<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File Number 1-11111
EDUCATION ALTERNATIVES, INC.
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(Exact name of registrant as specified in its charter)
Minnesota 41-1581297
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of 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)
(612) 832-0092
----------------------
(Registrant's telephone number, including area code)
Not applicable
------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 / /
As of October 31, 1997, there were issued and outstanding 7,493,806 shares of
Common Stock, $.01 par value.
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EDUCATION ALTERNATIVES, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 30, 1997
Page
Number
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Condensed consolidated balance sheets as of
September 30, 1997, and June 30, 1997 3
Condensed consolidated statements of operations for
the three months ended September 30, 1997 and 1996 4
Condensed consolidated statements of cash flows for
the three months ended September 30, 1997 and 1996 5
Notes to condensed consolidated financial statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 9
Signatures 10
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EDUCATION ALTERNATIVES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, JUNE 30,
(Dollars in thousands) 1997 1997
--------------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 21,295 $ 23,246
Settlement receivable - 650
Accounts receivable, net 59 20
Other current assets 506 315
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Total current assets 21,860 24,231
PROPERTY AND EQUIPMENT, NET 7,732 4,826
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$ 29,592 $ 29,057
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--------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,246 $ 571
Other current liabilities 4,506 3,606
--------------- ------------
Total current liabilities 5,752 4,177
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 5,000,000
shares authorized; no shares issued
and outstanding - -
Common stock, $.01 par value, 25,000,000
shares authorized; issued and
outstanding 7,493,672 at September 30,
1997 and 7,489,637 at June 30, 1997
75 75
Additional paid-in capital 46,407 46,388
Accumulated deficit (22,642) (21,583)
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Total shareholders' equity 23,840 24,880
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$ 29,592 $ 29,057
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See notes to condensed consolidated financial statements.
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EDUCATION ALTERNATIVES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
(In thousands, except per share amounts) SEPTEMBER 30,
---------------------------
1997 1996
------------ -----------
TUITION AND OTHER REVENUE $ 777 $ 747
PRIVATE SCHOOL COSTS AND OTHER EXPENSES 1,222 713
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GROSS PROFIT (LOSS) (445) 34
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 944 949
------------ -----------
OPERATING LOSS (1,389) (915)
------------ -----------
OTHER INCOME (EXPENSE)
Investment income 330 450
Settlement income - 625
Interest expense - (12)
------------ -----------
330 1,063
------------ -----------
EARNINGS (LOSS) BEFORE INCOME TAX EXPENSE (1,059) 148
INCOME TAX EXPENSE - -
------------ -----------
NET EARNINGS (LOSS) $ (1,059) $ 148
------------ -----------
------------ -----------
NET EARNINGS (LOSS) PER SHARE $(.14) $ .02
------------ -----------
------------ -----------
WEIGHTED AVERAGE SHARES OUTSTANDING 7,490 7,489
------------ -----------
------------ -----------
See notes to condensed consolidated financial statements.
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EDUCATION ALTERNATIVES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
(In thousands) SEPTEMBER 30,
------------------------------
1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) $ (1,059) $ 148
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation and amortization 81 79
Changes in operating assets and liabilities 1,995 105
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Net cash provided by operating activities 1,017 332
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INVESTING ACTIVITIES
Proceeds from sales and maturities of marketable securities - 7,367
Additions to property and equipment (2,987) (15)
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Net cash provided by (used in) investing activities (2,987) 7,352
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FINANCING ACTIVITIES
Proceeds from exercise of stock options 19 -
Repayment of long-term debt - (87)
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Net cash provided by (used in) financing activities 19 (87)
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,951) 7,597
Cash and cash equivalents at beginning of period 23,246 15,391
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 21,295 $ 22,988
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</TABLE>
See notes to condensed consolidated financial statements.
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EDUCATION ALTERNATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting solely of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results
for the three-month period ended September 30, 1997, are not necessarily
indicative of the results that may be expected for the year ending June 30,
1998. For further information, refer to the financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for
the year ended June 30, 1997.
2. ACCOUNTING POLICIES
BASIS OF CONSOLIDATION: The condensed consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary.
Intercompany balances and transactions have been eliminated in
consolidation.
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.
