<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:
----------------------------------------------------------------------
(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:
----------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------
(3) Filing Party:
--------------------------------------------------------
(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 22, 1998
The Annual Meeting of Shareholders of Educational Medical, Inc. (the
"Company") will be held on Tuesday, September 22, 1998, at Donaldson Lufkin &
Jenrette ("DLJ"), 12th Floor Situation Room, 277 Park Avenue, New York, New York
10172 at 1:00 p.m., local time, to consider and act upon the following matters:
1. To elect five directors to serve for the ensuing year;
2. To approve amendment of the Company's Articles of Incorporation to
change the name of the Company to "Quest Education Corporation;"
3. To approve the Company's 1998 Employee Stock Purchase Plan;
4. To approve the 1998 Amendment to the Company's 1996 Incentive
Stock Option Plan;
5. 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,
1999; and
6. 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 August 19, 1998 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
August 24, 1998
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: AUGUST 24, 1998
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 22, 1998, 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 August 26, 1998. The Company's
Annual Report, including audited consolidated financial statements for the
fiscal year ended March 31, 1998, 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 August
19, 1998, are entitled to vote at the Annual Meeting. On that date, there were
8,169,195 issued and outstanding shares of Common Stock entitled to vote on each
matter to be presented at 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 approval of the amendment of the Company's
Articles of Incorporation to change the name of the Company to "Quest Education
Corporation," for approval of the Company's 1998 Employee Stock Purchase Plan,
for approval of the 1998 Amendment to the Company's 1996 Incentive Stock Option
Plan; and for the ratification of the appointment of Ernst & Young LLP as the
independent auditors of the Company for the fiscal year ending March 31, 1999,
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.
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. Votes cast by proxy or in person at
the Annual Meeting will be counted by the persons appointed by the Company to
act as election inspectors for the Annual Meeting. The elections inspectors will
treat shares represented by properly signed and returned proxies that reflect
abstentions as shares that are present and entitled to vote for purposes of
determining the presence of a quorum on all matters. A majority of the
outstanding shares will constitute a quorum at the meeting.
The election inspectors will treat shares referred to as "broker
non-votes" (i.e. shares held by brokers or nominees as to which instructions
have not been received from the beneficial owners as
<PAGE> 4
persons entitled to vote that the broker nor nominee does not have discretionary
powers to vote on a particular matter) as shares that are present and entitled
to vote for purposes of determining the presence of a quorum. Abstentions and
"broker non-votes" will not affect the outcome of the director elections.
None of the actions to be voted upon at the 1998 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.
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 July
31, 1998 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
BENEFICIAL OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1, 2) SHARES OWNED(2)
- ---------------------------------------------------- ---------------------------- ------------------------
<S> <C> <C>
Sprout Capital V(3) 920,005 11.7
Sprout Technology Fund(3) 19,889 *
DLJ Venture Capital Fund II, L.P.(3) 54,921 *
Wellington Management Co., Ltd. 727,900 9.2
J. & W. Seligman Co., Incorporated 630,000 8.0
Gary D. Kerber(4) 378,915 4.8
Vince Pisano(4) 190,074 2.4
Gerald T. Kosentos(4) 15,933 *
Elaine Neely-Eacona(4) 16,500 *
Ellen L. Bernhardt(4) 23,667 *
Linwood W. Galeucia(4) 101,266 1.3
Craig A. Wood(4) -- --
K. Terry Guthrie(4) 5,000 *
A. William Benham(4) 8,835 *
Robert J. Cresci(5) 28,000 *
Carl S. Hutman(6) 28,340 *
W. Patrick Ortale, III(7) 28,000 *
Richard E. Kroon(3,8) 28,000 *
William D. Ford(9) -- --
All executive officers and directors as a
group (14 persons) 852,530 10.4
</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 July 31, 1998 through the exercise of any stock option or
other right. The inclusion herein of any shares of Common Stock deemed
beneficially owned
2
<PAGE> 5
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 number of shares deemed outstanding includes shares outstanding as
of July 31, 1998 plus any shares subject to options held by the person
identified that are currently exercisable within 60 days after July 31,
1998.
(3) The address of such person or entity is 277 Park Avenue, 21st Floor,
New York, New York 10172.
(4) The address of such person is c/o Educational Medical, Inc., 1327
Northmeadow Parkway, Suite 132, Roswell, Georgia 30076.
(5) Mr. Cresci, a director of the Company, is a managing partner of Pecks
Management Partners, Ltd. Mr. Cresci's address is c/o Pecks Management
Partners Ltd., 1 Rockefeller Plaza, New York, New York 10020.
(6) Mr. Hutman's address is c/o Fundamental Management Corp., 4000
Hollywood Blvd., Suite 610-N, Hollywood, FL 33021.
(7) Mr. Ortale's address is c/o Lawrence,Tyrrell, Ortale & Smith, 200 31st
Avenue North, Suite 200, Nashville, Tennessee 37203. Mr. Ortale, a
director of the Company, is a general partner of Lawrence Venture
Partners, the general partner of Lawrence, Tyrrell, Ortale & Smith
("LTOS"), one of the original venture capital investors in the Company.
LTOS divested all of its holdings in the Company in the 1998 Offering.
Mr. Ortale's term as a director expires currently with the Annual
Stockholders' Meeting. See "Compensation Committee Interlocks and
Insider Participation."
(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.
Mr. Kroon's address is c/o DLJ/Sprout Group, 277 Park Avenue, 21st
Floor, New York, New York 10172. Excludes 994,815 shares of Common
Stock beneficially owned, in the aggregate, by such entities and for
which Mr. Kroon disclaims any beneficial ownership.
(9) Mr. Ford is a nominee for director. Mr. Ford's address is 312 8th
Street, S.E., Washington, DC 23003.
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 1998 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 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 1998 fiscal year has been filed in
a timely manner.
3
<PAGE> 6
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, except Mr. Ford, are currently Directors of the Company.
GARY D. KERBER, age 59, 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 54, 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., EIS International,
Inc., Sepracor, Inc., Arcadia Financial, Ltd., Hitox, Inc., Garnet Resources
Corporation, Meris Laboratories, Inc., Film Roman, Inc., Source Media, Inc.,
Castle Dental Centers, Inc., Candlewood Hotel Co., Inc., SeraCare, Inc. and
several private companies.
WILLIAM D. FORD, age 71, is an attorney admitted to practice in the State
of Michigan since 1951. From 1964 to 1994, he was a member of the U.S. House of
Representatives, representing the 13th District of Michigan. While a member of
the House of Representatives, Mr. Ford served on the Education & Labor Committee
from 1964 to 1994, and served as Chairman of that committee from 1991 until his
retirement in 1994. He actively participated in the passage of the Head Start
program, the Elementary and Secondary Education Act, and the Higher Education
Act. He was a sponsor of the Adult Education Act, the Bilingual Education Act,
the Education for All Handicapped Children's Act, the National and Community
Service Trust Act, and the Goals 2000: Educate America Act. Mr. Ford also
authored the Family and Medical Leave Act and was instrumental in the passage of
numerous bills designed to ensure workers' rights and safety, pension protection
and fair trade treatment for America's auto industry and its workers.
CARL S. HUTMAN, age 64, 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. Mr. Hutman is also
a member of the Board of Directors of Harris Trust/Bank of Montreal, Florida.
4
<PAGE> 7
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 the National Venture Capital Association.
Approval of a majority of the shares of Common Stock present or
represented by proxy and entitled to vote at the Annual Meeting is required for
election of nominees as directors. Broker non-votes with respect to this matter
will not be deemed to have been cast either "for" or "against" the matter,
although they will be counted in determining if a quorum is present.
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 44, 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 46, has been Vice President of Operations of the
Company since June 1997. From April 1997 through June 1997 he was Director of
Operations -- Central Region of the Company. From January 1995 to June 1997 he
was Director of ICM School of Business & Medical Careers, a wholly owned
subsidiary of the Company. Prior to January 1995, 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.
ELAINE NEELY-EACONA, age 45, was appointed Vice President of Financial Aid
of the Company in March 1998. From 1990 until March 1998, she was Director of
Financial Aid of the Company. From 1976 to 1990, she was employed in various
financial aid positions by Education Management Corporation, a provider of
postsecondary education.
ELLEN L. BERNHARDT, age 47, 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.
LINWOOD W. GALEUCIA, age 53, has been President of the Hesser College
Division since March 13, 1998. From 1983 to March 1998, Mr. Galeucia was
President, Executive Vice President and co-owner of Hesser, Inc., the former
owner of Hesser College. Since 1990, Mr. Galeucia has been a member of the New
Hampshire Postsecondary Education Commission.
CRAIG A. WOOD, age 49, was appointed Director of Operations -- Western
Region of the Company in March 1998. From December 1997 to March 1998, Mr. Wood
served as a consultant to the Company. From July 1997 to December 1997, Mr. Wood
was Vice President, Operations of Education America, Inc. From February 1995 to
July 1997, Mr. Wood was Vice President, Marketing of the Katherine Gibbs
Schools, Inc.
K. TERRY GUTHRIE, age 55, 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,
5
<PAGE> 8
which he co-founded. Ohio Institute of Photography and Technology was acquired
by the Company in July 1993.
A. WILLIAM BENHAM, JR., age 36, has been Controller of the Company since
May 1995. From 1990 to May 1995, Mr. Benham was Assistant Controller of the
Company.
BOARD AND COMMITTEE MEETINGS
During its fiscal year ended March 31, 1998, the Board of Directors of the
Company held six meetings at which a majority of the directors were physically
present and two meetings at which a majority of the directors participated by
telephone. The Board has a standing Audit Committee and a standing Compensation
Committee. It does not have a Nominating Committee. The Audit and Compensation
Committees each met once during the fiscal year ended March 31, 1998. 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.
Currently, Messrs. Kroon (Chairman), Cresci and W. Patrick Ortale, III
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. 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.
6
<PAGE> 9
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, 1996, March 31,
1997 and March 31, 1998), with respect to those persons who were, as of March
31, 1998, 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 UNDERLYING
FISCAL OTHER ANNUAL 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
Chairman, President 1998 $195,909 $120,828 -- 20,000 $2,400(2)
and Chief Executive 1997 188,660 148,000 -- 134,260 2,400(2)
Officer 1996 187,124 155,606 -- 16,667 2,400(2)
Vince Pisano
Vice President -- 1998 $147,197 $ 90,784 -- 20,000 --
Finance and Chief 1997 140,247 111,200 $10,000(3) 100,740 --
Financial Officer 1996 140,595 116,915 -- 13,333 --
Gerald T. Kosentos 1998 $128,269 $ 38,388 -- 78,833 --
Vice President -- 1997 86,166 24,430 -- 4,000 --
Operations 1996 80,026 1,280 -- 6,667 --
Ellen L. Bernhardt 1998 $116,967 $ 44,800 -- 15,000 --
Director of Operations 1997 110,914 22,500 -- 7,500 --
-- Eastern Region 1996 107,744 66,606 -- 10,000 --
Gerry M. Taylor(4) 1998 $116,087 -- -- -- --
Director of New Product 1997 116,048 -- -- 7,500 --
Development 1996 109,283 $101,615 -- 25,000 --
</TABLE>
(1) Does not include the dollar value of perquisites and other personal
benefits.
(2) Consists solely of premiums paid by the Company for a life insurance policy
for Mr. Kerber. Upon Mr. Kerber's death, the Company will receive no
proceeds from such policy.
(3) Consists of a discount on the outstanding amount of a loan from the Company
to Mr. Pisano in return for early repayment of the loan.
