<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) DECEMBER 18, 1997
-------------------------------
THE TESSERACT GROUP, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
MINNESOTA 1-11111 41-1581297
- --------------------------------------------------------------------------------
(State or other (Commission File (IRS Employer
jurisdiction) Number) Identification No.)
of incorporation
7900 XERXES AVENUE SOUTH
1300 NORWEST FINANCIAL CENTER
MINNEAPOLIS, MINNESOTA 55431
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 832-0092
-----------------------------
EDUCATION ALTERNATIVES, INC.
- --------------------------------------------------------------------------------
(Former name of Registrant)
1
<PAGE>
Item 2. ACQUISITION OR DISPOSITION OF INTERESTS.
On December 18, 1997, Sunrise Educational Services, Inc., a Delaware
corporation ("Sunrise"), merged with and into Sun Delaware, Inc., a Delaware
corporation and a wholly owned subsidiary of the Registrant (the "Merger"). The
surviving corporation will remain a wholly owned subsidiary of the Registrant
and has adopted the name "Sunrise Educational Services, Inc." in connection with
the Merger.
In connection with the Merger each outstanding share of the Common
Stock, par value $.01 per share, of Sunrise ("Sunrise Common Stock") was
converted into the right to receive .393 shares of the Common Stock, par value
$.01 per share, of the Registrant ("Registrant Common Stock"), cash in the
amount of $1.92, or a combination thereof, subject to an aggregate cash
consideration limit of 50% of the total consideration paid to the holders of
Sunrise Common Stock in the Merger. In addition, each outstanding share of the
Series C Preferred Stock, par value $1.00 per share, of Sunrise ("Sunrise
Preferred Stock") was converted into the right to receive 3.069 shares of
Registrant Common Stock. The total consideration to be paid in the Merger
consists of approximately 1,949,000 shares of Registrant Common Stock and cash
totaling approximately $4,162,000. The exact amounts will be determined
following the completion of the election and proration procedures. Additional
cash will be paid in lieu of the issuance of any fractional shares. The
Registrant also assumed options and warrants covering in the aggregate
approximately 557,000 shares of Registrant Common Stock in substitution for
previously outstanding options and warrants to acquire shares of Sunrise Common
Stock and Sunrise Preferred Stock. The Registrant will use current cash
reserves to fund the cash portion of the consideration to be paid in the Merger.
The Merger will be accounted for under the purchase method and is
intended to be tax-free to the stockholders of Sunrise as to the Registrant
Common Stock that they receive. The Registrant intends to continue Sunrise's
business of operating preschool centers, private schools and public charter
schools.
Additional information regarding the terms of the Merger is included
in the Agreement and Plan of Merger and Press Release included herein as
exhibits.
Item 7. FINANCIAL STATEMENTS AND EXHIBITS.
The following information follows or is attached hereto as an exhibit:
(a) FINANCIAL STATEMENTS OF SUNRISE
The following financial statements of Sunrise (Commission file
no. 0-16425) are incorporated herein by reference to Sunrise's
Annual Report on Form 10-KSB for the fiscal year ended July 31,
1997, and are included herein as Exhibit 99.2:
Report of Independent Public Accountants
Consolidated Balance Sheet
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
The following financial statements of Sunrise (Commission file
no. 0-16425), are incorporated herein by reference to Sunrise's
Quarterly Report on Form 10-QSB for the period ended October 31,
1997, and are included herein as Exhibit 99.3:
Consolidated Balance Sheets
2
<PAGE>
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(b) PRO FORMA FINANCIAL INFORMATION OF REGISTRANT AND SUNRISE
Description of Unaudited Pro Forma Condensed Combining
Consolidated Financial Statements
Unaudited Pro Forma Condensed Combining Statement of Operations
Unaudited Pro Forma Condensed Combining Balance Sheet
Notes to Unaudited Pro Forma Condensed Combining Financial
Statements
(c) EXHIBITS
2. Agreement and Plan of Merger dated as of September 2,
1997 among the Registrant, Sun Delaware, Inc. and Sunrise
Educational Services, Inc., incorporated by reference to
Exhibit 2.1 of the Registrant's Current Report on Form
8-K dated September 2, 1997.
The Registrant hereby agrees to furnish supplementally a
copy of any omitted schedule or exhibit to the Commission
upon request.
23. Consent of Ernst & Young LLP (relating to financial
statements of Sunrise).
99.1. Press Release of the Registrant dated December 18, 1997.
99.2 Financial Statements of Sunrise (from Annual Report on
Form 10-KSB for fiscal year ended July 31, 1997).
99.3 Financial Statements of Sunrise (from Quarterly Report on
Form 10-QSB for period ended October 31, 1997).
3
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
The following unaudited pro forma condensed combining financial statements
reflect the Merger of Sunrise into a wholly owned subsidiary of the Registrant.
The Merger will be accounted for as a purchase of Sunrise under generally
accepted accounting principles. The pro forma statements of operations combine
the operations of the Registrant for the fiscal year ended June 30, 1997 and the
three months ended September 30, 1997 with the operations of Sunrise for the
fiscal year ended July 31, 1997 and the three months ended October 31, 1997,
respectively, and assumes the Merger occurred at the beginning of the year. The
pro forma balance sheet combines the Registrant as of September 30, 1997 with
Sunrise as of October 31, 1997 and assumes the Merger occurred as of
September 30, 1997. The historical consolidated financial information of the
Registrant and Sunrise has been derived from their respective financial
statements which are included elsewhere herein or incorporated herein by
reference. The pro forma financial statements should be read in conjunction
with these historical financial statements and the notes thereto, as well as the
accompanying notes to unaudited pro forma condensed combining financial
statements. The pro forma financial statements are not necessarily indicative
of the financial position or operating results that would have been achieved had
the Merger occurred as of the dates indicated, nor are they indicative of future
operating results or financial position.
4
<PAGE>
THE REGISTRANT AND SUNRISE
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
HISTORICAL
REGISTRANT SUNRISE
THREE MONTHS ENDED PRO FORMA
9/30/97 10/31/97 ADJUSTMENTS COMBINED
------- -------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . $ 777 $ 4,138 $ - $ 4,915
Direct operating costs . . . . . . . . . . . . . . . . . . 1,222 3,637 - 4,859
----------- ------------ ---------------- ------------
Gross profit (loss). . . . . . . . . . . . . . . . . . . . (445) 501 - 56
Selling, general and administrative expenses . . . . . . . 944 341 - 1,285
Amortization of goodwill . . . . . . . . . . . . . . . . . - - 173(4) 173
----------- ------------ ---------------- ------------
Operating (loss) . . . . . . . . . . . . . . . . . . . . . (1,389) 160 (173) (1,402)
Interest income, net . . . . . . . . . . . . . . . . . . . 330 (8) (84) 238
Settlement and other income. . . . . . . . . . . . . . . . - - - -
----------- ------------ ---------------- ------------
Earnings (loss) before income taxes. . . . . . . . . . . . (1,059) 152 (257) (1,164)
Income tax expense . . . . . . . . . . . . . . . . . . . . - - - -
----------- ------------ ---------------- ------------
Net earnings (loss). . . . . . . . . . . . . . . . . . . . $ (1,059) $ 152 $ (257) $ (1,164)
----------- ------------ ---------------- ------------
----------- ------------ ---------------- ------------
Net earnings (loss) available for common shares. . . . . . $ (1,059) $ 28 $ (133)(5) $ (1,164)
----------- ------------ ---------------- ------------
----------- ------------ ---------------- ------------
Net earnings (loss) per common share . . . . . . . . . . . $ (.14) $ .01 $ - $ (.25)
----------- ------------ ---------------- ------------
----------- ------------ ---------------- ------------
Weighted average shares outstanding. . . . . . . . . . . . 7,490 3,854 (1,905)(1) 9,439
----------- ------------ ---------------- ------------
----------- ------------ ---------------- ------------
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combining Financial
Statements.
