<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement
[ ] Confidential, For Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[x] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
EDUCATIONAL MEDICAL, INC.
(Name of Registrant as Specified in Its Charter)
-----------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
--------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
--------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
--------------------------------------------------------------
(5) Total fee paid:
--------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing party:
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(4) Date filed:
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<PAGE> 2
EDUCATIONAL MEDICAL, INC.
1327 Northmeadow Parkway, Suite 132
Roswell, Georgia 30076
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD
ON TUESDAY, SEPTEMBER 9, 1997
The Annual Meeting of Shareholders of Educational Medical, Inc. (the
"Company") will be held on Tuesday, September 9, 1997, at the Westin Peachtree
Plaza Hotel, 210 Peachtree Street, N.W., Atlanta, Georgia at 10:00 a.m., local
time, to consider and act upon the following matters:
1. To elect five directors to serve for the ensuing year;
2. To ratify the selection by the Board of Directors of Ernst &
Young LLP as the Company's independent auditors for the fiscal year ending March
31, 1998; and
3. To transact such other business as may properly come before
the meeting or any adjournment thereof.
Shareholders of record at the close of business on July 25, 1997 will
be entitled to notice of and to vote at the Annual Meeting or any adjournment
thereof. The stock transfer books of the Company will remain open following the
record date.
All shareholders are cordially invited to attend the Annual Meeting.
By Order of the Board of Directors,
Gary D. Kerber
President and Chief Executive Officer
Roswell, Georgia
July 29, 1997
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE
AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED ENVELOPE IN
ORDER TO ENSURE REPRESENTATION OF YOUR SHARES. NO POSTAGE NEED BE AFFIXED IF THE
PROXY IS MAILED IN THE UNITED STATES.
<PAGE> 3
EDUCATIONAL MEDICAL, INC.
1327 NORTHMEADOW PARKWAY, SUITE 132
ROSWELL, GEORGIA 30076
Telephone: 770-475-9930
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
Dated: July 29, 1997
This Proxy Statement has been prepared and is furnished by the Board of
Directors of Educational Medical, Inc. (the "Company") in connection with the
solicitation of proxies for the Annual Meeting of Shareholders of the Company to
be held on September 9, 1997, and at any adjournment thereof, for the purposes
set forth in the accompanying Notice of Meeting.
It is anticipated that this Proxy Statement and the accompanying form
of proxy will be mailed to shareholders on or about July 29, 1997. The Company's
Annual Report, including audited consolidated financial statements for the
fiscal year ended March 31, 1997, is being mailed or delivered concurrently with
this Proxy Statement. The Annual Report is not to be regarded as proxy
soliciting material.
Only holders of record of the Company's common stock, $.01 par value
(the "Common Stock"), on the books of the Company at the close of business on
July 25, 1997, are entitled to vote at the Annual Meeting. On that date, there
were 7,345,399 issued and outstanding shares of Common Stock entitled to vote on
each matter to be presented at the meeting. Each shareholder is entitled to one
vote for each share of Common Stock registered in that person's name on the
books of the Company on the record date on all business to come before the
meeting.
Shares represented by a properly executed proxy received in time to
permit its use at the Annual Meeting or any adjournment thereof will be voted in
accordance with the instructions indicated therein. If no instructions are
indicated, the shares represented by the proxy will be voted for the election of
all nominees for director, for the ratification of the appointment of Ernst &
Young LLP as the independent auditors of the Company for the fiscal year ending
March 31, 1998, and in the discretion of the proxy holders as to any other
matter which may properly come before the Annual Meeting. A shareholder who has
given a proxy may revoke it at any time before it is voted at the Annual Meeting
by giving written notice of revocation to the Secretary of the Company, by
submitting a proxy bearing a later date, or by attending the Annual Meeting and
voting in person.
The expense of soliciting proxies will be borne by the Company. Proxies
will be solicited principally by mail, but directors, officers and regular
employees of the Company may solicit proxies personally, by telephone or by
facsimile transmission. The Company will reimburse custodians, nominees or other
persons for their out-of-pocket expenses in sending proxy material to beneficial
owners.