(4) Ms. Taylor retired from employment with the Company effective June 1, 1998.
7
<PAGE> 10
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth all grants of options for the Company's
Common Stock to the Named Executive Officers of the Company during the fiscal
year ended March 31, 1998. In addition, the table shows the hypothetical gains
or "option spreads" that would exist for the respective options. These gains are
based on assumed rates of annual compound stock price appreciation of 5% and 10%
from the date the options were granted over the full option terms.
OPTION GRANTS FOR FISCAL YEAR ENDED MARCH 31, 1998
Individual Grants
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
% OF TOTAL ASSUMED ANNUAL RATES OF STOCK
NUMBER OF OPTIONS PRICE APPRECIATION FOR OPTION
SECURITIES GRANTED EXERCISE OR TERM(2)
UNDERLYING TO BASE PRICE EXPIRATION --------------------------------
NAME OPTIONS EMPLOYEES ($/SHARE) DATE(1) 5% 10%
---- ---------- ---------- ----------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Gary D. Kerber 20,000 7.7% $9.88 03/12/08 $124,200 $ 315,000
Vince Pisano 20,000 7.7 9.88 03/12/08 124,200 315,000
Ellen L. Bernhardt 15,000 5.8 9.88 03/12/08 93,150 236,250
Gerald T. Kosentos(3) 33,333 8.50 04/30/07 178,332 451,662
25,000 7.06 07/30/07 111,000 281,250
20,000 9.88 03/12/08 124,200 315,000
78,333 30.2(3) 413,532 1,047,912
------- ---- -------- ----------
TOTAL 133,333 $755,082 $1,914,162
======= ======== ==========
</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 Mr. Kosentos' options are inclusive of the three separate option grants
listed herein.
8
<PAGE> 11
The following table sets forth, as of March 31, 1998, the number of stock
options and the value of unexercised stock options held by the Named Executive
Officers and the exercises of stock options during the year ended March 31, 1998
by the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED MARCH 31, 1998
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE REALIZED OF NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED ON SHARES ACQUIRED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS(1)
NAME EXERCISE ON EXERCISE OPTIONS AT MARCH 31, 1998 AT MARCH 31, 1998
- --------------------- ---------------- ----------------- --------------------------- ---------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gary D. Kerber -- $ -- 75,184 137,408 $ 481,874 $ 290,381
Vince Pisano -- -- 50,482 108,592 306,423 230,599
Gerry M. Taylor -- -- 44,833 21,000 390,409 130,230
Ellen L. Bernhardt 16,666 70,204 22,167 27,000 161,734 84,210
Gerald T. Kosentos -- -- 3,466 85,534 22,712 290,926
------ ------- ------- ------- ---------- ----------
TOTAL 16,666 $70,204 196,132 379,534 $1,363,152 $1,026,346
====== ======= ======= ======= ========== ==========
</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.
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. This report is submitted by the Committee and
addresses the Company's policies for fiscal 1998 as they apply to Gary
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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.
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.
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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 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 "Stock Incentive Plans" and "1998
Amendment to 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 1998 for any of the Named
Executive Officers.
STOCK INCENTIVE PLANS
1996 STOCK 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, 1998, options for 13,000
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.
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,
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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 13,000 were available for grant as of March 31, 1998.
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
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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 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.
PLEASE SEE PROPOSAL FOUR FOR A DESCRIPTION OF THE
1998 AMENDMENT TO THE 1996 STOCK INCENTIVE PLAN
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
On June 20, 1996, the Company adopted, and its stockholders approved, the
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, 1998,
options covering 88,000 shares were available for future grant under the
Directors' Plan.
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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 options to purchase 25,000 shares of
Common Stock of the Company at $10.00 per share. These options vested in October
1996. 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 the date of grant, vesting in five equal annual installments
beginning on the first anniversary of the date of grant. 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).
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.
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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 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).
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COMPENSATION OF CHIEF EXECUTIVE OFFICER
In fiscal 1998, Mr. Kerber, the Company's President and Chief Executive
Officer, received a salary of $195,909, which represented his base salary for
1998, and a bonus of $120,828. In addition, he received an incentive grant of
options to purchase 20,000 shares of the Company's common stock at an exercise
price of $9.88. The amount of Mr. Kerber's base salary is set annually by the
Board of Directors. See "Employment Agreement" for a description of the
employment agreement between Mr. Kerber and the Company.
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 1998, 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 Company's initial
public offering (the "IPO" in October 1996, the Pecks Managed Entities
beneficially owned 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 1997, 1996 and 1995, the Company
incurred interest expense on the Notes to the Delaware Plan in the
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amounts of $149,834, $364,941 and $253,610, respectively, to the ICI Trust in
the amounts of $31,155, $75,883 and $52,733 respectively, and to the Zeneca
Trust in the amounts of $25,678, $62,543 and $43,464, respectively. The Company
utilized $2,700,000 of the proceeds of the IPO 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,
Lawrence, Tyrrell, Ortale & Smith ("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 (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 agreed to pay all expenses in
connection with such registrations.
In partial satisfaction of its obligations under the Securities Purchase
Agreement and the Registration Rights, the Company filed a registration
statement (SEC File No: 333-50221) on April 16, 1998 (the "1998 Offering"),
which registration statement as amended provided for the underwritten offering
of all of the shares owned by the Pecks Managed Entities (878,692 shares), all
of the shares owned by LTOS (995,307 shares), and 126,001 shares to be issued by
the Company for a total offering of 2,000,000 shares at a price of $8.75 per
share. The 1998 Offering was completed on July 2, 1998. The Company also sold an
additional 300,000 shares as a result of the exercise by the underwriters of
their over-allotment option on July 31, 1998.
As a result of the 1998 Offering, Pecks Managed Entities and LTOS divested
themselves of all shares held in the Company. W. Patrick Ortale, III, who served
on the Board of Directors of the Company as a representative of LTOS' interests
since 1988, has declined to continue to serve on the Board beyond the time of
this Annual Meeting of Shareholders to be held on September 22, 1998. Mr.
Cresci, who is the managing partner of the Pecks Managed Entities and also a
director of the Company, has been nominated for reelection to serve during
fiscal 1999.
See "Certain Relationships and Related Transactions."
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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 secured by a blanket
security interest in the Company's assets. In fiscal 1997 and 1996, the Company
incurred interest expense on the Secured Note of approximately $179,667 and
$309,771, 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 through July 1998. Pursuant to
the consulting agreement and the noncompetition agreement, the Company paid Mr.
Guthrie $35,000, $46,903 and $58,806 in fiscal years 1998, 1997 and 1996,
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.
On March 13, 1998, the Company acquired the four Hesser Schools and the
real estate in Manchester, New Hampshire, which is the main campus. Mr. Linwood
Galeucia, a Named Executive Officer of the Company, was one of the owners of the
Hesser Schools. The purchase price for the Hesser Schools was $17,683,372,
consisting of $2,000,000 in cash, promissory notes aggregating $13,683,372, and
202,532 shares of the Company's Common Stock, valued at an aggregate $2,000,000.
Of the purchase price, Mr. Galeucia received 101,266 shares of the Company's
Common Stock, promissory notes in the aggregate principal amount of $3,750,000
and cash of $1,000,000. The Company filed a registration statement on Form S-3
(SEC File No. 333-52451) on May 12, 1998 with respect to Mr. Galeucia's shares,
18
<PAGE> 21
which registration statement was declared effective by the Commission on May 19,
1998, and provided it continues to be effective, it will enable him to sell his
shares in the public market.
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.
STOCK PERFORMANCE GRAPHS
The following graphs compare 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,
1998 with (a) the Nasdaq Stock Market Index and (b) an index comprised of the
common stock of seven other education companies. Graph 1 shows the comparison
utilizing the six-member Self-Determined Peer Group presented by the Company in
its 1997 Stockholder Report and Graph 2 shows the comparison with the inclusion
of a seventh company, Edutrek International, Inc., a comparable company which
completed its initial public offering in September 1997. 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.
19
<PAGE> 22
GRAPH 1
COMPARISON OF TOTAL RETURN AMONG EDUCATIONAL MEDICAL, INC., THE
NASDAQ STOCK MARKET INDEX AND THE ORIGINAL SELF-DETERMINED
PEER GROUP
OCTOBER 29, 1996 -- MARCH 31, 1998 (QUARTERLY BASIS)
<TABLE>
<CAPTION>
NASDAQ SELF- EDUCATIONAL
MEASUREMENT PERIOD STOCK DETERMINED MEDICAL,
(FISCAL YEAR COVERED) MARKET PEER GROUP INC.
<S> <C> <C> <C>
10/29/96 100 100 100
12/31/96 107.78 100.59 111.25
3/31/97 101.94 95.88 112.50
6/30/97 120.62 124.57 81.25
9/30/97 141.03 130.52 81.25
12/31/97 132.25 145.56 81.25
3/31/98 154.71 148.19 116.25
</TABLE>
TABLE I -- CUMULATIVE VALUE OF $100 INVESTMENT
<TABLE>
<CAPTION>
10/29/96 12/31/96 03/31/97 06/30/97 09/30/97 12/31/97 03/31/98
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
NASDAQ STOCK MARKET $100.00 $107.78 $101.94 $120.62 $141.03 $132.25 $154.71
SELF-DETERMINED PEER GROUP $100.00 $100.59 $ 95.88 $124.57 $130.52 $145.56 $148.19
EDUCATIONAL MEDICAL, INC. $100.00 $111.25 $112.50 $ 81.25 $ 81.25 $ 81.25 $116.25
</TABLE>
TABLE II -- NON-CUMULATIVE ANNUAL RETURN
<TABLE>
<CAPTION>
10/29/96 12/31/96 03/31/97 06/30/97 09/30/97 12/31/97 03/31/98
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
NASDAQ STOCK MARKET NA 7.78% (5.42)% 18.33 % 16.92% (6.23)% 16.98%
SELF-DETERMINED PEER GROUP NA .59% (4.68)% 29.92 % 4.78% 11.52 % 1.80%
EDUCATIONAL MEDICAL, INC. NA 11.25% 1.12 % (27.78)% 0.00% 0.00 % 43.08%
</TABLE>
Self Determined Peer Group consists of Computer Learning Centers; DeVry, Inc.;
Educational Management Corp.; ITT Educational Services; Strayer Education, Inc.;
and Whitman Education Group, Inc.
20
<PAGE> 23
GRAPH 2
COMPARISON OF TOTAL RETURN AMONG EDUCATIONAL MEDICAL, INC., THE
NASDAQ STOCK MARKET INDEX AND THE REVISED SELF-DETERMINED
PEER GROUP
OCTOBER 29, 1996 -- MARCH 31, 1998 (QUARTERLY BASIS)
<TABLE>
<CAPTION>
NASDAQ SELF- EDUCATIONAL
MEASUREMENT PERIOD STOCK DETERMINED MEDICAL,
(FISCAL YEAR COVERED) MARKET PEER GROUP INC.