5
<PAGE>
THE REGISTRANT AND SUNRISE
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
HISTORICAL
REGISTRANT SUNRISE
YEAR ENDED PRO FORMA
6/30/97 7/31/97 ADJUSTMENTS COMBINED
------- -------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,835 $ 14,647 $ - $ 19,482
Direct operating costs . . . . . . . . . . . . . . . . . . 3,753 14,196 - 17,949
----------- ------------ ---------------- ------------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . 1,082 451 - 1,533
Selling, general and administrative expenses . . . . . . . 3,784 1,625 - 5,409
Amortization of goodwill . . . . . . . . . . . . . . . . . - - 690(4) 690
----------- ------------ ---------------- ------------
Operating (loss) . . . . . . . . . . . . . . . . . . . . . (2,702) (1,174) (690) (4,566)
Interest income, net . . . . . . . . . . . . . . . . . . . 1,368 (13) (335) 1,020
Settlement and other income. . . . . . . . . . . . . . . . 1,900 110 - 2,010
----------- ------------ ---------------- ------------
Earnings (loss) before income taxes. . . . . . . . . . . . 566 (1,077) (1,025) (1,536)
Income tax expense . . . . . . . . . . . . . . . . . . . . - - - -
----------- ------------ ---------------- ------------
Net earnings (loss). . . . . . . . . . . . . . . . . . . . $ 566 $ (1,077) $ (1,025) $ (1,536)
----------- ------------ ---------------- ------------
----------- ------------ ---------------- ------------
Net earnings (loss) available for common shares. . . . . . $ 566 $ (1,609) $ (493)(5) $ (1,536)
----------- ------------ ---------------- ------------
----------- ------------ ---------------- ------------
Net earnings (loss) per common share . . . . . . . . . . . $ .08 $ (.52) $ - $ (.16)
----------- ------------ ---------------- ------------
----------- ------------ ---------------- ------------
Weighted average shares outstanding. . . . . . . . . . . . 7,501 3,090 (1,141)(1) 9,450
----------- ------------ ---------------- ------------
----------- ------------ ---------------- ------------
</TABLE>
Sunrise's results for the fiscal year ended July 31, 1997 include a charge of
$1,114,000 to provide for impaired assets and rental commitments in connection
with its management contract with PSI.
See accompanying Notes to Unaudited Pro Forma Condensed Combining Financial
Statements.
6
<PAGE>
THE REGISTRANT AND SUNRISE
UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET
<TABLE>
<CAPTION>
HISTORICAL
REGISTRANT SUNRISE
YEAR ENDED PRO FORMA
9/30/97 10/31/97 ADJUSTMENTS COMBINED
------- -------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . $ 21,295 $ 1,219 $ (6,112)(2) $ 16,402
Receivables. . . . . . . . . . . . . . . . . . . . . . . 59 776 - 835
Other current assets . . . . . . . . . . . . . . . . . . 506 464 - 970
----------- ------------ ---------------- ------------
21,860 2,459 (6,112) 18,207
Property and Equipment . . . . . . . . . . . . . . . . . . 7,732 2,028 - 9,760
Intangible Assets. . . . . . . . . . . . . . . . . . . . . - 1,245 13,800(4) 15,045
Other Assets . . . . . . . . . . . . . . . . . . . . . . . - 975 - 975
----------- ------------ ---------------- ------------
$ 29,592 $ 6,707 $ 7,688 $ 43,987
----------- ------------ ---------------- ------------
----------- ------------ ---------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes and accounts payable . . . . . . . . . . . . . . . $ 1,246 $ 802 $ - $ 2,048
Accrued liabilities. . . . . . . . . . . . . . . . . . . 2,560 493 - 3,053
Other current liabilities. . . . . . . . . . . . . . . . 1,946 470 - 2,416
----------- ------------ ---------------- ------------
5,752 1,765 - 7,517
Long-Term Notes Payable. . . . . . . . . . . . . . . . . . - 823 - 823
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . - 785 - 785
Shareholders' Equity . . . . . . . . . . . . . . . . . . . 23,840 3,334 7,688(1)(3) 34,862
----------- ------------ ---------------- ------------
$ 29,592 $ 6,707 $ 7,688 $ 43,987
----------- ------------ ---------------- ------------
----------- ------------ ---------------- ------------
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combining Financial
Statements.
7
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINING FINANCIAL STATEMENTS
The unaudited pro forma condensed combining financial statements reflect
the Merger of Sunrise into a wholly owned subsidiary of the Registrant and have
been prepared under the purchase method of accounting. Adjustments reflected in
these pro forma financial statements include the following:
(1) The issuance of approximately 1,949,000 shares of Registrant Common
Stock and cash of approximately $4,162,000 for all outstanding Sunrise
Common Stock and Sunrise Preferred Stock, at an Exchange Ratio of .393
for the Sunrise Common Stock and a Series C Conversion Factor of 3.069
for the Sunrise Preferred Stock. The Exchange Ratio and the Series C
Conversion Factor are based on a per share price of Registrant Common
Stock of $4.89, the average sale price per share as computed under the
Merger Agreement. It is expected that cash of $1.92 per share will be
issued up to the limit of 50% of the total consideration paid to the
holders of the Sunrise Common Stock.
(2) Financial advisory fees, legal and accounting expenses and other
transaction costs are estimated to be $1,950,000.
(3) The assumption of all outstanding Sunrise options and warrants by the
Registrant, at an estimated purchase cost of $1,500,000 as determined
by the Black-Scholes option pricing method.
(4) The estimated total purchase price ($17,232,000) includes the value of
the Common Stock and cash issued by the Registrant, transaction costs
and the purchase cost of the Sunrise options and warrants. The excess
of the purchase price over the estimated net tangible and intangible
value of assets acquired has been allocated to goodwill. It is
expected that goodwill will be amortized over 20 years.
(5) Annual dividends of $532,000 on the Sunrise Preferred Stock will no
longer be paid upon the exchange of the Sunrise Preferred Stock for
shares of Registrant Common Stock in the Merger.
8
<PAGE>
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.
THE TESSERACT GROUP, INC.
Date: January 2, 1998 By /s/ Gerald A. Haugen
--------------------------------
Gerald A. Haugen
Chief Financial and
Administrative Officer
9
<PAGE>
EXHIBIT INDEX
No. Exhibit Page
- --- ------- ----
2 Agreement and Plan of Merger dated as of Incorporated by
September 2, 1997 among the Registrant, Reference
Sun Delaware, Inc. and Sunrise Educational
Services, Inc.
99.1 Press release dated December 18, 1997. Filed
Electronically
99.2 Financial Statements of Sunrise Educational Filed
Services, Inc. (form Annual Report on Electronically
Form 10-KSB for fiscal year ended
July 31, 1997).
99.3 Financial Statements of Sunrise Educational Filed
Services, Inc. (from Quarterly Report on Electronically
Form 10-QSB for period ended October 31, 1997).
<PAGE>
Ernst & Young LLP, Consent of Independent Auditors
We consent to the use of our report dated September 29, 1997, incorporated by
reference and included as Exhibit 99.2 in the Current Report on Form 8-K
dated December 18, 1997 of The TesseracT Group, Inc. (formerly known as
Education Alternatives, Inc.), with respect to the consolidated financial
statements of Sunrise Educational Services, Inc. and Subsidiary included in
its Annual Report (Form 10-KSB) for the year ended July 31, 1997, filed with
the Securities and Exchange Commission.
Ernst & Young LLP
Tucson, Arizona
January 2, 1998
<PAGE>
EXHIBIT 99.1
NEWS RELEASE
- --------------------------------------------------------------------------------
FOR IMMEDIATE RELEASE
EDUCATION ALTERNATIVES' SHAREHOLDERS APPROVE
MERGER AGREEMENT WITH SUNRISE EDUCATIONAL SERVICES;
THE TESSERACT-Registered Trademark- GROUP TO BECOME NEW CORPORATE NAME
REFORMULATED BUSINESS STRATEGY POSITIONS
THE TESSERACT-Registered Trademark- GROUP
AS AN INTEGRATED EDUCATIONAL MANAGEMENT COMPANY
MINNEAPOLIS, Dec. 18 -- Shareholders of Education Alternatives, Inc.
(Nasdaq: EAIN), operator of TESSERACT-Registered Trademark- Schools, today
approved an agreement under which Sunrise Educational Services, Inc. (Nasdaq:
SUNR and SUNRP) will merge into a wholly-owned subsidiary of Education
Alternatives, forming an integrated educational management company.
Shareholders also approved a change in the company's name to THE TESSERACT
GROUP, INC. The name change, along with a change in the company's Nasdaq
trading symbol to TSST, will be effective Jan. 1, 1998.
John T. Golle, chairman and chief executive officer, said, "We are very
pleased to move forward with this important business combination with Sunrise
Educational Services, which is the first step of our reformulated business
strategy for the future."
Sunrise Educational Services, founded in 1980, is a Scottsdale, Ariz.-based
child care provider operating 33 preschool centers primarily in the State of
Arizona. Sunrise has expanded into the operation of private schools and has a
management contract to operate public charter schools that have recently opened
in 16 of its Arizona centers.
"In early 1997 we developed an integrated business strategy for future
growth that capitalizes on our company's experience in education management
and our foundation of financial resources and operating infrastructure,"
Golle said. "Our strategy focuses on our core competencies of curriculum
development, personnel selection and training, and the delivery of high
quality educational services. We are now beginning to implement that
strategy to become a leading provider of high-value, proprietary educational
services across a broad spectrum from preschool to post-secondary education.
