<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
<TABLE>
<C> <S>
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
</TABLE>
COMMISSION FILE NUMBER 000-21567
QUEST EDUCATION CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 65-0038445
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1400 HEMBREE ROAD, SUITE 100, ROSWELL, 30076
GEORGIA (Zip Code)
(Address of principal executive offices)
</TABLE>
(770) 510-2000
Registrant's telephone number, including area code
Securities registered under Section 12(b) of the Exchange Act:
NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE
$.01 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K (sec.229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference to Part III
of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant based on the last sale price for such stock at June 25, 1999:
$71,880,542.
The number of shares outstanding of each of the registrant's classes of
common stock, as of June 25, 1999: 8,224,037 (one class).
DOCUMENTS INCORPORATED BY REFERENCE
None
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
QUEST EDUCATION CORPORATION
FORM 10-K
INDEX
<TABLE>
<S> <C> <C>
PART I..................................................................
ITEM 1. BUSINESS.................................................... 1
ITEM 2. PROPERTIES.................................................. 14
ITEM 3. LEGAL PROCEEDINGS........................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 15
PART II.................................................................
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 16
ITEM 6. SELECTED FINANCIAL DATA..................................... 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 33
PART III................................................................
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 34
ITEM 11. EXECUTIVE COMPENSATION...................................... 37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 43
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 44
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K......................................................... 47
SIGNATURES.............................................................. 55
</TABLE>
i
<PAGE> 3
PART I
ITEM 1. BUSINESS
OVERVIEW
We provide diversified career oriented postsecondary education to over
12,500 students at 30 schools located in eleven states. We offer 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. Our 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, 1999, approximately 50% of our 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.(1) We believe the
demand for postsecondary career oriented education will increase over the next
several years as a result of recognized trends, including
- 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,
- 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
- 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.(2)
According to the Department of Education, there were 1,997 accredited,
proprietary postsecondary institutions participating in the student financial
aid programs administered by the Department of Education pursuant to Title IV of
the Higher Education Act of 1965 as of June 1999. The ownership of these
institutions is highly fragmented. Although the industry appears to be moving
into a consolidation phase, we believe that no organization either holds a
significant national market share or owns or operates more than 75 schools.
OUR INITIAL PUBLIC OFFERING
In October 1996, we completed an initial public offering of 2,200,000
shares of our common stock and received net proceeds of approximately $19.3
million. We used approximately $4.8 million of the IPO's net proceeds to repay
indebtedness and related interest and expenses. The remainder of the net
proceeds, approximately $14.5 million, were used for general corporate purposes,
principally the expansion of our operations through the acquisition of
additional schools and adding academic programs at existing schools. Certain
stockholders also sold 410,000 shares in the IPO. We received none of the
proceeds from the sale of these shares.
1998 OFFERING
On July 2, 1998, we completed another offering. A total of 2,300,000 shares
were sold at $8.75 per share which included 426,001 shares sold by us and
1,873,999 shares sold by selling stockholders. Our net proceeds from the sale of
shares were approximately $3.5 million. We used approximately $440,000 of the
proceeds to pay a portion of the underwriting discounts and commissions on
shares sold by the selling stockholders. The remaining net proceeds were used to
repay promissory notes payable to sellers of various schools acquired. We
received none of the proceeds from the sale of shares by the selling
stockholders.
- ---------------
1 Source: National Center for Educational Statistics, Digest of Education
Statistics, 1996
2 Source: Department of Education
1
<PAGE> 4
IOWA ACQUISITION
On November 30, 1998, we acquired the two American Institute of Commerce
schools and the three Hamilton College schools located in Iowa. The American
Institute of Commerce schools are located in Cedar Falls and Davenport, Iowa.
The Hamilton schools are located in Cedar Rapids, Des Moines, and Mason City,
Iowa.
OUR STRATEGY
Our goal is to increase our market share in the expanding market for
postsecondary education and improve profitability by:
- promoting internal growth at our new and existing schools,
- acquiring additional schools,
- opening new schools as additional locations or branches of existing
schools, and
- enhancing operating efficiencies.
We have implemented the following strategies to achieve these goals:
Internal Growth Strategy. We intend to increase student enrollment at our
schools by continuing to enhance local marketing efforts and increasing the
number and variety of program offerings at our schools. We intend to continue to
increase the number and variety of programs offered at our schools by:
- rolling out of new diploma and degree programs, including a centrally
developed information technology diploma and degree program;
- replicating existing programs at selected schools where such programs are
not offered; and
- introducing associate degree programs at all schools currently offering
only diploma programs.
Acquisition Strategy. We intend to continue to make selective acquisitions
of additional schools and integrate them into our existing system. We believe
that the fragmentation of the postsecondary education market provides
significant opportunities to consolidate existing independently owned schools.
We expect to utilize cash on hand, our bank credit facility, our common stock,
and seller financing in connection with such acquisitions. In general, our
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.
We concentrate our acquisition efforts on schools which (1) satisfy our
general acquisition criteria and (2) offer curricula in the fields of study
currently offered at our schools and selected other fields of study.
Additional Location Strategy. We intend to capitalize on our schools'
existing infrastructure and curricula by opening additional locations by
branching from our existing institutions in areas that exhibit strong enrollment
potential and job placement opportunities. Our 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. In
fiscal 1999, we opened one new school in Concord, New Hampshire and expect to
open additional new schools in fiscal 2000.
Operating Strategy. We provide each of our schools with certain services
which we believe can be performed most efficiently and cost effectively by a
centralized office. These services include marketing analysis, accounting,
information systems, financial aid, and regulatory compliance. We intend to
continue our 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
2
<PAGE> 5
the profitability and growth of their school. We believe the combination of
certain centralized services and decentralized management significantly
increases our operating efficiency.
OUR SCHOOLS
The location of each of our schools is shown on the following table. The
table also shows the name under which the school operates, the date of its
acquisition, if applicable, the principal fields of study in which it offers its
programs, its degree granting status, and its accrediting agency.
<TABLE>
<CAPTION>
INSTITUTIONAL
DATE PRINCIPAL DEGREE ACCREDITING
SCHOOL ACQUIRED CURRICULA(1) GRANTING(2) AGENCY(3)
- ------ -------- ------------------- ----------- -------------
<S> <C> <C> <C> <C>
Maric College................... 4/88 Healthcare Associate ACCSCT
San Diego, CA
Maric College................... 4/88 Healthcare Associate (5) ACCSCT
Vista, CA(4)
Long Technical College.......... 4/88 Healthcare/IT Associate ACCSCT
Phoenix,AZ
Andon College................... 11/89 Healthcare No ABHES
Stockton, CA
Andon College................... 11/89 Healthcare Associate ABHES
Modesto, CA
Bauder College.................. 3/92 Fashion and Associate SACS/COC
Atlanta, GA Design/Business
Modern Technology College....... 3/93 Healthcare Associate ACCSCT
North Hollywood, CA
Dominion Business College....... 5/93 Business/IT Associate ACICS
Roanoke, VA Healthcare
Dominion Business College....... 5/93 Business/IT Associate ACICS
Harrisonburg, VA(6) Healthcare
ICM School of Business.......... 7/93 Business/IT Associate ACICS
Pittsburgh, PA Healthcare/
Fashion and Design
Ohio Institute of Photography &
Technology.................... 7/93 Image Associate ACCSCT
Dayton, OH Technology/
Healthcare
California College of 8/93 Fashion and Associate ACICS
Technology....................
Sacramento, CA Design
San Antonio College of Medical
and Dental Assistants......... 9/96 Healthcare No ACCSCT
San Antonio, TX
San Antonio College of Medical
and Dental Assistants......... 9/96 Healthcare No ACCSCT
McAllen, TX
Career Centers of Texas -- El 9/96 Healthcare No ACCSCT
Paso..........................
El Paso, TX
Hagerstown Business College..... 12/96 Business/IT Associate ACICS
Hagerstown, MD Healthcare
Nebraska College of Business.... 3/97 Business/IT Associate ACICS
Omaha, NE Healthcare
Lincoln School of Commerce...... 3/97 Business/IT Associate ACICS
Lincoln, NE Healthcare
</TABLE>
3
<PAGE> 6
<TABLE>
<CAPTION>
INSTITUTIONAL
DATE PRINCIPAL DEGREE ACCREDITING
SCHOOL ACQUIRED CURRICULA(1) GRANTING(2) AGENCY(3)
- ------ -------- ------------------- ----------- -------------
<S> <C> <C> <C> <C>
CHI Institute................... 2/98 IT/Business/ Associate ACCSCT
Southampton, PA Healthcare/Electronic
Engineering
CHI Institute................... 2/98 IT/Business/ Associate ACCSCT
Broomall, PA Healthcare/Electronic
Engineering
Hesser College.................. 3/98 Business/ Bachelor/ NEASC
Manchester, NH Healthcare/ Associate
IT/Criminal Justice
Fashion and Design
Hesser College.................. 3/98 Healthcare/ Bachelor/ NEASC
Salem, NH IT/Criminal Associate
Justice Fashion and
Design
Hesser College.................. 3/98 Business/ Bachelor/ NEASC
Nashua, NH Healthcare/ Associate
IT/Criminal Justice
Fashion and Design
Hesser College.................. 3/98 Business/ Bachelor/ NEASC
Portsmouth, NH Healthcare/ Associate
IT/Criminal Justice
Fashion and Design
Hesser College.................. N/A Business/ Bachelor/ NEASC
Concord, NH Healthcare/ Associate
IT/Criminal Justice
Fashion and Design
American Institute of 11/98 Business/IT Associate ACICS/NCA
Commerce......................
Cedar Falls, IA Healthcare
American Institute of 11/98 Business/IT Associate ACICS/NCA
Commerce......................
Davenport, IA Healthcare
Hamilton College................ 11/98 Business/IT Associate ACICS/NCA
Cedar Rapids, IA Healthcare
Hamilton College................ 11/98 Business/IT Associate ACICS/NCA
Des Moines, IA Healthcare
Hamilton College................ 11/98 Business/IT Associate ACICS/NCA
Mason City, IA Healthcare
</TABLE>
- ---------------
(1) We offer a variety of programs in addition to those listed in the chart at
one or more of our 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, early childhood education, air
conditioning, heating, and refrigeration technology, social sciences, and
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"), New England Association of Schools and Colleges ("NEASC"), and
North Central Association of Colleges and Schools ("NCA").
4
<PAGE> 7
(4) We determined that there was a substantial overlap in the Vista, California
markets and combined the 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.
(5) Degree granting status has been approved; however, programs have not yet
been implemented.
(6) We determined that there was a substantial overlap in the Harrisonburg and
Staunton, Virginia markets, and combined the Staunton school with the
Harrisonburg school in fiscal 1997. The Harrisonburg and Staunton schools
were both acquired at the same time.
PROGRAMS OF STUDY
The programs of study that we offer 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. These 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.
We offer both associate degree and diploma programs in the following
principal areas:
- healthcare
- business
- information technology
We offer associate degree programs in fashion and design.
The Hesser schools offer bachelor degrees in business and criminal justice
and associate degrees.
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
- medical and dental office manager
- physical therapy
The business programs provide education in areas such as:
- accounting
- business management
- secretarial skills
- paralegal skills
- 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
- computer repair
- Microsoft engineering
- networking
and are also 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
- interior designers
Tuition and fees vary depending on the program offered and the location of
the school.
5
<PAGE> 8
The following table provides information at March 31, 1999 with respect to
the programs offered by our 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.................................. 22 4,277 17 1,103 5,380
Business.................................... 13 466 19 2,320 2,786(1)
Information Technology...................... 13 1,139 16 976 2,115
Fashion and Design.......................... -- -- 8 501 501
Other Programs.............................. 7 427 11 1,346 1,773(1)
----- ----- ------
Company Total..................... 6,309 6,246 12,555
===== ===== ======
</TABLE>
- ---------------
(1) Includes 71 students enrolled in bachelor degree business programs and 40 in
the bachelor degree criminal justice program.
All of our programs are designed to prepare graduates to perform
effectively in a variety of entry-level positions. We try to provide students
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 are a graded portion of the curricula and provide
hands-on experience in the work place. They are also a source of job
opportunities. Most of our 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 our schools varies depending on the programs we
offer. Degree programs begin four times a year. Diploma programs begin every
four to six weeks. Diploma courses are typically offered mornings, afternoons,
and evenings. Degree programs are principally offered during day-time hours,
except in the Hesser schools where the majority of associate degree students
attend at night. The schools generally have classes operating year round and are
open five days per week. Our diversified curricula provide us with an extensive
library of programs and experience in various fields enabling us to meet
changing demands in the areas served by each of our 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 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' executive 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 us in assessing and updating curricula and other aspects of
the relevant programs.
TUITION AND FEES
As of March 31, 1999, total tuition for completion (on a full-time basis)
for the diploma programs offered by our schools ranged from $3,445 to $19,900,
for an associate degree program the tuition ranged from $11,385 to $26,206, and
for our bachelor degree program the tuition ranged from $18,120 to $33,240. In
addition to these tuition amounts, students at our schools typically must
purchase textbooks and supplies as part of their educational programs.
STUDENT RECRUITMENT
Each of our schools try to recruit motivated students who have the ability
to complete the programs offered by them and to secure entry-level employment in
the fields for which their programs are designed to prepare the student. To
attract potential students, we engage in several activities to inform them, and
in some instances their parents, about our programs. These expenditures vary
from school to school, depending on the
6
<PAGE> 9
desired audience, and include television advertising, direct mailings, newspaper
advertising and yellow pages advertising. We also engage in high school visits
to attract potential students.
All advertising is coordinated and budgeted at the school level or
regionally, and frequently purchased 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 our schools employs a director of admissions who generally works
with a regional admissions 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. These 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
our schools. We employ 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.
Our 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 our
schools allowing each school to more efficiently utilize its marketing
resources. Also, when a particular school develops a successful marketing
program, we make 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 our 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 our 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. We are 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 our
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, we are generally allowed to retain a greater percentage of tuition
than that provided for by the California formula.
GRADUATE PLACEMENT
Each of our schools employs placement personnel to provide placement
assistance services to students and graduates and to solicit appropriate
employment opportunities from employers. In addition, our 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.
7
<PAGE> 10
As of March 31, 1999, since their respective acquisition, our schools have
graduated approximately 48,000 students, including 18,822 in fiscal 1999.
Based on data obtained from our students and their employers, we believe
that 77% and 82% of the students graduating from programs offered by our schools
(other than the Hesser Schools) during each of 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, we believe that their placement
rate is at least equal to the placement rate for our other schools.
FACULTY
Faculty members are hired locally in accordance with criteria established
by each 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 our faculty were previously employed in fields related to
their area of instruction. We believe that such faculty members provide a "real
world" perspective to our students. At most of our 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, 1999, our schools employed approximately 511 full-time faculty
members (faculty members spending at least 20 hours per week teaching classes at
our schools) and 492 part-time faculty members.
ADMINISTRATION AND EMPLOYEES
Each of our schools is managed by an executive director. The staff of each
school generally includes a director of placement, a financial aid
administrator, and a director or assistant director of admissions. Most 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, 1999, we had
approximately 2,067 full and part-time employees, including 70 people employed
at our home office in Roswell, Georgia and our four regional offices and 1,003
full and part-time faculty members. We also employed 192 students under the
Federal Work-Study program. None of our employees is represented by a labor
union or is subject to a collective bargaining agreement. We have never
experienced a work stoppage and believe that our employee relations are
satisfactory.
From our home office and regional offices, we provide each of our schools
with financial aid services, oversee regulatory compliance, assist in the
development and addition of programs to existing curricula, implement and
support management information systems, and provide accounting services and
financial resources. Our four regional offices each have a regional manager and
staff who manage the individual executive directors and provide expertise in the
area of operations, curricula development, and sales and marketing. These
centralized services relieve the local school management of tasks which we
believe can be performed most efficiently and cost effectively by a centralized
office. However, because of our belief that each of the markets served by our
schools are unique, and that by offering programs specifically targeted at each
market, we can maximize their long-term ability to enroll and place students in
an appropriate outcome, local school management has the responsibility and
authority to schedule the school's programs, hire its teachers, and make the day
to day decisions which effectively operates our business in order to best
service our students.
COMPETITION
The postsecondary education market is highly fragmented and competitive
with no private or public institution having a significant market share. We
compete for students with not-for-profit public and private colleges and
proprietary institutions which offer degree and/or non-degree granting programs.
Proprietary institutions include vocational and technical training schools,
continuing education programs and commercial training programs. We believe
competition among educational institutions is based on the quality of the
program, perceived reputation of the institution, the cost of the program, and
the employability of graduates.
8
<PAGE> 11
Public and private colleges may offer programs similar to those offered by our
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 our competitors in both the public and
private sector have greater financial and other resources than us.
TITLE IV STUDENT FINANCIAL ASSISTANCE PROGRAMS
A substantial majority of the students attending our schools finance all or
a part of their education through grants or loans under Title IV Programs under
the Higher Education Act. Each of our schools participates in Title IV Programs
either as an individual school or as an additional location of another school
which is the main campus of the school. Cash receipts from Title IV funding
provide most of our revenues. In fiscal 1999, approximately 73% of our cash
receipts were from Title IV funding. The maximum amount of a student's available
Title IV program assistance is generally based on the student's financial need.
We determine a student's financial need based on the national standard need
analysis system established by the Higher Education Act. 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
and other cost, the student is responsible for the difference.
Students at our schools participate in the following Title IV Programs:
Pell and Federal Supplemental Educational Opportunity 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 $3,000 annually, depending on the student's financial
need, as determined by a formula set by the Higher Education Act and the
regulations. The Higher Education Act guarantees that all of the eligible
students at a school receive Pell grants in the amounts to which they are
entitled. In fiscal 1999, Pell grants to students represented approximately
$19,285,000, or 20.8%, of our net revenues.
The Federal Supplemental Educational Opportunity Grant program
provides for awards to exceptionally needy undergraduate students. The
amount of an Federal Supplemental Educational Opportunity Grant 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
Federal Supplemental Educational Opportunity Grant awards is restricted.
We, or another outside source, are required to make a 25% matching
contribution for Federal Supplemental Educational Opportunity Grant program
funds it disburses. Federal Supplemental Educational Opportunity Grant
awards made to our students (net of matching contributions) amounted to
approximately $1,392,000 and represented approximately 1.5% of our net
revenues in fiscal 1999.
Federal Family Education Loans and Federal Direct Student Loans
The Federal Family Education Loan programs include the Federal
Stafford Loan Program, and the Federal PLUS Program pursuant to which
private lenders make loans to enable a student or his or her parents to pay
the cost of attendance at a postsecondary school.
The Federal Family Education Loan Programs are 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 is substantially the same as
the Federal Family Education Loan program in providing Stafford and PLUS
loans. Under the Federal Direct Student Loan Program, however, funds are
provided directly by the federal government to the students, and the loans
are administered through the school. For schools electing to participate,
the Federal Direct Student Loan Program replaces the Federal Family
Education Loan program, although loans are made on the same
9
<PAGE> 12
general terms and conditions. We were one of the initial participants in
the Federal Direct Student Loan Program.
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
through Stafford Loans under either the Federal Family Educational Loan
Program Stafford Loan program or the Federal Direct Student Loan Program
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 1999, all of our existing schools participated
exclusively in the Federal Direct Student Loan Program. Federal Direct
Student Loan Program and Federal Family Educational Loan Stafford loans
amounted to approximately $45,988,000, or approximately 49.5% of our net
revenues, in fiscal 1999.
PLUS Loan Program
Parents of dependent students may receive loans under the Federal
Family Education Loan PLUS Program or the Federal Direct Student Loan 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 Federal Family Education Loan PLUS loans are made by lending
schools and guaranteed by the federal government. The Federal Direct
Student Loan PLUS program provides PLUS loans by the federal government on
the same general terms as the Federal Family Education Loan PLUS loans.
Federal Direct Student Loan Program PLUS loans and Federal Family Education
Loan PLUS loans amounted to approximately $8,883,000, or approximately 9.6%
of our net revenues, in fiscal 1999.
Perkins Loans
Students who demonstrate financial need may borrow up to $4,000 per
academic year under the Federal Perkins Loan program, subject to the
availability of Perkins funds at the school. Repayment of loans under the
Perkins program is delayed until nine months after graduation or the
termination of studies. Funding for a school's Perkins program is made by
the Department of Education into a fund maintained by the participating
school for that purpose. The participating school is required to make a
matching contribution into the fund of 25% of the total loans made from the
fund and to deposit all repayments into the fund.
Six schools continue to participate in the Perkins program. A school
will not receive continued federal funding for Perkins loans if the
school's Cohort Default Rate for Perkins loans exceeds 30%. Perkins loans
amounted to approximately $215,000, or approximately 0.2% of our net
revenues, in fiscal 1999.
Federal Work-Study
Pursuant to the Federal Work-Study program, federal funds are made
available to provide part-time employment to eligible students based on
financial need. Our schools provide a limited number of on-campus and
off-campus jobs to eligible students participating in the Federal Work
Study program. During the 1998-99 award year, our schools employed less
than 300 students pursuant to this program. Either we, or another outside
source, is required to pay 25% of the gross earnings for each participant
in the Federal Work Study program.
10
<PAGE> 13
TITLE IV REGULATION
To obtain and maintain eligibility to participate in the programs described
above, we must comply with the rules and regulations set forth in the Title IV
of the Higher Education Act and the regulations issued and enforced by the
Department of Education. To participate in Title IV Programs, an institution and
its additional locations, if any, must be certified by the Department of
Education. Certification requires, among other things, that the school 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 Higher Education Act provides standards for institutional eligibility
to participate in the Title IV Programs. The standards are designed, among other
things, to:
- limit dependence on Title IV funds
- prevent schools with unacceptable student loan default rates from
participating in Title IV Programs
- in general, require schools to satisfy certain criteria intended to
protect the integrity of the federal programs, including criteria
regarding administrative capability and financial responsibility
Generally, a school is considered separately for compliance with the
regulations. Twenty-two of our 30 schools are main campuses.
A school's certification of eligibility to participate in the Title IV
Programs generally continues for six years. A school must apply for a renewal of
its certification prior to its expiration, and must demonstrate compliance with
the eligibility requirements in its application.
Under certain circumstances, the Department of Education may provisionally
certify a school to participate in Title IV programs. Provisional certification
may be imposed, when a school is reapplying for certification or when a school
undergoes a change of ownership resulting in a change in control, or at the
discretion of the Secretary of Education, if the school does not satisfy all the
financial responsibility standards, 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 under other circumstances determined by the Secretary of
Education. Provisional certification may last no longer than three years.
Provisional certification differs from certification in that a provisionally
certified school may be terminated from eligibility to participate in the Title
IV Programs without the same opportunity for a hearing before an independent
hearing officer and an appeal to the Secretary of Education as is afforded to a
fully certified school faced with termination, suspension, or limitation of
eligibility prior to expiration of its certification. Additionally, the
Department of Education may impose additional conditions on a provisionally
certified school's eligibility to continue participating in the Title IV
Programs.
STUDENT LOAN DEFAULTS
Under the Higher Education Act, a school may lose its eligibility to
participate in some or all Title IV Programs if student defaults on the
repayment of federally guaranteed student loans exceed specified Cohort Default
Rates. Similar rules regarding default rates apply to Federal Direct Loans made
pursuant to the Federal Direct Student Loan Program, 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 main campus on a federal fiscal year basis by determining the rate at
which the school's students entering repayment in that federal fiscal year
default by the end of the following federal fiscal year. Cohort Default Rates
are subject to revision by the Department of Education if new data becomes
available and is subject to appeal by schools contesting the accuracy of the
data or the adequacy of the servicing of the loans by the loan servicer.
A school 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 school a hearing before an independent Department of
Education hearing officer and an opportunity
11
<PAGE> 14
to appeal any decision to the Secretary of Education before the limitation,
suspension, or termination may take effect. None of our schools has, or has had,
a Cohort Default Rate in excess of 40% in the three most recent years.
A school whose Cohort Default Rate is 25% or more for the three consecutive
federal fiscal years ended September 30, 1996, 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, a school remains eligible for Title IV student loan programs while the
appeal is pending.
None of our schools had a Cohort Default Rate of 25% or more for the three
consecutive federal fiscal years ended September 30, 1996. Additionally, based
on preliminary data released by the Department of Education in March 1999, none
of our schools had a Cohort Default Rate of 25% or more for the three
consecutive federal fiscal years ended September 30, 1997. Accordingly, we
believe that none of the schools are currently vulnerable to termination from
Title IV eligibility based on three consecutive years of excess default rates.
However, the school located in Omaha, Nebraska had a Cohort Default Rate in
excess of 25% for federal fiscal 1995 and federal fiscal 1996. The Omaha,
Nebraska school 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 final rate for the federal fiscal year ended September 30, 1997 is
25% or greater. Preliminary data for such federal fiscal year has been released
which indicates the rate is below 25%. If this rate is released as a final rate,
the school would no longer be vulnerable to termination. Our other schools 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 90/10 RULE (FORMERLY THE 85/15 RULE)
The "90/10" rule, which applies to for-profit institutions, became
applicable to our schools beginning with the fiscal year ending March 31, 1999.
It requires that no more than 90% of the school's applicable cash receipts may
be derived from Title IV Programs. A school whose annual certified financial
statement does not reflect compliance with the 90/10 rule is subject to
immediate termination of its Title IV eligibility. We believe that each of our
schools were in compliance with the 90/10 rule with respect to fiscal years 1994
through 1999. We have taken steps to help ensure on-going compliance with the
90/10 Rule.
CHANGE IN CONTROL
For public companies like us, a change in control occurs when a report on
Form 8-K is required to be filed with the Securities and Exchange Commission
disclosing a change in control. Most states and accrediting agencies have
similar requirements, but they do not provide a uniform definition of change in
control. If we were to lose eligibility to participate in Title IV Programs for
a significant period of time pending an application to regain eligibility, or if
we were determined not to be eligible, our operations would be materially
adversely affected. The possible loss of Title IV eligibility resulting from a
change in control may also discourage or impede a tender offer, proxy contest or
other similar transaction involving control of the company.
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
12
<PAGE> 15
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.
Thirteen of our main campuses are provisionally certified to participate in
the Title IV Programs as a result of going through the change of ownership
process. The conditions imposed on them as a result of such provisional
certification include a variety of reporting requirements. The material
violation of such requirements, or any of the requirements of the Higher
Education Act or the regulations, would subject the school to a loss of its
provisional eligibility.
FINANCIAL RESPONSIBILITY REQUIREMENTS
The Higher Education Act 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. 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 institution fails to satisfy the Financial Responsibility Standards, it
may require it to post an irrevocable letter of credit called 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. One-half of Title IV funds received
by the company's individual schools in the most recent fiscal year ranged from
approximately $250,000 to $4,910,000, and one-half of the total Title IV funds
received by all of our schools in the most recent fiscal year was $34,310,000.
Pursuant to the regulations, we submit annual audited consolidated financial
statements and unaudited consolidating financial statements to the Department of
Education.
In November 1997, the Department of Education published new regulations
regarding financial responsibility which were effective on July 1, 1998. The new
regulations apply to our fiscal years commencing April 1, 1999 and thereafter.
The regulations provide a transition year alternative which permitted us to have
our schools' financial responsibility for the fiscal year ended March 31, 1999
measured on the basis of either the new regulations or the old regulations,
whichever were more favorable. The new standards use three different ratios:
- an equity ratio,
- a primary reserve ratio and
- a net income ratio.
The equity ratio is intended to measure an institution's capital resources,
ability to borrow and financial viability. The primary reserve ratio is intended
to measure an institution's ability to support current operations from
expendable resources. The net income ratio is intended to measure 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
13
<PAGE> 16
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 our
interpretation of the application of these new standards to our financial
statements for the fiscal year ended March 31, 1999, our calculations result in
a composite score of 1.7 on a consolidated basis, with each individual
institution included in the consolidating statements having a composite score
greater than 1.5, except with respect to the school located in Roanoke,
Virginia, which had a composite score of 1.4.
The Roanoke school accounted for 1.4% of our net revenues in fiscal 1999.
The failure of this school to meet the minimum composite score may result in the
Department of Education requiring the posting of a financial responsibility bond
or financial monitoring by the Department of Education. We were not required to
post a bond with the Department of Education as a result of non-compliance with
the applicable tests in fiscal 1998, or to otherwise provide a demonstration of
financial responsibility. Based on fiscal 1999 Title IV funding for the Roanoke
school, any bond would be $495,000 (one half of the Title IV funding received by
the school) and would be funded from our bank credit facility.
If we were unable to meet the minimum composite scores or post a financial
responsibility bond or make a satisfactory demonstration of financial
responsibility, we could become ineligible to receive Title IV funding in some
or all of our schools. Ineligibility for Title IV funding would have an
immediate material adverse effect on our operations.
ITEM 2. PROPERTIES
All of our facilities are leased, except for the facilities in Dayton,
Ohio, Lincoln, Nebraska, Omaha, Nebraska, and Manchester, New Hampshire which
are owned by us. The table below sets forth certain information regarding these
facilities as of March 31, 1999.
<TABLE>
<CAPTION>
APPROXIMATE
OFFICE/SCHOOL LOCATION SQUARE FOOTAGE
------------- ------------------- --------------
<S> <C> <C>
Home Office............................................... Roswell, GA 19,503
Western Region Office..................................... San Diego, CA 1,398
Eastern Region Office..................................... Tampa, FL 1,581
WESTERN REGION SCHOOLS
Andon College............................................. Modesto, CA 13,877
Andon College............................................. Stockton, CA 16,148
California College of Technology.......................... Sacramento, CA 6,232
Lincoln School of Commerce................................ Lincoln, NE 58,490(1)
Long Technology College................................... Phoenix, AZ 11,423
Maric College............................................. San Diego, CA 39,092
Maric College............................................. Vista, CA 14,597
Modern Technology College................................. North Hollywood, CA 24,303
Nebraska College of Business.............................. Omaha, NE 19,035
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
APPROXIMATE
OFFICE/SCHOOL LOCATION SQUARE FOOTAGE
------------- ------------------- --------------
<S> <C> <C>
EASTERN REGION SCHOOLS
Bauder College............................................ Atlanta, GA 27,187
Career Centers of Texas................................... El Paso, TX 12,500
CHI Institute............................................. Southampton, PA 43,000
CHI Institute............................................. Broomall, PA 50,000
Dominion Business College................................. Harrisonburg, VA 9,403
Dominion Business College................................. 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 23,150
San Antonio College of Medical and Dental Assistants...... McAllen, TX 14,900
NEW ENGLAND REGION SCHOOLS
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
Hesser College............................................ Concord, NH 2,000
MIDWEST REGION SCHOOLS
American Institute of Commerce............................ Cedar Falls, IA 17,497
American Institute of Commerce............................ Davenport, IA 35,100
Hamilton College.......................................... Cedar Rapids, IA 20,000
Hamilton College.......................................... Des Moines, IA 26,000
Hamilton College.......................................... Mason City, IA 13,934
</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 $560,367 at March 31, 1999.
ITEM 3. LEGAL PROCEEDINGS
Prior to its acquisition, a jury verdict in the amount of $102,000 was
entered against one of the schools we acquired 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 was appealed. The Plaintiff subsequently filed a separate
action in the Federal Court seeking an award of attorneys' fees and costs of
approximately $130,000. A final settlement was reached in August 1998 when we
agreed to pay a total of $175,000 in settlement of all claims including the
plaintiff's attorney's fees. All amounts, including our legal defense expenses,
were paid as of March 31, 1999.
