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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended JUNE 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____________ to ____________
Commission File Number 1-11111
EDUCATION ALTERNATIVES, INC.
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(Exact name of registrant as specified in its charter)
Minnesota 41-1581297
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1300 Norwest Financial Center
7900 Xerxes Avenue South
Minneapolis, Minnesota 55431
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (612) 832-0092
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock,
par value $.01 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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The aggregate market value of Common Stock, par value $.01 per share, held by
non-affiliates of the registrant as of September 15, 1996, was $18,397,000,
based on the closing sale price of such stock as reported by The Nasdaq Stock
Market. Calculation of the number of shares held by non-affiliates is based
on the assumption that the affiliates of the Company include only directors,
executive officers, and shareholders filing Schedules 13D or 13G with the
Company.
As of September 15, 1996, there were issued and outstanding 7,488,970 shares of
Common Stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held November 12, 1996 (the "Proxy Statement"), and to be
filed within 120 days after the registrant's fiscal year ended June 30, 1996,
are incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
Education Alternatives, Inc. (the "Company") historically has been in the
business of providing integrated school management programs for public and
private schools. The Company has sought to negotiate management contracts with
local school boards under which the Company would assume management
responsibilities for some or all of the schools within a school district. Under
these management contracts, the Company would be directly responsible for the
implementation of the educational system, including its proprietary Tesseract-
Registered Trademark- educational system. In addition, the Company would oversee
the noninstructional components of the managed schools, including the operation
and maintenance of the physical plant and the introduction of improved financial
systems and controls. The Company believes that its Tesseract educational system
can be successfully introduced in many public schools without increasing overall
education costs per student. This could be accomplished by improving operational
and financial efficiencies and redirecting a portion of the resulting cost
savings to the classroom for additional resources.
The Company's Tesseract system is an educational program developed to meet
children's individual needs by redesigning the classroom environment, changing
the role of the teacher, and increasing the use of technology in the classroom.
The Tesseract educational system was developed and refined during the last eight
years in two private schools in Eagan, Minnesota, and Paradise Valley, Arizona
(the "Tesseract Private Schools"). The Company believes that the Tesseract
educational system can be implemented in other elementary and secondary schools
in the United States.
In early 1989, the Company changed its strategic focus from owning and operating
private schools to managing public schools. In pursuing this business strategy,
the Company sought an alternative to developing internally the full range of
technical resources, skills, and personnel needed to manage part or all of a
major public school district. The Company's objective was to avoid duplicating
the significant administrative organization found in most public schools which
the Company believes is a major impediment to effective and efficient public
school management. The Company chose to establish strategic alliances with
experienced and nationally recognized providers to the educational community
which complemented the Company's expertise in education management and
developing effective educational programs. In December 1991, the Company formed
an alliance with Johnson Controls World Services Inc. and KPMG Peat Marwick (the
"Alliance") to cooperatively market their services for the private management of
public schools. Under the terms of the Alliance, the Company was responsible for
administrative matters relating to schools under management as well as
introduction of its Tesseract educational system, including curriculum, use of
technology, and compliance with teacher union contracts. Johnson Controls
performed services as a subcontractor in noninstructional areas, including the
operation, maintenance, and management of school buildings and facilities, and
Peat Marwick performed services as a subcontractor in the areas of financial
management, systems, and controls. As subcontractors, Johnson Controls and Peat
Marwick were compensated on their customary fee-for-services bases and have been
paid by the Company out of the amounts it received under the school management
contracts. In addition, Johnson Controls had incentives built into its contracts
with the Company which related to its ability to generate cost savings under the
Company's school management contracts. The Company also entered into a separate
strategic alliance with Computer Curriculum Corporation ("CCC"), pursuant to
which CCC agreed to install and maintain computer hardware and provide and
update educational computer software at the schools managed by the Company.
In July 1992, the Company, in cooperation with the Alliance, entered into a
five-year management agreement with Baltimore City Public Schools (the
"Baltimore District") under which the Company assumed management responsibility
for the operation of nine schools in the Baltimore District in return for
payment of a negotiated amount each year based on the average per-pupil
expenditure in the Baltimore District. In March 1994, a contract was signed with
an additional school in the Baltimore District to provide management services
for a period of five years. Under these contracts, the Company was responsible
for payment of all expenses related to the operation of the managed schools and
bore the risk that these expenses could exceed contract revenues.
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In December 1993, the Company entered into five-year consulting contracts with
two schools in the Baltimore District. These "enterprise schools" were given the
authority, through the Superintendent of Public Instruction for the Baltimore
District, to contract out for services related to educational programs,
financial resources, and physical facilities. The consulting contracts called
for payment to the Company of a negotiated amount each year based on the average
per-pupil expenditure in the Baltimore District. Utilizing these funds, the
Company was responsible for payment of all expenses related to the operation of
the schools.
These management and consulting contracts could be terminated by the Baltimore
District for any reason upon ninety days' notice to the Company and in November
1995, the Baltimore Board of School Commissioners voted to cancel the management
and consulting contracts with the Company, citing budgetary issues. The Company
provided services to the contracted schools through March 4, 1996, the effective
date of termination.
In November 1994, the Company entered into a five-year management contract (the
"Hartford Contract") with the Board of Education of the city of Hartford,
Connecticut, under which the Company provided comprehensive educational and
management operating services to the 32-school public school system of the city
of Hartford. The Company was responsible for the Hartford school district's
general operating budget and the restricted and special grant funds received by
the school district from the city of Hartford. The Company recognized revenue
and expense under the Hartford Contract based on the amounts appropriated from
the city of Hartford and the amounts actually expended and encumbered for the
operation of the Hartford public school district during the school year. The
Company would realize a profit for its services only if it generated cost
savings in the delivery and administration of educational, financial, and
noninstructional services, and such savings were acknowledged by the city of
Hartford and the Hartford Board of Education.
The Hartford Contract provided for the reimbursement of certain expenditures
incurred by the Company on the terms set forth therein. While the Company
believes it should have been reimbursed for expenditures it made under the
contract, city of Hartford and Hartford Board of Education officials did not
acknowledge nor fulfill their contractual obligations to pay for the services
provided and expenses incurred by the Company.
The Hartford Board of Education had the right to terminate the contract for any
reason upon ninety days' notice to the Company. In January 1996, the Hartford
Board of Education voted to seek an amicable dissolution of the contract, citing
an impasse in negotiations with the Company on amounts owed to the Company for
its management services.
In June 1995, the Company entered into a consulting contract with a private
school in southern California to assist the school in the implementation of the
Tesseract educational system and to provide other administrative services to
improve both the educational offering and the management of the school. In July
1995, the Company entered into a consulting contract with an additional private
school in southern California to provide similar services in implementing the
Tesseract educational system in this newly created school. The Company receives
consulting revenue on these contracts on a fee-for-services basis.
The educational consulting services can be distinguished from management
services in that the Company acts only in an advisory capacity, evaluating,
reporting on, and assisting with the implementation of the recommended services
without having the responsibility for the school's operations as it would under
a school management contract.
In addition to providing management and consulting services, the Company owns
and operates the Tesseract Private Schools in Eagan, Minnesota, and Paradise
Valley, Arizona. These two schools were operated by the Company under management
agreements from March 1991 through December 1994. The Company purchased the
schools in December 1994 which gave the Company full ownership of the schools
effective January 1, 1995. Through its affiliation with the Tesseract Private
Schools, the Company has
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developed a number of teacher training materials for schools utilizing the
Tesseract educational system and other materials for overall school improvement.
The Tesseract Private Schools will continue to be used by the Company to further
develop and refine these materials.
While the Company believes it presently has few, if any, direct competitors,
there are a number of public and private entities that are active in educational
reform and provide alternative forms of school management services. Also, to the
extent that companies are successful in obtaining school management contracts,
it can be expected that other companies will attempt to compete directly with
similar forms of school management programs. Many of the Company's potential
competitors currently have financial resources superior to those of the Company.
The Company's single most prevalent competitor remains the public school system
itself. Given the unique position of public education in this country, the
Company believes that educational reforms implemented directly by existing
school boards or superintendents will not face the same resistance from
political and other bodies that may be experienced by the Company. The Company
also competes with school reform efforts sponsored by private organizations and
universities and with consultants hired by a school district to provide
assistance with the identification of problems and implementation of solutions
without taking control of the subject districts or schools within districts. In
addition, there are a large number of private entities which market their
services and products to public schools which compete with portions of the
Company's school management program, including Johnson Controls, Peat Marwick,
and CCC.
The education industry is subject to extensive federal, state, and local
regulation. The impact of such regulation on the Company's business is
uncertain. The Company's ability to do business with public schools is
significantly affected by the legal powers and structure of the states and
school districts within which the Company does or seeks to do business,
including the federal, state, and local governmental regulations to which those
school districts are subject. The Company believes that the laws of many states
neither specifically authorize nor prohibit school districts from entering into
contracts with third parties for the types of services offered by the Company.
It is possible that a third party could challenge a school district's decision
to award a contract to the Company in such a situation. In certain
jurisdictions, the school district may be altogether precluded by law from
entering into management contracts with third parties. In addition, many school
districts are required to enter into a competitive bidding procedure before
awarding contracts for products or services. The laws of certain jurisdictions
may also require the Company to award subcontracts on a competitive basis and to
subcontract to varying degrees with businesses owned by women or minorities. The
Company's ability to successfully implement a management program for school
districts further depends upon its ability to award subcontracts to certain key
subcontractors or their successors. It is possible that a third party could
challenge sole-source awards to the Company or to the Company's subcontractors
as inconsistent with competitive bidding or minority contracting requirements.
Restrictions imposed on the content and delivery of public education by federal,
state, and local regulations may also adversely affect the Company's ability to
implement the managerial, financial, and educational changes necessary to
achieve the cost savings or generate the incremental revenues necessary to
realize a profit from delivery of its services. The Company would be obligated
to comply with the requirements of each federal program supporting elementary
and secondary education in which the contracting school district participates.
Failure by the Company to meet these requirements may result in financial
liability or contract termination. In the event that Company expenditures did
not comply with federal regulatory requirements, the Company may be required to
repay such expenditures.
The Company's public school marketing strategy has historically focused on
management contracts with entire or significant portions of large, urban
school districts where the need for educational improvement is well
established. Attempts to provide meaningful educational reforms in these
districts, particularly when initiated by a private, for-profit company, have
been met with intense
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and organized resistance from teacher unions and other local and national
political bodies with an interest in maintaining the status quo. The Company
has encountered additional roadblocks in its efforts to initiate educational
reforms by requirements in its previous contracts that the Company's services
may be terminated with or without cause upon limited notice, thereby putting at
risk the Company's ability to realize an educational or financial return on its
investment in the district if the political winds shift.
Accordingly, the Company has decided to limit the resources allocated to this
market and shift its focus and resources to the private school sector where
it presently owns and operates two successful private schools. The Company
expects to expand this business through internal growth and acquisitions. The
Company will continue, though, to maintain a presence in the public school
market as it believes this market is still evolving and eventually its
management services will be accepted under terms and conditions that will
provide for an appropriate return to the Company.
At September 1, 1996, the Company employed 125 employees, of which 18 were at
the corporate level and 107 were teachers or administrators at the Tesseract
Private Schools. The Company is not subject to any collective bargaining
agreement and believes that its employee relations are good.
