent at approximately 50% of tuition and other revenue.
Facilities and maintenance costs for fiscal 1997 were $4,777,000, an
increase of $901,000 or 23% from facilities and maintenance costs of $3,876,000
during fiscal 1996. This increase was due to $1,067,000 in additional costs at
the acquired and newly opened centers, and was partially offset by a reduction
in expense for sublease payments. Facilities and maintenance costs as a
percentage of tuition and other revenue were unchanged at 35%.
General and administrative expenses for fiscal 1997 were $2,121,000, an
increase of $483,000, or 30% from general and administrative expenses of
$1,638,000 during fiscal 1996. Of this increase, $401,000 was attributable to
the acquired and newly opened centers, which increase was partially offset by a
$69,000 decrease in insurance costs along with lower preopening costs. General
and administrative expenses represented approximately 16% of tuition and other
revenue in both fiscal 1996 and 1997.
During fiscal 1997 and 1996, the Company recorded unusual charges of
$1,114,000 and $602,000, respectively, related to its management of certain
child care centers under its agreement with PSI. In this regard, 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 such centers to PSI under an
Administrative Services Agreement, License and Equipment Lease (the "PSI
Agreement"). The PSI Agreement provides that the Company is to receive an
administrative services fee (the "Administrative Fee") equal to 9% of PSI's
adjusted gross revenues each month, subject to certain enumerated limitations.
In addition, the PSI Agreement provides that the Company is to receive annual
lease payments from PSI of approximately $138,000 for providing the
aforementioned services.
During fiscal 1995, the Company agreed to defer future administrative
fees and lease payments due from PSI until such time as PSI's cash flow was
sufficient to fund these fees. In connection with this deferral, the accumulated
amounts due from PSI at July 31, 1995, were converted to a promissory note,
totaling $256,000, which amount equaled the present value of the expected future
payments to be received from PSI over a period of seven years related to the
balance of the receivable outstanding at July 31, 1995. Due to the continuing
cash flow difficulties of PSI, this promissory note was fully reserved at July
31, 1997. This reserve is included in the $1,114,000 of unusual charges.
15
<PAGE>
Due to continued losses, PSI approved a plan in fiscal 1996 to close
two of its schools upon the expiration of the leases associated with such
schools. In fiscal 1997, PSI decided to close the two schools prior to the
expiration of the leases and relocate the children to other facilities. At July
31, 1996, the Company believed that the estimated future cash flows at these two
sites would not be sufficient to recover the related leasehold improvements and
recorded an asset impairment reserve totaling $184,000. As the operating losses
at these two sites continued during 1997, an additional impairment reserve of
$162,000 was recorded at July 31, 1997. Since the Company is the lessee for the
leases at these two sites, it is contingently liable for the lease payments to
the lessors of such sites. During 1996, the Company determined that the future
cash flows at these two sites would not be sufficient to make the scheduled
lease payments and recorded a charge of $418,000 to cover the estimated future
shortfall. During fiscal 1997, the Company determined, due to continued
operating losses, that an additional charge of $696,000 was necessary to cover
future lease commitments at these two sites. The charges for the asset
impairment and future lease commitments were included in unusual charges in both
fiscal 1997 and 1996.
Other income for fiscal 1997 increased $20,000 from fiscal 1996 due to
gains from the disposal of certain assets, refinancing of certain debt and
decreases in net interest income. Net interest income decreased $53,000 due to
the continued use of invested proceeds of the Company's December 1995 public
offering for the acquisition and construction of new centers. Other income and
gains included a gain on refinancing of $67,227 related to the Company's early
extinguishment of debt in fiscal 1997.
At July 31, 1997 and 1996, the Company had deferred tax assets of
approximately $1,917,000 and $1,499,000, respectively, which relate primarily to
net operating loss carryforwards generated by impairment losses and contingent
liabilities recorded in fiscal 1997 and 1996. Management believes operations
were adversely impacted in fiscal 1997 and 1996 as a result of recording the
impairment reserves and contingent liabilities, but expects the Company will
have sufficient taxable income in the next few years that will allow the
deferred tax assets of $695,00 reflected in the consolidated balance sheet at
July 31, 1997 to be recovered. The Company established valuation allowances of
$1,150,000 and $732,000 in fiscal 1997 and 1996, respectively, to reduce the
deferred tax assets to the amount expected to be recovered. The valuation
increased from fiscal 1996 to fiscal 1997 by $418,000 as the result of
additional impairment losses and contingent liabilities recorded as unusual
charges in fiscal 1997.
Net loss for the year ended July 31, 1997 was $1,077,000 ($.35 per
share) compared to net loss of $857,000 ($0.29 per share) for the year ended
July 31, 1996. The net loss in both fiscal 1996 and 1997 was the result of the
Company establishing reserves for amounts receivable under the PSI Agreement and
for impaired assets and rental commitments in connection with the Company's
agreement with PSI.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE (FAS No.
128), which changes the computation and disclosure of earnings per share. FAS
No. 128 is effective for both interim and annual periods ending after December
15, 1997, with restatement of prior periods. The adoption of FAS No. 128 is not
expected to have a material impact on the Company's earnings per share.
16
<PAGE>
SEASONALITY AND QUARTERLY RESULTS
The following table reflects certain selected unaudited quarterly
operating results for each quarter of fiscal 1997 and 1996. The operating
results of any quarter are not necessarily indicative of results of any future
period.
<TABLE>
<CAPTION>
Quarter Ended (in thousands)
-----------------------------------------------------------------------------
Jul. 31, Apr. 30, Jan. 31, Oct. 31, Jul. 31, Apr. 30, Jan. 31, Oct. 31,
1997 1997 1997 1996 1996 1996 1996 1995
-------- -------- -------- -------- --------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue $ 3,960 $ 3,830 $ 3,357 $ 3,500 $ 3,002 $ 2,866 $ 2,489 $ 2,620
Operating expenses (5,248) (3,663) (3,525) (3,385) (3,972) (2,800) (2,598) (2,541)
Income (loss) from operations (1,288) 167 (168) 115 (970) 66 (109) 79
Income (loss) before income
taxes (1,299) 228 (138) 132 (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 attendance levels and lower operating results in the second and fourth
fiscal quarters and higher attendance levels and operating results in the first
and third fiscal quarters.
TRENDS
Due to a moderate October tuition increase and continued tight
management of costs, same-center operating performance remained consistent
during fiscal 1997. Operations at the Company's newly opened centers continue to
improve as these centers move through their initial "ramp-up" phase. In
addition, profitability has improved as the acquired centers have become more
fully integrated into the Company.
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 and six centers in fiscal 1997 primarily through acquisitions.
Additionally, on September 2, 1997, the Company opened a newly constructed
free-standing center in Phoenix, Arizona.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the fiscal year ended July
31, 1997 was $146,000, reflecting the June opening of a newly constructed
center, and slower improvement in operating results in the acquired centers. 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 $1,184,000.
Net cash used in investing activities was $1,288,000, consisting of
purchases of property and equipment totaling $1,168,000 and $494,000 of costs
related to acquisitions. These uses were partially offset by $396,000 in
proceeds from disposals of property and equipment.
17
<PAGE>
During fiscal 1996, the Company completed a $5 million public offering
of its Series C 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. The underwriters of the
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 on same terms as those applicable to the initial offering
of the Series C Preferred Stock, resulting in net proceeds to the Company of
$298,072. Additionally, the 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 provided by financing activities was $16,000 in fiscal 1997.
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. Proceeds from the refinance of the notes payable totaled
$1,339,000, offset by $1,276,000 in repayments to retire the Company's
previously outstanding debt. Net borrowings on the Company's seasonal working
capital credit facility totaled $124,000, and payment of cash dividends on
Series B and C Preferred Stock were $171,000.
The Company is current on all principal and interest payments on its
lines of credit and notes payable. The Company has four credit facilities with a
financial institution totaling $3,000,000: (i) a $500,000 revolving working
capital line, bearing interest at prime (8.50% at July 31, 1997) plus 1.50%;
(ii) a $500,000 note for the purchase of vehicles and equipment, bearing
interest at prime plus 1.75%; (iii) a $1,000,000 nonrevolving line of credit for
acquisition financing, bearing interest at prime plus 2.5%; and (iv) a
$1,000,000 term loan to refinance the Company's existing notes payable and
capital leases, bearing interest at 10.42%. The lines of credit are renewable
each year on April 30. The credit facilities are secured by the Company's
accounts receivable, inventory, furniture, vehicles and equipment.
The Company currently expects that it will be able to renew its
existing 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, one center in Colorado Springs, Colorado, one center
in Sierra Vista, Arizona, and one center in Phoenix, Arizona. In fiscal 1997,
the Company acquired the assets of four child care centers in the Phoenix
metropolitan area, and opened two newly constructed free-standing centers, also
in the Phoenix metropolitan area.
The Company also plans to open several centers during fiscal 1998, in
addition to the newly constructed free-standing center opened on September 2,
1997 in Phoenix, Arizona. Under current plans, new centers opened by the Company
will be constructed by a third party and the Company will then enter into long
term leases for the land and buildings. Preopening costs of a center normally
range between $90,000 and $110,000 per center. Management expects cash generated
from operations and cash on hand as a result of the public offering to be
sufficient to satisfy the needs at its existing schools for the next 12 months
and to open the new centers as planned.
18
<PAGE>
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.
19
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
20
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Sunrise Educational Services, Inc.
We have audited the accompanying consolidated balance sheet of Sunrise
Educational Services, Inc. (a Delaware corporation) and subsidiary as of July
31, 1997, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the two years in the period 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 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 Educational Services,
Inc. and subsidiary as of July 31, 1997, and the results of their operations and
their cash flows for each of the two years in the period then ended in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Phoenix, Arizona
September 29, 1997
21
<PAGE>
SUNRISE EDUCATIONAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JULY 31, 1997
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,212,806
Accounts receivable, net 746,570
Prepaid expenses 542,515
Deferred tax asset, current portion 193,358
Inventory and supplies 33,323
-----------
Total current assets 2,728,572
PROPERTY AND EQUIPMENT, net 1,983,694
PROPERTY AND EQUIPMENT LEASED TO PSI, net 118,378
DEFERRED TAX ASSET, net of current portion 502,000
INTANGIBLE ASSETS, net 1,252,559
DEPOSITS AND OTHER ASSETS 337,968
-----------
Total assets $ 6,923,171
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 223,754
Accounts payable 297,973
Accrued expenses 733,376
Dividends payable on preferred stock 44,372
Notes payable, current portion 248,865
Accrued rental reserve, current position 341,808
Deferred rent, current portion 73,026
Deferred gain on sale and leaseback of preschool
facilities, current portion 45,003
-----------
Total current liabilities 2,008,177
NOTES PAYABLE, net of current portion 802,696
ACCRUED RENTAL RESERVE, net of current portion 480,000
DEFERRED RENT, net of current portion 283,833
DEFERRED GAIN ON SALE AND LEASEBACK OF PRESCHOOL FACILITIES,
net of current portion 42,645
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value - 1,000,000 shares
authorized, 857,333 shares issued and outstanding 857,333
Common stock, $.01 par value 10,000,000 shares
authorized, 3,252,915issued and outstanding 32,529
Paid-in capital 7,975,519
Accumulated deficit (5,559,561)
-----------
Total shareholders' equity 3,305,820
-----------
Total liabilities and shareholders' equity $ 6,923,171
===========
The accompanying notes are an integral part
of these consolidated financial statements.