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<PAGE> 4
Each share of Common Stock entitles the holder thereof to cast one vote
on each matter to be voted upon at the 1997 Annual Meeting. A majority of the
outstanding shares will constitute a quorum at the meeting. Abstentions and
broker non-votes are counted only for purposes of electing directors in
accordance with Proposal One. None of the actions to be voted upon at the 1997
Annual Meeting shall create dissenters' rights under the Delaware General
Corporation Law.
You are requested, regardless of the number of shares you hold, to sign
the proxy and return it promptly in the enclosed envelope.
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<PAGE> 5
PRINCIPAL SHAREHOLDERS AND SECURITY OWNERSHIP OF MANAGEMENT
The table below is based on information obtained from the persons named
below with respect to the shares of Common Stock beneficially owned, as of June
30, 1997 (except as noted below), by (i) each person known by the Company to be
the owner of more than 5% of the outstanding shares of Common Stock, (ii) each
director and nominee for director, (iii) each executive officer included in the
Summary Compensation Table and (iv) all executive officers and directors of the
Company as a group.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL BENEFICIAL OUTSTANDING
OWNER OWNERSHIP(1)(2) SHARES OWNED
- --------------------------------------------------------- ----------------------- --------------------
<S> <C> <C>
Sprout Capital V(3,4) 920,005 12.5
Sprout Technology Fund(3,4) 19,889 *
DLJ Venture Capital Fund II, L.P. (3,4) 54,921 *
Lawrence, Tyrrell, Ortale & Smith (4),(5) 995,307 13.5
Delaware State Employees' Retirement Fund(4,6,7) 637,051 8.7
Declaration of Trust for Defined Benefit Plans of ICI
America Holding Inc. (4,6,7) 109,178 1.5
Declaration of Trust for Defined Benefit Plans of
Zeneca Holding Inc. (4,6,7) 132,463 1.8
Pecks Management Partners Ltd. (6,7) 878,692 12.0
J. & W. Seligman Co., Incorporated 630,000 8.6
Gary D. Kerber(4,8) 359,632 4.8
Vince Pisano(8) 186,457 2.5
Gerry M. Taylor(8) 41,916 *
Ellen L. Bernhardt(8) 36,833 *
Gerald T. Kosentos(8) 2,133 *
Elaine Neely-Eacona(8) 14,500 *
K. Terry Guthrie(8) 3,000 *
A. William Benham(8) 6,501 *
Robert J. Cresci(6,7) 25,000 *
Carl S. Hutman(9) 25,340 *
W. Patrick Ortale, III(5,10) 25,000 *
Richard E. Kroon(3,11) 25,000 *
Richard D. Wikert(12) 488,772 6.7
All executive officers and directors as a
group (12 persons) 751,312 9.8
</TABLE>
* Less than 1%.
(1) The number of shares of Common Stock beneficially owned by each person
or entity 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
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<PAGE> 6
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 number of shares deemed outstanding includes shares outstanding as
of June 30, 1997 (7,345,399) plus any shares subject to options held by
the person in question that are currently exercisable within 60 days
after June 30, 1997 (321,966).
(3) The address of such person or entity is 277 Park Avenue, 21st Floor,
New York, New York 10172.
(4) 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 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, all which entities are
managed by Pecks Management Partners, Ltd. (see Note 7 below)
(collectively, the "Pecks Managed Entities").
(5) The address of such person or entity is 3100 West End Avenue, Suite
400, Nashville, Tennessee 37203.
(6) The address of such person or entity is c/o Pecks Management Partners
Ltd., 1 Rockefeller Plaza, New York, New York 10020.
(7) 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. 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.
(8) The address of such person is c/o Educational Medical, Inc., 1327
Northmeadow Parkway, Suite 132, Roswell, Georgia 30076.
(9) The address of such person is c/o Fundamental Management Corp., 4000
Hollywood Blvd., Suite 610-N, Hollywood, FL 33021.
