<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 2, 1998
REGISTRATION NO. 333-50221
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
POST-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
EDUCATIONAL MEDICAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 8222 65-0038445
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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1327 NORTHMEADOW PARKWAY, SUITE 132
ROSWELL, GEORGIA 30076
(770) 475-9930
(Address including zip code, and telephone number, including area code, of
registrant's principal executive offices)
GARY D. KERBER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
1327 NORTHMEADOW PARKWAY, SUITE 132
ROSWELL, GEORGIA 30076
(770) 475-9930
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES TO:
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MORRIS C. BROWN, ESQ. FREDERICK W. KANNER, ESQ.
GREENBERG, TRAURIG, HOFFMAN DEWEY BALLANTINE LLP
LIPOFF, ROSEN & QUENTEL, P.A. 1301 AVENUE OF THE AMERICAS
777 SOUTH FLAGLER DRIVE NEW YORK, NEW YORK 10019
SUITE 300-EAST TOWER (212) 259-8000
WEST PALM BEACH, FLORIDA 33401
(561) 650-7900
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box: [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JULY 2, 1998
PROSPECTUS
2,000,000 SHARES
EDUCATIONAL MEDICAL, INC.
(EDUCATIONAL MEDICAL LOGO)
COMMON STOCK
------------------
Of the 2,000,000 shares of common stock (the "Common Stock") offered hereby
(the "Offering"), 126,001 shares are being sold by Educational Medical, Inc.
(the "Company") and 1,873,999 shares are being sold by certain stockholders of
the Company (the "Selling Stockholders"). The Company will not receive any of
the proceeds from the sale of shares by the Selling Stockholders. See "Principal
and Selling Stockholders."
The Common Stock is listed on the Nasdaq National Market (the "Nasdaq")
under the trading symbol "EDMD." The last sales price of the Common Stock as
reported on the Nasdaq on July 1, 1998 was $8.75 per share. See "Price Range of
Common Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<CAPTION>
======================================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS(2)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share $ $ $ $
- ----------------------------------------------------------------------------------------------------------------------
Total(3) $ $ $ $
======================================================================================================================
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(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses of the Offering, estimated at $425,000, which
are payable by the Company. The Company has also agreed to pay a portion
of the Underwriting Discounts and Commissions in an amount equal to
$ per share (an aggregate of $ ) with respect to shares of
Common Stock being sold by the Selling Stockholders.
(3) The Company has granted the Underwriters a 30-day option to purchase up
to 300,000 additional shares of Common Stock solely to cover
over-allotment,s if any. See "Underwriting." If such option is exercised
in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and $ ,
respectively. Proceeds to Selling Stockholders will not be affected.
------------------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about
, 1998 at the office of Smith Barney Inc., 333 West 34th Street, New
York, New York 10001.
------------------
SALOMON SMITH BARNEY LEGG MASON WOOD WALKER
INCORPORATED
July , 1998
<PAGE> 3
[ARTWORK CONCERNING FIELDS OF STUDY]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING
TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE
WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE
"UNDERWRITING."
---------------------
This Prospectus contains certain forward-looking statements that involve
substantial risks and uncertainties. When used in this Prospectus, the words
"anticipate," "believe," "estimate," "expect" and similar expressions as they
relate to the Company or its management are intended to identify such
forward-looking statements. Actual results, performance or achievements could
differ materially from the results expressed in, or implied by, these
forward-looking statements. Factors that could cause or contribute to such
differences include general economic and business conditions, the Company's
ability to identify, acquire and integrate additional schools, its ability to
open additional schools, its continued compliance with Title IV funding
requirements and other matters discussed in "Risk Factors."
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the consolidated
financial statements and notes thereto appearing elsewhere in this Prospectus.
Prospective investors should consider carefully the information set forth under
the heading "Risk Factors." As used in this Prospectus, the term "school" means
a single location at which the Company offers programs of study and the term
"institution" means a main campus and its additional locations (if any) as
defined in the applicable regulations of the United States Department of
Education ("Department of Education").
THE COMPANY
The Company provides diversified career oriented postsecondary education to
over 10,000 students at 24 schools located in ten states. The Company offers a
variety of bachelor degree, associate degree and diploma programs designed to
provide students with the knowledge and skills necessary to qualify them for
entry level employment principally in the fields of healthcare, business,
information technology, and fashion and design. The Company's curricula include
programs leading to employment in ten of the 15 fastest growing occupations
(measured by percentage growth from 1994 through 2005) as projected by the U.S.
Department of Labor. At March 31, 1998, approximately 49% of the Company's
students were enrolled in bachelor and associate degree programs.
In 1996, there were 14.6 million students participating in postsecondary
education programs, 44% of whom were over the age of 24 (Source: National Center
for Educational Statistics, Digest of Education Statistics, 1996). The Company
believes the demand for postsecondary career oriented education will increase
over the next several years as a result of recognized trends, including (i) a
projected 24% growth in the number of new high school graduates from
approximately 2.5 million in 1994 to approximately 3.1 million in 2004, (ii) the
increasing enrollment of high school graduates attending postsecondary
educational institutions (65% in 1996 versus 53% in 1983) as they seek to
enhance their skills or retrain for new technologies, and (iii) the increasing
recognition of the income premium attributable to higher education degrees, with
individuals holding associate degrees earning on average approximately 30% more
income during their lifetimes than individuals holding only high school diplomas
(Source: Department of Education).
According to the Department of Education, there were 1,995 accredited,
proprietary postsecondary institutions participating in the student financial
aid programs ("Title IV Programs") administered by the Department of Education
pursuant to Title IV of the Higher Education Act of 1965, as amended ("HEA") as
of March 16, 1998. The ownership of these institutions is highly fragmented.
Although the industry appears to be moving into a consolidation phase,
management believes that no organization either holds a significant national
market share or owns or operates more than 75 schools.
COMPANY STRATEGY
The Company's goal is to increase its market share in the expanding market
for postsecondary education and improve profitability by (i) promoting internal
growth at the Company's new and existing schools, (ii) acquiring additional
schools, (iii) opening new schools as additional locations or branches of
existing schools, and (iv) enhancing operating efficiencies. The Company has
implemented the following strategies to achieve these goals:
Internal Growth Strategy. The Company intends to increase student
enrollment at its schools by continuing to enhance local marketing efforts and
increasing the number and variety of program offerings at its schools. The
Company intends to continue to increase the number and variety of programs
offered at its schools by (i) developing new diploma and degree programs,
including a centrally developed information technology diploma and degree
program, (ii) replicating existing programs at selected schools where such
programs were not previously offered, and (iii) introducing associate degree
programs at all of its schools currently offering only diploma programs.
1
<PAGE> 5
Acquisition Strategy. The Company intends to continue to make selective
acquisitions of additional schools and integrate them into its existing system.
The Company believes that the fragmentation of the postsecondary education
market provides significant opportunities to consolidate existing independently
owned schools. The Company expects to utilize cash on hand, its bank credit
facility, the Company's Common Stock, and seller financing in connection with
such acquisitions. In general, the Company's principal acquisition criteria are:
historical profitability; acceptable default rates with respect to federally
guaranteed or funded student loans; established and marketable curricula; and
demographic profiles in the area which indicate a potential for growth. The
Company concentrates its acquisition efforts on schools which satisfy its
general acquisition criteria and which offer curricula in the fields of study
currently offered at the Company's schools and selected other fields of study.
Additional Location Strategy. The Company intends to capitalize on its
schools' existing infrastructure and curricula by opening additional locations
by branching from its existing institutions in areas that exhibit strong
enrollment potential and job placement opportunities. The Company's principal
criteria for determining whether to open new schools are the demographic profile
of the location and the economic and management cost of opening the new
location.
Operating Strategy. The Company provides each of its schools with certain
services which the Company believes can be performed most efficiently and cost
effectively by a centralized office. Such services include marketing analysis,
accounting, information systems, financial aid and regulatory compliance. The
Company intends to continue its strategy of operating with a decentralized
management structure in which local schools' management is empowered to make
most of the day-to-day operating decisions at each school and is primarily
responsible for the profitability and growth of that school. The Company
believes the combination of certain centralized services and decentralized
management significantly increases its operating efficiency.
FISCAL 1998 ACQUISITIONS
The CHI Institute Acquisition. On February 14, 1998, the Company acquired
the CHI Institute, which operates two schools (the "CHI Institute Schools")
located in the Philadelphia, Pennsylvania area, by purchasing all of the stock
of Computer Hardware Service Company, Inc. (the "CHI Institute Acquisition").
The purchase price of the CHI Institute Acquisition was $11,750,000, consisting
of $1,500,000 in cash, promissory notes aggregating $8,750,000, and 151,900
shares of the Company's Common Stock, valued at an aggregate of $1,500,000. As
part of the CHI Institute Acquisition, the Company also agreed to make adjusting
payments to the sellers based on the ratio of certain assets to certain
liabilities of the CHI Institute Schools at the time of the acquisition. These
adjusting payments aggregated $1,084,230, all of which has been paid in fiscal
1999. The Company has accounted for the CHI Institute Acquisition as a purchase;
therefore, the results of its operations are included in the Company's
consolidated results of operations effective February 1, 1998.
The CHI Institute Schools are located in Broomall and Southampton,
Pennsylvania. As of March 31, 1998, approximately 1,019 students attended the
CHI Institute Schools, which offer associate degree and diploma programs in
business, healthcare, electronic engineering, and information technology.
The Hesser Acquisition. On March 13, 1998, the Company acquired Hesser
College, which operates four schools (the "Hesser Schools") located in New
Hampshire, by purchasing all of the stock of Hesser, Inc. and the property in
Manchester, New Hampshire at which its main campus is located (the "Hesser
Acquisition"). The purchase price of the Hesser Acquisition was $15,000,000,
consisting of $2,000,000 in cash, promissory notes aggregating $11,000,000, and
202,532 shares of the Company's Common Stock, valued at an aggregate $2,000,000.
As part of the Hesser Acquisition, the Company also agreed to make adjusting
payments to the sellers based on the ratio of certain assets to certain
liabilities of the Hesser Schools at the time of the acquisition. These
adjusting payments aggregated $2,683,372, of which $2,433,372 has been paid in
fiscal 1999 and $250,000 of which is due April 1, 1999. The Company has
accounted for the Hesser Acquisition as a purchase; therefore, the results of
its operations are included in the Company's consolidated results of operations
effective March 1, 1998.
2
<PAGE> 6
The Hesser Schools are located in Manchester, Nashua, Portsmouth and Salem,
New Hampshire. As of March 31, 1998, approximately 2,512 students attended the
Hesser Schools, which primarily offer bachelor degree and associate degree
programs in business, healthcare, information technology, criminal justice and
early childhood education.
COMPANY HISTORY
The Company began business by acquiring seven schools in fiscal 1989 and
1990, all of which offered programs in the healthcare field. In fiscal 1992, the
Company continued to grow by acquisition and implemented a new strategy to
diversify outside of the healthcare field by acquiring a fashion and design
school. In fiscal 1993 and 1994, the Company acquired seven additional schools,
which included schools offering programs in the fields of healthcare, business,
fashion and design, and image technology. In fiscal 1997, the Company acquired
two schools (the "Nebraska Schools") in Nebraska (the "Nebraska Acquisition"),
three schools in Texas (the "Texas Acquisition") and one school in Maryland (the
"Maryland Acquisition") (collectively, the Nebraska Acquisition, the Maryland
Acquisition and the Texas Acquisition are called the "Fiscal 1997
Acquisitions"). The Fiscal 1997 Acquisitions included schools offering programs
in the fields of healthcare, business and information technology. The Nebraska
Acquisition was accounted for as a pooling of interests. In fiscal 1998, the
Company acquired six schools through the CHI Institute Acquisition and the
Hesser Acquisition (collectively, the "Fiscal 1998 Acquisitions"). The Fiscal
1998 Acquisitions included schools offering programs primarily in the fields of
business, healthcare, information technology, electronic engineering, criminal
justice and early childhood education. The number of students attending the
Company's schools rose from 2,840 at March 31, 1993 to 10,008 at March 31, 1998.
The Company's net revenues increased 138% from $25,100,000 for the year ended
March 31, 1993 to $59,676,000 for the year ended March 31, 1998.
The Company is a Delaware corporation incorporated in 1988. The Company
operates the majority of its business through 14 subsidiaries. The Company's
principal executive offices are located at 1327 Northmeadow Parkway, Suite 132,
Roswell, Georgia 30076. Its telephone number is 770-475-9930 and its website
address is http://www.edmd.com. Subject to shareholder approval at its next
annual meeting of shareholders in September 1998, the Company has determined to
change its name to "Quest Education Corporation."
3
<PAGE> 7
THE OFFERING
Common Stock offered by the Company..... 126,001 shares
Common Stock offered by the Selling
Stockholders............................ 1,873,999 shares
Total......................... 2,000,000 shares
Common Stock to be outstanding after the
Offering................................ 7,869,195 shares(1)
Use of proceeds by the Company.......... To pay a portion of the
underwriting discounts and
commissions on shares of Common
Stock being sold by the Selling
Stockholders and for general
corporate purposes. The Company
will not receive any of the
proceeds from the sale of the
Common Stock by the Selling
Stockholders. See "Use of
Proceeds".
Nasdaq National Market symbol........... "EDMD"
- ---------------
(1) Excludes at May 31, 1998 up to (i) 913,319 shares reserved for issuance
under the Company's 1996 Stock Incentive Plan of which options to purchase
900,339 shares have been granted, (ii) 200,000 shares reserved for issuance
under the Company's Non-Employee Director Stock Option Plan, of which
options to purchase 112,000 shares have been granted, and (iii) 43,334
shares which may be purchased upon the exercise of outstanding warrants to
purchase Common Stock. Includes 19,050 shares held in escrow under the terms
of the Nebraska Acquisition and subject to possible return to the Company.
4
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL AND OTHER OPERATING DATA
The following table sets forth certain consolidated financial and other
operating data for the Company. This information should be read in conjunction
with the Consolidated Financial Statements and Notes thereto appearing elsewhere
in this Prospectus. These historical and pro forma as adjusted results are not
necessarily indicative of the results that may be expected in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Unaudited Pro Forma As Adjusted Condensed Consolidated
Statement of Income."
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YEAR ENDED MARCH 31,
--------------------------------------------
PRO FORMA
HISTORICAL AS ADJUSTED(1)
--------------------------- --------------
1996 1997 1998 1998
------- ------- ------- --------------
(DOLLARS AND SHARES IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
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STATEMENT OF OPERATIONS DATA:
Net revenues......................................... $43,347 $49,450 $59,676 $80,965
School operating costs:
Cost of education and facilities................... 19,651 23,151 27,087 35,769
Selling and promotion expenses..................... 6,534 7,531 8,644 12,852
General and administrative expenses................ 12,369 14,042 16,576 21,919
Amortization of goodwill and intangibles............. 883 886 1,285 1,757
Other expenses(2):
Merger costs....................................... -- 391 -- --
Legal defense and settlement costs................. 1,115 -- -- 232
Loss on closure or relocation of schools........... 50 144 -- --
Impairment of goodwill and intangibles............. 764 -- -- --
------- ------- ------- -------
Income from operations............................... 1,981 3,305 6,084 8,436
Interest (income) expense, net....................... 822 284 (253) 1,105
------- ------- ------- -------
Income before income taxes and extraordinary item.... 1,159 3,021 6,337 7,331
Provision (benefit) for income taxes................. 632 (845) 2,485 2,918
------- ------- ------- -------
Income before extraordinary item..................... 527 3,866 3,852 4,413
Extraordinary item, net of income taxes.............. -- 309 -- --
------- ------- ------- -------
Net income......................................... $ 527 $ 3,557 $ 3,852 $ 4,413
======= ======= ======= =======
PRO FORMA DATA(3):
Pro forma income tax data:
Income before income taxes......................... $ 1,159 $ 3,021
Provision for income taxes......................... 487 409
------- -------
Income before extraordinary item................... 672 2,612
Extraordinary item, net of income taxes............ -- 309
------- -------
Pro forma net income............................... $ 672 $ 2,303
======= =======
PER SHARE DATA(4):
Basic:
Net income before extraordinary item............... $ 0.28 $ 0.58 $ 0.52 $ 0.56
Net income......................................... $ 0.28 $ 0.51 $ 0.52 $ 0.56
Diluted:
Net income before extraordinary item............... $ 0.13 $ 0.41 $ 0.51 $ 0.55
Net income......................................... $ 0.13 $ 0.36 $ 0.51 $ 0.55
Weighted average number of shares outstanding:
Basic.............................................. 2,371 4,484 7,382 7,835
Diluted............................................ 5,182 6,447 7,612 8,065
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YEAR ENDED MARCH 31,
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PRO FORMA
HISTORICAL AS ADJUSTED(1)
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1996 1997 1998 1998
------- ------- ------- --------------
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OTHER OPERATING DATA:
Number of schools at end of year(5).................. 16 19 24 24
Number of students at end of year.................... 4,954 5,993 10,008 10,008
Number of new student starts during year............. 6,706 7,358 8,410
Monthly withdrawal rate during year(6)............... 4.1% 4.2% 3.6%
</TABLE>
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MARCH 31, 1998
---------------------------
PRO FORMA
HISTORICAL AS ADJUSTED(1)
---------- --------------
(IN THOUSANDS)
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BALANCE SHEET DATA:
Cash and cash equivalents................................... $21,446 $21,617
Total assets................................................ 81,298 81,469
Notes payable and long term debt, including current
portion................................................... 31,947 31,947
Total stockholders' equity.................................. 35,672 35,843
</TABLE>
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(1) Pro forma to give effect to the Fiscal 1998 Acquisitions and as adjusted to
give effect to the sale of 126,001 shares of Common Stock of the Company
pursuant to the Offering and application of the net proceeds therefrom as if
such transactions had occurred at the beginning of the year in the case of
the statement of income data, and as of March 31, 1998 in the case of the
balance sheet data. See "Use of Proceeds" and "Unaudited Pro Forma As
Adjusted Condensed Consolidated Statement of Income."
(2) Other expenses consist of (i) charges in fiscal 1996 of $1,115 for the
settlement of a class action lawsuit, $50 for the cost of relocating a
school, and $764 for the impairment of goodwill and other intangible assets;
(ii) charges in fiscal 1997 of $144 for the consolidation of two schools in
Virginia and two schools in California and $391 in merger expenses related
to the Nebraska Acquisition; and (iii) charges of $232 in fiscal 1998 pro
forma as adjusted for the accrual of a legal judgment against the CHI
Institute Schools prior to the date of acquisition by the Company.
(3) The corporation which owned the two Nebraska Schools acquired by the Company
in the fourth quarter of fiscal 1996 and its predecessor were treated as a
Subchapter S-Corporation and a partnership, respectively, under relevant
provisions of the Internal Revenue Code. Accordingly, income taxes were the
responsibility of the S-Corporation's stockholders and the partnership's
partners. For informational purposes, the selected consolidated financial
data for the two years ended March 31, 1997 include a pro forma presentation
that includes a provision for income taxes as if the merging entity had
operated as a C-Corporation and was combined with the Company for those
periods. Such pro forma calculations were based on the income tax laws and
rates in effect during those periods and Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes. See Notes 2 and 10 to the
Company's Consolidated Financial Statements.
(4) All earnings per share data have been calculated using Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), Earnings Per Share, and
SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Amounts for periods prior
to April 1, 1997 are based on the pro forma results described in (3) above.
(5) Two schools located in Virginia were combined in fiscal 1997; two schools
located in Vista, CA were combined in fiscal 1998.
(6) Represents the percentage calculated by dividing (i) the number of students
who withdrew from the Company's schools in the period by (ii) the sum of the
number of students at each month-end in the period and the number of
students who withdrew in the period.
6
<PAGE> 10
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. In addition to the other information in this Prospectus, the
following factors should be considered carefully in evaluating an investment in
the shares of Common Stock offered hereby.
DEPENDENCE ON TITLE IV FUNDING; REGULATORY COMPLIANCE AS A CONDITION FOR
CONTINUED ELIGIBILITY FOR TITLE IV FUNDING
The Company derives a substantial majority of its revenues from federal
financial aid received by the students at its schools under Title IV Programs
administered by the United States Department of Education under the HEA. Each of
the Company's schools participates in Title IV Programs either as an individual
institution or as an additional location of another institution which is the
main campus of the institution. In order to participate in Title IV Programs, an
institution must obtain certification by the Department of Education as an
"eligible institution." To obtain such certification, the institution must
satisfy certain eligibility, program, and general requirements imposed by the
HEA and by regulations (the "Regulations") promulgated and enforced by the
Department of Education. An institution also must be authorized to offer its
programs by the relevant state agency where it is located and it must be
accredited by an accrediting agency recognized by the Department of Education to
obtain and maintain such certification. Each of the Company's institutions and
locations is licensed and approved in the state where it operates and is
accredited by at least one such accrediting agency.
The provisions of the HEA and the Regulations govern many aspects of the
operation of the Company and its schools, including, but not limited to (i) the
maximum acceptable rate of default by an institution's students with respect to
federally guaranteed or funded student loans, (ii) the maximum acceptable
proportion of an institution's revenues derived from Title IV Programs, (iii) an
institution's satisfaction of certain financial responsibility standards, (iv)
an institution's satisfaction of certain administrative capability standards,
(v) the ability of an institution to add locations and educational programs, and
(vi) the ability of the Company to engage in transactions involving a change in
ownership resulting in a change of control of the institution or the Company.
Generally, each institution is considered separately for purposes of determining
compliance with the regulatory requirements, although certain financial
reporting is done on a consolidated basis.
During fiscal 1998, approximately 73% of the Company's cash receipts were
derived from Title IV Programs. Cash receipts represented approximately 96% of
the Company's net revenues in fiscal 1998. The failure of any of the Company's
institutions to comply with the requirements of the HEA or the Regulations, or
the requirements of applicable state law or accrediting agencies, could result
in the restriction or loss by such school of its ability to participate in Title
IV Programs, which could have a material adverse effect on the financial
condition and operations of the Company. The HEA and the Regulations require, as
a condition of Title IV eligibility, that no more than 85% of an institution's
revenues be derived from the Title IV Programs.
Financial Responsibility Requirements. The HEA and the Regulations
prescribe specific standards of financial responsibility which the Department of
Education must consider with respect to qualification for participation in the
Title IV Programs ("Financial Responsibility Standards"). These standards are
generally applied on an individual institutional basis. However, there can be no
assurance that the Department of Education will not attempt to apply such
standards on a consolidated basis. If the Department of Education determines
that any of the Company's institutions fails to satisfy the Financial
Responsibility Standards, it may require that such institution post an
irrevocable letter of credit (a "Financial Responsibility Bond") in favor of the
Secretary of Education in an amount equal to not less than one-half of Title IV
Program funds received by the school during the last complete award year or, in
the Department of Education's discretion, require some other less onerous
demonstration of financial responsibility (a "Demonstration of Financial
Responsibility"). One-half of Title IV funds received by the Company's
individual institutions in its most recent fiscal year ranged from $359,000 to
$4,964,000, and one-half of the total Title IV funds received by all the
Company's institutions in its most recent fiscal year was $39,173,000.
7
<PAGE> 11
Among the principal Financial Responsibility Standards which an institution
must satisfy are: (i) an "acid test" ratio (defined as the ratio of the total of
cash, cash equivalents and current accounts receivable to current liabilities)
of at least 1-to-1 at the end of the most recent fiscal year (the "Acid Test
Ratio"), (ii) a positive tangible net worth, as defined by the applicable
Regulations, at the end of the most recent fiscal year (the "Tangible Net Worth
Standard") and (iii) net operating results for the two most recent fiscal years,
excluding extraordinary losses or losses from discontinued operations, which do
not show an aggregate net loss in excess of 10 percent of tangible net worth at
the beginning of the two year period (the "Net Operating Results Test"). Except
for the Company's schools located in Roanoke, Virginia (the "Roanoke School")
and Harrisonburg, Virginia (the "Harrisonburg School") which did not meet the
Net Operating Results Test for fiscal 1998 on an individual basis, the Company,
on a consolidated basis, and each of the Company's other institutions on an
individual basis, were in compliance with all of the Financial Responsibility
Standards for fiscal 1998.
The Roanoke and Harrisonburg Schools accounted for 2.1% and 1.5%,
respectively, of the Company's net revenues in fiscal 1998. The failure of
either of the schools to comply with the Net Operating Results Test may result
in the Department of Education requiring the posting of a Financial
Responsibility Bond, although no such bond was required as a result of
non-compliance in fiscal 1996 or fiscal 1997, or otherwise requesting a
Demonstration of Financial Responsibility. Based on fiscal 1998 Title IV funding
for the Roanoke and Harrisonburg Schools, the maximum amount of such bond would
be $500,000 and $359,000, respectively, which would be funded from the Company's
bank credit facility.
The Company had a positive tangible net worth on a consolidated basis of
$3,177,701 at March 31, 1998, and $16,666,964 at March 31, 1997. The decline in
positive tangible net worth from fiscal 1997 to fiscal 1998 is attributable to
the increase in goodwill resulting from the Fiscal 1998 Acquisitions. The
positive tangible net worth at March 31, 1997 was primarily the result of the
receipt of the net proceeds of the Company's initial public offering of its
Common Stock (the "IPO"). The Company had a negative tangible net worth on a
consolidated basis for each of the Company's three fiscal years ending March 31,
1996, 1995 and 1994, primarily because a large portion of the Company's assets
consists of goodwill and other intangibles related to school acquisitions. None
of the Company's institutions had a negative tangible net worth on an individual
basis as of March 31, 1997 or March 31, 1998. The Company has filed audited
consolidated financial statements with the Department of Education for each of
the last three fiscal years in the period ended March 31, 1997 along with
unaudited consolidating statements. There also can be no assurance that the
Company's acquisition program will not again result in the Company having a
negative tangible net worth and no assurance can be given that the Department of
Education may not make a request for the Company to post a Financial
Responsibility Bond in such circumstances or otherwise make a request for a
Demonstration of Financial Responsibility based on a consolidated negative
tangible net worth. If such a request were to be made, there is no assurance
that the Company (i) would be successful in persuading the Department of
Education or a court that such a request is contrary to law, (ii) could secure
the funds to post the Financial Responsibility Bond which the Department of
Education may request, or (iii) that the Company would be successful in
negotiating a more favorable Demonstration of Financial Responsibility. If the
Company were unable to post a Financial Responsibility Bond or make a
satisfactory Demonstration of Financial Responsibility, it could become
ineligible to receive Title IV funding in some or all of its schools.
Ineligibility for Title IV funding would have an immediate material adverse
effect on the Company's operations.
In November 1997, the Department of Education published new regulations
regarding financial responsibility which are effective on July 1, 1998. The new
regulations will apply to the Company's fiscal years commencing April 1, 1999
and thereafter. The regulations provide a transition year alternative which will
permit the Company to have its institutions' financial responsibility for the
fiscal year ended March 31, 1999 measured on the basis of either the new
regulations or the current regulations, whichever are more favorable. The new
standards replace the Acid Test Ratio, the Tangible Net Worth Standard and the
Net Operating Results Test with three different ratios: an Equity Ratio, a
Primary Reserve Ratio and a Net Income Ratio. The Equity Ratio measures an
institution's capital resources, ability to borrow and financial viability. The
Primary Reserve Ratio measures an institution's ability to support current
operations from expendable resources. The Net Income Ratio measures the ability
to operate at a profit. The results of each ratio are
8
<PAGE> 12
assigned a strength factor on a scale from negative 1.0 to positive 3.0, with
negative 1.0 reflecting financial weakness and 3.0 reflecting financial
strength. An institution's strength factors are then weighted based on an
assigned weighting percentage for each ratio. The weighted scores for the three
ratios are then added together to produce a composite score for the institution.
The composite score must be at least 1.5 for the institution to be deemed
financially responsible by the Department of Education without the need for
further financial monitoring. If the institution's composite score is less than
1.5, but equal to or greater than 1.0, the institution may continue in the Title
IV Program for a maximum period of three (3) years, subject to more rigorous
financial aid disbursement and financial monitoring requirements of the
Department of Education. Based on the Company's interpretation of the
application of these new standards to the Company's financial statements for the
fiscal year ended March 31, 1998, the Company's calculations result in a
composite score of 1.4 on a consolidated basis, with each individual institution
included in the consolidating statements having a composite score greater than
1.5. After giving effect to the receipt of the net proceeds of this Offering,
the composite score of the Company on a pro forma consolidated basis would be
unchanged as of March 31, 1998.
Student Loan Defaults. The HEA provides that an institution may lose its
eligibility to participate in substantially all Title IV student loan programs
if student defaults on the repayment of federally guaranteed student loans or
direct loans are 25% or greater for each of the three most recent federal fiscal
years for which data is available ("Cohort Default Rates"). Cohort Default Rates
are calculated by the Department of Education for each institution for each
federal fiscal year by determining the rate at which the institution's students
entering repayment in that federal fiscal year default on repayment of their
loan by the end of the following federal fiscal year. Cohort Default Rates are
subject to revision by the Department of Education if new data becomes available
and are subject to appeal by schools contesting the accuracy of the data or the
adequacy of the servicing of the loans by the loan servicer. An institution that
is determined to have had Cohort Default Rates of 25% or greater for the three
most recent federal fiscal years for which data is available is subject to
immediate loss of eligibility to participate in substantially all Title IV
student loan programs, subject to a limited appeal of the determination, which
appeal only can be based on the Department of Education's having relied on
erroneous data in calculating the Cohort Default Rate, the inadequacy of the
servicing of the loans by the lender or loan servicer, or the existence of
certain exceptional mitigating circumstances. The loss of eligibility lasts for
the duration of the federal fiscal year in which the determination of
ineligibility is made, plus the two succeeding federal fiscal years. However, an
institution remains eligible for Title IV student loan funding while an appeal
of such determination is pending. The loss of Title IV student loan programs
eligibility at one or more of the Company's schools could have a material
adverse effect on the Company's operations.
None of the Company's institutions had a Cohort Default Rate of 25% or more
for the three consecutive federal fiscal years ended September 30, 1995.
Additionally, based upon preliminary data released by the Department of
Education in May 1998, none of the Company's institutions had a Cohort Default
Rate of 25% or more for the three consecutive federal fiscal years ended
September 30, 1996. Accordingly, the Company believes that none of its
institutions is currently vulnerable to termination from Title IV eligibility
based on three consecutive years of excess default rates. However, the Company's
institution located in Omaha, Nebraska had a Cohort Default Rate of 25% or
greater for federal fiscal 1995 and, based upon preliminary data, for federal
fiscal 1996 (32.1% and 26.0%, respectively). The Omaha, Nebraska institution had
a Cohort Default Rate of 17.3% in federal fiscal 1994, and is not vulnerable to
termination of Title IV student loan program eligibility unless its rate for the
federal fiscal year ended September 30, 1997 is 25% or greater. Preliminary data
for such federal fiscal year is not expected to be available until 1999. The
Company plans to challenge the Omaha, Nebraska preliminary Cohort Default Rate
with the Department of Education based upon what it believes to be erroneous
data. The Company's other institutions would have to have Cohort Default Rates
of 25% or greater for consecutive three year periods ending September 30, 1999
and thereafter in order to become vulnerable to termination of Title IV Program
eligibility.
An institution whose Cohort Default Rate exceeds 40% for any single federal
fiscal year may have its eligibility to participate in all Title IV Programs
limited, suspended or terminated. If the Department of Education elects to take
such action due to a single-year Cohort Default Rate in excess of the regulatory
level, it must afford the institution a hearing before an independent Department
of Education hearing officer and an
9
<PAGE> 13
opportunity to appeal any decision to the Secretary of Education before the
limitation, suspension, or termination may take effect. None of the Company's
institutions has, or has had, a Cohort Default Rate in excess of 40% in the most
recent three fiscal years.
Regulatory Compliance Generally. The HEA and the Regulations impose
numerous general and program specific requirements with which institutions
participating in the Title IV Programs must comply, including but not limited to
requirements in the areas of institutional eligibility to participate in Title
IV Programs; student eligibility to receive Title IV Program funds;
administrative capability; financial responsibility; and the packaging,
disbursement, and management of Title IV funds. The Department of Education
monitors institutional compliance with the Regulations through annual financial
statements and audits of institutional compliance with Title IV requirements,
both of which must be prepared by an independent auditor and timely submitted to
the Department of Education. The Department of Education also periodically
monitors compliance through on-site program reviews and on-site audits conducted
by the Office of Inspector General, U.S. Department of Education.
An institution's failure to comply with any of the Title IV requirements in
the HEA and the Regulations could result in adverse action by the Department of
Education against the institution, including the limitation, suspension or
termination of an institution's Title IV eligibility; the imposition of fines;
and/or the imposition of liabilities by the Department of Education upon the
institution. The HEA and the Regulations provide the institution with the right
to appeal any such action to an administrative hearing official and to the
Secretary of Education. The Department of Education could also transfer the
institution from the advance system of payment to the reimbursement method of
payment whereby institutions must demonstrate to the Department that each
student to receive Title IV funds meets all applicable Title IV requirements and
that the amount to be received is correctly calculated as a precondition to the
Department paying an institution for the disbursement of Title IV funds to its
students.
CHANGE IN OWNERSHIP RESULTING IN CHANGE OF CONTROL
Upon a change in ownership resulting in a change of control of the Company,
as defined in the HEA and the Regulations, each of the Company's schools would
lose its eligibility to participate in Title IV Programs for an indeterminate
period of time during which it applies to regain eligibility. A change of
control also could have significant regulatory consequences for the Company at
the state level and could affect the accreditation of the Company's schools.
The Regulations provide that for a publicly traded company, a change in
ownership resulting in a change of control occurs when a report on Form 8-K is
required to be filed with the Securities and Exchange Commission disclosing a
change of control. The Company will not be required to file such a report as a
consequence of the Offering.
Most states and accrediting agencies require notification and approval of a
change in ownership resulting in a change of control, but they do not provide a
uniform definition of change of control. Although the Offering may require
notice and approval by some state agencies, the Company does not expect
interruption of Title IV funding to result from the necessity of any such
approvals.
If the Company were to lose its eligibility to participate in Title IV
Programs for a significant period of time pending an application to regain
eligibility, or if it were determined not to be eligible, its operations would
be materially adversely affected. The possible loss of Title IV eligibility
resulting from a change of control may also discourage or impede a tender offer,
proxy contest or other similar transaction involving control of the Company.
PARTICIPATION IN FEDERAL DIRECT LENDING PROGRAM; RISK OF LEGISLATIVE ACTION
Since fiscal 1995, the Company has elected to administer its Title IV loan
funding pursuant to the Federal Direct Student Loan Program ("FDSLP") and has
been approved for such participation by the Department of Education. Excluding
the Hesser Schools, the Company derived all of its Title IV loan funding
pursuant to the FDSLP program in fiscal 1998. Funding for the FDSLP, as well as
for the Federal Family
10
<PAGE> 14
Educational Loan ("FFEL") program, must be appropriated by Congress annually.
FDSLP and FFEL loans represent a substantial majority of the Company's revenues.
There can be no assurance that funding will continue at current levels, or that
the FDSLP program itself will be continued. If the FDSLP program were
discontinued, or funding reduced so as to reduce the amount of direct lending
funds available to the Company's schools, the Company would have to rely on
loans provided pursuant to FFEL. Loans pursuant to FFEL are administered through
outside lenders, such as banking institutions and are federally guaranteed.
Although the Company believes that it would have no difficulty finding lenders
for federally guaranteed student loans to its students under FFEL, there can be
no assurance that such loans would be available in amounts sufficient to provide
for the Company's schools to operate at current and anticipated levels, or at
all.
Furthermore, there can be no assurance that federal funding for the FFEL
Program will be continued at current levels, or at all. Because the Company
derives a substantial majority of its cash receipts from Title IV funding,
discontinuance or significant reductions in the FDSLP and, if the FDSLP program
is discontinued or reduced, the FFEL program, would have a material adverse
effect on the Company's operations.
RELIANCE ON ACQUISITIONS
The Company has acquired all of its schools. Several of the schools
acquired by the Company have experienced losses following their acquisition
either in connection with their integration into the Company's operations or
because of their failure to perform as anticipated by the Company. The Company
expects that a significant part of its future growth will be based on its
ability to identify, acquire and profitably operate and integrate additional
schools. While the Company is continually searching for acquisition
opportunities, there can be no assurance that the Company will be successful in
identifying, acquiring, integrating and operating additional schools. When the
Company acquires an existing school and accounts for the acquisition as a
"purchase" rather than a "pooling of interests," a significant portion of the
purchase price for such school is often allocated to goodwill and intangibles
because most of these acquisitions do not involve the purchase of significant
amounts of tangible property. Such goodwill and intangibles are generally
amortized over periods ranging from 15 to 40 years, which reduces the Company's
reported earnings. If any potential acquisition opportunities are identified,
there can be no assurance that the Company will be able to consummate the
acquisition on terms favorable to the Company and successfully integrate any
such acquisition into its existing operations and there can be no assurance as
to the timing or effect on the business of the Company of any such acquisitions.
The Company's acquisition of a school constitutes a change in ownership
resulting in a change of control with respect to such school for purposes of
Title IV eligibility. Pursuant to the Regulations, a school that is acquired
loses its eligibility to participate in Title IV Programs and must apply to the
Department of Education for recertification of eligibility under the new
ownership. The school's eligibility to participate in the Title IV Programs is
temporarily suspended while the Department of Education considers the
application for recertification. The Company's experience has been that the
approval process, including obtaining prerequisite approvals from state
regulatory and appropriate accrediting agencies, typically takes from four to
seven months. Since this is less than the minimum enrollment period for each of
the Company's schools, there generally should be no significant interruption of
Title IV funding caused by the need to apply for a recertification of
eligibility as a result of an acquisition. There can be no assurance, however,
that recertification applications will be acted upon on a timely basis by the
Department of Education so as to avoid any significant interruption of Title IV
funding to students at the acquired school. Prior to recertification by the
Department of Education, the Company must also obtain approval of the change of
control from applicable states and accrediting agencies. In the past, this
process has taken from four to seven months for the Company to complete. The
Company has been timely recertified for eligibility by the Department of
Education with respect to each of its acquisitions. Recertification is currently
pending with the Department of Education for the CHI Institute Schools and the
Hesser Schools. Although the Company has had no difficulty in obtaining such
recertification and approval in the past, there can be no assurance that such
state, accrediting agency and Department of Education approvals may not be
subject to unexpected delays or difficulties which may materially and adversely
affect the Company's operations.
11
<PAGE> 15
In acquiring a school, the Company must assume any liabilities of the
institution to the Department of Education resulting from the institution's
failure to comply with the HEA or the Regulations prior to the date of
acquisition. The Company attempts to minimize the impact of any such liabilities
by including representations as to regulatory compliance and indemnification
provisions in the relevant acquisition agreements. No material amount of
unindemnified Title IV regulatory liabilities have been asserted against the
Company with respect to any of its prior acquisitions; however, no assurance can
be given that any assertions will not be made in the future. In addition, if
available offsets are insufficient, there can be no assurance that the parties
responsible for indemnification of the Company from such liabilities will have
the financial resources necessary to indemnify the Company for all or any
portion of such possible liabilities.
ABILITY TO OPEN ADDITIONAL SCHOOLS
The Company's growth strategy assumes that it can open and profitably
operate new schools as additional locations or branches of existing
institutions. Upon opening an additional location, the Company must notify the
Department of Education and obtain its approval of the additional location
before its students may participate in the Title IV Programs, and must obtain
approvals from the relevant state authorities and accrediting agencies. Some
states limit the distance between the main campus and branch or additional
locations of existing institutions or otherwise restrict branching. Some
accrediting agencies limit the number of new branches or additional locations
that an institution may open in a specified period of time. There can be no
assurance that these restrictions will not impede the Company's ability to
implement its strategy. Furthermore, no assurance can be given that the Company
will be able to identify successfully sites for such schools which meet
demographic requirements.
VARIABILITY IN QUARTERLY OPERATING RESULTS
The Company's quarterly net revenues have varied in the past and may vary
significantly in the future as a result of a number of factors, including
fluctuations in the number of new students enrolling in the Company's programs.
Traditionally, new enrollments in the Company's schools tend to be higher in the
third and fourth fiscal quarters because the third and fourth quarters cover
periods traditionally associated with the beginning of school semesters. The
Company believes its Fiscal 1998 Acquisitions will further increase this
seasonality because many of the longer programs offered at these schools do not
provide for monthly start dates. Furthermore, enrollment patterns in the Hesser
Schools have historically caused them to operate at a loss during the first and
second fiscal quarters based on low student populations during these periods and
relatively fixed operating expenses.
COMPETITION
The postsecondary education market is highly fragmented and competitive
with no private or public institution having a significant market share. The
Company's schools compete for students with not-for-profit public and private
colleges and with proprietary institutions which offer degree and/or non-degree
granting programs. Such proprietary institutions include vocational and
technical training schools, continuing education programs and commercial
training programs. Public and private colleges may offer programs similar to
those offered by the Company's schools at lower tuition costs due in part to
government subsidies, foundation grants, tax deductible contributions, or other
financial resources not available to proprietary institutions. Certain of the
Company's competitors in both the public and private sector have greater
financial and other resources than the Company.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends upon the availability and performance of its
senior management, particularly Gary D. Kerber, the Company's Chairman and
President. Mr. Kerber has entered into an employment contract with the Company,
however, it may be terminated by him at any time. Although the Company maintains
key man life insurance on Mr. Kerber in the amount of $1,000,000, the loss of
Mr. Kerber's services could have a material adverse affect on the Company.
12
<PAGE> 16
ABSENCE OF DIVIDENDS
The Company has not paid any dividends to date. The Company does not
currently intend to declare or pay dividends on its Common Stock in the
foreseeable future, but plans to retain any earnings for use in its business
operations. In addition, the Bank Credit Facility (See "Management's Discussion
and Analysis of Financial Conditions and Results of Operations -- Liquidity and
Capital Resources") contains restrictions which prohibit the Company from paying
dividends while such credit line is in effect.
SHARES ELIGIBLE FOR FUTURE SALE
As of May 31, 1998, the Company had outstanding 7,743,194 shares of Common
Stock. The Company has reserved an additional (i) 913,339 shares of Common Stock
for issuance pursuant to the Stock Option Plan, (ii) 200,000 shares of Common
Stock for issuance pursuant to the Directors' Plan, and (iii) 43,334 shares of
Common Stock which may be purchased upon exercise of outstanding warrants to
purchase Common Stock. Any shares issued pursuant to the Stock Option Plan or
the Director's Plan will be freely transferable upon issuance without
registration under the Securities Act, pursuant to registration statements
previously filed and declared effective, subject to volume limitations contained
in Rule 144 under the Securities Act applicable to affiliates, as that term is
defined in the Securities Act. Of the outstanding shares, 4,177,963 are freely
transferable without restriction under the Securities Act by persons other than
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act. The remaining 3,565,231 shares of Common Stock (the "Restricted
Shares") were acquired in transactions exempt from registration under the
Securities Act and, accordingly, are "restricted securities" as that term is
defined in Rule 144 and may be sold thereafter in compliance with Rule 144.
Restricted Shares may not be resold unless they are registered under the
Securities Act or are sold pursuant to an applicable exemption from such
registration, such as is contained in Rule 144. Of the shares being offered
pursuant to this Offering, 1,873,999 are Restricted Shares. No prediction can be
made as to the effect that resale of shares of Common Stock, or the availability
of shares of Common Stock for resale, will have on the market price of the
Common Stock prevailing from time to time. The resale of substantial amounts of
Common Stock, or the perception that such resales may occur, could adversely
affect prevailing market prices of the Common Stock and could impair the
Company's ability in the future to raise additional capital through the sale of
its equity securities. The Company has agreed not to issue, and certain current
shareholders of the Company holding 2,043,581 shares of Common Stock have agreed
not to sell, any shares of Common Stock or other equity securities of the
Company for 90 days after the date of this Prospectus without the prior written
consent of Smith Barney Inc. See "Underwriting."
ANTI-TAKEOVER PROVISIONS AND TITLE IV CHANGE OF CONTROL REGULATIONS
Certain provisions of the Company's Certificate of Incorporation and Bylaws
authorize the issuance of "Blank Check" preferred stock and establish advance
notice requirements for director nominations and actions to be taken at
stockholder meetings. These provisions could discourage or impede a tender
offer, proxy contest or other similar transaction involving control of the
Company, which transactions might be viewed favorably by minority stockholders.
Provisions in the applicable Regulations pursuant to which the Company would
lose its Title IV eligibility in the event of a change in ownership resulting in
a change of control could have a similar discouraging effect.
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<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the Offering, after deduction of
estimated underwriting discounts and commissions and Offering expenses, are
estimated to be approximately $611,000, assuming an Offering price of $8.75 per
share ($3,079,000 if the over-allotment option is exercised in full). The
Company will receive none of the proceeds from the sale of the shares of Common
Stock by the Selling Stockholders. The Company expects to use $440,389 of such
proceeds to pay a portion of the underwriting discounts and commissions on
shares of Common Stock being sold by the Selling Stockholders (equal to $0.235
per share) and the remainder for general corporate purposes. The net proceeds to
the Company from the over-allotment option, if exercised, are expected to be
used to repay bank indebtedness bearing interest at approximately 7.8% per annum
and maturing in March 2001.
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the Nasdaq under the symbol "EDMD." The
following table sets forth, for the periods indicated, the high and low closing
prices for the Common Stock, as reported on the Nasdaq. The Company's Common
Stock began trading on the Nasdaq on October 28, 1996, following the IPO at
$10.00 per share.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL 1997
Third Quarter(from October 28, 1996)...................... $11.13 $10.00
Fourth Quarter............................................ 14.25 10.38
FISCAL 1998
First Quarter............................................. $11.25 $ 7.75
Second Quarter............................................ 9.13 6.00
Third Quarter............................................. 9.25 6.50
Fourth Quarter............................................ 11.63 8.00
FISCAL 1999
First Quarter............................................. $12.50 $ 9.13
</TABLE>
As of May 31, 1998, there were approximately 94 shareholders of record. The
last sales price of the Common Stock as reported on the Nasdaq on July 1, 1998
was $8.75 per share.
DIVIDEND POLICY
The Company anticipates that it will not pay dividends on the Common Stock
for the foreseeable future and that it will retain its earnings to finance
future growth. The declaration and payment of dividends by the Company are
subject to the discretion of its Board of Directors and applicable corporation
law. Any determination as to the payment of dividends in the future will depend
upon, among other things, general business conditions, the effect of such
payment on the Company's financial condition and other factors the Company's
Board of Directors may in the future consider to be relevant. No dividends have
been declared or paid on the Common Stock since the Company's inception.
14
<PAGE> 18
CAPITALIZATION
The following table sets forth the Company's capitalization as of March 31,
1998 and as adjusted to give effect to the sale of 126,001 shares of Common
Stock of the Company pursuant to the Offering (at an assumed Offering price of
$8.75 per share), after deduction of the estimated underwriting discounts and
commissions and Offering expenses, and the application of the net proceeds
therefrom as described under "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1998
------------------------
HISTORICAL AS ADJUSTED
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $21,446 $21,617
======= =======
Notes payable and long term debt, including current
portion................................................... $31,947 $31,947
Stockholders' equity
Preferred Stock, authorized 5,000,000 shares (historical
and as adjusted); none issued and outstanding.......... -- --
Common Stock, $.01 par value, authorized 15,000,000 shares
(historical and as adjusted); 7,729,529 shares issued
and outstanding (historical) and 7,855,530 shares
issued and outstanding (as adjusted)................... 77 79
Additional paid-in capital on Common Stock................ 33,739 33,908
Retained earnings......................................... 1,856 1,856
------- -------
Total stockholders' equity........................ 35,672 35,843
------- -------
Total capitalization.............................. $67,619 $67,790
======= =======
</TABLE>
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<PAGE> 19
UNAUDITED PRO FORMA AS ADJUSTED CONDENSED CONSOLIDATED
STATEMENT OF INCOME
On February 14, 1998, the Company completed the CHI Institute Acquisition
and on March 13, 1998 completed the Hesser Acquisition. Both acquisitions were
accounted for as purchases as of the first day of the month of the respective
acquisition.