22
<PAGE>
SUNRISE EDUCATIONAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JULY 31, 1997 AND 1996
1997 1996
----------- -----------
OPERATING REVENUE:
Tuition and other $13,620,656 $10,237,418
Government programs 1,026,626 738,429
----------- -----------
Total operating revenue 14,647,282 10,975,847
OPERATING EXPENSES:
Payroll 6,766,002 5,055,138
Facilities and maintenance 4,777,442 3,876,373
General and administrative 2,121,493 1,637,925
Government programs 1,042,119 738,429
Unusual charges 1,114,000 602,000
----------- -----------
Total operating expenses 15,821,056 11,909,865
----------- -----------
LOSS FROM OPERATIONS (1,173,774) (934,018)
OTHER INCOME (EXPENSES):
Interest (expense) income, net (12,684) 70,810
Other income and gains 109,663 5,900
----------- -----------
Total other income 96,979 76,710
----------- -----------
LOSS BEFORE INCOME TAXES (1,076,795) (857,308)
INCOME TAXES -- --
----------- -----------
NET LOSS $(1,076,795) $ (857,308)
=========== ===========
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $(1,609,195) $(1,201,925)
=========== ===========
NET LOSS PER COMMON SHARE:
Primary $ (.52) $ (.40)
=========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES:
Primary 3,089,850 2,970,294
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
23
<PAGE>
SUNRISE EDUCATIONAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1997 AND 1996
<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, 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
Exercise of options -- -- 12,679 126 6,747 -- 6,873
Issuance of common stock for
preferred dividends -- -- 257,268 2,573 359,219 -- 361,792
Dividends payable on preferred
stock -- -- -- -- -- (532,400) (532,400)
Net loss -- -- -- -- -- (1,076,795) (1,076,795)
------- -------- --------- ------- ---------- ----------- -----------
BALANCE AT JULY 31, 1997 857,333 $857,333 3,252,915 $32,529 $7,975,519 $(5,559,561) $ 3,305,820
======= ======== ========= ======= ========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
24
<PAGE>
SUNRISE EDUCATIONAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,076,795) $ (857,308)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities-
Depreciation and amortization 705,645 384,574
Amortized gain on sale of real estate (45,003) (45,003)
Amortization of deferred rent (103,181) (52,988)
Provision for doubtful accounts 167,204 139,296
Unusual charges 1,114,000 602,000
Gain on disposal of property and equipment (42,436) (5,900)
Gain on refinancing (67,227) --
Changes in assets and liabilities-
Increase in accounts receivable (525,999) (147,818)
Increase in prepaid expenses (393,057) (53,216)
Increase in inventory and supplies (6,587) (10,718)
Decrease (increase) in deposits and other assets 45,790 (90,992)
Increase in accounts payable 25,454 146,891
Increase in accrued expenses 348,340 82,777
Decrease in accrued rental reserve (292,192) --
----------- -----------
930,751 948,903
----------- -----------
Net cash (used in) provided by operating activities (146,044) 91,595
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of child care centers (494,264) (1,107,121)
Registration of new tradenames (21,123) --
Purchases of property and equipment (1,168,218) (916,886)
Proceeds from disposal of property and equipment 396,098 10,800
----------- -----------
Net cash used in investing activities (1,287,507) (2,013,207)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of warrants and options 6,873 40,404
Proceeds from sale of preferred stock -- 4,324,547
Payment of dividends (170,605) (566,083)
Proceeds from notes payable 1,339,194 219,360
Net borrowings on lines of credit 123,754 100,000
Payments on notes payable and capital leases (1,283,475) (147,311)
----------- -----------
Net cash provided by financing activities 15,741 3,970,917
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,417,810) 2,049,305
CASH AND CASH EQUIVALENTS, beginning of year 2,630,616 581,311
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 1,212,806 $ 2,630,616
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 96,272 $ 42,150
=========== ===========
Payment of stock dividends $ 361,790 $ --
=========== ===========
Note payable issued for acquisition of child care centers $ 425,000 $ --
=========== ===========
Cash paid during the year for income taxes $ -- $ --
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
25
<PAGE>
SUNRISE EDUCATIONAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997
(1) ORGANIZATION AND OPERATIONS:
Sunrise Educational Services, Inc. (the Company), previously Sunrise Preschools,
Inc., was incorporated in the State of Delaware in May 1987. As of July 31,
1997, the Company operates 26 child care centers and manages an additional 7
child care centers in Arizona, Hawaii, Colorado and Wisconsin.
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 educational services (see Note 4). The results
of operations of the schools transferred to PSI are not included in the
accompanying consolidated financial statements.
During fiscal 1997, the Company acquired or opened six child care centers,
increasing its licensed capacity by approximately 911 children. During fiscal
1996, the Company acquired six child care centers, increasing its licensed
capacity by approximately 914 children.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Sunrise
Educational Services, Inc. and Sunrise Educational Services Hawaii, Inc. All
intercompany accounts and transactions have been eliminated in consolidation.
(b) USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(c) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company follows the provisions of Statement of Financial Accounting
Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF (FAS No. 121) which requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
26
<PAGE>
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are recorded at the lower of the carrying amount or net realizable
value (fair value less costs to sell).
(d) 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 $486,000 at July 31, 1997.
(e) 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.
(f) 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 determined at the dates of acquisition and amounts allocated to
noncompete agreements and customer base. The intangible assets are being
amortized using a straight-line method over various periods up to 20 years.
Amortization expense was approximately $109,000 and $12,000 during fiscal 1997
and fiscal 1996, respectively, and accumulated amortization at July 31, 1997 and
July 31, 1996 was $121,000 and $12,000, respectively. 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.
(g) PRE-OPENING COSTS
Pre-opening costs are expensed as incurred.
(h) ACCRUED EXPENSES
Accrued expenses include compensation and related benefits of $475,417 at July
31, 1997.
(i) ADVERTISING EXPENSES
Advertising costs are expensed when incurred which is generally when the
advertising first takes place. Advertising expenses were approximately $260,000
and $161,000 in 1997 and 1996, respectively. At July 31, 1997, prepaid expenses
included approximately $70,000 for prepaid advertising expenses.
(j) GOVERNMENT PROGRAMS
Revenues related to government programs include amounts paid by various
government agencies under contractual arrangements for programs for children
with special needs. 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 moderately handicapped children in child care centers.
27
<PAGE>
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.
(k) NET INCOME (LOSS) PER SHARE
Primary net loss per share is computed by dividing net loss attributable to
common shareholders (net loss plus accrued dividends for the period on Series B
and Series C Preferred Stock) by the weighted average number of common shares
outstanding during the period. Shares issuable upon the exercise of warrants and
employee stock options are considered antidilutive and are not included in the
weighted average number of common shares and common share equivalents
outstanding.
(l) 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.
(m) 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, 1997, the Company does not consider itself to have any
significant concentrations of credit risk with respect to accounts receivable.
(n) 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,
notes receivable and notes payable are carried at amounts that reasonably
approximate their fair values.
(o) RECENTLY ISSUED ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, EARNING PER Share (FAS No. 128) which
changes the computation and disclosure of earnings per share. FAS No. 128 is
effective for both interim and annual periods ending after December 15, 1997
with restatement of prior periods. The adoption of FAS No. 128 is not expected
to have a material impact on the Company's earnings per share.
(3) ACQUISITIONS:
During fiscal 1997, the Company purchased the assets of four preschool centers
in the Phoenix, Arizona metropolitan area. The total aggregate purchase price
for these acquisitions was $775,000. Additional acquisition costs totaled
approximately $144,000.
28
<PAGE>
The acquisitions were accounted for as purchases. The amount of the purchase
price in excess of net tangible assets acquired was allocated as follows:
goodwill - $488,000; noncompete agreements - $96,000, and; customer base -
$45,000.
Summarized below are the unaudited pro forma consolidated results of operations
of the Company for the fiscal year ended July 31, 1997 assuming the acquisitions
were consummated as of August 1, 1996. 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, 1996 or of results which may occur in the future.
Revenues $14,761,000
Net loss (1,058,000)
Net loss per common share (.52)
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.
(4) PRESCHOOL SERVICES, INC. AND UNUSUAL CHARGES:
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. PSI has certain contracts with the state of Hawaii to provide child
care services, one of which is subject to annual renewal. 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. Pursuant to the PSI Agreement, the Administrative Fee equals 9%
of PSI's adjusted gross revenues each month, subject to certain limitations.
During fiscal 1995, the Company agreed to defer future Administrative Fees and
lease payments due from PSI until such time as PSI's cash flow is adequate to
fund these fees, which the Company initially estimated would be no sooner than
fiscal 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. The promissory note bears interest at 8.0%, with monthly payments due
beginning January 1998 through July 2002. During fiscal 1997, the note
receivable of $256,251 was fully reserved through a provision to unusual charges
due to continued cash flow difficulties of PSI. In fiscal 1997 and 1996, all
administrative fees were deferred which totaled $50,000 and $42,000,
respectively.
The Company is the lessee under two leases for property subleased to PSI and 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
29
<PAGE>
payments, the Company recorded a provision for these contingent liabilities of
approximately $696,000 in fiscal 1997 and $418,000 in fiscal 1996 related to the
remaining lease payments (less estimated sublease rental income) which are
included in unusual charges. The reserve balance for these contingent
liabilities at July 31, 1997 is approximately $822,000. In fiscal 1996, an
allowance was provided for 1996 lease payments not paid by PSI to the Company
totaling $374,000 in addition to unusual charges.
Due to continued operating losses incurred during 1996, PSI approved a plan to
close certain schools prior to the expiration of the leases. In fiscal 1997, PSI
decided to close the two schools prior to the expiration of the leases and
relocate the children to other facilities. Since the estimated cash flows will
not be sufficient to recover the leasehold improvements related to these two
schools, the Company recorded impairment reserves for these assets which totaled
approximately $162,000 in fiscal 1997 and $184,000 in fiscal 1996 which are
included in unusual charges.
(5) PROPERTY AND EQUIPMENT:
Property and equipment and property and equipment leased to PSI at July 31, 1997
consist of the following:
Property and
Property Equipment
And Equipment Leased To Psi
------------- -------------
Furniture and fixtures $ 1,006,000 $ 80,000
Equipment 1,512,000 267,000
Vehicles 758,000 47,000
Leasehold improvements 934,000 981,000
----------- ----------
4,210,000 1,375,000
Less-Accumulated depreciation and
amortization (2,226,000) (997,000)
Less-Impaired asset reserve -- (260,000)
----------- ----------
$ 1,984,000 $ 118,000
=========== ==========
(6) CREDIT FACILITIES:
The Company has four credit facilities with a financial institution totaling
$3,000,000: (i) a $500,000 revolving working capital line, bearing interest at
prime (8.50 at July 31, 1997) plus 1.50%; (ii) a $500,000 note for the purchase
of vehicles and equipment, bearing interest at prime plus 1.75%; (iii) a
$1,000,000 nonrevolving line of credit for acquisition financing, bearing
interest at prime plus 2.5%; and (iv) 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. The credit facilities are secured by all of the
Company's accounts receivable, inventory, furniture, vehicles and equipment. As
of July 31, 1997, the amounts borrowed under the credit facilities listed above
are as follows: working capital line - $224,000; equipment note - $151,000;
acquisition financing line - $0; and term loan - $901,000.