(10) Mr. Ortale is a general partner of Lawrence Venture Partners, the
general partner of Lawrence, Tyrrell, Ortale & Smith ("LTOS"). Excludes
995,307 shares of Common Stock beneficially owned by LTOS and for which
Mr. Ortale disclaims any beneficial ownership.
(11) 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 beneficially owned, in the
aggregate, by such entities and for which Mr. Kroon disclaims any
beneficial ownership.
(12) The address of such person is 1770 North Colson, Fremont, NE 68025.
Includes 38,592 shares held in escrow pending resolution of certain
contingencies related to the Company's merger with a Nebraska
entity in March 1997.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors and executive officers, and any persons who
beneficially own 10% or more of the Company's Common stock, to file with the
Securities and Exchange Commission (the "Commission") initial reports of
beneficial ownership and reports of changes in beneficial ownership of Common
Stock. Such persons are required by regulations of the Commission to furnish the
Company with copies of all Section 16(a) forms they file.
Based solely upon a review of (i) copies of Section 16(a) filings
received by the Company during or with respect to the 1997 fiscal year and (ii)
certain written representations of its officers and directors with respect to
the filing of annual or periodic reports of changes in
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<PAGE> 7
beneficial ownership on Forms 3, 4 or 5, the Company believes that each filing
required to be made pursuant to Section 16(a) of the Exchange Act during the
1997 fiscal year, when the Company completed its initial public offering, has
been filed in a timely manner.
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<PAGE> 8
PROPOSAL ONE
ELECTION OF DIRECTORS
The persons named in the accompanying form of proxy intend to vote all
valid proxies received in favor of the election of each of the persons named
below as nominees for director unless authority is withheld. Directors elected
at the Annual Meeting will serve until the next Annual Meeting of Shareholders
and until their successors are elected and qualified, subject to the election
and qualification of their successors and to their earlier death, resignation or
removal. In the event that any nominee is unable or unwilling to serve,
discretionary authority is reserved to the persons named in the accompanying
form of proxy to vote for substitute nominees. Management does not anticipate
that such an event will occur. Each director shall be elected by a plurality of
the votes cast.
NOMINEES FOR DIRECTOR
The Company's Board of Directors is set at five persons. The following
five persons have been nominated by the Board of Directors to fill such
positions. All are currently Directors of the Company.
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.
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.
7
<PAGE> 9
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.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE
"FOR" ALL NOMINEES FOR DIRECTOR.
EXECUTIVE OFFICERS
Certain information relating to each executive officer of the Company
who is not a director (the "Named Executive Officers") is set forth below.
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 July 1997. He was Director of Operations -- Central Region of
the Company from April 1997 through June 1997. 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 the 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 53, 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 provider 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> 10
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.
BOARD AND COMMITTEE MEETINGS
The Board of Directors of the Company held five meetings during its
fiscal year ended March 31, 1997. The Board has a standing Audit Committee and a
standing Compensation Committee. It does not have a Nominating Committee. The
Compensation Committee met once during the fiscal year ended March 31, 1997 and
the Audit Committee did not meet. During the most recent fiscal year, each
director attended at least 75% of the meetings of the Board and any committee on
which such director served.
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 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.
See "Report of Compensation Committee On Executive Compensation" below.
DIRECTORS' COMPENSATION
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.
See "Stock Incentive Plans" below for a description of the Company's
Non-Employee Director Stock Option Plan.
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<PAGE> 11
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
ANNUAL COMPENSATION(1) COMPENSATION AWARDS
------------------- -------------------
Securities
Fiscal Other Annual Underlying Options All Other
Name and Principal Position Year Salary Bonus Compensation (Number of 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 of 1996 $140,595 116,915 --- 13,333 ---
Finance and Chief 1995 $145,384 --- --- -0- ---
Financial Officer
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 --- --- -0- ---
</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.