In connection with the CHI Institute Acquisition, the Company agreed to pay
the sellers $12,834,230 in cash, notes and stock, including adjustments of
$1,084,230 based on the ratio of certain assets to certain liabilities of the
CHI Institute at the time of the acquisition. The consideration consisted of
$1,500,000 paid to the sellers on the date of the acquisition and $1,084,230
paid on May 5, 1998. The Company also issued to the sellers (i) a $3,000,000
promissory note due within 30 days following the Department of Education's
recertification of the CHI Institute Schools; (ii) a note for $5,750,000 bearing
interest at 8% per annum with an initial payment of $1,100,000 plus accrued
interest due February 15, 1999, $250,000 plus accrued interest payable on March
15, 1999, and the remainder due in quarterly installments of principal and
interest commencing the last business day in May 1999 through February 13, 2003,
and (iii) 151,900 shares of the Company's Common Stock valued at an aggregate of
$1,500,000.
In connection with the Hesser Acquisition, the Company agreed to pay the
sellers a total of $17,683,372 in cash, notes and stock, including adjustments
of $2,683,372 based on the ratio of certain assets to certain liabilities of
Hesser College at the time of the acquisition. The consideration consisted of
$2,000,000 paid to the sellers on the date of the acquisition, $1,250,000 paid
on May 12, 1998, and $1,183,372 paid on June 2, 1998. The Company also issued to
the sellers (i) an $11,000,000 promissory note bearing interest at 2% per annum
due within 30 days following the Department of Education's recertification of
the Hesser Schools; (ii) a $250,000 promissory note due with accrued interest on
April 1, 1999, and (iii) 202,532 shares of the Company's Common Stock valued at
an aggregate of $2,000,000. The $11,000,000 promissory note was modified on June
2, 1998 to provide that repayment of $1,500,000 of its principal would be
deferred until April 1, 1999 with interest at 7.5% per annum beginning 30 days
following the Department of Education's recertification of the Hesser Schools.
The Unaudited Pro Forma As Adjusted Condensed Consolidated Statement of
Income set forth below for the year ended March 31, 1998 has been derived from
the Company's consolidated historical statement of income for the year ended
March 31, 1998 and from the CHI Institute and the Hesser, Inc. historical
statements of income for the ten months ended January 31, 1998 in the case of
the CHI Institute and the eleven months ended February 28, 1998 in the case of
Hesser, Inc., and gives effect to the CHI Institute Acquisition, the Hesser
Acquisition and the Offering as if they had occurred on April 1, 1997.
THE UNAUDITED PRO FORMA AS ADJUSTED CONDENSED CONSOLIDATED STATEMENT OF
INCOME IS PROVIDED FOR COMPARATIVE PURPOSES AND DOES NOT PURPORT TO BE
INDICATIVE OF THE RESULTS WHICH ACTUALLY WOULD HAVE BEEN OBTAINED IF THE
ABOVE-MENTIONED TRANSACTIONS HAD BEEN EFFECTED ON THE DATES INDICATED OR OF THE
RESULTS WHICH MAY BE OBTAINED IN THE FUTURE. THE UNAUDITED PRO FORMA AS ADJUSTED
CONDENSED CONSOLIDATED STATEMENT OF INCOME IS QUALIFIED IN ITS ENTIRETY BY, AND
SHOULD BE READ IN CONJUNCTION WITH, THE CONSOLIDATED FINANCIAL STATEMENTS OF THE
COMPANY AND RELATED NOTES THERETO, AND THE FINANCIAL STATEMENTS AND NOTES
THERETO OF CHI INSTITUTE AND HESSER, INC. INCLUDED ELSEWHERE HEREIN.
16
<PAGE> 20
UNAUDITED PRO FORMA AS ADJUSTED CONDENSED CONSOLIDATED
STATEMENT OF INCOME
(DOLLARS AND SHARES IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
YEAR ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
FISCAL YEAR
1998 PRO FORMA PRO FORMA
HISTORICAL(A) ACQUISITIONS(B) ADJUSTMENTS(C) AS ADJUSTED(D)
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Net revenues............................. $59,676 $21,289 $ -- $80,965
School operating costs:
Cost of education and facilities....... 27,087 8,682 -- 35,769
Selling and promotional expenses....... 8,644 4,208 -- 12,852
General and administrative expenses.... 16,576 8,179 (2,836)(1) 21,919
Amortization of goodwill and
intangibles............................ 1,285 99 373(2) 1,757
Other expenses........................... -- 232 -- 232
------- ------- ------- -------
Income (loss) from operations............ 6,084 (111) 2,463 8,436
Realized gains on investments............ -- (491) 491(3) --
Interest and dividends, net.............. (253) 316 1,042(4) 1,105
------- ------- ------- -------
Income before income taxes............... 6,337 64 930 7,331
Provision for income taxes............... 2,485 26 407(5) 2,918
------- ------- ------- -------
Net income............................... $ 3,852 $ 38 $ 523 $ 4,413
======= ======= ======= =======
Earnings per share:
Basic:
Net income............................. $ 0.52 $ 0.56
Weighted average number of shares
outstanding(6)...................... 7,382 7,835
Diluted:
Net income............................. $ 0.51 $ 0.55
Weighted average number of shares
outstanding(6)...................... 7,612 8,065
</TABLE>
- ---------------
(a) Includes two months of operations for CHI Institute and one month of
operations for Hesser, Inc.
(b) Includes ten months of operations for CHI Institute and eleven months of
operations for Hesser, Inc.
(c) Pro forma adjustments give effect to the acquisition of CHI Institute and
Hesser, Inc. as if such acquisitions had occurred at the beginning of the
fiscal year.
(d) There is no effect to the statement of income as a result of the Offering.
Pro Forma Adjustments:
(1) Elimination of excess prior owners' compensation.
(2) Includes (i) addition of $472 in amortization of goodwill and covenants not
to compete recorded in connection with the purchase price allocation of the
Hesser, Inc. and CHI Institute acquisitions (goodwill is being amortized
over a 40 year period) and (ii) elimination of $99 of goodwill amortization
for Hesser, Inc. for eleven months and CHI Institute for ten months, during
the periods prior to acquisition.
(3) Elimination of realized gains on investments due to use of investments for
the acquisition.
(4) Includes (i) interest expense of $1,140 in acquisition debt, (ii)
elimination of $428 of interest income on cash paid at the date of
acquisition, other payments due to sellers, and investments, (iii)
elimination of $396 of interest expense on mortgage financing not assumed
with the Hesser Acquisition, and (iv) elimination of $130 of interest
income on cash and cash equivalents used for the acquisitions.
(5) Provision for income taxes as a result of the pro forma adjustments.
(6) Pro forma as adjusted weighted average number of shares outstanding gives
effect to 151,900, 202,532 and 126,001 shares for the CHI Institute
Acquisition, the Hesser Acquisition, and the Offering, respectively, as if
outstanding for the entire fiscal year.
17
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL AND OTHER OPERATING DATA
The following table sets forth certain consolidated financial and other
operating data for the Company. This information should be read in conjunction
with the Consolidated Financial Statements and Notes thereto appearing elsewhere
in this Prospectus. All periods have been restated to reflect the pooling of
interests of the Nebraska Acquisition. The financial information for the
Company's fiscal years ended March 31, 1994 and 1995 includes the results of the
Nebraska Schools' fiscal years ended December 31, 1993 and 1994, respectively.
The results of the Company's fiscal years ended March 31, 1996 and 1997 reflect
a conformed year-end for the Nebraska Schools. The financial data set forth
below for each of the three years in the period ended March 31, 1998 and as of
March 31, 1998 and 1997, have been derived from the audited Consolidated
Financial Statements of the Company included elsewhere in this Prospectus. The
financial data for each of the two years in the period ended March 31, 1995 and
as of March 31, 1996, 1995 and 1994 have been derived from audited Consolidated
Financial Statements of the Company not included in this Prospectus. These
historical results are not necessarily indicative of the results that may be
expected in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
(DOLLARS AND SHARES IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues..................................... $32,231 $37,080 $43,347 $49,450 $59,676
School operating costs:
Cost of education and facilities............... 14,944 17,488 19,651 23,151 27,087
Selling and promotion expenses................. 4,985 6,216 6,534 7,531 8,644
General and administrative expenses............ 10,022 10,826 12,369 14,042 16,576
Amortization of goodwill and intangibles......... 1,235 1,255 883 886 1,285
Other expenses(1):
Merger costs................................... -- -- -- 391 --
Legal defense and settlement costs............. -- -- 1,115 -- --
Loss on closure or relocation of schools....... 1,126 600 50 144 --
Impairment of goodwill and intangibles......... -- 176 764 -- --
------- ------- ------- ------- -------
Income (loss) from operations.................... (81) 519 1,981 3,305 6,084
Interest expense (income), net................... 809 935 822 284 (253)
------- ------- ------- ------- -------
Income (loss) before income taxes and
extraordinary item............................. (890) (416) 1,159 3,021 6,337
Provision (benefit) for income taxes............. (170) 28 632 (845) 2,485
------- ------- ------- ------- -------
Income (loss) before extraordinary item.......... (720) (444) 527 3,866 3,852
Extraordinary item, net of income taxes.......... -- -- -- 309 --
------- ------- ------- ------- -------
Net income (loss).............................. $ (720) $ (444) $ 527 $ 3,557 $ 3,852
======= ======= ======= ======= =======
PRO FORMA DATA(2):
Pro forma income tax data:
Income (loss) before income taxes and
extraordinary item.......................... $ (890) $ (416) $ 1,159 $ 3,021
Provision for income taxes..................... 173 97 487 409
------- ------- ------- -------
Income (loss) before extraordinary item........ (1,063) (513) 672 2,612
Extraordinary item, net of income taxes........ -- -- -- 309
------- ------- ------- -------
Pro forma net income (loss).................... $(1,063) $ (513) $ 672 $ 2,303
======= ======= ======= =======
PER SHARE DATA(3):
Basic:
Net income (loss) before extraordinary item.... $ (0.45) $ (0.22) $ 0.28 $ 0.58 $ 0.52
Net income (loss).............................. $ (0.45) $ (0.22) $ 0.28 $ 0.51 $ 0.52
Diluted:
Net income (loss) before extraordinary item.... $ (0.45) $ (0.22) $ 0.13 $ 0.41 $ 0.51
Net income (loss).............................. $ (0.45) $ (0.22) $ 0.13 $ 0.36 $ 0.51
Weighted average number of shares:
Basic.......................................... 2,371 2,371 2,371 4,484 7,382
Diluted........................................ 2,371 2,371 5,182 6,447 7,612
</TABLE>
18
<PAGE> 22
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:
Number of schools at end of period(4)............ 16 16 16 19 24
Number of students at end of period.............. 4,026 4,695 4,954 5,993 10,008
Number of new student starts during period....... 5,504 6,297 6,706 7,358 8,410
Monthly withdrawal rate during period(5)......... 4.8% 4.3% 4.1% 4.2% 3.6%
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 2,737 $ 2,733 $ 3,209 $14,048 $21,446
Total current assets............................. 7,364 8,125 8,375 21,800 32,468
Total assets..................................... 21,047 21,867 20,986 42,073 81,298
Notes payable and long term debt, including
current portion................................ 7,688 8,974 7,755 6,129 31,947
Total liabilities................................ 13,251 15,271 14,717 13,873 45,626
Total stockholders' equity....................... 7,796 6,596 6,269 28,200 35,672
</TABLE>
- ---------------
(1) Other expenses consist of (i) charges in fiscal 1996 of $1,115 for the
settlement of the class action lawsuit, $50 for the cost of relocating a
school, and $764 for the impairment of goodwill and other intangible assets;
and (ii) charges in fiscal 1997 of $144 for the consolidation of two schools
in Virginia and two schools in California and $391 in merger expenses
related to the Nebraska Acquisition.
(2) The corporation which owned the two Nebraska Schools acquired by the Company
in the fourth quarter of fiscal 1996 and its predecessor were treated as a
Subchapter S-Corporation and a partnership, respectively, under relevant
provisions of the Internal Revenue Code. Accordingly, income taxes were the
responsibility of the S-Corporation's stockholders and the partnership's
partners. For informational purposes, the selected consolidated financial
data for the four years ended March 31, 1997 include a pro forma
presentation that includes a provision for income taxes as if the merging
entity had operated as a C-Corporation and was combined with the Company for
those periods. Such pro forma calculations were based on the income tax laws
and rates in effect during those periods and Financial Accounting Standards
Board Statement No. 109, Accounting for Income Taxes. See Notes 2 and 10 to
the Company's Consolidated Financial Statements.
(3) All earnings per share data have been calculated using SFAS 128 and SAB 98.
Amounts for periods prior to April 1, 1997 are based on the pro forma
results described in (2) above.
(4) Two schools in Virginia were combined in fiscal 1997; two schools located in
Vista, CA were combined in fiscal 1998.
(5) Represents the percentage calculated by dividing (i) the number of students
who withdrew from the Company's schools in the period by (ii) the sum of the
number of students at each month-end in the period and the number of
students who withdrew in the period.
19
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the Company's results of operations and
financial condition should be read in conjunction with "Selected Consolidated
Financial and Other Operating Data" and the Consolidated Financial Statements of
the Company and the Notes thereto appearing elsewhere in this Prospectus. All
dollar amounts are in thousands.
GENERAL
The Company owns and operates 24 schools in ten states which together
provided diversified career oriented postsecondary education to over 10,000
students. The Company derives its revenue almost entirely from tuition, fees and
charges paid by, or on behalf of, its students. Most students at the Company's
schools rely on funds received under various government-sponsored student
financial aid programs, especially Title IV Programs, to pay a substantial
portion of their tuition and other education-related expenses. During fiscal
1998, approximately 73% of the Company's cash receipts were indirectly derived
from Title IV Programs. Cash receipts represented approximately 96% of the
Company's net revenues in fiscal 1998.
The Company's revenue varies based on the aggregate student population,
which is influenced by the number of students attending the Company's schools at
the beginning of a fiscal period; by the number of new students entering the
Company's schools during such period; and by student retention rates. New
students enter the Company's schools' degree granting programs four times a year
and diploma courses every four-to-six weeks. The Company believes that the size
of its student population is affected to some extent by general economic
conditions, and that, in the absence of countervailing factors, student
enrollments and retention rates would tend to increase as opportunities for
immediate employment for high school graduates decline and decrease as such
opportunities increase. The purchase of new Company schools and the introduction
of additional program offerings at existing Company schools have been
significant factors in increasing the aggregate student population in recent
years.
In the fiscal year ended March 31, 1998, the Company derived approximately
89% of its net revenues from tuition. The Company recognizes tuition revenue on
each student contract as earned on a pro rata monthly basis over the term of the
contract. Refunds are due if a student withdraws from school prior to completion
of the program and are computed using methods required by accrediting agencies
or state and federal regulations. As of the time of withdrawal, the total
earnings on the contract mandated by the applicable formula are compared to the
revenue previously recognized by the Company. This comparison can result in
either an increase or decrease in final revenue recognition, which is recorded
for accounting purposes at the time of the applicable student's withdrawal.
Historically, these net adjustments have not been material. Other educational
revenue is comprised of fees and textbook sales.
The Company incurs expenses throughout a fiscal period in connection with
the operation of its schools. The cost of education and facilities includes
faculty salaries and benefits, cost of books sold, occupancy costs, depreciation
and amortization of equipment costs and leasehold improvements, and certain
other educational and facility costs incurred by the Company's schools.
Selling and promotional expenses include admission representatives'
salaries and benefits, direct and indirect marketing expenses and advertising
expenses.
General and administrative expenses include schools', regional offices' and
home office's salaries and benefits, other direct and indirect costs of the
schools, regional offices, and home office, and the provision for losses on
accounts receivable.
Since its inception, the Company has pursued a strategy of growth through
acquisition. All of the Company's schools have been acquired. Except in the case
of a pooling of interests, the Company records as goodwill and other intangible
assets the difference between the purchase price of a school and the fair value
of its tangible net assets. Since inception, the Company has allocated
approximately $43,000 of the purchase prices of acquired schools to goodwill and
other intangible assets. Goodwill is amortized over 15 to 40 years. Other
intangible assets are amortized over two to 15 years. The Company also
frequently enters into non-
20
<PAGE> 24
competition agreements with the owners or employees of the schools it acquires
and generally records the cost of such non-competition agreements as intangible
assets which are amortized over their respective lives which range from two to
ten years. Effective July 1993, such amortization is tax deductible; however,
amortization related to acquisitions consummated prior to that date is only
partially tax deductible on a current basis.
VARIATIONS IN QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly financial data for each
of the eight fiscal quarters in the two years ended March 31, 1998 and such data
expressed as a percentage of the Company's totals with respect to such
information for the applicable fiscal year. The Company believes that this
information includes all adjustments (consisting solely of normal recurring
adjustments) necessary for a fair presentation of such quarterly information
when read in conjunction with the consolidated financial statements included
elsewhere herein. The operating results for any quarter are not necessarily
indicative of the results for any future period.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31, 1997 FISCAL YEAR ENDED MARCH 31, 1998
------------------------------------- -------------------------------------
1ST QTR 2ND QTR 3RD QTR 4TH QTR 1ST QTR 2ND QTR 3RD QTR 4TH QTR
------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET REVENUES.......................... $10,401 $12,039 $13,324 $13,686 $12,909 $13,740 $14,820 $18,207
Percentage of fiscal year total....... 21.0% 24.3% 26.9% 27.8% 21.6% 23.0% 24.9% 30.5%
INCOME FROM OPERATIONS BEFORE OTHER
EXPENSES............................ $ 327 $ 1,122 $ 1,404 $ 987 $ 265 $ 896 $ 2,092 $ 2,831
Percentage of fiscal year total....... 8.5% 29.2% 36.6% 25.7% 4.4% 14.7% 34.4% 46.5%
</TABLE>
The Company's quarterly net revenues have fluctuated in the past and may
fluctuate significantly in the future as a result of a number of factors,
principally due to the number and timing of new students enrolling in the
Company's programs. New enrollments in the Company's schools tend to be higher
in the third and fourth fiscal quarters because the third and fourth quarters
cover periods traditionally associated with the beginning of school semesters.
The Company believes it has been less affected by this seasonal pattern than
many other educational institutions because it permits students to enroll in and
begin programs in any month of the year at most of its schools. In addition, the
impact of seasonality in new enrollments on results of operations has been
moderated to some extent by growth in the number of students attending programs
and the varying lengths of those programs. However, the Company believes its
Fiscal 1998 Acquisitions will further increase this seasonality because many of
the longer programs offered at these schools do not allow for monthly start
dates. Furthermore, enrollment patterns in the Hesser Schools have historically
caused them to operate at a loss during the first and second fiscal quarters
based on low student populations during these periods and relatively fixed
operating expenses. In addition, other factors affecting quarterly net revenues
include student withdrawals, the termination of programs, the introduction of
new programs, the upgrading or lengthening of programs, changes in tuition rates
(including changes in response to pricing actions by competitors), changes in
government-supported financial aid programs, modification of applicable
government regulations or interpretations, regulatory audits or other actions by
regulatory authorities. The Company has not experienced any material resistance
to raising its tuition rates in the past and, based on such prior experience,
anticipates that tuition increases will keep pace with inflation for the
foreseeable future. Because certain of the Company's expenses do not vary with
student enrollment, quarterly variations in net revenues are amplified at the
income from operations level.
21
<PAGE> 25
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain
statement of operations data to net revenues for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Net revenues................................................ 100.0% 100.0% 100.0%
School operating costs:
Cost of education and facilities.......................... 45.4 46.8 45.4
Selling and promotional................................... 15.1 15.2 14.4
General and administrative expenses....................... 28.5 28.4 27.8
Amortization of goodwill and intangibles.................... 2.0 1.8 2.2
----- ----- -----
Income before other expenses................................ 9.0 7.8 10.2
Other expenses.............................................. 4.4 1.1 --
----- ----- -----
Income from operations.................................... 4.6 6.7 10.2
Interest (income) expense, net.............................. 1.9 0.6 (0.4)
----- ----- -----
Income before income taxes................................ 2.7 6.1 10.6
Provision (benefit) for income taxes........................ 1.5 (1.7) 4.2
----- ----- -----
Income before extraordinary item.......................... 1.2 7.8 6.4
Extraordinary item.......................................... -- 0.6 --
----- ----- -----
Net income................................................ 1.2% 7.2% 6.4%
===== ===== =====
Pro forma income tax data:
Income before income taxes and extraordinary item......... 2.7% 6.1%
Provision for income taxes................................ 1.1 0.8
----- -----
Income before extraordinary item.......................... 1.6 5.3
Extraordinary item........................................ -- 0.6
----- -----
Pro forma net income...................................... 1.6% 4.7%
===== =====
</TABLE>
YEAR ENDED MARCH 31, 1998 COMPARED WITH YEAR ENDED MARCH 31, 1997
Net Revenues. Net revenue increased by $10,226, or 20.7%, to $59,676 for
the year ended March 31, 1998 from $49,450 for the year ended March 31, 1997.
Revenue growth was primarily attributable to (i) an increase in students at the
Texas, Maryland and Nebraska schools which were acquired in September 1996,
December 1996, and March 1997, respectively and (ii) the purchase of the CHI
Institute Schools in February 1998 and the Hesser College Schools in March 1998
which contributed a combined $3,128 in net revenues. The number of new student
starts at the Company's schools (including those acquired in the Fiscal 1998
Acquisitions) during the year ended March 31, 1998 increased to 8,410 from 7,358
for the corresponding twelve months of the prior year, a 14.3% increase.
Although the San Diego area schools experienced a decline in new student starts
of 11.0% from 1,944 for the prior year compared to 1,730 for the current year,
this is principally the result of the Company's decision to consolidate the
number of schools in the San Diego area from three to two. All other schools
recorded a combined increase of 23.4% in new student starts, with overall
student population largely offsetting the decline discussed above. As of March
31, 1998, the number of students in attendance increased 8.1% compared to the
prior year end for the Company's "same schools," defined as all schools except
for the Fiscal 1998 Acquisitions. The monthly student withdrawal rate decreased
to 3.6% compared to a 4.2% rate experienced by the Company during the prior
year, due in part to the Company's "Retention Program" in each of the schools.
This program includes commitment counseling prior to acceptance and follow-up
counseling for active students as well as counseling in the event a decision to
withdraw is made by the student.
Cost of Education and Facilities. Cost of education and facilities
increased by $3,936, or 17.0%, to $27,087 for the year ended March 31, 1998 from
$23,151 for the year ended March 31, 1997, principally as a
22
<PAGE> 26
result of facility expansions, the addition of the Texas and Maryland schools in
fiscal 1997, and the CHI Institute Schools and Hesser Schools in fiscal 1998,
and costs related to the increased enrollments in the Nebraska Schools. The cost
of education and facilities as a percentage of net revenue was 45.4% in 1998
compared with 46.8% in 1997.
Selling and Promotional. Selling and promotional expenses increased by
$1,113, or 14.8%, to $8,644 for the year ended March 31, 1998 from $7,531 for
the year ended March 31, 1997, principally as a result of the addition of the
Texas, Maryland, CHI Institute and Hesser schools. Selling and promotional
expenses as a percentage of net revenue were 14.4% in 1998 and 15.2% in 1997.
General and Administrative. General and administrative expenses increased
by $2,534, or 18.0%, to $16,576 for the year ended March 31, 1998 from $14,042
for the year ended March 31, 1997. General and administrative expenses as a
percentage of net revenue decreased to 27.8% in 1998 compared to 28.4% in 1997
as a result of the Company's ability to serve a greater student population
without a corresponding increase in costs and reduced bad debt expense.
Amortization of Goodwill and Intangibles. Amortization of goodwill and
intangibles increased by $399, or 45.0%, to $1,285 for the year ended March 31,
1998 from $886 for the year ended March 31, 1997. The increase was primarily a
result of the amortization of goodwill arising from the acquisition of the Texas
and Maryland schools.
Other Expenses. Other expenses in fiscal 1997 consisted of a charge of
$391 for merger costs associated with the Nebraska Acquisition and $144 for the
consolidation of two Virginia schools and two California schools.
Interest Income, Net. Net interest income increased by $537 to $253 of
interest income for the year ended March 31, 1998 from net interest expense of
$284 for the year ended March 31, 1997. The change was principally a result of
lower debt levels and increased interest income during the year ended March 31,
1998 due to the investment of a portion of the proceeds of the Company's IPO on
October 28, 1996.
Extraordinary Item. Extraordinary item consisted of a one time charge in
fiscal 1997 of $309 after tax to write off unamortized deferred debt issuance
costs and unamortized debt discount for early payoff of subordinated debt from
the proceeds of the Company's IPO.
Income Taxes. Income taxes increased by $3,330 to $2,485 for the year
ended March 31, 1998 from an income tax benefit of $845 for the year ended March
31, 1997 due to the 1997 recognition of a benefit from establishing deferred tax
assets when the Nebraska Acquisition terminated its status as a Subchapter
S-Corporation and the 1997 elimination of the deferred tax asset valuation
allowance of $1,320 due to the Company's profitable operations in fiscal 1997
and the acquisition of other historically profitable schools. Pro forma income
tax expense of $409 in fiscal 1997 reflects the taxation of the corporation
acquired by merger in the Nebraska Acquisition as a C-Corporation filing a
consolidated return with the Company for all periods and other differences
arising from the application of the liability method of accounting for income
taxes. The Company's effective tax rate for fiscal 1998 was 39.2%.
Net Income. Net income increased to $3,852, or 8.3%, for the year ended
March 31, 1998 from net income of $3,557 for the year ended March 31, 1997. The
increase is primarily a result of an 84.1% increase in income from operations
and increased net interest income, partially offset by an increased effective
tax rate for the year ended March 31, 1998. See "Income Taxes" above for a
discussion of income tax adjustments related to the Nebraska Acquisition
resulting in pro forma net income of $2,303 for the year ended March 31, 1997.
YEAR ENDED MARCH 31, 1997 COMPARED WITH YEAR ENDED MARCH 31, 1996
Net Revenues. Net revenues increased by $6,103, or 14.1%, to $49,450 for
the year ended March 31, 1997 from $43,347 for the year ended March 31, 1996.
Factors contributing to revenue growth included an increase in the number of
students attending the Company's schools and an approximate 4% increase in
tuition rates during fiscal 1997. The number of new student starts at the
Company's schools during the year increased to 7,358 in fiscal 1997 from 6,706
in fiscal 1996, a 9.7% increase. The Company's three San Diego area schools
23
<PAGE> 27
experienced a decline in new student starts to 1,944 for the current year as
compared to 2,178 for the prior year, principally in its medical assistant and
medical administration programs. The Company believes the decline in new student
starts was attributable to several factors in the San Diego area, including a
shift in employer requirements for medical assistants, a continued decline in
military personnel, and an increase in employment opportunities. The Company
believes that these factors may continue to adversely impact the Company's
operations in the San Diego area. The Texas and Maryland schools, acquired in
fiscal 1997, accounted for 855 new students starts in fiscal 1997. Student
withdrawal rates did not change materially compared to withdrawal rates
experienced by the Company during fiscal 1996.
Cost of Education and Facilities. Cost of education and facilities
increased by $3,500, or 17.8%, to $23,151 in fiscal 1997 from $19,651 in fiscal
1996 principally as a result of increased student count at the Company's
schools. The cost of education and facilities as a percentage of net revenue was
46.8% in fiscal 1997 compared with 45.4% in fiscal 1996, as a result of
increased costs associated with the introduction of several new programs at the
Company's two San Diego, California schools.
Selling and Promotional. Selling and promotional expenses increased by
$997, or 15.3%, to $7,531 in fiscal 1997 from $6,534 in fiscal 1996. Selling and
promotional expense as a percentage of net revenue was 15.2% in fiscal 1997
compared with 15.1% in fiscal 1996, as a result of increased advertising
spending by the Company's schools in order to increase inquiries from
prospective students.
General and Administrative. General and administrative expenses increased
by $1,673, or 13.5%, to $14,042 in fiscal 1997 from $12,369 in fiscal 1996
principally as a result of an increase in the number of administrative personnel
at the Company's schools and increased costs at the Company's home office and
regional offices. Such increase in personnel was necessary to service the
increase in student population and the expansion in number of schools. General
and administrative expenses as a percentage of net revenues were 28.4% in fiscal
1997 compared with 28.5% in fiscal 1996.
Amortization of Goodwill and Other Intangible Assets. Amortization of
goodwill and other intangible assets increased $3, or 0.4%, to $886 in fiscal
1997 from $883 in fiscal 1996. The increase was a result of amortizing costs
associated with schools acquired in fiscal 1997 offset by fully amortizing
certain intangible assets acquired in connection with the purchase of schools in
fiscal 1992 and prior.
Other Expenses. Other expenses in fiscal 1997 consisted of a charge of
$391 for merger costs associated with the Nebraska Acquisition and $144 for the
consolidation of two Virginia schools and two California schools.
Interest Expense, Net. Net interest expense decreased $538, or 65.5%, to
$284 in fiscal 1997 from $822 in fiscal 1996 principally as a result of paying
off $4,800 in subordinated debt with the proceeds from the Company's IPO and
increased interest income from excess cash on hand.
Income before Income Taxes and Extraordinary Item. Income before income
taxes and extraordinary item increased to $3,021 in fiscal 1997 from $1,159 in
fiscal 1996 principally as a result of the decline in other expenses and reduced
interest expense, net.
Extraordinary Item. Extraordinary item consisted of a one time charge of
$309 after tax to write off unamortized deferred debt issuance costs and
unamortized debt discount for early payoff of subordinated debt from the
proceeds of the Company's IPO.
Income Taxes. The income tax benefit was $845 in fiscal 1997 as compared
to expense of $632 in fiscal 1996 due to the 1997 recognition of a benefit from
establishing deferred tax assets when the Nebraska Acquisition terminated its
status as a Subchapter S-Corporation and the 1997 elimination of the deferred
tax asset valuation allowance of $1,320 due to the Company's profitable
operations in fiscal 1997 and the acquisition of other historically profitable
schools. Pro forma income tax expense of $409 in fiscal 1997 as compared to the
pro forma income tax benefit of $487 in fiscal 1996 reflects the taxation of the
Nebraska Acquisition as a C-Corporation filing a consolidated return with the
Company for all periods and other differences arising from the application of
the liability method of accounting for income taxes.
24
<PAGE> 28
Net Income. Net income increased in fiscal 1997 to $3,557 as compared to
$527 in fiscal 1996 due primarily to the acquisition of the Texas and Maryland
schools, improved results in the Nebraska schools, the reduction in the other
expenses such as the class action lawsuit settlement and the impairment of
goodwill and other intangible assets, and reduced interest expense, combined
with the income tax benefit described above in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended March 31, 1998, the Company financed its operating
activities and capital requirements, including debt repayments, principally from
cash provided by operating activities. Cash provided by operating activities for
fiscal 1997 and fiscal 1998 was approximately $2,737 and $2,359, respectively.
The Company's principal source of funds at March 31, 1998 were cash and cash
equivalents of $21,446 and net accounts receivable of $6,490. The $1,251
increase in net trade accounts receivable experienced for the year ended March
31, 1998 was primarily a result of accounts receivable purchased and revenue
recognized for the CHI Institute and Hesser Schools during the change in
ownership period when federal funding was suspended.
Historically, the Company's investment activity has primarily consisted of
capital asset purchases and the purchase of schools. Capital expenditures,
excluding capital leases and purchases of businesses, totaled $2,080 and $2,200
for fiscal 1997 and 1998, respectively. Capital expenditures are a result of
purchasing additional equipment and upgrading and replacing existing equipment
such as computers and medical equipment for school programs, and expanding
facilities at several locations. Purchases of the CHI Institute and Hesser
College businesses, including goodwill and intangibles, totaled $30,518 for the
year ended March 31, 1998.
The Company's capital assets consist primarily of classroom and laboratory
equipment (such as computers and medical devices), classroom and office
furniture, and leasehold improvements. All building facilities are leased with
the exception of the land and buildings owned by the Company in Dayton, Ohio,
Lincoln, Nebraska and Omaha, Nebraska and Manchester, New Hampshire. The Company
plans to continue to expand current facilities, upgrade and replace equipment,
and open new schools. The Company expects that its fiscal 1999 operations and
planned capital expenditures can be funded through cash to be generated from
existing operations.
Cash flow from operations on a long term basis is highly dependent on the
receipt of funds from Title IV Programs, and presently a majority of the
Company's net revenues are derived from Title IV Programs. Disbursement of Title
IV Program funds is dictated by federal regulations. For students enrolled in
"non-term" programs (i.e., not divided into quarters or semesters), payments are
generally made in two equal installments, one in the first 30 days following the
student's first day of class and the second when the student reaches the
midpoint of the program. For students enrolled in term programs (i.e., quarters
or semesters), payments are made at the beginning of each term, with the
exception of the initial disbursement which is made 30 days following the
student's first day of class. In addition, the Regulations set forth other
financial standards for the Company and its schools including (i) positive
tangible net worth, (ii) an "acid" test ratio of at least 1-to-1, (iii) a 10%
limitation on losses as a percentage of tangible net worth and (iv) the
maintenance of a minimum cash reserve equal to 25% of prior year school refunds
in the event of certain non-compliance. Except with respect to the operating
losses incurred at the Company's Roanoke and Harrisonburg Schools, the Company
believes each of its schools satisfied the financial responsibility standards.
Because the HEA and the Regulations are subject to amendment, and because the
Department of Education may change its interpretation of the HEA and the
Regulations, there can be no assurance that the Department of Education will
agree in the future with the Company's interpretation of each such requirement
or that such requirements will not change in the future.
Other than the Roanoke and Harrisonburg Schools, none of the Company's
schools had operating losses in fiscal 1997 or fiscal 1998 which, in the
aggregate, exceeded 10% of the tangible net worth at the beginning of the
period. Therefore, only the Roanoke and Harrisonburg Schools, which represented
2.1% and 1.5%,
25
<PAGE> 29
respectively, of the Company's total revenue in fiscal 1998, are in violation of
the Financial Responsibility Standard relating to operating losses.
In November 1997, the Department of Education published new regulations
regarding financial responsibility which are effective on July 1, 1998. The new
regulations will apply to the Company's fiscal years commencing April 1, 1999,
and thereafter. The regulations provide a transition year alternative which will
permit the Company to have its institutions' financial responsibility for the
fiscal year ended March 31, 1999 measured on the basis of either the new
regulations or the current regulations, whichever are more favorable. The new
standards replace the Acid Test Ratio, the Tangible Net Worth Standard and the
Net Operating Results Test with three different ratios: an equity ratio, a
primary reserve ratio and a net income ratio. The equity ratio measures the
institution's capital resources, ability to borrow and financial viability. The
primary reserve ratio measures the institution's ability to support current
operations from expendable resources. The net income ratio measures the ability
to operate at a profit. The results of each ratio are assigned a strength factor
on a scale from negative 1.0 to positive 3.0, with negative 1.0 reflecting
financial weakness and 3.0 reflecting financial strength. An institution's
strength factors are then weighted based on an assigned weighting percentage for
each ratio. The weighted scores for the three ratios are then added together to
produce a composite score for the institution. The composite score must be at
least 1.5 for the institution to be deemed financially responsible by the
Department of Education without the need for further financial monitoring. If
the institution's composite score is less than 1.5, but equal to or greater than
1.0, the institution may continue in the Title IV Program for a maximum period
of three (3) years, subject to more rigorous financial aid disbursement and
financial monitoring requirements of the Department of Education. Based on the
Company's interpretation of the application of these new standards to the
Company's financial statements for the year ended March 31, 1998, the Company's
calculations result in a composite score of 1.4 on a consolidated basis, with
each individual institution included in the consolidating statements having a
composite score greater than 1.5. After giving effect to the receipt of the net
proceeds of this Offering, the composite score of the Company on a pro forma
consolidated basis would be unchanged as of March 31, 1998.
In the routine course of acquiring other schools, the Company must obtain
certain regulatory approvals, typically from accrediting agencies, state
agencies and the Department of Education. Upon a school being acquired by new
ownership, the Department of Education suspends payments of the school's Title
IV funding until the Department of Education completes a recertification. This
recertification process including obtaining prerequisite approvals from state
regulatory and appropriate accrediting agencies typically takes from four to
seven months.
In connection with the Texas Acquisition, the Company made payments of
approximately $1,150 to the sellers in May 1997 and is required to make note
payments of approximately $250 per year for five years, beginning in fiscal
1998. The Company's Title IV funding from its Texas Acquisition was suspended
pending Department of Education recertification, which was received in April
1997. In connection with the Maryland Acquisition, the Company made payments of
$1,350 in May 1997. No further amounts are due. The Company's Title IV funding
from the schools included in its Maryland Acquisition was suspended pending
Department of Education recertification, which was received in April 1997. The
Company's Title IV funding for the schools included in its Nebraska Acquisition
was suspended pending Department of Education recertification, which was
received in October 1997.
In connection with the CHI Institute Acquisition, the Company paid $1,500
in February 1998 and $1,084 in May 1998, and issued shares of the Company's
Common Stock with an aggregate value of $1,500 at the date of the acquisition.
The Company is required to make note payments to the seller in fiscal 1999 of
$4,350 with the balance of $4,400 plus interest payable quarterly over the next
four years. The Company's Title IV funding for the CHI Institute Schools has
been suspended pending Department of Education recertification.
In connection with the Hesser Acquisition, the Company paid $2,000 in March
1998 and $2,433 in fiscal 1999, and issued shares of the Company's Common Stock
with an aggregate value of $2,000 at the date of the acquisition. The Company is
required to make note payments to the seller in fiscal 1999 of $9,500 and $1,750
in fiscal 2000. The Company's Title IV funding for the Hesser Schools has been
suspended pending Department of Education recertification.
26
<PAGE> 30
The Company expects to make the note payments for the CHI Institute and
Hesser Acquisitions with cash on hand and borrowings under its bank facility.
Pending recertification by Department of Education for Title IV funding at the
CHI Institute and Hesser Schools, the Company expects to fund its operations at
the related schools from cash on hand and bank debt.
The Company anticipates it will need additional debt or equity financing in
order to carry out its strategy of growth through acquisitions. In March 1998,
the Company amended its loan agreement with Bank of America, FSB increasing its
loan facilities to the Company to up to $36,000 (the "Bank Credit Facility").
The total amount of the Bank Credit Facility is divided into three separate
facilities: (i) a three year revolving line of credit of up to $10,000 which may
be utilized for advances to support letters of credit; (ii) a revolving term
loan facility of up to $11,000 which may be utilized prior to March 31, 1999 for
the purpose of financing permitted acquisitions, either directly or to support
stand-by letters of credit, reducing to $9,000 in March 1999 and subject to
quarterly reductions of $750 thereafter; and (iii) a three year non-revolving
line of credit of up to $15,000 which may be utilized for the purpose of
financing permitted acquisitions. As of March 31, 1998, $15,819 was available
under the Bank Credit Facility, and $26,819 was available as of May 31, 1998.
Interest is charged on borrowings at different floating rates above LIBOR
depending on certain financial conditions of the Company and depending on
whether drawn under the revolving line of credit or the term loan. In addition,
the Bank Credit Facility provides for commitment fees to be paid on the unused
portion of the facility. The Bank Credit Facility also contains restrictions on
the payment of dividends and incurrence of additional debt, and various other
financial covenants. The Bank Credit Facility is secured by substantially all of
the assets of the Company. The Company believes this Bank Credit Facility will
be adequate to meet its financing needs for at least the next twelve months.
Effect of Inflation. The Company does not believe its operations have been
materially affected by inflation.
Other Matters. The Company is currently in the process of evaluating its
computer software and database to ensure that any modifications required to be
year 2000 compliant are made in a timely manner. Management does not expect the
financial impact of such modifications, which are expected to be implemented in
1999, to be material to the Company's financial position or results of
operations in any given year.
27
<PAGE> 31
BUSINESS
OVERVIEW
The Company provides diversified career oriented postsecondary education to
over 10,000 students at 24 schools located in ten states. The Company offers a
variety of bachelor degree, associate degree and diploma programs designed to
provide students with the knowledge and skills necessary to qualify them for
entry level employment principally in the fields of healthcare, business,
information technology, and fashion and design. The Company's curricula include
programs leading to employment in ten of the 15 fastest growing occupations
(measured by percentage growth from 1994 through 2005) as projected by the U.S.
Department of Labor. At March 31, 1998, approximately 49% of the Company's
students were enrolled in bachelors and associate degree programs.
In 1996, there were 14.6 million students participating in postsecondary
education programs, 44% of whom were over the age of 24 (Source: National Center
for Educational Statistics, Digest of Education Statistics, 1996). The Company
believes the demand for postsecondary career oriented education will increase
over the next several years as a result of recognized trends, including (i) a
projected 24% growth in the number of new high school graduates from
approximately 2.5 million in 1994 to approximately 3.1 million in 2004, (ii) the
increasing enrollment of high school graduates attending postsecondary
educational institutions (65% in 1996 versus 53% in 1983) as they seek to
enhance their skills or retrain for new technologies, and (iii) the increasing
recognition of the income premium attributable to higher education degrees, with
individuals holding associate degrees earning on average approximately 30% more
income during their lifetimes than individuals holding only high school diplomas
(Source: Department of Education).
The Company derives a substantial majority of its revenues from federal
financial aid received by the students of its schools under Title IV Programs
administered by the Department of Education under the HEA. Each of the Company's
schools participates in Title IV Programs, or in the case of the schools
included in the Fiscal 1998 Acquisitions, will participate in such programs upon
recertification by the Department of Education.
According to the Department of Education, there were 1,995 accredited,
proprietary postsecondary institutions participating in Title IV programs as of
March 16, 1998. The ownership of these schools is highly fragmented. Although
the industry appears to be moving into a consolidation phase, management
believes that no organization either holds a significant national market share
or owns or operates more than 75 schools.
COMPANY STRATEGY
The Company's goal is to increase its market share in the expanding market
for postsecondary education and improve profitability by (i) promoting internal
growth at the Company's new and existing schools, (ii) acquiring additional
schools, (iii) opening new schools as additional locations or branches of
existing schools, and (iv) enhancing operating efficiencies. The Company has
implemented the following strategies to achieve these goals:
Internal Growth Strategy
The Company intends to increase student enrollment at its schools by
continuing to enhance local marketing efforts and increasing the number and
variety of program offerings at its schools. The Company intends to continue to
increase the number and variety of programs offered at its schools by (i)
developing new diploma and degree programs, (ii) replicating existing programs
at schools where such programs were not previously offered, and (iii)
introducing associate degree granting programs at all of its schools currently
offering only diploma programs.
The Company's ability to increase enrollment is limited by the capacity of
its facilities and its ability to attract teachers to maintain appropriate
student/teacher ratios. In the past, the Company has not had any difficulty in
expanding its facilities to accommodate increased enrollment or relocating
facilities if expansion was not feasible. The Company has also been able to
maintain appropriate student/teacher ratios by offering
28
<PAGE> 32
its existing teachers the opportunity to work additional hours and by recruiting
additional teachers. Based on its experience, the Company anticipates that
neither facilities nor faculty will constitute a significant barrier to
increasing enrollment.
The Company intends to continue to create new programs at individual
schools and to replicate its new and existing programs for introduction into
additional schools on a market-selected basis to increase student enrollment and
revenue at its existing schools.
The Company intends to continue to increase the number of associate degree
programs at those schools already approved to grant degrees and to introduce
degree granting programs at all of its other schools. Associate degree programs
generally generate greater revenue to the Company on a per student basis than
diploma programs because generally they take longer to complete and are more
expensive than diploma programs. In addition, the Company believes the ability
of its individual schools to offer one or more associate degree programs enables
the schools to attract additional students from market segments with different
academic goals. The Company also believes such programs attract diploma students
because of the increased prestige the associate degree programs bring to the
diploma programs. Furthermore, the continued participation in the schools'
associate degree programs by students desiring to continue their studies beyond
the diploma level increases total revenue without a corresponding increase in
marketing and related costs. In order to introduce additional degree programs,
the Company must secure approval from relevant state and accrediting agencies.
Acquisition Strategy
The Company intends to continue to make selective acquisitions and
integrate them into its existing school system. The Company believes that the
fragmentation of the postsecondary education market provides significant
opportunities to consolidate existing independently owned schools. The Company
expects to utilize cash on hand, its Bank Credit Facility, the Company's Common
Stock, and seller financing in connection with such acquisitions.
In general, the Company's principal acquisition criteria are: historical
profitability; acceptable default rates with respect to federally guaranteed or
funded student loans; established and marketable curricula; and demographic
profiles in the area which indicates a potential for growth. Each of the
Company's acquisitions during fiscal 1997 and 1998 met these criteria. The
Company intends to concentrate its acquisition efforts on schools which satisfy
its general eligibility criteria regardless of whether they offer programs in
the fields of study in which programs are currently being offered at the
Company's schools. However, the Company will consider other school acquisitions
which it believes will further its long-term goals. The Company believes the
newly acquired schools can benefit from its marketing analysis, accounting,
information systems, financial aid and regulatory compliance systems to increase
enrollment and enhance operating efficiencies. The Company also believes that
both new and existing schools will benefit from the ability to replicate
successful programs among the schools.
Upon the Company's acquiring a Title IV eligible school, the school's
eligibility to participate in the Title IV Programs is suspended pending the
approval by the Department of Education of an application for participation
under the new ownership. In the past, such suspensions have lasted from four to
seven months and have not resulted in any material adverse effect on the
Company's operations.
Additional Location Strategy
The Company intends to capitalize on its schools' existing infrastructure
and curricula by opening additional locations by branching from its existing
institutions in areas that exhibit strong enrollment potential and job placement
opportunities. The Company's principal criteria for determining whether to open
new schools are the demographic profile of the location and the economic and
management costs of opening the new location. When opening an additional
location of an existing school, the Company must obtain approvals from the
relevant state authorities and accrediting agency, and must notify the
Department of Education and obtain its approval prior to disbursing Title IV
Program funding at such additional location.
29
<PAGE> 33
Operating Strategy
The Company provides each of its schools with certain services which the
Company believes can be performed most efficiently and cost effectively by a
centralized office. Such services include marketing analysis, accounting,
information systems, financial aid and regulatory compliance. The Company
intends to continue its strategy of operating with a decentralized management
structure in which local schools' management is empowered to make most of the
day-to-day operating decisions at each school and is primarily responsible for
the profitability and growth of that school. The Company believes the
combination of certain centralized services and decentralized management
significantly increases its operating efficiency.
The Company's decentralized marketing strategy makes use of centralized
marketing data which tracks, among other things, lead sources, media
expenditures and individual school enrollments on a weekly basis. Individual
schools utilize these statistics to monitor their own marketing efforts. These
statistics, combined with placement statistics, allow the individual schools to
respond quickly to changing employment markets by developing new programs or
changing the emphasis placed on existing programs, and to identify new
populations of student candidates. The constant monitoring of enrollment
activity also allows the Company to determine whether it is appropriate to
increase its capital commitment to additional marketing efforts either to
improve unsatisfactory performance or to take advantage of successfully marketed
programs.
FISCAL 1998 ACQUISITIONS
The CHI Institute Acquisition
On February 14, 1998, the Company acquired the CHI Institute, which
operates the two CHI Institute Schools located in the Philadelphia, Pennsylvania
area, by purchasing all of the stock of Computer Hardware Service Company, Inc.