Amounts borrowed under the working capital line are due in monthly installments
of interest with all unpaid principal and interest due on April 24, 1998.
Amounts borrowed under the equipment note and term loan are payable in monthly
installments of principal and interest (see Note 7).
30
<PAGE>
The Company is required to meet certain covenants under these credit facilities,
including maintaining certain minimum net working capital balances and meeting
certain net worth, debt and interest coverage ratios. The terms of the credit
facilities, also limit the ability of the Company to sell assets without the
consent of the bank.
The lines of credit are renewable each year on April 30. 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.
As the result of refinancing certain debt, the Company recognized a gain of
$67,000 in fiscal 1997 which is included in other income and gains in the
accompanying statements of operations.
(7) NOTES PAYABLE:
Notes payable consist of the following:
Installment notes payable to Imperial Bank,
payable monthly with interest rates ranging
from prime (8.50% at July 31, 1997) plus
1.75% to 10.42%, maturing through July 2002,
secured by accounts receivable, equipment,
fixed assets and vehicles (approximately
$726,000 at July 31, 1997) $1,052,000
Less-current portion 249,000
----------
Long-term portion $ 803,000
==========
Repayment of notes payable are scheduled as follows:
Year Ended
July 31,
----------
1998 $ 249,000
1999 272,000
2000 299,000
2001 207,000
2002 25,000
----------
$1,052,000
==========
(8) COMMITMENTS AND CONTINGENCIES:
The Company leases 26 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.
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 approximately $357,000 at July 31, 1997. The liability will be satisfied
through future rental payments.
31
<PAGE>
The Company pays no rent at 5 of its child care centers. However, profit sharing
arrangements exist with the owners of these facilities, all of which are managed
for PSI. Amounts paid to the owners of these facilities are paid by PSI.
Future lease commitments under noncancelable operating leases are as follows:
Year Ending
July 31,
-----------
1998 $ 3,034,000
1999 2,405,000
2000 2,102,000
2001 1,963,000
2002 1,510,000
Thereafter 6,236,000
-----------
$17,250,000
===========
During fiscal 1997 and 1996, the Company leased equipment used in two preschool
facilities from an officer/stockholder for $2,000 per month. This lease expired
in November 1996. The Company also leased four vehicles used at its preschool
facilities during fiscal years 1997 and 1996 from officers/stockholders with
aggregate monthly payments of approximately $2,000 per month through March 1997.
The Company bought these four vehicles from the officers/stockholders in April
1997 for $31,000.
Total rent expense for operating leases, net of sublease income of $188,000 and
$243,000 and including amounts paid to related parties of $72,000 and $51,000,
was $2,750,000 and $2,296,000 for fiscal years 1997 and 1996, 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 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 then
current 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.
32
<PAGE>
The Company has an acquisition consulting and investor relations agreement with
a consultant. Pursuant to the agreement, the consultant provides 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 specifies monthly payments of
$3,500 for investor relation services. Pursuant to the agreement, the Company
granted the consultant, as additional consideration for consulting services,
warrants to purchase 145,000 shares of the Company's common stock at a price of
$1.21875 per share and 50,000 shares of the Company's common stock at a price of
$1.375 per share and has agreed to reimburse the consultant for certain
expenses. The agreement terminates on December 31, 1998 with an automatic
renewal through December 31, 2000; however, the agreement may be terminated for
cause (as defined in the agreement) upon ten days notice to the consultant.
The Company has a financial consulting agreement with another consultant. The
agreement specifies monthly payments of $3,000 for financial consulting services
and the Company has agreed to reimburse the consultant for certain expenses.
Pursuant to the agreement, the Company granted warrants to the consultant to
purchase 300,000 shares of the Company's common stock at an exercise price of
$1.375 per share with respect to an initial 150,000 shares and an exercise price
of $2.00 per share with respect to the remaining 150,000 shares. In addition to
the compensation described above, the Company has agreed to pay the consultant a
finder's fee in the event the Company effectuates a corporate restructuring,
merger, joint venture or acquisition initiated by the consultant based on a
percentage of the consideration of the transaction. The agreement terminates on
November 3, 1998 and can be renewed for subsequent two year terms.
(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 $491,000 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 $88,000 at July 31, 1997.
(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.
COMMON STOCK AND WARRANTS:
At July 31, 1995, the Company had outstanding warrants to purchase 1,000,000
shares of the Company's common stock. 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 $40,000.
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
33
<PAGE>
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.
On May 16,1997, the Board of Directors of the Company authorized the redemption
of all outstanding Rights of the Company at a redemption price of $.001 per
Right. The Board fixed the close of business on May 19, 1997, as the record date
for the determination of holders of common stock entitled to receive notice of
the redemption and a check from the Company in payment of the applicable
redemption price.
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
$34,000, were $466,000. 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, 1997 were $4,000. In
September 1997, all of the outstanding shares of Series B Preferred Stock were
converted into shares of common stock.
SERIES C PREFERRED STOCK AND WARRANTS:
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 $4,026,000, which are being 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 resulting in net proceeds to the Company of $298,000.
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, 1997 were $40,000.
34
<PAGE>
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.
At July 31, 1997, the Company had outstanding warrants to purchase an aggregate
of 33,333 shares of Series C Preferred Stock.
(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 assets depends on the Company's ability to generate sufficient
taxable income in the future.
In fiscal 1997 and 1996 the valuation allowance was increased by $418,000 and
$244,000, respectively, primarily due to the increase in the Company's net
operating loss carryforwards. The net losses for both fiscal years was mainly
attributable to the unusual charges recorded by Company for impairments of
certain assets.
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.
35
<PAGE>
The components of the net deferred tax asset are as follows at July 31, 1997:
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
carryforwards -- 732,000 732,000
Allowance for doubtful accounts 14,000 -- 14,000
Accelerated tax depreciation -- 206,000 206,000
Deferred revenue 37,000 -- 37,000
Accrued vacation and sick leave 81,000 -- 81,000
Accrued bonus 14,000 -- 14,000
Deferred rent 29,000 114,000 143,000
Deferred gain on sale of real estate 18,000 17,000 35,000
Asset impairment -- 40,000 40,000
Rental reserve -- 329,000 329,000
Intangible assets -- 10,000 10,000
Management fee reserve -- 273,000 273,000
Other -- 3,000 3,000
Valuation allowance -- (1,150,000) (1,150,000)
-------- ----------- -----------
193,000 574,000 767,000
-------- ----------- -----------
Net deferred tax assets $193,000 $ 502,000 $ 695,000
======== =========== ===========
The Company's net operating loss carryforwards for federal income tax purposes,
which comprise 38% of total deferred tax assets, at July 31, 1997, expire as
follows:
2004 $ 384,000
2005 861,000
2006 564,000
2011 286,000
----------
$2,095,000
==========
The Company's net operating loss carryforwards for state income tax purposes
totaled approximately $218,000, which begin to expire in 2001.
A reconciliation of the federal income tax rate to the Company's effective tax
rate is as follows at July 31, 1997:
1997 1996
---- ----
Statutory federal rate (34)% (34)%
State taxes, net of federal benefit (6) (6)
Increase in valuation allowance 40 40
--- ---
0% 0%
=== ===
36
<PAGE>
(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, 1997, the aggregate amounts of lease payments and other obligations
guaranteed by these officers totaled approximately $3,425,000.
(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 219,632 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.
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 391,126 of
such shares have been granted, with exercise prices of $1.1875 to $1.5125, 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
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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 40,000 shares
of common stock have been granted; such options have a term of six years with an
exercise price of $1.1875 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.
The Company has elected to continue to follow Accounting Principles Board
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25) and related
Interpretations in accounting for its employee stock options instead of adopting
the alternative fair value accounting provided for under Statement of Financial
Accounting Standard No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, (FAS No.
123). Under APB 25, because the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
FAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for 1997 and 1996,
respectively: risk-free interest rates of 6.0% and 6.0%; dividend yields of 0%
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and 0%, volatility factors of the expected market price of the Company's common
stock of .657 and .648; and a weighted-average expected life of the options of 5
years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair values of the options
are amortized over the options' vesting period. Had the Company accounted for
its stock option plans and recorded compensation cost in accordance with FAS No.
123, the Company's pro forma net loss and net loss per share for the year ended
July 31 would have been as follows:
1997 1996
---------- ----------
Net loss available for common stock - as reported $1,609,000 $1,202,000
Net loss available for common stock - pro forma 1,623,000 1,223,000
Net loss per share - as reported .52 .40
Net loss per share - pro forma .53 .41
A summary of the Company's stock option activity, and related information for
the years ended July 31 follows:
1997 1996
------------------------ ------------------------
Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price
------- -------------- ------- --------------
Outstanding-beginning of year 630,000 $1.45 610,000 $1.43
Granted 56,126 1.29 26,189 2.02
Exercised (25,368) 0.94 -- --
Canceled (10,000) 2.25 (6,189) 1.38
------- ----- ------- -----
Outstanding-end of year 650,758 $1.45 630,000 $1.45
======= ===== ======= =====
Exercisable at end of year 493,317 $1.43 396,480 $1.45
======= ===== ======= =====
Weighted-average fair value
of options granted during
the year $ 1.29 $ 2.02
======= =======
Exercise prices for options outstanding as of July 31, 1997 ranged from $.50 to
$2.375. The weighted-average remaining contractual life of those options is 5
years.
401(K) PLAN
The Company has 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 20% of their
salary, not to exceed the statutory limit. The Company will make a
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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 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.
Under the agreement, EAI is to acquire the Company for approximately $13.5
million in cash and stock, subject to adjustment. If the cash and stock paid by
EAI is valued at $13.5 million, Sunrise common shareholders will receive a per
share value of $1.92 and preferred shareholders will receive a value of $15.00
per share.
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 shares will be tax-free to Sunrise
shareholders and that the merger, which is subject to the approval of
shareholders of both companies and certain other conditions, will be completed
by early January 1998.
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 entered into an agreement to manage and lease space to
Sunray Charter Schools.
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
As reported on a current report on Form 8-K, dated May 1, 1996 (the
"Form 8-K"), the Company engaged Ernst & Young LLP as its independent auditors
for the fiscal year ended July 31, 1996 to replace the firm of Arthur Andersen
LLP, who was dismissed at the same time. The decision to change accountants was
approved by the Board of Directors of the Company.
The reports of Arthur Andersen LLP on the Company's financial
statements for the two fiscal years ended July 31, 1995 and 1994 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 or 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 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 to the Form 8-K.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of the
directors and executive officers of the Company as of September 30, 1997. A
summary of the background and experience of each of these individuals is set
forth after the table.