<S> <C> <C> <C>
10/29/96 100 100 100
12/31/96 107.78 100.59 111.25
3/31/97 101.94 95.88 112.50
6/30/97 120.62 124.57 81.25
9/30/97 141.03 130.52 81.25
12/31/97 132.25 145.56 81.25
3/31/98 154.71 148.19 116.25
</TABLE>
TABLE I -- CUMULATIVE VALUE OF $100 INVESTMENT
<TABLE>
<CAPTION>
10/29/96 12/31/96 03/31/97 06/30/97 09/30/97 12/31/97 03/31/98
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
NASDAQ STOCK MARKET $100.00 $107.78 $101.94 $120.62 $141.03 $132.25 $154.71
SELF-DETERMINED PEER GROUP $100.00 $100.59 $ 95.88 $124.57 $130.88 $145.46 $147.32
EDUCATIONAL MEDICAL, INC. $100.00 $111.25 $112.50 $ 81.25 $ 81.25 $ 81.25 $116.25
</TABLE>
TABLE II -- NON-CUMULATIVE ANNUAL RETURN
<TABLE>
<CAPTION>
10/29/96 12/31/96 03/31/97 06/30/97 09/30/97 12/31/97 03/31/98
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
NASDAQ STOCK MARKET NA 7.78% (5.42)% 18.33 % 16.92% (6.23)% 16.98%
SELF-DETERMINED PEER GROUP NA 0.59% (4.68)% 29.92 % 5.06% 11.14 % 1.28%
EDUCATIONAL MEDICAL, INC. NA 11.25% 1.12 % (27.28)% 0.00% 0.00 % 43.08%
</TABLE>
Revised Self Determined Peer Group consists of Computer Learning Centers; DeVry,
Inc.; Education Management Corp.; ITT Educational Services; Strayer Education,
Inc.; Whitman Education Group, Inc.; and Edutrek International, Inc. (added to
peer group for this proxy period; completed its initial public offering on
September 24, 1997).
21
<PAGE> 24
PROPOSAL TWO
APPROVAL OF THE AMENDMENT OF THE COMPANY'S ARTICLES OF
INCORPORATION TO CHANGE THE NAME OF THE COMPANY TO
"QUEST EDUCATION CORPORATION"
The Board of Directors has approved, subject to approval by the
stockholders at this Annual Meeting, an amendment to the Company's Articles of
Incorporation to change the name of the Company to "Quest Education
Corporation." The Board and the Company believe that the proposed name more
accurately describes the current strategy and focus of the Company. When the
Company was originally formed, its focus was to acquire schools offering
primarily healthcare-oriented curricula, which was reflected in the Company name
of "Educational Medical, Inc." The use of the word "Medical" in the Company's
name implies that it is limited to or focused on medical fields. In recent
years, the Company has expanded its business to include schools offering not
only healthcare, but business, information technology, criminal justice and many
other fields. It has also expanded its ability to offer associate and bachelor
degree programs as well as diploma programs. In the future, the Company expects
to continue to expand the range of its curriculum base. The Board and the
Company feel that the new name will reflect the Company's current strategy
including a broad array of curriculum.
The Company intends to change its trading symbol for its common stock,
traded on The Nasdaq National Market System, from "EDMD" to "QEDC," effective as
soon as practicable following the filing of the certificate of amendment with
the Secretary of State of the State of Delaware. The change in the Company's
name will not affect the validity or transferability of the Company's
outstanding securities nor will it affect the Company's capital or corporate
structure. The Company's stockholders will not be required to exchange any
certificates representing any of the Company's securities held by them.
In accordance with Delaware law and notwithstanding approval of the filing
of the certificate of amendment with the Secretary of State, the Board of
Directors may abandon such proposed amendment without further action by the
stockholders.
Approval of a majority of the shares of Common Stock present or
represented by proxy and entitled to vote at the Annual Meeting is required for
approval of this proposal. Broker non-votes with respect to this matter will not
be deemed to have been cast either "for" or "against" the matter, although they
will be counted in determining if a quorum is present. Proxies marked "abstain"
or a vote to abstain by a stockholder present in person at the Annual Meeting
will have the same legal effect as a vote "against" the matter because it
represents a share present or represented at the meeting and entitled to vote,
thereby increasing the number of affirmative votes required to approve this
proposal.
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE AMENDMENT
OF THE COMPANY'S ARTICLES OF INCORPORATION TO CHANGE THE NAME OF THE
COMPANY TO "QUEST EDUCATION CORPORATION"
PROPOSAL THREE
PROPOSAL TO RATIFY THE COMPANY'S EMPLOYEE STOCK PURCHASE PLAN
The Company's Board of Directors has adopted and is submitting to the
shareholders for approval, the 1998 Employee Stock Purchase Plan (the "Plan").
The Plan becomes effective October 22, 1998 and is designed to qualify as an
employee stock purchase plan under Section 423 of the Internal Revenue Code of
1986, as amended (the "Code"). Two hundred thousand (200,000) shares of the
Company's Common Stock have been reserved for issuance over the term of the
Plan, subject to periodic adjustment for changes in the outstanding Common Stock
occasioned by stock splits, stock dividends, recapitalizations or other similar
changes. The material features of the Plan are discussed below, but the
description is subject to, and is qualified in its entirety by, the full text of
the Plan, which is attached hereto as Exhibit A.
22
<PAGE> 25
The purpose of the Plan is to encourage stock ownership in the Company by
employees of the Company and those subsidiaries of the Company designated by the
Company's Board of Directors as eligible to participate, thereby enhancing
employee interest in the continued success and progress of the Company.
GENERAL TERMS AND CONDITIONS
The Plan will be administered by the Board of Directors; however, under
the Plan's terms, the Board may appoint a Committee to administer the Plan. The
Plan gives broad powers to the Board or the Committee to administer and
interpret the Plan.
The Plan permits employees to purchase stock of the Company at a favorable
price and possibly with favorable tax consequences to the participants. All
employees (including officers) either of the Company or of subsidiaries
designated by the Board who are regularly scheduled to work at least 20 hours
per week and more than five months per year are eligible to participate in any
of the purchase periods of the Plan after completing one year of continuous
employment. However, any participant who would own (as determined under the
Code), immediately after the grant of an option, stock possessing 5% or more of
the total combined voting power or value of all classes of the stock of the
Company will not be granted an option under the Plan.
Under the Plan, eligible employees may elect to participate in the Plan on
January 1 or July 1 of each year (except in 1998, when the election date is
October 22, 1998). On the date an employee becomes a participant, subject to
certain limitations determined in accordance with calculations set forth in the
Plan, an eligible employee is granted a right to purchase shares of Common Stock
(up to a maximum of 750 shares) on the last business day on or before each June
30 and December 31 during which the employee is a participant. Upon enrollment
in the Plan, the participant authorizes a payroll deduction, on an after-tax
basis, in an amount of not less than 1% and not more than 25% of the
participant's compensation on each payroll date. Unless the participant
withdraws from the Plan, the participant's option for the purchase of shares
will be exercised automatically on each exercise date, and the maximum number of
full shares subject to such option shall be purchased for the participant at the
applicable exercise price with the accumulated Plan contributions then credited
to the participant's account under the Plan. The option exercise price per share
may not be less than 85% of the lower of the market price on the first day of
the offering period or the market price on the exercise date, unless the
participant's entry date is not the first day of the offering period, in which
case the exercise price may not be lower than 85% of the market price of the
Common Stock on the entry date.
As required by tax law, no participant may receive an option under the
Plan for shares which have a fair market value in excess of $25,000 for any
calendar year, determined at the time such option is granted. Any funds not used
to purchase shares will remain credited to the participant's bookkeeping account
and applied to the purchase of shares of Common Stock in the next succeeding
purchase period. No interest is paid by the Company on funds withheld, and such
funds are used by the Company for general operating purposes.
No plan contributions or options granted under the Plan are assignable or
transferable, other than by will or by the laws of descent and distribution or
as provided under the Plan. During the lifetime of a participant, an option is
exercisable only by such participant. The expiration date of the Plan will be
determined by the Board and may be made any time following the close of any
six-month exercise period, but may not be longer than ten years from the date of
the grant. Under circumstances of dissolution or liquidation, the offering
period will terminate immediately prior to the consummation of such proposed
action, unless otherwise provided by the Board. In the event of merger or a sale
of all or substantially all of the Company's assets, each option under the Plan
shall be assumed or an equivalent option substituted by the successor
corporation, unless the Board, in its sole discretion, accelerates the date on
which the options may be exercised. No option may be exercised under the Plan
after October 22, 2008. The unexercised
23
<PAGE> 26
portion of any option granted to an employee under the Plan shall be
automatically terminated immediately upon the termination of the employee's
employment for any reason, including retirement or death.
The Plan provides for adjustment of the number of shares for which options
may be granted, the number of shares subject to outstanding options and the
exercise price of outstanding options in the event of any increase or decrease
in the number of issued and outstanding shares as a result of one or more
reorganizations, restructurings, recapitalizations, reclassifications, stock
splits, reverse stock splits, or stock dividends.
The Board or the Committee may amend, suspend or terminate the Plan at any
time, provided that such amendment may not change any option which adversely
affects the rights of the holder of the option and the Plan may not be amended
if such amendment would in any way cause rights issued under the Plan to fail to
meet the requirements for employee stock purchase plans as defined in Section
423 of the Code, or would cause the Plan to fail to comply with Rule 16b-3 of
the Exchange Act of 1934, as amended.
No shares of Common Stock have been purchased under the Plan. The
Company's shareholders will not have any preemptive rights to purchase or
subscribe for the shares reserved for issuance under the Plan. If any option
granted under the Plan expires or terminates for any reason other than having
been exercised in full, the unpurchased shares subject to that option will again
be available for purposes of the Plan.
FEDERAL INCOME TAX EFFECTS
Options granted under the Plan are intended to qualify for favorable tax
treatment to the employees under Sections 421 and 423 of the Code. Employee
contributions are made on an after-tax basis. A capital gain or capital loss on
Common Stock purchased under the Plan would not be realized until the
participant sells the shares of Common Stock. If a participant disposes of
shares two years or more after the date of the beginning of the purchase period
when the shares were acquired, and more than one year after the shares are
purchased, the participant would recognize as ordinary income the lesser of: (i)
the excess of the fair market value of the shares on the date of sale over the
price paid or (ii) the discount (currently 15%) of the fair market value of the
shares at the beginning of the purchase period(s). Additionally, the participant
would recognize a long-term capital gain or loss (within the meaning of the
Code) equal to the difference between the amount realized from the sale of the
shares and the basis (the basis would be the purchase price plus any amount
taxed as ordinary compensation income). If a participant disposes of shares
within two years of the date of the beginning of the purchase period when the
shares were acquired, or within one year after the shares are purchased, the
participant would recognize ordinary compensation income equal to the excess of
the fair market value of the shares on the purchase date(s) over the price paid
for the shares. Additionally, the participant would recognize a capital gain or
loss (within the meaning of the Code) equal to the difference between the amount
realized from the sale of the shares and the basis (the basis would be the
purchase price plus the amount taxed as ordinary compensation income). If the
participant held the shares for more than one year, the capital gain or loss
would be a long-term gain or loss. The Company would not receive an income tax
deduction upon either the grant or exercise of the option by the participant,
but generally would receive a deduction equal to the ordinary compensation
income required to be recognized by the participant as a result of the
disposition of the shares if the shares are disposed of by the participant
within two years of the date of the beginning of the purchase period when the
shares were acquired, or within one year after the shares are purchased.
Importance of Consulting Tax Advisor. The information set forth above is
a summary only and does not purport to be complete. In addition, the information
is based upon current Federal income tax rules and therefore is subject to
change when those rules change. Moreover, because the tax consequences to any
participant in the Plan may depend on his or her particular situation, each
participant should consult
24
<PAGE> 27
his or her tax adviser as to the federal, state, local and other tax
consequences of the acquisition or disposition of Common Stock under the Plan.
