<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
------------ -------------
Commission file number 000-21567
EDUCATIONAL MEDICAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 65-0038445
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1327 Northmeadow Parkway, Suite 132, Roswell, Georgia 30076
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 475-9930
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK,
PAR VALUE $.01
PER SHARE
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 [ ]
Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference to Part
III of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant based on the last sale price for such stock at June 23, 1997:
$3,616,822
The number of shares outstanding of each of the registrant's classes of common
stock, as of June 23, 1997: 7,383,283(one class).
DOCUMENTS INCORPORATED BY REFERENCE
The Company's definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders which will be filed pursuant to Regulation 14A not later than July
29, 1997 is incorporated by reference in Part III hereof.
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EDUCATIONAL MEDICAL, INC.
FORM 10-K
INDEX
<TABLE>
<S> <C>
PART I ............................................................................................ 1
ITEM 1. BUSINESS ............................................................................... 1
ITEM 2. PROPERTIES ............................................................................. 19
ITEM 3. LEGAL PROCEEDINGS ...................................................................... 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .................................... 21
PART II ........................................................................................... 21
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS .................. 21
ITEM 6. SELECTED FINANCIAL DATA ................................................................ 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS .................................................................. 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ............................................ 34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE ................................................................... 34
PART III .......................................................................................... 35
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT .................................... 35
ITEM 11. EXECUTIVE COMPENSATION ................................................................ 35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ........................ 35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ........................................ 35
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ....................... 35
SIGNATURES ........................................................................................ 41
</TABLE>
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PART I
ITEM 1. BUSINESS
COMPANY HISTORY
The Company, a Delaware corporation, was founded in 1988 by Gary D.
Kerber, the Chairman of the Board and President of the Company. The Company
began business by acquiring seven schools in fiscal 1989 and 1990, all of which
offered programs in the healthcare field. In fiscal 1992, the Company
continued to grow by acquisition and implemented a new strategy to diversify
outside of the healthcare field by acquiring a fashion and design school. In
fiscal 1993 and 1994, the Company acquired seven additional schools which
included schools offering programs in the fields of healthcare, business,
fashion and design, and photography. In fiscal 1997, the Company acquired six
schools which included schools offering programs in the fields of healthcare
and business - See "Fiscal Year 1997 Acquisitions." As a result of its fiscal
1992, 1993, 1994 and 1997 acquisitions (4,176 students were attending such
schools at the date of their respective acquisitions) and increasing enrollment
at its existing and newly acquired schools, the number of students attending
the Company's schools rose 3,153 from 2,840 at March 31, 1993 to 5,993 at March
31, 1997. During the same period, the Company's net revenues increased 97% from
$25.1 million for the year ended March 31, 1993 to $49.4 million for the year
ended March 31, 1997. As of March 31, 1997, the Company owned and operated 19
schools in nine states. The foregoing and all other information include the
operations of the Company's two schools in Nebraska, which were acquired in
fiscal 1997 and accounted for as a pooling of interests.
THE INITIAL PUBLIC OFFERING
In October 1996, the Company completed an initial public offering (the
"IPO") of 2,200,000 shares of its common stock and received net proceeds of
approximately $19.3 million. Approximately $4.8 million of the net proceeds of
the IPO were used to repay indebtedness and related interest and expenses. The
remainder of the net proceeds, approximately $14.5 million, have been and
continue to be used for general corporate purposes, principally the expansion
of its operations through the acquisition of additional schools and adding
academic programs at existing schools. Certain stockholders also sold 410,000
shares in the IPO; the Company received no proceeds related to these sales.
FISCAL YEAR 1997 ACQUISITIONS
During the fiscal year ended March 31, 1997, the Company acquired a total
of six schools operating in Texas, Maryland and Nebraska.
The Texas Acquisition
In September 1996, the Company acquired three Texas schools (the "Texas
Schools") for $2.5 million (the "Texas Acquisition"). As of the acquisition
date, approximately 706 students attended the schools, which offer diploma
programs in the healthcare field at locations in San Antonio, McAllen, and El
Paso, Texas. As of March 31, 1997, approximately 844 students attended the
Texas Schools. The acquisition was accounted for as a purchase and the results
of operations of the Texas Schools are included in the consolidated results
of operations of the Company, effective September 1996.
Of the $2.5 million purchase price for the Texas Acquisition, $1,250,000
was paid in cash and the remaining $1,250,000 was financed by the issuance of
the Company's five-year promissory note
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bearing interest at 8% per annum and due in five equal annual principal
payments, beginning in fiscal year 1998.
The Maryland Acquisition
In December 1996, the Company acquired one school in Maryland known as
Hagerstown Business College (the "Hagerstown School") for $2.7 million in cash
(the "Maryland Acquisition"). As of the date of the acquisition, approximately
495 students attended Hagerstown Business College, which offers diploma and
degree programs in the field of business at a single location in Hagerstown,
Maryland, which is located in the Washington, D.C.-Baltimore corridor. As of
March 31, 1997 approximately 435 students attended the Hagerstown School. The
decrease is a result of the seasonal timing of student starts. The acquisition
was accounted for as a purchase and the results of operations of the Hagerstown
School are included in the consolidated results of operations of the
Company, effective December 1996.
The Nebraska Acquisition
On March 31, 1997, the Company acquired two schools located in Nebraska
(the "Nebraska Schools") by merging Educational Management, Inc., a privately
held corporation, which previously operated the schools, into a wholly-owned
subsidiary of the Company in exchange for 761,263 shares (the "Merger Shares")
of the Company's common stock (the "Nebraska Acquisition"). As of March 31,
1997, approximately 687 students attended the Nebraska Schools, which offer
degree and diploma programs in business and healthcare at locations in Lincoln,
Nebraska ("Lincoln") under the name of the "Lincoln School of Commerce," and
Omaha, Nebraska ("Omaha") under the name "Nebraska College of Business." The
Nebraska Acquisition has been accounted for as a pooling of interests, and
therefore the results of the Nebraska Schools' operations are included in the
restated consolidated results of operations of the Company for fiscal 1997
and all prior periods.
The Company has agreed to file a registration statement pursuant to the
Securities Act of 1933 (the "Act") with respect to the Merger Shares prior to
August 1, 1997. When declared effective by the Securities and Exchange
Commission (the "SEC"), and provided it continues to be effective, such
registration statement will enable the holders of the Merger Shares to sell
their shares in the public market.
OVERVIEW
As of March 31, 1997, the Company provides diversified career oriented
postsecondary education to approximately 6,000 students in 19 schools located
in nine states. The Company's 19 schools offer diploma and/or associate degree
programs designed to provide students with the knowledge and skills necessary
to qualify them for entry level employment in the fields of healthcare (offered
in 17 schools), business (offered in seven schools), fashion and design
(offered in three schools), and photography (offered in one school). The
Company's curricula include programs leading to employment in nine of the 15
fastest growing occupations (measured by percentage growth from 1994 through
2005) as projected by the U.S. Department of Labor. At March 31, 1997,
approximately 67% of the Company's students were enrolled in programs in the
healthcare field. As of the same date, approximately 32% of the Company's
students were enrolled in associate degree programs and the remainder were
enrolled in diploma programs. Due to the diversity of the programs offered by
the Company's schools, graduates of the Company's programs are employed by a
wide variety of employers, including hospitals, physicians, insurance
companies, retailers, corporate graphics departments, photographic studios and
other businesses.
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The Company believes the demand for postsecondary career oriented
education will increase over the next several years as a result of recognized
trends, including (i) a projected 21% growth in the number of new high school
graduates from approximately 2.5 million in 1993-94 to approximately 3.0
million in 2005-06, (ii) the increasing enrollment of students over the age of
24 in postsecondary education institutions as they seek to enhance their skills
or retrain for new technologies, and (iii) the increasing recognition of the
income premium attributable to higher education degrees, with individuals
holding associate degrees earning on average approximately 30% more income
during their lifetimes than individuals holding only high school diplomas.
The Company derives a substantial majority of its revenues from federal
financial aid received by the students of its schools under Title IV programs
("Title IV Programs") administered by the United States Department of Education
("Department of Education") under the Higher Education Act of 1965, as amended
(the "HEA"). Each of the Company's schools participates in Title IV Programs.
According to the Department of Education, there were approximately 2,187
accredited, proprietary postsecondary main campuses that participate in Title
IV programs as of March 1997. The ownership of these schools is highly
fragmented. Although the industry appears to be moving into a consolidation
phase, management believes that no organization either holds a significant
national market share or owns or operates more than 75 schools.
The Company's goal is to increase its market share in the expanding market
for postsecondary education and improve profitability by (i) acquiring
additional schools, (ii) promoting internal growth at the Company's existing
and any newly acquired schools, and (iii) enhancing operating efficiencies. The
Company has implemented the following strategies to achieve these goals:
Acquisition Strategy
The Company intends to acquire additional schools and integrate them into
its existing school system. The Company believes that the fragmentation of the
postsecondary education market provides significant opportunities to
consolidate existing independently owned schools. The Company expects to
utilize a majority of the proceeds of the IPO in connection with such
acquisitions.
In general, the Company's principal acquisition criteria are: historical
profitability; acceptable default rates with respect to federally guaranteed or
funded student loans; established and marketable curricula; and locations with
populations in excess of 100,000. Each of the Company's acquisitions during
fiscal 1997 met these criteria. The Company intends to concentrate its
acquisition efforts on schools which satisfy its general eligibility criteria
regardless of whether they offer programs in the fields of study in which
programs are currently being offered at the Company's schools. However, the
Company will consider other school acquisitions which it believes will further
its long-term goals. The Company believes the newly acquired schools can
benefit from its marketing analysis, accounting, information systems, financial
aid and regulatory compliance systems to increase enrollment and enhance
operating efficiencies. The Company also believes that both new and existing
schools will benefit from the ability to replicate successful programs among
the schools.
The Company believes its acquisition strategy and the increased liquidity
provided by the proceeds of the IPO and the availability of funds pursuant to
its recently completed loan arrangements with a major bank will encourage
acquisition candidates to consider the Company as a leading potential
acquirer. The Company's experience with acquiring and integrating schools
offering diverse curricula
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provides it with the ability to consider a wide variety of potential school
candidates. The Company believes that its decentralized management strategy,
which in many cases will enable existing management to remain involved in the
operations of acquired schools, also will enhance its ability to attract
acquisition candidates.
Internal Growth Strategy
The Company intends to increase student enrollment at its existing and any
newly acquired schools by continuing to enhance local marketing efforts and
increasing the number and variety of program offerings at its schools.
The Company's ability to increase enrollment is limited by the capacity of
its facilities and its ability to attract teachers to maintain appropriate
student/teacher ratios. In the past, the Company has not had any difficulty in
expanding its facilities to accommodate increased enrollment or relocating
facilities if expansion was not feasible. The Company has also been able to
maintain appropriate student/teacher ratios by offering its existing teachers
the opportunity to work additional hours and by recruiting additional teachers.
Based on its experience, the Company anticipates that neither facilities nor
faculty will constitute a significant barrier to increasing enrollment.
The Company's decentralized marketing strategy makes use of centralized
marketing data which tracks, among other things, lead sources, media
expenditures and individual school enrollments on a weekly basis. Individual
schools utilize these statistics to monitor their own marketing efforts. These
statistics, combined with placement statistics, allow the individual schools to
respond quickly to changing employment markets by developing new programs or
changing the emphasis placed on existing programs, and to identify new
populations of student candidates. The constant monitoring of enrollment
activity also allows the Company to determine whether it is appropriate to
increase its capital commitment to additional marketing efforts either to
improve unsatisfactory performance or to take advantage of successfully
marketed programs.
The Company intends to continue to increase the number and variety of
programs offered at its schools by (i) developing new diploma and degree
programs, (ii) replicating existing programs at schools where such programs
were not previously offered, and (iii) introducing associate degree granting
programs at all of its schools currently offering only diploma programs.
The Company intends to continue to create new programs at individual
schools and to replicate its new and existing programs for introduction into
additional schools on a market-selected basis to increase student enrollment
and revenue at its existing schools.
The Company intends to continue to increase the number of associate degree
programs at those schools already approved to grant degrees and to introduce
degree granting programs at all of its other schools. Associate degree programs
generally generate greater revenue to the Company on a per student basis than
diploma programs because generally they take longer to complete and are more
expensive than diploma programs. In addition, the Company believes the ability
of its individual schools to offer one or more associate degree programs
enables the schools to attract additional students from market segments with
different academic goals. The Company also believes such programs attract
diploma students because of the increased prestige the associate degree
programs bring to the diploma programs. Furthermore, the continued
participation in the schools' associate degree programs by students desiring to
continue their studies beyond the diploma level has the same economic impact as
a newly enrolled degree student. In order to introduce additional degree
programs, the Company must secure approval
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from relevant state and accrediting agencies. After receiving such approval, in
order to receive Title IV funding, the schools must apply to the Department of
Education for certification of the new degree program for eligibility under
Title IV. The time to complete this process varies from state to state, and the
entire process as to an individual program has taken the Company up to one year
to complete.
Operating Strategy
The Company provides each of its schools with certain services which the
Company believes can be performed most efficiently and cost effectively by a
centralized office. Such services include marketing analysis, accounting,
information systems, financial aid and regulatory compliance. The Company
believes this will enable it to achieve significant economies of scale during
its planned expansion by combining a number of general and administrative
functions at the home office and regional levels. The Company believes that
this leaves local management the flexibility to react to the needs of its
students and changing job markets both promptly and effectively.
Although the Company provides centralized services to its schools, it
operates through a decentralized management structure to manage them. The
Company manages its schools with experienced local managers who have a valuable
understanding of their local markets and businesses. The Company intends to
continue its strategy of operating with a decentralized management structure in
which local school management is empowered to make most of the day-to-day
operating decisions at each school and are primarily responsible for the
profitability and growth of that school.
SCHOOLS
The following table shows the location of each of the Company's schools,
the name under which it operates, the date of its acquisition, the fields of
study in which it offers its programs, its degree granting status and number of
students attending the school at March 31, 1997 and at the time of its
acquisition.
<TABLE>
<CAPTION>
APPROXIMATE
STUDENT STUDENT
ASSOCIATE INSTITUTIONAL POPULATION POPULATION
DATE DEGREE ACCREDITING AT DATE OF AT MARCH
INSTITUTION ACQUIRED CURRICULUM GRANTING (1) AGENCY (2) ACQUISITION 31, 1997
- ----------- ------------- ---------- ----------------- -------------- ------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Maric College of
Medical Careers
San Diego, CA 4/88 Healthcare Yes ACCSCT 135 829
Maric College of
Medical Careers
San Marcos Campus
Vista, CA (3) 4/88 Healthcare Yes(4) ACCSCT 91 222
Maric College of
Medical Careers
Vista Campus
Vista, CA (3) 4/88 Healthcare Yes(4) ACCSCT 14 265
</TABLE>
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<TABLE>
<CAPTION>
APPROXIMATE
ASSOCIATE STUDENT STUDENT
DEGREE INSTITUTIONAL POPULATION POPULATION
DATE GRANTING ACCREDITING AT DATE OF AT MARCH
INSTITUTION ACQUIRED CURRICULUM (1) AGENCY (2) ACQUISITION 31, 1997
- ----------- ------------- ---------- ----------------- -------------- ------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Long Medical Institute
Phoenix, AZ 4/88 Healthcare Yes ACCSCT 129 168
Andon College
Stockton, CA 11/89 Healthcare No ABHES 150 420
Andon College
Modesto, CA 11/89 Healthcare Yes ABHES 123 286
Bauder College Fashion and ACCSCT
Atlanta, GA 3/92 Design/ Business Yes SACS/COC 440 384
Modern Technology
School of X-Ray
North Hollywood, CA 3/93 Healthcare Yes ACCSCT 221 357
Dominion Business School Business/
Roanoke, VA 5/93 Healthcare Yes ACICS 129 161
Dominion Business School Business/
Harrisonburg, VA(5) 5/93 Healthcare Yes ACICS 408 150
ICM School of Business Business/
Pittsburgh, PA 7/93 Healthcare/ Yes ACICS 376 420
Fashion and Design
Ohio Institute of
Photography &
Technology Photography/
Dayton, OH 7/93 Healthcare Yes ACCSCT 67 259
California Institute of
Merchandising Art &
Design Fashion and
Sacramento, CA 8/93 Design Yes ACICS 5 106
San Antonio College of
Medical and Dental
Assistants
San Antonio, TX 9/96 Healthcare No ACCSCT 234 342
San Antonio College of
Medical and Dental
Assistants
McAllen Campus
McAllen, TX 9/96 Healthcare No ACCSCT 186 176
</TABLE>
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<TABLE>
<CAPTION>
APPROXIMATE
ASSOCIATE STUDENT STUDENT
DEGREE INSTITUTIONAL POPULATION POPULATION
DATE GRANTING ACCREDITING AT DATE OF AT MARCH
INSTITUTION ACQUIRED CURRICULUM (1) AGENCY (2) ACQUISITION 31, 1997
- ----------- ------------- ---------- ----------------- -------------- ------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Career Centers of
Texas-El Paso
El Paso, TX 9/96 Healthcare No ACCSCT 286 326
Hagerstown Business
College Business/
Hagerstown, MD 12/96 Healthcare Yes ACICS 495 435
Lincoln School
of Commerce Business/
Lincoln, NE 3/97 Healthcare Yes ACICS 342 342
Nebraska College
of Business Business/
Omaha, NE 3/97 Healthcare Yes ACICS 345 345
----- -----
TOTAL 4,176 5,993
</TABLE>
(1) In order for a school to grant associate degrees, it must be accredited
by the applicable accrediting agency and approved by the relevant state
agency. After receiving accreditation and state authorization, the
Department of Education must recertify the school when it becomes degree
granting in order for Title IV funding to be available for the new degree
programs.
(2) Accrediting Commission of Career Schools and Colleges of Technology
("ACCSCT"), Accrediting Council for Independent Colleges and Schools
("ACICS"), Accrediting Bureau of Health Education Schools ("ABHES"),
Southern Association of Colleges and Schools/Commission on Colleges
("SACS/COC"), and Council on Occupational Educational Institutions
("COEI"). All schools were accredited at their time of acquisition other
than Maric College of Medical Careers in Vista, California, which was
accredited in fiscal 1989. See "Financial Aid and Regulation-State
Authorization and Accreditation."
(3) The Company recently determined that there was a substantial overlap in
the San Marcos and Vista, California markets. The Vista school will be
combined into the San Marcos school during the second quarter of fiscal
1998. The Vista and San Marcos schools were acquired at approximately the
same time.
(4) Degree granting status has been approved; however, programs have not yet
been implemented.
(5) The Company determined that there was a substantial overlap in the
Harrisonburg and Staunton, Virginia markets, and combined its Staunton
school with the Harrisonburg school in fiscal 1997. The Harrisonburg and
Staunton schools were both acquired at the same time. The chart
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represents the combined operations of the schools at the date of the
acquisition and at March 31, 1997.
PROGRAMS OF STUDY
The Company's programs are intended to provide students with the specific
knowledge and job skills required to prepare them for entry-level positions in a
chosen career field. The Company's programs, which generally provide for
internships or include business simulation instruction, are designed after
consultation with employers and advisory committees, which are composed of
business and educational professionals who assist the Company in assessing and
updating curricula and other aspects of relevant programs.
The Company offers both associate degree and diploma programs in three
areas: healthcare, business and photography and offers associate degree
programs in fashion and design. The healthcare programs are designed to prepare
students for occupations associated with the medical and healthcare industry,
such as nursing, medical and dental assisting, home health aid, patient care
services and medical and dental office management. Fashion and design programs
prepare students for positions associated with fashion merchandising, fashion
design and interior design, such as buyers, display directors, fashion
coordinators, pattern makers, fashion designers and interior designers. The
photography programs provide education in photography, video, desktop media and
computer graphics, and are designed to prepare students for such occupations as
professional photographer, videographer, photographic laboratory technician,
computer graphic technician and desktop publisher. The business programs
provide education in areas such as accounting, business management, computer
operations, secretarial skills, paralegal skills and travel, and are designed
to prepare students for entry level positions in such areas.
The Company provides healthcare programs at 17 of its schools, business
programs at seven of its schools, fashion and design at three of its schools
and photography at one of its schools. Tuition and fees vary depending on the
program offered and the location of the school.
The following table provides information at March 31, 1997 with respect to
the programs offered by the Company's schools in each of the four major fields
described above:
<TABLE>
<CAPTION>
DIPLOMA
---------------------------------------------------
AVERAGE
STUDENT
NO. OF NO. OF PROGRAM
PROGRAM SCHOOLS STUDENTS COST*
-------------- --------------- ------------------
<S> <C> <C> <C>
Healthcare 17 3,537 $6,376
Business 7 485 $6,679
Fashion and Design - - -
Photography 1 26 $9,205
--------
Company Total 4,048
DEGREE
--------------------------------------------------------------------
AVERAGE
STUDENT Total No.
NO. OF NO. OF PROGRAM of
PROGRAM SCHOOLS STUDENTS COST* Students
-------------- --------------- -------------------- -------------
<S> <C> <C> <C> <C>
Healthcare 8 489 $7,204 4,026
Business 7 880 $9,456 1,365
Fashion and Design 3 451 $9,745 451
Photography 1 125 $7,883 151
-------- ------------
Company Total 1,945 5,993
* Represents weighted average tuition and fees on an academic year basis (i.e., a nine month basis)
</TABLE>
As of March 31, 1997, approximately 67%, 23%, 7% and 3% of students were
enrolled in programs in the fields of healthcare, business, fashion and design,
and photography, respectively. All of the Company's programs are designed to
prepare graduates to perform effectively in a variety of
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entry-level positions by providing the student with practical experience both
in the classroom and, in the case of most programs in the healthcare and
fashion and design fields, through the use of internships. The internships
constitute a graded portion of the curricula and provide hands-on experience in
the work place as well as a source of job opportunities. In addition, most of
the Company's business programs provide for a significant amount of education
in a simulated business environment with a view toward preparing the student
for participation in actual business situations.
The academic schedule of the Company's schools varies depending on the
programs offered by the individual schools. Degree programs begin four times a
year. Diploma programs begin every four to six weeks. Diploma courses are
typically offered mornings, afternoons, and evenings, and degree programs are
principally offered during day-time hours. The schools generally have classes
operating year round and are generally open five days per week. The Company
believes that its diversified curricula provide it with an extensive library of
programs and experience in various fields enabling it to meet changing demands
in the areas served by each of its schools and to expand offerings at each of
the schools when justified by student and employer demand.
Programs which lead to similar occupational outcomes have the same general
content. However, modifications are made to conform each program to the
requirements of the particular market as well as to state and accrediting
regulations. In addition to courses directly related to a student's program of
study, degree programs may also include general education courses such as
English, Psychology or Mathematics. The programs in each field are reviewed
periodically by the regional managers and the schools' directors in order to
respond to changes in the job market and technology. Each school also has
established advisory committees, comprised of local business executives and
academics, to assist it in assessing and updating curricula and other aspects
of the relevant programs.
STUDENT RECRUITMENT
The Company endeavors to recruit motivated students with the ability to
complete the programs offered by the Company's schools and to secure
entry-level employment in the fields for which their programs are designed to
prepare them. To attract potential students, the Company engages in several
activities to inform them, and in some instances their parents, about the
Company's programs. These expenditures vary from school to school, depending
on the desired audience, and include television advertising, direct mailings,
newspaper advertising and yellow pages advertising. The Company also engages
in high school visits to attract potential students.
The Company's television advertising is coordinated and developed locally,
and budgeted on a centralized basis. It is tailored to and directed at the
local market in which each school is located and is intended to create
recognition for the name under which the applicable school operates. Responses
to direct mail campaigns are received and followed up on a local basis;
however, all marketing activities are tracked and analyzed on a centralized
system and the results forwarded to the individual schools for use in
evaluating the effectiveness of their marketing programs.
Each of the Company's schools employs a director of admissions who
generally reports to the school director. The director of admissions for each
school is responsible for, among other things, coordinating the efforts of the
school to recruit qualified students to the school. The director of admissions
also determines recruiting policies and procedures and standards for hiring and
training admissions representatives; however, such policies, procedures and
standards are reviewed at the regional or national level.
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Admissions representatives contact potential students who have indicated
an interest in the schools' programs and arrange for interviews which generally
take place at the school, although occasionally such interviews take place at
the prospective student's home. The interview is designed to establish the
student's qualifications, academic background and employment goals.
Prospective students are generally given a school catalogue which describes the
applicable school's programs, a tour of the campus, an explanation of the
programs offered and the types of employment opportunities typically available
to graduates of the Company's schools. The Company employs admissions
representatives who generally perform their services in recruitment offices
located at each school, but who, in some instances, make visits and
presentations at high schools or other sources from which students may likely
be recruited.
The Company's central marketing system monitors the effectiveness of each
school's marketing efforts to gauge the extent to which such efforts result in
student enrollment. The results of such monitoring are communicated to each of
the Company's schools allowing each school to more efficiently utilize its
marketing resources. Also, when a particular school develops a successful
marketing program, the Company makes such programs available to the other
schools for incorporation into their marketing programs as appropriate.
ADMISSION AND RETENTION
In order to apply for admission to any of the Company's programs, a
candidate is required to have a high school diploma or recognized equivalent,
or to pass an admissions test specifically approved by the Department of
Education. At March 31, 1997, 85% of the students were high school graduates or
held recognized equivalent certification. Approximately 15% of enrolled
students were under 20 years of age, 39% were between 20 and 24 years of age,
and 46% were 25 years of age or older. At March 31, 1997, 84% of the students
attending the Company's schools were women.
In an attempt to minimize student withdrawals prior to the completion of
their program, each of the Company's schools provides staff and other resources
to assist and advise its students regarding academic and financial matters, and
employment. Each of the schools also provides tutoring, and encourages help
sessions between individual students and instructors when students are
experiencing academic difficulties. The Company is obligated to provide
refunds to those students who withdraw from school prior to completion of the
program based on formulas required by applicable accrediting agencies or by
state and federal regulations. The refund formula in California, where the
Company's largest schools are located, provides for pro rata refunds based on
the number of days a student is in attendance compared to the total number of
days in the program. In other states, the Company is generally allowed to
retain a greater percentage of tuition than that provided for by the California
formula.
GRADUATE PLACEMENT
Each of the Company's schools employs placement personnel to provide
placement assistance services to students and graduates and to solicit
appropriate employment opportunities from employers. In addition, the Company's
schools utilize their internship programs to develop job opportunities and
referrals. During the course of each program, students receive instruction on
job-search and interviewing skills and have available reference materials and
assistance with the composition of resumes.
Since their respective acquisition by the Company, the Company's schools
have graduated approximately 23,000 students, including 4,992 in fiscal 1997.
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<PAGE> 13
Based on data obtained by the Company from its students and their
employers, the Company believes that 77% of the students graduating from
programs offered by the Company's schools during the prior two calendar years,
who did not go on to further education, obtained employment in a field related
to their program of study as of June 30 or earlier of the year following
graduation.
FACULTY
Faculty members are hired locally in accordance with criteria established
by the school, applicable accreditation organizations, and applicable state
regulatory authorities. Members of a school's faculty are hired based on
academic background, prior educational experience, and prior work experience. A
significant portion of the Company's faculty were previously employed in fields
related to their area of instruction. The Company believes that such faculty
members provide a "real world" perspective to the students. At most of the
Company's schools, instructors are supervised by the school director and an
academic dean. At the remaining schools, faculty members are supervised by lead
instructors with respect to particular areas of instruction, subject to review
by the school director. As of March 31, 1997, the Company's schools employed
approximately 242 full-time faculty members (defined as those faculty members
spending at least 20 hours per week teaching classes at the Company's schools)
and 230 part-time faculty members.
ADMINISTRATION AND EMPLOYEES
Each of the Company's schools is managed by a school director.
Additionally, the staff of each school includes a director of placement, a
financial aid administrator, and a director or assistant director of admissions.
Twelve schools also employ a director of education. In the other schools, lead
instructors are appointed to oversee instruction in their areas of expertise,
subject to the overall supervision of the school director. As of March 31,
1997, the Company had approximately 1,212 full and part-time employees,
including 42 people employed at its home office in Roswell, Georgia and its
regional offices in Tampa, Florida, San Diego, California and Pittsburgh,
Pennsylvania, and 472 full and part-time faculty members. It also employed 75
students under the Federal Work-Study program. None of the Company's employees
is represented by a labor union or is subject to a collective bargaining
agreement. The Company has never experienced a work stoppage and believes that
its employee relations are satisfactory.
From its home office and its three regional offices, the Company provides
each of its schools with financial aid services, oversees regulatory compliance,
assists in the development and addition of programs to existing curricula,
implements and supports management information systems and provides accounting
services and financial resources. The Company's regional offices each have a
regional manager and staff who manage the individual school directors and
provide expertise in the area of operations, curriculum development, and sales
and marketing. These centralized services relieve the local school management
of tasks which the Company believes can be performed most efficiently and cost
effectively by a centralized office. However, because of the Company's belief
that each of the markets served by its schools is unique, and that by offering
programs specifically targeted at each market it can maximize its long-term
ability to enroll and place students in an appropriate outcome, local school
management has the responsibility and authority to schedule the school's
programs, hire its teachers, and originate new program development or propose
the addition of programs from the existing curricula library.
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<PAGE> 14
COMPETITION
The postsecondary education market is highly fragmented and competitive
with no private or public institution having a significant market share. The
Company's schools compete for students with not-for-profit public and private
colleges and proprietary institutions which offer degree and/or non-degree
granting programs. Such proprietary institutions include vocational and
technical training schools, continuing education programs and commercial
training programs. Competition among educational institutions is believed to be
based on the quality of the program, perceived reputation of the institution,
the cost of the program, and the employability of graduates. Public and private
colleges may offer programs similar to those offered by the Company's schools
at lower tuition costs due in part to government subsidies, foundation grants,
tax deductible contributions, or other financial resources not available to
proprietary institutions. Certain of the Company's competitors in both the
public and private sector have greater financial and other resources than the
Company.
TITLE IV STUDENT FINANCIAL ASSISTANCE PROGRAMS
A substantial majority of the students attending the Company's schools
finance all or a part of their education through grants or loans under Title IV
Programs. Revenues from Title IV funding provide most of the Company's tuition
revenues (approximately 76% of cash receipts in fiscal 1997). The maximum
amount of a student's available Title IV program assistance is generally based
on the student's financial need. The Company determines a student's financial
need based on the national standard need analysis system established by the
HEA. If there is a difference between the amount of Title IV program funding a
student is entitled to receive (combined with other outside assistance) and the
student's tuition, the student is responsible for the difference.
Students at the Company's schools participate in the following Title IV
Programs:
Pell and FSEOG Grants
The Federal Pell Grant Program provides for grants to help financially
needy undergraduate students meet the costs of their postsecondary education.
The amount of an eligible student's Pell grant award currently ranges from $400
to $2,470 annually, depending on the student's financial need, as determined by
a formula set by the HEA and the Regulations. The HEA guarantees that all of
the eligible students at a school receive Pell grants in the amounts to which
they are entitled. In fiscal 1997, Pell grants to students represented
approximately $9.5 million, or 19.3%, of the Company's net revenues.
The Federal Supplemental Educational Opportunity Grant ("FSEOG") program
provides for awards to exceptionally needy undergraduate students. The amount
of an FSEOG award currently ranges from $100 to $4,000, depending on the
student's financial need and the availability of funds. The availability of
federal funding for FSEOG awards is restricted. The Company, or another outside
source, is required to make a 25% matching contribution for FSEOG program funds
it disburses. FSEOG awards made to the Company's students (net of matching
contributions) amounted to approximately $618,000 and represented approximately
1.3% of the Company's net revenues in fiscal 1997.
Federal Family Education Loans and Federal Direct Student Loans
The Federal Family Education Loan ("FFEL") programs include the Federal
Stafford Loan Program ("Stafford Loan") and the Federal PLUS Program ("PLUS"),
pursuant to which private lenders
12
<PAGE> 15
make loans to enable a student or his or her parents to pay the cost of
attendance at a postsecondary school.
The FFEL Program is administered through state and private nonprofit
guarantee agencies that insure loans directly, collect defaulted loans and
provide various services to lenders. The federal government provides interest
subsidies in some cases and reinsurance payments for borrower default, death,
disability, and bankruptcy.
The Federal Direct Student Loan Program ("FDSLP") is substantially the
same as the FFEL program in providing Stafford and PLUS loans. Under the FDSLP,
however, funds are provided directly by the federal government to the students,
and the loans are administered through the school. For schools electing to
participate, the FDSLP replaces the FFEL program, although loans are made on
the same general terms and conditions. The Company was one of the initial
participants in the FDSLP.
Stafford Loan Program
Students may borrow an aggregate of $2,625 for their first undergraduate
academic year and $3,500 for their second academic year under the FFEL Stafford
Loan or FDSLP Stafford Loan program. If the student qualifies for a subsidized
loan, based on financial need, the federal government pays interest on the loan
while the student is attending school and during certain grace and deferment
periods. If the student does not qualify for a subsidized Stafford Loan, the
interest accruing on the loans must be paid by the student. In addition,
independent students may qualify for an additional $4,000 a year in
unsubsidized Stafford loans.
By the end of fiscal 1997, all of the Company's existing schools
participated in the FDSLP program and in fiscal 1998, all of its existing
schools will participate exclusively in such programs. FDSLP and FFEL Stafford
loans amounted to approximately $27.1 million, or approximately 54.8% of the
Company's net revenues, in fiscal 1997.
PLUS Loan Program
Parents of dependent students may receive loans under the FFEL PLUS
Program or the FDSLP PLUS Program on an academic year basis. The maximum amount
of any PLUS loan is the total cost of a student's education for each relevant
academic year less other financial aid received by the student attributable to
such year. PLUS loans carry a maximum interest rate of 9%. These loans are
repayable commencing 60 days following the last disbursement made with respect
to the relevant academic year, with flexible payment schedules over a 10 year
period. The FFEL PLUS loans are made by lending institutions and guaranteed by
the federal government. The FDSLP PLUS Program provides PLUS loans by the
federal government on the same general terms as the FFEL PLUS loans. FDSLP PLUS
loans and FFEL PLUS loans amounted to approximately $3.6 million, or
approximately 7.3% of the Company's net revenues, in fiscal 1997.
Perkins Loans
Students who demonstrate financial need may borrow up to $3,000 per
academic year under the Federal Perkins Loan ("Perkins") program, subject to
the availability of Perkins funds at the institution. Repayment of loans under
the Perkins program is delayed until nine months after graduation or the
termination of studies. Funding for a school's Perkins program is made by the
Department of Education into a fund maintained by the participating school for
that purpose. The participating school is required
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<PAGE> 16
to make a matching contribution into the fund of 25% of the total loans made
from the fund and to deposit all repayments into the fund.
Five of the Company's schools participated in the Perkins program in
fiscal 1997. In fiscal 1998, three of these schools will liquidate the Perkins
programs and no longer participate. The Company made no matching contributions
in fiscal 1997 because the Company did not receive any Perkins funding from the
Department of Education and utilized only funds received from borrower
repayments. A school will not receive continued federal funding for Perkins
loans if the school's Cohort Default Rate for Perkins loans exceeds 30%.
One of the Company's schools receiving Perkins loan funding had a Cohort
Default Rate in excess of 30% in the last fiscal year and is therefore
ineligible to receive additional funds from the government for the subsequent
fiscal year. The school will, however, remain able to make Perkins loans to
students through funds repaid by previous borrowers. Perkins loans amounted to
approximately $311,500, or approximately 0.6% of the Company's net revenues, in
fiscal 1997.
Federal Work-Study
Pursuant to the Federal Work-Study ("FWS") program, federal funds are made
available to provide part-time employment to eligible students based on
financial need. The Company's schools provide a limited number of on-campus and
off-campus jobs to eligible students participating in the FWS program. During
the 1996-97 award year, the Company's schools employed less than 300 students
pursuant to this program. The Company, or another outside source, is required
to pay 25% of the gross earnings for each participant in the FWS program.
TITLE IV REGULATION
To obtain and maintain eligibility to participate in the programs
described above, the Company's schools must comply with the rules and
regulations set forth in the HEA and the Regulations thereunder. An institution
must obtain certification by the Department of Education as an "eligible
institution" to participate in Title IV Programs. Certification as an "eligible
institution" requires, among other things, that the institution be authorized
to offer its educational programs by the state in which it operates. It must
also be accredited by an accrediting agency recognized by the Department of
Education.
The HEA provides standards for institutional eligibility to participate in
the Title IV Programs. The standards are designed, among other things, to limit
dependence on Title IV funds, prevent schools with unacceptable student loan
default rates from participating in Title IV Programs and, in general, require
institutions to satisfy certain criteria intended to protect the integrity of
the federal programs, including criteria regarding administrative capability
and financial responsibility.
Generally, a school (a main campus and any additional locations for
purposes of the Regulations) is considered separately for compliance with the
Regulations. Seventeen of the Company's schools are main campuses. One school,
located in Vista, California, is an additional location of the San Marcos,
California main campus, and another school located in McAllen, Texas is an
additional location of the San Antonio, Texas main campus.
A school that has been certified as eligible to participate in the Title
IV Programs continues to remain eligible for the period of its certification,
which is generally four years. A school must apply for a renewal of its
certification prior to its expiration, and must demonstrate compliance with the
eligibility requirements in its application.
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<PAGE> 17
Under certain circumstances, the Department of Education may provisionally
certify a school to participate in Title IV programs. Provisional certification
may be imposed, when a school is reapplying for certification or when a school
undergoes a change of ownership resulting in a change in control, if the school
(i) does not satisfy all the financial responsibility standards, (ii) has a
Cohort Default Rate of 25% or more in any single fiscal year of the three most
recent federal fiscal years for which data is available, and (iii) under other
circumstances determined by the Secretary of Education. Provisional
certification may last no longer than three years. Provisional certification
differs from certification in that a provisionally certified school may be
terminated from eligibility to participate in the Title IV Programs without the
same opportunity for a hearing before an independent hearing officer and an
appeal to the Secretary of Education as is afforded to a fully certified school
faced with termination, suspension, or limitation of eligibility prior to
expiration of its certification. Additionally, the Department of Education may
impose additional conditions on a provisionally certified institution's
eligibility to continue participating in the Title IV Programs.
Student Loan Defaults
Under the HEA, an institution may lose its eligibility to participate in
some or all Title IV Programs if student defaults on the repayment of federally
guaranteed student loans exceed specified Cohort Default Rates. Similar rules
regarding default rates apply to Federal Direct Loans made pursuant to the
FDSLP, commencing with those loans entering into repayment for the first time
in the 12 month period ending September 30, 1995. Under existing regulations,
these rates are based on the repayment history of current and former students
for loans provided under the Stafford Loan program and the SLS program. A
Cohort Default Rate is calculated for each school on a federal fiscal year
basis by determining the rate at which the school's students entering repayment
in that federal fiscal year default by the end of the following federal fiscal
year. Cohort Default Rates are subject to revision by the Department of
Education if new data becomes available and is subject to appeal by schools
contesting the accuracy of the data or the adequacy of the servicing of the
loans by the loan servicer.
An institution whose Cohort Default Rate exceeds 40% for any single
federal fiscal year may have its eligibility to participate in all Title IV
Programs limited, suspended or terminated. If the Department of Education
elects to take such action due to a single-year Cohort Default Rate in excess
of the regulatory level, it must afford the institution a hearing before an
independent Department of Education hearing officer and an opportunity to
appeal any decision to the Secretary of Education before the limitation,
suspension, or termination may take effect. Except for its school located in
Albany, Georgia, which was closed in fiscal 1995, none of the Company's schools
has, or has had, a Cohort Default Rate in excess of 40%.
An institution whose Cohort Default Rate is 25% or more for the three most
recent federal fiscal years for which data is available is subject to immediate
loss of eligibility to participate in Title IV Student Loan Programs, subject
to an appeal (on the bases stated in the prior paragraph) of the determination,
including an appeal based on a claim of exemption from the Cohort Default Rate
requirements by virtue of exceptional mitigating circumstances. The loss of
eligibility lasts for the duration of the fiscal year in which the
determination of ineligibility is made, plus the two succeeding fiscal years.
However, an institution remains eligible for Title IV funding while the appeal
is pending.
None of the Company's schools had a Cohort Default Rate of 25% or more for
either each of the three consecutive federal fiscal years ending 1994 or those
ending with federal fiscal 1995 based on 1995 data released by the Department
of Education in May 1997. The Department of Education has designated this 1995
data as preliminary, reserving the right to issue final 1995 Cohort Default
Rates in
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<PAGE> 18
or about November 1997. The Company does not expect its final 1995 Cohort
Default Rates to differ materially from the preliminary data. Accordingly, the
Company believes that none of the schools is currently vulnerable to
termination from Title IV eligibility based on three consecutive years of
excess default rates. Only the Company's school located in Omaha, Nebraska had
a Cohort Default Rate of 25% or more for federal fiscal 1995 (based on the
preliminary data). This school had a Cohort Default Rate of 17.3% in federal
fiscal 1994, and therefore, is not vulnerable to termination of Title IV
Student Loan Program eligibility unless its rates for the next two federal
fiscal years are 25% or more. The Company's other schools must have Cohort
Default Rates of 25% or more for consecutive three year periods beginning with
federal fiscal 1996 and thereafter in order to become vulnerable to termination
of Title IV eligibility.
The Regulations require that any school which experiences a Cohort Default
Rate in excess of 20% must establish a default management plan in compliance
with the federally mandated plan included in the Regulations. This plan
includes measures to reduce student withdrawal rates, improve student
employment rates and counseling of students on their responsibility to repay
their loans. The Company also instituted default reduction programs in each of
its schools; however, economic and other factors outside of the Company's
control could adversely affect default rates.
The 85/15 Rule
The "85/15" rule, which applies to for-profit institutions such as the
schools owned and operated by the Company, became applicable to the Company's
schools beginning with the fiscal year ending March 31, 1996. It requires that
no more than 85% of the school's applicable cash receipts may be derived from
Title IV Programs. A school whose annual certified financial statement or Title
IV compliance audit report to the Department of Education does not reflect
compliance with the 85/15 rule is subject to immediate termination of its Title
IV eligibility. The Company believes that each of its schools was in compliance
with the 85/15 rule with respect to fiscal 1995, 1996 and 1997, and has taken
steps to help ensure on-going compliance with the 85/15 Rule.
Change in Control
Upon a change in ownership resulting in a change in control of the
Company, as defined in the HEA and Regulations, each of the Company's schools
would lose its eligibility to participate in Title IV Programs for an
indeterminate period of time during which it applies to regain eligibility. A
change of control also could have significant regulatory consequences for the
Company at the state level and could affect the accreditation of the Company's
schools.
The Department of Education's regulations provide that after a company
becomes publicly traded, a change in control occurs when a report on Form 8-K
is required to be filed with the Securities and Exchange Commission disclosing
a change in control. Most states and accrediting agencies have similar
requirements, but they do not provide a uniform definition of change in
control. If the Company were to lose its eligibility to participate in Title IV
Programs for a significant period of time pending an application to regain
eligibility, or if it were determined not to be eligible, its operations would
be materially adversely effected. The possible loss of Title IV eligibility
resulting from a change in control may also discourage or impede a tender
offer, proxy contest or other similar transaction involving control of the
Company.
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Administrative Capability
The Regulations set certain standards of "administrative capability" which
a school must satisfy to participate in the Title IV Programs. These criteria
require, among other things, that the school comply with all applicable Title
IV Regulations, have capable and sufficient personnel to administer the Title
IV Programs, have acceptable methods of defining and measuring the satisfactory
academic progress of its students, provide financial aid counseling to its
students, timely submit all reports and financial statements required by the
Regulations, and that the school's Cohort Default Rate not equal or exceed 25%
for any single fiscal year.