The directors and executive officers of the Company are:
Name Age Position
---- --- --------
James R. Evans 50 Chairman of the Board, President
Dr. Richard H. Hinze 76 Director
Robert A. Rice 42 Director
Barbara L. Owens 49 Director, Executive Vice President,
Secretary & Treasurer
Jennifer L. Andrew 33 Chief Financial Officer
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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 Ms. Andrew serves at the pleasure of the Board of Directors, subject to a
severance agreement. See "EXECUTIVE COMPENSATION -- Employment Contracts." There
are no family relationships among the directors and executive officers.
JAMES R. EVANS has been the President and a Director of the Company
since its inception. Prior to that time, Mr. Evans was an executive with
Smitty's Super Value, Inc., a large retail food and general merchandise chain.
During his twenty years at Smitty's Super Value, Inc., Mr. Evans was responsible
at various times for marketing strategy, designing store layouts, development of
financial models and budgets and store management. Mr. Evans is a member of the
Arizona Child Care Licensure Advisory Committee and has been a national
presenter at various child care conventions on diverse child care topics.
DR. RICHARD H. HINZE has been a Director of the Company since August
1987. Since September 1984, Dr. Hinze has been the president and chairman of
Flying H Enterprises, Inc., a family-owned Hawaii corporation focusing on
consulting and development of child care programs for public and private
entities, which has been inactive since 1994. From 1972 until his retirement in
April 1987, Dr. Hinze was a researcher for the Curriculum Research and
Development Group at the University of Hawaii-Manoa studying gifted children and
early childhood education. He has also served from October 1985 through April
1987 as the director for all campuses of the University of Hawaii Child Care
Project, where he developed a system for offering child care for students and
faculty. Dr. Hinze was also the treasurer of the National Association for
Education of Young Children from 1976 through 1980. Dr. Hinze has published
several articles in professional publications relating to child care and
education and received his Ed.D from Stanford University.
ROBERT A. RICE has been a Director of the Company since October 1993.
Mr. Rice is a director of Firstmark Corp., which is listed for trading on
Nasdaq, and is a Vice-President of two subsidiaries of Firstmark Corp.,
Firstmark Investment Corp. and Firstmark Capital Corp. Firstmark Corp. and its
subsidiaries are engaged in financial services and real estate and timber
operations. Mr. Rice has been the President and Chairman of Prime Discount
Securities, Inc., a National Association of Securities Dealers registered
investment broker-dealer, since he founded the entity in 1983. Mr. Rice has also
been the President of Prime Securities Corp., an investment management company,
since he founded the entity in 1990. Mr. Rice is a general partner of BR
Partners, a partnership that owns and operates commercial and residential real
estate in Maine.
BARBARA L. OWENS was a consultant to the Company beginning in February
1987, and became a full-time employee as 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
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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.
JENNIFER L. ANDREW has been the Chief Financial Officer of the Company
since June 20, 1997. From 1995 to June 1997, Ms. Andrew served as the Chief
Financial Officer of Regional Health Services Corp. in Casa Grande, Arizona.
From 1992 to 1995, Ms. Andrew served as the Director of Patient Services for the
University of Arizona Medical Center in Tucson, Arizona. Ms. Andrew has resigned
her position with the Company effective November 14, 1997.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act requires the Company's
officers and directors, and persons who beneficially own more than 10% of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the SEC. Officers, directors and greater
than 10% shareholders are required by Exchange Act regulations to furnish the
Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it,
or written representations from certain reporting persons that no Form 5 was
required for such persons, the Company believes that during the fiscal year
ending July 31, 1997, all filing requirements applicable to its officers,
directors and greater than 10% beneficial owners were complied with.
ITEM 10. EXECUTIVE COMPENSATION.
The following table summarizes all compensation paid to the Company's
President (the Chief Executive Officer of the Company) and to the Company's
other most highly compensated executive officers other than the President whose
total annual salary and bonus exceeded $100,000 (collectively, the "Named
Executive Officers"), for services rendered in all capacities to the Company
during the fiscal years ended July 31, 1997, 1996 and 1995.
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 1997 $223,904 $ -0- $-0- $-0- 7,500 $-0- $-0-
Chairman of the 1996 173,813 45,746 -0- -0- 373,200 -0- -0-
Board and President 1995 168,750 65,151 -0- -0- -0- -0- -0-
Barbara L. Owens 1997 146,702 -0- -0- -0- 7,500 -0- -0-
Executive Vice 1996 98,494 45,746 -0- -0- 135,858(2) -0- -0-
President, Secretary 1995 95,625 52,777 -0- -0- -0- -0- -0-
and Treasurer
</TABLE>
- ----------
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(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 $2.00 per share, exceeded the current
market price for the Company's Common Stock.
The table below sets forth certain information concerning grants of stock
options to each of the Named Officers during the fiscal year ended July 31,
1997. In accordance with the rules of the Securities and Exchange Commission,
shown are the hypothetical gains or "option spreads" that would exist for the
respective options. These gains are based on the assumed rates off annual
compounded stock price appreciation of 5% and 10% from the date the option was
granted over the full option terms.
OPTION GRANTS IN FISCAL YEAR 1997
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------------------------------------
% of Total Potential Realizable
Number of Options Value at Assumed
Securities Granted to Annual Rates of Stock
Underlying Employees in Price Appreciation for
Stock Options Fiscal Exercise Price Expiration Option Term(2)
Name Granted (#)(1) Year per Share ($) Date 5% ($) 10%($)
---- -------------- -------- -------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
James R. Evans 7,500 16.25% 1.5125 07/01/2007 5,454 15,404
Barbara L. Owens 7,500 16.25% 1.5125 07/01/2007 5,454 15,404
</TABLE>
- -----------
(1) All options were granted under the Company's 1995 Stock Option Plan and are
immediately exercisable.
(2) The potential realizable dollar value of a grant is the product of (a) the
difference between: (i) the product of the per share market price on the
date of grant and the sum of one plus the appreciation rate raised to the
term of the option (the future value of the option at the stock price
appreciation rate); and (ii) the per-share exercise price of the option;
and (b) the number of shares underlying the grant at fiscal year-end.
The following table sets forth certain information concerning each
exercise of stock options during the year ended July 31, 1997 by each of the
Named Executive Officers and the aggregated fiscal year-end value of the
unexercised options of each such Named Executive Officer.
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<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
OPTION VALUE AS OF JULY 31, 1997
<TABLE>
<CAPTION>
Value of Unexercised
Number of 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 6,885 $19,600 236,681 145,454 $17,027 $7,345
Barbara L. Owens -0- -0- 155,050 -0- 37,204 -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 and receive the compensation outlined
in the description of such plan below.
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
$229,783 and $150,034 per year, respectively, may be increased on August 1 of
each year to reflect increases in the National Consumer Price Index of the
preceding year. The Employee is entitled to receive bonuses in the discretion of
the Compensation Committee to be paid in accordance with Company bonus plans in
effect from time to time. Each of the agreements has a perpetual three-year
term, such that on any given date each agreement has a three-year remaining
term. The agreements may not be terminated unilaterally by the Company, except
for cause, which includes (i) conviction of a felony that impairs the ability of
the Employee to perform his or her duties with the Company or (ii) failure of
performance as determined by the Board. The agreements provide that the salaries
of Mr. Evans and Ms. Owens will be reviewed annually, but such salaries may not
be decreased.
Each of the agreements provides that if the Employee is terminated by
the Company other than for cause or disability, or by the Employee for good
reason (as defined in the agreements), the Company shall pay to the Employee (i)
his or her salary through the termination date plus any accrued but unpaid
bonuses, and (ii) a lump sum payment equal to the sum of three years of the
Employee's then current 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 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 until the first to occur of (i) the
Employee's attainment of alternative employment or (ii) three years from 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
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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 then current 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.
In July 1997, the Company entered into a letter agreement with Ms.
Andrew that provides for a lump sum payment equal to six months of her then base
salary if her employment is terminated without "cause" or if she resigns for
"good reason" following a "change in control" (as such terms are defined in the
letter agreement) of the Company. The letter agreement also provides for the
continuation of Company benefits provided to Ms. Andrew as of the date of
termination until the first to occur of (i) Ms. Andrew's attainment of
alternative employment or (ii) three years from the date of termination.
STOCK OPTION PLANS
1987 STOCK OPTION PLAN
The Company's Stock Option Plan (the "1987 Plan") was adopted by the
Board of Directors and approved by the stockholders in July 1987. Only employees
(including officers and directors, subject to certain limitations) are eligible
to receive options under the 1987 Plan, under which 240,000 shares of Common
Stock are authorized for issuance. As of September 30, 1997, options to purchase
219,632 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
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<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 September 30, 1997, under the 1995 Plan, options to purchase 391,126
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 $1.1875 to
$1.5125 per share.
47
<PAGE>
NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
The Company's Non-Employee Directors Stock Option Plan (the "Directors'
Plan") was adopted by the Board of Directors in May 1995. Only non-employee
directors are eligible to receive options under the Directors' Plan, under which
100,000 shares are authorized for issuance. As of September 30, 1997, options to
purchase 40,000 shares of Common Stock have been granted; such options have a
term of six years with an exercise prices ranging from $1.1875 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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information concerning the
beneficial ownership of the Company's Common Stock and Preferred Stock, on a
combined basis, as of October 3, 1997, by (i) each stockholder known by the
Company to own beneficially more than 5% of the outstanding Common Stock; (ii)
each director of the Company; (iii) the President of the Company and other
executive officers with annual compensation greater than $100,000 (including
salary and bonus); and (iv) all executive officers and directors of the Company
as a group. Each share of the Company's Preferred Stock is convertible into
7.0588 shares of Common Stock.
Shares of Common and Series B and Series C
Preferred Stock Beneficially Owned
------------------------------------------
Number of Shares Percent of
Name and Address(1) Beneficially Held Ownership
- ------------------- ----------------- ---------
James R. Evans (2) 893,438 3.4%
Barbara L. Owens (3) 160,493 2.3%
Jennifer L. Andrew -- --
Robert A. Rice (4) 32,187 *
Dr. Richard H. Hinze (5) 31,000 *
Private Opportunity Partners II, Ltd. (6) 541,116 8.0%
All directors and executive officers as a group 1,117,118 15.5%
(5 persons)
- ----------
* Represents beneficial ownership of not more than 1% of the outstanding
common stock.
48
<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) Includes 235,681 shares issuable pursuant to options exercisable within 60
days.
(3) Includes 155,050 shares issuable pursuant to options exercisable within 60
days.
(4) Includes 30,000 shares issuable pursuant to options exercisable within 60
days.
(5) Includes 30,000 shares issuable pursuant to options exercisable within 60
days.