ITEM 2. PROPERTIES
The Company's headquarters is comprised of approximately 10,600 square feet of
leased office space in Minneapolis, Minnesota. The Company also owns and
operates private schools in Eagan, Minnesota, and Paradise Valley, Arizona. Each
private school facility has approximately 21,000 square feet of classroom and
administrative office space.
ITEM 3. LEGAL PROCEEDINGS
At June 30, 1996, the Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders by the Company during
the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's common stock trades on The Nasdaq Stock Market under the symbol
EAIN. For common stock price information, see Note 16. As of June 30, 1996, the
Company's common stock was held by approximately 3,350 shareholders of record or
through nominee or street name accounts with brokers.
The Company has not paid any cash dividends on its common stock and the board of
directors presently intends to retain future earnings for use in the expansion
of the Company's business.
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ITEM 6. SELECTED FINANCIAL DATA
The table below shows selected financial data for the periods indicated. This
information should be read in conjunction with the Consolidated Financial
Statements and related notes contained in Item 14 herein and Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in Item 7 herein.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year ended June 30,
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1996 1995 1994 1993 1992
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STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenues $115,090 $213,582 $34,403 $30,055 $2,944
Gross profit (loss) (2,672) (3,745) 3,876 2,983 (67)
Net earnings (loss) (9,507) (7,443) 2,534 1,119 (1,551)
Net earnings (loss) per share $ (1.27) $ (1.09) $ .33 $ .18 $ (.44)
Weighted average shares outstanding 7,477 6,822 7,785 6,352 3,500
June 30,
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1996 1995 1994 1993 1992
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BALANCE SHEET DATA:
Working capital (deficit) $12,927 $(6,986) $ 1,402 $ 8,051 $2,619
Long-term marketable securities 7,322 28,972 26,262 27,106 -
Total assets 30,110 43,481 34,899 39,639 4,856
Long-term debt 309 636 253 5 27
Shareholders' equity $24,312 $29,825 $29,397 $36,549 $2,911
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
In July 1992, the Company entered into a five-year management agreement with
Baltimore City Public Schools under which the Company assumed management
responsibility for the operation of nine schools in the Baltimore District. In
March 1994, a contract was signed with an additional school in the Baltimore
District to provide management services for a period of five years. In December
1993, the Company entered into five-year consulting contracts with two
additional schools in the Baltimore District. These management and consulting
contracts (the "Baltimore Contracts") provided for payment to the Company of
revenue based on the average dollars spent in the Baltimore District. Any
expenditures over the amount received for the operation of these schools were
the responsibility of the Company. The Baltimore Contracts allowed the Baltimore
District to cancel the agreements for any reason upon ninety days' notice to the
Company and in November 1995, the Baltimore Board of School Commissioners voted
to cancel the Baltimore Contracts, citing budgetary issues. The Company
provided services to the contracted schools through March 4, 1996, the effective
date of termination.
In November 1994, the Company entered into a five-year management contract with
the Board of Education of the city of Hartford, Connecticut, under which the
Company provided comprehensive educational and management operating services to
the 32-school public school system of the city of Hartford. The Company was
responsible for the Hartford school district's general operating budget and the
restricted and special grant funds received by the school district from the city
of Hartford.
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The Hartford Contract provided for the reimbursement of certain expenditures
incurred by the Company on the terms set forth therein. While the Company
believes it should have been reimbursed for expenditures it made under the
contract, city of Hartford and Hartford Board of Education officials did not
acknowledge nor fulfill their contractual obligations to pay for the services
provided and expenses incurred by the Company.
The Hartford Board of Education had the right to terminate the contract for any
reason upon ninety days' notice to the Company. In January 1996, the Hartford
Board of Education voted to seek an amicable dissolution of the contract, citing
an impasse in negotiations with the Company on amounts owed to the Company for
its management services.
The accompanying consolidated financial statements also reflect the operations
of private schools in Eagan, Minnesota, and Paradise Valley, Arizona. The
Tesseract Private Schools, operated by the Company under management agreements
from March 1991 through December 1994, were purchased by the Company effective
January 1, 1995. For the period through December 1994, school management revenue
and expenses include the Company's management fees for the operation of the
Tesseract Private Schools, as well as operating costs of the schools that were
reimbursed to the Company when the schools achieved positive cash flow. Tuition
and other revenue and private school costs and other expenses for the period
subsequent to December 1994 includes actual tuition revenue received and
expenses incurred by the schools in that period.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1996 AND 1995. Total revenue in 1996
was $115,090,000 compared to $213,582,000 in 1995, a decrease of $98,492,000.
This decrease reflects the impact of the termination of the Hartford and
Baltimore Contracts during the third quarter of the current year.
With the January 1996 termination of services, no revenue was recorded on the
Hartford Contract subsequent to December 31, 1995. Total Hartford school
management revenue recorded in 1996 was $89,192,000, compared to $175,625,000 in
1995. Revenue on the Baltimore management contracts, which was recorded through
the March 4, 1996 termination date, totaled $21,503,000 in 1996, compared to
$34,197,000 in 1995.
Tuition and other revenue in 1996 represent tuition revenue from the Tesseract
Private Schools as well as consulting revenue generated from the Company's
public and private school consulting contracts. Tuition and other revenue in
1995 represent tuition revenue from the Tesseract Private Schools beginning
January 1, 1995, as well as public school consulting revenue.
Direct expenses in 1996 were $117,762,000 compared to $217,327,000 in 1995, a
decrease of $99,565,000. This decrease related to the termination of the
Hartford and Baltimore school management contracts as previously discussed.
School management expenses related to the Hartford Contract were $90,374,000 in
1996, compared to $181,125,000 in 1995. Included in 1996 and 1995 amounts were
charges of $4,255,000 and $5,500,000, respectively, related to costs incurred
under the contract but not yet reimbursed by the Hartford Board of Education.
In June 1996, the Company reached partial settlement with city of Hartford and
Hartford Board of Education officials on amounts owed the Company under its
school management contract. Hartford paid the Company $3,073,000 for the
computers installed in and the capital improvements made to the Hartford
schools. This amount has been included in school management expenses as a
recovery against amounts previously written-off under the contract.
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School management expenses related to the Baltimore contracts were $21,770,000
in 1996, compared to $32,735,000 in 1995.
In addition to the school management expenses directly related to the management
contracts, the Company recorded a charge of $2,000,000 during 1996 to cover
estimated write-offs and shutdown costs associated with the cancellation of the
Baltimore and Hartford Contracts. The Company also recorded provisions in prior
years for various disputed items and contingencies under the contracts. The
Company believes these reserves are adequate to cover any contingencies and
other commitments under the Contracts.
Private school costs and other expenses in 1996 and 1995 primarily relate to
expenses incurred at the Tesseract Private Schools from January 1, 1995 through
June 30, 1996.
Selling, general, and administrative expenses in 1996 were $5,061,000 compared
to $5,862,00 in 1995, a decrease of $801,000. This decrease was the result of
reductions in marketing and legal expenditures in 1996, offset by increases in
personnel costs due to higher personnel levels early in the year and severance
costs from staff cutbacks in the last half of the year.
Other income (expense) was a net expense of $1,774,000 in 1996, compared to net
income of $2,164,000 in 1995. The results for 1996 include a charge of
$3,400,000 to reflect what the Company believes is a permanent impairment in the
value of its investment portfolio and its related decision to liquidate these
investments in fiscal 1997. This write-down to market value had previously been
reported as a direct charge to shareholders' equity. Interest income in 1996
totaled $1,885,000, compared to $2,330,000 in 1995. This decrease is due to
lower investable funds in 1996. The increase in interest expense from $151,000
in 1995 to $249,000 in 1996 is primarily the result of the financing of the
Tesseract Private Schools purchase which occurred in December 1994.
For the year ended June 30, 1996, the Company recorded a net loss of $9,507,000,
or $1.27 per share compared to a net loss of $7,443,000, or $1.09 per share in
1995. The increase in the net loss is primarily due to the impact of the
cancellation of the Baltimore Contracts and the marketable securities charge
recorded in 1996.
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1995 AND 1994. Total revenue in 1995
was $213,582,000 compared to $34,403,000 in 1994, an increase of $179,179,000.
The increase is due to increases in school management revenue, primarily related
to revenue generated from the Hartford Contract. School management revenue from
the Hartford Contract, recognition of which began in October 1994, totaled
$175,625,000. School management revenue related to the management contracts in
Baltimore totaled $34,197,000 in 1995, compared to $30,864,000 in 1994. This
increase was due to an increase in the number of schools under management
contracts in Baltimore. During 1995, the Company provided management services to
ten schools in Baltimore. During 1994, the Company provided management services
to nine schools for the full year, with management services provided to the
tenth school beginning in March 1994. Other school management revenue represents
the Company's fee and reimbursement of costs related to the operation of the
Tesseract Private Schools prior to their purchase by the Company in December
1994.
Tuition and other revenue in 1995 and 1994 represent tuition revenue from the
Tesseract Private Schools beginning January 1, 1995, as well as consulting
revenue generated from the Company's consulting contracts in Baltimore and Dade
County.
Direct expenses in 1995 were $217,327,000 compared to $30,527,000 in 1994, an
increase of $186,800,000. The increase in direct expenses relates to increases
in school management expenses, primarily associated with the Hartford Contract.
School management expenses related to the Hartford Contract were $181,125,000.
This amount includes a charge of $5,500,000 related to costs incurred but not
yet reimbursed under the contract. The Hartford Contract provided that recovery
of certain costs incurred on the contract were contingent on the Company
generating sufficient cost savings over the term of the
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contract to pay for such costs. While the Company believed sufficient savings to
cover reimbursable costs incurred in 1995 had been identified, city of Hartford
and Hartford Board of Education officials had not acknowledged such savings. As
a result of uncertainties regarding collectability of the reimbursable
expenditures, the Company recorded the charge in the fourth quarter of 1995.
School management expenses related to the Company's management contracts in
Baltimore were $32,735,000 in 1995, compared to $27,225,000 in 1994. This
increase is due to an increase in the number of schools under management
contract, as discussed above. In addition, unanticipated costs for additional
required educational staffing, and a 4.6% increase in the average teacher salary
paid to the Baltimore District contributed to the increase in costs on the
Baltimore management contracts in 1995 as compared to 1994.
Other school management expense relates to the operation of the Tesseract
Private Schools prior to the purchase of the schools by the Company in December
1994.
Private school costs and other expenses relate to expenses incurred at the
Tesseract Private Schools subsequent to December 1994 and expenses associated
with the Company's consulting contract with Dade County.
Selling, general, and administrative expenses were $5,862,000 in 1995 compared
to $4,177,000 in 1994, an increase of $1,685,000. During 1995, the Company made
investments in personnel and other infrastructure required to perform under
existing school management contracts and to continue pursuit of additional
school management contracts. Marketing and legal expenditures also increased
during 1995 as the Company continued to pursue additional school management
contracts.
