<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 24, 1997
REGISTRATION NO: 333-33025
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
EDUCATIONAL MEDICAL, INC.
(Exact name of registrant as specified in charter)
<TABLE>
<S> <C> <C>
DELAWARE 8222 65-0038445
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
1327 NORTHMEADOW PARKWAY, SUITE 132
ROSWELL, GEORGIA 30076
(770) 475-9930
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
GARY D. KERBER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
1327 NORTHMEADOW PARKWAY, SUITE 132
ROSWELL, GEORGIA 30076
(770) 475-9930
(Names, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
MORRIS C. BROWN, ESQ.
GREENBERG TRAURIG HOFFMAN LIPOFF ROSEN & QUENTEL, P.A.
777 SOUTH FLAGLER DRIVE, SUITE 310-EAST TOWER
WEST PALM BEACH, FLORIDA 33401
(561) 650-7900
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
=======================================================================================================================
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) FEE(3)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01........... 723,379 $8.25 $5,967,877 1,808.45
=======================================================================================================================
</TABLE>
(1) All of the shares of common stock, par value $0.01 per share ("Common
Stock"), offered hereby are being sold by certain stockholders (the "Selling
Stockholders") of the Company. The Company will not receive any part of the
proceeds from the sale of the shares by the Selling Stockholders.
(2) Estimated solely for the purposes of calculating the registration fee.
(3) $1,589.24 of the Registration Fee was paid prior to initial filing of the
Form S-1. The remainder of $219.21 was paid prior to the filing of this
Amendment No. 1.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
EDUCATIONAL MEDICAL, INC.
Cross-reference sheet furnished pursuant to Item 501(b) of Registration S-K
showing location in the Prospectus of information required by Part I of Form
S-1.
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<CAPTION>
FORM S-1 ITEM LOCATION IN PROSPECTUS
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<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus........ Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.................................... Outside Front Cover Page; Inside Front, Cover
Page; Outside Back Cover Page
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges..................... Outside Front Cover Page; Prospectus Summary;
Risk Factors
4. Use of Proceeds................................. Use of Proceeds
5. Determination of Offering Price................. Outside Front Cover Page
6. Dilution........................................ Not Applicable
7. Selling Security Holders........................ Selling Stockholders
8. Plan of Distribution............................ Outside Front Cover Page; Inside Front Cover
Page
9. Description of Securities to be Registered...... Dividend Policy; Description of Capital Stock;
Shares Eligible for Future Sale
10. Interests of Named Experts and Counsel.......... Not Applicable
11. Information with Respect to the Registrant...... Prospectus Summary; Risk Factors; Dividend and
Other Operating Data; Selected Consolidated
Financial and Other Operating Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Financial Aid and
Regulation; Management; Principal and Selling
Stockholders; Description of Capital Stock;
Shares Eligible for Future Sale; Index to
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................... Not Applicable
</TABLE>
<PAGE> 3
SUBJECT TO COMPLETION, DATED SEPTEMBER 24, 1997
PROSPECTUS
723,379 SHARES
[EDUCATIONAL MEDICAL LOGO]
EDUCATIONAL MEDICAL, INC.
COMMON STOCK
------------------
All of the shares of common stock, par value $0.01 per share ("Common
Stock"), offered hereby (the "Offering") are being sold by certain stockholders
of the Company (the "Selling Stockholders"). All expenses of registration
incurred in connection herewith are being borne by the Company, but all selling
and other expenses, including, but not limited to, commissions, discounts and
other compensation paid to brokers or dealers in connection with the sale of the
Shares, incurred by the Selling Shareholders will be borne by the Selling
Shareholders. The Company will not receive any proceeds from the sale of the
Shares by the Selling Stockholders. See "Selling Stockholders" and "Use of
Proceeds."
The Common Stock of the Company has been traded on NASDAQ since October 28,
1996 under the symbol "EDMD." The last reported sale price of the Common Stock
on NASDAQ on September 18, 1997, was $8.25 per share. See "Price Range of Common
Stock and Dividends."
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FACTORS SET FORTH IN
"RISK FACTORS," BEGINNING ON PAGE 8.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=============================================================================================================
PRICE TO PROCEEDS TO PROCEEDS TO
PUBLIC COMPANY STOCKHOLDERS
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share......................... $8.25 $0.00 $5,967,877
- -------------------------------------------------------------------------------------------------------------
Total............................. $8.25 $0.00 $5,967,877
=============================================================================================================
</TABLE>
(1) Expenses, which are estimated at $131,276.03, are payable by the Company.
------------------
<PAGE> 4
AVAILABLE INFORMATION
The Company furnishes its stockholders annual reports containing audited
consolidated financial statements and quarterly reports containing unaudited
consolidated financial statements.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act of
1933, as amended (the "Securities Act"), of which this Prospectus is a part,
with respect to the Common Stock offered hereby. This Prospectus omits certain
information contained in the Registration Statement, and reference is made to
the Registration Statement for further information with respect to the Company
and the Common Stock offered hereby. Statements contained herein concerning the
provisions of documents are necessarily summaries of such documents and when any
such document is an exhibit to the Registration Statement, each such statement
is qualified in its entirety by reference to the copy of such document filed
with the Commission. Copies of the Registration Statement may be obtained upon
payment of the prescribed fees or examined without charge at the public
referenced facilities of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549.
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements, and other information with the
Commission. Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, and at the following Regional Offices of the Commission: Seven World
Trade Center, 13th Floor, New York, New York 10048 and Northwest Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies can also be
obtained at prescribed rates from the Public Reference Section of the Commission
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition,
such materials filed electronically by the Company with the Commission are
available at the Commission's World Wide Web Site at http://www.sec.gov.
The Common Stock is listed on The NASDAQ Stock Market. Reports, proxy
statements and other information concerning the Company can be inspected at the
offices of The NASDAQ Stock Market, Inc., 1735 K Street, N.W., Washington, D.C.
20006-1506.
REFERENCE DATA
Industry, market and market share information contained herein is based on
information appearing in publicly available reports. The Company has not
independently verified such information.
FORWARD-LOOKING INFORMATION
This Prospectus contains certain forward-looking statements that involve
substantial risks and uncertainties. When used in this Prospectus, the words
"anticipate," "believe," "estimate," "expect" and similar expressions as they
relate to the Company or its management are intended to identify such
forward-looking statements. Actual results, performance or achievements could
differ materially from the results expressed in, or implied by, these
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed in "Risk Factors."
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the consolidated
financial statements and notes thereto appearing elsewhere in this Prospectus.
Prospective investors should consider carefully the information set forth under
the heading "Risk Factors."
THE COMPANY
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.
The foregoing and all other information in this Prospectus 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.
As of March 31, 1997, the Company provided diversified career oriented
postsecondary education to approximately 6,000 students in 19 schools located in
nine states. The Company's 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). In July 1997, the
Company consolidated two of its schools, both of which were located in Vista,
California. 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.
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.
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.
3
<PAGE> 6
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:
THE IPO
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.
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, its bank credit facility, and seller financing in
connection with such acquisitions.
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 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.
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.
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 and
degree 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.
4
<PAGE> 7
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 NEBRASKA ACQUISITION
On March 31, 1997, the Company acquired two schools located in Nebraska
(the "Nebraska Schools") by merging 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"). A total of 95,000 shares were held in escrow
pending resolution of certain contingencies related to the acquisition and in
July 1997, 37,884 were returned to the Company, leaving 57,116 shares still held
in escrow which shares will become available for sale upon termination of the
escrow. 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 Company has filed a registration statement pursuant to the Securities
Act of 1933 (the "Act") with respect to the Merger Shares of which this
Preliminary Prospectus is a part. 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 (who are the
Selling Stockholders) to sell their shares in the public market. (See "Certain
Transactions.")
The Company operates the majority of its business through 13 subsidiaries.
The Company's principal executive offices are located at 1327 Northmeadow
Parkway, Suite 132, Roswell, Georgia 30076. Its telephone number is (770)
475-9930.
THE OFFERING
Common Stock offered by the Selling
Shareholders:..................... 723,379 shares
Common Stock to be outstanding after
the Offering(1):.................... 7,345,399 shares(1)
Use of proceeds:.................... The Company will not receive any of the
proceeds of the Offering.
Nasdaq National Market symbol:...... "EDMD"
Dividend Policy:.................... The Company has never declared or paid
any cash dividends. The Company intends
to retain any future earnings to
finance growth and developments, and
therefore does not anticipate paying
any cash dividends in the foreseeable
future.
- ---------------
(1) Excludes at June 30, 1997 up to (i) 961,666 shares reserved for issuance
under the Company's 1996 Stock Incentive Plan of which 746,499 have been
granted, (ii) 200,000 shares reserved for issuance under the Company's
Non-employee Director Stock Option Plan, of which 100,000 have been granted,
and (iii) 43,334 shares which may be purchased upon the exercise of
outstanding warrants to purchase Common Stock.
5
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL AND OTHER OPERATING DATA
The following table sets forth certain consolidated financial and other
operating data for the Company. This information should be read in conjunction
with the Consolidated Financial Statements and Notes thereto appearing elsewhere
in this Prospectus. All periods 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 and three months ended June 30, 1996 and 1997 reflect a conformed year-end
for the Nebraska Schools. The financial data set forth below for each of the
three years in the period ended March 31, 1997 and as of March 31, 1997 and
1996, have been derived from the audited Consolidated Financial Statements of
the Company included elsewhere in this Prospectus. The financial data for each
of the two years in the period ended March 31, 1994 and as of March 31, 1995,
1994, and 1993 have been derived from audited Consolidated Financial Statements
of the Company not included in this Prospectus. The information at June 30, 1997
and June 30, 1996 and for the three month periods then ended is unaudited, but
in the opinion of the Company reflects all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the results
of operations for such periods. These historical results are not necessarily
indicative of the results that may be expected in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
-------------------------------------------------------------- -------------------------
1993 1994 1995 1996 1997 1996 1997
---------- ---------- ---------- ---------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues......................... $ 25,139 $ 32,231 $ 37,080 $ 43,347 $ 49,450 $ 10,401 $ 12,909
School operating costs:
Cost of education and facilities... 10,359 14,944 17,488 19,651 23,151 5,243 6,370
Selling and promotional expenses... 3,470 4,985 6,216 6,534 7,531 1,670 1,976
General and administrative
expenses......................... 6,773 10,022 10,826 12,369 14,042 2,985 3,985
Amortization of goodwill and
intangibles........................ 1,071 1,235 1,255 883 886 176 313
Other expenses(1):
Merger costs....................... -- -- -- -- 391 -- --
Legal defense and settlement
costs............................ -- -- 600 1,115 -- -- --
Loss on closure or relocation of
schools.......................... -- 1,126 -- 50 144 -- --
Impairment of goodwill and
intangibles...................... -- -- 176 764 -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations........ 3,466 (81) 519 1,981 3,305 327 265
Interest (income) expense, net....... 572 809 935 822 284 211 (94)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes and
extraordinary item................. 2,894 (890) (416) 1,159 3,021 116 359
Provision for income taxes........... 749 (170) 28 632 (845) 44 146
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary
item............................... 2,145 (720) (444) 527 3,866 72 213
Extraordinary item................... -- -- -- -- 309 -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss).................... $ 2,145 $ (720) $ (444) $ 527 $ 3,557 $ 72 $ 213
========== ========== ========== ========== ========== ========== ==========
Pro forma income tax data:(2)
Income (loss) before income
taxes............................ $ 2,894 $ (890) $ (416) $ 1,159 $ 3,021 $ 116 --
Provision for income taxes......... 1,223 173 97 487 409 57 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary
item............................... 1,671 (1,063) (513) 672 2,612 59 --
Extraordinary item, net of income
taxes.............................. -- -- -- -- 309 -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Pro forma net income (loss).......... $ 1,671 $ (1,063) $ (513) $ 672 $ 2,303 $ 59 --
========== ========== ========== ========== ========== ========== ==========
Income (loss) per share before
extraordinary loss(2).............. $ 0.39 $ (0.43) $ (0.21) $ 0.13 $ 0.41 $ 0.01 $ 0.03
Net income (loss) per share(2)....... $ 0.39 $ (0.43) $ (0.21) $ 0.13 $ 0.36 $ 0.01 $ 0.03
Weighted average shares
outstanding(2)..................... 4,330,864 2,483,115 2,483,115 5,149,764 6,447,339 5,524,548 7,603,243
</TABLE>
6
<PAGE> 9
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
------------------------------------- ---------------------
1993 1994 1995 1996 1997 1996 1997
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<S> <C> <C> <C> <C> <C> <C> <C>
OTHER OPERATING DATA (3):
Number of schools at end of period.......................... 11 16 16 16 19 16 19
Number of students at end of period......................... 2,840 4,026 4,695 4,954 5,993 4,347 5,604
Number of new student starts during period.................. 4,581 5,504 6,297 6,706 7,358 1,242 1,693
Monthly withdrawal rate during period(4).................... 5.8% 4.8% 4.3% 4.1% 4.2% 4.6% 4.4%
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
----------------------------------------------- -----------------
1993 1994 1995 1996 1997 1996 1997
------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....... $ 7,061 $ 2,737 $ 2,733 $ 3,209 $14,048 $ 2,895 $ 9,158
Total current assets............ 9,918 7,364 8,125 8,375 21,800 7,632 17,771
Total assets.................... 19,246 21,047 21,867 20,986 42,073 20,442 37,817
Long term debt, including
current portion............... 4,756 7,688 8,974 7,755 6,129 7,364 2,599
Total liabilities............... 9,516 13,251 15,271 14,717 13,873 14,354 9,404
Total stockholders' equity...... 9,730 7,796 6,596 6,269 28,200 6,088 28,413
</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 (as defined under "Fiscal 1997 Acquisitions -- The Nebraska
Acquisition").
(2) Prior to March 31, 1997, the corporation which owned the Nebraska schools
and its predecessor were organized as a Subchapter S-Corporation and a
partnership, respectively, 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 merging entity 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. Earnings per share
for periods ending through March 31, 1997 are calculated using the pro forma
financial data. 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.
7
<PAGE> 10
RISK FACTORS
The following factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements made in this
Prospectus 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 at 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.
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
8
<PAGE> 11
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
becomes 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.
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. 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
either 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
9
<PAGE> 12
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, 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.
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
10
<PAGE> 13
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 and
President. 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.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
Common Stock by the Selling Shareholders.
Sale of the Common Stock by the Selling Shareholders may be effected from
time to time in transactions (which may include block transactions) on the
Nasdaq National Market or on any national or regional securities exchange in
which the Common Stock is listed or traded, in negotiated transactions, or a
combination of such methods of sale, at fixed prices which may be changed, at
market prices prevailing at the time of sale, or at negotiated prices. None of
the Selling Shareholders has, to the Company's knowledge, entered into
agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their Shares. The Selling Shareholders may
effect transactions by selling their Shares directly to purchasers or to or
through broker-dealers which may act as agents or principals. Such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the Selling Shareholders and/or the purchasers of the Shares
for whom the broker-dealers may act as agents or to whom they sell as principal,
or both (which compensation as to a particular broker-dealer might be in excess
of customary commissions). The Selling Shareholders and any broker-dealers that
act in connection with the sale of the Shares might be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act. The
Selling Shareholders may agree to indemnify any agent, dealer or broker-dealer
that participates in transactions involving sales of the securities against
certain liabilities, including liabilities arising under the Securities Act.
The Company has agreed to keep the Registration Statement, of which this
Prospectus is a part, effective until all the Shares are sold or can be sold
freely under an appropriate exemption from the securities laws of the United
States and the states, without limitation. In addition, any shares that qualify
for sale pursuant to
11
<PAGE> 14
Rule 144 under the Securities Act of 1933 may be sold under Rule 144 rather than
pursuant to this Prospectus.
The Selling Shareholders will pay the commissions and discounts of
underwriters, dealers or agents, if any, incurred in connection with the sale of
the Shares. The Company will pay all expenses incident to the offering and sale
of the Shares by the Selling Shareholders, including but not limited to, fees
and expenses of compliance with state securities or "blue sky" laws. No
underwriters are employed with respect to the sale of the Shares, nor will the
Company pay any fees upon their sale.
DIVIDEND POLICY
The Company anticipates that it will not pay dividends on the Common Stock
for the foreseeable future and that it will retain its earnings to finance
future growth. The declaration and payment of dividends by the Company are
subject to the discretion of its Board of Directors and applicable corporation
law. Any determination as to the payment of dividends in the future will depend
upon, among other things, general business conditions, the effect of such
payment on the Company's financial condition and other factors the Company's
Board of Directors may in the future consider to be relevant. Prior to 1991, the
Company's convertible preferred stock had a cumulative dividend feature of 8%
per annum. This feature was eliminated in 1991 and the dividends due of
$1,232,498 were paid by the issuance of 410,833 shares of Common Stock. Since
then, no dividends have been declared or paid on the convertible preferred
stock, which shares were converted into 1,705,082 shares of Common Stock in
connection with the consummation of the IPO. No dividends have been declared or
paid on the Common Stock since the Company's inception.
12
<PAGE> 15
CAPITALIZATION
The following table sets forth, as of June 30, 1997, the capitalization of
the Company. The Company will not receive any of the proceeds from the sale of
Common Stock by Selling Shareholders.
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------
HISTORICAL PRO FORMA
----------- ---------
(UNAUDITED)
<S> <C> <C>
Long term debt.............................................. $ 2,599 $ 2,599
Stockholders' equity
Preferred Stock, authorized 5,000,000 shares, none issued
and outstanding........................................
Common Stock, $.01 par value -- authorized 15,000,000
shares, 7,418,100 shares issued and outstanding........ 74 74
Additional paid-in capital on common stock.................. 30,223 30,223
Accumulated deficit......................................... (1,784) (1,784)
Less treasury stock, at cost (34,817 shares of common
stock).................................................... (100) (100)
------- -------
Total stockholders' equity........................ 28,413 28,413
------- -------
Total capitalization.............................. $31,012 $31,012
======= =======
</TABLE>
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<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL AND OTHER OPERATING 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 Prospectus. All periods 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 School's fiscal year ended December 31,
1992 through 1994, respectively. The results of the Company's fiscal years ended
March 31, 1996 and 1997 and three months ended June 30, 1996 and 1997 reflect a
conformed year-end for the Nebraska Schools. The financial data set forth below
for each of the three years in the period ended March 31, 1997 and as of March
31, 1997 and 1996, have been derived from the audited Consolidated Financial
Statements of the Company included elsewhere in this Prospectus. The financial
data for each of the two years in the period ended March 31, 1994 and as of
March 31, 1995, 1994, and 1993 have been derived from audited Consolidated
Financial Statements of the Company not included in this Prospectus. The
information at June 30, 1997 and June 30, 1996 and for the three month periods
then ended is unaudited, but in the opinion of the Company reflects all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results of operations for such periods. These
historical results are not necessarily indicative of the results that may be
expected in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
-------------------------------------------------------------- -------------------------
1993 1994 1995 1996 1997 1996 1997
---------- ---------- ---------- ---------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues......................... $ 25,139 $ 32,231 $ 37,080 $ 43,347 $ 49,450 $ 10,401 $ 12,909
School operating costs:
Cost of education and facilities... 10,359 14,944 17,488 19,651 23,151 5,243 6,370
Selling and promotional
expenses....................... 3,470 4,985 6,216 6,534 7,531 1,670 1,976
General and administrative
expenses......................... 6,773 10,022 10,826 12,369 14,042 2,985 3,985
Amortization of goodwill and
intangibles........................ 1,071 1,235 1,255 883 886 176 313
Other expenses(1):
Merger costs....................... -- -- -- -- 391 -- --
Legal defense and settlement
costs............................ -- --
Loss on closure or relocation of
schools.......................... -- 1,126 -- 50 144 -- --
Impairment of goodwill and
intangibles...................... -- -- 176 764 -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations........ 3,466 (81) 519 1,981 3,305 327 265
Interest (income) expense, net....... 572 809 935 822 284 211 (94)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes and
extraordinary item................. 2,894 (890) (416) 1,159 3,021 116 359
Provision for income taxes........... 749 (170) 28 632 (845) 44 146
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary
item............................... 2,145 (720) (444) 527 3,866 72 213
Extraordinary item................... -- -- -- -- 309 -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss).................... $ 2,145 $ (720) $ (444) $ 527 $ 3,557 $ 72 $ 213
========== ========== ========== ========== ========== ========== ==========
Pro forma income tax data(2):
Income (loss) before income taxes
and extraordinary item........... $ 2,894 $ (890) $ (416) $ 1,159 $ 3,021 $ 116 --
Provision for income taxes......... 1,223 173 97 487 409 57 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary
item............................. 1,671 (1,063) (513) 672 2,612 $ 59 --
Extraordinary item, net of income
taxes............................ -- -- -- -- 309 -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Pro forma net income (loss)........ $ 1,671 $ (1,063) $ (513) $ 672 $ 2,303 $ 59 --
========== ========== ========== ========== ========== ========== ==========
Income (loss) per share before
extraordinary loss(2).............. $ 0.39 $ (0.43) $ (0.21) $ 0.13 $ 0.41 $ 0.01 $ 0.03
Net income (loss) per share(2)....... $ 0.39 $ (0.43) $ (0.21) $ 0.13 $ 0.36 $ 0.01 $ 0.03
Weighted average shares
outstanding(2)..................... 4,330,864 2,483,115 2,483,115 5,149,764 6,447,339 5,524,548 7,603,243
OTHER OPERATING DATA(3):
Number of schools at end of period... 11 16 16 16 19 16 19
Number of students at end of
period............................. 2,840 4,026 4,695 4,954 5,993 4,347 5,604
Number of new student starts during
period............................. 4,581 5,504 6,297 6,706 7,358 1,242 1,693
Monthly withdrawal rate during
period(4).......................... 5.8% 4.8% 4.3% 4.1% 4.2% 4.6% 4.4%
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
----------------------------------------------- -------------------------
1993 1994 1995 1996 1997 1996 1997
------- ------- ------- ------- ------- ----------- -----------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents... $ 7,061 $ 2,737 $ 2,733 $ 3,209 $14,048 $ 2,895 $ 9,158
Total current assets........ 9,918 7,364 8,125 8,375 21,800 7,632 17,771
Total assets................ 19,246 21,047 21,867 20,986 42,073 20,442 37,816
Long term debt, including
current portion........... 4,756 7,688 8,974 7,755 6,129 7,364 2,590
Total liabilities........... 9,516 13,251 15,271 14,717 13,873 14,354 9,404
Total stockholders'
equity.................... 9,730 7,796 6,596 6,269 28,200 6,088 28,413
</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 corporation which owned the Nebraska schools
and its predecessor were organized as a Subchapter S-Corporation and a
partnership, respectively, 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 merging entity 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. Earnings per share
for periods ending through March 31, 1997 are calculated using the pro forma
financial data. 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.
