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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, 1997
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.
(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
------------------------
(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, 1997, was $28,116,000,
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, 1997, there were issued and outstanding 7,490,838 shares of
Common Stock, par value $.01 per share.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Education Alternatives, Inc. (the "Company") is in the business of owning and
operating proprietary private preschool, elementary, and secondary schools
utilizing its TesseracT educational system and seeks to expand its educational
offering through the operation of public charter schools, the growth of its
preschool activities, and the addition of post-secondary programs to become a
comprehensive education management organization. The Company currently owns and
operates five private schools, located in Minnesota, Arizona, Indiana, and New
Jersey.
The Company's strategy is to provide a proprietary alternative of high quality
educational programs from preschool through adult education. To achieve its
objective, the Company plans to build on its experience and expertise both in
the private and public school sectors. The Company's strategy to take advantage
of the significant growth opportunities in the education market has three
components. First, the Company plans to continue to leverage its ten years of
experience in the private school sector by opening private preschool,
elementary, and secondary schools utilizing the Company's TesseracT educational
system in select geographic markets. Second, the Company plans to actively
pursue opportunities to operate public charter schools, which the Company
believes offers students and parents an alternative within the public system.
Finally, the Company plans to grow through strategic acquisitions of education
providers, particularly those offering preschool and post-secondary education
programs. As evidence of this final strategic component, the Company announced
on September 2, 1997, its proposed acquisition of Sunrise Educational Services,
Inc., a Scottsdale, Arizona, based child care provider operating approximately
35 preschool centers, primarily in the state of Arizona.
GENERAL
The Company was originally organized to design, develop, market, and operate a
network of for-profit, private preschool and elementary schools utilizing the
TesseracT teaching philosophy. In September 1987, the Company began operation
of its first school in Eagan, Minnesota, and a year later, opened its second
school in Paradise Valley, Arizona (the "TesseracT Private Schools"). Through
its affiliation with the TesseracT Private Schools, the Company has 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. 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. It has been developed and refined during
the last ten years at the Tesseract Private Schools. In the fall of fiscal
1998, the Company will add a middle school at its Eagan, Minnesota, location and
will enter the private high school market with the opening of college
preparatory high schools in South Bend, Indiana, and Mays Landing, New Jersey.
The Company believes that its TesseracT educational system can be implemented in
other elementary and secondary schools throughout the United States.
In 1989, the Company shifted 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 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
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compliance with teacher union contracts. Johnson Controls performed services as
a subcontractor in noninstructional areas, including the operation, maintenance,
and management of the school buildings, and Peat Marwick performed services as a
subcontractor in the areas of financial management, systems, and controls. 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 educational 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. The Company subsequently entered into
management or consulting contracts with three additional schools in the
Baltimore District under similar arrangements. Under these contracts, the
Company was responsible for payment of all expenses related to the operation of
the schools and bore the risk that these expenses could exceed contract
revenues. These management and consulting contracts could be terminated by the
Baltimore District for any reason upon ninety days' notice to the Company.
During the summer of 1995, the Baltimore District proposed to pay the Company an
amount significantly less than the contracted amount to operate the twelve
schools for school year 1996, citing budgetary issues. When the Company refused
to accept this proposal, the Baltimore Board of School Commissioners voted to
cancel the management and consulting contracts with the Company. 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 would
realize a profit for its services only if it generated cost savings in the
delivery and administration of educational, financial, and noninstructional
services. The Hartford Board of Education had the right to terminate the
contract for any reason upon ninety days' notice to the Company. Through
December 1995, the Company invested approximately $12 million to repair school
facilities, purchase technology, and make other school improvements. When
Hartford officials refused to reimburse the Company for such expenditures, the
Company notified the Board of Education and the city of Hartford that it would
stop all services unless payment was received promptly in accordance with the
contractual terms. 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.
Due to the Company's experiences with public school contracts and the related
restrictions and problems and the rapidly evolving acceptance of a "private"
alternative, the Company has made the strategic decision to focus its attention
and resources on expanding its private school business and entering the growing
public charter school market. These two markets will give the Company the
opportunity to open schools utilizing the following criteria: the Company will
only operate schools in which it can use its own employees and its own proven
curriculum; contracts to operate schools must be granted directly by a state
designated agency, with full funding and must be for an extended period of time,
with cancellation due only to non-performance; and attendance at the schools
must be by choice.
Public charter schools are generally autonomous entities authorized by the state
or locality to conduct operations independent from the surrounding public school
district. Various state laws provide that charters can be granted by state
boards of education, public universities, and local districts which can also
revoke a charter if the school fails to meet its obligations under the charter.
Although charter operators are required to meet certain educational standards,
they often will be free from various state and local regulations. Therefore, in
many states, charter schools can hire their own teachers and other staff, use
their own curriculum, and manage their operations independent from public school
district bureaucracy.
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Whereas traditional public schools often hold near monopolies on education,
charters must attract students based on their educational approach and program
offerings. Charters compete for students, with a per-pupil allocation of funds
generally comparable, although sometimes less than that available to other
public schools. Charters can only succeed if they deliver an education of
sufficiently high quality to attract students, while keeping costs at a level
that generates a reasonable return to the operator.
Presently, approximately 30 states have enacted some form of charter legislation
with over 700 charter schools currently in operation. The charter school
application and approval process is highly competitive, with many individuals,
non-profit organizations, private and for-profit companies all pursuing a
limited number of available charters. In addition, traditional public schools
and the teachers' unions have provided strong opposition to the charter movement
in many states. During fiscal 1998, the Company will be submitting applications
to operate charter schools in various states. However, there can be no
assurances that the Company will be successful in obtaining all or a portion of
the charters requested. In 1997, the Company did receive a charter from the
state of Arizona to open and operate 12 charter schools. However, the eventual
opening of any charter school is dependant on various factors, including the
receipt of adequate state funding and the availability of school facilities.
The level of capital funding in Arizona is presently inadequate to provide for
facility costs and therefore, the Company has deferred the opening of any
charter schools in Arizona. The Company believes that in selected high growth
communities, it may be able to partner with real estate developers who will
subsidize the Company's capital costs in return for the Company's agreement to
operate a public charter school in a new housing development. The Company
believes that funding levels in various charter states will allow the Company to
open and operate both elementary and secondary public charter schools that will
be successful, both educationally and financially.
The Company has successfully operated the TesseracT Private Schools for over ten
years and plans to expand its private school base. In fiscal 1998, it will add
a middle school at its Eagan, Minnesota, location and will enter the private
high school market with the opening of college preparatory high schools in South
Bend, Indiana, and Mays Landing, New Jersey. The private school market faces
the same type of competition as charter schools, except that ownership can be
limited due to the higher capital required to open a new private school. In
addition, non-profit and religious organizations will typically offer private
education at a reduced tuition level than that offered by the Company.
In addition to the significant capital requirements of acquiring a satisfactory
school facility and providing all necessary improvements, fixtures, equipment,
and furniture, there will likely be a long lead time required to establish a new
private school's reputation and attract a sufficient number of students willing
to pay the private school tuition. Accordingly, the Company anticipates that
its new private schools will generally take two to three years to operate
profitably. Public charter schools offer a more immediate opportunity for
financial return since no tuition is required for attendance. However, the
ultimate profitability of a charter school is roughly one-half of a fully
occupied private school.