Other income was $2,164,000 in 1995 compared to $2,881,000 in 1994, a decrease
of $717,000. Investment income decreased from $2,883,000 in 1994 to $2,315,000
in 1995. This decrease is primarily due to lower yields obtained on the
Company's investment portfolio during 1995, as the portfolio had been negatively
impacted by the rise in interest rates that occurred during 1994 and 1995. Also
included in investment income for 1995 were realized losses on marketable
securities totaling $3,015,000, offset by a gain on the settlement of a dispute
with the Company's investment management firm of $3,000,000. As a result of the
dispute settlement, the Company had the right to sell securities to the
investment management firm for amounts exceeding fair value by a minimum of
$3,000,000. The gain on settlement could increase to $4,500,000 based upon an
arbitrators decision required to settle the dispute (see Note 6).
The increase in interest expense was primarily the result of the financing of
the Tesseract Private Schools purchase and various capital lease commitments
entered into at the managed schools in Baltimore during 1995.
The Company recorded a net loss of $7,443,000, or $1.09 per share in 1995
compared to net earnings of $2,534,000, or $.33 per share in 1994. The decline
in earnings from 1994 to 1995 is primarily attributable to the charge recorded
on the Hartford Contract, lower margins generated in Baltimore, and increases in
selling, general, and administrative expenses.
CAPITAL RESOURCES AND LIQUIDITY
During the year ended June 30, 1996, the Company satisfied its working capital
needs principally from cash provided from sales of marketable securities during
the year.
Cash used in operating activities totaled $4,189,000, primarily due to the net
loss incurred during the year. The Company received cash of $22,763,000 from
sales and maturities of marketable securities during 1996.
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Cash investments in property and equipment totaled $2,261,000 during 1996,
including $1,699,000 related to building improvements and technology additions
at the Company's managed schools in Baltimore and Hartford.
During 1996, the Company used proceeds from the sales of marketable securities
to retire the short-term borrowings that were utilized to finance the Company's
purchase of the Tesseract Private Schools in December 1994.
At June 30, 1996, the Company had working capital of $12,927,000, an increase of
$19,913,000 over the working capital deficit at June 30, 1995. This increase is
primarily due to the sales of marketable securities as previously discussed.
Approximately $675,000 of marketable securities at June 30, 1996 were pledged to
collateralize various capital lease commitments. As discussed in Note 3,
subsequent to June 30, 1996, the Company entered into an agreement with the
Baltimore District that resolved all outstanding issues related to the Baltimore
Contracts. As part of the settlement agreement, the Company has agreed to
provide a letter of credit for a period of five years as security for any
federal or state restricted fund audit exceptions that relate to the periods
during which the Company managed or consulted with the schools. The letter of
credit requirement begins at $1,000,000 for fiscal 1997 and declines each year
to $200,000 in fiscal 2001. The Company will be required to pledge securities as
collateral for this letter of credit.
As discussed in Note 3, subsequent to year-end, the Company reached a
preliminary agreement with Hartford officials on the remaining amounts owed to
the Company. Under the proposed settlement, the Company will receive $3,250,000
in annual installments of $650,000 over the next five years, with the first
payment due in July 1997. These annual payments will be recorded in income as
they are received. This settlement is subject to the execution of a definitive
agreement. Although the Company expects to conclude these negotiations in the
near future, there can be no assurance that a final agreement will be reached on
terms satisfactory to the Company. In addition, as discussed in Note 6, the
Company's investment management firm agreed to pay the Company $1,250,000 to
resolve all remaining disputes relating to the firm's management of the
Company's investment portfolio. This settlement will be included in the
Company's fiscal 1997 operating results.
The Company believes it has sufficient cash on hand and liquidity within its
investment portfolio to ensure uninterrupted performance on its operating
obligations as currently structured and anticipated. No assurance can be made,
however, that this will remain the case.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and related notes and schedule are
included in Item 14 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by reference to the
information set forth under the captions "Proposal Number One: Election of
Directors" and "Executive Officers and Compensation" in the Proxy Statement.
-9-
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the
information set forth under the caption "Executive Officers and Compensation" in
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to the
information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the
information set forth under the caption "Compensation Committee Interlocks and
Insider Participation" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT:
(1) CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements of the Company and its subsidiary
begin on page 14 in the Appendix. The Report of Independent Public
Accountants on the Company's consolidated financial statements is
presented on page 15 in the Appendix.
(2) FINANCIAL STATEMENT SCHEDULES
See Index to Consolidated Financial Statements and Schedules on page 14
in the Appendix. The financial statement schedule should be read in
conjunction with the consolidated financial statements. All other
supplemental schedules are omitted because of the absence of conditions
under which they are required.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the fourth quarter
of the year ended June 30, 1996.
EXHIBITS
The following exhibits are filed as part of this Annual Report on Form 10-K
for the year ended June 30, 1996.
Exhibit
Number Exhibit Description
------ -------------------
3.1 Restated Articles of Incorporation of the Company. (1)
3.2 Amendment of the Restated Articles of Incorporation of the Company.
(2)
-10-
<PAGE>
3.3 By-Laws of the Company. (3)
4.1 Specimen Certificate of Common Stock. (4)
4.2 Share Rights Plan dated September 8, 1993. (5)
10.1* Employment Agreement between the Company and Philip E. Geiger dated
August 10, 1993. (10)
10.2* 1988 Education Alternatives, Inc. Stock Option Plan, as amended.
10.3 Real Property Lease between the Company and Zeller-Minnesota
Limited Partnership dated October 30, 1992. (7)
10.4 Agreement between the Company and Tesseract Development Company II
dated January 14, 1989. (14)
10.5 Teaming Agreement between the Company, Johnson Controls World
Services Inc. and KPMG Peat Marwick dated December 5, 1991. (8)
10.6* Employment Agreement between the Company and John T. Golle dated
January 1, 1991. (11)
10.7* Employment Agreement between the Company and Mable E. Gaskins dated
January 20, 1992. (12)
10.8* Amendment to Employment Agreement between the Company and John T.
Golle dated September 8, 1993. (9)
10.9* 1992 Education Alternatives, Inc. Long-Term Executive Stock Option
Plan, as amended. (6)
10.10* Amendment to Employment Agreement between the Company and John T.
Golle dated March 20, 1992. (15)
10.11* Employment Agreement between the Company and Gerald A. Haugen dated
January 15, 1996. (13)
11 Statement re Computation of Per Share Earnings (Loss).
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule (EDGAR version only).
-------------------------------
* Management contract or compensatory plan or arrangement.
(1) Incorporated herein by reference to Exhibit 3.2 to the Company's
Amendment No. 1 to Form S-18 Registration Statement (Registration
Number 33-39481-C).
(2) Incorporated herein by reference to the same numbered Exhibit to the
Company's Amendment No. 1 to Form S-1 Registration Statement
(Registration Number 33-46791).
-11-
<PAGE>
(3) Incorporated herein by reference to the same numbered Exhibit to the
Company's Form S-18 Registration Statement (Registration Number 33-
39481-C).
(4) Incorporated herein by reference to the same numbered Exhibit to the
Company's Amendment No. 1 to Form S-18 Registration Statement
(Registration Number 33-39481-C).
(5) Incorporated herein by reference to the same numbered Exhibit to the
Company's Annual Report on Form 10-K for the year ended June 30,
1993.
(6) Incorporated herein by reference to Exhibit Number 10.26 to the
Company's Annual Report on Form 10-K for the year ended June 30,
1993.
(7) Incorporated herein by reference to Exhibit 10.10 to the Company's
Form S-1 Registration Statement (Registration Number 33-59698).
(8) Incorporated herein by reference to Exhibit 10.12 to the Company's
Form S-1 Registration Statement (Registration Number 33-46791).
(9) Incorporated herein by reference to Exhibit 10.28 to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1993.
(10) Incorporated herein by reference to Exhibit 10.2 to the Company's
Form 10-Q for the quarter ended December 31, 1994.
(11) Incorporated herein by reference to Exhibit 10.17 to the Company's
Amendment No. 1 to Form S-18 Registration Statement (Registration
Number 33-39481-C).
(12) Incorporated herein by reference to Exhibit 10.18 to the Company's
Amendment No. 1 to Form S-1 Registration Statement (Registration
Number 33-46791).
(13) Incorporated herein by reference to Exhibit 10 to the Company's Form
10-Q for the quarter ended December 31, 1995.
(14) Incorporated herein by reference to Exhibit 10.11 to the Company's to
Form S-18 Registration Statement (Registration Number 33-39481-C).
(15) Incorporated herein by reference to Exhibit 10.24 to Amendment No. 2
to the Company's Form S-1 Registration Statement (Registration
Number 33-46791).
-12-
<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.
EDUCATION ALTERNATIVES, INC.
By /s/ Gerald A. Haugen
-----------------------------
Gerald A. Haugen
Date: September 25, 1996 Chief Financial Officer
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.
/s/ John T. Golle
- -----------------------------------
John T. Golle
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer) September 25, 1996
/s/ Richard T. Burke
- -----------------------------------
Richard T. Burke
Director September 25, 1996
/s/ Robert I. Karon
- -----------------------------------
Robert I. Karon
Director September 25, 1996
/s/ Gale R. Mellum
- -----------------------------------
Gale R. Mellum
Director September 25, 1996
/s/ John T. Walton
- -----------------------------------
John T. Walton
Director September 25, 1996
/s/ Gerald A. Haugen
- -----------------------------------
Gerald A. Haugen
Chief Financial Officer
(Principal Financial and Accounting Officer) September 25, 1996
-13-
<PAGE>
EDUCATION ALTERNATIVES, INC. APPENDIX
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS AND SCHEDULES
Page
----
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . 15
Consolidated Statements of Operations. . . . . . . . . . . . . . . . . . . . 16
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . . 17
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . 18
Consolidated Statements of Shareholders' Equity. . . . . . . . . . . . . . . 19
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 20
Schedule II--Valuation and Qualifying Accounts . . . . . . . . . . . . . . . 29
-14-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Education Alternatives, Inc.