"In the area of post-secondary education, we announced early today that we
have entered into a definitive purchase agreement to acquire the stock of
Academy of Business College (ABC), a privately held Phoenix, Ariz.-based
post-secondary career college. This acquisition, which is subject to the
completion of a 30-day due diligence review, would enable our company to offer a
truly integrated preschool through
<PAGE>
post-secondary education service in a geographically concentrated area. ABC is
accredited by the North Central Association of Colleges and Schools, and in
addition to offering a broad range of traditional business courses, is an
Authorized Academic Training Provider (AATP) for Microsoft, offering
comprehensive training to students preparing for various Microsoft
certifications.
"Now that the Sunrise merger has been approved by our shareholders, we are
acknowledging the transformation of our company by incorporating the name of our
widely recognized and highly successful private TesseracT Schools. This
appropriately reflects our new focus on proprietary educational offerings, and
our name will now help to reinforce our reformulated strategy. We are excited
about what this change represents and about our preparedness to cross the
threshold into a new era of growth and success for our company," Golle said.
In 1986, the company introduced and implemented the TesseracT model of
teaching which is based on the "best practices" in education, founded on the
belief that every child can learn effectively when the school environment and
instructional practices are focused on the student.
"We are now, with Sunrise, the largest provider of preschool to grade 12
educational services in the State of Arizona, and with the acquisition of ABC
would expand that offering to include post-secondary education -- the full
spectrum of educational services that is envisioned in our strategic plan.
"Long-term, we plan to expand our integrated educational services on a
state-by-state, geographically focused basis. By leveraging our existing
expertise and resources, benefiting from the synergy created in offering a
continuum of educational services, and guided by clearly defined criteria, we
believe that we can achieve predictable educational and financial outcomes. We
are poised and ready, and we possess all of the necessary resources to grow
rapidly and achieve long-term financial success." Golle said.
Founded in 1986, the company currently owns and operates four private
TESSERACT Schools -- one each in Minnesota, New Jersey, Indiana and Arizona.
Sunrise Educational Services, which will become a wholly-owned subsidiary,
operates 33 preschool centers, primarily in Arizona, and has expanded into the
operation of private and public charter schools. Together, THE TESSERACT GROUP
now operates 37 schools in 7 states serving over 5,000 students.
# # # #
12/18/97
<PAGE>
EXHIBIT 99.2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Sunrise Educational Services, Inc.
We have audited the accompanying consolidated balance sheet of Sunrise
Educational Services, Inc. (a Delaware corporation) and subsidiary as of July
31, 1997, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the two years in the period then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sunrise Educational Services,
Inc. and subsidiary as of July 31, 1997, and the results of their operations and
their cash flows for each of the two years in the period then ended in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Phoenix, Arizona
September 29, 1997
<PAGE>
SUNRISE EDUCATIONAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JULY 31, 1997
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $1,212,806
Accounts receivable, net 746,570
Prepaid expenses 542,515
Deferred tax asset, current portion 193,358
Inventory and supplies 33,323
------------
Total current assets 2,728,572
PROPERTY AND EQUIPMENT, net 1,983,694
PROPERTY AND EQUIPMENT LEASED TO PSI, net 118,378
DEFERRED TAX ASSET, net of current portion 502,000
INTANGIBLE ASSETS, net 1,252,559
DEPOSITS AND OTHER ASSETS 337,968
------------
Total assets $6,923,171
------------
------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 223,754
Accounts payable 297,973
Accrued expenses 733,376
Dividends payable on preferred stock 44,372
Notes payable, current portion 248,865
Accrued rental reserve, current position 341,808
Deferred rent, current portion 73,026
Deferred gain on sale and leaseback of preschool facilities,
current portion 45,003
------------
Total current liabilities 2,008,177
NOTES PAYABLE, net of current portion 802,696
ACCRUED RENTAL RESERVE, net of current portion 480,000
DEFERRED RENT, net of current portion 283,833
DEFERRED GAIN ON SALE AND LEASEBACK OF PRESCHOOL FACILITIES,
net of current portion 42,645
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value - 1,000,000 shares authorized,
857,333 shares issued and outstanding 857,333
Common stock, $.01 par value 10,000,000 shares authorized,
3,252,915 issued and outstanding 32,529
Paid-in capital 7,975,519
Accumulated deficit (5,559,561)
------------
Total shareholders' equity 3,305,820
------------
Total liabilities and shareholders' equity $6,923,171
------------
------------
The accompanying notes are an integral part
of these consolidated financial statements.
2
<PAGE>
SUNRISE EDUCATIONAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JULY 31, 1997AND 1996
1997 1996
------------- -------------
OPERATING REVENUE:
Tuition and other $ 13,620,656 $ 10,237,418
Government programs 1,026,626 738,429
------------- -------------
Total operating revenue 14,647,282 10,975,847
OPERATING EXPENSES:
Payroll 6,766,002 5,055,138
Facilities and maintenance 4,777,442 3,876,373
General and administrative 2,121,493 1,637,925
Government programs 1,042,119 738,429
Unusual charges 1,114,000 602,000
------------- -------------
Total operating expenses 15,821,056 11,909,865
------------- -------------
LOSS FROM OPERATIONS (1,173,774) (934,018)
OTHER INCOME (EXPENSES):
Interest (expense) income, net (12,684) 70,810
Other income and gains 109,663 5,900
------------- -------------
Total other income 96,979 76,710
------------- -------------
LOSS BEFORE INCOME TAXES (1,076,795) (857,308)
INCOME TAXES - -
------------- -------------
NET LOSS $ (1,076,795) $ (857,308)
------------- -------------
------------- -------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (1,609,195) $ (1,201,925)
------------- -------------
------------- -------------
NET LOSS PER COMMON SHARE:
Primary $ (.52) $ (.40)
------------- -------------
------------- -------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES:
Primary 3,089,850 2,970,294
------------- -------------
------------- -------------
The accompanying notes are an integral part
of these consolidated financial statements.
3
<PAGE>
SUNRISE EDUCATIONAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1997 AND 1996
<TABLE>
<CAPTION>
Preferred Stock Common Stock
---------------------- -----------------------
Outstanding Outstanding Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
----------- --------- ----------- --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 31, 1995 500,000 $500,000 2,935,894 $ 29,359 $ 3,602,406 $ (2,748,441) $ 1,383,324
Exercise of warrants - - 47,074 471 39,933 - 40,404
Issuance of preferred stock 357,333 357,333 - - 3,967,214 - 4,324,547
Dividends payable on preferred stock - - - - - (344,617) (344,617)
Net loss - - - - - (857,308) (857,308)
----------- --------- ----------- --------- ----------- ------------ ------------
BALANCE AT JULY 31, 1996 857,333 857,333 2,982,968 29,830 7,609,553 (3,950,366) 4,546,350
Exercise of options - - 12,679 126 6,747 - 6,873
Issuance of common stock
for preferred dividends - - 257,268 2,573 359,219 - 361,792
Dividends payable on preferred stock - - - - - (532,400) (532,400)
Net loss - - - - - (1,076,795) (1,076,795)
----------- --------- ----------- --------- ----------- ------------ ------------
BALANCE AT JULY 31, 1997 857,333 $857,333 3,252,915 $ 32,529 $ 7,975,519 $ (5,559,561) $ 3,305,820
----------- --------- ----------- --------- ----------- ------------ ------------
----------- --------- ----------- --------- ----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
4
<PAGE>
SUNRISE EDUCATIONAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 1997 AND 1996
1997 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,076,795) $ (857,308)
Adjustments to reconcile net loss
to net cash (used in) provided
by operating activities-
Depreciation and amortization 705,645 384,574
Amortized gain on sale of real estate (45,003) (45,003)
Amortization of deferred rent (103,181) (52,988)
Provision for doubtful accounts 167,204 139,296
Unusual charges 1,114,000 602,000
Gain on disposal of property and equipment (42,436) (5,900)
Gain on refinancing (67,227) -
Changes in assets and liabilities-
Increase in accounts receivable (525,999) (147,818)
Increase in prepaid expenses (393,057) (53,216)
Increase in inventory and supplies (6,587) (10,718)
Decrease (increase) in deposits
and other assets 45,790 (90,992)
Increase in accounts payable 25,454 146,891
Increase in accrued expenses 348,340 82,777
Decrease in accrued rental reserve (292,192) -
------------ ------------
930,751 948,903
------------ ------------
Net cash (used in) provided
by operating activities (146,044) 91,595
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of child care centers (494,264) (1,107,121)
Registration of new tradenames (21,123) -
Purchases of property and equipment (1,168,218) (916,886)
Proceeds from disposal of property and equipment 396,098 10,800
------------ ------------
Net cash used in investing activities (1,287,507) (2,013,207)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of warrants and options 6,873 40,404
Proceeds from sale of preferred stock - 4,324,547
Payment of dividends (170,605) (566,083)
Proceeds from notes payable 1,339,194 219,360
Net borrowings on lines of credit 123,754 100,000
Payments on notes payable and capital leases (1,283,475) (147,311)
------------ ------------
Net cash provided by financing activities 15,741 3,970,917
------------ ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (1,417,810) 2,049,305
CASH AND CASH EQUIVALENTS, beginning of year 2,630,616 581,311
------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 1,212,806 $ 2,630,616
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 96,272 $ 42,150
------------ ------------
------------ ------------
Payment of stock dividends $ 361,790 $ -
------------ ------------
------------ ------------
Note payable issued for acquisition of
child care centers $ 425,000 $ -
------------ ------------
------------ ------------
Cash paid during the year for income taxes $ - $ -
------------ ------------
------------ ------------
The accompanying notes are an integral part of
these consolidated financial statements.