3. SETTLEMENT OF DISPUTES
During the quarter ended September 30, 1996, the Company entered into a
final settlement agreement with its investment management firm, resolving
all remaining disputes relating to the firm's management of the Company's
investment portfolio. The investment management firm agreed to pay the
Company $1,250,000, of which $625,000 was received and recorded in income
during the quarter ended September 30, 1996.
4. ACQUISITION
On September 2, 1997, the Company signed a definitive agreement to acquire
Sunrise Educational Services, Inc. ("Sunrise"). Sunrise operates
preschools, private schools, and public charter schools at approximately 35
sites, primarily in Arizona. The Company expects to issue shares of common
stock and cash to Sunrise shareholders with a value of approximately
$13,500,000. This transaction is expected to be completed by January 1998.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Tuition and other revenue for the three months ended September 30, 1997, was
$777,000, compared to $747,000 for the same period in the prior year. Revenues
consisted primarily of tuition from the Company's private schools. The first
quarter represents a disproportionately small part of full-year revenues and
operating margins because of the September school start date.
Private school costs and other expenses for the three months totaled $1,222,000,
an increase of $509,000 over the prior year period. The current year quarter
includes start-up costs relating to the expansion of the Company's private
school in Eagan, Minnesota and the recently opened schools in Mays Landing, New
Jersey and South Bend, Indiana.
The increased investment levels will continue throughout the year as the Company
seeks to expand its school base through a combination of additional private
TesseracT schools and public charter schools.
Other income for the three months ended September 30, 1997, was $330,000
compared to $1,063,000 for the same period of the prior year. The decrease in
investment income from a year ago is due to lower cash investment levels. Also,
the prior year period included $625,000 received on the settlement of issues
with the Company's investment management firm.
The Company reported a net loss of $1,059,000 or $.14 per share in the three
months ended September 30, 1997, compared to net earnings of $148,000 or $.02
per share in the same period of the prior year. The change is primarily due to
the start-up costs incurred at the three new schools in the current year, and
the settlement income recorded in the prior year quarter.
CAPITAL RESOURCES AND LIQUIDITY
During the three months ended September 30, 1997, net cash provided by operating
activities totaled $1,017,000, primarily due to changes in current assets and
liabilities at September 30, 1997, offset by the net loss recorded in the three-
month period.
The Company invested $2,987,000 in property and equipment in the three months
ended September 30, 1997, primarily related to the opening of the two college
preparatory high schools and the expansion of its Eagan facility to include a
middle school.
The Company has working capital of $16,108,000 at September 30, 1997, compared
to $20,054,000 at June 30, 1997. The decrease is primarily due to the
investments in property and equipment previously discussed.
If the Sunrise stockholders elect to exchange part of their shares for cash, the
Company could use up to $4 million of its cash reserves to fund that portion of
the consideration to be paid in the merger.
As the Company undertakes its school expansion plans, it expects to lease all
future school sites and related equipment in order to reduce the significant
capital requirements of acquiring and equipping school facilities.
Although no assurances can be made, the Company believes it has sufficient cash
on hand to ensure uninterrupted performance of its operating obligations as
currently anticipated.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FUTURE OPERATIONS
The Company's recently revised strategy calls for internal expansion through a
combination of additional private TesseracT schools and public charter schools
and entry into the pre-school and post-secondary markets through acquisitions.
Given the longer lead times required to establish a new private school's
reputation and attract a sufficient number of students, the competitive nature
of the public charter school application and approval process, and the
integration issues associated with the Sunrise merger, the success of this
change in the strategic focus of the Company will not be known for some time.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
27 Financial Data Schedule (EDGAR version only).
(b) REPORTS ON FORM 8-K:
On September 12, 1997, the Company filed a report on Form 8-K
disclosing the proposed acquisition of Sunrise Educational Services,
Inc.
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SIGNATURES
Pursuant to the requirements 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.
Date: November 12, 1997 By /s/ John T. Golle
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John T. Golle
Chairman and Chief
Executive Officer
Date: November 12, 1997 By /s/ Gerald A. Haugen
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Gerald A. Haugen
Chief Financial and
Administrative Officer
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<TABLE> <S> <C>
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANTS FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
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<CURRENT-ASSETS> 21,860
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