We have audited the accompanying consolidated balance sheets of Education
Alternatives, Inc. (a Minnesota corporation) and subsidiary as of June 30, 1996
and 1995, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended June 30,
1996. These financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Education Alternatives, Inc.
and subsidiary as of June 30, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1996, in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index to consolidated financial statements and schedules is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not a required part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in our audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
September 24, 1996
-15-
<PAGE>
EDUCATION ALTERNATIVES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year ended June 30,
---------------------------------
1996 1995 1994
-------- -------- --------
REVENUES
School management $ 110,695 $ 211,562 $ 34,104
Tuition and other 4,395 2,020 299
-------- -------- --------
115,090 213,582 34,403
-------- -------- --------
DIRECT EXPENSES
School management 114,144 215,475 30,281
Private school costs and other 3,618 1,852 246
-------- -------- --------
117,762 217,327 30,527
-------- -------- --------
GROSS PROFIT (LOSS) (2,672) (3,745) 3,876
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 5,061 5,862 4,177
-------- -------- --------
OPERATING LOSS (7,733) (9,607) (301)
OTHER INCOME (EXPENSE)
Investment income (loss) (1,525) 2,315 2,883
Interest expense (249) (151) (2)
-------- -------- --------
(1,774) 2,164 2,881
-------- -------- --------
EARNINGS (LOSS) BEFORE INCOME TAX EXPENSE (9,507) (7,443) 2,580
INCOME TAX EXPENSE - - 46
-------- -------- --------
NET EARNINGS (LOSS) $(9,507) $(7,443) $ 2,534
-------- -------- --------
-------- -------- --------
NET EARNINGS (LOSS) PER SHARE $ (1.27) $ (1.09) $ .33
-------- -------- --------
-------- -------- --------
WEIGHTED AVERAGE SHARES OUTSTANDING 7,477 6,822 7,785
-------- -------- --------
-------- -------- --------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
-16-
<PAGE>
EDUCATION ALTERNATIVES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
June 30,
------------------------
1996 1995
---------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents, including
restricted cash (1995--$2,415) $15,391 $ 2,449
Marketable securities 2,221 -
Accounts receivable, net of allowance
(1996--$53; 1995--$49) 442 184
Settlement receivable 116 3,000
Other current assets 246 401
-------- --------
Total current assets 18,416 6,034
LONG-TERM MARKETABLE SECURITIES 7,322 28,972
PROPERTY AND EQUIPMENT, NET 4,372 8,475
-------- --------
$30,110 $43,481
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ - $ 3,300
Accounts payable 470 1,791
Other current liabilities 5,019 7,929
-------- --------
Total current liabilities 5,489 13,020
LONG-TERM DEBT 309 636
COMMITMENTS AND CONTINGENCIES (Notes 3, 10, and 15)
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value,
5,000,000 shares authorized; no
shares issued and outstanding - -
Common stock, $.01 par value,
25,000,000 shares authorized;
issued and outstanding 1996--7,488,970 shares;
1995--7,352,352 shares 75 74
Additional paid-in capital 46,386 46,080
Unrealized losses on marketable securities - (3,687)
Accumulated deficit (22,149) (12,642)
-------- --------
Total shareholders' equity 24,312 29,825
-------- --------
$30,110 $43,481
-------- --------
-------- --------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE BALANCE SHEETS.
-17-
<PAGE>
EDUCATION ALTERNATIVES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(IN THOUSANDS)
Year ended June 30,
----------------------------------------
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) $ (9,507) $ (7,443) $ 2,534
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,214 963 460
Provision for doubtful accounts 4 117 183
Amortization of discount on marketable securities (17) (139) (84)
Losses on marketable securities 3,410 15 -
Other - - 86
Changes in operating assets and liabilities:
Accounts receivable (262) 212 (153)
Other current assets 155 (106) 37
Accounts payable (1,321) 1,013 (339)
Other current liabilities 2,135 5,277 466
---------- ---------- ---------
Net cash provided by (used in) operating activities (4,189) (91) 3,190
---------- ---------- ---------
INVESTING ACTIVITIES
Additions to property and equipment (2,261) (3,568) (738)
Purchases of marketable securities - (196) (55,130)
Proceeds from sales and maturities of marketable securities 22,763 1,407 47,500
---------- ---------- ---------
Net cash provided by (used in) investing activities 20,502 (2,357) (8,368)
---------- ---------- ---------
FINANCING ACTIVITIES
Advances (repayments) on management and consulting contracts, net (69) (1,233) 1,429
Proceeds from exercise of stock options and warrants 307 1,074 733
Repayment of short-term borrowings and long-term debt (3,609) (165) (46)
---------- ---------- ---------
Net cash provided by (used in) financing activities (3,371) (324) 2,116
---------- ---------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12,942 (2,772) (3,062)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,449 5,221 8,283
---------- ---------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 15,391 $ 2,449 $ 5,221
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
-18-
<PAGE>
EDUCATION ALTERNATIVES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(IN THOUSANDS)
Common Stock Unrealized
-------------------------- Additional Losses on
Number Paid-In Marketable Accumulated
of Shares Amount Capital Securities Deficit
--------- ------ -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1993 6,179 $ 62 $ 44,220 $ - $ (7,733)
Net earnings - - - - 2,534
Issuance of common stock upon
exercise of stock options
and warrants 283 3 730 - -
Unrealized holding losses
on marketable securities - - - (10,484) -
Other 3 - 65 - -
----- ------- ------- ------- ---------
BALANCE, JUNE 30, 1994 6,465 65 45,015 (10,484) (5,199)
Net loss - - - - (7,443)
Issuance of common stock upon
exercise of stock options
and warrants 887 9 1,065 - -
Change in net unrealized holding
losses on marketable securities - - - 6,797 -
----- ------- ------- ------- ---------
BALANCE, JUNE 30, 1995 7,352 74 46,080 (3,687) (12,642)
Net loss - - - - (9,507)
Issuance of common stock upon
exercise of stock options
and warrants 137 1 306 - -
Change in net unrealized holding
losses on marketable securities - - - 3,687 -
----- ------- ------- ------- ---------
BALANCE, JUNE 30, 1996 7,489 $ 75 $46,386 $ - $(22,149)
----- ------- ------- ------- ---------
----- ------- ------- ------- ---------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
-19-
<PAGE>
EDUCATION ALTERNATIVES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Education
Alternatives, Inc. and its wholly owned subsidiary, Education Alternatives of
Connecticut, Inc. All material intercompany accounts and transactions have been
eliminated in consolidation.
The Company provides management and consulting services to public schools and
owns, operates, and consults with private schools.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES: Cash and cash equivalents,
consisting of highly liquid investments with a maturity of three months or less
when purchased, are stated at cost which approximates market.
The Company has classified its marketable securities as available-for-sale and
is carrying the securities at fair value, with any unrealized gains and losses
reported as a separate component of shareholders' equity.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost and
depreciated on the straight-line method over their estimated useful lives,
ranging from five to thirty years. Capital improvements at managed schools are
stated at cost and depreciated on the straight-line method over the remaining
life of the contract. The Company uses accelerated methods of depreciation for
income tax purposes.
REVENUE RECOGNITION: The Company applies its accounting policy for revenue
recognition based on the terms of each contract. On management contracts, where
the Company assumes the full risks of loss/reward on the contract and has
substantial control over the operation of the school, revenues and expenses are
included in the accompanying consolidated statements of operations. The Company
believes this represents the most useful presentation for the financial
statement user. Consulting contracts, under which the Company has less control
than the management contracts, are reported on a net fee basis, with consulting
revenue recorded based on the difference between total revenue and total expense
on the contract.
EARNINGS (LOSS) PER SHARE: Earnings (loss) per share is computed by dividing net
earnings (loss) for the year by the weighted average number of shares of common
stock and common stock equivalents outstanding. Stock options and warrants have
been excluded from loss per share computations as their effects are
antidilutive.
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 and contingency disclosures
included in the financial statements. Ultimate results could differ from these
estimates.
FINANCIAL STATEMENT RECLASSIFICATIONS: Certain 1994 and 1995 amounts have been
reclassified to conform to the 1996 presentation. These reclassifications had no
effect on the previously reported results of operations or shareholders' equity.
NEW ACCOUNTING PRONOUNCEMENT: In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS No. 123"). The Company will be
required to adopt SFAS No. 123 in fiscal 1997. This statement will have no
impact on the financial condition or results of operations of the Company.
-20-
<PAGE>
NOTE 3--PUBLIC SCHOOL CONTRACTS
BALTIMORE: In July 1992, the Company entered into a five-year contract with
Baltimore City Public Schools (the "Baltimore District") under which the Company
assumed management responsibility for the operation of nine schools. In March
1994, a contract was signed with an additional school to provide management
services for a period of five years. In December 1993, the Company entered into
five-year consulting contracts with two additional schools. These management and
consulting contracts (the "Baltimore Contracts") provided for payment to the
Company of revenue based on the average dollars spent per pupil in the Baltimore
District. Any expenditures over the amount received for the operation of these
schools were the responsibility of the Company. The Baltimore Contracts allowed
the Baltimore District to cancel the agreements for any reason upon ninety days'
notice to the Company and in November 1995, the Baltimore Board of School
Commissioners voted to cancel the Baltimore Contracts, citing budgetary issues.
The Company provided services to the contracted schools through March 4, 1996,
the effective date of termination.
The funding of school operations in the Baltimore District consisted of
restricted and unrestricted funds. During 1996, the Company received
approximately $2,750,000 in restricted federal and state funds. Expenditure of
these funds is subject to federal and state regulatory audits. While the Company
believes it has complied with all applicable regulations, there is no certainty
that issues regarding regulatory matters will not arise that may impact the
Company's future operating results or financial condition.
Subsequent to June 30, 1996, the Company entered into an agreement with the
Baltimore District that resolved all outstanding issues related to the Baltimore
Contracts. The Company assigned title to the capital improvements made to and
the technology purchased for the managed schools to the Baltimore District in
exchange for, among other things, the release of all claims made by the
Baltimore District. In addition, the Company has agreed to provide a letter of
credit for a period of five years as security for any federal or state
restricted fund audit exceptions that relate to the periods during which the
Company managed or consulted with the schools. The letter of credit requirement
begins at $1,000,000 for fiscal 1997 and declines each year to $200,000 in
fiscal 2001.
HARTFORD: In November 1994, the Company entered into a five-year management
contract (the "Hartford Contract") with the Board of Education of the city of
Hartford, Connecticut under which the Company provided comprehensive
educational and management operating services for the 32-school public school
system of the city of Hartford. The Company was responsible for the Hartford
school district's general operating budget and the restricted and special
grant funds received by the school district from the city of Hartford.
The Hartford Contract provided for the reimbursement of certain expenditures
incurred by the Company on the terms set forth therein. While the Company
believes it should have been reimbursed for expenditures it made under the
contract, city of Hartford and Hartford Board of Education officials did not
acknowledge nor fulfill their contractual obligations to pay for the services
provided and expenses incurred by the Company.
The Hartford Board of Education had the right to terminate the contract for any
reason upon ninety days' notice to the Company. In January 1996, the Hartford
Board of Education voted to seek an amicable dissolution of the contract, citing
an impasse in negotiations with the Company on amounts owed to the Company for
its management services.
In June 1996, the Company reached partial settlement with the city of Hartford
and Hartford Board of Education officials on amounts owed the Company under its
school management contract. Hartford paid the Company $3,073,000 for the
computers installed in and the capital improvements made to the Hartford
schools. This amount has been included in school management expenses as a
recovery against amounts previously written-off under the contract.
-21-
<PAGE>
Subsequent to June 30, 1996, the Company reached a preliminary agreement with
Hartford officials on the remaining amounts owed to the Company. Under the
proposed settlement, the Company will receive $3,250,000 in annual installments
of $650,000 over the next five years, with the first payment due in July 1997.
These annual payments will be recorded in income as they are received. In
addition, both parties will release each other from any further claims under the
management contract. This settlement is subject to the execution of a
definitive agreement. Although the Company expects to conclude these
negotiations in the near future, there can be no assurance that a final
agreement will be reached on terms satisfactory to the Company.
NOTE 4--CONSULTING CONTRACTS
In June 1995, the Company entered into a consulting contract with a private
school in southern California to assist the school in the implementation of the
Tesseract educational system and to provide other administrative services to
improve both the educational offering and the management of the school. In July
1995, the Company entered into a consulting contract with an additional private
school in southern California to provide similar services in implementing the
Tesseract educational system in this newly created school. The Company receives
consulting revenue on these contracts on a fee-for-services basis.
NOTE 5--PRIVATE SCHOOLS PURCHASE
On December 30, 1994, the Company purchased from Tesseract Development Company,
a partnership in which an officer/director of the Company was a 50% partner, the
two private schools it operated under management agreements since March 1991.