We are also a party to routine litigation incidental to our 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 our financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
<PAGE> 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been traded on the NASDAQ Exchange under the symbol
"EDMD" for common stock from October 28, 1996 until September 22, 1998, and
under "QEDC" from September 23, 1998 to the present. Prior to that time, there
was no public market for the common stock. The following table sets forth the
range of high and low closing sale prices for the common stock as reported on
the NASDAQ National Market System during each quarter of the two most recent
fiscal years. The quotations set forth below are inter-dealer quotations,
without retail mark-ups, mark-downs or commissions and do not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
COMMON STOCK
--------------
QUARTERLY PERIOD ENDED HIGH LOW
---------------------- ------ -----
<S> <C> <C>
Fiscal 1999:
Quarter ended June 30, 1998................................. $12.50 $9.13
Quarter ended September 30, 1998............................ 11.88 6.75
Quarter ended December 31, 1998............................. 10.63 5.75
Quarter ended March 31, 1999................................ 11.38 7.25
Fiscal 1998:
Quarter ended June 30, 1997................................. 11.25 7.75
Quarter ended September 30, 1997............................ 9.13 6.00
Quarter ended December 31, 1997............................. 9.25 6.50
Quarter ended March 31, 1998................................ 11.63 8.00
</TABLE>
As of June 25, 1999, there were approximately 89 holders of record of our
common stock. This number does not include beneficial owners of our common stock
whose shares are held in the names of various dealers, clearing agencies, banks,
brokers and other fiduciaries.
DIVIDEND POLICY
No dividends have been declared or paid on our common stock since our
inception. We do not anticipate paying dividends on the common stock in the
foreseeable future. We intend to retain earnings to finance future growth. The
declaration and payment of dividends by us is subject to the discretion of our
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 our financial condition and
other factors the Board of Directors may in the future consider to be relevant.
16
<PAGE> 19
ITEM 6. SELECTED FINANCIAL 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 filed as part of
this Form 10-K. All periods have been restated to reflect the pooling of
interests of the Nebraska schools acquired in fiscal 1997. The financial
information for the company's fiscal year ended March 31, 1995 includes the
results of the Nebraska Schools' fiscal year ended December 31, 1994. The
results of the company's fiscal years ended March 31, 1997 and 1996 reflect a
conformed year-end for the Nebraska schools.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues..................................... $92,870 $59,676 $49,450 $43,347 $37,080
School operating costs:
Cost of education and facilities............... 41,677 27,087 23,151 19,651 17,488
Selling and promotional expenses............... 12,651 8,644 7,531 6,534 6,216
General and administrative expenses............ 25,664 16,576 14,042 12,369 10,826
Amortization of goodwill and intangibles....... 1,521 1,285 886 883 1,255
Other expenses:(1)
Merger costs................................ -- -- 391 -- --
Legal defense and settlement costs.......... -- -- -- 1,115 --
Loss on closure or relocation of schools.... -- -- 144 50 600
Impairment of goodwill and intangibles...... -- -- -- 764 176
------- ------- ------- ------- -------
Income from operations........................... 11,357 6,084 3,305 1,981 519
Interest expense (income), net................... 1,204 (253) 284 822 935
------- ------- ------- ------- -------
Income (loss) before income taxes and
extraordinary item............................. 10,153 6,337 3,021 1,159 (416)
Provision (benefit) for income taxes............. 4,166 2,485 (845) 632 28
------- ------- ------- ------- -------
Income (loss) before extraordinary item.......... 5,987 3,852 3,866 527 (444)
Extraordinary item............................. -- -- 309 -- --
------- ------- ------- ------- -------
Net income (loss)................................ $ 5,987 $ 3,852 $ 3,557 $ 527 $ (444)
======= ======= ======= ======= =======
PRO FORMA INCOME TAX DATA:(2)
Income (loss) before income taxes and
extraordinary item.......................... $ 3,021 $ 1,159 $ (416)
Provision for income taxes..................... 409 487 97
------- ------- ------- ------- -------
Income (loss) before extraordinary item........ 2,612 672 (513)
Extraordinary item, net of income taxes........ 309 -- --
======= ======= ======= ======= =======
Pro forma net income (loss).................... $ 2,303 $ 672 $ (513)
======= ======= ======= ======= =======
PER SHARE DATA:(3)
Basic:
Net income (loss) before extraordinary item.... $ 0.74 $ 0.52 $ 0.58 $ 0.28 $ (0.22)
Net income (loss).............................. $ 0.74 $ 0.52 $ 0.51 $ 0.28 $ (0.22)
Diluted:
Net income (loss) before extraordinary item.... $ 0.73 $ 0.51 $ 0.41 $ 0.13 $ (0.22)
Net income (loss).............................. $ 0.73 $ 0.51 $ 0.36 $ 0.13 $ (0.22)
Weighted average number of shares (in
thousands)
Basic....................................... 8,043 7,382 4,484 2,371 2,371
Diluted..................................... 8,227 7,612 6,447 5,182 2,371
</TABLE>
17
<PAGE> 20
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:
Number of schools at end of period(4)............ 30 24 19 16 16
Number of students at end of period.............. 12,555 10,008 5,993 4,954 4,695
Number of new student starts during period....... 12,872 8,410 7,358 6,706 6,297
Monthly withdrawal rate during period(5)......... 3.2% 3.6% 4.2% 4.1% 4.3%
BALANCE SHEET DATA:
Cash and cash equivalents........................ $12,936 $21,446 $14,048 $ 3,209 $ 2,733
Total current assets............................. 27,470 32,468 21,800 8,375 8,125
Total assets..................................... 81,541 81,298 42,073 20,986 21,867
Notes payable and long term debt, including
current portion................................ 21,789 31,947 6,129 7,755 8,974
Total liabilities................................ 37,376 45,626 13,873 14,717 15,271
Total stockholders' equity....................... 44,164 35,672 28,200 6,269 6,596
</TABLE>
- ---------------
(1) 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;
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 1997 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 three 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 "Earnings
per share" and SAB 98 "Earnings per share". 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
California 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.
18
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS IN THOUSANDS)
This Annual Report on Form 10-K contains forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects" and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the Company's actual results
to differ materially from those indicated by such forward-looking statements.
These factors include, without limitation, those set forth below under the
caption "Certain Factors That May Affect Future Results."
The following discussion of the Company's results of operations and
financial condition should be read in conjunction with Item 6 and Item 8 and the
Notes thereto appearing elsewhere in this Form 10-K.
GENERAL
The Company owns and operates 30 schools in eleven states which together
provide diversified career oriented postsecondary education to over 12,500
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 1999, approximately 73% of the Company's cash receipts were
indirectly derived from Title IV Programs.
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 schools and the introduction of
additional program offerings at existing schools have been significant factors
in increasing the aggregate student population in recent years.
In the fiscal year ended March 31, 1999, the Company derived approximately
91% 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 for
accounting purposes is recorded 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.
19
<PAGE> 22
Since its inception, the Company has pursued a strategy of growth through
acquisition. All but one 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 $46,000,000 of the purchase prices of acquired schools
to goodwill and other intangible assets. Goodwill is amortized over fifteen to
forty years. Other intangible assets are amortized over two to fifteen years.
The Company also frequently enters into non-competition agreements with the
owners or employees of the schools it acquires and generally records the cost of
such non-competition agreements as intangible assets which are amortized over
their respective lives which range from two to ten years. Effective July 1993,
such amortization is tax deductible; however, amortization related to
acquisitions consummated prior to that date is only partially tax deductible on
a current basis.
VARIATIONS IN QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly financial data for each
of the eight fiscal quarters in the two years ended March 31, 1999 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, 1999 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................................ $18,710 $20,419 $24,878 $28,863 $12,909 $13,740 $14,820 $18,207
Percentage of fiscal year total............. 20.1% 22.0% 26.8% 31.1% 21.6% 23.0% 24.9% 30.5%
INCOME FROM OPERATIONS
BEFORE OTHER EXPENSES....................... $ 480 $ 1,049 $ 4,621 $ 5,207 $ 265 $ 897 $ 2,092 $ 2,830
Percentage of fiscal year total............. 4.3% 9.2% 40.7% 45.8% 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's fiscal 1998
acquisitions have increased this seasonality because many of the longer programs
offered at the acquired schools do not allow for monthly start dates. In
particular, enrollment patterns in these 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. 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, and 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 in
the foreseeable future. Since 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.
20
<PAGE> 23
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,
-----------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Net revenues................................................ 100.0% 100.0% 100.0%
School operating costs:
Cost of education and facilities.......................... 44.9 45.4 46.8
Selling and promotional................................... 13.6 14.4 15.2
General and administrative expenses....................... 27.6 27.8 28.4
Amortization of goodwill and intangibles.................... 1.6 2.2 1.8
----- ----- -----
Income before other expenses................................ 12.3 10.2 7.8
Other expenses.............................................. -- -- 1.1
----- ----- -----
Income from operations...................................... 12.3 10.2 6.7
Interest (income) expense, net.............................. 1.3 (0.4) 0.6
----- ----- -----
Income before income taxes and extraordinary item........... 11.0 10.6 6.1
Provision (benefit) for income taxes........................ 4.5 4.2 (1.7)
----- ----- -----
Income before extraordinary item............................ 6.5 6.4 7.8
Extraordinary item.......................................... -- -- 0.6
----- ----- -----
Net income................................................ 6.5% 6.4% 7.2%
===== ===== =====
Pro forma income tax data:
Income before income taxes and extraordinary item......... 6.1%
Provision for income taxes................................ 0.8
-----
Income before extraordinary item.......................... 5.3
Extraordinary item........................................ 0.6
-----
Pro forma net income...................................... 4.7%
=====
</TABLE>
YEAR ENDED MARCH 31, 1999 COMPARED WITH YEAR ENDED MARCH 31, 1998
Net Revenues. Net revenues increased by $33,194, or 55.6%, to $92,870 for
the year ended March 31, 1999 from $59,676 for the year ended March 31, 1998.
Revenue growth was primarily attributable to (i) an increase in students at the
CHI and Hesser schools which were acquired in February 1998 and March 1998,
respectively; (ii) the purchase of five schools in Iowa in November 1998 which
contributed a combined $4,153 in net revenues; and (iii) the introduction of new
programs. The number of new student starts at the Company's schools (including
those acquired in fiscal 1999) during the year ended March 31, 1999 increased to
12,872 from 8,410 for the corresponding twelve months of the prior year, a 53.1%
increase. As of March 31, 1999, the number of students in attendance increased
10.8% compared to the prior year end for the Company's "same schools," defined
as all schools except for those acquired in fiscal 1999 and a school the Company
opened in Concord, New Hampshire. The monthly student withdrawal rate decreased
to 3.2% compared to a 3.6% for 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 $14,590 or 53.9%, to $41,677 for the year ended March 31, 1999 from
$27,087 for the year ended March 31, 1998, principally as a result of facility
expansions in Texas and California, the acquisition of additional schools in
late fiscal 1998 and fiscal 1999, and costs related to the increased enrollments
in the Company's schools. The cost of education and facilities as a percentage
of net revenue was 44.9% in 1999 compared with 45.4% in 1998. The decrease is
primarily attributable to the more efficient use of facilities and teaching
personnel.
21
<PAGE> 24
Selling and Promotional. Selling and promotional expenses increased by
$4,007, or 46.4%, to $12,651 for the year ended March 31, 1999 from $8,644 for
the year ended March 31, 1998, principally as a result of the acquisition of
additional schools. Selling and promotional expenses as a percentage of net
revenue were 13.6% in 1999 and 14.4% in 1998. The reduction is primarily
attributable to the effect of standardization and common purchasing.
General and Administrative. General and administrative expenses increased
by $9,088, or 54.8%, to $25,664 for the year ended March 31, 1999 from $16,576
for the year ended March 31, 1998. General and administrative expenses as a
percentage of net revenue decreased to 27.6% in 1999 compared to 27.8% in 1998
as a result of the Company's ability to serve a greater student population
without a corresponding increase in costs.
Amortization of Goodwill and Intangibles. Amortization of goodwill and
intangibles increased by $236, or 18.4%, to $1,521 for the year ended March 31,
1999 from $1,285 for the year ended March 31, 1998. The increase was primarily a
result of the amortization of goodwill arising from the acquisition of the CHI,
Hesser, and Iowa schools.
Interest Expense, Net. Net interest expense increased by $1,457 to $1,204
for the year ended March 31, 1999 from $(253) for the year ended March 31, 1998.
The change was principally a result of higher debt levels because of
acquisitions and decreased interest income compared to the prior year ended
March 31, 1998. The prior year interest income was the result of investment of
proceeds from the Company's initial public offering on October 28, 1996. These
funds were utilized in the fiscal 1998 and 1999 acquisitions.
Income Taxes. Income taxes increased by $1,681 to $4,166 for the year
ended March 31, 1999 from an income tax provision of $2,485 for the year ended
March 31, 1998. The Company's effective tax rate for fiscal 1999 was 41.0%.
Net Income. Net income increased to $5,987, or 55.4%, for the year ended
March 31, 1999 from net income of $3,852 for the year ended March 31, 1998. The
increase is primarily a result of an 86.7% increase in income from operations.
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 those acquired in fiscal 1998. 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 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
22
<PAGE> 25
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. The decrease is primarily
attributable to the more efficient use of facilities and teaching personnel.
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 initial
public offering 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 initial public offering.
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.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended March 31, 1999, 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 1999 and fiscal 1998 was approximately $8,754 and $2,359, respectively.
The Company's principal sources of funds at March 31, 1999 were cash and cash
equivalents of $12,936 and net accounts receivable of $9,452. The $2,962
increase in net trade accounts receivable
23
<PAGE> 26
experienced for the year ended March 31, 1999 was primarily a result of accounts
receivable purchased and revenue recognized for Iowa Colleges during the change
in ownership period when federal funding was suspended, and the annualized
effect of the Hesser and CHI Schools.
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 $3,270 and $2,200
for fiscal 1999 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. The purchase of five schools in Iowa totaled
$3,684 for the year ended March 31, 1999.
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 2000 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 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
permitted 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 old regulations, whichever are more favorable. The new
standards use 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, 1999, the Company's calculations result in a composite
score of 1.7 on a consolidated basis, with each individual institution included
in the consolidating statements having a composite score greater than 1.5 except
with respect to the Company's school located in Roanoke, Virginia which had a
composite score of 1.4.
The Roanoke school accounted for 1.4% of the Company's net revenues in
fiscal 1999. The failure of this school to meet the minimum composite score may
result in the Department of Education requiring the posting of a financial
responsibility bond or financial monitoring by the Department of Education. The
Company was not required to post a bond with the Department of Education as a
result of non-compliance with the
24
<PAGE> 27
applicable tests in fiscal 1998, or to otherwise provide a demonstration of
financial responsibility. Based on fiscal 1999 Title IV funding for the Roanoke
school, any bond would be $495 (one half of the Title IV funding received by the
School) and would be funded from the Company's bank credit facility.
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. Historically, 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. The Department of Education has recently
adopted new regulations which provide for a new owner to apply for temporary
participation in the Title IV programs by filing an application for
recertification which is materially complete. If the application is accepted,
the school is eligible to receive funds pending recertification. The Company has
not acquired any schools since the new regulations became effective and is
unable to predict how long the process allowing for temporary participation may
take.
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 made the required 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 was
suspended pending Department of Education recertification, which was received
July, 1998.
In connection with the Hesser Acquisition, the Company paid $2,000 in March
1998 and $2,433 in June 1998, and issued shares of the Company's Common Stock
with an aggregate value of $2,000 at the date of the acquisition. The Company
made note payments to the seller in fiscal 1999 of $11,250. The Company's Title
IV funding for the Hesser Schools was suspended pending Department of Education
recertification, which was received July, 1998.
In connection with the Iowa Acquisition, the Company paid $1,000 cash in
November 1998, and $684 in April 1999. The payment of $684 consists of the
original $1,500 note less offsets provided for in the acquisition agreement. The
Company is required to make note payments to the Seller of $2,000 over five
years in equal quarterly principal payments plus accrued interest, beginning in
November 1999. The Company's Title IV Funding for the Iowa schools was suspended
pending Department of Education recertification, which was received February,
1999.
The Company expects to make the note payments for the CHI Institute and
Iowa with cash on hand and borrowings under its bank facility.
The Company anticipates it will need additional debt or equity financing in
order to carry out its strategy of growth through acquisitions. In November
1998, the Company amended its loan agreement increasing its loan facilities to
the Company to up to $40,000. As of March 31, 1999, $24,619 was available under
the facility. 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 facility is secured by substantially all
of the assets of the Company. The Company believes this 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.
LETTER OF CREDIT
In connection with the Company's purchase of five schools in Iowa, the
Company posted an irrevocable letter of credit with the Department of Education
of approximately $2.4 million to guarantee any financial obligations the schools
may incur to the Department of Education such as the obligation to pay any
refunds
25
<PAGE> 28
coming due to current or former students of the institution. The Letter of
Credit, which expires October 30, 1999, was required because the corporation
from which the Company acquired three of the schools had failed to meet certain
of the Department of Education's regulations applicable to its financial
condition.
YEAR 2000 COMPLIANCE
Computer-based systems that utilize two digits rather than four digits to
define the applicable year may fail to properly recognize date sensitive
information when the year changes to 2000. Because the Company has purchased or
upgraded substantially all of its computer hardware and software systems within
the last few years, for reasons unrelated to Year 2000 compliance issues, the
Company does not expect to be affected by Year 2000 issues arising from the use
of older "legacy" computer-based systems. The Company is currently conducting a
comprehensive review of its computer-based systems (both hardware and software)
to determine if those systems will be affected by resulting Year 2000 compliance
issues. So far, the Company's review of its computer-based systems indicates
that approximately 70% of all such systems are Year 2000 compliant. Systems
crucial to the Company's financial operations such as accounting and the
Company's federal financial aid system software are Year 2000 compliant.
Management has determined that replacement or upgrade of the non-compliant
systems will not require incurring costs in excess of $250, and that the
replacements and upgrades can be completed with a minimal allocation of
manpower. The Company anticipates that all of its internal systems will be Year
2000 compliant by September 30, 1999. The Company is seeking confirmation from
outside vendors, financial institutions and others that they are Year 2000
compliant or that they are developing and implementing plans to become Year 2000
compliant and has received written confirmation of compliance from approximately
two-thirds of such outside vendors, financial institutions and otherwise. The
Company has been advised by the Department of Education that modifications of
the systems involved in the administration of the Department's Federal Direct
Student Loan Program which represents a majority of the Company's funding were
completed in June 1999. However, there can be no assurance that these outside
vendors, financial institutions, and others will timely resolve their own Year
2000 compliance issues or that any such failure would not have an adverse effect
on the Company's results of operations and financial condition. The Company is
in the process of formulating contingency plans to assure the continuation of
its operations if these outside vendors, financial institutions or others fail
to timely resolve their own Year 2000 compliance issues. Management believes it
is devoting the necessary resources to timely address all Year 2000 compliance
issues over which it has control.
CHANGE IN 85/15 RULE TO 90/10 RULE
A proprietary institution, such as each Quest institution, becomes
ineligible to participate in Title IV Programs if, on a cash accounting basis,
the institution derives more than 85% of its applicable revenues for a fiscal
year from Title IV Programs. In 1998, the percentage of applicable fiscal year
revenues that a proprietary institution can derive from Title IV Programs and
still remain eligible to participate in Title IV Programs was increased from 85%
to 90%. This change should have a positive impact on the Company's results of
operations and cash flows because payments of Title IV Program funds are
generally paid sooner and are more collectible than certain other receivables.
The Department of Education, the accrediting commissions and most of the
state agencies have laws, regulations and/or standards pertaining to the change
in ownership and/or control (collectively "change in control") of educational
institutions, but these regulations do not uniformly define what constitutes a
change in control. Historically, upon the occurrence of a change in control
under the Department of Education's regulations, an institution immediately
becomes ineligible to participate in Title IV Programs and can only receive and
disburse certain Title IV Program funds that were previously committed to its
students, until it has applied for certification and is reinstated by the
Department of Education to continue Title IV program participation under such
institution's new ownership and control. The time required for the Department of
Education to act on such an application can vary substantially and may take
several months. The Department of Education's regulations also require that all
of the Quest institutions in a particular campus group have their state
authorizations and accreditations reaffirmed or reestablished before any
institute in that campus group can regain its eligibility from the Department of
Education to continue participation in Title IV Programs. The
26
<PAGE> 29
Department of Education has recently adopted new regulations which provide for a
new owner to apply for temporary participation in the Title IV programs by
filing an application for recertification which is materially complete. If the
application is accepted the school is eligible to receive funds pending
recertification. The Company has not acquired any schools since the new
regulations became effective and is unable to predict how long the process
allowing for temporary participation may take.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has considered the provision of Financial Reporting Release No.
48, "Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity Instruments."
The Company had no holdings of derivative financial or commodity
instruments at March 31, 1999, and the Company does not invest or intend to
invest in derivative financial instruments or derivative commodity instruments.
Substantially all of the Company's indebtedness was incurred in connection
with the acquisitions of its schools, is payable to the sellers of those
schools, and bears a fixed interest rate. However, the Company is exposed to
interest rate change market risk with respect to its $40,000 credit facility
with a financial institution which is priced based on the London Inter-Bank
Offered Rate (LIBOR) plus a spread of 1.500% - 2.375% based on certain
conditions. At March 31, 1999, $13,000 was outstanding under its credit facility
and the Company had utilized a portion of the credit line to support a Letter of
Credit in the amount of $2,381 issued in connection with the acquisition of the
Iowa schools. Changes in LIBOR during the next twelve months will have a
positive or negative effect on the Company's interest expense. Based on amounts
currently outstanding under the credit facility, including the Letter of Credit,
each 1% fluctuation in the LIBOR rate will increase or decrease interest expense
for the Company by approximately $130 annually.
The Company's sales and financial instruments are currently all denominated
in U.S. dollars.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the other information contained in this Annual Report, the
following risk factors should be considered carefully in evaluating our company
and its business. This Annual Report contains certain forward-looking statements
that are based on the beliefs and assumptions of our management based on
information currently available. The words "believe," "anticipate," "intend,"
"estimate," "expect" and similar expressions are intended to identify such
forward-looking statements, but are not only words which identify such
statements. Forward-looking statements reflect the current views of our
management and are subject to certain risks, uncertainties and assumptions,
including the ones that follow. If any of these risks or uncertainties
materialize, or if our underlying assumptions turn out to be incorrect, our
actual results, performance or achievements could differ materially from those
contained in this Annual Report or presented elsewhere by management from
time-to-time.
We must comply with the Department of Education's regulations and other
regulations to be eligible for Title IV funding. Most of our students receive
some government-sponsored financial aid, principally under Title IV of the
Higher Education Act. For Fiscal 1999, approximately 73% of our net revenue (on
a cash basis) was derived from government-sponsored financial aid received by
our students.
Each of our 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. To participate in Title IV Programs, an
institution and its additional locations, if any, must be certified by the
Department of Education. To obtain certification, the institution must satisfy
eligibility, program, and general requirements imposed by the Higher Education
Act and the Department of Education's regulations, which are issued and enforced
by the Department of Education. To obtain and maintain such certification, the
institution also must be authorized to offer its programs by the relevant state
agency where it is located and be accredited by an accrediting agency recognized
by the Department of Education.
27
<PAGE> 30
We are subject to extensive regulation by federal and state governmental
agencies and accrediting bodies. Many aspects of the operations of our
institutions are governed by the provisions of the Higher Education Act and the
Department of Education's regulations, including:
- the maximum acceptable rate of default by an institution's students with
respect to federally guaranteed or funded student loans,
- the maximum acceptable proportion of an institution's revenues derived
from Title IV Programs,
- an institution's satisfaction of certain financial responsibility
standards,
- an institution's satisfaction of certain administrative capability
standards,
- the ability of an institution to add locations and educational programs,
and
- the ability to engage in transactions involving a change in ownership
resulting in a change of control.
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. For purposes of these standards, the
regulations define an institution as a main campus and its additional locations,
if any.
The failure of any of our institutions to comply with the requirements of
the Higher Education Act 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 our financial condition and operations.
The Higher Education Act and the regulations prescribe specific standards
of financial responsibility. These standards are generally applied on an
individual institutional basis. The Department of Education, could, however,
attempt to apply such standards on a consolidated basis. If the Department of
Education determines that any of our institutions fail to satisfy the financial
responsibility standards, it may require that such institution post an
irrevocable letter of credit as 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. One-half of Title IV funds received
by our individual institutions in the most recent fiscal year ranged from
$250,000 to $4,910,000, and one-half of the total Title IV funds received by all
our institutions in the most recent fiscal year was $34,310,000.
In November 1997, the Department of Education published new regulations
regarding financial responsibility which were effective on July 1, 1998. The new
regulations apply to our fiscal years commencing April 1, 1999 and thereafter.
The regulations provide a transition year alternative which permitted us to have
our institutions' financial responsibility for the fiscal year ended March 31,
1999 measured on the basis of either the new regulations or the old regulations,
whichever were 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
- a net income ratio.
The equity ratio is intended to measure an institution's capital resources,
ability to borrow and financial viability. The primary reserve ratio is intended
to measure an institution's ability to support current operations from
expendable resources. The net income ratio is intended to measure 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
28
<PAGE> 31
more rigorous financial aid disbursement and financial monitoring requirements
of the Department of Education. Based on our interpretation of the application
of these new standards to our financial statements for the fiscal year ended
March 31, 1999, our calculations result in a composite score of 1.7 on a
consolidated basis, with each individual institution included in the
consolidating statements having a composite score greater than 1.5, except with
respect to the school located in Roanoke, Virginia, which had a composite score
of 1.4.
The Roanoke school accounted for 1.4% of our net revenues in fiscal 1999.
The failure of this school to meet the minimum composite score may result in the
Department of Education requiring the posting of a financial responsibility bond
or financial monitoring by the Department of Education. We were not required to
post a bond with the Department of Education as a result of non-compliance with
the applicable tests in fiscal 1998, or to otherwise provide a demonstration of
financial responsibility. Based on fiscal 1999 Title IV funding for the Roanoke
school, any bond would be $495,000 (one-half of the Title IV funding received by
the School) and would be funded from our bank credit facility.
If we were unable to meet the minimum composite scores or post a financial
responsibility bond or make a satisfactory demonstration of financial
responsibility, we could become ineligible to receive Title IV funding in some
or all of our schools. Ineligibility for Title IV funding would have an
immediate material adverse effect on our operations.
We may lose student financial aid if we experience high student loan
default rates. The Higher Education Act 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. These are called 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 may remain 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 our
schools could have a material adverse effect on our operations.
None of our institutions had a Cohort Default Rate of 25% or more for the
three consecutive federal fiscal years ended September 30, 1996. Additionally,
based on preliminary data released by the Department of Education in March 1999,
none of our institutions had a Cohort Default Rate of 25% or more for the three
consecutive federal fiscal years ended September 30, 1997. Accordingly, we
believe that none of our institutions is currently vulnerable to termination
from Title IV eligibility based on three consecutive years of excess default
rates. However, the institution located in Omaha, Nebraska had a Cohort Default
rate of in excess of 25% for federal fiscal 1995, federal fiscal 1996. 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 final rate for the federal fiscal year ended September
30, 1997 is 25% or greater. Preliminary data for such federal fiscal year has
been released which indicates the rate is below 25%. If this rate is released as
a final rate, the institution would no longer be vulnerable to termination. 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 our Title IV student loan
program eligibility.
29
<PAGE> 32
An institution whose Cohort Default Rate exceeds 40% for any single federal
fiscal year may have its eligibility to participate in all Title IV Programs
limited, suspended or terminated. If the Department of Education elects to take
such action due to a single-year Cohort Default Rate in excess of the regulatory
level, it must afford the institution a hearing before an independent Department
of Education hearing officer and an opportunity to appeal any decision to the
Secretary of Education before the limitation, suspension, or termination may
take effect. None of our institutions has, or has had, a Cohort Default Rate in
excess of 40% in the most recent three fiscal years.
The Higher Education Act specifies the maximum percentage of annual cash
revenues which may be derived from the Title IV Programs. As a condition of
Title IV eligibility, no more than 85% of an institution's cash revenue can come
from Title IV Programs for fiscal years ending before October 7, 1998, and no
more than 90% of revenues can come from Title IV Programs for fiscal years
ending after October 7, 1999.
There are monetary liabilities and possible penalties for failing to comply
with Title IV program requirements. If any of our institutions failed to
comply with applicable Title IV program requirements, we could be required to
repay improperly disbursed Title IV program funds and could be assessed an
administrative fine of up to $25,000 per violation of Title IV program
requirements.
In addition, the Department of Education could transfer that institution
from the "advance" system of payment of Title IV program funds, under which an
institution requests and receives funding from the Department of Education in
advance based on anticipated needs, to the "reimbursement" or cash monitoring
system of payment, under which an institution must document their students'
eligibility for Title IV program funds before receiving funds from the
Department of Education or from Federal Family Education Loan program lenders.
Violation of Title IV program requirements could also subject an institution or
the company to sanctions under the False Claims Act, as well as other civil and
criminal penalties. Penalties under the False Claims Act can amount to up to
$10,000 per violation, in addition to treble damages which may be sought by the
government as a result of the action constituting the false claim. The federal,
state or accrediting agency requirements could result in the limitation,
suspension or termination of that institution's ability to participate in the
Title IV programs or the loss of state licensure or accreditation. Any such
event could have a material adverse effect on our business, results of
operations or financial condition. There are no proceedings for any such
purposes pending against any of our institutions and we have no reason to
believe that any such proceeding is contemplated.
A change in ownership resulting in a change of control may affect Title IV
eligibility and could affect accreditation of the schools. Upon a change in
ownership resulting in a change of control of the company, as defined in the
Higher Education Act and the regulations, each of our schools would lose its
eligibility to participate in Title IV Programs for an indeterminate period of
time during which it applies to regain eligibility. This interruption may be
avoided if the new owner submits a materially complete application for
recertification of eligibility within 10 business days of such a change of
ownership and the Department of Education agrees to allow continued
participation on a temporary, provisional basis. Approval of an application for
recertification must be based upon a determination by the Department of
Education that the institution under its new ownership is in compliance with the
requirements of institutional eligibility. The time required to act on such an
application can vary substantially and may take several months. If an
institution is recertified following a change of ownership, it may be on a
provisional basis. Provisional certification does not limit an institution's
access to Title IV program funds, but may subject that institution to closer
review by the Department of Education and possible summary adverse action if
that institution commits violations of Title IV program requirements. A change
of control also could have significant regulatory consequences for us at the
state level and could affect the accreditation of our 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. 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. If we were to lose our
eligibility to participate in Title IV Programs for a significant period of time
pending an application to regain eligibility, or if we were determined not to be
eligible, our
30
<PAGE> 33
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.
Legislative action may reduce financial aid funding or increase regulatory
burdens. Reauthorization of the Higher Education Act by the U.S. Congress takes
place approximately every five years. The Title IV Programs are subject to
significant political and budgetary pressures. There can be no assurance that
government funding for the Title IV Programs will continue to be available or
maintained at current levels. A reduction in government funding levels could
lead to lower enrollments at our schools and require us to seek alternative
sources of financial aid for students enrolled in our schools. Because most of
our net revenue is derived, either directly or indirectly, from the Title IV
Programs, the loss of or a significant reduction in Title IV Program funds
available to students at our schools would have a material adverse effect on our
business, results of operations and financial condition. In addition, there can
be no assurance that current requirements for student and institutional
participation in the Title IV Programs will not change or that one or more of
the present Title IV Programs will not be replaced by other programs with
materially different student or institutional eligibility requirements.
We expect that a significant part of our future growth will be based on our
ability to identify, acquire and profitably operate and integrate additional
schools. We have acquired all but one of our schools through the acquisition of
existing schools rather than through the establishment of new schools. Several
of the schools we acquired have experienced losses following their acquisition
either in connection with their integration into our operations or because of
their failure to perform as anticipated. While we are continually searching for
acquisition opportunities, there can be no assurance that we will be successful
in identifying, acquiring, integrating and operating additional schools. If any
potential acquisition opportunities are identified, there can be no assurance
that we will be able to consummate the acquisition on terms favorable to us and
successfully integrate any such acquisition into our existing operations and
there can be no assurance as to the timing or effect on our business of any such
acquisitions.