OPTION GRANTS
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 and the quarter ended June 30, 1997. In addition, the
table shows the hypothetical gains or "option spreads" that would exist for the
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<PAGE> 12
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 THE PERIOD ENDED JUNE 30, 1997
Individual Grants
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF STOCK
SECURITIES OPTIONS EXERCISE OR PRICE APPRECIATION FOR OPTION
UNDERLYING GRANTED TO BASE PRICE EXPIRATION TERM(2)
NAME OPTIONS EMPLOYEES ($/SHARE) DATE(1) 5% 10%
---- -------- --------- --------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Gary D. Kerber 100,000 33.3%(3) $10.00 06/20/06 $766,495(3) $1,904,104(3)
34,260 $10.00 11/06/06
Vince Pisano 75,000 24.8%(3) $10.00 06/20/06 $575,155 $1,428,796(3)
25,740 $10.00 11/06/06
Gerry M. Taylor 7,500 1.8% $10.00 06/20/06 47,175 119,550
Ellen Bernhardt 7,500 1.8% $10.00 06/20/06 47,175 119,550
Gerry Kosentos 4,000 9.2% $10.00 06/20/06 203,492 515,422
33,000 $8.50 11/30/07
TOTAL 287,333 1,639,492 4,087,422
========= ==========
</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, Pisanos, and Kosentos' options are inclusive
of the two separate option grants listed herein.
No options were exercised in the period ended June 30, 1997 by any of
the Named Executive Officers. The following table sets forth, as of June 30,
1997, the number of stock options and the value of unexercised stock options
held by the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN THE PERIOD ENDED JUNE 30, 1997
AND PERIOD-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options(1)
Name Options at March 31, 1997 at March 31, 1997
- -------------------------------- ------------------------------------- ---------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gary D. Kerber 72,130 120,464 253,625 60,336
Vince Pisano 48,037 91,036 155,193 48,264
Gerry Taylor 39,833 26,000 213,456 90,500
Ellen L. Bernhardt 36,833 14,000 146,549 36,200
Gerald T. Kosentos 2,133 41,867 6,032 24,136
------- ------- ------- -------
TOTAL: 198,966 293,367 $774,855 $259,436
</TABLE>
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(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.
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.
REPORT OF COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
The Company's executive compensation program is administered by the
Compensation Committee of the Board of Directors (the "Committee"), which is
composed of three non-employee Directors. The Committee is responsible for
establishing and administering the policies which govern both annual
compensation and equity ownership programs. All decisions by the Committee
relating to the compensation of the Company's executive officers are reviewed by
the full Board of Directors. The one employee Director does not participate in
the Committee's discussions concerning his own compensation. This report is
submitted by the Committee and addresses the Company's policies for fiscal 1998
as they apply to Gary D. Kerber, the President and Chief Executive Officer of
the Company, and the other Named Executive Officers.
OVERVIEW AND PHILOSOPHY
The Company's executive compensation program is designed to promote the
following objectives:
To provide competitive compensation that will help attract, retain and
reward highly qualified executives who contribute to the long-term
success of the Company.
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To align management's interests with the success of the Company by
placing a portion of the executive's compensation at risk in relation
to the Company's performance.
To align management's interests with stockholders by including
long-term equity incentives.
The Committee believes that the Company's executive compensation
program provides an overall level of compensation that is competitive within its
industry and among companies of comparable size and complexity. To ensure that
compensation is competitive, the Company regularly compares its compensation
practices with those of other similar companies and sets its compensation
guidelines based on this review. The Committee also seeks to achieve an
appropriate balance of the compensation paid to a particular individual and the
compensation paid to other executives both inside the Company and at comparable
companies and attempts to maintain an appropriate mix of salary and incentive
compensation. While compensation data are useful guides for comparative
purposes, the Company believes that a successful compensation program also
requires the application of judgment and subjective determinations of individual
performance.
EXECUTIVE COMPENSATION PROGRAM
The Company's executive compensation program consists of base salary,
periodic incentive compensation and long-term equity incentives in the form of
stock options. Executive officers also are eligible to participate in certain
benefit programs which are generally available to all employees of the Company,
such as medical insurance programs, life insurance programs and 401(k) plans.