Failure to satisfy any of the criteria may lead the Department of
Education to determine that the school lacks the requisite administrative
capability and may subject the school to provisional certification when it
seeks to renew its certification as an eligible institution, or may subject it
to a fine or to a proceeding for the limitation, suspension, or termination of
its participation in Title IV Programs. Proceedings to fine, limit, suspend, or
terminate an institution are conducted before an independent hearing officer of
the Department of Education and are subject to appeal to the Secretary of
Education, prior to any sanction taking effect. Thereafter, judicial review may
be sought in the federal courts pursuant to the federal Administrative
Procedures Act.
Eight of the Company's schools are provisionally certified to participate
in the Title IV Programs. The conditions imposed on them as a result of such
provisional certification include reporting requirements relating to each
school. The material violation of such requirements, or any of the requirements
of the HEA or the Regulations, would subject the school to a loss of its
provisional eligibility.
Financial Responsibility Requirements
The HEA and the Regulations prescribe specific standards of financial
responsibility which the Department of Education must consider with respect to
qualification for participation in the Title IV Programs ("Financial
Responsibility Standards"). These standards are generally applied on an
individual school basis. However, there can be no assurance that the
Department of Education will not apply such standards on a consolidated basis.
If the Department of Education determines that any of the Company's schools
fails to satisfy the Financial Responsibility Standards, the Department may
require that such school post an irrevocable letter of credit (a "Financial
Responsibility Bond") in favor of the Secretary of Education in an amount equal
to not less than one-half of Title IV Program funds received by the school
during the last complete fiscal year or, in the Department of Education's
discretion, require some other less onerous demonstration of financial
responsibility (a "Demonstration of Financial Responsibility"). One-half of
Title IV funds received by the Company's individual schools in the most recent
fiscal year ranged from approximately $232,000 to $3.7 million, and one-half of
the total Title IV funds received by all the Company's schools in the most
recent fiscal year was $18.4 million. Pursuant to the Regulations, the Company
submits annual audited consolidated financial statements and unaudited
consolidating financial statements to the Department of Education.
Among the principal Financial Responsibility Standards which a school must
satisfy are: (i) an "acid test" ratio (defined as the ratio of the total of
cash, cash equivalents and current accounts receivable to current liabilities)
of at least 1-to-1 at the end of the most recent fiscal year, (ii) a positive
tangible net worth, as defined by the applicable Regulations, at the end of the
most recent fiscal year (the "Tangible Net Worth Standard") and (iii) net
operating results for the two most recent fiscal years, excluding extraordinary
losses or losses from discontinued operations, which do not show an aggregate
net loss in
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excess of 10% of tangible net worth at the beginning of the two year period.
The Company has a positive tangible net worth of $16.7 million as of
March 31, 1997, primarily because of the receipt of the net proceeds
of the IPO, although the Company has not yet filed the applicable financial
statements with the Department of Education. Primarily because a large portion
of the Company's assets consists of goodwill and other intangibles related to
school acquisitions, the Company had a negative tangible net worth on a
consolidated basis for the Company's three prior fiscal years; none of the
Company's schools had a negative tangible net worth on an individual school
basis as of March 31, 1997. The Company has filed audited consolidated
financial statements with the Department of Education for each of the last
three fiscal years ended March 31, 1996, along with unaudited consolidating
statements. Although the Department of Education has not cited any of the
Company's schools for violation of the Tangible Net Worth Standard, there can
be no assurance that the Department of Education will not attempt to apply the
Tangible Net Worth Standard on a consolidated basis. There also can be no
assurance that the Company's acquisition program will not again result in the
Company having a negative tangible net worth, and, no assurance can be given
that the Department of Education may not make a request for the Company to post
a Financial Responsibility Bond in such circumstances or otherwise make a
request for a Demonstration of Financial Responsibility based on its
consolidated negative tangible net worth. If such a request were to be made,
there is no assurance that the Company (i) would be successful in persuading
the Department of Education or a court that such a request is contrary to law,
(ii) could secure the funds to post the Financial Responsibility Bond which the
Department of Education may request, or (iii) that the Company would be
successful in negotiating a more favorable Demonstration of Financial
Responsibility. If the Company were unable to post a Financial Responsibility
Bond or make a satisfactory Demonstration of Financial Responsibility, it could
become ineligible to receive Title IV funding in some or all of its schools.
Ineligibility for Title IV funding would have an immediate material adverse
effect on the Company's operations.
Other than the Roanoke, Virginia school, none of the Company's schools had
operating losses in fiscal 1996 or fiscal 1997 which, in the aggregate,
exceeded 10% of the tangible net worth at the beginning of the period.
Therefore, only the Roanoke school is in violation of the Financial
Responsibility Standard relating to operating losses.
The Nebraska Acquisition
The Lincoln School underwent a program review (the "Program Review") which
was completed in May 1997 in which the Department of Education alleged that the
prior operations were not in compliance with certain applicable regulations.
As a result, the Company was obligated to make payments to the Department of
Education and various other parties totaling approximately $398,000 (the
"Compliance Payment"), all of which were paid in June 1997. The Nebraska
Schools are also subject to allegations of certain fund administration errors
which were noted in connection with certain Title IV Financial Aid Audits (the
"Financial Aid Audits") filed pursuant to the applicable regulations. The
terms of the Nebraska Acquisition provide that the number of shares of the
Company's common stock exchanged in the transaction will be adjusted with
respect to all liabilities arising from the resolution of (a) the alleged
compliance deficiencies asserted by Department of Education in the Program
Reviews, (b) the fund administration errors described in the Financial Aid
Audits, or otherwise. To facilitate any adjustments, a total of 95,000 shares
of the total number of shares of the Company's stock exchanged were placed in
escrow and approximately one tenth of such shares will be returned to the
Company for each dollar paid to the DOE with respect to the relevant program
compliance deficiencies or administration error refunds. As a result of the
Compliance Payment, 37,884 shares of the Company's
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common stock will be returned to it from escrow. Certain other contingencies
have not yet been resolved and the balance of the shares remain in escrow.
Each of the Nebraska Schools must be recertified as eligible for
participation in Title IV funding by the Department of Education because of
the change in ownership resulting in a change in control, as defined by
applicable regulations. While such approval is pending, the relevant school is
not eligible to participate in Title IV funding programs, which make up
substantially all of its revenue and cash receipts; therefore, the school's
operations must be funded from the Company's working capital. Upon
recertification, the school receives applicable Title IV funding for students
currently enrolled, including funding for prior periods. Although the Company
has had no difficulty in obtaining such recertification in the past, there can
be no assurance that such approvals may not be subject to unexpected delays or
difficulties which may adversely effect the Company's operations.
ITEM 2. PROPERTIES
All of the Company's facilities are leased by the Company, except for the
facilities in Dayton, Ohio, Lincoln, Nebraska, and Omaha, Nebraska, which are
owned by the Company. The table below sets forth certain information regarding
these facilities as of March 31, 1997.
<TABLE>
<CAPTION>
APPROXIMATE SQUARE
OFFICE/SCHOOL LOCATION FOOTAGE
- ------------- -------- --------------------
<S> <C> <C>
Home Office Roswell, GA 8,850
Western Region Office San Diego, CA 2,001
Eastern Region Office Tampa, FL 1,581
Central Region Office (1)
WESTERN REGION SCHOOLS
Andon College Modesto, CA 11,319
Andon College Stockton, CA 13,241
California Academy of
Merchandising, Art, and Design Sacramento, CA 6,232
Long Medical Institute Phoenix, AZ 11,423
Maric College of Medical Careers San Diego, CA 39,092
Maric College of Medical Careers Vista, CA 14,600
Maric College of Medical Careers (2) Vista, CA (San Marcos Campus) 13,500
Modern Technology School of X-Ray North Hollywood, CA 15,194
EASTERN REGION SCHOOLS
Bauder College Atlanta, GA 27,187
Career Centers of Texas El Paso, TX 10,453
Dominion Business School Harrisonburg, VA 9,400
Dominion Business School Roanoke, VA 12,500
Hagerstown Business College Hagerstown, MD 23,682
Ohio Institute of Photography and
Technology (3) Dayton, OH 24,200
San Antonio College of Medical and
Dental Assistants San Antonio, TX 23,712
San Antonio College of Medical and
Dental Assistants McAllen, TX 7,800
CENTRAL REGION SCHOOLS
</TABLE>
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<TABLE>
APPROXIMATE SQUARE
OFFICE/SCHOOL LOCATION FOOTAGE
- ------------- -------- --------------------
<S> <C> <C>
Lincoln School of Commerce (4) Lincoln, NE 58,490(5)
Nebraska College of Business (4) Omaha, NE 19,035
ICM School of Business Pittsburgh, PA 47,833
</TABLE>
(1) Because the Central Region was established at the time of the Nebraska
Acquisition, its operations have been conducted at the school facility
located in Pittsburgh, where the regional manager also serves as campus
director.
(2) The Vista campus will be consolidated with the San Marcos campus during
the second quarter of fiscal 1998 due to market overlap.
(3) The Dayton, Ohio facility was purchased in connection with the
acquisition of the school in fiscal 1994. It is owned subject to a
mortgage with an aggregate principal amount outstanding of $625,668 at
March 31, 1997.
(4) The Nebraska facilities were acquired in connection with the Nebraska
Acquisition in March 1997. These facilities are unencumbered by mortgage
debt.
(5) Total square footage includes dormitory facilities at this location.
ITEM 3. LEGAL PROCEEDINGS
NORTH HOLLYWOOD PROCEEDING
In September 1995, the Company filed suit in the California Superior Court
in connection with its 1993 purchase of its North Hollywood, California school.
The suit alleged that the sellers made significant financial and operational
misrepresentations to the Company. The sellers denied the Company's
allegations and filed a Cross-Complaint against the Company seeking an
indeterminate amount of damages and alleging among other things, breach of
contract and fraud. In order to avoid protracted litigation and discovery, the
Company decided it was in its best interests to settle the lawsuit in April
1997. In that connection the Company agreed to immediately pay all amounts
remaining on the notes payable to sellers related to the financing of the
acquisition and the related payments for the covenants not to compete plus
attorneys' fees. All amounts were paid in April 1997.
SAN DIEGO PROCEEDING
On June 24, 1994, eight students enrolled in one of the Company's programs
at its schools in the San Diego, California area filed a class action lawsuit
against the Company in state court in San Diego, California. In substance, the
suit alleged that there were material misrepresentations made with respect to
the context of the program and the potential jobs available to the students who
graduated from it. The suit was certified as a class action in the fall of
1994. Although the Company believes that it accurately described the course
content and the jobs to which the course could lead, in order to avoid further
legal expense and because of the uncertainty and risks inherent in any
litigation, the Company settled the lawsuit in March 1996. Pursuant to the
terms of the settlement, the Company paid $600,000 in March 1996 and $400,000
in April 1997. Additionally, the Company agreed to make available tuition
credits. Approximately $115,000 was paid in April 1997 related to unused
tuition credits. The involved program was discontinued in the summer of 1994
for reasons unrelated to the lawsuit.
In order to reduce the risk of any similar actions, the Company has
reviewed all of its catalogs and admission materials and, where the Company
believes appropriate, taken steps to further disclose to
20
<PAGE> 23
students in writing that placement rates are based on multiple outcomes and the
course is not represented to lead to any one particular outcome, including the
course title.
ROUTINE PROCEEDINGS
The Company is also a party to routine litigation incidental to its
business, including ordinary course employment litigation. Management does not
believe that the resolution of any or all of such routine litigation is likely
to have a material adverse effect on the Company's financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
[NOT APPLICABLE]
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock has been traded since October 28, 1996 on the
NASDAQ Exchange under the symbol "EDMD" for common stock. Prior to that time,
there was no public market for the common stock. The following table sets forth
the range of high and low closing sale prices for the common stock as reported
on the NASDAQ National Market System during each of the quarters presented. The
quotations set forth below are inter-dealer quotations, without retail
mark-ups, mark-downs or commissions and do not necessarily represent actual
transactions.
<TABLE>
COMMON STOCK
QUARTERLY PERIOD ENDED HIGH LOW
<S> <C> <C>
Period from October 28, 1996
to December 31, 1996 $11.125 $10.000
Quarter ended March 31, 1997 $14.250 $10.375
</TABLE>
As of June 15, 1997, there were approximately 117 holders of record of the
Company's common stock. This number does not include beneficial owners of the
Common Stock whose shares are held in the names of various dealers, clearing
agencies, banks, brokers and other fiduciaries.
The Company has never declared or paid any cash dividends. The Company
currently intends to retain any future earnings to finance the growth and
development of its business and future operations, and therefore does not
anticipate paying any cash dividends in the foreseeable future.
21
<PAGE> 24
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below is derived from and should be
read in conjunction with the consolidated financial statements, including the
notes thereto, filed as part of this Form 10-K. All years have been restated
to reflect the pooling of interests of the Nebraska Acquisition. The financial
information for the Company's fiscal years ended March 31, 1993 through 1995
includes the results of the Nebraska Schools' fiscal year ended December 31,
1992 through 1994, respectively. The results of the Company's fiscal years
ended March 31, 1996 and 1997 reflect a conformed year-end for the Nebraska
Schools.
YEAR ENDED MARCH 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<C> <C> <C> <C>
---------------------- ---------------------- --------------------
STATEMENT OF OPERATIONS DATA:
Net revenues........................... $ 25,139 $ 32,231 $ 37,080
School operating costs:
Cost of education and
facilities........................... 10,359 14,944 17,488
Selling and promotional
expenses............................. 3,470 4,985 6,216
General and administrative expenses... 6,773 10,022 10,826
Amortization of goodwill and
intangibles.......................... 1,071 1,235 1,255
Other expenses(1) :
Merger costs.......................... - - -
Legal defense and settlement
costs................................ - - 600
Loss on closure or relocation of
schools.............................. - 1,126 -
Impairment of goodwill and
intangibles.......................... - - 176
---------------------- ---------------------- --------------------
Income (loss) from operations.......... 3,466 (81) 519
Interest expense, net.................. 572 809 935
---------------------- ---------------------- --------------------
Income (loss) before income taxes and
extraordinary item.................... 2,894 (890) (416)
Provision (benefit) for income taxes... 749 (170) 28
---------------------- ---------------------- --------------------
Income (loss) before extraordinary item 2,145 (720) (444)
Extraordinary item..................... - - -
---------------------- ---------------------- --------------------
Net income (loss)...................... $ 2,145 $ (720) $ (444)
====================== ====================== ====================
Pro forma income tax data: (2)
Income (loss) before income taxes
and extraordinary item............... $ 2,894 $ (890) $ (416)
Provision for income taxes............ 1,223 173 97
---------------------- ---------------------- --------------------
Income (loss) before extraordinary
item................................. 1,671 (1,063) (513)
Extraordinary item, net of income
taxes................................ - - -
---------------------- ---------------------- --------------------
Pro forma net income (loss)........... $ 1,671 $ (1,063) $ (513)
====================== ====================== ====================
Pro forma income (loss) per share
before extraordinary loss (2)......... $ 0.39 $ (0.43) $ (0.21)
Pro forma net income (loss) per
share (2)............................. $ 0.39 $ (0.43) $ (0.21)
Pro forma shares outstanding 4,330,864 2,483,115 2,483,115
OTHER OPERATING DATA (3):
Number of schools at end of period..... 11 16 16
Number of students at end of period.... 2,840 4,026 4,695
Number of new student starts during
period................................ 4,581 5,504 6,297
Monthly withdrawal rate during
period(4)............................. 5.8% 4.8% 4.3%
<CAPTION>
1996 1997
---- ----
<C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues........................... $ 43,347 $ 49,450
School operating costs:
Cost of education and
facilities........................... 19,651 23,151
Selling and promotional
expenses............................. 6,534 7,531
General and administrative expenses... 12,369 14,042
Amortization of goodwill and
intangibles.......................... 883 886
Other expenses(1) :
Merger costs.......................... - 391
Legal defense and settlement
costs................................ 1,115 -
Loss on closure or relocation of
schools.............................. 50 144
Impairment of goodwill and
intangibles.......................... 764 -
---------- ----------
Income (loss) from operations.......... 1,981 3,305
Interest expense, net.................. 822 284
---------- ----------
Income (loss) before income taxes and
extraordinary item.................... 1,159 3,021
Provision (benefit) for income taxes... 632 (845)
---------- ----------
Income (loss) before extraordinary item 527 3,866
Extraordinary item..................... - 309
---------- ----------
Net income (loss)...................... $ 527 $ 3,557
========== ==========
Pro forma income tax data: (2)
Income (loss) before income taxes
and extraordinary item............... $ 1,159 $ 3,021
Provision for income taxes............ 487 409
---------- ----------
Income (loss) before extraordinary
item................................. 672 2,612
Extraordinary item, net of income
taxes................................ - 309
---------- ----------
Pro forma net income (loss)........... $ 672 $ 2,303
========== ==========
Pro forma income (loss) per share
before extraordinary loss (2)......... $ 0.13 $ 0.41
Pro forma net income (loss) per
share (2)............................. $ 0.13 $ 0.36
Pro forma shares outstanding........... 5,149,764 6,447,339
OTHER OPERATING DATA (3):
Number of schools at end of period..... 16 19
Number of students at end of period.... 4,954 5,993
Number of new student starts during
period................................ 6,706 7,358
Monthly withdrawal rate during
period(4)............................. 4.1% 4.2%
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
MARCH 31,
(DOLLARS IN THOUSANDS)
1993 1994 1995
---- ---- ----
<C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 7,061 $ 2,737 $ 2,733
Total current assets 9,918 7,364 8,125
Total assets 19,246 21,047 21,867
Long term debt, including current portion 4,756 7,688 8,974
Total liabilities 9,516 13,251 15,271
Total stockholders' equity 9,730 7,796 6,596
</TABLE>
<TABLE>
<CAPTION>
1996 1997
---- ----
<C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 3,209 $ 14,048
Total current assets 8,375 21,800
Total assets 20,986 42,073
Long term debt, including current portion 7,755 6,129
Total liabilities 14,717 13,873
Total stockholders' equity 6,269 28,200
</TABLE>
(1) Other expenses consist of (i) a charge in fiscal 1994 of $1,126 in
connection with the closing of a school purchased in 1989; (ii) charges in
fiscal 1995 of $600 for legal costs associated with the defense of the
class action lawsuit, and $176 for impairment of other intangible assets,
(iii) charges in fiscal 1996 of $1,115 for the settlement of the class
action lawsuit, $50 for the cost of relocating a school, and $764 for the
impairment of goodwill and other intangible assets; and (iv) charges in
fiscal 1997 of $144 for the consolidation of two schools in Virginia and
two schools in California and $391 in merger expenses related to the
Nebraska Acquisition.
(2) Prior to March 31, 1997, the Nebraska Acquisition and its predecessor were
organized as a Subchapter S-Corporation and a partnership under the
Internal Revenue Code. Accordingly, income taxes were the responsibility
of the S-Corporation's stockholders and the partnership's partners. For
informational purposes, the selected pro forma consolidated financial data
for the five years ended March 31, 1997 include a pro forma presentation
that includes a provision for income taxes as if the Nebraska Acquisition
had operated as a C-Corporation and was combined with the Company for
those periods. Such pro forma calculations were based on the income tax
laws and rates in effect during those periods and Financial Accounting
Standards Board Statement No. 109. Primary and fully diluted earnings per
share on a pro forma basis are the same except in fiscal year 1996 when
fully diluted earnings per share was $0.12.
(3) 1994 Other Operating Data excludes the Company's school located in
Albany, Georgia, which the Company decided to close in fiscal 1994. See
Note 1 above.
(4) Represents the percentage calculated by dividing (i) the number of
students who withdrew from the Company's schools in the period by (ii) the
sum of the number of students at each month-end in the period and the
number of students who withdrew in the period.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Annual Report on Form 10-K contains forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believes," "anticipates," "plans," "expects"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause the Company's actual
results to differ materially from those indicated by such forward-looking
statements. These factors include, without limitation, those set forth below
under the caption "Certain Factors That May Affect Future Results."
The following discussion of the Company's results of operations and
financial condition should be read in conjunction with Item 6 and Item 8 and
the Notes thereto appearing elsewhere in this Form 10-K.
23
<PAGE> 26
GENERAL
The Company owns and operates 19 schools in nine states which together
provide diversified career oriented postsecondary education to approximately
6,000 students as of March 31, 1997. The Company derives its revenue almost
entirely from tuition, fees and charges paid by, or on behalf of, its students.
Most students at the Company's schools rely on funds received under various
government-sponsored student financial aid programs, especially Title IV
Programs, to pay a substantial portion of their tuition and other
education-related expenses. During fiscal 1997, approximately 76% of the
Company's cash receipts were indirectly derived from Title IV Programs. Cash
receipts represented approximately 98% of the Company's net revenue in fiscal
1997.
The Company's revenue varies based on the aggregate student population,
which is influenced by the number of students attending the Company's schools
at the beginning of a fiscal period, by the number of new students entering the
Company's schools during such period, and by student retention rates. New
students enter the Company's schools' degree granting programs four times a
year and diploma courses every four-to-six weeks. The Company believes that the
size of its student population is affected to some extent by general economic
conditions, and that, in the absence of countervailing factors, student
enrollments and retention rates would tend to increase as opportunities for
immediate employment for high school graduates decline and decrease as such
opportunities increase. The purchase of new Company schools and the
introduction of additional program offerings at existing Company schools have
been significant factors in increasing the aggregate student population in
recent years.
In the fiscal year ending March 31, 1997, the Company derived
approximately 93% of its net revenues from tuition. The Company recognizes
tuition revenue on each student contract as earned on a pro rata monthly basis
over the term of the contract. Refunds are due if a student withdraws from
school prior to completion of the program and are computed using methods
required by accrediting agencies or state and federal regulations. As of the
time of withdrawal, the total earnings on the contract mandated by the
applicable formula are compared to the revenue previously recognized by the
Company. This comparison can result in either an increase or decrease in final
revenue recognition, which is recorded for accounting purposes at the time of
the applicable student's withdrawal. Historically, these net adjustments have
not been material. Other educational revenue is comprised of fees and textbook
sales.
The Company incurs expenses throughout a fiscal period in connection with
the operation of its schools. The cost of education and facilities includes
faculty salaries and benefits, cost of books sold, occupancy costs,
depreciation and amortization of equipment costs and leasehold improvements,
and certain other educational and facility costs incurred by the Company's
schools.
Selling and promotional expenses include admission representatives'
salaries and benefits, direct and indirect marketing expenses and advertising
expenses.
General and administrative expenses include schools', regional offices'
and home office's salaries and benefits, other direct and indirect costs of the
schools, regional offices, and home office, and the provision for losses on
accounts receivable.
Since its inception, the Company has pursued a strategy of growth
through acquisition. All of the Company's schools have been acquired. Except in
the case of a pooling of interests, the Company records as goodwill and
intangibles the difference between the purchase price of a school and the fair
value of its tangible net assets. Since inception, the Company has allocated
approximately $20.8 million of its purchase prices of acquired schools to
goodwill and intangibles. Goodwill is amortized over 15 years. Other
intangibles are
24
<PAGE> 27
amortized over two to 15 years. The Company also frequently enters into
non-competition agreements with the owners or employees of the schools it
acquires and generally records the cost of such non-competition agreements as
intangible assets which are amortized over their respective lives which range
from two to ten years. Effective July 1993, such amortization is tax
deductible; however, amortization related to acquisitions consummated prior to
that date is only partially tax deductible on a current basis.
VARIATIONS IN QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly financial data for each
of the eight fiscal quarters in the two years ended March 31, 1997 and such
data expressed as a percentage of the Company's totals with respect to such
information for the applicable fiscal year. The Company believes that this
information includes all adjustments (consisting solely of normal recurring
adjustments) necessary for a fair presentation of such quarterly information
when read in conjunction with the consolidated financial statements included
elsewhere herein. The operating results for any quarter are not necessarily
indicative of the results for any future period.
<TABLE>
<CAPTION>
Fiscal Year Ended March 31, 1996 Fiscal Year Ended March 31, 1997
-------------------------------- --------------------------------
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Net revenues:
Amount.............. $9,765 $10,377 $11,538 $11,667 $10,401 $12,039 $13,324 $13,686
Percentage of fiscal
year total...... 22.5% 23.9% 26.6% 27.0% 21.0% 24.3% 26.9% 27.8%
Income from
operations before
other expenses:
Amount............ $ 145 $ 792 $ 1,490 $ 1,483 $ 327 $ 1,122 $ 1,404 $ 987
Percentage of fiscal
year total....... 3.7% 20.3% 38.1% 37.9% 8.5% 29.2% 36.6% 25.7%
</TABLE>
The Company's quarterly net revenues have fluctuated in the past and may
fluctuate significantly in the future as a result of a number of factors,
principally due to the number and timing of new students enrolling in the
Company's programs. New enrollments in the Company's schools tend to be higher
in the third and fourth fiscal quarters because the third and fourth quarters
cover periods traditionally associated with the beginning of school semesters.
The Company believes it is less affected by this seasonal pattern than many
other educational institutions because it permits students to enroll in and
begin programs in any month of the year at most of its schools. In addition,
the impact of seasonality in new enrollments on results of operations has been
moderated to some extent by growth in the number of students attending programs
and the varying lengths of those programs. In addition, other factors affecting
quarterly net revenues include student withdrawals, the termination of
programs, the introduction of new programs, the upgrading or lengthening of
programs, changes in tuition rates (including changes in response to pricing
actions by competitors), changes in government-supported financial aid programs,
modification of applicable government regulations or interpretations,
regulatory audits or other actions by regulatory authorities. The Company has
not experienced any material resistance to raising its tuition rates in the
past and, based on such prior experience, anticipates that tuition increases
will keep pace with inflation for the foreseeable future. Because certain of
the Company's expenses do not vary with student enrollment, quarterly
variations in net revenues are amplified at the income (loss) from operations
level.
25
<PAGE> 28
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain
statement of operations data to net revenues, for the periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------
1995 1996 1997
------------ ------------ ------------
% of Revenue % of Revenue % of Revenue
------------ ------------ ------------
<S> <C> <C> <C>
Net Revenues 100.0 100.0 100.0
School Operating Costs:
Cost of education and facilities 47.2 45.4 46.8
Selling and promotional 16.8 15.1 15.2
General and administrative expenses 29.2 28.5 28.4
Amortization of goodwill and intangibles 3.4 2.0 1.8
----- ----- -----
Income before other expenses 3.4 9.0 7.8
Other expenses 2.1 4.4 1.1
----- ----- -----
Income from operations 1.3 4.6 6.7
Interest expense, net 2.5 1.9 0.6
----- ----- -----
Income (loss) before income taxes (1.2) 2.7 6.1
Provision (benefit) for income taxes 0.1 1.5 (1.7)
----- ----- -----
Income (loss) before extraordinary item (1.3) 1.2 7.8
Extraordinary item - - 0.6
----- ----- -----
Net income (loss) (1.3) 1.2 7.2
----- ----- -----
</TABLE>
Year Ended March 31, 1997 Compared With Year Ended March 31, 1996.
Net Revenues. Net revenues increased by $6,103, or 14.1%, to $49,450 for
the year ended March 31, 1997 from $43,347 for the year ended March 31, 1996.
Factors contributing to revenue growth included an increase in the number of
students attending the Company's schools and an approximate 4% increase in
tuition rates during fiscal 1997. The number of new student starts at the
Company's schools during the year increased to 7,358 in fiscal 1997 from 6,706
in fiscal 1996, a 9.7% increase. The Company's three San Diego area schools
experienced a decline in new student starts to 1,944 for the current year as
compared to 2,178 for the prior year, principally in its medical assistant and
medical administration programs. The Company believes the decline in new
student starts is attributable to several factors in the San Diego area,
including a shift in employer requirements for medical assistants, a continued
decline in military personnel, and an increase in employment opportunities.
The Company believes that these factors may continue to adversely impact the
Company's operations in the San Diego area. The Texas and Maryland schools,
acquired in fiscal 1997, accounted for 855 new students starts in fiscal 1997.
Student withdrawal rates did not change materially compared to withdrawal rates
experienced by the Company during fiscal 1996.
Cost of Education and Facilities. Cost of education and facilities
increased by $3,500, or 17.8%, to $23,151 in fiscal 1997 from $19,651 in fiscal
1996 principally as a result of increased student count at the Company's
schools. The cost of education and facilities as a percentage of net revenue
was 46.8% in fiscal 1997 compared with 45.4% in fiscal 1996, as a result of
increased costs associated with the introduction of several new programs at the
Company's two San Diego, California schools.
Selling and Promotional. Selling and promotional expenses increased by
$997, or 15.3%, to $7,531 in fiscal 1997 from $6,534 in fiscal 1996. Selling
and promotional expense as a percentage of net revenue was 15.2% in fiscal 1997
compared with 15.1% in fiscal 1996, as a result of increased advertising
spending by the Company's schools in order to increase inquiries from
prospective students.
26
<PAGE> 29
General and Administrative. General and administrative expenses increased
by $1,673, or 13.5%, to $14,042 in fiscal 1997 from $12,369 in fiscal 1996
principally as a result of an increase in the number of administrative
personnel at the Company's schools and increased costs at the Company's home
office and regional offices. Such increase in personnel was necessary to
service the increase in student population and the expansion in number of
schools. General and administrative expenses as a percentage of net revenues
were 28.4% in fiscal 1997 compared with 28.5% in fiscal 1996.
Amortization of Goodwill and Intangibles. Amortization of goodwill and
intangibles increased $3, or .4% to $886 in fiscal 1997 from $883 in fiscal
1996. The increase was a result of amortizing costs associated with schools
acquired in fiscal 1997 offset by fully amortizing certain intangible
assets acquired in connection with the purchase of schools in fiscal 1992 and
prior.
Other Expenses. Other expenses in fiscal 1997 consisted of a charge of
$391 for merger costs associated with the Nebraska acquisition and $144 for the
consolidation of two Virginia schools and two California schools.
Interest Expense, Net. Net interest expense decreased $538, or 65.5%, to
$284 in fiscal 1997 from $822 in fiscal 1996 principally as a result of paying
off $4.8 million in subordinated debt with the proceeds from the Company's IPO
and increased interest income from excess cash on hand.
Income before Income Taxes and Extraordinary Item. Income before income
taxes and extraordinary item increased to $3,021 in fiscal 1997 from $1,159 in
fiscal 1996 principally as a result of the decline in other expenses and
reduced interest expense, net.
Extraordinary Item. Extraordinary item consisted of a one time charge of
$309 after tax to write off unamortized deferred debt issuance costs and
unamortized debt discount for early payoff of subordinated debt from the
proceeds of the Company's IPO.
Income Taxes. The income tax benefit was $845 in fiscal 1997 as compared
to expense of $632 in fiscal 1996 due to the 1997 recognition of a benefit
from establishing deferred tax assets when the Nebraska Acquisition terminated
its status as a Subchapter S Corporation and the 1997 elimination of the
deferred tax asset valuation allowance of $1,320 due to the Company's
profitable operations in fiscal 1997 and the acquisition of other historically
profitable schools. Pro forma income tax expense of $409 in fiscal 1997 as
compared to the pro forma income tax benefit of $487 in fiscal 1996 reflects
the taxation of the Nebraska Acquisition as a C corporation filing a
consolidated return with the Company for all periods and other differences
arising from the application of the liability method of accounting for income
taxes.
Net Income. Net income increased in fiscal 1997 to $3,557 as compared to
$527 in fiscal 1996 due primarily to the acquisition of the Texas and Maryland
schools, improved results in the Nebraska schools, the reduction in the other
expenses such as the class action lawsuit settlement and the impairment of
goodwill and intangibles, and reduced interest expense, combined with the
income tax benefit described above in fiscal 1997.
Year Ended March 31, 1996 Compared With Year Ended March 31, 1995.
Net Revenues. Net revenues increased by $6,267, or 16.9%, to $43,347 for
the year ended March 31, 1996 from $37,080 for the year ended March 31, 1995.
Factors contributing to revenue growth included an increase in the number of
students attending the Company's schools and an approximate 5%
27
<PAGE> 30
increase in tuition rates during fiscal 1996. The number of students attending
the Company's schools increased 16.6% from the beginning of fiscal 1995 to the
beginning of fiscal 1996. The number of new student starts at the Company's
schools during the year increased to 6,706 in fiscal 1996 from 6,297 in fiscal
1995, a 6.5% increase. The seven new schools acquired in fiscal 1994 and the
two Nebraska schools accounted for 2,845 new student starts in fiscal 1996
compared with 2,559 in fiscal 1995 representing a 11.2% increase. Student
withdrawal rates did not change materially compared to withdrawal rates
experienced by the Company during fiscal 1995.
Cost of Education and Facilities. Cost of education and facilities
increased by $2,163, or 12.4%, to $19,651 in fiscal 1996 from $17,488 in fiscal
1995 principally as a result of increased student count at the Company's
schools. The cost of education and facilities as a percentage of net revenues
was 45.4% in fiscal 1996 compared with 47.2% in fiscal 1995, reflecting the
Company's ability to serve a greater student population without a corresponding
proportional increase in faculty and facilities costs.
Selling and Promotional. Selling and promotional expenses increased by
$318, or 5.1%, to $6,534 in fiscal 1996 from $6,216 in fiscal 1995. Selling
and promotional expenses as a percentage of net revenues was 15.1% in fiscal
1996 compared with 16.8% in fiscal 1995, due to an increased percentage of new
student starts resulting from student referrals.
General and Administrative. Administrative expenses increased by $1,543,
or 14.3%, to $12,369 in fiscal 1996 from $10,826 in fiscal 1995 principally as
a result of an increase in the number of administrative personnel at the
schools. Such increase in personnel was necessary to service the increased
student population. Administrative expense as a percentage of net revenues
declined to 28.5% in fiscal 1996 compared with 29.2% in fiscal 1995 resulting
from the Company's ability to leverage fixed costs at the home office, regional
and school level.
Amortization of Goodwill and Intangibles. Amortization of goodwill and
intangibles declined $372, or 29.6%, to $883 in fiscal 1996 from $1,255 in
fiscal 1995. The decline was a result of fully amortizing certain intangible
assets acquired in connection with the purchase of schools in fiscal 1992 and
prior.
Other Expenses. Other expenses in fiscal 1996 consisted of a charge of
$1,115 for the settlement of a class action lawsuit and a $50 charge related to
the relocation of one of the Company's schools, and $764 for the impairment of
goodwill and intangibles due to operating losses of the Company's Roanoke,
Virginia school.
Interest Expense, Net. Net interest expense decreased $113, or 12.1%, to
$822 in fiscal 1996 from $935 in fiscal 1995 principally as a result of lower
debt levels during fiscal 1996.
Income Taxes. Income taxes increased by $604 to $632 in fiscal 1996 from
$28 in fiscal 1995 due principally to not recognizing a tax benefit for the
impairment of goodwill and intangibles and a portion of the legal settlement.
As a result, the effective income tax rate in fiscal 1996 was substantially
higher than in fiscal 1995.
Net Income. Net income increased to $527 in fiscal 1996 from a loss of
$444 in fiscal 1995 principally as a result of increased net revenues and
reduced expenses as a percentage of net revenues.
28
<PAGE> 31
LIQUIDITY AND CAPITAL RESOURCES
During the last three fiscal years, the Company financed its operating
activities and capital requirements, including debt repayments, principally
from cash provided by operating activities and by a $2.2 million subordinated
debt borrowing in March 1995. Cash provided by operating activities for fiscal
1996 and fiscal 1997 was $4.3 million and $2.7 million, respectively. The
Company's principal sources of funds at March 31, 1997 were cash and cash
equivalents of $14.0 million and accounts receivable of $5.2 million.
Historically, the Company's investment activity has primarily consisted of
capital asset purchases and the purchase of schools. Capital expenditures,
excluding capital leases, totaled $1.3 million and $2.0 million for fiscal 1996
and 1997, respectively, as a result of purchasing additional equipment and
upgrading and replacing existing equipment such as computers and medical
equipment for school programs, and expanding facilities at several locations.
Purchases of the Texas and Maryland businesses, including goodwill and
intangibles, totaled $5.2 million of which $1.4 million was paid in cash in
fiscal 1997.
The Company's capital assets consist primarily of classroom and laboratory
equipment (such as computers and medical devices), classroom and office
furniture, and leasehold improvements. All building facilities are leased with
the exception of the land and buildings owned by the Company in Dayton, Ohio,
Lincoln, Nebraska and Omaha, Nebraska. The Company plans to continue to expand
current facilities, upgrade and replace equipment, and open new schools. The
Company expects fiscal 1998 capital expenditures for its existing schools to be
approximately $2.2 million. The Company expects that its fiscal 1998
operations and planned capital expenditures can be funded through cash to be
generated from existing operations.
Cash flow from operations on a long term basis is highly dependent on the
receipt of funds from Title IV Programs, and presently a majority of the
Company's net revenues are derived from Title IV Programs. Disbursement of
Title IV Program funds is dictated by federal regulations. For students
enrolled in "non-term" programs (i.e., not divided into quarters or semesters),
payments are generally made in two equal installments, one in the first 30 days
following the student's first day of class and the second when the student
reaches the midpoint of the program. For students enrolled in term programs
(i.e., quarters or semesters), payments are made at the beginning of each
term, with the exception of the initial disbursement which is made 30 days
following the student's first day of class. In addition, the Title IV
regulations set forth other financial standards for the Company and its schools
including restrictions for (i) positive tangible net worth, (ii) an "acid"
test ratio of at least 1-to-1, (iii) a 10% limitation on losses as a percentage
of tangible net worth and (iv) the maintenance of a minimum cash reserve equal
to 25% of prior year school refunds in the event of certain non-compliance.
Except with respect to the operating losses incurred at the Company's Roanoke
school, the Company believes each of its schools satisfied the financial
responsibility standards. Because the HEA and the Regulations are subject to
amendment, and because the Department of Education may change its
interpretation of the HEA and the Regulations, there can be no assurance that
the Department of Education will agree in the future with the Company's
interpretation of each such requirement or that such requirements will not
change in the future.
In connection with the Texas Acquisition, the Company made payments of
approximately $1,150,000 to the sellers in May 1997 and will make note payments
of approximately $250,000 per year for five years, beginning in fiscal 1998.
The Company's Title IV funding from its Texas Acquisition was suspended pending
Department of Education recertification, which was received in April 1997. In
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<PAGE> 32
connection with the Maryland Acquisition, the Company made payments of
$1,350,000 in May 1997. No further amounts are due. The Company's Title IV
funding from its Maryland Acquisition was suspended pending Department of
Education recertification, which was received in April 1997. The Company's
Title IV funding for its Nebraska Acquisition has been suspended pending
Department of Education recertification, which is expected to be received in
the fall of 1997.
The Company anticipates it will need additional debt or equity financing
in order to carry out its strategy of growth through acquisitions. In February
1997, the Company entered into a loan agreement with a major U.S. bank for loan
facilities to the Company of up to $17.5 million (the "Bank Credit Facility").
Of the total amount of the Bank Credit Facility, $5 million is to be provided
in the form of a three year revolving line of credit and the remainder by a
term loan facility maturing on the third anniversary of the Bank Credit
Facility. Subject to compliance by the Company with certain financial
conditions and expenditure of all the proceeds from the IPO, the term loan
facility provides $5 million of availability the first year, increasing to $7.5
million in the second year and $12.5 million in the third year. Interest is
charged on borrowings at different floating rates above LIBOR depending on
certain financial conditions of the Company and depending on whether drawn
under the revolving line of credit or the term loan. In addition, the Bank
Credit Facility provides for commitment fees to be paid on the unused portion
of the facility. The Bank Credit Facility also contains restrictions on the
payment of dividends and incurrence of additional debt, and various other
financial covenants. The Bank Credit Facility is secured by substantially
all of the assets of the Company. The Company believes this Bank Credit
Facility will be adequate to meet its financing needs for at least the next
twelve months.
Effect of Inflation. The Company does not believe its operations have been
materially affected by inflation.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements made in this
Annual Report on Form 10-K and presented elsewhere by management from
time-to-time.
DEPENDENCE ON TITLE IV FUNDING; REGULATORY COMPLIANCE AS A CONDITION FOR
CONTINUED ELIGIBILITY FOR TITLE IV FUNDING
The Company derives a substantial majority of its revenues from federal
financial aid received by the students of its schools under Title IV programs
administered by the United States Department of Education under the HEA. Each
of the Company's schools participates in Title IV Programs. In order to
participate in Title IV Programs, an institution, such as each of the schools
owned and operated by the Company, must obtain certification by the Department
of Education as an "eligible institution." To obtain such certification, the
institution must satisfy certain eligibility, program, and general requirements
imposed by the HEA and by regulations thereunder (the "Regulations")
promulgated and enforced by the Department of Education. Generally, a school
(a main campus and any additional locations for purposes of the Regulations) is
considered separately for compliance with the Regulations. All but two of the
Company's schools are main campuses. An institution also must be authorized to
offer its programs by the relevant state agency where it is located and it must
be accredited by a nationally recognized accrediting agency to obtain and
maintain such certification. Each of the Company's schools is licensed and
approved in the state where it operates and is accredited by at least one
nationally recognized accrediting agency.
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<PAGE> 33
The provisions of the HEA and the Regulations govern many aspects of the
operation of the Company and its schools, including, but not limited to (i) the
maximum acceptable rate of default by a school's students with respect to
federally guaranteed or funded student loans, (ii) the maximum acceptable
proportion of school revenues derived from Title IV Programs, (iii) the
school's satisfaction of certain financial responsibility standards, (iv) the
school's satisfaction of certain administrative capability standards, (v) the
ability of a school to add locations and educational programs, and (vi) the
ability of the Company to engage in transactions involving a change in
ownership resulting in a change in control of the schools or the Company.
Generally, each school is considered separately for purposes of determining
compliance with the regulatory requirements, although certain financial
reporting is done on a consolidated basis.
Financial Responsibility Requirements. The HEA and the Regulations
prescribe specific standards of financial responsibility which the Department
of Education must consider with respect to qualification for participation in
the Title IV Programs ("Financial Responsibility Standards"). These standards
are generally applied on an individual school basis. However, there can be no
assurance that the Department of Education will not attempt to apply such
standards on a consolidated basis. If the Department of Education determines
that any of the Company's schools fails to satisfy the Financial Responsibility
Standards, it may require that such schools post an irrevocable letter of credit
(a "Financial Responsibility Bond") in favor of the Secretary of Education in
an amount equal to not less than one-half of Title IV Program funds received by
the school during the last complete award year or, in the Department of
Education's discretion, require some other less onerous demonstration of
financial responsibility (a "Demonstration of Financial Responsibility").
Among the principal Financial Responsibility Standards which a school must
satisfy are: (i) an "acid test" ratio (defined as the ratio of the total of
cash, cash equivalents and current accounts receivable to current liabilities)
of at least 1-to-1 at the end of the most recent fiscal year, (ii) a positive
tangible net worth, as defined by the applicable Regulations, at the end of the
most recent fiscal year (the "Tangible Net Worth Standard") and (iii) net
operating results for the two most recent fiscal years, excluding extraordinary
losses or losses from discontinued operations, which do not show an aggregate
net loss in excess of 10% of tangible net worth at the beginning of the two
year period.
Student Loan Defaults. The HEA provides that a school may lose its
eligibility to participate in some or all Title IV Programs if defaults on the
repayment of federally guaranteed student loans or direct loans exceed certain
rates ("Cohort Default Rates"). Cohort Default Rates are calculated for each
school for each federal fiscal year by determining the rate at which the
school's students entering in that federal fiscal year default on repayment
of their loan by the end of the following federal fiscal year. Cohort
default rates are subject to revision by the Department of Education if new
data become available and are subject to appeal by schools contesting the
accuracy of the data or the adequacy of the servicing of the loans by the loan
servicer. A school that is determined to have had Cohort Default Rates of 25%
or greater for the three most recent federal fiscal years for which data is
available is subject to immediate loss of eligibility to participate in
substantially all Title IV Student Loan Programs, subject to a limited appeal
of the determination, including an appeal based on a claim of exemption from
the Cohort Default Rate requirements by virtue of exceptional mitigating
circumstances. The loss of eligibility lasts for the duration of the federal
fiscal year in which the determination of ineligibility is made, plus the two
succeeding federal fiscal years. However, an institution remains eligible for
Title IV funding while an appeal of such determination is pending. The loss of
Title IV eligibility at one or more of the Company schools could have a
material adverse effect on the Company's operations.