When we acquire an existing school and account 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. Most of our acquisitions do not involve the purchase of
significant amounts of tangible property. Such goodwill and intangibles are
generally amortized over periods ranging from fifteen to forty years, which
reduces our reported earnings.
In acquiring a school, we must assume any liabilities of the institution to
the Department of Education resulting from the institution's failure to comply
with the Higher Education Act or the regulations prior to the date of
acquisition. We attempt to minimize the impact of any such liabilities by
including representations as to regulatory compliance and indemnification
provisions in the relevant acquisition agreements. We have not had any material
amount of unindemnified Title IV regulatory liabilities asserted against us with
respect to any of our 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 indemnifying us from such liabilities will have the financial resources
necessary to indemnify us for all or any portion of such possible liabilities.
We may have difficulties in entering new business areas. Historically, our
primary business activity has been providing various levels of education in the
fields of healthcare and business. Since fiscal year 1998, we have also been
providing programs and degrees in information technology, criminal justice,
electronic engineering, and early childhood education. We are also upgrading, as
much as is possible based on the types of programs offering, our schools to
degree granting institutions. In addition, we may from time to time enter other
new business areas, including providing programs in other academic fields. We
may not be able to perform in any of these new areas at the level we have
historically performed in our traditional business activities.
Our quarterly operating 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 our programs.
Traditionally, new enrollments in our schools tend to be higher in the third and
fourth fiscal quarters because
31
<PAGE> 34
the third and fourth quarters cover periods traditionally associated with the
beginning of school semesters. We believe our 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 may affect our revenue growth or operating margins. The
postsecondary education market is highly fragmented and competitive with no
private or public institution having a significant market share. Our 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 our 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 our competitors in both the public and
private sector have greater financial and other resources than we have.
An attractive employment market also reduces the number of students seeking
additional education. This increases competition for potential students. We
believe that the competition among education institutions is based primarily on
the quality of educational programs, location, perceived reputation of the
institution, cost of the programs and employment opportunities for graduates.
There can be no assurance that these or other competitive factors will not
have a material adverse effect on our enrollment rates, pricing or recruitment
costs, and as a result, on our revenue growth or operating margins.
We are dependent on certain key personnel. Our continued successful
operation requires managerial, operational and academic expertise. In
particular, we are dependent upon the management and leadership skills of a
number of our senior executives, including Gary D. Kerber, our Chairman and
President, as well as on the skills of the directors of our various institutions
and our faculty members. The nature of the skills required to manage the company
and teach in its schools affords our key employees substantial opportunities for
alternative employment, and there can be no assurance that we will continue to
be successful in attracting and retaining such personnel. Mr. Kerber has entered
into an employment contract with the Company, however, it may be terminated by
him at any time. Although we maintain 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 our operations.
We do not pay dividends. We have not paid any dividends to date. We do not
currently intend to declare or pay dividends on our Common Stock in the
foreseeable future, but plan to retain any earnings for use in its business
operations. In addition, the bank credit facility contains restrictions which
prohibit us from paying dividends while the credit line is in effect.
Anti-takeover provisions could discourage beneficial
transactions. Effective as of May 21, 1999, we adopted a Share Rights Program
which is commonly known as a "Poison Pill Plan" which could discourage or impede
a tender offer, proxy contest or other similar transaction involving control of
the company.
Certain provisions of our 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, even though these
transactions might be viewed favorably by minority stockholders. Provisions in
the applicable regulations pursuant to which we would lose our Title IV
eligibility in the event of a change in ownership resulting in a change of
control could have a similar discouraging effect.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are indexed in Item 14
hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
32
<PAGE> 35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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....................... 60 Chairman, President, Chief Executive Officer and a
Director
Vince Pisano......................... 45 Vice President and Chief Financial Officer
Gerald T. Kosentos................... 47 Vice President of Operations
Elaine Neely-Eacona.................. 46 Vice President of Financial Aid
Ellen L. Bernhardt................... 48 Director of Operations-- Eastern Region
Linwood W. Galeucia.................. 54 President-- New England Region
Craig A. Wood........................ 50 Director of Operations-- Western Region
K. Terry Guthrie..................... 56 Director of Accreditation
A. William Benham, Jr................ 37 Controller
Robert J. Cresci..................... 55 Director
Carl S. Hutman....................... 65 Director
Richard E. Kroon..................... 57 Director
William D. Ford...................... 71 Director
</TABLE>
GARY D. KERBER, age 60, 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 45, 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 47, 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, a provider of postsecondary
education, 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 46 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 48, 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 54, has been President of the New England Region
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.
33
<PAGE> 36
CRAIG A. WOOD, age 50, was appointed Director of Operations -- Western
Region of the Company in March 1998. From December 1997 to March 1998, Mr. Wood
served as a consultant to the Company. From July 1997 to December 1997, Mr. Wood
was Vice President, Operations of Education America, Inc. From February 1995 to
July 1997, Mr. Wood was Vice President, Marketing of the Katherine Gibbs
Schools, Inc.
K. TERRY GUTHRIE, age 56, 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 37, 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 55, 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 currently
serves on the boards of Bridgeport Machines, Inc., EIS International, Inc.,
Sepracor, Inc., Arcadia Financial, Ltd., Aviva Petroleum Ltd., Film Roman, Inc.,
Castle Dental Centers, Inc., Candlewood Hotel Co., Inc., SeraCare, Inc. and
several private companies.
CARL S. HUTMAN, age 65, 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 57, 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 several private companies and is president-elect and director of
National Venture Capital Association.
WILLIAM D. FORD, age 71, is an attorney admitted to practice in the State
of Michigan since 1951. From 1964 to 1994, he was a member of the U.S. House of
Representatives, representing the 13th District of Michigan. While a member of
the House of Representatives, Mr. Ford served on the Education & Labor Committee
from 1964 to 1994, and served as Chairman of that committee from 1991 until his
retirement in 1994. He actively participated in the passage of the Head Start
program, the Elementary and Secondary Education Act, and the Higher Education
Act. He was a sponsor of the Adult Education Act, the Bilingual Education Act,
and Education for all Handicapped Children's Act, the National and Community
Service Trust Act, and the Goals 2000: Educate America Act. Mr. Ford also
authored the Family and Medical Leave Act and was instrumental in the passage of
numerous bills designed to ensure workers' rights and safety, pension protection
and fair trade treatment for America's auto industry and its workers.
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,
34
<PAGE> 37
time and cost of any audit and any other services they may be asked to perform,
and also review with the auditors their report on the financial statements
following completion of each such audit. In addition, the Audit Committee is
responsible for policies, procedures and other matters relating to business
integrity, ethics and conflicts of interests.
Messrs. Kroon (Chairman), Cresci and Ford 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 March 31, 1999,
options covering 82,000 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 three 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).
35
<PAGE> 38
ITEM 11. EXECUTIVE COMPENSATION
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, 1999, March 31,
1998 and March 31, 1997), with respect to those persons who were, as of March
31, 1999, 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 ALL
FISCAL OTHER ANNUAL UNDERLYING OPTIONS OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (NUMBER OF SHARES) COMPENSATION
- --------------------------- ------ -------- -------- ------------ ------------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Gary D. Kerber................... 1999 $215,634 $416,110 $ -- 50,414 $2,400(2)
Chairman, President and........ 1998 195,909 120,828 -- 20,000 2,400(2)
Chief Executive Officer........ 1997 188,660 148,000 -- 134,260 2,400(2)
Vince Pisano..................... 1999 162,025 312,655 -- 22,686 --
Vice President of Finance
and.......................... 1998 147,197 90,784 -- 20,000 --
Chief Financial Officer........ 1997 140,247 111,200 10,000(3) 100,740 --
Gerald T. Kosentos............... 1999 149,885 270,750 -- --
Vice President of.............. 1998 128,269 38,388 -- 78,833 --
Operations..................... 1997 86,166 24,430 -- 4,000 --
Ellen L. Bernhardt............... 1999 127,404 49,188 -- --
Director of Operations --...... 1998 116,967 44,800 -- 15,000 --
Eastern Region................. 1997 110,914 22,500 -- 7,500 --
Linwood Galeucia................. 1999 119,999 87,613 -- -- --
President, New England
Region..................... 1998 5,770 -- -- -- --
1997 -- -- -- -- --
</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.
36
<PAGE> 39
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, 1999. 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, 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL
RATES
OF STOCK PRICE
NUMBER OF % OF TOTAL 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........................... 50,414 57.9% $5.81 10/14/99 $307,551 $322,196
Vince Pisano............................. 22,686 26.0% 5.81 10/14/99 138,396 144,986
------ ---- ----- -------- -------- --------
Total........................... 73,100 $445,947 $467,182
====== ==== ===== ======== ======== ========
</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.
The following table sets forth, as of March 31, 1999, 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, 1999
by the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED MARCH 31, 1999
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
VALUE UNDERLYING UNEXERCISED
NUMBER OF REALIZED OPTIONS AT MARCH 31, 1999
SHARES OF SHARES ---------------------------
NAME ACQUIRED ON EXERCISE ACQUIRED ON EXERCISE EXERCISABLE UNEXERCISABLE
- ---- -------------------- -------------------- ----------- -------------
<S> <C> <C> <C> <C>
Gary D. Kerber.............. 13,889 $ 76,917 118,117 103,224
Vince Pisano................ 6,250 34,613 81,233 81,776
Ellen L. Bernhardt.......... -- -- 12,000 37,167
Gerald T. Kosentos.......... -- -- 21,666 67,734
Linwood W. Galeucia......... -- -- -- --
------ -------- ------- -------
Total.............. 20,139 $111,530 232,616 289,901
====== ======== ======= =======
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY OPTIONS
AT MARCH 31, 1999(1)
---------------------------
NAME EXERCISABLE UNEXERCISABLE
- ---- ----------- -------------
<S> <C> <C>
Gary D. Kerber.............. $406,283 $ 44,837
Vince Pisano................ 248,396 35,863
Ellen L. Bernhardt.......... 105,357 138,986
Gerald T. Kosentos.......... 40,350 331,768
Linwood W. Galeucia......... -- --
-------- --------
Total.............. $800,385 $551,454
======== ========
</TABLE>
- ---------------
(1) The dollar value of the unexercised options has been calculated by
determining the difference between the fair market value of the securities
underlying the options and the exercise or base price of the option at
exercise or fiscal year-end, respectively.
1996 PERFORMANCE INCENTIVE PLAN AND 1998 AMENDMENT TO THE 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,
37
<PAGE> 40
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. Effective
September 22, 1998, the 1998 Amendment to Stock Option Plan was approved by the
Company's shareholders. The Amendment increased the number of shares subject to
the Stock Option Plan by 500,000 to a maximum of 1,461,666 shares of Common
Stock. As of March 31, 1999, options for 604,454 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 1,461,666 shares of
Common Stock of which 604,454 were available for grant as of March 31, 1999.
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
38
<PAGE> 41
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.
39
<PAGE> 42
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.
40
<PAGE> 43
Withholding Payments. If, upon exercise of a Nonqualified Option or
stock appreciation right, or upon the award of restricted stock or the
expiration of restrictions applicable to restricted stock, or upon a
disqualifying disposition of shares acquired upon exercise of an Incentive
Option, the Company must pay amounts for income tax withholding, then in
the Committee's sole discretion, either the Company will appropriately
reduce the amount of stock or cash to be delivered or paid to the
Participant or the Participant must pay such amount to the Company to
reimburse the Company for such payment. The Committee may permit a
Participant to satisfy such withholding obligations by electing to reduce
the number of shares of Common Stock delivered or deliverable to the
Participant upon exercise of a stock option or stock appreciation right or
award of restricted stock or by electing to tender an appropriate number of
shares of Common Stock back to the Company subsequent to exercise of a
stock option or stock appreciation right or award of restricted stock (with
such restrictions as the Committee may adopt).
EMPLOYMENT AGREEMENTS
On December 31, 1992, the Company entered into an Employment Agreement with
Gary D. Kerber as President and Chief Executive Officer. The Employment
Agreement provides for a base salary of $160,000 per year as of March 21, 1992,
which salary is reviewed on an annual basis by the Board of Directors of the
Company prior to the end of each fiscal year. The Employment Agreement also
provides that Mr. Kerber will prepare, on an annual basis for each fiscal year,
an appropriate incentive compensation plan for himself and other executive
officers of the Company, which plan may be implemented only with the consent of
the Board of Directors of the Company. In reviewing such plans, the Compensation
Committee of the Board of Directors has considered the appropriateness of the
goals presented in light of the Company's past performance and prospects and the
reasonableness of the projected compensation in light of the Company's size and
potential income levels. The term of the Employment Agreement continues until
terminated by either Mr. Kerber or the Company, with or without cause; provided,
however, that if the Company terminates the Employment Agreement without cause,
the Company will be obligated to pay Mr. Kerber termination pay equal to the
greater of $160,000 or an amount based upon a specified fraction of Mr. Kerber's
most recent annual fiscal year base compensation (net of incentive or bonus
compensation), as determined under the Employment Agreement.
41
<PAGE> 44
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The table below sets forth, as of June 25, 1999, certain information
regarding beneficial ownership of the shares of Common Stock of the Company by
(i) each person known by the Company to be the beneficial owner of more than 5%
of the outstanding shares of Common Stock, (ii) each director, (iii) each
executive officer included in the Summary Compensation Table, and (iv) all
executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENTAGE OF
BENEFICIAL OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1,2) SHARES OWNED(2)
------------------------------------ -------------- ---------------
<S> <C> <C>
Sprout Capital V(3)......................................... 920,005 11.2%
Sprout Technology Fund(3)................................... 19,889 *
DLJ Venture Capital Fund II, L.P.(3)........................ 54,921 *
Wellington Management Co., Ltd.(4).......................... 808,000 9.8%
Matador Capital Management(5)............................... 434,150 5.3%
Gary D. Kerber(6,7)......................................... 449,764 5.2%
Vince Pisano(6,8)........................................... 256,507 3.0%
Gerald T. Kosentos(6,9)..................................... 33,733 *
Elaine Neely-Eacona(6,10)................................... 17,375 *
Ellen L. Bernhardt(6,11).................................... 30,167 *
Linwood W. Galeucia(6)...................................... 101,266 1.3%
Craig A. Wood(6,12)......................................... 2,000 *
K. Terry Guthrie(6,13)...................................... 8,000 *
A. William Benham(6,14)..................................... 12,526 *
Robert J. Cresci(15)........................................ 31,000 *
Carl S. Hutman(16).......................................... 31,340 *
Richard E. Kroon(18)........................................ 31,000 *
William D. Ford(19)......................................... 7,400 *
All executive officers and directors as a group (13
persons).................................................. 994,118 11.4%
</TABLE>
- ---------------
* Less than 1%.
(1) The number of shares of Common Stock beneficially owned by each person or
entity is determined under the rules of the Securities and Exchange
Commission, and the information is not necessarily indicative of beneficial
ownership for any other purpose. Under such rules, beneficial ownership
includes any shares for which the individual has sole or shared voting
power or investment power and also any shares of Common Stock which the
individual has the right to acquire within 60 days after June 25, 1999
through the exercise of any stock option or other right. The inclusion
herein of any shares of Common Stock deemed beneficially owned does not
constitute an admission of beneficial ownership of those shares. Unless
otherwise indicated, the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
(2) The number of shares deemed outstanding includes shares outstanding as of
June 25, 1999 (8,224,037) plus any shares subject to options held by the
person in question that are exercisable within 60 days after June 25, 1999.
(3) The address of such person or entity is 277 Park Avenue, 21st Floor, New
York, New York 10172.
(4) The address of such person or entity is 75 State Street, Boston,
Massachusetts 02109.
(5) The address of such person or entity is 200 1st Avenue North, Suite 203,
St. Petersburg, Florida 33701.
(6) The address of such person is c/o Quest Education Corporation, 1400 Hembree
Road, Suite 100, Roswell, Georgia 30076.
(7) Includes 158,672 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.
42
<PAGE> 45
(8) Includes 111,676 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. Also, includes 17,799 shares held by Mr. Pisano for the benefit
of his minor children, for which he disclaims any beneficial ownership, and
160 shares hold by a minor child residing with him, for which he disclaims
beneficial ownership.
(9) Includes 33,733 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 14,250 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 30,167 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 2,000 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.
(13) Includes 7,000 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 11,484 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) Mr. Cresci, a director of the Company, is a managing partner of Pecks
Management Partners, Ltd. Mr. Cresci's address is c/o Pecks Management
Partners Ltd., 1 Rockefeller Plaza, New York, New York 10020. Includes
31,000 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) Mr. Hutman's address is c/o Fundamental Management Corp., 4000 Hollywood
Blvd., Suite 610-N, Hollywood, FL 33021. Includes 31,000 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 31,000 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. Ford's address is 312 Eighth Street SE, Washington, D.C. 23003.
Includes 7,400 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Richard E. Kroon, Robert J.
Cresci and William D. Ford. No member of the Compensation Committee was at any
time during fiscal 1999, 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
43
<PAGE> 46
than five percent of the issued and outstanding Common Stock of the Company. In
addition, Robert J. Cresci, who is a director of the Company, is a managing
director of Pecks, which serves as investment advisor for each of the Pecks
Managed Entities. In fiscal 1996, Mr. Cresci served as a member of the
Compensation Committee of the Board of Directors of the Company. In connection
with the IPO, the Pecks Managed Entities exercised, on a cashless basis, the
Warrants to purchase 1,333,333 shares of Common Stock at $3.00 per share, which
resulted in the issuance of 933,333 shares of Common Stock in respect of such
Warrants. In fiscal years 1997, 1996 and 1995, the Company incurred interest
expense on the Notes to the Delaware Plan in the amounts of $149,834, $364,941
and $253,610, respectively, to the ICI Trust in the amounts of $31,155, $75,883
and $52,733 respectively, and to the Zeneca Trust in the amounts of $25,678,
$62,543 and $43,464, respectively. 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. See "Certain Transactions."
CERTAIN TRANSACTIONS
For information regarding transactions among the Company, the Pecks Managed
Entities and Robert J. Cresci, who is a director of the Company, see
"Compensation Committee Interlocks and Insider Participation."
In March 1995, the Company entered into a Loan Agreement with Sirrom
Capital Corporation ("Sirrom"), pursuant to which Sirrom loaned $2,200,000 to
the Company, less expenses of the transaction and a processing fee of $44,000.
Upon completion of the IPO, Sirrom owned less than one percent of the Company's
outstanding Common Stock. The loan was evidenced by a secured promissory note
(the "Secured Note") which matured on March 31, 2000, bore interest at a rate of
14.0% per annum on the unpaid principal amount, and was secured by a blanket
security interest in the Company's assets. In fiscal 1997 and 1996, the Company
incurred interest expense on the Secured Note of approximately $179,667 and
$309,771, respectively. The Secured Note was paid in full with a portion of the
net proceeds of the IPO.
In connection with the issuance of the Secured Note, the Company issued
warrants (the "Sirrom Warrants") to Sirrom to acquire up to 141,667 shares of
Common Stock, for a purchase price of $.006 per share. The Sirrom Warrants were
exercised in connection with the IPO for shares of Common Stock. Pursuant to the
Loan Agreement, Sirrom was also made a party to the Registration Rights
Agreement, and
44
<PAGE> 47
was granted rights pari passu with the Pecks Managed Entities for purposes of
determining its registration rights under such Registration Rights Agreement.
Sirrom waived its registration rights with regard to the IPO.
In July 1993, the Company acquired the Ohio Institute of Photography and
Technology, which was previously partially-owned by K. Terry Guthrie, who is an
executive officer of the Company. The purchase price for the school was
$1,236,000, including amounts paid for covenants not to compete and real estate.
Mr. Guthrie received cash of $132,127. In addition, Mr. Guthrie and the Company
entered into a three-year consulting agreement pursuant to which Mr. Guthrie
received a consulting fee of $23,807 per year through July 1996. Mr. Guthrie
also entered into a noncompetition agreement pursuant to which Mr. Guthrie
receives $35,000 per year for a five-year term through July 1998. Pursuant to
the consulting agreement and the noncompetition agreement, the Company paid Mr.
Guthrie $35,000, $46,903 and $58,806 in fiscal years 1998, 1997 and 1996,
respectively.
In September 1991, the Company made a loan to Vince Pisano and Mr. Pisano's
wife, Gail Pisano, in the amount of $75,000 pursuant to an Employee Loan
Agreement, as amended. The loan did not bear interest and was to be repaid upon
the earlier of December 31, 1996 or certain other events. The loan was secured
by certain real property owned by Mr. Pisano. If the loan was paid at or prior
to its stated maturity, $10,000 of the loan would be cancelled. Mr. Pisano is a
Vice President and Chief Financial Officer of the Company. The Company and Mr.
Pisano entered into an agreement which permitted Mr. Pisano to repay the loan on
its maturity date with Common Stock of the Company owned by Mr. Pisano which
stock was valued at its fair market value on the date of repayment. Pursuant to
this agreement, during fiscal 1997, Mr. Pisano repaid his loan from the Company
in full by transfer of 5,652 shares of Common Stock to the Company.
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, 1999, the principal amount outstanding of such indebtedness was
$750,000.
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, 1999, the
principal amount of such indebtedness was $4,400,000 and $-0- 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, 1998, and as of the date of
this Form 10-K believes that approximately 14,416 of the Merger Shares,
including 4,762 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.
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.
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
45
<PAGE> 48
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.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS (indexed as F-1 to F-24)
<TABLE>
<S> <C>
Report of Independent Auditors
Consolidated Balance Sheets as of March 31, 1999 and 1998
Consolidated Statements of Income for the years ended March
31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the
years ended March 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended
March 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
</TABLE>
(B) FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedule of Quest Education
Corporation and subsidiaries is included in Item 14(d):
Schedule II -- Valuation and qualifying accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have been
omitted.
(c) Reports on Form 8-K:
None.
(d) Exhibits
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C> <C>
3.1(a)* -- Restated Certificate of Incorporation of EMI Acquisition
Corp. (See Exhibit 3.1(a) to Amendment No. 1 to Registration
Statement on Form S-1 filed with the Commission on September
20, 1996.)
3.1(b)* -- Certificate of Amendment of Certificate of Incorporation of
EMI Acquisition Corp. (See Exhibit 3.1(b) to Amendment No. 3
to Registration Statement on Form S-1 filed with the
Commission on October 22, 1996.)
3.1(c)* -- Second Amendment to Restated Certificate of Incorporation of
Educational Medical, Inc. (See Exhibit 3.1(c) to Amendment
No. 3 to Registration Statement on Form S-1 filed with the
Commission on October 22, 1996.)
3.1(d)* -- Third Amendment to Restated Certificate of Incorporation of
Educational Medical, Inc. (See Exhibit 3.1(d) to Amendment
No. 3 to Registration Statement on Form S-1 filed with the
Commission on October 22, 1996.)
3.1(e)* -- Fourth Amendment to Restated Certificate of Incorporation of
Educational Medical, Inc. (See Exhibit 3.1(e) to Amendment
No. 3 to Registration Statement on Form S-1 filed with the
Commission on October 22, 1996.)
3.1(f)* -- Fifth Amendment to Restated Certificate of Incorporation of
Educational Medical, Inc. (See Exhibit 3.1(f) to Amendment
No. 3 to Registration Statement on Form S-1 filed with the
Commission on October 22, 1996.)
3.1(g)* -- Sixth Amendment to Restated Certificate of Incorporation of
Educational Medical, Inc. (See Exhibit 3.1(g) to Amendment
No. 3 to Registration Statement on Form S-1 filed with the
Commission on October 22, 1996.)
</TABLE>
46
<PAGE> 49
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C> <C>
3.1(h)* -- Seventh Amendment to Restated Certificate of Incorporation
of Educational Medical, Inc.(See Exhibit 3.1(h) to Amendment
No. 3 to Registration Statement on Form S-1 filed with the
Commission on October 22, 1996.)
3.1(i)* -- Eighth Amendment to Restated Certificate of Incorporation of
Educational Medical, Inc. (See Exhibit 3.1(i) to Amendment
No 3 to Registration Statement on Form S-1 filed with the
Commission on October 22, 1996)
3.1(j) -- Ninth Amendment to Restated Certificate of Incorporation of
Educational Medical, Inc. (See Exhibit 99.1 to Form 8-K
filed with the Commission on October 5, 1998.)
3.2(a)* -- Restated By-Laws of the Company effective June 20, 1996
through May 14, 1999. (See Exhibit 3.2 to Amendment No. 3 to
Registration Statement on Form S-1 filed with the Commission
on October 22, 1996.)
3.2(b)* -- Amended and Restated By-Laws of the Company as of May 14,
1999 (See Exhibit 3.2 to Form 8-K filed with the Commission
on May 21, 1999.)
4.1* -- Form of Common Stock Certificate. (See Exhibit 4.1 to
Amendment No. 3 to Registration Statement on S-1 filed with
the Commission on October 22, 1996.)
4.2* -- Certificate of Designation of Series A Junior Participating
Preferred Stock (See Exhibit 3.1 to Form 8-K filed with the
Commission on May 21, 1999.)
4.3* -- Rights Agreement, dated as of May 14, 1999, between the
Company and First Union National Bank, as Rights Agent, and
the Exhibits thereto, including the form of Rights
Certificate attached as Exhibit B there to and the form of
Summary of Rights attached as Exhibit C thereto. (See
Exhibit 4.1 to Form 8-K filed with the Commission on May 21,
1999.)
10.1* -- Securities Purchase Agreement, dated as of July 23, 1991, by
and among the Company and the Pecks Managed Entities. (See
Exhibit 10.1 to Registration Statement on Form S-1 filed
with the Commission on August 8, 1996.)
10.2* -- Promissory Note R-002, dated as of July 16, 1991, in the
principal amount of $2,900,000 issued by the Company in
favor of NAP & Company. (See Exhibit 10.2 to Amendment No. 3
Registration Statement on Form S-1 filed with the Commission
on October 22, 1996.)
10.3* -- Promissory Note R-003, dated as of July 23, 1991, in the
principal amount of $603,000 issued by the Company in favor
of Fuelship & Company. (See Exhibit 10.3 to Registration
Statement on Form S-1 filed with the Commission on August 8,
1996.)
10.4* -- Promissory Note R-004, dated as of July 23, 1991, in the
principal amount of $497,000 issued by the Company in favor
of Fuelship & Company. (See Exhibit 10.4 to Registration
Statement on Form S-1 filed with the Commission on August 8,
1996.)
10.5* -- Allonge to Promissory Note R-002, dated as of March 31,
1995. (See Exhibit 10.5 to Registration Statement on Form
S-1 filed with the Commission on August 8, 1996.)
10.6* -- Allonge to Promissory Note R-003, dated as of March 31,
1995. (See Exhibit 10.6 to Registration Statement on Form
S-1 filed with the Commission on August 8, 1996.)
10.7* -- Allonge to Promissory Note R-004, dated as of March 31,
1995. (See Exhibit 10.7 to Registration Statement on Form
S-1 filed with the Commission on August 8, 1996.)
10.8* -- Warrant No. R-001 to purchase Common Stock issued to
Fuelship & Company. (See Exhibit 10.8 to Registration
Statement on Form S-1 filed with the Commission on August 8,
1996.)
10.9* -- Warrant No. R-002 to purchase Common Stock issued to NAP &
Company. (See Exhibit 10.8 to Registration Statement on Form
S-1 field with the Commission on August 8, 1996.)
10.10* -- Warrant No. E-007 to purchase Common Stock issued to
Equitable Securities Corporation. (See Exhibit 10.10 to
Amendment No. 3 to Registration Statement on Form S-1 filed
with the Commission on October 22, 1996.)
10.11* -- First Amendment to Securities Purchase Agreement, dated as
of March 31, 1995, by and among the Company and the Pecks
Managed Entities. (See Exhibit 10.11 to Registration
Statement on Form S-1 filed with the Commission on August 8,
1996.)
</TABLE>
47
<PAGE> 50
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C> <C>
10.12* -- Loan Agreement, dated as of March 31, 1995, by and between
the Company, each of its subsidiaries, and Sirrom. (See
Exhibit 10.12 to Amendment No. 3 to Registration Statement
on Form S-1 filed with the Commission on October 22, 1996.)
10.13* -- Letter Addendum to Loan Agreement, dated as of March 31,
1995, between the Company, each of its subsidiaries, and
Sirrom. (See Exhibit 10.13 to Registration Statement on Form
S-1 filed with the Commission on August 8, 1996).
10.14* -- Secured Promissory Note, dated as of March 31, 1995, in the
principal amount of $2,200,000, issued by the Company and
each of its subsidiaries in favor of Sirrom. (See Exhibit
10.14 to Amendment No. 3 to Registration Statement on Form
S-1 filed with the Commission on October 22, 1996.)
10.15* -- Security Agreement, dated as of March 31, 1995, among the
Company, each of its subsidiaries, and Sirrom. (See Exhibit
10.15 to Amendment No. 3 to Registration Statement on Form
S-1 filed with the Commission on October 22, 1996.)
10.16* -- Stock Purchase Warrant to purchase Common Stock of the
Company issued to Sirrom, dated as of March 31, 1995. (See
Exhibit 10.16 to Registration Statement on Form S-1 filed
with the Commission on August 8, 1996.)
10.17* -- Pledge Agreement, dated as of March 31, 1995, between the
Company and Sirrom. (See Exhibit 10.17 to Registration
Statement on Form S-1 filed with the Commission on August 8,
1996.)
10.18* -- Agreement in Respect of Warrant, dated as of March 31, 1995,
among NAP & Company, the Company and Sirrom. (See Exhibit
10.18 to Registration Statement on Form S-1 filed with the
Commission on August 8, 1996.)
10.19* -- Agreement in Respect of Warrant, dated as of March 31, 1995,
among Fuelship & Company, the Company and Sirrom. (See
Exhibit 10.19 to Registration Statement on Form S-1 filed
with the Commission on August 8, 1996.)
10.20* -- Registration Rights Agreement, dated as of July 23, 1991, by
and among the Company, the Sprout Group, LTOS, and the Pecks
Managed Entities (See Exhibit 10.20 to Registration
Statement on Form S-1 filed with the Commission on August 8,
1996.)
10.21* -- First Amendment to Registration Rights Agreement, dated as
of March 31, 1995, by and among the Company, the Sprout
Group, LTOS, the Pecks Managed Entities and Sirrom. (See
Exhibit 10.21 to Registration Statement on Form S-1 filed
with the Commission on August 8, 1996.)
10.22* -- Coinvestors Agreement, dated as of July 23, 1991, by and
among the Company, the Sprout Group, LTOS, the Pecks Managed
Entities and Investech, L.P. (See Exhibit 10.22 to
Registration Statement on Form S-1 filed with the Commission
on August 8, 1996.)
10.23* -- Letter Agreement, dated as of July 23, 1991, by and among
the Company, the Sprout Group, LTOS and Investech, L.P. (See
Exhibit 10.23 to Registration Statement on Form S-1 filed
with the Commission on August 8, 1996.)
10.24* -- Business Loan Agreement, dated as of July 14, 1993, between
Bank One, Dayton, N.A. and OIOPT Acquisition Corp. (See
Exhibit 10.24 to Registration Statement on Form S-1 filed
with the Commission on August 8, 1996.)
10.25* -- Business Purpose Promissory Note, dated as of July 14, 1993,
in the principal amount of $720,000 issued by OIOPT
Acquisition Corp. in favor of Bank One, Dayton, N.A., and
guaranteed by the Company. (See Exhibit 10.25 to
Registration Statement on Form S-1 filed with the Commission
on August 8, 1996.)
10.26* -- Mortgage, dated as of July 14, 1993, by OIOPT Acquisition
Corp., (Mortgagor), to Bank One, Dayton, N.A., (Mortgagee),
guaranteed by the Company. (See Exhibit 10.26 to
Registration Statement on Form S-1 filed with the Commission
on August 8, 1996.)
10.27* -- Pledge Agreement, dated as of July 14, 1993, among the
Company, Ohio Institute of Photography and Technology, Inc.
and OIOPT Acquisition Corp. (See Exhibit 10.27 to
Registration Statement on Form S-1 filed with the Commission
on August 8, 1996.)