5
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SUNRISE EDUCATIONAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997
(1) ORGANIZATION AND OPERATIONS:
Sunrise Educational Services, Inc. (the "Company"), previously Sunrise
Preschools, Inc., was incorporated in the State of Delaware in May 1987. As of
July 31, 1997, the Company operates 26 child care centers and manages an
additional 7 child care centers in Arizona, Hawaii, Colorado and Wisconsin.
The Company is successor to Venture Educational Programs, Inc., an Arizona
corporation formed in 1980, and Sunrise Preschools, Inc., an Arizona
corporation, formed in 1985. The Company has one wholly owned subsidiary,
Sunrise Preschools Hawaii, Inc., formed in fiscal 1990. Another subsidiary,
Sunrise Holdings, Inc., formed in fiscal 1987, was dissolved effective September
10, 1994.
Effective February 1, 1994, a portion of the Company's operations were
transferred to a Hawaii nonprofit corporation, Preschool Services, Inc. (PSI).
Because of PSI's nonprofit status, PSI is eligible to receive certain grants and
subsidies. The Company provides PSI with management, administration,
educational programs and operation of PSI's educational services (see Note 4).
The results of operations of the schools transferred to PSI are not included in
the accompanying consolidated financial statements.
During fiscal 1997, the Company acquired or opened six child care centers,
increasing its licensed capacity by approximately 911 children. During fiscal
1996, the Company acquired six child care centers, increasing its licensed
capacity by approximately 914 children.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Sunrise
Educational Services, Inc. and Sunrise Educational Services Hawaii, Inc. All
intercompany accounts and transactions have been eliminated in consolidation.
(b) USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(c) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
The Company follows the provisions of Statement of Financial Accounting
Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF (FAS No. 121) which requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Assets
to be disposed of are recorded at the lower of the carrying amount or net
realizable value (fair value less costs to sell).
6
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(d) CASH AND CASH EQUIVALENTS
All short-term investments with a maturity of three months or less when
purchased are considered to be cash equivalents. Cash equivalents, which
consist primarily of government securities and other short-term investments, are
stated at the lower of aggregate cost or market and totaled $486,000 at July 31,
1997.
(e) DEPRECIATION AND AMORTIZATION
Property and equipment are recorded at cost and depreciated over the estimated
useful lives of the related assets, which range from three to twelve years.
Leasehold improvements are amortized over the shorter of either the asset's
useful life or the related lease term. Depreciation is computed on the
straight-line method for financial reporting purposes.
(f) INTANGIBLE ASSETS
Intangible assets represent the unamortized excess of the cost of acquisitions
of existing child care centers, over the fair values of the centers' net
tangible assets determined at the dates of acquisition and amounts allocated to
noncompete agreements and customer base. The intangible assets are being
amortized using a straight-line method over various periods up to 20 years.
Amortization expense was approximately $109,000 and $12,000 during fiscal 1997
and fiscal 1996, respectively, and accumulated amortization at July 31, 1997 and
July 31, 1996 was $121,000 and $12,000, respectively. The recoverability of
goodwill attributable to the Company's acquisition is continually assessed based
on actual and projected levels of profitability and cash flows of the centers
acquired on an undiscounted basis.
(g) PRE-OPENING COSTS
Pre-opening costs are expensed as incurred.
(h) ACCRUED EXPENSES
Accrued expenses include compensation and related benefits of $475,417 at July
31, 1997.
(i) ADVERTISING EXPENSES
Advertising costs are expensed when incurred which is generally when the
advertising first takes place. Advertising expenses were approximately $260,000
and $161,000 in 1997 and 1996, respectively. At July 31, 1997, prepaid expenses
included approximately $70,000 for prepaid advertising expenses.
(j) GOVERNMENT PROGRAMS
Revenues related to government programs include amounts paid by various
government agencies under contractual arrangements for programs for children
with special needs. Since July 1987, the Company has been awarded an annual
contract from the Division of Developmental Disabilities of the Arizona
Department of Economic Security to provide a goal-oriented training program for
and to integrate mild to moderately handicapped children in child care centers.
Since June 1991, the Arizona Department of Economic Security, as administrator
of a child care block grant, has awarded the Company an annual contract to
deliver child care to families with special needs children.
(k) NET INCOME (LOSS) PER SHARE
Primary net loss per share is computed by dividing net loss attributable to
common shareholders (net loss plus accrued dividends for the period on Series B
and Series C Preferred Stock) by the weighted average number of common shares
outstanding during the period. Shares issuable upon the exercise of warrants
and employee stock
7
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options are considered antidilutive and are not included in the weighted average
number of common shares and common share equivalents outstanding.
(l) BASIS OF PRESENTATION
The fiscal year of the Company consists of eight four-week periods and four
five-week periods. Each quarter of the Company's fiscal year consists of two
four-week periods and one five-week period. The Company's fiscal year ends on
the Saturday nearest July 31 of each year. However, for clarity of
presentation, all information has been presented as if the fiscal year ended on
July 31.
(m) CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash and cash equivalents and accounts
receivable. The Company places its cash and cash
equivalents with federally insured institutions and in mutual funds. The
Company believes it is not exposed to any significant credit risk on cash and
cash equivalents.
Concentrations of credit risk with respect to accounts receivable is limited due
to the large number of customers comprising the Company's customer base. As a
result, at July 31, 1997, the Company does not consider itself to have any
significant concentrations of credit risk with respect to accounts receivable.
(n) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS requires that the Company disclose estimated fair
values of financial instruments. Cash and cash equivalents, accounts
receivable, notes receivable and notes payable are carried at amounts that
reasonably approximate their fair values.
(o) RECENTLY ISSUED ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, EARNING PER SHARE (FAS No. 128) which
changes the computation and disclosure of earnings per share. FAS No. 128 is
effective for both interim and annual periods ending after December 15, 1997
with restatement of prior periods. The adoption of FAS No. 128 is not expected
to have a material impact on the Company's earnings per share.
(3) ACQUISITIONS:
During fiscal 1997, the Company purchased the assets of four preschool centers
in the Phoenix, Arizona metropolitan area. The total aggregate purchase price
for these acquisitions was $775,000. Additional acquisition costs totaled
approximately $144,000.
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<PAGE>
The acquisitions were accounted for as purchases. The amount of the purchase
price in excess of net tangible assets acquired was allocated as follows:
goodwill - $488,000; noncompete agreements - $96,000, and; customer base -
$45,000.
Summarized below are the unaudited pro forma consolidated results of operations
of the Company for the fiscal year ended July 31, 1997 assuming the acquisitions
were consummated as of August 1, 1996. The unaudited pro forma consolidated
results of operations have been prepared for comparative purposes only and are
not necessarily indicative of what would have occurred had these transactions
been made at August 1, 1996 or of results which may occur in the future.
Revenues $14,761,000
Net loss (1,058,000)
Net loss per common share (.52)
During fiscal 1996, the Company purchased, for cash, the assets of the following
five child care centers: two child care centers in the Denver, Colorado
metropolitan area on November 1, 1995, one center in Colorado Springs, Colorado
on April 5, 1996, one center in Sierra Vista, Arizona on April 16, 1996, and
one center in Phoenix, Arizona on June 28, 1996. These acquisitions increased
the Company's licensed capacity by 791. The total aggregate purchase price for
these acquisitions was $850,000. Additional acquisition costs totaled $137,817.
The acquisitions were accounted for as purchases. The amount of each purchase
price in excess of net tangible assets acquired was allocated among the
following intangible assets: goodwill-$584,087; noncompete agreements-$105,000;
and customer base-$56,000.