The purchase price of the CHI Institute Acquisition was $11,750,000, consisting
of $1,500,000 in cash, promissory notes aggregating $8,750,000, and 151,900
shares of the Company's Common Stock, valued at an aggregate of $1,500,000. As
part of the CHI Institute Acquisition the Company also agreed to make adjusting
payments to the sellers based on the ratio of certain assets to certain
liabilities of the CHI Institute Schools at the time of the acquisition. These
adjusting payments aggregated $1,084,230, all of which has been paid in fiscal
1999. The Company has accounted for the CHI Institute Acquisition as a purchase;
therefore, the results of its operations are included in the Company's
consolidated results of operations effective February 1, 1998. Because the
acquisition constitutes a change in ownership based on a change in control under
the applicable Regulations, Title IV funding has been suspended pending
recertification by the Department of Education.
The CHI Institute Schools are located in Broomall and Southampton,
Pennsylvania. As of March 31, 1998, approximately 1,019 students attended the
CHI Institute Schools, which offer associate degree and diploma programs in
business, healthcare, electronic engineering, and information technology.
The Hesser Acquisition
On March 13, 1998, the Company acquired Hesser College, which operates the
four Hesser Schools located in New Hampshire, by purchasing all of the stock of
Hesser, Inc. and the property in Manchester, New Hampshire at which its main
campus is located. The purchase price of the Hesser Acquisition was $15,000,000
consisting of $2,000,000 in cash, promissory notes aggregating $11,000,000, and
202,532 shares of the Company's Common Stock valued at an aggregate of
$2,000,000. As part of the Hesser Acquisition the Company also agreed to make
adjusting payments to the sellers based on the ratio of certain assets to
liabilities of the Hesser Schools at the time of the acquisition. These
adjusting payments aggregated $2,683,372, of which $2,433,322 has been paid in
fiscal 1999 and $250,000 of which is due on April 1, 1999. The Company has
accounted for the Hesser Acquisition as a purchase; therefore, the results of
its operations are included in the Company's consolidated results of operations
effective March 1, 1998. Because the acquisition constitutes a change in
ownership based on a change in control under the applicable Regulations, Title
IV funding has been suspended pending recertification by the Department of
Education.
30
<PAGE> 34
The Hesser Schools are located in Manchester, Nashua, Portsmouth and Salem,
New Hampshire. As of March 31, 1998, approximately 2,512 students attended the
Hesser Schools, which primarily offer bachelor degree and associate degree
programs in business, healthcare, information technology, criminal justice and
early childhood education.
COMPANY HISTORY
The Company began business by acquiring seven schools in fiscal 1989 and
1990, all of which offered programs in the healthcare field. In fiscal 1992, the
Company continued to grow by acquisition and implemented a new strategy to
diversify outside of the healthcare field by acquiring a fashion and design
school. In fiscal 1993 and 1994, the Company acquired seven additional schools
which included schools offering programs in the fields of healthcare, image
technology and fashion and design. In fiscal 1997, the Company acquired the two
Nebraska Schools in the Nebraska Acquisition, three schools in the Texas
Acquisition and one school in the Maryland Acquisition. The Fiscal 1997
Acquisitions included schools offering programs in the fields of healthcare,
business and information technology. The Nebraska Acquisition was accounted for
as a pooling of interests. In fiscal 1998, the Company acquired six schools
through the CHI Institute Acquisition and the Hesser Acquisition. The Fiscal
1998 Acquisitions included schools offering programs primarily in the fields of
business, healthcare, information technology, electronic engineering, criminal
justice and early childhood education. The number of students attending the
Company's schools rose from 2,840 at March 31, 1993 to 10,008 at March 31, 1998.
The Company's net revenues increased 138% from $25,100,000 for the year ended
March 31, 1993 to $59,676,000 for the year ended March 31, 1998.
The Company is a Delaware corporation incorporated in 1988. The Company
operates the majority of its business through 14 subsidiaries. The Company's
principal executive offices are located at 1327 Northmeadow Parkway, Suite 132,
Roswell, Georgia 30076. Its telephone number is 770-475-9930 and its website
address is http://www.edmd.com. Subject to shareholder approval at its next
annual meeting of shareholders in September 1998, the Company has determined to
change its name to "Quest Education Corporation."
SCHOOLS
The following table shows the location of each of the Company's schools,
the name under which it operates, the date of its acquisition, the principal
fields of study in which it offers its programs, its degree granting status and
number of students attending the school at the time of its acquisition and at
March 31, 1998.
<TABLE>
<CAPTION>
APPROXIMATE
STUDENT STUDENT
INSTITUTIONAL POPULATION POPULATION AT
DATE PRINCIPAL DEGREE ACCREDITING AT DATE OF MARCH 31,
INSTITUTION ACQUIRED CURRICULA(1) GRANTING(2) AGENCY(3) ACQUISITION 1998
- ----------- -------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Maric College of Medical
Careers......................... 4/88 Healthcare Associate ACCSCT 135 858
San Diego, CA
Maric College of Medical
Careers......................... 4/88 Healthcare Associate(5) ACCSCT 105 445
North County Campus
Vista, CA(4)
Long Medical Institute............ 4/88 Healthcare Associate ACCSCT 129 202
Phoenix, AZ
Andon College..................... 11/89 Healthcare No ABHES 150 312
Stockton, CA
Andon College..................... 11/89 Healthcare Associate ABHES 123 334
Modesto, CA
Bauder College.................... 3/92 Fashion and Associate ACCSCT 440 406
Atlanta, GA Design/ SACS/COC
Business
Modern Technology School of
X-Ray........................... 3/93 Healthcare Associate ACCSCT 221 402
North Hollywood, CA
</TABLE>
31
<PAGE> 35
<TABLE>
<CAPTION>
APPROXIMATE
STUDENT STUDENT
INSTITUTIONAL POPULATION POPULATION AT
DATE PRINCIPAL DEGREE ACCREDITING AT DATE OF MARCH 31,
INSTITUTION ACQUIRED CURRICULA(1) GRANTING(2) AGENCY(3) ACQUISITION 1998
- ----------- -------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dominion Business School.......... 5/93 Business/ Associate ACICS 129 174
Roanoke, VA Healthcare
Dominion Business School.......... 5/93 Business/ Associate ACICS 408 103
Harrisonburg, VA(6) Healthcare
ICM School of Business............ 7/93 Business/ Associate ACICS 376 464
Pittsburgh, PA Healthcare/
Fashion and
Design
Ohio Institute of Photography &
Technology...................... 7/93 Image Associate ACCSCT 67 254
Dayton, OH Technology/
Healthcare
California Institute of
Merchandising
Art & Design.................... 8/93 Fashion and Associate ACICS 5 118
Sacramento, CA Design
San Antonio College of Medical and
Dental Assistants............... 9/96 Healthcare No ACCSCT 234 480
San Antonio, TX
San Antonio College of Medical and
Dental Assistants............... 9/96 Healthcare No ACCSCT 186 298
McAllen Campus
McAllen, TX
Career Centers of Texas --
El Paso......................... 9/96 Healthcare No ACCSCT 286 400
El Paso, TX
Hagerstown Business College....... 12/96 Business/ Associate ACICS 495 422
Hagerstown, MD Healthcare
Nebraska College of Business...... 3/97 Business/ Associate ACICS 345 408
Omaha, NE Healthcare
Lincoln School of Commerce........ 3/97 Business/ Associate ACICS 342 397
Lincoln, NE Healthcare
CHI Institute..................... 2/98 IT/Business/ Associate ACCSCT 560 545
Southhampton, PA Healthcare/
Electronic
Engineering
CHI Institute..................... 2/98 IT/Business/ Associate ACCSCT 435 474
Broomall, PA Healthcare/
Electronic
Engineering
Hesser College.................... 3/98 Business/ Bachelor/ NEASC 1,185 1,202
Manchester, NH Healthcare/IT/ Associate
Criminal
Justice
Hesser College.................... 3/98 Business/ Bachelor/ NEASC 303 451
Salem, NH Healthcare/IT/ Associate
Criminal
Justice
Hesser College.................... 3/98 Business/ Bachelor/ NEASC 354 447
Nashua, NH Healthcare/IT/ Associate
Criminal
Justice
</TABLE>
32
<PAGE> 36
<TABLE>
<CAPTION>
APPROXIMATE
STUDENT STUDENT
INSTITUTIONAL POPULATION POPULATION AT
DATE PRINCIPAL DEGREE ACCREDITING AT DATE OF MARCH 31,
INSTITUTION ACQUIRED CURRICULA(1) GRANTING(2) AGENCY(3) ACQUISITION 1998
- ----------- -------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Hesser College.................... 3/98 Business/ Bachelor/ NEASC 407 412
Portsmouth, NH Healthcare/IT/ Associate
Criminal
Justice
----- ------
TOTAL.................... 7,420 10,008
===== ======
</TABLE>
- ---------------
(1) The Company offers a variety of programs in addition to those listed in the
chart at one or more of its schools, with the significant majority of such
additional programs being offered at the Hesser Schools and the CHI
Institute Schools. These programs include, among others (i) early childhood
education, (ii) air conditioning, heating, and refrigeration technology
(iii) social sciences, and (iv) hotel and restaurant management.
(2) In order for a school to grant associate or bachelor degrees, it must be
accredited by the applicable accrediting agency and approved by the relevant
state agency.
(3) Accrediting Commission of Career Schools and Colleges of Technology
("ACCSCT"), Accrediting Council for Independent Colleges and Schools
("ACICS"), Accrediting Bureau of Health Education Schools ("ABHES"),
Southern Association of Colleges and Schools/Commission on Colleges
("SACS/COC") and New England Association of Schools and Colleges ("NEASC").
See "Licensing, Accreditation and Financial Aid Regulation."
(4) The Company determined that there was a substantial overlap in the Vista,
California markets and combined its Vista school with the San Marcos school
during the second quarter of fiscal 1998. The Vista and San Marcos schools
were acquired at approximately the same time. The chart represents the
combined operations of the schools at the date of the acquisition and at
March 31, 1998.
(5) Degree granting status has been approved; however, programs have not yet
been implemented.
(6) The Company determined that there was a substantial overlap in the
Harrisonburg and Staunton, Virginia markets, and combined its Staunton
school with the Harrisonburg school in fiscal 1997. The Harrisonburg and
Staunton schools were both acquired at the same time. The chart represents
the combined operations of the schools at the date of the acquisition and at
March 31, 1998.
PROGRAMS OF STUDY
The Company's programs are intended to provide students with the specific
knowledge and job skills required to prepare them for entry-level positions in a
chosen career field. The Company's programs, which generally provide for
internships or include business simulation instruction, are designed after
consultation with employers and advisory committees, which are composed of
business and educational professionals who assist the Company in assessing and
updating curricula and other aspects of relevant programs.
At March 31, 1998, the Company offered associate degree and diploma
programs in the principal areas of healthcare, business, and information
technology and associate degree programs in fashion and design. The Hesser
Schools also offer bachelor degrees in business and criminal justice. The
healthcare programs are designed to prepare students for occupations associated
with the medical and healthcare industry, such as nursing, medical and dental
assistant, home health aid, patient care provider and medical and dental office
manager. The business programs provide education in areas such as accounting,
business management, information technology, secretarial skills, paralegal
skills and travel, and are designed to prepare students for entry level
positions in such areas. The information technology programs provide computer
skills which may include training in various specific applications, hardware and
software integration and computer repair, and are designed to provide students
with entry level positions in such areas. Fashion and design programs prepare
students for positions associated with fashion merchandising, fashion design and
interior design, such as buyers, display directors, fashion coordinators,
pattern makers, fashion designers and interior designers. Tuition and fees vary
depending on the program offered and the location of the school.
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<PAGE> 37
The following table provides information at March 31, 1998 with respect to
the programs offered by the Company's schools in each of the four principal
fields described above:
<TABLE>
<CAPTION>
DIPLOMA DEGREE
------------------ ------------------ TOTAL NO.
NO. OF NO. OF NO. OF NO. OF OF
PROGRAM SCHOOLS STUDENTS SCHOOLS STUDENTS STUDENTS
- ------- ------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
Healthcare....................................... 18 3,833 12 1,116 4,949
Business......................................... 11 546 10 1,677 2,223(1)
Information Technology........................... 2 500 6 291 791
Fashion and Design............................... -- -- 3 496 496
Other Programs................................... 5 224 6 1,325 1,549(1)
----- ----- ------
Company Total.......................... 5,103 4,905 10,008
===== ===== ======
</TABLE>
- ---------------
(1) Includes 32 students enrolled in bachelor degree business programs and 36 in
the bachelor degree criminal justice program.
As of March 31, 1998, approximately 49.5%, 22.2%, 7.9% and 5.0% of students
were enrolled in programs in the fields of healthcare, business, information
technology and fashion and design, respectively. All of the Company's programs
are designed to prepare graduates to perform effectively in a variety of
entry-level positions by providing the student with practical experience both in
the classroom and, in the case of most programs in the healthcare and fashion
and design fields, through the use of internships. The internships constitute a
graded portion of the curricula and provide hands-on experience in the work
place as well as a source of job opportunities. In addition, most of the
Company's business programs provide for a significant amount of education in a
simulated business environment with a view toward preparing the student for
participation in actual business situations.
The academic schedule of the Company's schools varies depending on the
programs offered by the individual schools. Degree programs begin four times a
year. Diploma programs begin every four to six weeks. Diploma courses are
typically offered mornings, afternoons, and evenings, and, except in the Hesser
Schools where the majority of associate degree students attend at night, degree
programs are principally offered during day-time hours. The schools generally
have classes operating year round and are generally open five days per week. The
Company believes that its diversified curricula provide it with an extensive
library of programs and experience in various fields enabling it to meet
changing demands in the areas served by each of its schools and to expand
offerings at each of the schools when justified by student and employer demand.
Programs which lead to similar occupational outcomes have the same general
content. However, modifications are made to conform each program to the
requirements of the particular market as well as to state and accrediting
regulations. In addition to courses directly related to a student's program of
study, degree programs may also include general education courses such as
English, Psychology or Mathematics. The programs in each field are reviewed
periodically by the regional managers and the schools' directors in order to
respond to changes in the job market and technology. Each school also has
established advisory committees, comprised of local business executives and
academics, to assist it in assessing and updating curricula and other aspects of
the relevant programs.
TUITION AND FEES
As of March 31, 1998, total tuition for completion (on a full time basis)
for the diploma programs offered by the Company's schools ranged from $3,200 to
$13,770, for an associate degree program the tuition ranged from $5,300 to
$22,560, and for the Company's bachelor degree program the tuition ranged from
$17,520 to $31,960. In addition to these tuition amounts, students at the
Company's schools typically must purchase textbooks and supplies as part of
their educational programs.
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<PAGE> 38
STUDENT RECRUITMENT
The Company endeavors to recruit motivated students with the ability to
complete the programs offered by the Company's schools and to secure entry-level
employment in the fields for which their programs are designed to prepare them.
To attract potential students, the Company engages in several activities to
inform them, and in some instances their parents, about the Company's programs.
These expenditures vary from school to school, depending on the desired
audience, and include television advertising, direct mailings, newspaper
advertising and yellow pages advertising. The Company also engages in high
school visits to attract potential students.
The Company's television advertising is coordinated and developed locally,
and budgeted on a centralized basis. It is tailored to and directed at the local
market in which each school is located and is intended to create recognition for
the name under which the applicable school operates. Responses to direct mail
campaigns are received and followed up on a local basis; however, all marketing
activities are tracked and analyzed on a centralized system and the results
forwarded to the individual schools for use in evaluating the effectiveness of
their marketing programs.
Each of the Company's schools employs a director of admissions who
generally reports to the executive director. The director of admissions for each
school is responsible for, among other things, coordinating the efforts of the
school to recruit qualified students to the school. The director of admissions
also determines recruiting policies and procedures and standards for hiring and
training admissions representatives; however, such policies, procedures and
standards are reviewed at the regional or national level.
Admissions representatives contact potential students who have indicated an
interest in the schools' programs and arrange for interviews which generally
take place at the school, although occasionally such interviews take place at
the prospective student's home. The interview is designed to establish the
student's qualifications, academic background and employment goals. Prospective
students are generally given a school catalogue which describes the applicable
school's programs, a tour of the campus, an explanation of the programs offered
and the types of employment opportunities typically available to graduates of
the Company's schools. The Company employs admissions representatives who
generally perform their services in recruitment offices located at each school,
but who, in some instances, make visits and presentations at high schools or
other sources from which students may likely be recruited.
The Company's central marketing system monitors the effectiveness of each
school's marketing efforts to gauge the extent to which such efforts result in
student enrollment. The results of such monitoring are communicated to each of
the Company's schools allowing each school to more efficiently utilize its
marketing resources. Also, when a particular school develops a successful
marketing program, the Company makes such programs available to the other
schools for incorporation into their marketing programs as appropriate.
ADMISSION AND RETENTION
In order to apply for admission to any of the Company's programs, a
candidate is required to have a high school diploma or recognized equivalent, or
pass an admissions test specifically approved by the Department of Education.
In an attempt to minimize student withdrawals prior to the completion of
their program, each of the Company's schools provides staff and other resources
to assist and advise its students regarding academic and financial matters, and
employment. Each of the schools also provides tutoring, and encourages help
sessions between individual students and instructors when students are
experiencing academic difficulties. The Company is obligated to provide refunds
to those students who withdraw from school prior to completion of the program
based on formulas required by applicable accrediting agencies or by state and
federal regulations. The refund formula in California, where the largest number
of the Company's schools are located, provides for pro rata refunds based on the
number of days a student is in attendance compared to the total number of days
in the program. In other states, the Company is generally allowed to retain a
greater percentage of tuition than that provided for by the California formula.
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<PAGE> 39
GRADUATE PLACEMENT
Each of the Company's schools employs placement personnel to provide
placement assistance services to students and graduates and to solicit
appropriate employment opportunities from employers. In addition, the Company's
schools utilize their internship programs to develop job opportunities and
referrals. During the course of each program, students receive instruction on
job-search and interviewing skills and have available reference materials and
assistance with the composition of resumes.
As of March 31, 1998, since their respective acquisition by the Company,
the Company's schools have graduated approximately 29,000 students, including
5,359 in fiscal 1998.
Based on data obtained by the Company from its students and their
employers, the Company believes that 77% of the students graduating from
programs offered by the Company's schools (other than the Hesser Schools) during
the prior two calendar years, who did not go on to further education, obtained
employment in a field related to their program of study as of June 30 or earlier
of the year following graduation. Hesser has not obtained similar data. However,
based on limited student surveys conducted by the Hesser Schools, the Company
believes that their placement rate is at least equal to the placement rate for
the Company's other schools.
FACULTY
Faculty members are hired locally in accordance with criteria established
by the school, applicable accreditation organizations, and applicable state
regulatory authorities. Members of a school's faculty are hired based on
academic background, prior educational experience, and prior work experience. A
significant portion of the Company's faculty were previously employed in fields
related to their area of instruction. The Company believes that such faculty
members provide a "real world" perspective to the students. At most of the
Company's schools, instructors are supervised by the executive director and an
academic dean. At the remaining schools, faculty members are supervised by lead
instructors with respect to particular areas of instruction, subject to review
by the executive director. As of March 31, 1998, the Company's schools employed
approximately 409 full-time faculty members (defined as those faculty members
spending at least 20 hours per week teaching classes at the Company's schools)
and 424 part-time faculty members.
ADMINISTRATION AND EMPLOYEES
Each of the Company's schools is managed by an executive director.
Additionally, the staff of each school includes a director of placement, a
financial aid administrator, and a director or assistant director of admissions.
Twelve schools also employ a director of education. In the other schools, lead
instructors are appointed to oversee instruction in their areas of expertise,
subject to the overall supervision of the executive director. As of March 31,
1998, the Company had approximately 1,624 full and part-time employees,
including 55 people employed at its home office in Roswell, Georgia and its
regional offices in Tampa, Florida, San Diego, California and Pittsburgh,
Pennsylvania, and 833 full and part-time faculty members. It also employed 151
students under the Federal Work-Study program. None of the Company's employees
is represented by a labor union or is subject to a collective bargaining
agreement. The Company has never experienced a work stoppage and believes that
its employee relations are satisfactory.
From its home office and regional offices, the Company provides each of its
schools with financial aid services, oversees regulatory compliance, assists in
the development and addition of programs to existing curricula, implements and
supports management information systems and provides accounting services and
financial resources. The Company's regional offices each have a regional manager
and staff who manage the individual executive directors and provide expertise in
the area of operations, curriculum development, and sales and marketing. These
centralized services relieve the local school management of tasks which the
Company believes can be performed most efficiently and cost effectively by a
centralized office. However, because of the Company's belief that each of the
markets served by its schools is unique, and that by offering programs
specifically targeted at each market it can maximize its long-term ability to
enroll and place students in an appropriate outcome, local school management has
the responsibility and authority to schedule the school's
36
<PAGE> 40
programs, hire its teachers, and originate new program development or propose
the addition of programs from the existing curricula library.
COMPETITION
The postsecondary education market is highly fragmented and competitive
with no private or public institution having a significant market share. The
Company's schools compete for students with not-for-profit public and private
colleges and proprietary institutions which offer degree and non-degree granting
programs. Such proprietary institutions include vocational and technical
training schools, continuing education programs and commercial training
programs. Competition among educational institutions is believed to be based on
the quality of the program, perceived reputation of the institution, the cost of
the program, and the employability of graduates. Public and private colleges may
offer programs similar to those offered by the Company's schools at lower
tuition costs due in part to government subsidies, foundation grants, tax
deductible contributions, or other financial resources not available to
proprietary institutions. Certain of the Company's competitors in both the
public and private sector have greater financial and other resources than the
Company.
FACILITIES
All of the Company's facilities are leased by the Company, except for the
facilities in Dayton, Ohio, Lincoln, Nebraska, Omaha, Nebraska, and Manchester,
New Hampshire, which are owned by the Company. The table below sets forth
certain information regarding these facilities as of May 31, 1998:
<TABLE>
<CAPTION>
APPROXIMATE
OFFICE/SCHOOL LOCATION SQUARE FOOTAGE
- ------------- -------- --------------
<S> <C> <C>
Home Office................................... Roswell, GA 8,850
Western Region Office......................... San Diego, CA 2,001
Eastern Region Office......................... Tampa, FL 1,581
WESTERN REGION SCHOOLS
Andon College................................. Modesto, CA 12,952
Andon College................................. Stockton, CA 13,241
California Academy of Merchandising, Art, and
Design...................................... Sacramento, CA 6,232
Lincoln School of Commerce.................... Lincoln, NE 58,490(1)
Long Medical Institute........................ Phoenix, AZ 11,423
Maric College of Medical Careers.............. San Diego, CA 39,092
Maric College of Medical Careers.............. Vista, CA 14,597
Modern Technology School of X-Ray............. North Hollywood, CA 17,153
Nebraska College of Business.................. Omaha, NE 19,035
EASTERN REGION SCHOOLS
Bauder College................................ Atlanta, GA 27,187
Career Centers of Texas....................... El Paso, TX 10,357
CHI Institute................................. Southampton, PA 43,000
CHI Institute................................. Broomall, PA 50,000
Dominion Business School...................... Harrisonburg, VA 9,403
Dominion Business School...................... Roanoke, VA 11,077
Hagerstown Business College................... Hagerstown, MD 23,682
ICM School of Business........................ Pittsburgh, PA 47,833
Ohio Institute of Photography and
Technology(2)............................... Dayton, OH 24,200
San Antonio College of Medical and Dental
Assistants.................................. San Antonio, TX 21,605
San Antonio College of Medical and Dental
Assistants.................................. McAllen, TX 14,900
</TABLE>
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<PAGE> 41
<TABLE>
<CAPTION>
APPROXIMATE
OFFICE/SCHOOL LOCATION SQUARE FOOTAGE
- ------------- -------- --------------
<S> <C> <C>
HESSER COLLEGE DIVISION
Hesser College................................ Manchester, NH 136,000(1)
Hesser College................................ Nashua, NH 17,905
Hesser College................................ Salem, NH 12,000
Hesser College................................ Portsmouth, NH 9,150
</TABLE>
- ---------------
(1) Total square footage includes dormitory facilities at these locations.
(2) The Dayton, Ohio facility was purchased in connection with the acquisition
of the school in fiscal 1994. It is owned subject to a mortgage with an
aggregate principal amount outstanding of $595,076 at March 31, 1998.
LITIGATION
North Hollywood Proceeding
In September 1995, the Company filed suit in the California Superior Court
in connection with its 1993 purchase of its North Hollywood, California school.
The suit alleged that the sellers made significant financial and operational
misrepresentations to the Company. The sellers denied the Company's allegations
and filed a Cross-Complaint against the Company seeking an indeterminate amount
of damages and alleging among other things, breach of contract and fraud. In
order to avoid protracted litigation and discovery, the Company decided it was
in its best interests to settle the lawsuit in April 1997. In connection with
the settlement, the Company agreed to pay immediately all amounts remaining on
the notes payable to sellers related to the financing of the acquisition and the
related payments for the covenants not to compete plus attorneys' fees. All
amounts were paid in April 1997.
San Diego Proceeding
On June 24, 1994, eight students enrolled in one of the Company's programs
at its schools in the San Diego, California area filed a class action lawsuit
against the Company in state court in San Diego, California. In substance, the
suit alleged that there were material misrepresentations made with respect to
the context of the program and the potential jobs available to the students who
graduated from it. The suit was certified as a class action in the fall of 1994.
Although the Company believes that it accurately described the course content
and the jobs to which the course could lead, in order to avoid further legal
expense and because of the uncertainty and risks inherent in any litigation, the
Company settled the lawsuit in March 1996. Pursuant to the terms of the
settlement, the Company paid $600,000 in March 1996 and $400,000 in April 1997.
Additionally, the Company agreed to make available tuition credits.
Approximately $115,000 was paid in April 1997 related to unused tuition credits.
The involved program was discontinued in the summer of 1994 for reasons
unrelated to the lawsuit.
In order to reduce the risk of any similar actions, the Company has
reviewed all of its catalogs and admission materials and, where the Company
believes appropriate, taken steps to further disclose to students in writing
that placement rates are based on multiple outcomes and the course is not
represented to lead to any one particular outcome, including the course title.
Southampton, PA Proceeding
Prior to the CHI Institute Acquisition by the Company, a jury verdict in
the amount of $102,000 was entered against the acquired company in an action
filed in the United States District Court for the Eastern District of
Pennsylvania. The action was based on alleged mental distress suffered by a
former student as a result of conduct of her fellow students and employees of
CHI Institute's Southampton location. The verdict has been appealed and is under
consideration. The Plaintiff subsequently filed a separate action in the Federal
Court seeking an award of attorneys' fees and costs of approximately $130,000.
The Company intends to pursue the appeal as well as vigorously defend against
any subsequent awards to Plaintiff of attorneys' fees and costs. Should the
appeal not be successful and should Plaintiff prevail in her action for fees and
costs, the
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<PAGE> 42
Company will be liable for payment of the total judgment amount plus Plaintiff's
accrued fees and costs pursuant to the terms of the acquisition.
Routine Proceedings
The Company is also a party to routine litigation incidental to its
business, including ordinary course employment litigation. Management does not
believe that the resolution of any or all of such routine litigation is likely
to have a material adverse effect on the Company's financial condition or
results of operations.
LICENSING, ACCREDITATION AND FINANCIAL AID REGULATION
TITLE IV STUDENT FINANCIAL ASSISTANCE PROGRAMS
A substantial majority of the students attending the Company's schools
finance all or a part of their education through grants or loans under Title IV
Programs. Each of the Company's schools participates in Title IV Programs either
as an individual institution or as an additional location of another school
which is the main campus of the institution. Cash receipts from Title IV funding
provide most of the Company's revenues (approximately 73% of cash receipts in
fiscal 1998). The maximum amount of a student's available Title IV program
assistance is generally based on the student's financial need. The Company
determines a student's financial need based on the national standard need
analysis system established by the HEA. If there is a difference between the
amount of Title IV program funding a student is entitled to receive (combined
with other outside assistance) and the student's tuition, the student is
responsible for the difference.
Students at the Company's schools participate in the following Title IV
Programs:
Pell and FSEOG Grants
The Federal Pell Grant Program provides for grants to help financially
needy undergraduate students meet the costs of their postsecondary education.
The amount of an eligible student's Pell grant award currently ranges from $400
to $2,700 annually, depending on the student's financial need, as determined by
a formula set by the HEA and the Regulations. The HEA guarantees that all of the
eligible students at a school receive Pell grants in the amounts to which they
are entitled. In fiscal 1998, Pell grants to students represented approximately
$13,161,000 or 22.1% of the Company's net revenues.
The Federal Supplemental Educational Opportunity Grant ("FSEOG") program
provides for awards to exceptionally needy undergraduate students. The amount of
an FSEOG award currently ranges from $100 to $4,000, depending on the student's
financial need and the availability of funds. The availability of federal
funding for FSEOG awards is restricted. The Company, or another outside source,
is required to make a 25% matching contribution for FSEOG program funds it
disburses. FSEOG awards made to the Company's students (net of matching
contributions) amounted to approximately $1,110,300 and represented
approximately 1.9% of the Company's net revenue in fiscal 1998.
Federal Family Education Loans and Federal Direct Student Loans
The Federal Family Education Loan ("FFEL") programs include the Federal
Stafford Loan Program ("Stafford Loan"), and the Federal PLUS Program ("PLUS")
pursuant to which private lenders make loans to enable a student or his or her
parents to pay the cost of attendance at a postsecondary institution.
The FFEL Program is administered through state and private nonprofit
guarantee agencies that insure loans directly, collect defaulted loans and
provide various services to lenders. The federal government provides interest
subsidies in some cases and reinsurance payments for borrower default, death,
disability, and bankruptcy.
The Federal Direct Student Loan Program ("FDSLP") is substantially the same
as the FFEL program in providing Stafford and PLUS loans. Under the FDSLP,
however, funds are provided directly by the federal government to the students,
and the loans are administered through the school. For schools electing to
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<PAGE> 43
participate, the FDSLP replaces the FFEL program, although loans are made on the
same general terms and conditions. The Company was one of the initial
participants in the FDSLP.
Stafford Loan Program
Students may borrow an aggregate of $2,625 for their first undergraduate
academic year and $3,500 for their second academic year under the FFEL Stafford
Loan or FDSLP Stafford Loan program. If the student qualifies for a subsidized
loan, based on financial need, the federal government pays interest on the loan
while the student is attending school and during certain grace and deferment
periods. If the student does not qualify for a subsidized Stafford Loan, the
interest accruing on the loans must be paid by the student. In addition,
independent students may qualify for an additional $4,000 a year in unsubsidized
Stafford loans.
By the end of fiscal 1998, all of the Company's existing schools except
Hesser College participated in the FDSLP program and in fiscal 1999, all of its
existing schools will participate exclusively in such programs. FDSLP and FFEL
Stafford loans amounted to approximately $30,927,000, or approximately 51.8% of
the Company's net revenues, in fiscal 1998.
PLUS Loan Program
Parents of dependent students may receive loans under the FFEL PLUS Program
or the FDSLP PLUS Program on an academic year basis. The maximum amount of any
PLUS loan is the total cost of a student's education for each relevant academic
year less other financial aid received by the student attributable to such year.
PLUS loans carry a maximum interest rate of 9%. These loans are repayable
commencing 60 days following the last disbursement made with respect to the
relevant academic year, with flexible payment schedules over a 10 year period.
The FFEL PLUS loans are made by lending institutions and guaranteed by the
federal government. The FDSLP PLUS Program provides PLUS loans by the federal
government on the same general terms as the FFEL PLUS loans. FDSLP PLUS loans
and FFEL PLUS loans amounted to approximately $4,703,000, or approximately 7.9%
of the Company's net revenues, in fiscal 1998.
Perkins Loans
Students who demonstrate financial need may borrow up to $3,000 per
academic year under the Federal Perkins Loan ("Perkins") program, subject to the
availability of Perkins funds at the institution. Repayment of loans under the
Perkins program is delayed until nine months after graduation or the termination
of studies. Funding for an institution's Perkins program is made by the
Department of Education into a fund maintained by the participating institution
for that purpose. The participating institution is required to make a matching
contribution into the fund of 25% of the total loans made from the fund and to
deposit all repayments into the fund.
In fiscal 1998, three of the Company's institutions liquidated their
Perkins programs and no longer participate. An institution will not receive
continued federal funding for Perkins loans if the institution's Cohort Default
Rate for Perkins loans exceeds 30%. One of the Company's institutions receiving
Perkins loan funding had a cohort default rate in excess of 30% in the last
fiscal year and is therefore ineligible to receive additional funds from the
government for the subsequent fiscal year. This institution will, however,
remain able to make Perkins loans to students through funds repaid by previous
borrowers. Perkins loans amounted to approximately $116,000 (or approximately
0.2%) of the Company's net revenues, in fiscal 1998.
Federal Work-Study
Pursuant to the Federal Work-Study ("FWS") program, federal funds are made
available to provide part-time employment to eligible students based on
financial need. The Company's schools provide a limited number of on-campus and
off-campus jobs to eligible students participating in the FWS program. During
the 1997-98 award year, the Company's schools employed less than 300 students
pursuant to this program. The Company, or another outside source, is required to
pay 25% of the gross earnings for each participant in the FWS program.
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<PAGE> 44
TITLE IV REGULATION
To obtain and maintain eligibility to participate in the programs described
above, the Company's institutions must comply with the rules and regulations set
forth in the HEA and the Regulations thereunder. An institution must obtain
certification by the Department of Education as an "eligible institution" to
participate in Title IV Programs. Certification as an "eligible institution"
requires, among other things, that the institution be authorized to offer its
educational programs by the state in which it operates. It must also be
accredited by an accrediting agency recognized by the Department of Education.
The HEA provides standards for institutional eligibility to participate in
the Title IV Programs. The standards are designed, among other things, to limit
dependence on Title IV funds, prevent institutions with unacceptable student
loan default rates from participating in Title IV student loan programs and, in
general, require institutions to satisfy certain criteria intended to protect
the integrity of the federal programs, including criteria regarding
administrative capability and financial responsibility.
Generally, an institution is considered separately for compliance with the
Regulations. Including the Fiscal 1998 Acquisitions, 20 of the Company's 24
schools are main campuses.
An institution's certification of eligibility to participate in the Title
IV Programs generally continues for four years. An institution must apply for a
renewal of its certification prior to its expiration, and must demonstrate
compliance with the eligibility requirements in its application.
Under certain circumstances, the Department of Education may provisionally
certify an institution to participate in Title IV programs. Provisional
certification may be imposed, when an institution is reapplying for
certification or when an institution undergoes a change in ownership resulting
in a change of control or at the discretion of the Secretary of Education, if
the institution (i) does not satisfy all the financial responsibility standards,
(ii) has a Cohort Default Rate of 25% or more in any single fiscal year of the
three most recent federal fiscal years for which data is available, and (iii)
under other circumstances determined by the Secretary of Education. Provisional
certification may last no longer than three years. Provisional certification
differs from certification in that a provisionally certified institution may be
terminated from eligibility to participate in the Title IV Programs without the
same opportunity for a hearing before an independent hearing officer and an
appeal to the Secretary of Education as is afforded to a fully certified
institution faced with termination, suspension, or limitation of eligibility
prior to expiration of its certification. Additionally, the Department of
Education may impose additional conditions on a provisionally certified
institution's eligibility to continue participating in the Title IV Programs.
Student Loan Defaults
The HEA provides that an institution may lose its eligibility to
participate in substantially all Title IV student loan programs if student
defaults on the repayment of federally guaranteed student loans exceed specified
Cohort Default Rates. Similar rules regarding default rates apply to Federal
Direct Loans made pursuant to the FDSLP, commencing with those loans entering
into repayment for the first time in the 12 month period ending September 30,
1995. Under existing regulations, these rates are based on the repayment history
of current and former students for loans provided under the Stafford Loan
program and the SLS program. A Cohort Default Rate is calculated for each
institution on a federal fiscal year basis by determining the rate at which the
institution's students entering repayment in that federal fiscal year default by
the end of the following federal fiscal year. Cohort Default Rates are subject
to revision by the Department of Education if new data becomes available and are
subject to appeal by institutions contesting the accuracy of the data or the
adequacy of the servicing of the loans by the loan servicer.
An institution whose Cohort Default Rate exceeds 40% for any single federal
fiscal year may have its eligibility to participate in all Title IV Programs
limited, suspended or terminated. If the Department of Education elects to take
such action due to a single-year Cohort Default Rate in excess of the regulatory
level, it must afford the institution a hearing before an independent Department
of Education hearing officer and an opportunity to appeal any decision to the
Secretary of Education before the limitation, suspension, or
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<PAGE> 45
termination may take effect. None of the Company's institutions has, or has had,
a Cohort Default Rate in excess of 40% in the three most recent years.
An institution whose Cohort Default Rate is 25% or more for the three most
recent federal fiscal years for which data is available is subject to immediate
loss of eligibility to participate in Title IV student loan programs, subject to
an appeal of the determination, which appeal only can be based on the Department
of Education having relied on erroneous data in calculating the Cohort Default
Rate, the inadequacy of the servicing of the loans by the lender or loan
servicer, or the existence of certain exceptional mitigating circumstances. The
loss of eligibility lasts for the duration of the fiscal year in which the
determination of ineligibility is made, plus the two succeeding fiscal years.
However, an institution remains eligible for Title IV student loan programs
while the appeal is pending.
None of the Company's institutions had a Cohort Default Rate of 25% or more
for the three consecutive federal fiscal years ended September 30, 1995.
Additionally, based on preliminary data released by the Department of Education
in May 1998, none of the Company's institutions had a Cohort Default Rate of 25%
or more for the three consecutive federal fiscal years ended September 30, 1996.
Accordingly, the Company believes that none of the institutions is currently
vulnerable to termination from Title IV eligibility based on three consecutive
years of excess default rates. However, the Company's institution located in
Omaha, Nebraska had a Cohort Default Rate of 25% or more for federal fiscal
1995, and, based on preliminary data, for Federal Fiscal 1996 (32.1% and 26.0%,
respectively). The Omaha, Nebraska institution had a Cohort Default Rate of
17.3% in federal fiscal 1994 and is not vulnerable to termination of Title IV
student loan program eligibility unless its rate for the federal fiscal year
ended September 30, 1997 is 25% or greater. Preliminary data for such federal
fiscal year is not expected to be available until 1999. The Company has plans to
challenge the Omaha, Nebraska preliminary Cohort Default Rate with the
Department of Education based upon what it believes to be erroneous data. The
Company's other institutions would have to have Cohort Default Rates of 25% or
more for consecutive three year periods ending September 30, 1999 and thereafter
in order to become vulnerable to termination of Title IV student loan program
eligibility.
The 85/15 Rule
The "85/15" rule, which applies to for-profit institutions such as those
owned and operated by the Company, became applicable to the Company's schools
beginning with the fiscal year ending March 31, 1994. It requires that no more
than 85% of the institution's applicable cash receipts may be derived from Title
IV Programs. An institution whose annual certified financial statement or Title
IV compliance audit report to the Department of Education does not reflect
compliance with the 85/15 rule is subject to immediate termination of its Title
IV eligibility. The Company believes that each of its institutions was in
compliance with the 85/15 rule with respect to fiscal years 1994 through 1998,
and has taken steps to help ensure on-going compliance with the 85/15 Rule.
Change of Control
Upon a change in ownership resulting in a change of control of the Company,
as defined in the HEA and Regulations, each of the Company's schools would lose
its eligibility to participate in Title IV Programs for an indeterminate period
of time during which it applies to regain eligibility. A change of control also
could have significant regulatory consequences for the Company at the state
level and could affect the accreditation of the Company's schools.
The Regulations provide that after a company becomes publicly traded, a
change of control occurs when a report on Form 8-K is required to be filed with
the Securities and Exchange Commission disclosing a change of control. The
Company will not be required to file such a report as a consequence of the
Offering. Most states and accrediting agencies have similar requirements, but
they do not provide a uniform definition of change of control. If the Company
were to lose its eligibility to participate in Title IV Programs for a
significant period of time pending an application to regain eligibility, or if
it were determined not to be eligible, its operations would be materially
adversely affected. The possible loss of Title IV eligibility resulting from a
42
<PAGE> 46
change of control may also discourage or impede a tender offer, proxy contest or
other similar transaction involving control of the Company.
Administrative Capability
The Regulations set certain standards of "administrative capability" which
a school must satisfy to participate in the Title IV Programs. These criteria
require, among other things, that the school comply with all applicable Title IV
Regulations, have capable and sufficient personnel to administer the Title IV
Programs, have acceptable methods of defining and measuring the satisfactory
academic progress of its students, provide financial aid counseling to its
students, timely submit all reports and financial statements required by the
Regulations, and that the school's Cohort Default Rate not equal or exceed 25%
for any single fiscal year.
Failure to satisfy any of the criteria may lead the Department of Education
to determine that the school lacks the requisite administrative capability and
may subject the school to provisional certification when it seeks to renew its
certification as an eligible institution, or may subject it to a fine or to a
proceeding for the limitation, suspension, or termination of its participation
in Title IV Programs. Proceedings to fine, limit, suspend, or terminate an
institution are conducted before an independent hearing officer of the
Department of Education and are subject to appeal to the Secretary of Education,
prior to any sanction taking effect. Thereafter, judicial review may be sought
in the federal courts pursuant to the federal Administrative Procedures Act.
Eight of the Company's schools are provisionally certified to participate
in the Title IV Programs. The conditions imposed on them as a result of such
provisional certification include reporting requirements relating to each
school. The material violation of such requirements, or any of the requirements
of the HEA or the Regulations, would subject the school to a loss of its
provisional eligibility.
Financial Responsibility Requirements
The HEA and the Regulations prescribe specific standards of financial
responsibility which the Department of Education must consider with respect to
qualification for participation in the Title IV Programs ("Financial
Responsibility Standards"). These standards are generally applied on an
individual institutional basis. However, there can be no assurance that the
Department of Education will not apply such standards on a consolidated basis.
If the Department of Education determines that any of the Company's institutions
fails to satisfy the Financial Responsibility Standards, the Department may
require that such institution post an irrevocable letter of credit (a "Financial
Responsibility Bond") in favor of the Secretary of Education in an amount equal
to not less than one-half of Title IV Program funds received by the school
during the last complete fiscal year for which figures are available or, in the
Department of Education's discretion, require some other less onerous
demonstration of financial responsibility (a "Demonstration of Financial
Responsibility"). One-half of Title IV funds received by the Company's
individual institutions in the its most recent fiscal year ranged from
approximately $359,000 to $4,964,000 and one-half of the total Title IV funds
received by all the Company's institutions in its most recent fiscal year was
$39,173,000. Pursuant to the Regulations, the Company submits annual audited
consolidated financial statements and unaudited consolidating financial
statements to the Department of Education.
Among the principal Financial Responsibility Standards which an institution
currently must satisfy are: (i) an "acid test" ratio (defined as the ratio of
the total of cash, cash equivalents and current accounts receivable to current
liabilities) of at least 1-to-1 at the end of the most recent fiscal year, (ii)
a positive tangible net worth, as defined by the applicable Regulations, at the
end of the most recent fiscal year (the "Tangible Net Worth Standard") and (iii)
net operating results for the two most recent fiscal years, excluding
extraordinary losses or losses from discontinued operations, which do not show
an aggregate net loss in excess of 10% of tangible net worth from that at the
beginning of the two year period (the "Net Operating Results Test"). Except for
the Company's schools located in Roanoke, Virginia (the "Roanoke School") and
Harrisonburg, Virginia (the "Harrisonburg School") which did not meet the Net
Operating Results Test for fiscal 1998 on an individual basis, the Company, on a
consolidated basis, and each of the institutions on an individual basis, were in
compliance with all of the Financial Responsibility Standards for fiscal 1998.
43
<PAGE> 47
The Roanoke and Harrisonburg Schools accounted for 2.1% and 1.5%
respectively of the Company's total net revenues in fiscal 1998. Its failure to
comply with the Net Operating Results Test may result in the Department of
Education requiring the posting of a Financial Responsibility Bond, although no
such bond was required as a result of non-compliance in fiscal 1997, or
otherwise request a Demonstration of Financial Responsibility. Based on fiscal
1998 Title IV funding for the Roanoke and Harrisonburg Schools, the maximum
amount of such bond would be $500,000 and $359,000, respectively, which would be
funded from the Company's bank facility.
The Company had a positive tangible net worth on a consolidated basis of
$3,177,701 at March 31, 1998, and $16,666,964 at March 31, 1997. The decline in
positive tangible net worth from fiscal 1997 to fiscal 1998 is attributable to
the increase in goodwill resulting from the Fiscal 1998 Acquisitions. The
positive tangible net worth at March 31, 1997 was primarily the result of the
receipt of the net proceeds of the IPO. The Company had a negative tangible net
worth on a consolidated basis for each of the Company's three fiscal years
ending March 31, 1996, 1995 and 1994, primarily because a large portion of the
Company's assets consists of goodwill and other intangibles related to school
acquisitions. None of the Company's institutions had a negative tangible net
worth on an individual school basis as of March 31, 1998. The Company has filed
audited consolidated financial statements with the Department of Education for
each of the last three fiscal years in the period ended March 31, 1997, along
with unaudited consolidating statements. There also can be no assurance that the
Company's acquisition program will not again result in the Company having a
negative tangible net worth, and, no assurance can be given that the Department
of Education may not make a request for the Company to post a Financial
Responsibility Bond in such circumstances or otherwise make a request for a
Demonstration of Financial Responsibility based on its consolidated negative
tangible net worth. If such a request were to be made, there is no assurance
that the Company (i) would be successful in persuading the Department of
Education or a court that such a request is contrary to law, (ii) could secure
the funds to post the Financial Responsibility Bond which the Department of
Education may request, or (iii) that the Company would be successful in
negotiating a more favorable Demonstration of Financial Responsibility. If the
Company were unable to post a Financial Responsibility Bond or make a
satisfactory Demonstration of Financial Responsibility, it could become
ineligible to receive Title IV funding in some or all of its schools.
Ineligibility for Title IV funding would have an immediate material adverse
effect on the Company's operations.
Other than the Roanoke and Harrisonburg Schools, none of the Company's
schools had operating losses in fiscal 1997 or fiscal 1998 which, in the
aggregate, exceeded 10% of the tangible net worth at the beginning of the
period. Therefore, only the Roanoke and Harrisonburg Schools, which represented
2.1% and 1.5%, respectively, of the Company's total net revenues for the year
ended March 31, 1998, is in violation of the Financial Responsibility Standard
relating to operating losses for the year ended March 31, 1998.
In November 1997, the Department of Education published new regulations
regarding financial responsibility which are effective on July 1, 1998. The new
regulations will apply to the Company's fiscal years commencing April 1, 1999
and thereafter. The regulations provide a transition year alternative which will
permit the Company to have its institutions' financial responsibility for the
fiscal year ended March 31, 1999 measured on the basis of either the new
regulations or the current regulations, whichever are more favorable. The new
standards replace the Acid Test Ratio, the Tangible Net Worth Standard and the
Net Operating Results Test with three different ratios: an equity ratio, a
primary reserve ratio and a net income ratio. The equity ratio measures an
institution's capital resources, ability to borrow and financial viability. The
primary reserve ratio measures an institution's ability to support current
operations from expendable resources. The net income ratio measures the ability
to operate at a profit. The results of each ratio are assigned a strength factor
on a scale from negative 1.0 to positive 3.0, with negative 1.0 reflecting
financial weakness and 3.0 reflecting financial strength. An institution's
strength factors are then weighted based on an assigned weighting percentage for
each ratio. The weighted scores for the three ratios are then added together to
produce a composite score for the institution. The composite score must be at
least 1.5 for the institution to be deemed financially responsible by the
Department of Education without the need for further financial monitoring. If
the institution's composite score is less than 1.5, but equal to or greater than
1.0, the institution may continue in the Title IV Programs for a maximum period
of three (3) years, subject to more rigorous financial aid
44
<PAGE> 48
disbursement and financial monitoring requirements of the Department of
Education. Based on the Company's interpretation of the application of these new
standards to the Company's financial statements for the fiscal year ended March
31, 1998, the Company's calculations result in a composite score of 1.4 on a
consolidated basis, with each individual institution included in the
consolidating statements having a composite score greater than 1.5. After giving
effect to the receipt of the net proceeds of this Offering, the composite score
of the Company on a pro forma consolidated basis would be unchanged as of March
31, 1998.