</TABLE>
48
<PAGE> 51
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C> <C>
10.28* -- Asset Purchase Agreement, dated as of June 23, 1993, among
the Company, OIOPT Acquisition Corp., Ohio Institute of
Photography and Technology, Inc., K. Terry Guthrie, Richard
L. Cretcher, Stephen T. McLain, Gerald D. Guthrie and James
R. Madden. (See Exhibit 10.28 to Registration Statement on
Form S-1 filed with the Commission on August 8, 1996.)
10.29* -- Amendment to Business Loan Agreement, dated as of August 28,
1995, by and between OIOPT Acquisition Corp. and Bank One,
Dayton, N.A., with the Company as guarantor. (See Exhibit
10.29 to Registration Statement on Form S-1 filed with the
Commission on August 8, 1996.)
10.30* -- Promissory Note Modification Agreement, dated as of August
28, 1995, by and between OIOPT Acquisition Corp. and Bank
One, Dayton, N.A., with the Company as guarantor. (See
Exhibit 10.30 to Registration Statement on Form S-1 filed
with the Commission on August 8, 1996.)
10.31* -- Amendment to Business Loan Agreement, dated as of August 28,
1995, by and between OIOPT Acquisition Corp. and Bank One,
Dayton, N.A., and the Company as guarantor. (See Exhibit
10.39 to Amendment No. 3 to Registration Statement on Form
S-1 filed with the Commission on October 22, 1996.)
10.32* -- Employment Agreement, dated as of December 31, 1992, between
the Company and Gary D. Kerber. (See Exhibit 10.42 to
Registration Statement on Form S-1 filed with the Commission
on August 8, 1996.)
10.33* -- Letter Agreement, dated November 21, 1988 between the
Company and Robert L. Heidrich concerning the granting of
options. (See Exhibit 10.52 to Registration Statement on
Form S-1 filed with the Commission on August 8, 1996.)
10.34* -- 1996 Stock Incentive Plan of the Company. (See Exhibit 10.53
to Amendment No. 1 to Registration Statement on Form S-1
filed with the Commission on September 20, 1996.)
10.35* -- Non-employee Director Stock Option Plan of the Company. (See
Exhibit 10.54 to Amendment No. 1 to Registration Statement
on Form S-1 filed with the Commission on September 20,
1996.)
10.36* -- Letter Agreement, dated April 6, 1995 between the Company
and Equitable Securities Corporation amending the maturity
date of Warrant No. E-007. (See Exhibit 10.55 to
Registration Statement on Form S-1 filed with the Commission
on August 8, 1996.)
10.37* -- Asset Purchase Agreement, dated as of September 6, 1996,
among the Company, SACMD Acquisition Corp., San Antonio
College of Medical and Dental Assistants, Inc., Career
Centers of Texas -- El Paso, Inc. and Mr. Comer Alden. (See
Exhibit 10.56 to Amendment No. 1 to Registration Statement
on Form S-1 filed with the Commission on September 20,
1996.)
10.38* -- Letter of Commitment, dated August 22, 1996, from Bank of
America to the Company concerning the Proposed Bank Line of
Credit. (See Exhibit 10.57 to Amendment No. 1 to
Registration Statement on Form S-1 filed with the Commission
on September 20, 1996.)
10.39* -- Asset Purchase Agreement dated December 12, 1996, as
amended, between the Company, HBC Acquisition Corp. and O/E
Learning, Inc. (including all exhibits) (See Exhibit 10.1 to
the Company's Form 8-K filed with the Commission on January
15, 1997.)
10.40* -- Executed Form of Second Payment Note in the amount of
$1,350,000 from HBC to O/E (See Exhibit 10.2 to the
Company's Form 8-K filed with the Commission on January 15,
1997.)
10.41* -- Executed Form of Pledge Agreement (See Exhibit 10.3 to the
Company's Form 8-K filed with the Commission on January 15,
1997.)
10.42* -- Executed Form of Assumption Agreement (See Exhibit 10.4 to
the Company's Form 8-K filed with the Commission on January
15, 1997.)
10.43* -- Executed Form of Bill of Sale (See Exhibit 10.5 to the
Company's Form 8-K filed with the Commission on January 15,
1997.)
</TABLE>
49
<PAGE> 52
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C> <C>
10.44* -- Agreement and Plan of Reorganization dated as of March 29,
1997, by and among the Company, Nebraska Acquisition Corp.
and Educational Management, Inc. with attached Exhibit
A -- Plan of Merger (See Exhibit 10.1 to the Company's Form
8-K filed with the Commission on April 15, 1997.)
10.45* -- Escrow Agreement dated as of March 29, 1997 by and among the
Company, Acquisition and Richard O. Wikert, the Lila Rhude
Trust, the Scott L. Rhude Trust, the A. Lauren Rhude Trust,
Roger B. Bojens and Sacks Tierney, P.A. as Escrow Agent.
(See Exhibit 10.5 to the Company's Form 8-K filed with the
Commission on April 15, 1997.)
10.46* -- Business Loan Agreement dated as of February 25,1997 between
Bank of America, FSB and the Company (See Exhibit 10.46 to
the Company's Form 10-K filed with the Commission on June
30, 1997.)
10.47* -- Stock Pledge Agreement dated as of February 25, 1997 between
Bank of America, FSB and the Company See Exhibit 10.47 to
the Company's Form 10-K filed with the Commission on June
30, 1997.)
10.48* -- Security Agreement dated as of February 25, 1997 between
Bank of America, FSB and the Company(See Exhibit 10.48 to
the Company's Form 10-K filed with the Commission on June
30, 1997.)
10.49* -- First Amendment to Business Loan Agreement dated as of June
30, 1997 between Bank of America, FSB and the Company (See
Exhibit 10.49 to Amendment No. 1 to the Company's Form S-1
filed with the Commission on September 22, 1997.)
10.50* -- Stock Purchase Agreement dated February 14, 1998 among the
Company, Computer Hardware Service Company, Inc. and CHI
Acquisition Corp. (See Exhibit 10.1 to the Company's Form
8-K filed with the Commission on February 25, 1998.)
10.51* -- Amendment to Mortgage Loam Promissory Note, dated as of
September 12, 1994, by and between the Company and Vince and
Gail Pisano. (See Exhibit 10.51 to Registration Statement on
Form S-1 filed with the Commission on August 8, 1996.)
10.52* -- Second Payment Note from the Company and CHI Acquisition
Corp. to sellers of Computer Hardware Service Company, Inc.
(See Exhibit 10.2 to the Company's Form 8-K filed with the
Commission on February 25, 1998.)
10.53* -- Purchase Money Promissory Note from the Company and CHI
Acquisition Corp. to sellers of Computer Hardware Service
Company, Inc. (See Exhibit 10.3 to the Company's Form 8-K
filed with the Commission on February 25, 1998.)
10.54* -- Pledge Agreement from the Company to sellers of Computer
Hardware Service Company, Inc. (See Exhibit 10.4 to the
Company's Form 8-K filed with the Commission on February 25,
1998.)
10.55* -- Security Agreement among the Company, CHI Acquisition Corp.
and sellers of Computer Hardware Service Company, Inc. (See
Exhibit 10.5 to the Company's Form 8-K filed with the
Commission on February 25, 1998.)
10.56* -- Registration Rights Agreement between the Company and
sellers of Computer Hardware Service Company, Inc. (See
Exhibit 10.6 to the Company's Form 8-K filed with the
Commission on February 25, 1998.)
10.57* -- Stock Power from the sellers of Computer Hardware Service
Company, Inc. to the Company (See Exhibit 10.7 to the
Company's Form 8-K filed with the Commission on February 25,
1998.)
10.58* -- Sellers' Subordination Agreement from the sellers of
Computer Hardware Service Company, Inc. to the Company and
the Company's lender. (See Exhibit 10.8 to the Company's
Form 8-K filed with the Commission on February 25, 1998.)
10.59* -- Stock Purchase Agreement dated March 13, 1998 in connection
with the Hesser Acquisition. (See Exhibit 10.1 to the
Company's Form 8-K filed with the Commission on March 30,
1998.)
</TABLE>
50
<PAGE> 53
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C> <C>
10.60* -- Legal Description of the Hesser Acquisition property. (See
Exhibit 10.2 to the Company's Form 8-K filed with the
Commission on March 30, 1998.)
10.61* -- Second Payment Note from the Company to the sellers of
Hesser, Inc. (See Exhibit 10.3 to the Company's Form 8-K
filed with the Commission on March 30, 1998.)
10.62* -- List of Shareholders of Hesser, Inc. (See Exhibit 10.4 to
the Company's Form 8-K filed with the Commission on March
30, 1998.)
10.63* -- Form of Registration Rights Agreement between the Company
and the sellers of Hesser, Inc. (See Exhibit 10.5 to the
Company's Form 8-K filed with the Commission on March 30,
1998.)
10.64* -- Form of Employment Agreement between the Company and the
sellers of Hesser, Inc. (See Exhibit 10.6 to the Company's
Form 8-K filed with the Commission on March 30, 1998.)
10.65* -- Form of Non-Competition Agreement between the Company and
the sellers of Hesser, Inc. (See Exhibit 10.7 to the
Company's Form 8-K filed with the Commission on March 30,
1998.)
10.66* -- Stock Power from the sellers of Hesser, Inc. to the Company.
(See Exhibit 10.8 to the Company's Form 8-K filed with the
Commission on March 30, 1998.)
10.67* -- Amendment to Bank Agreement dated as of March 31, 1998
between Bank of America, FSB and the Company. (See Exhibit
10.9 to the Company's Form 8-K filed with the Commission on
March 30, 1998.)
10.68* -- Form of Indemnification Agreement between the Company and
its Directors. (Filed with Amendment No. 1 to Form S-1 filed
with the Commission on June 9, 1998.)
10.69* -- Amended and Restated Escrow Agreement between the Company
and the Sellers of Hesser, Inc. (Filed with Amendment No. 1
to Form S-1 filed with the Commission on June 9, 1998.)
10.70* -- Letter Modification of Non-Competition Agreement between the
Company and Madeline Galeucia. (Filed with Amendment No. 1
to Form S-1 filed with the Commission on June 9, 1998.)
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. (Filed with Amendment No. 1 to Form
S-1 filed with the Commission on June 9, 1998.)
10.72* -- Non-Negotiable Promissory Notes in the aggregate amount of
$1,500,000 between the Company and the Sellers of Hesser,
Inc. (Filed with Amendment No. 1 to Form S-1 filed with the
Commission on June 9, 1998.)
10.73* -- Amendment to 1996 Stock Incentive Plan (See Exhibit 10.1 to
Form 8-K filed with the Commission on October 5, 1998.)
10.74* -- 1998 Employee Stock Purchase Plan (See Exhibit 10.2 to Form
8-K filed with the Commission on October 5, 1998.)
10.75* -- Asset Purchase Agreement dated November 30, 1998, among the
Company, Iowa College Acquisition Corp., Iowa College, Inc.,
f/k/a Quad City Business School, Inc., Huston Education
Corp. of Iowa, an Iowa corporation wholly owned by Iowa
College, Inc., Hamilton College, Inc., and Mr. John C.
Huston, the sole shareholder of Iowa College and Hamilton.
(See Exhibit. 10.1 to Form 8-K filed with the Commission on
November 13, 1998.)
10.76** -- Revolving Credit Agreement among the Company, its
subsidiaries and Nationsbank, N.A dated as of November 30,
199..
23.1** -- Consent of Ernst & Young LLP
23.2** -- Consent of Winther, Stave LLP
27.1** -- Financial Data Schedule (for SEC use only)
99.1* -- Report of Winther, Stave & Co., LLP (See Ex. 99.1 to the
Company's Form 10-K filed with the Commission on June
30,1997.)
99.2* -- Report of Winther, Stave & Co., LLP (See Ex 99.2 to the
Company's Form 10-K filed with the Commission on June 30,
1997.)
</TABLE>
51
<PAGE> 54
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C> <C>
99.3* -- Report of Winther, Stave & Co., LLP (See Ex. 99.3 to the
Company's Form 10-K filed with the Commission on June 30,
1997.)
</TABLE>
- ---------------
* The exhibits thus designated are incorporated herein by reference as exhibits
hereto. Following the description of such exhibits is a reference to the copy
of the exhibit heretofore filed with the Commission, to which there have been
no amendments or changes.
** To be filed with this Annual Report.
52
<PAGE> 55
ITEM 14 (D)
SCHEDULE II
QUEST EDUCATION CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER NET BALANCE AT
OF YEAR EXPENSES ACCOUNTS(1) DEDUCTIONS END OF YEAR
---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended March 31, 1999............ $2,294,225 $2,469,746 $ 409,032 $1,129,538 $4,043,465(2)
Year ended March 31, 1998............ 922,704 1,151,669 1,323,372 1,103,520 2,294,225(2)
Year ended March 31, 1997............ 974,357 1,239,151 240,475 1,521,279 922,704
</TABLE>
- ---------------
(1) Principally represents allowances for losses on trade accounts of acquired
companies at the date of acquisition.
(2) Represents allowances for losses on trade accounts and notes receivable.
53
<PAGE> 56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
QUEST EDUCATION CORPORATION
(Registrant)
By: /s/ Gary D. Kerber
------------------------------------
Gary D. Kerber
Chairman of the Board, President and
Chief Executive Officer
Date: June 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ Gary D. Kerber President, Chief Executive June 29, 1999
- ----------------------------------------------------- Officer and Chairman of the
Gary D. Kerber Board (Principal Executive
Officer)
/s/ Vince Pisano Vice President and Chief June 29, 1999
- ----------------------------------------------------- Financial Officer
Vince Pisano
/s/ Robert J. Cresci Director June 29, 1999
- -----------------------------------------------------
Robert J. Cresci
/s/ Carl S. Hutman Director June 29, 1999
- -----------------------------------------------------
Carl S. Hutman
/s/ William D. Ford Director June 29, 1999
- -----------------------------------------------------
William D. Ford
/s/ Richard E. Kroon Director June 29, 1999
- -----------------------------------------------------
Richard E. Kroon
</TABLE>
54
<PAGE> 57
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
Report of Independent Auditors.............................. F-
Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 1999 and 1998... F-
Consolidated Statements of Income for the years ended March
31, 1999, 1998 and 1997................................... F-
Consolidated Statements of Stockholders' Equity for the
years ended March 31, 1999, 1998 and 1997................. F-
Consolidated Statements of Cash Flows for the years ended
March 31, 1999, 1998 and 1997............................. F-
Notes to Consolidated Financial Statements.................. F-
</TABLE>
F-1
<PAGE> 58
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Quest Education Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Quest
Education Corporation and subsidiaries (formerly Educational Medical, Inc.) as
of March 31, 1999 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, 1999. 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 Quest Education Corporation 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
net revenues of approximately $6,012,000 for the year ended March 31, 1997.
Those statements were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to data included for Nebraska
Acquisition Corporation, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Quest Education Corporation and
subsidiaries at March 31, 1999 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, 1999, in conformity with generally accepted accounting principles.
Atlanta, Georgia
May 10, 1999
F-2
<PAGE> 59
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $12,936,466 $21,445,782
Restricted cash........................................... -- 384,295
Trade accounts receivable, less allowance for doubtful
accounts of $2,412,029 and $1,968,218, respectively..... 9,451,674 6,490,004
Notes receivable, less allowance for doubtful accounts of
$1,296,600 and $155,700, respectively................... 1,296,600 622,800
Prepaid expenses and other current assets................. 2,724,014 2,821,970
Deferred income tax assets................................ 1,060,862 702,814
----------- -----------
Total current assets............................... 27,469,616 32,467,665
Notes receivable, less allowance for doubtful accounts of
$334,836 and $170,307, respectively....................... 334,836 737,132
Property and equipment, net................................. 15,830,496 13,644,236
Deferred debt issuance costs, net of accumulated
amortization of $219,803 and $112,143, respectively....... 204,051 275,538
Covenants not to compete, net of accumulated amortization of
$1,642,291 and $1,481,359, respectively................... 1,034,101 945,033
Goodwill and other intangible assets, net of accumulated
amortization of $9,358,231 and $7,949,081, respectively... 35,065,331 31,273,709
Deferred income tax assets.................................. 1,091,951 1,777,824
Other assets................................................ 510,202 176,855
----------- -----------
Total assets....................................... $81,540,584 $81,297,992
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 63,473 $ 682,310
Other amounts due to sellers.............................. -- 3,517,602
Accrued compensation...................................... 2,996,082 1,241,079
Other accrued expenses.................................... 1,871,749 2,139,830
Deferred tuition income................................... 8,498,186 5,095,954
Current portion of notes payable and long-term debt....... 2,524,252 14,837,203
Income taxes payable...................................... 1,522,194 --
----------- -----------
Total current liabilities.......................... 17,475,936 27,513,978
Notes payable and long-term debt, less current portion...... 19,264,558 17,109,568
Other liabilities........................................... 635,936 1,002,465
----------- -----------
Total liabilities.................................. 37,376,430 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; 8,220,287 and 7,729,259 shares issued and
outstanding at March 31, 1999 and 1998, respectively.... 82,203 77,295
Additional paid-in capital on common stock................ 36,239,242 33,739,114
Retained earnings......................................... 7,842,709 1,855,572
----------- -----------
Total stockholders' equity......................... 44,164,154 35,671,981
----------- -----------
Total liabilities and stockholders' equity......... $81,540,584 $81,297,992
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 60
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net revenues............................................ $92,870,264 $59,675,509 $49,449,680
School operating costs:
Cost of education and facilities...................... 41,676,975 27,086,555 23,150,599
Selling and promotional............................... 12,650,746 8,643,485 7,530,741
Provision for losses on accounts and notes
receivable......................................... 2,469,746 1,151,669 1,239,151
General and administrative expenses................... 23,194,656 15,424,764 12,802,441
Amortization of goodwill and intangibles................ 1,521,480 1,284,552 886,268
Other expenses:
Loss on closure or relocation of schools.............. -- -- 143,585
Merger expenses....................................... -- -- 391,453
----------- ----------- -----------
Income from operations.................................. 11,356,661 6,084,484 3,305,442
Interest expense (income), net (net of interest income
of $572,725 in 1999, net of interest expense of
$282,870 in 1998 and net of interest income of
$476,194 in 1997)..................................... 1,204,002 (252,750) 284,162
----------- ----------- -----------
Income before income taxes and extraordinary item....... 10,152,659 6,337,234 3,021,280
Provision (benefit) for income taxes.................... 4,165,522 2,484,773 (845,363)
----------- ----------- -----------
Net income before extraordinary item.................... 5,987,137 3,852,461 3,866,643
Extraordinary item -- loss on early extinguishment of
debt, net of income taxes............................. -- -- 308,683
----------- ----------- -----------
Net income.............................................. $ 5,987,137 $ 3,852,461 $ 3,866,643
=========== =========== ===========
Pro forma income tax data:
Income before income taxes and extraordinary item..... $ 3,021,280
Provision for income taxes............................ 408,951
-----------
Income before extraordinary item...................... 2,612,329
Extraordinary item, net of income taxes............... 308,683
-----------
Pro forma net income.................................. $ 2,303,646
===========
Earnings (loss) per share:
Basic:
Income before extraordinary item...................... $ 0.74 $ 0.52 $ 0.58
Extraordinary item.................................... -- -- (0.07)
----------- ----------- -----------
Net income............................................ $ 0.74 $ 0.52 $ 0.51
=========== =========== ===========
Weighted average common shares outstanding............ 8,043,303 7,382,307 4,484,492
=========== =========== ===========
Diluted:
Income before extraordinary item...................... $ 0.73 $ 0.51 $ 0.41
Extraordinary item.................................... -- -- (0.05)
----------- ----------- -----------
Net income............................................ $ 0.73 $ 0.51 $ 0.36
=========== =========== ===========
Weighted average common shares outstanding............ 8,226,966 7,612,155 6,447,265
=========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 61
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL ADDITIONAL
PAID-IN PAID-IN
CAPITAL CAPITAL COMMON
CONVERTIBLE ON CONVERTIBLE ON STOCK
PREFERRED PREFERRED COMMON COMMON PURCHASE
STOCK STOCK STOCK STOCK WARRANTS
----------- -------------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1996......................... $ 10,230 $ 6,732,160 $24,381 $ 42,424 $ 2,838,148
Accretion of value of common stock purchase
warrants........................................ -- -- -- -- 281,398
Issuance of common stock in connection with
initial public offering......................... -- -- 22,000 19,238,000 --
Conversion of note receivable to treasury stock... -- -- -- -- --
Exercise of common stock purchase warrants........ -- -- 1,417 367,583 (368,150)
Cashless exercise of common stock purchase
warrants........................................ -- -- 9,333 2,742,063 (2,751,396)
Conversion of convertible preferred stock to
common stock.................................... (10,230) (6,732,160) 17,050 6,725,340 --
Distributions to former Nebraska Shareholders..... -- -- -- -- --
Reclassification of undistributed Nebraska S
Corporation earnings to additional paid-in
capital......................................... -- -- -- 693,366 --
Recognition of deferred income tax assets related
to termination of Nebraska Subchapter S
Corporation status upon consummation of pooling
of interests.................................... -- -- -- 414,000 --
Net income........................................ -- -- -- -- --
-------- ----------- ------- ----------- -----------
Balance at March 31, 1997......................... -- -- 74,181 30,222,776 --
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) --
Shares returned from escrow and retired........... -- -- (432) 432 --
Net income........................................ -- -- -- -- --
-------- ----------- ------- ----------- -----------
Balance at March 31, 1998......................... -- -- 77,295 33,739,114 --
Exercise of common stock options.................. -- -- 648 175,847 --
Issuance of common stock in connection with
secondary offering.............................. -- -- 4,260 2,324,281 --
Net income........................................ -- -- -- -- --
-------- ----------- ------- ----------- -----------
Balance at March 31, 1999......................... $ -- $ -- $82,203 $36,239,242 $ --
======== =========== ======= =========== ===========
<CAPTION>
RETAINED
EARNINGS
(ACCUMULATED TREASURY
DEFICIT) STOCK TOTAL
------------ --------- -----------
<S> <C> <C> <C>
Balance at March 31, 1996......................... $(3,343,115) $ (35,000) $ 6,269,228
Accretion of value of common stock purchase
warrants........................................ (281,398) -- --
Issuance of common stock in connection with
initial public offering......................... -- -- 19,260,000
Conversion of note receivable to treasury stock... -- (65,000) (65,000)
Exercise of common stock purchase warrants........ -- -- 850
Cashless exercise of common stock purchase
warrants........................................ -- -- --
Conversion of convertible preferred stock to
common stock.................................... -- -- --
Distributions to former Nebraska Shareholders..... (1,236,970) -- (1,236,970)
Reclassification of undistributed Nebraska S
Corporation earnings to additional paid-in
capital......................................... (693,366) -- --
Recognition of deferred income tax assets related
to termination of Nebraska Subchapter S
Corporation status upon consummation of pooling
of interests.................................... -- -- 414,000
Net income........................................ 3,557,960 -- 3,557,960
----------- --------- -----------
Balance at March 31, 1997......................... (1,996,889) (100,000) 28,200,068
Issuance of common stock in connection with
acquisitions.................................... -- -- 3,500,000
Exercise of common stock options.................. -- -- 119,452
Treasury shares retired........................... -- 100,000 --
Shares returned from escrow and retired........... -- -- --
Net income........................................ 3,852,461 -- 3,852,461
----------- --------- -----------
Balance at March 31, 1998......................... 1,855,572 -- 35,671,981
Exercise of common stock options.................. -- -- 176,495
Issuance of common stock in connection with
secondary offering.............................. -- -- 2,328,541
Net income........................................ 5,987,137 -- 5,987,137
----------- --------- -----------
Balance at March 31, 1999......................... $ 7,842,709 $ -- $44,164,154
=========== ========= ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 62
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................................. $ 5,987,137 $ 3,852,461 $ 3,557,960
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation......................................... 2,288,567 1,617,897 1,330,180
Amortization of other assets......................... 1,656,570 1,284,552 958,599
Extraordinary item -- loss on early extinguishment of
debt, net of income taxes......................... -- -- 308,683
Loss on closure or relocation of schools............. -- -- 25,000
Provision for losses on accounts and notes
receivable........................................ 2,469,746 1,151,669 1,239,151
Deferred income taxes................................ 327,825 430,460 (1,563,995)
Changes in operating assets and liabilities, net of
assets acquired and liabilities assumed:
Restricted cash................................... 384,295 -- 610,000
Trade accounts receivable......................... (6,886,819) 22,255 (1,885,940)
Income taxes receivable........................... -- 155,542 (155,542)
Notes receivable.................................. (552,409) (1,478,790) --
Prepaid expenses.................................. 220,331 (756,631) (68,651)
Other assets...................................... (247,494) 155,269 62,297
Accounts payable and accrued expenses............. 78,634 (3,133,196) 708,334
Deferred tuition income........................... 1,871,546 (1,438,135) (1,826,398)
Income taxes payable.............................. 1,522,194 -- --
Other liabilities................................. (366,529) 495,932 (563,021)
------------ ----------- -----------
Net cash provided by operating activities.............. 8,753,594 2,359,285 2,736,657
INVESTING ACTIVITIES:
Purchases of businesses, net of cash acquired.......... (39,394) 2,192,983 (1,400,000)
Purchases of property and equipment.................... (3,270,480) (2,199,621) (2,079,501)
------------ ----------- -----------
Net cash used in investing activities.................. (3,309,874) (6,638) (3,479,501)
FINANCING ACTIVITIES:
Issuance of common stock............................... 2,328,541 -- 19,260,000
Proceeds from notes payable and long-term debt......... 4,000,000 9,000,000 532,295
Principal payments on acquisition notes payable........ (16,904,297) (3,984,017) (1,890,493)
Payments on other amounts due to sellers............... (3,517,602) -- --
Proceeds from exercise of common stock purchase
warrants............................................. -- -- 850
Proceeds from exercise of common stock options......... 176,495 119,452 --
Principal payments on senior subordinated debt......... -- -- (5,000,000)
Increase in deferred financing costs................... (36,173) (90,189) (297,492)
Distributions to former Nebraska Shareholders.......... -- -- (1,023,472)
------------ ----------- -----------
Net cash (used in) provided by financing activities.... (13,953,036) 5,045,246 11,581,688
------------ ----------- -----------
(Decrease) increase in cash and cash equivalents....... (8,509,316) 7,397,893 10,838,844
Cash and cash equivalents at beginning of year......... 21,445,782 14,047,889 3,209,045
------------ ----------- -----------
Cash and cash equivalents at end of year............... $ 12,936,466 $21,445,782 $14,047,889
============ =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 63
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
1. ORGANIZATION AND NATURE OF BUSINESS
Quest Education Corporation (formerly Educational Medical, Inc.) (the
"Company") operates diversified career-oriented postsecondary education schools.
The Company offers degree and, in certain locations, diploma programs through
its 30 schools located in 11 states. The Company's diploma programs,
baccalaureate and associate degree programs offer students the knowledge and
skills necessary for employment in a range of fields, including healthcare,
business, information technology and fashion and design.
Approximately 26%, 19% and 17% of the Company's fiscal 1999 net revenues
were derived from its schools in California, New Hampshire and Pennsylvania,
respectively. No other schools in a single state represented over 10% of net
revenues for the year ended March 31, 1999. Approximately 73% of the Company's
fiscal 1999 cash receipts were derived from Title IV programs as provided for by
the Higher Education Act of 1965, as amended. Cash receipts accounted for all of
the Company's net revenues in fiscal 1999.
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.
RECLASSIFICATIONS
Certain reclassifications have been made to certain prior year amounts to
conform with the fiscal 1999 presentation.
CASH AND CASH EQUIVALENTS AND 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, 1999 and 1998, the Company held $12,596,312 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 consists of 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 Hesser College ("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.
F-7
<PAGE> 64
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTES RECEIVABLE
Notes receivable consist primarily of promissory notes issued to students
as a result of loss of federal loan eligibility due to the change of ownership
regulations and have varying interest rates. Such notes are payable in minimum
monthly payments beginning six months after the student's graduation and are
generally due in a maximum of ten years from the date of issuance.
LONG-LIVED ASSETS
The Company continually monitors events and changes in circumstances that
would indicate the carrying amounts of property, equipment and intangible assets
may not be recoverable. When such events or changes in circumstances are
present, the Company assesses the recoverability of the respective asset by
determining whether the carrying value of such asset will be recovered through
undiscounted expected future cash flows. Should the Company determine that the
carrying values of the respective assets are not recoverable, the Company would
record a charge to reduce the carrying values of such assets to their fair
values.
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 upon withdrawal 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 completion of the course of study.
F-8
<PAGE> 65
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
The Company uses the liability method of accounting for income taxes. Under
this method, deferred income tax assets and liabilities are determined based on
differences between the financial reporting and the tax bases of assets and
liabilities measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
PRO FORMA INCOME TAX DATA
Prior to March 31, 1997, the Nebraska Acquisition (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 purposes, the 1997
consolidated statement of income includes a pro forma presentation that includes
a provision for income taxes as if the Nebraska Acquisition had been a taxable
corporation for that period 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 that period 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,
-------------------------------------
1999 1998 1997
---------- ----------- ----------
<S> <C> <C> <C>
Capital leases.................................... $ 62,000 $ 392,000 $ 121,000
Issuance of notes payable and other amounts due to
sellers in connection with acquisitions and
related non-compete agreements.................. 2,684,208 23,517,602 4,100,000
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>
ADVERTISING
Advertising costs are expensed as incurred. The Company incurred
approximately $6,822,000, $4,503,000 and $4,427,000 in advertising costs for the
years ended March 31, 1999, 1998 and 1997, respectively.
STOCK-BASED 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 common stock on the date of grant. The Company
discloses the pro forma effect of all stock-based compensation using the fair
value method as prescribed by Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," ("SFAS 123"). See Note 9.
EARNINGS PER SHARE
The Company computes earnings per share in accordance with SFAS No. 128,
"Earnings per Share."
F-9
<PAGE> 66
QUEST EDUCATION CORPORATION 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 of the Company's schools derived from Title IV Programs to no more than
90% (85% in the prior year) 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. All
of the Company's schools participate in Title IV Programs and are in compliance
with the 90% regulation.
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 $.3 million to $4.9 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 $34.3 million. At March 31, 1999, the Company in connection with the
acquisition of three Iowa colleges posted an irrevocable letter of credit for
three of its schools totaling $2,381,000 which is payable to the Department of
Education and expires in October 1999.
In November 1997, the Department of Education published new regulations
regarding financial responsibility which become effective on July 1, 1998. The
new regulations apply to the Company's fiscal years commencing April 1, 1999,
and thereafter, however, the regulations provide a transition year alternative
which permits 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 former 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, 1999, the Company's
calculations result in a composite score of 1.7 on a consolidated basis, with
each individual institution included in the consolidating financial statements
having a composite score greater than 1.5, except with respect to the Company's
school located in Roanoke, Virginia which had a composite score of 1.4.
F-10
<PAGE> 67
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, negotiations
with the Department.
4. ACQUISITIONS
During the fiscal years ended March 31, 1999 and 1998, the Company
completed one and two acquisitions, respectively, adding a total of eleven
schools.
Each of these acquisitions were accounted for using the purchase method of
accounting. Under the purchase method of accounting, the results of operations
of the acquired companies are included in the consolidated statements of income
as of the acquisition date. The assets and liabilities of the companies acquired
in fiscal 1999 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 the 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 1999 and
1998 acquisitions and the fiscal 1997 pooling of interests:
IOWA ACQUISITION
On November 30, 1998, the Company acquired all of the outstanding stock of
Iowa College, Inc., Huston Education Corp. of Iowa, and Hamilton College, Inc.
(Iowa Acquisition). The purchase price of the Iowa Acquisition was $4,500,000,
consisting of $1,000,000 in cash, a $1,500,000 short-term promissory note and a
$2,000,000 long-term promissory note. The results of the Iowa Acquisition's
operations are included in the Company's consolidated statement of income
effective November 30, 1998.