The cash purchase price of $3,300,000 for the schools located in Eagan,
Minnesota, and Paradise Valley, Arizona, was based on an independent appraisal.
This transaction was accounted for under the purchase method of accounting.
Beginning January 1, 1995, the Company has recorded all revenue and expense
associated with the operation of the two schools in its consolidated statement
of operations.
Prior to January 1, 1995, the Company managed these same schools under separate
management agreements. The terms of the management agreements provided that the
Company furnish all employees, curriculum, materials, furniture, and equipment
and also pay other expenses related to the operation of the schools. For these
services, the Company was entitled to an annual management fee for each school
plus reimbursement of expenses incurred, subject to the schools generating
positive cash flow. Accumulated but uncollected fees totaling $692,000, fully
reserved due to continuing cash shortfalls at the schools, were written off at
December 31, 1994.
NOTE 6--MARKETABLE SECURITIES
The Company has classified its marketable securities as available-for-sale in
accordance with Statement of Financial Accounting Standards No. 115. Available-
for-sale securities are carried at fair value, with any unrealized gains and
losses reported as a separate component of shareholders' equity.
At June 30, 1996, the Company had approximately $675,000 of marketable
securities pledged as collateral for various capital lease commitments. The
following is a summary of marketable securities:
Unrealized Estimated
Cost Losses Fair Value
---------- ---------- ----------
June 30, 1996
U.S. Treasury securities $2,221,000 $ - $2,221,000
Other U.S. government agency securities 4,023,000 - 4,023,000
Other debt securities 1,839,000 - 1,839,000
Investment in fixed income mutual fund 1,460,000 - 1,460,000
---------- -------- ----------
$9,543,000 $ - $9,543,000
---------- -------- ----------
---------- -------- ----------
-22-
<PAGE>
Unrealized Estimated
Cost Losses Fair Value
----------- ---------- -----------
June 30, 1995
- -------------
U.S. Treasury securities $ 5,753,000 $ 90,000 $ 5,663,000
Other U.S. government agency securities 21,066,000 2,168,000 18,898,000
Other debt securities 3,572,000 768,000 2,804,000
Investment in fixed income mutual fund 2,268,000 661,000 1,607,000
---------- -------- ----------
$32,659,000 $3,687,000 $28,972,000
----------- ---------- -----------
----------- ---------- -----------
The fixed income mutual fund is comprised primarily of structured notes
involving securities of the U.S. government, its agencies, or instrumentalities.
The amortized cost and estimated fair value of debt and equity securities at
June 30, 1996, by contractual maturity, are shown below. The table includes
mortgage-backed securities which do not have a single maturity date. These
securities have been presented in the maturity group based on the securities
estimated maturity date, determined at applicable current market interest rates.
Estimated
Cost Fair Value
----------- -----------
Debt securities
Due within one year $2,221,000 $2,221,000
Due after ten years through fifteen years 3,610,000 3,610,000
Due after fifteen years through twenty years 573,000 573,000
Due after twenty years 1,679,000 1,679,000
Investment in fixed income mutual fund 1,460,000 1,460,000
---------- ----------
$9,543,000 $9,543,000
---------- ----------
---------- ----------
During the fourth quarter of 1996, the Company recorded a charge of $3,400,000
to reflect what the Company believes is a permanent impairment in the value of
its investment portfolio and its related decision to liquidate these investments
in fiscal 1997. This write-down to market value had been previously reported as
a direct charge to shareholders' equity. The Company will continue to classify
its marketable securities portfolio as available-for-sale. Any future unrealized
gains and losses from the adjusted cost basis will be reported as a separate
component of shareholders' equity.
During 1995, the Company and the firm hired to manage the Company's investment
portfolio became involved in a dispute over the purchase and management of
certain securities included in the Company's investment portfolio. An
officer/director of the Company was a board member of a company, whose mutual
funds were advised by the Company's investment management firm, from March 1987
to June 1995. The Company and its investment management firm entered into a
settlement agreement on June 30, 1995, whereby the investment management firm
agreed to reimburse the Company a minimum of $3,000,000 for losses on the
Company's portfolio. Under the terms of the agreement, the investment management
firm could be required to pay an additional $1,500,000 based on an arbitrator's
decision required to settle the dispute.
At June 30, 1995, the Company recorded a $3,000,000 loss on marketable
securities and a corresponding reduction in the unrealized loss on marketable
securities, representing the difference between amortized cost and fair value of
designated securities which were sold in 1996 or are to be sold to the
investment management firm. The Company also recorded a gain on the dispute
settlement totaling $3,000,000.
-23-
<PAGE>
During 1996, the Company received proceeds of $22,653,000 on the sale of
securities, including $19,130,000 from the Company's investment manager related
to the settlement of the dispute previously discussed. The securities purchased
by the investment manager had a fair value of $16,246,000 at the time of
purchase, with the difference between cost and fair value at the time of
purchase allocated to the settlement amount. Realized losses on the sale of
securities in 1996 totaled $10,000. During 1995, the Company received proceeds
of $1,110,000 on the sale of securities, realizing losses of $15,000. For
purposes of calculating realized gains and losses on sales of marketable
securities, the amortized cost of each security sold is used.
Subsequent to June 30, 1996, the Company's investment management firm agreed to
pay the Company $1,250,000 to resolve all remaining disputes relating to the
firm's management of the Company's investment portfolio. This settlement will be
included in the Company's fiscal 1997 operating results.
NOTE 7--PROPERTY AND EQUIPMENT
Property and equipment at June 30 consist of the following:
1996 1995
---------- -----------
Land $1,305,000 $1,305,000
Buildings 1,905,000 1,905,000
Furniture and equipment 2,174,000 3,242,000
Capital improvements at managed schools - 3,881,000
Less accumulated depreciation and amortization (1,012,000) (1,858,000)
----------- -----------
$4,372,000 $8,475,000
----------- -----------
----------- -----------
During 1995, additions to furniture and equipment and capital improvements at
managed schools totaling $538,000 and $274,000, respectively, were financed
through capital lease commitments.
At June 30, property and equipment include the following amounts related to
assets under capital leases:
1996 1995
---------- -----------
Furniture and equipment $325,000 $866,000
Capital improvements at managed schools - 274,000
Less accumulated depreciation and amortization (154,000) (251,000)
----------- -----------
$171,000 $889,000
----------- -----------
----------- -----------
NOTE 8--OTHER CURRENT LIABILITIES
Other current liabilities at June 30 consist of the following:
1996 1995
---------- -----------
Accrued expenses--managed schools $1,767,000 $3,052,000
Reserve for contract contingencies 1,420,000 2,756,000
Deposits and prepaid tuition from private schools 656,000 817,000
Current portion of long-term debt 337,000 319,000
Other 839,000 985,000
---------- ----------
$5,019,000 $7,929,000
---------- ----------
---------- ----------
-24-
<PAGE>
NOTE 9--LONG-TERM DEBT
Long-term debt at June 30 consists of the following:
1996 1995
----------- -----------
4.75% note due August 1999 $ 10,000 $ 14,000
Capital lease obligations (interest rates
ranging from 7.28% to 9.49%) 636,000 941,000
----------- -----------
646,000 955,000
Less current maturities (337,000) (319,000)
----------- -----------
$ 309,000 $ 636,000
----------- -----------
----------- -----------
The Company made interest payments of $249,000, $149,000, and $9,000,
respectively, in the years ended June 30, 1996, 1995, and 1994.
NOTE 10--LEASES
The Company leases office space and equipment under various operating lease
agreements, the last of which expires in 2001. In addition, the Company has
various capitalized lease commitments for computer equipment that also expire in
2001. At June 30, 1996, future minimum lease payments under capital leases and
noncancelable operating leases were as follows:
Operating Capital
Year ending June 30, leases leases
- -------------------- --------- --------
1997 $273,000 $350,000
1998 154,000 268,000
1999 25,000 63,000
2000 4,000 14,000
2001 1,000 2,000
-------- --------
Total future minimum lease payments $457,000 697,000
--------
--------
Less amounts representing interest (61,000)
--------
Present value of minimum lease payments $636,000
--------
--------
Total rent expense for the years ended June 30, 1996, 1995, and 1994 was
$1,436,000, $1,789,000, and $1,603,000, respectively. Rent expense of
$1,201,000, $1,582,000, and $1,414,000 relates to school management contracts
and is included in school management expenses in the accompanying consolidated
statements of operations.
NOTE 11--INVESTMENT INCOME (LOSS)
Investment income (loss) for the year ended June 30 consists of the following
(see Note 6):
1996 1995 1994
----------- ----------- ----------
Interest income $1,885,000 $2,330,000 $2,849,000
Gain (loss) on marketable securities, net (3,410,000) (3,015,000) 34,000
Gain on settlement of dispute - 3,000,000 -
----------- ----------- ----------
$(1,525,000) $2,315,000 $2,883,000
----------- ----------- ----------
----------- ----------- ----------
-25-
<PAGE>
NOTE 12--STOCK OPTIONS AND WARRANTS
STOCK OPTIONS: Under the terms of the Company's 1988 Stock Option Plan as
Amended and Restated, 1,000,000 shares of common stock have been reserved for
issuance to directors, officers, employees or other individuals or entities who
are not employees but who provide services to the Company, upon the exercise of
stock options. The stock options are exercisable over periods of up to ten years
from the date of grant and may be issued as incentive or nonqualified stock
options.
Under the terms of the Company's 1992 Long-Term Executive Stock Option Plan,
1,100,000 shares of common stock have been reserved for issuance to key
employees of the Company, upon the exercise of stock options. The stock options
issuable under the 1992 Plan are nonqualified stock options and are exercisable
over periods of up to ten years from the date of grant.
At June 30, 1996, options to purchase 216,000 shares of common stock are
currently exercisable and 551,000 shares are available for grant under the two
option plans. Stock option activity was as follows:
Options Option Price
Outstanding Per Share
----------- -------------
Balance at June 30, 1993 955,899 $3.08-$17.63
Granted 453,667 21.00-40.50
Canceled (15,965) 11.00-34.75
Exercised (102,670) 3.08-33.50
----------- ------------
Balance at June 30, 1994 1,290,931 3.08-40.50
Granted 270,500 13.75-22.75
Canceled (225,335) 11.00-40.50
Exercised (9,887) 3.08-13.75
----------- ------------
Balance at June 30, 1995 1,326,209 3.38-40.50
Granted 1,674,388 4.00-13.25
Canceled (1,589,624) 4.75-40.50
Exercised (43,568) 3.38-13.75
----------- ------------
Balance at June 30, 1996 1,367,405 $3.38-$13.75
----------- ------------
----------- ------------
During 1996, the Company canceled 1,192,000 stock options and reissued a like
number at the current market price.
In addition to options issued pursuant to the above plans, the Company
previously issued nonqualified stock options to key employees at $1.00 per
share, exercisable through March 1996. Options to purchase the remaining 59,700
shares were exercised during the year ended June 30, 1996.
WARRANTS: The Company has issued warrants to purchase up to 822,282 shares of
common stock, at exercise prices ranging from $1.00 to $8.40 per share. During
1996 and 1995, 33,350 and 615,310, respectively, of such warrants were
exercised. At June 30, 1996, 200 warrants are outstanding and currently
exercisable. These warrants expire in June 1997.