15
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Prospectus 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 under the caption "Risk Factors" above.
The following discussion of the Company's results of operations and
financial condition should be read in conjunction with "Selected Consolidated
Financial and other Operating Data" and the Consolidated Financial Statements of
the Company and the Notes thereto appearing elsewhere in this Prospectus.
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 revenue 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.
16
<PAGE> 19
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
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 nine fiscal quarters in the period ended June 30, 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
FISCAL YEAR ENDED MARCH 31, 1996 FISCAL YEAR ENDED MARCH 31, 1997 MARCH 31, 1998
------------------------------------- ------------------------------------- --------------
1ST QTR 2ND QTR 3RD QTR 4TH QTR 1ST QTR 2ND QTR 3RD QTR 4TH QTR 1ST QTR
------- ------- ------- ------- ------- ------- ------- ------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Revenues:
Amount...................... $9,765 $10,377 $11,538 $11,667 $10,401 $12,039 $13,324 $13,686 $12,909
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 $ 327
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.
17
<PAGE> 20
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>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
--------------------------------------------- ---------------------------
1995 1996 1997 1996 1997
------------- ------------- ------------- ------------ ------------
% OF % OF % OF % OF % OF
REVENUE REVENUE REVENUE REVENUE REVENUE
------------- ------------- ------------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Revenues........................ 100.0 100.0 100.0 100.0 100.0
School Operating Costs:
Cost of education and
facilities..................... 47.2 45.4 46.8 50.4 49.3
Selling and promotional........... 16.8 15.1 15.2 16.1 15.3
General and administrative
expenses....................... 29.2 28.5 28.4 28.7 30.9
Amortization of goodwill and
intangibles....................... 3.4 2.0 1.8 1.7 2.4
----- ----- ----- ----- -----
Income before other expenses........ 3.4 9.0 7.8 3.1 2.1
Other expenses...................... 2.1 4.4 1.1 -- --
----- ----- ----- ----- -----
Income from operations.............. 1.3 4.6 6.7 3.1 2.1
Interest (income) expense, net...... 2.5 1.9 0.6 2.0 (0.7)
----- ----- ----- ----- -----
Income (loss) before income taxes... (1.2) 2.7 6.1 1.1 2.8
Provision (benefit) for income
taxes............................. 0.1 1.5 (1.7) 0.4 1.1
----- ----- ----- ----- -----
Income (loss) before extraordinary
item.............................. (1.3) 1.2 7.8 0.7 1.7
Extraordinary item.................. -- -- 0.6 -- --
----- ----- ----- ----- -----
Net income (loss)................... (1.3) 1.2 7.2 0.7 1.7
===== ===== ===== ===== =====
</TABLE>
Three Months Ended June 30, 1997 Compared With Three Months Ended June 30, 1996
Net Revenue. Net revenue increased by $2,508 or 24.1%, to $12,909 for the
three months ended June 30, 1997 from $10,401 for the three months ended June
30, 1996. Revenue growth was primarily a result of the operations of the Texas,
Maryland and Nebraska schools which were acquired in September 1996, December
1996, and March 1997 respectively. Revenue from the operations of schools
included in the Company's results for the entire first quarter ending June 30,
1997 and 1996 (which includes the two Nebraska schools due to the restatement
for the pooling of interests) increased 3.7%. The number of students attending
the Company's schools at the end of the quarter increased 28.9% to 5,604 from
4,347 for the end of the corresponding quarter in 1996 principally as a result
of the addition of the Texas and Maryland schools and increased enrollments in
the Nebraska schools. The number of new student starts at the Company's schools
during the three months ended June 30, 1997 increased to 1,693 from 1,242 for
the corresponding three months of the prior year, a 36.3% increase. The
Company's San Diego area schools experienced a decline in new student starts of
141 for the current quarter as compared to the corresponding period of 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. All other schools recorded a combined increase in new student
starts, largely offsetting the declines discussed above. Student withdrawal
rates did not change materially compared to withdrawal rates experienced by the
Company during the corresponding three months of the prior year.
Cost of Education and Facilities. Cost of education and facilities
increased by $1,127, or 21.5%, to $6,370 for the three months ended June 30,
1997 from $5,243 for the three months ended June 30, 1996, principally as a
result of facility expansions and the addition of the Texas and Maryland schools
in fiscal 1997, and costs related to the increased enrollments in the Nebraska
schools. The cost of education and facilities as a percentage of net revenue was
49.3% in 1997 compared with 50.4% in 1996.
18
<PAGE> 21
Selling and Promotional. Selling and promotional expenses increased by
$307, or 18.4%, to $1,977 for the three months ended June 30, 1997 from $1,670
for the three months ended June 30, 1996 principally as a result of the addition
of the Texas and Maryland schools. Selling and promotional expenses as a
percentage of net revenue was 15.3% in 1997 compared with 16.1% in 1996.
General and Administrative. General and administrative expenses increased
by $1,000, or 33.5%, to $3,985 for the three months ended June 30, 1997 from
$2,985 for the three months ended June 30, 1996. General and administrative
expenses as a percentage of net revenue increased to 30.9% in 1997 compared with
28.7% in 1997 as a result of the Company's addition of a director of operations
for the central region, regional sales positions and increased cost at the
company's home office.
Amortization of Goodwill and Intangibles. Amortization of goodwill and
intangibles increased $137 or 77.8%, to $313 for the three months ended June 30,
1997 from $176 for the three months ended June 30, 1996. The increase was
primarily a result of the amortization of goodwill arising from the acquisition
of the Texas and Maryland schools.
Interest Income, Net. Net interest income increased $305 to $94 of
interest income for the three months ended June 30, 1997 from net expense of
$211 for the three months ended June 30, 1996. The change was principally a
result of lower debt levels and increased interest income during the three
months ended June 30, 1997 due to the investment of a portion of the proceeds of
the Company's Initial Public Offering on October 28, 1996.
Income Taxes. Income taxes increased by $102 to $146 for the three months
ended June 30, 1997 from $44 for the three months ended June 30, 1996 due to the
increase in income before income taxes.
Net Income. Net income increased to $213 for the three months ended June
30, 1997 from net income of $72 (pro forma net income of $59) for the three
months ended June 30, 1996 principally as a result of increased net revenue, and
reduced net interest expense.
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.
19
<PAGE> 22
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% 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
20
<PAGE> 23
Company's schools. The cost of education and facilities as a percentage of net
revenue 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.
LIQUIDITY AND CAPITAL RESOURCES
During the three fiscal years ended March 31, 1997, 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
and cash used in operating activities for the quarter ended June 30, 1996 and
1997 was $248 and $921 respectively. The use of cash experienced in the quarter
ended June 30, 1997 was a result of payments of debt related to the Texas and
Maryland acquisitions, and payments of accrued merger expenses. The Company's
principal sources of funds at June 30, 1997 were cash and cash equivalents of
$9.2 million and accounts receivable of $7.1 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,
21
<PAGE> 24
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
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.
22
<PAGE> 25
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 IPO
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 and
degree 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 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
23
<PAGE> 26
accounted for as a purchase and the results of operations of the Hagerstown
School are included in the consolidated results of the operations of 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 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, which date was extended by mutual agreement. 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 provided 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.
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,
24
<PAGE> 27
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 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
25
<PAGE> 28
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 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.
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<PAGE> 29
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
ASSOCIATE STUDENT STUDENT
DEGREE INSTITUTIONAL POPULATION POPULATION
DATE GRANTING ACCREDITING AT DATE OF AT MARCH 31,
INSTITUTION ACQUIRED CURRICULUM (1) AGENCY (2) ACQUISITION 1997
- ----------- -------- ------------ --------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Maric College of Medical Careers 4/88 Healthcare Yes ACCSCT 135 829
San Diego, CA
Maric College of Medical Careers 4/88 Healthcare Yes(4) ACCSCT 91 222
San Marcos Campus
Vista, CA(3)
Maric College of Medical Careers 4/88 Healthcare Yes(4) ACCSCT 14 265
Vista Campus
Vista, CA(3)
Long Medical Institute 4/88 Healthcare Yes ACCSCT 129 168
Phoenix, AZ
Andon College 11/89 Healthcare No ABHES 150 420
Stockton, CA
Andon College 11/89 Healthcare Yes ABHES 123 286
Modesto, CA
Bauder College 3/92 Fashion and Yes ACCSCT 440 384
Atlanta, GA Design/ SACS/COC
Business
Modern Technology 3/93 Healthcare Yes ACCSCT 221 357
School of X-Ray
North Hollywood, CA
Dominion Business School 5/93 Business/ Yes ACICS 129 161
Roanoke, VA Healthcare
Dominion Business School 5/93 Business/ Yes ACICS 408 150
Harrisonburg, VA(5) Healthcare
ICM School of Business 7/93 Business/ Yes ACICS 376 420
Pittsburgh, PA Healthcare/
Fashion and
Design
Ohio Institute of Photography & 7/93 Photography/ Yes ACCSCT 67 259
Technology Healthcare
Dayton, OH
California Institute of 8/93 Fashion and Yes ACICS 5 106
Merchandising Art & Design Design
Sacramento, CA
San Antonio College of Medical 9/96 Healthcare No ACCSCT 234 342
and Dental Assistants
San Antonio, TX
San Antonio College of Medical 9/96 Healthcare No ACCSCT 186 176
and Dental Assistants
McAllen, TX
Career Centers of Texas-El Paso 9/96 Healthcare No ACCSCT 286 326
El Paso, TX
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
APPROXIMATE
ASSOCIATE STUDENT STUDENT
DEGREE INSTITUTIONAL POPULATION POPULATION
DATE GRANTING ACCREDITING AT DATE OF AT MARCH 31,
INSTITUTION ACQUIRED CURRICULUM (1) AGENCY (2) ACQUISITION 1997
- ----------- -------- ------------ --------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
12/96 Business/ Yes ACICS 495 435
Hagerstown Business College
Hagerstown, MD Healthcare
Lincoln School of Commerce 3/97 Business/ Yes ACICS 342 342
Lincoln, NE Healthcare
Nebraska College of Business 3/97 Business/ Yes ACICS 345 345
Omaha, NE Healthcare
----- -----
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 determined that there was a substantial overlap in the San
Marcos and Vista, California markets. The Vista school was 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 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.
28
<PAGE> 31
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 DEGREE
---------------------------- ----------------------------
AVERAGE AVERAGE TOTAL
STUDENT STUDENT NO.
NO. OF NO. OF PROGRAM NO. OF NO. OF PROGRAM OF
PROGRAM SCHOOLS STUDENTS COST SCHOOLS STUDENTS COST* STUDENTS
- ------- ------- -------- ------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Healthcare....................... 17 3,537 $6,376 8 489 $7,204 4,026
Business......................... 7 485 6,679 7 880 9,456 1,365
Fashion and Design............... -- -- -- 3 451 9,745 451
Photography...................... 1 26 9,205 1 125 7,883 151
----- ------ -----
Company Total.................. 4,048 1,945 5,993
</TABLE>
- ---------------
* Represents weighted average tuition and fees on an academic year basis (i.e.
nine month basis).
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 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.
29
<PAGE> 32
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.
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
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.
30
<PAGE> 33
Since their respective acquisition by the Company, the Company's schools
have graduated approximately 23,000 students, including 4,992 in fiscal 1997.
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.
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
31
<PAGE> 34
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 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
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<PAGE> 35
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 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 $140,000, or approximately
0.3% 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
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<PAGE> 36
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.
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%.
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<PAGE> 37
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 June 30, 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 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 has 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
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<PAGE> 38
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.
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 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 has had a negative tangible net worth on a
consolidated basis for the Company's
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<PAGE> 39
three fiscal years ending March 31, 1996. 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. 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
("Fund Administration Errors"). 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 common stock were returned to
the Company from escrow in July 1997. The balance of the shares remain in escrow
pending the resolution of the Fund Administration Errors and related matters.
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.
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FACILITIES
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 June 30, 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
Technology(3) 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
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 former regional manager, now the Company's
Vice President of Operations, Mr. Kosentos, also serves as campus director.
Mr. Kosentos is expected to continue to serve as Central Regional Director
until various matters relating to potential acquisitions are resolved.
(2) The Vista campus was 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 $618,277 at June 30, 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.
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<PAGE> 41
LITIGATION
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 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.
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<PAGE> 42
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table provides information regarding the executive officers
and directors of the Company. Biographical information for each of the persons
set forth in the table is presented below.
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
Chairman, President, Chief Executive Officer and a
Gary D. Kerber......................... 58 Director
Vince Pisano........................... 43 Vice President and Chief Financial Officer
Gerald T. Kosentos..................... 45 Vice President of Operations
Gerry M. Taylor........................ 54 Director of Operations -- Western Region
Ellen L. Bernhardt..................... 46 Director of Operations -- Eastern Region
Elaine Neely-Eacona.................... 45 Director of Financial Aid
K. Terry Guthrie....................... 54 Director of Accreditation
A. William Benham, Jr.................. 35 Controller
Robert J. Cresci....................... 53 Director
Carl S. Hutman......................... 63 Director
W. Patrick Ortale, III................. 44 Director
Richard E. Kroon....................... 55 Director
</TABLE>
Gary D. Kerber, age 58, has been President, Chief Executive Officer and a
Director of the Company since March 1988. From 1971 to 1983, he was employed by
American Hospital Supply Company in various sales and executive positions. From
1983 to 1986, Mr. Kerber was the chief executive officer for Kimberly Services,
Inc.
Vince Pisano, age 43, has been Vice President of Finance and Chief
Financial Officer of the Company since March 1990. From 1978 to 1990, he was
employed by National Education Corporation, a provider of postsecondary
education, as corporate controller and subsequently as the vice president of
finance of its educational centers division.
Gerald T. Kosentos, age 45, was appointed Vice President of Operations of
the Company in June 1997. He was Director of Operations -- Central Region of the
Company from April 1997 through June 1997 and continues as Acting Regional
Director. Mr. Kosentos has been Director of ICM School of Business & Medical
Careers, a wholly owned subsidiary of the Company located in Pittsburgh,
Pennsylvania, since January 1995 and is expected to continue as the Acting
Director of that school until a replacement is hired. Prior to that, Mr.
Kosentos was employed for 21 years by National Education Corporation, in various
positions including the directorship of three school locations, Regional
Director of Operations and, for the last nine years of his employment, as Vice
President of Operations.
Gerry M. Taylor, age 54, has been Director of Operations -- Western Region
of the Company since July 1991. From 1989 to 1991, she was employed as Executive
Director of the Company's three schools in the San Diego, California area.
Ellen L. Bernhardt, age 46, has been Director of Operations -- Eastern
Region of the Company since August 1993. From 1985 to 1993, she was employed by
National Education Corporation, a provider of postsecondary education, most
recently as southeast regional director of operations.
Elaine Neely-Eacona, age 45, has been Director of Financial Aid of the
Company since 1990. From 1976 to 1990, she was employed in various financial aid
positions by Education Management Corporation, a provided of postsecondary
education.
K. Terry Guthrie, age 54, has been Director of Accreditation of the Company
since July 1993. From 1971 to July 1993, he was employed as president of Ohio
Institute of Photography and Technology, which he co-founded. Ohio Institute of
Photography and Technology was acquired by the Company in July 1993.
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<PAGE> 43
A. William Benham, age 35, has been Controller of the Company since May
1995. From 1989 to May 1995, Mr. Benham was Assistant Controller of the Company.
On December 16, 1992, Mr. Benham filed for protection under Chapter VII of the
Federal Bankruptcy Act in the United States Bankruptcy Court for the Northern
District of Georgia (Atlanta Division) and was discharged on May 18, 1993.
Robert J. Cresci, age 53, has been a Director of the Company since 1991.
Since September 1990, Mr. Cresci has been a managing director of Pecks
Management Partners Ltd., an investment management firm. Mr. Cresci is a member
of the boards of directors of Bridgeport Machines, Inc., Serv-Tech, Inc., EIS
International, Inc., Sepracor, Inc., Vestro Natural Foods, Inc., Arcadia
Financial, Inc., Hitox, Inc., Natures Elements, Inc., Garnet Resources
Corporation, HarCor Energy, Inc., Meris Laboratories, Inc. and several private
companies.
Carl S. Hutman, age 63, has been a Director of the Company since 1988.
Since 1996, he has also been managing director of Fundamental Management
Corporation, an investment management firm. Since 1981, he has been president of
Anlyn Advisers, Inc., an investment advisory company. From 1981 to 1991, he was
a general partner of Investech, L.P., a venture capital partnership which
purchased convertible preferred stock and Common Stock of the Company in 1988
and 1989 and distributed all of its holdings to its general and limited partners
in 1991. Mr. Hutman is a member of the Board of Directors of Canadian General
Investments, Limited, Canadian World Fund Limited and Third Canadian General
Investment Trust Limited, all of which are investment funds.
Richard E. Kroon, age 55, has been a Director of the Company since 1994.
Since 1981, Mr. Kroon has been managing partner of the Sprout Group and
President and Chief Executive Officer of DLJ Capital Corp. Mr. Kroon is a
director of Loehmann's, Inc., a clothing retailer, AMCOMP, a workers'
compensation insurance company, and other private companies.
W. Patrick Ortale, III, age 44, has been a Director of the Company since
1988. Since 1985, Mr. Ortale has been a general partner of Lawrence Venture
Partners, the general partner of Lawrence, Tyrrell, Ortale & Smith, a private
venture capital limited partnership, which is a principal stockholder of the
Company. Since 1990, 1994 and 1996, respectively, Mr. Ortale has been a general
partner of the general partnerships which control Lawrence, Tyrrell, Ortale &
Smith II, L.P., Richland Ventures, L.P. and Richland Ventures II, L.P., private
venture capital limited partnerships.
BOARD OF DIRECTORS
Pursuant to the Restated Certificate of Incorporation, as amended (the
"Certificate of Incorporation"), and the Bylaws (the "Bylaws") of the Company,
the Company's Board of Directors consists of five directors or such greater or
lesser number as may be fixed from time to time by a majority of the total
number of directors which the Company would have if there were no vacancies on
the Company's Board of Directors.
The Board has a standing Audit Committee and a standing Compensation
Committee. It does not have a Nominating Committee.
Messrs. Cresci (Chairman) and Hutman comprise the Audit Committee of the
Board of Directors, which is responsible for policies, procedures and other
matters relating to accounting, internal financial controls and financial
reporting, including the engagement of independent auditors and the planning,
scope, time and cost of any audit and any other services they may be asked to
perform, and also review with the auditors their report on the financial
statements following completion of each such audit. In addition, the Audit
Committee is responsible for policies, procedures and other matters relating to
business integrity, ethics and conflicts of interests.