Regulatory Compliance Generally. The HEA and the Regulations impose
numerous general and program specific requirements with which institutions
participating in the Title IV Programs must comply, including but not limited to
requirements in the areas of institutional eligibility to participate in Title
IV Programs; student eligibility to receive Title IV funds; administrative
capability; financial responsibility; and the packaging, disbursement, and
management of Title IV funds. The Department of Education monitors institutional
compliance with the Title IV through annual financial statements and audits of
institutional compliance with Title IV requirements, both of which must be
prepared by an independent auditor and timely submitted to the Department of
Education. The Department of Education also periodically monitors compliance
through on-site program reviews and through on-site audits conducted by the
Office of Inspector General, U.S. Department of Education.
An institution's failure to comply with any of the Title IV requirements in
the HEA and the Regulations could result in adverse action by the Department of
Education against the institution, including the limitation, suspension or
termination of an institution's Title IV eligibility; the imposition of fines;
and/or the imposition of liabilities by the Department of Education upon the
institution. The HEA and the Regulations provide the institution with the right
to appeal any such action to an administrative hearing official and to the
Secretary of Education. The Department of Education could also transfer the
institution from the advance system of payment to the reimbursement method of
payment whereby institutions must demonstrate to the Department that each
student to receive Title IV funds meets all applicable Title IV requirements and
that the amount to be received is correctly calculated as a precondition to the
Department paying an institution for the disbursement of Title IV funds to its
students.
45
<PAGE> 49
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table provides information regarding the executive officers
and directors of the Company as of the date of this Prospectus. Biographical
information for each of the persons set forth in the table is presented below.
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
Gary D. Kerber.................... 59 Chairman, President, Chief Executive Officer and a Director
Vince Pisano...................... 44 Vice President and Chief Financial Officer
Gerald T. Kosentos................ 46 Vice President of Operations
Elaine Neely-Eacona............... 45 Vice President of Financial Aid
Ellen L. Bernhardt................ 47 Director of Operations -- Eastern Region
Linwood W. Galeucia............... 53 President -- Hesser College Division
Craig A. Wood..................... 49 Director of Operations -- Western Region
K. Terry Guthrie.................. 55 Director of Accreditation
A. William Benham, Jr. ........... 36 Controller
Robert J. Cresci.................. 54 Director
Carl S. Hutman.................... 64 Director
Richard E. Kroon.................. 55 Director
W. Patrick Ortale, III............ 44 Director
</TABLE>
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.
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 parent
company 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
46
<PAGE> 50
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, 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.
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.
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.
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.
W. PATRICK ORTALE, III, age 44, has been a Director of the Company since
1988. Since 1985, Mr. Ortale has been a general partner of Lawrence Venture
Partners, the general partner of Lawrence, Tyrrell, Ortale & Smith, a private
venture capital limited partnership, which is a principal stockholder of the
Company. Since 1990, 1994 and 1996, respectively, Mr. Ortale has been a general
partner of the general partnerships which control Lawrence, Tyrrell, Ortale &
Smith II, L.P., Richland Ventures, L.P. and Richland Ventures II, L.P., private
venture capital limited partnerships.
BOARD OF DIRECTORS
Pursuant to the Restated Certificate of Incorporation, as amended (the
"Certificate of Incorporation"), and the Bylaws (the "Bylaws") of the Company,
the Company's Board of Directors consists of five directors or such greater or
lesser number as may be fixed from time to time by a majority of the total
number of directors which the Company would have if there were no vacancies on
the Companies Board of Directors.
The Board has a standing Audit Committee and a standing Compensation
Committee. It does not have a Nominating Committee.
Messrs. Cresci (Chairman) and Hutman comprise the Audit Committee of the
Board of Directors, which is responsible for policies, procedures and other
matters relating to accounting, internal financial controls and financial
reporting, including the engagement of independent auditors and the planning,
scope, time and cost of any audit and any other services they may be asked to
perform, and also review with the auditors their report on the financial
statements following completion of each such audit. In addition, the Audit
Committee is responsible for policies, procedures and other matters relating to
business integrity, ethics and conflicts of interests.
47
<PAGE> 51
Messrs. Kroon (Chairman), Cresci and Ortale comprise the Compensation
Committee of the Board of Directors, which is responsible for policies,
procedures and other matters relating to employee benefit and compensation
plans, including compensation of the executive officers as a group and the chief
executive officer individually. The Compensation Committee is also responsible
for administering and making awards under the stock-based compensation plans,
procedures and other matters relating to management development and for
reviewing, monitoring and recommending (for approval by the Company's full Board
of Directors) plans with respect to succession of the chief executive officer.
COMPENSATION OF THE BOARD OF DIRECTORS
All directors hold office until the next annual meeting of shareholders and
the election and qualification of their successors. Directors who are not
employees and do not otherwise receive compensation from the Company are
entitled to an annual directors' fee of $6,000 and directors' fees of $1,000 for
each Board meeting attended and $500 for each Committee meeting attended in
addition to the reimbursement of reasonable expenses incurred in connection with
their activities as directors of the Company. Directors who are also employees
of the Company receive no compensation for serving on the Board of Directors.
Non-Employee Directors are also entitled to receive options to purchase the
Company's Common Stock. See "Non-Employee Directors' Stock Option Plan."
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
On June 20, 1996, the Company adopted, and its stockholders approved, a
Non-Employee Director Stock Option Plan (the "Directors' Plan") to attract and
retain the services of non-employee members of the Board of Directors and to
provide them with increased motivation and incentive to exert their best efforts
on behalf of the Company by enlarging their personal stake in the Company. The
maximum number of shares of Common Stock with respect to which options may be
granted under the Directors' Plan is 200,000 shares. As of May 31, 1998, options
covering 88,000 shares were available for future grant under the Directors'
Plan.
Each member of the Board of Directors of the Company who otherwise (i) is
not currently an employee of the Company, (ii) is not a former employee still
receiving compensation for prior services (other than benefits under a
tax-qualified pension plan), and (iii) is not currently receiving remuneration
from the Company in any capacity other than as a director shall be eligible for
the grant of stock options under the Directors' Plan. Currently, all directors
other than Mr. Kerber are eligible to participate in the Directors' Plan.
On the date the Directors' Plan was adopted, each of the four existing
non-employee directors were each granted, contingent upon completion of the IPO,
options to purchase 25,000 shares of Common Stock of the Company at the IPO
price, or $10.00 per share. These options vested immediately upon consummation
of the IPO. Upon the election of any new member to the Board of Directors, such
member will be granted an option to purchase 25,000 shares of Common Stock at
the fair market value at date of grant, vesting in five equal annual
installments beginning on the first anniversary of the date of grant. Beginning
with the next annual meeting of the stockholders of the Company and provided
that a sufficient number of shares remain available under the Directors' Plan,
each year immediately following the date of the annual meeting of the Company
there automatically will be granted to each non-employee director who is then
serving on the Board an option to purchase 3,000 shares of the Common Stock of
the Company, which options will be immediately vested. The options to be granted
under the Directors' Plan shall be nonqualified stock options (stock options
which do not constitute "incentive stock options" within the meaning of Section
422A of the Plan).
48
<PAGE> 52
COMPENSATION OF EXECUTIVE OFFICERS
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 next four highest paid
executive officers of the Company (the "Named Executive Officers") who earned
compensation greater than $100,000 in such year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION(1) ------------------
------------------------------------------- SECURITIES
FISCAL OTHER ANNUAL UNDERLYING OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (NUMBER OF SHARES) COMPENSATION
- --------------------------- ------ -------- -------- ------------ ------------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Gary D. Kerber.............. 1998 $195,909 $120,828 $ -- 20,000 $ 2,400(2)
Chairman, President 1997 188,660 148,000 -- 134,260 2,400(2)
and Chief Executive 1996 187,124 155,606 -- 16,667 2,400(2)
Officer
Vince Pisano................ 1998 147,197 90,784 -- 20,000 --
Vice President of 1997 140,247 111,200 10,000(3) 100,740 --
Finance and Chief 1996 140,595 116,915 -- 13,333 --
Financial Officer
Gerald T. Kosentos.......... 1998 128,269 38,388 -- 78,833 --
Vice President of 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 1997 116,048 -- -- 7,500 --
Product 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.
49
<PAGE> 53
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
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE APPRECIATION
SECURITIES OPTIONS EXERCISE OR FOR OPTION TERM(2)
UNDERLYING GRANTED TO BASE PRICE EXPIRATION ---------------------------
NAME OPTIONS EMPLOYEES ($/SHARE) DATE(1) 5% 10%
- ---- ---------- ----------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gary D. Kerber.................. 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.
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>
VALUE NUMBER OF SECURITIES VALUE OF UNEXERCISED
REALIZED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
NUMBER OF OF SHARES OPTIONS AT MARCH 31, 1998 AT MARCH 31, 1998(1)
SHARES ACQUIRED ON --------------------------- ---------------------------
NAME ACQUIRED ON EXERCISE EXERCISE 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.
50
<PAGE> 54
1996 PERFORMANCE INCENTIVE PLAN
In June 1996, the Board of Directors of the Company (the "Board")
authorized, and the stockholders of the Company approved, the 1996 Stock
Incentive Plan for executive and other employees of the Company, including a
limited number of outside consultants and advisors, effective as of the
completion of the IPO (the "Stock Option Plan"). Under the Stock Option Plan,
employees, outside consultants and advisors (the "Participants") of the Company
(as defined in the Stock Option Plan) may receive awards of stock options (both
Nonqualified Options and Incentive Options, as defined in the Stock Option
Plan), stock appreciation rights or restricted stock. A maximum of 961,666
shares of Common Stock are subject to the Stock Option Plan. As of May 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, 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 May 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
51
<PAGE> 55
time of exercise. This amount may be payable in cash, shares of Common Stock or
a promissory note from the Participant, or any combination thereof, as
determined in the discretion of the Administrator.
The exercise period for stock options and stock appreciation rights will be
determined by the Administrator, but no stock option or stock appreciation right
may be exercisable prior to the expiration of six months from the date of grant
or after 10 years from the date of grant, subject to certain conditions and
limitations.
Incentive options and related stock appreciation rights are not
transferable by a Participant other than by will or by the laws of descent and
distribution, and incentive options and related stock appreciation rights are
exercisable, during the lifetime of the Participant, only by the Participant.
If the employment or consultancy of a Participant by the Company
terminates, the Administrator may, in its discretion, permit the exercise of
stock options and stock appreciation rights granted to such Participant (i) for
a period not to exceed three months following termination of employment with
respect to Incentive Options or related stock appreciation rights if termination
of employment is not due to death or permanent disability of the Participant,
(ii) for a period not to exceed one year following termination of employment
with respect to Incentive Options or related stock appreciation rights if
termination of employment is due to the death or permanent disability of the
Participant, and (iii) for a period not to extend beyond the expiration date
with respect to Nonqualified Options or related or independently granted stock
appreciation rights.
Restricted Stock Awards. Subject to the terms of the Stock Option Plan,
the Administrator may award shares of restricted stock to Participants. All
shares of restricted stock will be subject to the following terms and
conditions, among others: (i) at the time of each award of restricted shares, a
restricted period of no less than six months and no greater than five years,
will be established for the shares. The restricted period may differ among
Participants and may have different expiration dates with respect to portions of
shares covered by the same award; (ii) shares of restricted stock awarded to
Participants may not be sold, assigned, transferred, pledged, hypothecated or
otherwise encumbered during the restricted period applicable to such shares.
Except for such restrictions on transfer, a Participant will have all of the
rights of a shareholder in respect to restricted shares awarded to him or her
including the right to receive any dividends on, and the right to vote, the
shares; and (iii) if a Participant ceases to be an employee or consultant of the
Company for any reason other than death or permanent disability, all shares
theretofore awarded to the Participant which are still subject to the
restrictions imposed by provision (ii) above will upon such termination of
employment or consultancy be forfeited and transferred back to the Company. If
such employment or consultancy is terminated by action of the Company without
cause or by agreement between the Company and the Participant, the Administrator
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.
52
<PAGE> 56
FEDERAL INCOME TAX CONSEQUENCES OF STOCK INCENTIVE PLANS
The Company understands that, under current federal income tax rules,
awards under the 1996 Performance Incentive Plan and the Non-Employee Director
Plan have the consequences described below:
The rules governing the tax treatment of stock options, stock appreciation
rights, restricted stock and shares acquired upon the exercise of stock options
and stock appreciation rights are technical. Therefore, the description of
federal income tax consequences set forth below is necessarily general in nature
and does not purport to be complete. Moreover, statutory provisions are subject
to change, as are their interpretations, and their application may vary in
individual circumstances. Finally, the tax consequences under applicable state
and local income tax laws may not be the same as under the federal income tax
laws.
Incentive Options. Incentive Options granted pursuant to the Plan are
intended to qualify as "Incentive Options" within the meaning of Section 422 of
the Code. If the Participant makes no disposition of the shares acquired
pursuant to exercise of an Incentive Option within one year after the transfer
of shares to such Participant and within two years from grant of the option,
such Participant will realize no taxable income as a result of the grant or
exercise of such option, and any gain or loss that is subsequently realized may
be treated as long-term capital gain or loss, as the case may be. Under these
circumstances, the Company will not be entitled to a deduction for federal
income tax purposes with respect to either the issuance of such Incentive
Options or the transfer of shares upon their exercise. However, the exercise of
an Incentive Option is an item of tax preference and a Participant may have
alternative minimum tax liability.
If shares acquired upon exercise of Incentive Options are disposed of prior
to the expiration of the above time periods, the Participant will recognize
ordinary income in the year in which the disqualifying disposition occurs, the
amount of which will generally be the lesser of (i) the excess of the market
value of the shares on the date of exercise over the option price, or (ii) the
gain recognized on such disposition. Such amount will ordinarily be deductible
by the Company for federal income tax purposes in the same year, provided that
the amount constitutes reasonable compensation. In addition, the excess, if any,
of the amount realized on a disqualifying disposition over the market value of
the shares on the date of exercise will be treated as capital gain.
Nonqualified Options. A Participant who acquires shares by exercise of a
Nonqualified Option generally realizes as taxable ordinary income, at the time
of exercise, the difference between the exercise price and the fair market value
of the shares on the date of exercise. Such amount will ordinarily be deductible
by the Company in the same year, provided that the amount constitutes reasonable
compensation. Subsequent appreciation or decline in the value of the shares on
the sale or other disposition of the shares will generally be treated as capital
gain or loss.
Stock Appreciation Rights. A Participant generally will recognize income
upon the exercise of a stock appreciation right in an amount equal to the amount
of cash received and the fair market value of any shares received at the time of
exercise, plus the amount of any taxes 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
53
<PAGE> 57
appropriately reduce the amount of stock or cash to be delivered or paid to the
Participant or the Participant must pay such amount to the Company to reimburse
the Company for such payment. The Committee may permit a Participant to satisfy
such withholding obligations by electing to reduce the number of shares of
Common Stock delivered or deliverable to the Participant upon exercise of a
stock option or stock appreciation right or award of restricted stock or by
electing to tender an appropriate number of shares of Common Stock back to the
Company subsequent to exercise of a stock option or stock appreciation right or
award of restricted stock (with such restrictions as the Committee may adopt).
EMPLOYMENT AGREEMENTS
On December 31, 1992, the Company entered into an Employment Agreement with
Gary D. Kerber as President and Chief Executive Officer. The Employment
Agreement provides for a base salary of $160,000 per year as of March 21, 1992,
which salary is reviewed on an annual basis by the Board of Directors of the
Company prior to the end of each fiscal year. The Employment Agreement also
provides that Mr. Kerber will prepare, on an annual basis for each fiscal year,
an appropriate incentive compensation plan for himself and other executive
officers of the Company, which plan may be implemented only with the consent of
the Board of Directors of the Company. In reviewing such plans, the Compensation
Committee of the Board of Directors has considered the appropriateness of the
goals presented in light of the Company's past performance and prospects and the
reasonableness of the projected compensation in light of the Company's size and
potential income levels. The term of the Employment Agreement continues until
terminated by either Mr. Kerber or the Company, with or without cause; provided,
however, that if the Company terminates the Employment Agreement without cause,
the Company will be obligated to pay Mr. Kerber termination pay equal to the
greater of $160,000 or an amount based upon a specified fraction of Mr. Kerber's
most recent annual fiscal year base compensation (net of incentive or bonus
compensation), as determined under the Employment Agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Richard E. Kroon, Robert J.
Cresci and W. Patrick Ortale, III. No member of the Compensation Committee was
at any time during fiscal 1996, or formerly, an officer or employee of the
Company or any subsidiary of the Company.
In July 1991, the Company entered into a Securities Purchase Agreement,
dated July 21, 1991, as amended (the "Securities Purchase Agreement"), among the
Company and the Pecks Managed Entities, pursuant to which the Delaware Plan, the
ICI Trust and the Zeneca Trust loaned $2,900,000, $603,000 and $497,000,
respectively, to the Company on a senior subordinated basis in exchange for 13%
Senior Subordinated Notes (the "Notes") originally due July 23, 1996 issued by
the Company in the aggregate principal face amount of $4,000,000 and warrants
(the "Warrants") to purchase an aggregate of 1,333,333 shares of Common Stock at
a purchase price equal to the lesser of (i) $3.00 per share or (ii) 70% of the
cash purchase price per share of Common Stock in an initial public offering
without regard to deductions for underwriting discounts and commissions. In May
1996, the terms of the Warrants were amended to provide for a cashless exercise
based on the initial public offering price in the event of a public offering of
the Company's Common Stock. In return, the holders agreed to exercise the
Warrants simultaneously with the commencement of the initial public offering and
to terminate certain "put" provisions originally contained in the Warrants. The
modifications were approved by all of the members of the Company's Board of
Directors, with Mr. Cresci abstaining. At completion of the IPO, the Pecks
Managed Entities beneficially 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 1995, 1996
and 1997, the Company incurred interest expense on the Notes to the Delaware
Plan in the amounts of $253,610, $364,941 and $149,834, respectively, to the ICI
Trust in the amounts of $52,733,
54
<PAGE> 58
$75,883 and $31,155, respectively, and to the Zeneca Trust in the amounts of
$43,464, $62,543 and $25,678, respectively. Upon consummation of the IPO, the
Company utilized $2,700,000 of the proceeds of this Offering to repay the entire
outstanding amount of principal and accrued interest on the Notes.
In connection with the transactions contemplated by the Securities Purchase
Agreement, the Company, the Pecks Managed Entities, the Sprout Group, LTOS and
Gary D. Kerber entered into a Coinvestors Agreement (the "Coinvestors
Agreement"), dated July 23, 1991, pursuant to which the parties thereto agreed
to vote their respective shares of Common Stock of the Company for the election
to the Board of Directors of the Company of one person designated by the Pecks
Managed Entities, so long as the Pecks Managed Entities collectively held or
beneficially owned (i) $750,000 aggregate principal amount of Notes or (ii)
250,000 shares of Common Stock issued or issuable upon exercise of the Warrants.
In addition, pursuant to a Registration Rights Agreement, dated as of July
23, 1991, as amended (the "Registration Rights Agreement"), the Pecks Managed
Entities were granted certain demand registration rights with respect to shares
of Common Stock issued or issuable to them upon exercise of the Warrants.
Pursuant thereto, upon request of Pecks Managed Entities holding at least 50%
(by voting power) of the Warrants (assuming conversion of the Warrants into
shares of Common Stock), the Company shall use its best efforts to effect the
registration under the Securities Act of Common Stock at such holders' request.
The Company is only required to undertake two such registrations. In the event
of a registration initiated by the Company or by any other stockholder of the
Company holding registration rights, the Company has granted certain
"piggy-back" registration rights to the Pecks Managed Entities and must notify
the Pecks Managed Entities of such registration and permit the inclusion of any
of the Pecks Managed Entities' Common Stock in any such registration if so
requested. The number of shares of Common Stock held by the Pecks Managed
Entities that must be included in a registration will be determined by the
managing underwriter selected by the Company, and Pecks Managed Entities'
participation will be subject to a priority cut-back as provided for in the
Registration Rights Agreement. The Company has agreed to pay all expenses in
connection with such registrations. All of the shares owned by the Pecks Managed
Entities are included in this Offering.
See "Certain Transactions."
55
<PAGE> 59
CERTAIN TRANSACTIONS
For information regarding transactions among the Company, the Pecks Managed
Entities and Robert J. Cresci, who is a director of the Company, see
"Compensation Committee Interlocks and Insider Participation."
In March 1995, the Company entered into a Loan Agreement with Sirrom
Capital Corporation ("Sirrom"), pursuant to which Sirrom loaned $2,200,000 to
the Company, less expenses of the transaction and a processing fee of $44,000.
Upon completion of the IPO, Sirrom owned less than one percent of the Company's
outstanding Common Stock. The loan was evidenced by a secured promissory note
(the "Secured Note") which matured on March 31, 2000, bore interest at a rate of
14.0% per annum on the unpaid principal amount, and was secured by a blanket
security interest in the Company's assets. In fiscal 1996 and 1997, the Company
incurred interest expense on the Secured Note of approximately $309,771 and
$179,667, respectively. The Secured Note was paid in full with a portion of the
net proceeds of the IPO.
In connection with the issuance of the Secured Note, the Company issued
warrants (the "Sirrom Warrants") to Sirrom to acquire up to 141,667 shares of
Common Stock, for a purchase price of $.006 per share. The Sirrom Warrants were
exercised in connection with the IPO for shares of Common Stock. Pursuant to the
Loan Agreement, Sirrom was also made a party to the Registration Rights
Agreement, and was granted rights pari passu with the Pecks Managed Entities for
purposes of determining its registration rights under such Registration Rights
Agreement. Sirrom waived its registration rights with regard to the IPO.
In July 1993, the Company acquired the Ohio Institute of Photography and
Technology, which was previously partially-owned by K. Terry Guthrie, who is an
executive officer of the Company. The purchase price for the school was
$1,236,000, including amounts paid for covenants not to compete and real estate.
Mr. Guthrie received cash of $132,127. In addition, Mr. Guthrie and the Company
entered into a three-year consulting agreement pursuant to which Mr. Guthrie
received a consulting fee of $23,807 per year through July 1996. Mr. Guthrie
also entered into a noncompetition agreement pursuant to which Mr. Guthrie
receives $35,000 per year for a five-year term through July 1998. Pursuant to
the consulting agreement and the noncompetition agreement, the Company paid Mr.
Guthrie $58,806, $46,903 and $35,000 in fiscal years 1996, 1997 and 1998,
respectively.
In September 1991, the Company made a loan to Vince Pisano and Mr. Pisano's
wife, Gail Pisano, in the amount of $75,000 pursuant to an Employee Loan
Agreement, as amended. The loan did not bear interest and was to be repaid upon
the earlier of December 31, 1996 or certain other events. The loan was secured
by certain real property owned by Mr. Pisano. If the loan was paid at or prior
to its stated maturity, $10,000 of the loan would be cancelled. Mr. Pisano is a
Vice President and Chief Financial Officer of the Company. The Company and Mr.
Pisano entered into an agreement which permitted Mr. Pisano to repay the loan on
its maturity date with Common Stock of the Company owned by Mr. Pisano which
stock was valued at its fair market value on the date of repayment. Pursuant to
this agreement, during fiscal 1997, Mr. Pisano repaid his loan from the Company
in full by transfer of 5,652 shares of Common Stock to the Company.
In connection with the Company's acquisition of its three schools in
Virginia, its school in North Hollywood, California, its three schools in El
Paso and San Antonio, Texas and its school in Hagerstown, Maryland, the Company
pledged the stock of its acquiring subsidiaries to secure related indebtedness.
As of March 31, 1998, the principal amount outstanding of such indebtedness was
$1,292,500.
In connection with the acquisitions of two CHI Institute Schools and four
Hesser College Schools, the Company also pledged the stock of the acquiring
subsidiaries to secure indebtedness. As of the date of March 31, 1998, the
principal amount of such indebtedness was $8,750,000 and $11,000,000 for CHI
Institute and Hesser College, respectively.
On March 31, 1997, the Company acquired the Nebraska Schools by merging a
privately held corporation, which previously operated the schools, into a
wholly-owned subsidiary of the Company in exchange for 761,263 shares (the
"Merger Shares") of the Company's common stock. The Company has filed a
registration statement (SEC File No. 333-33025) pursuant to the Securities Act
of 1933 (the "Securities Act") with respect to the Merger Shares which was
declared effective by the Commission on February 27,
56
<PAGE> 60
1998, and as of the date of this Prospectus believes that approximately 291,349
of the Merger Shares, including 19,050 shares held in escrow, remain unsold.
Provided this registration statement continues to be effective, such
registration statement will enable the holders of the Merger Shares to sell
their shares in the public market.
On February 14, 1998, the Company acquired the CHI Institute Schools. As
part of the purchase price, 151,900 shares of the Company's Common Stock were
issued to the two major shareholders. The Company filed a registration statement
on Form S-3 (SEC File No. 333-47775) on March 11, 1998 with respect to such
shares. This registration statement was declared effective by the SEC on April
3, 1998, and provided it continues to be effective, it will enable the holders
of such shares to sell their shares in the public market. See
"Business -- Fiscal 1998 Acquisitions -- The CHI Institute Acquisition."
On March 13, 1998, the Company acquired the four Hesser Schools and the
real estate in Manchester, New Hampshire, which is the main campus. As part of
the purchase price, 202,532 shares of the Company's Common Stock were issued to
the two shareholders of Hesser. The Company filed a registration statement on
Form S-3 (SEC File No. 333-52451) on May 12, 1998 with respect to such shares.
This registration statement was declared effective by the Commission on May 19,
1998, and provided it continues to be effective, it will enable the holders of
the such shares to sell their shares in the public market. See "Business --
Fiscal 1998 Acquisitions -- The Hesser Acquisition."
With respect to each transaction between the Company and an affiliate of
the Company, a majority of the disinterested members of the Board of Directors
determined that such transactions were on terms at least as fair as if they had
been consummated with unrelated third parties. The Board of Directors has
adopted a policy that prior to entering into any transaction with a related
party, a similar determination must be made with respect to such transaction by
a majority of the Company's disinterested directors.
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<PAGE> 61
PRINCIPAL AND SELLING STOCKHOLDERS
The table below sets forth, as of May 31, 1998, certain information
regarding beneficial ownership of the shares of Common Stock of the Company and
as adjusted to reflect the sale of the shares of Common Stock offered hereby by
(i) each person known by the Company to be the beneficial owner of more than 5%
of the outstanding shares of Common Stock (including the Selling Shareholders),
(ii) each director, (iii) each executive officer included in the Summary
Compensation Table, (iv) all executive officers and directors of the Company as
a group and (v) by each of the Selling Shareholders.
<TABLE>
<CAPTION>
SHARES OWNED SHARES
PRIOR NUMBER OF OWNED AFTER
TO OFFERING SHARES OFFERING
----------------- SOLD IN -----------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER PERCENT OFFERING NUMBER PERCENT
- --------------------------------------- ------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
Sprout Capital V(2)(3)................................... 920,005 11.9% -- 920,005 11.7%
Sprout Technology Fund(2)(3)............................. 19,889 * -- 19,889 *
DLJ Venture Capital Fund II, L.P.(2)(3).................. 54,921 * -- 54,921 *
Lawrence, Tyrrell, Ortale & Smith(3)(4).................. 995,307 12.9 995,307 -- --
Delaware State Employees' Retirement Fund(3)(5)(6)....... 637,051 8.2 637,051 -- --
Declaration of Trust for Defined Benefit Plans of ICI
America Holding Inc.(3)(5)(6).......................... 132,463 1.7 132,463 -- --
Declaration of Trust for Defined Benefit Plans of Zeneca
Holding Inc.(3)(5)(6).................................. 109,178 1.4 109,178 -- --
Pecks Management Partners Ltd.(5)(6)..................... 878,692 11.3 878,692 -- --
J. & W. Seligman Co., Incorporated....................... 635,600 8.1 -- 635,600 8.1
Wellington Management, Ltd............................... 727,900 9.4 -- 727,900 9.2
Gary D. Kerber(3)(7)..................................... 352,915 4.5 -- 352,915 4.4
Vince Pisano(8).......................................... 182,574 2.3 -- 182,574 2.3
Gerry M. Taylor(9)....................................... 63,416 * -- 63,416 *
Ellen L. Bernhardt(10)................................... 23,667 * -- 23,667 *
Gerald T. Kosentos(11)................................... 15,933 * -- 15,933 *
Elaine Neely-Eacona(12).................................. 16,500 * -- 16,500 *
K. Terry Guthrie(13)..................................... 5,000 * -- 5,000 *
A. William Benham(14).................................... 8,835 * -- 8,835 *
Robert J. Cresci(6)(15).................................. 28,000 * -- 28,000 *
Carl S. Hutman(16)....................................... 28,340 * -- 28,340 *
Richard E. Kroon(17)..................................... 28,000 * -- 28,000 *
W. Patrick Ortale, III(18)............................... 28,000 * -- 28,000 *
All executive officers and directors as a group (11
persons)............................................... 781,180 9.6% -- 781,180 9.5%
</TABLE>
- ---------------
* Less than 1%.
(1) Unless otherwise noted, the Company believes that all persons and entities
named in the table have sole voting and investment power over the shares of
Common Stock listed opposite his, her or its name. The number of shares of
Common Stock beneficially owned by each person is determined under the
rules of the Securities and Exchange Commission, and the information is not
necessarily indicative of beneficial ownership for any other purpose. Under
such rules, beneficial ownership includes any shares for which the
individual has sole or shared voting power or investment power and also any
shares of Common Stock which the individual has the right to acquire within
60 days after May 31, 1998 through the exercise of any stock option or
other right. The inclusion herein of any shares of Common Stock deemed
beneficially owned does not constitute an admission of beneficial ownership
of those shares.
(2) The address of such entity is 277 Park Avenue, 21st Floor, New York, New
York 10172.
(3) Pursuant to a Coinvestors Agreement, such entity has agreed to vote its
shares of Common Stock along with the other parties to such agreement for
the election of one director jointly designated by the Pecks Managed
Entities (see Note (6) for definition of "Pecks Managed Entities").
(4) The address of such entity is 200 31st Avenue North, Suite 200, Nashville,
Tennessee 37203.
(5) The address of such entity is c/o Pecks Management Partners Ltd., 1
Rockefeller Plaza, New York, New York 10020.
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<PAGE> 62
(6) Pecks Management Partners Ltd. ("Pecks") is an investment advisor to
Delaware State Employees' Retirement Fund, Declaration of Trust for Defined
Benefit Plans of ICI American Holdings Inc. and Declaration of Trust for
Defined Benefit Plans of Zeneca Holding Inc. (collectively, the "Pecks
Managed Entities"). As such, Pecks has sole investment and voting power
with respect to the shares beneficially owned by such entities. Mr. Cresci,
a director of the Company, is a managing partner of Pecks. Pecks disclaims
beneficial ownership of such shares.
(7) Includes 69,463 shares of Common Stock which may be purchased upon the
exercise of options which are exercisable within 60 days of the date of
this table.
(8) Includes 58,202 shares of Common Stock which may be purchased upon the
exercise of options which are exercisable within 60 days of the date of
this table.
(9) Includes 61,333 shares of Common Stock which may be purchased upon the
exercise of options which are exercisable within 60 days of the date of
this table.
(10) Includes 23,667 shares of Common Stock which may be purchased upon the
exercise of options which are exercisable within 60 days of the date of
this table.
(11) Includes 15,933 shares of Common Stock which may be purchased upon the
exercise of options which are exercisable within 60 days of the date of
this table.
(12) Includes 16,500 shares of Common Stock which may be purchased upon the
exercise of options which are exercisable within 60 days of the date of
this table.
(13) Includes 4,000 shares of Common Stock which may be purchased upon the
exercise of options which are exercisable within 60 days of the date of
this table.
(14) Includes 8,835 shares of Common Stock which may be purchased upon the
exercise of options which are exercisable within 60 days of the date of
this table.
(15) Includes 28,000 shares of Common Stock which may be purchased upon the
exercise of options which are exercisable within 60 days of the date of
this table.
(16) Includes 28,000 shares of Common Stock which may be purchased upon the
exercise of options which are exercisable within 60 days of the date of
this table.
(17) Mr. Kroon is the general partner of the general partner of Sprout Capital
V, Sprout Technology Fund, and DLJ Venture Capital Fund II, L.P. Excludes
994,815 shares of Common Stock owned, in the aggregate, by such entities.
Mr. Kroon disclaims any beneficial ownership. Includes 28,000 shares of
Common Stock which may be purchased upon the exercise of options which are
exercisable within 60 days of the date of this table.
(18) Mr. Ortale is a general partner of Lawrence Venture Partners, the general
partner of Lawrence, Tyrrell, Ortale & Smith ("LTOS"). Excludes 637,500
shares of Common Stock owned by LTOS and for which Mr. Ortale disclaims any
beneficial ownership. Includes 28,000 shares of Common Stock which may be
purchased upon the exercise of options which are exercisable within 60 days
of the date of this table.
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<PAGE> 63
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 15 million shares
of Common Stock, par value $.01 per share, and five million shares of preferred
stock, par value $.01 per share (the "Preferred Stock"). As of the date of this
Prospectus, there are approximately 94 holders of record of the Common Stock, no
holders of record of the Preferred Stock and two holders of warrants to purchase
Common Stock.
The following summary description of the Company's capital stock does not
purport to be complete and is qualified in its entirety by this reference to the
Company's Certificate of Incorporation and By-laws, copies of which have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part.
COMMON STOCK
The holders of the Common Stock are entitled to one vote per share of
record on all matters to be voted upon by stockholders. At a meeting of
stockholders at which a quorum is present, a majority of the votes cast decides
all questions, unless the matter is one upon which a different vote is required
by express provision of law or the Company's Certificate of Incorporation or
Bylaws. There is no cumulative voting with respect to the election of directors
(or any other matter).
The holders of Common Stock have no preemptive rights and have no rights to
convert their Common Stock into any other securities. Subject to the rights of
holders of Preferred Stock, if any, in the event of a liquidation, dissolution
or winding up of the Company, holders of Common Stock are entitled to
participate equally, share for share, in all assets remaining after payment of
liabilities.
The holders of Common Stock are entitled to receive ratably such dividends
as the Board of Directors may declare out of funds legally available therefor,
when and if so declared. The payment by the Company of dividends, if any, rests
within the discretion of its Board of Directors and will depend upon the
Company's results of operations, financial condition and capital expenditure
plans, as well as other factors considered relevant by the Board of Directors.
PREFERRED STOCK
At the time of this Offering, no shares of Preferred Stock are outstanding.
The Company's Certificate of Incorporation authorizes the Board of Directors to
issue up to 5,000,000 shares of Preferred Stock in one or more series and to
establish such relative voting, dividend, redemption, liquidation, conversion
and other powers, preferences, rights, qualifications, limitations and
restrictions as the Board of Directors may determine without further approval of
the stockholders of the Company. The issuance of Preferred Stock by the Board of
Directors could, among other things, adversely affect the voting power of the
holders of Common Stock and, under certain circumstances, make it more difficult
for a person or group to gain control of the Company.
The issuance of any series of Preferred Stock, and the relative powers,
preferences, rights, qualifications, limitations and restrictions of such
series, if and when established, will depend upon, among other things, the
future capital needs of the Company, the then-existing market conditions and
other factors that, in the judgment of the Board of Directors, might warrant the
issuance of Preferred Stock. At the date of this Prospectus, there are no plans,
agreements or understandings relative to the issuance of any share of Preferred
Stock.
WARRANTS TO PURCHASE COMMON STOCK
In July 1991, the Company issued a warrant (the "Equitable Warrant") to
purchase 26,667 shares of Common Stock to Equitable Securities Corporation
("Equitable"). The Equitable Warrant has an exercise price of $3.60 per share
and expires on July 31, 1999. The Company issued the warrant to Equitable in
connection with assistance provided by Equitable to the Company in issuing
certain convertible preferred stock by the Company.
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<PAGE> 64
In November 1988, the Company granted an option to Robert L. Heidrick to
purchase 16,667 shares of Common Stock at a purchase price equal to the offering
price of the Company's Common Stock in an initial public offering. The option
became exercisable upon the effective date of an initial public offering
(October 28, 1996) of the Company's Common Stock and expires on the tenth
anniversary of such date. This option was granted to Mr. Heidrick as partial
compensation for certain executive search services provided by Mr. Heidrick to
the Company.
REGISTRATION RIGHTS
As of the date of this preliminary prospectus, 3,565,231 shares of Common
Stock were "restricted" securities within the meaning of the Securities Act of
1933, as amended, and may not be sold in the absence of registration under the
Securities Act, or an exemption therefrom, including the exemptions combined in
Rule 144 under the Securities Act. Pursuant to the Registration Rights
Agreements, the Company has granted the Sprout Group, LTOS and the Pecks Managed
Entities demand registration rights covering up to 2,868,814 shares of Common
Stock and covering up to a maximum of four demand registrations. In addition,
such parties have been granted "piggy-back" registration rights, pursuant to
which the Company must notify such parties of any registration of Common Stock
under the Securities Act, and must include shares of Common Stock held by such
parties in such registration. In addition, upon qualification for registration
under the Securities Act on Form S-2 and/or S-3, such parties have demand
registration rights; provided, that the amount of Common Stock proposed to be
registered pursuant to a demand registration must have an aggregate offering
price of at least $500,000. The Company has agreed to pay all expenses in
connection with the demand and "piggy-back" registrations described above. See
"Certain Transactions," and "Risk Factors -- Shares Eligible for Future Sale."
In connection with the CHI Institute Acquisition, the Company agreed to
file a registration statement with regard to the 151,900 shares issued to the
CHI stockholders as part of the purchase price. The Company agreed to pay
registration expenses; however, the CHI stockholders are required to pay
underwriting fees and commissions incurred as a result of the sale of such
shares. In fulfillment of this provision, the Company filed a registration
statement on Form S-3 (SEC File No. 333-47775) which became effective April 3,
1998.
In connection with the Hesser Acquisition, the Company agreed to file a
registration statement with regard to the 202,532 shares issued to the Hesser
shareholders as part of the purchase price. The Company agreed to pay
registration expenses; however, the Hesser shareholders are required to pay any
underwriting fees and commissions incurred as a result of the sale of such
shares. In fulfillment of this provision, the Company filed a registration
statement on Form S-3 (SEC File No. 333-52451) which became effective May 19,
1998.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
Certain provisions of the General Corporation Law of the State of Delaware
and of the Company's Certificate of Incorporation and By-laws, summarized in the
following paragraphs, may be considered to have an anti-takeover effect and may
delay, deter or prevent a tender offer, proxy contest or other takeover attempt
that a stockholder might consider to be in such stockholder's best interest,
including such an attempt as might result in payment of a premium over the
market price for shares held by stockholders.
DELAWARE ANTI-TAKEOVER LAW
The Company, a Delaware corporation, is subject to the provisions of the
General Corporation Law of the State of Delaware, including Section 203 thereof.
In general, Section 203 prohibits a public Delaware corporation from engaging in
a "business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which such person became an
interested stockholder unless (i) prior to such date, the Board of Directors
approved either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder, or (ii) upon becoming an
interested stockholder the stockholder then owned at least 85% of the voting
stock, as defined in Section 203; or (iii) subsequent to such date, the business
combination is approved by both the Board of Directors and by at
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<PAGE> 65
least 66 2/3% of the corporation's outstanding voting stock, excluding shares
owned by the interested stockholder. For these purposes, the term "business
combination" includes mergers, asset sales and other similar transactions with
an "interested stockholder." An "interested stockholder" is a person who,
together with affiliates and associates, owns (or, within the prior three years,
did own) 15% or more of the corporation's voting stock. Although Section 203
permits a corporation to elect not to be governed by its provisions, the Company
to date has not made this election.
SPECIAL MEETINGS OF STOCKHOLDERS; NO ACTION WITHOUT MEETING
The Company's Bylaws provide that special meetings of stockholders may be
called only by the Chairman or by the Secretary or any Assistant Secretary at
the request in writing of a majority of the Board of Directors of the Company.
The Company's Certificate of Incorporation and Bylaws also provide that no
action required to be taken or that may be taken at any annual or special
meeting of stockholders may be taken without a meeting; the power of
stockholders to consent in writing, without a meeting, to the taking of any
action is specifically denied. These provisions may make it more difficult for
stockholders to take action opposed by the Board of Directors.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDERS PROPOSALS AND DIRECTOR NOMINATIONS
The Company's Bylaws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for election
as directors at an annual or a special meeting of stockholders, must provide
timely notice thereof in writing. To be timely, a stockholder's notice must be
delivered to, or mailed and received at, the principal executive office of the
Company, (i) in the case of an annual meeting that is called for a date that is
within 30 days before or after the anniversary date of the immediately preceding
annual meeting of stockholders, not less than 60 days nor more than 90 days
prior to such anniversary date, and (ii) in the case of an annual meeting that
is called for a date that is not within 30 days before or after the anniversary
date of the immediately preceding annual meeting, or in the case of a special
meeting of stockholders called for the purpose of electing directors, not later
than the close of business on the tenth day following the day on which notice of
the date of the meeting was mailed or public disclosure of the date of the
meeting was made, whichever occurs first. The Bylaws also specify certain
requirements for a stockholder's notice to be in proper written form. These
provisions may preclude some stockholders from making nominations for directors
at an annual or special meeting or from bringing other matters before the
stockholders at a meeting.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is First Union
National Bank of North Carolina, N.A.
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<PAGE> 66
SHARES ELIGIBLE FOR FUTURE SALE
As of May 31, 1998, the Company has outstanding 7,743,194 shares of Common
Stock. The Company has reserved an additional (i) 913,339 shares of Common Stock
for issuance pursuant to the Stock Option Plan, (ii) 200,000 shares of Common
Stock for issuance pursuant to the Directors' Plan, and (iii) 43,334 shares of
Common Stock which may be purchased upon exercise of outstanding warrants to
purchase Common Stock. Any shares issued pursuant to the Stock Option Plan or
the Director's Plan will be freely transferable upon issuance without
registration under the Securities Act, pursuant to registration statements
previously filed and declared effective, subject to volume limitations contained
in Rule 144 under the Securities Act applicable to affiliates, as that term is
defined in the Securities Act. Of the outstanding shares, 4,177,963 are freely
transferable without restriction under the Securities Act by persons other than
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act. The remaining 3,565,231 shares of Common Stock (the "Restricted
Shares") were acquired in transactions exempt from registration under the
Securities Act and, accordingly, are "restricted securities" as that term is
defined in Rule 144. Restricted Shares may not be resold unless they are
registered under the Securities Act or are sold pursuant to an applicable
exemption from such registration, such as is contained in Rule 144. Of the
shares being offered pursuant to this Offering, 1,873,999 are Restricted Shares.
In general, Rule 144 currently provides that a person (or persons whose
shares are aggregated) who satisfies a one-year holding period with respect to
"restricted securities" will be entitled to sell, in brokers' transactions and
within any three-month period, a number of shares that does not exceed the
greater of (i) 1% of the then outstanding shares of Common Stock or (ii) the
average weekly trading volume in Common Stock during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to manner of sale and
notice requirements and the availability of current public information about the
Company. After "restricted securities" that are held by persons who are no
longer "affiliates" of the Company have satisfied a two-year holding period,
such shares may be sold without regard to such volume limitation, current public
information, manner of sale or notice requirements. However, under Rule 144,
"restricted securities" held by "affiliates" must continue, after the two-year
holding period, to be sold in brokers' transactions or to market makers subject
to the volume limitations described above. The requirements described above
(except the holding period requirements) also apply to non-restricted securities
of the Company held by affiliates of the Company. Such shares are required,
under Rule 144, to be sold in brokers' transactions subject to the volume
limitations described above. Shares properly sold in reliance upon Rule 144 to
persons who are not "affiliates" are thereafter freely tradable without
restrictions or registration requirements under the Securities Act. The
foregoing discussion is only a summary of Rule 144 and is not intended to be a
complete description of the rule.
The Company, its Officers and Directors, and certain other stockholders and
warrantholders, holding 2,043,581 of the Company's currently outstanding Common
Stock, agreed not to sell, assign or transfer any of their shares of Common
Stock for a period of 90 days after the effective date of the registration
statement of which this Preliminary Prospectus is a part, without the prior
consent of Smith Barney Inc. At the expiration of this 90 day period, all of
such shares of Common Stock immediately become eligible for sale under Rule 144,
subject to the volume and manner of sale restrictions imposed by that Rule or
under effective registration statements. The Company is unable to predict the
effect that sales of Common Stock may have on the then prevailing market price
of the shares of the Common Stock, but such sales may have a substantial
depressing effect on such market price.
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UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreements each Underwriter named below has severally agreed to purchase, and
the Company and the Selling Stockholders have agreed to sell to such
Underwriter, shares of Common Stock which equal the number of shares set forth
opposite the name of such Underwriter below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
Smith Barney Inc.
Legg Mason Wood Walker, Incorporated
---------
Total............................................. 2,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares are subject to
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to take and pay for all shares of Common Stock
offered hereby (other than those covered by the over-allotment option described
below) if any such shares are taken.
The Company has been advised by the Underwriters that the Underwriters
propose to offer part of the shares of Common Stock directly to the public at
the public offering price set forth on the cover page hereof and part to certain
dealers at a price that represents a concession not in excess of $ per
share under the public offering price. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share to other
Underwriters or to certain other dealers. After the public offering, the public
offering price and such concessions may be changed by the Underwriters.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of 300,000
additional shares of Common Stock at the public offering price set forth on the
cover page hereof less underwriting discounts and commissions. The Underwriters
may exercise such option to purchase additional shares solely for the purpose of
covering over-allotments, if any, incurred in connection with the sale of the
shares offered hereby. To the extent such option is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional shares as the number set forth next to
such Underwriter's name in the preceding table bears to the total number of
shares in such table.
The Company, the Selling Shareholders and the Company's executive officers
and directors have agreed that, for a period of 90 days from the date of this
Prospectus, they will not, without the prior written consent of Smith Barney
Inc., offer, sell, contract to sell, or otherwise dispose of, any shares of
Common Stock of the Company or any securities convertible into, or exercisable
or exchangeable for, Common Stock of the Company.
In connection with the Offering and in compliance with applicable law, the
Underwriters may over-allot (i.e., sell more Common Stock than the total amount
shown on the list of Underwriters and participations which appear above) and may
effect transactions which stabilize, maintain or otherwise affect the market
price of the Common Stock at levels above those which might otherwise prevail in
the open market. Such transactions may include placing bids for the Common Stock
or effecting purchases of Common Stock for the purpose of pegging, fixing or
maintaining the price of Common Stock for the purpose of reducing a short
position created in connection with the Offering. A short position may be
covered by exercise of the option described below in lieu of or in addition to
open market purchases. In addition, the contractual arrangements between the
Underwriters include a provision whereby, if the Underwriters purchase Common
Stock in the open market for the account of the Underwriters and the securities
purchased can be traced to a particular Underwriter or member of the selling
group, the Underwriters may require the Underwriter or selling group member in
question to purchase the Common Stock in question at the cost price to the
Underwriters or may recover from (or decline to pay to) the Underwriter or
selling group member in question the selling concession applicable to the
securities in question. The Underwriters are not required to engage in any of
these activities, and any such activities, if commenced, may be discontinued at
any time.
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<PAGE> 68
The Underwriters and certain selling group members that currently act as
market makers for the Common Stock may engage in "passive market making" in the
Common Stock in accordance with Rule 103 of Regulation M under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Rule 103 permits, upon
the satisfaction of certain conditions, underwriters and selling group members
participating in a distribution that are also market makers in the security
being distributed to engage in limited market-making transactions during the
period when Rule 101 of Regulation M would otherwise prohibit such activity. In
general, under Rule 103, any Underwriter or selling group member engaged in
passive market making in the Common Stock (i) may not bid for or purchase Common
Stock at a price that exceeds the highest bid for the Common Stock displayed by
a market maker that is not participating in the distribution of the Common
Stock, (ii) may not have net daily purchases of the Common Stock that exceed the
greater of 200 shares or 30% of its average daily trading volume in such stock
for a specified two-month period preceding the filing date of the registration
statement of which this Prospectus forms a part and (iii) must identify its bids
as bids made by a passive market maker.