(6) Information with respect to Private Opportunity partners II, Ltd. is
provided in reliance upon information included in a Schedule 13D filed by
such stockholder dated February 12, 1997. The address for Private
Opportunity Partners II, Ltd. is c/o B C Capital Corp., 201 S. Biscayne
Blvd., Suite 2950, Miami, Florida 33131.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
James R. Evans and Barbara L. Owens have personally guaranteed various
child care facility lease payments and other obligations to third parties. As of
July 31, 1997, the aggregate amounts of lease payments and other obligations
guaranteed by Mr. Evans and Ms. Owens were approximately $3,728,000 and
$899,000, respectively. In addition, the Company leased equipment used in two
child care centers and three 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 1997 were approximately $3,000 and $600, respectively. The
prescribed lease rates reflected fair rental value at the time the leases were
entered into. In May 1997, the vehicles were purchased by the Company and the
leases were terminated in accordance with the terms thereof. The Company paid
approximately $15,000 and $17,000, respectively, to Mr. Evans and Ms. Owens for
the buy-out of the vehicle leases. Both Mr. Evans and Ms. 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 non-profit 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. 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.
49
<PAGE>
Due to continued operating losses incurred during 1996, PSI approved a
plan to close two of their schools upon the expiration of the leases. Since the
estimated cash flows will not be sufficient to recover the leasehold
improvements related to these two 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.
50
<PAGE>
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
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 of (17)
Incorporation
3.4 Certificate of Designation of Series B Preferred Stock of (7)
Registrant, dated November 21, 1991
3.5(a) Certificate of Designation of Series C Preferred Stock of (19)
Sunrise Preschools, Inc. dated November 3, 1995
3.5(b) First Certificate of Amendment to Certificate of Designation (19)
of Series C Preferred Stock, dated December 15, 1995
3.5(c) Second Certificate of Amendment to Certificate of Designation (19)
of Series C Preferred Stock, dated December 19, 1995
3.6 Bylaws of Registrant, as amended (1)
4.1 Preferred Shares Rights Agreement, dated February 10, 1995, (12)
between Sunrise Educational Services, 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.
10.1 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 McClintock (1)
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 Educational Services, Inc., an Arizona corporation
10.4 Lease Agreement dated October 16, 1986 between Sun School (1)
I Limited Partnership, an Arizona limited partnership, and
Sunrise Educational Services, Inc., an Arizona corporation
51
<PAGE>
Exhibit Page Number or
Number Description Method of Filing
------- ----------- ----------------
10.5 Lease Agreement dated April 1, 1986, between Sunrise (1)
Partners, an Arizona corporation, and Sunrise Educational
Services, 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 Educational Services, Inc., an Arizona
corporation
10.7 Lease Agreement dated June 26, 1987, between Huber Farm (1)
Service of Phoenix, Inc., an Arizona corporation, and Sunrise
Educational Services, Inc., a Delaware corporation
10.8 Lease Agreement dated June 26, 1987, between Huber Farm (1)
Service of Phoenix, Inc., an Arizona corporation, and Sunrise
Educational Services, Inc., a Delaware corporation
10.9 Equipment Lease between James R. Evans and Sunrise (1)
Educational Services, Inc.
10.10 Lease Agreement, dated July 29, 1988, between Sunrise (2)
Educational Services, Inc. and Investad, Inc.
10.11 Lease Agreement, dated July 25, 1988, between Sunrise (2)
Educational Services, Inc., and LV Properties, an Arizona
general partnership
10.12 Lease Agreement, dated May 12, 1988, between Sunrise (2)
Educational Services, 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)
Educational Services, Inc. and Kailua Beach Center, Inc.
10.14 Lease Agreement, dated January 11, 1988, between Sunrise (3)
Educational Services, Inc. and Mercado Developers
10.15 Amendment of Lease Agreement dated March 8, 1990 (4)
between Sunrise Educational Services, Inc. and Jaymark
Komer and Komer Family Trust dated May 12, 1988
10.16 Purchase Agreement and Registration Rights Agreement dated (5)
April 6, 1990, between Sunrise Educational Services, Inc. and
Lepercq Capital Management, Inc.
10.17 Vehicle Use Agreement dated February 14, 1991 between (6)
Sunrise Educational Services, Inc. and James R. Evans
10.18 Vehicle Use Agreement dated February 14, 1991 between (6)
Sunrise Educational Services, Inc. and Barbara L. Owens
52
<PAGE>
Exhibit Page Number or
Number Description Method of Filing
------ ----------- ----------------
10.19 Lease Agreement, dated July 1, 1991, between Sunrise (6)
Educational Services, Inc., and Maruni Arizona, Inc.
10.20 Purchase Agreement, dated November 18, 1991, between (7)
Sunrise Educational Services, 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 Sunrise (8)
Educational Services, Inc. and Jaymark Komer and Komer
Family Trust
10.22 Management Agreement, dated November 14, 1993, between (11)
United Church of Christ and Sunrise Educational Services,
Inc.
10.23 Vehicle Use Agreement dated June 15, 1993 between Sunrise (9)
Educational Services, Inc. and James R. Evans
10.24 Vehicle Use Agreement dated June 15, 1993 between Sunrise (9)
Educational Services, Inc. and Barbara L. Owens
10.25 Term Sheet Agreement, dated December 7, 1992, between Joy (9)
of Christ Lutheran Church and Sunrise Educational Services,
Inc.
10.26 Agreement between Lutheran Church of Honolulu and Sunrise (9)
Educational Services, Inc., dated May 19, 1993
10.27 Employment Agreement between Sunrise Educational Services, (10)
Inc. and James R. Evans, dated October 15, 1993.*
10.28 Employment Agreement between Sunrise Educational Services, (10)
Inc. and Barbara L. Owens, dated October 15, 1993.*
10.29 Administrative Services Agreement, License, and Equipment (11)
Lease, dated February 1, 1994, between Sunrise Educational
Services, Inc. and Preschool Services, Inc.
10.31 First Amendment to Employment Agreement between Sunrise (13)
Educational Services, Inc. and James R. Evans, dated
September 16, 1994.*
53
<PAGE>
Exhibit Page Number or
Number Description Method of Filing
------ ----------- ----------------
10.32 First Amendment to Employment Agreement between Sunrise (13)
Educational Services, Inc. and Barbara L. Owens, dated
September 16, 1994.*
10.33 Acquisition Consulting and Investor Relations Agreement (14)
between Sunrise Educational Services, Inc. and Miller Capital
Corporation, dated April 14, 1995
10.34 Second Amendment to Employment Agreement between (14)
Sunrise Educational Services, Inc. and James R. Evans, dated
May 4, 1995*
10.35 Second Amendment to Employment Agreement between (14)
Sunrise Educational Services, Inc. and Barbara L. Owens,
dated May 4, 1995*
10.36 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
10.37 Form of Credit and Security Agreement between Imperial (18)
Bank and Sunrise Educational Services, Inc., dated April,
1997
10.38 Sunrise Preschools, Inc. Stock Option Plan (1)
10.39 Sunrise Preschools, Inc. 1995 Stock Option Plan **
10.40 Sunrise Preschools, Inc. Nonemployee Directors Stock **
Option Plan
16 Letter from Arthur Andersen LLP on Change in Certifying (16)
Accountant
21 List of Subsidiaries **
23 Consent of Ernst & Young LLP **
27 Financial Data Schedule **
- ----------
* Represents a management contract required to be filed as an exhibit to
the Form 10-KSB pursuant to Item 14(c) of Form 10-KSB.
** Filed herewith.
54
<PAGE>
(1) Incorporated by reference to exhibits to Form S-1 filed July 10, 1987.
(2) Incorporated by reference to exhibits to Form 10-K filed on or about
October 31, 1988.
(3) Incorporated by reference to exhibits to Form 10-K filed on or about
October 30, 1989.
(4) Incorporated by reference to exhibits to Form 10-Q filed on or about
January 31, 1990.
(5) Incorporated by reference to exhibits to Form 8-K filed on or about April
20, 1990.
(6) Incorporated by reference to exhibits to Form 10-K filed on or about
October 28, 1991.
(7) Incorporated by reference to exhibits to Form 10-Q filed on or about
December 16, 1991.
(8) Incorporated by reference to exhibits to Form 10-K filed on or about
October 21, 1992.
(9) Incorporated by reference to exhibits to Form 10-KSB filed on or about
October 8, 1993.
(10) Incorporated by reference to exhibits to Form 10-QSB filed on or about
March 14, 1994.
(11) Incorporated by reference to exhibits to Form 10-KSB for the fiscal year
ended July 31, 1994.
(12) Incorporated by reference to exhibits to Form 8-K filed on or about
February 10, 1995.
(13) Incorporated by reference to exhibits to Form 10-QSB filed on or about
March 10, 1995.
(14) Incorporated by reference to exhibits to Form SB-2 filed October 23, 1995.
(15) Incorporated by reference to exhibits to Form 8-K filed on or about
September 9, 1996
(16) Incorporated by reference to exhibits to Form 8-K filed on or about
May 1, 1996.
(17) Incorporated by reference to exhibits to Form 8-K filed on or about
February 18, 1997.
(18) Incorporated by reference to exhibits to Form 10-QSB filed March 11, 1997.
(19) Incorporated by reference to exhibits to Form SB-2 filed on or about June
13, 1997.
(b) REPORTS ON FORM 8-K.
No report on Form 8-K was filed during the quarterly period
ended July 31, 1997.
(c) FINANCIAL STATEMENTS
(1) Independent Auditors Reports
Ernst & Young LLP Page 21
(2) Consolidated Financial Statements and Notes to Consolidated
Financial Statements of the Company for the fiscal years
ended July 31, 1997 and 1996 Page 22
(d) FINANCIAL STATEMENT SCHEDULES.
Financial Statement Schedules have been omitted because of the absence
of conditions under which they are required or because the required material
information is included in the Financial Statements or Notes to the Financial
Statements included herein.
55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SUNRISE EDUCATIONAL SERVICES, INC.
a Delaware corporation
Date: October 29, 1997 By /s/ James R. Evans
----------------------------
James R. Evans, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ James R. Evans Chairman of the Board, and October 29, 1997
- ---------------------------- President (Principal Executive
James R. Evans Officer)
/s/ Jennifer L. Andrew Chief Financial Officer October 29, 1997
- ---------------------------- (Principal Financial Officer;
Jennifer L. Andrew Principal Accounting Officer)
/s/ Robert A. Rice Director October 29, 1997
- ----------------------------
Robert A. Rice
/s/ Richard H. Hinze Director October 29, 1997
- ----------------------------
Richard H. Hinze
/s/ Barbara L. Owens Director October 29, 1997
- ----------------------------
Barbara L. Owens
56
EXHIBIT 10.39
SUNRISE PRESCHOOLS, INC.
1995 STOCK OPTION PLAN
1. PURPOSE OF THE PLAN. The purposes of this 1995 Stock Option Plan are
to attract and retain the best available personnel for positions of substantial
responsibility to provide successful management of the Company's business, to
provide additional incentive to certain key employees of the Company, and to
promote the success of the Company's business through the grant of options to
purchase shares of the Company's Common Stock.
Options granted hereunder may be either "Incentive Stock Options," as
defined in Section 422 of the Code, or "Non-Statutory Stock Options," at the
discretion of the Board and as reflected in the terms of the written option
agreement.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "BOARD" shall mean the Board of Directors of the Company or
the Committee, if one has been appointed.