ACQUISITIONS; RECENT DEVELOPMENTS
The Company also plans on expanding its educational offering to the preschool
and post-secondary markets through the acquisition of selected educational
providers.
On September 2, 1997, the Company signed a definitive agreement to acquire
Sunrise Educational Services, Inc. ("Sunrise") through a merger of Sunrise
into a wholly-owned subsidiary of the Company. In addition to operating
approximately 35 preschools, Sunrise has expanded into the operation of
private schools and has a management contract to operate public charter
schools that have recently opened at approximately 15 of its Arizona centers.
Sunrise reported revenues of $9,900,000 and net earnings of $235,000 for the
nine months ended April 30, 1997. The proposed acquisition requires the
approval of both shareholder groups and is expected to be completed by
January 1998.
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INDUSTRY AND COMPETITION
Annual spending on education in the United States is estimated to be in excess
of $670 billion. Of the $320 billion spent on kindergarten through twelfth
grade, less than 3% is spent at for-profit, private schools. In contrast, of
the $30 billion spent on preschool education, more than a third is spent with
private, for-profit companies.
While price is an important factor in competition, the Company believes that
other important factors include offering professionally developed
educational programs, well-equipped facilities, trained teachers, and other
related services. Particularly in the preschool market, many of these
services are not offered by the Company's competition.
Competition in the Company's markets is highly fragmented. For school age
children, the Company competes with other for-profit private schools, with non-
profit schools and, most importantly, with the public school system. The
Company is not aware of any secular competitor which currently competes beyond a
regional level. However, the Company anticipates that, given the perceived
potential of the education market, well-financed competition may emerge,
including possible competition from the large for-profit child care companies.
The Company believes that the structure of these larger companies may make it
difficult for them to implement and develop programs which are based upon
curriculum-intensive goals, which would require significant cultural changes.
For preschool age children, the Company competes with other curriculum-based
preschools. Also seeking enrollments of preschool age children are large for-
profit child care companies, as well as other child care providers (including
in-home individual child care providers and corporations that provide child care
for their employees). However, the Company believes that persons in its target
market - parents seeking curriculum-based programs for their children - seek
services not provided by these child care providers.
REGULATION
Schools and preschools are subject to a variety of state and local regulations
and licensing requirements. These regulations and licensing requirements vary
greatly from jurisdiction to jurisdiction. Generally, the governmental agencies
review the safety, fitness, and adequacy of the buildings and equipment, the
ratio of staff personnel to enrolled children, the dietary program, the daily
curriculum, compliance with health standards, and the qualifications of the
Company's personnel.
As the Company enters into post-secondary education, the Company will become
subject to the Higher Education Act of 1986, as amended (the "HEA"), in order
for students to participate in Federal Financial Aid programs under Title IV of
the HEA. The Company will also become subject to the general oversight of the
United States Department of Education ("DOE") and will need to be accredited by
an association recognized by the DOE. The Company will also become subject to
regulation promulgated by applicable state higher education regulatory bodies.
INSURANCE
The Company currently maintains comprehensive general liability insurance,
workers compensation, automobile liability, property, excess umbrella
liability, and student accident insurance. The policies provide for a
variety of coverage and are subject to various limits. Companies involved in
the education and care of children, however, may not be able to obtain
insurance for the total risks inherent in their operations. In particular,
general liability coverage can have reduced limits per claim for child abuse.
The Company carries fire and other casualty insurance on its schools and
liability insurance in amounts which management feels are adequate for its
operations in the foreseeable future.
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SEASONALITY
The Company's TesseracT Private Schools historically have lower operating
revenues in the summer due to lower summer enrollment. The Company seeks to
improve summer results through camps and other programs.
EMPLOYEES
At September 15, 1997, the Company employed approximately 120 employees, of
which 105 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 4,500 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, 1997, 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, 1997, the
Company's common stock was held by approximately 3,300 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,
--------------------------------------------------
1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue $ 4,835 $115,090 $213,582 $34,403 $30,055
Gross profit (loss) 1,082 (2,672) (3,745) 3,876 2,983
Net earnings (loss) 566 (9,507) (7,443) 2,534 1,119
Net earnings (loss) per share $ .08 $ (1.27) $ (1.09) $ .33 $ .18
Weighted average shares outstanding 7,501 7,477 6,822 7,785 6,352
<CAPTION>
June 30,
--------------------------------------------------
1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit) $ 20,054 $ 12,927 $ (6,986) $ 1,402 $ 8,051
Long-term marketable securities - 7,322 28,972 26,262 27,106
Total assets 29,057 29,684 43,481 34,899 39,639
Long-term debt - 309 636 253 5
Shareholders' equity $ 24,880 $ 24,312 $ 29,825 $29,397 $36,549
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The accompanying consolidated financial statements reflect the operations of
private schools in Eagan, Minnesota, and Paradise Valley, Arizona. The TesseracT
Private Schools were purchased by the Company effective January 1, 1995. Prior
to that time, the schools were operated by the Company under management
agreements.
The accompanying consolidated financial statements for the years ended June 30,
1996 and 1995 also include the results of operations of the Company's public
school management and consulting contracts. 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. The Company subsequently entered into
management or consulting contracts with three additional schools in the
Baltimore District. The management and consulting contracts (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.
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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 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.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1997 AND 1996. Total revenue in 1997
was $4,835,000 compared to $115,090,000 in 1996. The decrease is the result of
the cancellation of the Company's public school management contracts in
Baltimore and Hartford in the third quarter of fiscal 1996. Tuition and other
revenue consists of revenue from the TesseracT Private Schools and consulting
revenue on the Company's private school consulting contracts.
Private school costs and other expenses represent costs incurred in the
operation of the TesseracT Private Schools.
School management expenses in fiscal 1996 relate to costs incurred on the
Baltimore and Hartford school management contracts. These expenses include
charges of $4,255,000 related to costs incurred under the Hartford contract but
not yet reimbursed by the Hartford Board of Education and a charge of $2,000,000
to cover estimated write-offs and shutdown costs associated with the
cancellation of the Baltimore and Hartford contracts. 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. 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 contract.
Selling, general, and administrative expenses in 1997 were $3,784,000 compared
to $5,061,000 in 1996, a decrease of $1,277,000. This decrease reflects a
reduction in personnel due to the cancellation of the public school contracts
during the third quarter of fiscal 1996. In addition, marketing and legal costs
were below prior year levels as the Company focused its resources on public
charter schools and expanding its private school business. These decreases were
offset by start-up costs of $363,000 incurred in connection with the fiscal 1998
opening of private college preparatory high schools in South Bend, Indiana, and
Mays Landing, New Jersey.
Other income in 1997 was $3,268,000 compared to a net expense of $1,774,000 is
fiscal 1996. The current year includes settlement income of $1,250,000 received
from the Company's investment management firm to resolve all remaining issues
relating to the firms management of the Company's investment portfolio and
$650,000 related to the final settlement of issues regarding amounts owed to the
Company under the Hartford contract.