(4) PRESCHOOL SERVICES, INC. AND UNUSUAL CHARGES:
In January 1994, the Board of Directors approved the transfer of a portion of
the Company's operations to Preschool Services, Inc. (PSI), a Hawaii nonprofit
corporation. PSI has certain contracts with the state of Hawaii to provide
child care services, one of which is subject to annual renewal. The Company
provides PSI with management, administration and educational programs for PSI's
child care centers and leases substantially all of the equipment and other
property necessary for the operation of the related child care centers to PSI
under an Administrative Services Agreement, License and Equipment Lease (the PSI
Agreement). The PSI Agreement stipulates that the Company is to receive an
administrative services fee (the Administrative Fee) for providing the services
described above. Pursuant to the PSI Agreement, the Administrative Fee equals
9% of PSI's adjusted gross revenues each month, subject to certain limitations.
During fiscal 1995, the Company agreed to defer future Administrative Fees and
lease payments due from PSI until such time as PSI's cash flow is adequate to
fund these fees, which the Company initially estimated would be no sooner than
fiscal 1998. In connection with this deferral, the accumulated amounts due from
PSI at July 31, 1995, were converted to a promissory note equal to the present
value of the expected future payments to be received from PSI related to the
balance of the receivable outstanding at July 31, 1995, over a period of seven
years. The promissory note bears interest at 8.0%, with monthly payments due
beginning January 1998 through July 2002. During fiscal 1997, the note
receivable of $256,251 was fully reserved through a provision to unusual charges
due to continued cash flow difficulties of PSI. In fiscal 1997 and 1996, all
administrative fees were deferred which totaled $50,000 and $42,000,
respectively.
The Company is the lessee under two leases for property subleased to PSI and is
contingently liable for the lease payments to third-parties. Since the
estimated future cash flows of PSI will not be sufficient to make the scheduled
lease payments, the Company recorded a provision for these contingent
liabilities of approximately $696,000 in fiscal 1997 and $418,000 in fiscal 1996
related to the remaining lease payments (less estimated sublease rental income)
which are included in unusual charges. The reserve balance for these contingent
liabilities at July 31, 1997 is approximately $822,000. In fiscal 1996, an
allowance was provided for 1996 lease payments not paid by PSI to the Company
totaling $374,000 in addition to unusual charges.
9
<PAGE>
Due to continued operating losses incurred during 1996, PSI approved a plan to
close certain schools prior to the expiration of the leases. In fiscal 1997,
PSI decided to close the two schools prior to the expiration of the leases and
relocate the children to other facilities. Since the estimated cash flows will
not be sufficient to recover the leasehold improvements related to these two
schools, the Company recorded impairment reserves for these assets which totaled
approximately $162,000 in fiscal 1997 and $184,000 in fiscal 1996 which are
included in unusual charges.
(5) PROPERTY AND EQUIPMENT:
Property and equipment and property and equipment leased to PSI at July 31, 1997
consist of the following:
Property and
Property Equipment
and equipment Leased to PSI
------------- -------------
Furniture and fixtures $ 1,006,000 $ 80,000
Equipment 1,512,000 267,000
Vehicles 758,000 47,000
Leasehold improvements 934,000 981,000
------------- -------------
4,210,000 1,375,000
Less-Accumulated depreciation and
amortization (2,226,000) (997,000)
Less-Impaired asset reserve - (260,000)
------------- -------------
$ 1,984,000 $ 118,000
------------- -------------
------------- -------------
(6) CREDIT FACILITIES:
The Company has four credit facilities with a financial institution totaling
$3,000,000: (i) a $500,000 revolving working capital line, bearing interest at
prime (8.50 at July 31, 1997) plus 1.50%; (ii) a $500,000 note for the purchase
of vehicles and equipment, bearing interest at prime plus 1.75%; (iii) a
$1,000,000 nonrevolving line of credit for acquisition financing, bearing
interest at prime plus 2.5%; and (iv) a $1,000,000 term loan which was used to
refinance the Company's existing notes payable and capital leases, bearing
interest at 10.42% annually. The credit facilities are secured by all of the
Company's accounts receivable, inventory, furniture, vehicles and equipment. As
of July 31, 1997, the amounts borrowed under the credit facilities listed above
are as follows: working capital line - $224,000; equipment note - $151,000;
acquisition financing line - $0; and term loan - $901,000.
Amounts borrowed under the working capital line are due in monthly installments
of interest with all unpaid principal and interest due on April 24, 1998.
Amounts borrowed under the equipment note and term loan are payable in monthly
installments of principal and interest (see Note 7).
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<PAGE>
The Company is required to meet certain covenants under these credit facilities,
including maintaining certain minimum net working capital balances and meeting
certain net worth, debt and interest coverage ratios. The terms of the credit
facilities, also limit the ability of the Company to sell assets without the
consent of the bank.
The lines of credit are renewable each year on April 30. The Company expects to
be able to renew the lines of credit under similar terms in the future.
However, if the credit lines are not renewed, there is no assurance that they
can be replaced.
As the result of refinancing certain debt, the Company recognized a gain of
$67,000 in fiscal 1997 which is included in other income and gains in the
accompanying statements of operations.
(7) NOTES PAYABLE:
Notes payable consist of the following:
Installment notes payable to Imperial Bank, payable monthly with interest
rates ranging from prime (8.50% at July 31, 1997) plus 1.75% to 10.42%,
maturing through July 2002, secured by accounts receivable, equipment,
fixed assets and vehicles (approximately $726,000 at July 31, 1997)
$1,052,000
Less-current portion 249,000
----------
Long-term portion $ 803,000
----------
----------
Repayment of notes payable are scheduled as follows:
Year Ended
July 31,
----------
1998 $ 249,000
1999 272,000
2000 299,000
2001 207,000
2002 25,000
----------
$1,052,000
----------
(8) COMMITMENTS AND CONTINGENCIES:
The Company leases 26 of its child care facilities and certain vehicles and
equipment under agreements which have been classified as operating leases for
financial reporting purposes. Under these agreements, the Company generally has
responsibility for maintenance, utilities, taxes and insurance expenses. Certain
agreements provide for the escalation of future rents based on the Consumer
Price Index or other formulas. Renewal of the agreements are for periods of 5 to
25 years at the Company's discretion. Two of these child care facilities have
been subleased to PSI.
For those leases that require fixed rental escalations during their lease terms,
rent expense is recognized on a straight-line basis resulting in deferred rent
of approximately $357,000 at July 31, 1997. The liability will be satisfied
through future rental payments.
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<PAGE>
The Company pays no rent at 9 of its child care centers. However, profit
sharing arrangements exist with the owners of five of these facilities, all of
which are managed for PSI. Amounts paid to the owners of these facilities are
paid by PSI. The arrangements with the remaining four child care centers
provide for the Company to be reimbursed for expenses and paid a predetermined
fee for operating the child care centers.
Future lease commitments under noncancelable operating leases are as follows:
Year Ending
July 31,
-----------
1998 $ 3,034,000
1999 2,405,000
2000 2,102,000
2001 1,963,000
2002 1,510,000
Thereafter 6,236,000
------------
$ 17,250,000
------------
------------
During fiscal 1997 and 1996, the Company leased equipment used in two
preschool facilities from an officer/stockholder for $2,000 per month. This
lease expired in November 1996. The Company also leased four vehicles used
at its preschool facilities during fiscal years 1997 and 1996 from
officers/stockholders with aggregate monthly payments of approximately $2,000
per month through March 1997. The Company bought these four vehicles from the
officers/stockholders in April 1997 for $31,000.
Total rent expense for operating leases, net of sublease income of $188,000 and
$243,000 and including amounts paid to related parties of $72,000 and $51,000,
was $2,750,000 and $2,296,000 for fiscal years 1997 and 1996, respectively.
The Company has employment agreements with two of its principal officers (the
Employee). These agreements, which have been amended from time-to-time, provide
for minimum salary levels, cost of living changes, as well as for the payment of
incentive bonuses, at the discretion of the Compensation Committee of the
Company's Board of Directors, in accordance with Company bonus plans in effect.
Each of the agreements has a perpetual three-year term, such that on any given
date each agreement has a three-year remaining term. The agreements provide
that the employees' salaries will be reviewed annually, but such salaries may
not be decreased.
Each of the agreements provide that if the Employee is terminated by the Company
other than for cause or disability, or by the Employee for good reason (as
defined in the agreements), the Company shall pay to the Employee (i) his or her
salary through the termination date plus any accrued but unpaid bonuses, and
(ii) a lump sum payment equal to the sum of three years of the Employee's then
current annual salary and an amount equal to all bonuses paid to the Employee in
the three years immediately preceding termination. In addition, the Company
must maintain until the first to occur of (i) the Employee's attainment of
alternative employment or (ii) three years from the date of termination, the
Employee's benefits under the Company's benefit plans to which the Employee and
his or her eligible beneficiaries were entitled immediately prior to the date of
termination. In addition, all options or warrants to purchase common stock held
by the Employee on the date of termination become exercisable on the date of
termination, regardless of any vesting provisions, and remain exercisable for
the longer of one year from the date of termination or the then remaining
unexpired term of such warrants or options.