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<PAGE> 34
CHANGE IN OWNERSHIP RESULTING IN CHANGE IN CONTROL
Upon a change in ownership resulting in a change in control of the
Company, as defined in the HEA and the Regulations, each of the Company's
schools would lose its eligibility to participate in Title IV Programs for an
indeterminate period of time during which it applies to regain eligibility. A
change of control also could have significant regulatory consequences for the
Company at the state level and could affect the accreditation of the Company's
schools.
The Department of Education's regulations provide that after a Company
becomes publicly-traded, a change in control occurs when a report on Form 8-K
is required to be filed with the Securities and Exchange Commission disclosing
a change in control. Most states and accrediting agencies have similar
requirements, but they do not provide a uniform definition of change in
control. If the Company were to lose its eligibility to participate in Title IV
Programs for a significant period of time pending an application to regain
eligibility, or if it were determined not to be eligible, its operations would
be materially adversely affected. The possible loss of Title IV eligibility
resulting from a change in control may also discourage or impede a tender
offer, proxy contest or other similar transaction involving control of the
Company.
PARTICIPATION IN FEDERAL DIRECT LENDING PROGRAM; RISK OF LEGISLATIVE ACTION
Prior to fiscal 1995, the Company derived all of its Title IV loan funding
from the FFEL loan program. Since fiscal 1995, the Company's schools elected to
administer their Title IV loan funding pursuant to the Federal Direct Student
Loan Program ("FDSLP"). As of this date, the Company expects to derive all of
its Title IV loan funding pursuant to the FDSLP program in fiscal 1998.
Funding for the FDSLP, as well as for the FFEL program, must be appropriated by
Congress annually. FDSLP and FFEL loans represent a substantial majority of
the Company's revenues. In 1996 there was debate in Congress over whether the
Title IV loan programs should be financed entirely through the FFEL program, or
through a combination of the FFEL program and the FDSLP program. There can be
no assurance that funding will continue at current levels, or that the FDSLP
program itself will be continued. If the FDSLP program were discontinued, or
funding reduced so as to reduce the amount of direct lending funds available to
the Company's schools, the Company would have to rely on loans provided
pursuant to FFEL. Loans pursuant to FFEL are administered through outside
lenders, such as banking institutions and are federally guaranteed. Although
the Company believes that it would have no difficulty finding lenders for
federally guaranteed student loans to its students under FFEL, there can be no
assurance that such loans would be available in amounts sufficient to provide
for the Company's schools to operate at current and anticipated levels, or at
all.
Furthermore, there can be no assurance that federal funding for the FFEL
Program will be continued at current levels, or at all. Because the Company
derives a substantial majority of its cash receipts from Title IV funding,
discontinuance or significant reductions in the FDSLP and, if the FDSLP program
is discontinued or reduced, the FFEL program, would have a material adverse
effect on the Company's operations.
RELIANCE ON ACQUISITIONS
The Company has acquired all of its schools. Several of the schools
acquired by the Company have experienced losses following their acquisition in
connection with their integration into the Company's operations or because of
their failure to perform as anticipated by the Company. The Company expects
that a significant part of its future growth will be based on its ability to
identify, acquire and profitably operate additional schools. While the Company
is continually searching for acquisition opportunities,
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<PAGE> 35
there can be no assurance that the Company will be successful in identifying,
acquiring and operating additional schools. When the Company acquires an
existing school and accounts for the acquisition as a "purchase" rather than a
"pooling of interests", a significant portion of the purchase price for such
school is often allocated to goodwill and intangibles because most of these
acquisitions do not involve the purchase of significant amounts of tangible
property. All of such goodwill and intangibles must be amortized over a
relatively short period of time, which reduces the Company's reported earnings.
If any potential acquisition opportunities are identified, there can be no
assurance that the Company will be able to consummate the acquisition on terms
favorable to the Company and successfully integrate any such acquisition into
its existing operations and there can be no assurance as to the timing or
effect on the business of the Company of any such acquisitions.
The Company's acquisition of a school constitutes a change in ownership
resulting in a change of control with respect to such school for purposes of
Title IV eligibility, which means that schools must either be acquired subject
to recertification of eligibility by the Department of Education or that the
school will lose its eligibility to participate in Title IV Programs for an
indeterminate period of time during which it applies for recertification of
eligibility. The Company's experience has been that the Department of Education
typically processes such applications for recertification in three to six
months. Since this is less than the minimum enrollment period for each of the
Company's schools, there generally should be no significant interruption of
Title IV funding caused by the need to apply for a recertification of
eligibility as a result of an acquisition. There can be no assurance, however,
that recertification applications will be acted upon on a timely basis by the
Department of Education so as to avoid any significant interruption of Title IV
funding to students at the acquired school. Prior to recertification by the
Department of Education, the Company must also obtain approval of the change in
control from applicable states and accrediting agencies. In the past this
process has taken from three to six months for the Company to complete. The
Company has been timely recertified for eligibility by the Department of
Education with respect to each of its acquisitions. Although the Company has
had no difficulty in obtaining such recertification and approval in the past,
there can be no assurance that such state, accrediting and Department of
Education approvals may not be subject to unexpected delays or difficulties
which may materially and adversely effect the Company's operations.
In acquiring a school, the Company becomes liable to the Department of
Education for any liabilities of the seller on account of the seller's failure
to comply with the HEA or the Regulations prior to the date of acquisition. The
Company attempts to minimize the impact of any such liabilities by including
representations as to regulatory compliance and indemnification provisions in
the relevant acquisition agreements. No material amount of unindemnified Title
IV regulatory liabilities have been asserted against the Company with respect
to any of its prior acquisitions, however, no assurance can be given that any
assertions will not be made in the future. In addition, if available offsets
are insufficient, there can be no assurance that the parties responsible for
indemnification of the Company from such liabilities will have the financial
resources necessary to indemnify the Company for all or any portion of such
possible liabilities.
VARIABILITY IN QUARTERLY OPERATING RESULTS
The Company's quarterly revenues have varied in the past and may vary
significantly in the future as a result of a number of factors, including
fluctuations in the number of new students enrolling in the Company's programs.
New enrollments in the Company's schools tend to be higher in the third and
fourth fiscal quarters because the third and fourth quarters cover periods
associated with the beginning of school semesters. The Company expects these
seasonal trends will continue.
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COMPETITION
The postsecondary education market is highly fragmented and competitive
with no private or public institution having a significant market share. The
Company's schools compete for students with not-for-profit public and private
colleges and proprietary institutions which offer degree and/or non-degree
granting programs. Such proprietary institutions include vocational and
technical training schools, continuing education programs and commercial
training programs. Public and private colleges may offer programs similar to
those offered by the Company's schools at lower tuition costs due in part to
government subsidies, foundation grants, tax deductible contributions, or other
financial resources not available to proprietary institutions. Certain of the
Company's competitors in both the public and private sector have greater
financial and other resources than the Company.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends upon the availability and performance of its
senior management, particularly Gary D. Kerber, the Company's Chairman,
President and Chief Executive Officer. Mr. Kerber has entered into an
employment contract with the Company, however, it may be terminated by him at
any time. Although the Company maintains key man life insurance on Mr. Kerber
in the amount of $1,000,000, the loss of Mr. Kerber's services could have a
material adverse effect on the Company.
ABSENCE OF DIVIDENDS
The Company has not paid any dividends to date. The Company does not
currently intend to declare or pay dividends on its Common Stock in the
foreseeable future, but plans to retain any earnings for use in its business
operations. In addition, the Bank Credit Facility contains restrictions which
prohibit the Company from paying dividends while such credit line is in effect.
ANTI-TAKEOVER PROVISIONS AND TITLE IV CHANGE IN CONTROL REGULATIONS
Certain provisions of the Company's Certificate of Incorporation and
Bylaws authorize the issuance of "Blank Check" preferred stock and establishing
advance notice requirements for director nominations and actions to be taken at
stockholder meetings. These provisions could discourage or impede a tender
offer, proxy contest or other similar transaction involving control of the
Company, which transactions might be viewed favorably by minority stockholders.
Provisions in the applicable Regulations pursuant to which the Company would
lose its Title IV eligibility in the event of a change in ownership resulting
in a change of control could have a similar discouraging effect.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are indexed in Item 14
hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item regarding directors, executive
officers, promoters and control persons of the Company is incorporated by
reference from the Registrant's definitive Proxy Statement for its 1997 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
not later than July 29, 1997.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from
the Registrant's definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission not later
than July 29, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from
the Registrant's definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission not later
than July 29, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from
the Registrant's definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission not later
than July 29, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets as of March 31, 1996 and 1997
Consolidated Statements of Operations for the years ended
March 31, 1995, 1996 and 1997
Consolidated Statements of Stockholders' Equity for the years
ended March 31, 1995, 1996 and 1997
Consolidated Statements of Cash Flows for the years ended
March 31, 1995, 1996 and 1997
Notes to Consolidated Financial Statements
(b) FINANCIAL STATEMENT SCHEDULES
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<PAGE> 38
The following consolidated financial statement schedule of Educational
Medical, Inc. and subsidiaries is included in Item 14(d):
Schedule II--Valuation and qualifying accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore
have been omitted.
(c) REPORTS ON FORM 8-K:
Form 8-K filed January 15, 1997 reporting the acquisition of Hagerstown
Business College, Hagerstown, Maryland.
Form 8-K/A filed March 14, 1997 submitting financial statements and pro
forma financial statements as to the acquisition of Hagerstown Business
College, Hagerstown, Maryland.
(d) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
3.1(a)* Restated Certificate of Incorporation of EMI Acquisition Corp. (See
Exhibit 3.1(a) to Amendment No. 1 to Registration Statement on Form S-1
filed with the Commission on September 20, 1996.)
3.1(b)* Certificate of Amendment of Certificate of Incorporation of EMI
Acquisition Corp. (See Exhibit 3.1(b) to Amendment No. 3 to Registration
Statement on Form S-1 filed with the Commission on October 22, 1996.)
3.1(c)* Second Amendment to Restated Certificate of Incorporation of
Educational Medical, Inc. (See Exhibit 3.1(c) to Amendment No. 3 to
Registration Statement on Form S-1 filed with the Commission on October
22, 1996.)
3.1(d)* Third Amendment to Restated Certificate of Incorporation of
Educational Medical, Inc. (See Exhibit 3.1(d) to Amendment No. 3 to
Registration Statement on Form S-1 filed with the Commission on October
22, 1996.)
3.1(e)* Fourth Amendment to Restated Certificate of Incorporation of
Educational Medical, Inc. (See Exhibit 3.1(e) to Amendment No. 3 to
Registration Statement on Form S-1 filed with the Commission on October
22, 1996.)
3.1(f)* Fifth Amendment to Restated Certificate of Incorporation of
Educational Medical, Inc. (See Exhibit 3.1(f) to Amendment No. 3 to
Registration Statement on Form S-1 filed with the Commission on October
22, 1996.)
3.1(g)* Sixth Amendment to Restated Certificate of Incorporation of
Educational Medical, Inc. (See Exhibit 3.1(g) to Amendment No. 3 to
Registration Statement on Form S-1 filed with the Commission on October
22, 1996.)
3.1(h)* Seventh Amendment to Restated Certificate of Incorporation of
Educational Medical, Inc. (See Exhibit 3.1(h) to Amendment No. 3 to
Registration Statement on Form S-1 filed with the Commission on October
22, 1996.)
3.1(i)* Eighth Amendment to Restated Certificate of Incorporation of
Educational Medical, Inc. (See Exhibit 3.1(i) to Amendment No. 3 to
Registration Statement on Form S-1 filed with the Commission on October
22, 1996.)
</TABLE>
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<PAGE> 39
<TABLE>
<CAPTION>
<S> <C>
3.2* Restated By-Laws of the Company. (See Exhibit 3.2 to Amendment No. 3 to
Registration Statement on Form S-1 filed with the Commission on October
22, 1996.)
4.1* Form of Common Stock Certificate. (See Exhibit 4.1 to Amendment No. 3
to Registration Statement on Form S-1 filed with the Commission on October
22, 1996.)
10.1* Securities Purchase Agreement, dated as of July 23, 1991, by and among
the Company and the Pecks Managed Entities. (See Exhibit 10.1 to
Registration Statement on Form S-1 filed with the Commission on August 8,
1996.)
10.2* Promissory Note R-002, dated as of July 16, 1991, in the principal
amount of $2,900,000 issued by the Company in favor of NAP & Company. (See
Exhibit 10.2 to Amendment No. 3 Registration Statement on Form S-1 filed
with the Commission on October 22, 1996.)
10.3* Promissory Note R-003, dated as of July 23, 1991, in the principal
amount of $603,000 issued by the Company in favor of Fuelship & Company.
(See Exhibit 10.3 to Registration Statement on Form S-1 filed with the
Commission on August 8, 1996.)
10.4* Promissory Note R-004, dated as of July 23, 1991, in the principal
amount of $497,000 issued by the Company in favor of Fuelship & Company.
(See Exhibit 10.4 to Registration Statement on Form S-1 filed with the
Commission on August 8, 1996.)
10.5* Allonge to Promissory Note R-002, dated as of March 31, 1995. (See
Exhibit 10.5 to Registration Statement on Form S-1 filed with the
Commission on August 8, 1996.)
10.6* Allonge to Promissory Note R-003, dated as of March 31, 1995. (See
Exhibit 10.6 to Registration Statement on Form S-1 filed with the
Commission on August 8, 1996.)
10.7* Allonge to Promissory Note R-004, dated as of March 31, 1995. (See
Exhibit 10.7 to Registration Statement on Form S-1 filed with the
Commission on August 8, 1996.)
10.8* Warrant No. R-001 to purchase Common Stock issued to Fuelship &
Company. (See Exhibit 10.8 to Registration Statement on Form S-1 filed
with the Commission on August 8, 1996.)
10.9* Warrant No. R-002 to purchase Common Stock issued to NAP & Company.
(See Exhibit 10.8 to Registration Statement on Form S-1 filed with the
Commission on August 8, 1996.)
10.10* Warrant No. E-007 to purchase Common Stock issued to Equitable
Securities Corporation. (See Exhibit 10.10 to Amendment No. 3 to
Registration Statement on Form S-1 filed with the Commission on October
22, 1996.)
10.11* First Amendment to Securities Purchase Agreement, dated as of March
31, 1995, by and among the Company and the Pecks Managed Entities. (See
Exhibit 10.11 to Registration Statement on Form S-1 filed with the
Commission on August 8, 1996.)
10.12* Loan Agreement, dated as of March 31, 1995, by and between the
Company, each of its subsidiaries, and Sirrom. (See Exhibit 10.12 to
Amendment No. 3 to Registration Statement on Form S-1 filed with the
Commission on October 22, 1996.)
10.13* Letter Addendum to Loan Agreement, dated as of March 31, 1995, between
the Company, each of its subsidiaries, and Sirrom. (See Exhibit 10.13 to
Registration Statement on Form S-1 filed with the Commission on August 8,
1996.)
10.14* Secured Promissory Note, dated as of March 31, 1995, in the principal
amount of $2,200,000, issued by the Company and each of its subsidiaries
in favor of Sirrom. (See Exhibit 10.14 to Amendment No. 3 to Registration
Statement on Form S-1 filed with the Commission on October 22, 1996.)
10.15* Security Agreement, dated as of March 31, 1995, among the Company,
each of its subsidiaries, and Sirrom. (See Exhibit 10.15 to Amendment No.
3 to Registration Statement on Form S-1 filed with the Commission on
October 22, 1996.)
</TABLE>
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<PAGE> 40
<TABLE>
<S> <C>
10.16* Stock Purchase Warrant to purchase Common Stock of the Company issued
to Sirrom, dated as of March 31, 1995. (See Exhibit 10.16 to Registration
Statement on Form S-1 filed with the Commission on August 8, 1996.)
10.17* Pledge Agreement, dated as of March 31, 1995, between the Company and
Sirrom. (See Exhibit 10.17 to Registration Statement on Form S-1 filed
with the Commission on August 8, 1996.)
10.18* Agreement in Respect of Warrant, dated as of March 31, 1995, among NAP
& Company, the Company and Sirrom. (See Exhibit 10.18 to Registration
Statement on Form S-1 filed with the Commission on August 8, 1996.)
10.19* Agreement in Respect of Warrant, dated as of March 31, 1995, among
Fuelship & Company, the Company and Sirrom. (See Exhibit 10.19 to
Registration Statement on Form S-1 filed with the Commission on August 8,
1996.)
10.20* Registration Rights Agreement, dated as of July 23, 1991, by and among
the Company, the Sprout Group, LTOS, and the Pecks Managed Entities (See
Exhibit 10.20 to Registration Statement on Form S-1 filed with the
Commission on August 8, 1996.).
10.21* First Amendment to Registration Rights Agreement, dated as of March
31, 1995, by and among the Company, the Sprout Group, LTOS, the Pecks
Managed Entities and Sirrom. (See Exhibit 10.21 to Registration Statement
on Form S-1 filed with the Commission on August 8, 1996.)
10.22* Coinvestors Agreement, dated as of July 23, 1991, by and among the
Company, the Sprout Group, LTOS, the Pecks Managed Entities and Investech,
L.P. (See Exhibit 10.22 to Registration Statement on Form S-1 filed with
the Commission on August 8, 1996.)
10.23* Letter Agreement, dated as of July 23, 1991, by and among the Company,
the Sprout Group, LTOS and Investech, L.P. (See Exhibit 10.23 to
Registration Statement on Form S-1 filed with the Commission on August 8,
1996.)
10.24* Business Loan Agreement, dated as of July 14, 1993, between Bank One,
Dayton, N.A. and OIOPT Acquisition Corp. (See Exhibit 10.24 to
Registration Statement on Form S-1 filed with the Commission on August 8,
1996.)
10.25* Business Purpose Promissory Note, dated as of July 14, 1993, in the
principal amount of $720,000 issued by OIOPT Acquisition Corp. in favor of
Bank One, Dayton, N.A., and guaranteed by the Company. (See Exhibit 10.25
to Registration Statement on Form S-1 filed with the Commission on August
8, 1996.)
10.26* Mortgage, dated as of July 14, 1993, by OIOPT Acquisition Corp.,
(Mortgagor), to Bank One, Dayton, N.A., (Mortgagee), guaranteed by the
Company. (See Exhibit 10.26 to Registration Statement on Form S-1 filed
with the Commission on August 8, 1996.)
10.27* Pledge Agreement, dated as of July 14, 1993, among the Company, Ohio
Institute of Photography and Technology, Inc. and OIOPT Acquisition Corp.
(See Exhibit 10.27 to Registration Statement on Form S-1 filed with the
Commission on August 8, 1996.)
10.28* Asset Purchase Agreement, dated as of June 23, 1993, among the
Company, OIOPT Acquisition Corp., Ohio Institute of Photography and
Technology, Inc., K. Terry Guthrie, Richard L. Cretcher, Stephen T.
McLain, Gerald D. Guthrie and James R. Madden. (See Exhibit 10.28 to
Registration Statement on Form S-1 filed with the Commission on August 8,
1996.)
10.29* Amendment to Business Loan Agreement, dated as of August 28, 1995, by
and between OIOPT Acquisition Corp. and Bank One, Dayton, N.A., with the
Company as guarantor. (See Exhibit 10.29 to Registration Statement on
Form S-1 filed with the Commission on August 8, 1996.)
10.30* Promissory Note Modification Agreement, dated as of August 28, 1995,
by and between OIOPT Acquisition Corp. and Bank One, Dayton, N.A., with
the Company as guarantor.
</TABLE>
38
<PAGE> 41
<TABLE>
<S> <C>
(See Exhibit 10.30 to Registration Statement on Form S-1 filed
with the Commission on August 8, 1996.)
10.31* Amendment to Business Loan Agreement, dated as of August 28, 1995, by
and between OIOPT Acquisition Corp. and Bank One, Dayton, N.A., and the
Company as guarantor. (See Exhibit 10.39 to Amendment No. 3 to
Registration Statement on Form S-1 filed with the Commission on October
22, 1996.)
10.32* Employment Agreement, dated as of December 31, 1992, between the
Company and Gary D. Kerber. (See Exhibit 10.42 to Registration Statement
on Form S-1 filed with the Commission on August 8, 1996.)
10.33* Letter Agreement, dated November 21, 1988 between the Company and
Robert L. Heidrich concerning the granting of options. (See Exhibit 10.52
to Registration Statement on Form S-1 filed with the Commission on August
8, 1996.)
10.34* 1996 Stock Incentive Plan of the Company. (See Exhibit 10.53 to
Amendment No. 1 to Registration Statement on Form S-1 filed with the
Commission on September 20, 1996.)
10.35* Non-employee Director Stock Option Plan of the Company. (See Exhibit
10.54 to Amendment No. 1 to Registration Statement on Form S-1 filed with
the Commission on September 20, 1996.)
10.36* Letter Agreement, dated April 6, 1995 between the Company and
Equitable Securities Corporation amending the maturity date of Warrant No.
E-007. (See Exhibit 10.55 to Registration Statement on Form S-1 filed
with the Commission on August 8, 1996.)
10.37* Asset Purchase Agreement, dated as of September 6, 1996, among the
Company, SACMD Acquisition Corp., San Antonio College of Medical and
Dental Assistants, Inc., Career Centers of Texas -- El Paso, Inc. and Mr.
Comer Alden. (See Exhibit 10.56 to Amendment No. 1 to Registration
Statement on Form S-1 filed with the Commission on September 20, 1996.)
10.38* Letter of Commitment, dated August 22, 1996, from Bank of America to
the Company concerning the Proposed Bank Line of Credit. (See Exhibit
10.57 to Amendment No. 1 to Registration Statement on Form S-1 filed with
the Commission on September 20, 1996.)
10.39* Asset Purchase Agreement dated December 12, 1996, as amended, between
the Company, HBC Acquisition Corp. and O/E Learning, Inc. (including all
exhibits) (See Exhibit 10.1 to the Company's Form 8-K filed with the
Commission on January 15, 1997.)
10.40* Executed Form of Second Payment Note in the amount of $1,350,000 from
HBC to O/E (See Exhibit 10.2 to the Company's Form 8-K filed with the
Commission on January 15, 1997.)
10.41* Executed Form of Pledge Agreement (See Exhibit 10.3 to the Company's
Form 8-K filed with the Commission on January 15, 1997.)
10.42* Executed Form of Assumption Agreement (See Exhibit 10.4 to the
Company's Form 8-K filed with the Commission on January 15, 1997.)
10.43* Executed Form of Bill of Sale (See Exhibit 10.5 to the Company's Form
8-K filed with the Commission on January 15, 1997.)
10.44* Agreement and Plan of Reorganization dated as of March 29, 1997, by
and among the Company, Nebraska Acquisition Corp. and Educational
Management, Inc. with attached Exhibit A - Plan of Merger (See Exhibit
10.1 to the Company's Form 8-K filed with the Commission on April 15,
1997.)
10.45* Escrow Agreement dated as of March 29, 1997 by and among the Company,
Acquisition and Richard O. Wikert, the Lila Rhude Trust, the Scott L.
Rhude Trust, the A. Lauren
</TABLE>
39
<PAGE> 42
<TABLE>
<S> <C>
Rhude Trust, Roger B. Bojens and Sacks Tierney, P.A. as Escrow
Agent. (See Exhibit 10.5 to the Company's Form 8-K filed with the
Commission on April 15, 1997.)
10.46 Business Loan Agreement dated as of February 25,1997 between Bank of
America, FSB and the Company
10.47 Stock Pledge Agreement dated as of February 25, 1997 between Bank of
America, FSB and the Company
10.48 Security Agreement dated as of February 25, 1997 between Bank of
America, FSB and the Company
11.1 Statement regarding computation of pro forma net income (loss) per share.
11.2 Statement regarding computation of historical net income (loss) per share.
11.3 Statement regarding computation of historical supplemental net income per share.
21 List of Subsidiaries
23.1 Consent of Winther, Stave & Co., LLP.
27.1 Financial Data Schedule (for SEC use only).
99.1 Report of Winther, Stave & Co., LLP
99.2 Report of Winther, Stave & Co., LLP
99.3 Report of Winther, Stave & Co., LLP
</TABLE>
* The exhibits thus designated are incorporated herein by reference as exhibits
hereto. Following the description of such exhibits is a reference to the copy
of the exhibit heretofore filed with the Commission, to which there have been
no amendments or changes.
40
<PAGE> 43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
EDUCATIONAL MEDICAL, INC..
(Registrant)
Date: June 30, 1997 By: /s/ Gary D. Kerber
--------------------------------------
Gary D. Kerber
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Gary D. Kerber President, Chief Executive June 30, 1997
- ------------------------- Officer and Chairman
Gary D. Kerber of the Board (Principal
Executive Officer)
/s/ Vince Pisano Vice President and Chief June 30, 1997
- ------------------------- Financial Officer
Vince Pisano
/s/ Robert T. Cresci Director June 30, 1997
- -------------------------
Robert T. Cresci
/s/ Carl S. Hutman Director June 30, 1997
- -------------------------
Carl S. Hutman
/s/ W. Patrick Ortale, III Director June 30, 1997
- --------------------------
W. Patrick Ortale, III
/s/ Richard E. Kroon Director June 30, 1997
- -------------------------
Richard E. Kroon
41
<PAGE> 44
ITEM 14(D)
SCHEDULE II
EDUCATIONAL MEDICAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS CHARGED
BEGINNING OF TO COSTS AND BALANCE AT END
YEAR EXPENSES NET DEDUCTIONS OF YEAR
-------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
For the year ended March 31, 1995 $ 1,027,433 $ 1,280,654 $1,286,920 $ 1,021,167
For the year ended March 31, 1996 1,021,167 1,270,565 1,317,375 974,357
For the year ended March 31, 1997 974,357 1,239,151 1,290,804 922,704
</TABLE>
<PAGE> 45
Educational Medical, Inc. and Subsidiaries
Consolidated Financial Statements
March 31, 1997
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors...................................F-1
Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 1996 and 1997........F-2
Consolidated Statements of Operations for the years ended
March 31, 1995, 1996 and 1997...................................F-4
Consolidated Statements of Stockholders' Equity for the years
ended March 31, 1995, 1996 and 1997.............................F-5
Consolidated Statements of Cash Flows for the years
ended March 31, 1995, 1996 and 1997.............................F-6
Notes to Consolidated Financial Statements.......................F-7
</TABLE>
<PAGE> 46
Report of Independent Auditors
Board of Directors and Stockholders
Educational Medical, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Educational
Medical, Inc. and subsidiaries as of March 31, 1996 and 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended March 31, 1997. Our audits also
included the financial statement schedule listed in the Index at Item 14(b).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. We did not audit the financial
statements of Nebraska Acquisition Corporation, a wholly-owned subsidiary, or
its predecessors (Educational Management, Inc. and Wikert and Rhude, a general
partnership) acquired by Educational Medical, Inc. on March 31, 1997 in a
business combination accounted for as a pooling of interests as described in
Note 4 to the consolidated financial statements, which statements reflect total
assets of approximately $2,625,000 and $5,681,000 as of March 31, 1996 and
1997, respectively, and total net revenues of approximately $5,015,000,
$4,695,000, and $6,012,000 for the years ended March 31, 1995, 1996 and 1997,
respectively. Those statements were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to data included
for Nebraska Acquisition Corporation, is based solely on the report of the
other auditors.
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 and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Educational Medical, Inc. and
subsidiaries at March 31, 1996 and 1997, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, based on our audits and the report of other auditors, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Ernst & Young LLP
June 30, 1997
Atlanta, Georgia
F-1
<PAGE> 47
Educational Medical, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
MARCH 31
1996 1997
------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,209,045 $14,047,889
Restricted cash 610,000 -
Trade accounts receivable, less allowance for
doubtful accounts of $974,357 and $922,704,
respectively 3,522,715 5,238,742
Prepaid expenses 1,033,098 1,149,146
Income taxes receivable - 155,542
Deferred income tax assets - 1,208,669
------------------------
Total current assets 8,374,858 21,799,988
Property and equipment, net 6,270,619 7,617,958
Deferred debt issuance costs, net of accumulated
amortization of $286,402 and $0, respectively 96,109 297,492
Covenants not to compete, net of accumulated
amortization of $902,780 and $1,194,238, respectively 974,445 1,082,987
Goodwill and other intangible assets, net of
accumulated amortization of $6,488,863 and
$7,063,793, respectively 5,040,410 10,152,625
Deferred income tax assets - 944,629
Other assets 229,210 176,855
------------------------
Total assets $20,985,651 $42,072,534
========================
</TABLE>
F-2
<PAGE> 48
<TABLE>
<CAPTION>
MARCH 31
1996 1997
-------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 723,834 $ 820,784
Accrued compensation 1,175,423 858,049
Accrued income taxes 232,252 -
Other accrued expenses 1,051,497 2,486,532
Deferred tuition income 2,821,257 3,184,225
Current portion of long-term debt 1,080,085 3,964,851
-------------------------
Total current liabilities 7,084,348 11,314,441
Long-term debt, less current portion 6,674,909 2,163,880
Other liabilities 957,166 394,145
-------------------------
Total liabilities 14,716,423 13,872,466
Commitments and contingencies
Stockholders' equity:
Preferred stock, authorized 5,000,000 shares, none
issued and outstanding - -
Convertible preferred stock, $.01 par value -
authorized 1,100,000 shares; 1,023,049 shares
issued and outstanding (liquidation preference of
$6.66 per share) at March 31, 1996; none
authorized, issued or outstanding at March 31, 1997 10,230 -
Additional paid-in capital on convertible preferred
stock 6,732,160 -
Common stock, $.01 par value - authorized 5,833,333
and 15,000,000 shares in 1996 and 1997,
respectively; 2,438,100 and 7,418,100 shares issued
and outstanding at March 31, 1996 and 1997,
respectively 24,381 74,181
Additional paid-in capital on common stock 42,424 30,222,776
Common stock purchase warrants 2,838,148 -
Accumulated deficit (3,343,115) (1,996,889)
Less treasury stock, at cost, 29,165 and 34,817
common shares at March 31, 1996 and 1997,
respectively (35,000) (100,000)
-------------------------
Total stockholders' equity 6,269,228 28,200,068
-------------------------
Total liabilities and stockholders' equity $20,985,651 $42,072,534
=========================
</TABLE>
See accompanying notes.
F-3
<PAGE> 49
Educational Medical, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1995 1996 1997
---------------------------------------
<S> <C> <C> <C>
Net revenues $37,080,045 $43,346,533 $49,449,680
School operating costs:
Cost of education and facilities 17,487,917 19,650,937 23,150,599
Selling and promotional 6,215,697 6,533,229 7,530,741
Provision for losses on accounts receivable 1,280,654 1,270,565 1,239,151
General and administrative expenses 9,545,715 11,098,422 12,802,441
Amortization of goodwill and intangibles 1,255,288 882,953 886,268
Other expenses:
Legal defense and settlement costs 600,000 1,115,000 -
Loss on closure or relocation of schools - 50,000 143,585
Impairment of goodwill and intangibles 176,042 764,000 -
Merger expenses - - 391,453
---------------------------------------
Income from operations 518,732 1,981,427 3,305,442
Interest expense (net of interest income of $60,327 in
1995, $171,870 in 1996, and $476,194 in 1997) 934,529 822,434 284,162
---------------------------------------
Income (loss) before income taxes and extraordinary item (415,797) 1,158,993 3,021,280
Provision (benefit) for income taxes 27,982 632,185 (845,363)
---------------------------------------
Net income (loss) before extraordinary item (443,779) 526,808 3,866,643
Extraordinary item - loss on early extinguishment of
debt, net of income taxes - - 308,683
---------------------------------------
Net income (loss) $ (443,779) $ 526,808 $ 3,557,960
=======================================
Pro forma income tax data:
Income (loss) before income taxes and extraordinary item $ (415,797) $ 1,158,993 $ 3,021,280
Provision (benefit) for income taxes 97,633 (486,505) 408,951
---------------------------------------
Income (loss) before extraordinary item (513,430) 672,488 2,612,329
Extraordinary item, net of income taxes - - 308,683
---------------------------------------
Pro forma net income (loss) $ (513,430) $ 672,488 $ 2,303,646
---------------------------------------
Pro forma net income (loss) per common and common
equivalent share:
Primary:
Income (loss) before extraordinary item $ (0.21) $ 0.13 $ 0.41
Extraordinary item - - (0.05)
---------------------------------------
Net income (loss) $ (0.21) $ 0.13 $ 0.36
=======================================
Weighted average number of shares and common equivalent
shares outstanding (primary) 2,483,115 5,149,764 6,447,339
=======================================
Fully diluted:
Income (loss) before extraordinary item $ (0.21) $ 0.12 $ 0.41
Extraordinary item - - (0.05)
---------------------------------------
Net income (loss) $ (0.21) $ 0.12 $ 0.36
=======================================
Weighted average number of shares and common equivalent
shares outstanding (fully diluted) 2,483,115 5,416,712 6,447,339
=======================================
</TABLE>
See accompanying notes.
F-4
<PAGE> 50
Educational Medical, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN ADDITIONAL
CAPITAL ON PAID-IN COMMON
CONVERTIBLE CONVERTIBLE CAPITAL ON STOCK
PREFERRED PREFERRED COMMON COMMON PURCHASE
STOCK STOCK STOCK STOCK WARRANTS
-------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
Balance at March 31, 1994, as restated $ 10,230 $ 6,732,160 $24,381 $ 42,424 $ 1,724,400
Accretion of value of common stock purchase warrants - - - - 339,252
Issuance of common stock purchase warrants - - - - 368,150
Distributions to former Nebraska Shareholders - - - - -
Adjustment for change in Nebraska year end - - - - -
Net loss - - - - -
-------------------------------------------------------------------
Balance at March 31, 1995 10,230 6,732,160 24,381 42,424 2,431,802
Accretion of value of common stock purchase warrants - - - - 406,346
Distributions to former Nebraska Shareholders - - - - -
Net income - - - - -
-------------------------------------------------------------------
Balance at March 31, 1996 10,230 6,732,160 24,381 42,424 2,838,148
Accretion of value of common stock purchase warrants - - - - 281,398
Issuance of common stock in connection with initial
public offering - - 22,000 19,238,000 -
Conversion of note receivable to treasury stock - - - - -
Exercise of common stock purchase warrants - - 1,417 367,583 (368,150)
Cashless exercise of common stock purchase warrants - - 9,333 2,742,063 (2,751,396)
Conversion of convertible preferred stock to common
stock (10,230) (6,732,160) 17,050 6,725,340 -
Distributions to former Nebraska Shareholders - - - - -
Reclassification of undistributed Nebraska S
Corporation earnings to additional paid-in-capital - - - 693,366 -
Recognition of deferred income tax assets related to
termination of Nebraska Subchapter S Corporation
status upon consummation of pooling of interests - - - 414,000 -
Net income - - - - -
-------------------------------------------------------------------
Balance at March 31, 1997 $ - $ - $74,181 $30,222,776 $ -
===================================================================
<CAPTION>
ACCUMU-
LATED TREASURY
DEFICIT STOCK TOTAL
--------------------------------------
<C> <C> <C> <C>
Balance at March 31, 1994, as restated $ (702,527) $ (35,000) $ 7,796,068
Accretion of value of common stock purchase warrants (339,252) - -
Issuance of common stock purchase warrants - - 368,150
Distributions to former Nebraska Shareholders (1,333,075) - (1,333,075)
Adjustment for change in Nebraska year end 208,229 - 208,229
Net loss (443,779) - (443,779)
--------------------------------------
Balance at March 31, 1995 (2,610,404) (35,000) 6,595,593
Accretion of value of common stock purchase warrants (406,346) - -
Distributions to former Nebraska Shareholders (853,173) - (853,173)
Net income 526,808 - 526,808
--------------------------------------
Balance at March 31, 1996 (3,343,115) (35,000) 6,269,228
Accretion of value of common stock purchase warrants (281,398) - -
Issuance of common stock in connection with initial
public offering - - 19,260,000
Conversion of note receivable to treasury stock - (65,000) (65,000)
Exercise of common stock purchase warrants - - 850
Cashless exercise of common stock purchase warrants - - -
Conversion of convertible preferred stock to common
stock - - -
Distributions to former Nebraska Shareholders (1,236,970) - (1,236,970)
Reclassification of undistributed Nebraska S
Corporation earnings to additional paid-in-capital (693,366) - -
Recognition of deferred income tax assets related to
termination of Nebraska Subchapter S Corporation
status upon consummation of pooling of interests - - 414,000
Net income 3,557,960 - 3,557,960
--------------------------------------
Balance at March 31, 1997 $(1,996,889) $(100,000) $28,200,068
======================================
</TABLE>
See accompanying notes.
F-5
<PAGE> 51
Educational Medical, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1995 1996 1997
---------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (443,779) $ 526,808 $ 3,557,960
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 930,715 1,104,039 1,330,180
Amortization of other assets 1,284,043 931,076 886,555
Extraordinary item - loss on early extinguishment
of debt, net of income taxes - - 308,683
Loss on closure or relocation of schools - 50,000 25,000
Impairment of goodwill and intangibles 176,042 764,000 -
Provision for losses on accounts receivable 1,280,654 1,270,565 1,239,151
Deferred income taxes - - (1,563,995)
Amortization of discount on long-term debt 212,445 123,567 72,044
Changes in operating assets and liabilities, net
of assets acquired and liabilities assumed:
Restricted cash (525,000) (235,000) 610,000
Accounts receivable (1,986,958) (673,666) (1,885,940)
Income taxes receivable - - (155,542)
Prepaid expenses 91,400 (60,224) (68,651)
Other assets (183,766) (40,292) 62,297
Accounts payable and accrued expenses 1,052,681 (282,548) 734,795
Deferred tuition income (519,615) 202,430 (1,826,398)
Income taxes payable - 220,807 (26,461)
Other liabilities 134,352 305,713 (563,021)
---------------------------------------
Net cash provided by operating activities 1,503,214 4,207,275 2,736,657
INVESTING ACTIVITIES
Purchase of businesses, net of cash acquired - - (1,400,000)
Purchases of property and equipment (2,200,758) (1,342,638) (2,079,501)
---------------------------------------
Net cash used in investing activities (2,200,758) (1,342,638) (3,479,501)
FINANCING ACTIVITIES
Issuance of common stock - - 19,260,000
Issuance of common stock purchase warrants 368,150 - -
Proceeds from notes payable and long-term debt 2,529,950 391,837 532,295
Principal payments on acquisition notes payable (1,156,187) (1,404,160) (1,890,493)
Exercise of common stock purchase warrants - - 850
Principal payments on senior subordinated debt (300,000) (500,000) (5,000,000)
Increase in deferred financing costs (66,100) (86,222) (297,492)
Distributions to former Nebraska Shareholders (1,057,273) (790,193) (1,023,472)
---------------------------------------
Net cash provided by (used in) financing activities 318,540 (2,388,738) 11,581,688
---------------------------------------
Increase (decrease) in cash and cash equivalents (379,004) 475,899 10,838,844
Cash and cash equivalents at beginning of year 3,112,150 2,733,146 3,209,045
---------------------------------------
Cash and cash equivalents at end of year $ 2,733,146 $ 3,209,045 $14,047,889
=======================================
</TABLE>
See accompanying notes.
F-6
<PAGE> 52
Educational Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1997
1. ORGANIZATION AND NATURE OF BUSINESS
Educational Medical, Inc. (the "Company") operates diversified career-oriented
postsecondary education schools. The Company offers diploma and, in certain
locations, degree programs through its 19 schools located in nine states. The
Company's 19 schools offer programs designed to provide enrolled students with
the knowledge and skills necessary for entry level employment in the fields of
healthcare, business, fashion and design, and photography.
The consolidated financial statements have been restated for the March 31, 1997
acquisition of Educational Management, Inc. ("Nebraska Acquisition"), which has
been accounted for as a pooling of interests. The financial statements and
notes reflect amounts related to the consolidated results of the Company and
the Nebraska Acquisition. See Note 4 for further details.
On October 28, 1996, the Company completed its initial public offering ("IPO")
of common stock by selling 2,200,000 shares of newly issued shares, in addition
to 410,000 shares sold by certain selling stockholders in October and November
1996. See Note 7 for further details.
Approximately 46% and 12% of the Company's fiscal 1997 net revenues were
derived from its schools in California and Nebraska, respectively. No other
state represented over 10% of net revenues. Approximately 76% of the Company's
fiscal 1997 cash receipts were derived from Title IV programs as provided for
by the Higher Education Act of 1965, as amended. Cash receipts approximated 98%
of the Company's net revenues in fiscal 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
F-7
<PAGE> 53
Educational Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles ("GAAP") requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS/RESTRICTED CASH
Cash equivalents includes overnight investments in a bank. These investments
are recorded at cost, which approximates market. The Company considers
investments with maturities of three months or less at the date of purchase to
be cash equivalents for purposes of the statements of cash flows.
Restricted cash represents 25% of certain of the Company's Title IV program
refunds made in the preceding fiscal year, as previously required by such
programs or posting of irrevocable letters of credit. In 1997, the Company
determined that segregation of such funds was no longer required except in
instances of failure to demonstrate financial responsibility, as defined, or to
pay refunds on a timely basis.
At March 31, 1996 and 1997, the Company held $3,717,558 and $13,515,475,
respectively, in cash balances at certain financial institutions which amounts
were in excess of the $100,000 federally insured amounts. The Company monitors
the financial condition of these institutions since it is exposed to credit
risk for such excess amounts, however, at this time the Company does not
believe any of these institutions present such a risk.
F-8
<PAGE> 54
Educational Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
In accordance with Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" ("SFAS 121"), the Company records impairment losses on
long-lived assets, including intangibles, used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted
cash flows estimated to be generated by those assets are less than the carrying
amounts of those assets.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation, including that related
to assets under capital leases, is computed using the straight-line method over
the estimated useful lives of the related assets or the remaining lease term
for leasehold improvements, if shorter.
COVENANTS NOT TO COMPETE
Non-compete agreements obtained from the sellers of certain acquired schools
are being amortized on the straight-line basis over the life of the agreement,
generally from two to 15 years.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is amortized over a fifteen year period.
Other intangible assets, which are similar in character to goodwill (acquired
student contracts, program curriculum, favorable leases assumed, accreditation
and acquired tradenames) are being amortized using the straight-line method
over periods ranging generally from two to ten years.
F-9
<PAGE> 55
Educational Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)
During the fiscal year ended March 31, 1995, the Company wrote-off
approximately $176,000 of unamortized intangible assets due to changes in
federal regulations regarding student referrals. During the fiscal year ended
March 31, 1996, the Company wrote-off approximately $764,000 of unamortized
goodwill related to one of its schools due to estimated impairment in value
(see Note 11).
LONG-TERM DEBT
Outstanding principal amounts are carried net of unamortized debt discount,
when applicable. The debt discount is being amortized over the period until
maturity of the underlying debt, using the straight-line method. Such
amortization is included in interest expense.
Deferred debt issuance costs represent fees and other costs associated with
obtaining long-term debt financing. Such amounts are amortized over the lives
of the related loans.
REVENUE RECOGNITION
Tuition revenue is recognized monthly on a straight-line basis over the term of
the course of study. Certain nonrefundable fees and charges are fully
recognized as revenue at the time a student begins classes.
The Company is generally required to refund a portion of a student's unearned
tuition who withdraws from a Company school. The amount of tuition, if any,
that may be retained by the Company after payment of any potential refund is
immediately recognized in the Company's statement of operations.
Deferred tuition income represents the portion of student tuitions received in
advance of the course of study's completion.
F-10
<PAGE> 56
Educational Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company uses the liability method of accounting for income taxes. Under
this method, deferred income tax assets and liabilities are determined based on
differences between the financial reporting and the tax bases of assets and
liabilities measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse.
PRO FORMA INCOME TAX DATA
Prior to March 31, 1997, the Nebraska Acquisition consisted of a Subchapter S
Corporation and a partnership and, accordingly, was not subject to federal or
state income taxes. For informational purposes, the statements of operations
include a pro forma presentation that includes a provision for income taxes as
if the Nebraska Acquisition had been a taxable corporation for these periods
and had filed a consolidated income tax return with the Company. Such pro forma
calculations were based on the income tax laws and rates in effect during those
periods and Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes.