The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
LEGAL MATTERS
The validity of the Common Stock being offered hereby will be passed upon
for the Company and the Selling Stockholders by Greenberg Traurig Hoffman Lipoff
Rosen & Quentel, P.A., West Palm Beach, Florida and for the Underwriters by
Dewey Ballantine LLP, New York, New York.
EXPERTS
The consolidated financial statements and schedule of Educational Medical,
Inc. at March 31, 1997 and 1998 and for each of the three years in the period
ended March 31, 1998 appearing in this Prospectus and Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their reports thereon also appearing elsewhere herein which are based in part on
the reports of Winther Stave & Co., LLP incorporated by reference elsewhere
herein. The financial statements referred to above are included in reliance upon
such reports given upon the authority of such firms as experts in accounting and
auditing.
The financial statements of CHI Institute(a division of Computer Hardware
Service Company, Inc.) for the year ended on September 30, 1997, have been
audited by Asher & Company, Ltd., independent auditors, as set forth in their
report thereon also appearing elsewhere herein and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of Hesser, Inc. for the years ending December 31,
1996 and 1997, have been audited by Coopers & Lybrand L.L.P., independent
auditors, as set forth in their report thereon also appearing elsewhere herein
and are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company furnishes its stockholders annual reports containing audited
consolidated financial statements and quarterly reports containing unaudited
consolidated financial statements.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act of
1933, as amended (the "Securities Act"), of which this Prospectus is a part,
with respect to the Common Stock offered hereby. This Prospectus omits certain
information contained in the Registration Statement, and reference is made to
the Registration Statement for further information with respect to the Company
and the Common Stock offered hereby. Statements contained herein concerning the
provisions of documents are necessarily summaries of such documents and when any
such document is an exhibit to the Registration Statement, each such statement
is qualified in its entirety by reference to the copy of such document filed
with the Commission. Copies of the
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<PAGE> 69
Registration Statement may be obtained upon payment of the prescribed fees or
examined without charge at the public reference facilities of the Commission at
450 Fifth Street, NW, Washington, D.C. 20549.
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements, and other information with the
Commission. Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities maintain by the
Commission at Judiciary Plaza, 450 Fifth Street, NW, Room 1024, Washington, D.C.
20549, and at the following regional offices of the Commission: Seven World
Trade Center, 13th Floor, New York, New York 10048 and Northwest Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies can also be
obtained at prescribed rates from the Public Reference Section of the Commission
at Judiciary Plaza, 450 Fifth Street, NW, Washington, D.C. 20549. In addition,
such materials filed electronically by the Company with the Commission are
available at the Commission's World Wide Web Site at http://www.sec.gov.
The Common Stock is listed on the Nasdaq National Market. Reports, proxy
statements and other information concerning the Company can be inspected at the
offices of the Nasdaq National Market, Inc., 1735 K Street, NW, Washington, D.C.
20006-1506.
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<PAGE> 70
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 1997 and 1998... F-3
Consolidated Statements of Income for the years ended March
31, 1996, 1997 and 1998................................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended March 31, 1996, 1997 and 1998................. F-5
Consolidated Statements of Cash Flows for the years ended
March 31, 1996, 1997 and 1998............................. F-6
Notes to Consolidated Financial Statements.................. F-7
HESSER, INC.
Report of Coopers & Lybrand LLP, Independent Accountants.... F-25
Balance Sheets as of December 31, 1997 and 1996............. F-26
Statements of Operations for the years ended December 31,
1997 and 1996............................................. F-27
Statements of Changes in Stockholders' Equity for the years
ended December 31, 1997 and 1996.......................... F-28
Statements of Cash Flows for the years ended December 31,
1997 and 1996............................................. F-29
Notes to Financial Statements............................... F-30
CHI INSTITUTE
Independent Auditors Report -- Asher & Company, Ltd. ....... F-36
Balance Sheets as of September 30, 1997 and December 31,
1997 (unaudited).......................................... F-37
Statements of Operations and Retained Earnings for the year
ended September 30, 1997 and for the three month periods
ended December 31, 1997 and 1996 (unaudited).............. F-38
Statement of Cash Flows for the year ended September 30,
1997 and for the three month periods ended December 31,
1997 and 1996 (unaudited)................................. F-39
Notes to Financial Statements............................... F-40
</TABLE>
F-1
<PAGE> 71
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Educational Medical, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Educational
Medical, Inc. and subsidiaries as of March 31, 1997 and 1998 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended March 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Nebraska Acquisition
Corporation, a wholly-owned subsidiary, or its predecessors (Educational
Management, Inc. and Wikert and Rhude, a general partnership) acquired by
Educational Medical, Inc. on March 31, 1997 in a business combination accounted
for as a pooling of interests as described in Note 4 to the consolidated
financial statements, which statements reflect total assets of approximately
$5,681,000 as of March 31, 1997, and total net revenues of approximately
$4,695,000, and $6,012,000 for the years ended March 31, 1996 and 1997,
respectively. Those statements were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to data included
for Nebraska Acquisition Corporation, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Educational Medical, Inc. and
subsidiaries at March 31, 1997 and 1998, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1998, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Atlanta, Georgia
June 2, 1998
F-2
<PAGE> 72
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $14,047,889 $21,445,782
Restricted cash........................................... -- 384,295
Trade accounts receivable, less allowance for doubtful
accounts of $922,704 and $1,968,218, respectively....... 5,238,742 6,490,004
Notes receivable.......................................... -- 622,800
Prepaid expenses and other current assets................. 1,149,146 2,821,970
Income taxes receivable................................... 155,542 --
Deferred income tax assets................................ 1,208,669 702,814
----------- -----------
Total current assets............................... 21,799,988 32,467,665
Notes receivable, less allowance for doubtful accounts of
none and $326,007, respectively........................... -- 737,132
Property and equipment, net................................. 7,617,958 13,644,236
Deferred debt issuance costs, net of accumulated
amortization of none and $112,143, respectively........... 297,492 275,538
Covenants not to compete, net of accumulated amortization of
$1,194,238 and $1,481,359, respectively................... 1,082,987 945,033
Goodwill and other intangible assets, net of accumulated
amortization of $7,063,793 and $7,949,081, respectively... 10,152,625 31,273,709
Deferred income tax assets.................................. 944,629 1,777,824
Other assets................................................ 176,855 176,855
----------- -----------
Total assets....................................... $42,072,534 $81,297,992
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 820,784 $ 682,310
Other amounts due to sellers.............................. -- 3,517,602
Accrued compensation...................................... 858,049 1,241,079
Other accrued expenses.................................... 2,486,532 2,139,830
Deferred tuition income................................... 3,184,225 5,095,954
Current portion of notes payable and long-term debt....... 3,964,851 14,837,203
----------- -----------
Total current liabilities.......................... 11,314,441 27,513,978
Notes payable and long-term debt, less current portion...... 2,163,880 17,109,568
Other liabilities........................................... 394,145 1,002,465
----------- -----------
Total liabilities.................................. 13,872,466 45,626,011
Stockholders' equity:
Preferred stock, authorized 5,000,000 shares, none issued
and outstanding......................................... -- --
Common stock, $.01 par value -- authorized 15,000,000
shares, 7,418,100 and 7,729,529 shares issued and
outstanding at March 31, 1997 and 1998, respectively.... 74,181 77,295
Additional paid-in capital on common stock................ 30,222,776 33,739,114
Retained earnings (accumulated deficit)................... (1,996,889) 1,855,572
Less treasury stock, at cost, 34,817 common shares at
March 31, 1997, none at March 31, 1998.................. (100,000) --
----------- -----------
Total stockholders' equity......................... 28,200,068 35,671,981
----------- -----------
Total liabilities and stockholders' equity......... $42,072,534 $81,297,992
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 73
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net revenues................................................ $43,346,533 $49,449,680 $59,675,509
School operating costs:
Cost of education and facilities.......................... 19,650,937 23,150,599 27,086,555
Selling and promotional................................... 6,533,229 7,530,741 8,643,485
Provision for losses on accounts and notes receivable..... 1,270,565 1,239,151 1,151,669
General and administrative expenses....................... 11,098,422 12,802,441 15,424,764
Amortization of goodwill and intangibles.................... 882,953 886,268 1,284,552
Other expenses:
Legal defense and settlement costs........................ 1,115,000 -- --
Loss on closure or relocation of schools.................. 50,000 143,585 --
Impairment of goodwill and intangibles.................... 764,000 -- --
Merger expenses........................................... -- 391,453 --
----------- ----------- -----------
Income from operations...................................... 1,981,427 3,305,442 6,084,484
Interest (income) expense, net (net of interest income of
$171,870 in 1996 and $476,194 in 1997 and net of interest
expense of $282,870 in 1998).............................. 822,434 284,162 (252,750)
----------- ----------- -----------
Income before income taxes and extraordinary item........... 1,158,993 3,021,280 6,337,234
Provision (benefit) for income taxes........................ 632,185 (845,363) 2,484,773
----------- ----------- -----------
Net income before extraordinary item........................ 526,808 3,866,643 3,852,461
Extraordinary item -- loss on early extinguishment of debt,
net of income taxes....................................... -- 308,683 --
----------- ----------- -----------
Net income.................................................. $ 526,808 $ 3,557,960 $ 3,852,461
=========== =========== ===========
Pro forma income tax data:
Income before income taxes and extraordinary item......... $ 1,158,993 $ 3,021,280
Provision (benefit) for income taxes...................... (486,505) 408,951
----------- -----------
Income before extraordinary item.......................... 672,488 2,612,329
Extraordinary item, net of income taxes................... -- 308,683
----------- -----------
Pro forma net income...................................... $ 672,488 $ 2,303,646
=========== ===========
Earnings per share:
Basic:
Income before extraordinary item........................ $ 0.28 $ 0.58 $ 0.52
Extraordinary item...................................... -- (0.07) --
----------- ----------- -----------
Net income.............................................. $ 0.28 $ 0.51 $ 0.52
=========== =========== ===========
Weighted average number shares outstanding.............. 2,371,041 4,484,492 7,382,307
=========== =========== ===========
Diluted:
Income before extraordinary item........................ $ 0.13 $ 0.41 $ 0.51
Extraordinary item...................................... -- (0.05) --
----------- ----------- -----------
Net income.............................................. $ 0.13 $ 0.36 $ 0.51
=========== =========== ===========
Weighted average number of shares outstanding........... 5,181,867 6,447,265 7,612,155
=========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 74
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN ADDITIONAL
CAPITAL ON PAID-IN COMMON RETAINED
CONVERTIBLE CONVERTIBLE CAPITAL ON STOCK EARNINGS
PREFERRED PREFERRED COMMON COMMON PURCHASE (ACCUMULATED TREASURY
STOCK STOCK STOCK STOCK WARRANTS DEFICIT) STOCK
----------- ------------ ------- ----------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1995............. $ 10,230 $ 6,732,160 $24,381 $ 42,424 $ 2,431,802 $(2,610,404) $ (35,000)
Accretion of value of common stock
purchase warrants................. -- -- -- -- 406,346 (406,346) --
Distributions to former Nebraska
Shareholders...................... -- -- -- -- -- (853,173) --
Net income.......................... -- -- -- -- -- 526,808 --
-------- ----------- ------- ----------- ----------- ----------- ---------
Balance at March 31, 1996............. 10,230 6,732,160 24,381 42,424 2,838,148 (3,343,115) (35,000)
Accretion of value of common stock
purchase warrants................. -- -- -- -- 281,398 (281,398) --
Issuance of common stock in
connection with initial public
offering.......................... -- -- 22,000 19,238,000 -- -- --
Conversion of note receivable to
treasury stock.................... -- -- -- -- -- -- (65,000)
Exercise of common stock purchase
warrants.......................... -- -- 1,417 367,583 (368,150) -- --
Cashless exercise of common stock
purchase warrants................. -- -- 9,333 2,742,063 (2,751,396) -- --
Conversion of convertible preferred
stock to common stock............. (10,230) (6,732,160) 17,050 6,725,340 -- -- --
Distributions to former Nebraska
Shareholders...................... -- -- -- -- -- (1,236,970) --
Reclassification of undistributed
Nebraska S Corporation earnings to
additional paid-in capital........ -- -- -- 693,366 -- (693,366) --
Recognition of deferred income tax
assets related to termination of
Nebraska Subchapter S Corporation
status upon consummation of
pooling of interests.............. -- -- -- 414,000 -- -- --
Net income.......................... -- -- -- -- -- 3,557,960 --
-------- ----------- ------- ----------- ----------- ----------- ---------
Balance at March 31, 1997............. -- -- 74,181 30,222,776 -- (1,996,889) (100,000)
Issuance of common stock in
connection with acquisitions...... -- -- 3,544 3,496,456 -- -- --
Exercise of common stock options.... -- -- 351 119,101 -- -- --
Treasury shares retired............. -- -- (349) (99,651) -- -- 100,000
Shares returned from escrow and
retired........................... -- -- (432) 432 -- -- --
Net income.......................... -- -- -- -- -- 3,852,461 --
-------- ----------- ------- ----------- ----------- ----------- ---------
Balance at March 31, 1998............. $ -- $ -- $77,295 $33,739,114 $ -- $ 1,855,572 $ --
======== =========== ======= =========== =========== =========== =========
<CAPTION>
TOTAL
-----------
<S> <C>
Balance at March 31, 1995............. $ 6,595,593
Accretion of value of common stock
purchase warrants................. --
Distributions to former Nebraska
Shareholders...................... (853,173)
Net income.......................... 526,808
-----------
Balance at March 31, 1996............. 6,269,228
Accretion of value of common stock
purchase warrants................. --
Issuance of common stock in
connection with initial public
offering.......................... 19,260,000
Conversion of note receivable to
treasury stock.................... (65,000)
Exercise of common stock purchase
warrants.......................... 850
Cashless exercise of common stock
purchase warrants................. --
Conversion of convertible preferred
stock to common stock............. --
Distributions to former Nebraska
Shareholders...................... (1,236,970)
Reclassification of undistributed
Nebraska S Corporation earnings to
additional paid-in capital........ --
Recognition of deferred income tax
assets related to termination of
Nebraska Subchapter S Corporation
status upon consummation of
pooling of interests.............. 414,000
Net income.......................... 3,557,960
-----------
Balance at March 31, 1997............. 28,200,068
Issuance of common stock in
connection with acquisitions...... 3,500,000
Exercise of common stock options.... 119,452
Treasury shares retired............. --
Shares returned from escrow and
retired........................... --
Net income.......................... 3,852,461
-----------
Balance at March 31, 1998............. $35,671,981
===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 75
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.............................................. $ 526,808 $ 3,557,960 $ 3,852,461
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation.......................................... 1,104,039 1,330,180 1,617,897
Amortization of other assets.......................... 931,076 886,555 1,284,552
Extraordinary item -- loss on early extinguishment of
debt, net of income taxes.......................... -- 308,683 --
Loss on closure or relocation of schools.............. 50,000 25,000 --
Impairment of goodwill and intangibles................ 764,000 -- --
Provision for losses on accounts and notes
receivable......................................... 1,270,565 1,239,151 1,151,669
Deferred income taxes................................. -- (1,563,995) 430,460
Amortization of discount on long-term debt............ 123,567 72,044 --
Changes in operating assets and liabilities, net of
assets acquired and liabilities assumed:
Restricted cash.................................... (235,000) 610,000 --
Accounts receivable................................ (673,666) (1,885,940) 22,255
Income taxes receivable............................ -- (155,542) 155,542
Prepaid expenses................................... (60,224) (68,651) (756,631)
Notes receivable................................... -- -- (1,478,790)
Other assets....................................... (40,292) 62,297 155,269
Accounts payable and accrued expenses.............. (61,741) 708,334 (3,133,196)
Deferred tuition income............................ 202,430 (1,826,398) (1,438,135)
Other liabilities.................................. 305,713 (563,021) 495,932
----------- ----------- -----------
Net cash provided by operating activities............... 4,207,275 2,736,657 2,359,285
INVESTING ACTIVITIES:
Purchases of businesses, net of cash acquired........... -- (1,400,000) 2,192,983
Purchases of property and equipment..................... (1,342,638) (2,079,501) (2,199,621)
----------- ----------- -----------
Net cash used in investing activities................... (1,342,638) (3,479,501) (6,638)
FINANCING ACTIVITIES:
Issuance of common stock................................ -- 19,260,000 --
Proceeds from notes payable and long-term debt.......... 391,837 532,295 9,000,000
Principal payments on acquisition notes payable......... (1,404,160) (1,890,493) (3,984,017)
Proceeds from exercise of common stock purchase
warrants.............................................. -- 850 --
Proceeds from exercise of common stock options.......... -- -- 119,452
Principal payments on senior subordinated debt.......... (500,000) (5,000,000) --
Increase in deferred financing costs.................... (86,222) (297,492) (90,189)
Distributions to former Nebraska Shareholders........... (790,193) (1,023,472) --
----------- ----------- -----------
Net cash (used in) provided by financing activities..... (2,388,738) 11,581,688 5,045,246
----------- ----------- -----------
Increase in cash and cash equivalents................... 475,899 10,838,844 7,397,893
Cash and cash equivalents at beginning of year.......... 2,733,146 3,209,045 14,047,889
----------- ----------- -----------
Cash and cash equivalents at end of year................ $ 3,209,045 $14,047,889 $21,445,782
=========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 76
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
1. ORGANIZATION AND NATURE OF BUSINESS
Educational Medical, Inc. (the "Company") operates diversified
career-oriented postsecondary education schools. The Company offers diploma and,
in certain locations, degree programs through its 24 schools located in ten
states. The Company's schools offer degree and diploma programs designed to
provide enrolled students with the knowledge and skills necessary for entry
level employment in the fields of healthcare, business, information technology,
fashion and design.
Approximately 38%, 13%, 12%, and 11% of the Company's fiscal 1998 net
revenues were derived from its schools in California, Nebraska, Texas, and
Pennsylvania, respectively. No other schools in a single state represented over
10% of net revenues for the year ended March 31, 1998. Approximately 73% of the
Company's fiscal 1998 cash receipts were derived from Title IV programs as
provided for by the Higher Education Act of 1965, as amended. Cash receipts
approximated 96% of the Company's net revenues in fiscal 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS/RESTRICTED CASH
Cash equivalents include overnight investments in a bank. These investments
are recorded at cost, which approximates market. The Company considers
investments with maturities of three months or less at the date of purchase to
be cash equivalents for purposes of the statements of cash flows.
At March 31, 1997 and 1998, the Company held $13,515,475 and $16,207,676,
respectively, in cash balances at certain financial institutions which amounts
were in excess of the $100,000 federally insured amounts. The Company monitors
the financial condition of these institutions since it is exposed to credit risk
for such excess amounts, however, at this time the Company does not believe any
of these institutions present such risk.
Restricted cash represents amounts received from the New Hampshire Higher
Education Assistance Foundation (NHHEAF) for student loans which will be
credited to individual student's account receivable balances once the student
enrolls at the College. Loan disbursements received for students who do not
ultimately enroll at the College are required to be returned to the NHHEAF. The
corresponding liability for these undisbursed loan proceeds has been recorded as
deferred tuition income in the accompanying consolidated balance sheet.
NOTES RECEIVABLE
Notes receivable consist of promissory notes with varying interest terms
issued to students. Such notes are payable in minimum monthly payments beginning
six months after the student's graduation and are due in a maximum of ten years.
F-7
<PAGE> 77
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
The Company measures and records impairment losses on long-lived assets,
including property, equipment and intangibles, used in operations when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation, including that
related to assets under capital leases, is computed using the straight-line
method over the estimated useful lives of the related assets or the remaining
lease terms for leasehold improvements, if shorter.
COVENANTS NOT TO COMPETE
Non-compete agreements obtained from the sellers of certain acquired
schools are being amortized on the straight-line basis over the lives of the
agreements, generally from two to 15 years.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is amortized over periods ranging from 15 to 40 years. Other
intangible assets, which are similar in character to goodwill (acquired student
contracts, program curriculum, favorable leases assumed, accreditation and
acquired tradenames) are being amortized using the straight-line method over
periods ranging generally from two to ten years.
DEFERRED DEBT ISSUANCE COSTS
Deferred debt issuance costs represent fees and other costs associated with
obtaining long-term debt financing. Such amounts are amortized over the lives of
the related debt, using the straight-line method.
REVENUE RECOGNITION
Tuition revenue is recognized monthly on a straight-line basis over the
term of the course of study. Certain nonrefundable fees and charges are fully
recognized as revenue at the time a student begins classes.
The Company is generally required to refund a portion of a student's
unearned tuition who withdraws from a Company school. The amount of tuition, if
any, that may be retained by the Company after payment of any potential refund
is immediately recognized in the Company's consolidated statement of income.
Deferred tuition income represents the portion of student tuitions received
in advance of the course of study's completion.
INCOME TAXES
The Company uses the liability method of accounting for income taxes. Under
this method, deferred income tax assets and liabilities are determined based on
differences between the financial reporting and the tax bases of assets and
liabilities measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
PRO FORMA INCOME TAX DATA
Prior to March 31, 1997, the Nebraska Acquisition (see Note 4) consisted of
a Subchapter S Corporation and a partnership and, accordingly, was not subject
to federal or state income taxes. For informational
F-8
<PAGE> 78
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
purposes, the 1996 and 1997 statements of income include a pro forma
presentation that includes a provision for income taxes as if the Nebraska
Acquisition had been a taxable corporation for these periods and had filed a
consolidated income tax return with the Company. Such pro forma amounts were
based on the income tax laws and rates in effect during those periods and
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes."
STATEMENTS OF CASH FLOWS
The following non-cash transactions have been excluded from the
consolidated statements of cash flows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------
1996 1997 1998
-------- ---------- -----------
<S> <C> <C> <C>
Capital leases..................................... $347,000 $ 121,000 $ 392,000
Issuance of notes payable and other amounts due to
sellers in connection with acquisitions and
related non-compete agreements................... -- 4,100,000 23,517,602
Distribution of note receivable to former Nebraska
shareholders..................................... -- 213,498 --
Conversion of note receivable to treasury stock.... -- 65,000 --
Issuance of Common Stock in connection with
acquisitions..................................... -- -- 3,500,000
</TABLE>
STOCK COMPENSATION
The Company uses the intrinsic value method of accounting for its
stock-based compensation awards. As such, compensation expense is measured and
recorded if the exercise price of the stock options (or other awards) is below
the fair value of the Company's stock on the date of grant. The Company
discloses the pro forma effect of all stock compensation using the fair value
method as prescribed by Financial Accounting Standards Board Statement No. 123,
"Accounting for Stock-Based Compensation," ("SFAS 123"). See Note 9.
EARNINGS PER SHARE
Earnings per share are calculated using Statement of Financial Accounting
Standards No. 128, Earnings per Share, ("SFAS 128") and Securities and Exchange
Commission Staff Accounting Bulletin No. 98 ("SAB 98"). Basic earnings per share
include weighted average common shares outstanding. Diluted earnings per share
include weighted average common shares outstanding plus the dilutive effect of
outstanding preferred stock, stock options, and stock purchase warrants.
All earnings per share calculations include 761,263 shares issued on March
31, 1997 to effect the Nebraska Acquisition, less shares returned to the Company
pursuant to the contingency clause, as if outstanding for all periods.
NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board issued Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information ("SFAS
131"), which is effective for financial statements for periods after December
15, 1997. SFAS 131 requires the reporting of segment profit or loss, certain
specific revenue and expense items, segment assets, and a reconciliation of
these disclosed items in total to the consolidated financial statements. SFAS
131 also requires the restatement of comparative information for earlier years
in the initial year of application. The Company has not yet adopted SFAS 131
however there will be no impact on the financial statements, other than
disclosure.
F-9
<PAGE> 79
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. REGULATORY MATTERS
The Company derives a substantial portion of its net revenues from
financial aid received by its students under Title IV programs ("Title IV
Programs") administered by the United States Department of Education
("Department") pursuant to the federal Higher Education Act of 1965, ("HEA"), as
amended. In order to continue to participate in Title IV Programs, the Company
and its schools must comply with complex standards set forth in the HEA and the
regulations promulgated thereunder (the "Regulations"). Among other things these
Regulations require the Company's schools to exercise due diligence in approving
and disbursing funds and servicing loans, limit the proportion of cash receipts
by the Company's schools derived from Title IV Programs to no more than 85% of
the total net revenue derived from the school's students in its Title IV
eligible educational programs, and to exercise financial responsibility related
to maintaining certain financial covenants (including cash reserve for refunds,
an "acid test" ratio, a positive tangible net worth test and limitations on the
amount of operating losses in comparison to tangible net worth, as defined). All
of the Company's schools participate in Title IV Programs.
The failure of any of the Company's schools to comply with the requirements
of the HEA or the Regulations could result in the restriction or loss by the
Company or such school of its ability to participate in Title IV Programs. If
the Department determines that any of the Company's schools is not financially
responsible, the Department may require that the Company or such school post an
irrevocable letter of credit in an amount equal to not less than one-half of
Title IV Program funds received by the relevant school during the last complete
award year or, at the Department's discretion, require some other less onerous
demonstration of financial responsibility. One-half of Title IV funds received
by the Company's individual schools in the Company's most recent fiscal year
ranged from $.4 million to $5.0 million and one-half of the aggregate Title IV
funds received by all of the Company's schools in the most recent fiscal year
equaled $39.2 million. At March 31, 1998, the Company posted irrevocable letters
of credit for two of its schools totaling $181,000 which are payable to the
Department of Education and expire in October 1998.
Many of the financial responsibility standards are new, difficult to
interpret, and subject to the interpretation of the Department for
implementation. Further, the process for resolving lack of compliance with such
Regulations is also subject to interpretation and, in some cases, negotiation
with the Department. The Company believes each of its schools satisfies the
financial responsibility standards for fiscal 1998 except with respect to the
operating losses incurred by the Company's schools located in Roanoke and
Harrisonburg, Virginia.
In November 1997, the Department of Education published new regulations
regarding financial responsibility which are effective on July 1, 1998. The new
regulations will apply to the Company's fiscal years commencing April 1, 1999,
and thereafter. The regulations provide a transition year alternative which will
permit the Company to have its institutions' financial responsibility for the
fiscal year ended March 31, 1999 measured on the basis of either the new
regulations or the current regulations, whichever are more favorable. The new
standards replace the Acid Test Ratio, the Tangible Net Worth Standard and the
Net Operating Results Test with three different ratios: an equity ratio, a
primary reserve ratio and a net income ratio. The equity ratio measures the
institution's capital resources, ability to borrow and financial viability. The
primary reserve ratio measures the institution's ability to support current
operations from expendable resources. The net income ratio measures the ability
to operate at a profit. The results of each ratio are assigned a strength factor
on a scale from negative 1.0 to positive 3.0, with negative 1.0 reflecting
financial weakness and 3.0 reflecting financial strength. An institution's
strength factors are then weighted based on an assigned weighting percentage for
each ratio. The weighted scores for the three ratios are then added together to
produce a composite score for the institution. The composite score must be at
least 1.5 for the institution to be deemed financially responsible by the
Department of Education without the need for further financial monitoring. If
the institution's composite score is less than 1.5, but equal to or greater than
1.0, the institution may continue in the Title IV Program for a maximum period
of three (3) years, subject to more rigorous financial aid
F-10
<PAGE> 80
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. REGULATORY MATTERS (CONTINUED)
disbursement and financial monitoring requirements of the Department of
Education. Based on the Company's interpretation of the application of these new
standards to the Company's financial statements for the year ended March 31,
1998, the Company's calculations result in a composite score of 1.4 on a
consolidated basis, with each individual institution included in the
consolidating statements having a composite score greater than 1.5. The Company
is evaluating its options in order to comply with the new regulations.
4. ACQUISITIONS
During the fiscal years ended March 31, 1997 and 1998 the Company completed
three and two acquisitions, respectively, adding a total of twelve schools.
All of the acquisitions were accounted for under the purchase method of
accounting except the March 1997 Nebraska Acquisition. Under the purchase method
of accounting, the results of operations of the acquired companies are included
in the consolidated statement of income as of the acquisition date. The assets
and liabilities of the companies acquired in fiscal 1998 are included in the
Company's consolidated balance sheet based on a preliminary allocation of their
estimated fair values on the date of acquisition. The excess of cost over
acquired net assets of businesses acquired has been recorded as an intangible
asset and is being amortized on a straight line basis.
The following summarizes key information relevant to the fiscal 1998 and
1997 acquisitions:
HESSER ACQUISITION
On March 13, 1998, the Company acquired all of the outstanding stock of
Hesser, Inc. and certain real estate assets from an affiliate of Hesser, Inc
(collectively, the "Hesser Acquisition"). The purchase price of the Hesser
Acquisition was $17,683,372 consisting of $2,000,000 in cash, promissory notes
and other payables aggregating $13,683,372 and 202,532 shares of the Company's
Common Stock. The results of the Hesser Acquisition's operations are included in
the Company's consolidated statement of income effective March 1, 1998.
The Hesser Schools are located in Manchester, Nashua, Portsmouth and Salem,
New Hampshire and primarily offer bachelor degree and associate degree programs
in business, healthcare, information technology, criminal justice, electronic
engineering, early childhood education, and other careers. As of March 31, 1998,
the Company's Title IV funding for the Hesser Schools was suspended pending
Department of Education recertification.
CHI INSTITUTE ACQUISITION
On February 14, 1998, the Company acquired all of the outstanding stock of
Computer Hardware Service Company, Inc. ("CHI Institute Acquisition"). The
purchase price of the CHI Institute Acquisition was $12,834,230, consisting of
$1,500,000 in cash, promissory notes and other payables aggregating $9,834,230
and 151,900 shares of the Company's Common Stock. The results of the CHI
Institute Acquisition's operations are included in the Company's consolidated
statement of income effective February 1, 1998.
The CHI Institute Acquisition consists of two schools located in Broomall
and Southampton, Pennsylvania which offer associate degree and diploma programs
in business, healthcare and information technology. As of March 31, 1998, the
Company's Title IV funding for the CHI Institute Schools was suspended pending
Department of Education recertification.
F-11
<PAGE> 81
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. ACQUISITIONS (CONTINUED)
MARYLAND ACQUISITION
On December 12, 1996, the Company acquired substantially all of the assets
of one school located in Hagerstown, Maryland ("Maryland Acquisition") for
$2,700,000 in cash. The Maryland school offers healthcare and business diploma
and degree programs. The results of the Maryland Acquisition's operations are
included in the Company's consolidated statement of income effective December 1,
1996.
TEXAS ACQUISITION
On September 6, 1996, the Company acquired substantially all of the assets
of three schools located in Texas for $2,500,000 (the "Texas Acquisition"). The
schools offer healthcare degree and diploma programs and are located in San
Antonio, McAllen and El Paso, Texas. The results of the Texas Acquisition's
operations are included in the Company's consolidated statement of income
effective September 1, 1996.
The Company financed the purchase of the Texas schools with $1,250,000 in
cash and the remaining $1,250,000 payable in the form of a promissory note
bearing interest at 8% per annum and due in five equal annual principal
payments.
NEBRASKA ACQUISITION
On March 31, 1997, the Company acquired all of the outstanding stock of
Educational Management, Inc. ("Nebraska Acquisition"). The Nebraska Acquisition
consisted of two schools located in Lincoln and Omaha, Nebraska, which offer
business degree and diploma programs, and related real estate. In connection
with the acquisition, the Company issued 761,263 shares of its common stock,
agreed to pay $300,000 in non-compete agreements and paid approximately
$1,100,000 in cash which was used to pay off mortgage notes on certain real
estate owned by the Nebraska Acquisition.
This transaction was accounted for as a pooling of interests; therefore,
all financial statements presented have been restated to reflect the
acquisition. The Nebraska Acquisition prepared its financial statements using a
December 31 calendar year-end prior to the acquisition. Prior to the
acquisition, the Nebraska Acquisition and its predecessor filed its income tax
returns under the provisions of Subchapter S of the Internal Revenue Code and as
a partnership and hence recorded no provision for income taxes. Certain
adjustments were made to the Company's financial statements to record deferred
income taxes at the date of acquisition.
Net revenues and net income included in the Company's consolidated
statements of income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
-------------------------
1996 1997
----------- -----------
<S> <C> <C>
Net revenues:
Educational Medical, Inc................................. $38,651,827 $43,437,416
Nebraska Acquisition..................................... 4,694,706 6,012,264
----------- -----------
$43,346,533 $49,449,680
=========== ===========
Net income
Educational Medical, Inc................................. $ 79,424 $ 2,321,432
Nebraska Acquisition..................................... 447,384 1,236,528
----------- -----------
$ 526,808 $ 3,557,960
=========== ===========
</TABLE>
In connection with this acquisition, 95,074 shares of the 761,263 shares
issued were placed into escrow pending the resolution of certain financial aid
compliance matters with the Department of Education. In fiscal
F-12
<PAGE> 82
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. ACQUISITIONS (CONTINUED)
year 1998, the Company settled a portion of these contingencies and as a result
received 43,215 shares from the sellers' escrow and 32,809 shares were released
from escrow. The other 19,050 shares continue to be held in escrow for specified
periods.
SUMMARY PRO FORMA INFORMATION (UNAUDITED)
Summary unaudited pro forma results of operations for the years ended March
31, 1997 and 1998 for the four acquisitions accounted for as purchases, as if
the acquisitions had occurred at April 1, 1996 and April 1, 1997, respectively,
and as if the entities involved in the Texas and Hesser Acquisitions filed
Federal income tax returns as C Corporations rather than as Subchapter S
Corporations and a partnership, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
Net revenues.............................................. $70,739,000 $80,965,000
Income before extraordinary items......................... 2,428,000 3,668,000
Net income................................................ 2,119,000 3,668,000
Earnings per share:
Basic:
Income per share before extraordinary item........... $ 0.50 $ 0.48
Net income per share................................. $ 0.44 $ 0.48
Weighted average common and common equivalent shares
outstanding........................................ 4,838,924 7,709,134
Diluted:
Income per share before extraordinary item........... $ 0.36 $ 0.46
Net income per share................................. $ 0.31 $ 0.46
Weighted average common and common equivalent shares
outstanding........................................ 6,801,697 7,939,050
</TABLE>
These unaudited pro forma results of operations in fiscal 1997 and fiscal
1998 do not purport to represent what the Company's actual results of operations
would have been if the acquisitions had occurred on April 1, 1996 and April 1,
1997, respectively, and should not serve as a forecast of the Company's
operating results for any future periods. The pro forma adjustments are based
solely on the available information and certain assumptions that management
believes are reasonable. Management believes the full impact of potential cost
savings has not been reflected in the pro forma results presented above,
although there can be no assurances such cost savings will be achieved.
Subsequent adjustments may be necessary upon final determination of the
allocation of the purchase prices.
F-13
<PAGE> 83
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
---------------------------
1997 1998
----------- ------------
<S> <C> <C>
Land and land improvements............................... $ 748,598 $ 927,598
Buildings and building improvements...................... 3,288,257 6,538,230
Equipment, furniture and fixtures........................ 7,451,297 10,018,311
Leasehold improvements................................... 1,517,178 3,133,234
----------- ------------
13,005,330 20,617,373
Less accumulated depreciation and amortization........... ( 5,387,372) (6,973,137)
----------- ------------
$ 7,617,958 $ 13,644,236
=========== ============
</TABLE>
6. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
Bank lines of credit and term loan, $36,000,000 principal,
monthly interest payments, matures March 13, 2001. As of
March 31, 1998, $15,819,000 was available under the lines
of credit(a).............................................. $ -- $ 9,000,000
8.75% mortgage payable, adjustable in 1998 up to prime plus
1.25%, to a bank, due in monthly installments of principal
and interest, secured by land and building of one
school.................................................... 625,668 595,076
Promissory notes payable to sellers of various schools
acquired, non-interest bearing or with interest rates
ranging from 7.5% to 11% per annum, principal and interest
payable periodically through February 2003(b)............. 1,790,000 21,180,000
9% note payable to a bank, due in monthly installments of
$15,000 plus interest. The note was paid in full in May
1998...................................................... -- 410,000
Various unsecured, non-interest bearing notes payable for
noncompetition agreements, payable periodically through
May 1999.................................................. 757,500 112,500
Various unsecured, non-interest bearing notes payable to
sellers of various schools acquired....................... 2,500,000 --
8% to 12% capital leases, payable periodically through
September 2002; secured by equipment...................... 455,563 649,195
----------- -----------
6,128,731 31,946,771
Less current portion........................................ (3,964,851) (14,837,203)
----------- -----------
$ 2,163,880 $17,109,568
=========== ===========
</TABLE>
- ---------------
(a) In March 1998, the Company entered into an amended and restated loan
agreement (the "Agreement") with a major U.S. Bank (the "Bank"). The
Agreement increases the Company's aggregate borrowing limit with the Bank to
$36,000,000 (the "Bank Credit Facility"). The total amount of the Bank
Credit Facility is divided into three separate facilities: (i) a three year
revolving line of credit of up to $10,000,000 which may be utilized for
advances or to support letters of credit; (ii) a revolving term loan
facility of up to $11,000,000 which may be utilized prior to March 31, 1999
for the purpose of financing permitted acquisitions, either directly or to
support stand by letters of credit, reducing to $9,000,000 in March 1999 and
subject to quarterly reductions of $750,000 thereafter; and (iii) a three
year non-revolving line of credit up to $15,000,000 which may be utilized
for the purpose of financing permitted
F-14
<PAGE> 84
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
acquisitions. Interest is charged on borrowings at different floating rates
above LIBOR depending on certain financial conditions of the Company and
depending on which facility amounts are drawn on. In addition, the Bank
Credit Facility provides for commitment fees to be paid on the unused
portion of the facility. The Bank Credit Facility also contains restrictions
on the payment of dividends and incurrence of additional debt, as well as
various other financial covenants. The Bank Credit Facility is secured by
substantially all of the assets of the Company.
(b) Included in the $21,180,000 above is a note issued in connection with the
Hesser Acquisition aggregating $11,000,000 which is due upon the Department
of Education's approval of the change in control. As of March 31, 1998 the
note was secured by an $11,000,000 letter of credit which expires in March
1999. In May 1998 the Company canceled the letter of credit and replaced it
by depositing $11,000,000 in an escrow cash account. On June 2, 1998 the
note was modified to provide that $1,500,000 of the principal amount is due
on April 1, 1999 and bears interest at 7.5% beginning 30 days following the
Department of Education's recertification of the Hesser schools. This
modification has been reflected in the financial statements as of March 31,
1998. Notes payable aggregating $21,042,500 are secured by the stock of the
Company's acquiring subsidiaries.
Aggregate maturities of long-term debt at March 31, 1998 are as follows:
<TABLE>
<S> <C>
Fiscal year ending March 31
1999...................................................... $14,837,203
2000...................................................... 3,679,488
2001...................................................... 10,482,850
2002...................................................... 1,410,979
2003...................................................... 1,149,051
Thereafter................................................ 387,200
-----------
$31,946,771
===========
</TABLE>
Interest paid during the years ended March 31, 1996, 1997 and 1998 was
approximately $1,328,000, $655,000 and $254,000, respectively.
7. OTHER AMOUNTS DUE TO SELLERS
In addition to the notes payable described in Note 6, the Company owes the
former Hesser, Inc. shareholders approximately $2,433,372 as part of the
purchase of Hesser, Inc. based on the ratio of certain assets to certain
liabilities of the Hesser Schools at the time of the acquisition. Of the total
amount due, $1,250,000 was paid in May 1998 and $1,183,372 was paid in June
1998.
In addition to the notes payable described in Note 6, the Company owes the
former Computer Hardware Service Company, Inc. shareholders approximately
$1,084,230 as part of the purchase of Computer Hardware Service Company, Inc.,
based on the ratio of certain assets to certain liabilities of the CHI Institute
Schools at the time of the acquisition. All of this amount was paid in May 1998.
8. STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
On October 28, 1996, the Company completed its IPO. A total of 2,400,000
shares was sold at $10 per share which included 2,200,000 shares sold by the
Company and 200,000 shares sold by certain selling stockholders. The selling
stockholders sold an additional 210,000 shares in November 1996; the Company did
not receive any of the proceeds from the selling stockholders' sales. The net
proceeds to the Company were approximately $19.3 million and were partially used
to repay $4.8 million of subordinated debt. The balance of
F-15
<PAGE> 85
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
the IPO proceeds will be used for general corporate purposes, including the
expansion of its operations through the acquisition of additional schools.
In connection with the early extinguishment of the $4.8 million in
subordinated debt in fiscal year 1997, the Company incurred an extraordinary
loss of $514,500 ($308,683, net of tax), as a result of the write-off of the
related unamortized deferred debt issuance costs and unamortized debt discount.
STOCK SPLIT
On June 20, 1996, the Company amended its certificate of incorporation to
increase the authorized Common Stock to 15,000,000 shares, retain the par value
of $.01 per share, and to provide a five-for-three Common Stock split. Such
amendment was effective upon the IPO. All common share and per common share
amounts have been adjusted for all periods to reflect the stock split.
PREFERRED STOCK
In 1996, the Company authorized 5,000,000 shares of Preferred Stock; terms
will be set upon issuance.
CONVERTIBLE PREFERRED STOCK
Prior to its IPO, the Company issued 1,023,049 shares of Convertible
Preferred Stock, $.01 par value. At the option of the holder, shares of
Convertible Preferred Stock converted into 1.67 shares of Common Stock and prior
to March 1996, were mandatorily redeemable at $6.66 per share, subject to
certain antidilution adjustments.
Through July 22, 1991, the shares of Convertible Preferred Stock accrued
dividends at an annual rate of 8%. In 1991, pursuant to the issuance of certain
notes payable bearing interest at 13% per annum (the "13% Notes"), the terms of
the Convertible Preferred Stock were amended to eliminate the cumulative
dividends feature and the mandatory redemption in all circumstances, but still
permitting conversion at the option of the holder. In May 1996, terms were again
amended to require automatic conversion of all outstanding shares of Convertible
Preferred Stock in the event of an IPO.
All outstanding shares of Convertible Preferred Stock converted into
1,705,082 shares of Common Stock at the IPO.
COMMON STOCK
As of March 31, 1998, the Company has reserved the following shares of
Common Stock for future issuance related to the following:
<TABLE>
<S> <C>
Common Stock purchase warrants.............................. 43,334
Stock options............................................... 1,127,004
---------
1,170,338
=========
</TABLE>
COMMON STOCK PURCHASE WARRANTS
The holders of the certain 13% Notes were also granted stock purchase
warrants allowing for the purchase of up to 1,333,333 shares of Common Stock at
$3 per share (the "$3 Warrants"), for a total of $4,000,000. The $3 exercise
price of the warrants was subject to adjustment for any future issuances of
equity or equity related securities at a per share price less than the exercise
price. As of the IPO, these warrants were exercised
F-16
<PAGE> 86
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
for the purchase of 1,333,333 shares, less shares used for the cashless
exercise, yielding 933,333 additional shares of Common Stock.
The holders of the $3 warrants had certain rights to "put" their warrants
to the Company and the Company had certain rights to "call" the warrants. In May
1996, the terms of the warrants were amended to provide for a cashless exercise
based on the IPO price per share, in the event of an IPO of the Company's common
stock and to eliminate the "put" feature.
The $3 warrants were assigned a value of $1,050,000 when issued. The
difference between the $1,050,000 and the exercise price of $4,000,000 was being
accreted, using a method which approximated the effective interest rate method,
through the date of earliest exercise (50% through March 31, 1998 and 50%
through March 31, 1999). Accretion of $406,346 and $281,398 was charged to
accumulated deficit during the years ended March 31, 1996 and 1997,
respectively.
In connection with the issuance of the Convertible Preferred Stock in 1991,
a third party was granted warrants to purchase 26,667 shares of Common Stock
exercisable at $3.60 per share. These warrants expire July 31, 1999 and are
outstanding as of March 31, 1998.
At the time of the IPO, the Company issued to a third party, warrants to
purchase 16,667 shares of Common Stock at $10 per share. These warrants expire
October 28, 2001 and are outstanding as of March 31, 1998.
9. STOCK OPTION PLANS
The Company granted employees and non-employee directors options to
purchase its Common Stock. The employee options vest incrementally over periods
ranging from four to five years and expire five years after vesting. The
non-employee director options vest immediately and expire five years after
vesting.
A summary of the status of the Company's employee and director stock option
activity, and related information for the years ended March 31, is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------------ ------------------ --------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year......................... 190,833 $2.68 361,666 $3.13 821,499 $7.04
Granted...................... 175,000 3.60 465,500 10.10 277,333 9.34
Exercised.................... -- -- -- -- (34,662) 3.45
Canceled/forfeited........... (4,167) 2.40 (5,667) 8.12 (38,166) 7.40
------- ------- ---------
Outstanding at end of year..... 361,666 3.13 821,499 7.04 1,026,004 7.77
======= ======= =========
Exercisable at end of year..... 156,667 2.57 313,000 5.09 431,038 6.15
======= ======= =========
Options available for future
grant........................ 600,000 340,167 101,000
======= ======= =========
</TABLE>
F-17
<PAGE> 87
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCK OPTION PLANS (CONTINUED)
The following table summarizes information about employee and director
stock options outstanding and exercisable at March 31, 1998 by exercise price:
<TABLE>
<CAPTION>
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
------------------------- -----------
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE EXERCISABLE
AT REMAINING AT
MARCH 31, CONTRACTUAL MARCH 31,
EXERCISE PRICE 1998 LIFE 1998
- -------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
$ 2.40.................................................. 143,333 4.30 143,333
$ 4.00.................................................. 16,667 4.00 16,667
$ 3.60.................................................. 150,171 7.70 67,577
$10.00.................................................. 418,500 7.55 175,767
$11.50.................................................. 26,000 8.80 6,067
$ 8.50.................................................. 34,333 9.90 6,294
$ 7.06.................................................. 25,000 9.30 3,333
$ 7.63.................................................. 12,000 4.50 12,000
$ 9.88.................................................. 200,000 10.00 --
--------- -------
1,026,004 431,038
========= =======
</TABLE>
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
On June 20, 1996, the Company adopted and its stockholders approved a
Non-employee Director Stock Option Plan (the "Directors' Plan") to attract and
retain the services of non-employee members of the Board of Directors and to
provide them with increased motivation and incentive to exert their best efforts
on behalf of the Company by enlarging their personal stake in the Company. The
maximum number of shares of Common Stock with respect to which options may be
granted under the Directors' Plan is 200,000 shares. As of March 31, 1998,
88,000 options were available for future grant.
Each member of the Board of Directors of the Company who otherwise (i) is
not currently an employee of the Company, (ii) is not a former employee still
receiving compensation for prior services, and (iii) is not currently receiving
remuneration from the Company in any capacity other than as a director shall be
eligible for the grant of stock options under the Directors' Plan
("Participant"). Currently, all directors other than the Chairman are eligible
to participate in the Directors' Plan.
On the date the Directors' Plan was adopted, each of the four existing
non-employee directors were each granted, contingent upon completion of the IPO,
options to purchase 25,000 shares of Common Stock of the Company at the per
share IPO price ($10). These options vested immediately upon consummation of the
IPO. Upon the election of any new member of the Board of Directors, such member
will be granted an option to purchase 25,000 shares of Common Stock at the fair
market value at date of grant, vesting in five equal annual installments
beginning on the first anniversary of the date of grant. Beginning with the next
annual meeting of the stockholders of the Company and provided that a sufficient
number of shares remain available under the Directors' Plan, each year
immediately following the date of the annual meeting of the Company there
automatically will be granted to each non-employee director who is then serving
on the Board an option to purchase 3,000 shares of the Common Stock of the
Company, which options will be immediately vested. On September 9, 1997, at the
annual meeting of the Board of Directors, each of the four non-employee
directors was issued an option to purchase an additional 3,000 shares of the
Company's common stock with an exercise price per share equal to the then
current fair market value of $7.63; such options vest immediately and are
exercisable for five years.