The Company has an acquisition consulting and investor relations agreement with
a consultant. Pursuant to the agreement, the consultant provides various
acquisition consulting and investor relations services to the Company,
including consulting with the Company on matters involving the financial
community as well as internal financial matters. The agreement specifies
monthly payments of $3,500 for investor relation services. Pursuant to the
agreement, the Company granted the consultant, as additional consideration for
consulting services, warrants to purchase 145,000 shares of the Company's common
stock at a price of $1.21875 per share and 50,000 shares of the
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<PAGE>
Company's common stock at a price of $1.375 per share and has agreed to
reimburse the consultant for certain expenses. The agreement terminates on
December 31, 1998 with an automatic renewal through December 31, 2000; however,
the agreement may be terminated for cause (as defined in the agreement) upon ten
days notice to the consultant.
The Company has a financial consulting agreement with another consultant. The
agreement specifies monthly payments of $3,000 for financial consulting services
and the Company has agreed to reimburse the consultant for certain expenses.
Pursuant to the agreement, the Company granted warrants to the consultant to
purchase 300,000 shares of the Company's common stock at an exercise price of
$1.375 per share with respect to an initial 150,000 shares and an exercise price
of $2.00 per share with respect to the remaining 150,000 shares. In addition to
the compensation described above, the Company has agreed to pay the consultant a
finder's fee in the event the Company effectuates a corporate restructuring,
merger, joint venture or acquisition initiated by the consultant based on a
percentage of the consideration of the transaction. The agreement terminates on
November 3, 1998 and can be renewed for subsequent two year terms.
(9) DEFERRED GAIN ON SALE AND LEASEBACK OF PRESCHOOL FACILITIES:
In 1988, the Company entered into sale and leaseback agreements for three
preschool facilities. The aggregate gain of $491,000 is being amortized as a
reduction of rent expense over the lease terms of ten and fifteen years. The
unamortized deferred gain on the sale and leaseback of these preschool
facilities was $88,000 at July 31, 1997.
(10) SHAREHOLDERS' EQUITY:
The Company's authorized capital stock consists of 10,000,000 shares of common
stock, par value $.01, and 1,000,000 shares of preferred stock par value $1.00.
COMMON STOCK AND WARRANTS:
At July 31, 1995, the Company had outstanding warrants to purchase 1,000,000
shares of the Company's common stock. The warrants were issued as part of the
Company's initial public offering in September 1987, and had an exercise price
of $5.00 per share. On September 20, 1995, the expiration date of the warrants
was extended until November 6, 1995 and the exercise price was reduced to $1.00
per share. As a condition of this extension and change in exercise price,
warrant holders were able to exercise only one of every 16 warrants held or a
total of 62,500 warrants. On November 6, 1995, warrants representing the right
to purchase 47,074 shares of common stock were exercised, and the Company issued
47,074 shares of common stock in exchange for net proceeds of $40,000.
SERIES A PREFERRED STOCK:
On February 10, 1995, the Board of Directors adopted a shareholder rights plan
(the "Plan"), which authorized the distribution of one right to purchase one
one-thousandth of a share of $1.00 par value Series A Participating Preferred
Stock (a "Right") for each share of common stock of the Company. Rights will
become exercisable following the tenth day (or such later date as may be
determined by a majority of the Directors not affiliated with an acquiring
person or group) after a person or group (a) acquires beneficial ownership of
15% or more of the Company's common stock or (b) announces a tender or exchange
offer, the consummation of which would result in ownership by a person or group
of 15% or more of the Company's common stock.
Upon exercise, each Right will entitle the holder (other than the party seeking
to acquire control of the Company) to acquire shares of the common stock of the
Company or, in certain circumstances, such acquiring person at a 50% discount
from market value. The Rights may be terminated by the Board of Directors at
any time prior to the date they become exercisable; thereafter, they may be
redeemed for a specified period of time at $0.001 per Right.
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<PAGE>
On May 16,1997, the Board of Directors of the Company authorized the redemption
of all outstanding Rights of the Company at a redemption price of $.001 per
Right. The Board fixed the close of business on May 19, 1997, as the record
date for the determination of holders of common stock entitled to receive notice
of the redemption and a check from the Company in payment of the applicable
redemption price.
SERIES B PREFERRED STOCK AND WARRANTS:
On April 6, 1990, the Company completed the sale of 500,000 shares of $1.00 par
value Series A Preferred Stock for $500,000. On November 22, 1991, the Company
issued 500,000 shares of its Series B Preferred Stock ("Series B") in exchange
for its formerly issued Series A Preferred Stock and the Series A Preferred
Stock was retired. The transaction also included the issuance of warrants to
purchase up to 500,000 shares of the Company's common stock at any time during
the period from April 6, 1990 to April 6, 1995 at $1.00 per share, subject to
adjustment. On April 6, 1995, all 500,000 warrants were exercised. Proceeds
from this issuance of common stock, net of issuance and registration costs of
$34,000, were $466,000. Each share of Series B has a $1.00 per share
liquidation preference, carries a $.10 per share annual cumulative dividend and
is convertible into one share of the Company's common stock, subject to
adjustment. Cumulative dividends payable on the Series B as of July 31, 1997
were $4,000. In September 1997, all of the outstanding shares of Series B
Preferred Stock were converted into shares of common stock.
SERIES C PREFERRED STOCK AND WARRANTS:
In December 1995, the Company completed a public offering of 333,333 newly
issued shares of Series C Preferred Stock at $15 per share. Net proceeds from
the offering were $4,026,000, which are being used primarily for expansion of
the Company's operations, both through the opening of additional Company
facilities and the acquisition of existing child care centers.
In February 1996, the underwriters of the public offering exercised their option
to purchase 24,000 additional shares of Series C Preferred Stock to cover
over-allotments. These shares were sold by the Company at the same price and
same terms as those applicable to the initial offering of Series C Preferred
Stock resulting in net proceeds to the Company of $298,000.
Each share of Series C carries a 9% annual cumulative dividend and is
convertible into 7.0588 shares of the Company's common stock. Dividends payable
after the first anniversary of the sale of the Series C may, at the option of
the Company, be paid in shares of Common Stock having a fair market value equal
to the amount of the dividend. Cumulative dividends payable on the Series C as
of July 31, 1997 were $40,000.
14
<PAGE>
The Series C ranks junior to the Company's Series B in terms of dividends and
liquidation rights, but senior to all other capital stock of the Company.
At July 31, 1997, the Company had outstanding warrants to purchase an aggregate
of 33,333 shares of Series C Preferred Stock.
(11) INCOME TAXES:
Statement of Financial Accounting Standards No. 109 (SFAS 109), ACCOUNTING FOR
INCOME TAXES, requires the use of an asset and liability approach in accounting
for income taxes. Deferred tax assets and liabilities are recorded based on
differences between the financial statement and tax bases of assets and
liabilities at the tax rates in effect when these differences are expected to
reverse.
Deferred tax assets are reduced by a valuation allowance if, based on the weight
of available evidence, it is more likely than not that all or some portion of
the deferred tax assets will not be realized. The ultimate realization of the
deferred tax assets depends on the Company's ability to generate sufficient
taxable income in the future.
In fiscal 1997 and 1996 the valuation allowance was increased by $418,000 and
$244,000, respectively, primarily due to the increase in the Company's net
operating loss carryforwards. The net losses for both fiscal years was mainly
attributable to the unusual charges recorded by Company for impairments of
certain assets.
If the Company is unable to generate sufficient taxable income in the future,
increases in the valuation allowance will be required through a charge to
expense. If, however, the Company achieves sufficient profitability to realize
all of the deferred tax assets, the valuation allowance will be further reduced
and reflected as an income tax benefit in future periods.
15
<PAGE>
The components of the net deferred tax asset are as follows at July 31, 1997:
Current Long-Term Total
---------- ---------- ----------
Deferred Tax Liabilities:
Excess of book basis over tax
basis in fixed assets $ - $ (68,000) $ (68,000)
Other - (4,000) (4,000)
---------- ---------- ----------
- (72,000) (72,000)
Deferred Tax Assets:
Tax effect of net operating loss
carryforwards - 732,000 732,000
Allowance for doubtful accounts 14,000 - 14,000
Accelerated tax depreciation - 206,000 206,000
Deferred revenue 37,000 - 37,000
Accrued vacation and sick leave 81,000 - 81,000
Accrued bonus 14,000 - 14,000
Deferred rent 29,000 114,000 143,000
Deferred gain on sale of real estate 18,000 17,000 35,000
Asset impairment - 40,000 40,000
Rental reserve - 329,000 329,000
Intangible assets - 10,000 10,000
Management fee reserve - 273,000 273,000
Other - 3,000 3,000
Valuation allowance - (1,150,000) (1,150,000)
---------- ---------- ----------
193,000 574,000 767,000
---------- ---------- ----------
Net deferred tax assets $ 193,000 $ 502,000 $ 695,000
---------- ---------- ----------
---------- ---------- ----------
The Company's net operating loss carryforwards for federal income tax purposes,
which comprise 38% of total deferred tax assets, at July 31, 1997, expire as
follows:
2004 $ 384,000
2005 861,000
2006 564,000
2011 286,000
-----------
$ 2,095,000
-----------
-----------
The Company's net operating loss carryforwards for state income tax purposes
totaled approximately $218,000, which begin to expire in 2001.