-26-
<PAGE>
NOTE 13--INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets as of June 30 are as follows:
1996 1995
----------- -----------
Federal net operating loss carryforwards $5,789,000 $2,986,000
Securities valuation reserve 1,156,000 1,254,000
Accrued expenses 483,000 948,000
Other 64,000 288,000
----------- -----------
7,492,000 5,476,000
Valuation allowance (7,492,000) (5,476,000)
----------- -----------
Net deferred income taxes $ - $ -
----------- -----------
----------- -----------
At June 30, 1996, the Company had net operating loss carryforwards of
$17,279,000 for federal tax purposes, expiring through 2009. Pursuant to the Tax
Reform Act of 1986, annual use of the Company's net operating loss carryforward
will be limited since a cumulative change in ownership of more than 50% has
occurred within a three-year period. The Company has determined that the
realization of the net operating loss carryforward and the other deferred tax
assets does not meet the recognition criteria under SFAS No. 109 and,
accordingly, a valuation allowance has been established for the tax benefit of
these items as of June 30, 1996 and 1995.
The Company received income tax refunds of $19,500 and made income tax payments
of $4,000 and $29,000, respectively, in the years ended June 30 1996, 1995, and
1994.
NOTE 14--RELATED-PARTY TRANSACTIONS
In addition to the related-party transactions described elsewhere, certain
shareholders and directors provide legal and accounting services to the Company.
Total amounts incurred for these services for the years ended June 30, 1996,
1995, and 1994 were $230,000, $201,000, and $284,000, respectively.
NOTE 15--COMMITMENTS AND CONTINGENCIES
The Company has employment agreements with executive officers of the Company and
certain of these agreements contain provisions that would entitle severance
benefits to be received if employment is terminated for various reasons,
including termination following a change of ownership or control of the Company
as defined by the agreements. The maximum contingent liability for severance
payments that the Company would be required to make under the employment
agreements is approximately $476,000 at June 30, 1996.
-27-
<PAGE>
NOTE 16--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Common
Gross Profit Net Earnings Net Earnings Stock Price
Revenue (Loss) (Loss) (Loss) Per Share High Low
------------ ------------ ------------ ---------------- ---- ---
<S> <C> <C> <C> <C> <C> <C>
1996:
First $ 30,532,000 $(1,643,000) $(2,551,000) $ (.34) $17 1/4 $12 1/4
Second 74,925,000 (3,613,000) (4,653,000) (.62) 15 1/4 3 7/8
Third 8,573,000 (215,000) (1,166,000) (.16) 6 1/4 3
Fourth 1,060,000 2,799,000 (1,137,000) (.15) 4 1/2 3
------------ ------------ ------------ ----------- ------- -------
------- -------
$115,090,000 $(2,672,000) $(9,507,000) $ (1.27)
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
1995:
First $ 6,162,000 $ 465,000 $ (236,000) $ (.03) $21 3/4 $11 1/2
Second 65,029,000 813,000 201,000 .03 24 14
Third 67,266,000 261,000 (243,000) (.03) 19 12 1/4
Fourth 75,125,000 (5,284,000) (7,165,000) (.98) 18 3/4 9 3/4
------------ ------------ ------------ ----------- ------- -------
------- -------
$213,582,000 $(3,745,000) $(7,443,000) $ (1.09)
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
</TABLE>
During the fourth quarter of 1996, the Company recorded a charge of $3,400,000
to reflect what the Company believes is a permanent impairment in the value of
the Company's investment portfolio and its related decision to liquidate these
investments in fiscal 1997 (see Note 6). Also in the fourth quarter, the Company
received $3,073,000 for the computers installed in and the capital improvements
made to the Hartford schools. This amount was included in school management
expenses as a recovery against amounts previously written off under the Hartford
Contract (see Note 3).
During the second quarter of 1996, the Company recorded a charge of $2,000,000
to cover estimated write-offs and shutdown costs associated with the
cancellation of the Baltimore and Hartford contracts.
During fiscal 1996, the Company recorded charges of $1,662,000, $1,973,000, and
$620,000 in the first, second, and third quarters, respectively, related to
costs incurred but not yet reimbursed under the Company's contract with the
Hartford Board of Education.
During the fourth quarter of 1995, the Company recorded a charge of $5,500,000
related to costs incurred but not yet reimbursed under the Company's contract
with the Hartford Board of Education.
Net earnings (loss) per share is computed independently for each of the quarters
presented. The sum of the quarterly per share amounts may not equal the total
year amount due to the impact of changes in the weighted average shares
outstanding. Stock options and warrants have been excluded from loss per share
computations as their effects are antidilutive.
-28-
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
EDUCATION ALTERNATIVES, INC.
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ------------------------- -------- ------------------------- -------- --------
Additions
---------
Balance at Charged to Charged to Balance at
beginning costs and other end of
Description of period expenses accounts Deductions period
- ------------------------- ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1996:
Allowance for uncollectible
accounts receivable $ 49,000 $ 4,000 $ 53,000
YEAR ENDED JUNE 30, 1995:
Allowance for uncollectible
accounts receivable 579,000 117,000 $(647,000) (1) 49,000
Provision for affiliated schools 391,000 (391,000) (2) -
YEAR ENDED JUNE 30, 1994:
Allowance for uncollectible
accounts receivable 396,000 183,000 579,000
Provision for affiliated schools 495,000 (104,000) (3) 391,000
</TABLE>
(1) The reduction in the allowance for uncollectible accounts receivable
resulted primarily from the write-off of the fully reserved accumulated but
uncollected management fees associated with the Tesseract Private Schools
prior to their purchase in December 1994.
(2) The provision for affiliated schools was reclassified on December 31, 1994
when the private schools were purchased by the Company. This reserve was
utilized to provide for the write-off of school leasehold improvements
included in the purchase price of the schools and for other expenses
associated with the school purchase.
(3) Cash shortfalls of the Tesseract Private Schools funded by the Company and
charged against the provision for affiliated schools.
-29-
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
3.1 Restated Articles of Incorporation of the Company. (1)
3.2 Amendment of the Restated Articles of Incorporation of the Company. (2)
3.3 By-Laws of the Company. (3)
4.1 Specimen Certificate of Common Stock. (4)
4.2 Share Rights Plan dated September 8, 1993. (5)
10.1* Employment Agreement between the Company and Philip E. Geiger dated
August 10, 1993. (10)
10.2* 1988 Education Alternatives, Inc. Stock Option Plan, as amended.
10.3 Real Property Lease between the Company and Zeller-Minnesota Limited
Partnership dated October 30, 1992. (7)
10.4 Agreement between the Company and Tesseract Development Company II
dated January 14, 1989. (14)
10.5 Teaming Agreement between the Company, Johnson Controls World
Services Inc. and KPMG Peat Marwick dated December 5, 1991. (8)
10.6* Employment Agreement between the Company and John T. Golle dated
January 1, 1991. (11)
10.7* Employment Agreement between the Company and Mable E. Gaskins dated
January 20, 1992. (12)
10.8* Amendment to Employment Agreement between the Company and John T.
Golle dated September 8, 1993. (9)
10.9* 1992 Education Alternatives, Inc. Long-Term Executive Stock Option
Plan, as amended. (6)
10.10* Amendment to Employment Agreement between the Company and John T.
Golle dated March 20, 1992. (15)
10.11* Employment Agreement between the Company and Gerald A. Haugen dated
January 15, 1996. (13)
11 Statement re Computation of Per Share Earnings (Loss).
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule (EDGAR version only).
------------------------------
* Management contract or compensatory plan or arrangement.
<PAGE>
(1) Incorporated herein by reference to Exhibit 3.2 to the Company's
Amendment No. 1 to Form S-18 Registration Statement (Registration Number
33-39481-C).
(2) Incorporated herein by reference to the same numbered Exhibit to the
Company's Amendment No. 1 to Form S-1 Registration Statement
(Registration Number 33-46791).
(3) Incorporated herein by reference to the same numbered Exhibit to the
Company's Form S-18 Registration Statement (Registration Number 33-39481-
C).
(4) Incorporated herein by reference to the same numbered Exhibit to the
Company's Amendment No. 1 to Form S-18 Registration Statement
(Registration Number 33-39481-C).
(5) Incorporated herein by reference to the same numbered Exhibit to the
Company's Annual Report on Form 10-K for the year ended June 30, 1993.
(6) Incorporated herein by reference to Exhibit Number 10.26 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1993.
(7) Incorporated herein by reference to Exhibit 10.10 to the Company's Form
S-1 Registration Statement (Registration Number 33-59698).
(8) Incorporated herein by reference to Exhibit 10.12 to the Company's Form
S-1 Registration Statement (Registration Number 33-46791).
(9) Incorporated herein by reference to Exhibit 10.28 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1993.
(10) Incorporated herein by reference to Exhibit 10.2 to the Company's Form
10-Q for the quarter ended December 31, 1994.
(11) Incorporated herein by reference to Exhibit 10.17 to the Company's
Amendment No. 1 to Form S-18 Registration Statement (Registration Number
33-39481-C).
(12) Incorporated herein by reference to Exhibit 10.18 to the Company's
Amendment No. 1 to Form S-1 Registration Statement (Registration Number
33-46791).
(13) Incorporated herein by reference to Exhibit 10 to the Company's Form 10-Q
for the quarter ended December 31, 1995.
(14) Incorporated herein by reference to Exhibit 10.11 to the Company's to
Form S-18 Registration Statement (Registration Number 33-39481-C).
(15) Incorporated herein by reference to Exhibit 10.24 to Amendment No. 2 to
the Company's Form S-1 Registration Statement (Registration Number 33-
46791).
<PAGE>
1988 EDUCATION ALTERNATIVES, INC. STOCK OPTION PLAN
1. PURPOSE OF PLAN. The purpose of this 1988 Education
Alternatives, Inc. Stock Option Plan (the "Plan"), is to promote the interests
of Education Alternatives, Inc., a Minnesota corporation (the "Company"), and
its shareholders by providing personnel of the Company and its subsidiaries with
an opportunity to acquire a proprietary interest in the Company and thereby
develop a stronger incentive to put forth maximum effort for the continued
success and growth of the Company and its subsidiaries. In addition, the
opportunity to acquire a proprietary interest in the Company will aid in
attracting and retaining key personnel of outstanding ability.
2. ADMINISTRATION OF PLAN. This Plan shall be administered by a
committee of two or more directors (the "Committee") appointed by the Company's
board of directors (the "Board"). No director shall serve as a member of the
Committee unless such director shall be a "disinterested person" as that term is
defined in Rule 16b-3(c), promulgated under the Securities Exchange Act of 1934,
as amended (the "Act"), or any successor statute or regulation comprehending the
same subject matter. A majority of the members of the Committee shall
constitute a quorum for any meeting of the Committee, and the acts of a majority
of the members present at any meeting at which a quorum is present or the acts
unanimously approved in writing by all members of the Committee shall be the
acts of the Committee. Subject to the provisions of this Plan, the Committee
may from time to time adopt such rules for the administration of this Plan as it
deems appropriate. The decision of the Committee on any matter affecting this
Plan or the rights and obligations arising under this Plan or any option granted
hereunder, shall be final, conclusive and binding upon all persons, including
without limitation the Company, shareholders, employees and optionees. To the
full extent permitted by law, no member of the Committee shall be liable for any
action or determination taken or made in good faith with respect to this Plan or
any option granted hereunder.