BASE SALARY
At the beginning of each fiscal year, the Committee establishes an
annual salary plan for the Company's senior executive officers based on
recommendations made by the Company's Chief Executive Officer. The Committee
attempts to set base salary compensation within its perceived range of salaries
of executive officers with comparable qualifications, experience and
responsibilities at other companies in the same or similar businesses and of
comparable size and success. The Committee has reviewed compensation for
comparable positions by reviewing published compensation data as part of its
efforts to set the annual cash compensation for Company executives. The
Committee has attempted to base salary determinations both upon the Company's
financial performance and upon the individual's performance as measured by
certain subjective non-financial objectives. These non-financial objectives
include the individual's contribution to the Company as a whole, including his
or her ability to motivate others, develop the skills necessary to grow as the
Company matures, recognize and pursue new business opportunities and initiate
programs to enhance the Company's growth and success.
ANNUAL AND LONG-TERM INCENTIVE COMPENSATION
The Company has no formal bonus program for its key employees, although
the Committee may consider adopting such a program in the future. Bonus payments
may be
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made to key employees based on the achievement of agreed upon performance
objectives or as a part of the recruitment process.
The Company's stock option plan (see "1996 Performance Incentive Plan"
below) is designed to promote the identity of long-term interests between the
Company's employees and its shareholders and to assist in the retention of
executives. The size of option grants is generally intended by the Committee to
reflect the executive's position with the Company and his or her contributions
to the Company. Stock options generally vest over a period not to exceed five
years from the date of the grant in order to encourage key employees to continue
in the employ of the Company. Stock options are granted at an option price equal
to the fair market value of the Company's Common Stock on the date of grant;
however, the Company reserves the right to grant stock options having exercise
prices less than the fair market value of the Common Stock on the date of grant,
to modify the terms of existing options and to reprice the options as an
incentive for employees to remain with the Company.
BENEFITS
The Company's executive officers are entitled to receive life and
medical insurance benefits on the same basis as other full-time employees of the
Company. They are also eligible to participate in the Company's 401(k) plan.
The amount of perquisites, as determined in accordance with the rules
of the Securities Exchange Commission relating to executive compensation, did
not exceed $50,000 or 10% of salary and bonus for fiscal 1997 for any of the
Named Executive Officers.
STOCK INCENTIVE PLANS
1996 PERFORMANCE INCENTIVE PLAN
In June 1996, the Board of Directors of the Company (the "Board")
authorized, and the shareholders 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. On June 20, 1996,
the Company's 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. As of March 31, 1997, options for 260,167
shares of Common Stock were available for grant. 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.
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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 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
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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
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
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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.
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.
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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.
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
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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).
COMPENSATION OF CHIEF EXECUTIVE OFFICER
In fiscal 1997, Mr. Kerber, the Company's President and Chief Executive
Officer, received a salary of $188,660, which represented his base salary for
1997. In addition, he received an incentive grant in connection with the
consummation of the Company's IPO of options to purchase 100,000 shares of the
Company's common stock at an exercise price of $10.00 per share and an
additional incentive grant of options to purchase 34,260 shares of the Company's
common stock at an exercise price of $10.00. The amount of Mr. Kerber's base
salary and provisions for bonus payments to him are included in an employment
agreement between the Company and him. See "Employment Agreement."
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COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(M)
The deductibility of executive compensation in excess of the limit set
in Section 162(m) of the Internal Revenue Code 1986, as amended, was not a
factor in the Committee's determination of 1996 compensation levels. The
Committee will continue to review the Company's executive compensation plans to
determine what changes, if any, may be advisable in connection with Section
162(m).
COMPENSATION COMMITTEE
Richard E. Kroon
Robert J. Cresci
W. Patrick Ortale, III
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 1997, or prior, 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 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 933,333
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,
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$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 Coinvestors Agreement (the "Coinvestors
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 (which the Pecks Managed Entities exercised,
in full, at the time of the IPO, converting the Warrants into 933,333 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.
See "Certain Relationships and Related Transactions."
CERTAIN RELATIONSHIPS AND RELATED 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."