STATEMENTS OF CASH FLOWS
The following non-cash transactions have been excluded from the consolidated
statements of cash flows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1995 1996 1997
-------------------------------
<S> <C> <C> <C>
Capital leases $623,000 $347,000 $ 121,000
Issuance of notes payable in connection with
acquisitions and related non-compete
agreements - - 4,100,000
Distribution of note receivable to former
Nebraska shareholders - - 213,498
Conversion of note receivable to treasury
stock - - 65,000
</TABLE>
F-11
<PAGE> 57
Educational Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
Historical net income (loss) per share presented in accordance with generally
accepted accounting principles is as follows:
<TABLE>
<CAPTION>
Year ended March 31
1995 1996 1997
--------------------------------------
<S> <C> <C> <C>
Net income (loss) per common share
and common equivalent share:
Income (loss)
before extraordinary item $ (0.18) $ 0.10 $ 0.60
Extraordinary item - - (.05)
Net income (loss) (0.18) 0.10 0.55
Weighted average number of shares
used in computing net income (loss)
per common share and common
equivalent share 2,483,115 5,149,764 6,447,339
</TABLE>
Historical net income (loss) per share was computed by dividing net income
(loss) by the weighted average number of shares of common stock and common
stock equivalents outstanding including 761,263 shares issued on March 31,
1997 to effect the Nebraska Acquisition less 37,810 shares returned pursuant to
the contingency clause, as if outstanding for all periods plus cheap stock
using the treasury stock method at the estimated market prices at each
applicable date. In 1995, common stock equivalents were antidilutive,
therefore they were not included in the computation of weighted average shares
outstanding for such period.
Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin
No. 83, common stock and common stock equivalents issued at prices below the
assumed initial public offering price per share ("cheap stock") during the
twelve month period immediately preceding the initial filing date of the
Company's Registration Statement for its IPO have been included as if
outstanding for all periods prior to the IPO (using the treasury stock method
at the IPO price) even though the effect is to reduce the loss per share in
1995.
F-12
<PAGE> 58
Educational Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Pro forma net income (loss) per share was computed by dividing net income
(loss) adjusted for the pro forma income tax provision after considering the
Nebraska Acquisition (which previously was a Subchapter S corporation) by the
weighted average number of shares of common stock and common stock equivalents
outstanding (including the 761,263 shares issued on March 31, 1997 to effect
the Nebraska Acquisition less 37,810 shares returned pursuant to the
contingency clause, as if outstanding for all
F-13
<PAGE> 59
Educational Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE (CONTINUED)
periods) plus cheap stock using the treasury stock method at the IPO price
for all periods. In 1995, common stock equivalents were antidilutive, therefore
they were not included in the computation of weighted average shares
outstanding for such period.
Assuming the repayment of certain long-term debt outstanding of $4,800,000 as
if repaid at the beginning of the period with the proceeds of the sale of
common stock, supplemental historical net income for fiscal year 1997 would
have been $0.59 per share of common stock before extraordinary item and $0.55
per share of common stock after extraordinary item.
STOCK COMPENSATION
The Company uses the intrinsic value method of accounting for its stock-based
compensation awards. As such, compensation expense is measured and recorded if
the exercise price of the stock options (or other awards) is below the fair
value of the Company's stock on the date of grant. The Company discloses the
pro forma effect of all stock compensation using the fair value method as
prescribed by Financial Accounting Standards Board Statement No. 123,
Accounting for Stock-based Compensation, ("SFAS 123"). See Note 7.
F-14
<PAGE> 60
Educational Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share", ("SFAS 128"), which generally simplifies the calculation
of earnings per share. The Company will adopt this new standard in fiscal year
1998 and has not yet evaluated the impact.
RECLASSIFICATIONS
Certain reclassifications were made to the 1995 and 1996 consolidated financial
statements to conform to the 1997 presentation.
3. REGULATORY MATTERS
The Company derives a substantial portion of its revenues from financial aid
received by its students under Title IV programs ("Title IV Programs")
administered by the United States Department of Education ("Department")
pursuant to the federal Higher Education Act of 1965, ("HEA"), as amended. In
order to continue to participate in Title IV Programs, the Company and its
schools must comply with complex standards set forth in the HEA and the
regulations promulgated thereunder (the "Regulations"). Among other things
these Regulations require the Company's schools to exercise due diligence in
approving and disbursing funds and servicing loans, limit the proportion of
cash receipts by the Company's schools derived from Title IV Programs to no
more than 85% of the total revenue derived from the school's students in its
Title IV eligible educational programs, and to exercise financial
responsibility related to maintaining certain financial covenants (including
cash reserve for refunds, an "acid test" ratio, a positive tangible net worth
test and limitations on the amount of operating losses in comparison to
tangible net worth, as defined). All of the Company's schools participate in
Title IV Programs.
The failure of any of the Company's schools to comply with the requirements of
the HEA or the Regulations could result in the restriction or loss by the
Company or such school of its ability to participate in Title IV Programs. If
the Department determines that any of the Company's schools is not financially
responsible, the Department may require that the Company or such school post an
F-15
<PAGE> 61
Educational Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. REGULATORY MATTERS (CONTINUED)
irrevocable letter of credit in an amount equal to not less than one-half of
Title IV Program funds received by the relevant school during the last complete
award year or, at the Department's discretion, require some other less onerous
demonstration of financial responsibility. One-half of Title IV funds received
by the Company's individual schools in the most recent fiscal year ranged from
$0.2 million to $3.7 million and one-half of the aggregate Title IV funds
received by all of the Company's schools in the most recent fiscal year equaled
$18.4 million. At March 31, 1997, the Company posted irrevocable letters
of credit for two of its schools totaling $145,000 which are payable to the
Department of Education and expire in January 1998.
Many of the financial responsibility standards are new, difficult to interpret,
and subject to the interpretation of the Department for implementation.
Further, the process for resolving lack of compliance with such Regulations is
also subject to interpretation and, in some cases, negotiation with the
Department. The Company believes each of its schools satisfies the financial
responsibility standards for fiscal 1997 except with respect to the operating
losses incurred by the Company's school located in Roanoke, Virginia.
4. ACQUISITIONS
During the fiscal year ended March 31, 1997, the Company acquired the stock or
certain assets and assumed certain liabilities of three businesses operating a
total of six schools. The following summarizes key information relevant to
these acquisitions:
TEXAS ACQUISITION
On September 6, 1996, the Company entered into an acquisition agreement
providing for the purchase of three schools located in Texas for $2.5 million
(the "Texas Acquisition"). The schools offer healthcare degree and diploma
programs and are located in San Antonio, McAllen and El Paso, Texas.
The Company financed the purchase of the Texas schools with $1,250,000 in
cash and the remaining $1,250,000 payable in the form of a promissory note
bearing interest at 8% per annum and due in five equal annual principal
payments.
F-16
<PAGE> 62
Educational Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. ACQUISITIONS (CONTINUED)
MARYLAND ACQUISITION
On December 12, 1996, the Company entered into an acquisition agreement
providing for the purchase of one school located in Hagerstown, Maryland
("Maryland Acquisition") for $2.7 million in cash. The Maryland school offers
healthcare and business diploma and degree programs.
The Texas Acquisition and the Maryland Acquisition, described above, were each
accounted for using the purchase method of accounting. The results of
operations of the acquired companies are included in the Company's fiscal 1997
consolidated statement of operations beginning with the respective acquisition
dates. The assets and liabilities of the acquired companies are included in
the Company's consolidated balance sheet based on a preliminary allocation of
the estimated fair values on the dates of acquisition. The excess of cost over
acquired net assets of the Texas and Maryland businesses acquired aggregated
approximately $5,687,000 at the dates of acquisition and is being amortized over
a 15 year period.
NEBRASKA ACQUISITION
On March 31, 1997, the Company acquired all of the outstanding stock of
Educational Management, Inc. ("Nebraska Acquisition"). The Nebraska Acquisition
consisted of two schools located in Lincoln and Omaha, Nebraska, which offer
business degree and diploma programs, and related real estate. In connection
with the acquisition, the Company issued 761,263 shares of its common stock,
agreed to pay $300,000 in non-compete agreements and paid approximately
$1,100,000 in cash which was used to pay off mortgage notes on certain real
estate owned by the Nebraska Acquisition.
This transaction was accounted for as a pooling of interests; therefore, all
financial statements presented have been restated to reflect the acquisition.
The Nebraska Acquisition prepared its financial statements using a December 31
calendar year-end prior to the acquisition. In recording the pooling of
interests combination, the Nebraska Acquisition's financial statements for the
years ended March 31, 1997, March 31, 1996 and December 31, 1994 were combined
with the Company's financial statements for the
F-17
<PAGE> 63
Educational Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. ACQUISITIONS (CONTINUED)
NEBRASKA ACQUISITION (CONTINUED)
years ended March 31, 1997, 1996 and 1995, respectively. The Nebraska
Acquisition reported net revenues and net income of $1,345,000 and $208,229,
respectively for the three-month period ended March 31, 1995. An adjustment of
$208,229 was made directly to the Company's consolidated stockholders' equity
representing the results of operations for the Nebraska Acquisition for the
period from January 1, 1995 through March 31, 1995 to conform the Nebraska
Acquisition's year end to the Company's year-end. Prior to the acquisition,
the Nebraska Acquisition and its predecessor filed its income tax returns under
the provisions of Subchapter S of the Internal Revenue Code and as a
partnership and hence recorded no income tax provision. Certain adjustments
were made to the Company's financial statements to record deferred income taxes
at the date of acquisition.
Net revenues and net income (loss) included in the Company's consolidated
statements of operations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1995 1996 1997
---------------------------------------
<S> <C> <C> <C>
Net revenues:
Educational Medical, Inc. $32,065,009 $38,651,827 $43,437,416
Nebraska Acquisition 5,015,036 4,694,706 6,012,264
----------- ----------- -----------
$37,080,045 $43,346,533 $49,449,680
=======================================
Net income (loss):
Educational Medical, Inc. $(1,428,376) $ 79,424 $ 2,321,432
Nebraska Acquisition 984,597 447,384 1,236,528
----------- ----------- -----------
$ (443,779) $ 526,808 $ 3,557,960
=======================================
</TABLE>
F-18
<PAGE> 64
Educational Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. ACQUISITIONS (CONTINUED)
SUMMARY PRO FORMA INFORMATION (UNAUDITED)
In connection with this acquisition, 95,000 shares of the 761,263 shares issued
were placed into escrow pending the resolution of certain financial aid
compliance matters with the Department of Education. In May 1997, the Company
settled a portion of these contingencies and as a result agreed to pay
approximately $397,000 to various parties and hence will receive approximately
37,810 shares from the sellers' escrow. The other shares will continue to be
held in escrow for specified periods.
Summary unaudited pro forma results of operations for the years ended March 31,
1996 and 1997 for the acquisitions, as if the acquisitions had occurred at
April 1, 1995 and as if the Texas and Nebraska Acquisitions were filing as C
Corporations rather than as Subchapter S corporations and a partnership, are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1996 1997
-------------------------
<S> <C> <C>
Net revenues $50,631,529 $53,156,034
Income before extraordinary item 1,225,350 3,914,088
Net income 1,225,350 3,605,405
Income per share before extraordinary item $ 0.24 $ 0.61
Net income per share 0.24 0.56
Weighted average common and common equivalent
shares outstanding 5,149,764 6,447,339
</TABLE>
The pro forma adjustments for acquisitions are based on the available
information and certain assumptions that management believes are reasonable.
F-19
<PAGE> 65
Educational Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. ACQUISITIONS (CONTINUED)
SUMMARY PRO FORMA INFORMATION (UNAUDITED) (CONTINUED)
These unaudited pro forma results of operations do not purport to represent
what the Company's actual results of operations would have been if the
acquisitions had occurred on April 1, 1995, and should not serve as a forecast
of the Company's operating results for any future periods. The pro forma
adjustments are based solely upon certain assumptions that management believes
are reasonable under the circumstances at this time. Management believes the
full impact of potential cost savings has not been reflected in the pro forma
results presented above, although there can be no assurances such cost savings
will be achieved. Subsequent adjustments may be necessary upon final
determination of the allocation of the purchase prices.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31
-------------------------
1996 1997
----------- -----------
<S> <C> <C>
Land $ 732,148 $ 748,598
Buildings 2,544,531 3,288,257
Equipment, furniture and fixtures 5,812,629 7,451,297
Leasehold improvement 1,272,871 1,517,178
----------- -----------
10,362,179 13,005,330
Less accumulated depreciation and amortization (4,091,560) (5,387,372)
----------- -----------
$ 6,270,619 $ 7,617,958
=========== ===========
</TABLE>
F-20
<PAGE> 66
Educational Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31
1996 1997
--------- ---------
<S> <C> <C>
Bank line of credit, $17,500,000 principal, monthly
interest-only payments, matures February 25, 2000. As of
March 31, 1997, $4,200,000 was available under the revolving
line of credit and none was available under the term loan (a) $ - $ -
14% senior subordinated debt, ("14% Notes"), $2,200,000
principal, quarterly interest-only payments through March 31,
2000, principal due March 31, 2000. Outstanding principal
amounts at March 31, 1996 are net of unamortized discount of
$294,520 (b) 1,905,480 -
13% senior subordinated debt, ("13% Notes") $4,000,000
principal, quarterly interest-only payments through March 31,
1993, quarterly principal payments of $100,000 plus interest
beginning June 30, 1993 through the repayment of the 14%
notes. One month after repayment in full of the 14% Notes, 15%
of unpaid principal is due. The remaining balance is then
payable in three monthly installments of 20%, 25% and
remaining principal balance, respectively. Outstanding
principal amounts at March 31, 1996 are net of unamortized
debt discount of $216,056 (c) 2,583,944 -
8% note, due in monthly installments of interest and annual
installments of principal, secured by substantially all assets
including land and buildings at two schools and the personal
guarantees of three individuals (d) 615,051 -
</TABLE>
F-21
<PAGE> 67
Educational Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31
1996 1997
------------ ------------
<S> <C> <C>
8.75% mortgage payable, adjustable in 1998 up to
prime plus 1.25%, to a bank, due in monthly
installments of principal and interest, secured by
land and building of one school 653,527 625,668
8% to 11% unsecured promissory notes payable to
sellers of various schools acquired, principal and
interest payable periodically through November 2001 810,000 1,790,000
Various unsecured, non-interest bearing notes
payable for noncompetition agreements, payable
periodically through July 1999 702,500 757,500
Various unsecured, non-interest bearing notes
payable to sellers of various schools acquired,
payable in fiscal 1997 - 2,500,000
8% to 12% capital leases, payable periodically
through November 2001; secured by equipment 484,492 455,563
----------- -----------
7,754,994 6,128,731
Less current portion (1,080,085) (3,964,851)
----------- -----------
$ 6,674,909 $ 2,163,880
=========== ===========
</TABLE>
(a) In February 1997, the Company entered into a loan with a major U.S. bank
for $17.5 million of which $5 million is for a three year revolving line
of credit and the remainder a three year term loan (the "Bank Line of
Credit"). Subject to certain financial conditions of the Company and the
use of all the net proceeds received by the Company from the IPO, the
term loan begins at the lesser of $5 million or the amount of eligible
accounts receivable in the first year, increasing to $7.5 million in the
second year and then to $12.5 million in the third year. Interest will be
charged on borrowings at different floating rates above LIBOR depending on
certain financial conditions of the Company and depending on whether drawn
under
F-22
<PAGE> 68
Educational Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. LONG-TERM DEBT (CONTINUED)
the revolving line of credit or the term loan. In addition, the Bank
Line of Credit requires fees for the borrowing commitment. The Bank Line
of Credit contains restrictions on the payment of dividends, capital
expenditures and incurrence of additional debt and contains various
financial covenants such as minimum net worth, tangible net worth and debt
coverage. The loan is secured by substantially all of the assets of the
Company.
(b) On March 31, 1995, the Company issued $2,200,000 of 14% Senior
Subordinated Debt and warrants to purchase a total of up to 308,333 shares
of Common Stock. Pursuant to this transaction, $368,150 was recorded as
debt discount and attributed to the warrants (see Note 7). Amortization of
this discount aggregated $73,630 and $42,952 in the years ended March 31,
1996 and 1997, respectively. The 14% Notes were secured by substantially
all the assets of the Company. These Notes were repaid in full with
proceeds of the IPO.
(c) In 1991, the Company issued $4,000,000 of 13% Senior Subordinated Debt
Notes and warrants to purchase a total of 1,333,333 shares of common
stock. Pursuant to this transaction, $1,050,000 was recorded as debt
discount and attributed to the warrants (see Note 7). Amortization of the
discount aggregated $50,000 and $29,092 for the year ended March 31, 1996
and 1997, respectively. In 1995, the 13% Notes were amended to extend the
maturity date from 1996 to dates correlated to the repayment of the 14%
Notes. The 13% Notes were secured by substantially all the assets of the
Company. Such security was subordinate to all senior debt, as defined,
including the 14% Notes. These Notes were repaid in full with proceeds of
the IPO.
(d) This mortgage note was paid in full in conjunction with the Nebraska
Acquisition in March 1997. See Note 4.
F-23
<PAGE> 69
Educational Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. LONG-TERM DEBT (CONTINUED)
Aggregate maturities of long-term debt at March 31, 1997 are as follows:
<TABLE>
<CAPTION>
Fiscal year ending March 31
<S> <C>
1998 $3,964,851
1999 726,370
2000 380,575
2001 321,173
2002 306,447
Thereafter 429,315
----------
$6,128,731
==========
</TABLE>
Interest paid during the years ended March 31, 1995, 1996 and 1997 was
approximately $1,002,000, $1,328,000 and $655,000, respectively.
The fair values of the Company's long-term debt are estimated using discounted
cash flow analyses, based on the Company's estimate of current borrowing rates
for credit facilities with maturities which approximate the weighted average
maturities for its existing long-term debt. At March 31, 1996 the estimated
fair value of the Company's long-term debt approximated $8,600,000 and at March
31, 1997 the estimated fair value of the Company's long-term debt approximated
its carrying value.
7. STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
On October 28, 1996, the Company completed its IPO. A total of 2,400,000
shares were sold at $10 per share which included 2,200,000 shares sold by the
Company and 200,000 shares sold by certain selling stockholders. The selling
stockholders sold an additional 210,000 shares in November 1996; the Company
did not receive any of the proceeds from the selling stockholders sales. The
net proceeds to the Company were approximately $19.3 million and were partially
used to repay $4.8 million of subordinated debt. The balance of the IPO
proceeds will be used for general corporate purposes, including the expansion
of its operations through the acquisition of additional schools.
F-24
<PAGE> 70
Educational Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
INITIAL PUBLIC OFFERING (CONTINUED)
In connection with the early extinguishment of the $4.8 million in subordinated
debt in fiscal year 1997, the Company incurred an extraordinary loss of
$514,500 ($308,683, net of tax), as a result of the write-off of the related
unamortized deferred debt issuance costs and unamortized debt discount.
STOCK SPLIT
On June 20, 1996, the Company amended its certificate of incorporation to
increase the authorized Common Stock to 15,000,000 shares, retain the par value
of $.01 per share, and to provide a five-for-three Common Stock split. Such
amendment was effective upon the IPO. All common share and per common share
amounts have been adjusted for all periods to reflect the stock split. In
addition, the Company authorized 5,000,000 shares of Preferred Stock; terms
will be set upon issuance.
CONVERTIBLE PREFERRED STOCK
Prior to its IPO, the Company had issued and outstanding 1,023,049 shares of
Convertible Preferred Stock, $.01 par value. At the option of the holder,
shares of Convertible Preferred Stock converted into 1.67 shares of Common
Stock and prior to March 1996, were mandatorily redeemable at $6.66 per share,
subject to certain antidilution adjustments (1,705,082 shares at March 31,
1996).
Through July 22, 1991, the shares of Convertible Preferred Stock accrued
dividends at an annual rate of 8%. In 1991, pursuant to the issuance of the 13%
Notes (see Note 6), the terms of the Convertible Preferred Stock were amended
to eliminate the cumulative dividends feature and the mandatory redemption
requirement except in the event of an initial public offering of common stock
and certain other circumstances. The Company issued 410,833 shares of Common
Stock in 1991 in full payment of accrued dividends through July 22, 1991
totaling $1,232,498. In March 1996, the terms were further amended to eliminate
the mandatory redemption in all circumstances, but still permitting
F-25
<PAGE> 71
Educational Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
CONVERTIBLE PREFERRED STOCK (CONTINUED)
conversion at the option of the holder. In May 1996, terms were again amended
to require automatic conversion of all outstanding shares of Convertible
Preferred Stock in the event of an IPO.
All outstanding shares of Convertible Preferred Stock converted into 1,705,082
shares of common stock at the IPO.
COMMON STOCK
As of March 31, 1997, the Company has reserved the following shares of Common
Stock for future issuance by the following:
<TABLE>
<S> <C>
Common Stock purchase warrants 43,334
Stock options 340,167
-------
383,501
=======
</TABLE>
COMMON STOCK PURCHASE WARRANTS
As described in Note 6, the holders of the 14% Notes were granted common stock
purchase warrants allowing for the purchase of at least 141,667 and up to
308,333 common shares, depending on the date of repayment of the 14% Notes, at
$.006 per share. The warrants were assigned a value of $368,150 and did
not include put or call features. As of the IPO, these warrants were exercised
for the purchase of 141,667 shares of Common Stock.
As also described in Note 6, the holders of the 13% Notes were granted stock
purchase warrants allowing for the purchase of up to 1,333,333 shares of Common
Stock at $3 per share (the "$3 Warrants"), for a total amount of $4,000,000.
The $3 exercise price of the warrants was subject to adjustment for any future
issuances of equity or equity related
F-26
<PAGE> 72
Educational Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK PURCHASE WARRANTS (CONTINUED)
securities at a per share price less than the exercise price. As of the IPO,
these warrants were exercised for the purchase of 1,333,333 shares, less shares
used for the cashless exercise, yielding 933,333 additional shares of Common
Stock.
At any time after March 31, 1998, but on or before March 31, 1999, the holders
of the $3 warrants had the right to "put" to the Company warrants representing
50% of total warrants then outstanding. At any time after March 31, 1999, the
holders had the right to "put" to the Company all then outstanding $3 warrants.
The Company could "call" the warrants at the later of two years from closing
(July 23, 1991) or after the Company's stock has been publicly traded for six
months. The put/call price was $3 per share. In May 1996, the terms of the
warrants were amended to provide for a cashless exercise based on the IPO price
per share, in the event of an IPO of the Company's common stock and to
eliminate the "put" feature.
The $3 warrants were assigned a value of $1,050,000 when issued. The difference
between the $1,050,000 and the exercise price of $4,000,000 was being accreted,
using a method which approximated the effective interest rate method, through
the date of earliest exercise (50% through March 31, 1998 and 50% through March
31, 1999). Accretion of $339,252, $406,346 and $281,398 was charged to
accumulated deficit during the years ended March 31, 1995, 1996 and 1997,
respectively.
In connection with the issuance of the Convertible Preferred Stock in 1991, a
third party was granted warrants to purchase 26,667 shares of Common Stock
exercisable at $3.60 per share. These warrants expire July 31, 1999 and are
outstanding as of March 31, 1997.
At the time of the IPO, the Company issued to a third party, warrants to
purchase 16,667 shares of Common Stock at $10 per share. These warrants expire
October 28, 2001 and are outstanding as of March 31, 1997.
F-27
<PAGE> 73
Educational Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS
The Company has granted employees and non-employee directors options to
purchase its Common Stock. The employee options vest incrementally over periods
ranging from four to five years and expire five years after vesting. The
non-employee director options vest immediately and expire five years after
vesting.
A summary of the status of the Company's employee and director stock option
activity, and related information for the years ended March 31 is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 199,166 $2.67 190,833 $2.68 361,666 $ 3.13
Granted - - 175,000 3.60 465,500 10.10
Exercised - - - - - -
Canceled/forfeited (8,333) 2.40 (4,167) 2.40 (5,667) 8.12
------- ------- -------
Outstanding at end of year 190,833 2.68 361,666 3.13 821,499 7.04
======= ======= =======
Exercisable at end of year 130,833 2.50 156,667 2.57 313,000 5.09
======= ======= =======
Options available for
future grant 770,833 600,000 340,167
======= ======= =======
</TABLE>
F-28
<PAGE> 74
Educational Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
The following table summarizes information about employee and director stock
options outstanding at March 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- ----------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
MARCH 31, CONTRACTUAL EXERCISE MARCH 31, EXERCISE
EXERCISE PRICES 1997 LIFE PRICE 1997 PRICE
--------------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 2.40 153,333 5.0 years $ 2.40 153,333 $ 2.40
$ 4.00 33,333 5.3 years 4.00 25,000 4.00
$ 3.60 173,333 8.7 years 3.60 34,667 3.60
$10.00 100,000 4.6 years 10.00 100,000 10.00
$10.00 331,000 9.6 years 10.00 - -
$11.50 30,500 9.8 years 11.50 - -
------- -------
821,499 7.04 313,000 5.09
======= =======
</TABLE>
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
On June 20,1996, the Company adopted and its stockholders approved a
Non-employee Director Stock Option Plan (the "Directors' Plan") to attract and
retain the services of non-employee members of the Board of Directors and to
provide them with increased motivation and incentive to exert their best
efforts on behalf of the Company by enlarging their personal stake in the
Company. The maximum number of shares of Common Stock with respect to which
options may be granted under the Directors' Plan is 200,000 shares.
As of March 31, 1997, 100,000 options were available for future grant.
F-29
<PAGE> 75
Educational Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN (CONTINUED)
Each member of the Board of Directors of the Company who otherwise (i) is not
currently an employee of the Company, (ii) is not a former employee still
receiving compensation for prior services, and (iii) is not currently receiving
remuneration from the Company in any capacity other than as a director shall be
eligible for the grant of stock options under the Directors' Plan
("Participant"). Currently, all directors other than the Chairman are eligible
to participate in the Directors' Plan.
On the date the Directors' Plan was adopted, each of the four existing
non-employee directors were each granted, contingent upon completion of the
IPO, options to purchase 25,000 shares of Common Stock of the Company at the
per share IPO price ($10). These options vested immediately upon consummation
of the IPO. Upon the election of any new member of the Board of Directors,
such member will be granted an option to purchase 25,000 shares of Common Stock
at the fair market value at date of grant, vesting in five equal annual
installments beginning on the first anniversary of the date of grant.
Beginning with the next annual meeting of the stockholders of the Company and
provided that a sufficient number of shares remain available under the
Directors' Plan, each year immediately following the date of the annual meeting
of the Company there automatically will be granted to each non-employee
director who is then serving on the Board an option to purchase 3,000 shares of
the Common Stock of the Company, which options will be immediately vested.
PRO FORMA INFORMATION
Pro forma information regarding net income and earnings per share is required
by SFAS 123, which also requires that the information be determined as if the
Company had accounted for its employee and director stock options granted
subsequent to April 1, 1995 under the fair value method described in SFAS 123.
F-30
<PAGE> 76
Educational Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
PRO FORMA INFORMATION (CONTINUED)
The fair value of these stock options was estimated at the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions for the years ended March 31, 1996 and 1997, respectively: (i)
dividend yield of 0%; (ii) expected volatility of 4.91; (iii) risk-free
interest rates of 6.50% and 6.18%; and (iv) expected life of 6.00 and 5.64
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 and director 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 and director stock
options.
For purposes of pro forma disclosure, the estimated fair value of the employee
and director options is amortized to expense over the options' vesting period.
The Company's pro forma information using SFAS 123 follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1996 1997
--------------------
<S> <C> <C>
Pro forma income before extraordinary item $479,629 $3,456,221
Pro forma net income 479,629 3,147,538
Pro forma earnings per common share and common
equivalent share:
Income before extraordinary item $ .09 $ .54
Net income .09 .49
</TABLE>
F-31
<PAGE> 77
Educational Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
PRO FORMA INFORMATION (CONTINUED)
Because SFAS 123 is applicable only to options granted subsequent to April 1,
1995, its pro forma effect will not be fully reflected until future years.
8. INCOME TAXES
At March 31, 1997, the Company recognized the deferred income tax assets and
liabilities related to its Nebraska Acquisition. The predecessor entities
previously filed their income tax returns under the provisions of Subchapter
S of the Internal Revenue Code and as a partnership and hence recorded no
income tax provision or deferred income tax assets or liabilities at the
corporate level.
The components of historical income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
-----------------------------
1995 1996 1997
------- -------- ----------
<S> <C> <C> <C>
Current:
Federal $ - $484,376 $ 567,544
State 27,982 147,809 151,088
------- -------- ----------
27,982 632,185 718,632
Deferred:
Federal - - (1,218,248)
State - - (345,747)
------- -------- ----------
- - (1,563,995)
------- -------- ----------
$27,982 $632,185 $ (845,363)
======= ======== ==========
</TABLE>
F-32
<PAGE> 78
Educational Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
A reconciliation of income tax expense (benefit) computed at the statutory
federal income tax rate on income before extraordinary item to the Company's
effective income tax rate follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
----------------------------------------
1995 1996 1997
--------- -------- -----------
<S> <C> <C> <C>
Federal $(141,370) $394,058 $ 1,027,235
State, net of federal tax benefit - 97,554 99,718
Permanent differences 49,988 55,436 53,554
Increase (decrease) in deferred tax
asset valuation allowance 465,497 308,584 (1,319,987)
Effect of Nebraska Acquisition filing
as a Subchapter S corporation (344,763) (152,111) (420,420)
Effect of Nebraska Acquisition's
termination of Subchapter S
corporation status - - (285,463)
Utilization of AMT credit - (56,000) -
Other, net (1,370) (15,336) -
--------- --------- -----------
$ 27,982 $ 632,185 $ (845,363)
========= ========= ===========
</TABLE>
F-33
<PAGE> 79
Educational Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
MARCH 31
-----------------------
1996 1997
----------- ----------
<S> <C> <C>
Prepaid expenses $ (192,974) $ (229,722)
----------- ----------
Total deferred income tax liabilities (192,974) (229,722)
Deferred income tax assets:
Tradenames and other intangibles 868,393 575,393
Property and equipment 8,419 369,236
Allowance for doubtful accounts 339,637 330,135
Accrued expenses and other liabilities 264,166 1,108,256
Other, net 32,346 -
----------- ----------
Total deferred income tax assets 1,512,961 2,383,020
Valuation allowance (1,319,987) -
----------- ----------
Net deferred income tax assets $ - $2,153,298
=========== ==========
</TABLE>
Based on its history of recurring losses before income taxes and the Company's
evaluation of available evidence at March 31, 1995 and 1996 as described in
SFAS No. 109, Accounting for Income Taxes ("SFAS No. 109"), the Company
determined that it was more likely than not, for purposes of SFAS No. 109, that
it would not realize its net deferred income tax assets at such dates.
Accordingly, the Company recorded a valuation allowance against all of its net
deferred income tax assets at March 31, 1995 and 1996. In fiscal year 1997, as
a result of its results of operations and the three acquisitions of
historically profitable businesses, all of the valuation allowance was
eliminated.
F-34
<PAGE> 80
Educational Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
The Company paid approximately $17,000, $360,000 and $1,076,000 of income taxes
in the years ended March 31, 1995, 1996 and 1997, respectively. The Company
received approximately $733,000 of income tax refunds during the year ended
March 31, 1995.
9. LEASES
The Company leases office, classroom and dormitory space under operating lease
agreements expiring through 2004. Rent expense totaled approximately
$3,111,000, $2,971,000 and $3,650,000 for the years ended March 31, 1995, 1996
and 1997, respectively.
Future minimum lease payments under noncancelable operating leases in effect at
March 31, 1997 are as follows:
<TABLE>
<CAPTION>
Fiscal year ending March 31
<S> <C>
1998 $ 3,307,000
1999 2,499,000
2000 2,001,000
2001 777,000
2002 1,181,000
Thereafter 3,327,000
-----------
$13,092,000
===========
</TABLE>
10. EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution plan covering substantially all
employees; the plan is qualified under Section 401(k) of the Internal Revenue
Code. Under the provisions of the plan, eligible participating employees may
elect to contribute up to the maximum amount of tax deferred contribution
allowed by the Internal Revenue Code. The Company matches a portion of such
contributions up to a maximum percentage of the employees' compensation. The
Company's contributions to the plan and predecessor plans of the Nebraska
Acquisition were approximately $101,000, $104,000 and $133,000 for the years
ended March 31, 1995, 1996 and 1997, respectively.
F-35
<PAGE> 81
Educational Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. OTHER EXPENSES
IMPAIRMENT OF LONG-LIVED ASSETS
The Company's Roanoke, Virginia school has incurred significant operating
losses since its acquisition. Accordingly, the Company evaluated the
recoverability of the school's long-lived assets including its identifiable
intangible assets and goodwill. Based on the Company's expectation of future
cash flows, the Company determined that assets with a carrying amount of
$764,000 were impaired and recorded an impairment loss in fiscal year 1996 to
record such assets at management's estimate of the net present value of such
future cash flows. This estimate was based on estimated undiscounted future
cash flows to be generated by such assets and is a subjectively determined
amount subject to change based upon actual results.
CONTINGENCIES
In September 1995, the Company filed suit in connection with its 1993 purchase
of its Hollywood, California school. The suit alleged that the sellers made
significant financial and operational misrepresentations to the Company. The
Company sought damages from the sellers. The Sellers denied the Company's
allegations and filed a Cross-Complaint against the Company alleging among
other things, breach of contract and fraud. Both parties agreed to dismiss
their claims in April 1997 when the Company agreed to pay a total of $564,892
representing all amounts outstanding on the acquisition notes payable to the
sellers and the notes payable for covenants not-to-compete, in addition to the
payment of a portion of the sellers' legal fees. All amounts, including the
Company's legal defense expenses, were accrued or paid as of March 31, 1997.
On June 24, 1994, eight students enrolled in one of the Company's programs at
its schools in the San Diego, California area filed a lawsuit against the
Company in the state court in California. In substance, the suit alleged that
there were material misrepresentations made with respect to the content of the
program and the potential outcomes achieved by the students who graduated from
it. The suit was certified as a class action in the fall of 1994. Although the
Company believes that it accurately described the course content and the
multiple outcomes to which the course could lead, in order to avoid further
legal
F-36
<PAGE> 82
Educational Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. OTHER EXPENSES (CONTINUED)
CONTINGENCIES (CONTINUED)
expense and because of the uncertainty and risks inherent in any litigation,
the Company determined that it was desirable to settle the lawsuit. A final
settlement was approved in March 1996. Pursuant to the terms of the settlement,
the Company paid the plaintiffs $600,000 in the fiscal year ended March 31,
1996 and an additional $400,000 on April 1, 1997. In addition, the Company
agreed to make available tuition credits of $1,150,000 to class members,
provided that students elected to utilize such tuition credits by July 17,
1996. Any unused tuition credits were to be redeemed in cash by the Company for
10% of the credit and $115,000 was accrued for these credits, as of March 31,
1996. All of this settlement expense is reflected in the 1996 consolidated
statement of operations. As of March 31, 1997, only a few students had
requested tuition credits and substantially all of the $115,000 balance was
paid into the settlement fund on April 1, 1997.
The Company incurred $600,000 and $1,115,000 in expenses in the fiscal years
ended March 31, 1995 and 1996, respectively (of which $515,000 and $515,000 was
accrued at March 31, 1996 and 1997, respectively) related to legal costs to
defend the class action lawsuit and the settlement related to such suit.
The Company is also a party to routine litigation incidental to its business,
including ordinary course employment litigation. Management does not believe
that the resolution of any or all of such routine litigation is likely to have
a material adverse effect on the Company's financial condition or results of
operations.
F-37
<PAGE> 83
Educational Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
The following is a summary of the unaudited quarterly results of operations for
the fiscal years ended March 31, 1997 and 1996 (in thousands, except per share
data):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1997
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
--------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $10,401 $12,039 $13,324 $13,686
Income before extraordinary
item 72 698 1,141 1,956
Net income 72 698 832 1,956
Proforma income before
extraordinary item* 59 738 1,071 744
Pro forma net income* 59 738 762 744
Income per share and
common equivalent share:
Income before
extraordinary item $ 0.01 $ 0.13 $ 0.16 $ 0.25
Net income 0.01 0.13 0.12 0.25
Pro forma income before
extraordinary item* 0.01 0.13 0.15 0.10
Pro forma income* 0.01 0.13 0.11 0.10
</TABLE>
* Pro forma reflects the adjustments described in "Pro Forma Income Tax
Data" in Note 2 and does not reflect the adjustments described in Note 4.
Quarterly earnings per share do not total to the annual amount due to the
issuance of shares in the IPO.
F-38
<PAGE> 84
Educational Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1996
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
--------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $9,765 $10,377 $11,538 $11,667
Net income (loss) (119) 321 (66) 391
Pro forma net income (loss)* (74) 288 92 366
Income (loss) per share and
common equivalent share:
Net income (loss) $(0.05) $ 0.07 $ (0.03) $ 0.08
Pro forma net income (loss)* (0.03) 0.06 0.02 0.07
</TABLE>
* Pro forma reflects the adjustments described in "Pro Forma Income Tax
Data" in Note 2 and does not reflect the adjustments described in Note 4.
Fully diluted earnings per common and common equivalent share for the fourth
quarter in the year ended March 31, 1996 was $0.07. Primary and fully diluted
earnings per share were the same for all other quarters in each of the years
ended March 31, 1996 and 1997.
F-39
<PAGE> 85
ITEM 14(D)
SCHEDULE II
EDUCATIONAL MEDICAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS CHARGED
BEGINNING OF TO COSTS AND BALANCE AT END
YEAR EXPENSES NET DEDUCTIONS OF YEAR
-------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
For the year ended March 31, 1995 $ 1,027,433 $ 1,280,654 $ 1,286,920 $ 1,021,167
For the year ended March 31, 1996 1,021,167 1,270,565 1,317,375 974,357
For the year ended March 31, 1997 974,357 1,239,151 1,290,804 922,704
</TABLE>
<PAGE> 1
EXHIBIT 10.46
BUSINESS LOAN AGREEMENT
BETWEEN
BANK OF AMERICA, FSB (THE "BANK")
AND
EDUCATIONAL MEDICAL, INC. ("EMI")
AND ALL SUBSIDIARIES OF EMI ("BORROWERS")
DATED: FEBRUARY 25, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S><C> <C>
1. DEFINITIONS .......................................................... 1
1.1 "Borrowing Base" ............................................ 1
1.2 "Acceptable Receivable" ..................................... 1
1.3 "Termination Date" .......................................... 3
2. FACILITY NO. 1: REVOLVING LINE OF CREDIT AMOUNT AND TERMS............. 3
2.1 Revolving Line of Credit Amount ............................. 3
2.2 Availability Period ......................................... 4
2.3 Conditions to Each Extension of Credit ...................... 4
2.4 Repayment Terms ............................................. 4
2.5 Letters of Credit ........................................... 6
3. FACILITY NO. 2: ACQUISITION Line OF CREDIT AMOUNT AND TERMS........... 7
3.1 Acquisition Line of Credit Amount ........................... 7
3.2 Availability Period ......................................... 7
3.3 Conditions to Each Extension of Credit ...................... 7
3.4 Repayment Terms ............................................. 8
4. INTEREST ............................................................. 10
4.1 Interest Rate ............................................... 10
4.2 Optional Interest Rate ...................................... 10
5. COLLATERAL ........................................................... 12
5.1 Personal Property ........................................... 12
6. DISBURSEMENTS, PAYMENTS AND COSTS .................................... 13
6.1 Requests for Credit ......................................... 13
6.2 Disbursements and Payments .................................. 13
6.3 Direct Debit ................................................ 13
6.4 Banking Days ................................................ 13
6.5 Taxes ....................................................... 14
6.6 Additional Costs ............................................ 14
6.7 Interest Calculation ........................................ 14
6.8 Default Rate ................................................ 14
6.9 Overdrafts .................................................. 15
</TABLE>
i
<PAGE> 3
<TABLE>
<S><C> <C>
6.10 Payments in Kind ............................................ 15
7. CONDITIONS ........................................................... 15
7.1 Authorizations .............................................. 15
7.2 Governing Documents ......................................... 15
7.3 Security Agreements ......................................... 16
7.4 Evidence of Priority ........................................ 16
7.5 Insurance ................................................... 16
7.6 Legal Opinion ............................................... 16
7.7 Good Standing ............................................... 16
7.8 Payment of Closing Fee ...................................... 16
7.9 Payment of Expenses and Fees ................................ 16
7.10 Representations of Corporate Officers ....................... 16
7.11 Other Items ................................................. 16
8. REPRESENTATIONS AND WARRANTIES ....................................... 16
8.1 Organization of Borrower .................................... 16
8.2 Authorization ............................................... 17
8.3 Enforceable Agreement ....................................... 17
8.4 Good Standing ............................................... 17
8.5 No Conflicts ................................................ 17
8.6 Financial Information ....................................... 17
8.7 Lawsuits .................................................... 17
8.8 Collateral .................................................. 17
8.9 Permits, Franchises ......................................... 18
8.10 Other Obligations ........................................... 18
8.11 Income Tax Returns .......................................... 18
8.12 No Tax Avoidance Plan ....................................... 18
8.13 No Event of Default ......................................... 18
8.14 ERISA Plans ................................................. 18
8.15 Locations of Borrowers ...................................... 19
8.16 Subsidiaries ................................................ 19
9. COVENANTS ............................................................ 19
9.1 Use of Proceeds ............................................. 19
9.2 Financial Information ....................................... 19
9.3 Net Worth ................................................... 21
9.4 Tangible Net Worth .......................................... 22
9.5 Fixed Charge Coverage Ratio ................................. 22
9.6 Total Funded Debt/Adjusted Cash Flow Coverage Ratio ......... 22
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
9.7 Senior Funded Debt/Adjusted Cash Flow Ratio ................. 23
9.8 Other Debts ................................................. 23
9.9 Other Liens ................................................. 23
9.10 Capital Expenditures ........................................ 24
9.11 Dividends ................................................... 24
9.12 Loans and Investments ....................................... 24
9.13 Change of Ownership ......................................... 25
9.14 Notices to Bank ............................................. 25
9.15 Books and Records ........................................... 26
9.16 Audits ...................................................... 26
9.17 Compliance with Laws ........................................ 26
9.18 Preservation of Rights ...................................... 26
9.19 Maintenance of Properties ................................... 26
9.20 Perfection of Liens ......................................... 26
9.21 Cooperation ................................................. 26
9.22 Insurance ................................................... 26
9.23 Additional Negative Covenants ............................... 27
9.24 ERISA Plans ................................................. 29
9.25 Title IV Program Requirements ............................... 29
9.26 Subsidiaries ................................................ 30
10. HAZARDOUS WASTE INDEMNIFICATION ..................................... 30
11. DEFAULT ............................................................. 30
11.1 Failure to Pay .............................................. 30
11.2 Lien Priority ............................................... 31
11.3 False Information ........................................... 31
11.4 Bankruptcy .................................................. 31
11.5 Receivers ................................................... 31
11.6 Lawsuits .................................................... 31
11.7 Judgments ................................................... 31
11.8 Government Action ........................................... 31
11.9 Material Adverse Change ..................................... 31
11.10 Cross-default ............................................... 31
11.11 Default under Related Documents ............................. 32
11.12 Other Bank Agreements ....................................... 32
11.13 ERISA Plans ................................................. 32
11.14 Other Breach Under Agreement ................................ 32
12. ENFORCING THIS AGREEMENT; MISCELLANEOUS ............................. 33
</TABLE>
iii
<PAGE> 5
<TABLE>
<S> <C>
12.1 GAAP ........................................................ 33
12.2 Georgia Law ................................................. 33
12.3 Successors and Assigns ...................................... 33
12.4 Arbitration ................................................. 33
12.5 Severability; Waivers ....................................... 34
12.6 Reimbursement Costs ......................................... 34
12.7 Administration Costs ........................................ 34
12.8 Attorneys' Fees ............................................. 34
12.9 Joint and Several Liability ................................. 35
12.10 One Agreement ............................................... 36
12.11 Disposition of Schedules .................................... 36
12.12 Credit Adjustments .......................................... 36
12.13 Verification of Receivables ................................. 37
12.14 Indemnification ............................................. 37
12.15 Notices ..................................................... 37
12.16 Headings .................................................... 37
12.17 Counterparts ................................................ 37
</TABLE>
iv
<PAGE> 6
List of Certain Defined Terms
-----------------------------
<TABLE>
<CAPTION>
Defined Term Location in Text
------------ ----------------
<S> <C>
Acceptable Receivable Para. 1.2
BofA Para. 4.1(b)
banking day Para. 7.5
Borrower, Borrowers Page 1, First Paragraph
Borrowing Base Para. 1.1
Closing Date Page 1, First Paragraph
Default Para. 12
EBITDA Para. 3.3
EMI Page 1, First Paragraph
ERISA Para. 8.14(e)
event of default Para. 12
Facilities or Facility Para. 4.1
Facility No. 1 Para. 2.1
Facility No. 1 Commitment Para. 2.1
Facility No. 2 Para. 3.1
Facility No. 2 Commitment Para. 3.1
GAAP Para. 12.1
issuer Para. 2.5
</TABLE>
v
<PAGE> 7
<TABLE>
<CAPTION>
<S> <C>
LIBOR Banking Day Para. 4.2(a)
LIBOR Rate Para. 4.2(c)
LIBOR Rate Portion Para. 4.2
PBGC Para. 8.14(e)
Plan Para. 8.14(e)
Reference Rate Para. 4.1
schools Para. 9.25(e)
Termination Date Para. 1.3
Test Ratio Para. 2.4(a)
Title IV Program Requirements Para. 9.27
</TABLE>
vi
<PAGE> 8
BUSINESS LOAN AGREEMENT
This Agreement, dated as of February 25, 1997, is made among BANK OF
AMERICA, FSB (the "Bank"), EDUCATIONAL MEDICAL, INC. ("EMI") and all those
subsidiaries of EMI listed on the signature page(s) to this Agreement (EMI and
such subsidiaries hereinafter sometimes collectively called the "Borrowers" and
individually called a "Borrower").