(b) "CODE" shall mean the Internal Revenue Code of 1986, as
amended, and the rules and regulations promulgated thereunder.
(c) "COMMON STOCK" shall mean the common stock of the Company
described in the Company's Certificate of Incorporation, as amended.
(d) "COMPANY" shall mean Sunrise Preschools, Inc., a Delaware
corporation, and shall include any parent or subsidiary corporation of
the Company as defined in Sections 424(e) and (f), respectively, of the
Code.
(e) "COMMITTEE" shall mean the Committee appointed by the Board
in accordance with paragraph (a) of Section 4 of the Plan, if one is
appointed.
(f) "EMPLOYEE" shall mean any person, including officers and
directors, employed by the Company. The payment of a director's fee by
the Company shall not be sufficient to constitute "employment" by the
Company.
(g) "EXCHANGE ACT" shall mean the Securities and Exchange Act of
1934, as amended.
(h) "FAIR MARKET VALUE" shall mean, with respect to the date a
given Option is granted or exercised, the value of the Common Stock
determined by the Board in such manner as it may deem equitable for Plan
purposes but, in the case of an Incentive Stock Option, no less than is
required by applicable laws or regulations; provided, however, that
where there is a public market for the Common Stock, the Fair Market
Value per Share shall be the mean of the bid and asked prices of the
<PAGE>
Common Stock on the date of grant, as reported in the WALL STREET
JOURNAL (or, if not reported, as otherwise reported by the National
Association of Securities Dealers Automated Quotation System) or, in the
event the Common Stock is listed on the New York Stock Exchange or the
American Stock exchange, the Fair Market Value per Share shall be the
closing price on such exchange on the date of grant of the Option, as
reported in the WALL STREET JOURNAL.
(i) "INCENTIVE STOCK OPTION" shall mean an Option which is
intended to qualify as an incentive stock option within the meaning of
Section 422 of the Code.
(j) "OPTION" shall mean a stock option granted under the Plan.
(k) "OPTIONED STOCK" shall mean the Common Stock subject to an
Option.
(l) "OPTIONEE" shall mean an Employee of the Company who has been
granted one or more Options.
(m) "PARENT" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(n) "PLAN" shall mean this Stock Option Plan.
(o) "SHARE" shall mean a share of the Common Stock, as adjusted
in accordance with Section 11 of the Plan.
(p) "SUBSIDIARY" shall mean a "subsidiary corporation," whether
now or hereafter existing, as defined in Section 424(f) of the Code.
(q) "TAX DATE" shall mean the date an Optionee is required to pay
the Company an amount with respect to tax withholding obligations in
connection with the exercise of an option.
3. COMMON STOCK SUBJECT TO THE PLAN. Subject to the provisions of
Section 11 of the Plan, the maximum aggregate number of shares which may be
optioned and sold under the Plan is 500,000 Shares of Common Stock. The Shares
may be authorized, but unissued, or previously issued Shares acquired or to be
acquired by the Company and held in treasury.
If an Option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares covered by such
Option shall, unless the Plan shall have been terminated, be available for
future grants of Options.
2
<PAGE>
4. ADMINISTRATION OF THE PLAN.
(a) PROCEDURE.
(i) The Plan shall be administered by the Board in
accordance with Securities and Exchange Commission Rule 16b-3
("Rule 16b-3"); provided, however, that the Board may appoint a
Committee to administer the Plan at any time or from time to time
and, provided further, that if members of the Board are not
"disinterested" within the meaning of Securities and Exchange
Commission Rule 16b-3, then any participation by directors in the
Plan must be administered by a Committee appointed by the Board.
(ii) The Committee shall consist of at least two (2)
members of the Board, each of whom is "disinterested" within the
meaning of Securities and Exchange Commission Rule 16b-3 to
administer the Plan on behalf of the Board, subject to such terms
and conditions as the Board may prescribe. Once appointed, the
Committee shall continue to serve until otherwise directed by the
Board. From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members
(with or without cause), and appoint new members in substitution
therefor, fill vacancies however caused, or remove all members of
the Committee and thereafter directly administer the Plan;
provided, however, that at no time may any director who is not
"disinterested" within the meaning of Securities and Exchange
Commission Rule 16b-3 serve on the Committee nor shall a
Committee of less than two (2) members administer the Plan.
(b) POWERS OF THE BOARD. Subject to the provisions of the Plan,
the Board shall have the authority, in its discretion: (i) to grant
Incentive Stock Options, in accordance with Section 422 of the Code, and
to grant "nonstatutory stock options;" (ii) to determine, upon review of
relevant information and in accordance with Section 2 of the Plan, the
Fair Market Value of the Common Stock; (iii) to determine the exercise
price per Share of Options to be granted, which exercise price shall be
determined in accordance with Section 8(a) of the Plan; (iv) to
determine the Employees to whom, and the time or times at which Options
shall be granted and the number of shares to be represented by each
Option; (v) to interpret the Plan; (vi) to prescribe, amend and rescind
rules and regulations relating to the Plan; (vii) to determine the terms
and provisions of each Option granted (which need not be identical) and,
with the consent of the Optionee thereof, modify or amend each Option;
(viii) to accelerate or defer (with the consent of the Optionee) the
exercise date of any Option; (ix) to authorize any person to execute on
behalf of the Company any instrument required to effectuate the grant of
an Option previously granted by the Board; (x) to accept or reject the
election made by an Optionee pursuant to Section 17 of the Plan; and
(xi) to make all other determinations deemed necessary or advisable for
the administration of the Plan.
3
<PAGE>
(c) EFFECT OF BOARD'S DECISION. All decisions, determinations and
interpretations of the Board shall be final and binding on all Optionees
and any other holders of any Options granted under the Plan.
5. ELIGIBILITY.
(a) Consistent with the Plan's purposes, Options may be granted
only to key Employees of the Company as determined by the Board. An
Employee who has been granted an Option may, if he is otherwise
eligible, be granted an additional Option or Options. Incentive Stock
Options may be granted only to those Employees who meet the requirements
applicable under Section 422 of the Code.
(b) With respect to Incentive Stock Options granted under the
Plan, the aggregate fair market value (determined at the time the
Incentive Stock Option is granted) of the Common Stock with respect to
which Incentive Stock Options are exercisable for the first time by the
employee during any calendar year (under all plans of the Company and
its parent and subsidiary corporations) shall not exceed One Hundred
Thousand Dollars ($100,000).
The Plan shall not confer upon any Optionee any right with respect to
continuation of employment with the Company, nor shall it interfere in any way
with his right or the Company's right to terminate his employment at any time.
6. EFFECTIVE DATE. The Plan shall take effect on May 4, 1995, the date
on which the Board approved the Plan. No Option may be granted after May 5, 2005
(ten (10) years from the effective date of the Plan); provided, however, that
the Plan and all outstanding Options shall remain in effect until such Options
have expired or until such Options are canceled. The Plan shall be submitted for
shareholder approval at the next meeting of shareholders of the Company;
provided, however, that failure to obtain such approval shall not affect the
effectiveness of the Plan.
7. TERM OF OPTION. Unless otherwise provided in the Stock Option
Agreement, the term of each Incentive Stock Option shall be ten (10) years from
the date of grant thereof. Unless otherwise provided in the Stock Option
Agreement, the term of each Option which is not an Incentive Stock Option shall
be eleven (11) years from the date of grant. Notwithstanding the above, in the
case of an Incentive Stock Option granted to an Employee who, at the time the
Incentive Stock Option is granted, owns ten percent (10%) or more of the Common
Stock as such amount is calculated under Section 422(b)(6) of the Code ("Ten
Percent Shareholder"), the term of the Incentive Stock Option shall be five (5)
years from the date of grant thereof or such shorter time as may be provided in
the Stock Option Agreement.
8. EXERCISE PRICE AND PAYMENT.
(a) EXERCISE PRICE. The per Share exercise price for the Shares
to be issued pursuant to exercise of an Option shall be determined by
the Board, but in the case of an Incentive Stock Option shall be no less
than one hundred percent (100%) of the Fair Market Value per Share on
4
<PAGE>
the date of grant; provided, further, that in the case of an Incentive
Stock Option granted to an Employee who, at the time of the grant of
such Incentive Stock Option, is a Ten Percent Shareholder, the per Share
exercise price shall be no less than one hundred ten percent (110%) of
the Fair Market Value per Share on the date of grant. In no event may
the exercise price in the case of a nonstatutory stock option be less
than eighty-five (85%) of the Fair Market Value per share on the date of
grant.
(b) PAYMENT. The price of an exercised Option and any taxes
attributable to the delivery of Common Stock under the Plan, or portion
thereof, shall be paid:
(i) In United States dollars in cash or by check, bank
draft or money order payable to the order of the Company; or
(ii) At the discretion of the Board, through the delivery
of shares of Common Stock, with an aggregate Fair Market Value,
equal to the option price; or
(iii) By a combination of (i) and (ii) above.
The Board shall determine acceptable methods for tendering Common
Stock as payment upon exercise of an Option and may impose such
limitations and prohibitions on the use of Common Stock to exercise an
Option as it deems appropriate, with respect to nonstatutory options, at
the election of the Optionee pursuant to Section 17, the Company may
satisfy its withholding obligations by retaining such number of shares
of Common Stock subject to the exercised Option which have an aggregate
Fair Market value on the exercise date equal to the Company's aggregate
federal, state, local and foreign tax withholding and FICA and FUTA
obligations with respect to income generated by the exercise of the
Option by Optionee.
9. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option
granted hereunder shall be exercisable at such times and under such
conditions as determined by the Board, including performance criteria
with respect to the Company and/or the Optionee, and as shall be
permissible under the terms of the Plan. Unless otherwise determined by
the Board at the time of grant, an Option may be exercised in whole or
in part. An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms
of the Option by the person entitled to exercise the Option and full
payment for the Shares with respect to which the Option is exercised has
been received by the Company. Full payment may, as authorized by the
Board, consist of any consideration and method of payment allowable
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under Section 8(b) of the Plan. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the stock certificate evidencing such
Shares, no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. No adjustment will be made
for a dividend or other right for which the record date is prior to the
date the stock certificate is issued, except as provided in Section 11
of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for
purposes of the Plan and for sale under the Option by the number of
Shares as to which the Option is exercised.
Notwithstanding anything contained in this Plan to the contrary,
the Board may establish certain restrictions on the times at which an
Option may be exercised after a number of elapsed years together with
cumulative exercise rights and may retain certain rights with respect to
a fixed repurchase price for the Option Stock if the Employee
voluntarily terminates his employment with the Company within a certain
period of time after exercising the Option or whose employment is
involuntarily terminated for gross misconduct, fraud, embezzlement,
theft, breach of any fiduciary duty owed to the Company or for
nonperformance of duties.