F-18
<PAGE> 88
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCK OPTION PLANS (CONTINUED)
PRO FORMA INFORMATION
Pro forma information regarding net income and earnings per share is
required by SFAS 123, which also requires that the information be determined as
if the Company had accounted for its employee and director stock options granted
subsequent to April 1, 1995 under the fair value method described in SFAS 123.
The fair value of these stock options was estimated at the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions for the years ended March 31, 1997 and 1998, respectively: (i)
dividend yield of 0%; (ii) expected volatility of .491 and .514; (iii) risk-free
interest rates of 6.18% and 6.09%; and (iv) expected life of 5.64 and 5.65
years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee and director stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
and director stock options.
For purposes of pro forma disclosure, the estimated fair value of the
employee and director options is amortized to expense over the options' vesting
period. The Company's pro forma information using SFAS 123 follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
Pro forma income before extraordinary item.................. $2,201,907 $3,510,440
Pro forma net income........................................ $1,893,224 3,510,440
Pro forma earnings per common share:
Basic:
Income before extraordinary item....................... $ 0.49 $ 0.48
Net income............................................. 0.42 0.48
Diluted:
Income before extraordinary item....................... $ 0.34 $ 0.46
Net income............................................. 0.29 0.46
</TABLE>
Since SFAS 123 is applicable only to options granted subsequent to April 1,
1995, its pro forma effect will not be fully reflected until future years.
F-19
<PAGE> 89
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------
1996 1997 1998
-------- ----------- ----------
<S> <C> <C> <C>
Current:
Federal.......................................... $484,376 $ 567,544 $1,701,104
State............................................ 147,809 151,088 353,209
-------- ----------- ----------
632,185 718,632 2,054,313
Deferred:
Federal.......................................... -- (1,218,248) 453,453
State............................................ -- (345,747) (22,993)
-------- ----------- ----------
-- (1,563,995) 430,460
-------- ----------- ----------
$632,185 $ (845,363) $2,484,773
======== =========== ==========
</TABLE>
At March 31, 1997, the Company recognized deferred income tax assets and
liabilities related to its Nebraska Acquisition. The predecessor entities
previously filed their income tax returns under the provisions of Subchapter S
of the Internal Revenue Code and as a partnership and hence recorded no
provision for income taxes or deferred income tax assets or liabilities at the
corporate level.
A reconciliation of the provision (benefit) for income taxes computed at
the statutory federal income tax rate on income before extraordinary item to the
Company's effective income tax rate follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------
1996 1997 1998
--------- ----------- ----------
<S> <C> <C> <C>
Federal........................................... $ 394,058 $ 1,027,235 $2,154,659
State, net of federal income tax benefit.......... 97,554 99,718 237,077
Permanent differences............................. 55,436 53,554 36,006
Increase (decrease) in deferred income tax asset
valuation allowance............................. 308,584 (1,319,987) --
Effect of Nebraska Acquisition filing as a
Subchapter S corporation........................ (152,111) (420,420) --
Effect of Nebraska Acquisition's termination of
Subchapter S corporation status................. -- (285,463) --
Utilization of AMT credit......................... (56,000) -- --
Other, net........................................ (15,336) -- 57,031
--------- ----------- ----------
$ 632,185 $ (845,363) $2,484,773
========= =========== ==========
</TABLE>
F-20
<PAGE> 90
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net income tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred income tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
Deferred income tax assets:
Tradenames and other intangibles.......................... $ 575,393 $ 579,375
Property and equipment.................................... 369,236 911,789
Allowance for doubtful accounts........................... 330,135 902,084
Accrued expenses and other liabilities.................... 1,108,256 416,681
Other, net................................................ -- 50,000
---------- ----------
Total deferred income tax assets............................ 2,383,020 2,859,929
Total deferred income tax liabilities -- prepaid expenses... (229,722) (379,291)
---------- ----------
Net deferred income tax assets.............................. $2,153,298 $2,480,638
========== ==========
</TABLE>
The Company paid approximately $360,000, 1,076,000 and $2,130,000 of income
taxes in the years ended March 31, 1996, 1997 and 1998, respectively.
11. LEASES
The Company leases office, classroom and dormitory space under various
operating lease agreements expiring through 2006. Rent expense totaled
approximately $2,971,000, $3,650,000 and $4,396,000 for the years ended March
31, 1996, 1997 and 1998, respectively.
Approximate future minimum lease payments under noncancelable operating
leases in effect at March 31, 1998 are as follows:
<TABLE>
<S> <C>
Fiscal year ending March 31
1999...................................................... $ 4,472,000
2000...................................................... 3,909,000
2001...................................................... 3,288,000
2002...................................................... 2,715,000
2003...................................................... 2,099,000
Thereafter................................................ 4,018,000
-----------
$20,501,000
===========
</TABLE>
12. EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution plan covering substantially all
employees; the plan is qualified under Section 401(k) of the Internal Revenue
Code. Under the provisions of the plan, eligible participating employees may
elect to contribute up to the maximum amount of tax deferred contribution
allowed by the Internal Revenue Code. The Company matches a portion of such
contributions up to a maximum percentage of the employees' compensation. The
Company's contributions to the plan and to predecessor plans assumed in the CHI
Acquisition were approximately $104,000, $133,000 and $111,000 for the years
ended March 31, 1996, 1997 and 1998, respectively.
F-21
<PAGE> 91
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. OTHER EXPENSES
IMPAIRMENT OF LONG-LIVED ASSETS
The Company's Roanoke, Virginia school has incurred significant operating
losses since its acquisition. Accordingly, the Company evaluated the
recoverability of the school's long-lived assets including its identifiable
intangible assets and goodwill. Based on the Company's expectation of future
cash flows, the Company determined that assets with a carrying amount of
$764,000 were impaired and recorded an impairment loss in fiscal year 1996 to
record such assets at management's estimate of the net present value of such
future cash flows. This estimate was based on estimated undiscounted future cash
flows to be generated by such assets.
CONTINGENCIES
In September 1995, the Company filed suit in connection with its 1993
purchase of its Hollywood, California school. The suit alleged that the sellers
made significant financial and operational misrepresentations to the Company.
The Company sought damages from the sellers. The Sellers denied the Company's
allegations and filed a Cross-Complaint against the Company alleging among other
things, breach of contract and fraud. Both parties agreed to dismiss their
claims in April 1997 when the Company agreed to pay a total of $564,892
representing all amounts outstanding on the acquisition notes payable to the
sellers and the notes payable for covenants not-to-compete, in addition to the
payment of a portion of the sellers' legal fees. All amounts, including the
Company's legal defense expenses, were accrued or paid as of March 31, 1997.
On June 24, 1994, eight students enrolled in one of the Company's programs
at its schools in the San Diego, California area filed a lawsuit against the
Company in the state court in California. In substance, the suit alleged that
there were material misrepresentations made with respect to the content of the
program and the potential outcomes achieved by the students who graduated from
it. The suit was certified as a class action in the fall of 1994. Although the
Company believes that it accurately described the course content and the
multiple outcomes to which the course could lead, in order to avoid further
legal expense and because of the uncertainty and risks inherent in any
litigation, the Company determined that it was desirable to settle the lawsuit.
A final settlement was approved in March 1996. Pursuant to the terms of the
settlement, the Company paid the plaintiffs $600,000 in the fiscal year ended
March 31, 1996 and an additional $400,000 on April 1, 1997. In addition, the
Company agreed to make available tuition credits of $1,150,000 to class members,
provided that students elected to utilize such tuition credits by July 17, 1996.
Any unused tuition credits were to be redeemed in cash by the Company for 10% of
the credit and $115,000 was accrued for these credits, as of March 31, 1996. All
of this settlement expense is reflected in the 1996 consolidated statement of
income. As of March 31, 1997, only a few students had requested tuition credits
and substantially all of the $115,000 balance was paid into the settlement fund
on April 1, 1997. The Company incurred $600,000 and $1,115,000 in expenses in
the fiscal years ended March 31, 1995 and 1996, respectively (of which $515,000
was accrued at March 31, 1997, respectively) related to legal costs to defend
the class action lawsuit and the settlement related to such suit.
On January 12, 1998, and prior to the acquisition by the Company, a jury
verdict of $102,000 was entered against Computer Hardware Service Company, Inc.
("CHSC") in favor of a former student concerning alleged injuries suffered by
the former student as a result of conduct of her fellow students and employees
of CHSC's Southampton location. The Plaintiff subsequently filed a separate
action seeking an award of attorney's fees and costs of approximately $120,000.
CHSC filed an appeal and has retained counsel in connection with its defense of
this matter. Should the appeal be successful, the Company will be liable for
payment of the total judgment plus Plaintiff's accrued fees and costs. As of
this time, no opinion can be rendered as to the ultimate outcome of this matter,
however, the Company has accrued the amount of the verdict, the separate action
and related legal defense costs.
F-22
<PAGE> 92
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. OTHER EXPENSES (CONTINUED)
The Company is also a party to routine litigation incidental to its
business, including ordinary course employment litigation. Management does not
believe that the resolution of any or all of such routine litigation is likely
to have a material adverse effect on the Company's financial condition or
results of operations.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash, cash equivalents and restricted cash: The carrying amounts
reported on the consolidated balance sheets for cash, cash equivalents and
restricted cash approximates their fair values.
Accounts and notes receivable: The carrying amounts reported on the
consolidated balance sheets for accounts and notes receivable approximates
their fair values.
Notes payable and long-term debt: The fair values of the Company's
notes payable and long-term debt are estimated using discounted cash flow
analyses, based on the Company's estimate of current borrowing rates for
credit facilities with maturities which approximate the weighted average
maturities for its existing long-term debt. At March 31, 1997 and 1998, the
estimated fair values of the Company's notes payable and long-term debt
approximates their carrying values.
15. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the years ended March 31, 1996, 1997, and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Numerator(1):
Net income....................................... $ 672,488 $2,303,646 $3,852,461
========== ========== ==========
Denominator:
Denominator for basic earnings per
share -- weighted average shares.............. 2,371,041 4,484,492 7,382,307
Effect of dilutive securities:
Convertible preferred stock................... 1,705,082 981,006 --
Options....................................... 222,936 301,222 214,145
Warrants...................................... 882,808 680,545 15,703
---------- ---------- ----------
Dilutive potential common shares(2).............. 2,810,826 1,962,773 229,848
---------- ---------- ----------
Denominator for diluted earnings per share --
adjusted weighted average shares............ 5,181,867 6,447,265 7,612,155
========== ========== ==========
Basic earnings per share
Income before extraordinary item................. $ 0.28 $ 0.58 $ 0.52
Extraordinary item............................... -- (0.07) --
---------- ---------- ----------
Net income....................................... $ 0.28 $ 0.51 $ 0.52
========== ========== ==========
Diluted earnings per share
Income before extraordinary item................. $ 0.13 $ 0.41 $ 0.51
Extraordinary item............................... -- (0.05) --
---------- ---------- ----------
Net income....................................... $ 0.13 $ 0.36 $ 0.51
========== ========== ==========
</TABLE>
F-23
<PAGE> 93
EDUCATIONAL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. EARNINGS PER SHARE (CONTINUED)
- ---------------
(1) The fiscal year 1996 and 1997 numerator amounts reflect the pro forma
provision for income taxes recorded due to the Nebraska Acquisition.
Similarly, the basic and diluted per share amounts are the pro forma
earnings per share amounts. Historical earnings per share in fiscal year
1996 and 1997 is considered meaningless.
(2) Warrants and stock purchase options to purchase 16,667, 482,167, and 665,500
shares of common stock at March 31, 1996, 1997 and 1998, respectively, were
outstanding but were not included in the computation of diluted earnings per
share because the exercise price was greater than the average market price
of the common shares and, therefore, the effect would be antidilutive.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for the fiscal years ended March 31, 1998 and 1997 (in thousands, except per
share data):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1998
-----------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues....................................... $12,909 $13,740 $14,820 $18,207
Net income......................................... 213 584 1,308 1,747
Earnings per share data:
Basic:
Net income.................................... $ 0.03 $ 0.08 $ 0.18 $ 0.23
Diluted:
Net income.................................... 0.03 0.08 0.17 0.23
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1997
-----------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues....................................... $10,401 $12,039 $13,324 $13,686
Income before extraordinary item................... 72 698 1,141 1,956
Net income......................................... 72 698 832 1,956
Pro forma income before extraordinary item*........ 59 738 1,071 744
Pro forma net income*.............................. 59 738 762 744
Earnings per share data:
Basic:
Pro forma income before extraordinary item*... $ 0.03 $ 0.31 $ 0.18 $ 0.10
Pro forma net income*......................... 0.03 0.31 0.13 0.10
Diluted:
Pro forma income before extraordinary item*... 0.01 0.13 0.15 0.10
Pro forma net income*......................... 0.01 0.13 0.11 0.10
</TABLE>
- ---------------
* Pro forma reflects the adjustments described in "Pro Forma Income Tax Data" in
Note 2 and does not reflect the adjustments described in Note 4.
F-24
<PAGE> 94
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Hesser, Inc.:
We have audited the accompanying balance sheets of Hesser, Inc. as of
December 31, 1997 and 1996, and the related statements of operations, changes in
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hesser, Inc. as of December
31, 1997 and 1996, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
/s/ COOPERS & LYBRAND LLP
-------------------------------------
Coopers & Lybrand LLP
Boston, Massachusetts
March 13, 1998
F-25
<PAGE> 95
HESSER, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,815,846 $ 3,004,681
Restricted cash (Note A).................................. 766,215 105,533
Accounts receivable, net of allowance for doubtful
accounts and accumulated finance charges for $1,196,224
and $987,167 in 1997 and 1996, respectively............ 1,407,109 1,243,034
Due from federal government............................... 74,997 62,816
Due from related party (Note G)........................... 23,078 23,798
Inventories............................................... 489,076 493,400
Notes receivable -- current portion (Note D).............. 8,304 5,425
Prepaid expenses.......................................... 89,830 52,943
Refundable state income taxes (Note F).................... 120,238 --
Deferred state income taxes (Note F)...................... -- 76,987
----------- -----------
Total current assets.............................. 5,794,693 5,068,617
Investments (Note A)........................................ -- 1,066,228
Property, plant and equipment, net (Notes B and E).......... 4,511,263 4,802,766
Contributions to Perkins Loan Program, net of allowance for
unrecoverable contributions of $59,695 at December 31,
1997 and 1996............................................. 272,271 272,271
Notes receivable (Note D)................................... 24,470 28,890
Cash surrender value of life insurance...................... 55,447 43,932
Due from related party, net of allowance for uncollectible
amounts of $68,000 and $0 in 1997 and 1996, respectively
(Note G).................................................. 274,244 38,260
----------- -----------
Total assets...................................... $10,932,388 $11,320,964
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note E)................ $ 166,985 $ 74,773
Accounts payable, including accounts receivable credit
balances of $525,320 and $523,491 at December 31, 1997
and 1996, respectively................................. 1,514,806 1,274,901
Deposits and deferred revenues............................ 953,693 372,046
Accrued expenses.......................................... 315,268 280,386
Due to related party (Note G)............................. 85,906 180,000
State income tax payable (Note F)......................... -- 38,207
----------- -----------
Total current liabilities......................... 3,036,658 2,220,313
Long-term liabilities:
Long-term debt (Note E)................................... 2,091,660 2,008,644
Deferred state income taxes (Note F)...................... 70,347 51,939
----------- -----------
Total liabilities................................. 5,198,665 4,280,896
----------- -----------
Commitments and contingencies (Notes C and E)
Stockholder' equity:
Common stock, no par value; authorized 200 shares; 100
shares issued and outstanding at $1 stated value
each................................................... 100 100
Net unrealized investment gains........................... -- 289,320
Retained earnings......................................... 5,733,623 6,750,648
----------- -----------
Total Stockholders' Equity........................ 5,733,723 7,040,068
----------- -----------
Total liabilities and stockholders' equity........ $10,932,388 $11,320,964
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-26
<PAGE> 96
HESSER, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Revenues.................................................... $16,234,587 $15,259,617
----------- -----------
Operating expenses:
General and administrative................................ 3,533,416 3,514,601
Facilities................................................ 1,717,200 1,510,942
Admissions................................................ 2,081,016 1,800,283
Instructional............................................. 3,527,319 3,219,879
Student services.......................................... 654,821 632,671
Scholarships.............................................. 594,640 439,725
Cost of sales, bookstore and cafeteria.................... 1,589,986 1,494,495
Depreciation and amortization............................. 450,828 411,859
Bad debts................................................. 798,813 643,719
----------- -----------
Total operating expenses.......................... 14,948,039 13,668,174
----------- -----------
Operating income.................................. 1,286,548 1,591,443
----------- -----------
Other expense:
Interest expense.......................................... (997,719) (663,446)
Interest and dividend income.............................. 161,915 154,255
Realized gains on investments............................. 489,285 316,809
Other income, net......................................... 33,253 57,262
----------- -----------
Total other expense............................... (313,266) (135,120)
----------- -----------
Income before income taxes........................ 973,282 1,456,323
Provision for income taxes.................................. 85,275 104,560
----------- -----------
Net income........................................ 888,007 1,351,763
Pro forma provision for income taxes (unaudited)............ 304,038 477,969
----------- -----------
Pro forma net income (unaudited)............................ $ 583,969 $ 873,794
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-27
<PAGE> 97
HESSER, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
NET
UNREALIZED
COMMON INVESTMENT RETAINED
STOCK GAINS EARNINGS TOTAL
------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1995................. $100 $ 261,569 $ 5,734,963 $ 5,996,632
Net income................................. 1,351,763 1,351,763
Dividends distributed...................... (336,078) (336,078)
Net unrealized investment gains............ 27,751 27,751
---- --------- ----------- -----------
Balance, December 31, 1996................. 100 289,320 6,750,648 7,040,068
Net income................................. 888,007 888,007
Dividends distributed...................... (1,905,032) (1,905,032)
Net unrealized investment gains............ (289,320) (289,320)
---- --------- ----------- -----------
Balance, December 31, 1997................. $100 $ -- $ 5,733,623 $ 5,733,723
==== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-28
<PAGE> 98
HESSER, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 888,007 $1,351,763
---------- ----------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 450,828 411,859
Bad debt expense....................................... 798,813 643,719
Realized gain on investments........................... (489,285) (316,809)
Deferred state income taxes............................ 10,120 28,214
Change in assets and liabilities:
Due from federal government.......................... (12,181) 48,475
Accounts receivable.................................. (970,829) (867,575)
Prepaid expenses..................................... (36,887) 35,144
Refundable state income taxes........................ (34,963) --
Inventories.......................................... 4,324 2,558
Cash surrender value of life insurance............... (11,515) (12,267)
Accounts payable and accrued expenses................ 274,787 (338,646)
Deposits and deferred revenues....................... (79,035) (5,025)
State income taxes payable........................... (38,207) 1,971
---------- ----------
Total adjustments................................. (134,030) (368,382)
---------- ----------
Net cash provided by operating activities......... 753,977 983,381
---------- ----------
Cash flows from investing activities:
Purchase of fixed assets.................................. (83,384) (569,221)
Contributions to Perkins Loan Program..................... -- 15,261
Decrease in notes receivable.............................. 1,541 3,944
Investments, net.......................................... 1,266,193 1,185,210
Due to/from related party................................. (397,358) 176,002
---------- ----------
Net cash provided by investing activities......... 786,992 811,196
---------- ----------
Cash flows from financing activities:
Principal payments on long-term debt...................... (74,772) (413,127)
Proceeds from long-term debt.............................. 250,000 660,363
Dividends paid............................................ (1,905,032) (336,078)
---------- ----------
Net cash used in financing activities............. (1,729,804) (88,842)
---------- ----------
Net (decrease) increase in cash and cash equivalents........ (188,835) 1,705,735
Cash and cash equivalents at beginning of year.............. 3,004,681 1,298,946
---------- ----------
Cash and cash equivalents at end of year.................... $2,815,846 $3,004,681
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest............................................... $ 975,501 $ 670,930
========== ==========
Income taxes........................................... $ 148,325 $ 74,375
========== ==========
</TABLE>
See also Notes A and E for additional disclosure of supplemental noncash
investing and financing activities.
The accompanying notes are an integral part of the financial statements.
F-29
<PAGE> 99
HESSER, INC.
NOTES TO FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS
Hesser, Inc. ("Hesser" or the "Company"), was formed to do business as
Hesser College (the "College"). The College currently offers two-year
(associate) degrees in 29 different majors and maintains a traditional day
school program as well as an evening program for nontraditional, continuing
education students. In addition, during 1996, the College received approval to
offer baccalaureate degrees in criminal justice and business
administration/accounting. Campuses are located in Manchester, Nashua,
Portsmouth and Salem, New Hampshire.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity when
purchased of three months or less to be cash equivalents. Cash equivalents
recorded on the Company's balance sheet consist principally of money market
funds.
REVENUE AND COST RECOGNITION
The Company recognizes tuition (including room and board) revenue as earned
ratably over the academic year. Other income is derived primarily from textbook
sales and cafeteria services.
INVENTORIES
Inventories consist primarily of textbooks and supplies and are valued at
the lower of cost (first-in, first-out) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Major additions and
improvements are capitalized, while ordinary maintenance and repairs are charged
to expense as incurred. The cost and accumulated depreciation on assets sold or
retired are removed from the accounts and any gains or losses are reflected in
income.
Equipment under capital leases is recorded and amortized in accordance with
Statement of Financial Accounting Standards No. 13.
Depreciation is computed using primarily accelerated methods for both book
and tax purposes. Estimated useful lives for computing depreciation for book
purposes are as follows:
<TABLE>
<CAPTION>
LIFE
-----------
<S> <C>
Buildings and building improvements......................... 10-35 years
Leasehold improvements...................................... 10
Machinery and equipment..................................... 5
Furniture and fixtures...................................... 7
Library books............................................... 7
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
F-30
<PAGE> 100
HESSER, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATION OF CREDIT RISK
At December 31, 1997, substantially all of the Company's cash was deposited
with three banks.
INCOME TAXES
The Company has elected to be taxed as an S Corporation for federal income
tax purposes. Accordingly, the income of the Company is passed through directly
to the stockholders for federal income tax purposes. The Company continues to be
subject to income tax for state income tax purposes.
The Company uses the liability method of accounting for income taxes as set
forth in Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting
for Income Taxes." Under SFAS No. 109, state deferred tax assets or liabilities
are computed based on the difference between the financial statement and income
tax basis of assets and liabilities using enacted marginal tax rates. State
deferred income tax expense or credits are based on the changes in the assets or
liabilities from period to period.
STUDENT FINANCIAL ASSISTANCE PROGRAMS
The records of the Student Financial Assistance Programs (Federal Perkins
Loan Program, Federal Supplemental Educational Opportunity Grant Program and
Federal Work Study Program) are maintained by employees of the Company and are
not part of the financial statements as presented herein. Additionally, amounts
due from the federal government represent federal financial assistance monies
advanced to students by the Company on behalf of the United States Government,
for which the Company was awaiting reimbursement.
CONTRIBUTIONS TO PERKINS LOAN PROGRAM
Institutional capital contributions to the Perkins Loan Program are
recorded at cost. An allowance is provided for the Company's portion of
estimated uncollectible loans.
INVESTMENTS
Investments have been classified as available for sale and as a result are
stated at fair market value. At December 31,1996, these investments were
comprised of mutual funds managed by a third party portfolio manager. During
November 1997, the Company liquidated all of its investments and distributed the
proceeds to the stockholders. The cost and market value of investments held at
December 31, 1996, were $776,908 and $1,066,228, respectively. The unrealized
holding gains of $0 and $289,320 at December 31, 1997 and 1996, respectively,
were included as a component of stockholders' equity. The cost of investments
sold is based on the specific identification method.
RESTRICTED CASH
Restricted cash represents amounts received from the New Hampshire Higher
Education Assistance Foundation (NHHEAF) for student loans which will be
credited to individual student's account receivable balances once the student
enrolls at the College. Loan disbursements received for students who do not
ultimately enroll at the College will have to be returned to NHHEAF. The
corresponding liability for these undisbursed loan proceeds has been grouped
with deposits and deferred revenues in the accompanying financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 financial statements
to conform to the 1997 financial statement presentation.
F-31
<PAGE> 101
HESSER, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
B. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Land and land improvements.................................. $ 124,868 $ 124,868
Buildings and improvements.................................. 5,270,740 5,265,656
Furniture and fixtures...................................... 1,529,521 1,471,426
Computer equipment.......................................... 858,356 840,899
Machinery and equipment..................................... 318,242 318,242
Equipment under capital leases.............................. 37,700 37,700
Library books............................................... 29,364 29,364
Leasehold improvements...................................... 465,722 450,673
---------- ----------
Total............................................. 8,634,513 8,538,828
Less: Accumulated depreciation.............................. 4,123,250 3,736,062
---------- ----------
$4,511,263 $4,802,766
========== ==========
</TABLE>
C. LEASES:
The Company has various leases for classroom and office space for its
continuing education programs and auto leases which are accounted for as
operating leases. The operating leases expire at various dates from 1997 through
2004.
Future minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<S> <C>
1998........................................................ $ 580,367
1999........................................................ 438,818
2000........................................................ 407,633
2001........................................................ 341,720
2002........................................................ 190,630
Thereafter.................................................. 375,968
----------
$2,335,136
==========
</TABLE>
Rent expense amounted to $746,087 and $499,478 for the years ended December
31, 1997 and 1996, respectively.
D. NOTES RECEIVABLE:
Notes receivable consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
------- -------
<S> <C> <C>
Darilyn Enterprises (a related party; 9% note requiring
monthly interest and principal payments, due in April,
2002)..................................................... $28,890 $32,931
Other notes receivable 3,884 1,384
------- -------
32,774 34,315
Less; Current portion....................................... 8,304 5,425
------- -------
$24,470 $28,890
======= =======
</TABLE>
F-32
<PAGE> 102
HESSER, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
E. LONG-TERM DEBT:
Long-term debt consists of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Finance obligation payable to Hardwood Properties Limited
Partnership, a related party (see below).................. $2,258,645 $2,083,417
Less: Current portion....................................... 166,985 74,773
---------- ----------
$2,091,660 $2,008,644
========== ==========
</TABLE>
On October 5, 1993, the Company entered into an agreement with Hardwood
Properties Limited Partnership ("Hardwood"), an entity whose general and limited
partners are either shareholders of the Company or immediate family members,
whereby substantially all of the Company's real property was sold to Hardwood
for approximately $4,182,000. The sales price consisted of the assumption of the
existing mortgage by Hardwood on the properties sold of $2,992,400 and a demand
note for the remainder of the balance. The Company remains, however, jointly and
severally liable on the first mortgage ($1,071,750 balance outstanding at
December 31, 1997) with respect to all of its terms, provisions, and covenants.
In connection with this transaction, the Company and Hardwood also entered into
two one-year lease agreements for the properties sold which call for an annual
payment of $1,050,000 plus all operating expenses related to the facilities. The
Company and Hardwood have extended this lease through September 30, 1998, under
the same terms and conditions. Under the Provisions of SFAS Nos. 66, "Accounting
for Sales of Real Estate," and 98, "Accounting for Leases," this transaction has
been accounted for as a financing given the Company's continuing involvement by
virtue of its guarantee of the debt related to the properties which were sold.
Accordingly, the net book value of the properties sold ($3,500,997 at December
31, 1997) remains on the Company's books and will continue to be depreciated.
Accordingly, a finance obligation (with an effective interest rate of 37.75%)
was recorded in an amount equal to the mortgage balance at the time of the sale.
On August 6, 1996, the Company amended the agreement with Hardwood
discussed above in connection with an additional bank borrowing by Hardwood in
the amount of $1,500,000 which expires in June 2003, under which the Company is
jointly and severally liable. In addition, the Company borrowed from Hardwood an
additional $410,364 to finance building and leasehold improvements which was
funded out of the proceeds from the new $1,500,000 bank borrowing. Under the
terms of the amended agreement, the term of the existing mortgage on the
Company's real property was extended through December 2002. The terms of the
amended agreement call for the annual lease payment of $1,050,000 to be
allocated pro rata between the existing finance obligation and the additional
liability (with an effective interest rate of 46.91%) which was incurred by the
Company as a result of the 1996 borrowing. The total amount due to Hardwood
under the amended agreement has been recorded as a finance obligation in the
Company's financial statements and is being reduced as the lease payments are
made through the related terms of the underlying bank borrowings. In December
1997, Hardwood paid to the Company an additional $250,000 in connection with the
transactions previously discussed. This amount has also been reflected as a
component of the finance obligation as of December 31, 1997.
Total interest expense incurred under this arrangement was $975,228 in 1997
and $607,635 in 1996.
The mortgage note agreement with Citizens Bank discussed above contain
various restrictive covenants, including the maintenance of minimum net worth of
$3,500,000, the maintenance of various insurance coverages, restrictions on
additional borrowings, the making of loans to employees and directors, and
limitations on the payment of dividends.
During the year ended December 31, 1997, the Company violated the covenant
limiting the payment of dividends. Prior to year-end, the Company obtained a
waiver from the bank regarding this violation.
F-33
<PAGE> 103
HESSER, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Aggregate annual principal maturities of long-term debt are as follows for
the years ended December 31:
<TABLE>
<S> <C>
1998........................................................ $ 166,985
1999........................................................ 246,485
2000........................................................ 364,304
2001........................................................ 539,169
2002........................................................ 799,086
Thereafter.................................................. 142,616
----------
$2,258,645
==========
</TABLE>
F. INCOME TAXES:
The provision for income taxes consists of the following components for the
years ended:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
------- --------
<S> <C> <C>
State:
Current................................................... $75,155 $112,582
Deferred.................................................. 10,120 (8,022)
------- --------
$85,275 $104,560
======= ========
</TABLE>
Deferred income taxes arise from differences in the timing of the
recognition of certain expenses for financial statement and income tax reporting
purposes. The principal sources of these differences are depreciation, accounts
receivable reserves, the difference in book and tax treatment of the building
sale to Hardwood, and certain other nondeductible accruals.
The pro forma provision for income taxes represents a provision for Federal
income taxes as if the Company had operated as a C Corporation for federal
income tax purposes.
G. RELATED PARTY TRANSACTIONS:
The Company has entered into a five-year lease agreement with Darilyn
Enterprises, a business owned by certain officers of the Company, for the rental
of parking space adjacent to the Manchester campus. The terms of the lease
agreement call for monthly payments of $2,300. Rental expense under this
agreement for the years ended December 31, 1997 and 1996, amounted to
approximately $28,000.
Throughout the year, the Company advanced monies to Harmony Learning
Center, Inc., (Harmony), a corporation owned jointly by the two stockholders of
the Company. At December 31, 1997, amounts owed to the Company as a result of
these advances were $23,078. This amount has been classified as a current asset
based upon the timing of the anticipated repayment.
During 1996, the Company entered into an agreement with Loan 4 Education,
an entity owned jointly by the two stockholders of the Company. Loan 4 Education
was created to loan money to students with the initial funding for loans being
provided by the Company. The total amount due the Company, net of allowance, as
of December 31, 1997 and 1996, is $274,244 and $38,260, respectively.
The Company owed $85,906 to Hardwood at December 31, 1997. The Company
intends to repay the amount in 1998.
F-34
<PAGE> 104
HESSER, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
H. SUBSEQUENT EVENT:
On March 13, 1998, the stockholders of the Company signed a purchase and
sale agreement whereby 100% of the Company's outstanding stock and the real
property currently being leased by the Company from Hardwood will be sold to a
third party.
F-35
<PAGE> 105
INDEPENDENT AUDITORS REPORT
The Board of Directors
CHI Institute
(A Division of Computer Hardware
Service Company, Inc.)
We have audited the accompanying balances sheet of CHI INSTITUTE (A
DIVISION OF COMPUTER HARDWARE SERVICE COMPANY, INC.) as of September 30, 1997
and the related statements of operations and retained earnings and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above presents fairly,
in all material respects, the financial position of CHI INSTITUTE (A DIVISION OF
COMPUTER HARDWARE SERVICE COMPANY, INC.) as of September 30, 1997 and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
ASHER & COMPANY, LTD.
Philadelphia, Pennsylvania
March 20, 1998
F-36
<PAGE> 106
CHI INSTITUTE
(A DIVISION OF COMPUTER HARDWARE SERVICE COMPANY, INC.)
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $1,204,851 $1,446,026
Accounts receivable....................................... 656,187 639,744
Other current assets...................................... 13,139 36,500
---------- ----------
Total current assets.............................. 1,874,177 2,122,270
INVESTMENT IN PARTNERSHIP
Computer Hardware Investors............................... 253,216 253,216
PROPERTY AND EQUIPMENT
Leasehold improvements.................................... 473,319 473,318
Equipment................................................. 896,585 896,585
Furniture and fixtures.................................... 129,036 129,035
---------- ----------
1,498,940 1,498,938
Less accumulated depreciation............................. 754,998 783,877
---------- ----------
743,942 715,061
OTHER ASSETS
Deferred income tax benefit............................... 68,777 68,777
Deposits.................................................. 1,500 1,500
Goodwill, net of accumulated amortization of $127,859 and
$151,474, respectively................................. 549,041 538,426
Covenant, net of accumulated amortization of $11,333 and
$0, respectively....................................... 8,667 7,000
---------- ----------
Total other assets................................ 627,985 615,703
TOTAL ASSETS...................................... $3,499,320 $3,706,250
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt...................... $ 180,000 $ 180,000
Accounts payable.......................................... 205,096 113,306
Accrued expenses.......................................... 608,253 235,302
Deferred tuition revenue.................................. 613,344 752,074
Income taxes payable...................................... 44,045 243,059
---------- ----------
Total current liabilities......................... 1,650,738 1,523,741
LONG TERM DEBT.............................................. 305,000 288,668
STOCKHOLDERS' EQUITY
Common stock, no par value; authorized 100,000 shares,
issued 55,300 shares, and outstanding 35,250 shares.... 74,930 74,930
Retained earnings......................................... 1,568,987 1,919,246
---------- ----------
1,643,917 1,994,176
Less treasury stock, at cost, 20,050 shares............... (100,335) (100,335)
---------- ----------
1,543,582 1,893,841
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $3,499,320 $3,706,250
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE> 107
CHI INSTITUTE
(A DIVISION OF COMPUTER HARDWARE SERVICE COMPANY, INC.)
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE THREE
MONTHS MONTHS
YEAR ENDED ENDED ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1997 1997 1996
------------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenue
Tuition and related income............................. $7,434,950 $1,880,087 $1,746,543
Costs and expenses
Operating expenses..................................... 3,842,213 559,654 519,204
General and administrative expenses.................... 2,084,460 701,149 528,228
Taxes, other than income tax........................... 352,934 8,805 8,325
Depreciation and amortization.......................... 144,603 41,161 33,517
Interest expense....................................... 59,442 10,692 --
---------- ---------- ----------
6,483,652 1,321,461 1,089,274
---------- ---------- ----------
Income from operations................................... 951,298 558,626 657,269
Other
Litigation expense..................................... (232,000) -- --
Interest and other income.............................. 152,210 21,633 27,762
---------- ---------- ----------
(79,790) 21,633 27,762
---------- ---------- ----------
Income before income taxes............................... 871,508 580,259 685,031
Provision for:
Current taxes.......................................... (445,621) (230,000) (273,000)
Deferred income tax benefit............................ 89,000 -- --
---------- ---------- ----------
(356,621) 230,000 (273,000)
---------- ---------- ----------
Net income............................................... 514,887 350,259 412,031
Retained earnings, beginning of period................... 1,054,100 1,568,987 1,054,100
---------- ---------- ----------
Retained earnings, end of period......................... $1,568,987 $1,919,246 $1,466,131
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE> 108
CHI INSTITUTE
(A DIVISION OF COMPUTER HARDWARE SERVICE COMPANY, INC.)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR THREE MONTHS THREE MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ ----------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................................ $ 514,887 $ 350,259 412,031
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization................... 144,603 41,161 33,517
Income from investment in Partnership........... (37,953) -- --
Deferred income tax............................. (89,000) -- --
Changes in:
Accounts receivable........................... (283,064) 16,443 2,597
Other current assets.......................... (12,839) (23,361) (36,194)
Accounts payable.............................. 71,404 (91,790) 27,678
Accrued expenses.............................. 544,833 (372,949) 276,538
Deferred tuition revenue...................... (108,546) 138,730 96,473
Income taxes payable.......................... (212,497) 199,014 (202,233)
---------- ---------- ----------
Net cash provided by operating activities......... 531,828 257,507 610,407
INVESTING ACTIVITIES
Purchase of property and equipment................ (98,324) -- --
---------- ---------- ----------
Net cash utilized by investing activities......... (98,324) -- --
FINANCING ACTIVITIES
Principal payments on long-term debt.............. (360,000) (16,332) (180,000)
Purchase of Treasury stock........................ (17,824) -- (93,883)
Interdivisional due to/from....................... (131,162) -- --
---------- ---------- ----------
Net cash utilized by financing activities......... (508,986) (16,332) (273,883)
INCREASE/(DECREASE) IN CASH AND CASH
EQUIVALENTS.............................. (75,482) 241,175 336,524
Cash and cash equivalents, beginning of period...... 1,280,333 1,204,851 1,280,333
---------- ---------- ----------
Cash and cash equivalents, end of period............ $1,204,851 $1,446,026 $1,616,857
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest........................................ $ 59,442 $ 10,692 $ --
========== ========== ==========
Income taxes.................................... $ 660,818 $ 30,986 $ 202,406
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE> 109
CHI INSTITUTE
(A DIVISION OF COMPUTER HARDWARE SERVICE COMPANY, INC.)
NOTES TO FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITIES
CHSC derives its revenue primarily from two sources. The Company operates
CHI Institute, a career technical school. The school operates two separate
campuses in the suburbs of Philadelphia, Pennsylvania. CHSC also derives revenue
from modifying, refurbishing and providing maintenance services to computers for
companies primarily located in Eastern Pennsylvania and New Jersey.
PROPERTY AND EQUIPMENT AND RELATED DEPRECIATION
Property and equipment are carried at cost and related depreciation is
provided primarily by the declining balance method over the estimated useful
lives of the assets:
The useful lives of property and equipment for purposes of computing
depreciation are:
<TABLE>
<S> <C>
Leasehold improvements...................................... 10-15 years
Equipment................................................... 5-7 years
Furniture and fixtures...................................... 5-7 years
</TABLE>
It is the general practice to charge repairs and maintenance to expense;
major expenditures for repairs and improvements are capitalized and depreciated.
When assets are sold or otherwise disposed of, the cost and related reserves are
removed from the accounts and any resulting gain or loss is included in income.
GOODWILL AND COVENANT NOT TO COMPETE
The Company is amortizing goodwill on a straight-line basis over 15 years.
The covenant not to compete is amortized on a straight-line basis over five
years.
TUITION REVENUE RECOGNITION
In accordance with industry practice, tuition revenue is recognized as
income on a pro rata basis over the length of the program based on the
percentage of scheduled hours completed. Tuition revenue received in advance is
reflected as deferred tuition revenue on the balance sheet.
TUITION RECEIVABLE
The Company analyzes, on a monthly basis, students' payments on their
contracts in comparison to the portion of the education they received. Amounts
owed by students for the education received are classified as tuition receivable
and are included in accounts receivable.
INCOME TAXES
The deferred tax liability was determined based on the differences between
the financial statement and tax bases of assets and liabilities. Current income
taxes are based on the year's taxable income for Federal and state income tax
reporting purposes.
CASH AND CASH EQUIVALENTS
For the purpose of the statement of cash flows, the Company considers all
highly liquid investment with maturities of three months or less at the time of
purchase to be cash equivalents.
F-40
<PAGE> 110
CHI INSTITUTE
(A DIVISION OF COMPUTER HARDWARE SERVICE COMPANY, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ADVERTISING COST
The Company's policy is to expense all advertising costs as they are
incurred. Advertising expense charged to operations for the year ended September
30, 1997 was $559,839.
INVESTMENT IN PARTNERSHIP
The Company is a Partner in Computer Hardware Investor (a Partnership)
which owns real estate in Southampton, Pennsylvania. The property is used by CHI
Institute as a technical school. Under the Partnership Agreement, profits and
losses resulting from the Partnership are allocated 33% to each of the two
general partners and 34% to Computer Hardware Service Company (CHSC).
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
INTERIM STATEMENTS
The interim financial data for the three months ended December 31, 1997 and
1996 is unaudited; however, in the opinion of management, the interim data
includes all adjustments, consisting only of normal recurring adjustments,
necessary for the fair statement of the results for the interim periods, on a
consistent basis.
NOTE B -- LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<S> <C>
Note payable in monthly installments of $15,000 plus
interest at the rate of 9%, matures on December 1, 1999,
collateralized by all the assets of CHSC and the personal
guarantees of the two principal Stockholders and the
property owned by Computer Hardware Investors (a
Partnership).............................................. $485,000
Less current portion........................................ 180,000
--------
$305,000
========
</TABLE>
Prior to September 30, 1997, the Company was required to make a prepayment
within 90 days of their fiscal year end in an amount equal to 50% of excess
cash, as defined in the note. During the year ended September 30, 1997, the bank
agreed to rescind this provision.
Aggregate maturities for long-term debt for the three years subsequent to
September 30, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, AMOUNT
- ------------------------ --------
<S> <C>
1999................................................. $180,000
2000................................................. 180,000
2001................................................. 125,000
</TABLE>
F-41
<PAGE> 111
CHI INSTITUTE
(A DIVISION OF COMPUTER HARDWARE SERVICE COMPANY, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In addition, the Company had guaranteed a mortgage loan for Computer
Hardware Investors in which it is a Partner. The outstanding balance on the
mortgage at September 30, 1997 is $146,128.
NOTE C -- PENSION
The Company has a 401(k) Saving Plan that covers substantially all of its
employees. Participants may make voluntary contributions to the Plan up to 15%
of their compensation not to exceed Internal Revenue Service allowable limits
($9,500 in 1997). The Company will contribute 50% of the amount contributed by
an employee that is not in excess of 3% of their compensation.
NOTE D -- INCOME TAXES
Summaries of the provisions for income taxes are as follows:
<TABLE>
<S> <C>
Current taxes:
Federal................................................... $333,624
State..................................................... 111,997
--------
Total............................................. 445,621
Deferred taxes:
Federal benefit........................................... (69,222)
State benefit............................................. (19,778)
--------
Total............................................. (89,000)
--------
Provision for income taxes.................................. $356,621
========
</TABLE>
The provision for income taxes differs from the amount computed by applying
the U.S. Federal income tax rate (34%) because of the effect of the following
items:
<TABLE>
<S> <C>
Tax at Federal income tax rate.............................. $375,193
State income taxes, net of U.S. Federal benefit............. 70,428
Deferred income taxes Depreciation.......................... 8,445
Legal settlement............................................ (97,445)
--------
$356,621
========
</TABLE>
Temporary differences giving rise to the deferred tax liability consist of
the excess of depreciation for tax purposes over the amount for financial
reporting purposes and the accrual of a legal settlement which is not deductible
for tax purposes until paid.
As a result of the fact that the Company is related to Computer Hardware
Maintenance Company, Inc. (CHMC), they are required to share a surtax exemption
with CHMC. For the year ended September 30, 1997, the surtax exemption was split
evenly between CHSC and CHMC.
NOTE E -- RELATED PARTY TRANSACTIONS
CHSC is affiliated with Computer Hardware Maintenance Company, Inc. (CHMC)
as a result of the fact that the same Stockholders who own a majority common
stock interest in CHSC also own a majority interest in CHMC. For the year ended
September 30, 1997, there was no significant activity between these related
parties. During the year ended September 30, 1997, CHSC paid CHMC $50,000 to
purchase six computer hardware maintenance accounts.
CHSC is also affiliated with Computer Hardware Investors, a Partnership, as
a result of the fact that CHSC is a Partner in the Partnership and the
Partnership owns 4,000 shares of CHSC common stock.
F-42
<PAGE> 112
CHI INSTITUTE
(A DIVISION OF COMPUTER HARDWARE SERVICE COMPANY, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
CHSC rents a building from the Partnership that CHI Institute (Bucks
Campus) uses to operate its technical school. The building is approximately
40,000 square feet. Rent expense for the building for the year ended September
30, 1997 was $144,000.
NOTE F -- TITLE IV PROGRAM REVENUE COMPLIANCE
In accordance with U.S. Department of Education guidelines, proprietary
educational institutions must derive at least 15% of their revenue on a cash
basis from sources other than Title IV, HEA Programs.
For the year ended September 30, 1997, CHI (Bucks Campus) and CHI (Delaware
County Campus) received on a cash basis 55% and 68%, respectively, of their
gross tuition and related revenue from Title IV, HEA Programs calculated as
follows:
<TABLE>
<CAPTION>
CHI CHI
BUCKS COUNTY DELAWARE COUNTY
CAMPUS CAMPUS
------------ ---------------
<S> <C> <C>
Receipts from Title IV
Programs (cash basis)................................... $2,243,182 $2,073,383
=55% =68%
Net tuition and related revenue received (cash basis)..... $4,060,142 $3,042,727
</TABLE>
NOTE G -- LEASES
The Company rents the building where CHI Institute (Bucks Campus) is
located from Computer Hardware Investors, a related party, under a one year
lease agreement expiring March 31, 1998. The terms of the lease require a ninety
day written notice upon termination. The current rent is $12,000 per month.
Additionally, the Company leases the building from which CHI (Delaware
County Campus) operates. The lease is a non-cancelable operating lease for land
and building and expires on August 31, 1999. The current annual rent is $127,442
and is subject to an annual change effective January 1, 1998, based on the
change in the consumer price index.
Rent expense for the year ended September 30, 1997 was $325,570.
Minimum future lease payments under the above mentioned leases for each of
the next two years are as follows:
<TABLE>
<CAPTION>
YEARS ENDING SEPTEMBER 30, AMOUNT
- -------------------------- --------
<S> <C>
1999........................................................ $249,130
2000........................................................ 117,539
--------
$366,669
========
</TABLE>
NOTE H -- COMMITMENTS AND CONTINGENCIES
FEDERAL STUDENT FINANCIAL AID
The trade schools operated by the Company participate in various Federal
financial aid programs. These programs are for the benefit of the student
attending the schools. These programs have strict requirements for participation
and the Company is subject to government program reviews.
F-43
<PAGE> 113
CHI INSTITUTE
(A DIVISION OF COMPUTER HARDWARE SERVICE COMPANY, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
LITIGATION
A provision has been made to accrue a liability for a judgment in a
lawsuit. The Company was found guilty of sexual harassment by virtue of the
actions of its' students and a judgement was entered against the Company in the
amount of $232,000 in January, 1998. The Company is appealing this verdict,
however the entire amount has been accrued.
NOTE I -- STOCK PURCHASE
During the year ended September 30, 1997, the Company purchased 1,600
shares of stock from a Shareholder for $17,824.
NOTE J -- CONCENTRATION OF CREDIT RISK
The Company maintains cash accounts, which at times, may exceed federally
insured limits. The Company has not experienced any losses from maintaining cash
accounts in excess of federally insured limits. Management believes that it is
not exposed to any significant credit risks on its cash accounts.
NOTE K -- SUBSEQUENT EVENT
On February 14, 1998, a stock purchase agreement was entered into between
the Stockholders of the Company and Educational Medical, Inc. (EMI) for the
purchase of all the Company's stock. The computer hardware service division of
Computer Hardware Service Company and the investment in Computer Hardware
Investors were sold prior to the sale to EMI.