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
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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 non-competition agreement pursuant to which Mr. Guthrie
receives $35,000 per year for a five-year term. Pursuant to the consulting
agreement and the non-competition 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 Vice President - Finance 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, in fiscal year 1997, Mr. Pisano repaid
his loan from the Company in full by the 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 March 31, 1997, the principal amount outstanding of such indebtedness was
$4,650,000.
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.
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STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder return of
the Company's Common Stock from October 28, 1996 (the date that trading in the
Common Stock commenced on the Nasdaq National Market ("Nasdaq") to March 31,
1997 with (a) the Nasdaq Stock Market Index and (b) an index comprised of the
common stock of six other education companies. The comparison assumes that $100
was invested on October 28, 1996 in the Company's Common Stock and in each of
the comparison indices, and assumes reinvestment of dividends. The Company has
historically reinvested earnings in the growth of its business and has not paid
cash dividends on its Common Stock.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
EDUCATIONAL MEDICAL, INC., THE NASDAQ STOCK MARKET INDEX
AND THE SELF-DETERMINED PEER GROUP
OCTOBER 31, 1996 - MARCH 1997
(GRAPH)
TABLE I - CUMULATIVE VALUE OF $100 INVESTMENT
<TABLE>
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<S> <C> <C> <C> <C> <C> <C> <C>
Nasdaq Stock Market $100.00 $101.60 $107.88 $107.77 $115.43 $109.07 $101.96
Self-Determined Peer
Group(1) $100.00 $ 99.56 $ 90.93 $100.59 $107.59 $ 96.16 $ 95.88
Educational Medical, Inc (2) $100.00 $100.31 $101.25 $111.25 $118.75 $110.00 $112.50
</TABLE>
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(1) The Self-Determined Peer Group consists of the following: Computer Learning
Centers; DeVry, Inc.; Education Management Corp.; ITT Educational Services;
Strayer Education, Inc.; and Whitman Education Group, Inc.
(2) Based on initial public offering price of $10.00.
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TABLE II - NON-CUMULATIVE ANNUAL RETURN
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<S> <C> <C> <C> <C> <C> <C> <C>
Nasdaq Stock Market NA 1.60% 6.18% (0.10%) 7.11% (5.51%) (6.52%)
Self-Determined Peer
Group NA (0.44%) (8.66%) 10.63% 6.96% (10.63%) (0.28%)
Educational Medical, Inc. NA 0.31% 0.93%) 9.88% 6.74% (7.37%) 2.27%
</TABLE>
PROPOSAL TWO
RATIFICATION OF APPOINTMENT OF
INDEPENDENT AUDITORS
The Board of Directors has appointed the firm of Ernst & Young LLP to
continue as independent auditors for the Company for the fiscal year ending
March 31, 1998. Ernst & Young LLP has been acting as independent auditors of the
Company for more than five fiscal years. Unless otherwise indicated, properly
executed proxies will be voted for the ratification of the appointment of Ernst
& Young LLP, independent auditors, to audit the consolidated financial
statements of the Company for the fiscal year ending March 31, 1998.
Representatives of Ernst & Young LLP are expected to be present at the
Annual Meeting, will be given an opportunity to make a statement if they desire
to do so, and will also be available to respond to appropriate questions from
shareholders.
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE
"FOR" THE RATIFICATION OF THE APPOINTMENT OF
ERNST & YOUNG LLP AS INDEPENDENT AUDITORS
FOR THE COMPANY FOR THE FISCAL YEAR ENDING MARCH 31, 1998.
SHAREHOLDER PROPOSALS
Shareholders who intend to submit proposals to the Company's
shareholders at the 1998 Annual Meeting of Shareholders must submit such
proposals to the Company no later than April 3, 1998, in order to be considered
for inclusion in the Proxy Statement and Proxy to be distributed by the Board of
Directors in connection with that meeting. Shareholder proposals should be
submitted to Vince Pisano, Vice President, Educational Medical, Inc., 1327
Northmeadow Parkway, Suite 132, Roswell, GA 30076.