Investment income in 1996 included a charge of $3,400,000 to reflect what the
Company believed was 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 1997 totaled $1,336,000
compared to $1,885,000 in 1996. This decrease is due to lower investment levels
and yields in 1997.
The decrease in interest expense from $249,000 in 1996 to $17,000 in 1997
reflects the retirement of short-term borrowings used to finance the purchase of
the TesseracT Private Schools and capital leases related to the Baltimore
Contract.
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For the year ended June 30, 1997, the Company recorded net earnings of $566,000
or $.08 per share compared to a net loss of $9,507,000 or $1.27 per share in
1996. The change is primarily due to the charges recorded in the prior year on
the Baltimore and Hartford public school management contracts along with the
settlement income recorded in fiscal 1997.
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 fiscal 1996.
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 is related to the termination of the
Hartford and Baltimore school management contracts.
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. 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 contract.
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.
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. Fiscal 1995 included settlement income of
$3,000,000 related to the preliminary settlement between the Company and its
investment management firm over the management of the Company's investment
portfolio and a $3,015,000 loss on the sale of marketable securities.
Investment income in 1996 included a charge of $3,400,000 to reflect what the
Company believed was a permanent impairment in the value of its investment
portfolio and its related decision to liquidate these investments in fiscal
1997. This
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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 investment levels 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.
CAPITAL RESOURCES AND LIQUIDITY
During the year ended June 30, 1997, the Company satisfied its working capital
needs principally from cash on hand at the beginning of the year and from cash
generated from the sale of marketable securities during the year.
Net cash used in operating activities totaled $197,000, primarily due to changes
in current assets and liabilities at June 30, 1997, offset by the earnings
generated during the year. In addition, during the year the Company liquidated
its entire marketable securities portfolio generating proceeds of $9,592,000.
Cash investments in property and equipment totaled $896,000 during 1997,
primarily related to land and building costs incurred in connection with the
addition of a middle school at Eagan, Minnesota.
At June 30, 1997, the Company had working capital of $20,054,000, an increase of
$7,127,000 over the working capital at June 30, 1996. This increase is
primarily due to the sales of marketable securities previously discussed. As
discussed in Note 3, during fiscal 1997, 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 through June 2001 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 is $800,000 for fiscal 1998 and declines each year to
$200,000 in fiscal 2001. The Company will be required to pledge cash or
securities as collateral for this letter of credit.
As discussed in Note 3, during fiscal 1997, the Company reached a final
agreement with Hartford officials on the remaining amounts owed to the Company.
Under the agreement, the Company will receive $3,250,000 in annual installments
of $650,000 over the next five years. These annual payments are being recorded
in income as they are received.
As discussed in Note 15, subsequent to the end of the year, the Company entered
into a definitive agreement to acquire Sunrise Educational Services, Inc.
("Sunrise"). The Company expects to issue shares of common stock and cash to
Sunrise shareholders with a total value of approximately $13,500,000, with the
cash portion not to exceed $4,100,000. In addition, the Company will open
college preparatory high schools in South Bend, Indiana, and Mays Landing, New
Jersey, and a middle school in Eagan, Minnesota, during 1998. The Company
anticipates spending approximately $3,600,000 to acquire, construct, and
renovate facilities and to purchase furniture and equipment for these new
schools.
The Company believes it has sufficient cash on hand to ensure uninterrupted
performance of its operating obligations as currently structured and
anticipated. No assurance can be made, however, that this will remain the case.
- 9 -
<PAGE>
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 directors and executive officers of the Company are as follows:
Name Age Position
------------------------ --- ----------------------------------------
John T. Golle 53 Chairman of the Board of Directors and
Chief Executive Officer
Richard T. Burke (1)(2) 53 Vice Chairman of the Board of Directors
Robert I. Karon (1)(3) 51 Director
Gale R. Mellum (1) 55 Director
John T. Walton (2)(3) 50 Director
Philip E. Geiger, Ph.D. 50 President and Chief Operating Officer
Gerald A. Haugen 56 Chief Financial and Administrative
Officer
- ---------------------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Option Committee
Mr. Golle founded the Company and has been Chairman of the Board and Chief
Executive Officer since its inception.
Mr. Burke was elected Vice Chairman of the Board in November 1992. He is
general partner and Chief Executive Officer of the NHL's Phoenix Coyote hockey
franchise. Prior to this position, Mr. Burke was Chairman and Chief Executive
Officer of United HealthCare Corporation until his retirement in February 1988.
Mr. Burke is a director of United HealthCare Corporation and First Cash, Inc.
Mr. Karon has been a member of the accounting firm of Schweitzer Rubin Karon &
Bremer since 1975.
Mr. Mellum has been a member of the law firm of Faegre & Benson LLP since 1968,
which has acted as general counsel to the Company since its inception.
Mr. Walton has been Chairman of SATLOC, INC., a manufacturer of global
positioning satellite systems for industrial and agricultural application since
March 1994. From July 1983 to March 1994, Mr. Walton was Chairman and Chief
Executive Officer of Corsair Marine, Inc., a sailboat manufacturing company. Mr.
Walton has also served as Vice President of Walton Enterprises II, L.P., a real
estate holding company, since November 1990. Mr. Walton is a director of Wal-
Mart Stores, Inc.
- 10 -
<PAGE>
Dr. Geiger was appointed President of the Company in January 1996 and was
appointed to the additional position of Chief Operating Officer in February
1997. From July 1994 to December 1995, Dr. Geiger served as the Company's New
Jersey Division President. Prior to joining the Company, Dr. Geiger was
Superintendent of Piscataway Township Public Schools, Piscataway, New Jersey,
from July 1991 to June 1994.
Mr. Haugen was appointed Chief Financial and Administrative Officer of the
Company in January 1996. Prior to joining the Company, Mr. Haugen was an
independent business consultant. From August 1989 to July 1993, Mr. Haugen was
Senior Vice President and Chief Financial Officer of Jostens, Inc.
None of the Company's directors or executive officers are related to any other
director or executive officer of the Company.
DIRECTOR COMPENSATION
Members of the Board of Directors receive no cash compensation. The 1988 Plan
provides for the nondiscretionary grant of a nonstatutory stock option to
purchase 10,000 shares of common stock to each non-employee director on the date
of each annual meeting of the Company's shareholders as compensation for
services for the ensuing year. Non-employee directors joining the board between
annual meetings are granted an option to purchase a pro-rata portion of such
number of shares. All non-employee director options have an exercise price
equal to the fair market value of a share of common stock on the date of grant
and become fully exercisable one year after the date of grant. Pursuant to the
approval of an amendment to the Company's 1988 Stock Option Plan at the 1996
Annual Meeting of Shareholders, on November 12, 1996, each non-employee director
received a one-time grant of an option to purchase 30,000 shares of common stock
in exchange for surrendering existing options to purchase a total of 30,000
shares. The purpose of the new grant was to effect a repricing of the existing
options to $4.75 per share. The new grant becomes fully exercisable at the 1997
Annual Meeting.