F-44
<PAGE> 114
[ARTWORK CONTAINING SCHOOL LOCATIONS AND MAP]
<PAGE> 115
======================================================
NO UNDERWRITER, DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY
OFFER TO BUY, ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT
IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 7
Use of Proceeds....................... 14
Price Range of Common Stock........... 14
Dividend Policy....................... 14
Capitalization........................ 15
Unaudited Pro Forma As Adjusted
Condensed Consolidated Statement of
Income.............................. 16
Selected Consolidated Financial and
Other Operating Data................ 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 28
Licensing, Accreditation and Financial
Aid Regulation...................... 39
Management............................ 46
Certain Transactions.................. 56
Principal and Selling Stockholders.... 58
Description of Capital Stock.......... 60
Shares Eligible for Future Sale....... 63
Underwriting.......................... 64
Legal Matters......................... 65
Experts............................... 65
Additional Information................ 65
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
======================================================
======================================================
2,000,000 SHARES
EDUCATIONAL
MEDICAL, INC.
COMMON STOCK
(EDUCATIONAL MEDICAL LOGO)
------------
PROSPECTUS
JULY , 1998
------------
SALOMON SMITH BARNEY
LEGG MASON WOOD WALKER
INCORPORATED
======================================================
<PAGE> 116
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses to be borne by the Registrant
in connection with the issuance and distribution of the securities being
registered hereby other than underwriting discounts and commissions. All
expenses other than the SEC registration fee and the NASD filing fee are
estimated.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 16,818.89
NASD filing fee............................................. 4,022.00
Nasdaq Rule 10b-17 filing fee............................... 12,520.02
Accounting fees and expenses................................ 120,000.00
Legal fees and expenses..................................... 100,000.00
"Blue Sky" fees and expenses (including legal fees)......... 11,000.00
Costs of printing and engraving............................. 160,000.00
Miscellaneous............................................... 639.09
-----------
Total....................................................... $425,000.00
===========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Bylaws effectively provide that the Registrant shall, to
the full extent permitted by Section 145 of the General Corporation Law of the
State of Delaware, as amended from time to time ("Section 145"), indemnify all
persons whom it may indemnify pursuant thereto. In addition, the Registrant's
Certificate of Incorporation eliminates personal liability of its directors to
the full extent permitted by Section 102(b)(7) of the General Corporation Law of
the State of Delaware, as amended from time to time ("Section 102(b)(7)").
Section 145 permits a corporation to indemnify its directors and officers
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlements actually and reasonably incurred by them in connection with any
action, suit or proceeding brought by a third party if such directors or
officers acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action, indemnification may be made only for expenses
actually and reasonably incurred by directors and officers in connection with
the defense or settlement of an action or suit and only with respect to a matter
as to which they shall have acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interest of the corporation, except
that no indemnification shall be made if such person shall have been adjudged
liable to the corporation, unless and only to the extent that the court in which
the action or suit was brought shall determine upon application that the
defendant officers or directors are reasonably entitled to indemnity for such
expenses despite such adjudication of liability.
Section 102(b)(7) provides that a corporation may eliminate or limit the
personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, provided that such
provision shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for willful or negligent conduct
in paying dividends or repurchasing stock out of other than lawfully available
funds or (iv) for any transaction from which the director derived an improper
personal benefit. No such provisions shall eliminate or limit the liability of a
director for any act or omission occurring prior to the date when such provision
becomes effective.
The Company has entered into an Indemnification Agreement with each of its
directors containing provisions that may require the Company, among other
things, to indemnify its directors against certain liabilities that may arise by
reason of their status or service as directors (other than liabilities arising
from willful misconduct of a culpable nature) and to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified.
II-1
<PAGE> 117
The Company maintains insurance against liabilities under the Securities
Act of 1933 for the benefit of its officers and directors.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
There have been no sales of unregistered securities by the Registrant
within the past three years, except as follows:
In March 1995, the Company issued warrants (the "Sirrom Warrants") to
Sirrom to acquire up to 141,667 shares of Common Stock for a purchase price
of $.006 per share. The Sirrom Warrants had an expiration date of April 30,
2000. In connection with the IPO, the Sirrom Warrants were exercised in
full.
In connection with its Initial Public Offering (the "IPO") on October
28, 1996, the Company issued 933,333 shares of Common Stock to the Pecks
Managed Entities upon the cashless exercise of warrants to purchase
1,333,333 shares of Common Stock based on the initial public offering
price. In March 1997, February 1998 and March 1998, the Company issued
761,263, 151,900 and 202,532 shares of Common Stock in connection with the
Nebraska transaction, the CHI Institute Acquisition and the Hesser
Acquisition, respectively.
In each such transaction, the securities were not registered under the
Securities Act of 1933, as amended, in reliance upon the exemption from
registration provided by Section 4(2) of the Act. The factors that assured
the availability of that exemption for each such transaction included the
sophistication of the offerees and of the purchasers, their access to
material information, the disclosures actually made to them by the
Registrant and the absence of any general solicitation or advertising.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
1.1** -- Form of Underwriting Agreement.
3.1(a)* -- Restated Certificate of Incorporation of EMI Acquisition
Corp.
3.1(b)* -- Certificate of Amendment of Certificate of Incorporation of
EMI Acquisition Corp.
3.1(c)* -- Second Amendment to Restated Certificate of Incorporation of
Educational Medical, Inc.
3.1(d)* -- Third Amendment to Restated Certificate of Incorporation of
Educational Medical, Inc.
3.1(e)* -- Fourth Amendment to Restated Certificate of Incorporation of
Educational Medical, Inc.
3.1(f)* -- Fifth Amendment to Restated Certificate of Incorporation of
Educational Medical, Inc.
3.1(g)* -- Sixth Amendment to Restated Certificate of Incorporation of
Educational Medical, Inc.
3.1(h)* -- Seventh Amendment to Restated Certificate of Incorporation
of Educational Medical, Inc.
3.1(i)* -- Eighth Amendment to Restated Certificate of Incorporation of
Educational Medical, Inc.
3.2* -- Restated By-Laws of the Company.
4.1* -- Form of Common Stock Certificate.
5.1** -- Opinion of Greenberg Traurig.
10.1* -- Securities Purchase Agreement, dated as of July 23, 1991, by
and among the Company and the Pecks Managed Entities.
10.2* -- Promissory Note R-002, dated as of July 16, 1991, in the
principal amount of $2,900,000 issued by the Company in
favor of NAP & Company.
10.3* -- Promissory Note R-003, dated as of July 23, 1991, in the
principal amount of $603,000 issued by the Company in favor
of Fuelship & Company.
10.4* -- Promissory Note R-004, dated as of July 23, 1991, in the
principal amount of $497,000 issued by the Company in favor
of Fuelship & Company.
10.5* -- Allonge to Promissory Note R-002, dated as of March 31,
1995.
10.6* -- Allonge to Promissory Note R-003, dated as of March 31,
1995.
10.7* -- Allonge to Promissory Note R-004, dated as of March 31,
1995.
10.8* -- Warrant No. R-001 to purchase Common Stock issued to
Fuelship & Company.
</TABLE>
II-2
<PAGE> 118
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
10.9* -- Warrant No. R-002 to purchase Common Stock issued to NAP &
Company.
10.10* -- Warrant No. E-007 to purchase Common Stock issued to
Equitable Securities Corporation.
10.11* -- First Amendment to Securities Purchase Agreement, dated as
of March 31, 1995, by and among the Company and the Pecks
Managed Entities.
10.12* -- Loan Agreement, dated as of March 31, 1995, by and between
the Company, each of its subsidiaries, and Sirrom.
10.13* -- Letter Addendum to Loan Agreement, dated as of March 31,
1995, between the Company, each of its subsidiaries, and
Sirrom.
10.14* -- Secured Promissory Note, dated as of March 31, 1995, in the
principal amount of $2,200,000, issued by the Company and
each of its subsidiaries in favor of Sirrom.
10.15* -- Security Agreement, dated as of March 31, 1995, among the
Company, each of its subsidiaries, and Sirrom.
10.16* -- Stock Purchase Warrant to purchase Common Stock of the
Company issued to Sirrom, dated as of March 31, 1995.
10.17* -- Pledge Agreement, dated as of March 31, 1995, between the
Company and Sirrom.
10.18* -- Agreement in Respect of Warrant, dated as of March 31, 1995,
among NAP & Company, the Company and Sirrom.
10.19* -- Agreement in Respect of Warrant, dated as of March 31, 1995,
among Fuelship & Company, the Company and Sirrom.
10.20* -- Registration Rights Agreement, dated as of July 23, 1991, by
and among the Company, the Sprout Group, LTOS, and the Pecks
Managed Entities.
10.21* -- First Amendment to Registration Rights Agreement, dated as
of March 31, 1995, by and among the Company, the Sprout
Group, LTOS, the Pecks Managed Entities and Sirrom.
10.22* -- Coinvestors Agreement, dated as of July 23, 1991, by and
among the Company, the Sprout Group, LTOS, the Pecks Managed
Entities and Investech, L.P.
10.23* -- Letter Agreement, dated as of July 23, 1991, by and among
the Company, the Sprout Group, LTOS and Investech, L.P.
10.24* -- Business Loan Agreement, dated as of July 14, 1993, between
Bank One, Dayton, N.A. and OIOPT Acquisition Corp.
10.25* -- Business Purpose Promissory Note, dated as of July 14, 1993,
in the principal amount of $720,000 issued by OIOPT
Acquisition Corp. in favor of Bank One, Dayton, N.A., and
guaranteed by the Company.
10.26* -- Mortgage, dated as of July 14, 1993, by OIOPT Acquisition
Corp., (Mortgagor), to Bank One, Dayton, N.A., (Mortgagee),
guaranteed by the Company.
10.27* -- Pledge Agreement, dated as of July 14, 1993, among the
Company, Ohio Institute of Photography and Technology, Inc.
and OIOPT Acquisition Corp.
10.28* -- Asset Purchase Agreement, dated as of June 23, 1993, among
the Company, OIOPT Acquisition Corp., Ohio Institute of
Photography and Technology, Inc., K. Terry Guthrie, Richard
L. Cretcher, Stephen T. McLain, Gerald D. Guthrie and James
R. Madden.
10.29* -- Amendment to Business Loan Agreement, dated as of August 28,
1995, by and between OIOPT Acquisition Corp. and Bank One,
Dayton, N.A., with the Company as guarantor.
10.30* -- Promissory Note Modification Agreement, dated as of August
28, 1995, by and between OIOPT Acquisition Corp. and Bank
One, Dayton, N.A., with the Company as guarantor.
10.31* -- Amendment to Business Loan Agreement, dated as of August 28,
1995, by and between OIOPT Acquisition Corp. and Bank One,
Dayton, N.A., and the Company as guarantor.
10.32* -- Employment Agreement, dated as of December 31, 1992, between
the Company and Gary D. Kerber.
10.33* -- Letter Agreement, dated November 21, 1988 between the
Company and Robert L. Heidrich concerning the granting of
options.
10.34* -- 1996 Stock Incentive Plan of the Company.
10.35* -- Non-Employee Director Stock Option Plan of the Company.
</TABLE>
II-3
<PAGE> 119
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
10.36* -- Letter Agreement, dated April 6, 1995 between the Company
and Equitable Securities Corporation amending the maturity
date of Warrant No. E-007.
10.37* -- Asset Purchase Agreement, dated as of September 6, 1996,
among the Company, SACMD Acquisition Corp., San Antonio
College of Medical and Dental Assistants, Inc., Career
Centers of Texas -- El Paso, Inc. and Mr. Comer Alden.
10.38* -- Letter of Commitment, dated August 22, 1996, from Bank of
America to the Company concerning the Proposed Bank Line of
Credit.
10.39* -- Asset Purchase Agreement dated December 12, 1996, as
amended, between the Company, HBC Acquisition Corp. and O/E
Learning, Inc. (including all exhibits).
10.40* -- Executed Form of Second Payment Note in the amount of
$1,350,000 from HBC Acquisition Corp. to O/E Learning, Inc.
10.41* -- Executed Form of Pledge Agreement among HBC Acquisition
Corp., the Company and O/E Learning, Inc.
10.42* -- Executed Form of Assumption Agreement among HBC Acquisition
Corp., the Company and O/E Learning, Inc.
10.43* -- Executed Form of Bill of Sale from O/E Learning, Inc. to HBC
Acquisition Corp.
10.44* -- Agreement and Plan of Reorganization dated as of March 29,
1997, by and among the Company, Nebraska Acquisition Corp.
and Educational Management, Inc. with attached Exhibit
A -- Plan of Merger.
10.45* -- Escrow Agreement dated as of March 29, 1997 by and among the
Company, Acquisition and Richard O. Wikert, the Lila Rhude
Trust, the Scott L. Rhude Trust, the A. Lauren Rhude Trust,
Roger B. Bojens and Sacks Tierney, P.A. as Escrow Agent.
10.46* -- Business Loan Agreement dated as of February 25,1997 between
Bank of America, FSB and the Company.
10.47* -- Stock Pledge Agreement dated as of February 25, 1997 between
Bank of America, FSB and the Company.
10.48* -- Security Agreement dated as of February 25, 1997 between
Bank of America, FSB and the Company.
10.49* -- First Amendment to Business Loan Agreement dated as of June
30, 1997 between Bank of America, FSB and the Company.
10.50* -- Stock Purchase Agreement dated February 14, 1998 among the
Company, Computer Hardware Service Company, Inc. and CHI
Acquisition Corp.
10.51* -- Amendment to Mortgage Loan Promissory Note, dated as of
September 12, 1994 between the Company and Vince & Gail
Pisano.
10.52* -- Second Payment Note from the Company and CHI Acquisition
Corp. to sellers of Computer Hardware Service Company, Inc.
10.53* -- Purchase Money Promissory Note from the Company and CHI
Acquisition Corp. to sellers of Computer Hardware Service
Company, Inc.
10.54* -- Pledge Agreement from the Company to sellers of Computer
Hardware Service Company, Inc.
10.55* -- Security Agreement among the Company, CHI Acquisition Corp.
and sellers of Computer Hardware Service Company, Inc.
10.56* -- Registration Rights Agreement between the Company and
sellers of Computer Hardware Service Company, Inc.
10.57* -- Stock Power from the sellers of Computer Hardware Service
Company, Inc. to the Company.
10.58* -- Sellers' Subordination Agreement from the sellers of
Computer Hardware Service Company, Inc. to the Company and
the Company's lender.
10.59* -- Stock Purchase Agreement dated March 13, 1998 in connection
with the Hesser Acquisition.
10.60* -- Legal Description of the Hesser Acquisition property.
10.61* -- Second Payment Note from the Company to the sellers of
Hesser, Inc.
</TABLE>
II-4
<PAGE> 120
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
10.62* -- List of Shareholders of Hesser, Inc.
10.63* -- Form of Registration Rights Agreement between the Company
and the sellers of Hesser, Inc.
10.64* -- Form of Employment Agreement between the Company and the
sellers of Hesser, Inc.
10.65* -- Form of Non-Competition Agreement between the Company and
the sellers of Hesser, Inc.
10.66* -- Stock Power from the sellers of Hesser, Inc. to the Company.
10.67* -- Amended and Restated Business Loan Agreement.
10.68* -- Form of Indemnification Agreement between the Company and
its Directors.
10.69* -- Amended and Restated Escrow Agreement between the Company
and the Sellers of Hesser, Inc.
10.70* -- Letter Modification of Non-Competition Agreement between the
Company and Madeline Galeucia.
10.71* -- Letter Agreement and attached Non-Negotiable Promissory Note
in the amount of $250,000 between the Company and the
sellers of Hesser, Inc.
10.72* -- Letter Agreement and attached Non-Negotiable Promissory Note
in the amount of $1,500,000 between the Company and the
Sellers of Hesser, Inc.
21* -- List of Subsidiaries of the Registrant.
23.1** -- Consent of Ernst & Young LLP
23.2** -- Consent of Greenberg Traurig (included in the opinion filed
as Exhibit 5.1 to the Registration Statement).
23.3* -- Consent of Winther, Stave & Co., LLP
23.4* -- Consent of Asher & Co., Ltd
23.5* -- Consent of Coopers & Lybrand, LLP
24.1* -- Power of Attorney (contained on signature page of the
Registration Statement).
27.1* -- Financial Data Schedule (for SEC use only).
99.1* -- Report of Winther, Stave & Co., LLP
99.2* -- Report of Winther, Stave & Co., LLP
99.3* -- Report of Winther, Stave & Co., LLP
</TABLE>
- ---------------
* Previously filed.
** Filed with this Amendment
(B) INDEX TO FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is included in this Registration
Statement:
Report of Independent Auditors
Schedule II -- Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have been
omitted.
II-5
<PAGE> 121
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby further undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities assigned under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that, for the purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 122
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of Educational
Medical, Inc. and subsidiaries as of March 31, 1997 and 1998, and for each of
the three years in the period ended March 31, 1998, and have issued our report
thereon dated June 2, 1998 (included elsewhere in this Registration Statement).
Our audits also included the financial statement schedule listed in Item 16(b)
of this Registration Statement. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. We did not audit the financial statements of Nebraska Acquisition
Corporation, a wholly-owned subsidiary, or its predecessors (Educational
Management, Inc. and Wikert and Rhude, a general partnership) acquired by
Educational Medical, Inc. on March 31, 1997 in a business combination accounted
for as a pooling of interests as described in Note 4 to the consolidated
financial statements, which statements reflect total assets of approximately
$5,681,000 as of March 31, 1997, and total net revenues of approximately
$4,695,000, and $6,012,000 for the years ended March 31, 1996 and 1997,
respectively. Those statements were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to data included
for Nebraska Acquisition Corporation, is based solely on the report of the other
auditors.
In our opinion based on our audits and the report of other auditors, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Ernst & Young LLP
Atlanta, Georgia
June 2, 1998
II-7
<PAGE> 123
SCHEDULE II
EDUCATIONAL MEDICAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS CHARGED
BEGINNING OF TO COSTS AND CHARGED TO BALANCE AT END
YEAR EXPENSES OTHER ACCOUNTS(A) NET DEDUCTIONS OF YEAR
------------ ----------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Year ended March 31,
1996................ $1,021,167 $1,270,565 $ -- $1,317,375 $ 974,357
Year ended March 31,
1997................ 974,357 1,239,151 240,475 1,531,279 922,704
Year ended March 31,
1998................ 922,704 1,151,669 1,323,372 1,103,520 2,294,225
</TABLE>
- ---------------
(a) Principally represents allowances for losses on trade accounts of acquired
companies at the date of acquisition.
II-8
<PAGE> 124
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Atlanta,
State of Georgia, on July 1, 1998.
EDUCATIONAL MEDICAL, INC.
By: /s/ GARY D. KERBER
------------------------------------
Gary D. Kerber
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* President, Chief Executive July 1, 1998
- ----------------------------------------------------- Officer and Chairman of the
Gary D. Kerber Board (Principal Executive
Officer)
* Vice President and Chief July 1, 1998
- ----------------------------------------------------- Financial Officer
Vince Pisano
* Director July 1, 1998
- -----------------------------------------------------
Robert J. Cresci
* Director July 1, 1998
- -----------------------------------------------------
Carl S. Hutman
* Director July 1, 1998
- -----------------------------------------------------
Richard E. Kroon
* Director July 1, 1998
- -----------------------------------------------------
W. Patrick Ortale, III
*By: /s/ GARY D. KERBER
---------------------------------------------------
Gary D. Kerber
Attorney-in-fact
</TABLE>
II-9
<PAGE> 1
Exhibit 1.1
Draft of June 25, 1998
2,500,000 SHARES
EDUCATIONAL MEDICAL, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
________, 1998
SMITH BARNEY INC.
LEGG MASON WOOD WALKER, INCORPORATED
As Representatives of the Several Underwriters
c/o SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Dear Sirs:
Educational Medical, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell an aggregate of 626,001 shares of its
common stock, par value $0.01 per share (the "Common Stock"), to the several
Underwriters named in Schedule II hereto (the "Underwriters"), and the persons
named in Schedule I hereto as selling stockholders (the "Selling Stockholders")
propose to sell to the several Underwriters an aggregate of 1,873,999 shares of
Common Stock. The 626,001 shares of Common Stock to be issued and sold to the
Underwriters by the Company and the 1,873,999 shares of Common Stock to be sold
to the Underwriters by the Selling Stockholders are hereinafter referred to as
the "Firm Shares." In addition, solely for the purpose of covering
over-allotments, the Company propose to sell to the Underwriters, upon the terms
and conditions set forth in Section 2 hereof, up to an additional 375,000 shares
(the "Additional Shares") of Common Stock. The Firm Shares and the Additional
Shares are hereinafter collectively referred to as the "Shares." The Company and
the Selling Stockholders are hereinafter sometimes referred to as the "Sellers."
The Company and the Selling Stockholders wish to confirm as
follows their agreement with you (the "Representatives") and the other several
Underwriters on whose behalf you are acting, in connection with the several
purchases of the Shares by the Underwriters.
1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has
prepared and filed with the Securities and Exchange Commission (the
"Commission") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "Act"), a registration statement on Form S-1 under the Act
(the "registration statement"), including a prospectus subject to completion,
relating to the
<PAGE> 2
Shares. The term "Registration Statement" as used in this Agreement means the
registration statement (including all financial schedules and exhibits) as
amended at the time it becomes effective or, if the registration statement
became effective prior to the execution of this Agreement, as supplemented or
amended prior to the execution of this Agreement. If it is contemplated, at the
time this Agreement is executed, that a post-effective amendment to the
registration statement will be filed and must be declared effective before the
offering of the Shares may commence, the term "Registration Statement" as used
in this Agreement means the registration statement as amended by said
post-effective amendment. If an abbreviated registration statement is prepared
and filed with the Commission in accordance with Rule 462(b) under the Act (an
"Abbreviated Registration Statement"), the term "Registration Statement" as used
in this Agreement includes the Abbreviated Registration Statement. The term
"Prospectus" as used in this Agreement means the prospectus in the form included
in the Registration Statement, or, if the prospectus included in the
Registration Statement omits information in reliance on Rule 430A under the Act
and such information is included in a prospectus filed with the Commission
pursuant to Rule 424(b) under the Act, the term "Prospectus" as used in this
Agreement means the prospectus in the form included in the Registration
Statement as supplemented by the addition of the Rule 430A information contained
in the prospectus filed with the Commission pursuant to Rule 424(b). The term
"Prepricing Prospectus" as used in this Agreement means the prospectus subject
to completion in the form included in the registration statement at the time of
the initial filing of the registration statement with the Commission and as such
prospectus shall have been amended from time to time prior to the date of the
Prospectus.
2. AGREEMENTS TO SELL AND PURCHASE. Subject to any adjustments as you
may determine to avoid fractional shares, the Company hereby agrees, subject to
all the terms and conditions set forth herein, to issue and sell to each
Underwriter and, upon the basis of the representations, warranties and
agreements of the Company and the Selling Stockholders herein contained and
subject to all the terms and conditions set forth herein, each Underwriter
agrees, severally and not jointly, to purchase from the Company, at a purchase
price of $___ per share (the "purchase price per share"), that number of Firm
Shares which bears the same proportion to the aggregate number of Firm Shares to
be issued and sold by the Company as the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule II hereto (or such number of
Firm Shares increased as set forth in Section 12 hereof) bears to the aggregate
number of shares to be sold by the Company and the Selling Stockholders.
Subject to any adjustments as you may determine to avoid fractional
shares, each Selling Stockholder hereby agrees, subject to all the terms and
conditions set forth herein, to issue and sell to each Underwriter and, upon the
basis of the representations, warranties and agreements of the Company and the
Selling Stockholders herein contained and subject to all the terms and
conditions set forth herein, each Underwriter agrees, severally and not jointly,
to purchase from each Selling Stockholder, at the purchase price per share, that
number of Firm Shares which bears the same proportion to the aggregate number of
Firm Shares to be sold by the Selling Stockholders as the number of Firm Shares
set forth opposite the name of such Underwriter in Schedule II hereto (or such
number of Firm Shares increased as set forth in Section 12 hereof) bears to the
aggregate number of shares to be sold by the Company and the Selling
Stockholders.
The Company also agree, subject to all the terms and conditions set
forth herein, to sell to the Underwriters, and, upon the basis of the
representations, warranties and agreements of the Company and the Selling
Stockholders herein contained and subject to all the terms and conditions set
forth herein, the Underwriters shall have the right to purchase from the
Company, at the purchase price per share, pursuant to an option (the
"over-allotment option") which may be
2
<PAGE> 3
exercised at any time and from time to time prior to 9:00 p.m., New York City
time, on the 30th day after the date of the Prospectus (or, if such 30th day
shall be a Saturday or Sunday or a holiday, on the next business day thereafter
when the New York Stock Exchange is open for trading), up to an aggregate of
375,000 Additional Shares. Upon any exercise of the over-allotment option, each
Underwriter, severally and not jointly, agrees to purchase from the Company the
number of Additional Shares (subject to such adjustments as you may determine in
order to avoid fractional shares) which bears the same proportion to the number
of Additional Shares to be sold by the Company as the number of Firm Shares set
forth opposite the name of such Underwriter in Schedule II hereto (or such
number of Firm Shares increased as set forth in Section 12 hereof) bears to the
aggregate number of Firm Shares to be sold by the Sellers.
Certificates in transferable form for the Shares (including any
Additional Shares) which each of the Selling Stockholders agree to sell pursuant
to this Agreement have been placed in custody with Vince Pisano (the
"Custodian") for delivery under this Agreement pursuant to a Custody Agreement
and Power of Attorney (the "Custody Agreement") executed by the Selling
Stockholders appointing [______________] and [____________________] as agents
and attorneys-in-fact (the "Attorneys-in-Fact"), except in the case of the
Delaware State Employee's Retirement Fund, the Trust for Defined Benefit Plans
of ICI American Holding Inc., and Trust for Defined Benefit Plans of Zeneca
Holding Inc. (collectively such three entities are referred to as the "Pecks
Managed Entities") who have executed the Custody Agreement solely for the
purpose of transferring the relevant Additional Shares to the Underwriters
pursuant to the terms of this Agreement). The Selling Stockholders agree that
(i) the Shares represented by the certificates held in custody pursuant to the
Custody Agreement are subject to the interests of the Underwriters and the
Company, (ii) the arrangements made by the Selling Stockholders for such custody
are, except as specifically provided in the Custody Agreement, irrevocable and
(iii) the obligations of the Selling Stockholders hereunder and under the
Custody Agreement shall not be terminated by any act of any Selling Stockholder
or by operation of law, whether by the death or incapacity of any Selling
Stockholder or the occurrence of any other event. If any Selling Stockholder
shall die or be incapacitated or if any other event shall occur before the
delivery of the Shares hereunder, certificates for the Shares to be sold by such
Selling Stockholder shall be delivered to the Underwriters by the
Attorneys-in-Fact in accordance with the terms and conditions of this Agreement
and the Custody Agreement as if such death or incapacity or other event had not
occurred, regardless of whether or not the Attorneys-in-Fact or any Underwriter
shall have received notice of such death, incapacity or other event. Each
Attorney-in-Fact represents that he is authorized, on behalf of the Selling
Stockholders to (i) execute this Agreement and any other documents necessary or
desirable in connection with the Custody Agreement and the sale of the Shares to
be sold hereunder by the Selling Stockholders, (ii) make delivery of the
certificates for such Shares, (iii) receive the proceeds of the sale of such
Shares, (iv) give receipts for such proceeds, (v) pay therefrom any expenses to
be borne by the Selling Stockholders in connection with the sale and public
offering of such Shares, (vi) distribute the balance thereof among the Selling
Stockholders and (vii) take such other actions as may be necessary or desirable
in connection with the transactions contemplated by this Agreement, except no
representation is made by either Attorney-in-Fact with respect to clauses (i)
and (vii) regarding the Pecks Managed Entities. Each Attorney-in-Fact agrees to
perform his duties under the Custody Agreement.
3. TERMS OF PUBLIC OFFERING. The Company and the Selling Stockholders
have been advised by you that the Underwriters propose to make a public offering
of their respective portions of the Shares as soon after the Registration
Statement and this Agreement have become effective as in your judgment is
advisable and initially to offer the Shares upon the terms set forth in the
Prospectus.
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<PAGE> 4
4. DELIVERY OF THE SHARES AND PAYMENT THEREFOR. Delivery to the
Underwriters of and payment for the Firm Shares shall be made at the office of
Smith Barney Inc., 388 Greenwich Street, New York, New York 10013, at 10:00
A.M., New York City time, on _________, 1998 (the "Closing Date"). The place of
closing for the Firm Shares and the Closing Date may be varied by agreement
among you, the Company and the Attorneys-in-Fact.
Delivery to the Underwriters of and payment for any Additional
Shares to be purchased by the Underwriters shall be made at the aforementioned
office of Smith Barney Inc. at such time on such date (the "Option Closing
Date"), which may be the same as the Closing Date but shall in no event be
earlier than the Closing Date nor earlier than two nor later than ten business
days after the giving of the notice hereinafter referred to, as shall be
specified in a written notice from you on behalf of the Underwriters to the
Company of the Underwriters' determination to purchase a number, specified in
such notice, of Additional Shares. The place of closing for any Additional
Shares and the Option Closing Date for such Shares may be varied by agreement
among you and the Company.
Certificates for the Firm Shares and for any Additional Shares to be
purchased hereunder shall be registered in such names and in such denominations
as you shall request by written notice, it being understood that a facsimile
transmission shall be deemed written notice, prior to 9:30 A.M., New York City
time, on the second business day preceding the Closing Date or any Option
Closing Date, as the case may be. Such certificates shall be made available to
you in New York City for inspection and packaging not later than 9:30 A.M., New
York City time, on the business day next preceding the Closing Date or the
Option Closing Date, as the case may be. The certificates evidencing the Firm
Shares and any Additional Shares to be purchased hereunder shall be delivered to
you on the Closing Date or the Option Closing Date, as the case may be, against
payment of the purchase price therefor in immediately available funds.
5. AGREEMENTS OF THE COMPANY. The Company agrees with the several
Underwriters as follows:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the registration statement or a post-effective amendment thereto
or any Abbreviated Registration Statement to be declared effective before the
offering of the Shares may commence, the Company will endeavor to cause the
Registration Statement or such post-effective amendment to become effective as
soon as possible and will advise you promptly and, if requested by you, will
confirm such advice in writing, when the Registration Statement or such
post-effective amendment has become effective.
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<PAGE> 5
(b) The Company will advise you promptly and, if requested by
you, will confirm such advice in writing: (i) of any request by the Commission
for amendment of or a supplement to the Registration Statement, any Prepricing
Prospectus or the Prospectus or for additional information; (ii) of the issuance
by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the suspension of qualification of the Shares for
offering or sale in any jurisdiction or the initiation of any proceeding for
such purpose; and (iii) within the period of time referred to in paragraph (f)
below, of any change in the Company's condition (financial or other), business,
prospects, properties, net worth or results of operations, or of the happening
of any event, which makes any statement of a material fact made in the
Registration Statement or the Prospectus (as then amended or supplemented)
untrue or which requires the making of any additions to or changes in the
Registration Statement or the Prospectus (as then amended or supplemented) in
order to state a material fact required by the Act or the regulations thereunder
to be stated therein or necessary in order to make the statements therein not
misleading, or of the necessity to amend or supplement the Prospectus (as then
amended or supplemented) to comply with the Act or any other law. If at any time
the Commission shall issue any stop order suspending the effectiveness of the
Registration Statement, the Company will make every reasonable effort to obtain
the withdrawal of such order at the earliest possible time.
(c) The Company will furnish to you, without charge, three
signed copies of the registration statement as originally filed with the
Commission and of each amendment thereto, including financial statements and all
exhibits to the registration statement and will also furnish to you, without
charge, such number of conformed copies of the registration statement as
originally filed and of each amendment thereto, but without exhibits, as you may
request.
(d) The Company will not (i) file any amendment to the
Registration Statement or make any amendment or supplement to the Prospectus of
which you shall not previously have been advised or to which you shall object
after being so advised or (ii) so long as, in the opinion of counsel for the
Underwriters, a prospectus is required to be delivered in connection with sales
by any Underwriter or dealer, file any information, documents or reports
pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), without delivering a copy of such information, documents or reports to
you, as Representatives of the several Underwriters, prior to or concurrently
with such filing.
(e) Prior to the execution and delivery of this Agreement, the
Company has delivered or will deliver to you, without charge, in such quantities
as you have requested or may hereafter request, copies of each form of the
Prepricing Prospectus. The Company consents to the use, in accordance with the
provisions of the Act and with the securities or Blue Sky laws of the
jurisdictions in which the Shares are offered by the several Underwriters and by
dealers, prior to the date of the Prospectus, of each Prepricing Prospectus so
furnished by the Company.
(f) As soon after the execution and delivery of this Agreement
as possible and thereafter from time to time for such period as in the opinion
of counsel for the Underwriters a prospectus is required by the Act to be
delivered in connection with sales by any Underwriter or dealer, the Company
will expeditiously deliver to each Underwriter and each dealer, without charge,
as many copies of the Prospectus (and of any amendment or supplement thereto) as
you may request. The Company consents to the use of the Prospectus (and of any
amendment or supplement thereto) in accordance with the provisions of the Act
and with the securities or Blue Sky laws of the jurisdictions in which the
Shares are offered by the several Underwriters and by all dealers to whom Shares
may be sold, both in connection with the offering and sale of the Shares
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<PAGE> 6
and for such period of time thereafter as the Prospectus is required by the Act
to be delivered in connection with sales by any Underwriter or dealer. If during
such period of time any event shall occur that in the judgment of the Company or
in the opinion of counsel for the Underwriters is required to be set forth in
the Prospectus (as then amended or supplemented) or should be set forth therein
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if it is necessary to supplement or
amend the Prospectus to comply with the Act or any other law, the Company will
forthwith prepare and, subject to the provisions of paragraph (d) above, file
with the Commission an appropriate supplement or amendment thereto and will
expeditiously furnish copies thereof to the Underwriters and dealers in such
quantities as you shall request. In the event that the Company and you, as
Representatives of the several Underwriters, agree that the Prospectus should be
amended or supplemented, the Company, if requested by you, will promptly issue a
press release announcing or disclosing the matters to be covered by the proposed
amendment or supplement.
(g) The Company will cooperate with you and with counsel for
the Underwriters in connection with the registration or qualification of the
Shares for offering and sale by the several Underwriters and by dealers under
the securities or Blue Sky laws of such jurisdictions as you may designate and
will file such consents to service of process or other documents necessary or
appropriate in order to effect such registration or qualification; provided that
in no event shall the Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified or to take any action that would
subject it to service of process in suits, other than those arising out of the
offering or sale of the Shares, in any jurisdiction where it is not now so
subject.
(h) The Company will make generally available to its security
holders a consolidated earnings statement, which need not be audited, covering a
twelve-month period commencing after the effective date of the Registration
Statement and ending not later than 15 months thereafter, as soon as practicable
after the end of such period, which consolidated earnings statement shall
satisfy the provisions of Section 11(a) of the Act.
(i) During the period of five years hereafter, the Company
will furnish to you (i) as soon as available, a copy of each report of the
Company mailed to stockholders or filed with the Commission, and (ii) from time
to time such other information concerning the Company as you may reasonably
request.
(j) If this Agreement shall terminate or shall be terminated
after execution pursuant to any provisions hereof (otherwise than pursuant to
the second paragraph of Section 12 hereof or by notice given by you terminating
this Agreement pursuant to Section 12 or Section 13 hereof) or if this Agreement
shall be terminated by the Underwriters because of any failure or refusal on the
part of the Company to comply with the terms or fulfill any of the conditions of
this Agreement, the Company agrees to reimburse the Representatives for all
out-of-pocket expenses (including fees and expenses of counsel for the
Underwriters) incurred by you in connection herewith.
(k) The Company will apply the net proceeds from the sale of
the Shares substantially in accordance with the description set forth in the
Prospectus.
(l) If Rule 430A of the Act is employed, the Company will
timely file the Prospectus pursuant to Rule 424(b) under the Act and will advise
you of the time and manner of such filing.
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<PAGE> 7
(m) The Company will not offer to sell, contract to sell, sell
or otherwise transfer or dispose of, or grant any option or warrant to purchase,
any shares of Common Stock (or any securities convertible into or exercisable or
exchangeable for Common Stock) for a period of 90 days after the date of the
Prospectus (the "Lock-up Period") without the prior written consent of Smith
Barney Inc., other than options granted at no less than fair market value
pursuant to its 1996 Stock Incentive Plan or its Non-employee Director Stock
Option Plan, each as in effect on the date hereof.
(n) The Company has furnished or will furnish to you "lock-up"
letters, in form and substance satisfactory to you, signed by each of its
current officers and directors and each of its stockholders designated by you.
(o) Except as stated in this Agreement and in the Prepricing
Prospectus and Prospectus, the Company has not taken, nor will it take, directly
or indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares.
(p) The Company will use its best efforts to have the Shares
listed on the Nasdaq National Market prior to or concurrently with the
effectiveness of the registration statement.
6. AGREEMENTS OF THE SELLING STOCKHOLDERS. Each of the Selling
Stockholders agrees with the several Underwriters as follows:
(a) Such Selling Stockholder will cooperate to the extent
necessary to cause the registration statement or any post-effective amendment
thereto to become effective at the earliest possible time.
(b) Such Selling Stockholder will pay all Federal and other
taxes, if any, on the transfer or sale of any Shares that are sold by such
Selling Stockholder to the Underwriters.
(c) Such Selling Stockholder will do or perform all things
reasonably required to be done or performed by such Selling Stockholder prior to
the Closing Date to satisfy all conditions precedent to the delivery of the
Shares to be sold by such Selling Stockholder pursuant to this Agreement.
(d) Such Selling Stockholder will not (and will not announce
or otherwise disclose any intention to) offer to sell, contract to sell, sell or
otherwise transfer or dispose of, or grant any option to purchase, any shares of
Common Stock (or any securities convertible into or exercisable or exchangeable
for Common Stock), or exercise any registration rights with respect to the sale
of Common Stock, owned by such Selling Stockholder during the Lock-up Period
without the prior written consent of Smith Barney Inc., except for the sale of
Shares to the Underwriters pursuant to this Agreement.
(e) Except as stated in this Agreement and in the Prepricing
Prospectus and the Prospectus, such Selling Stockholder will not take, directly
or indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares.
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<PAGE> 8
(f) Such Selling Stockholder will advise you promptly, and if
requested by you, will confirm such advice in writing, within the period of time
referred to in Section 5(f) hereof, of any change in information relating to
such Selling Stockholder and of any change in the Company's condition (financial
or other), business, prospects, properties, net worth or results of operations
or any other information relating to the Company or relating to any matter
stated in the Prospectus or any amendment or supplement thereto that comes to
the attention of such Selling Stockholder that would make any statement of a
material fact made in the Registration Statement or the Prospectus (as then
amended or supplemented, if amended or supplemented) untrue in any material
respect or would result in the Registration Statement or Prospectus (as then
amended or supplemented, if amended or supplemented) omitting to state a
material fact or a fact necessary to be stated therein in order to make the
statements therein not misleading in any material respect.
(g) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal Responsibility
Act of 1982, as amended, with respect to the transactions herein contemplated,
such Selling Stockholder agrees to deliver to you prior to or on the Closing
Date a properly completed and executed United States Treasury Department Form
W-9 (or other applicable form or statement specified by Treasury Department
regulations in lieu thereof).
7. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each Underwriter that:
(a) Each Prepricing Prospectus included as part of the
registration statement as originally filed or as part of any amendment or
supplement thereto, or filed pursuant to Rule 424 under the Act, complied when
so filed in all material respects with the provisions of the Act. The Commission
has not issued any order preventing or suspending the use of any Prepricing
Prospectus.
(b) The registration statement in the form in which it became
or becomes effective, and also in such form as it may be when any post-effective
amendment thereto or any Abbreviated Registration Statement shall become
effective, and the Prospectus and any supplement or amendment thereto when filed
with the Commission under Rule 424(b) under the Act, complied or will comply in
all material respects with the provisions of the Act and did not or will not at
any such times contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except that this representation and warranty does not
apply to statements in or omissions from the registration statement or the
Prospectus made in reliance upon and in conformity with information relating to
any Underwriter furnished to the Company in writing by or on behalf of such
Underwriter through you expressly for use therein.
(c) All the outstanding shares of capital stock of the Company
have been duly authorized and validly issued, are fully paid and nonassessable,
are free of any preemptive or similar rights and have been issued and sold in
compliance with all Federal and state securities laws; the Shares to be issued
and sold by the Company have been duly authorized and, when issued and delivered
to the Underwriters against payment therefor in accordance with the terms
hereof, will be validly issued, fully paid and nonassessable and free of any
preemptive or similar rights; and the capital stock of the Company conforms in
all material respects to the description thereof in the Registration Statement
and the Prospectus.
(d) The Company is a corporation duly organized, validly
existing and in good
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<PAGE> 9
standing under the laws of the State of Delaware with full corporate power and
authority to own, lease and operate its properties and to conduct its business
as described in the Registration Statement and the Prospectus, and is duly
registered and qualified to conduct its business and is in good standing in each
jurisdiction or place where the nature of its properties or the conduct of its
business requires such registration or qualification, except where the failure
so to register or qualify would not have a material adverse effect on the
condition (financial or other), business, prospects, properties, net worth or
results of operations of the Company and the Subsidiaries (as defined herein)
taken as a whole (a "Material Adverse Effect").
(e) All of the Company's subsidiaries (as defined in the Act)
are listed in an exhibit to the Registration Statement and are referred to
herein individually as a "Subsidiary" and collectively as the "Subsidiaries."
Each Subsidiary is a corporation duly organized, validly existing and in good
standing in the jurisdiction of its incorporation, with full corporate power and
authority to own, lease and operate its properties and to conduct its business
as described in the Registration Statement and the Prospectus and is duly
registered and qualified to conduct its business and is in good standing in each
jurisdiction or place where the nature of its properties or the conduct of its
business requires such registration, except where the failure so to register or
qualify would not have a Material Adverse Effect. All the outstanding shares of
capital stock of each of the Subsidiaries have been duly authorized and validly
issued, are fully paid and nonassessable and are wholly-owned by the Company
directly or indirectly through one of the other Subsidiaries, free and clear of
any lien, adverse claim, security interest, equity or other encumbrance, except
as disclosed in the Registration Statement and the Prospectus (or any amendment
or supplement thereto).
(f) There are no legal or governmental proceedings pending or,
to the knowledge of the Company, threatened, against the Company or any of the
Subsidiaries, or to which the Company or any of the Subsidiaries or any of their
respective properties is subject, that are required to be described in the
Registration Statement or the Prospectus but are not described as required.
There are no agreements, contracts, indentures, leases or other instruments that
are required to be described in the Registration Statement or the Prospectus or
to be filed as an exhibit to the Registration Statement that are not described
or filed as required by the Act. Neither the Company nor any of the Subsidiaries
is involved in any strike, job action or labor dispute, and to the Company's
best knowledge no such action or dispute is threatened.
(g) Neither the Company nor any of the Subsidiaries is (i) in
violation of its certificate of incorporation or by-laws or other organizational
documents, (ii) in violation of any law, ordinance, administrative or
governmental rule or regulation applicable to the Company or any of the
Subsidiaries, the violation of which would have a Material Adverse Effect, (iii)
in violation of any decree of any court or governmental agency or body having
jurisdiction over the Company or any of the Subsidiaries, or (iv) in default in
any material respect in the performance of any obligation, agreement or
condition contained in any bond, debenture, note or any other evidence of
indebtedness or in any material agreement, indenture, lease or other instrument
to which the Company or any of the Subsidiaries is a party or by which any of
them or any of their respective properties may be bound.
(h) Neither the issuance and sale of the Shares, the
execution, delivery or performance of this Agreement by the Company nor the
consummation by the Company of the transactions contemplated hereby (i) requires
any consent, approval, authorization or other order of, or registration or
filing with, any court, regulatory body, administrative agency or other
governmental body, agency or official (except such as may be required for the
registration of the
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<PAGE> 10
Shares under the Act and the Exchange Act, all of which have been or will be
effected in accordance with this Agreement, and compliance with the securities
or Blue Sky laws of various jurisdictions) or conflicts or will conflict with or
constitutes or will constitute a breach of, or a default under, the certificate
of incorporation or bylaws, or other organizational documents, of the Company or
any of the Subsidiaries or (ii) conflicts or will conflict with or constitutes
or will constitute a breach of, or a default under, any agreement, indenture,
lease or other instrument to which the Company or any of the Subsidiaries is a
party or by which the Company or any of the Subsidiaries or any of their
respective properties may be bound, violates or will violate any statute, law or
regulation, filing, judgment, injunction, order or decree applicable to the
Company or any of the Subsidiaries or any of their respective properties or will
result in the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any of the Subsidiaries pursuant to the
terms of any agreement or instrument to which it is a party or by which it may
be bound or to which any of the property or assets of it is subject.
(i) The accountants, Ernst & Young LLP, Asher & Company, Ltd.
and Coopers & Lybrand L.L.P., who have certified or shall certify the financial
statements filed or to be filed as part of the Registration Statement or the
Prospectus (or any amendment or supplement thereto), are independent public
accountants as required by the Act.
(j) The financial statements, together with the related
schedules and notes forming part of the Registration Statement and the
Prospectus (and any amendment or supplement thereto), comply with the
requirements of the Act and present fairly the consolidated financial position,
results of operations and changes in stockholders' equity and cash flows of the
Company and the Subsidiaries on the basis stated in the Registration Statement
at the respective dates or for the respective periods to which they apply; such
statements and related schedules and notes have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved, except as disclosed therein; the pro forma financial
information included in the Registration Statement and the Prospectus (and any
amendment or supplement thereto) has been prepared in accordance with
requirements of the Act and the rules and regulations of the Commission with
respect to pro forma financial information (including Article 11 of Regulation
S-X) and have been properly computed on the basis described therein, and the
assumptions used in preparing the pro forma financial statements and other pro
forma financial information included in the Registration Statement and the
Prospectus (or any amendment or supplement thereto) are reasonable, and the
adjustments used therein are reasonably appropriate to give effect to the
transactions or circumstances referred to therein; and the other financial and
statistical information and data set forth in the Registration Statement and the
Prospectus (and any amendment or supplement thereto) are accurately presented
and prepared on a basis consistent with such financial statements and the books
and records of the Company.
(k) The Company has all requisite power and authority to
execute, deliver and perform its obligations under this Agreement. The execution
and delivery of, and the performance by the Company of its obligations under,
this Agreement have been duly and validly authorized by the Company. This
Agreement has been duly executed and delivered by the Company and constitutes
the valid and legally binding agreement of the Company, enforceable against the
Company in accordance with its terms, except as rights to indemnity and
contribution hereunder may be limited by federal or state securities laws or
principles of public policy and subject to the qualification that the
enforceability of the Company's obligations hereunder may be limited by
bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium and
other laws relating to or affecting creditors' rights generally and by general
equitable principles.
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(l) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement thereto), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement thereto), neither
the Company nor any of the Subsidiaries has incurred any liability or
obligation, direct or contingent, or entered into any transaction that is
material to the Company and the Subsidiaries taken as a whole, and there has not
been any material change in the capital stock, or material increase in the
consolidated short-term or long-term debt, of the Company and the Subsidiaries,
or any material adverse change, or any development involving or which may
reasonably be expected to involve a prospective material adverse change, in the
condition (financial or other), business, prospects, properties, net worth or
results of operations of the Company and the Subsidiaries taken as a whole.
(m) Each of the Company and the Subsidiaries has good and
marketable title to all property (real and personal) described in the Prospectus
as being owned by it, free and clear of all liens, claims, security interests or
other encumbrances, except such as are described in the Registration Statement
and the Prospectus, and all the property described in the Prospectus as being
held under lease by the Company or any of the Subsidiaries is held by it under
valid, subsisting and enforceable leases.