(b) TERMINATION OF STATUS AS AN EMPLOYEE. Unless otherwise
provided in an Option Agreement relating to an Option that is not an
Incentive Stock Option, if an Employee's employment by the Company is
terminated, except if such termination is voluntary or occurs due to
retirement with the consent of the Board, death or disability, the
Option, to the extent not exercised, shall cease on the date on which
Employee's employment by the Company is terminated. If an Employee's
termination is voluntary or occurs due to retirement with the consent of
the Board, then the Employee may, but only within thirty (30) days (or
such other period of time not exceeding three (3) months as is
determined by the Board) after the date he ceases to be an Employee of
the Company, exercise his Option to the extent that he was entitled to
exercise it at the date of such termination. To the extent that he was
not entitled to exercise the Option at the date of such termination, or
if he does not exercise such Option (which he was entitled to exercise)
within the time specified herein, the Option shall terminate.
(c) DISABILITY. Unless otherwise provided in an Option Agreement
relating to an Option that is not an Incentive Stock Option,
notwithstanding the provisions of Section 9(b) above, in the event an
Employee is unable to continue his employment with the Company as a
result of his permanent and total disability (as defined in Section
22(e)(3) of the Code), he may, but only within three (3) months (or such
other period of time not exceeding twelve (12) months as it is
determined by the Board) from the date of termination, exercise his
Option to the extent he was entitled to exercise it at the date of such
termination. To the extent that he was not entitled to exercise the
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Option at the date of termination, or if he does not exercise such
Option (which he was entitled to exercise) within the time specified
herein, the Option shall terminate.
(d) DEATH OF OPTIONEE. Unless otherwise provided in an Option
Agreement relating to an Option that is not an Incentive Stock Option,
if Optionee dies during the term of the Option and is at the time of his
death an Employee of the Company who shall have been in continuous
status as an Employee since the date of grant of the Option, the Option
may be exercised at any time within one (1) year following the date of
death (or such other period of time as is determined by the Board), by
the Optionee's estate or by a person who acquired the right to exercise
the Option by bequest or inheritance, but only to the extent that
Optionee was entitled to exercise the Option on the date of death. To
the extent that decedent was not entitled to exercise the Option on the
date of death, or if the Optionee's estate, or person who acquired the
right to exercise the Option by bequest or inheritance, does not
exercise such Option (which he was entitled to exercise) within the time
specified herein, the Option shall terminate.
10. NON-TRANSFERABILITY OF OPTION. An Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER. Subject to any
required action by the shareholders of the Company, the number of shares of
Common Stock covered by each outstanding Option, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options have yet been granted or which have been returned to the Plan
upon cancellations or expiration of an Option, as well as the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the common stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class
shall affect, and no adjustment by reason thereof, shall be made with respect to
the number or price of shares of Common Stock subject to an Option.
In the event of the proposed dissolution or liquidation of the Company,
the Option will terminate immediately prior to the consummation of such proposed
action, unless otherwise provided by the Board. The Board may, in the exercise
of its sole discretion in such instances, declare that any Option shall
terminate as of a date fixed by the Board and give each Optionee the right to
exercise his Option as to all or any part of the Optioned Stock, including
Shares as to which the Option would not otherwise be exercisable. In the event
of a proposed sale of all or substantially all of the assets of the Company, or
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<PAGE>
the merger of the Company with or into another corporation, the Option shall be
assumed or an equivalent option shall be substituted by such successor
corporation or a parent or subsidiary of such successor corporation, unless the
Board determines, in the exercise of its sole discretion and in lieu of such
assumption or substitution, that the Optionee shall have the right to exercise
the Option as to all of the Optioned Stock, including Shares as to which the
Option would not otherwise be exercisable. If the Board makes an Option fully
exercisable in lieu of assumption or substitution in the event of a merger or
sale of assets, the Board shall notify the Optionee that the Option shall be
fully exercisable for a period of thirty (30) days from the date of such notice
(but not later than the expiration of the term of the Option under the Option
Agreement), and the Option will terminate upon the expiration of such period.
12. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for
all purposes, be the date on which the Board makes the determination granting
such Option. Notice of the determination shall be given to each Employee to whom
an Option is so granted within a reasonable time after the date of such grant.
13. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may amend or terminate
the Plan from time to time in such respect as the Board may deem
advisable; provided, however, that the following revisions or amendments
shall require approval of the holder of a majority of the outstanding
Shares of the Company entitled to vote:
(i) Any increase in the number of Shares subject to the
Plan, other than in connection with an adjustment under Section
11 of the Plan;
(ii) Any change in the designation of the class of
employees eligible to be granted Options; or
(iii) If the Company has a class of equity security
registered under Section 12 of the Exchange Act at the time of
such revision or amendment, any material increase in the benefits
accruing to participants under the Plan.
(b) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or
termination of the Plan shall not affect Options already granted and
such Options shall remain in full force and effect as if this Plan had
not been amended or terminated, unless mutually agreed otherwise between
the Optionee and the Board, which agreement must be in writing and
signed by the Optionee and the Company.
14. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Optionee unless the exercise of such Option and
the issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
8
<PAGE>
thereunder, and the requirements of any stock exchange upon which the Share may
then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned relevant provisions of law.
In the case of an Incentive Stock Option, any Optionee who disposes of
Shares of Common Stock acquired on the exercise of an Option by sale or exchange
(a) either within two (2) years after the date of the grant of the Option under
which the Common Stock was acquired or (b) within one (1) year after the
acquisition of such Shares of Common Stock shall notify the Company of such
disposition and of the amount realized upon such disposition.
15. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
Inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
16. OPTION AGREEMENT. Options shall be evidenced by written option
agreement in such form as the Board shall approve.
17. WITHHOLDING TAXES. Subject to Section 4(b)(x) of the Plan and prior
to the Tax Date, the Optionee may make an irrevocable election to have the
Company withhold from those Shares that would otherwise be received upon the
exercise of any nonstatutory stock option, a number of Shares having a Fair
Market Value equal to the minimum amount necessary to satisfy the Company's
federal, state, local and foreign tax withholding obligations and FICA and FUTA
obligations with respect to the exercise of such Option by the Optionee.
An Optionee who is also an officer of the Company must make the
above-described election:
(a) at least six months after the date of grant of the Option
(except in the event of death or disability); and
(b) either:
(i) six months prior to the Tax Date, or
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<PAGE>
(ii) prior to the Tax Date and during the period beginning on
the third business day following the date of the Company
releases its quarterly or annual statement of sales and earnings
and ending on the twelfth business day following such date.
18. MISCELLANEOUS PROVISIONS.
(a) PLAN EXPENSES. Any expenses of administering this Plan shall
be borne by the Company.
(b) USE OF EXERCISE PROCEEDS. The payment received from Optionees
from the exercise of Options shall be used for the general corporate
purposes of the Company.
(c) CONSTRUCTION OF PLAN. The place of administration of the Plan
shall be in the State of Arizona, and the validity, construction,
interpretation, administration and effect of the Plan and of its rules
and regulations, and rights relating to the Plan, shall be determined in
accordance with the laws of the State of Arizona and where applicable,
in the State of Delaware and in accordance with the Code.
(d) TAXES. The Company shall be entitled if necessary or
desirable to pay or withhold the amount of any tax attributable to the
delivery of Common Stock under the Plan from other amounts payable to
the Employee after giving the person entitled to receive such Common
Stock notice as far in advance as practical, and the Company may defer
making delivery of such Common Stock if any such tax may be pending
unless and until indemnified to its satisfaction.
(e) INDEMNIFICATION. In addition to such other rights of
indemnification as they may have as members of the Board, the members of
the Board shall be indemnified by the Company against all costs and
expenses reasonably incurred by them in connection with any action, suit
or proceeding to which they or any of them may be a party by reason of
any action taken or failure to act under or in connection with the Plan
or any Option, and against all amounts paid by them in settlement
thereof (provided such settlement is approved by independent legal
counsel selected by the Company) or paid by them in satisfaction of a
judgment in any such action, suit or proceeding, except a judgment based
upon a finding of bad faith; provided that upon the institution of any
such action, suit or proceeding a Board member shall, in writing give
the Company notice thereof and an opportunity, at its own expense, to
handle and defend the same before such Board member undertakes to handle
and defend it on her or his own behalf.
(f) GENDER. For purposes of this Plan, words used in the
masculine gender shall include the feminine and neuter, and the singular
shall include the plural and vice versa, as appropriate.
10
EXHIBIT 10.40
SUNRISE PRESCHOOLS, INC.
NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
1. PURPOSES OF THE PLAN. The purposes of this Plan are to attract and
retain the best available individuals to serve as non-employee members of the
Board of Directors of the Company, to reward such directors for their
contributions to the profitable growth of the Company, and to maximize the
identity of interest between such directors and stockholders generally.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "BOARD" shall mean the Board of Directors of the Company.
(b) "COMPANY" shall mean Sunrise Preschools, Inc., a Delawre
corporation.
(c) "EFFECTIVE DATE" shall be the date that the Board of Directors of
the Company adopts this Plan.
(d) "ELIGIBLE DIRECTOR" shall mean (i) those individuals who are
serving as non-employee members of the Board on the Effective Date, or (ii)
those individuals who are elected or appointed as non-employee members of
the Board after the Effective Date, whether through appointment by the
Board or election of the Company's stockholders.
(e) "EXERCISE PRICE" shall mean, with respect to Shares of Optioned
Stock, the Fair Market Value of such Shares on the date of grant of the
Option.
(f) "FAIR MARKET VALUE" shall mean, with respect to the date a given
Option is granted or exercised, the value of the Common Stock determined by
the Board in such manner as it may deem equitable for Plan purposes;
provided, however, that where there is a public market for the Common
Stock, the Fair Market Value per Share shall be the mean of the bid and
asked prices of the Common Stock on the date of grant, as reported in the
WALL STREET JOURNAL (or, if not reported, as otherwise reported by the
National Association of Securities Dealers Automated Quotation System) or,
in the event the Common Stock is listed on the New York Stock Exchange or
the American Stock exchange, the Fair Market Value per Share shall be the
closing price on such exchange on the date of grant of the Option, as
reported in the WALL STREET JOURNAL.
(g) "OPTION" shall mean a right to purchase Stock, granted pursuant
to the Plan.
<PAGE>
(h) "OPTIONED STOCK" shall mean the Stock subject to an Option.
(i) "OPTIONEE" shall mean a non-employee director of the Company who
has been granted an Option.
(j) "PLAN" shall mean this Non-Employee Directors Stock Option Plan.
(k) "SHARE" shall mean a share of the Stock.
(l) "STOCK" shall mean the Common Stock of the Company described in
the Certificate of Incorporation of the Company.
(m) "STOCK OPTION AGREEMENT" shall mean the written agreement
evidencing the grant of an Option.
(n) "TRADING DAY" shall mean a day on which the Fair Market Value of
the Stock can be determined.
3. COMMON STOCK SUBJECT TO THE PLAN. Subject to increases and
adjustments pursuant to Section 9 of the Plan, the number of Shares reserved and
available for distribution under the Plan shall be one hundred thousand
(100,000). If an Option shall expire or become unexercisable for any reason
without having been exercised in full, the unauthorized Shares covered by the
Option shall, unless the Plan shall have terminated, be available for future
grants of Options.