The Committee believes that shares granted under the Plan will be awarded
to all employees presently meeting the existing eligibility requirements, except
no one plan participant may be granted an aggregate number of shares with a fair
market value exceeding $25,000 in any calendar year as determined at the
beginning of each purchase period as defined under the Plan.
Approval of a majority of the shares of Common Stock present or
represented by proxy and entitled to vote at the Annual Meeting is required for
approval of this proposal. Broker non-votes with respect to this matter will not
be deemed to have been cast either "for" or "against" the matter, although they
will be counted in determining if a quorum is present. Proxies marked "abstain"
or a vote to abstain by a stockholder present in person at the Annual Meeting
will have the same legal effect as a vote "against" the matter because it
represents a share present or represented at the meeting and entitled to vote,
thereby increasing the number of affirmative votes required to approve this
proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR"
THE APPROVAL OF THE PROPOSAL TO RATIFY THE COMPANY'S 1998
EMPLOYEE STOCK PURCHASE PLAN.
PROPOSAL FOUR
APPROVAL OF THE AMENDMENT TO THE COMPANY'S 1996 STOCK INCENTIVE
PLAN TO INCREASE THE NUMBER OF SHARES ISSUABLE
The Board strongly believes that it is essential to motivate and retain
key employees by insuring that they have a direct interest in the overall
success of the Company. A principal means of doing this is to encourage
ownership of corporate stock which can be realized on an advantageous basis
through stock options. In this regard, the Company intends to continue with an
aggressive stock option program to hold and recruit individuals valuable to the
organization.
On August 11, 1998, the Board of Directors approved, subject to
shareholder approval, an amendment (the "1998 Amendment"), a copy of which is
attached hereto as Exhibit "B-1," to the 1996 Stock Incentive Plan (the "Option
Plan"), a copy of which is attached hereto as Exhibit "B-2," which would
increase the base number of common shares that may be subject to options granted
under the Option Plan by 500,000 shares, from 961,666 shares to 1,461,666
shares. As of June 30, 1998, of the 961,666 shares of common stock authorized
under the Option Plan, 48,327 shares have been purchased pursuant to the
exercise of stock options and 900,339 shares were subject to outstanding
options, leaving only 13,000 shares available for new options. The proposed
amendment would increase the number of available shares under the Option Plan to
513,000 as of September 30, 1998.
The Option Plan expires on June 20, 2006. In order to be able to carry
out its objectives throughout the remaining eight (8) years of the Option Plan,
the Board of Directors recommends that the stockholders approve the 1998
Amendment, which will add 500,000 shares of Common Stock to the present number
of shares
The Option Plan is fully described under the heading "Stock Incentive
Plans" elsewhere in this proxy. See "Stock Incentive Plans." Such description of
the Option Plan is qualified in its entirety by reference to the full text of
the Option Plan and the 1998 Amendment to the Option Plan, which govern in the
event of any conflict.
25
<PAGE> 28
Approval of a majority of the shares of Common Stock present or
represented by proxy and entitled to vote at the Annual Meeting is required for
election of approval of this proposal. Broker non-votes with respect to this
matter will not be deemed to have been cast either "for" or "against" the
matter, although they will be counted in determining if a quorum is present.
Proxies marked "abstain" or a vote to abstain by a stockholder present in person
at the Annual Meeting will have the same legal effect as a vote "against" the
matter because it represents a share present or represented at the meeting and
entitled to vote, thereby increasing the number of affirmative votes required to
approve this proposal.
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE
"FOR" THE APPROVAL OF THE 1998 AMENDMENT TO
THE COMPANY'S 1996 STOCK INCENTIVE PLAN.
PROPOSAL FIVE
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, 1999. 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, 1999.
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.
Approval of a majority of the shares of Common Stock present or
represented by proxy and entitled to vote at the Annual Meeting is required for
approval of this proposal. Broker non-votes with respect to this matter will not
be deemed to have been cast either "for" or "against" the matter, although they
will be counted in determining if a quorum is present. Proxies marked "abstain"
or a vote to abstain by a stockholder present in person at the Annual Meeting
will have the same legal effect as a vote "against" the matter because it
represents a share present or represented at the meeting and entitled to vote,
thereby increasing the number of affirmative votes required to approve this
proposal.
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, 1999.
SHAREHOLDER PROPOSALS
Shareholders who intend to submit proposals to the Company's shareholders
at the 1999 Annual Meeting of Shareholders must submit such proposals to the
Company no later than June 1, 1999, 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.
26
<PAGE> 29
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. 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, 1998 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, 1998 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
27
<PAGE> 30
EXHIBIT A
EDUCATIONAL MEDICAL, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
1. Purpose..................................................... 1
2. Definitions................................................. 1
3. Eligibility................................................. 3
4. Offering Periods............................................ 3
5. Election to Participate..................................... 3
6. Participant Contributions................................... 4
7. Grant of Option............................................. 4
8. Exercise Price.............................................. 5
9. Exercise of Options......................................... 5
10. Delivery.................................................... 5
11. Withdrawal; Termination of Employment....................... 5
12. Stock....................................................... 6
13. Administration.............................................. 6
14. Designation of Beneficiary.................................. 6
15. Transferability............................................. 7
16. Participant Accounts........................................ 7
Adjustments Upon Changes in Capitalization; Corporate
17. Transactions................................................ 7
18. Amendment of the Plan....................................... 8
19. Termination of the Plan..................................... 8
20. Notices..................................................... 8
21. Effective Date.............................................. 8
22. Conditions Upon Issuance of Shares.......................... 8
23. Expenses of the Plan........................................ 9
24. No Employment Rights........................................ 9
25. Applicable Law.............................................. 9
26. Additional Restrictions of Rule 16b-3....................... 9
</TABLE>
<PAGE> 31
EDUCATIONAL MEDICAL, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
1. Purpose. The purpose of the Plan is to provide incentive for present
and future employees of the Company and any Designated Subsidiary to acquire a
proprietary interest (or increase an existing proprietary interest) in the
Company through the purchase of Common Stock. It is the Company's intention that
the Plan qualify as an "employee stock purchase plan" under Section 423 of the
Code. Accordingly, the provisions of the Plan shall be administered, interpreted
and construed in a manner consistent with the requirements of that section of
the Code.
2. Definitions.
(a) "Applicable Percentage" means the percentage specified in
Section 8, subject to adjustment by the Committee as provided in Section
8.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended, and
any successor thereto.
(d) "Committee" means the committee appointed by the Board to
administer the Plan as described in Section 13 of the Plan or, if no such
Committee is appointed, the Board.
(e) "Common Stock" means the Company's common stock.
(f) "Company" means Educational Medical, Inc., a Delaware
corporation.
(g) "Compensation" means, with respect to each Participant for each
pay period, the full base salary, overtime and bonuses paid to such
Participant by the Company or a Designated Subsidiary. Except as otherwise
determined by the Committee, "Compensation" does not include: (i) any
amounts contributed by the Company or a Designated Subsidiary to any
pension plan; (ii) any automobile or relocation allowances (or
reimbursement for any such expenses); (iii) any amounts paid as a starting
bonus or finder's fee; (iv) any amounts realized from the exercise of any
stock options or incentive awards; (v) any amounts paid by the Company or
a Designated Subsidiary for other fringe benefits, such as health and
welfare, hospitalization and group life insurance benefits, or
perquisites, or paid in lieu of such benefits, or; (vi) other similar
forms of extraordinary compensation.
(h) "Continuous Status as an Employee" means the absence of any
interruption or termination of service as an Employee. Continuous Status
as an Employee shall not be considered interrupted in the case of a leave
of absence agreed to in writing by the Company or the Designated
Subsidiary that employs the Employee, provided that such leave is for a
period of not more than 90 days or reemployment upon the expiration of
such leave is guaranteed by contract or statute.
(i) "Designated Subsidiaries" means the Subsidiaries that have been
designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.
(j) "Employee" means any person, including an Officer, whose
customary employment with the Company or one of its Designated
Subsidiaries is at least twenty (20) hours per week and more than five (5)
months in any calendar year.
(k) "Entry Date" means the first day of each Exercise Period.
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(l) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(m) "Exercise Date" means the last Trading Day ending on or before
December 31, 1998, and the last Trading Day ending on or before each June
30 and December 31 thereafter.
(n) "Exercise Period" means, for any Offering Period, each period
commencing on the Offering Date and on the day after each Exercise Date,
and terminating on the immediately following Exercise Date.
(o) "Exercise Price" means the price per share of Common Stock
offered in a given Offering Period determined as provided in Section 8.
(p) "Fair Market Value" means, with respect to a share of Common
Stock, the Fair Market Value as determined under Section 7(b).
(q) "First Offering Date" means October 22, 1998.
(r) "Offering Date" means the first Trading Day of each Offering
Period; provided, that in the case of an individual who becomes eligible
to become a Participant under Section 3 after the first Trading Day of an
Offering Period, the term "Offering Date" shall mean the first Trading Day
of the Exercise Period coinciding with or next succeeding the day on which
that individual becomes eligible to become a Participant. Options granted
after the first day of an Offering Period will be subject to the same
terms as the options granted on the first Trading Day of such Offering
Period except that they will have a different grant date (thus,
potentially, a different exercise price) and, because they expire at the
same time as the options granted on the first Trading Day of such Offering
Period, a shorter term.
(s) "Offering Period" means (i) with respect to the first Offering
Period, the period beginning on the First Offering Date and ending on
December 31, 1998, and (ii) with respect to each Offering Period
thereafter, and subject to adjustment as provided in Section 4, the period
beginning [on the first Trading Day of the month of January in the
immediately succeeding calendar year and ending on the last Trading Day of
that calendar year.
(t) "Officer" means a person who is an officer of the Company
within the meaning of Section 16 under the Exchange Act and the rules and
regulations promulgated thereunder.
(u) "Participant" means an Employee who has elected to participate
in the Plan by filing an enrollment agreement with the Company as provided
in Section 5 of the Plan.
(v) "Plan" shall mean this 1998 Employee Stock Purchase Plan.
(w) "Plan Contributions" means, with respect to each Participant,
the after-tax payroll deductions withheld from the Compensation of the
Participant and contributed to the Plan for the Participant as provided in
Section 6 of the Plan and any other amounts contributed to the Plan for
the Participant in accordance with the terms of the Plan.
(x) "Subsidiary" shall mean any corporation, domestic or foreign,
of which the Company owns, directly or indirectly, 50% or more of the
total combined voting power of all classes of stock, and that otherwise
qualifies as a "subsidiary corporation" within the meaning of Section
424(f) of the Code.
(y) "Trading Day" shall mean a day on which the national stock
exchanges and the Nasdaq system are open for trading.
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3. Eligibility.
(a) Any Employee who has completed at least one year of employment
with the Company or any Subsidiary and who is an Employee as of the
Offering Date of a given Offering Period shall be eligible to become a
Participant as of any Entry Date within that Offering Period under the
Plan, subject to the requirements of Section 5(a) and the limitations
imposed by Section 423(b) of the Code.
(b) Notwithstanding any provision of the Plan to the contrary, no
Participant shall be granted an option under the Plan (i) to the extent
that if, immediately after the grant, such Employee (or any other person
whose stock would be attributed to such Employee pursuant to Section
424(d) of the Code) would own stock and/or hold outstanding options to
purchase stock possessing 5% or more of the total combined voting power or
value of all classes of stock of the Company or of any Subsidiary of the
Company, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its
Subsidiaries intended to qualify under Section 423 of the Code to accrue
at a rate which exceeds $25,000 of fair market value of stock (determined
at the time such option is granted) for each calendar year in which such
option is outstanding at any time.