Messrs. Kroon (Chairman), Cresci and Ortale comprise the Compensation
Committee of the Board of Directors, which is responsible for policies,
procedures and other matters relating to employee benefit and compensation
plans, including compensation of the executive officers as a group and the chief
executive officer individually., The Compensation Committee is also responsible
for administering and making awards under the stock-based compensation plans,
procedures and other matters relating to management development and
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<PAGE> 44
for reviewing, monitoring and recommending (for approval by the Company's full
Board of Directors) plans with respect to succession of the chief executive
officer.
COMPENSATION OF THE BOARD OF DIRECTORS
All directors hold office until the next annual meeting of shareholders and
the election and qualification of their successors. Directors who are not
employees and do not otherwise receive compensation from the Company are
entitled to an annual directors' fee of $6,000 and directors' fees of $1,000 for
each Board meeting attended and $500 for each Committee meeting attended in
addition to the reimbursement of reasonable expenses incurred in connection with
their activities as directors of the Company. Directors who are also employees
of the Company receive no compensation for serving on the Board of Directors.
Non-Employee Directors are also entitled to receive options to purchase the
Company's Common Stock. See "Non-Employee Directors' Stock Option Plan."
NON-EMPLOYEE DIRECTORS' 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,
options covering 100,000 shares were available for future grant under the
Directors' Plan.
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 (other than benefits under a
tax-qualified pension plan), 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 Mr. Kerber 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 IPO
price, or $10.00 per share. These options vested immediately upon consummation
of the IPO. Upon the election of any new member to 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. The options to be granted
under the Directors' Plan shall be nonqualified stock options (stock options
which do not constitute "incentive stock options" within the meaning of Section
422A of the Plan.
42
<PAGE> 45
COMPENSATION OF EXECUTIVE OFFICERS
Summary Of Compensation
The following table sets forth the annual and long-term compensation paid
by the Company for services performed on the Company's behalf for the last three
completed fiscal years (i.e., the fiscal years ended March 31, 1995, March 31,
1996 and March 31, 1997), with respect to those persons who were, as of March
31, 1997, the Company's Chief Executive Officer and the Company's executive
officers (the "Named Executive Officers") who earned compensation greater than
$100,000 in such year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
---------------------------------
ANNUAL COMPENSATION(1) SECURITIES
------------------------------------------- UNDERLYING OPTIONS
FISCAL OTHER ANNUAL (NUMBER OF ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION SHARES) COMPENSATION
- --------------------------- ------ -------- -------- ------------ ------------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Gary D. Kerber.............. 1997 $188,660 $148,000 -- 134,260 $ 2,400(2)
Chairman, President 1996 187,124 155,606 -- 16,667 4,720(2)
and Chief Executive 1995 193,511 -- -- -- 2,400(2)
Officer
Vince Pisano................ 1997 140,247 111,200 $10,000(3) 100,740 --
Vice President Finance 1996 140,595 116,915 -- 13,333 --
and Chief Financial
Officer 1995 145,384 -- -- -- --
Gerry M. Taylor............. 1997 116,048 -- -- 7,500 --
Director of Operations 1996 109,283 101,615 -- 25,000 --
-- Western Region 1995 108,162 15,435 -- -- --
Ellen L. Bernhardt.......... 1997 110,914 22,500 -- 7,500 --
Director of Operations 1996 107,744 66,606 -- 10,000 --
-- Eastern Region 1995 108,212 -- -- -- --
Gerald T. Kosentos.......... 1997 86,166 24,430 -- 4,000 --
Vice President of 1996 80,026 1,280 -- 6,667 --
Operations 1995 19,551 -- -- -- --
</TABLE>
- ---------------
(1) Does not include the dollar value of perquisites and other personal
benefits.
(2) Consists solely of premiums paid by the Company for a life insurance policy
for Mr. Kerber. Upon Mr. Kerber's death, the Company will receive no
proceeds from such policy.
(3) Consists of a discount on the outstanding amount of a loan from the Company
to Mr. Pisano in return for early repayment of the loan.
43
<PAGE> 46
Option Grants in Last Fiscal Year
The following table sets forth all grants of options for the Company's
Common Stock to the Named Executive Officers of the Company during the fiscal
year ended March 31, 1997. In addition, the table shows the hypothetical gains
or "option spreads" that would exist for the respective options. These gains are
based on assumed rates of annual compound stock price appreciation of 5% and 10%
from the date the options were granted over the full option terms.
OPTION GRANTS FOR FISCAL YEAR ENDED MARCH 31, 1997
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE APPRECIATION FOR
SECURITIES OPTIONS EXERCISE OR OPTION TERM(2)
UNDERLYING GRANTED TO BASE PRICE EXPIRATION -----------------------------
NAME OPTIONS EMPLOYEES ($/SHARE) DATE(1) 5% 10%
- ---- ---------- ---------- ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gary D. Kerber(3).............. 100,000 36.7%(3) $10.00 06/20/06 $ 766,495 $1,904,104
34,260 10.00 11/06/06
Vince Pisano(3)................ 75,000 27.6(3) 10.00 06/20/06 575,155 1,428,796
25,740 10.00 11/06/06
Gerry M. Taylor................ 7,500 2.1 10.00 06/20/06 47,175 119,550
Ellen L. Bernhardt............. 7,500 2.1 10.00 06/20/06 47,175 119,550
Gerald T. Kosentos............. 4,000 1.1 10.00 06/20/06 25,160 63,760
------- ---------- ----------
Total................ 254,000 $1,461,160 $3,635,760
======= ========== ==========
</TABLE>
- ---------------
(1) Expiration dates reflect the expiration date of the last vested installment
of each grant. The Company generally schedules an option grant to vest in
five equal installments, each installment expiring on the fifth anniversary
of the vesting date.
(2) The dollar amounts under these columns represent the potential tangible
value, before income taxes, of each option assuming that the market price of
the Common Stock appreciates in value from fair market value at the date of
grant to the end of the option term at 5% and 10% annual rates and therefore
are not intended to forecast possible future appreciation, if any, of the
price of the Common Stock. All grants of options have been made with
exercise prices equal to fair value at date of grant.
(3) The percentage of total options granted and potential realizable value given
for Messrs. Kerber and Pisano's options are inclusive of the two separate
option grants listed herein.
No options were exercised in fiscal year ended March 31, 1997 by any of the
Named Executive Officers. The following table sets forth, as of March 31, 1997,
the number of stock options and the value of unexercised stock options held by
the Named Executive Officers.
44
<PAGE> 47
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED MARCH 31, 1997
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS(1)
OPTIONS AT MARCH 31, 1997 AT MARCH 31, 1997
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gary D. Kerber.................................. 45,000 147,594 $ 394,250 $269,830
Vince Pisano.................................... 27,667 111,406 241,653 207,520
Gerry M. Taylor................................. 38,333 27,500 333,247 162,375
Ellen L. Bernhardt.............................. 27,000 23,833 196,550 130,989
Gerald T. Kosentos.............................. 1,333 9,334 10,197 45,805
------- ------- ---------- --------
Total:................................ 139,333 319,667 $1,175,897 $816,519
</TABLE>
- ---------------
(1) The dollar value of the unexercised options has been calculated by
determining the difference between the fair market value of the securities
underlying the options and the exercise or base price of the option at
exercise or fiscal year-end, respectively.
1996 PERFORMANCE INCENTIVE PLAN
In June 1996, the Board of Directors of the Company (the "Board")
authorized, and the stockholders of the Company approved, the 1996 Stock
Incentive Plan for executive and other employees of the Company, including a
limited number of outside consultants and advisors, effective as of the
completion of the IPO (the "Stock Option Plan"). Under the Stock Option Plan,
employees, outside consultants and advisors (the "Participants") of the Company
(as defined in the Stock Option Plan) may receive awards of stock options (both
Nonqualified Options and Incentive Options, as defined in the Stock Option
Plan), stock appreciation rights or restricted stock. A maximum of 961,666
shares of Common Stock are subject to the Stock Option Plan. As of March 31,
1997, options for 240,167 shares of Common Stock were available for grant. On
June 20, 1996, the Board of Directors approved the exchange of stock options
covering an aggregate of 361,666 shares of Common Stock previously granted to
certain executive officers of the Company and others for similar stock options
to be granted under the Stock Option Plan. The purpose of the Stock Option Plan
is to provide employees (including officers and directors who are also
employees) and non-employee consultants and advisors of the Company
("employees") with an increased incentive to make significant and extraordinary
contributions to the long-term performance and growth of the Company, to join
their interests with the interests of the shareholders of the Company, and to
facilitate attracting and retaining employees of exceptional ability.
Administration. The Stock Option plan may be administered by the Board, or
in the Board's sole discretion by the Compensation Committee of the Board (the
"Committee", and with the Board "the Administrator") or such other committee as
may be specified by the Board to perform the functions and duties of the
Committee under the Stock Option Plan. Subject to the provisions of the Stock
Option Plan, the Administrator shall determine, from those eligible to be
Participants, the persons to be granted stock options, stock appreciation rights
and restricted stock, the amount of stock or rights to be optioned or granted to
each such person, and the terms and conditions of any stock option, stock
appreciation rights and restricted stock. Subject to the provisions of the Stock
Option Plan, the Administrator is authorized to interpret the Stock Option Plan,
to make, amend and rescind rules and regulations relating to the Stock Option
Plan and to make all the determinations necessary or advisable for the Stock
Option Plan's administration.
Participants. The Participants in the Stock Option Plan are those
employees, consultants and advisors of the Company who in the judgment of the
Administrator are or will become responsible for the direction and financial
success of the Company. Employees include officers and directors who are also
employees of the Company.
Shares Subject to Plan. The maximum number of shares with respect to which
stock options or stock appreciation rights may be granted or which may be
awarded as restricted stock under the Stock Option Plan
45
<PAGE> 48
is 961,666 shares of Common Stock of which 260,167 were available for grant as
of March 31, 1997. Shares covered by expired or terminated stock options or
stock appreciation rights or forfeited restricted stock awards will again become
available for grant or award under the Stock Option Plan. The number of shares
subject to each outstanding stock option, stock appreciation right or restricted
stock award, the option price with respect to outstanding stock options, the
grant value with respect to outstanding stock appreciation rights and the
aggregate number of shares remaining available under the Stock Option Plan will
be subject to such adjustment as the Administrator, in its discretion, deems
appropriate to reflect such events as stock dividends, stock splits,
recapitalizations, mergers, consolidations or reorganizations of, or by, the
Company.
Stock Options and Stock Appreciation Rights. Subject to the terms of the
Stock Option Plan, the Administrator may grant to Participants either Incentive
Options meeting the definition of an incentive stock option under Section 422 of
the Code or Nonqualified Options not meeting such definition, or any combination
thereof. The exercise price for an Incentive Option may not be less than 100% of
the fair market value of the stock on the date of grant; however, the exercise
price for an Incentive Option granted to an employee who owns more than 10% of
the voting stock of the Company or any subsidiary may not be less than 110% of
the fair market value of the stock on the date of grant.
Subject to the terms of the Stock Option Plan, the Administrator may grant
stock appreciation rights to Participants either in conjunction with, or
independently of, any stock options. Stock appreciation rights may be granted in
conjunction with stock options as an alternative right or as an additional
right. Upon exercise of a stock appreciation right, a Participant will generally
be entitled to receive an amount equal to the difference between the fair market
value of the shares at the time of grant and the fair market value of the shares
at the time of exercise. This amount may be payable in cash, shares of Common
Stock or a promissory note from the Participant, or any combination thereof, as
determined in the discretion of the Administrator.
The exercise period for stock options and stock appreciation rights will be
determined by the Administrator, but no stock option or stock appreciation right
may be exercisable prior to the expiration of six months from the date of grant
or after 10 years from the date of grant, subject to certain conditions and
limitations.
Incentive options and related stock appreciation rights are not
transferable by a Participant other than by will or by the laws of descent and
distribution, and incentive options and related stock appreciation rights are
exercisable, during the lifetime of the Participant, only by the Participant.
If the employment or consultancy of a Participant by the Company
terminates, the Administrator may, in its discretion, permit the exercise of
stock options and stock appreciation rights granted to such Participant (i) for
a period not to exceed three months following termination of employment with
respect to Incentive Options or related stock appreciation rights if termination
of employment is not due to death or permanent disability of the Participant,
(ii) for a period not to exceed one year following termination of employment
with respect to Incentive Options or related stock appreciation rights if
termination of employment is due to the death or permanent disability of the
Participant, and (iii) for a period not to extend beyond the expiration date
with respect to Nonqualified Options or related or independently granted stock
appreciation rights.
Restricted Stock Awards. Subject to the terms of the Stock Option Plan,
the Administrator may award shares of restricted stock to Participants. All
shares of restricted stock will be subject to the following terms and
conditions, among others: (i) at the time of each award of restricted shares, a
restricted period of no less than six months and no greater than five years,
will be established for the shares. The restricted period may differ among
Participants and may have different expiration dates with respect to portions of
shares covered by the same award; (ii) shares of restricted stock awarded to
Participants may not be sold, assigned, transferred, pledged, hypothecated or
otherwise encumbered during the restricted period applicable to such shares.
Except for such restrictions on transfer, a Participant will have all of the
rights of a shareholder in respect to restricted shares awarded to him or her
including the right to receive any dividends on, and the right to vote, the
shares; and (iii) if a Participant ceases to be an employee or consultant of the
Company for any reason other than death or permanent disability, all shares
theretofore awarded to the Participant which are still subject to the
restrictions imposed by provision (ii) above will upon such termination of
employment or consultancy be forfeited and transferred back to the Company. If
such employment or consultancy is terminated by action of the Company without
cause or by agreement between the Company and the Participant, the Administrator
46
<PAGE> 49
may, in its discretion, release some or all of the shares from the restrictions;
(iv) if a Participant ceases to be an employee or consultant of the Company by
reason of death or permanent disability, the restrictions will lapse with
respect to shares then subject to such restrictions, unless otherwise determined
by the Administrator.
Termination, Duration and Amendments of Plan. The Stock Option Plan may be
abandoned or terminated at any time by the Board. Unless sooner terminated, the
Stock Option Plan will terminate on the date ten years after its adoption by the
Board. The termination of the Stock Option Plan will not affect the validity of
any stock option, stock appreciation right or restricted stock outstanding on
the date of termination.
For the purpose of conforming to any changes in applicable law or
governmental regulation, or for any other lawful purpose, the Board will have
the right, with or without approval of the shareholders of the Company, to amend
or revise the terms of the Stock Option Plan at any time; however, no such
amendment or revision will, without the consent of the holder thereof, change
the stock option price (other than anti-dilution adjustments) or alter or impair
any stock option, stock appreciation right or restricted stock which has been
previously granted or awarded under the Stock Option Plan.
FEDERAL INCOME TAX CONSEQUENCES OF STOCK INCENTIVE PLANS
The Company understands that, under current federal income tax rules,
awards under the 1996 Performance Incentive Plan and the Non-Employee Director
Plan have the consequences described below:
The rules governing the tax treatment of stock options, stock
appreciation rights, restricted stock and shares acquired upon the exercise
of stock options and stock appreciation rights are technical. Therefore,
the description of federal income tax consequences set forth below is
necessarily general in nature and does not purport to be complete.
Moreover, statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual
circumstances. Finally, the tax consequences under applicable state and
local income tax laws may not be the same as under the federal income tax
laws.
Incentive Options. Incentive Options granted pursuant to the Plan are
intended to qualify as "Incentive Options" within the meaning of Section 422 of
the Code. If the Participant makes no disposition of the shares acquired
pursuant to exercise of an Incentive Option within one year after the transfer
of shares to such Participant and within two years from grant of the option,
such Participant will realize no taxable income as a result of the grant or
exercise of such option, and any gain or loss that is subsequently realized may
be treated as long-term capital gain or loss, as the case may be. Under these
circumstances, the Company will not be entitled to a deduction for federal
income tax purposes with respect to either the issuance of such Incentive
Options or the transfer of shares upon their exercise. However, the exercise of
an Incentive Option is an item of tax preference and a Participant may have
alternative minimum tax liability.
If shares acquired upon exercise of Incentive Options are disposed of prior
to the expiration of the above time periods, the Participant will recognize
ordinary income in the year in which the disqualifying disposition occurs, the
amount of which will generally be the lesser of (i) the excess of the market
value of the shares on the date of exercise over the option price, or (ii) the
gain recognized on such disposition. Such amount will ordinarily be deductible
by the Company for federal income tax purposes in the same year, provided that
the amount constitutes reasonable compensation. In addition, the excess, if any,
of the amount realized on a disqualifying disposition over the market value of
the shares on the date of exercise will be treated as capital gain.
Nonqualified Options. A Participant who acquires shares by exercise of a
Nonqualified Option generally realizes as taxable ordinary income, at the time
of exercise, the difference between the exercise price and the fair market value
of the shares on the date of exercise. Such amount will ordinarily be deductible
by the Company in the same year, provided that the amount constitutes reasonable
compensation. Subsequent appreciation or decline in the value of the shares on
the sale or other disposition of the shares will generally be treated as capital
gain or loss.
47
<PAGE> 50
Stock Appreciation Rights. A Participant generally will recognize income
upon the exercise of a stock appreciation right in an amount equal to the amount
of cash received and the fair market value of any shares received at the time of
exercise, plus the amount of any taxes withheld. Such amount will ordinarily be
deductible by the Company in the same year, provided that the amount constitutes
reasonable compensation.
Restricted Stock. A Participant granted shares of restricted stock under
the Plan is not required to include the value of such shares in ordinary income
until the first time such Participant's rights in the shares are transferable or
are not subject to substantial risk of forfeiture, whichever occurs earlier,
unless such Participant timely files an election under Section 83(b) of the Code
to be taxed on the receipt of the shares. In either case, the amount of such
income will be equal to the excess of the fair market value of the stock at the
time the income is recognized over the amount (if any) paid for the stock. The
Company will ordinarily be entitled to a deduction, in the amount of the
ordinary income recognized by the Participant, for the Company's taxable year in
which the Participant recognizes such income, provided that the amount
constitutes reasonable compensation.
Withholding Payments. If, upon exercise of a Nonqualified Option or stock
appreciation right, or upon the award of restricted stock or the expiration of
restrictions applicable to restricted stock, or upon a disqualifying disposition
of shares acquired upon exercise of an Incentive Option, the Company must pay
amounts for income tax withholding, then in the Committee's sole discretion,
either the Company will appropriately reduce the amount of stock or cash to be
delivered or paid to the Participant or the Participant must pay such amount to
the Company to reimburse the Company for such payment. The Committee may permit
a Participant to satisfy such withholding obligations by electing to reduce the
number of shares of Common Stock delivered or deliverable to the Participant
upon exercise of a stock option or stock appreciation right or award of
restricted stock or by electing to tender an appropriate number of shares of
Common Stock back to the Company subsequent to exercise of a stock option or
stock appreciation right or award of restricted stock (with such restrictions as
the Committee may adopt).
EMPLOYMENT AGREEMENTS
On December 31, 1992, the Company entered into an Employment Agreement with
Gary D. Kerber as President and Chief Executive Officer. The Employment
Agreement provides for a base salary of $160,000 per year as of March 21, 1992,
which salary is reviewed on an annual basis by the Board of Directors of the
Company prior to the end of each fiscal year. The Employment Agreement also
provides that Mr. Kerber will prepare, on an annual basis for each fiscal year,
an appropriate incentive compensation plan for himself and other executive
officers of the Company, which plan may be implemented only with the consent of
the Board of Directors of the Company. In reviewing such plans, the Compensation
Committee of the Board of Directors has considered the appropriateness of the
goals presented in light of the Company's past performance and prospects and the
reasonableness of the projected compensation in light of the Company's size and
potential income levels. The term of the Employment Agreement continues until
terminated by either Mr. Kerber or the Company, with or without cause; provided,
however, that if the Company terminates the Employment Agreement without cause,
the Company will be obligated to pay Mr. Kerber termination pay equal to the
greater of $160,000 or an amount based upon a specified fraction of Mr. Kerber's
most recent annual fiscal year base compensation (net of incentive or bonus
compensation), as determined under the Employment Agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Richard E. Kroon, Robert J.
Cresci and W. Patrick Ortale, III. No member of the Compensation Committee was
at any time during fiscal 1996, or formerly, an officer or employee of the
Company or any subsidiary of the Company.