PREAMBLE. EMI and its subsidiaries are engaged in a common business
enterprise and, in connection therewith, have determined it to be in their
mutual economic interests to apply to the Bank on a collective basis for
extensions of credit for working capital and to finance continued expansion,
with EMI acting as agent for all Borrowers in connection with any requests for,
the receipt, disbursement, allocation and administration of, and the repayment
of, the extensions of credit to be made hereunder. Accordingly, the Borrowers
hereby covenant to and agree with the Bank as follows:
1. DEFINITIONS
In addition to the terms which are defined elsewhere in this Agreement, the
following terms have the meanings indicated for the purposes of this Agreement:
1.1 "Borrowing Base" means 80% of the balance due on Acceptable
Receivables of the Borrowers.
1.2 "Acceptable Receivable" means an account receivable of a
Borrower which satisfies the following requirements:
(a) The account has resulted from the sale of goods or
the performance of services by the Borrower in the ordinary course of the
Borrower's business.
(b) There are no conditions which must be satisfied
before the Borrower is entitled to receive payment of the account. Accounts
arising from COD sales, consignments or guaranteed sales are not acceptable.
(c) The debtor upon the account does not claim any
defense to payment of the account.
(d) The account balance does not include the amount of
any counterclaims or offsets which have been or may be asserted against the
Borrower by the account debtor (including offsets for any "contra accounts" owed
by the Borrower to the account debtor for goods purchased by the Borrower or for
services performed for the
<PAGE> 9
Borrower). To the extent any counterclaims, offsets, contra accounts, or credit
balances exist in favor of the debtor, such amounts shall be deducted from the
account balance.
(e) The account represents a genuine obligation of the
debtor for goods sold and accepted by the debtor, or for services performed for
and accepted by the debtor.
(f) The Borrower has sent an invoice to the debtor in the
amount of the account.
(g) The Borrower is not prohibited by the laws of the
state where the account debtor is located from bringing an action in the courts
of that state to enforce the debtor's obligation to pay the account. The
Borrower has taken all appropriate actions to ensure access to the courts of the
state where the account debtor is located, including, where necessary, the
filing of a notice of business activities report or other similar filing with
the applicable state agency or the qualification by the Borrower as a foreign
corporation authorized to transact business in such state.
(h) The account is owned by the Borrower free of any
title defects or any liens or interests of others except the security interest
in favor of the Bank, and except as permitted under Paragraph 9.9.
(i) The debtor upon the account is not any of the
following:
(1) an employee, affiliate, parent or subsidiary of the
Borrower, or an entity which has common officers or directors with the
Borrower;
(2) any state, county, city, town or municipality;
(3) any person or entity located in a foreign country.
(j) The account is not in default. An account will be
considered in default if any of the following occur:
(1) The account is not paid within the 180 day period
starting on its billing date; or
(2) Any petition is filed by or against the debtor
obligated upon the account under any bankruptcy law or any other law or
laws for the relief of debtors.
-2-
<PAGE> 10
(k) The account is not the obligation of a debtor who is
in default (as defined above) on 50% or more of the accounts (if more than one)
with the Borrower upon which such debtor is obligated.
(l) The account is not evidenced by a promissory note or
chattel paper.
(m) The account is otherwise acceptable to the Bank.
1.3 "Termination Date" shall mean the third (3rd) anniversary of
the date of this Agreement; provided, however, that the Bank, in its sole
discretion, upon the Borrowers' request, may elect, by giving written notice to
the Borrowers to such effect, beginning in the second year of this Agreement,
but not later than 120 days before any then effective Termination Date, to
extend such "Termination Date" for up to two (2) additional periods of up to one
(1) year each on such terms and conditions (which may differ from those set
forth herein) as the Bank may offer, and the Borrowers may accept.
2. FACILITY NO. 1: REVOLVING LINE OF CREDIT AMOUNT AND TERMS
2.1 Revolving Line of Credit Amount.
(a) During the availability period described below, the
Bank will provide a revolving line of credit ("Facility No. 1") to the
Borrowers. The amount of this revolving line of credit (the "Facility No. 1
Commitment") is equal to the lesser of (i) $5,000,000 or (ii) the Borrowing
Base.
(b) Facility No. 1 is a revolving line of credit for
advances with a within line facility for letters of credit. During the
availability period, the Borrowers may repay principal amounts and reborrow
them.
(c) Each advance under Facility No. 1 must be for at
least $250,000 or for the amount of the remaining available line of credit, if
less.
(d) The Borrowers agree not to permit the sum of
outstanding principal amount of advances obtained under Facility No. 1 plus the
outstanding amounts of any letters of credit under Paragraph 2.5, including
amounts drawn on letters of credit and not yet reimbursed, to exceed the
Facility No. 1 Commitment. If the Borrowers exceed this limit, the Borrowers
will immediately pay the excess to the Bank upon the Bank's demand. Unless and
until an Event of Default has occurred and is continuing, the Borrowers shall
have the right to direct the manner or order in which payments received from the
Borrowers
-3-
<PAGE> 11
under this Paragraph shall be applied to this Facility. From and after the
occurrence of an Event of Default and during its continuance, the Bank may apply
payments received from the Borrowers under this Paragraph to the obligations of
the Borrowers to the Bank in the order and the manner as the Bank, in its
discretion, may determine, including to this Facility or the other Facility.
2.2 Availability Period. Facility No. 1 is available between the
date of this Agreement and the Termination Date, unless the Borrowers are in
default.
2.3 Conditions to Each Extension of Credit. Before each extension
of credit under Facility No. 1, including the first, the Borrowers will deliver
to the Bank (i) a notice of borrowing, in form and detail satisfactory to the
Bank, issued by EMI as agent for and on behalf of the Borrowers, specifying the
amount of the requested advance, the intended use of the proceeds thereof, the
requested disbursement date and the desired interest rate to be applicable,
initially, thereto; and (ii) a borrowing base certificate, in form and detail
satisfactory to the Bank, issued by EMI as agent for and on behalf of the
Borrowers, setting forth the Acceptable Receivables on which the requested
extension of credit is to be based.
2.4 Repayment Terms
(a) The Borrowers will pay interest, in arrears, at the
then applicable interest rate described below on outstanding advances under
Facility No. 1 on the first day of the calendar month following the disbursement
of any advance under Facility No. 1 and then on a monthly basis thereafter until
payment in full of such advance. The interest rate payable on outstanding
advances under Facility No. 1 shall be determined as follows:
<TABLE>
<CAPTION>
Interest Interest
Rate shall Rate shall be
If the Test be Reference -or- LIBOR Rate
Ratio is: Rate plus plus
--------- --------- ----
<S> <C> <C>
1.5:1 or greater .50% 1.75%
1.0:1 or greater, but less than 1.5:1 .25% 1.50%
less than 1.0:1 0% 1.25%
</TABLE>
As used herein, (i) "Reference Rate" is defined in Paragraph 4.1, (ii) "LIBOR
Rate" is defined in Paragraph 4.2, and (iii) the "Test Ratio" shall be the
Senior Funded Debt/Adjusted Cash Flow Ratio, as defined in Paragraph 9.7. The
Test Ratio shall be calculated on a quarterly basis by the Bank from the
Borrowers' quarterly or, as the case may be, annual financial statements then
most recently delivered to it pursuant to Paragraphs 9.2(a) and
-4-
<PAGE> 12
9.2(b), and the interest rate(s) described above shall be adjusted by the Bank,
as appropriate, effective as of the first day of the month following the month
in which such financial statements are delivered to the Bank, (i) as to all
advances then outstanding and any made on or after such date, for all advances
which bear interest determined by reference to the Reference Rate and (ii) as to
all advances made on or after such date (including any "rollover" of existing
LIBOR Rate portions during such period), for LIBOR Rate portions; in each case,
until the next such determination by the Bank becomes effective. If, however,
the Borrowers fail to timely deliver their quarterly or, as the case may be,
annual financial statements to the Bank pursuant to Paragraphs 9.2(a) or 9.2(b)
for any fiscal quarter, the Bank shall use an assumed Test Ratio of 1.5:1 to
make its calculations.
(b) The Borrowers agree to pay the Bank an annual,
nonrefundable facility fee for Facility No. 1, equal to .375% of the full amount
of the Facility No. 1 Commitment, or $18,750, payable annually in advance,
commencing on the date of this Agreement and continuing on each anniversary of
such date (less $15,000 in respect of the first such payment, representing a
partial prepayment).
(c) The Borrowers further agree to pay the Bank a
commitment fee, determined by multiplying (i) the difference between (A) the
full amount of the Bank's Facility No. 1 Commitment and (B) the amount of credit
which the Borrowers actually use of Facility No. 1, based on the weighted
average credit outstanding under Facility No. 1 during the specified period, by
(ii) the per annum commitment fee described below, computed as follows:
<TABLE>
<CAPTION>
The Per Annum
If the Test Commitment
Ratio is Fee shall be
-------- ------------
<S> <C>
1.5:1 or greater .375%
less than 1.5:1 .250%
</TABLE>
with the Test Ratio being computed by the Bank in the same manner, and to take
effect at the same time, as is provided in subparagraph (a) above. The
calculation of credit outstanding under Facility No. 1 shall include the undrawn
amount of letters of credit. This commitment fee shall be due and payable
monthly in arrears on the first day of each calendar month until the expiration
of the availability period for Facility No. 1, commencing on the first day of
the first calendar month following the date of this Agreement.
-5-
<PAGE> 13
(d) The Borrowers will repay in full all principal and
any unpaid interest or other charges outstanding under Facility No. 1 no later
than the Termination Date.
2.5 Letters of Credit. Facility No. l may also be used for
financing standby letters of credit with a maximum maturity not to extend for
more than one (1) year or, in any event, beyond the Termination Date. The
standby letters of credit will be issued by Bank of America National Trust and
Savings Association or its designated affiliate bank (herein, an "issuer")
subject to a reimbursement obligation on the part of the Bank (which, in turn,
will be reimbursed by the Borrowers). The amount of such letters of credit
outstanding at any one time (including amounts drawn on letters of credit and
not yet reimbursed) may not exceed $1,000,000. In further regard to these
standby letters of credit, the Borrowers agree:
(a) any sum drawn under a letter of credit and reimbursed
by the Bank may, at the option of the Bank, be added to the principal amount
outstanding under this Agreement. This amount will bear interest and be due as
described elsewhere in this Agreement.
(b) if there is a default under this Agreement, to
immediately prepay and make the Bank whole for its liability to the issuer for
any outstanding letters of credit.
(c) the issuance of any letter of credit and any
amendment to a letter of credit is subject to the Bank's and the issuer's
written approval and must be in form and content satisfactory to the Bank and
the issuer and in favor of a beneficiary acceptable to the Bank and the issuer.
(d) at the Bank's or the issuer's request, to sign the
issuer's form application and agreement for standby letters of credit.
(e) to pay any issuance and/or other fees that the Bank
or the issuer notifies the Borrower will be charged for issuing and processing
letters of credit for the Borrower.
(f) to pay the Bank a non-refundable fee equal to 1-1/2%
per annum of the average daily balance of the outstanding undrawn amount of each
standby letter of credit, payable monthly in arrears. If there is a default
under this Agreement, at the Bank's option, the amount of the fee shall be
increased by 2% per annum, effective starting on the day the Bank provides
notice of the increase to the Borrowers.
-6-
<PAGE> 14
3. FACILITY NO. 2: ACQUISITION LINE OF CREDIT AMOUNT AND TERMS
3.1 Acquisition Line of Credit Amount
(a) During the availability period described below, the
Bank will provide a line of credit to the Borrowers for the purpose of
financing, in whole or in part, permitted acquisitions under Paragraph 9.23(e)
("Facility No. 2"). The amount of this acquisition line of credit (the "Facility
No. 2 Commitment") is equal to: (i) $5,000,000, for the first year in which
Facility No. 2 shall be available; (ii) $7,500,000, for the second year in which
Facility No. 2 shall be available; and (iii) $12,500,000, thereafter, subject,
however, to reduction in each year as provided in subparagraph (b).
(b) Facility No. 2 is not a revolving line of credit.
That is, each advance obtained under Facility No. 2 shall reduce,
dollar-for-dollar, the Facility No. 2 Commitment, regardless if and when such
advance is made or repaid; that is, an advance made in the first year shall
reduce the Facility No. 2 commitment dollar-for-dollar in such year and in all
subsequent years.
(c) Each advance under Facility No. 2 must be for at
least $500,000, or for the amount of the remaining available Facility No. 2
Commitment, if less.
(d) The Borrowers agree not to permit the outstanding
principal amount of advances obtained under Facility No. 2 to exceed the
Facility No. 2 Commitment. If the Borrowers exceed this limit, the Borrowers
will immediately pay the excess to the Bank upon the Bank's demand. Unless and
until an Event of Default has occurred and is continuing, the Borrowers shall
have the right to direct the manner or order in which payments received from the
Borrowers under this Paragraph shall be applied to this Facility. From and after
the occurrence of an Event of Default and during its continuance, the Bank may
apply any payments received from the Borrowers under this Paragraph to the
obligations of the Borrowers to the Bank in the order and manner as the Bank, in
its discretion, may determine, including to this Facility or another Facility.
3.2 Availability Period. Facility No. 2 is available between the
date of this Agreement and the Termination Date, unless the Borrowers are in
default.
3.3 Conditions to Each Extension of Credit. Before each extension
of credit under Facility No. 2, including the first, the Bank shall receive a
notice of borrowing, in form and detail satisfactory to the Bank, issued by EMI
as agent for and on behalf of the Borrowers, specifying the amount of the
requested advance, the intended use of the proceeds
-7-
<PAGE> 15
thereof, the requested disbursement date and the desired interest rate to be
applicable, initially, thereto, together with evidence satisfactory to the Bank
from the Borrowers that:
(i) the acquisition proposed to be financed is then
permitted under Paragraph 9.23(e).
(ii) all proceeds of EMI's initial public offering (net of
not more than $5,000,000 in existing debt repaid with such proceeds), equalling
at least $14,500,000, have been used to finance other acquisitions or will be
used, in part, to fund the proposed acquisition.
(iii) the "EBITDA" of EMI, computed as described below, on
a consolidated basis, for the trailing 12 months' period ending with the last
day of the calendar month immediately preceding the date of any requested
advance, computed on a pro forma basis inclusive of the school(s) proposed to be
acquired with the proceeds of such advance (as adjusted by the Bank, in its sole
discretion for any non-recurring charges or expenses), shall be not less than
the sum of (A) $5,500,000, plus (B) 20% of the sum of (i) the cost of all
acquisitions made by EMI since June 30, 1996, plus (ii) the cost of the
acquisition proposed to be made. For purposes hereof, "EBITDA" shall mean the
net income after taxes of EMI and its consolidated subsidiaries for the fiscal
period in question on a pro forma basis inclusive of the school(s) proposed to
be acquired, after adjustment by the Bank to reflect, in the case of such
school(s), the following, as applicable: plus any non-recurring charges or
expenses; less any items of extraordinary income or gain; plus interest
expense; plus tax expense; plus depreciation and amortization expense, each for
the same said entities and period.
3.4 Repayment Terms
(a) The Borrowers will pay interest, in arrears, at the
then applicable interest rate described below, on outstanding advances under
Facility No. 2 on the first day of the calendar month following the disbursement
of any advance under Facility No. 2 and then on a monthly basis thereafter until
such advance is paid in full. The interest rate payable on outstanding advances
under Facility No. 2 shall be determined as follows:
-8-
<PAGE> 16
<TABLE>
<CAPTION>
Interest Interest
Rate shall Rate shall
If the Test be Reference -or- be LIBOR
Ratio is : Rate plus Rate plus
---------- --------- ---------
<S> <C> <C>
1.5:1 or greater .50% 2.00%
1.0:1 or greater but less than 1.5:1 .25% 1.75%
less than 1.0:1 0% 1.50%
</TABLE>
with the Test Ratio, and resulting interest rate, being computed by the Bank in
the same manner as is provided in Paragraph 2.4(a).
(b) The Borrowers agree to pay the Bank an annual,
nonrefundable facility fee for Facility No. 2, determined as follows: (A) in the
first year, .375% of the initial Facility No. 2 Commitment, or $18,750, payable
at the time that the first advance is made under Facility No. 2 (and if no such
advance is made in the first year of this Agreement, this payment shall be
waived for the first year); (B) in the second year, .375% of the then full
amount of the Facility No. 2 Commitment, or $28,125, if no fee was paid in the
first year, but otherwise on the incremental increase of $2,500,000 in the
Facility No. 2 Commitment, or $9,375, payable on the first anniversary of the
date of this Agreement, and (C) in the third year, .375% of the incremental
increase of $5,000,000 in the Facility No. 2 Commitment, or $18,750, payable on
the second anniversary of the date of this Agreement.
(c) The Borrowers further agree to pay the Bank a
commitment fee determined by multiplying (i) the difference between (A) the then
full amount of the Bank's Facility No. 2 Commitment and (B) the amount of credit
which the Borrowers actually use of the Facility, based on the weighted average
credit outstanding under Facility No. 2 during the specified period, by (ii) the
per annum commitment fee described below, computed as follows:
<TABLE>
<CAPTION>
Per Annum
If the Test Commitment
Ratio is Fee shall be
-------- ------------
<S> <C>
1.5:1 or greater .500%
1.0:1 or greater, but less than 1.5:1 .375%
less than 1.0:1 .250%
</TABLE>
The fee shall be due and payable monthly in arrears on the first day of each
calendar month until the expiration of the availability period for Facility No.
2, commencing on the first day
-9-
<PAGE> 17
of the first calendar month following the date of this Agreement; provided,
however, for Facility No. 2 only, that the payment of this fee in the first year
of the Agreement shall be deferred until the first advance is obtained under
Facility No. 2 (but the fee will be due for the entire one year period to date
at such time based on the average unused amount) and shall be waived for the
first year if no advance under Facility No. 2 is obtained within such period.
(d) The Borrowers will repay in full all principal or
other charges outstanding under this Facility No. 2 no later than the
Termination Date; provided, however, that, pending the Termination Date, any
advances obtained under this Facility shall be repaid, in installments, based on
a four year straight-line monthly principal amortization schedule, commencing on
the first day of the calendar month following the date on which each such
advance is disbursed.
4. INTEREST
4.1 Interest Rate
(a) Unless the Borrowers elect the optional interest rate
described below, the interest rate payable on advances outstanding under
Facility No. 1 and Facility No. 2 (the "Facilities" or a "Facility") shall be
based on the Bank's Reference Rate (described below), plus the addition of a
spread, as described more particularly in Paragraphs 2.4(a) and 3.4(a).
(b) The "Reference Rate" is the rate of interest publicly
announced from time to time by Bank of America, National Trust and Saving
Association ("BofA") in San Francisco, California, as its Reference Rate. The
Reference Rate is set by BofA based on various factors, including its costs and
desired return, general economic conditions and other factors, and is used as a
reference point for pricing some loans. BofA may price loans to its customers
at, above, or below the Reference Rate. Any change in the Reference Rate shall
take effect at the opening of business on the day specified in the public
announcement of a change in BofA's Reference Rate.
4.2 Optional Interest Rate. Instead of an interest rate based on
the Reference Rate, the Borrowers may elect to have all or portions of their
outstanding advances (herein called a "LIBOR Rate Portion") bear interest based
on the "LIBOR Rate" (described below), plus the addition of a spread, as
described more particularly in Paragraphs 2.4(a) and 3.4(a). Designation of a
LIBOR Rate portion is subject to the following requirements:
-10-
<PAGE> 18
(a) The interest period during which the LIBOR Rate will
be in effect will be one, two, three or six months. The first day of the
interest period must be a day other than a Saturday or a Sunday on which BofA is
open for business in California, New York and London and dealing in offshore
dollars (a "LIBOR Banking Day"). The last day of the interest period and the
actual number of days during the interest period will be determined by the Bank
using the practices of the London interbank market. No interest period may
extend beyond the Termination Date, however.
(b) Each LIBOR Rate portion will be for an amount not
less than $500,000, and no more than four (4) LIBOR Rate portions, in total, per
each Facility, may be outstanding at any one time.
(c) The "LIBOR Rate" means the interest rate determined
by the following formula, rounded upward to the nearest 1/100th of one percent.
(All amounts in the calculation will be determined by the Bank as of the first
day of the interest period.)
LIBOR Rate = London Inter-Bank Offered Rate
------------------------------
(1.00 - Reserve Percentage)
Where,
(i) "London Inter-Bank Offered Rate" means the interest
rate at which BofA's London Branch, London, Great Britain, would offer U.S.
dollar deposits in amounts comparable to the LIBOR Rate Portion for the
applicable interest period to other major banks in the London inter-bank market
at approximately 11:00 a.m. London time two (2) London Banking Days before the
commencement of the interest period. A "London Banking Day" is a day on which
BofA's London Branch is open for business and dealing in offshore dollars.
(ii) "Reserve Percentage" means the total of the maximum
reserve percentages for determining the reserves to be maintained by member
banks of the Federal Reserve System for Eurocurrency Liabilities, as defined in
Federal Reserve Board Regulation D, rounded upward to the nearest 1/100th of one
percent. The percentage will be expressed as a decimal, and will include, but
not be limited to, marginal, emergency, supplemental, special, and other reserve
percentages.
(d) The Borrowers shall irrevocably request a LIBOR Rate
portion no later than 9:00 a.m. Atlanta time on the LIBOR Banking Day preceding
the day on which the London Inter-Bank Offered Rate will be set, as specified
above; that is, three (3) LIBOR Banking Days before the date on which the
requested advance is to be made.
-11-
<PAGE> 19
(e) The Borrowers may not elect a LIBOR Rate with respect
to any principal amount which is scheduled to be repaid before the last day of
the applicable interest period.
(f) Any portion of an advance already bearing interest at
the LIBOR Rate will not be converted to a different rate during its interest
period.
(g) Each prepayment of a LIBOR Rate portion, whether
voluntary, by reason of acceleration or otherwise, will be accompanied by the
amount of accrued interest on the amount prepaid and by a prepayment fee, which
shall be equal to the amount (if any) by which:
(i) the additional interest which would have been payable
at the LIBOR Rate, without the addition of any spread; i.e., add-on, during the
Reinvestment Period (as defined below) on the amount prepaid had it not been
prepaid, exceeds
(ii) the interest which would have been recoverable by the
Bank by relending the amount prepaid at the Reinvestment Rate, for a period
starting on the date on which it was prepaid and ending on the last day of the
interest period for such portion (or the scheduled payment date for the amount
prepaid, if earlier) (the "Reinvestment Period"). The "Reinvestment Rate" shall
be the LIBOR Rate, without the addition of any spread, determined as of the date
of the prepayment, for the entire Reinvestment Period.
(h) The Bank will have no obligation to accept an
election for a LIBOR Rate portion if any of the following described events has
occurred and is continuing:
(a) Dollar deposits in the principal amount, and for
periods equal to the interest period, of a LIBOR Rate portion are not available
in the London inter-bank market;
(b) the LIBOR Rate does not accurately reflect the cost
of a LIBOR Rate portion; or
(c) the Borrowers are in default.
5. COLLATERAL
5.1 Personal Property. The Borrowers' obligations to the Bank
under this Agreement will be secured by all personal property which the
Borrowers now own or will
-12-
<PAGE> 20
own in the future and, at the Bank's option, all or portions of any real
property (or interests in real property) owned or acquired by the Borrowers from
time to time. Collateral shall specifically include, but not be limited to, all
accounts receivables and general intangibles of each Borrower, all equipment of
each Borrower and the capital stock of each Borrower (other than the capital
stock of EMI, and except for any capital stock which, now or hereafter, is
encumbered in accordance with Section 9.9(e)). The collateral is further defined
in security agreement(s) executed by the Borrowers. In addition, all collateral
securing this Agreement shall also secure all other present and future
obligations of the Borrowers to the Bank. All collateral securing any other
present or future obligations of the Borrowers to the Bank shall also secure
this Agreement.
6. DISBURSEMENTS, PAYMENTS AND COSTS
6.1 Requests for Credit. Each request for an extension of credit
will be made in writing in a manner acceptable to the Bank, or by another means
acceptable to the Bank, to be issued by EMI, as agent for and on behalf of all
the Borrowers.
6.2 Disbursements and Payments. Each disbursement by the Bank and
each payment by the Borrowers will be: (a) made at the Bank's branch (or other
location) selected by the Bank from time to time; (b) made for the account of
the Bank's branch selected by the Bank from time to time; (c) made in
immediately available funds, or such other type of funds selected by the Bank;
and (d) evidenced by records kept by the Bank. In addition, the Bank may, at its
discretion, require the Borrowers to sign one or more promissory notes to
evidence the debt arising from such disbursements.
6.3 Direct Debit. The Borrowers agree that after their default in
the payment of any such obligation, the Bank may create advances under Facility
No. 1 to pay interest, principal payments, and any fees that are due under this
Agreement. The Bank will create such advances on the dates the payments become
due. If a due date does not fall on a banking day, the Bank will create the
advance on the first banking day following the due date. If the creation of an
advance under Facility No. 1 causes the total amount of credit outstanding under
Facility No. 1 to exceed the limitations set forth in this Agreement, the
Borrowers will immediately pay the excess to the Bank upon the Bank's demand.
The foregoing shall not constitute a waiver by the Bank of any such default.
6.4 Banking Days. Unless otherwise provided in this Agreement, a
"banking day" is a day other than a Saturday or a Sunday on which the Bank is
open for business in Georgia. All payments and disbursements which would be due
on a day which is not a banking day will be due on the next banking day. All
payments received on a day which is not a banking day will be applied to the
credit on the next banking day.
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<PAGE> 21
6.5 Taxes.
(a) If any payments to the Bank under this Agreement are
made from outside the United States, the Borrowers will not deduct any foreign
taxes from any payments it makes to the Bank. If any such taxes are imposed on
any payments made by the Borrower (including payments under this paragraph), the
Borrowers will pay the taxes and will also pay to the Bank, at the time interest
is paid, any additional amount which the Bank specifies as necessary to preserve
the after-tax yield the Bank would have received if such taxes had not been
imposed. The Borrowers will confirm that they have paid any such taxes by giving
the Bank of official tax receipts (or notarized copies) within 30 days after the
due date.
(b) Payments made by the Borrowers to the Bank will be
made without deduction of United States withholding or similar taxes. If the
Borrowers are required to pay U.S. withholding taxes, the Borrowers will pay
such taxes in addition to the amounts due to the Bank under this Agreement. If
the Borrowers fail to make such tax payments when due, each of the Borrowers
indemnifies the Bank against any liability for such taxes, as well as for any
related interest, expenses, additions to tax, or penalties asserted against or
suffered by the Bank with respect to such taxes.
6.6 Additional Costs. The Borrowers will pay the Bank, on demand,
for the Bank's costs or losses arising from any statute or regulation, or any
request or requirement of a regulatory agency which is applicable to all
national banks or a class of all national banks. The costs and losses will be
allocated to the advances in a manner determined by the Bank, using any
reasonable method. The costs include the following: (a) any reserve or deposit
requirements; and (b) any capital requirements relating to the Bank's assets and
commitments for credit.
6.7 Interest Calculation. Except as otherwise stated in this
Agreement, all interest and fees, if any, will be computed on the basis of a
360-day year and the actual number of days elapsed. This results in more
interest or a higher fee than if a 365-day year is used.
6.8 Default Rate. Upon the occurrence and during the continuation
of any default under this Agreement, principal amounts outstanding under this
Agreement will at the option of the Bank bear interest at a rate which is two
percent (2%) per annum higher than the rate of interest otherwise provided under
this Agreement. This will not constitute a waiver of any default. Installments
of principal which are not paid when due under this Agreement shall continue to
bear interest until paid. Any interest, fees or costs which are
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<PAGE> 22
not paid when due shall bear interest at the Reference Rate plus two percent
(2%) per annum. This may result in compounding of interest.
6.9 Overdrafts. At the Bank's sole option in each instance, the
Bank may do one of the following:
(a) The Bank may make advances under this Agreement to
prevent or cover an overdraft on any account of the Borrowers with the Bank or
BofA. Each such advance will accrue interest from the date of the advance or the
date on which the account is overdrawn, whichever occurs first, at the Reference
Rate plus two percent (2%) per annum.
(b) The Bank may reduce the amount of credit otherwise
available under this Agreement by the amount of any overdraft on any account of
the Borrowers with the Bank or BofA.
This paragraph shall not be deemed to authorize he Borrowers to create
overdrafts on any of the Borrower's accounts with the Bank or BofA.
6.10 Payments in Kind. If the Bank requires delivery in kind of the
proceeds of collection of any Borrower's accounts receivable, such proceeds
shall be credited to interest, principal, and other sums owed to the Bank under
this Agreement in the order and proportion determined by the Bank in its sole
discretion. All such credits will be conditioned upon collection and any
returned items may, at the Bank's option, be charged to the Borrowers.
7. CONDITIONS
The Bank must receive the following items, in form and content
acceptable to the Bank, before it is required to extend any credit to the
Borrowers under this Agreement:
7.1 Authorizations. Evidence that the execution, delivery and
performance by the Borrowers of this Agreement and any instrument or agreement
required under this Agreement have been duly authorized.
7.2 Governing Documents. A copy of each Borrower's articles of
incorporation and bylaws.
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<PAGE> 23
7.3 Security Agreements. Signed original security agreements,
assignments, financing statements and fixture filings (together with collateral
in which the Bank requires a possessory security interest), which the Bank may
require from any Borrower.
7.4 Evidence of Priority. Evidence that security interests and
liens in favor of the Bank are valid, enforceable, and prior to all others'
rights and interests, except as provided in Paragraph 9.9.
7.5 Insurance. Evidence of insurance coverage, as required in
Paragraph 9.22.
7.6 Legal Opinion. A written opinion from the Borrowers' legal
counsel, covering such matters as the Bank may require. The legal counsel and
the terms of the opinion must be acceptable to the Bank.
7.7 Good Standing. Certificates of good standing for each Borrower
from its state of formation and from any other state in which each Borrower is
required to qualify to conduct its business.
7.8 Payment of Closing Fee. Payment upon execution of this
Agreement of a non-refundable closing fee of Thirty-Five Thousand Dollars
($35,000).
7.9 Payment of Expenses and Fees. Payment of all accrued and
unpaid expenses incurred by the Bank as required by Paragraph 12.6.
7.10 Representations of Corporate Officers. A completed original of
the Bank's form of Representations and Warranties of Corporate Officers executed
by the principal of officers of each Borrower.
7.11 Other Items. Any other items that the Bank reasonably
requires.
8. REPRESENTATIONS AND WARRANTIES
When the Borrowers sign this Agreement, and until the Bank is repaid in
full, the Borrowers make the following representations and warranties. Each
request for an extension of credit (including any letter of credit) constitutes
a renewed representation:
8.1 Organization of Borrower. Each Borrower is a corporation duly
formed and existing under the laws of the state where organized.
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<PAGE> 24
8.2 Authorization. This Agreement, and any instrument or agreement
required hereunder, are within the Borrowers' powers, have been duly authorized,
and do not conflict with any of their organizational papers.
8.3 Enforceable Agreement. This Agreement is a legal, valid and
binding agreement of the Borrowers, enforceable against the Borrowers in
accordance with its terms, and any instrument or agreement required hereunder,
when executed and delivered, will be similarly legal, valid, binding and
enforceable.
8.4 Good Standing. In each state in which a Borrower does
business, it is properly licensed, in good standing, and, where required, in
compliance with fictitious name statutes.
8.5 No Conflicts. This Agreement does not conflict with any law,
agreement, or obligation by which any Borrower is bound.
8.6 Financial Information. All financial and other information
that has been or will be supplied to the Bank, including the Borrowers'
financial statements as of and for the most recently completed fiscal quarter of
the Borrowers for which financial statements are available, is:
(a) sufficiently complete to give the Bank accurate
knowledge of the Borrowers' financial condition.
(b) in compliance with all government regulations that
apply.
Since the date of the financial statements specified above, there has been no
material adverse change in the business condition (financial or otherwise),
operations, properties or prospects of the Borrowers.
8.7 Lawsuits. There is no lawsuit, tax claim or other
dispute pending or threatened against any Borrower which, if lost, would impair
such Borrower's financial condition or ability to repay the loan, except as have
been disclosed in writing to the Bank.
8.8 Collateral. All collateral required in this Agreement
is owned by the grantor of the security interest free of any title defects or
any liens or interests of others, except for those title defects, liens or
interests of others, as applicable thereto, specified in Paragraph 9.9.
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<PAGE> 25
8.9 Permits Franchises. The Borrowers possess all
permits, memberships, franchises, contracts and licenses required and all
trademark rights, trade name rights, patent rights and fictitious name rights
necessary to enable it to conduct the business in which it is now engaged.
8.10 Other Obligations. The Borrowers are not in default
on any obligation for borrowed money, any purchase money obligation or any other
material lease, commitment, contract, instrument or obligation.
8.11 Income Tax Returns. The Borrowers have no knowledge
of any pending assessments or adjustments of their income tax liabilities for
any year.
8.12 No Tax Avoidance Plan. The Borrowers' obtaining of
credit from the Bank under this Agreement does not have as a principal purpose
the avoidance of U.S. withholding taxes.
8.13 No Event of Default. There is no event which is, or
with notice or lapse of time or both would be, a default under this Agreement.
8.14 ERISA Plans.
(a) The Borrowers have fulfilled their
obligations, if any, under the minimum funding standards of ERISA and the Code
with respect to each Plan and are in compliance in all material respects with
the presently applicable provisions of ERISA and the Code, and have not incurred
any liability with respect to any Plan under Title IV of ERISA.
(b) No reportable event has occurred under
Section 4043(b) of ERISA for which the PBGC requires 30 day notice.
(c) No action by the Borrowers to terminate or
withdraw from any Plan has been taken and no notice of intent to terminate a
Plan has been filed under Section 4041 of ERISA.
(d) No proceeding has been commenced with
respect to a Plan under Section 4042 of ERISA, and no event has occurred or
condition exists which might constitute grounds for the commencement of such a
proceeding.
(e) The following terms have the meanings
indicated for purposes of this Agreement:
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<PAGE> 26
(i) "Code" means the Internal Revenue Code of
1986, as amended from time to time.
(ii) "ERISA" means the Employee Retirement Income
Security Act of 1974, as amended from time to time.
(iii) "PBGC" means the Pension Benefit Guaranty
Corporation established pursuant to Subtitle A of Title IV of ERISA.
(iv) "Plan" means any employee pension benefit
plan maintained or contributed to by the Borrowers and insured by the Pension
Benefit Guaranty Corporation under Title IV of ERISA.
8.15 Locations of Borrowers. Each Borrower's place of business (or,
if such Borrower has more than one place of business, its chief executive
office) is located at the address listed under such Borrower's signature on this
Agreement.
8.16 Subsidiaries. No Borrower, except EMI, has any subsidiaries,
except as disclosed on Schedule 8.16 attached hereto. All subsidiaries of EMI
are Borrowers under this Agreement.
9. COVENANTS
The Borrowers agree, so long as credit is available under this
Agreement and until the Bank is repaid in full:
9.1 Use of Proceeds. To use the proceeds of the credit only for
working capital and general operating needs under Facility No. l and permitted
acquisitions under Facility No. 2.
9.2 Financial Information. To provide the following financial
information and statements in form and content acceptable to the Bank, and such
additional information as requested by the Bank from time to time:
(a) Within 120 days following the end of EMI's fiscal
year (1) consolidated financial statements meeting the requirements of
regulation S-X ("Regulation S-X") promulgated by the Securities Exchange
Commission ("SEC") for financial statements to be included in EMI's Annual
Report on Form 10-K to be filed with the SEC pursuant to the provisions of the
Securities Exchange Act of 1934 (the "34 Act") audited
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<PAGE> 27
(with an unqualified opinion) by a firm of certified public accountants
acceptable to the Bank; (2) unaudited annual consolidating statements of
operations; and (3) audited balance sheets and statements of operations for the
individual schools operated by EMI, likewise accompanied by the unqualified
opinion of such certified public accountants.
(b) Within 45 days of EMI's first, second and third
fiscal quarter (i) unaudited consolidated financial statements meeting the
requirements of regulation S-X for financial statements to be included in EMI's
Quarterly Report on Form 10-Q to be filed with the SEC pursuant to the
provisions of the "34 Act," (ii) unaudited quarterly consolidating statements of
operations for the applicable quarter, and (iii) unaudited statements of
operations for the individual schools operated by EMI.
(c) Within 30 days of the period's end, EMI's monthly (i)
unaudited consolidated statements of operations for the applicable period, (ii)
unaudited monthly consolidating statements of operations for the applicable
period, and (iii) unaudited statements of operations for the individual schools
operated by EMI for the applicable period.
(d) Copies of EMI's Form 10-K Annual Report and Form 10-Q
Quarterly Report within 5 days after the date of filing with the Securities and
Exchange Commission, copies of EMI's Form 8-K Current Report within 1 business
day after the date of its filing with the Securities and Exchange Commission and
copies of any news releases within 1 business day after their publication.
(e) Within the period(s) provided in (a), (b) and (c)
above, a compliance certificate of the Borrowers signed by an authorized
financial of officer of EMI, as agent for the Borrowers, setting forth (i) the
information and computations (in sufficient detail) to establish that the
Borrowers are in compliance with all financial covenants contained herein at the
end of the period covered by the financial statements then being furnished and
(ii) whether there existed as of the date of such financial statements and
whether there exists as of the date of the certificate, any default under this
Agreement and, if any such default exists, specifying the nature thereof and the
action the Borrowers are taking and propose to take with respect thereto.
(f) A borrowing certificate, signed by EMI as agent for
the Borrowers, setting forth the amount of Acceptable Receivables as of the last
day of each fiscal quarter within 45 days after each quarter end, and on a pro
forma basis in connection with each proposed advance under Facility No. 2.
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<PAGE> 28
(g) Statements showing an aging and reconciliation of the
Borrowers' receivables upon Bank's request.
(h) A statement showing an aging of accounts payable of
the Borrowers upon Bank's request.
(i) A listing of the names and addresses of all debtors
obligated upon the Borrowers' accounts receivable upon the Bank's request.
(j) Promptly upon the Bank's request, such other
statements, lists of property and accounts, budgets, forecasts, reports or
information as to the Borrowers, any school, or group of schools, and as to each
guarantor of the Borrowers' obligations to the Bank as the Bank may request from
time to time.
(k) a report of continuing compliance and eligibility in
respect of all Title IV Program Requirements within 120 days after each fiscal
year end of EMI, such report to demonstrate, among other things, each school's
continuing maintenance of prescribed financial responsibility standards which
are part of the Title IV Program Requirements, to include calculations
demonstrating maintenance of at least the following: (i) a 1:1 "acid test;" (ii)
a positive tangible net worth; and (iii) net operating results (two years) which
do not show an aggregate net loss of 10% of tangible net worth.
9.3 Net Worth. To have a book net worth of at least the amounts
described below as of each fiscal quarter end in each fiscal period described
below:
<TABLE>
<CAPTION>
Fiscal Period Amount
------------- ------
<S> <C>
March 31, 1997 through March 30, 1998 $25,500,000
March 31, 1998 through March 30, 1999 $28,000,000
March 31, 1999 through March 30, 2000 $31,000,000
From and after March 31, 2000 $31,000,000 plus 80%
of each Fiscal Years
net income on a
cumulative basis
(without deduction
for loss), starting
with FYE March 31,
2000
</TABLE>
"Book net worth" shall have the meaning given to such term under GAAP.
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<PAGE> 29
9.4 Tangible Net Worth. To maintain a tangible net worth of at
least One Dollar ($1.00) at all times.
"Tangible net worth" means book net worth, as defined above, less the following:
goodwill, patents, trademarks, trade names, organization expense, treasury
stock, unamortized debt discount and expense, deferred research and development
costs, deferred marketing expenses, deferred income taxes, and any reserves
against assets, and other like intangibles, and monies due from any affiliates,
officers, directors, or shareholders; plus any purchase money debt owing to
sellers of schools subordinated to the Bank in a form, manner and substance
acceptable to the Bank to all of the Borrowers' obligations to the Bank.
9.5 Fixed Charge Coverage Ratio. To maintain on a consolidated
basis a Fixed Charge Coverage Ratio of at least 1.75:1.
"Fixed Charge Coverage Ratio" means the ratio of (1) Adjusted EBIRTDA to (2) the
sum of interest expense, lease expense and rent expense plus scheduled debt
repayments, to the extent made, in the preceding four fiscal quarters. "Adjusted
EBIRTDA" means the sum of net income after taxes, plus interest expense, lease
expense and rent expense, plus tax expense, plus depreciation and amortization
expense, but less capital expenditures of EMI and its subsidiaries (excluding
therefrom any payment made in respect of permitted school acquisitions), on a
consolidated basis. This ratio will be calculated at the end of each fiscal
quarter of EMI, using the results of that quarter and each of the three
immediately preceding quarters.
9.6 Total Funded Debt/Adjusted Cash Flow Coverage Ratio. To
maintain on a consolidated basis a Total Funded Debt/Adjusted Cash Flow Coverage
Ratio of not more than 3.0:1.
"Total Funded Debt/Adjusted Cash Flow Ratio" means the ratio of Total Funded
Debt to Adjusted Cash Flow. "Total Funded Debt" means purchase money debt
(including, without limitation, any such debts to sellers of schools, but
excluding trade payables) and indebtedness for money borrowed and guarantees of
such debts, including, without limitation, any debts represented by notes
payable, bonds, debentures, capitalized lease obligations and letters of credit
and any subordinated debt, of EMI and its subsidiaries, on a consolidated basis.
"Adjusted Cash Flow" means "EBITDA," as computed in Paragraph 3.3, less capital
expenditures (but excluding therefrom any capital expenditures made in respect
of permitted acquisitions of schools) less dividends, withdrawals, loans,
advances, and other distributions to any stockholders, of EMI and its
subsidiaries, on a consolidated basis. This ratio will be calculated at the end
of each fiscal quarter of EMI, using the results of that quarter and each of the
three immediately preceding quarters.