(n) The Company has not distributed and, prior to the later to
occur of the Closing Date and completion of the distribution of the Shares, will
not distribute any offering material in connection with the offering and sale of
the Shares other than the Registration Statement, the Prepricing Prospectus, the
Prospectus or other materials, if any, permitted by the Act and state securities
or Blue Sky laws.
(o) Each of the Company and the Subsidiaries has such permits,
licenses, franchises, authorizations and clearances ("Permits") of governmental
or regulatory authorities, including without limitation, all authorizations
required for participation in federal financial aid programs under Title IV
("Title IV Programs") of the Higher Education Act of 1965, as amended, as are
necessary to own, lease and operate its properties and to conduct its business
in the manner described in the Prospectus, subject to such qualifications as may
be set forth in the Prospectus. Subject to such qualifications as may be set
forth in the Prospectus, each of the Company and the Subsidiaries has fulfilled
and performed all its material obligations with respect to the Permits, and no
event has occurred which allows, or after notice or lapse of time would allow,
revocation or termination thereof or results in any other material impairment of
the rights of the holder of any Permit, subject in each case to such
qualification as may be set forth in the Prospectus. Except as described in the
Prospectus, none of the Permits contains any restriction that is materially
burdensome to the Company or any of the Subsidiaries.
(p) Neither the Company nor any of any of the Subsidiaries has
received nor is it aware of any communication (written or oral) relating to the
termination or modification or threatened termination or modification of the
agreements described or referred to in the Prospectus nor is it aware of any
communication (written or oral) relating to any determination or threatened
determination not to renew or extend any agreement described or referred to in
the Prospectus at the end of the current term of any such agreement.
(q) The property, assets and operations of the Company and the
Subsidiaries comply in all material respects with all applicable federal, state
and local laws, rules, orders, decrees, judgments, injunctions, licenses,
permits or regulations relating to environmental matters (the "Environmental
Laws"). To the Company's best knowledge, none of the Company's nor any of
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the Subsidiaries' property, assets or operations is the subject of any federal,
state or local investigation evaluating whether any remedial action is needed to
respond to a release of any substance regulated by or form the basis of
liability under any Environmental Laws (a "Hazardous Material") into the
environment or is in contravention of any federal, state, local or foreign law,
order or regulation. Neither the Company nor any of the Subsidiaries has
received any notice or claim, nor are there any pending or, to the Company's
best knowledge, threatened or reasonably anticipated lawsuits or other
proceedings against it with respect to violations of an Environmental Law or in
connection with the release of any Hazardous Material into the environment.
Neither the Company nor any of the Subsidiaries has any material contingent
liability in connection with any release of Hazardous Material into the
environment.
(r) Each of the Company and the Subsidiaries is insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as is customary in the businesses in which it is engaged;
all policies of insurance insuring the Company and each of the Subsidiaries or
their respective businesses, assets, employees, officers and directors are in
full force and effect; the Company and each of the Subsidiaries is in compliance
with the terms of such policies and instruments in all material respects; and
there are no claims by the Company or any of the Subsidiaries under any such
policy or instrument as to which any insurance company is denying liability or
defending under a reservation of rights clause.
(s) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(t) Neither the Company nor any of the Subsidiaries nor, to
the Company's best knowledge, any employee or agent of the Company or any of the
Subsidiaries has made any payment of funds of the Company or any of the
Subsidiaries or received or retained any funds in violation of any law, rule or
regulation, which payment, receipt or retention of funds is of a character
required to be disclosed in the Prospectus.
(u) Each of the Company and the Subsidiaries has filed all
federal, state, local and foreign tax returns and tax forms required to be
filed; such returns and forms are complete and correct in all material respects;
and all taxes shown by such returns or otherwise assessed that are due or
payable have been paid, except such taxes as are being contested in good faith
and as to which adequate reserves have been provided. All payroll withholdings
required to be made by the Company or any of the Subsidiaries with respect to
employees have been made. The charges, accruals and reserves on the books of the
Company and the Subsidiaries in respect of any tax liability for any year not
finally determined are adequate to meet any assessments or reassessments for
additional taxes; and there have been no tax deficiencies asserted and, to the
best knowledge of the Company, no tax deficiency might be reasonably asserted or
threatened against the Company or any of the Subsidiaries that could,
individually or in the aggregate, have a Material Adverse Effect.
(v) No holder of any security of the Company has any right
(other than rights that have been validly waived) to require registration of
shares of Common Stock or any other security of the Company because of the
filing of the registration statement or the consummation of the
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<PAGE> 13
transactions contemplated by this Agreement and, except as disclosed in the
Prospectus, no person has the right to require registration under the Act of any
shares of Common Stock or other securities of the Company. No person has the
right, contractual or otherwise, to cause the Company to permit such person to
underwrite the sale of any of the Shares. Except as described in or contemplated
by the Prospectus, there are no outstanding options, warrants or other rights
calling for the issuance of, and there are no commitments, plans or arrangements
to issue, any shares of capital stock of the Company or any of the Subsidiaries
or any security convertible into or exchangeable or exercisable for capital
stock of the Company or any of the Subsidiaries.
(w) The Company and the Subsidiaries own or possess all
trademarks, trademark registrations, service marks, service mark registrations,
trade names, copyrights, licenses, trade secrets and rights described in the
Prospectus as being owned by any of them or necessary for the conduct of their
respective businesses, and the Company is not infringing upon the rights of any
other person with respect to the foregoing.
(x) The Company is not, and, upon the sale of the Shares to be
issued and sold by it hereunder and application of the net proceeds from such
sale as described in the Prospectus under the caption "Use of Proceeds," will
not be an "investment company" within the meaning of the Investment Company Act
of 1940, as amended.
(y) The Company and each of the Subsidiaries is in compliance
with all provisions of Florida Statutes ss.517.075 and the regulations
thereunder, relating to issuers doing business with Cuba.
(z) The Company has filed in a timely manner with the
Commission each document required to be filed by it pursuant to the Exchange
Act, each such document at the time it was filed conformed in all material
respects to the requirements of the Exchange Act and none of such documents
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading.
8. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS.
Each of the Selling Stockholders represents and warrants to each Underwriter
that:
(a) Such Selling Stockholder now has, and on the Closing Date
will have, valid and marketable title to the Shares to be sold by such Selling
Stockholder, free and clear of any lien, claim, security interest or other
encumbrance, including, without limitation, any restriction on transfer or other
defect in title.
(b) Such Selling Stockholder now has, and on the Closing Date
will have, full legal right, power and authorization, and any approval required
by law (except such as may be required under the Act or state securities or Blue
Sky laws governing the purchase and distribution of the Shares), to sell,
assign, transfer and deliver the Shares to be sold by such Selling Stockholder
in the manner provided in this Agreement, and upon delivery of and payment for
such Shares hereunder, the several Underwriters will acquire valid and
marketable title to such Shares, free and clear of any lien, claim, security
interest, or other encumbrance or restriction on transfer or other defect in
title.
(c) This Agreement and the Custody Agreement have been duly
authorized, executed and delivered by or on behalf of such Selling Stockholder
and are the valid and binding agreements of such Selling Stockholder,
enforceable against such Selling Stockholder in
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<PAGE> 14
accordance with their respective terms, except as rights to indemnity and
contribution hereunder may be limited by federal or state securities laws or
principles of public policy and except as enforcement hereof and thereof may be
limited by bankruptcy, fraudulent conveyance, insolvency, reorganization,
moratorium and other laws relating to or affecting creditors' rights generally
and by general equitable principles.
(d) Neither the execution and delivery of this Agreement or
the Custody Agreement by or on behalf of such Selling Stockholder nor the
consummation of the transactions herein or therein contemplated by or on behalf
of such Selling Stockholder requires any consent, approval, authorization or
order of, or filing or registration with, any court, regulatory body,
administrative agency or other governmental body, agency or official (except
such as may be required under the Act or state securities or Blue Sky laws
governing the purchase and distribution of the Shares) or conflicts or will
conflict with or constitutes or will constitute a breach of, or default under,
or violates or will violate, any agreement, indenture or other instrument to
which such Selling Stockholder is a party or by which such Selling Stockholder
is or may be bound or to which any of such Selling Stockholder's property or
assets is subject, or any statute, law, rule, regulation, ruling, judgement,
injunction, order or decree applicable to such Selling Stockholder or to any
property or assets of such Selling Stockholder, except in each case as would not
adversely affect the ability of such Selling Stockholder to consummate the
transactions contemplated by this Agreement.
(e) Such Selling Stockholder has reviewed the Registration
Statement and the Prospectus. The parts of the Registration Statement and the
Prospectus relating to such Selling Stockholder do not contain an untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading. Such Selling Stockholder does not have actual knowledge
that the Registration Statement or Prospectus contains any untrue statement of a
material fact or omits to state a material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(f) The representation and warranties of such Selling
Stockholder herein and in the Custody Agreement are, and on the Closing Date
will be, true and correct.
(g) Such Selling Stockholder has not taken, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares, except for the lock-up arrangements
described in the Prospectus.
9. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to
indemnify and hold harmless each of you and each other Underwriter and each
person, if any, who controls any Underwriter within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act from and against any and all losses,
claims, damages, liabilities and expenses (including reasonable costs of
investigation) arising out of or based upon any untrue statement or alleged
untrue statement of a material fact contained in any Prepricing Prospectus or in
the Registration Statement or the Prospectus or in any amendment or supplement
thereto, or arising out of or based upon any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or expenses arise out of or are based upon any untrue
statement or omission or alleged untrue statement or omission which has been
made therein or omitted therefrom in reliance upon and in conformity with the
information relating to such Underwriter furnished in writing to
14
<PAGE> 15
the Company by or on behalf of any Underwriter through you expressly for use in
connection therewith; provided, however, that the indemnification contained in
this paragraph (a) with respect to any Prepricing Prospectus shall not inure to
the benefit of any Underwriter (or to the benefit of any person controlling such
Underwriter) on account of any such loss, claim, damage, liability or expense
arising from the sale of Shares by such Underwriter to any person if (i) a copy
of the Prospectus shall not have been delivered or sent to such person within
the time required by the Act and the untrue statement or alleged untrue
statement or omission or alleged omission of a material fact contained in such
Prepricing Prospectus was corrected in the Prospectus and (ii) the Company has
delivered the Prospectus to the several Underwriters in requisite quantity on a
timely basis to permit such delivery or sending. The foregoing indemnity
agreement shall be in addition to any liability which the Company may otherwise
have.
(b) If any action, suit or proceeding shall be brought against
any Underwriter or any person controlling any Underwriter in respect of which
indemnity may be sought against the Company, such Underwriter or such
controlling person shall promptly notify the Company, and the Company shall
assume the defense thereof, including the employment of counsel and payment of
all fees and expenses. Such Underwriter or any such controlling person shall
have the right to employ separate counsel in any such action, suit or proceeding
and to participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of such Underwriter or such controlling person
unless (i) the Company has agreed in writing to pay such fees and expenses, (ii)
the Company has failed to assume the defense and employ counsel or (iii) the
named parties to any such action, suit or proceeding (including any impleaded
parties) include both such Underwriter or such controlling person and the
Company and such Underwriter or such controlling person shall have been advised
by its counsel that representation of such indemnified party and the Company by
the same counsel would be inappropriate under applicable standards of
professional conduct (whether or not such representation by the same counsel has
been proposed) due to actual or potential differing interests between them (in
which case the Company shall not have the right to assume the defense of such
action, suit or proceeding on behalf of such Underwriter or such controlling
person). It is understood, however, that the Company shall, in connection with
any one such action, suit or proceeding or separate but substantially similar or
related actions, suits or proceedings in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the reasonable fees
and expenses of only one separate firm of attorneys (in addition to any local
counsel) at any time for all such Underwriters and controlling persons not
having actual or potential differing interests with you or among themselves,
which firm shall be designated in writing by Smith Barney Inc., and that all
such fees and expenses shall be reimbursed as they are incurred. The Company
shall not be liable for any settlement of any such action, suit or proceeding
effected without its written consent, but if settled with such written consent,
or if there be a final judgment for the plaintiff in any such action, suit or
proceeding, the Company agrees to indemnify and hold harmless any Underwriter
and any such controlling person, to the extent provided in the preceding
paragraph, from and against any loss, claim, damage, liability or expense by
reason of such settlement or judgment.
(c) The Selling Stockholders agree to indemnify and hold
harmless each Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act to
the same extent as the indemnity from the Company to each Underwriter set forth
in paragraph (a) above, but only with respect to information relating to such
Selling Stockholder furnished in writing to the Company by or on behalf of such
Selling Stockholder expressly for use in the Registration Statement, the
Prospectus or any Prepricing Prospectus, or any amendment or supplement thereto
and subject to the provisions of paragraph (g) below. In case any action or
claim shall be brought or asserted against
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<PAGE> 16
any Underwriter or any such controlling person in respect of which indemnity may
be sought against the Selling Stockholders pursuant to this paragraph (c), the
Selling Stockholders shall have the rights and duties given to the Company, and
each Underwriter and any such controlling person shall have the rights and
duties given to the Underwriters, under paragraph (b) above. The foregoing
indemnity agreement shall be in addition to any liability which the Selling
Stockholders may otherwise have.
(d) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who sign
the Registration Statement, any person who controls the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act and each
Selling Stockholder, to the same extent as the foregoing indemnity from the
Company to each Underwriter, but only with respect to information relating to
such Underwriter furnished in writing to the Company by or on behalf of such
Underwriter through you expressly for use in the Registration Statement, the
Prospectus or any Prepricing Prospectus, or any amendment or supplement thereto.
If any action, suit or proceeding shall be brought against the Company, any of
its directors, any such officer, any such controlling person or any Selling
Stockholder based on the Registration Statement, the Prospectus or any
Prepricing Prospectus, or any amendment or supplement thereto, and in respect of
which indemnity may be sought against any Underwriter pursuant to this paragraph
(d), such Underwriter shall have the rights and duties given to the Company by
paragraph (b) above (except that if the Company shall have assumed the defense
thereof such Underwriter shall not be required to do so, but may employ separate
counsel therein and participate in the defense thereof, but the fees and
expenses of such counsel shall be at such Underwriter's expense), and the
Company, its directors, any such officer, any such controlling person and any
Selling Stockholder shall have the rights and duties given to the Underwriters
by paragraph (b) above. The foregoing indemnity agreement shall be in addition
to any liability which the Underwriters may otherwise have.
(e) If the indemnification provided for in this Section 9 is
unavailable to an indemnified party under paragraphs (a), (c) or (d) hereof in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Selling Stockholders on the one hand and the Underwriters on the
other hand from the offering of the Shares, or (ii) if the allocation provided
by clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company and the Selling Stockholders on
the one hand and the Underwriters on the other hand in connection with the
statements or omissions that resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
Underwriters on the other hand shall be deemed to be in the same proportion as
the total net proceeds from the offering (before deducting expenses) received by
the Company bear to the total underwriting discounts and commissions received by
the Underwriters, in each case as set forth in the table on the cover page of
the Prospectus; provided that, in the event that the Underwriters shall have
purchased any Additional Shares hereunder, any determination of the relative
benefits received by the Company and the Selling Stockholders and the
Underwriters from the offering of the Shares shall include the net proceeds
(before deducting expenses) received by the Company and the Selling
Stockholders, and the underwriting discounts and commissions received by the
Underwriters, from the sale of such Additional Shares, in each case computed on
the basis of the respective amounts set forth in the notes to the table on the
cover page of the Prospectus. The relative fault of the Company and
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<PAGE> 17
the Selling Stockholders on the one hand and the Underwriters on the other hand
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or the
Selling Stockholders on the one hand or by the Underwriters on the other hand
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
(f) The Company, the Selling Stockholders and the Underwriters
agree that it would not be just and equitable if contribution pursuant to this
Section 9 were determined by a pro rata allocation (even if the Underwriters
were treated as one entity for such purpose) or by any other method of
allocation that does not take account of the equitable considerations referred
to in paragraph (e) above. The amount paid or payable by an indemnified party as
a result of the losses, claims, damages, liabilities and expenses referred to in
paragraph (e) above shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating any claim or defending any such action,
suit or proceeding. Notwithstanding the provisions of this Section 9, no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price of the Shares underwritten by it and distributed to the
public exceeds the amount of any damages which such Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to this
Section 9 are several in proportion to the respective numbers of Firm Shares set
forth opposite their names in Schedule II hereto (or such numbers of Firm Shares
increased as set forth in Section 12 hereof) and not joint.
(g) Notwithstanding any other provision of this Section 9, the
total liability of any Selling Stockholder for indemnification or contribution
under this Section 9 shall not exceed an amount equal to the number of Shares
sold by such Selling Stockholder hereunder multiplied by the purchase price per
share set forth in Section 2 hereof.
(h) No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending or
threatened action, suit or proceeding in respect of which any indemnified party
is or could have been a party and indemnity could have been sought hereunder by
such indemnified party, unless such settlement includes an unconditional release
of such indemnified party from all liability on claims that are the subject
matter of such action, suit or proceeding.
(i) Any losses, claims, damages, liabilities or expenses for
which an indemnified party is entitled to indemnification or contribution under
this Section 9 shall be paid by the indemnifying party to the indemnified party
as such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 9 and the
representations and warranties of the Company and the Selling Stockholders set
forth in this Agreement shall remain operative and in full force and effect,
regardless of (i) any investigation made by or on behalf of any Underwriter or
any person controlling any Underwriter, the Company, its directors or officers
or any person controlling the Company or the Selling Stockholders, (ii)
acceptance of any Shares and payment therefor hereunder and (iii) any
termination of this Agreement. A successor to any Underwriter or any person
controlling any Underwriter, or to the Company, its directors or officers, or
any person controlling the Company or the Selling Stockholders shall be entitled
to the benefits of the indemnity, contribution and reimbursement
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agreements contained in this Section 9.
10. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several
obligations of the Underwriters to purchase the Firm Shares hereunder are
subject to the following conditions:
(a) If, at the time this Agreement is executed and delivered,
it is necessary for the registration statement or a post-effective amendment
thereto or an Abbreviated Registration Statement to be declared effective before
the offering of the Shares may commence, the registration statement or such
post-effective amendment or Abbreviated Registration Statement shall have become
effective not later than 5:30 P.M., New York City time, on the date hereof, or
at such later date and time as shall be consented to in writing by you, and all
filings, if any, required by Rules 424 and 430A under the Act shall have been
timely made.
(b) Subsequent to the effective date of this Agreement, there
shall not have occurred (i) any change, or any development involving a
prospective change, in or affecting the condition (financial or other),
business, prospects, properties, net worth, or results of operations of the
Company or any of the Subsidiaries not contemplated by the Prospectus, which in
your opinion, as Representatives of the several Underwriters, would materially,
adversely affect the market for the Shares, or (ii) any event or development
relating to or involving the Company or any of the Subsidiaries, or any officer
or director of the Company or any of the Subsidiaries, which makes any statement
made in the Prospectus untrue or which, in the opinion of the Company and its
counsel or the Underwriters and their counsel, requires the making of any
addition to or change in the Prospectus in order to state a material fact
required by the Act or any other law to be stated therein or necessary in order
to make the statements therein not misleading, if amending or supplementing the
Prospectus to reflect such event or development would, in your opinion, as
Representatives of the several Underwriters, materially, adversely affect the
market for the Shares.
(c) You shall have received on the Closing Date an opinion of
Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A., counsel for the
Company and the Selling Stockholders, dated the Closing Date and addressed to
you, as Representatives of the several Underwriters, that:
(i) The Company is a corporation duly incorporated and
validly existing in good standing under the laws of the State of
Delaware with full corporate power and authority to conduct its
business as described in the Registration Statement and the Prospectus
(and any amendment or supplement thereto), and is duly qualified to
conduct its business and is in good standing as a foreign corporation
in each jurisdiction where the conduct of its business requires
qualification, except where the failure so to register or qualify would
not have a Material Adverse Effect;
(ii) Each Subsidiary is a corporation duly incorporated and
validly existing and in good standing under the laws of the
jurisdiction of its organization, with full corporate power and
authority to conduct its business as described in the Registration
Statement and the Prospectus (and any amendment or supplement thereto);
each Subsidiary is duly qualified to conduct its business and is in
good standing as a foreign corporation in each jurisdiction where the
conduct of its business requires such registration or qualification,
except where the failure so to register or qualify or to be in good
standing would not have a Material Adverse Effect; and all the
outstanding shares of capital stock of each of the Subsidiaries have
been duly authorized and validly issued, are fully paid and
nonassessable and are owned of record by the Company directly, or
indirectly through one of the other
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Subsidiaries, free and clear of any perfected security interest or, to
such counsel's knowledge, any other lien, adverse claim, equity or
other encumbrance, except as disclosed in the Registration Statement
and the Prospectus (or any amendment or supplement thereto);
(iii) The authorized capital stock of the Company is as set
forth under the caption "Capitalization" in the Prospectus, and the
authorized capital stock of the Company conforms in all material
respects as to legal matters to the description contained in the
Prospectus under the caption "Description of Capital Stock";
(iv) All the shares of capital stock of the Company
outstanding prior to the issuance of the Shares have been duly
authorized and validly issued and are fully paid and nonassessable;
(v) The Shares have been duly authorized and, when issued
and delivered to the Underwriters against payment therefor in
accordance with the terms hereof, will be validly issued, fully paid
and nonassessable and free of (A) any preemptive rights arising under
the Company's certificate of incorporation or the Delaware General
Corporation Law or (B) to the knowledge of such counsel, similar rights
provided for in any agreement filed as an exhibit to the Registration
Statement that entitle or will entitle any person to acquire any shares
of capital stock of the Company upon the issuance and sale of the
Shares by the Company;
(vi) The form of certificate for the Shares conforms to the
requirements of the Delaware General Corporation Law;
(vii) Such counsel has received oral confirmation from the
staff of the Commission that the Registration Statement and all
post-effective amendments, if any, have become effective under the Act
and, to the knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose are pending before or contemplated by the
Commission; and any required filing of the Prospectus pursuant to Rule
424(b) has been made in accordance with Rule 424(b);
(viii) The Company has the corporate power and authority to
enter into this Agreement and to issue, sell and deliver to the
Underwriters the Shares to be issued and sold by the Company as
provided herein, and this Agreement has been duly authorized, executed
and delivered by the Company and is a valid, legal and binding
agreement of the Company, enforceable against the Company in accordance
with its terms, except as enforcement of rights to indemnity and
contribution hereunder may be limited by federal or state securities
laws or principles of public policy and subject to the qualification
that the enforceability of the Company's obligations hereunder may be
limited by bankruptcy, fraudulent conveyance, insolvency,
reorganization, moratorium and other laws relating to or affecting
creditors' rights generally and by general equitable principles;
(ix) To the knowledge of such counsel, neither the Company
nor any of the Subsidiaries is in violation of its certificate of
incorporation or bylaws or in default in the performance of any
material obligation, agreement or condition contained in any bond,
debenture, note or other evidence of indebtedness, or in any agreement,
indenture, lease or other instrument to which the Company or any
Subsidiary is a party or by which any of them or any of their
respective properties may be bound which default would have a
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Material Adverse Effect, in each case that is made an exhibit to the
Registration Statement;
(x) Neither the offer, sale or delivery of the Shares, the
execution, delivery or performance of this Agreement, compliance by the
Company with the provisions hereof nor consummation by the Company of
the transactions contemplated hereby conflicts with or constitutes a
breach of, or a default under, the certificate of incorporation or
bylaws, or other organizational documents, of the Company or any of the
Subsidiaries or any agreement, indenture, lease or other instrument to
which the Company or any of the Subsidiaries is a party or by which the
Company or any of the Subsidiaries or any of their respective
properties is bound that is made an exhibit to the Registration
Statement, or is known to such counsel after reasonable inquiry, or to
the knowledge of such counsel will result in the creation or imposition
of any lien, charge or encumbrance upon any property or assets of the
Company or any of the Subsidiaries, nor, to our knowledge, will any
such action result in any violation of any existing law, regulation,
ruling (assuming compliance with all applicable state securities or
Blue Sky laws), judgment, injunction, order or decree applicable to the
Company or any of the Subsidiaries or any of their respective
properties;
(xi) No consent, approval, authorization or other order of,
or registration or filing with, any court, regulatory body,
administrative agency or other governmental body, agency, or official
is required on the part of the Company or any of the Subsidiaries
(except as have been obtained under the Act and the Exchange Act or
such as may be required under state securities or Blue Sky laws
governing the purchase and distribution of the Shares and the clearance
of the Offering with the National Association of Securities Dealers)
for the valid issuance and sale of the Shares to the Underwriters as
contemplated by this Agreement;
(xii) The Registration Statement and the Prospectus and any
supplements or amendments thereto (except for the financial statements
and the notes thereto and the schedules and other financial and
statistical data included therein, as to which such counsel need not
express any opinion) comply as to form in all material respects with
the requirements of the Act;
(xiii) To the knowledge of such counsel, (A) there are no
legal or governmental proceedings pending or threatened against the
Company or any of the Subsidiaries, or to which the Company or any of
the Subsidiaries or any of their respective properties is subject,
which are required to be described in the Registration Statement or
Prospectus (or any amendment or supplement thereto) that are not
described as required and (B) there are no agreements, contracts,
indentures, leases or other instruments that are required to be
described in the Registration Statement or the Prospectus (or any
amendment or supplement thereto) or to be filed as an exhibit to the
Registration Statement that are not described or filed as required, as
the case may be;
(xiv) To the knowledge of such counsel, neither the Company
nor any of the Subsidiaries is in violation of any law, ordinance,
administrative or governmental rule or regulation applicable to the
Company or any such Subsidiary the violation of which would have a
Material Adverse Effect, or of any decree of any court or governmental
agency or body having jurisdiction over the Company or any of the
Subsidiaries;
(xv) To the knowledge of such counsel, each of the Company
and the Subsidiaries
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has all necessary Permits (other than those Permits specifically
required to participate in Title IV Programs or pursuant to which the
Company or any of the Subsidiaries must be authorized by applicable
states to engage in rendering educational services, as to which such
counsel need not express an opinion), to own its properties and to
conduct its business as now being conducted as described in the
Registration Statement and the Prospectus (except where the failure to
so have any such Permits, individually or in the aggregate, would not
have a Material Adverse Effect);
(xvi) The statements in the Registration Statement and
Prospectus, insofar as they refer to statements of law or legal
conclusions, are accurate in all material respects (except with respect
to Title IV Programs, as to which such counsel need not express an
opinion);
(xvii) Except as described in the Prospectus, such counsel
does not know of any holder of any securities of the Company or any of
the Subsidiaries who has the right, as a result of the filing of the
Registration Statement, to require the Company to register under the
Act any shares of Common Stock or other securities of the Company, and
any registration rights in connection with the offering contemplated
hereby have been validly waived;
(xviii) The Company is not an "investment company" or a person
"controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended;
(xix) This Agreement and the Custody Agreement have each
been duly executed and delivered by or on behalf the Selling
Stockholders;
(xx) To the knowledge of such counsel, each of the Selling
Stockholders has full legal right, power and authorization, and any
approval required by law, to sell, assign, transfer and deliver good
and marketable title to the Shares which such Selling Stockholder has
agreed to sell pursuant to this Agreement; upon delivery of such Shares
pursuant to this Agreement and payment therefor as contemplated herein
and assuming that the several Underwriters purchased such Shares in
good faith and without notice of an adverse claim within the meaning of
the Uniform Commercial Code (the "UCC"), the Underwriters will acquire
such Shares free and clear of any adverse claim (within the meaning of
Section 8-302 of the UCC);
(xxi) To the knowledge of such counsel, the execution and
delivery of this Agreement and the Custody Agreement by or on behalf of
the Selling Stockholders and the consummation of the transactions
contemplated hereby and thereby will not conflict with, violate, result
in a breach of or constitute a default under the terms or provisions of
any agreement, indenture or other instrument to which any of the
Selling Stockholder is a party or by which any of the Selling
Stockholders or the assets or property of any of the Selling
Stockholders is bound, or any court order or decree or any law, rule,
or regulation applicable to any of the Selling Stockholders or to the
property or assets of any of the Selling Stockholders; and
In addition, such counsel shall state that although such
counsel has not undertaken, except as otherwise indicated in their opinion, to
determine independently, and does not assume any responsibility for, the
accuracy, completeness or fairness of the statements in the Registration
Statement, such counsel has participated in the preparation of the Registration
21
<PAGE> 22
Statement and the Prospectus, including review and discussion of the contents
thereof, and nothing has come to the attention of such counsel that has caused
it to believe that the Registration Statement, at the time the Registration
Statement became effective, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, or that the Prospectus, as of its
date and as of the Closing Date or the Option Closing Date, as the case may be,
contained or contains an untrue statement of a material fact or omitted or omits
to state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading, or
that any amendment or supplement to the Prospectus, as of its date, and as of
the Closing Date or the Option Closing Date, as the case may be, contained or
contains an untrue statement of a material fact or omitted or omits to state a
material fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading (it being understood
that such counsel need express no opinion with respect to the financial
statements and the notes thereto and the schedules and other financial and
statistical data included in the Registration Statement or the Prospectus).
In rendering their opinion as aforesaid, such counsel may rely
as to factual matters (i) upon certificates of the Selling Stockholders and (ii)
the representations of the Selling Stockholders contained herein and in the
Custody Agreement. In rendering their opinion as aforesaid, counsel may rely
upon an opinion or opinions, each dated the Closing Date, of other counsel
retained by them or the Company as to laws of any jurisdiction other than the
federal laws of United States or the State of New York or the corporation law of
the State of Delaware, provided that (1) each such local counsel is acceptable
to the Representatives, (2) such reliance is expressly authorized by each
opinion so relied upon and a copy of each such opinion is delivered to the
Representatives and is, in form and substance, satisfactory to them and counsel
for the Underwriters and (3) counsel shall state in their opinion that they
believe that they and the Underwriters are justified in relying thereon.
(d) You shall have received on the Closing Date an opinion of
Powers, Pyles, Sutter & Verville, P.C., special regulatory counsel for the
Company, dated the Closing Date and addressed to you, as Representatives of the
several Underwriters, that:
(i) The statements in the Prospectus under the captions "Risk
Factors-Dependance on Title IV Funding; Regulatory Compliance as a
Condition for Continued Eligibility for Title IV Funding," "Risk
Factors-Change in Ownership Resulting in Change in Control," "Risk
Factors-Participation in Federal Direct Lending Program; Risk of
Legislative Action," "Risk Factors-Reliance on Acquisitions," "Risk
Factors--Ability to Open Additional Schools," and "Licensing,
Accreditation and Financial Aid Regulation," and other references
therein to educational regulatory matters, insofar as such statements
constitute a summary of applicable federal and state laws and
regulations or a summary of judicial or administrative proceedings, are
accurate and present fairly the information purported to be shown;
(ii) Such counsel have no actual knowledge that lead them to
believe that the information contained in the Registration Statement
and the Prospectus forming a part thereof under the captions "Risk
Factors-Dependance on Title IV Funding; Regulatory Compliance as a
Condition for Continued Eligibility for Title IV Funding," "Risk
Factors-Change in Ownership Resulting in Change in Control," "Risk
Factors-Participation in Federal Direct Lending Program; Risk of
Legislative Action," "Risk Factors-Reliance on
22
<PAGE> 23
Acquisitions," "Risk Factors--Ability to Open Additional Schools," and
"Licensing, Accreditation and Financial Aid Regulation," as of the time
the Registration Statement became effective and as of the date of the
Prospectus and as of the Closing Date, contained any untrue statement
of a material fact, or omitted to state any material fact required to
be stated therein or necessary to make the statements therein not
misleading;
(iii) The Offering will not constitute a change in ownership
resulting in a change in control under the Higher Education Act of
1965, as amended, or the regulations of the Department promulgated
thereunder; and
(iv) To the best of such counsel's actual knowledge, each of
the Company and the Subsidiaries has all necessary Permits required for
each of the Company and the Subsidiaries to participate in Title IV
Programs or pursuant to which the Company or any of the Subsidiaries
must be authorized by applicable states to engage in rendering
educational services as described in the Registration Statement and the
Prospectus (except where the failure to so have any such Permits,
individually or in the aggregate, would not have a Material Adverse
Effect).
(e) You shall have received on the Closing Date an opinion of
Dewey Ballantine LLP, counsel for the Underwriters, dated the Closing Date and
addressed to you, as Representatives of the several Underwriters, with respect
to the matters referred to in clauses (v) (other than subclause (B) thereof),
(vii), (viii), (xii) and the penultimate paragraph of Section 10(c) hereof and
such other related matters as you may request.
(f) You shall have received letters addressed to you and dated
the date hereof and the Closing Date from Ernst & Young LLP, Asher & Company,
Ltd. and Coopers & Lybrand L.L.P., independent certified public accountants,
substantially in the forms heretofore approved by you.
(g)(i) No stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or, to the knowledge of the Company,
contemplated by the Commission at or prior to the Closing Date and any request
of the Commission for additional information (to be included in the registration
statement or the prospectus or otherwise) shall have been complied with; (ii)
there shall not have been any material change in the capital stock of the
Company nor any material increase in the short-term or long-term debt of the
Company and the Subsidiaries, taken as a whole, from that set forth or
contemplated in the Registration Statement or the Prospectus (or any amendment
or supplement thereto); (iii) there shall not have been, since the respective
dates as of which information is given in the Registration Statement and the
Prospectus (or any amendment or supplement thereto), except as may otherwise be
stated in the Registration Statement and Prospectus (or any amendment or
supplement thereto), any material adverse change in the condition (financial or
other), business, prospects, properties, net worth or results of operations of
the Company and the Subsidiaries, taken as a whole; (iv) neither the Company nor
any of the Subsidiaries shall have any liabilities or obligations, direct or
contingent (whether or not in the ordinary course of business), that are
material to the Company and the Subsidiaries, taken as a whole, other than those
reflected in or contemplated by the Registration Statement or the Prospectus (or
any amendment or supplement thereto); and (v) all the representations and
warranties of the Company contained in this Agreement shall be true and correct
in all material respects on and as of the date hereof and on and as of the
Closing Date as if made on and as of the Closing Date, and you shall have
received a certificate, dated the Closing Date and signed by the
23
<PAGE> 24
chief executive officer and the chief financial officer of the Company (or
such other officers as are acceptable to you), as to the matters set forth in
this Section 10(g) and in Section 10(h) hereof.
(h) The Company shall not have failed at or prior to the
Closing Date to have performed or complied with any of its agreements herein
contained and required to be performed or complied with by it hereunder at or
prior to the Closing Date.
(i) All the representations and warranties of the Selling
Stockholders contained in this Agreement shall be true and correct on and as of
the date hereof and on and as of the Closing Date as if made on and as of the
Closing Date, and you shall have received a certificate, dated the Closing Date
and signed by or on behalf of the Selling Stockholders to the effect set forth
in this Section 10(i) and in Section 10(j) hereof.
(j) The Selling Stockholders shall not have failed at or prior
to the Closing Date to have performed or complied with any of their agreements
herein contained and required to be performed or complied with by them hereunder
at or prior to the Closing Date.
(k) The Shares shall have been approved for quotation subject
to notice of issuance on the Nasdaq Stock Market's National Market.
(l) The Company shall have furnished or caused to be furnished
to you such further certificates and documents as you shall have reasonably
requested.
All such opinions, certificates, letters and other documents
will be in compliance with the provisions hereof only if they are satisfactory
in form and substance to you, as Representatives of the several Underwriters,
and counsel for the Underwriters.
Any certificate or document signed by any officer of the
Company and delivered to you, as Representatives of the several Underwriters, or
to counsel for the Underwriters, shall be deemed a representation or warranty by
the Company to each Underwriter as to the statements made therein.
The several obligations of the Underwriters to purchase
Additional Shares hereunder are subject to the satisfaction on and as of any
Option Closing Date of the conditions set forth in this Section 10, except that,
if any Option Closing Date is other than the Closing Date, the certificates,
opinions and letters referred to in paragraphs (c) through (g) shall be dated
the Option Closing Date in question and the opinions called for by paragraphs
(c), (d) and (e) shall be revised to reflect the sale of Additional Shares.
11. EXPENSES. The Company agrees to pay the following costs and
expenses and all other costs and expenses incident to the performance by it of
its obligations hereunder: (i) the preparation, printing or reproduction, and
filing with the Commission of the registration statement (including financial
statements and exhibits thereto), each Prepricing Prospectus, the Prospectus,
and each amendment or supplement to any of them; (ii) the printing (or
reproduction) and delivery (including postage, air freight charges and charges
for counting and packaging) of such copies of the registration statement, each
Prepricing Prospectus, the Prospectus, and all amendments or supplements to any
of them as may be reasonably requested for use in connection with the offering
and sale of the Shares; (iii) the preparation, printing, authentication,
issuance and delivery of certificates for the Shares, including any stamp taxes
in connection with the offering of the Shares; (iv) the printing (or
reproduction) and delivery of this Agreement, the preliminary and supplemental
24
<PAGE> 25
Blue Sky Memoranda and all other agreements or documents printed (or reproduced)
and delivered in connection with the offering of the Shares; (v) the
registration of the Common Stock under the Exchange Act and the listing of the
Shares on the Nasdaq National Market; (vi) the registration or qualification of
the Shares for offer and sale under the securities or Blue Sky laws of the
several states as provided in Section 5(g) hereof (including the reasonable
fees, expenses and disbursements of counsel for the Underwriters relating to the
preparation, printing or reproduction, and delivery of the preliminary and
supplemental Blue Sky Memoranda and such registration and qualification); (vii)
the filing fees and the reasonable fees and expenses of counsel for the
Underwriters in connection with any filings required to be made with the
National Association of Securities Dealers, Inc. in connection with the
offering; (viii) the transportation and other expenses incurred by or on behalf
of representatives of the Company in connection with presentations to
prospective purchasers of the Shares; (ix) the fees and expenses of the
Company's accountants and the fees and expenses of counsel (including local and
special counsel) for the Company; and (x) the performance by the Company of its
other obligations under this Agreement.
12. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become effective:
(i) upon the execution and delivery hereof by the parties hereto; or (ii) if, at
the time this Agreement is executed and delivered, it is necessary for the
registration statement or a post-effective amendment thereto or an Abbreviated
Registration Statement to be declared or become effective before the offering of
the Shares may commence, when notification of the effectiveness of the
registration statement or such post-effective amendment has been released by the
Commission or such Abbreviated Registration Statement has, pursuant to the
provisions of Rule 462 under the Act, become effective. Until such time as this
Agreement shall have become effective, it may be terminated by the Company, by
notifying you, or by you, as Representatives of the several Underwriters, by
notifying the Company.
If any one or more of the Underwriters shall fail or refuse to
purchase Shares which it or they have agreed to purchase hereunder, and the
aggregate number of Shares which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase is not more than one-tenth of the
aggregate number of Shares which the Underwriters are obligated to purchase on
the Closing Date, each non-defaulting Underwriter shall be obligated, severally,
in the proportion which the number of Firm Shares set forth opposite its name in
Schedule I hereto bears to the aggregate number of Firm Shares set forth
opposite the names of all non-defaulting Underwriters or in such other
proportion as you may specify in accordance with Section 20 of the Master
Agreement Among Underwriters of Smith Barney, Harris Upham & Co. Incorporated
(predecessor of Smith Barney Inc.), to purchase the Shares which such defaulting
Underwriter or Underwriters agreed, but failed or refused, to purchase. If any
Underwriter or Underwriters shall fail or refuse to purchase Shares which it or
they are obligated to purchase on the Closing Date and the aggregate number of
Shares with respect to which such default occurs is more than one-tenth of the
aggregate number of Shares which the Underwriters are obligated to purchase on
the Closing Date and arrangements satisfactory to you and the Company for the
purchase of such Shares by one or more non-defaulting Underwriters or other
party or parties approved by you and the Company are not made within 36 hours
after such default, this Agreement will terminate without liability on the part
of any non-defaulting Underwriter or the Company. In any such case which does
not result in termination of this Agreement, either you or the Company shall
have the right to postpone the Closing Date, but in no event for longer than
seven days, in order that the required changes, if any, in the Registration
Statement and the Prospectus or any other documents or arrangements may be
effected. Any action taken under this paragraph shall not relieve any defaulting
Underwriter from liability in respect of any such default of any such
Underwriter under this Agreement. The term "Underwriter" as used in this
Agreement includes, for all purposes of
25
<PAGE> 26
this Agreement, any party not listed in Schedule II hereto who, with your
approval and the approval of the Company, purchases Shares which a defaulting
Underwriter agreed, but failed or refused, to purchase.
Any notice under this Section 12 may be given by telegram,
telecopy or telephone but shall be subsequently confirmed by letter.
13. TERMINATION OF AGREEMENT. This Agreement shall be subject to
termination in your absolute discretion, without liability on the part of any
Underwriter to the Company, by notice to the Company, the Attorneys-in-Fact and
the Pecks Managed Entities, if prior to the Closing Date or any Option Closing
Date (if different from the Closing Date and then only as to the Additional
Shares), as the case may be, (i) trading in securities generally on the New York
Stock Exchange, the American Stock Exchange or the Nasdaq National Market shall
have been suspended or materially limited, (ii) a general moratorium on
commercial banking activities in New York shall have been declared by either
federal or state authorities, or (iii) there shall have occurred any outbreak or
escalation of hostilities or other international or domestic calamity, crisis or
change in political, financial or economic conditions, the effect of which on
the financial markets of the United States is such as to make it, in your
judgment, impracticable or inadvisable to commence or continue the offering of
the Shares at the offering price to the public set forth on the cover page of
the Prospectus or to enforce contracts for the resale of the Shares by the
Underwriters. Notice of such termination may be given by telegram, telecopy or
telephone and shall be subsequently confirmed by letter.
14. INFORMATION FURNISHED BY THE UNDERWRITERS. The statements set
forth in the last paragraph on the cover page, the stabilization legend on the
inside front cover page and the statements in the first and third paragraphs
under the caption "Underwriting" in any Prepricing Prospectus and in the
Prospectus constitute the only information furnished by or on behalf of the
Underwriters through you as such information is referred to in Sections 7(b) and
9 hereof.
15. MISCELLANEOUS. Except as otherwise provided in Sections 5, 12
and 13 hereof, notice given pursuant to any provision of this Agreement shall be
in writing and shall be delivered (i) if to the Company, at the office of the
Company at 1327 Northmeadow Parkway, Suite 132, Roswell, Georgia 30076,
Attention: Gary D. Kerber, Chairman of the Board, President and Chief Executive
Officer, with a copy to Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel,
P.A., 777 South Flagler Drive, West Palm Beach, Florida 33401, Attention: Morris
C. Brown, Esq.; (ii) if to the Selling Stockholders (other than the Pecks
Managed Entities), in care of the Attorney-in-Fact at the office of the Company,
at the address given in clause (i), with a copy to Greenberg, Traurig, Hoffman,
Lipoff, Rosen & Quentel, P.A., Attention: Morris C. Brown at the address given
in clause (i); (iii) if to the Pecks Managed Entities, care of Pecks Management
Partners Ltd., One Rockefeller Plaza, New York, New York 10020, Attention:
Robert J. Cresci, Managing Director; or (iv) if to you, as Representatives of
the several Underwriters, care of Smith Barney Inc., 388 Greenwich Street, New
York, New York 10013, Attention: Manager, Investment Banking Division, with a
copy to Dewey Ballantine, 1301 Avenue of the Americas, New York, New York 10019,
Attention: Frederick W. Kanner, Esq.
26
<PAGE> 27
This Agreement has been and is made solely for the benefit of
the several Underwriters, the Company, its directors, its officers who sign the
Registration Statement and the controlling persons referred to in Section 9
hereof and, to the extent provided herein, their respective successors and
assigns, and no other person shall acquire or have any right under or by virtue
of this Agreement. Neither the term "successor" nor the term "successors and
assigns" as used in this Agreement shall include a purchaser from any
Underwriter of any of the Shares in his status as such purchaser.
16. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be governed
by and construed in accordance with the laws of the State of New York applicable
to contracts made and to be performed within the State of New York.
This Agreement may be signed in various counterparts which
together constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
27
<PAGE> 28
Please confirm that the foregoing correctly sets forth the
agreement among the Company, the several Selling Stockholders and the several
Underwriters.
Very truly yours,
EDUCATIONAL MEDICAL, INC.
By:
-------------------------------------
Gary D. Kerber
President and Chief Executive
Officer
EACH OF THE SELLING
STOCKHOLDERS NAMED IN
SCHEDULE I HERETO
(other than the Pecks
Managed Entities)
By:
-------------------------------------
Attorney-in-Fact
TRUST FOR DEFINED BENEFIT PLAN OF ICI
AMERICAN HOLDINGS INC.
By: Pecks Management Partners Ltd.,
its Investment Advisor
By:
-------------------------------------
Robert J. Cresci
Managing Director
TRUST FOR DEFINED BENEFIT PLAN OF ZENECA
HOLDING INC.
By: Pecks Management Partners Ltd.,
its Investment Advisor
By:
-------------------------------------
Robert J. Cresci
Managing Director
28
<PAGE> 29
DELAWARE STATE EMPLOYEES' RETIREMENT FUND
By: Pecks Management Partners Ltd.,
its Investment Advisor
By:
-------------------------------------
Robert J. Cresci
Managing Director
Confirmed as of the date first
above mentioned on behalf of
themselves and the other several
Underwriters named in Schedule II
hereto.
SMITH BARNEY INC.
LEGG MASON WOOD WALKER, INCORPORATED
As Representatives of the Several Underwriters
By: SMITH BARNEY INC.
By:
---------------------------------------------
Managing Director
29
<PAGE> 30
SCHEDULE I
EDUCATIONAL MEDICAL INC.
<TABLE>
<CAPTION>
Number of
Selling Stockholder............................................................ Firm Shares
- ------------------- -----------
<S> <C>
Lawrence, Tyrrell, Ortale & Smith.............................................. 995,307
Delaware State Employees' Retirement Fund...................................... 637,051
Declaration of Trust for Defined Benefit Plans of ICI America
Holding Inc.......................................................... 109,178
Declaration of Trust for Defined Benefit Plans of Zeneca
Holding Inc.......................................................... 132,463
-----------
1,873,999
</TABLE>
<PAGE> 31
SCHEDULE II
EDUCATIONAL MEDICAL INC.
<TABLE>
<CAPTION>
Number of
Underwriter Firm Shares
- ----------- -----------
<S> <C>
Smith Barney Inc...............................................................
Legg Mason Wood Walker, Incorporated...........................................
..................................................................... ----------
Total.......................................
2,500,000
==========
</TABLE>
<PAGE> 1
Exhibit 5.1
GREENBERG TRAURIG LETTERHEAD
July 2, 1998
Educational Medical, Inc.
1327 Northmeadow Parkway, Suite 132
Roswell, Georgia 30076
Ladies and Gentlemen:
We have acted as counsel to Educational Medical, Inc. (the
"Corporation") in connection with the preparation and filing with the Securities
and Exchange Commission of a registration statement on Form S-1 (Registration
Statement No. 333-50221), and the amendments thereto (the "Registration
Statement"). The Registration Statement relates to a proposed public offering
pursuant to which up to 1,873,999 Shares are being offered by certain
stockholders of the Corporation (the "Selling Stockholder Shares") and up to
126,001 Shares are being offered by the Corporation (the "Corporation Shares").
Based upon and subject to the foregoing and the other qualifications,
limitations and assumptions contained herein, we are of the opinion that:
The Selling Stockholder Shares and the Corporation Shares, when sold as
contemplated in the Registration Statement, will be validly issued, fully paid
and non-assessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to us in the Prospectus contained
therein under the caption "Legal Matters."
Very Truly yours,
GREENBERG TRAURIG HOFFMAN
LIPOFF ROSEN & QUENTEL, P.A.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated June 2, 1998 with respect to the consolidated
financial statements and schedule of Educational Medical, Inc., in Post-
Effective Amendment No. 2 to the Registration Statement (Form S-1 No. 333-50221)
and the related Prospectus of Educational Medical, Inc.
/s/ Ernst & Young LLP
---------------------
Atlanta, Georgia
July 2, 1998