In addition, the former sellers of the Iowa Acquisition owed the Company
$815,792 at March 31, 1999 based on the ratio of certain assets to certain
liabilities at the time of acquisition. As the right of offset was allowed per
the Acquisition Agreement, this amount was netted against the $1,500,000
short-term promissory note in the financial statements.
The Iowa Acquisition consists of five schools located in Cedar Falls, Cedar
Rapids, Davenport, Des Moines, and Mason City, Iowa. These colleges offer degree
and diploma programs in information technology and business.
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 four schools acquired in the Hesser Acquisition 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.
F-11
<PAGE> 68
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
POOLING OF INTERESTS
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. 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 prior to the acquisition were 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
statement of income for the year ended March 31, 1997 are as follows:
<TABLE>
<S> <C>
Net revenues:
Quest Education Corporation............................... $43,437,416
Nebraska Acquisition...................................... 6,012,264
-----------
$49,449,680
===========
Net income:
Quest Education Corporation............................... $ 2,321,432
Nebraska Acquisition...................................... 1,236,528
-----------
$ 3,557,960
===========
</TABLE>
In connection with this acquisition, 95,074 shares of the 761,263 shares
issued (all of which have been included as outstanding, except for shares
returned from escrow, for purposes of computing earnings per share) were placed
into escrow pending the resolution of certain financial aid compliance matters
with the Department of Education. In fiscal 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. In fiscal 1999, an
additional 14,288 shares were released from escrow. The other 4,762 shares
continue to be held in escrow for specified periods.
F-12
<PAGE> 69
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUMMARY PRO FORMA INFORMATION (UNAUDITED)
Summary unaudited pro forma results of operations for the years ended March
31, 1999 and 1998 for the three acquisitions accounted for as purchases, as if
the acquisitions had occurred at April 1, 1998 and April 1, 1997, respectively,
and as if the entities involved in the Hesser Acquisition 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,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net revenues................................................ $99,800,000 $88,948,000
Net income.................................................. 5,903,000 3,401,000
Earnings per share:
Basic:
Net income per share................................... $ 0.73 $ 0.44
Weighted average common and common equivalent shares
outstanding........................................... 8,043,303 7,709,134
Diluted:
Net income per share................................... $ 0.72 $ 0.43
Weighted average common and common equivalent shares
outstanding........................................... 8,226,966 7,939,050
</TABLE>
These unaudited pro forma results of operations in fiscal 1999 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, 1998 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.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Land and land improvements.................................. $ 791,568 $ 927,598
Buildings and building improvements......................... 7,123,778 6,538,230
Equipment, furniture and fixtures........................... 13,059,040 10,018,311
Leasehold improvements...................................... 4,074,950 3,133,234
----------- -----------
25,049,336 20,617,373
Less accumulated depreciation and amortization.............. (9,218,840) (6,973,137)
----------- -----------
$15,830,496 $13,644,236
=========== ===========
</TABLE>
F-13
<PAGE> 70
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1999 1998
----------- ------------
<S> <C> <C>
Bank lines of credit and term loan, $40,000,000 principal,
monthly interest payments, matures November 30, 2001. As
of March 31, 1999, $24,619,000 was available under the
lines of credit(a)....................................... $13,000,000 $ 9,000,000
9% mortgage payable to a bank, due in monthly installments
of principal and interest, secured by land and building
of one school............................................ 560,365 595,076
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..... 7,834,208 21,180,000
9% note payable to a bank, due in monthly installments of
$15,000 plus interest, paid in full in May 1998.......... -- 410,000
Various unsecured, non-interest bearing notes payable for
noncompetition agreements, payable periodically through
May 1999................................................. -- 112,500
8% to 12% capital leases, payable periodically through
September 2002; secured by equipment..................... 394,237 649,195
----------- ------------
21,788,810 31,946,771
Less current portion....................................... (2,524,252) (14,837,203)
----------- ------------
$19,264,558 $ 17,109,568
=========== ============
</TABLE>
- ---------------
(a) In November 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 capacity under its
revolving line of credit with the Bank to $40,000,000 (the "Bank Credit
Facility") which may be utilized for advances or to support letters of
credit. Interest is charged on borrowings at different floating rates above
LIBOR depending on certain financial conditions of the Company (6.47% at
March 31, 1999). 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.
Aggregate maturities of long-term debt at March 31, 1999 are as follows:
<TABLE>
<S> <C>
Fiscal year ending March 31,
2000...................................................... $ 2,524,252
2001...................................................... 1,884,217
2002...................................................... 14,833,039
2003...................................................... 1,561,357
2004...................................................... 453,535
Thereafter................................................ 532,410
-----------
$21,788,810
===========
</TABLE>
Interest paid during the years ended March 31, 1999, 1998 and 1997 was
approximately $1,499,000, $254,000 and $655,000, respectively.
F-14
<PAGE> 71
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. OTHER AMOUNTS DUE TO SELLERS
In addition to the notes payable described in Note 6, the Company owed the
former Hesser, Inc. shareholders $2,433,372 at March 31, 1998 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 owed the
former Computer Hardware Service Company, Inc. shareholders $1,084,230 at March
31, 1998 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. Such amount was paid in May 1998.
8. STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
On October 28, 1996, the Company completed its initial public offering
("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 the IPO proceeds were 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 income taxes), as a result of the write-off
of the related unamortized deferred debt issuance costs and unamortized debt
discount.
SECONDARY OFFERING
On July 2, 1998, the Company completed a secondary offering. A total of
2,000,000 shares was sold at $8.75 per share which included 126,001 shares sold
by the Company and 1,873,999 shares sold by certain selling stockholders. The
Company received none of the proceeds from the sale of shares by the selling
stockholders. In connection with the secondary public offering, the Company
granted the underwriters an option to purchase up to 300,000 additional shares
to cover over-allotments. All 300,000 of such shares were sold by the Company in
July 1998 at $8.75 per share. The net proceeds to the Company from the sale of
shares from the secondary public offering and over-allotments were approximately
$3.5 million. The Company used approximately $440,000 of such proceeds to pay a
portion of the underwriting discounts and commissions on shares of Common Stock
being sold by the selling stockholders. The remaining net proceeds to the
Company were used to repay promissory notes payable to sellers of various
schools acquired.
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.
F-15
<PAGE> 72
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 pursuant to the IPO.
COMMON STOCK
As of March 31, 1999, the Company reserved the following shares of Common
Stock for future issuance related to the following:
<TABLE>
<S> <C>
Common Stock purchase warrants.............................. 83,665
Stock Options............................................... 1,062,247
---------
1,145,912
=========
</TABLE>
COMMON STOCK PURCHASE WARRANTS
The holders of the 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 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 $281,398 was charged to accumulated
deficit during the year ended March 31, 1997.
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 on July 31, 1999 and are
outstanding as of March 31, 1999.
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
on October 28, 2001 and are outstanding as of March 31, 1999.
F-16
<PAGE> 73
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In October 1998, the Company issued to a former officer of the Company,
warrants to purchase 40,331 shares of Common Stock at $5.81 per share. These
warrants expire on October 14, 2000 and are outstanding as of March 31, 1999.
9. STOCK OPTION PLANS
The Company grants 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>
1999 1998 1997
-------------------- -------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year........................ 1,026,004 $7.77 821,499 $7.04 361,666 $ 3.13
Granted..................... 121,087 6.50 277,333 9.34 465,500 10.10
Exercised................... (64,757) 2.73 (34,662) 3.45 -- --
Canceled/forfeited.......... (124,541) 5.39 (38,166) 7.40 (5,667) 8.12
--------- --------- -------
Outstanding at end of year.... 957,793 8.26 1,026,004 7.77 821,499 7.04
========= ========= =======
Exercisable at end of year.... 418,537 7.92 431,038 6.15 313,000 5.09
========= ========= =======
Options available for future
grant....................... 604,454 -- 101,000 -- 340,167 --
========= ========= =======
</TABLE>
The following table summarizes information about employee and director
stock options outstanding and exercisable at March 31, 1999 by exercise price:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS
-------------------------- EXERCISABLE
NUMBER WEIGHTED --------------
OUTSTANDING AVERAGE NUMBER
AT REMAINING EXERCISABLE AT
EXERCISE MARCH 31, CONTRACTUAL MARCH 31,
PRICE 1999 LIFE 1999
- -------- ------------ ----------- --------------
<S> <C> <C> <C>
$ 2.40 21,667 3.30 21,667
4.00 16,667 3.00 16,667
3.60 130,839 6.70 79,336
10.00 387,700 6.63 199,800
11.50 18,500 7.80 7,400
8.50 34,333 8.90 6,867
7.06 25,000 8.30 5,000
7.63 9,000 3.50 9,000
9.88 193,000 9.00 38,800
8.25 34,000 4.50 34,000
5.81 87,087 1.00 --
------- -------
957,793 418,537
======= =======
</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
F-17
<PAGE> 74
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of Directors and to provide them with increased motivation and incentive to
exert their best efforts on behalf of the Company by increasing their personal
stake in the Company. The maximum number of options which may be granted under
the Directors' Plan is 200,000. As of March 31, 1999, 82,000 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 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 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, the Company will automatically grant
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 22, 1998, at the annual meeting of the Board of
Directors, one newly elected non-employee director was issued an option to
purchase 25,000 shares of the Company's Common Stock and each of the three
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 $8.25; such options vested immediately and
are exercisable for five years.
PRO FORMA INFORMATION
Pro forma information regarding net income and earnings per share is
required by SFAS No. 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 No. 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, 1999, 1998 and 1997, respectively: (i)
dividend yield of 0%; (ii) expected volatility of .806, .514 and .491; (iii)
risk-free interest rates of 4.55%, 6.09% and 6.18% and (iv) expected life of
5.37, 5.65 and 5.64 years. The weighted average fair value of options granted
under the Company's stock option plans was $4.29, $5.60 and $3.62 for the years
ended March 31, 1999, 1998 and 1997, respectively.
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.
F-18
<PAGE> 75
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 No. 123 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Pro forma income before extraordinary item......... $5,687,154 $3,510,440 $2,201,907
Pro forma net income............................... 5,687,154 3,510,440 1,893,224
Pro forma earnings per share:
Basic:
Income before extraordinary item.............. $ 0.70 $ 0.48 $ 0.49
Net income.................................... 0.70 0.48 0.42
Diluted:
Income before extraordinary item.............. $ 0.69 $ 0.46 $ 0.34
Net income.................................... 0.69 0.46 0.29
</TABLE>
10. INCOME TAXES
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------
1999 1998 1997
---------- ---------- -----------
<S> <C> <C> <C>
Current:
Federal......................................... $3,262,042 $1,701,104 $ 567,544
State........................................... 575,655 353,209 151,088
---------- ---------- -----------
3,837,697 2,054,313 718,632
Deferred:
Federal......................................... 278,651 453,453 (1,218,248)
State........................................... 49,174 (22,993) (345,747)
---------- ---------- -----------
327,825 430,460 (1,563,995)
---------- ---------- -----------
$4,165,522 $2,484,773 $ (845,363)
========== ========== ===========
</TABLE>
At March 31, 1997, the Company recorded 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 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Federal............................................ $3,451,904 $2,154,659 $1,027,235
State, net of federal income tax benefit........... 471,093 237,077 99,718
Permanent differences.............................. 263,975 36,006 53,554
Decrease in deferred income tax asset valuation
allowance........................................ -- -- (1,319,987)
Effect of Nebraska Acquisition filing as a
Subchapter S corporation......................... -- -- (420,420)
Effect of Nebraska Acquisition's termination of
Subchapter S corporation status.................. -- -- (285,463)
Other, net......................................... (21,450) 57,031 --
---------- ---------- ----------
$4,165,522 $2,484,773 $ (845,363)
========== ========== ==========
</TABLE>
F-19
<PAGE> 76
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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>
YEAR ENDED MARCH 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Deferred income tax assets:
Non-compete agreements and other intangibles.............. $ 755,530 $ 816,034
Property and equipment.................................... 165,798 892,942
Allowance for doubtful accounts........................... 1,617,388 902,084
Accrued expenses and other liabilities.................... 21,210 198,869
Other, net................................................ 50,000 50,000
---------- ----------
Total deferred income tax assets.................. 2,609,926 2,859,929
Deferred income tax liabilities:
Prepaid expenses.......................................... (457,113) (379,291)
---------- ----------
Net deferred income tax assets.............................. $2,152,813 $2,480,638
========== ==========
</TABLE>
At March 31, 1999 and 1998, the Company did not require a deferred income
tax asset valuation allowance. The Company made income tax payments of
approximately $2,382,000, $2,130,000 and $1,076,000 in the years ended March 31,
1999, 1998 and 1997, respectively.
11. LEASES
The Company leases office, classroom and dormitory space under various
operating lease agreements expiring through 2008. Certain leases contain renewal
options ranging from one to five years. Rent expense totaled approximately
$5,775,000, $4,396,000 and $3,650,000 for the years ended March 31, 1999, 1998
and 1997, respectively.
Approximate future minimum lease payments under noncancelable operating
leases in effect at March 31, 1999 are as follows:
<TABLE>
<S> <C>
Year ending March 31,
2000...................................................... $ 5,258,000
2001...................................................... 4,389,000
2002...................................................... 3,238,000
2003...................................................... 2,499,000
2004...................................................... 1,923,000
Thereafter................................................ 4,046,000
-----------
$21,353,000
===========
</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 contributions
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 Iowa
Acquisition were approximately $255,000, $111,000 and $133,000 for the years
ended March 31, 1999, 1998 and 1997, respectively.
F-20
<PAGE> 77
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. OTHER EXPENSES
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 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. A final settlement was
reached in August 1998 when the Company agreed to pay a total of $175,000
($100,000 was paid by the Company's insurance carrier) in settlement of all
claims including the Plaintiff's attorney's fees. All amounts, including the
Company's legal defense expenses, were paid as of March 31, 1999.
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 approximate their fair values.
Accounts and notes receivable: The carrying amounts reported on the
consolidated balance sheets for accounts and notes receivable approximate 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, 1999 and 1998, the estimated fair values
of the Company's notes payable and long-term debt approximates their carrying
values.
F-21
<PAGE> 78
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the years ended March 31, 1999, 1998, and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Numerator(1)
Net income....................................... $5,987,137 $3,852,461 $2,303,646
---------- ---------- ----------
Denominator:
Denominator for basic earnings per share-weighted
average shares................................ 8,043,303 7,382,307 4,484,492
Effect of dilutive securities:
Convertible preferred stock...................... -- -- 981,006
Options.......................................... 163,438 214,145 301,222
Warrants......................................... 20,225 15,703 680,545
---------- ---------- ----------
Dilutive potential common shares(2)................ 183,663 229,848 1,962,773
---------- ---------- ----------
Denominator for diluted earnings per share-adjusted
weighted average shares.......................... 8,226,966 7,612,155 6,447,265
========== ========== ==========
Basic earnings (loss) per share
Income before extraordinary item................. $ 0.74 $ 0.52 $ 0.58
Extraordinary item............................... -- -- (0.07)
---------- ---------- ----------
Net income....................................... $ 0.74 $ 0.52 $ 0.51
---------- ---------- ----------
Diluted earnings (loss) per share
Income before extraordinary item................. $ 0.73 $ 0.51 $ 0.41
Extraordinary item............................... -- -- (0.05)
---------- ---------- ----------
Net income....................................... $ 0.73 $ 0.51 $ 0.36
========== ========== ==========
</TABLE>
- ---------------
(1) The fiscal year 1997 numerator amount reflects 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 1997 is not considered
relevant.
(2) Warrants and stock purchase options to purchase 18,500, 665,500 and 482,167
shares of common stock at March 31, 1999, 1998 and 1997, 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.
F-22
<PAGE> 79
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for the fiscal years ended March 31, 1999 and 1998 (in thousands, except per
share data):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1999
-----------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues....................................... $18,710 $20,419 $24,878 $28,863
Income from operations............................. 480 1,049 4,621 5,207
Net income......................................... 84 423 2,492 2,988
Earnings per share data:
Basic:
Net income.................................... $ 0.01 $ 0.05 $ 0.31 $ 0.36
Diluted:
Net income.................................... 0.01 0.05 0.30 0.36
</TABLE>
<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
Income from operations............................. 265 897 2,092 2,830
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>
Because of the method used in calculating per share data, the quarterly per
share data will not necessarily add to the per share data as computed for the
year.
F-23
<PAGE> 1
EXHIBIT 10.76
REVOLVING CREDIT AGREEMENT
AMONG
NATIONSBANK, N.A. (THE SUCCESSOR TO
BANK OF AMERICA, FSB), AS AGENT,
THE LENDERS FROM TIME TO TIME PARTY HERETO, AS LENDERS
AND
QUEST EDUCATION CORPORATION
AND ALL SUBSIDIARIES OF QUEST EDUCATION CORPORATION, AS
BORROWERS
DATED: NOVEMBER 30, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. DEFINITIONS..................................................................................................1
1.1. "Advances".............................................................................1
1.2. "Commitment"...........................................................................1
1.3. "Federal Funds Rate"...................................................................1
1.4. "Letter of Credit".....................................................................2
1.5. "Letter of Credit Obligations".........................................................2
1.6. "Obligations"..........................................................................2
1.7. "Reimbursement Obligations"............................................................2
1.8. "Required Lenders".....................................................................2
1.9. "Termination Date".....................................................................2
2. THE FACILITY AMOUNT AND TERMS................................................................................2
2.1. Revolving Line of Credit Amount........................................................2
2.2. Availability Period....................................................................3
2.3. Conditions to Each Advance.............................................................3
2.4. Funding................................................................................3
2.5. Repayment Terms........................................................................4
2.6. Letters of Credit......................................................................5
3. INTEREST.....................................................................................................9
3.1. Interest Rate..........................................................................9
3.2. Optional Interest Rate.................................................................9
4. COLLATERAL..................................................................................................11
4.1. Personal Property.....................................................................11
5. DISBURSEMENTS, PAYMENTS AND COSTS...........................................................................11
5.1. Requests for Credit...................................................................11
5.2. Disbursements and Payments............................................................11
5.3. Direct Debit..........................................................................11
5.4. Banking Days..........................................................................11
5.5. Taxes.................................................................................12
5.6. Additional Costs......................................................................12
5.7. Interest Calculation..................................................................12
5.8. Default Rate..........................................................................12
5.9. Overdrafts............................................................................13
5.10. Payments in Kind......................................................................13
6. CONDITIONS..................................................................................................13
6.1. Authorizations........................................................................13
6.2. Governing Documents...................................................................13
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Defined Term Location in Text
- ------------ ----------------
<S> <C>
6.3. Security Agreements...................................................................13
6.4. Evidence of Priority..................................................................13
6.5. Insurance.............................................................................14
6.6. Legal Opinion.........................................................................14
6.7. Good Standing.........................................................................14
6.8. Payment Closing Fee...................................................................14
6.9. Payment of Expenses and Fees..........................................................14
6.10. Representations of Corporate Officers.................................................14
6.11. Other Items...........................................................................14
7. REPRESENTATIONS AND WARRANTIES..............................................................................14
7.1. Organization of Each Borrower.........................................................14
7.2. Authorization.........................................................................14
7.3. Enforceable Agreement.................................................................14
7.4. Good Standing.........................................................................14
7.5. No Conflicts..........................................................................14
7.6. Financial Information.................................................................14
7.7. Lawsuits..............................................................................15
7.8. Collateral............................................................................15
7.9. Permits. Franchises..................................................................15
7.10. Other Obligations.....................................................................15
7.11. Income Tax Returns....................................................................15
7.12. No Tax Avoidance Plan.................................................................15
7.13. No Event of Default...................................................................15
7.14. ERISA Plans...........................................................................15
7.15. Locations of Borrowers................................................................16
7.16. Subsidiaries..........................................................................16
7.17. Year 2000 Compliance..................................................................16
8. COVENANTS...................................................................................................16
8.1. Use of Proceeds.......................................................................16
8.2. Financial Information.................................................................17
8.3. Fixed Charge Coverage Ratio...........................................................18
8.4. Total Funded Debt/Adjusted Cash Flow Ratio............................................19
8.5. Senior Funded Debt/Adjusted Cash Flow Ratio...........................................19
8.6. Minimum EBITDA........................................................................19
8.7. Other Debts...........................................................................20
8.8. Other Liens...........................................................................20
8.9. Capital Expenditures..................................................................21
8.10. Dividends.............................................................................21
8.11. Loans and Investments.................................................................21
8.12. Change of Ownership...................................................................21
8.13. Notices to the Agent and Lenders......................................................21
</TABLE>
3
<PAGE> 4
<TABLE>
<CAPTION>
Defined Term Location in Text
- ------------ ----------------
<S> <C> <C>
8.14. Books and Records.....................................................................22
8.15. Audits................................................................................22
8.16. Compliance with Laws..................................................................22
8.17. Preservation of Rights................................................................22
8.18. Maintenance of Properties.............................................................22
8.19. Perfection of Liens...................................................................22
8.20. Cooperation...........................................................................22
8.21. Insurance.............................................................................23
8.22. Additional Negative Covenants.........................................................23
8.23. ERISA Plans...........................................................................24
8.24. Title IV Program Requirements.........................................................25
8.25. Subsidiaries..........................................................................25
9. HAZARDOUS WASTE INDEMNIFICATION.............................................................................25
10. DEFAULT.....................................................................................................26
10.1. Failure to Pay........................................................................26
10.2. Lien Priority.........................................................................26
10.3. False Information.....................................................................26
10.4. Bankruptcy............................................................................26
10.5. Receivers.............................................................................26
10.6. Lawsuits..............................................................................26
10.7. Judgments.............................................................................26
10.8. Government Action.....................................................................27
10.9. Material Adverse Change...............................................................27
10.10. Cross-Default.........................................................................27
10.11. Default under Related Documents.......................................................27
10.12. Other NationsBank Agreements..........................................................27
10.13. ERISA Plans...........................................................................27
10.14. Delisting.............................................................................27
10.15. Other Breach Under Agreement..........................................................27
11. THE AGENT AND THE LENDERS...................................................................................28
11.1. Appointment: Powers and Immunities....................................................28
11.2. Reliance by Agent.....................................................................29
11.3. Defaults..............................................................................29
11.4. Rights of Agent and its Affiliates as a Lender........................................29
11.5. Indemnification.......................................................................30
11.6. Payee of Note Treated as Owner........................................................30
11.7. Nonreliance on Agent and Other Lenders................................................30
11.8. Failure to Act........................................................................31
11.9. Resignation of Agent..................................................................31
11.10. Joinder of Lenders....................................................................31
</TABLE>
4
<PAGE> 5
<TABLE>
<CAPTION>
Defined Term Location in Text
- ------------ ----------------
<S> <C> <C>
11.11. Agreements Regarding Collateral.......................................................31
11.12. Agent Field Audits....................................................................32
11.13. Designation of Co-Agent...............................................................32
11.14. Settlement Procedures.................................................................33
12. ENFORCING THIS AGREEMENT; MISCELLANEOUS.....................................................................34
12.1. GAAP..................................................................................34
12.2. Georgia Law...........................................................................34
12.3. Successors and Assigns................................................................35
12.4. Arbitration...........................................................................35
12.5. Severability; Waivers.................................................................36
12.6. Reimbursement Costs...................................................................37
12.7. Administration Costs..................................................................37
12.8. Attorneys' Fees.......................................................................37
12.9. Joint and Several Liability...........................................................37
12.10. One Agreement.........................................................................38
12.11. Disposition of Schedules..............................................................38
12.12. Credit Adjustments....................................................................38
12.13. Verification of Receivables...........................................................39
12.14. Indemnification.......................................................................39
12.15. Notices...............................................................................39
12.16. Headings..............................................................................39
12.17. Counterparts..........................................................................39
12.18. Amendment and Restatement.............................................................39
12.19. Setoff: Sharing of Setoffs............................................................39
</TABLE>
5
<PAGE> 6
List of Certain Defined Terms
<TABLE>
<CAPTION>
Defined Term Location in Text
- ------------ ----------------
<S> <C>
Advances Para. 1.1
Assignment and Acceptance Para. 12.3
banking day Para. S.4
Borrower, Borrowers Page 1, First Paragraph
Closing Date Page 1, First Paragraph
Commitment, Commitments Para. 1.2
Default Para. 1O
EBITDA Para. 8.4
ERISA Para. 7.14(e)
event of default Para. 1O
Facility Para. 2.1(a)
Federal Funds Rate Para. 1.3
First Restated Loan Agreement Para. 12.18
GAAP Para. 12.1
L/C Issuer Para. 2.6
Letter of Credit Para. 1.4
Letter of Credit obligations Para. 1.S
LIBOR Banking Day Para. 3.2(a)
LIBOR Rate Para. 3.2(c)
LIBOR Rate Portion Para. 3.2
Loan Documents Para. 2.6 (h)
obligations Para. 1.6
original Loan Agreement Para. 12.18
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
Defined Term Location in Text
- ------------ ----------------
<S> <C>
PBGC Para. 7.14(e)
Plan Para. 7.14(e)
Quest Page 1, First Paragraph
Reference Rate Para. 3.1
Reimbursement obligations Para. 1.7
Required Lenders Para. 1.8
schools Para. 8.22(e)
Termination Date Para. 1.9
Test Ratio Para. 2.S(a)
Title IV Program Requirements Para. 8.24
</TABLE>
7
<PAGE> 8
REVOLVING CREDIT AGREEMENT
This Agreement, dated as of November SO, 1998 ("Closing Date"), is made
among NATIONSBANK, N.A., as successor to Bank of America, FSB ("NationsBank"),
individually and as agent for itself and the other "Lenders" (hereinafter
defined) from time to time party hereto (NationsBank, in such capacity, the
"Agent"), the other lenders from time to time party hereto (NationsBank and each
other such lender each, individually, a "Lender" and, collectively, the
"Lenders"), QUEST EDUCATION CORPORATION, formerly known as Educational Medical,
Inc., a Delaware corporation ("Quest"), and all those subsidiaries of Quest
listed on the signature pages to this Agreement (Quest and such subsidiaries
hereinafter called collectively the "Borrowers" and individually called a
"Borrower").
PREAMBLE. Quest and its subsidiaries are engaged in a common business
enterprise and, in connection therewith, have determined it to be in their
mutual economic interests to apply to Lenders on a collective basis for
extensions of credit for working capital and to finance continued expansion,
with Quest acting as agent for all Borrowers in connection with any requests
for, the receipt, disbursement, allocation and administration of, and the
repayment of, the extensions of credit to be made hereunder. Accordingly, the
Borrowers hereby covenant to and agree with the Agent and Lenders as follows:
1. DEFINITIONS
In addition to the terms which are defined elsewhere in this Agreement, the
following terms have the meanings indicated for the purposes of this Agreement:
1.1. "Advances" means advances made by Lenders to Borrowers from
time to time under the Facility.
1.2. "Commitment" means, with respect to each Lender, the amount set
forth opposite its name as its "Commitment" on its signature page hereto; and as
to any Lender which enters into an Assignment and Acceptance (whether as
transferor Lender or assignee thereunder), the amount of such Lender's
Commitment after giving effect to such Assignment and Acceptance; in each case,
as such amount may be reduced from time to time pursuant to Paragraph 2.1(c).
"Commitments" means the aggregate amount of all Commitments as in effect from
time to time. on the Closing Date the aggregate amount of the Commitments shall
be $40,000,000.
1.3. "Federal Funds Rate" means, for any day, the rate per annum
(rounded upward, if necessary, to the next higher 1/100th of 1%) equal to the
weighted average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers on such
day, as published by the Federal Reserve Bank of New York on the banking day
next succeeding such day, provided that (i) if the day for which such rate is to
be determined is not a banking day, the Federal Funds Rate for such day shall be
such rate on such transactions on the next preceding banking day as so published
on the next succeeding banking day, and (ii) if such rate is not so published
for any day, the Federal Funds Rate for such day shall be the average rate
charged to the Agent on such day on such transactions, as determined in good
faith by the Agent.
<PAGE> 9
1.4. "Letter of Credit" means any letter of credit issued by the
L/C Issuer for the account of any Borrower pursuant to Paragraph 2.6 hereof.
1.5. "Letter of Credit Obligations" means, at any particular time,
the sum of (a) the Reimbursement obligations at such time, (b) the aggregate
maximum amount available for drawing under Letters of Credit at such time and
(c) the aggregate maximum amount available for drawing under Letters of Credit
the issuance of which has been authorized by the L/C Issuer but which have not
yet been issued at such time.
1.6. "Obligations" shall mean any and all debts of each Borrower to
Agent and Lenders arising hereunder or as a result hereof, whether constituting
Advances, or arising pursuant to a Letter of Credit or otherwise, including,
without limitation, the Reimbursement obligations, together with all extensions
or renewals of any of the foregoing, in whole or in part.
1.7. "Reimbursement Obligations" means all reimbursement or
repayment obligations of Borrowers to the L/C Issuer with respect to Letters of
Credit issued pursuant hereto.
1.8. "Required Lenders" shall mean, at any time, Lenders having at
least fifty-one percent (51%) of the aggregate amount of the Commitments or, if
the Commitments eke no longer in effect, Lenders holding at least fifty-one
percent (51%) of the aggregate outstanding principal amount of the sum of the
obligations; provided, however, that such calculation shall be made without
including the Commitment of, or principal amount of obligations held by, any
Lender which is in default with respect to its obligations to the Agent, the
Borrowers or any Lender.
1.9. "Termination Date" shall mean November 30,2001; provided,
however, that the Lenders, in their sole discretion, upon the Borrowers'
request, may elect, by giving written notice to the Borrowers to such effect,
beginning on or after November 30, 1999, but not later than 120 days before any
then effective Termination Date, to extend such "Termination Date" for up to two
(2) additional periods of up to one (1) year each on such terms and conditions
(which may differ from those set forth herein) as the Lenders may offer and the
Borrowers may accept.
2. THE FACILITY AMOUNT AND TERMS
2.1. Revolving Line of Credit Amount.
(a) During the availability period described below,
Lenders will provide a revolving line of credit (the "Facility") to the
Borrowers. The amount of the Facility is equal to the aggregate amount of the
Commitments; provided, however, that no Advance will be made hereunder or Letter
of Credit issued pursuant hereto unless, after giving effect thereto, Borrowers
will be in compliance with the requirements of Paragraphs 8.4 and 8.5.
(b) The Facility is a revolving line of credit for
Advances with a within line facility for Letters of Credit as provided below.
Each Lender severally agrees to extend its pro rata share of Advances and to
purchase its pro rata share of participations in Letters of Credit based on the
proportion which each Lender's Commitment bears to the aggregate Commitments;
provided that no Lender shall be required to extend credit hereunder in an
2
<PAGE> 10
amount in excess of its Commitment. During the availability period, the
Borrowers may repay principal amounts and reborrow them.
(c) On November 30, 1999, the amount of the Commitments
shall be reduced by $5,000,000. Such reduction (i) shall be made pro rata among
Lenders based on the proportion which each Lender's Commitment bears to the
aggregate Commitments and (ii) shall be accompanied by Borrowers' payment in
full of any amount of the Advances then outstanding which, if not then paid in
full, would cause total Advances, Letters of Credit and Reimbursement
obligations then outstanding under the Facility to exceed the Commitments, after
giving effect to such reduction.
(d) Each Advance under the Facility must be for at least
$250,000 or for the amount of the remaining available line of credit, if less.