In July 1991, the Company entered into a Securities Purchase Agreement,
dated July 21, 1991, as amended (the "Securities Purchase Agreement"), among the
Company and the Pecks Managed Entities, pursuant to which the Delaware Plan, the
ICI Trust and the Zeneca Trust loaned $2,900,000, $603,000 and $497,000,
respectively, to the Company on a senior subordinated basis in exchange for 13%
Senior
48
<PAGE> 51
Subordinated Notes (the "Notes") originally due July 23, 1996 issued by the
Company in the aggregate principal face amount of $4,000,000 and warrants (the
"Warrants") to purchase an aggregate of 1,333,333 shares of Common Stock at a
purchase price equal to the lesser of (i) $3.00 per share or (ii) 70% of the
cash purchase price per share of Common Stock in an initial public offering
without regard to deductions for underwriting discounts and commissions. In May
1996, the terms of the Warrants were amended to provide for a cashless exercise
based on the initial public offering price in the event of a public offering of
the Company's Common Stock. In return, the holders agreed to exercise the
Warrants simultaneously with the commencement of the initial public offering and
to terminate certain "put" provisions originally contained in the Warrants. The
modifications were approved by all of the members of the Company's Board of
Directors, with Mr. Cresci abstaining. At completion of the IPO, the Pecks
Managed Entities beneficially own more than five percent of the issued and
outstanding Common Stock of the Company. In addition, Robert J. Cresci, who is a
director of the Company, is a managing director of Pecks, which serves as
investment advisor for each of the Pecks Managed Entities. In fiscal 1996, Mr.
Cresci served as a member of the Compensation Committee of the Board of
Directors of the Company. In connection with the IPO, the Pecks Managed Entities
exercised, on a cashless basis, the Warrants to purchase 1,333,333 shares of
Common Stock at $3.00 per share, which resulted in the issuance of 1,000,000
shares of Common Stock in respect of such Warrants. In fiscal years 1995, 1996
and 1997, the Company incurred interest expense on the Notes to the Delaware
Plan in the amounts of $253,610, $364,941 and $149,834 respectively, to the ICI
Trust in the amounts of $52,733, $75,883 and $31,155, respectively, and to the
Zeneca Trust in the amounts of $43,464, $62,543 and $25,678, respectively. Upon
consummation of the IPO, the Company utilized $2.7 million of the proceeds of
this Offering to repay the entire outstanding amount of principal and accrued
interest on the Notes.
In connection with the transactions contemplated by the Securities Purchase
Agreement, the Company, the Pecks Managed Entities, the Sprout Group, LTOS and
Gary D. Kerber entered into a Co-investors Agreement (the "Co-investors
Agreement"), dated July 23, 1991, pursuant to which the parties thereto agreed
to vote their respective shares of Common Stock of the Company for the election
to the Board of Directors of the Company of one person designated by the Pecks
Managed Entities, so long as the Pecks Managed Entities collectively held or
beneficially owned (i) $750,000 aggregate principal amount of Notes or (ii)
250,000 shares of Common Stock issued or issuable upon exercise of the Warrants.
In addition, pursuant to a Registration Rights Agreement, dated as of July
23, 1991, as amended (the "Registration Rights Agreement"), the Pecks Managed
Entities were granted certain demand registration rights with respect to shares
of Common Stock issued or issuable to them upon exercise of the Warrants.
Pursuant thereto, upon request of Pecks Managed Entities holding at least 50%
(by voting power) of the Warrants (assuming conversion of the Warrants into
shares of Common Stock), the Company shall use its best efforts to effect the
registration under the Securities Act of Common Stock at such holders' request.
The Company is only required to undertake two such registrations. In the event
of a registration initiated by the Company or by any other stockholder of the
Company holding registration rights, the Company has granted certain
"piggy-back" registration rights to the Pecks Managed Entities and must notify
the Pecks Managed Entities of such registration and permit the inclusion of any
of the Pecks Managed Entities' Common Stock in any such registration if so
requested. The number of shares of Common Stock held by the Pecks Managed
Entities that must be included in a registration will be determined by the
managing underwriter selected by the Company, and Pecks Managed Entities'
participation will be subject to a priority cut-back as provided for in the
Registration Rights Agreement. The Company has agreed to pay all expenses in
connection with such registrations. The Company has been advised that Pecks
Managed Entities have waived their registration rights with regard to the
Offering.
See "Certain Transactions."
CERTAIN TRANSACTIONS
For information regarding transactions among the Company, the Pecks Managed
Entities and Robert J. Cresci, who is a director of the Company, see
"Compensation Committee Interlocks and Insider Participation."
49
<PAGE> 52
In March 1995, the Company entered into a Loan Agreement with Sirrom
Capital Corporation ("Sirrom"), pursuant to which Sirrom loaned $2,200,000 to
the Company, less expenses of the transaction and a processing fee of $44,000.
Upon completion of the IPO, Sirrom owned less than one percent of the Company's
outstanding Common Stock. The loan was evidenced by a secured promissory note
(the "Secured Note") which matured on March 31, 2000, bore interest at a rate of
14.0% per annum on the unpaid principal amount, and was secured by a blanket
security interest in the Company's assets. In fiscal 1996 and 1997, the Company
incurred interest expense on the Secured Note of approximately $309,771 and
$179,667, respectively. The Secured Note was paid in full with a portion of the
net proceeds of the IPO.
In connection with the issuance of the Secured Note, the Company issued
warrants (the "Sirrom Warrants") to Sirrom to acquire up to 141,667 shares of
Common Stock, for a purchase price of $.006 per share. The Sirrom Warrants were
exercised in connection with the IPO for shares of Common Stock. Pursuant to the
Loan Agreement, Sirrom was also made a party to the Registration Rights
Agreement, and was granted rights pari passu with the Pecks Managed Entities for
purposes of determining its registration rights under such Registration Rights
Agreement. Sirrom waived its registration rights with regard to the IPO.
In July 1993, the Company acquired the Ohio Institute of Photography and
Technology, which was previously partially-owned by K. Terry Guthrie, who is an
executive officer of the Company. The purchase price for the school was
$1,236,000, including amounts paid for covenants not to compete and real estate.
Mr. Guthrie received cash of $132,127. In addition, Mr. Guthrie and the Company
entered into a three-year consulting agreement pursuant to which Mr. Guthrie
received a consulting fee of $23,807 per year through July 1996. Mr. Guthrie
also entered into a noncompetition agreement pursuant to which Mr. Guthrie
receives $35,000 per year for a five-year term. Pursuant to the consulting
agreement and the noncompetition agreement, the Company paid Mr. Guthrie
$58,806, $58,806 and $46,903 in fiscal years 1995, 1996 and 1997, respectively
In September 1991, the Company made a loan to Vince Pisano and Mr. Pisano's
wife, Gail Pisano, in the amount of $75,000 pursuant to an Employee Loan
Agreement, as amended. The loan did not bear interest and was to be repaid upon
the earlier of December 31, 1996 or certain other events. The loan was secured
by certain real property owned by Mr. Pisano. If the loan was paid at or prior
to its stated maturity, $10,000 of the loan would be cancelled. Mr. Pisano is a
Vice President and Chief Financial Officer of the Company. The Company and Mr.
Pisano entered into an agreement which permitted Mr. Pisano to repay the loan on
its maturity date with Common Stock of the Company owned by Mr. Pisano which
stock was valued at its fair market value on the date of repayment. Pursuant to
this agreement, during fiscal 1997, Mr. Pisano repaid his loan from the Company
in full by transfer of 5,652 shares of Common Stock to the Company.
In connection with the Company's acquisition of its three schools in
Virginia, its school in North Hollywood, California, its three schools in El
Paso and San Antonio, Texas, and its school in Hagerstown, Maryland, the Company
pledged the stock of its acquiring subsidiaries to secure related indebtedness.
As of June 30, 1997, the principal amount outstanding of such indebtedness was
$1,575,000.
On March 31, 1997, the Company acquired two schools located in Nebraska
(the "Nebraska Schools") by merging 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"). The Company has filed a registration
statement pursuant to the Securities Act of 1933 (the "Act") with respect to the
Merger Shares of which this Preliminary Prospectus is a part. 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 (who are the Selling Stockholders) to sell their shares in
the public market. See "Business," "Fiscal Year 1997 Acquisitions -- The
Nebraska Acquisition," and "Title IV Regulation -- The Nebraska Acquisition."
With respect to each transaction between the Company and an affiliate of
the Company, a majority of the disinterested members of the Board of Directors
determined that such transactions were on terms at least as fair as if they had
been consummated with unrelated third parties. The Board of Directors has
adopted a policy that prior to entering into any transaction with a related
party, a similar determination must be made with respect to such transaction by
a majority of the Company's disinterested directors.
50
<PAGE> 53
PRINCIPAL AND SELLING SHAREHOLDERS
The table below sets forth, as of June 30, 1997, certain information
regarding beneficial ownership of the shares of Common Stock of the Company,
assuming consummation of the Offering Transactions) and as adjusted to reflect
the sale of the Shares offered hereby, by (i) each person known by the Company
to be the beneficial owner of more than 5% of the outstanding shares of Common
Stock (including the Selling Shareholders), (ii) each director, (iii) each
executive officer included in the Summary Compensation Table, (iv) all executive
officers and directors of the Company as a group and (v) by each of the Selling
Shareholders.
<TABLE>
<CAPTION>
SHARES OWNED SHARES TO BE
PRIOR NUMBER OF OWNED
TO OFFERING SHARES TO AFTER THE OFFERING
----------------- BE SOLD IN -------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER PERCENT OFFERING NUMBER PERCENT
- --------------------------------------- ------- ------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Sprout Capital V(2)(3)............................. 920,005 12.5 -- 920,005 12.5
Sprout Technology Fund(2)(3)....................... 19,889 * -- 19,889 *
DLJ Venture Capital Fund II, L.P(2)(3)............. 54,921 * -- 54,921 *
Lawrence, Tyrrell, Ortale & Smith(3)(4)............ 995,307 13.5 -- 995,307 13.5
Delaware State Employees' Retirement
Fund(3)(5)(6).................................... 637,051 8.7 -- 637,051 8.7
Declaration of Trust for Defined Benefit Plans of
ICI America Holding Inc(3)(5)(6)................. 109,178 1.5 -- 109,178 1.5
Declaration of Trust for Defined Benefit Plans of
Zeneca Holding Inc(3)(5)(6)...................... 132,463 1.8 -- 132,463 1.8
Pecks Management Partners Ltd(5)(6)................ 878,692 12.0 -- 878,692 12.0
J. & W. Seligman Co., Incorporated................. 630,000 8.6 -- 630,000 8.6
Gary D. Kerber(3).................................. 359,632 4.8 -- 359,632 4.8
Vince Pisano....................................... 186,457 2.5 -- 186,457 2.5
Gerry M. Taylor.................................... 41,916 * -- 41,916 *
Ellen L. Bernhardt................................. 36,833 * -- 36,833 *
Gerald T. Kosentos................................. 2,133 * -- 2,133 *
Elaine Neely-Eacona................................ 14,500 * -- 14,500 *
K. Terry Guthrie................................... 3,000 * -- 3,000 *
A. William Benham.................................. 6,501 * -- 6,501 *
Robert J. Cresci(6)................................ 25,000 * -- 25,000 *
Carl S. Hutman..................................... 25,340 * -- 25,340 *
W. Patrick Ortale, III(7).......................... 25,000 * -- 25,000 *
Richard E. Kroon(8)................................ 25,000 * -- 25,000 *
Richard D. Wikert(9)............................... 488,772 6.7 488,772 0 0.0
340 East Military
Fremont, NE 68025
The A. Lauren Rhude Trust(9)....................... 46,936 * 46,936 0 0.0
c/o a. Lauren Rhude, Trustee
4550 N. Calle Loma Linda
Tucson, AZ 85718
The Lila Rhude Trust(9).......................... 73,301 * 73,301 0 0.0
c/o Lila Rhude, Trustee
4550 N. Calle Loma Linda
Tucson, AZ 85718
The Scott L. Rhude Trust(9)........................ 72,338 * 72,338 0 0.0
c/o Scott L. Rhude, Trustee
4020 N. Pontatoc
Tucson, AZ 85718
</TABLE>
51
<PAGE> 54
<TABLE>
<CAPTION>
SHARES OWNED SHARES TO BE
PRIOR NUMBER OF OWNED
TO OFFERING SHARES TO AFTER THE OFFERING
----------------- BE SOLD IN -------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER PERCENT OFFERING NUMBER PERCENT
- --------------------------------------- ------- ------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Roger D. Bojens(9)................................. 42,032 * 42,032 0 0.0
4220 Sergeant Road
Sioux City, IA 51106
All executive officers and directors as a group (12
persons)......................................... 751,312 9.8 -- 751,312 9.8
</TABLE>
- ---------------
* Less than 1%.
(1) Unless otherwise noted, the Company believes that all persons and entities
named in the table have sole voting and investment power over the shares of
Common Stock listed opposite his, her or its name. The number of shares of
Common Stock beneficially owned by each person is determined under the rules
of the Securities and Exchange Commission, and the information is not
necessarily indicative of beneficial ownership for any other purpose. Under
such rules, beneficial ownership includes any shares for which the
individual has sole or shared voting power or investment power and also any
shares of Common Stock which the individual has the right to acquire within
60 days after June 30, 1997 through the exercise of any stock option or
other right. The inclusion herein of any shares of Common Stock deemed
beneficially owned does not constitute an admission of beneficial ownership
of those shares. Unless otherwise indicated, the persons named in the table
have sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them.
(2) The address of such entity is 277 Park Avenue, 21st Floor, New York, New
York 10172.
(3) Pursuant to a Coinvestors Agreement, such entity has agreed to vote its
shares of Common Stock along with the other parties to such agreement for
the election of one director jointly designated by the Pecks Managed
Entities (see Note 6 for definition of "Pecks Managed Entities").
(4) The address of such entity is 3100 West End Avenue, Suite 400, Nashville,
Tennessee 37203.
(5) The address of such entity is c/o Pecks Management Partners Ltd., 1
Rockefeller Plaza, New York, New York 10020.
(6) Pecks Management Partners Ltd. ("Pecks") is an investment advisor to
Delaware State Employees' Retirement Fund, Declaration of Trust for Defined
Benefit Plans of ICI American Holdings Inc. and Declaration of Trust for
Defined Benefit Plans of Zeneca Holding Inc. (collectively, the "Pecks
Managed Entities"). As such, Pecks has sole investment and voting power with
respect to the shares beneficially owned by such entities. Mr. Cresci, a
director of the Company, is a managing partner of Pecks. Pecks disclaims
beneficial ownership of such shares.
(7) Mr. Ortale is a general partner of Lawrence Venture Partners, the general
partner of Lawrence, Tyrrell, Ortale & Smith ("LTOS"). Excludes 637,500
shares of Common Stock owned by LTOS and for which Mr. Ortale disclaims any
beneficial ownership.
(8) Mr. Kroon is the general partner of the general partner of Sprout Capital V,
Sprout Technology Fund, and DLJ Venture Capital Fund II, L.P. Excludes
994,815 shares of Common Stock owned, in the aggregate, by such entities.
Mr. Kroon disclaims any beneficial ownership.
(9) Five shareholders, who received , in the aggregate, 761,263 shares of the
Company's Common Stock in connection with the Nebraska Acquisition, are
participating in this Offering (collectively, the "Selling Shareholders").
Due to circumstances as explained in "Title IV Student Financial Assistance
Programs -- The Nebraska Acquisition," 37,884 of those shares were returned
to the Company in July 1997, leaving 723,379 shares to be sold by the
Selling Shareholders participating in this Offering. As of the date of this
Prospectus, 57,116 of the 723,379 shares continue to be held in escrow
pending resolution of various contingency claims.
52
<PAGE> 55
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 15 million shares
of Common Stock, par value $.01 per share, and five million shares of preferred
stock, par value $.01 per share (the "Preferred Stock"). As of the date of this
Prospectus, there are approximately 117 holders of record of the Common Stock,
no holders of record of the Preferred Stock and two holders of warrants to
purchase Common Stock.
The following summary description of the Company's capital stock does not
purport to be complete and is qualified in its entirety by this reference to the
Company's Certificate of Incorporation and By-laws, copies of which have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part.
COMMON STOCK
The holders of the Common Stock are entitled to one vote per share of
record on all matters to be voted upon by stockholders. At a meeting of
stockholders at which a quorum is present, a majority of the votes cast decides
all questions, unless the matter is one upon which a different vote is required
by express provision of law or the Company's Certificate of Incorporation or
Bylaws. There is no cumulative voting with respect to the election of directors
(or any other matter).
The holders of Common Stock have no preemptive rights and have no rights to
convert their Common Stock into any other securities. Subject to the rights of
holders of Preferred Stock, if any, in the event of a liquidation, dissolution
or winding up of the Company, holders of Common Stock are entitled to
participate equally, share for share, in all assets remaining after payment of
liabilities.
The holders of Common Stock are entitled to receive ratably such dividends
as the Board of Directors may declare out of funds legally available therefor,
when and if so declared. The payment by the Company of dividends, if any, rests
within the discretion of its Board of Directors and will depend upon the
Company's results of operations, financial condition and capital expenditure
plans, as well as other factors considered relevant by the Board of Directors.
PREFERRED STOCK
At the time of this Offering, no shares of Preferred Stock are outstanding.
The Company's Certificate of Incorporation authorizes the Board of Directors to
issue up to 5,000,000 shares of Preferred Stock in one or more series and to
establish such relative voting, dividend, redemption, liquidation, conversion
and other powers, preferences, rights, qualifications, limitations and
restrictions as the Board of Directors may determine without further approval of
the stockholders of the Company. The issuance of Preferred Stock by the Board of
Directors could, among other things, adversely affect the voting power of the
holders of Common Stock and, under certain circumstances, make it more difficult
for a person or group to gain control of the Company.
The issuance of any series of Preferred Stock, and the relative powers,
preferences, rights, qualifications, limitations and restrictions of such
series, if and when established, will depend upon, among other things, the
future capital needs of the Company, the then-existing market conditions and
other factors that, in the judgment of the Board of Directors, might warrant the
issuance of Preferred Stock. At the date of this Prospectus, there are no plans,
agreements or understandings relative to the issuance of any share of Preferred
Stock.
WARRANTS TO PURCHASE COMMON STOCK
In July 1991, the Company issued a warrant (the "Equitable Warrant") to
purchase 26,667 shares of Common Stock to Equitable Securities Corporation
("Equitable"). The Equitable Warrant has an exercise price of $3.60 per share
and expires on July 31, 1999. The Company issued the warrant to Equitable in
connection with assistance provided by Equitable to the Company in issuing
certain convertible preferred stock by the Company.
53
<PAGE> 56
In November 1988, the Company granted an option to Robert L. Heidrick to
purchase 16,667 shares of Common Stock at a purchase price equal to the offering
price of the Company's Common Stock in an initial public offering. The option
became exercisable upon the effective date of an initial public offering
(October 28, 1996) of the Company's Common Stock and expires on the tenth
anniversary of such date. This option was granted to Mr. Heidrick as partial
compensation for certain executive search services provided by Mr. Heidrick to
the Company.
REGISTRATION RIGHTS
Following consummation of the IPO in October 1996, 3,994,411 shares of
Common Stock were "restricted" securities within the meaning of the Securities
Act of 1933, as amended, and may not be sold in the absence of registration
under the Securities Act, or an exemption therefrom, including the exemptions
combined in Rule 144 under the Securities Act. Pursuant to the Registration
Rights Agreement, the Company has granted the Sprout Group, LTOS, the Pecks
Managed Entities and Sirrom demand registration rights covering up to 3,240,286
shares of Common Stock and covering up to a maximum of four demand
registrations. In addition, such parties have been granted "piggy-back"
registration rights, pursuant to which the Company must notify such parties of
any registration of Common Stock under the Securities Act, and must include
shares of Common Stock held by such parties in such registration. In addition,
upon qualification for registration under the Securities Act on Form S-2 and/or
S-3, such parties have demand registration rights; provided, that the amount of
Common Stock proposed to be registered pursuant to a demand registration must
have an aggregate offering price of at least $500,000. The Company has agreed to
pay all expenses in connection with the demand and "piggy-back" registrations
described above. See "Certain Transactions," and "Risk Factors -- Shares
Eligible for Future Sale."
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
Certain provisions of the General Corporation Law of the State of Delaware
and of the Company's Certificate of Incorporation and By-laws, summarized in the
following paragraphs, may be considered to have an anti-takeover effect and may
delay, deter or prevent a tender offer, proxy contest or other takeover attempt
that a stockholder might consider to be in such stockholder's best interest,
including such an attempt as might result in payment of a premium over the
market price for shares held by stockholders.
DELAWARE ANTI-TAKEOVER LAW
The Company, a Delaware corporation, is subject to the provisions of the
General Corporation Law of the State of Delaware, including Section 203 thereof.