COMPLIANCE WITH REPORTING REQUIREMENTS
As required by Securities and Exchange Commission rules under Section 16(a) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and based
solely on a review of copies of forms submitted to the Company during and with
respect to the 1997 fiscal year, the Company makes the following disclosure. On
January 31, 1997, Mr. Golle filed a Form 4 which was due on December 10, 1996.
This form disclosed an acquisition of Company securities in November 1996.
- 11 -
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides certain summary information for the fiscal years
ended June 30, 1997, 1996, and 1995 concerning compensation paid or accrued by
the Company to or on behalf of the Company's Chief Executive Officer and the
Company's other executive officers whose total salary and bonus compensation for
fiscal 1997 exceeded $100,000 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
Name and ------------------------ ---------------
Principal Position Fiscal Year Salary Bonus Options Granted
- ------------------ ----------- -------- -------- ---------------
John T. Golle 1997 $325,000 $ -0- -0-
(Chairman and Chief 1996 325,000 -0- 120,000 (3)
Executive Officer) 370,000 (3)
125,000
1995 134,897 100,000 -0-
Philip E. Geiger (1) 1997 200,000 (4) 50,000 5,000
(President and Chief 1996 200,000 (4) -0- 100,000
Operating Officer) 5,000 (3)
Gerald A. Haugen (2) 1997 150,000 75,000 100,000
(Chief Financial and 1996 69,327 50,000 100,000
Administrative Officer)
(1) Dr. Geiger was named an executive officer of the Company on January 1,
1996.
(2) Mr. Haugen's employment with the Company commenced January 15, 1996.
(3) Options granted in fiscal 1996 through the repricing of existing options.
The 120,000 options granted to Mr. Golle were surrendered as part of the
370,000 repriced option grant in January 1996.
(4) Includes a guaranteed bonus of $50,000 paid in equal installments as part
of Dr. Geiger's monthly salary.
EMPLOYMENT AGREEMENTS
On April 19, 1991, the Company entered into an employment agreement with Mr.
Golle which provides that Mr. Golle will receive a base salary of $120,000
annually, or such higher amount as the Company in its discretion may determine
to be appropriate. The initial term of the employment agreement continued until
June 30, 1994, at which time the agreement renewed automatically for successive
one-year terms. The Company may terminate Mr. Golle's employment without cause
by giving 90 days written notice, upon which Mr. Golle would be entitled to
receive his current base salary for nine months plus the pro-rata portion of his
performance bonus, as described below, calculated as of a date 30 days after
such termination. Under the agreement, Mr. Golle may not compete with the
Company for a period of two years after the termination of his employment unless
such termination is involuntary and effected by the Company without cause.
- 12 -
<PAGE>
Effective July 1, 1993, Mr. Golle's employment agreement was amended to change
the terms of the performance bonus. Under the amended employment agreement, for
each fiscal year beginning with 1994, Mr. Golle will receive as a performance
bonus a share of the management bonus pool established by the Compensation
Committee for such year. The amount and the terms of Mr. Golle's share of each
management bonus pool are to be determined by the Compensation Committee in its
discretion.
On August 10, 1993, the Company entered into an employment agreement with Dr.
Geiger which provides that Dr. Geiger will receive a base salary of $150,000
annually, or such higher amount as the Company in its discretion may determine
to be appropriate. In addition, Dr. Geiger will be eligible to receive annual
performance bonuses to be based on the profitability of the Company. The
Company has guaranteed a minimum annual bonus of $50,000 which is paid in equal
installments as part of Dr. Geiger's monthly salary. The Company may terminate
Dr. Geiger's employment without cause by giving 30 days' written notice of
termination, upon which Dr. Geiger would be entitled to receive his regular base
salary for a period of six months. Under the agreement, Dr. Geiger may not
compete with the Company for a period of one year after the termination of his
employment unless such termination is involuntary and effected by the Company
without cause.
On January 15, 1996, the Company entered into an employment agreement with Mr.
Haugen which provides that Mr. Haugen will receive a base salary of $150,000
annually, or such higher amount as the Company in its discretion may determine
to be appropriate. Mr. Haugen shall be eligible to receive annual performance
bonuses to be determined by the Board of Directors and Chief Executive Officer
in annual amounts of at least $50,000, but not to exceed his annual base salary,
based on the achievement of mutually agreed individual and corporate performance
objectives. The Company may terminate Mr. Haugen's employment without cause by
giving 30 days' written notice of termination, upon which Mr. Haugen would be
entitled to receive his regular base salary for a period of six months. Under
the agreement, Mr. Haugen may not compete with the Company for a period of one
year after the termination of his employment unless such termination is
involuntary and effected by the Company without cause.
- 13 -
<PAGE>
STOCK OPTIONS
The following table provides information regarding stock options granted to the
Named Executive Officers during fiscal 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Individual Grants Annual Rates of
--------------------------------------------- Stock Price
Percent of Total Appreciation
Options Granted for Option Term (4)
Options to Employees Exercise Price Expiration -----------------------
Name Granted in Fiscal Year Per Share (3) Date 5% 10%
- ---------------- ----------- ---------------- -------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Philip E Geiger 5,000 (1) 1.9% $ 2.94 8/7/2006 $ 9,245 $ 23,428
Gerald A. Haugen 100,000 (2) 37.4 2.94 8/7/2006 184,895 468,560
</TABLE>
(1) These options were granted under the 1992 Plan and are exercisable in
annual 1/3 increments beginning August 8, 1999.
(2) 50,000 of these options were granted under the 1992 Plan and are
exercisable in annual 1/3 increments beginning August 8, 1999. The
remaining 50,000 options were granted under the 1988 Plan and are
exercisable in annual 1/5 increments beginning August 8, 1996.
(3) The exercise price per share of the options listed in the table are not
less than the fair market value of a share of common stock on the date of
grant, as determined under the 1988 and 1992 Plans.
(4) Potential realizable values shown above represent the potential gains based
upon annual compound stock price appreciation of 5% and 10% from the date
of grant through the full option term. The actual value realized, if any,
on stock option exercises will be dependent upon overall market conditions
and the future performance of the Company and its common stock. There is
no assurance that the actual value realized will approximate the amounts
reflected in this table.
The following table summarizes options exercised during fiscal 1997 and provides
information regarding unexercised options held by the Named Executive Officers
at fiscal year-end.
AGGREGATED OPTION EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR-END OPTION VALUES
Value of Unexercised
Unexercised Options In-the-Money Options
at Fiscal Year End at Fiscal Year End (1)
-------------------------- ---------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
John T. Golle -0- 495,000 $ -0- $ -0-
Philip E. Geiger -0- 110,000 -0- 7,175
Gerald A. Haugen 50,000 150,000 14,350 129,150
(1) Value is based on a share price of $4.375, which was the closing price for
a share of Common Stock on the NASDAQ National Market System on June 30,
1997, minus the exercise price.
No options were exercised by the Named Executive Officers during fiscal 1997.