4. Offering Periods. The Plan shall be implemented by a series of
consecutive Offering Periods. The first Offering Period shall commence on the
First Offering Date, the second Offering Period shall commence on the first
Trading Day in 1999, and succeeding Offering Periods shall commence on the first
Trading Day in each succeeding calendar year (or at such other time or times as
may be determined by the Committee). The Committee shall have the power to
change the duration and/or the frequency of Offering Periods with respect to
future offerings if such change is announced at least five (5) days prior to the
scheduled beginning of the first Offering Period to be affected.
5. Election to Participate.
(a) An eligible Employee may elect to participate in the Plan
commencing on any Entry Date by completing an enrollment agreement on the
form provided by the Company and filing the enrollment agreement with the
Company on or prior to such Entry Date, unless a later time for filing the
enrollment agreement is set by the Committee for all eligible Employees
with respect to a given offering. The enrollment agreement shall set forth
the percentage of the Participant's Compensation that is to be withheld by
payroll deduction pursuant to the Plan.
(b) Except as otherwise determined by the Committee under rules
applicable to all Participants, payroll deductions for a Participant shall
commence on the first payroll following the Entry Date on which the
Participant elects to participate in accordance with Section 5(a) and
shall end on the last payroll in the Offering Period, unless sooner
terminated by the Participant as provided in Section 11.
(c) Unless a Participant elects otherwise prior to the last
Exercise Date of an Offering Period, such Participant shall be deemed (i)
to have elected to participate in the immediately succeeding Offering
Period (and, for purposes of such Offering Period such Participant's
"Entry Date" shall be deemed to be the first day of such Offering Period)
and (ii) to have authorized the same payroll deduction for such
immediately succeeding Offering Period as was in effect for such
Participant immediately prior to the commencement of such succeeding
Offering Period.
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6. Participant Contributions.
(a) Except as otherwise authorized by the Committee pursuant to
Section 6(d) below, all Participant contributions to the Plan shall be
made only by payroll deductions. At the time a Participant files the
enrollment agreement with respect to an Offering Period, the Participant
may authorize payroll deductions to be made on each payroll date during
the portion of the Offering Period that he or she is a Participant in an
amount not less than 1% and not more than 25% of the Participant's
Compensation on each payroll date during the portion of the Offering
Period that he or she is a Participant (or subsequent Offering Periods as
provided in Section 5(c)). The amount of payroll deductions shall be a
whole percentage (i.e., 1%, 2%, 3%, etc.) of the Participant's
Compensation.
(b) A Participant may discontinue his or her participation in the
Plan as provided in Section 11, or may decrease or increase the rate or
amount of his or her payroll deductions during such Offering Period
(within the limitations of Section 6(a) above) by completing and filing
with the Company a new enrollment agreement authorizing a change in the
rate or amount of payroll deductions; provided, that a Participant may not
change the rate or amount of his or her payroll deductions more than once
in any Exercise Period. The change in rate or amount shall be effective
with the first full payroll period following ten (10) business days after
the Company's receipt of the new enrollment agreement.
(c) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) hereof, a
Participant's payroll deductions may be decreased to 0% at such time
during any Exercise Period which is scheduled to end during the current
calendar year that the aggregate of all payroll deductions accumulated
with respect to such Exercise Period and any other Exercise Period ending
within the same calendar year are equal to the product of $25,000
multiplied by the Applicable Percentage for the calendar year. Payroll
deductions shall recommence at the rate provided in the Participant's
enrollment agreement at the beginning of the following Exercise Period
which is scheduled to end in the following calendar year, unless
terminated by the Participant as provided in Section 11.
(d) Notwithstanding anything to the contrary in the foregoing, but
subject to the limitations set forth in Section 3(b), the Committee may
permit Participants to make after-tax contributions to the Plan at such
times and subject to such terms and conditions as the Committee may in its
discretion determine. All such additional contributions shall be made in a
manner consistent with the provisions of Section 423 of the Code or any
successor thereto, and shall be held in Participants' accounts and applied
to the purchase of shares of Common Stock pursuant to options granted
under this Plan in the same manner as payroll deductions contributed to
the Plan as provided above.
(e) All Plan Contributions made for a Participant shall be
deposited in the Company's general corporate account and shall be credited
to the Participant's account under the Plan. No interest shall accrue or
be credited with respect to a Participant's Plan Contributions. All Plan
Contributions received or held by the Company may be used by the Company
for any corporate purpose, and the Company shall not be obligated to
segregate or otherwise set apart such Plan Contributions from any other
corporate funds.
7. Grant of Option.
(a) On a Participant's Entry Date, subject to the limitations set
forth in Sections 3(b) and 12(a), the Participant shall be granted an
option to purchase on each subsequent Exercise Date during the Offering
Period in which such Entry Date occurs (at the Exercise Price determined
as provided in Section 8 below) up to a number of shares of Common Stock
determined by dividing such Participant's Plan Contributions accumulated
prior to such Exercise Date and retained in the
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<PAGE> 35
Participant's account as of such Exercise Date by the Exercise Price;
provided, that the maximum number of shares an Employee may purchase
during any Exercise Period shall be 750 shares. The Fair Market Value of a
share of Common Stock shall be determined as provided in Section 7(b).
(b) The Fair Market Value of a share of Common Stock on a given
date shall be determined by the Committee in its discretion; provided,
that if there is a public market for the Common Stock, the Fair Market
Value per share shall be either (i) the closing price of the Common Stock
on such date (or, in the event that the Common Stock is not traded on such
date, on the immediately preceding trading date), as reported by the
National Association of Securities Dealers Automated Quotation (Nasdaq)
National Market System, (ii) if such price is not reported, the average of
the bid and asked prices for the Common Stock on such date (or, in the
event that the Common Stock is not traded on such date, on the immediately
preceding trading date), as reported by Nasdaq, (iii) in the event the
Common Stock is listed on a stock exchange, the closing price of the
Common Stock on such exchange on such date (or, in the event that the
Common Stock is not traded on such date, on the immediately preceding
trading date), as reported in The Wall Street Journal, or (iv) if no such
quotations are available for a date within a reasonable time prior to the
valuation date, the value of the Common Stock as determined by the
Committee using any reasonable means. For purposes of the First Offering
Date, the Fair Market Value of a share of Common Stock shall be the Price
to Public as set forth in the final prospectus filed by the Company with
the Securities and Exchange Commission pursuant to Rule 424 under the
Securities Act of 1933, as amended.
8. Exercise Price. The Exercise Price per share of Common Stock offered
to each Participant in a given Offering Period shall be the lower of: (i) the
Applicable Percentage of the greater of (A) the Fair Market Value of a share of
Common Stock on the Offering Date or (B) the Fair Market Value of a share of
Common Stock on the Entry Date on which the Employee elects to become a
Participant within the Offering Period or (ii) the Applicable Percentage of the
Fair Market Value of a share of Common Stock on the Exercise Date. The
Applicable Percentage with respect to each Offering Period shall be 85%, unless
and until such Applicable Percentage is increased by the Committee, in its sole
discretion, provided that any such increase in the Applicable Percentage with
respect to a given Offering Period must be established not less than fifteen
(15) days prior to the Offering Date thereof.
9. Exercise of Options. Unless the Participant withdraws from the Plan as
provided in Section 11, the Participant's option for the purchase of shares will
be exercised automatically on each Exercise Date, and the maximum number of full
shares subject to such option shall be purchased for the Participant at the
applicable Exercise Price with the accumulated Plan Contributions then credited
the Participant's account under the Plan. During a Participant's lifetime, a
Participant's option to purchase shares hereunder is exercisable only by the
Participant.
10. Delivery. As promptly as practicable after each Exercise Date, the
Company shall arrange for the delivery to each Participant (or the Participant's
beneficiary), as appropriate, or to a custodial account for the benefit of each
Participant (or the Participant's beneficiary) as appropriate, of a certificate
representing the shares purchased upon exercise of such Participant's option.
Any amount remaining to the credit of a Participant's account after the purchase
of shares by such Participant on an Exercise Date, or which is insufficient to
purchase a full share of Common Stock, shall be carried over to the next
Exercise Period if the Participant continues to participate in the Plan or, if
the Participant does not continue to participate, shall be returned to the
Participant.
11. Withdrawal; Termination of Employment.
(a) A Participant may withdraw from the Plan at any time by giving
written notice to the Company. All of the Plan Contributions credited to
the Participant's account and not yet invested in Common Stock will be
paid to the Participant as soon as administratively practicable after
receipt of the Participant's notice of withdrawal, the Participant's
option to purchase shares
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<PAGE> 36
pursuant to the Plan automatically will be terminated, and no further
payroll deductions for the purchase of shares will be made for the
Participant's account. Payroll deductions will not resume on behalf of a
Participant who has withdrawn from the Plan (a "Former Participant")
unless the Former Participant enrolls in a subsequent Offering Period in
accordance with Section 5(a).
(b) Upon termination of the Participant's Continuous Status as an
Employee prior to any Exercise Date for any reason, including retirement
or death, the Plan Contributions credited to the Participant's account and
not yet invested in Common Stock will be returned to the Participant or,
in the case of death, to the Participant's beneficiary as determined
pursuant to Section 14, and the Participant's option to purchase shares
under the Plan will automatically terminate.
(c) A Participant's withdrawal from an Offering Period will not
have any effect upon the Participant's eligibility to participate in
succeeding Offering Periods or in any similar plan which may hereafter be
adopted by the Company.
12. Stock.
(a) The maximum number of shares of the Company's Common Stock that
shall be made available for sale under the Plan shall be two hundred
thousand (200,000) shares, subject to adjustment as provided in Section
17. Shares of Common Stock subject to the Plan may be newly issued shares
or shares reacquired in private transactions or open market purchases. If
and to the extent that any right to purchase reserved shares shall not be
exercised by any Participant for any reason or if such right to purchase
shall terminate as provided herein, shares that have not been so purchased
hereunder shall again become available for the purpose of the Plan unless
the Plan shall have been terminated, but all shares sold under the Plan,
regardless of source, shall be counted against the limitation set forth
above.
(b) A Participant will have no interest or voting right in shares
covered by his option until such option has been exercised.
(c) Shares to be delivered to a Participant under the Plan will be
registered in the name of the Participant or in the name of the
Participant and his or her spouse, as requested by the Participant.
13. Administration.
(a) The Plan shall be administered by the Committee. The Committee
shall have the authority to interpret the Plan, to prescribe, amend and
rescind rules and regulations relating to the Plan, and to make all other
determinations necessary or advisable for the administration of the Plan.
The administration, interpretation, or application of the Plan by the
Committee shall be final, conclusive and binding upon all persons.
(b) Notwithstanding the provisions of Subsection (a) of this
Section 13, in the event that Rule 16b-3 promulgated under the Exchange
Act or any successor provision thereto ("Rule 16b-3") provides specific
requirements for the administrators of plans of this type, the Plan shall
only be administered by such body and in such a manner as shall comply
with the applicable requirements of Rule 16b-3. Unless permitted by Rule
16b-3, no discretion concerning decisions regarding the Plan shall be
afforded to any person that is not "disinterested" as that term is used in
Rule 16b-3.
14. Designation of Beneficiary.
(a) A Participant may file a written designation of a beneficiary
who is to receive any shares and cash, if any, from the Participant's
account under the Plan in the event of the Participant's death subsequent
to an Exercise Date on which the Participant's option hereunder is
exercised but
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<PAGE> 37
prior to delivery to the Participant of such shares and cash. In addition,
a Participant may file a written designation of a beneficiary who is to
receive any cash from the Participant's account under the Plan in the
event of the Participant's death prior to the exercise of the option.