ADDITIONAL INFORMATION
The Board of Directors is not aware of any matters to be presented at
the meeting other than the matters described herein and does not intend to bring
any other matters before the meeting. However, if any other matters should come
before the meeting, or any adjournment thereof, the persons soliciting the
proxies will have discretionary authority to vote all proxies in accordance with
their best judgment.
If you do not plan to attend the meeting, in order that your shares may
be represented and in order to assure the required quorum, please sign, date and
return your proxy promptly.
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<PAGE> 26
In the event you are able to attend the meeting, at your request, the Company
will cancel any proxy executed by you.
FINANCIAL MATTERS
Detailed financial information of the Company for the fiscal year ended
March 31, 1997 is included in the Company's Annual Report to Shareholders, a
copy of which is enclosed herewith.
REPORT TO SHAREHOLDERS
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED MARCH 31, 1997 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION,
INCLUDING FINANCIAL STATEMENTS AND SCHEDULES THERETO, WILL BE FURNISHED WITHOUT
CHARGE TO ANY SHAREHOLDER UPON WRITTEN REQUEST TO THE COMPANY AT 1327
NORTHMEADOW PARKWAY, SUITE 132, ROSWELL, GA 30076, ATTENTION: INVESTOR
RELATIONS.
EXPENSES OF SOLICITATION
The Company will bear the cost of soliciting proxies from its
shareholders and will enlist the help of banks and brokerage houses in
soliciting proxies from their customers. The Company will reimburse these
institutions for out-of-pocket expenses incurred thereby. In addition to being
solicited through the mails, proxies may also be solicited personally or by
telephone by the directors, officers and employees of the Company.
Kindly date, sign and return the enclosed proxy card.
By Order of the Board of Directors
GARY D. KERBER
President and Chief Executive Officer
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<PAGE> 27
APPENDIX
EDUCATIONAL MEDICAL, INC.
PROXY FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD SEPTEMBER 9, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF THE COMPANY
The undersigned, revoking all prior proxies, hereby appoint(s) Gary D.
Kerber and Vince Pisano, and each of them, with full power of substitution, as
proxies to represent and vote, as designated herein, all shares of stock of
EDUCATIONAL MEDICAL, INC. (the "Company"), which the undersigned would be
entitled to vote if personally present at the Annual Meeting of Shareholders of
the Company to be held at the Westin Peachtree Plaza Hotel, 210 Peachtree
Street, N.W., Atlanta, Georgia, on Tuesday, September 9, 1997 at 10:00 a.m.,
local time, and at any adjournment thereof (the "Meeting").
In their discretion, the proxies are authorized to vote upon such other
matters as may properly come before the meeting or any adjournment thereof.
This proxy, when properly executed, will be voted in the manner
directed herein by the undersigned stockholder. If no direction is given, this
proxy will be voted FOR all proposals. Attendance of the undersigned at the
meeting, or at any adjournment thereof, will not be deemed to revoke this proxy
unless the undersigned shall revoke this proxy in writing or shall deliver a
subsequently dated proxy to the Secretary of the Company or shall vote in person
at the Meeting.
PLEASE FILL IN, DATE, SIGN AND MAIL THIS PROXY
IN THE ENCLOSED POSTAGE-PAID RETURN ENVELOPE.
1. To elect the following five (5) directors (except as marked below) for
the ensuing year.
NOMINEES: Gary D. Kerber, Robert J. Cresci, Carl S. Hutman, Richard E. Kroon,
W. Patrick Ortale, III
[ ] FOR all nominees (except as marked below)
[ ] WITHHOLD authority to vote for all nominees
For all nominees except the following nominee(s):
___________________________________________________________________________
(CONTINUED AND TO BE SIGNED, ON REVERSE SIDE)
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<PAGE> 28
2. To ratify the selection by the Board of Directors of Ernst & Young LLP
as the Company's independent auditors for the fiscal year ending March
31, 1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Dated: _______________ , 1997
___________________________________
Signature
___________________________________
Signature if held jointly
Please sign exactly as name appears hereon. If the stock is registered in the
names of two or more persons, each should sign. Executors, administrators,
trustees, guardians, attorneys and corporate officers should add their titles.
27