In general, Section 203 prohibits a public Delaware corporation from engaging in
a "business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which such person became an
interested stockholder unless (i) prior to such date, the Board of Directors
approved either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder, or (ii) upon becoming an
interested stockholder the stockholder then owned at least 85% of the voting
stock, as defined in Section 203; or (iii) subsequent to such date, the business
combination is approved by both the Board of Directors and by at least 66 2/3%
of the corporation's outstanding voting stock, excluding shares owned by the
interested stockholder. For these purposes, the term "business combination"
includes mergers, asset sales and other similar transactions with an "interested
stockholder." An "interested stockholder" is a person who, together with
affiliates and associates, owns (or, within the prior three years, did own) 15%
or more of the corporation's voting stock. Although Section 203 permits a
corporation to elect not to be governed by its provisions, the Company to date
has not made this election.
SPECIAL MEETINGS OF STOCKHOLDERS; NO ACTION WITHOUT MEETING
The Company's Bylaws provide that special meetings of stockholders may be
called only by the Chairman or by the Secretary or any Assistant Secretary at
the request in writing of a majority of the Board of Directors of the Company.
The Company's Certificate of Incorporation and Bylaws also provide that no
action required to be taken or that may be taken at any annual or special
meeting of stockholders may be taken
54
<PAGE> 57
without a meeting; the power of stockholders to consent in writing, without a
meeting, to the taking of any action is specifically denied. These provisions
may make it more difficult for stockholders to take action opposed by the Board
of Directors.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDERS PROPOSALS AND DIRECTOR NOMINATIONS
The Company's Bylaws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for election
as directors at an annual or a special meeting of stockholders, must provide
timely notice thereof in writing. To be timely, a stockholder's notice must be
delivered to, or mailed and received at, the principal executive office of the
Company, (i) in the case of an annual meeting that is called for a date that is
within 30 days before or after the anniversary date of the immediately preceding
annual meeting of stockholders, not less than 60 days nor more than 90 days
prior to such anniversary date, and (ii) in the case of an annual meeting that
is called for a date that is not within 30 days before or after the anniversary
date of the immediately preceding annual meeting, or in the case of a special
meeting of stockholders called for the purpose of electing directors, not later
than the close of business on the tenth day following the day on which notice of
the date of the meeting was mailed or public disclosure of the date of the
meeting was made, whichever occurs first. The Bylaws also specify certain
requirements for a stockholder's notice to be in proper written form. These
provisions may preclude some stockholders from making nominations for directors
at an annual or special meeting or from bringing other matters before the
stockholders at a meeting.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is First Union
National Bank of North Carolina, N.A.
SHARES ELIGIBLE FOR FUTURE SALE
As of June 30, 1997, the Company has outstanding 7,383,283 shares of Common
Stock. The Company has reserved an additional (i) 961,666 shares of Common Stock
for issuance pursuant to the Stock Option Plan, which shares have been
registered under the Securities Act, (ii) 200,000 shares of Common Stock for
issuance pursuant to the Directors' Plan, which shares have been registered
under the Securities Act, and (iii) 43,334 shares of Common Stock which may be
purchased upon exercise of outstanding warrants to purchase Common Stock. Any
shares issued pursuant to the Stock Option Plan or the Director's Plan will be
freely transferable upon issuance without registration under the Securities Act,
subject to volume limitations contained in Rule 144 under the Securities Act
applicable to affiliates, as that term is defined in the Securities Act. Of such
outstanding shares, all are freely transferable without restriction under the
Securities Act by persons other than "affiliates" of the Company, as that term
is defined in Rule 144 under the Securities Act.
In general, Rule 144 currently provides that a person (or persons whose
shares are aggregated) who satisfies a one-year holding period with respect to
"restricted securities" will be entitled to sell, in brokers' transactions and
within any three-month period, a number of shares that does not exceed the
greater of (i) 1% of the then outstanding shares of Common Stock or (ii) the
average weekly trading volume in Common Stock during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to manner of sale and
notice requirements and the availability of current public information about the
Company. After "restricted securities" that are held by persons who are no
longer "affiliates" of the Company have satisfied a two-year holding period,
such shares may be sold without regard to such volume limitation, current public
information, manner of sale or notice requirements. However, under Rule 144,
"restricted securities" held by "affiliates" must continue, after the two-year
holding period, to be sold in brokers' transactions or to market makers subject
to the volume limitations described above. The requirements described above
(except the holding period requirements) also apply to non-restricted securities
of the Company held by affiliates of the Company. Such shares are required,
under Rule 144, to be sold in brokers' transactions subject to the volume
limitations described above. Shares properly sold in reliance upon Rule 144 to
persons who are not "affiliates" are thereafter freely tradeable without
restrictions or registration requirements under the Securities Act. The
55
<PAGE> 58
foregoing discussion is only a summary of Rule 144 and is not intended to be a
complete description of the rule.
The Company, its officers and Directors, the Selling Stockholders and
certain other stockholders and warrantholders, holding in the aggregate
substantially all of the Company's currently outstanding equity securities,
agreed not to sell, assign or transfer any of their shares of Common Stock for a
period of 180 days after the effective date of the IPO (October 28, 1996)
without the prior consent of Smith Barney Inc. Such 180-day period expired on
April 29, 1997 and at the expiration of this 180 day period, 3,994,411 shares of
Common Stock immediately became eligible for sale under Rule 144, subject to the
volume and manner of sale restrictions imposed by that Rule. The Company is
unable to predict the effect that sales of Common Stock may have on the then
prevailing market price of the shares of the Common Stock, but such sales may
have a substantial depressing effect on such market price.
The Company intends to file registration statements under the Securities
Act to register for offer and sale Common Stock reserved for issuance pursuant
to the award of restricted stock or the exercise of stock options granted under
the Company's Stock Option Plan and Directors' Plan. See
"Management -- Compensation of Board of Directors" and "-- Stock Option Plan."
LEGAL MATTERS
The validity of the Common Stock being offered hereby will be passed upon
for the Company by Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A., West
Palm Beach, Florida.
EXPERTS
The consolidated financial statements and schedule of Educational Medical,
Inc. at March 31, 1996 and 1997 and for each of the three years in the period
ended March 31, 1997 appearing in this Prospectus and Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their reports thereon also appearing elsewhere herein which are based in part on
the reports of Winther, Stave & Co., LLP, independent auditors. The financial
statements referred to above are included in reliance upon such reports given
upon the authority of such firms as experts in accounting and auditing.
The combined financial statements of San Antonio College of Medical and
Dental Assistants, Inc. and Career Centers of Texas -- El Paso, Inc. as of
December 31, 1996 and 1995 and for the years then ended appearing in this
Prospectus and Registration Statement have been audited by Tsakopulos Brown
Schott & Anchors, independent auditors, as set forth in their report thereon
also appearing elsewhere herein and in the Registration Statement and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
The divisional financial statements of Hagerstown Business College (a
division of O/E Learning, Inc.) as of October 31, 1996 and 1995 and for the
years then ended appearing in this Prospectus and Registration Statement have
been audited by Plante & Moran, LLP, independent auditors, as set forth in their
report thereon also appearing elsewhere herein and in the Registration Statement
and are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), in Washington, D.C., a Registration Statement on Form S-1,
together with all amendments and exhibits thereto (the "Registration Statement")
under the Securities Act, with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the Rules and
Regulations of the Commission. Statements made in the Prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete; with respect to each such contract, agreement or other
document files as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter
56
<PAGE> 59
involved, and each such statement shall be deemed qualified in its entirely by
such reference. The Registration Statement, including exhibits and schedules
filed therewith, may be inspected and copies at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549;
1400 Citicorp Center, 500 West Madison, Chicago, Illinois 60661; and 7 World
Trade Center (13th Floor), New York, New York 10048. Copies of such material may
be obtained at prescribed rates from the Public Reference Section of the
Commission at 450 Fifth Street, N.W. Room 1024, Washington, D.C. 20549. The
Commission also maintains a Web site at http://www.sec.gov which contains
reports, proxy statements and other information regarding registrants that file
electronically with the Commission.
The Company is subject to the information requirements of the Security
Exchange Act of 1934, as amended (the "Exchange Act"). The Company will fulfill
its obligations with respect to the requirements of the Exchange Act by filing
periodic reports and other information with the Commission.
57
<PAGE> 60
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets as of March 31, 1996 and 1997
and June 30, 1997 (unaudited)............................. F-3
Consolidated Statements of Operations for the year ended
March 31, 1995, 1996 and 1997 and the three months ended
June 30, 1996 and 1997 (unaudited)........................ 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 and the three months ended
June 30, 1996 and 1997 (unaudited)........................ F-6
Notes to Consolidated Financial Statements.................. F-7
SAN ANTONIO COLLEGE OF MEDICAL AND DENTAL ASSISTANTS, INC.
AND CAREER CENTERS OF TEXAS -- EL PASO, INC.
Tsakopulos Brown Schott & Anchors, Independent Auditors'
Report.................................................... F-25
Combined Financial Statements:
Combined Balance Sheets as of December 31, 1994 and 1995 and
June 30, 1996 (unaudited)................................. F-26
Combined Statement of Operations for the year ended December
31, 1995.................................................. F-27
Combined Statements of Operations for the year ended
December 31, 1994 and the six month periods ended June 30,
1995 (unaudited) and June 30, 1996 (unaudited)............ F-28
Combined Statement of Retained Earnings for the years ended
December 31, 1994 and 1995 and for the six month period
ended June 30, 1996 (unaudited)........................... F-29
Combined Statement of Cash Flows for the years ended
December 31, 1994 and 1995................................ F-30
Combined Statements of Cash Flows for the six month period
ended June 30, 1995 (unaudited) and June 30, 1996
(unaudited)............................................... F-31
Notes to the Combined Financial Statements.................. F-32
HAGERSTOWN BUSINESS COLLEGE (A DIVISION OF O/E LEARNING,
INC.)
Plante & Moran, LLP, Independent Auditor's Report........... F-37
Financial Statements:
Divisional Balance Sheet as of October 31, 1996 and 1995.... F-38
Statement of Divisional Income for the year ended October
31, 1996 and 1995......................................... F-39
Statement of Changes in Divisional Equity for the year ended
October 31, 1996 and 1995................................. F-40
Statement of Divisional Cash Flows for the year ended
October 31, 1996 and 1995................................. F-41
Notes to Divisional Financial Statements.................... F-42
Unaudited Pro Forma as Adjusted Financial Data.............. F-44
Condensed Consolidated Statement of Operations for the year
ended March 31, 1997 (unaudited).......................... F-45
</TABLE>
F-1
<PAGE> 61
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
--------------------------------------
Ernst & Young LLP
Atlanta, Georgia
June 30, 1997
except as to the
second paragraph of
Note 3 as to which the
date is August 27, 1997
F-2
<PAGE> 62
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
------------------------- JUNE 30,
1996 1997 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,209,045 $14,047,889 $ 9,158,426
Restricted cash........................................... 610,000 -- --
Trade accounts receivable, less allowance for doubtful
accounts of $974,357, $922,704 and $924,713,
respectively............................................ 3,522,715 5,238,742 6,154,634
Prepaid expenses.......................................... 1,033,098 1,149,146 1,161,353
Income taxes receivable................................... -- 155,542 88,381
Deferred income tax assets................................ -- 1,208,669 1,208,669
----------- ----------- -----------
Total current assets........................................ 8,374,858 21,799,988 17,771,463
Property and equipment, net................................. 6,270,619 7,617,958 7,617,041
Deferred debt issuance costs, net of accumulated
amortization of $286,402, $0 and $28,035, respectively.... 96,109 297,492 308,396
Covenants not to compete, net of accumulated amortization of
$902,780, $1,194,238 and $1,271,600, respectively......... 974,445 1,082,987 1,054,792
Goodwill and other intangible assets, net of accumulated
amortization of $6,488,863, $7,063,793 and $7,271,139,
respectively.............................................. 5,040,410 10,152,625 9,943,676
Deferred income tax assets.................................. -- 944,629 944,629
Other assets................................................ 229,210 176,855 176,854
----------- ----------- -----------
Total assets................................................ $20,985,651 $42,072,534 $37,816,851
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 723,834 $ 820,784 $ 650,695
Accrued compensation...................................... 1,175,423 858,049 1,179,798
Accrued income taxes...................................... 232,252 -- --
Other accrued expenses.................................... 1,051,497 2,486,532 791,797
Deferred tuition income................................... 2,821,257 3,184,225 3,541,045
Current portion of long-term debt......................... 1,080,085 3,964,851 768,394
----------- ----------- -----------
Total current liabilities.......................... 7,084,348 11,314,441 6,931,729
Long-term debt, less current portion........................ 6,674,909 2,163,880 1,830,978
Other liabilities........................................... 957,166 394,145 641,153
----------- ----------- -----------
Total liabilities.................................. 14,716,423 13,872,466 9,403,860
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, or June 30, 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, 7,418,100 and 7,418,100 shares issued and
outstanding at March 31, 1996 and 1997 and June 30,
1997, respectively...................................... 24,381 74,181 74,181
Additional paid-in capital on common stock................ 42,424 30,222,776 30,222,776
Common stock purchase warrants............................ 2,838,148 -- --
Accumulated deficit....................................... (3,343,115) (1,996,889) (1,783,966)
Less treasury stock, at cost, 29,165, 34,817 and 34,817
common shares at March 31, 1996 and 1997 and June 30,
1997, respectively...................................... (35,000) (100,000) (100,000)
----------- ----------- -----------
Total stockholders' equity......................... 6,269,228 28,200,068 28,412,991
----------- ----------- -----------
Total liabilities and stockholders' equity......... $20,985,651 $42,072,534 $37,816,851
=========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 63
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, THREE MONTHS ENDED JUNE 30,
--------------------------------------- ---------------------------
1995 1996 1997 1996 1997
----------- ----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues.................................... $37,080,045 $43,346,533 $49,449,680 $10,400,873 $12,909,020
School operating costs:
Cost of education and facilities.............. 17,487,917 19,650,937 23,150,599 5,243,020 6,369,982
Selling and promotional....................... 6,215,697 6,533,229 7,530,741 1,669,958 1,976,541
Provision for losses on accounts receivable... 1,280,654 1,270,565 1,239,151 217,157 321,047
General and administrative expenses........... 9,545,715 11,098,422 12,802,441 2,768,193 3,664,179
Amortization of goodwill and intangibles........ 1,255,288 882,953 886,268 175,926 312,743
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 3,305,442 326,619 264,523
Interest (income) expense, net (net of interest
income of $60,327 in 1995, $171,870 in 1996,
and $476,194 in 1997) and (net of interest
income of $41,285 at June 30, 1996 and
interest expense of $49,944 at June 30,
1997)......................................... 934,529 822,434 284,162 210,741 (94,130)
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes and
extraordinary item............................ (415,797) 1,158,993 3,021,280 115,878 358,653
Provision (benefit) for income taxes............ 27,982 632,185 (845,363) 43,674 145,730
----------- ----------- ----------- ----------- -----------
Net income (loss) before extraordinary item..... (443,779) 526,808 3,866,643 72,204 212,923
Extraordinary item -- loss on early
extinguishment of debt, net of income taxes... -- -- 308,683 -- --
----------- ----------- ----------- ----------- -----------
Net income (loss)....................... $ (443,779) $ 526,808 $ 3,557,960 $ 72,204 $ 212,923
=========== =========== =========== =========== ===========
Pro forma income tax data:
Income (loss) before income taxes and
extraordinary item.......................... $ (415,797) $ 1,158,993 $ 3,021,280 $ 115,878
Provision (benefit) for income taxes.......... 97,633 (486,505) 408,951 56,429
----------- ----------- ----------- -----------
Income (loss) before extraordinary item....... (513,430) 672,488 2,612,329 $ 59,449
Extraordinary item, net of income taxes....... -- -- 308,683 --
----------- ----------- ----------- -----------
Pro forma net income (loss)..................... $ (513,430) $ 672,488 $ 2,303,646 $ 59,449
----------- ----------- ----------- -----------
Pro forma net income (loss) per common and
common equivalent share:
Primary:
Income (loss) before extraordinary item..... $ (0.21) $ 0.13 $ 0.41 $ 0.01
Extraordinary item.......................... -- -- (0.05) --
----------- ----------- ----------- -----------
Net income (loss)....................... $ (0.21) $ 0.13 $ 0.36 $ 0.01
=========== =========== =========== ===========
Weighted average number of shares and common
equivalent shares outstanding (primary)....... 2,483,115 5,149,764 6,447,339 5,524,548
=========== =========== =========== ===========
Fully diluted:
Income (loss) before extraordinary item....... $ (0.21) $ 0.12 $ 0.41 $ 0.01
Extraordinary item............................ -- -- (0.05) --
----------- ----------- ----------- -----------
Net income (loss)....................... $ (0.21) $ 0.12 $ 0.36 $ 0.01
=========== =========== =========== ===========
Weighted average number of shares and common
equivalent shares outstanding (fully
diluted)...................................... 2,483,115 5,416,712 6,447,339 5,524,548
=========== =========== =========== ===========
Net income per share............................ $ 0.03
-----------
Weighted average shares outstanding............. 7,603,243
===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 64
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 ACCUMULATED TREASURY
STOCK STOCK STOCK STOCK WARRANTS DEFICIT STOCK
----------- ------------ ------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994, as
restated............................. $ 10,230 $ 6,732,160 $24,381 $ 42,424 $1,724,400$ (702,527) $ (35,000)
Accretion of value of common stock
purchase warrants.................. -- -- -- -- 339,252 (339,252) --
Issuance of common stock purchase
warrants........................... -- -- -- -- 368,150 -- --
Distributions to former Nebraska
Shareholders....................... -- -- -- -- -- (1,333,075) --
Adjustment for change in Nebraska
year end........................... -- -- -- -- -- 208,229
Net loss............................. -- -- -- -- -- (443,779) --
-------- ----------- ------- ----------- ----------- ----------- ---------
Balance at March 31, 1995.............. 10,230 6,732,160 24,381 42,424 2,431,802 (2,610,404) (35,000)
Accretion of value of common stock
purchase warrants.................. -- -- -- -- 406,346 (406,346) --
Distributions to former Nebraska
Shareholders....................... -- -- -- -- -- (853,173) --
Net income........................... -- -- -- -- -- 526,808 --
-------- ----------- ------- ----------- ----------- ----------- ---------
Balance at March 31, 1996.............. 10,230 6,732,160 24,381 42,424 2,838,148 (3,343,115) (35,000)
Accretion of value of common stock
purchase warrants.................. -- -- -- -- 281,398 (281,398) --
Issuance of common stock in
connection with initial public
offering........................... -- -- 22,000 19,238,000 -- -- --
Conversion of note receivable to
treasury stock..................... -- -- -- -- -- -- (65,000)
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....................... -- -- -- -- -- (1,236,970) --
Reclassification of undistributed
Nebraska S Corporation earnings to
additional paid-in-capital......... -- -- -- 693,366 -- (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 --
-------- ----------- ------- ----------- ----------- ----------- ---------
Balance at March 31, 1997.............. -- -- 74,181 30,222,776 -- (1,996,889) (100,000)
Net income (unaudited)................. -- -- -- -- -- 212,923 --
-------- ----------- ------- ----------- ----------- ----------- ---------
Balance at June 30, 1997 (unaudited)... $ -- $ -- $74,181 $30,222,776 $ -- $(1,783,966) $(100,000)
======== =========== ======= =========== =========== =========== =========
<CAPTION>
TOTAL
-----------
<S> <C>
Balance at March 31, 1994, as
restated............................. $ 7,796,068
Accretion of value of common stock
purchase warrants.................. --
Issuance of common stock purchase
warrants........................... 368,150
Distributions to former Nebraska
Shareholders....................... (1,333,075)
Adjustment for change in Nebraska
year end........................... --
Net loss............................. (443,779)
-----------
Balance at March 31, 1995.............. 6,595,593
Accretion of value of common stock
purchase warrants.................. --
Distributions to former Nebraska
Shareholders....................... (853,173)
Net income........................... 526,808
-----------
Balance at March 31, 1996.............. 6,269,228
Accretion of value of common stock
purchase warrants.................. --
Issuance of common stock in
connection with initial public
offering........................... 19,260,000
Conversion of note receivable to
treasury stock..................... (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)
Reclassification of undistributed
Nebraska S Corporation earnings to
additional paid-in-capital......... --
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
-----------
Balance at March 31, 1997.............. 28,200,068
Net income (unaudited)................. 212,923
-----------
Balance at June 30, 1997 (unaudited)... $28,412,991
===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 65
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
--------------------------------------- -------------------------
1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......................... $ (443,779) $ 526,808 $ 3,557,960 $ 72,204 $ 212,923
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation............................ 930,715 1,104,039 1,330,180 310,998 350,703
Amortization of other assets............ 1,284,043 931,076 886,555 175,925 312,743
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 (35,187) --
Impairment of goodwill and
intangibles........................... 176,042 764,000 -- -- --
Provision for losses on accounts
receivable............................ 1,280,654 1,270,565 1,239,151 217,157 321,047
Deferred income taxes................... -- -- (1,563,995) -- --
Amortization of discount on long-term
debt.................................. 212,445 123,567 72,044 30,877 --
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) (124,570) (1,236,928)
Income taxes receivable............... -- -- (155,542) -- 67,161
Prepaid expenses...................... 91,400 (60,224) (68,651) (273,890) (12,207)
Other assets.......................... (183,766) (40,292) 62,297 -- 3,185
Accounts payable and accrued
expenses............................ 1,052,681 (282,548) 734,795 284,170 (1,543,075)
Deferred tuition income............... (519,615) 202,430 (1,826,398) (277,971) 356,820
Income taxes payable.................. -- 220,807 (26,461) (147,070) --
Other liabilities..................... 134,352 305,713 (563,021) (480,420) 247,008
----------- ----------- ----------- ---------- -----------
Net cash provided by (used in) operating
activities.............................. 1,503,214 4,207,275 2,736,657 (247,777) (920,620)
INVESTING ACTIVITIES
Net Additions to goodwill and
intangibles............................. -- -- -- -- (50,760)
Purchase of businesses, net of cash
acquired................................ -- -- (1,400,000) --
Purchases of property and equipment....... (2,200,758) (1,342,638) (2,079,501) (686,620) (349,786)
----------- ----------- ----------- ---------- -----------
Net cash (used in) investing activities... (2,200,758) (1,342,638) (3,479,501) (686,620) (400,546)
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.................................... 2,529,950 391,837 532,295 532,295 --
Principal payments on acquisition notes
payable................................. (1,156,187) (1,404,160) (1,890,493) (414,095) (3,529,358)
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) (38,939)
Distributions to former Nebraska
Shareholders............................ (1,057,273) (790,193) (1,023,472) (108,000) --
----------- ----------- ----------- ---------- -----------
Net cash provided by (used in) financing
activities.............................. 318,540 (2,388,738) 11,581,688 10,200 (3,568,297)
----------- ----------- ----------- ---------- -----------
Increase (decrease) in cash and cash
equivalents............................. (379,004) 475,899 10,838,844 (924,197) (4,889,463)
Cash and cash equivalents at beginning of
year.................................... 3,112,150 2,733,146 3,209,045 3,819,045 14,047,889
----------- ----------- ----------- ---------- -----------
Cash and cash equivalents at end of
year.................................... $ 2,733,146 $ 3,209,045 $14,047,889 $2,894,848 $ 9,158,426
=========== =========== =========== ========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 66
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.