(b) A Participant's beneficiary designation may be changed by the
Participant at any time by written notice. In the event of the death of a
Participant and in the absence of a beneficiary validly designated under
the Plan who is living at the time of such Participant's death, the
Company shall deliver such shares and/or cash to the executor or
administrator of the estate of the Participant, or if no such executor or
administrator has been appointed (to the knowledge of the Company), the
Company, in its discretion, may deliver such shares and/or cash to the
spouse or to any one or more dependents or relatives of the Participant,
or if no spouse, dependent or relative is known to the Company, then to
such other person as the Company may designate.
15. Transferability. Neither Plan Contributions credited to a
Participant's account nor any rights to exercise any option or receive shares of
Common Stock under the Plan may be assigned, transferred, pledged or otherwise
disposed of in any way (other than by will or the laws of descent and
distribution, or as provided in Section 14). Any attempted assignment, transfer,
pledge or other distribution shall be without effect, except that the Company
may treat such act as an election to withdraw funds in accordance with Section
11.
16. Participant Accounts. Individual accounts will be maintained for each
Participant in the Plan to account for the balance of his Plan Contributions and
options issued and shares purchased under the Plan. Statements of account will
be given to Participants semi-annually in due course following each Exercise
Date, which statements will set forth the amounts of payroll deductions, the per
share purchase price, the number of shares purchased and the remaining cash
balance, if any.
17. Adjustments Upon Changes in Capitalization; Corporate Transactions.
(a) If the outstanding shares of Common Stock are increased or
decreased, or are changed into or are exchanged for a different number or
kind of shares, as a result of one or more reorganizations,
restructurings, recapitalizations, reclassifications, stock splits,
reverse stock splits, stock dividends or the like, upon authorization of
the Committee, appropriate adjustments shall be made in the number and/or
kind of shares, and the per-share option price thereof, which may be
issued in the aggregate and to any Participant upon exercise of options
granted under the Plan.
(b) In the event of the proposed dissolution or liquidation of the
Company, the Offering Period will terminate immediately prior to the
consummation of such proposed action, unless otherwise provided by the
Committee. In the event of a proposed sale of all or substantially all of
the Company's assets, or the merger of the Company with or into another
corporation (each, a "Sale Transaction"), each option under the Plan shall
be assumed or an equivalent option shall be substituted by such successor
corporation or a parent or subsidiary of such successor corporation,
unless the Committee determines, in the exercise of its sole discretion
and in lieu of such assumption or substitution, to shorten the Exercise
Period then in progress by setting a new Exercise Date (the "New Exercise
Date"). If the Committee shortens the Exercise Period then in progress in
lieu of assumption or substitution in the event of a Sale Transaction, the
Committee shall notify each Participant in writing, at least ten (10) days
prior to the New Exercise Date, that the exercise date for such
Participant's option has been changed to the New Exercise Date and that
such Participant's option will be exercised automatically on the New
Exercise Date, unless prior to such date the Participant has withdrawn
from the Plan as provided in Section 11. For purposes of this Section
17(b), an option granted under the Plan shall be deemed to have been
assumed if, following the Sale Transaction, the option confers the right
to purchase, for each share of option stock subject to the option
immediately prior to the Sale Transaction, the consideration (whether
stock, cash or other securities or property) received in the Sale
Transaction by holders of Common Stock for each share of Common Stock held
on the effective date of the Sale Transaction (and if
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<PAGE> 38
such holders were offered a choice of consideration, the type of
consideration chosen by the holders of a majority of the outstanding
shares of Common Stock); provided, that if the consideration received in
the Sale Transaction was not solely common stock of the successor
corporation or its parent (as defined in Section 424(e) of the Code), the
Committee may, with the consent of the successor corporation and the
Participant, provide for the consideration to be received upon exercise of
the option to be solely common stock of the successor corporation or its
parent equal in fair market value to the per share consideration received
by the holders of Common Stock in the Sale Transaction.
(c) In all cases, the Committee shall have sole discretion to
exercise any of the powers and authority provided under this Section 17,
and the Committee's actions hereunder shall be final and binding on all
Participants. No fractional shares of stock shall be issued under the Plan
pursuant to any adjustment authorized under the provisions of this Section
17.
18. Amendment of the Plan. The Board or the Committee may at any time, or
from time to time, amend the Plan in any respect; provided, that (i) no such
amendment may make any change in any option theretofore granted which adversely
affects the rights of any Participant and (ii) the Plan may not be amended in
any way that will cause rights issued under the Plan to fail to meet the
requirements for employee stock purchase plans as defined in Section 423 of the
Code or any successor thereto. To the extent necessary to comply with Rule 16b-3
under the Exchange Act, Section 423 of the Code, or any other applicable law or
regulation), the Company shall obtain shareholder approval of any such
amendment.
19. Termination of the Plan.
The Plan and all rights of Employees hereunder shall terminate on the
earliest of:
(a) the Exercise Date that Participants become entitled to purchase
a number of shares greater than the number of reserved shares remaining
available for purchase under the Plan;
(b) such date as is determined by the Board in its discretion; or
(c) the last Exercise Date immediately preceding the tenth (10th)
anniversary of the Plan's effective date.
In the event that the Plan terminates under circumstances described in
Section 19(a) above, reserved shares remaining as of the termination date shall
be sold to Participants on a pro rata basis.
20. Notices. All notices or other communications by a Participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
21. Effective Date. Subject to adoption of the Plan by the Board, the
Plan shall become effective on the First Offering Date. The Board shall submit
the Plan to the shareholders of the Company for approval within twelve months
after the date the Plan is adopted by the Board.
22. Conditions Upon Issuance of Shares.
(a) The Plan, the grant and exercise of options to purchase shares
under the Plan, and the Company's obligation to sell and deliver shares
upon the exercise of options to purchase shares shall be subject to
compliance with all applicable federal, state and foreign laws, rules and
regulations and the requirements of any stock exchange on which the shares
may then be listed.
(b) The Company may make such provisions as it deems appropriate
for withholding by the Company pursuant to federal or state tax laws of
such amounts as the Company determines it
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<PAGE> 39
is required to withhold in connection with the purchase or sale by a
Participant of any Common Stock acquired pursuant to the Plan. The Company
may require a Participant to satisfy any relevant tax requirements before
authorizing any issuance of Common Stock to such Participant.
23. Expenses of the Plan. All costs and expenses incurred in
administering the Plan shall be paid by the Company, except that any stamp
duties or transfer taxes applicable to participation in the Plan may be charged
to the account of such Participant by the Company.
24. No Employment Rights. The Plan does not, directly or indirectly,
create any right for the benefit of any employee or class of employees to
purchase any shares under the Plan, or create in any employee or class of
employees any right with respect to continuation of employment by the Company,
and it shall not be deemed to interfere in any way with the Company's right to
terminate, or otherwise modify, an employee's employment at any time.
25. Applicable Law. The laws of the State of Delaware shall govern all
matter relating to this Plan except to the extent (if any) superseded by the
laws of the United States.
26. Additional Restrictions of Rule 16b-3. The terms and conditions of
options granted hereunder to, and the purchase of shares by, persons subject to
Section 16 of the Exchange Act shall comply with the applicable provisions of
Rule 16b-3. This Plan shall be deemed to contain, and such options shall
contain, and the shares issued upon exercise thereof shall be subject to, such
additional conditions and restrictions as may be required by Rule 16b-3 to
qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to Plan transactions.
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EXHIBIT B-1
1998 AMENDMENT TO 1996 INCENTIVE STOCK OPTION PLAN
1998 AMENDMENT TO EDUCATIONAL MEDICAL, INC.
1996 STOCK INCENTIVE PLAN
W I T N E S S E T H:
1. Amendment to Paragraph 1(i) of the 1996 Plan. Paragraph 1(i) of the
1996 Stock Incentive adopted by the Board of Directors of Educational Medical,
Inc. on June 20, 1996 is hereby amended in its entirety as follows:
"(i) 'Plan' shall mean the Educational Medical, Inc. 1996 Stock Incentive
Plan as amended from time to time."
2. Amendment to Paragraph 5 of the 1996 Plan. Paragraph 5 of the 1996
Plan is hereby amended in its entirety as follows:
"5. MAXIMUM NUMBER OF 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 Plan shall
be 1,461,666 shares in the aggregate of Common Stock of the Corporation.
The number of shares with respect to which a stock appreciation right is
granted, but not the number of shares which the Corporation delivers or
could deliver to a Participant upon exercise of a stock appreciation
right, shall be charged against the aggregate number of shares remaining
available under the Plan; provided, however, that in the case of a stock
appreciation right granted in conjunction with a stock option under
circumstances in which the exercise of the stock appreciation right
results in termination of the stock option and vice versa, only the number
of shares subject to the stock option shall be charged against the
aggregate number of shares remaining available under the Plan. If a stock
option or stock appreciation right expires or terminates for any reason
(other than termination as a result of the exercise of a related right)
without having been fully exercised, or if shares of restricted stock are
forfeited, the number of shares with respect to which the stock option or
stock appreciation right was not exercised at the time of its expiration
or termination, and the number of forfeited shares of restricted stock,
shall again become available for the grant of stock options or stock
appreciation rights, or the award of restricted stock, under the Plan,
unless the Plan shall have been terminated.
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 Plan shall 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 Corporation; provided,
however, that no fractional shares shall be issued pursuant to the Plan,
no rights may be granted under the Plan with respect to fractional shares,
and any fractional shares resulting from such adjustments shall be
eliminated from any outstanding stock option, stock appreciation right, or
restricted stock award."
3. Conflict Between 1996 Plan and this 1998 Amendment. In the event of
any conflict between the terms and provisions of the 1996 Plan and the terms and
provisions of this 1998 Amendment, the terms and provisions of this 1998
Amendment shall govern. All terms and provisions of the 1996 Plan not hereby
amended shall remain in full force and effect.
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EXHIBIT B-2
1996 INCENTIVE STOCK OPTION PLAN
EDUCATIONAL MEDICAL, INC.
1996 STOCK INCENTIVE PLAN
1. DEFINITIONS: As used herein, the following definitions shall apply:
(a) "Administrator" shall mean the Board of Directors or the
Committee if the Board of Directors, in its sole discretion, designates
the Committee to administer the Plan.
(b) "Board of Directors" shall mean the Board of Directors of the
Corporation.
(c) "Committee" shall mean the Compensation Committee designated by
the Board of Directors of the Corporation, or such other committee as
shall be specified by the Board of Directors to perform the functions and
duties of the Committee under the Plan; provided, however, that the
Committee shall comply with the requirements of (i) Rule 16b-3 of the
Rules and Regulations under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and (ii) Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"), and the regulations
thereunder.
(d) "Corporation" shall mean Educational Medical, Inc., a Delaware
corporation, or any successor thereof.
(e) "Discretion" shall mean in the sole discretion of the
Administrator, with no requirement whatsoever that the Administrator
follow past practices, act in a manner consistent with past practices, or
treat a key employee, consultant or advisor in a manner consistent with
the treatment afforded other key employees, consultants or advisors with
respect to the Plan.
(f) "Incentive Option" shall mean an option to purchase Common
Stock of the Corporation which meets the requirements set forth in the
Plan and also meets the definition of an incentive stock option within the
meaning of Section 422 of the Code; provided, however, that Incentive
Options may only be granted to persons who are employees of the
Corporation or of a subsidiary corporation in which the Corporation owns,
directly or indirectly, 50% or more of the combined voting power of all
classes of stock of the subsidiary corporation. The stock option agreement
for an Incentive Option shall state that the option is intended to be an
Incentive Option.