4. OPTION GRANTS.
(a) On the Effective Date, each Eligible Director shall be granted an
Option to purchase 10,000 shares of Stock.
(b) Each individual who first becomes an Eligible Director after the
Effective Date, whether through election by the stockholders or
appointment of the Board, shall automatically be granted at the time
of such initial election or appointment, an Option to purchase 10,000
shares of Stock.
(c) On the third business day after the announcement by the
Company of its annual financial results each year (the "Annual Grant
Date"), beginning with the date of such announcement in 1995, each
individual who is at that time an Eligible Director shall automatically
be granted an Option under the Plan to purchase an additional 5,000
shares of Stock; PROVIDED such individual (i) has attended 75% of the
meetings of the Board held during the 12-month period immediately
preceding the Annual Grant Date, or (ii) if such individual was
appointed or elected as a director during such 12-month period, he or
she has attended 75% of the meetings of the Board held during his of her
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<PAGE>
term as a director, and (iii) has attended 75% of the meetings of any
Committee of the Board to which such individual has been appointed as a
member during such 12-month period.
(d) The purchase price of Shares subject to an Option shall be the
Fair Market Value on the date of grant.
(e) Each Option granted on the Effective Date, as set forth in (a)
above, shall be fully vested and immediately exercisable. Each
Option granted after the Effective Date, as set forth in (b) and (c)
above, shall vest one year after the date of grant, provided that the
Optionee remains an Eligible Director at such vesting date.
5. STOCKHOLDER APPROVAL. This Plan was adopted by the Board of Directors
of the Company on May 30, 1995 (the "Effective Date"). Options may be granted
under the Plan on and after the Effective Date. The Plan shall be submitted for
stockholder approval at the next annual or special meeting of stockholders.
However, the failure to obtain such approval shall not affect the effectiveness
of the Plan. No Option may be granted after the expiration of 10 years from the
effective date of the Plan; PROVIDED, HOWEVER, that the Plan and all outstanding
Options shall remain in effect until such Options shall have been exercised,
shall have expired or shall otherwise be terminated.
6. TERM; EXERCISE; RIGHTS AS A STOCKHOLDER.
(a) The term of each Option shall be six (6) years from the date of
grant thereof. The Option may be exercised in whole or in part at any
time after vesting and during the term of the Option. No fractional
Shares will be issued upon exercise of the Option and, if the exercise
results in a fractional interest, an amount will be paid in cash equal
to the value of such fractional interest based on the Fair Market Value
of the Shares on the date of exercise.
(b) An Option shall be deemed to be exercised upon receipt by the
Company from the Optionee of written notice of such exercise. Such
notice shall be accompanied by full payment for the Shares subject to
such exercise.
7. PAYMENT. The Exercise Price shall be paid:
(a) In United States dollars in cash or by check payable to the order
of the Company; or
(b) Subject to the approval of the Board, by delivery of Shares with
an aggregate Fair Market Value equal to the Exercise Price; or
(c) By any combination of (a) and (b) above.
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The Board shall determine acceptable methods for tendering Stock as
payment upon exercise of an Option and may impose such limitations and
prohibitions on the use of Stock to exercise an Option as it deems appropriate.
8. TRANSFERABILITY OF OPTIONS. The Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent and distribution to the limited extent provided
herein or pursuant to a "qualified domestic relations order" as defined by the
Internal Revenue Code or the Employee Retirement Income Security Act or the
rules thereunder. Except as permitted herein, an Option may be exercised, during
the lifetime of the Optionee, only by the Optionee or by his guardian or legal
representative.
In the event of the Optionee's death, his or her Option shall be
exercisable, prior to the expiration of the Option, by the person or persons to
whom his or her accrued and vested rights pass by will or by the laws of descent
and distribution.
9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER. Subject to any
required action by the stockholders of the Company, the number of Shares covered
by each outstanding Option, and the number of Shares which have been authorized
for issuance under the Plan but as to which no Options have yet been granted or
which have been returned to the Plan upon cancellation or expiration of an
Option, as well as the price per Share covered by each such outstanding Option,
shall be proportionately adjusted for any increase or decrease in the number of
issued Shares resulting from a stock split, reverse stock split, consolidation,
subdivision, stock dividend, combination or reclassification of the Shares, or
any other increase or decrease in the number of issued Shares effected without
receipt of consideration by the Company; PROVIDED, HOWEVER, that conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made by
the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made, with
respect to the number or price of Shares subject to an Option.
In the event of the proposed dissolution or liquidation of the Company,
all Options will terminate immediately prior to the consummation of such
proposed action, unless otherwise provided by the Board. The Board may, in the
exercise of its sole discretion in such instances, declare that any Option shall
terminate as of a date fixed by the Board and give each holder the right to
exercise the Option as to all or any part thereof, including Shares as to which
the Option would not otherwise be exercisable. In the event of a proposed sale
of all or substantially all of the assets of the Company, or the merger of the
Company with or into another corporation, the Option shall be assumed or an
equivalent Option shall be substituted by such successor corporation or a parent
or subsidiary of such successor corporation, unless the Board determines, in the
exercise of its sole discretion and in lieu of such assumption or substitution,
that the holder shall have the right to exercise the Option as to all of the
Shares, including Shares as to which the Option would not otherwise be
4
<PAGE>
exercisable. If the Board makes an Option exercisable in lieu of assumption or
substitution in the event of a merger or sale of assets, the Board shall notify
the holder that the Option shall be fully exercisable for a period of 30 days
from the date of such notice (but not later than the expiration of the term of
the Option), and the Option will terminate upon the expiration of such period.
10. AMENDMENT AND TERMINATION OF THE PLAN. The Board may amend the Plan
from time to time in such respects as the Board may deem advisable or terminate
the Plan; PROVIDED, HOWEVER, that amendments to the Plan relating to the amount,
price or timing of Option grants shall not be made more than once in any six
month period, other than amendments necessary to comply with changes in the
Internal Revenue Code, the Employee Retirement Income Security Act, or the rules
thereunder. Any amendment or termination of the Plan shall not affect Options
already granted and such Options shall remain in full force and effect as if
this Plan had not been amended or terminated.
Notwithstanding the foregoing, revisions or amendments that accomplish
any of the following shall require approval of the stockholders of the Company,
to the extent required by law, rule or regulation:
(a) Materially increase the benefits accruing to participants under
the Plan;
(b) Materially increase the number of Shares which may be issued under
the Plan;
(c) Materially modify the Plan as to eligibility for participation in
the Plan; or
(d) Otherwise cause the Plan to lose its exemption under Section 16(b)
of the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder.
11. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation the Securities Act of
1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and
regulations promulgated thereunder, and the requirements of any stock exchange
or market system upon which the Shares may be listed, and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an Option, the Company may require
the Optionee to represent and warrant at the time of any such exercise that the
Shares are being purchased only for investment and without any present intention
to sell or distribute such Shares if, in the opinion of counsel for the Company,
such a representation is required or advisable.
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Inability of the Company to obtain authority from a regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary or advisable to the lawful issuance and sale of any Shares hereunder,
shall relieve the Company of any liability in respect of the failure to issue or
sell such Shares as to which such requisite authority shall not have been
obtained.
12. TERMINATION OF OPTION.
(a) TERMINATION AS A DIRECTOR. If an Optionee ceases to be a
director, unless such cessation occurs due to death or disability, then
the Option shall terminate on the date thirty days after the date the
Optionee ceases to be a director.
(b) DISABILITY. Unless otherwise provided in the Stock Option
Agreement, in the event an Optionee is unable to continue to be a member
of the Board as a result of his permanent and total disability (as
defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as
amended), he may exercise the Option at any time within twelve (12)
months following the date he ceased to be a director, but only to the
extent he was entitled to exercise it on the date he ceased to be a
director. To the extent that he was not entitled to exercise the Option
on the date he ceased to be a director, or if he does not exercise such
Option (which he was entitled to exercise) within the time specified
herein, the Option shall terminate.
(c) DEATH. Unless otherwise provided in the Stock Option
Agreement, if an Optionee dies during the term of the Option, the Option
may be exercised at any time within twelve (12) months following the
date of death, but only to the extent that an Optionee was entitled to
exercise the Option on the date of death. To the extent that decedent
was not entitled to exercise the Option on the date of death, or if the
Optionee's estate, or person who acquired the right to exercise the
Option by bequest or inheritance, does not exercise such Option (which
he was entitled to exercise) within the time specified herein, the
Option shall terminate.
13. OPTION AGREEMENT. Options shall be evidenced by Stock Option
Agreements in such form as the Board shall approve.
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14. MISCELLANEOUS PROVISIONS.
(a) PLAN EXPENSE. Any expenses of administering this Plan shall
be borne by the Company.
(b) CONSTRUCTION OF PLAN. The validity, construction,
interpretation, administration and effect of the Plan and of its rules
and regulations, and rights relating to the Plan, shall be determined by
the Board in accordance with the laws of the State of Delaware.
(c) TAXES. The Company shall be entitled if necessary or
desirable to pay or withhold the amount of any tax attributable to the
delivery of Common Shares under the Plan after giving the person
entitled to receive such Shares notice as far in advance as practical,
and the Company may defer making delivery of such Shares if any such tax
may be pending unless and until indemnified to its satisfaction.
(d) GENDER. For purposes of this Plan, words used in the
masculine gender shall include the female and neuter, and the singular
shall include the plural and vice versa, as appropriate.
7
EXHIBIT 21
SUNRISE EDUCATIONAL SERVICES, INC. AND SUBSIDIARY
LIST OF SUBSIDIARIES
Sunrise Educational Services Hawaii, Inc., a Hawaii corporation
EXHIBIT 23
Consent Of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8, No. 33-63313) pertaining to the Sunrise Educational Services, Inc. 1987
Stock Option Plan; in the Registration Statement (Form S-8, No. 33-95250)
pertaining to the 1995 Stock Option Plan; and in the Registration Statement
(Form S-8, No. 33-95440) pertaining to the Non-Employee Directors Stock Option
Plan, of our report dated September 29, 1997, with respect to the consolidated
financial statements included in this Annual Report (Form 10-KSB) of Sunrise
Educational Services, Inc.
ERNST & YOUNG LLP
Phoenix, Arizona
September 29, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JULY 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<EXCHANGE-RATE> 1
<CASH> 1,212,806
<SECURITIES> 0
<RECEIVABLES> 746,570
<ALLOWANCES> 35,165
<INVENTORY> 33,323
<CURRENT-ASSETS> 2,728,572
<PP&E> 5,585,000
<DEPRECIATION> 3,483,000
<TOTAL-ASSETS> 6,923,171
<CURRENT-LIABILITIES> 2,008,177
<BONDS> 0
0
857,333
<COMMON> 32,529
<OTHER-SE> 2,415,958
<TOTAL-LIABILITY-AND-EQUITY> 6,923,171
<SALES> 0
<TOTAL-REVENUES> 14,647,282
<CGS> 0
<TOTAL-COSTS> 15,821,056
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,684
<INCOME-PRETAX> (1,076,795)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,076,795)
<EPS-PRIMARY> (.52)
<EPS-DILUTED> 0
</TABLE>