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-7
<PAGE> 67
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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.
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-8
<PAGE> 68
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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>
EARNINGS PER SHARE
Historical net income (loss) per share presented in accordance with
generally accepted accounting principles is as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
------------------------------------ --------------
1995 1996 1997 1997
---------- ---------- ---------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss) per common share and
common equivalent share:
Income (loss) before extraordinary
item............................. $ (0.18) $ 0.10 $ 0.60 $ 0.03
Extraordinary item.................. -- -- (.05) --
Net income (loss)................... (0.18) 0.10 0.55 $ 0.03
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 7,603,243
</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
F-9
<PAGE> 69
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 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.
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.
INTERIM STATEMENTS
The interim financial data for the three months ended June 30, 1997 and
1996 is unaudited; however, in the opinion of management, the interim data
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results of operations for the interim
periods, on a consistent basis.
F-10
<PAGE> 70
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 following table sets forth, for each institution, the percentage of
revenues derived from Student Financial Assistance programs in the year ended
March 31, 1997. Percentages were calculated including funds received in periods
prior to acquisition by the Company.
<TABLE>
<CAPTION>
OPE TOTAL TITLE IV FUNDS
IDENTIFI- TITLE IV ELIGIBLE AS PERCENTAGE
CATION FUNDS FUNDS OF TOTAL FUNDS
SCHOOL NUMBER RECEIVED RECEIVED RECEIVED
- ------ --------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Maric College of Medical Careers --............ 02091700 $7,486,083 $9,246,540 81.0%
San Diego, California
Maric College of Medical Careers --............ 02549000 4,204,441 5,012,133 83.9%
San Marcos/Vista, California
Long Medical Institute --...................... 02071200 1,212,291 1,471,521 82.4%
Phoenix, Arizona
Andon College --............................... 02565400 2,187,271 2,613,929 83.7%
Stockton, California
Andon College of Modesto --.................... 02306300 1,485,259 1,808,792 82.1%
Modesto, California
Bauder College --.............................. 01157400 2,807,549 4,327,637 64.9%
Atlanta, Georgia
Modern Technology School of X-Ray --........... 02539100 2,632,371 3,127,512 84.2%
North Hollywood, California
Dominion Business School --.................... 01290100 952,712 1,122,745 84.9%
Roanoke, Virginia
Dominion Business School --.................... 03077000 923,703 1,144,852 80.7%
Harrisonburg, Virginia
ICM School of Business --...................... 00743600 2,919,497 4,590,857 63.6%
Pittsburgh, Pennsylvania
Ohio Institute of Photography &
Technology --................................ 02052000 1,838,577 2,707,130 67.9%
Dayton, Ohio
California Academy of Merchandising, Art, and
Design --.................................... 02351900 781,616 924,969 84.5%
Sacramento, California
San Antonio College of Medical & Dental
Assistants --................................ 00946600 1,330,135 1,785,291 74.5%
San Antonio/McAllen, TX
</TABLE>
F-11
<PAGE> 71
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OPE TOTAL TITLE IV FUNDS
IDENTIFI- TITLE IV ELIGIBLE AS PERCENTAGE
CATION FUNDS FUNDS OF TOTAL FUNDS
SCHOOL NUMBER RECEIVED RECEIVED RECEIVED
- ------ --------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Career Centers of Texas --..................... 02591900 $ 711,116 $1,140,656 62.3%
El Paso, Texas
Hagerstown Business College --................. 00794600 989,180 1,916,954 51.6%
Hagerstown, Maryland
Nebraska College of Business --................ 00849100 2,645,949 3,242,624 81.6%
Omaha, Nebraska
Lincoln School of Commerce --.................. 00472100 2,635,081 3,312,854 79.5%
Lincoln, Nebraska
</TABLE>
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
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.
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.
F-12
<PAGE> 72
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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>
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
F-13
<PAGE> 73
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$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.
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>
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).............................................. $ -- $ --
</TABLE>
F-14
<PAGE> 74
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
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 --
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 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
F-15
<PAGE> 75
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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-16
<PAGE> 76
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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 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
F-17
<PAGE> 77
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of equity or equity related 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.
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-18
<PAGE> 78
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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.
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.
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.
F-19
<PAGE> 79
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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-20
<PAGE> 80
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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>
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.
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.
F-21
<PAGE> 81
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-22
<PAGE> 82
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
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-23
<PAGE> 83
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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-24
<PAGE> 84
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
San Antonio College of Medical
and Dental Assistants, Inc.
and Career Centers of Texas -- El Paso, Inc.
We have audited the accompanying combined balance sheets of San Antonio
College of Medical and Dental Assistants, Inc. and Career Centers of Texas -- El
Paso, Inc. (S corporations) as of December 31, 1995 and 1994, and the related
combined statements of operations, retained earnings, and cash flows for the
years then ended. The combined financial statements are the responsibility of
the Institution's management. Our responsibility is to express an opinion on
these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to in the first
paragraph present fairly, in all material respects, the combined financial
position of San Antonio College of Medical and Dental Assistants, Inc. and
Career Centers of Texas -- El Paso, Inc. as of December 31, 1995 and 1994 and
the results of their combined operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
/s/ Tsakopulos Brown Schott &
Anchors
--------------------------------------
San Antonio, Texas
March 12, 1996, except for
Note 1, which is August 2, 1996
F-25
<PAGE> 85
SAN ANTONIO COLLEGE OF MEDICAL AND DENTAL ASSISTANTS, INC.
AND CAREER CENTERS OF TEXAS -- EL PASO, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1994 1995 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash.................................................... $1,358,394 $1,315,967 $1,336,260
Certificates of deposit................................. -- 415,227 473,438
Short-term investment................................... -- 25,761 25,761
Grant and loan program cash............................. 3,326 280 --
Due from Department of Education........................ -- -- 49,695
Accounts receivable from students....................... 898,650 1,127,003 966,877
Less: Deferred tuition income........................... -- (978,016) (884,843)
Allowance for uncollectible accounts............ (145,460) (148,987) (82,034)
Note receivable, current portion........................ -- 4,683 2,858
Other................................................... 13,632 13,885 13,851
---------- ---------- ----------
Total Current Assets............................ 2,128,542 1,775,803 1,901,863
Property and equipment
Furniture, fixtures and equipment....................... 969,230 950,431 966,299
Leasehold improvements.................................. 82,947 88,725 88,725
---------- ---------- ----------
1,052,177 1,039,156 1,055,024
Less accumulated depreciation........................... (797,340) (833,338) (874,988)
---------- ---------- ----------
Total Property and Equipment.................... 254,837 205,818 180,036
Other assets
Goodwill, less $24,884 accumulated amortization......... 12,898 11,976 11,516
Unsecured note receivable, less current portion......... -- 9,942 9,942
---------- ---------- ----------
Total Other Assets.............................. 12,898 21,918 21,458
---------- ---------- ----------
Total assets.................................. $2,396,277 $2,003,539 $2,103,357
========== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable........................................ 49,001 $ 45,851 $ 108,544
7% unsecured note payable to stockholder................ 83,226 -- --
Accrued expenses........................................ 21,064 36,227 216,225
Grant and loan program payable.......................... 3,326 280 --
---------- ---------- ----------
Grant and loan program overdraft........................ 49,695
Deferred tuition income................................. 1,454,483 1,595,010 1,542,120
Less amount to offset receivable from students....... -- (978,016) (884,843)
---------- ---------- ----------
Total Current Liabilities....................... 1,611,100 699,352 1,031,741
Stockholder's equity
Capital stock........................................... 11,000 11,000 11,000
Capital in excess of par value.......................... 104,074 104,074 104,074
Retained earnings....................................... 1,155,780 1,674,790 1,442,219
---------- ---------- ----------
1,270,854 1,789,864 1,557,293
Less treasury stock, at cost.................... (485,677) (485,677) (485,677)
---------- ---------- ----------
Total stockholder's equity.................... 785,177 1,304,187 1,071,616
---------- ---------- ----------
Total liabilities and stockholder's equity.... $2,396,277 $2,003,539 $2,103,357
========== ========== ==========
</TABLE>
The Accompanying Notes Are an Integral Part of These Combined Financial
Statements.
F-26
<PAGE> 86
SAN ANTONIO COLLEGE OF MEDICAL AND DENTAL ASSISTANTS, INC.
AND CAREER CENTERS OF TEXAS -- EL PASO, INC.
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
Net revenues................................................ $4,743,058
School operating costs:
Cost of education and facilities.......................... 2,225,106
Selling and promotional................................... 371,511
General and administrative expenses....................... 1,515,594
Amortization of goodwill and intangibles.................... 922
----------
Income from operations...................................... 629,925
Interest income............................................. 49,085
----------
Income before pro forma provision for income taxes.......... 679,010
Pro forma provision for income taxes (unaudited)............ 272,000
----------
Pro forma net income (unaudited)............................ $ 407,010
==========
</TABLE>
The Accompanying Notes Are an Integral Part of These Combined Financial
Statements.
F-27
<PAGE> 87
SAN ANTONIO COLLEGE OF MEDICAL AND DENTAL ASSISTANTS, INC.
AND CAREER CENTERS OF TEXAS -- EL PASO, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED JUNE 30,
DECEMBER 31, -------------------------
1994 1995 1996
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenues
Tuition income.......................................... $4,478,288 $2,249,178 $2,615,641
Student expenses........................................ (119,850) (38,484) (23,214)
Tuition refunds......................................... (333,435) (153,750) (141,183)
---------- ---------- ----------
Net tuition revenues............................ 4,025,003 2,056,944 2,451,244
Operating Expenses
Employee expense 1,954,660 1,033,979 1,146,486
Occupancy............................................... 424,147 207,204 221,474
Advertising and sales promotion......................... 187,262 118,102 152,936
Bad debts............................................... 147,337 116,950 106,700
Supplies................................................ 159,879 37,233 81,685
Depreciation............................................ 86,519 82,615 41,650
Books................................................... 115,943 65,670 34,796
Professional services................................... 59,509 41,141 34,607
Other................................................... 742,520 354,985 383,663
---------- ---------- ----------
Total operating expenses........................ 3,877,776 2,056,979 2,203,997
---------- ---------- ----------
Operating income (loss)................................. 147,227 (35) 247,247
Other income
Interest income......................................... 35,010 17,289 27,205
Miscellaneous........................................... 17,379 7,020 14,223
Vending................................................. 11,366 4,569 3,754
Interest Expense........................................ (10,062) (1,821) --
---------- ---------- ----------
Total other income.............................. 53,693 27,057 45,182
---------- ---------- ----------
Income before pro forma provision for income taxes........ 200,920 27,022 292,429
Pro forma provision for income taxes (unaudited).......... 80,000 11,000 117,000
---------- ---------- ----------
Pro forma net income (unaudited).......................... $ 120,920 $ 16,022 $ 175,429
========== ========== ==========
</TABLE>
The Accompanying Notes Are an Integral Part of These Combined Financial
Statements.
F-28
<PAGE> 88
SAN ANTONIO COLLEGE OF MEDICAL AND DENTAL ASSISTANTS, INC.
AND CAREER CENTERS OF TEXAS -- EL PASO, INC.
COMBINED STATEMENT OF RETAINED EARNINGS
<TABLE>
<S> <C>
Retained earnings at December 31, 1993...................... $1,244,583
Distribution to stockholder................................. (289,723)
Net income.................................................. 200,920
----------
Retained earnings at December 31, 1994...................... 1,155,780
Distribution to stockholder................................. (160,000)
Net income.................................................. 679,010
----------
Retained earnings at December 31, 1995...................... 1,674,790
Distribution to stockholder (unaudited)..................... (525,000)
Net income (unaudited)...................................... 292,429
----------
Retained earnings at June 30, 1996 (unaudited).............. $1,442,219
==========
</TABLE>
The Accompanying Notes are an Integral Part of the Combined Financial
Statements.
F-29
<PAGE> 89
SAN ANTONIO COLLEGE OF MEDICAL AND DENTAL ASSISTANTS, INC.
AND CAREER CENTERS OF TEXAS -- EL PASO, INC.
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Inflows
Cash received from students............................ $4,097,092 $4,467,065
Interest income........................................ 35,010 52,707
---------- ----------
4,132,102 4,519,772
Outflows
Cash paid to suppliers and employees................... 3,625,764 3,837,357
Interest expense....................................... 10,062 3,622
---------- ----------
3,635,826 3,840,979
---------- ----------
Net cash provided by operating activities......... 496,276 678,793
Cash flows from investing activities
Outflows
Purchase certificates of deposit and short-term
investment............................................ -- 440,988
Purchase property and equipment........................ 100,160 22,381
Loans to employees..................................... -- 14,625
---------- ----------
Net cash (used) by investing activities........... (100,160) (477,994)
Cash flows from financing activities
Outflows
Debt payments to stockholder........................... 76,774 83,226
Distribution to stockholder............................ 289,723 160,000
---------- ----------
Net cash (used) by financing activities........... (366,497) (243,226)
---------- ----------
Net increase (decrease) in cash............................. 29,619 (42,427)
Cash, beginning of year..................................... 1,328,775 1,358,394
---------- ----------
Cash, end of year........................................... $1,358,394 $1,315,967
========== ==========
</TABLE>
The Accompanying Notes are an Integral Part of these Combined Financial
Statements.
F-30
<PAGE> 90
SAN ANTONIO COLLEGE OF MEDICAL AND DENTAL ASSISTANTS, INC.
AND CAREER CENTERS OF TEXAS -- EL PASO, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities
Net income................................................ $ 27,022 $ 292,429
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization expense.................. 66,130 42,110
Bad debt expense....................................... 116,950 106,700
(Increase) in current assets
Accounts receivable.................................. (3,503) 66,870
Other current assets................................. 2,267 (2,441)
Increase in current liabilities
Accounts payable..................................... 6,076 62,693
Accrued liabilities.................................. 132,929 180,192
Deferred tuition income.............................. (4,111) (126,543)
---------- ----------
Net cash provided by operating activities......... 343,760 622,010
Cash flows from investing activities
Outflows
Purchase certificate of deposit........................ -- 58,211
Purchase property and equipment........................ 6,517 15,867
Inflows -- payments on notes receivable................... -- (1,824)
---------- ----------
Net cash (used) by investing activities........... (6,517) (72,254)
Cash flows from financing activities
Outflows
Repayments on loan from stockholder.................... 43,419 --
Distribution to stockholder............................ 135,000 525,000
---------- ----------
Net cash (used) by financing activities........... (178,419) (525,000)
---------- ----------
Net decrease in cash........................................ 158,824 24,756
Cash, beginning of period................................... 1,358,392 1,311,504
---------- ----------
Cash, end of period......................................... $1,517,216 $1,336,260
========== ==========
</TABLE>
The Accompanying Notes are an Integral Part of these Combined Financial
Statements.
F-31
<PAGE> 91
SAN ANTONIO COLLEGE OF MEDICAL AND DENTAL ASSISTANTS, INC.
AND CAREER CENTERS OF TEXAS -- EL PASO, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND DECEMBER 31, 1995
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Organization
The accompanying combined financial statements include the financial
position, results of operations and cash flows of San Antonio College of Medical
and Dental Assistants, Inc. and Career Centers of Texas -- El Paso, Inc.
(collectively, the "Institution"). The Institution's outstanding common stock is
owned by the same individual who is also an officer of both corporations. The
Institution's management believes that combined financial statements fairly
present the financial position, results of operations and cash flows of the
related entities. Intercompany transactions and balances have been eliminated in
the accompanying combined financial statements.
The Institution was organized to provide training to medical and dental
technicians in the San Antonio, McAllen and El Paso, Texas areas. A substantial
portion of the Institution's tuition income is derived from students who qualify
under government tuition assistance programs. Such programs are subject to
continued approval by the U.S. Congress. The Institution is also subject to
programmatic and financial audits by the Department of Education and other
regulatory agencies. Beginning in 1993, the Institution conducted a portion of
its training in an additional location (the "Additional Location") in El Paso,
Texas. Although the school received approvals for the Additional Location prior
to its opening from the applicable state regulatory authority and its
accrediting agency, it inadvertently failed to notify the Department of
Education of commencement of operations of the Additional Location until August
2, 1996, at which time the Department verbally approved the location.
Although the Company does not believe that its inadvertent failure to
notify the Department of its operations at the Additional Location will be
considered a significant failure to comply with relevant Department of Education
Regulations, the Department of Education could take the position that the
Additional Location was ineligible for Title IV funding pending its approval and
that all Title IV funding received by the Additional Location prior to the
August 1996 verbal approval (approximately $1,100,000 unaudited) is subject to
refund, repayment and applicable penalties. The Institution has not received
notice of any such claim from the Department, and does not believe that the
Department will take such a position.
The Institution has entered into an Asset Purchase Agreement dated
September 6, 1996 with an unrelated entity to sell substantially all of its
student receivables and property and equipment.
Use of Estimates
The Institution uses estimates and assumptions in preparing combined
financial statements in accordance with generally accepted accounting
principles. Those estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities, and
the reported revenues and expenses. Actual results could vary from the estimates
that were used.
Fair Values of Financial Instruments
The Institution's financial instruments consist of cash, certificates of
deposit, short-term investment, accounts receivable, note receivable and
accounts payable. The carrying amounts of these items reported in the combined
balance sheet approximate fair values due to the short maturity of those
instruments.
F-32
<PAGE> 92
SAN ANTONIO COLLEGE OF MEDICAL AND DENTAL ASSISTANTS, INC.
AND CAREER CENTERS OF TEXAS -- EL PASO, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Cash Equivalents
For purposes of the combined statement of cash flows, the Institution
considers all short-term debt securities purchased with a maturity of three
months or less to be cash equivalents. There were no cash equivalents at
December 31, 1995 and December 31, 1994.
Short-term Investment
The Institution's short-term investment is classified as available-for-sale
and is a highly liquid debt security. Market value approximated cost at December
31, 1995.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided in
amounts sufficient to relate the cost of depreciable assets to operations over
their estimated service lives principally on the straight-line method.
The cost of major additions and improvements is capitalized; expenditures
for maintenance and repairs are expensed as incurred. When assets are sold,
retired or otherwise disposed of, cost and related accumulated depreciation are
removed from the accounts, and any resulting gain or loss is included in current
operations.
Goodwill
Goodwill is amortized over forty years using the straight-line method.
Deferred Tuition Income
Deferred tuition income represents the amount of tuition for which course
instruction has not been provided and is calculated on a monthly pro-rata basis.