(g) "Nonqualified Option" shall mean an option to purchase Common
Stock of the Corporation which meets the requirements set forth in the
Plan but does not meet the definition of an incentive stock option within
the meaning of Section 422 of the Code. The stock option agreement for a
Nonqualified Option shall state that the option is intended to be a
Nonqualified Option.
(h) "Participant" shall mean any individual designated by the
Administrator under Paragraph 6 for participation in the Plan.
(i) "Plan" shall mean this Educational Medical, Inc. 1996 Stock
Incentive Plan.
(j) "Restricted stock award" shall mean a grant of Common Stock of
the Corporation which is subject to forfeiture, restrictions against
transfer, and such other terms and conditions determined by the
Administrator, as provided in Paragraph 18.
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<PAGE> 42
(k) "Stock appreciation right" shall mean a right to receive the
appreciation in value, or a portion of the appreciation in value, of a
specified number of shares of the Common Stock of the Corporation, as
provided in Paragraph 12.
(l) "Subsidiary" shall mean any corporation or similar entity in
which the Corporation owns, directly or indirectly, stock or other equity
interest ("Stock") possessing more than 25% of the combined voting power
of all classes of Stock; provided, however, that an Incentive Option may
be granted to an employee of a Subsidiary only if the Subsidiary is a
corporation and the Corporation owns, directly or indirectly, 50% or more
of the total combined voting power of all classes of Stock of the
Subsidiary.
2. PURPOSE OF PLAN: The purpose of the Plan is to provide employees
(including officers and directors who are also employees), consultants and
advisors of the Corporation and its Subsidiaries with an increased incentive to
make significant and extraordinary contributions to the long-term performance
and growth of the Corporation and its Subsidiaries, to join the interests of
employees, consultants and advisors with the interests of the shareholders of
the Corporation, and to facilitate attracting and retaining employees,
consultants and advisors of exceptional ability.
3. ADMINISTRATION: The Plan shall be administered by the Administrator.
Subject to the provisions of the Plan, the Administrator shall determine, from
those eligible to be Participants under the Plan, 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 options, stock appreciation rights and restricted stock.
Subject to the provisions of the Plan, the Administrator is authorized to
interpret the Plan, to make, amend and rescind rules and regulations relating to
the Plan and to make all other determinations necessary or advisable for the
Plan's administration. Interpretation and construction of any provision of the
Plan by the Administrator shall, unless otherwise determined by the Board of
Directors in cases where the Committee is the Administrator, be final and
conclusive. A majority of the Administrator shall constitute a quorum, and the
acts approved by a majority of the members present at any meeting at which a
quorum is present, or acts approved in writing by a majority of the
Administrator, shall be the acts of the Administrator.
4. INDEMNIFICATION OF THE BOARD OF DIRECTORS AND COMMITTEE MEMBERS: In
addition to such other rights of indemnification as they may have, the members
of the Board of Directors and the Committee shall be indemnified by the
Corporation in connection with any claim, action, suit or proceeding relating to
any action taken or failure to act under or in connection with the Plan or any
option, stock appreciation right or restricted stock granted hereunder to the
full extent provided for under the Corporation's Bylaws with respect to
indemnification of directors of the Corporation.
5. MAXIMUM NUMBER OF 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 Plan shall be 961,666
shares in the aggregate of Common Stock of the Corporation. The number of shares
with respect to which a stock appreciation right is granted, but not the number
of shares which the Corporation delivers or could deliver to a Participant upon
exercise of a stock appreciation right, shall be charged against the aggregate
number of shares remaining available under the Plan; provided, however, that in
the case of a stock appreciation right granted in conjunction with a stock
option under circumstances in which the exercise of the stock appreciation right
results in termination of the stock option and vice versa, only the number of
shares subject to the stock option shall be charged against the aggregate number
of shares remaining available under the Plan. If a stock option or stock
appreciation right expires or terminates for any reason (other than termination
as a result of the exercise of a related right) without having been fully
exercised, or if shares of restricted stock are forfeited, the number of shares
with respect to which the stock option or stock appreciation right was not
exercised at the time of its expiration or termination, and the number of
forfeited shares of restricted stock, shall again become available for the grant
of stock options or stock appreciation rights, or the award of restricted stock,
under the Plan, unless the Plan shall have been terminated.
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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 Plan shall 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 Corporation; provided, however, that no fractional shares shall be issued
pursuant to the Plan, no rights may be granted under the Plan with respect to
fractional shares, and any fractional shares resulting from such adjustments
shall be eliminated from any outstanding stock option, stock appreciation right,
or restricted stock award.
6. PARTICIPANTS: The Administrator shall determine and designate from
time to time, in its Discretion, those employees, consultants or advisors of the
Corporation or any Subsidiary to receive stock options, stock appreciation
rights, or restricted stock who, in the judgment of the Administrator, are or
will become responsible for the direction and financial success of the
Corporation or any Subsidiary; provided, however, that Incentive Options may be
granted only to persons who are employees of the Corporation or a Subsidiary,
and in the case of a Subsidiary only if (i) the Corporation owns, directly or
indirectly, 50% or more of the total combined voting power of all classes of
Stock of the Subsidiary and (ii) the Subsidiary is a corporation. For the
purposes of the Plan, eligible employees shall include officers and directors
who are also employees of the Corporation or any Subsidiary.
7. WRITTEN AGREEMENT: Each stock option, stock appreciation right and
restricted stock award shall be evidenced by a written agreement (each a
"Corporation-Participant Agreement") containing such provisions as may be
approved by the Administrator. Each such Corporation-Participant Agreement shall
constitute a binding contract between the Corporation and the Participant and
every Participant, upon acceptance of such Agreement, shall be bound by the
terms and restrictions of the Plan and of such Agreement. The terms of each such
Corporation-Participant Agreement shall be in accordance with the Plan, but each
Agreement may include such additional provisions and restrictions determined by
the Administrator, in its Discretion, provided that such additional provisions
and restrictions are not inconsistent with the terms of the Plan.
8. ALLOTMENT OF SHARES: Subject to the terms of the Plan, the
Administrator shall determine and fix, in its Discretion, the number of shares
of Common Stock with respect to which a Participant may be granted stock options
and stock appreciation rights and the number of shares of restricted stock which
a Participant may be awarded.
9. STOCK OPTIONS: Subject to the terms of the Plan, the Administrator, in
its Discretion, may grant to Participants either Incentive Options or
Nonqualified Options or any combination thereof. Each option granted under the
Plan shall designate the number of shares covered thereby, if any, with respect
to which the option is an Incentive Option, and the number of shares covered
thereby, if any, with respect to which the option is a Nonqualified Option.
10. STOCK OPTION PRICE: Subject to the rules set forth in this Paragraph
10, at the time any stock option is granted, the Administrator, in its
Discretion, shall establish the price per share for which the shares covered by
the option may be purchased. With respect to an Incentive Option, such option
price shall not be less than 100% of the fair market value of the stock on the
date on which such option is granted; provided, however, that with respect to an
Incentive Option granted to an employee who at the time of the grant owns (after
applying the attribution rules of Section 424(d) of the Code) more than 10% of
the total combined voting stock of the Corporation or of any parent or
subsidiary, the option price shall not be less than 110% of the fair market
value of the stock on the date such option is granted. Fair market value of a
share shall be determined by the Administrator and may be determined by taking
the mean between the highest and lowest quoted selling prices of the
Corporation's Common Stock on any exchange or other market on which the shares
of Common Stock of the Corporation shall be traded on such date, or if there are
no sales on such date, on the next following day on which there are sales. The
option price shall be subject to adjustment in accordance with the provisions of
paragraph 5 of the Plan.
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11. PAYMENT OF STOCK OPTION PRICE: To exercise in whole or in part any
stock option granted hereunder, payment of the option price in full in cash or,
with the consent of the Administrator, in Common Stock of the Corporation or by
a promissory note payable to the order of the Corporation in a form acceptable
to the Administrator, shall be made by the Participant for all shares so
purchased. Such payment may, with the consent of the Administrator, also consist
of a cash down payment and delivery of such promissory note in the amount of the
unpaid exercise price. In the Discretion of and subject to such conditions as
may be established by the Administrator, payment of the option price may also be
made by the Corporation retaining from the shares to be delivered upon exercise
of the stock option that number of shares having a fair market value on the date
of exercise equal to the option price of the number of shares with respect to
which the Participant exercises the stock option. Such payment may also be made
in such other manner as the Administrator determines is appropriate, in its
Discretion. No Participant shall have any of the rights of a shareholder of the
Corporation under any stock option until the actual issuance of shares to said
Participant, and prior to such issuance no adjustment shall be made for
dividends, distributions or other rights in respect of such shares, except as
provided in Paragraph 5.
12. STOCK APPRECIATION RIGHTS: Subject to the terms of the Plan, the
Administrator may grant stock appreciation rights to Participants either in
conjunction with, or independently of, any stock options granted under the Plan.
A stock appreciation right granted in conjunction with a stock option may be an
alternative right wherein the exercise of the stock option terminates the stock
appreciation right to the extent of the number of shares purchased upon exercise
of the stock option and, correspondingly, the exercise of the stock appreciation
right terminates the stock option to the extent of the number of shares with
respect to which the stock appreciation right is exercised. Alternatively, a
stock appreciation right granted in conjunction with a stock option may be an
additional right wherein both the stock appreciation right and the stock option
may be exercised. A stock appreciation right may not be granted in conjunction
with an Incentive Option under circumstances in which the exercise of the stock
appreciation right affects the right to exercise the Incentive Option or vice
versa, unless the stock appreciation right, by its terms, meets all of the
following requirements:
(a) the stock appreciation right will expire no later than the
Incentive Option;
(b) the stock appreciation right may be for no more than the
difference between the option price of the Incentive Option and the fair
market value of the shares subject to the Incentive Option at the time the
stock appreciation right is exercised;
(c) the stock appreciation right is transferable only when the
Incentive Option is transferable, and under the same conditions;
(d) the stock appreciation right may be exercised only when the
Incentive Option is eligible to be exercised; and
(e) the stock appreciation right may be exercised only when the
fair market value of the shares subject to the Incentive Option exceeds
the option price of the Incentive Option.
Upon exercise of a stock appreciation right, a Participant shall be
entitled to receive, without payment to the Corporation (except for applicable
withholding taxes), an amount equal to the excess of or, in the Discretion of
the Administrator if provided in the Corporation-Participant Agreement, a
portion of the excess of (i) the then aggregate fair market value of the number
of shares with respect to which the Participant exercises the stock appreciation
right, over (ii) the aggregate fair market value of such number of shares at the
time the stock appreciation right was granted. This amount shall be payable by
the Corporation, in the Discretion of the Administrator, in cash or in shares of
Common Stock of the Corporation or any combination thereof.
13. GRANTING AND EXERCISING OF STOCK OPTIONS AND STOCK APPRECIATION
RIGHTS: Subject to the provisions of this Paragraph 13, each stock option and
stock appreciation right granted
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<PAGE> 45
hereunder shall be exercisable at any such time or times or in any such
installments as may be determined by the Administrator at the time of the
grants; provided, however, no stock option or stock appreciation right may be
exercisable prior to the expiration of six months from the date of grant unless
the Participant dies or becomes disabled prior thereto. In addition, the
aggregate fair market value (determined at the time the option is granted) of
the Common Stock with respect to which Incentive Options are exercisable for the
first time by a Participant during any calendar year under any plan maintained
by the Corporation (or any parent or subsidiary corporation of the Corporation)
shall not exceed $100,000.