Notwithstanding any contrary provisions of this Plan, the Committee
shall have no discretion with respect to the granting of options to any Outside
Director (as hereinafter defined) or to alter or amend any terms, conditions or
eligibility requirements of an option granted or to be granted to any Outside
Director under this Plan, it being understood that the granting and terms,
conditions and eligibility requirements of such options are governed solely by
the provisions set forth in this Plan pertaining thereto.
3. SHARES SUBJECT TO PLAN. The shares that may be made subject to
options granted under this Plan shall be authorized and unissued shares of
Common Stock (the "Common Shares") of the Company, par value $.01 per share, and
they shall not exceed 1,000,000 in the aggregate, except that, if any option
lapses or terminates for any reason before such option has been completely
exercised, the Common Shares covered by the unexercised portion of such option
may again be made subject to options granted under this Plan. Appropriate
adjustments in the number of shares and in the purchase price per share may be
made by the Committee in its sole discretion to give effect to adjustments made
in the number of outstanding Common Shares of the Company through a merger,
consolidation, recapitalization, reclassification, combination, stock dividend,
<PAGE>
stock split or other relevant change, provided that fractional shares shall be
rounded to the nearest whole share.
4. ELIGIBLE PARTICIPANTS. Options may be granted under this Plan to
any employee of the Company or any subsidiary thereof, including any such
employee who is also an officer or director of the Company or any subsidiary
thereof. Nonstatutory stock options, as defined in paragraph 5(a) hereof, shall
be granted to directors of the Company who are not employees of the Company or
any subsidiary thereof (the "Outside Directors") in accordance with paragraph 6
hereof and may also be granted to other individuals or entities who are not
"employees" but who provide services to the Company or a parent or subsidiary
thereof in the capacity of an advisor or consultant. Options granted to Outside
Directors shall have the terms and conditions specified in paragraph 6 and
elsewhere in this Plan (other than paragraph 5) and options granted to employees
and other individuals or entities shall have the terms and conditions specified
in paragraph 5 and elsewhere in this Plan (other than paragraph 6). References
herein to "employment" and similar terms shall include the providing of services
in any such capacity or as a director.
5. TERMS AND CONDITIONS OF EMPLOYEE OPTIONS.
(a) Subject to the terms and conditions of this Plan (other than
paragraph 6), the Committee may, from time to time prior to September 30, 1998,
grant to such eligible employees as the Committee may determine options to
purchase such number of Common Shares of the Company on such terms and
conditions as the Committee may determine. In determining the employees to whom
options shall be granted and the number of Common Shares to be covered by each
option, the Committee may take into account the nature of the services rendered
by the respective employees, their present and potential contributions to the
success of the Company, and such other factors as the Committee in its sole
discretion shall deem relevant. The date and time of approval by the Committee
of the granting of an option shall be considered the date and the time of the
grant of such option. The Committee in its sole discretion may designate
whether an option is to be considered an "incentive stock option" (as that term
is defined in Section 422A of the Internal Revenue Code of 1986, as amended, or
any amendment thereto (the "Code")) or a "nonstatutory stock option" (an option
granted under this Plan that is not intended to be an "incentive stock option").
The Committee may grant both incentive stock options and nonstatutory stock
options to the same individual. However, if an incentive stock option and a
nonstatutory stock option are awarded simultaneously, such options shall be
deemed to have been awarded in separate grants, shall be clearly identified, and
in no event shall the exercise of one such option affect the right to exercise
the other. To the extent that the aggregate Fair Market Value (as defined in
paragraph 5(c)) of Common Shares with respect to which incentive stock options
(determined without regard to this sentence) are exercisable for the first time
by any individual during any calendar year (under all plans of the Company and
its parent and subsidiary corporations) exceeds $100,000, such options shall be
treated as nonstatutory stock options.
(b) The purchase price of each Common Share subject to an option
granted pursuant to this paragraph 5 shall be fixed by the Committee. For
nonstatutory stock options, such purchase price may be set at not less than 85%
of the Fair Market Value of a Common Share on
-2-
<PAGE>
the date of grant. For incentive stock options, such purchase price shall be no
less than 100% of the Fair Market Value of a Common Share on the date of grant,
provided that if such incentive stock option is granted to an employee who owns,
or is deemed under Section 425(d) of the Code to own, at the time such option is
granted, stock of the Company (or of any parent or subsidiary of the Company)
possessing more than 10% of the total combined voting power of all classes of
stock therein (a "10% Shareholder"), such purchase price shall be no less than
110% of the Fair Market Value of a Common Share on the date of grant.
(c) For purposes of this Plan, the "Fair Market Value" of a Common
Share at a specified date shall, unless otherwise expressly provided in this
Plan, means the closing sale price of a Common Share on the date immediately
preceding such date or, if no sale of such shares shall have occurred on that
date, on the next preceding day on which a sale of such shares occurred, on the
Composite Tape for New York Stock Exchange listed shares or, if such shares are
not quoted on the Composite Tape for New York Stock Exchange listed shares on
the National Association of Securities Dealers, Inc. Automated Quotation
System/National Market System or any similar system then in use or, if such
shares are not included in the National Association of Securities Dealers, Inc.
Automated Quotation System/National Market System or any similar system then in
use, the mean between the closing "bid" and the closing "asked" quotation of
such a share on the date immediately preceding the date as of which such Fair
Market Value is being determined, or, if no closing bid or asked quotation is
made on that date, on the next preceding day on which a quotation is made, on
the National Association of Securities Dealers, Inc. Automated Quotation System
or any similar system then in use, provided that if the shares in question are
not quoted on any such system, Fair Market Value shall be what the Committee
determines in good faith to be 100% of the fair market value of such a share as
of the date in question. Notwithstanding anything stated in this paragraph 5,
if the applicable securities exchange or system has closed for the day by the
time the determination is being made, all references in this paragraph to the
date immediately preceding the date in question shall be deemed to be references
to the date in question.
(d) Each option agreement provided for in paragraph 14 hereof shall
specify when each option granted under this Plan shall become exercisable.
(e) Each option granted pursuant to this paragraph 5 and all rights
to purchase shares thereunder shall cease on the earliest of:
(i) ten years after the date such option is granted (or in the
case of an incentive stock option granted to a 10% Shareholder, five years
after the date such option is granted) or on such date prior thereto as may
be fixed by the Committee on or before the date such option is granted;
(ii) the expiration of the period after the termination of the
optionee's employment within which the option is exercisable as specified
in paragraph 8(b) or 8(c), whichever is applicable; or
(iii) the date, if any, fixed for cancellation pursuant to
paragraph 9 of this Plan.
-3-
<PAGE>
In no event shall any option be exercisable at any time after its original
expiration date. When an option is no longer exercisable, it shall be deemed to
have lapsed or terminated and will no longer be outstanding.
6. TERMS AND CONDITIONS OF OUTSIDE DIRECTOR OPTIONS.
(a) Subject to the terms and conditions of this Plan (other than
paragraph 5), the Committee shall grant options to each Outside Director, on the
terms and conditions set forth in this paragraph 6. During the term of this
Plan, and provided that sufficient Common Shares are available pursuant to
paragraph 3:
(i) each person who is such an Outside Director on January 12,
1996 shall be granted a nonstatutory stock option. The date of grant for
such options shall be January 12, 1996. The number of Common Shares
covered by each such option shall be 30,000;
(ii) each person who is such an Outside Director at the
conclusion of each Annual Meeting of Shareholders shall be granted a
nonstatutory stock option on the date of such Annual Meeting of
Shareholders. The date of such Annual Meeting of Shareholders also shall
be the date of grant for options granted pursuant to this
subparagraph 6(a)(ii). The number of Common Shares covered by each such
option shall be 10,000;
(iii) each person who is elected to be an Outside Director
between Annual Meetings of Shareholders shall be granted a nonstatutory
stock option. The date such person is elected to be an Outside Director of
the Company (the "Date of Election") by the Board shall be the date of
grant for such options granted pursuant to this subparagraph 6(a)(iii).
The number of Common Shares covered by each such option shall be 10,000
multiplied by a fraction, the numerator of which shall be 12 minus the
number of whole 30-day months that have elapsed from the date of the most
recent Annual Meeting of Shareholders to the Date of Election of such
Outside Director, and the denominator of which shall be 12.
(b) The purchase price of each Common Share subject to an option
granted to an Outside Director pursuant to this paragraph 6 shall be the Fair
Market Value of a Common Share on the date of grant.
(c) Subject to the provisions of subparagraph 6(d) hereof, any option
granted to an Outside Director pursuant to subparagraph 6(a) shall vest and
become exercisable on the earlier of (x) one year after the date of grant or
(y) the date of the first Annual Meeting of Shareholders following the date of
grant if the Outside Director to whom the option was granted does not stand for
re-election at such Annual Meeting of Shareholders.
-4-
<PAGE>
(d) Each option granted to an Outside Director pursuant to this
paragraph 6 and all rights to purchase shares thereunder shall terminate on the
earliest of:
(i) ten years after the date such option is granted;
(ii) the expiration of the period specified in paragraph 8(b) or
8(c), whichever is applicable, after an Outside Director ceases to be a
director of the Company; or
(iii) the date, if any, fixed for cancellation pursuant to
paragraph 9 of this Plan.
In no event shall such option be exercisable at any time after its original
expiration date. When an option is no longer exercisable, it shall be deemed to
have lapsed or terminated and will no longer be outstanding.
7. MANNER OF EXERCISING OPTIONS. A person entitled to exercise an
option granted under this Plan may, subject to its terms and conditions and the
terms and conditions of this Plan, exercise it in whole at any time, or in part
from time to time, by delivery to the Company at its principal executive office,
to the attention of its Chief Financial Officer, of written notice of exercise,
specifying the number of shares with respect to which the option is being
exercised, accompanied by payment in full of the purchase price of the shares to
be purchased at the time. The purchase price of each share on the exercise of
any option shall be paid in full in cash (including check, bank draft or money
order) at the time of exercise or, at the discretion of the holder of the
option, by delivery to the Company of unencumbered Common Shares having an
aggregate Fair Market Value on the date of exercise equal to the purchase price,
or by a combination of cash and such unencumbered Common Shares; provided,
however, that no optionee shall be permitted to pay any portion of the purchase
price with Common Shares if the Committee believes that payment in such manner
could have an adverse effect on the Company's financial statements. No shares
shall be issued until full payment therefor has been made, and the granting of
an option to an individual shall give such individual no rights as a shareholder
except as to shares issued to such individual.
8. TRANSFERABILITY AND TERMINATION OF OPTIONS.
(a) During the lifetime of an optionee, only such optionee or his or
her guardian or legal representative may exercise options granted under this
Plan. No option granted under this Plan shall be assignable or transferable by
the optionee otherwise than by will or the laws of descent and distribution or
pursuant to a qualified domestic relations order as defined by the Code or
Title I of the Employee Retirement Income Security Act ("ERISA"), or the rules
thereunder.