- 14 -
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of common stock as of September 15, 1997 (unless otherwise noted
below) by (i) each person or entity known by the Company to own beneficially
more than 5% of the outstanding common stock, (ii) each director, (iii) each
executive officer named in the Summary Compensation Table on page 12 of this
Form 10-K, and (iv) all directors and executive officers of the Company as a
group. Except as otherwise noted below, the listed beneficial owner has sole
voting and investment power with respect to such shares and the address of the
listed beneficial owner is that of the Company.
Name and Address Amount and Nature Percent of Common
of Beneficial Owner of Beneficial Ownership Stock Outstanding
- ------------------- ----------------------- -----------------
Perkins Capital Management (1)
730 East Lake Street
Wayzata, MN 55391 811,100 10.8%
Nelkin Capital Management (2)
111 Great Neck Road Suite 304
Great Neck, NY 11021 700,000 9.3%
A. Baron Cass III (3)
5005 LBJ Freeway, LB # 119
Dallas, TX 75244 496,400 6.6%
John T. Golle (4) 346,906 4.5%
Richard T. Burke (5) 325,000 4.3%
John T. Walton (6) 273,333 3.6%
Gale R. Mellum (7) 252,372 3.4%
Robert I. Karon (8) 182,992 2.4%
Gerald A. Haugen (9) 60,000 *
Philip E. Geiger (10) 11,100 *
All directors and executive
officers as a group (7 persons)
(4) (5) (6) (7) (8) (9) (10) 1,451,703 18.2%
- ---------------------------------------
* Represents beneficial ownership of not more than 1% of the outstanding common
stock.
(1) Based on a Schedule 13G filed by Perkins Capital Management ("Perkins") on
February 10, 1997. Perkins reports having sole voting power with respect
to 349,000 shares and sole dispositive power with respect to all shares
listed.
(2) Based on information provided to the Company by Nelkin Capital Management
as of September 9, 1997.
- 15 -
<PAGE>
(3) Based on a Schedule 13D filed by A. Baron Cass III ("Cass") on October 18,
1995. Cass reports having sole voting and investment power with respect to
20,000 shares and shared voting and investment power with respect to
428,400 shares. Cass disclaims beneficial ownership on the remaining
48,000 shares owned by a partner of Cass.
(4) Includes 1,280 shares held by a member of Mr. Golle's immediate family, of
which shares Mr. Golle disclaims beneficial ownership. Does not include
56,285 shares held in five trusts of which Mr. Karon is trustee and the
beneficiaries of which are members of Mr. Golle's immediate family, and
18,310 shares held by the Golle Family Foundation, a charitable
organization. Includes 200,000 shares issuable pursuant to options
exercisable within 60 days.
(5) Includes 100,000 shares issuable pursuant to options exercisable within 60
days.
(6) Includes 10,000 shares owned by a member of Mr. Walton's immediate family,
of which shares Mr. Walton disclaims beneficial ownership. Includes 43,333
shares issuable pursuant to options exercisable within 60 days.
(7) Includes 72,222 shares owned by a member of Mr. Mellum's immediate family,
of which shares Mr. Mellum disclaims beneficial ownership. Includes 10,000
shares held by two trusts of which Mr. Mellum is trustee and the
beneficiaries of which are members of Mr. Mellum's immediate family.
Includes 40,000 shares issuable pursuant to options exercisable within 60
days.
(8) Includes 56,285 shares held by five trusts of which Mr. Karon is trustee
and the beneficiaries of which are members of Mr. Golle's immediate family.
Includes 1,175 shares owned by Schweitzer Rubin Karon & Bremer, a
professional association in which Mr. Karon is a shareholder. Includes
40,000 shares issuable pursuant to options exercisable within 60 days.
(9) Includes 60,000 shares issuable pursuant to options exercisable within 60
days.
(10) Includes 55 shares owned by a member of Mr. Geiger's immediate family, of
which shares Mr. Geiger disclaims beneficial ownership. Includes 10,000
shares issuable pursuant to options exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Faegre & Benson LLP, a law firm in which Mr. Mellum is a partner, provides the
Company with legal services.
The Company believes that the above-referenced transactions were on terms no
less favorable to the Company than those obtainable in arms-length transactions
with unaffiliated third parties.
- 16 -
<PAGE>
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 23 in the Appendix. The Report of Independent
Public Accountants on the Company's consolidated financial statements
is presented on page 22 in the Appendix.
(2) FINANCIAL STATEMENT SCHEDULES
See Index to Consolidated Financial Statements and Schedules on page
21 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, 1997.
(c) EXHIBITS
The following exhibits are filed as part of this Annual Report on Form 10-K
for the year ended June 30, 1997.
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
2 Agreement and Plan of Merger, dated September 2, 1997, by and
among the Company, Sun Delaware, Inc., and Sunrise Educational
Services, Inc. (1)
3.1 Restated Articles of Incorporation of the Company. (2)
3.2 Amendment of the Restated Articles of Incorporation of the
Company. (3)
3.3 By-Laws of the Company. (4)
4.1 Specimen Certificate of Common Stock. (5)
4.2 Share Rights Plan dated September 8, 1993. (6)
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.
(15)
10.3 Real Property Lease between the Company and Zeller-Minnesota
Limited Partnership dated October 30, 1992. (8)
- 17 -
<PAGE>
10.4 Agreement between the Company and TesseracT Development Company
II dated January 14, 1989. (13)
10.5* Employment Agreement between the Company and John T. Golle dated
January 1, 1991. (11)
10.6* Amendment to Employment Agreement between the Company and John T.
Golle dated September 8, 1993. (9)
10.7* 1992 Education Alternatives, Inc. Long-Term Executive Stock
Option Plan, as amended. (7)
10.8* Amendment to Employment Agreement between the Company and John T.
Golle dated March 20, 1992. (14)
10.9* Employment Agreement between the Company and Gerald A. Haugen
dated January 15, 1996. (12)
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 the same numbered Exhibit to the
Company's Current Report on Form 8-K filed September 12, 1997.
(2) 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).
(3) 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).
(4) Incorporated herein by reference to the same numbered Exhibit to the
Company's Form S-18 Registration Statement (Registration Number 33-39481-
C).
(5) 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).
(6) 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.
(7) 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.
(8) Incorporated herein by reference to Exhibit 10.10 to the Company's Form S-1
Registration Statement (Registration Number 33-59698).
- 18 -
<PAGE>
(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 to the Company's Form 10-Q
for the quarter ended December 31, 1995.
(13) Incorporated herein by reference to Exhibit 10.11 to the Company's to Form
S-18 Registration Statement (Registration Number 33-39481-C).
(14) 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).
(15) 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, 1996.