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<PAGE> 30
9.7 Senior Funded Debt/Adjusted Cash Flow Ratio. To maintain a
Senior Funded Debt/Adjusted Cash Flow Ratio of not more than 2.0:1.
"Senior Funded Debt/Adjusted Cash Flow Ratio" means the ratio of "Senior Funded
Debt" to "Adjusted Cash Flow." Senior Funded Debt is equal to Total Funded Debt
(as defined above) less any such debt which has been subordinated, in a form,
manner and substance acceptable to the Bank, to all of the Borrowers'
obligations to the Bank. "Adjusted Cash Flow" has the meaning described above.
This ratio will be calculated at the end of each fiscal quarter, using the
results of that quarter and each of the three immediately preceding quarters.
9.8 Other Debts. Not to have outstanding or incur any direct or
contingent liabilities or lease obligations (other than those to the Bank), or
become liable for the liabilities of others without the Bank's written consent.
This does not prohibit:
(a) Acquiring goods, supplies, or merchandise on normal
trade credit.
(b) Endorsing negotiable instruments received in the
usual course of business.
(c) Obtaining surety bonds in the usual course of
business.
(d) Liabilities in existence on the date of this
Agreement disclosed in the Borrowers' financial statements described in
Paragraph 8.6.
(e) Additional debts and lease obligations for the
acquisition of fixed or capital assets, to the extent permitted elsewhere in
this Agreement.
(f) unsecured (except for permitted stock pledges, as
described below) debt to sellers of schools.
(g) Additional debts and lease obligations incurred for
business purposes not otherwise described in, and permitted by, subparagraphs
(a) through (f) above, which, in aggregate amount, do not exceed a total
principal amount of $2,000,000 outstanding at any one time.
9.9 Other Liens. Not to create, assume, or allow any security
interest or lien (including judicial liens) on property the Borrowers now or
later own, except:
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<PAGE> 31
(a) Deeds of trust and security agreements in favor of
the Bank.
(b) Liens for taxes not yet due.
(c) Liens outstanding on the date of this Agreement and
disclosed in writing to the Bank on Schedule 9.9 attached hereto.
(d) Additional purchase money security interests in
personal or real property acquired after the date of this Agreement, if the
total principal amount of all debts secured by such liens does not exceed
$2,500,000 at any one time.
(e) Pledges of a school's capital stock given to support
the payment of permitted purchase money debt to the seller of a school pursuant
to an acquisition permitted in Paragraph 9.23(e).
(f) Liens which the DOE may claim in respect of certain
deposit accounts which the schools may be required to maintain for the receipt
of funds under Title IV Programs as part of the Title IV Program Requirements.
9.10 Capital Expenditures. Not to spend more than the following
amounts in any specified fiscal year to acquire fixed or capital assets (except
any made for permitted school acquisitions under Paragraph 9.23(e)):
<TABLE>
<CAPTION>
Fiscal Year
Ending Amount
------ ------
<S> <C>
March 31, 1997 $2,000,000
March 31, 1998 $3,000,000
March 31, 1999 $4,000,000
</TABLE>
9.11 Dividends. Not to declare or pay any dividends on any of its
shares except dividends payable to EMI by its subsidiaries and dividends payable
in capital stock of a Borrower; and not to purchase, redeem or otherwise acquire
for value any of its shares, or create any sinking fund in relation thereto.
9.12 Loans and Investments. Not to make any loans or other
extensions of credit to, or make any investments in, or make any capital
contributions or other transfers of assets to, any individual or entity, except
for:
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<PAGE> 32
(a) extensions of credit in the nature of accounts
receivable or notes receivable arising from the sale or lease of goods or
services in the ordinary course of business.
(b) investments in any of the following: (i) marketable,
direct obligations of the United States of America and its agencies maturing
within three hundred sixty-five (365) days of the date of purchase, (ii)
commercial paper issued by corporations maturing 180 days from the date of
original issue is rated "P-1" or better by Moody's or "A-1" or better by S&P,
(iii) certificates of deposit maturing within 1 year of the date of purchase
issued by a United States national or state bank having deposits totaling more
than $250,000,000, and whose short-term debt is rated "P-1" or better by Moody's
or "A-1" or better by S&P, and (iv) investments made with, or through, the Bank
or BofA.
(c) extensions of credit to and investments in other
Borrowers.
(d) acquisitions of schools permitted under Paragraph
9.23(e).
9.13 Change of Ownership. Not to cause, permit, or suffer any
change, direct or indirect, in (i) the capital ownership by EMI of its
subsidiaries; or (ii) the capital ownership of EMI, to the extent that a report
on Form 8-K is required to be filed with the Securities and Exchange Commission
disclosing a change in control.
9.14 Notices to Bank. To promptly notify the Bank in writing of:
(a) any lawsuit claiming damages over $100,000 against a
Borrower.
(b) any dispute between a Borrower and any government
authority which the Bank determines, if resolved adversely to such Borrower,
would materially interfere with the conduct of such Borrower's business as then
being conducted by it.
(c) any failure to comply with this Agreement.
(d) any material adverse change in the Borrower's (or any
guarantor's) business condition (financial or otherwise), operations, properties
or prospects, or ability to repay the credit.
(e) any change in a Borrower's name, legal structure,
place of business, or chief executive office if such Borrower has more than one
place of business.
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<PAGE> 33
(f) any default or event of default under Paragraph 11.
9.15 Books and Records. To maintain adequate books and records.
9.16 Audits. To allow the Bank and its agents to inspect Borrowers'
properties and examine, audit and make copies of books and records at any
reasonable time. If any of the Borrowers' properties, books or records are in
the possession of a third party, the Borrowers authorize that third party to
permit the Bank or its agents to have access to perform inspections or audits
and to respond to the Bank's requests for information concerning such
properties, books and records.
9.17 Compliance with Laws. To comply with the laws (including any
fictitious name statute), regulations, and orders of any government body with
authority over each Borrower's business (excepting therefrom, however, instances
of incidental noncompliance occurring from time to time in the ordinary course
of a Borrower's business without actual knowledge of a Borrower, which the Bank
determines are immaterial to the operation of its business and are capable of
being cured without any significant disruption to such business). The foregoing
shall include, specifically, but without limitation, compliance with all Title
IV Program Requirements, as prescribed with more particularity in Section 9.25.
9.18 Preservation of Rights. To maintain and preserve all rights,
privileges, and franchises the Borrowers now have.
9.19 Maintenance of Properties. To make any repairs, renewals, or
replacements to keep the Borrowers' properties in good working condition.
9.20 Perfection of Liens. To help the Bank perfect and protect its
security interests and liens, and reimburse it for related costs it incurs to
protect its security interests and liens.
9.21 Cooperation. To take any action reasonably requested by the
Bank to carry out the intent of this Agreement.
9.22 Insurance.
(a) Insurance Covering Collateral. To maintain all risk
property damage insurance policies covering the tangible property comprising the
collateral. Each insurance policy must be in an amount acceptable to the Bank.
The insurance must be
-26-
<PAGE> 34
issued by an insurance company acceptable to the Bank and must include a
lender's loss payable endorsement in favor of the Bank in a form acceptable to
the Bank.
(b) General Business Insurance. To maintain insurance
satisfactory to the Bank as to amount, nature and carrier covering property
damage (including loss of use and occupancy) to any Borrower's properties,
public liability insurance including coverage for contractual liability, product
liability and workers' compensation, and any other insurance which is usual for
the Borrowers' businesses.
(c) Evidence of Insurance. Upon the request of the Bank,
to deliver to the Bank a copy of each insurance policy, or, if permitted by the
Bank, a certificate of insurance listing all insurance in force.
9.23 Additional Negative Covenants. Not to, without the Bank's
written consent:
(a) engage in any business activities substantially
different from the Borrowers' present businesses.
(b) liquidate or dissolve any of the Borrowers'
businesses.
(c) enter into any consolidation, merger, or other
combination, or become a partner in a partnership, a member of a joint venture,
or a member of a limited liability company, except (i) in connection with any
acquisition permitted under subparagraph (e) and (ii) that Subsidiaries of EMI
may merge, combine or consolidate with each other or with EMI (so long as, in
the case of any merger, combination or consolidation with EMI, EMI is the
survivor.
(d) sell, lease, transfer or dispose of all or a
substantial part of a Borrower's business or a Borrower's assets, except, in the
case of any Borrower, to any other Borrower.
(e) acquire or purchase a business or its assets;
provided, however, that, acquisitions of all, or substantially all, of the
assets of, or of all or a controlling interest in the shares of capital stock
of, any business engaged in the provision of career-oriented, postsecondary
education within the United States (herein, a "school"), shall be permitted, if,
but only if: (i) no default then exists under this Agreement, or would be caused
by, or would result from, such proposed acquisition (after giving pro forma
effect to such acquisition, in respect of the financial covenants set forth at
Paragraphs 9.3 through 9.7); (ii) the cost of such acquisition, inclusive of any
assumed liabilities, does not exceed (A)
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<PAGE> 35
$10,000,000, if no advance under Facility No. 2 is requested for its financing
or (B) $5,000,000 if any advance under Facility No. 2 is requested for its
financing; (iii) the incremental amount which the Borrower then may borrow under
Facility No. 1 (after giving pro forma effect to the proposed acquisition),
determined under subparagraphs (a) and (d) of Paragraph 2.1, is at least
$3,000,000; (iv) the school being acquired has a positive EBITDA (computed in
the same manner as is defined in Paragraph 3.3 in respect of EMI, after
adjustments by the Bank as necessary for excessive compensation amount and like
items) for its most recently concluded period of twelve (12) fiscal months; and
(v) the acquisition is not opposed by the board of directors of the school
proposed to be acquired; i.e, it is not a "hostile" acquisition. EMI, as agent
on behalf of the Borrowers, shall certify the foregoing to the Bank at the time
of such acquisition. Such certification shall include calculations of pro forma
compliance with Paragraphs 9.3 through 9.7 on both a consolidated basis
(including the school being acquired) and on a stand alone basis for such
school. The Bank has reserved to itself the right, in its sole discretion, to
consent in writing to any such acquisition notwithstanding the Borrower's
non-compliance with one or more of the foregoing conditions, but any such
consent may be made subject to such other terms and conditions as the Bank, in
its sole discretion, then may elect.
(f) sell, assign, lease, transfer or otherwise dispose of
any assets, or enter into any agreement to do so, except:
(i) dispositions of inventory, or used, worn-out or
surplus equipment, all in the ordinary course of business;
(ii) the sale of equipment to the extent that such
equipment is exchanged for credit against the purchase price of similar
replacement equipment, or the proceeds of such sale are reasonably promptly
applied to the purchase price of such replacement equipment; and
(iii) dispositions not otherwise permitted hereunder which
are made for fair market value; provided, that (i) at the time of any
disposition, no event of default shall exist or shall result from such
disposition, (ii) the aggregate sales price from such disposition shall be paid
in cash, and (iii) the aggregate value of all assets so sold by the Borrowers
shall not exceed in any fiscal year $250,000.
(g) enter into any sale and leaseback agreement covering
any of its fixed or capital assets.
(h) close, or voluntarily suspend the business of any
school for more than 30 days, if that school's contribution (computed as defined
in Paragraph 9.25) then
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represents 5% or more of the total school contributions for the most recently
concluded period of four fiscal quarters.
9.24 ERISA Plans. To give prompt written notice to the Bank of:
(a) The occurrence of any reportable event under Section
4043(b) of ERISA for which the PBGC requires 30 day notice.
(b) Any action by a Borrower to terminate or withdraw
from a Plan or the filing of any notice of intent to terminate under Section
4041 of ERISA.
(c) Any notice of noncompliance made with respect to a
Plan under Section 4041(b) of ERISA.
(d) The commencement of any proceeding with respect to a
Plan under Section 4042 of ERISA.
9.25 Title IV Program Requirements. To maintain at all times all
Title IV Program Requirements for schools representing, in the aggregate, not
less than 80% of the total school contributions of all schools operated by the
Borrowers. For purposes hereof, "school contributions" for each school shall be
computed on a quarterly basis, for the most recently completed period of four
fiscal quarters, and shall be equal to each school's total revenue minus all
school operating costs (to include training expense, facility expense,
advertising expense, sales expense, administrative expense and bad debt
expense). "Total school contributions" of all schools shall be the aggregate of
each school's contribution.
"Title IV Program Requirements" shall mean and include all eligibility,
program and general requirements imposed upon schools under Title IV programs
administered by the U.S. Department of Education ("DOE") under the Higher
Education Act of 1965, as amended, and the regulations thereunder ("Title IV
Programs"), including, without limitation, for each of the schools operated by
Borrowers (i) its continuing certification by the DOE as an "eligible
institution;" (ii) its continuing authorization to offer its programs by the
relevant state agency where it is located; (iii) its continuing accreditation by
a nationally recognized accrediting agency; (iv) its continuing compliance with
respect to maximum rates of default by its students with respect to federally
guaranteed or funded student loans; i.e., cohort default rates; (v) its
continuing satisfaction of certain financial responsibility standards; (vi) its
continuing compliance with standards for maximum acceptable proportions of
school revenues derived from Title IV programs, i.e., "85/15" rule; and (vii)
its continuing compliance in respect of changes in curriculum, location and
control. Without limitation of the foregoing, to the extent that any school is
at any time
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required by the DOE to post a letter of credit, bond or other, similar evidence
of financial assurance as a condition to its remaining an "eligible
institution," the Bank, in its sole discretion, shall have the right to declare
that such school shall not be considered as maintaining all Title IV Program
Requirements for purposes of this Paragraph.
9.26 Subsidiaries. Promptly upon its creation or acquisition, to
cause all subsidiaries of Borrowers hereafter created or acquired (including any
acquired as schools) to execute a joinder to this Agreement in form and
substance acceptable to the Bank whereby such subsidiary shall become a Borrower
hereunder.
10. HAZARDOUS WASTE INDEMNIFICATION
The Borrowers, jointly and severally, will indemnify and hold harmless
the Bank from any loss or liability directly or indirectly arising out of the
use, generation, manufacture, production, storage, release, threatened release,
discharge, disposal or presence of a hazardous substance. This indemnity will
apply whether the hazardous substance is on, under or about any Borrower's
property or operations or property leased to any Borrower. The indemnity
includes but is not limited to attorneys' fees (including the reasonable
estimate of the allocated cost of in-house counsel and staff). The indemnity
extends to the Bank, its parent, its and its parents subsidiaries (including
BofA) and all of their directors, officers, employees, agents, successors,
attorneys and assigns. For these purposes, the term "hazardous substances" means
any substance which is or becomes designated as "hazardous" or "toxic" under any
federal, state or local law. This indemnity will survive repayment of the
Borrowers' obligations to the Bank and this Agreement's termination.
11. DEFAULT
If any of the following events occurs (called in this Agreement a
"default" or "event of default"), the Bank may do one or more of the following:
declare the Borrowers in default, stop making any additional credit available to
the Borrowers, and require the Borrowers to repay the entire debt immediately
and without prior notice. If an event of default occurs under the paragraph
entitled "Bankruptcy," below, with respect to the Borrowers, then, the entire
debt outstanding under this Agreement will automatically be due immediately.
11.1 Failure to Pay. A Borrower fails to make a payment under this
Agreement when due.
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11.2 Lien Priority. The Bank fails to have an enforceable first
lien (except for any prior liens to which the Bank has consented in writing)
on or security interest in any property given as security for the advances.
11.3 False Information. A Borrower (or any guarantor) has given the
Bank false or misleading information or representations in respect of any
matter, event or occurrence which the Bank determines to be material.
11.4 Bankruptcy. A Borrower (or any guarantor) files a bankruptcy
petition, a bankruptcy petition is filed against a Borrower (or any guarantor)
or a Borrower (or any guarantor) makes a general assignment for the benefit of
creditors. The default will be deemed cured if any bankruptcy petition filed
against a Borrower (or any guarantor) is dismissed within a period of 60 days
after the filing; provided, however, that the Bank will not be obligated to
extend any additional credit to the Borrowers during that period.
11.5 Receivers. A receiver or similar official is appointed for any
Borrower's business, or the business is terminated.
11.6 Lawsuits. Any lawsuit or lawsuits are filed on behalf of one
or more creditors against a Borrower in an aggregate amount of $100,000 or more
in excess of any insurance coverage.
11.7 Judgments. Any judgments or arbitration awards are entered
against any Borrower (or any guarantor), or any Borrower (or any guarantor)
enters into any settlement agreements with respect to any litigation or
arbitration, in an aggregate amount of $100,000 or more in excess of any
insurance coverage.
11.8 Government Action. Any government authority takes action that
the Bank believes materially adversely affects any Borrower's (or any
guarantor's) financial condition or ability to repay the advances.
11.9 Material Adverse Change. A material adverse change occurs in
any Borrower's (or any guarantor's) business condition (financial or otherwise),
operations, properties or prospects, or ability to repay the advances.
11.10 Cross-default. Any default occurs under any agreement in
connection with any credit which any Borrower (or any guarantor) or any
Borrower's related entities or affiliates has obtained from another lender else
or which any Borrower (or any guarantor) or any Borrowers related entices or
affiliates has guaranteed in the amount of $100,000 or
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<PAGE> 39
more in the aggregate if the default consists of failing to make a payment when
due or gives the other lender the right to accelerate the obligation.
11.11 Default under Related Documents. Any guaranty, subordination
agreement, security agreement, deed of trust, or other document required by this
Agreement is violated or no longer in effect.
11.12 Other Bank Agreements. A Borrower (or any guarantor) fails to
meet the conditions of, or fails to perform any obligation under any other
agreement which a Borrower (or any guarantor) has with the Bank, BofA or any
other affiliate of the Bank. If, in the Bank's opinion, the breach is capable of
being remedied, the breach will not be considered an event of default under this
Agreement for a period of 10 days after the date on which the Bank gives written
notice of the breach to the Borrowers; provided, however, that the Bank will not
be obligated to extend any additional credit to the Borrowers during that
period.
11.13 ERISA Plans. The occurrence of any one or more of the
following events with respect to any Borrower, provided such event or events
could reasonably be expected, in the judgment of the Bank, to subject any
Borrower to any tax, penalty or liability (or any combination of the foregoing)
which, in the aggregate, could have a material adverse effect on the financial
condition of any Borrower with respect to a Plan:
(a) A reportable event shall occur with respect to a Plan
which is, in the reasonable judgment of the Bank likely to result in the
termination of such Plan for purposes of Title IV of ERISA.
(b) Any Plan termination (or commencement of proceedings
to terminate a Plan) or a Borrower's full or partial withdrawal from a Plan.
11.14 Other Breach Under Agreement. The Borrowers fail to meet the
conditions of, or fail to perform any obligation under, any term of this
Agreement not specifically referred to in this Article. This includes any
failure or anticipated failure by the Borrowers to comply with any financial
covenants set forth in this Agreement, whether such failure is evidenced by
financial statements delivered to the Bank or is otherwise known to the
Borrowers or the Bank. If, in the Bank's opinion, the breach is capable of being
remedied, the breach will not be considered an event of default under this
Agreement for a period of 10 days after the date on which the Bank gives written
notice of the breach to the Borrowers; provided, however, that the Bank will not
be obligated to extend any additional credit to the Borrowers during that
period.
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<PAGE> 40
12. ENFORCING THIS AGREEMENT; MISCELLANEOUS
12.1 GAAP. Except as otherwise stated in this Agreement, all
financial information provided to the Bank and all financial covenants will be
made under generally accepted accounting principles, consistently applied
(herein, "GAAP").
12.2 Georgia Law. This Agreement is governed by Georgia law.
12.3 Successors and Assigns. This Agreement is binding on each
Borrower's and the Bank's successors and assignees. The Borrowers agree that
they will not assign this Agreement without the Bank's prior consent. The Bank
may sell participations in or assign this loan, and may exchange financial
information about the Borrowers with actual or potential participants or
assignees. If a participation is sold or the loan is assigned, the purchaser
will have the right of set-off against the Borrowers.
12.4 Arbitration.
(a) Dispute Resolution. Any controversy or claim between
or among the parties or their assignees arising out of or relating to this
Agreement or any agreements or instruments relating hereto or delivered in
connection herewith, including any claim based on or arising from an alleged
tort, shall at the request of any party be determined by arbitration, reference,
or trial by a judge as provided hereafter. A controversy involving only a single
claimant, or claimants who are related or asserting claims arising from a single
transaction, shall be determined by arbitration as described below. Any other
controversy shall be determined by judicial reference of the controversy to a
referee appointed by the court or, if the court where the controversy is venued
lacks the power to appoint a referee, by trial by a judge without a jury, as
described below. THE PARTIES AGREE AND UNDERSTAND THAT THEY ARE GIVING UP THE
RIGHT TO TRIAL BY JURY, AND THERE SHALL BE NO JURY WHETHER THE CONTROVERSY OR
CLAIM IS DECIDED BY ARBITRATION, BY JUDICIAL REFERENCE, OR BY TRIAL BY A JUDGE.
(b) Arbitration. Since this Agreement touches and
concerns interstate commerce, an arbitration under this Agreement shall be
conducted in accordance with the United States Arbitration Act (Title 9, United
States Code), notwithstanding any choice of law provision in this Agreement. The
Commercial Rules of the American Arbitration Association ("AAA") also shall
apply. The arbitrator(s) shall follow the law and shall give effect to statutes
of limitation in determining any claim. Any controversy concerning whether an
issue is arbitrable shall be determined by the arbitrator(s). The award of the
arbitrator(s) shall be in writing and include a statement of reasons for the
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<PAGE> 41
award. The award shall be final. Judgment upon the award may be entered in any
court having jurisdiction, and no challenge to entry of judgment upon the award
shall be entertained except as provided by Section 10 of the United States
Arbitration Act or upon a finding of manifest injustice.
(c) Judicial Reference or Trial by a Judge. At the
request of any party, any controversy or claim under subparagraph (a) that is
not submitted to arbitration as provided in subparagraph (b) shall be
determined by reference to a referee appointed by the court who, sitting alone
and without a jury, shall decide all questions of law and fact. The parties
shall designate to the court a referee selected under the auspices of the AAA
in the same manner as arbitrators are selected in AAA-sponsored proceedings.
The referee shall be an active attorney or retired judge. If the court where
the controversy is venued lacks the power to appoint a referee, the controversy
instead shall be decided by trial by a judge without a jury.
(d) Self-Help, Foreclosure, and Provisional Remedies. No
provision of this paragraph shall limit the right of any party to this Agreement
to exercise self-help remedies such as set off or repossession, to foreclose by
power of sale or judicially against or sell any collateral or security, or to
obtain any provisional or ancillary remedies from a court of competent
jurisdiction before, after, or during the pendency of any arbitration under
subparagraph (6), above. Neither the obtaining nor the exercise of any such
remedy shall waive the right of either party to demand that the related or any
other dispute or controversy be determined by arbitration as provided above.
12.5 Severability; Waivers. If any part of this Agreement is not
enforceable, the rest of the Agreement may be enforced. The Bank retains all
rights, even if it makes an advance after default. If the Bank waives a default,
it may enforce a later default. Any consent or waiver under this Agreement must
be in writing.
12.6 Reimbursement Costs. The Borrowers agree to reimburse the Bank
immediately for any expenses it incurs in the preparation of this Agreement and
any agreement or instrument required by this Agreement. Expenses include, but
are not limited to, reasonable attorneys' fees, including any allocated costs of
the Bank's in-house counsel, filing, recording and search fees, appraisal fees,
title report fees and documentation fees.
12.7 Administration Costs. The Borrowers shall pay the Bank for all
reasonable costs incurred by the Bank in connection with administering this
Agreement.
12.8 Attorneys' Fees. The Borrowers shall reimburse the Bank for
any reasonable costs and attorneys' fees incurred by the Bank in connection with
the
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<PAGE> 42
enforcement or preservation of any rights or remedies under this Agreement and
any other documents executed in connection with this Agreement, and including
any amendment, waiver, "workout" or restructuring under this Agreement. In the
event of a lawsuit or arbitration proceeding, the prevailing party is entitled
to recover costs and reasonable attorneys' fees incurred in connection with the
lawsuit or arbitration proceeding, as determined by the court or arbitrator. In
the event that any case is commenced by or against the Borrowers under the
Bankruptcy Code (Title 11, United States Code) or any similar or successor
statute, the Bank is entitled to recover costs and reasonable attorneys' fees
incurred by the Bank related to the preservation, protection, or enforcement of
any rights of the Bank in such a case. As used in this paragraph, "attorneys'
fees" includes the allocated costs of the Bank's in-house counsel.
12.9 Joint and Several Liability.
(a) Each Borrower agrees that it is jointly and severally
liable to the Bank for the payment of all obligations arising under this
Agreement, and that such liability is independent of the obligations of the
other Borrower(s) (or any guarantor). The Bank may bring an action against any
Borrower, whether an action is brought against the other Borrower(s) (or any
guarantor).
(b) Each Borrower agrees that any release which may be
given by the Bank to the other Borrower(s) (or any guarantor) will not release
such Borrower from its obligations under this Agreement.
(c) Each Borrower waives any right to assert against the
Bank any defense, setoff, counterclaim, or claims which such Borrower may have
against the other Borrower(s) or any other party (including any grantor) liable
to the Bank for the obligations of the Borrowers under this Agreement.
(d) Each Borrower agrees that it is solely responsible
for keeping itself informed as to the financial condition of the other
Borrower(s) and of all circumstances which bear upon the risk of nonpayment.
Each Borrower waives any right it may have to require the Bank to disclose to
such Borrower any information which the Bank may now or hereafter acquire
concerning the financial condition of the other Borrower(s).
(e) Each Borrower waives all rights to notices of default
or nonperformance by any other Borrower under this Agreement. Each Borrower
further waives all rights to notices of the existence or the creation of new
indebtedness by any other Borrower.
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<PAGE> 43
(f) The Borrowers represent and warrant to the Bank that
they each will derive benefit, directly and indirectly, from the collective
administration and availability of credit under this Agreement. The Borrowers
agree that the Bank will not be required to inquire as to the disposition by any
Borrower of funds disbursed in accordance with the terms of this Agreement.
(g) Each Borrower waives any right of subrogation,
reimbursement, indemnification and contribution (contractual, statutory or
otherwise), including without limitation, any claim or right of subrogation
under the Bankruptcy Code (Title 11 of the U.S. Code) or any successor statute,
which such Borrower may now or hereafter have against any other Borrower with
respect to the indebtedness incurred under this Agreement, unless and until this
Agreement is terminated and all debts to the Bank arising hereunder have been
fully paid and satisfied. Each Borrower further waives any right to enforce any
remedy which the Bank now has or may hereafter have against any other Borrower,
and waives any benefit of, and any right to participate in, any security now or
hereafter held by the Bank.
12.10 One Agreement. This Agreement and any related security or
other agreements required by this Agreement, collectively:
(a) represent the sum of the understandings and
agreements between the Bank and the Borrowers concerning this credit;
(b) replace any prior oral or written agreements between
the Bank and the Borrowers concerning this credit; and
(c) are intended by the Bank and the Borrowers as the
final, complete and exclusive statement of the terms agreed to by them.
In the event of any conflict between this Agreement and any other agreements
required by is Agreement, this Agreement will prevail.
12.11 Disposition of Schedules. The Bank will not be obligated to
return any schedules, invoices, statements, budgets, forecasts, reports or other
papers delivered by the Borrowers. The Bank will destroy or otherwise dispose of
such materials at such time as the Bank, in its discretion, deems appropriate.
12.12 Credit Adjustments. Until the Bank exercises its rights to
collect the accounts receivable as provided under any security agreement
required under this Agreement, the Borrowers may continue their present policies
for credit adjustments. If a
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<PAGE> 44
credit adjustment is made with respect to any Acceptable Receivable, the amount
of such adjustment shall no longer be included in the amount of such Acceptable
Receivable in computing the Borrowing Base.
12.13 Verification of Receivables. The Bank may at any time, either
orally or in writing, request confirmation from any debtor of the current amount
and status of the accounts receivable upon which such debtor is obligated.
12.14 Indemnification. The Borrowers will indemnify and hold the
Bank harmless from any loss, liability, damages, judgments, and costs of any
kind relating to or arising directly or indirectly out of (a) this Agreement or
any document required hereunder, (b) any credit extended or committed by the
Bank to the Borrowers hereunder, (c) any claim, whether well-founded or
otherwise, that there has been a failure to comply with any law regulating the
Borrowers' sales or leases to or performance of services for debtors obligated
upon the Borrowers' accounts receivable and disclosures in connection therewith,
and (d) any litigation or proceeding related to or arising out of this
Agreement, any such document, any such credit, or any such claim. This indemnity
includes but is not limited to attorneys' fees (including the allocated cost of
in-house counsel). This indemnity extends to the Bank, its parent, its and its
parent's subsidiaries (including BofA) and all of their directors, officers,
employees, agents, successors, attorneys, and assigns. This indemnity will
survive repayment of the Borrowers' obligations to the Bank and this Agreement's
termination. All sums due to the Bank hereunder shall be obligations of the
Borrowers, due and payable immediately without demand.
12.15 Notices. All notices required under this Agreement shall be
personally delivered or sent by first class mail, postage prepaid, to the
addresses on the signature page of this Agreement, or to such other addresses as
the Bank and the Borrowers may specify from time to time in writing.
12.16 Headings. Article and paragraph headings are for reference
only and shall not affect the interpretation or meaning of any provisions of
this Agreement.
12.17 Counterparts. This Agreement may be executed in as many
counterparts as necessary or convenient, and by the different parties on
separate counterparts each of which, when so executed, shall be deemed an
original but all such counterparts shall constitute but one and the same
agreement.
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<PAGE> 45
This Agreement is executed as of the date stated at the top of the first page.
BANK OF AMERICA, FSB EDUCATIONAL MEDICAL, INC.
By By /s/ Vince Pisano
------------------------ ----------------------------------------
Typed Name Typed Name Vince Pisano
---------------- --------------------------------
Title Title Vice President and Chief Financial
--------------------- -------------------------------------
Officer
-------------------------------------
Attest /s/ Morris C. Brown
-------------------------------------
Typed Name Morris C. Brown
--------------------------------
Title Secretary
-------------------------------------
Address where notices to Address where notices to
the Bank are to be sent: the Borrowers are to be sent:
1230 Peachtree Street, Suite 3600 1327 Northmeadow Parkway, Suite 132
Atlanta, Georgia 30309 Roswell, Georgia 30076
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<PAGE> 46
ANDON COLLEGES, INC.
By /s/ Vince Pisano
----------------------------------------
Typed Name Vince Pisano
--------------------------------
Title Vice President and Chief Financial
-------------------------------------
Officer
-------------------------------------
Attest /s/ Morris C. Brown
-------------------------------------
Typed Name Morris C. Brown
--------------------------------
Title Secretary
-------------------------------------
Chief executive office:
1327 Northmeadow Parkway
Suite 132
Roswell, Georgia 30076
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<PAGE> 47
CALIFORNIA ACADEMY OF
MERCHANDISING, ART AND DESIGN, INC.
By /s/ Vince Pisano
----------------------------------------
Typed Name Vince Pisano
--------------------------------
Title Vice President and Chief Financial
-------------------------------------
Officer
-------------------------------------
Attest /s/ Morris C. Brown
-------------------------------------
Typed Name Morris C. Brown
--------------------------------
Title Secretary
-------------------------------------
Chief executive office:
1327 Northmeadow Parkway
Suite 132
Roswell, Georgia 30076
-40-
<PAGE> 48
DBS ACQUISITION CORP.
By /s/ Vince Pisano
----------------------------------------
Typed Name Vince Pisano
--------------------------------
Title Vice President and Chief Financial
-------------------------------------
Officer
-------------------------------------
Attest /s/ Morris C. Brown
-------------------------------------
Typed Name Morris C. Brown
--------------------------------
Title Secretary
-------------------------------------
Chief executive office:
1327 Northmeadow Parkway
Suite 132
Roswell, Georgia 30076
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<PAGE> 49
DEST EDUCATION CORPORATION
By /s/ Vince Pisano
----------------------------------------
Typed Name Vince Pisano
--------------------------------
Title Vice President and Chief Financial
-------------------------------------
Officer
-------------------------------------
Attest /s/ Morris C. Brown
-------------------------------------
Typed Name Morris C. Brown
--------------------------------
Title Secretary
-------------------------------------
Chief executive office:
1327 Northmeadow Parkway
Suite 132
Roswell, Georgia 30076
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<PAGE> 50
ICM ACQUISITION CORP.
By /s/ Vince Pisano
----------------------------------------
Typed Name Vince Pisano
--------------------------------
Title Vice President and Chief Financial
-------------------------------------
Officer
-------------------------------------
Attest /s/ Morris C. Brown
-------------------------------------
Typed Name Morris C. Brown
--------------------------------
Title Secretary
-------------------------------------
Chief executive office:
1327 Northmeadow Parkway
Suite 132
Roswell, Georgia 30076
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<PAGE> 51
HBC ACQUISITION CORP.
By /s/ Vince Pisano
----------------------------------------
Typed Name Vince Pisano
--------------------------------
Title Vice President and Chief Financial
-------------------------------------
Officer
-------------------------------------
Attest /s/ Morris C. Brown
-------------------------------------
Typed Name Morris C. Brown
--------------------------------
Title Secretary
-------------------------------------
Chief executive office:
1327 Northmeadow Parkway
Suite 132
Roswell, Georgia 30076
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<PAGE> 52
MARIC LEARNING SYSTEMS
By /s/ Vince Pisano
----------------------------------------
Typed Name Vince Pisano
--------------------------------
Title Vice President and Chief Financial
-------------------------------------
Officer
-------------------------------------
Attest /s/ Morris C. Brown
-------------------------------------
Typed Name Morris C. Brown
--------------------------------
Title Secretary
-------------------------------------
Chief executive office:
1327 Northmeadow Parkway
Suite 132
Roswell, Georgia 30076
-45-
<PAGE> 53
MTSX ACQUISITION CORP.
By /s/ Vince Pisano
----------------------------------------
Typed Name Vince Pisano
--------------------------------
Title Vice President and Chief Financial
-------------------------------------
Officer
-------------------------------------
Attest /s/ Morris C. Brown
-------------------------------------
Typed Name Morris C. Brown
--------------------------------
Title Secretary
-------------------------------------
Chief executive office:
1327 Northmeadow Parkway
Suite 132
Roswell, Georgia 30076
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<PAGE> 54
OIOPT ACQUISITION CORP.
By /s/ Vince Pisano
----------------------------------------
Typed Name Vince Pisano
--------------------------------
Title Vice President and Chief Financial
-------------------------------------
Officer
-------------------------------------
Attest /s/ Morris C. Brown
-------------------------------------
Typed Name Morris C. Brown
--------------------------------
Title Secretary
-------------------------------------
Chief executive office:
1327 Northmeadow Parkway
Suite 132
Roswell, Georgia 30076
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<PAGE> 55
PALO VISTA COLLEGE OF NURSING AND
ALLIED HEALTH SCIENCES, INC.
By /s/ Vince Pisano
----------------------------------------
Typed Name Vince Pisano
--------------------------------
Title Vice President and Chief Financial
-------------------------------------
Officer
-------------------------------------
Attest /s/ Morris C. Brown
-------------------------------------
Typed Name Morris C. Brown
--------------------------------
Title Secretary
-------------------------------------
Chief executive office:
1327 Northmeadow Parkway
Suite 132
Roswell, Georgia 30076
-48-
<PAGE> 56
SACMD ACQUISITION CORP.
By /s/ Vince Pisano
----------------------------------------
Typed Name Vince Pisano
--------------------------------
Title Vice President and Chief Financial
-------------------------------------
Officer
-------------------------------------
Attest /s/ Morris C. Brown
-------------------------------------
Typed Name Morris C. Brown
--------------------------------
Title Secretary
-------------------------------------
Chief executive office:
1327 Northmeadow Parkway
Suite 132
Roswell, Georgia 30076
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<PAGE> 57
SCOTTSDALE EDUCATIONAL CENTER FOR
ALLIED HEALTH CAREERS, INCORPORATED
By /s/ Vince Pisano
----------------------------------------
Typed Name Vince Pisano
--------------------------------
Title Vice President and Chief Financial
-------------------------------------
Officer
-------------------------------------
Attest /s/ Morris C. Brown
-------------------------------------
Typed Name Morris C. Brown
--------------------------------
Title Secretary
-------------------------------------
Chief executive office:
1327 Northmeadow Parkway
Suite 132
Roswell, Georgia 30076
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<PAGE> 58
SCHEDULE 8.1
[SUBSIDIARIES]
Dest Education Corporation is a subsidiary of Andon Colleges, Inc.
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<PAGE> 59
SCHEDULE 9.9
[LIENS]
[See attached]
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<PAGE> 1
EXHIBIT 10.47
STOCK PLEDGE AGREEMENT
THIS STOCK PLEDGE AGREEMENT (this "Pledge Agreement"), dated as of
February 25, 1997, between EDUCATIONAL MEDICAL, INC., a Delaware corporation
(herein called the "Pledgor"), and BANK OF AMERICA, FSB (the "Bank"),
individually and as agent for itself and each "Issuer," as that term is defined
below (the Bank, acting in such capacity, herein called the "Secured Party").
W I T N E S S E T H:
WHEREAS, pursuant to a Business Loan Agreement, dated as of even date
herewith, among Pledgor, its subsidiaries and Secured Party (herein, as the
same may be amended, modified, supplemented or renewed from time to time,
called the "Loan Agreement"; capitalized terms used herein, but not expressly
defined herein, shall have the meanings given to such terms in the Loan
Agreement), the Bank has agreed to extend credit and other financial
accommodations to Borrowers; and
WHEREAS, the Pledgor is the owner of all shares of capital stock of
each Borrower (other than Pledgor), all as specified on Schedule "A" attached
hereto and by reference made part hereof (all such owned shares, together with
other shares delivered or required to be delivered hereunder hereinafter called
the "Pledged Shares"); and
WHEREAS, it is a condition to the making of such financial
accommodations that the Pledgor execute and deliver this Pledge Agreement in
favor of Secured Party and, it being in the Pledgor's best interest that
Borrowers obtain such financial accommodations, Pledgor is willing to execute
and deliver this Pledge Agreement;
NOW, THEREFORE, in consideration of the foregoing, the Pledgor agrees
with Secured Party that:
SECTION 1. Pledge. To secure the due and punctual payment of the
"Secured Obligations" (as hereinafter defined), the Pledgor hereby pledges,
hypothecates, assigns, transfers, sets over and delivers unto Secured Party,
and hereby grants to the Secured Party a security interest in, the following:
(i) the Pledged Shares and the certificates representing the Pledged Shares,
and all cash securities, dividends, rights, and other property at any time and
from time to time received, receivable or otherwise distributed in respect of
or in exchange for any or all of the Pledged Shares; (ii) all additional shares
of stock at any time and from time to time acquired by the Pledgor in any
manner, and the certificates representing such additional shares, and also any
cash, securities, dividends, rights, and other property at any time and from
time to time received, receivable or otherwise distributed in respect of or in
exchange for any or all of such shares; and (iii) all other property hereafter
delivered to the Secured Party in substitution for or in addition to any of the
foregoing, all certificates and instruments representing or evidencing such
property and all cash,
<PAGE> 2
securities, interest, dividends, rights, and other property at any time and
from time to time received, receivable or otherwise distributed in respect of
or in exchange for any or all thereof (all such Pledged Shares, additional
shares, certificates, notes, instruments, cash, securities, interest,
dividends, rights, and other property being herein collectively called the
"Collateral");
TO HAVE AND TO HOLD the Collateral, together with all rights, titles,
interest, privileges, and preferences appertaining or incidental thereto, unto
the Secured Party, its successors and assigns, forever, subject, however, to
the terms, covenants, and conditions hereinafter set forth. As used herein,
the terms "Issuer," "Loan Documents" and "Secured Obligations," shall mean as
follows:
"Issuer" shall mean Bank of America National Trust and Savings
Association, or any affiliate thereof, which at any time or from time
to time issues any letter of credit, banker's acceptance, foreign
exchange contract, interest rate "hedge" or similar agreement, or
otherwise extends any credit or other financial accommodation to, with
or on behalf of Borrowers, or any one or more of them, whether
pursuant to the Loan Agreement or otherwise.
"Loan Documents" shall mean the Loan Agreement and any
document, instrument or agreement, whether now or hereafter existing,
evidencing, giving rise to or otherwise securing any of the Secured
Obligations.
"Secured Obligations" shall mean (i) all of the unpaid
principal amount of, and accrued interest on, the Loans, (ii) all
prepayment, facility commitment and other fees owing under the Loan
Agreement to Bank and (iii) all other debts, liabilities and other
obligations owing at any time or from time to time to the Bank or any
Issuer by the Borrowers, or any one or more of them, whether joint or
several, or as maker, surety, guarantor or otherwise, including any
arising under or in respect of any loan, lease, letter of credit,
banker's acceptance, foreign exchange contract, interest rate "hedge"
agreement or any other similar agreement, whether arising pursuant to
the Loan Agreement or otherwise.
SECTION 2. Warranties and Further Assurances. The Pledgor warrants
to the Secured Party that the Pledgor is, or at the time of any future
delivery, pledge, assignment, or transfer will be, the lawful owner of the
Collateral, free of all claims and liens other than the security interest
hereunder (and those security interests described in Schedule "A" with regard
to certain of the Pledged Shares), with full right to deliver, pledge, assign
and transfer the Collateral to the Secured Party as Collateral hereunder. The
Pledgor agrees to deliver to the Secured Party from time to time upon request
of the Secured Party such stock powers and similar documents, satisfactory in
form and substance to the Secured Party, with respect to the Collateral as the
Secured Party may reasonably request. The Pledgor further agrees not to sell,
assign, exchange, pledge or otherwise transfer or encumber any of its right to
any of the Collateral (except as described in Schedule "A").
SECTION 3. Care of Collateral. The Secured Party shall be deemed to
have exercised reasonable care with respect to the interest of the Pledgor in
the custody and preservation of the
<PAGE> 3
Collateral if it takes such action for that purpose as the Secured Party takes
customarily with respect to similar property of others in its custody or
control, but no failure of the Secured Party to preserve or protect any rights
with respect to the Collateral against prior parties, or to do any act with
respect to preservation of the Collateral not so requested by the Pledgor,
shall be deemed a failure to exercise reasonable care in the custody of
preservation of the Collateral.
SECTION 4. Certain Rights Regarding Collateral and Secured
Obligations. The Secured Party may from time to time, if a Default (as
hereinafter defined) exists hereunder, without notice to the Pledgor, take all
or any of the following actions: (i) transfer all or any part of the Collateral
into the name of the Secured Party or its nominee, with or without disclosing
that such Collateral is subject to the lien and security interest hereunder,
(ii) notify the parties obligated on any of the Collateral to make payment to
the Secured Party of any amounts due or to become due thereunder, (iii) enforce
collection of any of the Collateral by suit or otherwise, and surrender,
release or exchange all or any part thereof or compromise or extend or renew
for any period (whether or not longer than the original period) any obligations
of any nature of any party with respect thereto, (iv) take control of any
proceeds of the Collateral, and (v) resort to the Collateral for payment of any
of the Secured Obligations whether or not it shall have resorted to any other
property securing the Secured Obligations or shall have proceeded against any
party primarily or secondarily liable on any of the Secured Obligations. The
Secured Party may, furthermore from time to time, whether before or after any
of the Secured Obligations shall become due and payable, without notice to the
Pledgor, take all or any of the following actions: (i) retain or obtain a
security interest in any property, in addition to the Collateral, to secure any
of the Secured Obligations, (ii) retain or obtain the primary or secondary
liability of any party or parties, in addition to the Pledgor with respect to
any of the Secured Obligations, (iii) extend or renew for any period (whether
or not longer than the original period) or exchange any of the Secured
Obligations or release or compromise any obligation of any nature of any party
with respect thereto, and (iv) surrender, release or exchange all or any part
of any property, in addition to the Collateral, securing any of the Secured
Obligations, or compromise or extend or renew for any period any obligations of
any nature of any party with respect to any such property.