(b) During the lifetime of an optionee, an option may be exercised
only while the optionee is an employee of the Company or of a parent or
subsidiary thereof, and only if such optionee has been continuously so employed
since the date the option was granted, except that:
-5-
<PAGE>
(i) an option granted to an individual who is not an Outside
Director shall continue to be exercisable for three months after
termination of such individual's employment but only to the extent that the
option was exercisable immediately prior to such individual's termination
of employment, and an option granted to an individual who is an Outside
Director shall continue to be exercisable after such Outside Director
ceases to be a director of the Company but only to the extent that the
option was exercisable immediately prior to such Outside Director's ceasing
to be a director;
(ii) in the case of an employee who is disabled (within the
meaning of Section 22(e)(3) of the Code) while employed, such individual or
his or her legal representative may exercise the option within one year
after termination of such individual's employment; and
(iii) as to any individual whose termination occurs following
a declaration pursuant to paragraph 9 of this Plan, such individual may
exercise the option at any time permitted by such declaration.
(c) An option may be exercised after the death of the optionee by
such individual's legal representatives, heirs or legatees, but only within one
year after the death of such optionee.
(d) In the event of the disability (within the meaning of Section
22(e)(3) of the Code) or death of an optionee, any option held by such
individual or his or her legal representative that was not previously
exercisable shall become immediately exercisable in full if the disabled or
deceased individual shall have been continuously employed by the Company or a
parent or subsidiary thereof between the date such option was granted and the
date of such disability, or, in the event of death, a date not more than three
months prior to such death.
9. DISSOLUTION, LIQUIDATION, MERGER. In the event of (a) a proposed
merger or consolidation of the Company with or into any other corporation,
regardless of whether the Company is the surviving corporation, unless
appropriate provision shall have been made for the protection of the outstanding
options granted under this Plan by the substitution, in lieu of such options, of
options to purchase appropriate voting common stock (the "Survivor's Stock") of
the corporation surviving any such merger or consolidation or, if appropriate,
the parent corporation of the Company or such surviving corporation, or,
alternatively, by the delivery of a number of shares of the Survivor's Stock
which has a Fair Market Value as of the effective date of such merger or
consolidation equal to the product of (i) the excess of (x) the Event Proceeds
per Common Share (as hereinafter defined) covered by the option as of such
effective date, over (y) the option price per Common Share, times (ii) the
number of Common Shares covered by such option, or (b) the proposed dissolution
or liquidation of the Company (such merger, consolidation, dissolution or
liquidation being herein called an "Event"), the Committee shall declare, at
least ten days prior to the actual effective date of an Event, and provide
written notice to each optionee of the declaration, that each outstanding
option, whether or not then exercisable, shall be cancelled at the time of, or
immediately prior to the occurrence of, the Event (unless it shall have been
exercised prior to the occurrence of the Event) in exchange for payment to each
optionee, within ten days after the Event,
-6-
<PAGE>
of cash equal to the amount (if any), for each Common Share covered by the
cancelled option, by which the Event Proceeds per Common Share (as hereinafter
defined) exceeds the exercise price per Common Share covered by such option. At
the time of the declaration provided for in the immediately preceding sentence,
each option shall immediately become exercisable in full and each optionee shall
have the right, during the period preceding the time of cancellation of the
option, to exercise his or her option as to all or any part of the Common Shares
covered thereby. Each outstanding option granted pursuant to this Plan that
shall not have been exercised prior to the Event shall be cancelled at the time
of, or immediately prior to, the Event, as provided in the declaration, and this
Plan shall terminate at the time of such cancellation, subject to the payment
obligations of the Company provided in this paragraph 9. For purposes of this
paragraph, "Event Proceeds per Common Share" shall mean the cash plus the fair
market value, as determined in good faith by the Committee, of the non-cash
consideration to be received per Common Share by the shareholders of the Company
upon the occurrence of the Event.
10. SUBSTITUTION OPTIONS. Options may be granted under this Plan
from time to time in substitution for stock options held by employees of other
corporations who are about to become employees of the Company or a subsidiary of
the Company, or whose employer is about to become a subsidiary of the Company,
as the result of a merger or consolidation of the Company or a subsidiary of the
Company with another corporation, the acquisition by the Company or a subsidiary
of the Company of all or substantially all the assets of another corporation or
the acquisition by the Company or a subsidiary of the Company of at least 50% of
the issued and outstanding stock of another corporation. The terms and
conditions of the substitute options so granted may vary from the terms and
conditions set forth in this Plan to such extent as the Board at the time of the
grant may deem appropriate to conform, in whole or in part, to the provisions of
the stock options in substitution for which they are granted, but with respect
to stock options which are incentive stock options, no such variation shall be
permitted which affects the status of any such substitute option as an incentive
stock option under Section 422A of the Code.
11. TAX WITHHOLDING. Delivery of Common Shares upon exercise of any
nonstatutory stock option granted under this Plan shall be subject to any
required withholding taxes. A person exercising such an option may, as a
condition precedent to receiving the Common Shares, be required to pay the
Company a cash amount equal to the amount of any required withholdings. In lieu
of all or any part of such a cash payment, the Committee may, but shall not be
required to, permit the individual to elect to cover all or any part of the
required withholdings, and to cover any additional withholdings up to the
amount needed to cover the individual's full FICA and federal, state and local
income tax liability with respect to income arising from the exercise of the
option, through a reduction of the number of Common Shares delivered to the
person exercising the option or through a subsequent return to the Company of
shares delivered to the person exercising the option; provided, however, that
the Committee is required to permit an Outside Director to make such an
election. Any such election by an individual who is subject to the reporting
requirements of Section 16 of the Act (a "Section 16 Individual"), also is
subject to the following:
(a) Any such election by a Section 16 Individual may be made only
during certain specified time periods, as follows:
-7-
<PAGE>
(i) the election may be made during the period beginning on the
third business day following the date of public release of the Company's
quarterly or annual financial statements and ending on the twelfth business
day following such date of public release; or
(ii) the election may be made at least six months prior to the
date as of which the amount of tax to be withheld is determined;
provided, however, an election by such a person pursuant to clause (i) or (ii)
may not be made within six months of the date of grant of the option being
exercised unless death or disability of the individual to whom the option was
granted occurs during said six-month period; and
(b) The Committee's approval of such an election by a Section 16
Individual, if given, may be granted in advance, but is subject to revocation by
the Committee at any time; provided, however, that such an election by a
Section 16 Individual who is an Outside Director is not subject to approval nor
to revocation by the Committee. Once such an election is made by a Section 16
Individual, he or she may not revoke it.
12. TERMINATION OF EMPLOYMENT. Neither the transfer of employment of
an individual to whom an option is granted between any combination of the
Company, a parent corporation or a subsidiary thereof, nor a leave of absence
granted to such individual and approved by the Committee, shall be deemed a
termination of employment for purposes of this Plan. The terms "parent" or
"parent corporation" and "subsidiary" as used in this Plan shall have the
meaning ascribed to "parent corporation" and "subsidiary corporation",
respectively, in Sections 425(e) and (f) of the Code.
13. OTHER TERMS AND CONDITIONS. The Committee shall have the power,
subject to the terms and conditions of paragraph 6 hereof and subject to the
other limitations contained herein, to fix any other terms and conditions for
the grant or exercise of any option under this Plan. Nothing contained in this
Plan, or in any option granted pursuant to this Plan, shall confer upon any
employee holding an option any right to continued employment by the Company or
any parent or subsidiary of the Company or limit in any way the right of the
Company or any such parent or subsidiary to terminate an employee's employment
at any time.
14. OPTION AGREEMENTS. All options granted under this Plan shall be
evidenced by a written agreement in such form or forms as the Committee may from
time to time determine, which agreement shall, among other things, designate
whether the options being granted thereunder are nonstatutory stock options or
incentive stock options under Section 422A of the Code.
15. AMENDMENT AND DISCONTINUANCE OF PLAN. The Board may at any time
amend, suspend or discontinue this Plan; provided, however, that the Board shall
not amend paragraph 6 hereof more than once every six months other than to
comport with changes in the Code, ERISA, or the rules thereunder; and provided,
further, that no amendment by the Board shall, without further approval of the
shareholders of the Company, if required in order for the Plan to continue to
satisfy the conditions of Rule 16b-3 promulgated under the Act, or any successor
-8-
<PAGE>
statute or regulation comprehending the same subject matter or to meet the
requirements of the Code:
(a) change the class of employees eligible to receive options;
(b) except as provided in paragraph 3 hereof, increase the total
number of Common Shares of the Company which may be made subject to options
granted under this Plan;
(c) except as provided in paragraph 3 hereof, change the minimum
purchase price for the exercise of an option;
(d) increase the maximum period during which options may be exercised
or otherwise materially increase the benefits accruing to participants under
this Plan;
(e) extend the term of this Plan beyond September 30, 1998; or
(f) change the terms, conditions or eligibility requirements of an
option granted or, subject to the right of the Board to discontinue this Plan,
to be granted to each Outside Director under this Plan.
No amendment to this Plan shall, without the consent of the holder of the
option, alter or impair any options previously granted under this Plan.
16. EFFECTIVE DATE. This Plan shall be effective upon approval
thereof by the Board; provided, however, that no option granted under this Plan
may be exercised prior to such time, if any, as the shareholders of the Company
shall have approved this Plan at a duly held shareholders meeting of the
Company.
M1:0061260.02
-9-
<PAGE>
STATEMENT RE COMPUTATION OF
PER SHARE EARNINGS (LOSS)
EDUCATION ALTERNATIVES, INC.
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------
1996 1995 1994
------------ ------------ ----------
<S> <C> <C> <C>
Weighted average number of
shares outstanding 7,477,000 6,822,000 6,377,000
Effect of dilutive stock options and
warrants, based on the treasury stock method - - 1,408,000
------------ ------------ ----------
Weighted average shares outstanding used
to compute net earnings (loss) per share 7,477,000 6,822,000 7,785,000
------------ ------------ ----------
------------ ------------ ----------
Net earnings (loss) $(9,507,000) $(7,443,000) $2,534,000
------------ ------------ ----------
------------ ------------ ----------
Net earnings (loss) per share $ (1.27) $ (1.09) $ .33
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
Stock options and warrants have been excluded from the loss per share
computation as their effects are antidilutive.
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accounts, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated September 24, 1996, into the
Company's previously filed Registration Statement File No.'s 33-47486, 33-59646,
and 33-87456.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
September 27, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANTS FORM 10-K FOR THE YEAR ENDED JUNE 30, 1996
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 15,391
<SECURITIES> 2,221
<RECEIVABLES> 495
<ALLOWANCES> (53)
<INVENTORY> 0
<CURRENT-ASSETS> 18,416
<PP&E> 5,384
<DEPRECIATION> (1,012)
<TOTAL-ASSETS> 30,110
<CURRENT-LIABILITIES> 5,489
<BONDS> 309
0
0
<COMMON> 75
<OTHER-SE> 24,237
<TOTAL-LIABILITY-AND-EQUITY> 30,110
<SALES> 0
<TOTAL-REVENUES> 115,090
<CGS> 0
<TOTAL-COSTS> 117,762
<OTHER-EXPENSES> 5,061
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 249
<INCOME-PRETAX> (9,507)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,507)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,507)
<EPS-PRIMARY> (1.27)
<EPS-DILUTED> (1.27)
</TABLE>