- 19 -
<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 26, 1997 Chief Financial and Administrative 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 26, 1997
/s/ Richard T. Burke
- -----------------------------------
Richard T. Burke
Director September 26, 1997
/s/ Robert I. Karon
- -----------------------------------
Robert I. Karon
Director September 26, 1997
/s/ Gale R. Mellum
- -----------------------------------
Gale R. Mellum
Director September 26, 1997
/s/ John T. Walton
- -----------------------------------
John T. Walton
Director September 26, 1997
/s/ Gerald A. Haugen
- -----------------------------------
Gerald A. Haugen
Chief Financial and Administrative Officer
(Principal Financial and Accounting Officer) September 26, 1997
- 20 -
<PAGE>
EDUCATION ALTERNATIVES, INC. APPENDIX
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS AND SCHEDULES
Page
----
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . 22
Consolidated Statements of Operations. . . . . . . . . . . . . . . . . . . . 23
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . . 24
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . 25
Consolidated Statements of Shareholders' Equity. . . . . . . . . . . . . . . 26
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 27
Schedule II--Valuation and Qualifying Accounts . . . . . . . . . . . . . . . 35
- 21 -
<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, 1997
and 1996, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended June 30,
1997. 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, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1997, 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,
August 6, 1997
- 22 -
<PAGE>
EDUCATION ALTERNATIVES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year ended June 30,
-----------------------------------
1997 1996 1995
------- --------- ---------
<S> <C> <C> <C>
REVENUE
School management $ - $ 110,695 $ 211,562
Tuition and other 4,835 4,395 2,020
------- --------- ---------
4,835 115,090 213,582
------- --------- ---------
DIRECT EXPENSES
School management - 114,144 215,475
Private school costs and other 3,753 3,618 1,852
------- --------- ---------
3,753 117,762 217,327
------- --------- ---------
GROSS PROFIT (LOSS) 1,082 (2,672) (3,745)
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 3,784 5,061 5,862
------- --------- ---------
OPERATING LOSS (2,702) (7,733) (9,607)
------- --------- ---------
OTHER INCOME (EXPENSE)
Settlement income 1,900 - 3,000
Investment income (loss) 1,385 (1,525) (685)
Interest expense (17) (249) (151)
------- --------- ---------
3,268 (1,774) 2,164
------- --------- ---------
EARNINGS (LOSS) BEFORE INCOME TAX EXPENSE 566 (9,507) (7,443)
INCOME TAX EXPENSE - - -
------- --------- ---------
NET EARNINGS (LOSS) $ 566 $ (9,507) $ (7,443)
------- --------- ---------
------- --------- ---------
NET EARNINGS (LOSS) PER SHARE $ .08 $ (1.27) $ (1.09)
------- --------- ---------
------- --------- ---------
WEIGHTED AVERAGE SHARES OUTSTANDING 7,501 7,477 6,822
------- --------- ---------
------- --------- ---------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
- 23 -
<PAGE>
EDUCATION ALTERNATIVES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
June 30,
---------------------
1997 1996
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 23,246 $ 15,391
Marketable securities - 2,221
Settlement receivable 650 -
Accounts receivable, net of allowance
(1997--$30; 1996--$53) 20 16
Other current assets 315 362
-------- --------
Total current assets 24,231 17,990
LONG-TERM MARKETABLE SECURITIES - 7,322
PROPERTY AND EQUIPMENT, NET 4,826 4,372
-------- --------
$ 29,057 $ 29,684
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 571 $ 470
Other current liabilities 3,606 4,593
-------- --------
Total current liabilities 4,177 5,063
LONG-TERM DEBT - 309
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 3, 9, 14, 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 1997--7,489,637 shares;
1996--7,488,970 shares 75 75
Additional paid-in capital 46,388 46,386
Accumulated deficit (21,583) (22,149)
-------- --------
Total shareholders' equity 24,880 24,312
-------- --------
$ 29,057 $ 29,684
-------- --------
-------- --------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE BALANCE SHEETS.
- 24 -
<PAGE>
EDUCATION ALTERNATIVES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(IN THOUSANDS)
Year ended June 30,
---------------------------------
1997 1996 1995
-------- ------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) $ 566 $(9,507) $(7,443)
Adjustments to reconcile net earnings (loss) to net cash
used in operating activities:
Depreciation and amortization 316 1,214 963
Provision for doubtful accounts 10 4 117
Amortization of discount on marketable securities - (17) (139)
(Gains)/losses on marketable securities (49) 3,410 15
Changes in operating assets and liabilities:
Accounts receivable (14) 164 212
Other current assets (603) 155 (106)
Accounts payable 101 (1,321) 1,013
Other current liabilities (524) 1,709 5,277
-------- ------- -------
Net cash used in operating activities (197) (4,189) (91)
-------- ------- -------
INVESTING ACTIVITIES
Additions to property and equipment (896) (2,261) (3,568)
Proceeds from sales and maturities of marketable securities 9,592 22,763 1,211
-------- ------- -------
Net cash provided by (used in) investing activities 8,696 20,502 (2,357)
-------- ------- -------
FINANCING ACTIVITIES
Repayments on management and consulting contracts, net - (69) (1,233)
Proceeds from exercise of stock options and warrants 2 307 1,074
Repayment of short-term borrowings and long-term debt (646) (3,609) (165)
-------- ------- -------
Net cash used in financing activities (644) (3,371) (324)
-------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,855 12,942 (2,772)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 15,391 2,449 5,221
-------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 23,246 $15,391 $ 2,449
-------- ------- -------
-------- ------- -------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
- 25 -
<PAGE>
EDUCATION ALTERNATIVES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
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, 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 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)
Net earnings - - - - 566
Issuance of common stock upon
exercise of stock options 1 - 2 - -
------ ---- -------- -------- ---------
BALANCE, JUNE 30, 1997 7,490 $ 75 $ 46,388 $ - $ (21,583)
------ ---- -------- -------- ---------
------ ---- -------- -------- ---------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
- 26 -
<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 owns, operates, and consults with private schools and seeks to
establish contracts to operate public charter 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 had classified its marketable securities as available-for-sale and
was 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. The Company uses accelerated methods of
depreciation for income tax purposes.
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 1995 and 1996 amounts have been
reclassified to conform to the 1997 presentation. These reclassifications had
no effect on the previously reported results of operations or shareholders'
equity.
RECENTLY ISSUED ACCOUNTING STANDARDS: In March 1997, the Financial Accounting
Standards Board released Statement of Financial Accounting Standards No. 128,
Earnings per Share ("SFAS No. 128"), which changes the computation and
disclosure of earnings per share. SFAS No. 128 is effective for both interim
and annual periods ending after December 15, 1997, and earlier application is
not permitted. Under the Company's current capital structure, the adoption of
SFAS No. 128 will not have a material impact on the Company's determination of
earnings per share.
- 27 -
<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. The
Company subsequently entered into management or consulting contracts with three
additional schools in the Baltimore District. These management and consulting
contracts (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.
During fiscal 1997, the Company entered into an agreement with the Baltimore
District that resolved all outstanding issues related to the Baltimore
Contracts. As part of this agreement, 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 through June 2001 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 is $800,000 for fiscal 1998 and declines each year to $200,000 in
fiscal 2001.
HARTFORD: In November 1994, the Company entered into a five-year management
contract with the Board of Education of the city of Hartford, Connecticut (the
"Hartford Contract"), under which the Company provided comprehensive educational
and management operating services for the 32-school public school system of the
city of Hartford. 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. 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 fiscal 1996 school management expenses as a recovery
against amounts previously written-off under the contract.