A reconciliation of the federal income tax rate to the Company's effective tax
rate is as follows at July 31, 1997:
1997 1996
------ ------
Statutory federal rate (34)% (34)%
State taxes, net of federal benefit (6) (6)
Increase in valuation allowance 40 40
------ ------
0% 0%
------ ------
------ ------
(12) RELATED PARTY TRANSACTIONS:
Certain officers of the Company have personally guaranteed child care facility
lease payments to nonrelated
16
<PAGE>
parties. In addition, certain officers of the Company have personally
guaranteed the Company's outstanding debt. As of July 31, 1997, the aggregate
amounts of lease payments and other obligations guaranteed by these officers
totaled approximately $3,425,000.
(13) EMPLOYEE BENEFIT PLANS:
1987 STOCK OPTION PLAN
The Company's Stock Option Plan (the "1987 Plan") was adopted by the Board of
Directors and approved by the stockholders in July 1987. Only employees
(including officers and directors, subject to certain limitations) are eligible
to receive options under the 1987 Plan, under which 240,000 shares of common
stock are authorized for issuance. To date, options to purchase 219,632 of such
shares have been granted; such options have terms of five to ten years, with
exercise prices of $0.50 to $2.375 per share, which is generally the fair market
value of the underlying shares as of the date of grant. Options are generally
subject to a three or five-year vesting schedule.
The 1987 Plan provides for the granting to employees of either "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), or non-qualified stock options. The 1987 Plan is
administered by the Board of Directors of the Company, or a committee of the
Board, which determines the terms of options granted under the 1987 Plan,
including the exercise price and the number of shares subject to the option.
Generally, the exercise price of options granted under the 1987 Plan must be not
less than the fair market value of the underlying shares on the date of grant,
and the term of each option may not exceed eleven years (ten years in the case
of incentive stock options). Incentive stock options granted to persons who
have voting control over ten percent or more of the Company's capital stock are
granted at 110% of the fair market value of the underlying shares on the date of
grant and expire five years after the date of grant.
The 1987 Plan provides the Board of Directors with the discretion to determine
when options granted thereunder shall become exercisable. Generally, such
options may be exercised after a period of time specified by the Board of
Directors at any time prior to expiration, so long as the optionee remains
employed by the Company. No option granted under the 1987 Plan is transferable
by the optionee other than by will or the laws of descent and distribution, and
each option is exercisable during the lifetime of the optionee only by the
optionee.
1995 STOCK OPTION PLAN
The Company's 1995 Stock Option Plan (the "1995 Plan") authorizes the Board to
grant options to employees of the Company to purchase up to an aggregate of
500,000 shares of common stock. Officers and other employees of the Company
who, in the opinion of the Board of Directors, are responsible for the continued
growth and development and the financial success of the Company are eligible to
be granted options under the 1995 Plan. To date, options to purchase 391,126 of
such shares have been granted, with exercise prices of $1.1875 to $1.5125, per
share. Options may be non-qualified options, incentive stock options, or any
combination of the foregoing. In general, options granted under the 1995 Plan
are not transferable and expire eleven years after the date of grant (ten years
in the case of incentive stock options). The per share exercise price of an
incentive stock option granted under the 1995 Plan may not be less than the fair
market value of the common stock on the date of grant. Incentive stock options
granted to persons who have voting control over 10% or more of the Company's
capital stock are granted at 110% of the fair market value of the underlying
shares on the date of grant and expire five years after the date of grant.
17
<PAGE>
The 1995 Plan provides the Board of Directors with the discretion to determine
when options granted thereunder will become exercisable. Generally, such
options may be exercised after a period of time specified by the Board of
Directors at any time prior to expiration, so long as the optionee remains
employed by the Company. No option granted under the 1995 Plan is transferable
by the optionee other than by will or the laws of descent and distribution, and
each option is exercisable during the lifetime of the optionee only by the
optionee. No option may be granted after May 2, 2005.
NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
The Company's Non-Employee Directors Stock Option Plan (the "Directors' Plan")
was adopted by the Board of Directors in May 1995. Only non-employee directors
are eligible to receive options under the Directors' Plan, under which 100,000
shares are authorized for issuance. To date, options to purchase 40,000 shares
of common stock have been granted; such options have a term of six years with an
exercise price of $1.1875 to $2.1875 per share, which was the fair market value
of the underlying shares on the date of grant. Except for options granted on
the effective date of the Directors' Plan, which are fully vested, all options
granted under the Directors' Plan will be subject to a one-year vesting
schedule. All options granted or to be granted under the Directors' Plan are
non-qualified stock options.
On the date the Directors' Plan was adopted by the Company's Board of Directors,
each non-employee director was granted an option to acquire 10,000 shares of the
Company's common stock. Each non-employee director who joins the Board of
Directors after the date the Company's Board of Directors approved the plan will
likewise receive an option to acquire 10,000 shares of the Company's common
stock. In addition to the foregoing option grants, each year every non-employee
director automatically receives an option to acquire 5,000 shares of the
Company's common stock on the third business day following the date the Company
publicly announces its annual financial results; provided that such director has
attended at least 75% of the meetings of the Board of Directors and of the Board
Committees of which such non-employee director is a member in the preceding
fiscal year.
No option granted under the Directors Plan is transferable by the optionee other
than by will or the laws of descent and distribution, and each option is
exercisable during the lifetime of the optionee only by the optionee.
The Company has elected to continue to follow Accounting Principles Board
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25) and related
Interpretations in accounting for its employee stock options instead of adopting
the alternative fair value accounting provided for under Statement of Financial
Accounting Standard No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, (FAS No.
123). Under APB 25, because the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
FAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for 1997 and 1996,
respectively: risk-free interest rates of 6.0% and 6.0%; dividend yields of 0%
and 0%, volatility factors of the expected market price of the Company's common
stock of .657 and .648; and a weighted-average expected life of the options of 5
years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair values of the options
are amortized over the options' vesting period. Had the Company accounted for
its stock option plans and recorded compensation cost in
18
<PAGE>
accordance with FAS No. 123, the Company's pro forma net loss and net loss per
share for the year ended July 31 would have been as follows:
1997 1996
---------- ----------
Net loss available for common stock - as reported $1,609,000 $1,202,000
Net loss available for common stock - pro forma 1,623,000 1,223,000
Net loss per share - as reported .52 .40
Net loss per share - pro forma .53 .41
A summary of the Company's stock option activity, and related information for
the years ended July 31 follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------ -------------------------------------
Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Outstanding-beginning of year 630,000 $1.45 610,000 $1.43
Granted 56,126 1.29 26,189 2.02
Exercised (25,368) 0.94 - -
Canceled (10,000) 2.25 (6,189) 1.38
---------------- ---------------- ---------------- ----------------
Outstanding-end of year 650,758 $1.45 630,000 $1.45
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
Exercisable at end of year 493,317 $1.43 396,480 $1.45
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
Weighted-average fair value of
options granted during the year $1.29 $2.02
---------------- ----------------
---------------- ----------------
</TABLE>
Exercise prices for options outstanding as of July 31, 1997 ranged from $.50 to
$2.375. The weighted-average remaining contractual life of those options is 5
years.
401(k) PLAN
The Company has a contributory retirement plan (the 401(k) Plan) for the
majority of its employees with at least one year of service. The 401(k) Plan is
designed to provide tax-deferred income to the Company's employees in accordance
with the provisions of Section 401(k) of the Code.
The 401(k) Plan provides that each participant may contribute up to 20% of their
salary, not to exceed the statutory limit. The Company will make a
fixed-matching contribution equal to 25% of each participant's contribution, up
to a maximum of 2% of total annual cash compensation received by respective
participants. Under the terms of the 401(k) Plan, the Company may also make
discretionary year-end contributions. Each participant has the right to direct
the investment of his or her funds among certain named plans.
19
<PAGE>
(14) SUBSEQUENT EVENTS:
On September 2, 1997, the Company announced it had signed a definitive agreement
to combine with Education Alternatives, Inc. (EAI). Under the agreement,
Sunrise will operate as a wholly owned subsidiary of EAI.
Under the agreement, EAI is to acquire the Company for approximately $13.5
million in cash and stock, subject to adjustment.