SECTION 5. Voting Right and Dividends.
(a) So long as no Default (as hereinafter defined) shall have
occurred and be continuing:
(i) The Pledgor shall have the right to vote the Pledged
Shares in a manner consistent with the terms of the
Loan Agreement and the other Loan Documents;
(ii) If and to the extent permitted under the Loan
Documents, the Pledgor shall be entitled to receive
any and all cash dividends on the Pledged Shares,
which it is otherwise entitled to receive, but any
and all stock and/or liquidating dividends,
distributions in property, returns of capital or
other distributions made on or in respect of the
Pledged Shares, whether resulting from a
-3-
<PAGE> 4
subdivision, combination or reclassification of the
outstanding capital stock of any issuer thereof or
received in exchange for the Pledged Shares or any
part thereof or as a result of any merger,
consolidation, acquisition or other exchange of
assets to which any issuer may be a party or
otherwise, and any and all cash and other property
received in exchange for any Collateral shall be and
become part of the Collateral pledged hereunder and,
if received by the Pledgor, shall forthwith be
delivered to the Secured Party or its designated
nominee (accompanied, if appropriate, by proper
instruments of assignment and/or stock power executed
by the Pledgor in accordance with the Secured Party's
instructions) to be held subject to the terms of this
Pledge Agreement; and
(iii) If the Pledged Shares shall have been registered in
the name of the Secured Party or its subagent, the
Secured Party shall execute and deliver (or cause to
be executed and delivered) to the Pledgor all such
dividend orders and other instruments as the Pledgor
may request for the purpose of enabling the Pledgor
to receive the dividends or other payments which it
is authorized to receive and retain pursuant to
subparagraph (i) above.
(b) Upon the occurrence and during the continuance of a Default:
(i) after written notice from the Secured Party to the
Pledgor, all rights of the Pledgor pursuant to Section 5(a)(i)
to vote the Pledged Shares shall cease and Secured Party or
its designated nominee shall have the sole and exclusive
authority to exercise such rights, (ii) all rights of the
Pledgor pursuant to Section 5(a)(ii) and 5(a)(iii) shall
cease, and (iii) the Secured Party shall have the sole and
exclusive right and authority to receive and retain the
dividends which the Pledgor would otherwise be authorized to
receive and retain pursuant to Section 5(a)(ii) hereof. Any
and all money and other property paid over to or received by
the Secured Party pursuant to the provisions of this paragraph
(b) shall be retained by the Secured Party as additional
Collateral hereunder and be applied in accordance with the
provisions hereof.
SECTION 6. Default.
(a) The occurrence of any of the following shall constitute a
"Default" hereunder: nonpayment, when due, whether by
acceleration or otherwise, of any amount due and payable on
any of the Secured Obligations; an "event of default,"
"default" or similar event or occurrence, howsoever
denominated, at any time arising under any of the Loan
Documents; any representation of the Pledgor contained herein
or given pursuant hereto shall be untrue in any material
respect; or the Pledgor shall default in the performance of
any agreement contained herein which is not cured to Secured
Party's satisfaction within ten (10) days after Pledgor
receives written notice thereof from Pledgor. Upon any such
Default, (i) the Secured Party may exercise from time to time
any rights and remedies available to it under the Uniform
Commercial Code
-4-
<PAGE> 5
as in effect from time to time in Georgia or otherwise
available to it, and (ii) the Secured Party may, without
demand or notice of any kind, appropriate and apply toward the
payment of such of the Secured Obligations, and in such order
or application, as the Secured Party may from time to time
elect, any balances, credits, deposits, accounts or moneys of
the Pledgor then constituting part of, or proceeds from, the
Collateral. If any notification of intended disposition of
any of the Collateral is required by law, such notification
shall be deemed reasonably and properly given if given at
least ten (10) days before such disposition, in the manner
prescribed for the giving of notices in Section 10 below. Any
proceeds of any disposition of Collateral may be applied by
the Secured Party to the payment of expenses in connection
with the Collateral, including reasonable attorneys' fees and
legal expenses, and any balance of such proceeds may be
applied by the Secured Party toward the payment of such of the
Secured Obligations and in such order of application, as
provided in Section 7 hereof. All rights and remedies of the
Secured Party expressed hereunder are in addition to all other
rights and remedies possessed by it, including those under any
other Loan Document. No delay on the part of the Secured
Party in the exercise of any right or remedy shall operate as
a waiver thereof, and no single or partial exercise by the
Secured Party of any right or remedy shall preclude other or
further exercise thereof or the exercise of any other right or
remedy. No action of the Secured Party permitted hereunder
shall impair or affect the rights of the Secured Party in and
to the Collateral.
(b) The Pledgor agrees that in any sale of any of the Collateral
whenever a Default hereunder shall have occurred and be
continuing, the Secured Party is hereby authorized to comply
with any limitation or restriction in connection with such
sale as it may be advised by counsel is necessary in order to
avoid any violation of applicable law (including, without
limitation, compliance with such procedures as may restrict
the number of prospective bidders and purchasers, require that
such prospective bidders and purchasers have certain
qualifications, and restrict such prospective bidders and
purchasers to persons who will represent and agree that they
are purchasing for their own account for investment and not
with a view to the distribution or resale of such Collateral),
or in order to obtain any required approval of the sale or of
the purchaser by any governmental regulatory authority or
official, and the Pledgor further agrees that such compliance
shall not result in such sale being considered or deemed not
to have been made in a commercially reasonable manner, nor
shall the Secured Party be liable or accountable to the
Pledgor for any discount allowed by the reason of the fact
that such Collateral is sold in compliance with any such
limitation or restriction.
SECTION 7. Application of Proceeds of Sale or Cash Held as
Collateral. The proceeds of sale of Collateral sold pursuant to Section 6
hereof and/or, after a Default, the cash held as Collateral hereunder, shall be
applied by the Secured Party as follows:
-5-
<PAGE> 6
First: to payment of the costs and expenses of such sale
actually incurred by Secured Party, including the out-of-pocket
expenses of the Secured Party and the reasonable fees and
out-of-pocket expenses of counsel employed in connection therewith,
and to the payment of all advances made by the Secured Party for the
account of the Pledgor hereunder and the payment of all costs and
expenses incurred by the Secured Party in connection with the
administration and enforcement of this Pledge Agreement, to the extent
that such advances, costs and expenses shall not have been reimbursed
to the Secured Party (it being understood that, as used herein, costs
of "counsel" includes the allocated costs of the Secured Party's
in-house counsel);
Second: to the Bank and each Issuer, as appropriate, in an
amount equal to the then unpaid amount of the Secured Obligations in
such manner and order as they may elect, and if such proceeds shall be
insufficient to pay in full such amount, then to the Bank and each
Issuer ratably in accordance with the then unpaid amounts thereof
owing to them; and
Third: upon full payment and satisfaction of the Secured
Obligations, the balance, if any, of such proceeds shall be paid to
the Pledgor, its successors and assigns, or as a court of competent
jurisdiction otherwise may direct.
SECTION 8. Authority of Secured Party. The Secured Party shall have
and be entitled to exercise all such powers hereunder as are specifically
delegated to the Secured Party by the terms hereof, together with such powers
as are incidental thereto. The Secured Party may execute any of its duties
hereunder by or through agents or employees and shall be entitled to retain
counsel and to act in reliance upon the advice of such counsel concerning all
matters pertaining to its duties hereunder. Neither the Secured Party, nor any
director, officer or employee of the Secured Party, shall be liable for any
action taken or omitted to be taken by it or them hereunder or in connection
herewith, except for its or their own gross negligence or willfull misconduct.
The Pledgor hereby agrees to reimburse the Secured Party, on demand, for all
expenses incurred by the Secured Party in connection with the administration
and enforcement of this Agreement (including expenses incurred by any sub-agent
employed by the Secured Party) and agrees to indemnify and hold harmless the
Secured Party and/or any such sub-agent from and against any and all liability
incurred by the Secured Party (or such sub-agent) hereunder or in connection
herewith, unless such liability shall be due to willful misconduct or gross
negligence on the part of the Secured Party or such sub-agent.
SECTION 9. Term of Agreement; Reinstatement. This Pledge Agreement
and the security interests granted hereunder shall remain in full force and
effect until all Secured Obligations have been fully paid and satisfied and all
Loan Documents have been terminated (except for any obligations designated
under any Loan Document as continuing on an unsecured basis). Further this
Agreement shall remain in full force and effect and continue to be effective
should any petition be filed by or against any Borrower for liquidation or
reorganization, should any Borrower become insolvent or make an assignment for
the benefit of creditors or should a receiver or trustee be appointed for all
or any significant part of any Borrower's assets, and shall continue to be
effective
-6-
<PAGE> 7
or be reinstated, as the case may be, if at any time payment and performance of
the Secured Obligations, or any part thereof, is, pursuant to applicable law,
rescinded or reduced in amount, or must otherwise be restored or returned by
any obligee of the Secured Obligations, whether as a "voidable preference",
"fraudulent conveyance", or otherwise, all as though such payment or
performance had not been made. In the event that any payment, or any part
thereof, is rescinded, reduced, restored or returned, the Secured Obligations
shall be reinstated and deemed reduced only by such amount paid and not so
rescinded, reduced, restored or returned.
SECTION 10. Notices. Except as otherwise provided herein, whenever
it is provided herein that any notice, demand, request, consent, approval,
declaration or other communication shall or may be given to or served upon any
of the parties by any other party, or whenever any of the parties desires to
give or serve upon any other party any other communication with respect to
this Security Agreement, each such notice, demand, request, consent, approval,
declaration or other communication shall be in writing and shall be delivered
in the manner and to the addresses set forth in the Loan Agreement.
SECTION 11. Severability. Any provision of this Pledge Agreement
which is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate
or render unenforceable such provision in any other jurisdiction.
SECTION 12. No Waiver; Cumulative Remedies. Secured Party shall not
by any act, delay, omission or otherwise be deemed to have waived any of its
rights or remedies hereunder, and no waiver shall be valid unless in writing,
signed by Secured Party, and then only to the extent therein set forth. A
waiver by Secured Party of any right or remedy hereunder on any one occasion
shall not be construed as a bar to any right or remedy which Secured Party
would otherwise have had on any future occasion. No failure to exercise nor
any delay in exercising on the part of Secured Party, any right, power or
privilege hereunder, shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, power or privilege hereunder preclude any other
or future exercise thereof or the exercise of any other right, power or
privilege. The rights and remedies hereunder provided are cumulative and may
be exercised singly or concurrently, and are not exclusive of any rights and
remedies provided by law. None of the terms or provisions of this Pledge
Agreement may be waived, altered, modified or amended except by an instrument
in writing, duly executed by Secured Party and, where applicable, by Pledgor.
SECTION 13. Successor and Assigns; Governing Law.
A. This Security Agreement and all obligations of
Pledgor hereunder shall be binding upon the successors and assigns of Pledgor,
and shall, together with the rights and remedies of Secured Party hereunder,
inure to the benefit of Bank, the Issuers and the Secured Party and their
respective successors and assigns. No sales of participations, other sales,
assignments, transfers or other dispositions of any agreement governing or
instrument evidencing the Secured Obligations or
-7-
<PAGE> 8
any portion thereof or interest therein shall in any manner affect the security
interest granted to Secured Party hereunder.
B. THIS PLEDGE AGREEMENT SHALL BE GOVERNED BY, AND BE
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF GEORGIA,
WITHOUT REGARD TO THE PROVISIONS THEREOF REGARDING CONFLICTS OF LAWS.
SECTION 14. Further Indemnification. Pledgor agrees to pay, and to
save Secured Party harmless from, any and all liabilities with respect to, or
resulting from any delay in paying, any and all excise, sales or other similar
taxes which may be payable or determined to be payable with respect to any of
the Collateral or in connection with any of the transactions contemplated by
this Security Agreement.
IN WITNESS WHEREOF, the Pledgor has caused this Pledge Agreement to be
duly executed by its officers thereunto duly authorized as of the date first
above written.
PLEDGOR:
EDUCATIONAL MEDICAL, INC.
By: /s/ Vince Pisano
---------------------------------------
Name: Vince Pisano
Title: Vice President and
Chief Financial Officer
Attest: /s/ Morris C. Brown
-----------------------------------
Name: Morris C. Brown
Title: Secretary
-8-
<PAGE> 9
SCHEDULE "A"
SCHEDULE OF SHARES OF CAPITAL STOCK
OWNED BY PLEDGOR
<TABLE>
<CAPTION>
Corporation No. Shares Stock Certificate No(s).
- ----------- ---------- ------------------------
<S> <C> <C>
Andon Colleges, Inc.
California Academy
of Merchandising,
Art and Design, Inc.
DBS Acquisition Corp.
ICM Acquisition Corp.
HBC Acquisition Corp.
Maric Learning Systems
MTSX Acquisition Corp.
OIOPT Acquisition Corp.
Palo Vista College of
Nursing and Allied
Health Sciences, Inc.
SACMD Acquisition Corp.
Scottsdale Educational
Center for Allied Health
Careers, Incorporated
</TABLE>
-9-
<PAGE> 1
EXHIBIT 10.48
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (this "Security Agreement"), dated as
of February 25, 1997, made by EDUCATIONAL MEDICAL, INC., a Delaware corporation
("EMI") and all of those subsidiaries of EMI identified as such on the
signature page(s) to this Agreement (EMI and all such subsidiaries herein
called, collectively, "Borrowers" and, individually, a "Borrower"), to and in
favor of BANK OF AMERICA, FSB (the "Bank"), individually and as agent for
itself and each "Issuer," as that term is defined below (the Bank, acting in
such capacity, herein called "Secured Party");
W I T N E S S E T H :
WHEREAS, pursuant to the Business Loan Agreement, dated as of
even date herewith, between Borrowers and Bank (as the same may from time to
time be amended, modified, supplemented or renewed, called the "Loan
Agreement"), Bank has agreed to extend credit and other financial
accommodations to Borrowers (the same being collectively referred to herein as
the "Loans"); and
WHEREAS, Bank is willing to make the Loans but only upon the
condition that Borrowers shall have executed and delivered to Secured Party
this Security Agreement;
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants herein contained and for other good and valuable
consideration, the receipt of which is hereby acknowledged, the parties hereto
agree as follows:
1. Defined Terms. Unless otherwise defined herein, terms defined
in the Loan Agreement are used herein as therein defined, and the following
terms shall have the following meanings (such meanings being equally applicable
to both the singular and plural forms of the terms defined):
"Account Debtor" shall mean any "account debtor," as such term
is defined in Section 9-105(1)(a) of the UCC.
"Accounts" shall mean any "accounts," as such term is defined
in Section 9-106 of the UCC, now owned or hereafter acquired by a
Borrower or in which a Borrower now has or hereafter acquires any
rights, and, in any event, shall include, without limitation, all
accounts receivable, intercompany accounts and other forms of
obligations (other than forms of obligations evidenced by Chattel
Paper, Documents or Instruments), now owned or hereafter received or
acquired by or belonging or owing to a Borrower (including, without
limitation, under any trade names, styles or divisions thereof)
whether arising out of goods sold or leased or services rendered by a
Borrower or from any other transaction, whether or not the same
involves the sale or lease of goods or services by a Borrower
(including, without limitation, any such obligation, which might be
characterized as an account or
<PAGE> 2
contract right under the UCC) and all of a Borrower's rights in, to
and under all purchase orders or receipts now owned or hereafter
acquired by it for goods or services, and all of a Borrower's rights
to any goods represented by any of the foregoing (including, without
limitation, unpaid seller's rights of rescission, replevin,
reclamation and stoppage in transit and rights to returned, reclaimed
or repossessed goods), and all moneys due or to become due to a
Borrower under all contracts for the sale of goods or the performance
of services or both by a Borrower (whether or not yet earned by
performance on the part of a Borrower or in connection with any other
transaction), now in existence or hereafter occurring, including,
without limitation, the right to receive the proceeds of said purchase
orders and contracts, and all collateral security and guarantees of
any kind given by any Person with respect to any of the foregoing.
"Chattel Paper" shall mean any "chattel paper," as such term
is defined in Section 9-105(1)(b) of the UCC, now owned or hereafter
acquired by a Borrower or in which a Borrower now has or hereafter
acquires any rights and wherever located.
"Collateral" shall have the meaning assigned to such term in
Section 2 of this Security Agreement.
"Contracts" shall mean all contracts, undertakings, or other
agreements (other than rights evidenced by Chattel Paper, Documents or
Instruments) in or under which a Borrower may now or hereafter have
any right, title or interest, including, without limitation, with
respect to an Account, any agreement relating to the terms of payment
or the terms of performance thereof.
"Documents" shall mean any "documents," as such term is
defined in Section 9-105(1)(f) of the UCC, now owned or hereafter
acquired by a Borrower or in which a Borrower now has or hereafter
acquires any rights and wherever located.
"Equipment" shall mean any "equipment," as such term is
defined in Section 9-109(2) of the UCC, now owned or hereafter
acquired by a Borrower or in which a Borrower now has or hereafter
acquires any rights and wherever located, and, in any event, shall
include, without limitation, all machinery, equipment, molds,
furnishings, fixtures, motor vehicles and computers and other
electronic data-processing and other office equipment now owned or
hereafter acquired by a Borrower or in which a Borrower now has or
hereafter acquired any rights and wherever located, and any and all
additions, substitutions and replacements of any of the foregoing,
wherever located, together with all attachments, components, parts,
equipment and accessories installed thereon or affixed thereto.
"Event of Default" shall mean any "default," "event of
default," or similar event or occurrence, howsoever denominated, at
any time arising under any of the Loan Documents.
-2-
<PAGE> 3
"General Intangibles" shall mean any "general intangibles," as
such term is defined in Section 9-106 of the UCC, now owned or
hereafter acquired by a Borrower or in which Borrower now has or
hereafter acquires any rights, and, in any event, shall include,
without limitation, all right, title and interest which a Borrower may
now or hereafter have in or under any Contract, causes of action,
franchises, tax refund claims, customer lists, Trademarks, Patents,
rights in intellectual property, Licenses, permits, copyrights, trade
secrets, proprietary or confidential information, inventions and
discoveries (whether patented or patentable or not) and technical
information, procedures, designs, knowledge, know-how, software, data
bases, business records data, skill, expertise, experience, processes,
models, drawings, materials and records, goodwill, all claims under
guarantees, security interests or other security held by or granted to
a Borrower to secure payment of the Accounts by an account debtor
obligated thereon, all rights of indemnification and all other
intangible property of any kind and nature.
"Instruments" shall mean any "instrument," as such term is
defined in Section 9-105(1)(i) of the UCC, now owned or hereafter
acquired by a Borrower or in which a Borrower now has or hereafter
acquires any rights and wherever located, other than instruments that
constitute, or are a part of a group of writings that constitute,
Chattel Paper.
"Inventory" shall mean any "inventory," as such term is
defined in Section 9-109(4) of the UCC, now owned or hereafter
acquired by a Borrower or in which a Borrower now has or hereafter
acquires any rights and wherever located, and, in any event, shall
include, without limitation, all inventory, merchandise, supplies,
goods and other personal property, now owned or hereafter acquired by
a Borrower or in which a Borrower now has or hereafter acquires any
rights and wherever located, which are held for sale or lease or are
furnished or are to be furnished under a contract of service or which
constitute raw materials, work in process or materials used or
consumed or to be used or consumed in a Borrower's business, or the
processing, packaging, delivery or shipping of the same, and all
finished goods.
"Issuer" shall mean Bank of America National Trust and Savings
Association, or any affiliate thereof, which at any time or from time
to time issues any letter of credit, banker's acceptance, foreign
exchange contract, interest rate "hedge" or similar agreement, or
otherwise extends any credit or other financial accommodation to, with
or on behalf of Borrowers, or any one or more of them, whether
pursuant to the Loan Agreement or otherwise.
"License" shall mean any Patent License, Trademark License or
other license as to which Secured Party has been granted a security
interest hereunder.
"Loan Documents" shall mean the Loan Agreement and any
document, instrument or agreement, whether now or hereafter existing,
evidencing, giving rise to or otherwise securing any of the Secured
Obligations.
-3-
<PAGE> 4
"Patent License" shall mean all of the following now owned or
hereafter acquired by a Borrower or in which a Borrower now has or
hereafter acquires any rights: to the extent assignable by a
Borrower, any written agreement granting any right to make, use, sell
and/or practice any invention or discovery that is the subject matter
of a Patent.
"Patent" or "Patents" shall mean one or all of the following
now or hereafter owned by Borrower or in which a Borrower now has or
hereafter acquires any rights: (i) all letters patent of the United
States or any other country and all applications for letters patent of
the United States or any other country, (ii) all reissues,
continuations, continuations-in-part, divisions, reexaminations or
extensions of any of the foregoing, and (iii) all inventions disclosed
in and claimed in the Patents and any and all trade secrets and
knowhow related thereto.
"Proceeds" shall mean "proceeds," as such term is defined in
Section 9-306(1) of the UCC and, in any event, shall include, without
limitation, (i) any and all proceeds of any insurance, indemnity,
warranty or guaranty payable to a Borrower from time to time with
respect to any of the Collateral, (ii) any and all payments (in any
form whatsoever) made or due and payable to a Borrower from time to
time in connection with any requisition, confiscation, condemnation,
seizure or forfeiture of all or any part of the Collateral by any
governmental body, authority, bureau or agency (or any person acting
under color of governmental authority), (iii) any claim of a Borrower
against third parties (A) for past, present or future infringement of
any Patent or Patent License or (B) for past, present or future
infringement or dilution of any Trademark or Trademark License or for
injury to the goodwill associated with any Trademark, Trademark
registration or Trademark licensed under any Trademark License, (iv)
any and all other amounts from time to time paid or payable under or
in connection with any of the Collateral, and (v) the following types
of property acquired with cash proceeds: Accounts, Chattel Paper,
Contracts, Documents, General Intangibles, Equipment and Inventory.
"Secured Obligations" shall mean (i) all of the unpaid
principal amount of, and accrued interest on, the Loans, (ii) all
prepayment, commitment and other fees owing under the Loan Agreement
to Bank and (iii) all other debts, liabilities and other obligations
owing at any time or from time to time to the Bank or any Issuer by
the Borrowers, or any one or more of them, whether joint or several,
or as maker, surety, guarantor or otherwise, including any arising
under or in respect of any loan, lease, letter of credit, banker's
acceptance, foreign exchange contract, interest rate "hedge" agreement
or any other similar agreement, whether arising pursuant to the Loan
Agreement or otherwise.
"Security Agreement" shall mean this Security Agreement, as
the same may from time to time be amended, modified or supplemented
and shall refer to this Security Agreement as in effect of the date
such reference becomes operative.
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<PAGE> 5
"Supplemental Documentation" shall have the meaning assigned
to it in Section 5(a) of this Security Agreement.
"Trademark License" shall mean all of the following now owned
or hereafter acquired by a Borrower or in which a Borrower now has or
hereafter acquires any rights: any written agreement granting any
right to use any Trademark or Trademark registration.
"Trademark" or "Trademarks" shall mean one or all of the
following now owned or hereafter acquired by a Borrower or in which a
Borrower now has or hereafter acquires any rights: (i) all
trademarks, trade names, corporate names, business names, trade
styles, service marks, logos, other source or business identifiers,
prints and labels on which any of the foregoing have appeared or
appear, designs and general intangibles of like nature, now existing
or hereafter adopted or acquired, all registrations and recordings
thereof, and all applications in connection therewith, including,
without limitation, registrations, recordings and applications in the
United States Patent and Trademark Office or in any similar office or
agency of any State of the United States or any other country or any
political subdivision thereof, (ii) all extensions or renewals thereof
and (iii) the goodwill symbolized by any of the foregoing.
"UCC" shall mean the Uniform Commercial Code as the same may,
from time to time, be in effect in the State of Georgia; provided,
however, in the event that, by reason of mandatory provisions of law,
any or all of the attachment, perfection or priority of Secured
Party's security interest in any Collateral is governed by the Uniform
Commercial Code as in effect in a jurisdiction other than the State of
Georgia, the term "UCC" shall mean the Uniform Commercial Code as in
effect in such other jurisdiction for purposes of the provisions
hereof relating to such attachment, perfection or priority and for
purposes of definitions related to such provisions.
2. Grant of Security Interest. (a) Collateral. As collateral
security for the prompt and complete payment and performance when due (whether
at stated maturity, by acceleration or otherwise) of all the Secured
Obligations, each Borrower hereby assigns, conveys, mortgages, pledges,
hypothecates and transfers to Secured Party and hereby grants to Secured Party,
a security interest in, all of such Borrower's right, title and interest in, to
and under the following (all of which being hereinafter collectively called the
"Collateral"):
(i) all Accounts of each Borrower;
(ii) all Chattel Paper of each Borrower;
(iii) all Contracts of each Borrower;
(iv) all Documents of each Borrower;
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(v) all Equipment of each Borrower;
(vi) all General Intangibles of each Borrower;
(vii) all Instruments of each Borrower;
(viii) all Inventory of each Borrower;
(ix) all other goods and personal property of each
Borrower, whether tangible or intangible, including without
limitation, all bank accounts of each Borrower, now owned or hereafter
acquired by such Borrower or in which such Borrower now has or
hereafter acquires any rights and wherever located; and
(x) to the extent not otherwise included, all Proceeds of
each of the foregoing and all accessions to, substitutions and
replacements for, and rents, profits and products of each of the
foregoing and all books and records relating to each of the foregoing.
(b) Property in Possession. In addition, as collateral
security for the prompt and complete payment when due of the Secured
Obligations, Secured Party is hereby granted a lien and security interest in
all property of any Borrower held by Bank or any Issuer, including, without
limitation, all property of every description, now or hereafter in the
possession or custody of or in transit to Bank or any Issuer, for any purpose,
including for deposit, safekeeping, collection or pledge, for the account of
any Borrower, or as to which any Borrower may have any right or power.
3. Right of Secured Party; Limitations on Secured Party's
Obligations; License.
(a) Borrowers Remain Liable. It is expressly agreed by
Borrowers that, anything herein to the contrary notwithstanding, each Borrower
shall remain liable under each of its Contracts and each of its Licenses to
observe and perform all the conditions and obligations to be observed and
performed by it thereunder and such Borrower shall perform all of its duties
and obligations thereunder, all in accordance with and pursuant to the terms
and provisions of each such Contract or License, unless and except to the
extent that the same are being Properly Contested. Secured Party shall not
have any obligation or liability under any Contract or License by reason of or
arising out of this Security Agreement or the granting to Secured Party of a
security interest therein or the receipt by Secured Party of any payment
relating to any Contract or License pursuant hereto, nor shall Secured Party be
required or obligated in any manner to perform or fulfill any of the
obligations of any Borrower under or pursuant to any Contract or License, or to
make any payment, or to make any inquiry as to the nature or the sufficiency of
any payment received by it or the sufficiency of any performance by any party
under any Contract or License, or to present or file any claim, or to take any
action to collect or enforce any performance or the payment of any amounts
which may have been assigned to it or to which it may be entitled at any time
or times.
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(b) Direct Collection. Secured Party may at any time,
after the occurrence of, and during the continuance of, any Event of Default,
after first notifying Borrowers of its intention to do so, open any Borrower's
mail and collect any and all amounts due from Account Debtors, and notify
Account Debtors of any Borrower, parties to the Contracts of any Borrower,
obligors of Instruments of any Borrower and obligors in respect of Chattel
Paper of any Borrower that the Accounts and the right, title and interest of
Borrower in and under such Contracts, such Instruments and such Chattel Paper
have been assigned to Secured Party and that payments shall be made directly to
Secured Party or to a lockbox designated by Secured Party. Upon the request of
Secured Party made at any time after the occurrence of, and during the
continuance of, an Event of Default, Borrowers will so notify such Account
Debtors, parties to such Contracts, obligors of such Instruments and obligors
in respect of such Chattel Paper. Secured Party also may at any time, upon
reasonable advance notice to Borrowers (unless an Event of Default has
occurred, in which case no notice is necessary), in its own name or in the name
of any Borrower, communicate with such Account Debtors, parties to such
Contracts, obligors of such Instruments and obligors in respect of such Chattel
Paper to verify with such Persons to Secured Party's sole satisfaction the
existence, amount and terms of any such Accounts, Contracts, Instruments or
Chattel Paper.
(c) Test Verifications. Upon reasonable prior notice to
Borrowers (unless an Event of Default has occurred, in which case no notice is
necessary), Secured Party shall have the right to make test verifications of
the Accounts and physical verifications of the Inventory in any reasonable
manner and through any reasonable medium that it considers advisable, and
Borrowers agree to furnish all such assistance and information as Secured Party
may require in connection therewith.
(d) License to Borrowers. Unless and until there shall
have occurred and be continuing an Event of Default, Secured Party hereby
grants to Borrowers the worldwide, exclusive, nontransferable (subject to each
Borrower's right to grant sublicenses), royalty-free right and license or
sublicense, in the case of the Patent Licenses and Trademark Licenses, to use
and enjoy the Patents, Trademarks, Patent Licenses and Trademark Licenses for
each Borrower's own benefit and account and for none other, including, without
limitation, the right to make, have made for it, use, sell, sublicense and/or
practice the inventions disclosed in any of the Patents or Patent Licenses.
With respect to Trademarks and Trademark Licenses, without limitation, each
Borrower shall maintain standards of quality that conform to those high-quality
standards presently established and used by such Borrower, standards with which
such Borrower is presently familiar, or established and used by such Borrower
from time to time in the future in connection with products and/or services
presently offered for sale by such Borrower or hereafter offered for sale by
such Borrower. Each Borrower agrees not to sell or assign its interest in, or,
after the occurrence of and during the continuance of an Event of Default, to
grant any sublicenses under, the license granted to such Borrower in this
Section 3(d) without the prior written consent of Secured Party. Upon the
occurrence of an Event of Default, Secured Party may terminate the license
granted under this Section 3(d) and exercise all of the rights and remedies
granted to it under this Security Agreement. In furtherance of the license or
sublicense granted to Borrowers hereunder, unless an Event of Default has
occurred and is continuing, Secured Party shall from time to time execute and
deliver,
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<PAGE> 8
upon the written request of Borrowers, any and all instruments, certificates,
or other documents, in the form so requested, necessary or appropriate in the
judgment of Borrowers to permit a Borrower to continue to exploit, license, use
and enjoy the Patents, Trademarks, Patent Licenses and Trademark Licenses.
4. Representations and Warranties. Each Borrower hereby
represents and warrants to Secured Party that:
(a) Sole Owner. Except for the security interest granted
to Secured Party pursuant to this Security Agreement, each Borrower is the sole
owner or lessee or authorized licensee of each item of the Collateral in which
it purports to grant a security interest hereunder, having good and sufficient
title thereto, or a valid interest as a lessee or licensee thereunder, free and
clear of any and all liens, and, in the case of Patents and Trademarks, free
and clear of licenses, registered user agreements and covenants not to sue
third persons. No amount in excess of $5,000 in the aggregate payable under or
in connection with any of its Accounts or Contracts are evidenced by
Instruments which have not been delivered to Secured Party.
(b) No Security Agreement. No currently effective
security agreement, financing statement, equivalent security or lien instrument
or continuation statement covering all or any part of the Collateral is on file
or of record in any public office, except such as may have been filed by any
Borrower in favor of Secured Party pursuant to this Security Agreement.
(c) Financing Statements. Upon the filing of appropriate
financing statements in the jurisdictions listed in Schedule I hereto and, upon
the filing of the Patent, Trademark and License Assignments to be filed in the
United States Patent and Trademark Office, this Security Agreement is effective
to create a valid and continuing first priority lien on and first priority
perfected security interest in the Collateral with respect to which a security
interest may be perfected by filing pursuant to the UCC or by the filing of an
appropriate document in the United States Patent and Trademark Office in favor
of Secured Party, prior to all other Liens, and is enforceable as such as
against creditors of and purchasers from Borrowers (other than purchasers of
Inventory in the ordinary course of business) and as against any purchaser of
real property where any of the Equipment is located and any present or future
creditor obtaining a Lien on such real property. Upon such filing, all action
requested by Secured Party as necessary or desirable to protect and perfect
such security interest in each item of the Collateral will have been duly
taken.
(d) Locations. Each Borrower's chief executive office,
principal place of business and the place where its records concerning the
Collateral are kept and the locations of its Inventory and Equipment are set
forth on Schedule II hereto, and such Borrower will not change such principal
place of business or remove such records or Inventory or Equipment (except for
removal of Inventory for transfer from one such location to another or upon its
sale) unless it has taken such action (if any) as is necessary to cause the
security interest of Secured Party in the Collateral to continue to be
perfected and has given thirty (30) days' prior written notice thereof to
Secured Party.
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<PAGE> 9
Any new place of business of Borrower or Collateral location shall be within
the United States of America.
(e) Patents. As of the date hereof, no Borrower has any
rights in or to any Patents or Patent Licenses.
(f) Trademarks. The Trademarks and, to the best of each
Borrower's knowledge, any trademarks in which a Borrower has been granted
rights pursuant to Trademark Licenses, are subsisting and have not been
adjudged invalid or unenforceable; each of the Trademarks and, to the best of
each Borrower's knowledge, any trademark in which such Borrower has been
granted rights pursuant to Trademark Licenses is valid and enforceable; no
claim has been made that the use of any of the Trademarks or any trademark in
which such Borrower has been granted rights pursuant to the Trademark Licenses
does or may violate the rights of any third person; upon registration of its
Trademarks, each Borrower will use for the duration of this Security Agreement,
proper statutory notice in connection with its use of the Trademarks; and each
Borrower will use for the duration of this Security Agreement, consistent
standards of quality in its manufacture of products sold under the Trademarks
and any Trademarks in which such Borrower has been granted rights pursuant to
the Trademark Licenses.
5. Covenants. Each Borrower covenants and agrees with Secured
Party that from and after the date of this Security Agreement and until the
Secured Obligations are fully satisfied and the Loan Documents have been
terminated:
(a) Further Documentation; Pledge of Instruments. At any
time and from time to time, upon the written request of Secured Party, and at
the sole expense of such Borrower, such Borrower will promptly and duly execute
and deliver any and all such further instruments, documents and agreements and
take such further action as Secured Party may reasonably deem desirable to
obtain the full benefits of this Security Agreement and of the rights and
powers herein granted, including, without limitation, using its best efforts to
secure all consents and approvals necessary or appropriate for the assignment
to Secured Party of any License or Contract held by such Borrower or in which
such Borrower has any rights not heretofore assigned, the filing of any
financing or continuation statements under the UCC with respect to the liens
and security interests granted hereby, transferring Collateral to Secured
Party's possession (if a security interest in such Collateral can be perfected
only by possession), placing the interest of Secured Party as lienholder on the
certificate of title of any vehicle and using its best efforts to obtain
waivers of liens from landlords and mortgagees. Each Borrower hereby
irrevocably makes, constitutes and appoints Secured Party (and all Persons
designated by Secured Party for that purpose) as such Borrower's true and
lawful attorney, effective upon the failure or refusal of such Borrower upon
request to execute and/or deliver to Secured Party any financing statement,
continuation statement, instrument, document, or agreement which Secured Party
may reasonably deem desirable to obtain the full benefits of this Security
Agreement and of the rights and powers granted hereunder (herein, "Supplemental
Documentation"), to sign such Borrower's name on any such Supplemental
Documentation and to deliver any such Supplemental Documentation to such Person
as Secured
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<PAGE> 10
Party, in its sole discretion, shall elect. Each Borrower also hereby
authorizes Secured Party to file any financing or continuation statement
without the signature of such Borrower to the extent permitted by applicable
law. Each Borrower agrees that a carbon, photographic, photostatic, or other
reproduction of this Security Agreement or of a financing statement is
sufficient as a financing statement and may be filed by Secured Party in any
filing office. If any amount payable under or in connection with any of the
Collateral shall be or become evidenced by any Instrument or Document, such
Instrument or Document shall be immediately pledged to Secured Party hereunder,
and, if requested by Secured Party, shall be duly endorsed in a manner
satisfactory to Secured Party and delivered to Secured Party.
(b) Indemnification. In any suit, proceeding or action
brought by Secured Party relating to any Account, Chattel Paper, Contract,
General Intangible or Instrument for any sum owing thereunder, or to enforce
any provision of any Account, Chattel Paper, Contract, General Intangible or
Instrument, each Borrower will save, indemnify and keep Secured Party harmless
from and against all expense, loss or damage suffered by reason of any defense,
setoff, counterclaim, recoupment or reduction of liability whatsoever of the
obligor thereunder, arising out of a breach by such Borrower of any obligation
thereunder or arising out of any other agreement, indebtedness or liability at
any time owing to, or in favor of, such obligor or its successors from such
Borrower, and all such obligations of such Borrower shall be and remain
enforceable against and only against such Borrower and shall not be enforceable
against Secured Party.
(c) Limitation on Liens on Collateral. No Borrower will
create, permit or suffer to exist, and will defend the Collateral against and
take such other action as is necessary to remove, any Lien on the Collateral
except Permitted Encumbrances, and will defend the right, title and interest
of Secured Party in and to any of Borrower's rights under the Chattel Paper,
Contracts, Documents, General Intangibles and Instruments and to the Equipment
and Inventory and in and to the Proceeds thereof against the claims and demands
of all Persons whomsoever.
(d) Maintenance of Insurance. Each Borrower will
maintain, with financially sound and reputable companies, casualty and
liability insurance policies with respect to the Collateral which conform in
all respects to any requirements of the Loan Documents in respect of insurance.
(e) Limitations on Disposition. No Borrower will sell,
lease, transfer or otherwise dispose of any of the Collateral, or attempt or
contract to do so except as may be permitted by the Loan Documents.
(f) Right of Inspection. Secured Party shall at all
times have the rights of inspection set forth in the Loan Documents. Secured
Party and its representatives shall also have the right, with reasonable notice
and at all reasonable times, to enter into and upon any premises where any of
the Equipment or Inventory is located for the purpose of inspecting the same,
observing its use or otherwise protecting its interests therein.
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<PAGE> 11
(g) Continuous Perfection. No Borrower will change its
name, identity or corporate structure in any manner which might make any
financing or continuation statement filed in connection herewith seriously
misleading within the meaning of Section 9-402(7) of the UCC (or any other then
applicable provision of the UCC) unless such Borrower shall have given Secured
Party at least thirty (30) days' prior written notice thereof and shall have
taken all action (or made arrangements to take such action substantially
simultaneously with such change if it is impossible to take such action in
advance) necessary or reasonably requested by Secured Party to amend such
financing statement or continuation statement so that it is not seriously
misleading.
6. Covenants Regarding Specific Collateral. Each Borrower
covenants and agrees with Secured Party that from and after the date of this
Security Agreement and until the Secured Obligations have been fully satisfied
and the Loan Documents have been terminated:
(a) Covenants Relating to Accounts, Etc.
(i) Each Borrower will perform and comply with
all obligations in respect of Accounts, Chattel Paper, Contracts and Licenses
and all other agreements to which it is a party or by which it is bound, unless
and except to the extent that the same are being Properly Contested.
(ii) No Borrower will, without Secured Party's
prior written consent, with respect to any Eligible Accounts and, after the
occurrence of, and during the continuance of, any Default or Event of Default,
any Accounts, Chattel Paper or Instruments, grant any extension of the time of
payment of any of the Accounts, Chattel Paper or Instruments, compromise,
compound or settle the same for less than the full amount thereof, release,
wholly or partly, any Person liable for the payment thereof, or allow any
credit or discount whatsoever thereon other than trade discounts granted in the
ordinary course of business of such Borrower.
(iii) Secured Party may rely, in determining which
Accounts listed on any Borrowing Base Certificate, collateral valuation report
or any other report delivered by a Borrower to Secured Party pursuant to the
Loan Agreement are Eligible Accounts, on all statements or representations made
by such Borrower on or with respect to any such certificate or report and,
unless otherwise indicated in writing by such Borrower, that: (A) they are
genuine, are in all respects what they purport to be, are not evidenced by a
judgment and are only evidenced by one, if any, executed original instrument,
agreement, contract, or document, which, if requested by Secured Party, has
been delivered to Secured Party; (B) they represent undisputed, bona fide
transactions completed in accordance with the terms and provisions contained in
any documents related thereto; (C) except as set forth in Subsection (D) below,
the amounts of the face value shown on any certificate or report provided to
Secured Party, and/or any invoices and statements delivered to Secured Party
with respect to any Account are actually and absolutely owing to such Borrower
and are not contingent for any reason; (D) there are no setoffs, counterclaims
or disputes existing or asserted with respect thereto and such Borrower has not
made any agreement with any Account Debtor thereunder for any deduction
therefrom, except for discounts, rebates or allowances by such
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<PAGE> 12
Borrower in the ordinary course of its business for prompt payments, all of
which discounts, rebates or allowances are reflected in the calculation of the
face value of each respective invoice related thereto or have been disclosed by
such Borrower to Secured Party in writing; (E) there are no facts, events, or
occurrences which in any way impair the validity or enforceability thereof or
reduce the amount payable thereunder from the amount of the invoice face value
shown on any such certificate or report and on all contracts, invoices and
statements delivered to Secured Party with respect thereto; (F) to the best of
each Borrower's knowledge, all Account Debtors thereunder had the capacity to
contract at the time any contract or other document giving rise to the Account
was executed and are solvent; (G) the goods giving rise thereto are not, and
were not at the time of the sale thereof, subject to any lien, claim,
encumbrance or security interest, except those of Secured Party and those
removed, terminated or assigned to Secured Party on or prior to the date
hereof; (H) such Borrower has no knowledge of any fact or circumstance which
would impair the validity or collectibility thereof; (I) to the best of such
Borrower's knowledge, there are no proceedings or actions which are threatened
or pending against any Account Debtor thereunder which might result in any
material adverse change in its financial condition; (J) no security interest
therein has been granted by such Borrower to any Person other than that granted
to Secured Party pursuant hereto; and (K) each invoice or other evidence of
payment obligation furnished to Account Debtors with respect to outstanding
Accounts is issued in Borrower's corporate name; provided, however, that a
Borrower may use other trade styles different from its corporate name from time
to time for invoicing purposes so long as (i) such Borrower shall notify
Secured Party in writing thereof prior to the use of such trade styles; (ii)
the Accounts so created and the payments received with respect thereto shall be
and remain Borrower's property; (iii) no other person shall have any interest
in such Accounts; and (iv) the trade styles so used are names either owned by
such Borrower or for the use of which such Borrower shall have obtained prior
approval.
(b) Maintenance of Equipment. Subject to each Borrower's
right to dispose of Equipment from time to time to the extent provided in the
Loan Documents, Borrower will at all times maintain and preserve the Equipment
in use or useful in the conduct of its business and keep the same in good
repair, working order and condition (taking into account ordinary wear and
tear) and from time to time make, or cause to be made, all needful and proper
repairs, renewals and replacements, betterments and improvements thereto
consistent with industry practice so that the business carried on in connection
therewith may be properly and advantageously conducted at all times.
(c) Covenants Regarding Patent and Trademark Collateral.
(i) Each Borrower shall notify Secured Party
immediately if it knows or has reason to know that any Patent or any
registration relating to any Trademark which is material to the conduct of such
Borrower's business may become abandoned, cancelled or declared invalid, or if
any Trademark or the invention disclosed in any of the Patents is dedicated to
the public domain, or of any adverse determination or development in any
proceeding in the United States Patent and Trademark Office, in analogous
offices or agencies in other countries or in any court
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<PAGE> 13
regarding such Borrower's ownership of any Patent or Trademark which is
material to the conduct of such Borrower's business, its right to register the
same, or to keep and maintain the same.
(ii) If a Borrower, either itself or through any
agent, employee, licensee or designee, applies for a patent or files an
application for the registration of any Trademark with the United States Patent
and Trademark Office or any analogous office or agency in any other country or
any political subdivision thereof or otherwise obtains rights in any Patent or
Trademark, such Borrower will promptly inform Secured Party, and, upon request
of Secured Party, execute and deliver any and all agreements, instruments,
documents, and papers as Secured Party may request to evidence Secured Party's
security interest in such Patent or Trademark and the General Intangibles,
including, without limitation, in the case of Trademarks, the goodwill of such
Borrower, relating thereto or represented thereby.