(e) The Borrowers agree not to permit the sum of the
outstanding principal amount of Advances obtained under the Facility Dab the
outstanding amounts of any Letters of Credit under Paragraph 2.6 plus all
Reimbursement obligations to exceed the lesser of (i) the amount of the
Commitments or (ii) that amount which would not result in a violation of the
provisions of Paragraphs 8.4 or 8.5 hereof, determined on a pro forma basis as
of the most recently ended fiscal quarter of Quest after giving effect to all
outstanding Advances, Letters of Credit and Reimbursement obligations. If the
Borrowers exceed these limits, the Borrowers will immediately pay the excess to
the Agent upon the Agent's or any Lender's demand. Unless and until an Event of
Default has occurred and is continuing, the Borrowers shall have the right to
direct the manner or order in which payments received from the Borrowers under
this Paragraph shall be applied to the Advances. From and after the occurrence
of an Event of Default and during its continuance, the Agent may apply payments
received from the Borrowers under this Paragraph to the obligations of the
Borrowers to the Agent and Lenders in the order and the manner as the Required
Lenders, in their discretion, may determine (but such application must be on a
pro rata basis among Lenders).
2.2. Availability Period. The Facility is available between the
date of this Agreement and the Termination Date, unless the Borrowers are in
default.
2.3. Conditions to Each Advance. Before each Advance under the
Facility, including the first, the Borrowers will deliver to the Agent (i) a
notice of borrowing, in form and detail satisfactory to the Required Lenders,
issued by Quest, as agent for and on behalf of the Borrowers, specifying the
amount of the requested Advance, the intended use of the proceeds thereof, the
requested disbursement date and the desired interest rate to be applicable,
initially, thereto; and (ii) a certificate, in form and detail satisfactory to
the Required Lenders, issued by Quest, as agent for and on behalf of the
Borrowers, setting forth calculations demonstrating the Borrowers' compliance
with the requirements of Paragraphs 8.4 and 8.S after giving effect to such
Advance.
2.4. Funding. Subject to any overriding provisions of Paragraph
11 .14, the Agent shall promptly notify each Lender of each Advance to be made
under the Facility on the date of the making thereof, and such Lender's pro rata
share thereof Not later than 2:00 p.m. (Atlanta, Georgia time) on the date of
each such Advance, each Lender shall make available to the Agent its pro rata
share of such Advance, in federal or other funds immediately available to the
3
<PAGE> 11
Agent in Atlanta, Georgia. Unless the Agent has received contrary written notice
from a Lender not later than 4:00 p.m. (Atlanta, Georgia time) on the banking
day preceding the date of any such Advance, the Agent shall be entitled to
assume that such Lender will timely make its pro rata share of such Advance
available to the Agent and, in reliance on such assumption, the Agent may (but
need not) make available such Lender's pro rata share of such Advance to
Borrower from the Agent's own funds. In such event, if Agent does not receive
such Lender's pro rata share of such Advance by 2:00 p.m. (Atlanta, Georgia
time) on the date of such Advance, the Agent shall be entitled (i) to require
Borrowers to return such share to the Agent, together with interest thereon at
the applicable rate specified in Paragraph 3.1, or (ii) to receive such share
from such Lender, together with interest thereon for each day from the date such
payment was first due until the date such amount is paid in full at the Federal
Funds Rate for the first three (3) days and at the Reference Rate thereafter.
The failure of any Lender to make available its pro rata share of any Advance
shall neither relieve nor increase the obligation of any other Lender hereunder
to make available its pro rata share of such Advance.
2.5. Repayment Terms
(a) The Borrowers will pay interest, in arrears, at the
then applicable interest rate described below on outstanding Advances under the
Facility on the first day of the calendar month following the disbursement of
any Advance under the Facility and then on a monthly basis thereafter until
payment in full of such advance. The interest rate payable on outstanding
Advances under the Facility shall be determined as follows:
<TABLE>
<CAPTION>
INTEREST RATE SHALL BE -OR- INTEREST RATE SHALL BE
IF THE TEST RATIO IS: REFERENCE RATE PLUS LIBOR RATE PLUS
--------------------- ------------------- ---------------
<S> <C> <C>
3.0:1 or greater .75% 2.375%
2.50:1 or greater, but less than 3.0:1 .50% 2.125%
2.0:1 or greater, but less than 2.50:1 .25% 1.875%
less than 2.0:1.0 0% 1.500%
</TABLE>
As used herein, (i) "Reference Rate" is defined in Paragraph 3.1, (ii) "LIBOR
Rate" is defined in Paragraph 3.2, and (iii) the "Test Ratio" shall be the Total
Funded Debt/Adjusted Cash Flow Ratio, as defined in Paragraph 8.4. The Test
Ratio shall be calculated on a quarterly basis by the Agent from the Borrowers'
quarterly or, as the case may be, annual financial statements then most recently
delivered to the Agent and Lenders pursuant to Paragraphs 8.2(a) and 8.2(b), and
the interest rate(s) described above shall be adjusted by the Agent, as
appropriate, effective as of the first day of the month following the month in
which such financial statements are delivered to the Agent and Lenders, (i) as
to all Advances then outstanding and any made on or after such date, for all
Advances which bear interest determined by reference to the Reference Rate and
(ii) as to all Advances made on or after such date (including any "rollover" of
existing LIBOR Rate portions during such period), for LIBOR Rate portions; in
each case, until the next such determination by the Agent becomes effective. If,
however, the Borrowers fail to timely deliver their quarterly or, as the case
may be, annual financial statements to the Agent and Lenders pursuant to
Paragraphs 8.2(a) or 8.2(b) for any fiscal quarter, the Agent shall use an
assumed Test Ratio of 3.0:1 to make its calculations.
4
<PAGE> 12
(b) The Borrowers agree to pay to the Agent, for the
account of Lenders, a commitment fee, determined by multiplying (i) the
difference between (A) the full amount of the Lenders' Commitments as then in
effect and (B) the amount of credit which the Borrowers actually use of the
Facility, based on the weighted average credit outstanding under the Facility
during the specified period, by (ii) the per annum commitment fee described
below, computed as follows:
<TABLE>
<CAPTION>
THE PER ANNUM
IF THE TEST RATIO IS COMMITMENT FEE SHALL BE
-------------------- -----------------------
<S> <C>
3.0:1 or greater .500%
greater than 2.5:1 but less than 3.0:1 .450%
greater than 2.0:1 but less than 2.5:1 .425%
less than 2.0:1 .375%
</TABLE>
with the Test Ratio being computed by the Agent in the same manner, and to take
effect at the same time, as is provided in subparagraph (a) above. The
calculation of credit outstanding under the Facility shall include the undrawn
amount of Letters of Credit. This commitment fee shall be due and payable
monthly in arrears on the first day of each calendar month until the expiration
of the availability period for the Facility, commencing on the first day of the
first calendar month following the date of this Agreement. The Agent shall
promptly remit such commitment fees, when paid, to the Lenders in accordance
with their pro rata shares thereof, based on the Commitments then outstanding.
(c) The Borrowers will repay in full all principal and
any unpaid interest or other charges outstanding under the Facility no later
than the Termination Date.
2.6. Letters of Credit. The Facility may also be used for financing
standby letters of credit with a maximum maturity not to extend for more than
one (1) year or, in any event, beyond the Termination Date. The standby letters
of credit will be issued by NationsBank or its designated affiliate bank
(herein, an "L/C Issuer") subject to a reimbursement obligation on the part of
the Lenders as provided below (which, in turn, will be reimbursed by the
Borrowers). The amount of such Letters of Credit outstanding at any one time
plus all outstanding Reimbursement obligations may not exceed $16,000,000.
(a) Conditions. No Letters of Credit shall be issued
except upon satisfaction in full of the following conditions:
(i) Quest, as agent for the Borrowers, shall have
delivered to the Agent at such times and in such manner as the Agent
may prescribe, the L/C Issuer's form application and agreement for
standby letters of credit and such other documents and materials as may
be required pursuant to the terms thereof, all satisfactory in form and
substance to the L/C Issuer and the Agent, and the terms of the
proposed Letter of Credit shall be satisfactory in form and substance
to the L/C Issuer and the Agent;
(ii) the unused portion of the Commitments shall not
be less than the amount of the requested Letter of Credit; and
5
<PAGE> 13
(iii) the issuance of such Letter of Credit shall not
cause a violation of the requirements of Paragraph 8.4 or 8.5 hereof.
(b) Issuance of Letters of Credit. At least three (3)
banking days before the effective date for any Letter of Credit, Quest, as agent
for the Borrowers, shall give the Agent written notice of its request for the
issuance of a Letter of Credit. Such notice shall be irrevocable and shall
specify the original face amount of the Letter of Credit requested, the
effective date (which day shall be a banking day) of issuance of such requested
Letter of Credit, the date on which such requested Letter of Credit is to
expire, the amount of then outstanding Letter of Credit obligations, the purpose
for which such Letter of Credit is to be issued, whether such Letter of Credit
may be drawn in single or partial draws and the person for whose benefit the
requested Letter of Credit is to be issued and shall contain a calculation,
demonstrating that after giving effect to such issuance Borrowers will not be in
violation of the requirements of Paragraphs 8.4 and 8.5 hereof. If the
applicable conditions set forth in this Agreement are satisfied (including,
without limitation, those conditions set forth in clause (a) above), the Agent
shall cause the L/C Issuer to issue the requested Letter of Credit. The Agent
shall give each Lender written notice, or telephonic notice confirmed promptly
thereafter in writing, of the issuance of a Letter of Credit and shall deliver
to each Lender in connection with such notice a copy of the Letter of Credit
issued by the L/C Issuer, if then requested to do so by any Lender.
(c) Reimbursement. (i) the Borrowers shall reimburse the
L/C Issuer for drawings under a Letter of Credit issued by it no later than the
earlier of (A) the time specified in the application and agreement applicable
thereto, or (B) one (1) banking day after the payment by the L/C Issuer; (ii)
any Reimbursement obligation with respect to any Letter of Credit shall bear
interest from the date of the relevant drawing under the pertinent Letter of
Credit until the date of payment in full thereof at a rate per annum equal to
the default rate specified in Paragraph 5.8 hereof; and (iii) in order to
implement the foregoing, upon the occurrence of a drawing under any Letter of
Credit, unless L/C Issuer is reimbursed in accordance with subsection (i) above,
Borrowers irrevocably authorize the Agent to treat such nonpayment as a request
for advance in the amount of such Reimbursement obligation and to make an
Advance, on Borrowers' behalf, under the Facility in such amount regardless of
whether the conditions precedent to the making of Advances thereunder otherwise
have been met. Borrowers further authorize the Agent to credit the proceeds of
such Advance so as to immediately eliminate the liability of Borrowers for such
Reimbursement obligations under such Letter of Credit.
(d) Duties of L/C Issuer. Any action taken or omitted to
be taken by L/C Issuer in connection with any Letter of Credit, if taken or
omitted in the absence of willful misconduct or gross negligence, shall not put
L/C Issuer under any resulting liability to any Lender, or assuming that L/C
Issuer has complied with the procedures specified in this Section for the
issuance of such Letter of Credit, relieve that Lender of its obligations
hereunder to L/C Issuer. In determining whether to pay under any Letter of
Credit, L/C Issuer shall have no obligation relative to the Agent or the Lenders
other than to confirm that any documents required to have been delivered under
such Letter of Credit appear to comply on their face with the requirements of
such Letter of Credit.
(e) Purchase of Participations. Immediately upon issuance
by L/C Issuer of any Letter of Credit in accordance with the procedures set
forth in this Section, without necessity of further act or deed, each Lender
shall be deemed to have irrevocably and
6
<PAGE> 14
unconditionally purchased and received from L/C Issuer, without recourse or
warranty, an undivided interest and participation, to the extent of such
Lender's pro rata share, in such Letter of Credit.
(f) Sharing of Letter of Credit Payments. In the event
that L/C Issuer makes any payment under any Letter of Credit for which the
Borrowers shall not have repaid such amount to L/C Issuer pursuant hereto or
which cannot be paid by an Advance, L/C Issuer shall notify the Agent and the
Agent shall promptly notify each Lender of such failure, and each Lender shall
promptly and unconditionally pay to L/C Issuer such Lender's pro rata share of
the amount of such payment in United States dollars and in same day funds. If
the Agent so notifies such Lender prior to 10:00 A.M. (Atlanta, Georgia time) on
any banking day, such Lender shall make available to L/C Issuer its pro rata
share of the amount of such payment on such banking day in same day funds. If
and to the extent such Lender shall not have so made its pro rata share of the
amount of such payment available to L/C Issuer, such Lender agrees to pay to L/C
Issuer forthwith on demand such amount together with interest thereon, for each
day from the date such payment was first due until the date such amount is paid
to L/C Issuer at the Federal Funds Rate for the first three (3) days and
thereafter at the Reference Rate. The failure of any Lender to make available to
L/C Issuer its pro rata share of any such payment shall neither relieve nor
increase the obligation of any other Lender hereunder to make available to L/C
Issuer its pro rata share of any payment on the date such payment is to be made.
(g) Sharing of Reimbursement Obligation Payments.
Whenever L/C Issuer receives a payment on account of a Reimbursement obligation,
including any interest thereon, as to which L/C Issuer has received any payments
from the Lenders pursuant to this Section, it shall promptly pay to each Lender
which has funded its participating interest therein, in United States dollars
and in the kind of funds so received, an amount equal to such Lender's pro rata
share thereof. Each such payment shall be made by L/C Issuer on the banking day
on which the funds are paid to such Person, if received prior to 10:00 am.
(Atlanta, Georgia time) on such banking day, and otherwise on the next
succeeding banking day.
(h) Obligations Irrevocable. The obligations of
Borrowers, initially, and, upon Borrowers' failure to do so on a timely basis,
the Lenders to make payments to L/C Issuer with respect to drawings made under a
Letter of Credit shall be irrevocable, not subject to any qualification or
exception whatsoever and shall be made in accordance with, but not subject to,
the terms and conditions of this Agreement under all circumstances, including,
without limitation, any of the following circumstances: (i) any lack of validity
or enforceability of this Agreement or any of the other documents, instruments
or agreements executed in connection herewith or pursuant hereto, (this
Agreement and all such other documents, instruments and agreements, together
with all amendments and modifications thereto, collectively, the "Loan
Documents"); (ii) the existence of any claim, set-off, defense or other right
which any Borrower may have at any time against a beneficiary named in a Letter
of Credit or any transferee of any Letter of Credit (or any Person for whom any
such transferee may be acting), L/C Issuer, any Lender or any other Person,
whether in connection with this Agreement, any Letter of Credit, the
transactions contemplated herein or any unrelated transactions; (iii) any draft,
certificate or any other document presented under the Letter of Credit proves to
be forged, fraudulent, invalid or insufficient in any respect or any statement
therein being untrue or inaccurate in any respect; (iv) the surrender or
impairment of any security for the performance or observance of any of the
7
<PAGE> 15
terms of any of the this Agreement or any other loan document; (v) payment by
the L/C Issuer under any Letter of Credit proving to be forged, fraudulent,
invalid or insufficient in any respect or any statement therein being untrue or
inaccurate in any respect; (vi) payment by the L/C Issuer under any Letter of
Credit against presentation of any draft or certificate that does not comply
with the terms of such Letter of Credit, except payment resulting from the gross
negligence or willful misconduct of the L/C Issuer; or (vii) any other
circumstances or happenings whatsoever, whether or not similar to any of the
foregoing, except circumstances or happenings resulting from the gross
negligence or willful misconduct of the L/C Issuer.
(i) Recovery or Avoidance of Payments. In the event any
payment by or on behalf of Borrowers received by the L/C Issuer with respect to
a Letter of Credit and distributed by the L/C Issuer to the Lenders on account
of their participations is thereafter set aside, avoided or recovered from the
L/C Issuer in connection with any receivership, liquidation or bankruptcy
proceeding, each Lender that received such distribution shall, upon demand by
the L/C Issuer, contribute such Lender's pro rata share of the amount set aside,
avoided or recovered together with interest at the rate required to be paid by
the L/C Issuer upon the amount required to be repaid by it.
(j) Letter of Credit Fees. Borrowers shall pay to the
Agent with respect to each Letter of Credit issued hereunder a letter of credit
fee equal to (i) one and one-half percent (1-1/2%) per annum multiplied by (ii)
the undrawn face amount of such Letter of Credit, payable monthly in arrears.
Letter of Credit Fees payable hereunder shall be computed on the basis of a year
of 36O days and paid for the actual number of days elapsed (including the first
day but excluding the last day). If there is a default under this Agreement, at
the Required Lenders' option, the amount of such fee shall be increased by 2%
per annum, effective starting on the day the Agent provides notice of the
increase to Borrowers. The Agent shall promptly remit such Letter of Credit
Fees, when paid, to the Menders in accordance with their pro rata shares
thereof, based on the Letter of Credit obligations then outstanding.
(k) Other Charges. The Borrowers shall pay to L/C Issuer,
solely for its own account, the standard charges assessed by L/C Issuer in
connection with the issuance, administration, amendment and payment or
cancellation of Letters of Credit issued hereunder.
(l) Indemnification. Borrowers, jointly and severally,
shall protect, indemnify, pay and save the L/C Issuer, the Agent and each Lender
harmless from and against any and all claims, demands, liabilities, damages,
losses, costs, charges and expenses (including reasonable attorneys' fees) which
the L/C Issuer, the Agent or any Lender may incur or be subject to as a
consequence of the issuance of any Letter of Credit for Borrowers' account other
than as a result of its gross negligence or willful misconduct, as determined by
a court of competent jurisdiction. As among Borrowers, L/C Issuer, the Agent and
the Lenders, Borrowers assume all risks of the acts and omissions of, or misuse
of the Letters of Credit issued for Borrowers' account by, the respective
beneficiaries of such Letters of Credit. In furtherance and not in limitation of
the foregoing, L/C Issuer, the Agent and the Lenders shall not be responsible
for (i) the form, validity, sufficiency, accuracy, genuineness or legal effect
of any document submitted by any party in connection with the application for
and issuance of the Letters of Credit, even if it should in fact prove to be in
any or all respects invalid, insufficient, inaccurate, fraudulent or forged,
(ii) the validity or sufficiency of any instrument transferring or assigning or
purporting to transfer or assign a Letter of Credit or the rights or benefits
8
<PAGE> 16
thereunder or proceeds thereof, in whole or in part, which may prove to be
invalid or ineffective for any reason, (iii) failure of the beneficiary of a
Letter of Credit to comply duly with conditions required in order to draw upon
such Letter of Credit, (iv) errors, omissions, interruptions or delays in
transmission or delivery of any messages, by mail, cable, telegraph, telex or
otherwise, whether or not they be in cipher, for errors in interpretation of
technical terms, (v) any loss or delay in the transmission or otherwise of any
document required in order to make a drawing under any Letter of Credit or of
the proceeds thereof, (vi) the misapplication by the beneficiary of a Letter of
Credit of the proceeds of any drawing under such Letter of Credit; and (vii) any
consequences arising from causes beyond the control of the L/C Issuer, the Agent
and the Lenders. In furtherance and extension and not in limitation of the
specific provisions hereinabove set forth, any action taken or omitted by L/C
Issuer under or in connection with the Letters of Credit or any related
certificates if taken or omitted in good faith and with reasonable care, shall
not put L/C Issuer or any Lender under any resulting liability to Borrowers or
relieve Borrowers of any of their obligations hereunder to any such Person.
3. INTEREST
3.1. Interest Rate
(a) Unless the Borrowers elect the optional interest rate
described below, the interest rate payable on Advances outstanding under the
Facility shall be based on NationsBank's Reference Rate (described below), plus
the addition of a spread, as described more particularly in Paragraph 2.5(a).
(b) The "Reference Rate" is the rate of interest publicly
announced from time to time by NationsBank in Charlotte, North Carolina, as its
Reference Rate. The Reference Rate is set by NationsBank based on various
factors, including its costs and desired return, general economic conditions and
other factors, and is used as a reference point for pricing some loans.
NationsBank may price loans to its customers at, above, or below the Reference
Rate. Any change in the Reference Rate shall take effect at the opening of
business on the day specified in the public announcement of a change in
NationsBank's Reference Rate.
3.2. Optional Interest Rate. Instead of an interest rate based on the
Reference Rate, the Borrowers may elect to have all or portions of their
outstanding Advances (herein called a "LIBOR Rate Portion") bear interest based
on the "LIBOR Rate" (described below), plus the addition of a spread, as
described more particularly in Paragraph 2.5(a). Designation of a LIBOR Rate
Portion is subject to the following requirements:
(a) The interest period during which the LIBOR Rate will
be in effect will be one, two, three or six months. The first day of the
interest period must be a day other than a Saturday or a Sunday on which
NationsBank is open for business in North Carolina and Georgia and that is also
a day for trading by and between banks in dollar deposits in the applicable
interbank LIBOR market (a "LIBOR Banking Day"). The last day of the interest
period and the actual number of days during the interest period will be
determined by the Agent using the practices of the London interbank market. No
interest period may extend beyond the Termination Date, however.
9
<PAGE> 17
(b) Each LIBOR Rate Portion will be for an amount not
less than $500,000, and there shall be no more than four (4) LIBOR Rate
Portions, in total.
(c) "LIBOR Rate" means for any interest period, the rate
per annum (rounded upwards to the nearest 1/16th of one percentage point, if
necessary) equal to the quotient obtained by dividing (i) the offered rate for
United States dollar deposits for a period comparable to such interest period
appearing on the Reuters Screen LIBO Page (or as quoted or published by such
other recognized independent quote service as may be selected by Agent from time
to time) as of 11:00 a.m., London time, on the day that is two (2) LIBOR Banking
Days prior to the beginning of such interest period (but if at least two such
rates appear on such screen or are so quoted at such time, the offered rate for
such interest period shall be the arithmetic mean of such rates) by (ii) a
percentage equal to one (1) minus the then average stated maximum amount (stated
as a decimal) of all reserve requirements applicable to any member of the
Federal Reserve System in respect of Eurocurrency liabilities as defined in
Regulation D of the Board of Governors of the Federal Reserve System (or any
successor categories for such liabilities under such Regulation D).
(d) The Borrowers shall irrevocably request a LIBOR Rate
Portion no later than 9:00 a.m. Atlanta time on the LIBOR Banking Day preceding
the day on which the London Inter-Bank offered Rate will be set, as specified
above; that is, three (3) LIBOR Banking Days before the date on which the
requested advance is to be made.
(e) The Borrowers may not elect a LIBOR Rate with respect
to any principal amount which is scheduled to be repaid before the last day of
the applicable interest period.
(f) Any portion of an Advance already bearing interest
at the LIBOR Rate will not be converted to a different rate during its interest
period.
(g) Each prepayment of a LIBOR Rate Portion, whether
voluntary, by reason of acceleration or otherwise, will be accompanied by the
amount of accrued interest on the amount prepaid and by a prepayment fee (to be
paid to the Agent for disbursement to Lenders on a pro rata basis), which shall
be equal to the amount (if any) by which:
(i) the additional interest which would have been
payable at the LIBOR Rate, without the addition of any spread; he,
add-on, during the Reinvestment Period (as defined below) on the amount
prepaid had it not been prepaid, exceeds
(ii) the interest which would have been recoverable
by the Lenders by relending the amount prepaid at the Reinvestment
Rate, for a period starting on the date on which it was prepaid and
ending on the last day of the interest period for such portion (or the
scheduled payment date for the amount prepaid, if earlier) (the
"Reinvestment Period"). The "Reinvestment Rate" shall be the LIBOR
Rate, without the addition of any spread, determined as of the date of
the prepayment, for the entire Reinvestment Period.
(h) The Agent will not accept an election for a LIBOR
Rate Portion if any of the following described events has occurred and is
continuing:
10
<PAGE> 18
(i) Dollar deposits in the principal amount, and
for periods equal to the interest period, of a LIBOR Rate Portion are
not available in the London inter-bank market;
(ii) the LIBOR Rate does not accurately reflect the
cost of a LIBOR Rate Portion; or
(iii) the Borrowers are in default.
4. COLLATERAL
4.1. Personal Property. The Borrowers' obligations to the Agent and
Lenders under this Agreement will be secured by security interest in favor of
the Agent, for its benefit and the ratable benefit of Lenders, in all personal
property which the Borrowers now own or will own in the future and, at the
Required Lenders' or the Agent's option, all or portions of any real property
(or interests in real property) owned or acquired by the Borrowers from time to
time. Collateral shall specifically include, but not be limited to, all accounts
receivables and general intangibles of each Borrower, all equipment of each
Borrower and the capital stock of each Borrower (other than the capital stock of
Quest, and except for any capital stock which, now or hereafter, is encumbered
in accordance with Paragraph 8.8(e)).
5. DISBURSEMENTS, PAYMENTS AND COSTS
5.1. Requests for Credit. Each request for an extension of credit will
be made in writing in a manner acceptable to the Agent, or by another means
acceptable to the Agent, to be issued by Quest, as agent for and on behalf of
all the Borrowers.
5.2. Disbursements and Payments. Each disbursement by the Agent on
behalf of Lenders and each payment by the Borrowers will be: (a) made at the
Agent's branch (or other location) selected by the Agent from time to time; (b)
made for the account of the Agent's branch selected by the Agent from time to
time; (c) made in immediately available funds, or such other type of funds
selected by the Agent; and (d) evidenced by records kept by the Agent. In
addition, the Agent may, at its discretion, require the Borrowers to sign one or
more promissory notes to evidence the debt arising from such disbursements.
5.3. Direct Debit. The Borrowers agree that after their default in the
payment of any such obligation, the Agent may create Advances under the Facility
to pay interest, principal payments, and any fees that are due under this
Agreement. The Agent will create such Advances on the dates the payments become
due. If a due date does not fall on a banking day, the Agent will create the
Advance on the first banking day following the due date. If the creation of an
Advance under the Facility causes the total amount of credit outstanding under
the Facility to exceed the limitations set forth in this Agreement, the
Borrowers will immediately pay the excess to the Agent, for application to the
outstanding Advances of Lenders on a pro rata basis, upon the Agent's demand.
The foregoing shall not constitute a waiver by the Agent or Lenders of any such
default.
5.4. Banking Days. Unless otherwise provided in this Agreement, a
"banking day" is a day other than a Saturday or a Sunday on which NationsBank is
open for business in the
11
<PAGE> 19
States of North Carolina and Georgia. All payments and disbursements which would
be due on a day which is not a banking day will be due on the next banking day.
All payments received on a day which is not a banking day will be applied to the
credit on the next banking day.
5.5. Taxes.
(a) If any payments to the Agent, for the account of
Lenders, under this Agreement are made from outside the United States, the
Borrowers will not deduct any foreign taxes from any payments it makes to the
Agent. If any such taxes are imposed on any payments made by the Borrowers
(including payments under this paragraph), the Borrowers will pay the taxes and
will also pay to the Agent, for the account of the applicable Lender, at the
time interest is paid, any additional amount as to which any Lender specifies to
Quest, as agent for the Borrowers, in writing (with a copy to the Agent) as
necessary to preserve the after-tax yield such Lender would have received if
such taxes had not been imposed. The Borrowers will concern that they have paid
any such taxes by giving the Agent official tax receipts (or notarized copies)
within 30 days after the due date.
(b) Payments made by the Borrowers to the Agent for the
account of Lenders will be made without deduction of United States withholding
or similar taxes. If the Borrowers are required to pay U.S. withholding taxes,
the Borrowers will pay such taxes in addition to the amounts due to the Lenders
under this Agreement. If the Borrowers fail to make such tax payments when due,
each of the Borrowers indemnifies the Agent and each Lender against any
liability for such taxes, as well as for any related interest, expenses,
additions to tax, or penalties asserted against or suffered by the Agent or any
Lender with respect to such taxes.
5.6. Additional Costs. The Borrowers will pay each Lender, upon
written demand by such Lender to Quest, as agent for the Borrowers (with a copy
to the Agent), for such Lender's costs or losses arising from any statute or
regulation, or any request or requirement of a regulatory agency which is
applicable to such Lender. The costs and losses will be allocated to the
Advances of such Lender in a manner determined by such Lender, using any
reasonable method. The costs include the following: (a) any reserve or deposit
requirements; and (b) any capital requirements relating to a Lender's assets and
commitments for credit.
5.7. Interest Calculation. Except as otherwise stated in this
Agreement, all interest and fees, if any, will be computed on the basis of a
36O-day year and the actual number of days elapsed. This results in more
interest or a higher fee than if a 365-day year is used.
5.8. Default Rate. Upon the occurrence and during the continuation
of any default under this Agreement, principal amounts outstanding under this
Agreement will at the option of the Required Lenders bear interest at a rate
which is two percent (2%) per annum higher than the rate of interest otherwise
provided under this Agreement. This will not constitute a waiver of any default.
Installments of principal which are not paid when due under this Agreement shall
continue to bear interest until paid. Any interest, fees or costs which are not
paid when due shall bear interest at the Reference Rate plus two percent (2%)
per annum. This may result in compounding of interest.
12
<PAGE> 20
5.9. Overdrafts. At the Agent's sole option in each instance, the
Agent may do one of the following:
(a) The Agent may cause Advances to be made under this
Agreement to prevent or cover an overdraft on any account of the Borrowers with
NationsBank. Each such Advance will accrue interest from the date of the Advance
or the date on which the account is overdrawn, whichever occurs first, at the
Reference Rate plus two percent (2%) per annum. Each such Advance shall be
deemed to be made by all Menders on a pro rata basis.
(b) The Agent may reduce the amount of credit otherwise
available under this Agreement by the amount of any overdraft on any account of
the Borrowers with NationsBank.
This paragraph shall not be deemed to authorize the Borrowers to create
overdrafts on any of the Borrowers' accounts with NationsBank.
5.10. Payments in Kind. If the Agent or the Required Lenders require
delivery in kind of the proceeds of collection of any Borrower's accounts
receivable, such proceeds shall be credited first to accrued interest, then to
fees, then to principal due and, then to any other obligations then owing (on a
pro rata basis, as among the Lenders). Any remaining funds shall be applied to
the further reduction of principal. Notwithstanding the foregoing, upon the
occurrence of a default, or event which with notice or the passage of time would
constitute a default, such amounts shall be credited to the obligations in such
order as Required Lenders, in their sole discretion, may elect. All such credits
will be conditioned on collection and any returned items will be charged to
Borrowers.
6. CONDITIONS
The Agent must receive the following items, in form and content acceptable to
the Lenders, before the Lenders are required to extend any credit to the
Borrowers under this Agreement:
6.1. Authorizations. Evidence that the execution, delivery and
performance by the Borrowers of this Agreement and any instrument or agreement
required under this Agreement have been duly authorized.
6.2. Governing Documents. A copy of each Borrower's articles of
incorporation and bylaws.
6.3. Security Agreements. Signed original security agreements (or
amendments to existing security agreements made by the Borrowers in favor of
NationsBank pursuant to the original Loan Agreement and the First Restated Loan
Agreement), assignments, financing statements and fixture filings (together with
collateral in which the Lenders require a possessory security interest), which
the Lenders may require from any Borrower.
6.4. Evidence of Priority. Evidence that security interests and
liens in favor of the Agent are valid, enforceable, and prior to all others'
rights and interests, except as provided in Paragraph 8.8.
13
<PAGE> 21
6.5. Insurance. Evidence of insurance coverage, as required in
Paragraph 8.21.
6.6. Legal Opinion. A written opinion from the Borrowers' legal
counsel, covering such matters as the Lenders may require. The legal counsel and
the terms of the opinion must be acceptable to the Lenders.
6.7. Good Standing. Certificates of good standing for each Borrower
from its state of formation and from any other state in which each Borrower is
required to qualify to conduct its business.
6.8. Payment Closing Fee. Payment to the Lenders upon execution
of this Agreement of a non-refundable closing fee in the amount of $15,000.
6.9. Payment of Expenses and Fees. Payment of all accrued and
unpaid expenses incurred by the Agent as required by Paragraph 12.6.
6.10. Representations of Corporate Officers. A completed original of
the NationsBank's form of Representations and Warranties of Corporate of fleers
executed by the principal officers of each Borrower.
6.11. Other Items. Any other items that the Agent or Lenders
reasonably require.
7. REPRESENTATIONS AND WARRANTIES
When the Borrowers sign this Agreement, and until the Facility is terminated the
obligations are repaid in full, the Borrowers make the following representations
and warranties. Each request for an extension of credit (including any Letter of
Credit) constitutes a renewed representation:
7.1. Organization of Each Borrower. Each Borrower is a corporation
duly formed and existing under the laws of the state where organized.