EAI, based out of Minneapolis, operates private schools and has been awarded a
contract to operate 12 charter schools in Arizona.
It is expected that the exchange of shares will be tax-free to Sunrise
shareholders and that the merger, which is subject to the approval of
shareholders of both companies and certain other conditions, will be completed
by early January 1998.
During fiscal 1997, PSI was selected to operate charter schools in the State of
Arizona. In September 1997, PSI opened several schools as Sunray Charter
Schools. The Company has agreed to manage and lease space to Sunray Charter
Schools.
20
<PAGE>
EXHIBIT 99.3
SUNRISE EDUCATIONAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, 1997 July 31, 1997
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets
Cash and Cash Equivalents $ 1,219,141 $ 1,212,806
Accounts Receivable, net 775,666 746,570
Prepaid Expenses 241,242 542,515
Deferred Tax Asset, current portion 193,358 193,358
Inventory and Other Current Assets 29,461 33,323
- -----------------------------------------------------------------------------------------------
Total Current Assets 2,458,868 2,728,572
Property and Equipment, net 1,714,887 1,983,694
Property and Equipment Held for Lease, net 313,470 118,378
Deferred Tax Asset, net of current portion 502,000 502,000
Intangible Assets, net 1,244,987 1,252,559
Deposits and Other Assets 472,672 337,968
- -----------------------------------------------------------------------------------------------
Total Assets $ 6,7O6,884 $ 6,923,171
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Line of Credit $ 223,754 $ 223,754
Accounts Payable 329,436 297,973
Accrued Expenses 493,305 733,376
Dividends Payable on Preferred Stock 168,310 44,372
Notes Payable and Capital Leases, current portion 248,865 248,865
Accrued Rental Reserve, current portion 176,819 341,808
Deferred Rent, current portion 79,492 73,026
Deferred Gain on Sale and Leaseback of
Preschool Facilities, current portion 45,003 45,003
- -----------------------------------------------------------------------------------------------
Total Current Liabilities 1,764,984 2,008,177
- -----------------------------------------------------------------------------------------------
Notes Payable and Capital Leases, net of current portion 823,384 802,696
- -----------------------------------------------------------------------------------------------
Accrued Rental Reserve, net of current portion 480,000 480,000
- -----------------------------------------------------------------------------------------------
Deferred Rent, net of current portion 265,427 283,833
- -----------------------------------------------------------------------------------------------
Deferred Gain on Sale and Leaseback of Preschool
Facilities, net of current portion 38,862 42,645
- -----------------------------------------------------------------------------------------------
Shareholders' Equity
Preferred Stock, $1 par value - 1,000,000 shares
authorized, 357,333 shares issued and outstanding 357,333 857,333
Common Stock, $.01 par value - 10,000,000 shares
authorized, 4,335,095 shares issued and outstanding 43,350 32,529
Paid-in Capital 8,465,517 7,975,519
Accumulated Deficit (5,531,973) (5,559,561)
- -----------------------------------------------------------------------------------------------
Total Shareholders' Equity 3,334,227 3,305,820
- -----------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 6,706,884 $ 6,923,171
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
The accompanying footnotes are an integral part of these
consolidated financial statements.
<PAGE>
SUNRISE EDUCATIONAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months
Ended October 31,
--------------------------
1997 1996
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Revenue
Tuition and Other $ 3,846,800 $ 3,242,628
Government Programs 290,834 257,372
- -----------------------------------------------------------------------------------------------
Total Operating Revenue $ 4,137,634 $ 3,500,000
- -----------------------------------------------------------------------------------------------
Operating Expenses
Payroll 1,832,064 1,614,921
Facilities and Maintenance 1,368,527 1,085,612
General and Administrative 548,125 423,517
Government Programs 228,978 260,950
- -----------------------------------------------------------------------------------------------
Total Operating Expenses 3,977,694 3,385,000
- -----------------------------------------------------------------------------------------------
Income from Operations 159,940 115,000
Other Income (Expense)
Interest Income (Expense), net (7,573) 8,297
Other Income -- 9,330
- -----------------------------------------------------------------------------------------------
Total Other Income (Expense) (7,573) 17,627
- -----------------------------------------------------------------------------------------------
Net Income $ 152,367 $ 132,627
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Net Income (Loss) Available
for Common Stock $ 28,429 $ (473)
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Net Income per Common Share
and Common Share Equivalent (Note 2)
Primary $ 0.01 $ (0.00)
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Weighted Average Number of
Common Shares and Common
Share Equivalents Outstanding
Primary 3,853,985 3,015,261
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
The accompanying footnotes are an integral part of these
consolidated financial statements.
2
<PAGE>
SUNRISE EDUCATIONAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months
Ended October 31,
-----------------------
1997 1996
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 152,367 $ 132,627
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Depreciation and Amortization 196,794 156,379
Amortized Gain on Sale of Real Estate (3,783) (11,251)
Deferred Rent (11,940) (52,043)
Provision for Doubtful Accounts 27,039 15,359
Gain on Disposal of Property and Equipment 0 (9,330)
Changes in Assets and Liabilities, net of
effect of businesses acquired:
Increase in Accounts Receivable (56,135) (171,761)
Decrease (Increase) in Prepaid Expenses 301,273 (102,032)
Decrease (Increase) in Inventory and Other Current Assets 3,862 (7,280)
(Increase) Decrease in Deposits and Other Assets (134,704) 252,487
Increase (Decrease) in Accounts Payable 31,463 (155,097)
(Decrease) Increase in Accrued Expenses (240,071) 188,245
Decrease in Accrued Rental Reserve (164,989) (73,048)
- -----------------------------------------------------------------------------------------------
Total Adjustments (51,191) 30,628
- -----------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 101,176 163,255
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Child Care Centers -- (494,264)
Purchases of Property and Equipment (115,507) (394,469)
Proceeds from Disposal of Property and Equipment -- 9,330
- -----------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (115,507) (879,403)
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of Dividends -- (133,100)
Proceeds from Notes Payable 76,969 54,408
Borrowings on Lines of Credit -- 50,000
Payments on Notes Payable and Capital Leases (56,281) (66,402)
- -----------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 20,688 (95,094)
- -----------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 6,357 (811,242)
Cash and Cash Equivalents, Beginning of Period 1,212,806 2,630,616
- -----------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period $ 1,219,163 $ 1,819,374
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
Cash Paid During the Period for Interest $ 25,236 $ 18,112
Cash Paid for Income Taxes -- --
Note Payable Issued for Acquisition of Child Care Centers -- 425,000
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
The accompanying footnotes are an integral part of these
consolidated financial statements.
3
<PAGE>
SUNRISE EDUCATIONAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
- -------------------------------------------------------------------------------
The fiscal year of Sunrise Educational Services, Inc. (the "Company")
consists of eight four-week periods and four five-week periods. Each
quarter of the Company's fiscal year consists of two four-week periods and
one five-week period. The Company's fiscal year ends on the Saturday
nearest July 31 of each year, and the first quarter ends on the Saturday
nearest October 31. However, for clarity of presentation, all information
has been presented as if the first quarter ended on October 31 and the
fiscal year ended on July 31.
The consolidated financial statements included herein have been prepared
by the Company without audit pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of Management, the
accompanying interim financial statements reflect all adjustments,
consisting only of normal recurring adjustments, necessary to present
fairly the Company's financial position and its results of operations and
cash flows for the three month periods ended October 31, 1997 and 1996.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. Certain
reclassifications have been made to amounts previously reported for
fiscal 1997 to conform with the fiscal 1998 presentation. It is suggested
that these interim financial statements be read in conjunction with the
Company's 1997 Annual Report on Form 10-KSB. The results of operations
for the interim periods are not necessarily indicative of the results to
be expected for the complete fiscal year.
The consolidated financial statements include the accounts of Sunrise
Educational Services, Inc. and Sunrise Preschools Hawaii, Inc.
2. NET INCOME PER COMMON SHARE AND COMMON SHARE EQUIVALENT
- -------------------------------------------------------------------------------
Primary net income per share is computed by dividing net income available
for common stock (net income less dividends accrued during the period on
Series B and Series C Preferred Stock) by the weighted average number of
common shares and common share equivalents outstanding during the period.
Shares issuable upon the exercise of warrants and employee stock options
that are considered antidilutive are not included in the weighted average
number of common shares and common share equivalents outstanding. Fully
diluted net income per share is not included because the calculation for
that period is antidilutive.
3. INCOME TAXES
- -------------------------------------------------------------------------------
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes.
As of July 31, 1997, net operating loss carryforwards totaled
approximately $2,095,000, and expire through the year 2011. Accordingly,
income taxes on income generated during the three month periods ended
October 31, 1997 and 1996 have been offset by the available net operating
loss carryforwards.
4