(iii) Each Borrower will take all necessary actions
to prosecute vigorously each application and to attempt to obtain the broadest
Patent or registration of a Trademark therefrom and to maintain each Patent and
Trademark registration which is material to the conduct of such Borrower's
business, including, without limitation, with respect to Patents, payments of
required maintenance fees, and, with respect to Trademarks, filing of
applications for renewal, affidavits of use and affidavits of incontestability.
In the event that any Borrower fails to take any of such actions, Secured Party
may do so in such Borrower's name or in Secured Party's name and all reasonable
expenses incurred by Secured Party in connection therewith shall be paid by
Borrowers in accordance with Section 9 hereof.
(iv) Each Borrower shall use its best efforts to
detect infringers of the Patents and Trademarks. In the event that any of the
Patents or Trademarks is infringed, misappropriated or diluted by a third
party, Borrower shall notify Secured Party promptly after it learns thereof and
shall, if such Patents or Trademarks is material to the conduct of such
Borrower's business, promptly take appropriate action to protect such Patents
or Trademarks. In the event that any Borrower fails to take any such actions
Secured Party may do so in such Borrower's name or Secured Party's name and all
expenses incurred by Secured Party in connection therewith shall be paid by
Borrower in accordance with Section 9 hereof.
7. Reporting and Recordkeeping. Each Borrower covenants and
agrees with Secured Party that from and after the date of this Security
Agreement and until the Secured Obligations have been fully satisfied and the
Loan Documents have been terminated:
(a) Maintenance of Records Generally. Each Borrower will
keep and maintain at its own cost and expense satisfactory and complete records
of the Collateral, including, without limitation, a record of all payments
received and all credits granted with respect to the Collateral and all other
dealings with the Collateral. Each Borrower will mark its books and records
pertaining to the Collateral to evidence this Security Agreement and the
security interests granted hereby. If requested by Secured Party, all Chattel
Paper will be marked with the following legend: "This writing and the
obligations evidenced or secured hereby are subject to the security interest of
Bank
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<PAGE> 14
of America, FSB, as Agent." If requested by Secured Party, the security
interest of Secured Party shall be noted on the certificate of title of each
vehicle. For Secured Party's further security, each Borrower agrees that
Secured Party and Secured Party shall have a special property interest in all
of such Borrower's books and records pertaining to the Collateral and, upon the
occurrence and during the continuation of any event of default, each Borrower
shall deliver and turn over any such books and records to Secured Party or to
its representatives at any time on demand of Secured Party. Prior to the
occurrence of an Event of Default and upon reasonable notice from Secured
Party, each Borrower shall permit any representative of Secured Party to
inspect such books and records and will provide photocopies thereof to Secured
Party.
(b) Special Provisions Regarding Maintenance of Records.
(i) EMI, on behalf of Borrowers, shall deliver to
Secured Party the Borrowing Base Certificate and such other reports and
schedules with respect to the Accounts as shall be required by the Loan
Agreement, and upon the request of Secured Party, invoice registers and copies,
(or originals to the extent necessary or advisable for Secured Party to collect
on Accounts after the occurrence of an Event of Default), of all invoices,
shipping receipts, orders and other documents relating to the creation of the
Accounts listed on such certificates, reports and schedules. Borrower shall
keep complete and accurate records of its Accounts.
(ii) EMI shall maintain accurate, itemized records
itemizing and describing the kind, type, quantity and value of its Equipment
and shall furnish Secured Party with a current schedule containing the
foregoing information on an annual basis and more often if requested by Secured
Party.
(iii) EMI will promptly upon, but in no event later
than five (5) Business Days after its learning thereof, in addition to any
obligation to disclose such information or the Borrowing Base Certificate,
immediately inform Secured Party in writing in the event any Eligible Accounts
having an aggregate value equal to five percent (5%) or more of total Eligible
Accounts, become ineligible and of the reasons for such ineligibility.
(iv) Each Borrower will promptly notify Secured
Party in writing if any of the Accounts, the face value of which exceeds
$5,000, arises out of a contract with the United States of America, or any
department, agency, subdivision or instrumentality thereof (which shall make
such Account ineligible) and at any time will take any action required or
reasonably requested by Secured Party to give notice of Secured Party's
security interest in such Accounts under the provisions of the federal
Assignment of Claims Act or any comparable law or act enacted by any state or
local governmental authority; and
(v) Each Borrower at its expense will cause
certified independent public accountants satisfactory to Secured Party to
prepare and deliver to Secured Party at any time and from time to time promptly
upon Secured Party's request, the following reports: (A) a reconciliation of
all of its Accounts, (B) an aging of all of its Accounts, (C) trial balances,
and (D) a test
-14-
<PAGE> 15
verification of such Accounts as Secured Party may request. At Secured Party's
request, each Borrower at its expense will cause certified independent public
accountants satisfactory to Secured Party to prepare and deliver to Secured
Party the results of the annual physical verification of its Inventory made or
observed by such accountants.
(c) Further Identification of Collateral. Each Borrower
will if so requested by Secured Party furnish to Secured Party, as often as
Secured Party reasonably requests, statements and schedules further identifying
and describing the Collateral and such other reports in connection with the
Collateral as Secured Party may reasonably request, all in reasonable detail.
(d) Notices. In addition to the notices required by
Section 7(b) hereof, each Borrower will advise Secured Party promptly, in
reasonable detail, (i) of any lien, security interest, encumbrance or claim
made or asserted against any of the Collateral, (ii) of any material change in
the composition of the Collateral, and (iii) of the occurrence of any other
event which would have a material adverse effect on the aggregate value of the
Collateral or on the security interests created hereunder.
8. Secured Party's Appointment as Attorney-in-Fact. Each
Borrower hereby irrevocably constitutes and appoints Secured Party and any
officer or agent thereof, with full power of substitution, as its true and
lawful attorney-in-fact with full irrevocable power and authority in the place
and stead of such Borrower and in the name of such Borrower or in its own name,
from time to time in Secured Party's discretion, for the purpose of carrying
out the terms of this Security Agreement, to take any and all appropriate
action and to execute and deliver any and all documents and instruments which
may be necessary or desirable to accomplish the purposes of this Security
Agreement and, without limiting the generality of the foregoing, hereby gives
Secured Party the power and right, on behalf of such Borrower, without notice
to or assent by such Borrower to do the following:
(i) to ask, demand, collect, receive and give
acquittances and receipts for any and all moneys due and to become due under
any Collateral and, in the name of such Borrower or its own name or otherwise,
to take possession of and endorse and collect any checks, drafts, notes,
acceptances or other Instruments for the payment of moneys due under any
Collateral and to file any claim or to take any other action or proceeding in
any court of law or equity or otherwise deemed appropriate by Secured Party for
the purpose of collecting any and all such moneys due under any Collateral
whenever payable and to file any claim or to take any other action or
proceeding in any court of law or equity or otherwise deemed appropriate by
Secured Party for the purpose of collecting any and all such moneys due under
any Collateral whenever payable;
(ii) to pay or discharge taxes, liens, security
interests or other encumbrances levied or placed on or threatened against the
Collateral, to effect any repairs or any insurance called for by the terms of
this Security Agreement and to pay all or any part of the premiums therefor and
the costs thereof; and
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<PAGE> 16
(iii) (A) to direct any party liable for any
payment under any of the Collateral to make payment of any and all moneys due,
and to become due thereunder, directly to Secured Party or as Secured Party
shall direct; (B) to receive payment of and receipt for any and all moneys,
claims and other amounts due, and to become due at any time, in respect of or
arising out of any Collateral; (C) to sign and endorse any invoices, freight or
express bills, bills of lading, storage or warehouse receipts, drafts against
debtors, assignments, verifications and notices in connection with accounts and
other Documents constituting or relating to the Collateral; (D) to commence
and prosecute any suits, actions or proceedings at law or in equity in any
court of competent jurisdiction to collect the Collateral or any part thereof
and to enforce any other right in respect of any Collateral; (E) to defend any
suit, action or proceeding brought against any Borrower with respect to any
Collateral; (F) to settle, compromise or adjust any suit, action or proceeding
described above and, in connection therewith, to give such discharges or
releases as Secured Party may deem appropriate; (G) to license or, to the
extent permitted by an applicable license, sublicense, whether general, special
or otherwise, and whether on an exclusive or non-exclusive basis, any Patent or
Trademark, throughout the world for such term or terms, on such conditions, and
in such manner, as Secured Party shall in its sole discretion determine; and
(H) generally, to sell, transfer, pledge, make any agreement with respect to or
otherwise deal with any of the Collateral as fully and completely as though
Secured Party were the absolute owner thereof for all purposes, and to do, at
Secured Party's option and Borrowers' expense, at any time, or from time to
time, all acts and things which Secured Party reasonably deems necessary to
protect, preserve or realize upon the Collateral and Secured Party's lien
therein, in order to effect the intent of this Security Agreement, all as fully
and effectively as any Borrower might do.
(a) Secured Party agrees that, except upon the occurrence
and during the continuation of an Event of Default, it will not exercise the
power of attorney or any rights granted to Secured Party pursuant to this
Section 8 except for the rights granted under clause (ii) above, provided that
the foregoing shall not limit Secured Party's rights under the power of
attorney granted in Section 5(a) hereof. Each Borrower hereby ratifies, to the
extent permitted by law, all that said attorneys shall lawfully do or cause to
be done by virtue hereof. The power of attorney granted pursuant to this
Section is a power coupled with an interest and shall be irrevocable until the
Secured Obligations are indefeasibly paid in full and the Loan Documents have
been terminated.
(b) The powers conferred on Secured Party hereunder are
solely to protect Secured Party's interests in the Collateral and shall not
impose any duty upon it to exercise any such powers. Secured Party shall be
accountable only for amounts that it actually receives as a result of the
exercise of such powers and neither it nor any of its officers, directors,
employees or agents shall be responsible to Borrowers for any act or failure to
act, except for its own gross negligence or willful misconduct.
(c) Each Borrower also authorizes Secured Party, at any
time and from time to time upon the occurrence and during the continuation of
any Event of Default, (i) to communicate in its own name with any party to any
Contract with regard to the assignment of the right, title and interest of
Borrower in and under the Contracts hereunder and other matters relating
thereto and
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<PAGE> 17
(ii) to execute, in connection with the sale provided for in Section 10 hereof,
any endorsements, assignments or other instruments of conveyance or transfer
with respect to the Collateral.
9. Performance by Secured Party of a Borrower's Obligations. If
any Borrower fails to perform or comply with any of its agreements contained
herein and Secured Party, as provided for by the terms of this Security
Agreement, shall (after giving any notices thereof to Borrower which are
required under the Loan Agreement) itself perform or comply, or otherwise cause
performance or compliance, with such agreement, the reasonable expenses of
Secured Party incurred in connection with such performance or compliance,
together with interest thereon at the highest contract rate then applicable to
advances under Facility No. 1 shall be payable by Borrowers to Secured Party on
demand and shall constitute Secured Obligations secured hereby.
10. Remedies and Rights Upon Default. (a) If an Event of Default
shall occur and be continuing, Secured Party may exercise in addition to all
other rights and remedies granted to it in this Security Agreement and in any
other instrument or agreement securing, evidencing or relating to the Secured
Obligations, all rights and remedies of a secured party under the UCC. Without
limiting the generality of the foregoing, each Borrower expressly agrees that
in any such event Secured Party, without demand of performance or other demand,
advertisement or notice of any kind (except the notice specified below of time
and place of public or private sale) to or upon Borrower or any other person
(all and each of which demands, advertisements and/or notices are hereby
expressly waived to the maximum extent permitted by the UCC and other
applicable law), may forthwith collect, receive, appropriate and realize upon
the Collateral, or any part thereof, and/or may forthwith sell, lease, assign,
give an option or options to purchase, or sell or otherwise dispose of and
deliver said Collateral (or contract to do so), or any part thereof, in one or
more parcels at public or private sale or sales, at any exchange or broker's
board or at any of Secured Party's offices or elsewhere at such prices as it
may deem best, for cash or on credit or for future delivery without assumption
of any credit risk. Secured Party shall have the right upon any such public
sale or sales, and, to the extent permitted by law, upon any such private sale
or sales, to purchase the whole or any part of said Collateral so sold, free of
any right or equity of redemption, which equity of redemption each Borrower
hereby releases. Each Borrower further agrees, at Secured Party's request, to
assemble the Collateral and make it available to Secured Party at places which
Secured Party shall reasonably select, whether at a Borrower's premises or
elsewhere. Secured Party shall apply the net proceeds of any such collection,
recovery, receipt, appropriation, realization or sale, as provided in Section
10(d) hereof, Borrowers remaining liable for any deficiency remaining unpaid
after such application, and only after so paying over such net proceeds and
after the payment by Secured Party of any other amount required by any
provision of law, including Section 9-504(1)(c) of the UCC, need Secured Party
account for the surplus, if any, to Borrowers. To the maximum extent permitted
by applicable law, each Borrower waives all claims, damages, and demands
against Secured Party arising out of the repossession, retention or sale of the
Collateral except such as arise out of the gross negligence or wilful
misconduct of Secured Party. Each Borrower agrees that Secured Party need not
give more than ten (10) days' notice (which notification shall be deemed given
when mailed or delivered on an overnight basis, postage prepaid, addressed to
each Borrower at its address referred to in Section 14 hereof) of the time and
place of any public sale or of the time after which
-17-
<PAGE> 18
a private sale may take place and that such notice is reasonable notification
of such matters. Each Borrower shall remain liable for any deficiency if the
proceeds of any sale or disposition of the Collateral are insufficient to pay
all amounts to which Secured Party is entitled, each Borrower also being liable
for the reasonable fees actually incurred of any attorneys to collect such
deficiency.
(b) Each Borrower also agrees to pay all costs of Secured
Party, including, without limitation, reasonable attorneys' fees, incurred in
connection with the enforcement of any of its rights and remedies hereunder.
(c) Each Borrower hereby waives presentment, demand,
protest or any notice (to the maximum extent permitted by applicable law) of
any kind in connection with this Security Agreement or any Collateral, except
for any notices which are expressly required to be given under the Loan
Agreement or hereunder.
(d) The Proceeds of any sale, disposition or other
realization upon all or any part of the Collateral shall be distributed by
Secured Party in the following order of priorities:
first, to Secured Party in an amount sufficient to
pay in full the reasonable expenses of Secured Party in connection with such
sale, disposition or other realization, including all expenses, liabilities and
advances incurred or made by Secured Party in connection therewith, including,
without limitation, reasonable attorney's fees (it being understood that, as
used herein, "attorney's fees" includes the allocated costs of the Secured
Party's in-house counsel);
second, to the Bank and each Issuer in an amount
equal to the then unpaid amount of the Secured Obligations, in such manner and
order as they may elect, and if such Proceeds shall be insufficient to pay in
full such amount, then to the Bank and each Issuer ratably in accordance with
the then unpaid amounts thereof owing to them; and
finally, upon full payment and satisfaction of all of
the Secured Obligations, to pay to Borrowers or as a court of competent
jurisdiction otherwise may direct, any surplus then remaining from such
Proceeds.
11. Grant of License to Use Patent and Trademark Collateral. For
the purpose of enabling Secured Party to exercise rights and remedies under
Section 10 hereof at such time as Secured Party, without regard to this Section
11, shall be lawfully entitled to exercise such rights and remedies, each
Borrower hereby grants to Secured Party an irrevocable, non-exclusive license
(exercisable without payment of royalty or other compensation to any Borrower)
to use, license or sublicense any Patent or Trademark, now owned or hereafter
acquired by any Borrower, and wherever the same may be located, and including,
without limitation, in such license reasonable access to all media in which any
of the licensed items may be recorded or stored and to all computer and
automatic machinery software and programs used for the compilation or printout
thereof.
-18-
<PAGE> 19
12. Limitation on Secured Party's Duty in Respect of Collateral.
Secured Party shall not have any duty as to any Collateral in its possession or
control or in the possession or control of any agent or nominee of it or any
income thereon or as to the preservation of rights against prior parties or any
other rights pertaining thereto, except that Secured Party shall use reasonable
care with respect to the Collateral in its possession or under its control.
Upon request of Borrowers, Secured Party shall account for any moneys received
by it in respect of any foreclosure on or disposition of the Collateral.
13. Term of Agreement; Reinstatement. This Agreement and the
security interests granted hereunder shall remain in full force and effect
until all Secured Obligations have been fully paid and satisfied and all Loan
Documents have been terminated (except for any obligations designated under any
Loan Document as continuing on an unsecured basis). Further this Agreement
shall remain in full force and effect and continue to be effective should any
petition be filed by or against any Borrower for liquidation or reorganization,
should any Borrower become insolvent or make an assignment for the benefit of
creditors or should a receiver or trustee be appointed for all or any
significant part of any Borrower's assets, and shall continue to be effective
or be reinstated, as the case may be, if at any time payment and performance of
the Secured Obligations, or any part thereof, is, pursuant to applicable law,
rescinded or reduced in amount, or must otherwise be restored or returned by
any obligee of the Secured Obligations, whether as a "voidable preference",
"fraudulent conveyance", or otherwise, all as though such payment or
performance had not been made. In the event that any payment, or any part
thereof, is rescinded, reduced, restored or returned, the Secured Obligations
shall be reinstated and deemed reduced only by such amount paid and not so
rescinded, reduced, restored or returned.
14. Notices. Except as otherwise provided herein, whenever it is
provided herein that any notice, demand, request, consent, approval,
declaration or other communication shall or may be given to or served upon any
of the parties by any other party, or whenever any of the parties desires to
give or serve upon any other party any other communication with respect to
this Security Agreement, each such notice, demand, request, consent, approval,
declaration or other communication shall be in writing and shall be delivered
in the manner and to the addresses set forth in the Loan Agreement.
15. Severability. Any provision of this Security Agreement which
is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate
or render unenforceable such provision in any other jurisdiction.
16. No Waiver; Cumulative Remedies. Secured Party shall not by
any act, delay, omission or otherwise be deemed to have waived any of its
rights or remedies hereunder, and no waiver shall be valid unless in writing,
signed by Secured Party, and then only to the extent therein set forth. A
waiver by Secured Party of any right or remedy hereunder on any one occasion
shall not be construed as a bar to any right or remedy which Secured Party
would otherwise have had on any
-19-
<PAGE> 20
future occasion. No failure to exercise nor any delay in exercising on the
part of Secured Party, any right, power or privilege hereunder, shall operate
as a waiver thereof, nor shall any single or partial exercise of any right,
power or privilege hereunder preclude any other or future exercise thereof or
the exercise of any other right, power or privilege. The rights and remedies
hereunder provided are cumulative and may be exercised singly or concurrently,
and are not exclusive of any rights and remedies provided by law. None of the
terms or provisions of this Security Agreement may be waived, altered, modified
or amended except by an instrument in writing, duly executed by Secured Party
and, where applicable, by Borrowers.
17. Successor and Assigns; Governing Law.
(a) This Security Agreement and all obligations of
Borrowers hereunder shall be binding upon the successors and assigns of each
Borrower, and shall, together with the rights and remedies of Secured Party
hereunder, inure to the benefit of Bank, the Issuers and the Secured Party and
their respective successors and assigns. No sales of participations, other
sales, assignments, transfers or other dispositions of any agreement governing
or instrument evidencing the Secured Obligations or any portion thereof or
interest therein shall in any manner affect the security interest granted to
Secured Party hereunder.
(b) THIS SECURITY AGREEMENT SHALL BE GOVERNED BY, AND BE
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF GEORGIA,
WITHOUT REGARD TO THE PROVISIONS THEREOF REGARDING CONFLICTS OF LAWS.
18. Use and Protection of Patent and Trademark Collateral.
Notwithstanding anything to the contrary contained herein, unless an Event of
Default has occurred and is continuing, Secured Party shall from time to time
execute and deliver, upon the written request of Borrowers, any and all
instruments, certificates or other documents, in the form so requested,
necessary or appropriate in the judgment of a Borrower to permit such Borrower
to continue to exploit, license, use, enjoy and protect the Patents and
Trademarks.
19. Further Indemnification. Each Borrower agrees to pay, and to
save Secured Party harmless from, any and all liabilities with respect to, or
resulting from any delay in paying, any and all excise, sales or other similar
taxes which may be payable or determined to be payable with respect to any of
the Collateral or in connection with any of the transactions contemplated by
this Security Agreement.
-20-
<PAGE> 21
IN WITNESS WHEREOF, Borrowers have caused this Security
Agreement to be executed and delivered by their duly authorized officers, under
seal, as of the date first set forth above.
"EMI"
EDUCATIONAL MEDICAL, INC., a Delaware
corporation
By: /s/ Vince Pisano
-----------------------------------
Name: Vince Pisano
Title: Vice President and
Chief Financial Officer
Attest: /s/ Morris C. Brown
-------------------------------
Name: Morris C. Brown
Title: Secretary
[SEAL]
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<PAGE> 22
"SUBSIDIARIES"
ANDON COLLEGES, INC., a California
corporation
By: /s/ Vince Pisano
--------------------------------------
Name: Vince Pisano
Title: Vice President and
Chief Financial Officer
Attest: /s/ Morris C. Brown
----------------------------------
Name: Morris C. Brown
Title: Secretary
[SEAL]
CALIFORNIA ACADEMY OF
MERCHANDISING, ART AND DESIGN, INC., a
Delaware corporation
By: /s/ Vince Pisano
--------------------------------------
Name: Vince Pisano
Title: Vice President and
Chief Financial Officer
Attest: /s/ Morris C. Brown
----------------------------------
Name: Morris C. Brown
Title: Secretary
[SEAL]
-22-
<PAGE> 23
DBS ACQUISITION CORP., a Virginia
corporation
By: /s/ Vince Pisano
-----------------------------------
Name: Vince Pisano
Title: Vice President and
Chief Financial Officer
Attest: /s/ Morris C. Brown
-------------------------------
Name: Morris C. Brown
Title: Secretary
[SEAL]
DEST EDUCATION CORPORATION, a
California corporation
By: /s/ Vince Pisano
-----------------------------------
Name: Vince Pisano
Title: Vice President and
Chief Financial Officer
Attest: /s/ Morris C. Brown
-------------------------------
Name: Morris C. Brown
Title: Secretary
[SEAL]
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<PAGE> 24
ICM ACQUISITION CORP., a Delaware
corporation
By: /s/ Vince Pisano
-------------------------------------
Name: Vince Pisano
Title: Vice President and
Chief Financial Officer
Attest: /s/ Morris C. Brown
---------------------------------
Name: Morris C. Brown
Title: Secretary
[SEAL]
HBC ACQUISITION CORP., a Delaware
corporation
By: /s/ Vince Pisano
-------------------------------------
Name: Vince Pisano
Title: Vice President and
Chief Financial Officer
Attest: /s/ Morris C. Brown
---------------------------------
Name: Morris C. Brown
Title: Secretary
[SEAL]
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<PAGE> 25
MARIC LEARNING SYSTEMS, a California
corporation
By: /s/ Vince Pisano
------------------------------------
Name: Vince Pisano
Title: Vice President and
Chief Financial Officer
Attest: /s/ Morris C. Brown
--------------------------------
Name: Morris C. Brown
Title: Secretary
[SEAL]
MTSX ACQUISITION CORP., a Delaware
corporation
By: /s/ Vince Pisano
------------------------------------
Name: Vince Pisano
Title: Vice President and
Chief Financial Officer
Attest: /s/ Morris C. Brown
--------------------------------
Name: Morris C. Brown
Title: Secretary
[SEAL]
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<PAGE> 26
OIOPT ACQUISITION CORP., a Delaware
corporation
By: /s/ Vince Pisano
----------------------------------
Name: Vince Pisano
Title: Vice President and
Chief Financial Officer
Attest: /s/ Morris C. Brown
------------------------------
Name: Morris C. Brown
Title: Secretary
[SEAL]
PALO VISTA COLLEGE OF NURSING AND ALL
IED HEALTH SCIENCES, INC., a
California corporation
By: /s/ Vince Pisano
----------------------------------
Name: Vince Pisano
Title: Vice President and
Chief Financial Officer
Attest: /s/ Morris C. Brown
------------------------------
Name: Morris C. Brown
Title: Secretary
[SEAL]
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<PAGE> 27
SACMD ACQUISITION CORP., a Delaware
corporation
By: /s/ Vince Pisano
-----------------------------------
Name: Vince Pisano
Title: Vice President and
Chief Financial Officer
Attest: /s/ Morris C. Brown
-------------------------------
Name: Morris C. Brown
Title: Secretary
[SEAL]
SCOTTSDALE EDUCATIONAL CENTER FOR
ALLIED HEALTH CAREERS, INCORPORATED,
an Arizona corporation
By: /s/ Vince Pisano
-----------------------------------
Name: Vince Pisano
Title: Vice President and
Chief Financial Officer
Attest: /s/ Morris C. Brown
-------------------------------
Name: Morris C. Brown
Title: Secretary
[SEAL]
Accepted and Acknowledged by:
BANK OF AMERICA, FSB
By: ______________________________
Name:_____________________________
Title:____________________________
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<PAGE> 28
SCHEDULE I
FILINGS
JURISDICTION FILING OFFICES
------------ --------------
1. Educational Medical, Inc.
(a) Secretary of State of Arizona
(b) Secretary of State of California
(c) Secretary of State of Florida
(d) Fulton County, Georgia
(e) Department of Assessments and Taxation of Maryland
(f) Secretary of State of Ohio
(g) Montgomery County, Ohio
(h) Secretary of Commonwealth of Pennsylvania
(i) Allegheny County, Pennsylvania
(j) Secretary of State of Texas
(k) Secretary of State of Virginia
(l) Rockingham County, Virginia
(m) City of Roanoke, Virginia
(n) City of Stauntan, Virginia
2. Bauder College (trade name of Educational Medical, Inc.)
(a) Fulton County, Georgia (included in 1(d) above)
3. Andon Colleges, Inc. (subsidiary)
(a) Secretary of State of California
(b) Fulton County, Georgia
4. Andon College (trade name of Andon Colleges, Inc.)
(a) Secretary of State of California (included in 3(a) above)
(b) Fulton County, Georgia (included in 3(b) above)
5. Andon College at Modesto (trade name of Andon Colleges, Inc.)
(a) Secretary of State of California (included in 3(a) above)
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<PAGE> 29
(b) Fulton County, Georgia (included in 3(b) above)
6. California Academy of Merchandising, Art and
Design, Inc. (subsidiary)
(a) Secretary of State of California
(b) Fulton County, Georgia
7. California Academy of Fashion Merchandising,
Art and Design (trade name of California Academy of
Merchandising, Art and Design, Inc.)
(a) Secretary of State of California (included in 6(a) above)
(b) Fulton County, Georgia (included in 6(b) above)
8. DBS Acquisition Corp. (subsidiary)
(a) Fulton County, Georgia
(b) Secretary of State of Virginia
(c) Rockingham County, Virginia
(d) City of Roanoke, Virginia
(e) City of Staunton, Virginia
9. Dominion Business School (a trade name of DBS Acquisition
Corp.)
(a) Fulton County, Georgia (included in 8(a) above)
(b) Secretary of State of Virginia
(c) Rockingham County, Virginia
(d) City of Roanoke, Virginia
(e) City of Staunton, Virginia
10. DEST Education Corporation (subsidiary)
(a) Secretary of State of California
(b) Fulton County, Georgia
11. Andon College (trade name of DEST Education Corporation)
(a) Secretary of State of California (included in 10(a) above)
(b) Fulton County, Georgia (included in 10(b) above)
12. Andon College at Stockton (trade name of DEST Education
Corporation)
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<PAGE> 30
(a) Secretary of State of California (included in 10(a) above)
(b) Fulton County, Georgia (included in 10(b) above)
13. HBC Acquisition Corp. (subsidiary)
(a) Fulton County, Georgia
(b) Secretary of State of Maryland
14. Hagerstown Business College (trade name of HBC Acquisition
Corp.)
(a) Fulton County, Georgia (included in 13(a) above)
(b) Secretary of State of Maryland
15. ICM Acquisition Corp. (subsidiary)
(a) Fulton County, Georgia
(b) Secretary of Commonwealth of Pennsylvania
(c) Allegheny County, Pennsylvania
16. ICM School of Business (a trade name of ICM Acquisition Corp)
(a) Fulton County, Georgia (included in 15(a) above)
(b) Secretary of Commonwealth of Pennsylvania
(c) Allegheny County, Pennsylvania
17. Maric Learning Systems (subsidiary)
(a) Secretary of State of California
(b) Fulton County, Georgia
18. Maric College of Medical Careers (a trade name of Maric
Learning Systems)
(a) Secretary of State of California (included in 17(a) above)
(b) Fulton County, Georgia (included in 17(b) above)
19. MTSX Acquisition Corp. (subsidiary)
(a) Secretary of State of California
(b) Fulton County, Georgia
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<PAGE> 31
20. Modern Technology School of X-Ray (a trade name of MTSX
Acquisition Corp.)
(a) Secretary of State of California (included in 19(a) above)
(b) Fulton County, Georgia (included in 19(b) above)
21. OIOPT Acquisition Corp. (subsidiary)
(a) Fulton County, Georgia
(b) Secretary of State of Ohio
(c) Montgomery County, Ohio
22. Ohio Institute of Photography and Technology (d/b/a)
(a) Fulton County, Georgia (included in 21(a) above)
(b) Secretary of State of Ohio
(c) Montgomery County, Ohio
23. Palo Vista College of Nursing and Allied Health Sciences, Inc.
(subsidiary)
(a) Secretary of State of California
(b) Fulton County, Georgia
24. Maric College of Medical Careers (a trade name of Palo Vista
College of Nursing and Allied Health Sciences, Inc.)
(a) Secretary of State of California (included in 23(a) above)
(b) Fulton County, Georgia (included in 23(b) above)
25. SACMD Acquisition Corp. (subsidiary)
(a) Fulton County, Georgia
(b) Secretary of State of Texas
26. Career Centers of Texas (a trade name of SACMD Acquisition
Corp.)
(a) Fulton County, Georgia (included in 25(a) above)
(b) Secretary of State of Texas (included in 25(b) above)
27. San Antonio College of Medical and Dental Assistants
-31-
<PAGE> 32
(a trade name of SACMD Acquisition Corp.)
(a) Fulton County, Georgia (included in 25(a) above)
(b) Secretary of State of Texas
28. Scottsdale Educational Center for Allied Health Careers, Inc.
(subsidiary)
(a) Secretary of State of Arizona
(b) Fulton County, Georgia
29. Long Medical Institute (a trade name of Scottsdale Center
for Allied Health Careers, Inc.)
(a) Secretary of State of Arizona
(b) Fulton County, Georgia (included in 28(b) above)
-32-
<PAGE> 33
SCHEDULE II
LOCATION OF RECORDS AND CERTAIN COLLATERAL
1. Principal Place of Business
and Chief Executive Office:
Ownership Status:
2. Other Collateral Location
-33-
<PAGE> 1
EXHIBIT 11.1
EDUCATIONAL MEDICAL, INC.
COMPUTATION OF PRO-FORMA NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------
1995 1996 1997
------------- ------------- --------------
<S> <C> <C> <C>
Primary:
Weighted average common stock and common stock
equivalents outstanding during the period (1) 2,371,115 2,462,040 4,695,468
Convertible Preferred Stock converted into Common
Stock upon consummation of initial public
offering(2) - 1,705,082 981,006
Exercise of common stock purchase warrants upon
consummation of initial public offering(2) - 870,642 658,865
Effect of Common Stock equivalents issued subsequent
to August 7, 1995 computed in accordance with the
treasury stock method as required by the SEC(3) 112,000 112,000 112,000
------------ ------------- -------------
TOTAL 2,483,115 5,149,764 6,447,339
============ ============= =============
Pro forma income (loss) before extraordinary item $ (513,430) $ 672,488 $2,612,329
Extraordinary item, net of income taxes - - 308,683
------------ ------------- -------------
Pro forma net income (loss) $ (513,430) $ 672,488 $2,303,646
============ ============= =============
Per share of common stock:
Pro forma income (loss) before extraordinary item $ (0.21) $ 0.13 $ 0.41
Extraordinary item, net of income taxes - - (0.05)
------------ ------------- -------------
Pro forma net income (loss) $ (0.21) $ 0.13 $ 0.36
============ ============= =============
Fully Diluted:
Weighted average common stock and common stock
equivalents outstanding during the period(1) 2,371,115 2,524,715 4,695,468
Convertible Preferred Stock converted into Common
Stock upon consummation of initial public
offering(2) - 1,705,082 981,006
Exercise of common stock purchase warrants upon
consummation of initial public offering(2) - 1,074,915 658,865
Effect of Common Stock equivalents issued subsequent
to August 7, 1995 computed in accordance with the
treasury stock method as required by the SEC(3) 112,000 112,000 112,000
------------ ------------- -------------
TOTAL 2,483,115 5,416,712 6,447,339
============ ============= =============
Pro forma income (loss) before extraordinary item $ (513,430) $ 672,488 $2,612,329
Extraordinary item, net of income taxes - - 308,683
------------ ------------- -------------
Pro forma net income (loss) $ (513,430) $ 672,488 $2,303,646
============ ============= =============
Per share of common stock:
Pro forma income (loss) before extraordinary item $ (0.21) $ 0.12 $ 0.41
Extraordinary item, net of income taxes - - (0.05)
------------ ------------- -------------
Pro forma income (loss) $ (0.21) $ 0.12 0.36
============ ============= =============
</TABLE>
<PAGE> 2
EXHIBIT 11.1 continued
(1) Weighted average common stock outstanding during fiscal 1995 excludes all
common stock equivalents as such equivalents are antidilutive during the
period.
(2) Pro forma income (loss) per share reflects preferred stock automatically
converted into Common Stock and warrants which were exercised upon
consummation of the initial public offering as if such conversion and
exercises had occurred at the beginning of fiscal 1995. Subsequent to the
Offering, such shares were included in weighted average common stock and
common stock equivalents outstanding during the period.
(3) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, Common Stock equivalents issued at prices below the initial public
offering price per share ("cheap stock") during the twelve month period
immediately preceding the initial filing date of the Company's
Registration Statement for its initial public offering have been included
as outstanding for all periods presented prior to the initial public
offering.
<PAGE> 1
EXHIBIT 11.2
EDUCATIONAL MEDICAL, INC.
COMPUTATION OF HISTORICAL NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------
1995 1996 1997
------------- ------------- ---------------
<S> <C> <C> <C>
Primary and Fully Diluted:
Weighted average common stock and common stock
equivalents outstanding during the period (1) 2,371,115 2,462,040 4,695,468
Convertible Preferred Stock converted into Common Stock
upon consummation of initial public offering - 1,705,082 981,006
Exercise of common stock purchase warrants upon
consummation of initial public offering - 870,642 658,865
Effect of Common Stock equivalents issued subsequent to
August 7, 1995 computed in accordance with the
treasury stock method as required by the SEC(2) 112,000 112,000 112,000
------------ ------------- --------------
TOTAL 2,483,115 5,149,764 6,447,339
============ ============= ==============
Historical income (loss) before extraordinary item $ (443,779) $ 526,808 $3,866,643
Extraordinary item, net of income taxes - - 308,683
------------ ------------- --------------
Historical net income (loss) $ (443,779) $ 526,808 $3,557,960
============ ============= ==============
Historical income (loss)
before extraordinary item $ (0.18) $ 0.10 $ 0.60
Extraordinary item, net of income taxes, per share - - (0.05)
------------ ------------- --------------
Historical net income (loss) per share $ (0.18) $ 0.10 $ .55
============ ============= ==============
</TABLE>
(1) Common stock equivalents were antidilutive in 1995, therefore, they were
not included in the computation of weighted average shares outstanding for
such period. Cheap stock is included as outstanding for all periods even
though the effect is to reduce loss per share in 1995.
(2) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, Common Stock equivalents issued at prices below the initial public
offering price per share ("cheap stock") during the twelve month period
immediately preceding the initial filing date of the Company's
Registration Statement for its initial public offering have been included
as outstanding for all periods presented.
<PAGE> 1
EXHIBIT 11.3
EDUCATIONAL MEDICAL, INC.
COMPUTATION OF HISTORICAL SUPPLEMENTAL NET INCOME PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31, 1997
--------------
<S> <C>
Primary and fully diluted:
Weighted average common stock and common stock equivalents outstanding
during the period(3) 5,175,468
Convertible Preferred Stock converted into Common Stock upon
consummation of initial public offering(1) 981,006
Exercise of common stock purchase warrants upon consummation of initial
public offering(1) 658,865
Effect of Common Stock equivalents issued subsequent to August 7, 1995
computed in accordance with the treasury stock method as required by
the SEC(2) 112,000
----------
TOTAL 6,927,339
==========
Net income before extraordinary item $3,866,643
Plus: Reduction in interest expense from repayment of long-term notes
payable net of income taxes 231,801
----------
Supplemental income before extraordinary items 4,098,444
Extraordinary item, net of income taxes 308,683
----------
Supplemental net income $3,789,761
==========
Supplemental income per share of common stock before extraordinary item $ .59
Extraordinary item net of income taxes, per share (0.04)
----------
Supplemental net income per share(3) $ 0.55
==========
</TABLE>
(1) Pro forma historical net income per share reflects preferred stock
automatically converted into Common Stock and warrants which were
exercised upon consummation of the initial public offering as if such
conversion and exercises had occurred at the beginning of fiscal 1997.
(2) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, Common Stock equivalents issued at prices below the initial public
offering price per share ("cheap stock") during the twelve month period
immediately preceding the initial filing date of the Company's
Registration Statement for its initial public offering have been included
as outstanding for all periods presented.
(3) Historical supplemental net income per share reflects the number of
shares of Common Stock issued upon consummation of the initial public
offering used to repay $4.8 million in current and long-term debt as if
such issuance had occurred at the beginning of fiscal 1997, the period of
the initial public offering and the related reduction in interest expense.
<PAGE> 1
EXHIBIT 21
LIST OF REGISTRANT'S SUBSIDIARIES
Parent Corporation: Educational Medical, Inc.
1. Andon Colleges, Inc. d/b/a/ Andon College, Andon College at Modesto
2. California Academy of Merchandising, Art and Design, Inc. f/k/a CAMAD
Acquisition Corp. d/b/a California Academy of Fashion Merchandising, Art
and Design
3. DBS Acquisition Corp. f/k/a A-DBS Acquisition Corp. d/b/a Dominion
Business School.
4. DEST Education Corporation d/b/a Andon College, Andon College at Stockton,
(DEST is 100% owned by Andon Colleges, Inc.)
5. HBC Acquisition Corp. d/b/a Hagerstown Business College
6. ICM Acquisition Corp. d/b/a ICM School of Business
7. Maric Learning Systems, Inc. d/b/a Maric College of Medical Careers
8. MTSX Acquisition Corp. d/b/a Modern Technology School of X-Ray
9. Nebraska Acquisition Corp. d/b/a (1) Lincoln School of Commerce and (2)
Nebraska School of Business
10. OIOPT Acquisition Corp. d/b/a Ohio Institute of Photography and Technology
11. Palo Vista College of Nursing and Allied Health Sciences, Inc. d/b/a Maric
College of Medical Careers
12. SACMD Acquisition Corp. d/b/a (1) Career Centers of Texas - El Paso and
(2) San Antonio College of Medical and Dental Assistants
13. Scottsdale Educational Center for Allied Health Careers, Inc. d/b/a Long
Medical Institute
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the inclusion of our report dated April 18, 1997 with respect to
the audited combined financial statements of Educational Management, Inc. and
Wikert and Rhude, general partnership, as of December 31, 1996 and 1995 and for
each of the three years in the period ended December 31, 1996 and our reports
dated May 16, 1997 with respect to the balance sheet of Nebraska College of
Business (a division of Nebraska Acquisition Corp., a wholly-owned subsidiary
of Educational Medical, Inc.) as of March 31, 1997 and the balance sheet of
Lincoln School of Commerce (a division of Nebraska Acquisition Corp., a
wholly-owned subsidiary of Educational Medical, Inc.) as of March 31, 1997 in
the Annual Report on Form 10-K for Educational Medical, Inc. for the year ended
March 31, 1997.
/s/ Winther, Stave & Co., LLP
Spencer, Iowa
June 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 14,047,889
<SECURITIES> 0
<RECEIVABLES> 6,161,446
<ALLOWANCES> 922,704
<INVENTORY> 0
<CURRENT-ASSETS> 21,799,988
<PP&E> 13,005,327
<DEPRECIATION> 5,387,369
<TOTAL-ASSETS> 42,072,534
<CURRENT-LIABILITIES> 11,314,441
<BONDS> 6,128,731
0
0
<COMMON> 74,181
<OTHER-SE> 28,125,887
<TOTAL-LIABILITY-AND-EQUITY> 42,072,534
<SALES> 49,449,680
<TOTAL-REVENUES> 49,449,680
<CGS> 43,483,781
<TOTAL-COSTS> 43,483,781
<OTHER-EXPENSES> 1,421,306
<LOSS-PROVISION> 1,239,151
<INTEREST-EXPENSE> 284,162
<INCOME-PRETAX> 3,021,280
<INCOME-TAX> (845,363)
<INCOME-CONTINUING> 3,866,643
<DISCONTINUED> 0
<EXTRAORDINARY> (308,683)
<CHANGES> 0
<NET-INCOME> 3,557,960
<EPS-PRIMARY> 0.36<F1>
<EPS-DILUTED> 0
<FN>
<F1>EPS - PRIMARY IS SHOWN ON A PRO-FORMA BASIS GIVING EFFECT TO A MAR-31-1997
POOLING OF INTERESTS.
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 99.1
INDEPENDENT AUDITORS REPORT
Board of Directors
Nebraska Acquisition Corp.,
a wholly-owned subsidiary of Educational Medical, Inc.
We have audited the accompanying balance sheet of Nebraska College of
Business (a division of Nebraska Acquisition Corp., a wholly-owned subsidiary
of Educational Medical, Inc.) as of March 31, 1997. This financial statement
is the responsibility of the Division's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in
all material respects, the financial position of Nebraska College of Business
(a division of Nebraska Acquisition Corp., a wholly-owned subsidiary of
Educational Medical, Inc.) as of March 31,1997 in conformity with generally
accepted accounting principles.
/s/ Winther, Stave & Co., LLP
Spencer, Iowa
May 16, 1997
<PAGE> 1
EXHIBIT 99.2
INDEPENDENT AUDITORS REPORT
Board of Directors
Nebraska Acquisition Corp.,
a wholly-owned subsidiary of Educational Medical, Inc.
We have audited the accompanying balance sheet of Lincoln School of
Commerce (a division of Nebraska Acquisition Corp., a wholly-owned subsidiary
of Educational Medical, Inc.) as of March 31, 1997. This financial statement
is the responsibility of the Division's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in
all material respects, the financial position of Lincoln School of Commerce (a
division of Nebraska Acquisition Corp., a wholly-owned subsidiary of
Educational Medical, Inc.) as of March 31,1997 in conformity with generally
accepted accounting principles.
/s/ Winther, Stave & Co., LLP
Spencer, Iowa
May 16, 1997
<PAGE> 1
EXHIBIT 99.3
INDEPENDENT AUDITORS REPORT
Board of Directors
Educational Management, Inc. and
Partners, Wikert and Rhude, General Partnership
We have audited the accompanying combined balance sheets of Educational
Management, Inc. and Wikert and Rhude, general partnership, (collectively, the
"Company") as of December 31, 1996 and 1995 and the related combined statements
of operations, owners' equity, and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the combined financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
combined financial statements presentation. We believe that our audit of the
combined financial statements provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the combined financial position of
Educational Management, Inc. and Wikert and Rhude, general partnership, as of
December 31, 1996 and 1995, and the results of their combined operations and
cash flows for each of the three years in the period ended December 31, 1996,
in conformity with generally accepted accounting principles.
/s/ Winther, Stave & Co., LLP
Spencer, Iowa
April 18, 1997