During fiscal 1997, the Company reached a final agreement with Hartford
officials on the remaining amounts owed to the Company. Under the final
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 are being recorded in income as they are received. In
addition, both parties released each other from any further claims under the
management contract.
NOTE 4--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 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 expenses
associated with the operation of the two schools in its consolidated statement
of operations.
- 28 -
<PAGE>
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.
NOTE 5--MARKETABLE SECURITIES
During fiscal 1996, the Company 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's marketable securities
portfolio was comprised of U.S. Treasury securities, other U.S. government
agency securities, other debt securities, and a fixed income mutual fund.
During the fourth quarter of 1996, the Company recorded a charge of $3,400,000
to reflect what the Company believed was 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. At June 30, 1996, the fair value of
the Company's marketable securities portfolio was equal to its cost.
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. The Company
and its investment management firm entered into a preliminary settlement
agreement on June 30, 1995, whereby the investment management firm agreed to
reimburse the Company $3,000,000 for losses on the Company's portfolio. During
fiscal 1997, the Company and its investment management firm entered into a final
settlement agreement whereby the investment management firm agreed to pay the
Company an additional $1,250,000 in fiscal 1997 to resolve all remaining
disputes relating to the firm's management of the Company's investment
portfolio.
During 1997 and 1996, the Company received proceeds of $9,592,000 and
$22,653,000, respectively, on the sale and maturity of marketable securities.
The Company realized gains of $49,000 during 1997 and realized losses of $10,000
during 1996 on the sale of marketable securities. For purposes of calculating
realized gains and losses on sales of marketable securities, the amortized cost
of each security sold was used.
NOTE 6--PROPERTY AND EQUIPMENT
Property and equipment at June 30 consist of the following:
1997 1996
---------- ----------
Land $1,733,000 $1,305,000
Buildings 2,400,000 2,400,000
Furniture and equipment 1,096,000 1,679,000
Construction in progress 367,000 -
Less accumulated depreciation and amortization (770,000) (1,012,000)
---------- ----------
$4,826,000 $4,372,000
---------- ----------
---------- ----------
- 29 -
<PAGE>
NOTE 7--OTHER CURRENT LIABILITIES
Other current liabilities at June 30 consist of the following:
1997 1996
---------- ----------
Reserve for contract contingencies $1,512,000 $2,142,000
Deposits and prepaid tuition from private schools 960,000 676,000
Accrued expenses - managed schools 573,000 840,000
Accrued payroll and related costs 405,000 420,000
Current portion of long-term debt - 337,000
Other 156,000 178,000
---------- ----------
$3,606,000 $4,593,000
---------- ----------
---------- ----------
NOTE 8--LONG-TERM DEBT
Long-term debt at June 30, 1996, consisted of the following:
4.75% note due August 1999 $ 10,000
Capital lease obligations 636,000
----------
646,000
Less current maturities (337,000)
----------
$ 309,000
----------
----------
The Company retired all long-term debt during fiscal 1997. The Company made
interest payments in the years ended June 30, 1997, 1996, and 1995 of $17,000,
$249,000, and $149,000, respectively.
NOTE 9--OPERATING LEASES
The Company leases office space and equipment under various operating lease
agreements, the last of which expires in 2001. At June 30, 1997, future minimum
lease payments under noncancelable operating leases were as follows:
Year ending June 30,
- --------------------
1998 $ 138,000
1999 43,000
2000 15,000
2001 1,000
---------
$ 197,000
---------
---------
Total rent expense for the years ended June 30, 1997, 1996, and 1995 was
$313,000, $1,436,000, and $1,789,000, respectively. Rent expense of $1,201,000
and $1,582,000 in the years ended June 30, 1996 and 1995, respectively, related
to school management contracts and is included in school management expenses in
the accompanying consolidated statements of operations.
- 30 -
<PAGE>
NOTE 10--INVESTMENT INCOME (LOSS)
Investment income (loss) for the year ended June 30 consists of the following
(see Note 5):
1997 1996 1995
---------- ----------- ----------
Interest income $1,336,000 $ 1,885,000 $2,330,000
Gain (loss) on marketable securities, net 49,000 (3,410,000) (3,015,000)
---------- ----------- ----------
$1,385,000 $(1,525,000) $ (685,000)
---------- ----------- ----------
---------- ----------- ----------
NOTE 11--EQUITY
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 and are exercisable over periods
of up to ten years from the date of grant.
At June 30, 1997, options to purchase 411,000 shares of common stock are
currently exercisable and 561,000 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, 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
Granted 267,200 2.94-4.38
Canceled (277,171) 2.94-13.75
Exercised (667) 2.94
---------- ------------
Balance at June 30, 1997 1,356,767 $2.94-$11.75
---------- ------------
---------- ------------
During 1996, the Company canceled 1,192,000 stock options and reissued a like
number at the current market price.
- 31 -
<PAGE>
As permitted under the provisions of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-based Compensation ("SFAS No. 123"),the Company
has elected to continue to account for the two stock option plans under APB
Opinion No. 25, under which no compensation cost has been recognized. Had the
Company accounted for its stock option plans and recorded compensation cost in
accordance with SFAS No. 123, the Company's pro forma net earnings (loss) and
net earnings (loss) per share for the year ended June 30 would have been as
follows:
1997 1996
----------- ------------
Net earnings (loss) - as reported $ 566,000 $(9,507,000)
Net earnings (loss) - pro forma (6,000) (9,757,000)
Net earnings (loss) per share - as reported $ .08 $ (1.27)
Net earnings (loss) per share - pro forma - (1.30)
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
1997 1996
----------- ------------
Risk free interest rate 5.3% - 6.4% 5.6% - 5.9%
Expected life 7 years 3 to 7 years
Expected volatility 58.5% 58.5%
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 59,700 and 101,000
shares were exercised during the year ended June 30, 1996 and 1995,
respectively.
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 776,322, respectively, of such warrants were
exercised. At June 30, 1997, no warrants remain outstanding.
SHARE RIGHTS PLAN: Under the terms of the Company's share rights plan, the
Company distributed as a dividend one right for each share of the Company's
common stock outstanding on October 1, 1993. Each right entitles its holder to
buy one one-hundredth of a share of a new series of junior participating
preferred stock at an exercise price of $175, subject to adjustment. The rights
will be exercisable only if a person or group acquires ownership of at least 20%
of the Company's outstanding common stock or announces a tender offer to acquire
20% or more of the common stock.
- 32 -
<PAGE>
NOTE 12--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 (liabilities) as of June 30 are as follows:
1997 1996
---------- ----------
Federal net operating loss benefit, net of
amount to be credited to equity $5,621,000 $5,789,000
Capital loss carryforward benefit 704,000 -
Securities valuation reserve - 1,156,000
Accrued expenses 514,000 483,000
Other (18,000) 64,000
---------- ----------
6,803,000 7,492,000
Valuation allowance (6,803,000) (7,492,000)
---------- ----------
Net deferred income taxes $ - $ -
---------- ----------
---------- ----------
At June 30, 1997, the Company had net operating loss carryforwards of
$23,997,000 for federal tax purposes, expiring through 2012 and capital loss
carryforwards of $2,072,000, expiring through 2002. The Company has determined
that the realization of the loss carryforwards 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, 1997 and 1996.