A Participant may exercise a stock option or stock appreciation right, if
then exercisable, in whole or in part by delivery to the Corporation of written
notice of the exercise, in such form as the Administrator may prescribe,
accompanied, in the case of a stock option, by (i) payment for the shares with
respect to which the stock option is exercised in accordance with Paragraph 11,
or (ii) in the Discretion of the Administrator, irrevocable instructions to a
stock broker to promptly deliver to the Corporation full payment for the shares
with respect to which the stock option is exercised from the proceeds of the
stock broker's sale of or loan against the shares. Except as provided in
Paragraph 17 or as provided in any applicable Corporation-Participant Agreement,
stock options and stock appreciation rights granted to a Participant may be
exercised only while the Participant is an employee or consultant of the
Corporation or a Subsidiary.
Successive stock options and stock appreciation rights may be granted to
the same Participant, whether or not the stock option(s) and stock appreciation
right(s) previously granted to such Participant remain unexercised. A
Participant may exercise a stock option or a stock appreciation right, if then
exercisable, notwithstanding that stock options and stock appreciation rights
previously granted to such Participant remain unexercised.
14. NON-TRANSFERABILITY OF INCENTIVE STOCK OPTIONS: No Incentive Stock
Option granted under the Plan to a Participant shall be transferable by such
Participant otherwise than by will or by the laws of descent and distribution,
and Incentive Stock Options shall be exercisable, during the lifetime of the
Participant, only by the Participant.
15. TERM OF STOCK OPTIONS AND STOCK APPRECIATION RIGHTS: If not sooner
terminated, each stock option and stock appreciation right granted hereunder
shall expire not more than 10 years from the date of the granting thereof;
provided, however, that with respect to an Incentive Option or a related stock
appreciation right granted to a Participant who, at the time of the grant, owns
(after applying the attribution rules of Section 424(d) of the Code) more than
10% of the total combined voting stock of all classes of stock of the
Corporation or of any parent or subsidiary, such option and stock appreciation
right shall expire not more than five (5) years after the date of granting
thereof.
16. CONTINUATION OF EMPLOYMENT: The Administrator may require, in its
Discretion, that any Participant under the Plan to whom a stock option or stock
appreciation right shall be granted shall agree in writing as a condition of the
granting of such stock option or stock appreciation right to remain in the
employ of the Corporation or a Subsidiary as an employee, consultant or advisor
for a designed minimum period from the date of the granting of such stock option
or stock appreciation right as shall be fixed by the Administrator.
17. TERMINATION OF EMPLOYMENT: If the employment or consultancy of a
Participant by the Corporation or a Subsidiary shall terminate, 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. In no
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<PAGE> 46
event, however, shall a stock option or stock appreciation right be exercisable
subsequent to its expiration date and, furthermore, unless the Administrator in
its Discretion determine otherwise, a stock option or stock appreciation right
may only be exercised after termination of a Participant's employment or
consultancy to the extent exercisable on the date of such termination or to the
extent exercisable as a result of the reason for such termination. The period of
time, if any, a Participant shall have to exercise stock options or stock
appreciation rights upon termination of employment or consultancy shall be set
forth in the Corporation-Participant Agreement, subject to extension of such
time period by the Administrator in its Discretion.
18. RESTRICTED STOCK AWARDS: Subject to the terms of the Plan, the
Administrator may award shares of restricted stock to Participants. All shares
of restricted stock granted to Participants under the Plan shall be subject to
the following terms and conditions (and to such other terms and conditions
prescribed by the Administrator):
(a) At the time of each award of restricted shares, there shall be
established for the shares a restricted period, which shall be no less
than six months and no greater than five years. Such restricted period may
differ among Participants and may have different expiration dates with
respect to portions of shares covered by the same award.
(b) 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 shall have all of the rights of a
shareholder in respect of restricted shares awarded to him or her
including, but not limited to, the right to receive any dividends on, and
the right to vote, the shares.
(c) If the employment of a Participant as an employee, consultant
or advisor of the Corporation or a Subsidiary terminates for any reason
(voluntary or involuntary, and with or without cause) other than death or
permanent disability, all shares theretofore awarded to the Participant
which are still subject to the restrictions imposed by Paragraph 18(b)
shall upon such termination of employment be forfeited and transferred
back to the Corporation, without payment of any consideration by the
Corporation. In the event such employment is terminated by action of the
Corporation or a Subsidiary without cause or by agreement between the
Corporation or a Subsidiary and the Participant, however, the
Administrator may, in its Discretion, release some or all of the shares
from the restrictions.
(d) If the employment of a Participant as an employee, consultant
or advisor of the Corporation or a Subsidiary terminates by reason of
death or permanent disability, the restrictions imposed by Paragraph 18(b)
shall lapse with respect to shares then subject to such restrictions,
unless otherwise determined by the Administrator.
(e) Stock certificates shall be issued in respect of shares of
restricted stock awarded hereunder and shall be registered in the name of
the Participant. Such certificates shall be deposited with the Corporation
or its designee, together with a stock power endorsed in blank, and, in
the Discretion of the Administrator, a legend shall be placed upon such
certificates reflecting that the shares represented thereby are subject to
restrictions against transfer and forfeiture.
(f) At the expiration of the restricted period applicable to the
shares, the Corporation shall deliver to the Participant or the legal
representative of the Participant's estate the stock certificates
deposited with it or its designee and as to which the restricted period
has expired. If a legend has been placed on such certificates, the
Corporation shall cause such certificates to be reissued without the
legend.
In the case of events such as stock dividends, stock splits,
recapitalizations, mergers, consolidations or reorganizations of or by the
Corporation, any stock, securities or other property which a Participant
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<PAGE> 47
receives or is entitled to receive by reason of his or her ownership of
restricted shares shall, unless otherwise determined by the Administrator, be
subject to the same restrictions applicable to the restricted shares and shall
be deposited with the Corporation or its designee.
19. INVESTMENT PURPOSE: If the Administrator in its Discretion determines
that as a matter of law such procedure is or may be desirable, it may require a
Participant, upon any acquisition of Common Stock hereunder (whether by reason
of the exercise of stock options or stock appreciation rights or the award of
restricted stock) and as a condition to the Corporation's obligation to issue or
deliver certificates representing such shares, to execute and deliver to the
Corporation a written statement, in form satisfactory to the Administrator,
representing and warranting that the Participant's acquisition of shares of
stock shall be for such person's own account, for investment and not with a view
to the resale or distribution thereof and that any subsequent offer for sale or
sale of any such shares shall be made either pursuant to (a) a registration
statement on an appropriate form under the Securities Act of 1933, as amended
(the "Securities Act"), which registration statement has become effective and is
current with respect to the shares being offered and sold, or (b) a specific
exemption from the registration requirements of the Securities Act, but in
claiming such exemption the Participant shall, prior to any offer for sale or
sale of such shares, obtain a favorable written opinion from counsel for or
approved by the Corporation as to the availability of such exemption. The
Corporation may endorse an appropriate legend referring to the foregoing
restriction upon the certificate or certificates representing any shares issued
or transferred to a Participant under the Plan.
20. RIGHTS TO CONTINUED EMPLOYMENT: Nothing contained in the Plan or in
any stock option, stock appreciation right or restricted stock granted or
awarded pursuant to the Plan, nor any action taken by the Administrator
hereunder, shall confer upon any Participant any right with respect to
continuation of employment as an employee, consultant or advisor of the
Corporation or a Subsidiary nor interfere in any way with the right of the
Corporation or a Subsidiary to terminate such person's employment at any time.
21. WITHHOLDING PAYMENTS: If upon the 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 (within the meaning of Section 422 of the Code) of
shares acquired upon exercise of an Incentive Option, there shall be payable by
the Corporation or a Subsidiary any amount for income tax withholding, in the
Administrator's Discretion, either the Corporation shall appropriately reduce
the amount of Common Stock or cash to be delivered or paid to the Participant or
the Participant shall pay such amount to the Corporation or Subsidiary to
reimburse it for such income tax withholding. The Administrator may, in its
Discretion, permit Participants to satisfy such withholding obligations, in
whole or in part, by electing to have the amount of Common Stock delivered or
deliverable by the Corporation upon exercise of a stock option or stock
appreciation right or upon award of restricted stock appropriately reduced, or
by electing to tender Common Stock back to the Corporation subsequent to
exercise of a stock option or stock appreciation right or award of restricted
stock, to reimburse the Corporation or a Subsidiary for such income tax
withholding (any such election being irrevocable), subject to such rules and
regulations as the Administrator may adopt, including such rules as it
determines appropriate with respect to Participants subject to the reporting
requirements of Section 16(a) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), to effect such tax withholding in compliance with the
Rules established by the Securities and Exchange Commission (the "Commission")
under Section 16 to the Exchange Act and the positions of the staff of the
Commission thereunder expressed in no-action letters exempting such tax
withholding from liability under Section 16(b) of the Exchange Act. The
Administrator may make such other arrangements with respect to income tax
withholding as it shall determine.
22. EFFECTIVENESS OF PLAN: The Plan shall be effective on the date the
Board of Directors of the Corporation adopts the Plan, provided that the
shareholders of the Corporation approve the Plan within 12 months of its
adoption by the Board of Directors. Stock options, stock appreciation rights and
restricted stock may be granted or awarded prior to shareholder approval of the
Plan, but each such stock
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<PAGE> 48
option, stock appreciation right or restricted stock grant or award shall be
subject to shareholder approval of the Plan. No stock option or stock
appreciation right may be exercised prior to shareholder approval, and any
restricted stock awarded is subject to forfeiture if such shareholder approval
is not obtained.
23. TERMINATION, DURATION AND AMENDMENTS OF PLAN: The Plan may be
abandoned or terminated at any time by the Board of Directors of the
Corporation. Unless sooner terminated, the Plan shall terminate on the date ten
years after its adoption by the Board of Directors, and no stock options, stock
appreciation rights or restricted stock may be granted or awarded thereafter.
The termination of the Plan shall 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 regulations, or for any other lawful purpose, the Board of
Directors shall have the right, with or without approval of the shareholders of
the Corporation, to amend or revise the terms of the 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 adjustment) or alter or
impair any stock option, stock appreciation right or restricted stock which has
been previously granted or awarded under the Plan.
As adopted by the Board of Directors on June 20, 1996.
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APPENDIX
EDUCATIONAL MEDICAL, INC.
PROXY FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD SEPTEMBER 22, 1998
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 Donaldson Lufkin & Jenrette, 12th Floor Situation Room, 277 Park Avenue,
New York, NY 10172 on Tuesday, September 22, 1998 at 1:00 p.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, WILLIAM D. FORD, ROBERT J. CRESCI, CARL S. HUTMAN,
RICHARD E. KROON,
<TABLE>
<S> <C>
[ ] FOR all nominees [ ] WITHHOLD AUTHORITY
(except as marked below) to vote for all nominees
</TABLE>
For all nominees except the following nominee(s):
- --------------------------------------------------------------------------------
(Continued and to be signed, on reverse side)
(Continued from other side)
2. To approve amendment of the Company's Articles of Incorporation to change the
name of the Company to "Quest Education Corporation."
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. To approve the Company's 1998 Employee Stock Purchase Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. To approve the 1998 Amendment to the Company's 1996 Stock Incentive Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. 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, 1999.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Dated: , 1998
--------------------
--------------------------------
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.