7.2. Authorization. This Agreement, and any instrument or agreement
required hereunder, are within the Borrowers' powers, have been duly authorized,
and do not conflict with any of their organizational papers.
7.3. Enforceable Agreement. This Agreement is a legal, valid and
binding agreement of the Borrowers, enforceable against the Borrowers in
accordance with its terms, and any instrument or agreement required hereunder,
when executed and delivered, will be similarly legal, valid, binding and
enforceable.
7.4. Good Standing. In each state in which a Borrower does
business, it is properly licensed, in good standing, and, where required. in
compliance with fictitious name statutes.
7.5. No Conflicts. This Agreement does not conflict with any law,
agreement, or obligation by which any Borrower is bound.
7.6. Financial Information. All financial and other information
that has been or will be supplied to the Agent and Lenders, including the
Borrowers' financial statements as of and for
14
<PAGE> 22
the most recently completed fiscal quarter of the Borrowers for which financial
statements are available, is:
(a) sufficiently complete to give the Agent and Lenders
accurate knowledge of the Borrowers' financial condition.
(b) in compliance with all government regulations that
apply.
Since the date of the financial statements specified above, there has been no
material adverse change in the business condition (financial or otherwise),
operations, properties or prospects of the Borrowers.
7.7. Lawsuits. There is no lawsuit, tax claim or other dispute
pending or threatened against any Borrower which, if lost, would impair such
Borrower's financial condition or ability to repay the Advances made pursuant
hereto, except as have been disclosed in writing to the Agent and Lenders.
7.8. Collateral. All collateral required in this Agreement is owned
by the grantor of the security interest free of any title defects or any liens
or interests of others, except for those title defects, liens or interests of
others, as applicable thereto, specified in Paragraph 8.8.
7.9. Permits. Franchises. The Borrowers possess all permits,
memberships, franchises, contracts and licenses required and all trademark
rights, trade name rights, patent rights and fictitious name rights necessary to
enable them to conduct the business in which they are now engaged.
7.10. Other Obligations. The Borrowers are not in default on any
obligation for borrowed money, any purchase money obligation or any other
material lease, commitment, contract, instrument or obligation.
7.11. Income Tax Returns. The Borrowers have no knowledge of any
pending assessments or adjustments of their income tax liabilities for any year.
7.12. No Tax Avoidance Plan. The Borrowers' obtaining of credit from
the Lenders under this Agreement does not have as a principal purpose the
avoidance of U.S. withholding taxes.
7.13. No Event of Default. There is no event which is, or with
notice or lapse of time or both would be, a default under this Agreement.
7.14. ERISA Plans.
(a) The Borrowers have fulfilled their obligations, if
any, under the minimum funding standards of ERISA and the Code with respect to
each Plan and are in compliance in all material respects with the presently
applicable provisions of ERISA and the Code, and have not incurred any liability
with respect to any Plan under Title IV of ERISA.
(b) No reportable event has occurred under Section 4043(b)
of ERISA for which the PBGC requires 30 day notice.
15
<PAGE> 23
(c) No action by the Borrowers to terminate or withdraw
from any Plan has been taken and no notice of intent to terminate a Plan has
been filed under Section 4041 of ERISA.
(d) No proceeding has been commenced with respect to a
Plan under Section 4042 of ERISA, and no event has occurred or condition exists
which might constitute grounds for the commencement of such a proceeding.
(e) The following terms have the meanings indicated for
purposes of this Agreement:
(i) "Code" means the Internal Revenue Code of 1986,
as amended from time to time.
(ii) "ERISA" means the Employee Retirement Income
Security Act of 1974, as amended from time to time.
(iii) "PBGC" means the Pension Benefit Guaranty
Corporation established pursuant to Subtitle A of Title IV of ERISA.
(iv) "Plan" means any employee pension benefit plan
maintained or contributed to by the Borrowers and insured by the
Pension Benefit Guaranty Corporation under Title IV of ERISA.
7.15. Locations of Borrowers. Each Borrower's place of business (or,
if such Borrower has more than one place of business, its chief executive
office) is located at the address listed under such Borrower's signature on this
Agreement.
7.16. Subsidiaries. No Borrower has any subsidiaries, except as
disclosed on Schedule 7.16 attached hereto. All subsidiaries of Quest are
Borrowers under this Agreement, other than Iowa College Acquisition Corp. which
will be joined as a Borrower within ten (10) days after the Closing Date in
accordance with the requirements of Paragraph 8.25.
7.17. Year 2000 Compliance. The Borrowers have conducted a
comprehensive review and assessment of their computer applications and made
inquiry of the Borrowers' key suppliers, vendors and customers as they have
determined to be appropriate with respect to the "year 2000 problem" (that is,
the risk that computer applications may not be able to properly perform
date-sensitive functions after December 31, 1999) and, based on that review and
inquiry, the Borrowers do not believe the year 2000 problem will result in a
material adverse change in their business condition (financial or otherwise),
operations, properties or prospects, or ability to repay the credit.
8. COVENANTS
The Borrowers agree, so long as the Facility is available under this Agreement
and until the obligations are repaid in full:
8.1. Use of Proceeds. To use the proceeds of the initial Advance
under the Facility to repay all amounts outstanding under the "Facilities" (as
that term is defined in the Exiting Loan
16
<PAGE> 24
Agreement) and to use the proceeds of all subsequent Advances only for working
capital, general operating needs and permitted acquisitions.
8.2. Financial Information. To provide the following financial
information and statements in form and content acceptable to the Agent and
Lenders, and such additional information as requested by the Agent and Lenders
from time to time:
(a) Within 120 days following the end of Quest's fiscal
year (1) consolidated financial statements meeting the requirements of
regulation S-X ("Regulation S-X") promulgated by the Securities Exchange
Commission ("SEC") for financial statements to be included in Quest's Annual
Report on Form 10-K to be filed with the SEC pursuant to the provisions of the
Securities Exchange Act of 1934 (the "34 Act") audited (with an unqualified
opinion) by a firm of certified public accountants acceptable to the Required
Lenders; (2) unaudited annual consolidating statements of operations; and (3)
unaudited balance sheets and statements of operations for the individual schools
operated by Quest, likewise accompanied by the unqualified opinion of such
certified public accountants.
(b) Within 45 days of Quest's first, second and third
fiscal quarter (i) unaudited consolidated financial statements meeting the
requirements of regulation S-X for financial statements to be included in
Quest's Quarterly Report on Form 10-Q to be filed with the SEC pursuant to the
provisions of the "34 Act," (ii) unaudited quarterly consolidating statements of
operations for the applicable quarter, and (iii) unaudited statements of
operations for the individual schools operated by Quest.
(c) Within 30 days of the period's end, Quest's monthly
(i) unaudited consolidated statements of operations for the applicable period,
(ii) unaudited monthly consolidating statements of operations for the applicable
period, and (iii) unaudited statements of operations for the individual schools
operated by Quest for the applicable period.
(d) Copies of Quest's Form 10-K Annual Report and Form
10-Q Quarterly Report within 5 days after the date of filing with the Securities
and Exchange Commission, copies of Quest's Form 8-K Current Report within 1
business day after the date of its filing with the Securities and Exchange
Commission and copies of any news releases within one (1) business day after
their publication.
(e) Within the period(s) provided in (a) and (b) above, a
compliance certificate of the Borrowers signed by an authorized financial
officer of Quest, as agent for the Borrowers, setting forth (i) the information
and computations (in sufficient detail) to establish that the Borrowers are in
compliance with all financial covenants contained herein at the end of the
period covered by the financial statements then being furnished and (ii) whether
there existed as of the date of such financial statements and whether there
exists as of the date of the certificate, any default under this Agreement and,
if any such default exists, specifying the nature thereof and the action the
Borrowers are taking and propose to take with respect thereto.
(f) A certificate, signed by Quest, as agent for the
Borrowers, setting forth the calculation of Borrowers' compliance with the
requirements of Paragraphs 8.4 and 8.5, after giving effect to all outstanding
Advances, Letters of Credit and Reimbursement obligations, as
17
<PAGE> 25
of the last day of each fiscal month as to which average daily Advance Letters
of Credit and Reimbursement obligations under the Facility equaled or exceeded
$15,000,000, within 30 days after each month end, and as of the last day of each
fiscal quarter, within 45 days after each quarter end.
(g) Statements showing an aging and reconciliation of the
Borrowers' receivables upon the Agent's or any Lender's request.
(h) A statement showing an aging of accounts payable of
the Borrowers upon the Agent's or any Lender's request.
(i) A listing of the names and addresses of all debtors
obligated upon the Borrowers' accounts receivable upon the Agent's or any
Lender's request.
(j) Promptly upon the Agent's or any Lender's request,
such other statements, lists of property and accounts, budgets, forecasts,
reports or information as to the Borrowers, any school, or group of schools, and
as to each guarantor of the Borrowers' obligations to the Lenders as the Agent
or any Lender may request from time to time.
(k) a report of continuing compliance and eligibility in
respect of all Title IV Program Requirements within 120 days after each fiscal
year end of Quest, such report to demonstrate, among other things, each school's
continuing maintenance of prescribed financial responsibility standards which
are part of the Title IV Program Requirements, to include calculations
demonstrating maintenance of at least the following: (i) a 1:1 "acid test;" (ii)
a positive tangible net worth; and (iii) net operating results (two years) which
do not show an aggregate net loss of 10% of tangible net worth.
8.3. Fixed Charge Coverage Ratio. To maintain on a consolidated
basis a Fixed Charge Coverage Ratio of at least the ratio set forth below for
each fiscal quarter end occurring within each "Applicable Period" set forth
below:
<TABLE>
<CAPTION>
APPLICABLE PERIOD RATIO
----------------- -----
<S> <C>
Fiscal year ending March 31, 1999 1.10:1.0
Fiscal year ending March 31, 2000 1.15:1.0
Fiscal year ending March 31, 2001 and 1.20:1.0
thereafter
</TABLE>
"Fixed Charge Coverage Ratio" means the ratio of (1 ) Adjusted EBIRTDA to (2)
the sum of interest expense, lease expense and rent expense plus scheduled debt
repayments capital expenditures of Quest and its subsidiaries (excluding
therefrom any payment made in respect of permitted school acquisitions), on a
consolidated basis, in the preceding four fiscal quarters. "Adjusted EBIRTDA"
means the sum of net income after taxes (considered without regard to any
extraordinary items of gain or loss unless otherwise approved by the Required
Lenders after consultation with Quest), plus interest expense, lease expense and
rent expense, plus tax expense, plus depreciation and amortization expense, on a
consolidated basis. This ratio will be calculated at the end of each fiscal
quarter of Quest, using the results of that quarter and each of the three
immediately preceding quarters.
18
<PAGE> 26
8.4. Total Funded Debt/Adjusted Cash Flow Ratio. To maintain on a
consolidated basis a Total Funded Debt/Adjusted Cash Flow Ratio of not more than
3.25:1.0 during the fiscal year of Quest and its consolidated subsidiaries
ending March 31, 1999 and 3.00:1.0 during each fiscal year of Quest and its
consolidated subsidiaries ending thereafter.
"Total Funded Debt/Adjusted Cash Flow Ratio" means the ratio of Total Funded
Debt to Adjusted Cash Flow. "Total Funded Debt" means purchase money debt
(including, without limitation, any such debts to sellers of schools, but
excluding trade payables) and indebtedness for money borrowed and guarantees of
such debts, including, without limitation, any debts represented by notes
payable, bonds, debentures, capitalized lease Obligations and letters of credit
and any subordinated debt, of Quest and its subsidiaries, on a consolidated
basis, less cash on hand of Borrowers in excess of $2,500,000. "Adjusted Cash
Flow" means the sum of (a) "EBITDA" (as defined below) of Quest and its
consolidated subsidiaries less dividends, withdrawals, loans, advances, and
other distributions to any stockholders, of Quest and its subsidiaries on a
consolidated basis and (b) 75% of EBITDA for all schools acquired by Quest
during the measurement period (to the extent that the operating results of such
schools would not otherwise be included in the calculation set forth in the
preceding clause (a)). For purposes hereof "EBITDA" for any entity shall mean
net income after taxes of such entity (considered without regard to any
extraordinary items of gain or loss unless otherwise approved by the Required
Lenders after consultation with Quest), and, in the case of Quest, its
consolidated subsidiaries, after adjustment to reflect the following, as
applicable: plus in the case of any newly-acquired school, any non-recurring
charges or expenses; plus interest expense; plus tax expense; depreciation and
amortization expense, each for the same said entities and period. This ratio
will be calculated (a) at the end of each fiscal quarter of Quest, using the
results of that quarter and each of the three immediately preceding quarters and
(b) prior to the making of any Advance or issuance of any Letter of Credit under
the Facility, on a pro forma basis, as of the most recently ended fiscal quarter
of Quest, after giving effect to such Advance or Letter of Credit.
8.5. Senior Funded Debt/Adjusted Cash Flow Ratio. To maintain a
Senior Funded Debt/Adjusted Cash Flow Ratio of not more than 2.75:1 at all
times.
"Senior Funded Debt/Adjusted Cash Flow Ratio" means the ratio of "Senior Funded
Debt" to "Adjusted Cash Flow." Senior Funded Debt is equal to Total Funded Debt
(as defined above) less any such debt which has been subordinated, in a form,
manner and substance acceptable to the Required Lenders, to all of the
obligations, and less cash on hand of Borrowers in excess of $2,500,000.
"Adjusted Cash Flow" has the meaning described in Paragraph 8.4 above. This
ratio will be calculated (a) at the end of each fiscal quarter, using the
results of that quarter and each of the three immediately preceding quarters and
(b) prior to the making of any Advance or the issuance of any Letter of Credit
under the Facility, on a pro forma basis, as of the most recently ended fiscal
quarter of Quest, after giving effect to such Advance or Letter of Credit.
8.6. Minimum EBITDA. To achieve EBITDA (as defined in Paragraph 8.4
above) of at least $3,000,000 for its fiscal quarters ending on March 31 and
December 31 in each fiscal year and $1,000,000 for its fiscal quarters ending on
June 30 and September 30 in each fiscal year.
19
<PAGE> 27
8.7. Other Debts. Not to have outstanding or incur any direct or
contingent inabilities or lease obligations (other than those to the Agent, the
Lenders or any L/C Issuer arising pursuant hereto), or become liable for the
liabilities of others (other than those to the Agent, the Lenders or any L/C
Issuer arising pursuant hereto) without the Required Lenders' written consent.
This does not prohibit:
(a) Acquiring goods, supplies, or merchandise on normal
trade credit.
(b) Endorsing negotiable instruments received in the usual
course of business.
(c) obtaining surety bonds in the usual course of
business.
(d) Liabilities in existence on the date of this Agreement
disclosed in the Borrowers' financial statements described in Paragraph 7.6.
(e) Additional debts and lease obligations for the
acquisition of fixed or capital assets, to the extent permitted elsewhere in
this Agreement.
(f) unsecured (except for permitted liens, as described
below) debt to sellers of schools provided that (i) such indebtedness is on
terms and conditions satisfactory to the Required Lenders and (ii) except to the
extent that such debt has been subordinated, in a form, manner and substance
acceptable to the Required Lenders, to all of the obligations, the maximum
amount of such indebtedness does not exceed $ 10,000,000.
(g) Additional debts and lease obligations incurred for
business purposes not otherwise described in, and permitted by, subparagraphs
(a) through (g) above, which, in aggregate amount, do not exceed a total
principal amount of $2,000,000 outstanding at any one time.
8.8. Other Liens. Not to create, assume, or allow any security
interest or lien (including judicial liens) on property the Borrowers now or
later own, except:
(a) Deeds of trust and security agreements in favor of the
Agent, for its benefit and the ratable benefit of Lenders, arising pursuant
hereto.
(b) Liens for taxes not yet due.
(c) Liens outstanding on the date of this Agreement and
disclosed in writing to the Lenders on Schedule 8.8 attached hereto.
(d) Additional purchase money security interests in
personal or real property acquired after the date of this Agreement, if the
total principal amount of all debts secured by such liens does not exceed
$2,500,000 at any one time.
(e) Pledges of a school's capital stock given to support
the payment of permitted purchase money debt to the seller of a school pursuant
to an acquisition permitted in Paragraph 8.22(e).
20
<PAGE> 28
(f) Liens which the DOE may claim in respect of certain
deposit accounts which the schools may be required to maintain for the receipt
of funds under Title IV Programs as part of the Title IV Program Requirements.
8.9. Capital Expenditures. Not to spend more than the following
amounts in any specified fiscal year to acquire fixed or capital assets (except
any made for permitted school acquisitions under Paragraph 8.22(e)):
<TABLE>
<CAPTION>
Fiscal Year
Ending Amount
------ ------
<S> <C>
March 31, 1999 $4,000,000
March 31, 2000 $5,000,000
March 31, 2001 $6,000,000
</TABLE>
8.10. Dividends. Not to declare or pay any dividends on any of its
shares except dividends payable to Quest by its subsidiaries and dividends
payable in capital stock of a Borrower; and not to purchase, redeem or otherwise
acquire for value any of its shares, or create any sinking fund in relation
thereto.
8.11. Loans and Investments. Not to make any loans or other
extensions of credit to, or make any investments in, or make any capital
contributions or other transfers of assets to, any individual or entity, except
for:
(a) extensions of credit in the nature of accounts
receivable or notes receivable arising from the sale or lease of goods or
services in the ordinary course of business.
(b) investments in any of the following: (i) marketable,
direct obligations of the United States of America and its agencies maturing
within three hundred sixty-five (36S) days of the date of purchase, (ii)
commercial paper issued by corporations maturing 18O days from the date of
original issue which is rated "P-1" or better by Moody's or "A-1 " or better by
S&P, (iii) certificates of deposit maturing within 1 year of the date of
purchase issued by a United States national or state bank having deposits
totaling more than $250,000,000, and whose short-term debt is rated "P-1" or
better by Moody's or "A-1" or better by S&P, and (iv) investments made with, or
through, any Lender.
(c) extensions of credit to and investments in other
Borrowers.
(d) acquisitions of schools permitted under Paragraph
8.22(e).
8.12. Change of Ownership. Not to cause, permit, or suffer any
change, direct or indirect, in (i) the capital ownership by Quest of its
subsidiaries; or (ii) the capital ownership of Quest, to the extent that a
report on Form 8-K is required to be filed with the Securities and Exchange
Commission disclosing a change in control.
8.13. Notices to the Agent and Lenders. To promptly notify the Agent
and Lenders in writing of:
21
<PAGE> 29
(a) any lawsuit claiming damages over $100,000 against a
Borrower.
(b) any dispute between a Borrower and any government
authority which the Borrower determines, if resolved adversely to such Borrower,
would materially interfere with the conduct of such Borrower's business as then
being conducted by it.
(c) any failure to comply with this Agreement.
(d) any material adverse change in a Borrower's (or any
guarantor's) business, condition (financial or otherwise), operations,
properties or prospects, or ability to repay the credit.
(e) any change in a Borrower's name, legal structure,
place of business, or chief executive of rice if such Borrower has more than one
place of business.
(f) any default or event of default under Paragraph 10.
8.14. Books and Records. To maintain adequate books and records.
8.15. Audits. To allow the Agent and each Lender and their
respective agents to inspect Borrowers' properties and examine, audit and make
copies of books and records at any reasonable time. If any of the Borrowers'
properties, books or records are in the possession of a third party, the
Borrowers authorize that third party to permit the Agent and each Lender and
their respective agents to have access to perform inspections or audits and to
respond to the Agent's or any Lender's requests for information concerning such
properties, books and records.
8.16. Compliance with Laws. To comply with the laws (including any
fictitious name statute), regulations, and orders of any government body with
authority over each Borrower's business (excepting therefrom, however, instances
of incidental noncompliance occurring from time to time in the ordinary course
of a Borrower's business without actual knowledge of a Borrower, which the
Required Lenders determine are immaterial to the operation of its business and
are capable of being cured without any significant disruption to such business).
The foregoing shall include, specifically, but without limitation, compliance
with all Title IV Program Requirements, as prescribed with more particularity in
Paragraph 8.24.
8.17. Preservation of Rights. To maintain and preserve all rights,
privileges, and franchises the Borrowers now have.
8.18. Maintenance of Properties. To make any repairs, renewals, or
replacements to keep the Borrowers' properties in good working condition.
8.19. Perfection of Liens. To help the Agent perfect and protect its
security interests and liens, and reimburse it for related costs it incurs to
protect its security interests and liens.
8.20. Cooperation. To take any action reasonably requested by the
Agent or Lenders to carry out the intent of this Agreement.
22
<PAGE> 30
8.21. Insurance.
(a) Insurance Covering Collateral. To maintain all risk
property damage insurance policies covering the tangible property comprising the
collateral. Each insurance policy must be in an amount acceptable to the Agent.
The insurance must be Issued by an insurance company acceptable to the Agent and
must include a lender's loss payable endorsement in favor of the Agent in a form
acceptable to the Agent.
(b) General Business Insurance. To maintain insurance
satisfactory to the Agent as to amount, nature and carrier covering property
damage (including loss of use and occupancy) to any Borrower's properties,
public liability insurance including coverage for contractual liability, product
liability and workers' compensation, and any other insurance which is usual for
the Borrowers' businesses.
(c) Evidence of Insurance. Upon the request of the Agent,
to deliver to the Agent a copy of each insurance policy, or, if permitted by the
Agent, a certificate of insurance listing all insurance in force.
8.22. Additional Negative Covenants. Not to, without the Required
Lenders' written consent:
(a) engage in any business activities substantially
different from the Borrowers' present businesses.
(b) liquidate or dissolve any of the Borrowers'
businesses.
(c) enter into any consolidation, merger, or other
combination, or become a partner in a partnership, a member of a joint venture,
or a member of a limited liability company, except (i) in connection with any
acquisition permitted under subparagraph (e) and (ii) that Subsidiaries of Quest
may merge, combine or consolidate with each other or with Quest (so long as, in
the case of any merger, combination or consolidation with Quest, Quest is the
survivor).
(d) sell, lease, transfer or dispose of all or a
substantial part of a Borrower's business or a Borrower's assets, except, in the
case of any Borrower, to any other Borrower.
(e) acquire or purchase a business or its assets;
provided, however, that, acquisitions of all, or substantially all, of the
assets of, or of all or a controlling interest in the shares of capital stock
of, any business engaged in the provision of career-oriented, postsecondary
education within the United States (herein, a "school"), shall be permitted, if,
but only if: (i) no default then exists under this Agreement, or would be caused
by, or would result from, such proposed acquisition (after giving pro forma
effect to such acquisition, in respect of the financial covenants set forth at
Paragraphs 8.3 through 8.6); (ii) both (A) the cash consideration payable in
respect of such acquisition does not exceed $5,000,000, and (B) the cash
consideration payable in respect of such acquisition (subject to the foregoing
limitation) plus the amount of any assumed liabilities plus the amount of any
seller debt does not exceed $10,000,000; (iii) the incremental amount which the
Borrower then may borrow under the Facility (after giving pro forma effect to
the proposed acquisition), determined under
23
<PAGE> 31
subparagraphs (a) and (d) of Paragraph 2.1, is at least $7,000,000; (iv) the
school being acquired has a positive EBITDA (computed in the same manner as is
defined in Paragraph 8.4 in respect of Quest, after adjustments by the Agent as
necessary for excessive compensation amounts and like items) for its most
recently concluded period of twelve (12) fiscal months; (v) the acquisition is
not opposed by the board of directors of the school proposed to be acquired;
ret, it is not a "hostile" acquisition; and (vi) after giving effect to such
acquisition, the aggregate amount of the cash consideration paid by Borrowers,
seller debt incurred by Borrowers and the liabilities assumed by Borrowers in
respect of all such acquisitions consummated in the then current fiscal year
does not exceed $15,000,000. Quest, as agent on behalf of the Borrowers, shall
certify the foregoing to the Agent and Lenders at the time of such acquisition.
Such certification shall include calculations of pro forma compliance with
Paragraphs 8.3 through 8.6 on both a consolidated basis (including the school
being acquired) and on a stand alone basis for such school. The Required Lenders
have reserved to themselves the right, in their sole discretion, to consent in
writing to any such acquisition notwithstanding the Borrowers' non-compliance
with one or more of the foregoing conditions, but any such consent may be made
subject to such other terms and conditions as the Required Lenders, in their
sole discretion, then may elect.
(f) sell, assign, lease, transfer or otherwise dispose of
any assets, or enter into any agreement to do so, except:
(i) dispositions of inventory, or used, worn-out or
surplus equipment, all in the ordinary course of business;
(ii) the sale of equipment to the extent that such
equipment is exchanged for credit against the purchase price of similar
replacement equipment, or the proceeds of such sale are reasonably
promptly applied to the purchase price of such replacement equipment;
and
(iii) dispositions not otherwise permitted hereunder
which are made for fair market value; provided, that (A) at the time of
any disposition, no event of default shall exist or shall result from
such disposition, (B) the aggregate sales price from such disposition
shall be paid in cash, and (C) the aggregate value of all assets so
sold by the Borrowers shall not exceed in any fiscal year $250,000.
(g) enter into any sale and leaseback agreement covering
any of its fixed or capital assets.
(h) close, or voluntarily suspend the business of any
school (other than for the purpose of consolidating the operations of one school
with one or more other schools) for more than 30 days, if that school's
contribution (computed as defined in Paragraph 8.24) then represents 5% or more
of the total school contributions for the most recently concluded period of four
fiscal quarters.
8.23. ERISA Plans. To give prompt written notice to the Agent and
Lenders of:
(a) The occurrence of any reportable event under Section
4O43(b) of ERISA for which the PBGC requires 30 day notice.
24
<PAGE> 32
(b) Any action by a Borrower to terminate or withdraw
from a Plan or the filing of any notice of intent to terminate under Section 4O4
1 of ERISA.
(c) Any notice of noncompliance made with respect to a
Plan under Section 4O41(b) of ERISA.
(d) The commencement of any proceeding with respect to a
Plan under Section 4O42 of ERISA.
8.24. Title IV Program Requirements. To maintain at all times all
Title IV Program Requirements for schools representing, in the aggregate, not
less than 80% of the total school contributions of all schools operated by the
Borrowers. For purposes hereof, "school contributions" for each school shall be
computed on a quarterly basis, for the most recently completed period of four
fiscal quarters, and shall be equal to each school's total revenue minus all
school operating costs (to include training expense, facility expense,
advertising expense, sales expense, administrative expense and bad debt
expense). "Total school contributions" of all schools shall be the aggregate of
each school's contribution.
"Title IV Program Requirements" shall mean and include all eligibility,
program and general requirements imposed upon schools under Title IV programs
Administered by the U.S. Department of Education ("DOE") under the Higher
Education Act of 196S, as amended, and the regulations thereunder ("Title IV
Programs"), including, without limitation, for each of the schools operated by
Borrowers (i) its continuing certification by the DOE as an "eligible
institution;" (ii) its continuing authorization to offer its programs by the
relevant state agency where it is located; (iii) its continuing accreditation by
a nationally recognized accrediting agency; (iv) its continuing compliance with
respect to maximum rates of default by its students with respect to federally
guaranteed or funded student loans; he, cohort default rates; (v) its continuing
satisfaction of certain financial responsibility standards; (vi) its continuing
compliance with standards for maximum acceptable proportions of school revenues
derived from Title IV programs, i.e., "85/15" rule; and (vii) its continuing
compliance in respect of changes in curriculum, location and control. Without
limitation of the foregoing, to the extent that any school is at any time
required by the DOE to post a letter of credit, bond or other, similar evidence
of financial assurance as a condition to its remaining an "eligible
institution," the Required Lenders, in their sole discretion, shall have the
right to declare that such school shall not be considered as maintaining all
Title IV Program Requirements for purposes of this Paragraph.
8.25. Subsidiaries. Promptly upon its creation or acquisition, to
cause all subsidiaries of Borrowers hereafter created or acquired (including any
acquired as schools) to execute a joinder to this Agreement in form and
substance acceptable to the Agent whereby such subsidiary shall become a
Borrower hereunder.
9. HAZARDOUS WASTE INDEMNIFICATION
The Borrowers, jointly and severally, will indemnify and hold harmless
the Agent and each Lender from any loss or liability directly or indirectly
arising out of the use, generation, manufacture, production, storage, release,
threatened release, discharge, disposal or presence of a hazardous substance.
This indemnity will apply whether the hazardous substance is on,
25
<PAGE> 33
under or about any Borrower's property or operations or property leased to any
Borrower. The indemnity includes but is not limited to attorneys' fees
(including the reasonable estimate of the allocated cost of in-house counsel and
staff). The indemnity extends to the Agent and each Lender and their respective
parents, their and their respective parents' subsidiaries and all of their
directors, officers, employees, agents, successors, attorneys and assigns. For
these purposes, the term "hazardous substances" means any substance which is or
becomes designated as "hazardous" or "toxic" under any federal, state or local
law. This indemnity will survive repayment of the Borrowers' obligations to the
Agent and Lenders and this Agreement's termination.
10. DEFAULT
If any of the following events occurs (called in this Agreement a
"default" or "event of default"), with the consent of the Required Lenders, the
Agent may, and, at the direction of the Required Lenders, the Agent shall, do
one or more of the following: declare the Borrowers in default, stop making any
additional credit available to the Borrowers, and require the Borrowers to repay
the entire obligations immediately and without prior notice. If an event of
default occurs under the paragraph entitled "Bankruptcy," below, with respect to
the Borrowers, then, the entire obligations outstanding under this Agreement
will automatically be due immediately.
10.1. Failure to Pay. A Borrower fails to make a payment under this
Agreement when due.
10.2. Lien Priority. The Agent fails to have an enforceable first
lien (except for any prior liens which are expressly permitted to exist under
this Agreement or as to which the Required Lenders have consented in writing) on
or security interest in any property given as security for the advances.
10.3. False Information. A Borrower (or any guarantor) has given the
Agent or any Lender false or misleading information or representations in
respect of any matter, event or occurrence which the Agent or the Required
Lenders determine to be material.
10.4. Bankruptcy. A Borrower (or any guarantor) files a bankruptcy
petition, a bankruptcy petition is filed against a Borrower (or any guarantor)
or a Borrower (or any guarantor) makes a general assignment for the benefit of
creditors. The default will be deemed cured if any bankruptcy petition filed
against a Borrower (or any guarantor) is dismissed within a period of 60 days
after the filing; provided, however, that the Lenders will not be obligated to
extend any additional credit to the Borrowers during that period.
10.5. Receivers. A receiver or similar official is appointed for
any Borrower's business, or the business is terminated.
10.6. Lawsuits. Any lawsuit or lawsuits are filed on behalf of one
or more creditors against a Borrower in an aggregate amount of $100,000 or more
in excess of any insurance coverage.
10.7. Judgments. Any judgments or arbitration awards are entered
against any Borrower (or any guarantor), or any Borrower (or any guarantor)
enters into any settlement
26
<PAGE> 34
agreements with respect to any litigation or arbitration, in an aggregate amount
of $100,000 or more in excess of any insurance coverage.
10.8. Government Action. Any government authority takes action that
the Required Lenders believe materially adversely affects any Borrower's (or any
guarantor's) financial condition or ability to repay the advances.
10.9. Material Adverse Change. A material adverse change occurs in
any Borrower's (or any guarantor's) business, condition (financial or
otherwise), operations, properties or prospects, or ability to repay the
advances.
10.10. Cross-Default. Any default occurs under any agreement in
connection with any credit which any Borrower (or any guarantor) or any
Borrower's related entities or affiliates has obtained from another lender or
which any Borrower (or any guarantor) or any Borrower's related entities or
affiliates has guaranteed in the amount of $100,000 or more in the aggregate if
the default consists of failing to make a payment when due or gives the other
lender the right to accelerate the obligation.
10.11. Default under Related Documents. Any guaranty, subordination
agreement, security agreement, deed of trust, or other document required by this
Agreement is violated or no longer in effect.