NOTE 13--RELATED-PARTY TRANSACTIONS
In addition to the related-party transactions described elsewhere, certain
shareholders and directors provided legal and accounting services to the
Company. Total amounts incurred for these services for the years ended June 30,
1997, 1996, and 1995 were $216,000, $230,000, and $201,000, respectively.
NOTE 14--COMMITMENTS AND CONTINGENCIES
The Company has employment agreements with executive officers of the Company
which would require severance benefits to be paid 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 $431,000 at June 30, 1997.
NOTE 15--EVENT SUBSEQUENT TO THE DATE OF REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS
On September 2, 1997, the Company signed a definitive agreement to acquire
Sunrise Educational Services, Inc. ("Sunrise"). The Company expects to issue
shares of common stock and cash to Sunrise shareholders with a value of
approximately $13,500,000.
Sunrise operates preschools, private schools, and public charter schools at
approximately 35 sites, primarily in Arizona, and has annual revenue of
approximately $14,000,000. This combination, which will be accounted for as a
purchase, requires the approval of both shareholder groups and is expected to be
completed by January 1998.
- 33 -
<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>
1997:
First $ 747,000 $ 34,000 $ 148,000 $ .02 $ 4.00 $ 2.44
Second 1,512,000 489,000 277,000 .04 5.88 3.75
Third 1,459,000 408,000 117,000 .02 6.75 3.50
Fourth 1,117,000 151,000 24,000 - 5.50 3.66
------------ ----------- ----------- ---------- ------- -------
------- -------
$ 4,835,000 $ 1,082,000 $ 566,000 $ .08
------------ ----------- ----------- ----------
------------ ----------- ----------- ----------
1996:
First $ 30,532,000 $(1,643,000) $(2,551,000) $ (.34) $ 17.25 $ 12.25
Second 74,925,000 (3,613,000) (4,653,000) (.62) 15.25 3.88
Third 8,573,000 (215,000) (1,166,000) (.16) 6.25 3.00
Fourth 1,060,000 2,799,000 (1,137,000) (.15) 4.50 3.00
------------ ----------- ----------- --------- ------- -------
------- -------
$115,090,000 $(2,672,000) $(9,507,000) $ (1.27)
------------ ----------- ----------- ---------
------------ ----------- ----------- ---------
</TABLE>
During the first, second, and third quarters of fiscal 1997, the Company
received $625,000, $313,000, and $312,000, respectively, related to the final
settlement with its investment management firm (see Note 5). In addition,
during the fourth quarter of fiscal 1997, the Company recorded settlement income
of $650,000 related to amounts received in July 1997 from the city of Hartford
and the Hartford Board of Education on the final settlement of issues
surrounding the Hartford Contract (see Note 3).
During the fourth quarter of 1996, the Company recorded a charge of $3,400,000
to reflect what the Company believed was 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 5). Also in the fourth quarter of 1996,
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.
- 34 -
<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, 1997:
Allowance for uncollectible
accounts receivable $ 53,000 $ 10,000 $ (33,000)(1) $ 30,000
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) (2) 49,000
Provision for affiliated schools 391,000 (391,000) (3) -
</TABLE>
(1) The reduction in the allowance for uncollectible accounts receivable was
made to bring the allowance in line with the anticipated uncollectible
accounts receivable at June 30, 1997.
(2) 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.
(3) 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.
- 35 -
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
2 Agreement and Plan of Merger, dated September 2, 1997, by and
among the Company, Sun Delaware, Inc., and Sunrise Educational
Services, Inc. (1)
3.1 Restated Articles of Incorporation of the Company. (2)
3.2 Amendment of the Restated Articles of Incorporation of the
Company. (3)
3.3 By-Laws of the Company. (4)
4.1 Specimen Certificate of Common Stock. (5)
4.2 Share Rights Plan dated September 8, 1993. (6)
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.
(15)
10.3 Real Property Lease between the Company and Zeller-Minnesota
Limited Partnership dated October 30, 1992. (8)
10.4 Agreement between the Company and TesseracT Development Company
II dated January 14, 1989. (13)
10.5* Employment Agreement between the Company and John T. Golle dated
January 1, 1991. (11)
10.6* Amendment to Employment Agreement between the Company and John T.
Golle dated September 8, 1993. (9)
10.7* 1992 Education Alternatives, Inc. Long-Term Executive Stock
Option Plan, as amended. (7)
10.8* Amendment to Employment Agreement between the Company and John T.
Golle dated March 20, 1992. (14)
10.9* Employment Agreement between the Company and Gerald A. Haugen
dated January 15, 1996. (12)
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 the same numbered Exhibit to the
Company's Current Report of Form 8-K filed September 12, 1997.
(2) 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).
(3) 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).
(4) Incorporated herein by reference to the same numbered Exhibit to the
Company's Form S-18 Registration Statement (Registration Number 33-39481-
C).
(5) 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).
(6) 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.
(7) 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.
(8) Incorporated herein by reference to Exhibit 10.10 to the Company's Form S-1
Registration Statement (Registration Number 33-59698).
(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 to the Company's Form 10-Q
for the quarter ended December 31, 1995.
(13) Incorporated herein by reference to Exhibit 10.11 to the Company's to Form
S-18 Registration Statement (Registration Number 33-39481-C).
(14) 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).
(15) 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, 1996.
<PAGE>
EXHIBIT 11
STATEMENT RE COMPUTATION OF
PER SHARE EARNINGS (LOSS)
EDUCATION ALTERNATIVES, INC.
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Weighted average number of
shares outstanding 7,489,000 7,477,000 6,822,000
Effect of dilutive stock options
based on the treasury stock method 12,000 - -
---------- ----------- -----------
Weighted average shares outstanding used to
compute net earnings (loss) per share 7,501,000 7,477,000 6,822,000
---------- ----------- -----------
---------- ----------- -----------
Net earnings (loss) $ 566,000 $(9,507,000) $(7,443,000)
---------- ----------- -----------
---------- ----------- -----------
Net earnings (loss) per share $ .08 $ (1.27) $ (1.09)
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
Stock options and warrants have been excluded from the loss per share
computation as their effects are antidilutive.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statement File No.'s 33-47486, 33-59646, and 33-87456.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
September 25, 1997
<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, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 23,246
<SECURITIES> 0
<RECEIVABLES> 700
<ALLOWANCES> (30)
<INVENTORY> 0
<CURRENT-ASSETS> 24,231
<PP&E> 5,596
<DEPRECIATION> (770)
<TOTAL-ASSETS> 29,057
<CURRENT-LIABILITIES> 4,177
<BONDS> 0
0
0
<COMMON> 75
<OTHER-SE> 24,805
<TOTAL-LIABILITY-AND-EQUITY> 29,057
<SALES> 0
<TOTAL-REVENUES> 4,835
<CGS> 0
<TOTAL-COSTS> 3,753
<OTHER-EXPENSES> 3,784
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17
<INCOME-PRETAX> 566
<INCOME-TAX> 0
<INCOME-CONTINUING> 566
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 566
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