In 1995, the institution decided for financial reporting purposes, that the
related deferred tuition should be shown as an offset against student
receivables. Amounts in excess of student receivables are presented as a current
liability in the accompanying combined balance sheet. Deferred tuition income
will be amortized ratably to future operations as educational services are
rendered.
Advertising Costs
All costs related to marketing and advertising the Institution's services
are expensed in the year incurred.
Interim Statements
The interim financial data for the six months ended June 30, 1996 and 1995
is unaudited; however, in the opinion of management, the interim data includes
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair statement of the results for the interim periods, on a consistent basis.
F-33
<PAGE> 93
SAN ANTONIO COLLEGE OF MEDICAL AND DENTAL ASSISTANTS, INC.
AND CAREER CENTERS OF TEXAS -- EL PASO, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Institution's financial
instruments at December 31, 1995 are summarized as follows:
<TABLE>
<CAPTION>
CARRYING
AMOUNT FAIR VALUE
---------- ----------
<S> <C> <C>
Cash and certificates of deposit............................ $1,731,474 $1,731,474
Short-term investment....................................... 25,761 25,761
Accounts receivable......................................... 1,127,003 1,127,003
Note receivable............................................. 14,625 14,625
Accounts payable............................................ 45,851 45,851
</TABLE>
NOTE 3. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Institution to
concentrations of credit risk consist principally of cash, certificates of
deposit and accounts receivable from students. The Institution places its
depository accounts and certificates of deposit with high-quality financial
institutions and, by policy, limits the amounts of credit exposure to any one
financial institution. As of December 31, 1994 and 1995, aggregate deposits
exceeded the insuring governmental agency's limit by $271,000 and $477,000,
respectively. The concentration of credit risk with respect to student accounts
receivable is limited due to the significant large number of students comprising
the Institution's student base, their dispersion across San Antonio, McAllen and
El Paso, Texas and their qualification for governmental financial assistance
(Note 1). The Institution continually monitors student academic performance and
maintains allowances for anticipated withdrawals.
NOTE 4. GRANT PROGRAMS
The Institution participates in the Pell Grant and Supplemental Educational
Opportunity Grant programs. A separate bank account is maintained for the
administration of these grants which entails receipt of grant monies and
disbursement thereof to eligible students. The ending cash balance represents
receipts that are either payable to the students or refundable back to the grant
programs if the students do not complete the required program.
NOTE 5. SHORT-TERM INVESTMENT
The Institution adopted Statement of Financial Accounting Standards
Statement No. 115, "Accounting for Certain Debt and Equity Securities," at
December 31, 1995 and has classified its investment as available-for-sale. The
investment was purchased in 1995.
NOTE 6. CAPITAL STOCK
Capital stock at December 31, 1995 and December 31, 1994 are summarized as
follows:
<TABLE>
<S> <C>
San Antonio College of Medical and Dental Assistants, Inc.
Class A Common Stock -- $1 par value, 50,000 shares
authorized; none issued................................ $ --
Class B Common Stock -- $1 par value, 10,000 shares
authorized and issued; 3,534 shares outstanding........ 10,000
Career Centers of Texas -- El Paso, Inc.
Common Stock -- $1 par value, 500,000 shares authorized;
1,000 shares issued and outstanding.................... 1,000
-------
$11,000
=======
</TABLE>
F-34
<PAGE> 94
SAN ANTONIO COLLEGE OF MEDICAL AND DENTAL ASSISTANTS, INC.
AND CAREER CENTERS OF TEXAS -- EL PASO, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Treasury stock represents 6,466 shares of Class B common stock issued by
San Antonio College of Medical and Dental Assistants, Inc.
NOTE 7. NET TUITION REVENUES
Net tuition revenues for each campus for the year ended December 31, 1994
and 1995 is summarized as follows:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
San Antonio -- Central...................................... $1,106,343 $1,356,148
San Antonio -- Medical Center............................... 893,797 775,650
McAllen..................................................... 854,710 1,116,558
El Paso..................................................... 1,170,153 1,494,702
---------- ----------
Total Net Tuition Revenues........................ $4,025,003 $4,743,058
========== ==========
</TABLE>
NOTE 8. PROFIT SHARING PLAN
The Institution has a qualified profit sharing plan for the benefit of its
eligible employees. Contributions are made at the discretion of the Board of
Directors. Profit sharing expense for the years ended December 31, 1994 and 1995
was $14,091 and $20,986, respectively.
NOTE 9. RELATED PARTY TRANSACTIONS
During 1993, the Institution's stockholder purchased the facility currently
occupied by the San Antonio -- Central campus from its owner. The Institution
has guaranteed the related debt to the bank which financed the purchase of the
property and it must also meet certain financial ratios. The stockholder also
owns the facility occupied by the McAllen campus.
During 1995, the Institution's stockholder purchased the facility currently
occupied by the main El Paso campus. Previously, the facility was owned by a
partnership partially owned by the Institution's stockholder (see Note 13). The
Institution has guaranteed the related debt to the bank which financed the
purchase of the property, and it must also meet certain financial ratios.
Operating lease payments aggregating $271,000 and $288,000 for the San
Antonio -- Central, McAllen and El Paso campuses were paid to the stockholder in
1994 and 1995, respectively.
NOTE 10. FEDERAL INCOME TAXES
Pursuant to applicable provisions of the Internal Revenue Code, the
Institution has received permission to be treated as an "S Corporation" for
income tax purposes. Under such provisions, the Institution is not responsible
for the federal income tax liability attributable to its taxable income. The
Institution's taxable income will be reported on its stockholder's individual
income tax return and the related tax liability, if any, will be the
responsibility of the stockholder.
The pro forma provision for income taxes represents a provision for income
taxes as if the Institution had operated as subchapter C Corporations.
NOTE 11. EMPLOYEE EXPENSE
The Institution "leases" its employees from an unrelated company.
Consequently, salaries, wages, payroll taxes and other related employee benefit
costs are included in the appropriate expense category.
F-35
<PAGE> 95
SAN ANTONIO COLLEGE OF MEDICAL AND DENTAL ASSISTANTS, INC.
AND CAREER CENTERS OF TEXAS -- EL PASO, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12. CASH FLOWS
A reconciliation of net income to net cash provided by operating activities
for the year ended December 31, 1994 and 1995 is summarized as follows:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Net income.................................................. $ 200,920 $ 679,010
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization expense..................... 87,441 72,241
Bad debt expense.......................................... 147,337 223,797
(Increase) in current assets
Accounts receivables................................... (175,212) (428,204)
Other current assets................................... 7,039 (173)
Increase (decrease) in current liabilities
Accounts payable....................................... (17,065) (3,150)
Accrued expenses....................................... (2,207) 15,163
Deferred tuition income................................ 248,023 120,109
--------- ---------
Net cash provided by operating activities................... $ 496,276 $ 678,793
========= =========
</TABLE>
NOTE 13. COMMITMENTS
The Institution conducts its operations in facilities pursuant to lease
agreements which are classified as operating leases. The following is a schedule
by years of minimum rental payments under such operating leases which expire at
various dates through 2009:
<TABLE>
<CAPTION>
LEASED FROM
FOR THE YEARS ---------------------------
ENDING INSTITUTION'S UNRELATED
DECEMBER 31, TOTAL STOCKHOLDER 3RD PARTIES
------------- ---------- ------------- -----------
<S> <C> <C> <C>
1996................................................ $ 417,700 $ 286,000 $131,700
1997................................................ 417,700 286,000 131,700
1998................................................ 402,800 286,000 116,800
1999................................................ 402,300 286,000 116,300
2000................................................ 381,100 286,000 95,100
Remaining rentals................................... 2,088,000 2,088,000 --
---------- ---------- --------
$4,109,600 $3,518,000 $591,600
========== ========== ========
</TABLE>
Total rent expense for the years ended December 31, 1994 and 1995 was
$389,003 and $427,054, respectively, of which $271,000 and $288,000 was paid to
the Institution's stockholder, respectively.
As indicated in Note 9 to the combined financial statements, the
Institution has guaranteed the related debt which financed the stockholder's
purchase of the San Antonio -- Central and El Paso facilities.
The Institution is from time to time subject to routine litigation
incidental to its business. While the ultimate results of these matters cannot
be determined at this time, the Institution believes that it has meritorious
defenses with respect to such matters and does not expect them to have a
material adverse impact on the Institution's financial condition.
F-36
<PAGE> 96
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Hagerstown Business College
We have audited the accompanying divisional balance sheet of Hagerstown
Business College (a division of O/E Learning, Inc.) as of October 31, 1996 and
1995 and the related statements of divisional income, changes in divisional
equity and divisional cash flows for the years then ended. These divisional
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these divisional financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the divisional financial statements referred to above
present fairly, in all material respects, the divisional financial position of
Hagerstown Business College as of October 31, 1996 and 1995 and the results of
its divisional operations and its divisional cash flows for the years then
ended, in conformity with generally accepted accounting principles.
/s/ Plante & Moran, LLP
--------------------------------------
Southfield, Michigan
December 30, 1996
F-37
<PAGE> 97
HAGERSTOWN BUSINESS COLLEGE
(A DIVISION OF O/E LEARNING, INC.)
DIVISIONAL BALANCE SHEET
<TABLE>
<CAPTION>
OCTOBER 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash (including restricted cash of $14,338 in 1996 and
$20,450 in 1995).......................................... $ 229,600 $ 207,000
Accounts receivable (net allowance for doubtful accounts of
$15,000 in 1996).......................................... 342,800 302,500
Inventory (Note 2).......................................... 34,500 23,800
---------- ----------
Total current assets.............................. $ 606,900 $ 533,300
PROPERTY AND EQUIPMENT
Furniture and equipment..................................... 850,000 788,400
Land and building........................................... 2,436,300 2,436,300
---------- ----------
Total property and equipment...................... 3,286,300 3,224,700
Less accumulated depreciation............................... (1,070,800) (883,700)
---------- ----------
Net property and equipment........................ 2,215,500 2,341,000
INTANGIBLE ASSETS (net of accumulated amortization of
$66,000 in 1996 and $58,000 in 1995)...................... 134,000 142,000
---------- ----------
Total assets...................................... $2,956,400 $3,016,300
========== ==========
LIABILITIES AND DIVISIONAL EQUITY
CURRENT LIABILITIES
Accounts payable -- Trade................................... $ 11,800 $ 31,900
Accrued expenses and other liabilities...................... 91,100 86,200
Deferred revenue (Note 2)................................... 402,700 385,000
---------- ----------
Total current liabilities......................... 505,600 503,100
DIVISIONAL EQUITY (NOTE 2).................................. 2,450,800 2,513,200
---------- ----------
Total liabilities and divisional equity........... $2,956,400 $3,016,300
========== ==========
</TABLE>
See Notes to Divisional Financial Statements.
F-38
<PAGE> 98
HAGERSTOWN BUSINESS COLLEGE
(A DIVISION OF O/E LEARNING, INC.)
STATEMENT OF DIVISIONAL INCOME
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
REVENUE
Training.................................................. $2,294,800 $2,329,900
Other..................................................... 46,100 36,700
---------- ----------
2,340,900 2,366,600
EXPENSES
Training.................................................. 973,700 1,012,400
Depreciation.............................................. 188,300 176,100
Amortization of intangible assets......................... 8,000 8,000
Selling, general and administrative....................... 581,500 669,000
---------- ----------
Total expenses.................................... 1,751,500 1,865,500
---------- ----------
INCOME -- Before income taxes............................... 589,400 501,100
INCOME TAX EXPENSE (Note 3)................................. 205,300 173,100
---------- ----------
NET INCOME........................................ $ 384,100 $ 328,000
========== ==========
</TABLE>
See Notes to Divisional Financial Statements.
F-39
<PAGE> 99
HAGERSTOWN BUSINESS COLLEGE
(A DIVISION OF O/E LEARNING, INC.)
STATEMENT OF CHANGES IN DIVISIONAL EQUITY
<TABLE>
<S> <C>
BALANCE -- November 1, 1994................................. $2,490,700
Net income.................................................. 328,000
Repayment of contributed capital (Note 5)................... (305,500)
----------
BALANCE -- October 31, 1995................................. 2,513,200
Net income.................................................. 384,100
Repayment of contributed capital (Note 5)................... (446,500)
----------
BALANCE -- October 31, 1996................................. $2,450,800
==========
</TABLE>
See Notes to Divisional Financial Statements.
F-40
<PAGE> 100
HAGERSTOWN BUSINESS COLLEGE
(A DIVISION OF O/E LEARNING, INC.)
STATEMENT OF DIVISIONAL CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 384,100 $ 328,000
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization.......................... 196,300 184,100
Changes in assets and liabilities:
(Increase) decrease in accounts receivable........... (40,300) 5,700
Increase in inventory................................ (10,700) (1,100)
Decrease in other current assets..................... -- --
Decrease (increase) in deferred revenue.............. 17,700 (1,300)
and other liabilities............................. (15,200) 2,300
--------- ---------
Net cash provided by operating activities......... 531,900 518,300
Cash Flows from Investing Activities -- Purchase of fixed
assets.................................................... (62,800) (207,800)
Cash Flows from Financing Activities -- Repayment of
contributed capital....................................... (446,500) (305,500)
--------- ---------
Increase in Cash............................................ 22,600 5,000
Cash -- Beginning of year................................... 207,000 202,000
--------- ---------
Cash -- End of year......................................... $ 229,600 $ 207,000
========= =========
Supplemental Disclosures of Cash Flow Information -- Cash
paid during the year for:
Interest.................................................. $ -- $ --
Income taxes -- O/E Learning, Inc......................... 205,300 173,100
</TABLE>
See Notes to Divisional Financial Statements.
F-41
<PAGE> 101
HAGERSTOWN BUSINESS COLLEGE
(A DIVISION OF O/E LEARNING, INC.)
NOTES TO DIVISIONAL FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
1. DIVISIONAL INFORMATION
Hagerstown Business College (a division of O/E Learning, Inc.) is a
majority-owned subsidiary of O/E Automation, Inc. The College's operations
consists of proprietary secondary education in Hagerstown, Maryland.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounts Receivable. Accounts receivable are comprised of tuition and fee
payments due from students.
Cash. Cash includes petty cash and bank deposits. Restricted cash consists
of federal funds on hand to be paid to students.
Inventory. Inventory is stated at cost on a first-in, first-out basis and
is comprised of text books and supplies.
Property and Equipment. Furniture, equipment and buildings are recorded at
cost and depreciated on a straight-line basis over their estimated useful lives.
Intangible Assets. Intangible assets consist of goodwill from acquisitions
of businesses, which is being amortized using the straight-line method over the
estimated lives ranging from 20 to 25 years. Amortization expense amounted to
$8,000 and $8,300 for the years ended October 31, 1996 and 1995, respectively.
Deferred Revenue. Certain students are billed in advance. Deferred revenue
consists of billings pertaining to the subsequent year.
Divisional Equity. Divisional equity represents the cumulative results of
operation of the College since its purchase by O/E Learning, Inc. plus cash
contributed by O/E Learning, Inc., net of any repayments of contributed capital.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expense during
the reporting period. Actual results could differ from those estimates.
3. INCOME TAXES
The College is included in the consolidated income tax returned filed by
O/E Automation, Inc. and, as agreed, the consolidated taxes payable are
allocated to O/E Learning, Inc. based on its contribution to consolidated
taxable income. Income tax expense has been allocated to Hagerstown Business
College based on statutory tax rates applied to book income, and payment has
been made to O/E Learning, Inc. for this amount in 1996 and 1995. Accordingly,
no deferred income tax assets or liabilities have been allocated to the College.
4. EMPLOYEE BENEFIT PLANS
Eligible employees of the College participated in the O/E Automation, Inc.
defined benefit pension plan. Participation in the plan was contingent upon
attainment of one year of eligible service, provided the employee has reached
the age of 21 and was employed prior to reaching age 60 and one day. The
benefits under the plan were based on years of service and the employee's
highest compensation in a consecutive five-year period of employment. The
participating companies annually contributed to the plan an amount actuarially
determined to provide the plan with sufficient assets to meet future benefit
payment requirements. The plan was
F-42
<PAGE> 102
HAGERSTOWN BUSINESS COLLEGE
(A DIVISION OF O/E LEARNING, INC.)
NOTES TO DIVISIONAL FINANCIAL STATEMENTS -- (CONTINUED)
terminated effective October 31, 1995. As of October 31, 1996, the plan's assets
at fair value are less than the projected benefit obligation by $212,400. O/E
Learning, Inc. has accrued its share of the pension liability. O/E Learning,
Inc.'s pension expense under this plan amounted to $97,300 for 1995. This
pension expense was included in part in the allocated selling, general and
administrative costs charged to the College division. There was no pension
expense in 1996.
Pension expense and liability include the estimated curtailment loss
associated with plan termination. Any adjustments to the estimated curtailment
loss will be reflected in net income in future years.
Substantially all of the College's employees are eligible to participate in
the O/E Automation, Inc. 401(k) plan. Under this plan, eligible employees may
elect to contribute up to 15 percent of their compensation subject to limits
established under the Internal Revenue Code and O/E Learning, Inc. may make a
discretionary matching contribution.
For the plan year ended October 31, 1996, the plan was amended to also
incorporate a discretionary profit-sharing contribution. The total expense for
Hagerstown Business College for matching and profit-sharing contributions
amounted to $13,119 and $11,947 for the years ended October 31, 1996 and 1995,
respectively.
5. RELATED PARTY TRANSACTIONS
O/E Learning, Inc. provides selling, general and administrative support to
Hagerstown Business College. The College paid O/E Learning, Inc. $581,500 and
$669,000 in 1996 and 1995, respectively, for allocated costs for these services.
O/E Learning, Inc. contributes cash to Hagerstown Business College to fund
operations as needed. These capital contributions are repaid whenever excess
funds are available. Repayments of capital of $446,500 and $305,500 were made in
1996 and 1995, respectively.
6. SUBSEQUENT EVENT
On December 31, 1996, O/E Learning, Inc. sold certain assets associated
with the Hagerstown Business College division to an unrelated company. O/E
Learning, Inc. will discontinue all activity associated with operation of
Hagerstown Business College effective January 1, 1997.
F-43
<PAGE> 103
UNAUDITED PRO FORMA AS ADJUSTED FINANCIAL DATA
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 paid
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.
On December 17, 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.
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 Unaudited Pro Forma Condensed Consolidated Statement of Operations set
forth below for the year ended March 31, 1997 has been derived from the
Company's consolidated historical statement of operations for the fiscal year
ended March 31, 1997 and from the Texas Acquisition's combined statement of
operations for the year ended December 31, 1995, and the Maryland Acquisition's
statement of operations for the year ended October 31, 1996 and gives effect to
the Texas Acquisition and the Maryland Acquisition as if they had occurred on
April 1, 1996.
The Unaudited Pro Forma Condensed Consolidated Statement of Operations is
provided for comparative purposes only and does not purport to be indicative of
the results which actually would have been obtained if the above-mentioned
transactions had been effected on the dates indicated or of the results which
may be obtained in the future. The information provided in the Unaudited Pro
Forma Condensed Consolidated Statement of Operations is qualified in its
entirety by, and should be read in conjunction with, the Consolidated Financial
Statements of the Company and related notes thereto, the San Antonio College of
Medical and Dental Assistants, Inc. and Career Centers of Texas -- El Paso,
Inc.'s Combined Financial Statements and related notes thereto and the
Hagerstown Business College (a division of O/E Learning, Inc.) Divisional
Financial Statements and related notes thereto.
F-44
<PAGE> 104
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
EDUCATIONAL EDUCATIONAL
MEDICAL, INC. PRO MEDICAL, INC.
YEAR ENDED FORMA YEAR ENDED
MARCH 31, 1997 TEXAS MARYLAND ACQUISITION MARCH 31, 1997
ACTUAL ACQUISITION ACQUISITION ADJUSTMENTS PRO FORMA
-------------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Net revenues................... $49,449,680 $2,149,154 $1,557,200 $ -- $53,156,034
Cost of education and
facilities................... 23,150,599 922,819 1,058,700 (65,000)(1) 25,185,785
(60,000)(2)
178,667(3)
Selling and promotional
expenses..................... 7,530,741 299,293 178,400 -- 8,008,434
Administrative expenses........ 14,041,592 559,392 94,640 (293,333)(4) 14,402,291
Amortization of goodwill and
intangibles.................. 886,268 -- -- 217,047(5) 1,266,624
163,309(6)
Other expenses................. 535,038 -- -- -- 535,038
----------- ---------- ---------- --------- -----------
Income (loss) from
operations................... 3,305,442 367,650 225,460 (140,690) 3,757,862
Interest expense, net.......... 284,162 -- -- 80,000(7) 364,162
----------- ---------- ---------- --------- -----------
Income (loss) before income
taxes and extraordinary
item......................... 3,021,280 367,650 225,460 (220,690) 3,393,700
Provision (benefit) for income
taxes........................ (845,363) -- -- 553,521(8) (291,842)
----------- ---------- ---------- --------- -----------
Income (loss) before
extraordinary item........... $ 3,866,643 $ 367,650 $ 225,460 $(774,211) $ 3,685,542
=========== ========== ========== ========= ===========
</TABLE>
- ---------------
(1) Represents a negotiated reduction in lease expense for property leased from
the former owners in connection with the Texas Acquisition.
(2) Represents a reduction in depreciation expense for buildings not acquired in
the Maryland Acquisition.
(3) Represents additional rent expense for lease payments on facilities which
were not acquired and will be leased from the former owners related to the
Maryland Acquisition.
(4) Represents a reduction in corporate overhead allocation which will be
eliminated in connection with the Maryland Acquisition.
(5) Represents additional amortization of goodwill recorded in connection with
the Texas Acquisition.
(6) Represents additional amortization of goodwill recorded in connection with
the Maryland Acquisition.
(7) Represents additional interest expense recorded in connection with long-term
debt issued in connection with the Texas Acquisition.
(8) Represents a provision for income taxes as the Nebraska Acquisition and the
Texas Acquisition operated as subchapter S corporations and all federal
income taxes were the responsibility of the individual shareholders plus the
income tax effect of all pro forma adjustments.
F-45
<PAGE> 105
======================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED HEREIN IN
THIS PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT RELATES
IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH
STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................... 2
Reference Data.......................... 2
Forward-looking Information............. 2
Prospectus Summary...................... 3
Summary Consolidated Financial and Other
Operating Data........................ 6
Risk Factors............................ 8
Use of Proceeds......................... 11
Dividend Policy......................... 12
Capitalization.......................... 13
Selected Consolidated Financial and
Other Operating Data.................. 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 16
Business................................ 23
Facilities.............................. 38
Litigation.............................. 39
Management.............................. 40
Certain Transactions.................... 49
Principal and Selling Shareholders...... 51
Description of Capital Stock............ 53
Shares Eligible for Future Sale......... 55
Legal Matters........................... 56
Experts................................. 56
Additional Information.................. 56
Index to Financial Statements........... F-1
</TABLE>
------------------
Until , 1997 (25 calendar days after the date of this
Prospectus) all dealers effecting transactions in the Common Stock, whether or
not participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
======================================================
======================================================
723,379 SHARES
EDUCATIONAL
MEDICAL, INC.
COMMON STOCK
[EDUCATIONAL MEDICAL LOGO]
------------
PROSPECTUS
, 1997
------------
======================================================
<PAGE> 106
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses to be borne by the Registrant
in connection with the issuance and distribution of the securities being
registered hereby other than underwriting discounts and commissions. All
expenses other than the SEC registration fee and the Nasdaq National Market
filing fee are estimated.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 1,808.45
NASD filing fee............................................. $ 0.00
Nasdaq National Market filing fee........................... $ 14,467.58
Transfer agent's fee and expenses........................... $ 0.00
Accounting fees and expenses................................ $ 30,000.00
Legal fees and expenses..................................... $ 65,000.00
"Blue Sky" fees and expenses (including legal fees)......... $ 10,000.00
Costs of printing and engraving............................. $ 10,000.00
-----------
Total............................................. $131,276.03
===========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Bylaws effectively provide that the Registrant shall, to
the full extent permitted by Section 145 of the General Corporation Law of the
State of Delaware, as amended from time to time ("Section 145"), indemnify all
persons whom it may indemnify pursuant thereto. In addition, the Registrant's
Certificate of Incorporation eliminates personal liability of its directors to
the full extent permitted by Section 102(b)(7) of the General Corporation Law of
the State of Delaware, as amended from time to time ("Section 102(b)(7)").
Section 145 permits a corporation to indemnify its directors and officers
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlements actually and reasonably incurred by them in connection with any
action, suit or proceeding brought by a third party if such directors or
officers acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action, indemnification may be made only for expenses
actually and reasonably incurred by directors and officers in connection with
the defense or settlement of an action or suit and only with respect to a matter
as to which they shall have acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interest of the corporation, except
that no indemnification shall be made if such person shall have been adjudged
liable to the corporation, unless and only to the extent that the court in which
the action or suit was brought shall determine upon application that the
defendant officers or directors are reasonably entitled to indemnity for such
expenses despite such adjudication of liability.
Section 102(b)(7) provides that a corporation may eliminate or limit the
personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, provided that such
provision shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for willful or negligent conduct
in paying dividends or repurchasing stock out of other than lawfully available
funds or (iv) for any transaction from which the director derived an improper
personal benefit. No such provisions shall eliminate or limit the liability of a
director for any act or omission occurring prior to the date when such provision
becomes effective.
The Company maintains insurance against liabilities under the Securities
Act of 1933 for the benefit of its officers and directors.
II-1
<PAGE> 107
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
There have been no sales of unregistered securities by the Registrant
within the past three years, except as follows:
In March 1995, the Company issued warrants (the "Sirrom Warrants") to
Sirrom to acquire up to 141,667 shares of Common Stock for a purchase price of
$.006 per share. The Sirrom Warrants had an expiration date of April 30, 2000.
In connection with the IPO, the Sirrom Warrants were exercised in full.
In connection with the IPO, the Company issued 1,000,000 shares of Common
Stock to the Pecks Managed Entities upon the cashless exercise of warrants to
purchase 1,333,333 shares of Common Stock based on the initial public offering
price. In connection with the IPO, these warrants were exercised in full for a
total of 933,333 shares.
In each such transaction, the securities were not registered under the
Securities Act of 1933, as amended, in reliance upon the exemption from
registration provided by Section 4(2) of the Act. The factors that assured the
availability of that exemption for each such transaction included the
sophistication of the offerees and of the purchasers, their access to material
information, the disclosures actually made to them by the Registrant and the
absence of any general solicitation or advertising.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) Exhibits
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- -----------
<C> <C> <S>
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>
II-2
<PAGE> 108
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- -----------
<C> <C> <S>
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.)
5.1*** -- Opinion of Greenberg Traurig Hoffman Lipoff Rosen and
Quentel, P.A. (includes consent).
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.)
</TABLE>
II-3
<PAGE> 109
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- -----------
<C> <C> <S>
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.)
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.)
</TABLE>
II-4
<PAGE> 110
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- -----------
<C> <C> <S>
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. (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. Heidrick 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.)
</TABLE>
II-5
<PAGE> 111
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- -----------
<C> <C> <S>
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 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 (See Exhibit 10.46 to
the Company's Form 10-K filed with the Commission on June
30, 1997.)
10.47* -- Stock Pledge Agreement dated as of February 25, 1997 between
Bank of America, FSB and the Company (See Exhibit 10.47 to
the Company's Form 10-K filed with the Commission on June
30, 1997.)
10.48* -- Security Agreement dated as of February 25, 1997 between
Bank of America, FSB and the Company (See Exhibit 10.48 to
the Company's Form 10-K filed with the Commission on June
30, 1997.)
10.49*** -- First Amendment to Business Loan Agreement dated as of June
30, 1997 between Bank of America, FSB and the Company.
11.1* -- Statement regarding computation of pro forma net income
(loss) per share. (See Exhibit 11.1 to the Company's Form
10-K filed with the Commission on June 30, 1997.)
11.2* -- Statement regarding computation of historical net income
(loss) per share. (See Exhibit 11.2 to the Company's Form
10-K filed with the Commission on June 30, 1997.)
11.3* -- Statement regarding computation of historical supplemental
net income per share. (See Exhibit 11.3 to the Company's
Form 10-K filed with the Commission on June 30, 1997.)
11.4* -- Statement regarding computation of pro forma net income per
share for three months ended June 30, 1996 (See Exhibit 11.1
to the Company's Form 10-Q filed with the Commission on
August 14, 1997.)
11.5* -- Statement regarding computation of historical net income per
share for three months ended June 30, 1997 and 1996 (See
Exhibit 11.2 to the Company's Form 10-Q filed with the
Commission on August 14, 1997.)
21* -- List of Subsidiaries (see Exhibit 21 to the Company's Form
10-K filed with the Commission on June 30, 1997.)
23.1*** -- Consent of Ernst & Young LLP.
23.2*** -- Consent of Winther, Stave & Co., LLP.
23.3*** -- Consent of Tsakopulos Brown Schott & Anchors.
23.4*** -- Consent of Plante & Moran LLP.
</TABLE>
II-6
<PAGE> 112
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- -----------
<C> <C> <S>
27.1*** -- Financial Data Schedule (for SEC use only).
99.1* -- Report of Winther, Stave & Co., LLP. (See Exhibit 99.1 to
the Company's Form 10-K filed with the Commission on June
30, 1997.)
99.2* -- Report of Winther, Stave & Co., LLP. (See Exhibit 99.2 to
the Company's Form 10-K filed with the Commission on June
30, 1997.)
99.3* -- Report of Winther, Stave & Co., LLP. (See Exhibit 99.3 to
the Company's Form 10-K filed with the Commission on June
30, 1997.)
</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.
** Filed with original S-1
*** Filed with this Amendment
(B) Index to Financial Statement Schedules
The following financial statement schedule is included in this Registration
Statement:
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.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
The undersigned Registrant hereby further undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
II-7
<PAGE> 113
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities assigned under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that, for the purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-8
<PAGE> 114
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)
By: /s/ GARY D. KERBER
--------------------------------------
Gary D. Kerber
Chairman of the Board, President and
Chief Executive Officer
Date: September 22, 1997
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints GARY D. KERBER his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this registration
statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or his substitute may lawfully do or cause to be done by virtue hereof.
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ GARY D. KERBER President, Chief Executive September 22, 1997
- ----------------------------------------------------- Officer and Chairman of the
Gary D. Kerber Board (Principal Executive
Officer)
/s/ VINCE PISANO Vice President and Chief September 22, 1997
- ----------------------------------------------------- Financial Officer
Vince Pisano
/s/ ROBERT J. CRESCI Director September 22, 1997
- -----------------------------------------------------
Robert J. Cresci
/s/ CARL S. HUTMAN Director September 22, 1997
- -----------------------------------------------------
Carl S. Hutman
/s/ W. PATRICK ORTALE, III Director September 22, 1997
- -----------------------------------------------------
W. Patrick Ortale, III
/s/ RICHARD E. KROON Director September 22, 1997
- -----------------------------------------------------
Richard E. Kroon
</TABLE>
II-9
<PAGE> 115
ITEM 14(D)
SCHEDULE II
EDUCATIONAL MEDICAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND NET BALANCE AT
YEAR EXPENSES DEDUCTIONS END 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............. 1,011,167 1,270,565 2,327,275 974,957
For the year ended March 31, 1997............. 974,357 1,239,157 1,290,801 922,704
</TABLE>
<PAGE> 1
EXHIBIT 5.1
GREENBERG TRAURIG LETTERHEAD
September 23, 1997
Educational Medical, Inc.
1327 Northmeadow Parkway, Suite 132
Roswell, Georgia 30076
Ladies and Gentlemen:
We have acted as counsel to Educational Medical, Inc. (the
"Corporation") in connection with the preparation and filing with the Securities
and Exchange Commission of a registration statement on Form S-1 (Registration
Statement No. 333-09777), and the amendments thereto (the "Registration
Statement"). The Registration Statement relates to a proposed public offering
pursuant to which up to 723,379 Shares are being offered by certain stockholders
of the Corporation (the "Selling Stockholder Shares"). Based upon and subject to
the foregoing and the other qualifications, limitations and assumptions
contained herein, we are of the opinion that:
The Selling Stockholder Shares, when sold as contemplated in the
Registration Statement, will be validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to us in the Prospectus contained
therein under the caption "Legal Matters."
Very Truly yours,
GREENBERG TRAURIG HOFFMAN
LIPOFF ROSEN & QUENTEL, P.A.
<PAGE> 1
EXHIBIT 10.49
FIRST AMENDMENT TO BUSINESS LOAN AGREEMENT
PREAMBLE: THIS AMENDMENT, dated as of June 30,1 997 (this "Amendment"),
is made and entered into by and 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 Amendment (EMI and such subsidiaries hereinafter
sometimes collectively called the "Borrowers" and individually called a
"Borrower").
RECITALS:
WHEREAS, Borrowers and Lender are parties to a certain Business Loan
Agreement dated as of February 25, 1997 (the "Loan Agreement"; capitalized terms
used herein and not defined herein have the meanings assigned to them in the
Loan Agreement); and
WHEREAS, Borrowers and Lender desire to enter into this Amendment to
amend the Loan Agreement in certain respects as hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
covenants and conditions herein contained, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows agree as follows:
1. AMENDMENT TO SECTION 9.5 OF THE LOAN AGREEMENT. Section 9.5 of the
Loan Agreement is hereby amended by deleting the ratio "1.75:1.00" set forth
therein and substituting in lieu thereof the ratio of "1.50:1.00."
2. AMENDMENT TO SECTION 9.10 OF THE LOAN AGREEMENT. Section 9.10 of
the Loan Agreement is hereby amended by adding the following sentence at the
end of such Section:
In determining Borrowers' compliance with the covenant set forth in
this Section 9.10, there shall be excluded from the calculation of
Borrowers' capital expenditures that amount (which as of March 31, 1997
was approximately $900,000) reflected as capital expenditures on the
consolidated financial statements of EMI as a result of its accounting
for its acquisition of Educational Management, Inc. (pursuant to a
merger of such entity with and into EMI's wholly-owned subsidiary,
Nebraska Acquisition Corp.) as a pooling of interests.
3. MISCELLANEOUS.
(a) Effect of Amendment. The amendments to the Loan Agreement specified
hereinabove shall have retroactive effect to February 25, 1997, as if such
amendments were an integral part of the Loan Agreement as of that date. Except
as set forth expressly herein, all terms of the Loan Agreement and the other
documents, instruments and agreements executed and delivered in connection
therewith (collectively, "Loan Documents"), as amended hereby, shall be and
remain in full force and effect and shall constitute the legal, valid, binding
and enforceable
<PAGE> 2
obligations of Borrowers to Lender. To the extent any terms and conditions in
any of the Loan Documents shall contradict or be in conflict with any terms or
conditions of the Loan Agreement, after giving effect to this Amendment, such
terms and conditions are hereby deemed modified and amended accordingly to
reflect the terms and conditions of the Loan Agreement as modified and amended
hereby.
(b) Reaffirmation of Representations and Warranties. Borrowers hereby
ratify and reaffirm all of the representations and warranties set forth in the
Loan Agreement and the other Loan Documents, including without limitation, in
Section 8 of the Loan Agreement, except to the extent that such representation
and warranties relate to an earlier date or may be untrue or incorrect solely as
a result of occurrences permitted under the Loan Agreement.
(c) Ratification. Borrowers hereby restate, ratify and reaffirm each
and every term and condition set forth in the Loan Agreement, as amended hereby,
and the Loan Documents effective as of the date hereof.
(d) Estoppel. To induce Lender to enter into this Amendment, Borrowers
hereby acknowledge and agree that, as of the date hereof, and after giving
effect to this Amendment, no default or event of default hs occurred and is
continuing and, in addition, there exists no right of offset, defense,
counterclaim or objection in favor of Borrowers with respect to any obligations
of Borrowers to Lender.
(e) Governing Law. This Amendment shall be governed by Georgia law.
(f) Costs and Expenses. Borrowers agree to pay all reasonable costs and
expenses of Lender in connection with the preparation, execution, delivery and
enforcement of this Amendment and all other Loan Documents executed in
connection herewith, the closing hereof, and any other transactions contemplated
hereby, including the reasonable fees and out-of-pocket expense of Lender's
counsel.
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officer or officers thereunto duly authorized, s of
the date first above written.
BANK OF AMERICA, FSB.
By:/s/
------------------------------
Name:
--------------------
Title:
-------------------
<PAGE> 4
EDUCATIONAL MEDICAL, INC.
By:/s/ Vince Pisano
-----------------------------------
Name: Vince Pisano
Title: Vice President/CFO
ANDON COLLEGE, INC.
By:/s/ Vince Pisano
-----------------------------------
Name: Vince Pisano
Title: Vice President/CFO
CALIFORNIA ACADEMY OF
MERCHANDISING, ART AND DESIGN,
INC.
By:/s/ Vince Pisano
-----------------------------------
Name: Vince Pisano
Title: Vice President/CFO
DBS ACQUISITION CORP.
By:/s/ Vince Pisano
-----------------------------------
Name: Vince Pisano
Title: Vice President/CFO
DEST EDUCATION CORPORATION
By:/s/ Vince Pisano
-----------------------------------
Name: Vince Pisano
Title: Vice President/CFO
ANDON COLLEGE, INC.
By:/s/ Vince Pisano
------------------------------------
Name: Vince Pisano
Title: Vice President/CFO
<PAGE> 5
ICM ACQUISITION CORP.
By:/s/ Vince Pisano
------------------------------------
Name: Vince Pisano
Title: Vice President/CFO
HBC ACQUISITION CORP.
By:/s/ Vince Pisano
------------------------------------
Name: Vince Pisano
Title: Vice President/ CFO
MARIC LEARNING SYSTEMS
By:/s/ Vince Pisano
------------------------------------
Name: Vince Pisano
Title: Vice President/CFO
MTSX ACQUISITION CORP.
By:/s/ Vince Pisano
------------------------------------
Name: Vince Pisano
Title: Vice President/ CFO
OIOPT ACQUISITION CORP.
By:/s/ Vince Pisano
------------------------------------
Name: Vince Pisano
Title: Vice President/ CFO
<PAGE> 6
PALO VISTA COLLEGE OF NURSING
AND ALLIED HEALTH SCIENCES, INC.
By:/s/ Vince Pisano
-----------------------------------
Name: Vince Pisano
Title: Vice President/CFO
SACMD ACQUISITION CORP.
By:/s/ Vince Pisano
------------------------------------
Name: Vince Pisano
Title: Vice President/CFO
SCOTTSDALE EDUCATIONAL CENTER
FOR ALLIED HEALTH CAREERS,
INCORPORATED.
By:/s/ Vince Pisano
------------------------------------
Name: Vince Pisano
Title: Vice President/CFO
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated June 30, 1997, except as to the second paragraph of
Note 3 as to which the date is August 27, 1997, in Amendment No. 1 to the
Registration Statement on Form S-1 (No. 333-33025) of Educational Medical, Inc.
for the registration of 723,379 shares of its Common Stock.
/s/ Ernst & Young LLP
Atlanta, Georgia
September 22, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm as "Experts" and to the use 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
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 Amendment No. 1 to the Registration Statement on
Form S-1 (No. 333-33025) of Educational Medical, Inc. for the registration of
723,379 shares of its common stock.
/s/ Winther, Stave & Co. LLP
Spencer, Iowa
September 24, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report with respect to the combined financial statements of San
Antonio College of Medical and Dental Assistants, Inc. and Career Centers of
Texas -- El Paso, Inc., dated March 12, 1996, except for Note 1, as to which the
date is August 2, 1996, in Amendment No. 1 to the Registration Statement on Form
S-1 (No. 333-33025) of Educational Medical, Inc. for the registration of 723,379
shares of its Common Stock.
/s/ Tsakopulos Brown Schott &
Anchors
San Antonio, Texas
September 22, 1997
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated December 30, 1996 on the divisional financial
statements of Hagerstown Business College (a division of O/E Learning, Inc.) for
the years ended October 31, 1996 and 1995 in Amendment No. 1 to the Registration
Statement on Form S-1 (No. 333-33025) of Educational Medical, Inc. for the
registration of 723,379 shares of its Common Stock.
/s/ Plante & Moran, LLP
Southfield, Michigan
September 22, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF EDUCATIONAL MEDICAL, INC. FOR THE QUARTER ENDED JUNE
30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 9,158,426
<SECURITIES> 0
<RECEIVABLES> 7,079,347
<ALLOWANCES> 924,713
<INVENTORY> 0
<CURRENT-ASSETS> 17,771,463
<PP&E> 13,355,113
<DEPRECIATION> 5,738,072
<TOTAL-ASSETS> 37,816,851
<CURRENT-LIABILITIES> 6,931,729
<BONDS> 2,599,372
0
0
<COMMON> 74,181
<OTHER-SE> 28,338,810
<TOTAL-LIABILITY-AND-EQUITY> 37,816,851
<SALES> 12,909,020
<TOTAL-REVENUES> 12,909,020
<CGS> 12,077,952
<TOTAL-COSTS> 12,077,952
<OTHER-EXPENSES> 314,880
<LOSS-PROVISION> 251,665
<INTEREST-EXPENSE> (94,130)
<INCOME-PRETAX> 358,653
<INCOME-TAX> 145,730
<INCOME-CONTINUING> 212,923
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 212,923
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0
</TABLE>