10.12. Other NationsBank Agreements. A Borrower (or any guarantor)
fails to meet the conditions of, or fails to perform any obligation under any
other agreement which a Borrower (or any guarantor) has with NationsBank, any
L/C Issuer or any other affiliate of NationsBank. If, in NationsBank's opinion,
the breach is capable of being remedied, the breach will not be considered an
event of default under this Agreement for a period of 10 days after the date on
which the Agent gives written notice of the breach to the Borrowers; provided,
however, that Lenders will not be obligated to extend any additional credit to
the Borrowers during that period.
10.13. ERISA Plans. The occurrence of any one or more of the
following events with respect to any Borrower, provided such event or events
could reasonably be expected, in the judgment of the Required Lenders, to
subject any Borrower to any tax, penalty or liability (or any combination of the
foregoing) which, in the aggregate, could heave a material adverse effect on the
financial condition of any Borrower with respect to a Plan:
(a) A reportable event shall occur with respect to a Plan
which is, in the reasonable judgment of the Required Lenders likely to result in
the termination of such Plan for purposes of Title IV of ERISA.
(b) Any Plan termination (or commencement of proceedings
to terminate a Plan) or a Borrower's full or partial withdrawal from a Plan.
10.14. Delisting. Quest's stock ceases to be listed on NASDAQ for
any reason (except for its being listed, instead, on the NYSE or AMEX).
10.15. Other Breach Under Agreement. The Borrowers fail to meet the
conditions of, or fail to perform any obligation under, any term of this
Agreement not specifically referred to in
27
<PAGE> 35
this Article. This includes any failure or anticipated failure by the Borrowers
to comply with any financial covenants set forth in this Agreement, whether such
failure is evidenced by financial statements delivered to the Agent and Lenders
or is otherwise known to the Borrowers, the Agent or Lenders. If, in the
Required Lenders' opinion, the breach is capable of being remedied, the breach
will not be considered an event of default under this Agreement for a period of
10 days after the date on which the Agent gives written notice of the breach to
the Borrowers; provided, however, that the Lenders will not be obligated to
extend any additional credit to the Borrowers during that period.
11. THE AGENT AND THE LENDERS
11.1. Appointment: Powers and Immunities.
(a) Each Lender hereby irrevocably appoints and
authorizes the Agent (including its successors by merger) to act as its agent
hereunder and under the other Loan Documents with such powers as are
specifically delegated to the Agent by the terms hereof and thereof, together
with such other powers as are reasonably incidental thereto. The Agent: (i)
shall have no duties or responsibilities except as expressly set forth in this
Agreement and the other Loan Documents, and shall not by reason of this
Agreement or any other Loan Document be a trustee for any Lender; (ii) shall not
be responsible to the Lenders for any recitals, statements, representations or
warranties contained in this Agreement or any other Loan Document, or in any
certificate or other document referred to or provided for in, or received by any
Lender under, this Agreement or any other Loan Document, or for the validity,
effectiveness, genuineness, enforceability or sufficiency of this Agreement or
any other Loan Document or any other document referred to or provided for herein
or therein or for any failure by any Borrower to perform any of its obligations
hereunder or thereunder; (iii) shall not be required to initiate or conduct any
litigation or collection proceedings hereunder or under any other Loan Document
except to the extent requested by the Required Lenders, and then only on terms
and conditions which do not, in the reasonable judgment of the Agent, subject
the Agent to any undue risk, and (iv) shall not be responsible for any action
taken or omitted to be taken by it hereunder or under any other Loan Document or
any other document or instrument referred to or provided for herein or therein
or in connection herewith or therewith, except for its own gross negligence or
willful misconduct. The Agent may employ agents and attorneys-in-fact and shall
not be responsible for the negligence or misconduct of any such agents or
attorneys-in-fact selected by it with reasonable care. The provisions of this
Paragraph 11 are solely for the benefit of the Agent and the Lenders, and no
Borrower shall have any rights as a third party beneficiary of any of the
provisions hereof. In performing its functions and duties under this Agreement
and under the other Loan Documents, the Agent shall act solely as agent of the
Lenders and does not assume and shall not be deemed to have assumed any
obligation towards or relationship of agency or trust with or for the Borrowers.
The duties of the Agent shall be ministerial and administrative in nature, and
the Agent shall not have by reason of this Agreement or any other Loan Document
a fiduciary relationship in respect of any Lender. The Agent shall remit to the
Lenders, as soon as reasonably practical following receipt thereof, all payments
and other amounts received by it hereunder for the account of the Lenders;
(b) Unless and until its authority to do so is revoked in
writing by the Required Lenders, the Agent alone shall be authorized to
determine whether to impose or
28
<PAGE> 36
release any reserve against borrowing availability, and to exercise its own
credit judgment in connection therewith, which determinations and judgments, if
exercised in good faith, shall exonerate Agent from any liability to any Lender
or any other Person for any errors in judgment;
(c) The Agent shall have the sole and exclusive right and
authority to (i) act as the disbursing and collecting agent for the Lenders with
respect to all payments and collections arising in connection with this
Agreement and the other Loan Documents; (ii) execute and deliver each Loan
Document (other than this Loan Agreement) on behalf of the Lenders and accept
delivery of each such agreement delivered by any Borrower or any other Person;
(iii) act as collateral agent for the Lenders for purposes of the perfection of
all security interests and liens created by this Agreement or the other Loan
Documents with respect to all material items of the Collateral and, subject to
the direction of the Required Lenders, for all other purposes stated therein;
(iv) subject to the direction of the Required Lenders, manage, supervise or
otherwise deal with the Collateral; and (v) except as may be otherwise
specifically restricted by the terms of this Agreement and subject to the
direction of the Required Lenders, exercise all remedies given to the Agent or
Lenders with respect to any of the Collateral under the Loan Documents relating
thereto, applicable law or otherwise. As to any matters not expressly provided
for otherwise by this Agreement or any other Loan Document, the Agent shall in
all cases be fully protected in acting, or in refraining from acting, hereunder
and thereunder in accordance with instructions signed by the Required Lenders,
and such instructions of the Required Lenders to the Agent in any action taken
or failure to act pursuant thereto shall be binding on all of the Lenders.
11.2. Reliance by Agent. The Agent shall be entitled to rely upon
any certification, notice or other communication (including any thereof by
telephone, telecopier, telegram or cable) believed by it to be genuine and
correct and to have been signed or sent by or on behalf of the proper person or
persons, and upon advice and statements of legal counsel, independent
accountants or other experts selected by the Agent.
11.3. Defaults. The Agent shall not be deemed to have knowledge of
the occurrence of a Default or event which with notice or the passage of time
would become a Default (other than the nonpayment of any of the obligations)
unless the Agent has received written notice from a Lender or any Borrower
specifying such Default or other event and stating that such notice is a "Notice
of Default," each of Lenders hereby agreeing to promptly notify in writing the
Agent of any Default or event which with notice or the passage of time would
become a Default to which such Lender obtains knowledge. In the event that the
Agent receives such a notice of the occurrence of a Default or event which with
notice or the passage of time would become a Default, the Agent shall give
prompt notice thereof to the Lenders. The Agent shall give each Lender prompt
notice of each nonpayment of any of the obligations whether or not it has
received any notice of the occurrence of such nonpayment.
11.4. Rights of Agent and its Affiliates as a Lender. With respect
to the Advances made by the Agent and any affiliate of the Agent, NationsBank in
its capacity as a Lender hereunder and any affiliate of the Agent or such
affiliate in its capacity as a Lender hereunder shall have the same rights and
powers hereunder as any other Lender and may exercise the same as though
NationsBank were not acting as the Agent, and the term "Lender" or "Lenders"
shall, unless the context otherwise indicates, include NationsBank in its
individual capacity and any affiliate of the Agent in its individual capacity.
The Agent and any affiliate of the Agent may
29
<PAGE> 37
(without having to account therefor to any Lender) accept deposits from, lend
money to and generally engage in any kind of banking, trust or other business
with the Borrowers (and any of the Borrowers' affiliates) as if NationsBank were
not acting as the Agent, and the Agent and any affiliate of the Agent may accept
fees and other consideration from the Borrowers (in addition to any agency fees
and arrangement flees heretofore agreed to between the Borrowers and the Agent)
for services in connection with this Agreement or any other Loan Document or
otherwise without having to account for the same to the Lenders and Agent shall
not be subject to any liability by reason of its acting or refraining to act
pursuant to any request of the Required Lenders except as a result of its own
willful misconduct or gross negligence.
11.5. Indemnification. Each Lender severally agrees to indemnify the
Agent and hold the Agent harmless from, to the extent the Agent shall not have
been reimbursed by the Borrowers, ratably in accordance with its Commitment, for
any and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits (including, without limitation, counsel fees and
disbursements), and costs and expenses (but not fees) Agent may be required to
bear with respect to any lockbox or collateral collection account arrangement,
or disbursements of any kind and nature whatsoever which may be imposed on,
incurred by or asserted against the Agent in any way relating to or arising out
of this Agreement or any other Loan Document or any other documents contemplated
by or referred to herein or therein or the transactions contemplated hereby or
thereby (excluding, unless an Event of Default has occurred and is continuing,
the normal out-of-pocket administrative costs and expenses incident to the
performance of its agency duties hereunder) or the enforcement of any of the
terms hereof or thereof or any such other documents; provided that no Lender
shall be liable for any of the foregoing to the extent they arise from the gross
negligence or willful misconduct of the Agent. If any indemnity furnished to the
Agent for any purpose shall, in the opinion of the Agent, be insufficient or
become impaired, the Agent may call for additional indemnity and cease, or not
commence, to do the acts indemnified against until such additional indemnity is
furnished.
11.6. Payee of Note Treated as Owner. The Agent may deem and treat
the payee of any note evidencing the obligations as the owner thereof for all
purposes hereof unless and until a written notice of the assignment or transfer
thereof shall have been filed with the Agent and the provisions of Paragraph
12.3 have been satisfied. Any requests, authority or consent of any person who
at the time of making such request or giving such authority or consent is the
holder of any note evidencing the obligations shall be conclusive and binding on
any subsequent holder, transferee or assignee of that note or of any note or
notes issued in exchange therefor or replacement thereof.
11.7. Nonreliance on Agent and Other Lenders. Each Lender agrees
that it has, independently and without reliance on the Agent or any other
Lender, and based on such documents and information as it has deemed
appropriate, made its own credit analysis of Borrowers and decision to enter
into this Agreement and that it will, independently and without reliance upon
the Agent or. any other Lender, and based on such documents and information as
it shall deem appropriate at the time, continue to make its own analysis and
decisions in taking or not taking action under this Agreement or any of the
other Loan Documents. Except as expressly provided in Paragraph 11.3, the Agent
shall not be required to keep itself (or any Lender) informed as to the
performance or observance by Borrowers of this Agreement or any of the other
Loan Documents or any other document referred to or provided for herein or
therein or to inspect the properties or books of Borrowers or any other person.
Except for
30
<PAGE> 38
notices, reports and other documents and information expressly required to be
furnished to the Lenders by the Agent hereunder or under the other Loan
Documents, the Agent shall not have any duty or responsibility to provide any
Lender with any credit or other information concerning the affairs, financial
condition or business of Borrowers or any other Person (or any of their
affiliates) which may come into the possession of the Agent.
11.8. Failure to Act. Except for action expressly required of the
Agent hereunder or under the other Loan Documents, the Agent shall in all cases
be fully justified in failing or refusing to act hereunder and thereunder unless
it shall receive further assurances to its satisfaction by the Lenders of their
indemnification obligations under Paragraph 11.S against any and all liability
and expense which may be incurred by the Agent by reason of taking, continuing
to take, or failing to take any such action. In any event, if the Agent requests
in writing the authorization or direction of the Required Lenders (or all
Lenders if required) and the Lenders do not timely respond to such request in
writing, the Agent may act or refrain from acting with respect to the matters
set forth in such request by the Agent without liability to any of the Lenders
with respect to such matters.
11.9. Resignation of Agent. Subject to the appointment and
acceptance of a successor Agent as provided below, the Agent may resign at any
time by giving notice thereof to the Lenders and Quest as Borrowers' Agent. Upon
any such resignation the Required Lenders shall have the right to appoint a
successor Agent, subject to the consent of Borrowers, if no Default is in
existence, which consent shall not be unreasonably withheld or delayed. If no
successor Agent shall have been so appointed by the Required Lenders and shall
have accepted such appointment within 30 days after the retiring Agent's notice
of resignation, then the retiring Agent may, on behalf of the Lenders, appoint a
successor Agent. Any successor Agent shall be a Lender hereunder or other bank
or financial institution which has a combined capital and surplus of at least
$500,000,000. Upon the acceptance of any appointment as Agent hereunder by a
successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the retiring Agent,
and the retiring Agent shall be discharged from its duties and obligations
hereunder. After any retiring Agent's resignation hereunder as Agent, the
provisions of this Paragraph 11 shall continue in effect for its benefit in
respect of any actions taken or omitted to be taken by it while it was acting as
the Agent hereunder.
11.10. Joinder of Lenders. The rights, remedies, powers and
privileges conferred upon the Agent hereunder and under the other Loan Documents
may be exercised by the Agent without the necessity of the joinder of any other
parties unless otherwise required by applicable law.
11.11. Agreements Regarding Collateral. Each Lender shall have a pro
rata interest, in accordance with the percentage of the obligations held by such
Lender, in the security interests and liens in and to the Collateral and any
other assets granted and assigned to the Agent under the Loan Documents. The
Lenders hereby irrevocably authorize the Agent, at its option and in its
discretion, to release any security interest upon any Collateral (i) as
authorized by this Agreement or any of the other Loan Documents, (ii) upon the
termination of the Commitments and payment or satisfaction of all of the
obligations, or (iii) constituting Collateral sold or disposed of in accordance
with the terms of this Agreement if the Borrowers certify to the Agent that the
disposition is made in compliance with the terms of this Agreement (and the
Agent may
31
<PAGE> 39
rely conclusively on any such certificate, without further inquiry). Except as
expressly authorized or required by this Agreement or applicable law, the Agent
shall not execute any release or termination of any security interest upon any
of the Collateral without the prior written authorization of all Lenders. The
Agent shall have no obligation whatsoever to any of the Lenders to assure that
any of the Collateral exists or is owned by any Borrower or is cared for,
protected or insured or has been encumbered, or that the Agent's security
interests have been properly or sufficiently or lawfully created, perfected,
protected or enforced or entitled to any particular priority or to exercise at
all or in any manner or under any duty of care, disclosure or fidelity, or to
continue exercising, any of the rights or powers granted or available to the
Agent pursuant to this Agreement or any of the other Loan Documents, it being
understood and agreed that in respect of the Collateral, or any act, omission or
event related thereto, the Agent may act in any manner it may deem appropriate,
in its discretion, given the Agent's own interests in the Collateral in its
capacity as one of the Lenders.
11.12. Agent Field Audits. The Agent shall promptly, upon receipt
thereof, forward to each Lender copies of the results of any field audits by the
Agent with respect to Borrowers. The Agent shall have no liability to any Lender
for any errors in or omissions from any field audit or other examination of the
Borrowers or the Collateral, unless such error or omission was the direct result
of the Agent's willful misconduct.
11.13. Designation of Co-Agent. It is the purpose of this Agreement
that there hall be no violation of any applicable law denying or restricting the
right of financial institutions to transact business as an agent in any
jurisdiction. It is recognized that, in case of litigation under any of the Loan
Documents, or in case the Agent deems that by reason of present or future laws
of any jurisdiction the Agent might be prohibited from exercising any of the
powers, rights or remedies granted to the Agent or the Lenders hereunder or
under any of the Loan Documents or from holding title to or a security interest
upon any Collateral or from taking any other action which may be necessary
hereunder or under any of the Loan Documents, the Agent may appoint an
additional person or persons as a separate collateral agent or co-collateral
agent which is not so prohibited from taking any of such actions or exercising
any of such powers, rights or remedies. If the Agent shall appoint an additional
person as a separate collateral agent or co-collateral agent as provided above,
each and every remedy, power, right, claim, demand or cause of action intended
by this Agreement and any of the Loan Documents and every remedy, power, right,
claim, demand or cause of action intended by this Agreement and any of the Loan
Documents to be exercised by or vested in or conveyed to the Agent with respect
thereto shall be exercisable by and vested in such separate collateral agent or
co-collateral agent, but only to the extent necessary to enable such separate
collateral agent or co-collateral agent to exercise such powers, rights and
remedies, and every covenant and obligation necessary to the exercise thereof by
such separate collateral agent or co-collateral agent shall run to and be
enforceable by any of them. Should any instrument from the Lenders be required
by the separate collateral agent or co-collateral agent so appointed by the
Agent in order more fully and certainly to vest in and confirm to him or it such
rights, powers, duties and obligations, any and all of such instruments shall,
on request, be executed, acknowledged and delivered by the Lenders whether or
not a Default Condition or Event of Default then exists. In case any separate
collateral agent or co-collateral agent, or a successor to either, shall die,
become incapable of acting, resign or be removed, all the estates, properties,
rights, power, duties and obligations of such separate collateral agent or
co-collateral agent, so far as
32
<PAGE> 40
permitted by applicable law, shall vest in and be exercised by the Agent until
the appointment of a new collateral agent or successor to such separate
collateral agent or co-collateral agent.
11.14. Settlement Procedures. Notwithstanding any other terms of this
Agreement to the contrary, as between Agent and the Lenders, the following
settlement procedures shall be controlling:
(a) Line Balance. In respect of Advances made, and
principal payments received, by Agent under the Facility, on the first (1st)
banking day of each calendar week, or more frequently (including daily), if
Agent so elects (each such day being a "Settlement Date"), Agent will advise
each Lender by telephone or telecopy of the amount of each such Lender's pro
rata share of the principal balance of then outstanding Advances under the
Facility (herein, the "Line Balance") as of the close of business of the (2nd)
second banking day immediately preceding the Settlement Date. In the event that
any payments are necessary to adjust the amount of such Lender's required pro
rata share of the Line Balance to such Lender's actual pro rata share of the
Line Balance as of any Settlement Date, the party from which such payment is due
will pay the other, in same day funds, by wire transfer to the other's account
not later than 1:00 p.m. (Atlanta time) on the banking day following the
Settlement Date.
(b) Interest. For purposes of this paragraph (b), the
following terms will have the meanings indicated:
(i) "Daily Loan Balance" means an amount calculated
as of the end of each calendar day by subtracting (i) the cumulative
principal amount remitted by Agent to a Lender with respect to any
Advances under the Facility (herein called, in each case, a "Loan")
from the Closing Date through and including such calendar day, in
payment thereof from (ii) the cumulative principal amount remitted by
such Lender to Agent on that Loan from the Closing Date through and
including such calendar day.
(ii) "Daily Interest Rate" means an amount
calculated by dividing the interest rate per annum payable to a Lender
on a Loan at the applicable rate as provided in Paragraph 3.1 by three
hundred sixty (36O).
(iii) "Daily Interest Amount" means an amount
calculated by multiplying the Daily Loan Balance of a Loan by the
associated Daily Interest Rate on that Loan.
(iv) "Interest Ratio" means a number calculated by
dividing the total amount of the interest on a Loan received by Agent
with respect to the immediately preceding calendar month by the total
amount of interest on that Loan due from Borrowers during the
immediately preceding calendar month.
On the first (1st) banking day of each calendar month ("Interest Settlement
Date"), Agent will advise each Lender by telephone, telex, or telecopy of the
amount of such Lender's pro rata share of interest and any per annum fees on
each of the Loans as of the end of the last day of the immediately preceding
calendar month. Provided that such Lender has made all payments required to be
made by it under this Agreement and is otherwise in compliance herewith, Agent
will pay to such Lender, by wire transfer to such Lender's account (as specified
by such Lender
33
<PAGE> 41
on the signature page of this Agreement or the applicable Assignment and
Acceptance, as amended by such Lender from time to time after the date hereof
pursuant to the notice provisions contained herein or in the applicable Lender
Assignment and Acceptance) not later than 3:00 p.m. (Atlanta time) on the
Interest Settlement Date, such Lender's pro rata share of interest and per annum
fees on each of the Loans. Such Lender's pro rata share of interest on each Loan
will be calculated for that Loan by adding together the Daily Interest Amounts
for each calendar day of the prior calendar month for that Loan and multiplying
the total thereof by the Interest Ratio for that Loan. Such Lender's pro rata
share of any per annum fees shall be paid and calculated in a manner consistent
with the payment and calculation of interest as described in this subsection
(b).
(c) Other Payments. Payments of all principal, interest
and fees not otherwise described in subsections (a) or (b) above will be settled
on the first banking day of each week following their receipt by Agent in
accordance with the provisions of this Agreement in relation thereto.
(d) Availability of Lender's Pro Rata Share. Unless Agent
has been notified by a Lender prior to a funding date of such Lender's intention
not to fund its pro rata share of such Loan amount requested by Borrower, Agent
may assume that such Lender will make such amount available to Agent by 1:00
p.m. (Atlanta time) on the banking day following the next Settlement Date. If
such amount is not, in fact, made available to Agent by such Lender when due,
Agent will be entitled to recover such amount on demand from such Lender without
set-off, counterclaim or deduction of any kind. Nothing contained in this
Section will be deemed to relieve a Lender of its obligation to fulfill its
commitments or to prejudice any rights Agent or Borrower may have against such
Lender as a result of any default by such Lender under this Agreement.
(e) Return of Payments. If Agent pays an amount to a
Lender under this Agreement in the belief or expectation that a related payment
has been or will be received by Agent from Borrowers and such related payment is
not received by Agent, then Agent will be entitled to recover such amount from
such Lender without set-off, counterclaim or deduction of any kind. If Agent
determines at any time that any amount received by Agent under this Agreement
must be returned to Borrowers or paid to any other person pursuant to any
solvency law or otherwise, then, notwithstanding any other term or condition of
this Agreement, Agent will not be required to distribute any portion thereof to
any Lender. In addition, each Lender will repay to Agent on demand any portion
of such amount that Agent has distributed to such Lender, together with interest
at such rate, if any, as Agent is required to pay to Borrowers or such other
person, without set-off, counterclaim or deduction of any kind.
12. ENFORCING THIS AGREEMENT; MISCELLANEOUS
12.1. GAAP. Except as otherwise stated in this Agreement, all
financial information provided to the Agent and Lenders and all financial
covenants will be made under generally accepted accounting principles,
consistently applied (herein, "GAAP").
12.2. Georgia Law. This Agreement is governed by Georgia law.
34
<PAGE> 42
12.3. Successors and Assigns. This Agreement is binding on each
Borrower's, each Lender's and the Agent's successors and assignees. The
Borrowers agree that they will not assign this Agreement without the Lenders'
prior consent. Each Lender may sell participations in or assign all or any
portion of its rights under this Agreement and the Advances, and may exchange
financial information about the Borrowers with actual or potential participants
or assignees. If a participation is sold or all or any portion of the Advances
and this Agreement are assigned, the purchaser or assignee will have the right
of set-off against the Borrowers. In the event of any such assignment, the
assignor Lender, the assignee Lender and the Agent shall execute and deliver an
assignment and acceptance in form satisfactory to the Agent ("Assignment and
Acceptance") pursuant to which the assignor Lender shall assign to the assignee
Lender all or a proportionate part of its rights and obligations under this
Agreement and the other Loan Documents and such assignee Lender shall assume
such obligations. Upon (A) execution of the Assignment and Acceptance by such
assignor Lender, such assignee Lender and the Agent, (B) delivery of an executed
copy of the Assignment and Acceptance to the Borrowers and the Agent, (C)
payment by such assignee Lender to such assignor Lender of an amount equal to
the purchase price agreed between such assignor Lender and such assignee Lender,
and (D) payment by such assignee Lender of a processing and recordation fee of
$5,000 to the Agent, such assignee Lender shall for all purposes be a Lender
party to this Agreement and shall have all the rights and obligations of a
Lender under this Agreement to the same extent as if it were an original party
hereto with a Commitment as set forth in such Assignment and Acceptance, and the
assignor Lender shall be released from its obligations hereunder to a
corresponding extent, and no further consent or action by the Borrowers, the
Lenders or the Agent shall be required. Upon the consummation of any transfer to
an assignee Lender pursuant to this paragraph 12.3, the assignor Lender, the
Agent and the Borrower shall make appropriate arrangements so that, if required,
a new note is issued to each of the assignee Lender and such assignor Lender.
12.4. Arbitration.
(a) Dispute Resolution. Any controversy or claim between
or among the parties or their assignees arising out of or relating to this
Agreement or any agreements or instruments relating hereto or delivered in
connection herewith, including any claim based on or arising from an alleged
tort, shall at the request of any party be determined by arbitration, reference,
or trial by a judge as provided hereafter. A controversy involving only a single
claimant, or claimants who are related or asserting claims arising from a single
transaction, shall be determined by arbitration as described below. Any other
controversy shall be determined by judicial reference of the controversy to a
referee appointed by the court or, if the court where the controversy is venued
lacks the power to appoint a referee, by trial by a judge without a jury, as
described below. THE PARTIES AGREE AND UNDERSTAND THAT THEY ARE GIVING UP THE
RIGHT TO TRIAL BY JURY, AND THERE SHALL BE NO JURY WHETHER THE CONTROVERSY OR
CLAIM IS DECIDED BY ARBITRATION, BY JUDICIAL REFERENCE, OR BY TRIAL BY A JUDGE.
(b) Arbitration. Since this Agreement touches and
concerns interstate commerce, an arbitration under this Agreement shall be
conducted in accordance with the United States Arbitration Act (Title 9, United
States Code), notwithstanding any choice of law provision in this Agreement. The
Commercial Rules of the American Arbitration Association ("AAA") also shall
apply. The arbitrator(s) shall follow the law and shall give effect to statutes
of
35
<PAGE> 43
limitation in determining any claim. Any controversy concerning whether an
issue is arbitrable shall be determined by the arbitrator(s). The award of the
arbitrator(s) shall be in writing and include a statement of reasons for the
award. The award shall be final. Judgment upon the award may be entered in any
court having jurisdiction, and no challenge to entry of judgment upon the award
shall be entertained except as provided by Section 10 of the United States
Arbitration Act or upon a finding of manifest injustice.
(c) Judicial Reference or Trial by a Judge. At the
request of any party, any controversy or claim under subparagraph (a) that is
not submitted to arbitration as provided in subparagraph (b) shall be determined
by reference to a referee appointed by the court who, sitting alone and without
a jury, shall decide all questions of law and fact. The parties shall designate
to the court a referee selected under the auspices of the AAA in the same manner
as arbitrators are selected in AAA-sponsored proceedings. The referee shall be
an active attorney or retired judge. If the court where the controversy is
venued lacks the power to appoint a referee, the controversy instead shall be
decided by trial by a judge without a jury.
(d) Self-Help. Foreclosure. and Provisional Remedies. No
provision of this paragraph shall limit the right of any party to this Agreement
to exercise self-help remedies such as setoff or repossession (subject to the
provisions of Paragraph 12.19), to foreclose by power of sale or judicially
against or sell any collateral or security, or to obtain any provisional or
ancillary remedies from a court of competent jurisdiction before, after, or
during the pendency of any arbitration under subparagraph (b), above. Neither
the obtaining nor the exercise of any such remedy shall waive the right of
either party to demand that the related or any other dispute or controversy be
determined by arbitration as provided above.
12.5. Severability; Waivers. If any part of this Agreement is not
enforceable, the rest of the Agreement may be enforced. The Agent retains all
rights, even if Lenders make an Advance after default. If the Required Lender or
Lenders, as applicable, waive a default, they may enforce a later default. Any
amendment, consent or waiver under this Agreement must be in writing and signed
by the Required Lenders (and, if the rights or duties of the Agent are affected
thereby, by the Agent) and, in the case of an amendment, by the Borrowers
provided that, no such amendment, consent or waiver shall, unless signed by all
Lenders (or, in the case of any amendment, consent or waiver in respect of any
Commitment or Advance, each Lender then holding any interest therein), (i)
change the Commitment of any Lender or subject any Lender to any additional
obligation, (ii) change the principal of or rate of interest on any Advance or
any fees (other than fees payable to the Agent) hereunder, (iii) change the date
fixed for any payment of principal of or interest on any Advance or any fees
hereunder, (iv) change the amount of principal, interest or fees due on any date
fixed for the payment thereof, (v) change the percentage of the Commitments or
of the aggregate unpaid principal amount of any notes, evidencing the
obligations or the percentage of Lenders, which shall be required for the
Lenders or any of them to take any action under this Section or any other
provision of this Agreement, (vi) change the manner of application of any
payments made under this Agreement or any notes, evidencing the obligations or
the provisions with respect to pro rata treatment among Lenders (including,
without limitation, as to sharing of payments and expenses), (vii) except as
expressly provided in this Agreement or any of the other Loan Documents, release
or substitute, or agree to subordination of, all or any substantial part of the
Collateral held as security for the obligations, (viii) release any guarantee
given to support payment of the obligations, (ix) change the definition of
"Required Lenders," (x) change the provisions of any of
36
<PAGE> 44
Paragraph 12.3, 12.9, 12.14 or 12.19, (xi) change the joint and several nature
of the obligations of Borrowers, or the several nature of the obligations of the
Lenders under their respective Commitments, or (xii) change any provision of
this Agreement or any Loan Document which by its terms expressly requires the
approval of all Lenders to a modification thereof.
12.6. Reimbursement Costs. The Borrowers agree to reimburse the
Agent immediately for any expenses it incurs in the preparation of this
Agreement and any agreement or instrument required by this Agreement. Expenses
include, but are not limited to, reasonable attorneys' fees, including any
allocated costs of the Agent's in-house counsel, filing, recording and search
fees, appraisal fees, title report fees and documentation fees.
12.7. Administration Costs. The Borrowers shall pay the Agent for
all reasonable costs incurred by the Agent in connection with administering this
Agreement.
12.8. Attorneys' Fees. The Borrowers shall reimburse the Agent and
each Lender for any reasonable costs and attorneys' fees incurred by the Agent
and each Lender in connection with the enforcement or preservation of any rights
or remedies under this Agreement and any other documents executed in connection
with this Agreement, and including any amendment, waiver, "workout" or
restructuring under this Agreement. In the event of a lawsuit or arbitration
proceeding, the prevailing party is entitled to recover costs and reasonable
attorneys' fees incurred in connection with the lawsuit or arbitration
proceeding, as determined by the court or arbitrator. In the event that any case
is commenced by or against the Borrowers under the Bankruptcy Code (Title 11,
United States Code) or any similar or successor statute, the Agent and each
Lender are entitled to recover costs and reasonable attorneys' fees incurred by
the Agent and each Lender related to the preservation, protection, or
enforcement of any rights of the Agent in such a case. As used in this
paragraph, "attorneys' fees" includes the allocated costs of the Agent's and
each Lender's in-house counsel.
12.9. Joint and Several Liability.
(a) Each Borrower agrees that it is jointly and severally
liable to the Agent and Lenders for the payment of all obligations arising under
this Agreement, and that such liability is independent of the obligations of the
other Borrower(s) (or any guarantor). The Agent, individually or on behalf of
Lenders, may bring an action against any Borrower, whether an action is brought
against the other Borrower(s) (or any guarantor).
(b) Each Borrower agrees that any release which may be
given by the Lenders to the other Borrower(s) (or any guarantor) will not
release such Borrower from its obligations under this Agreement.
(c) Each Borrower waives any right to assert against the
Agent or my Lender, any defense, setoff, counterclaim, or claims which such
Borrower may have against the other Borrower(s) or any other party (including
any guarantor) liable to the Agent and Lenders for the obligations of the
Borrowers under this Agreement.
(d) Each Borrower agrees that it is solely responsible
for keeping itself informed as to the financial condition of the other
Borrower(s) and of all circumstances which bear upon the risk of nonpayment.
Each Borrower waives any right it may have to require the
37
<PAGE> 45
Agent or any Lender to disclose to such Borrower any information which the Agent
or any Lender may now or hereafter acquire concerning the financial condition of
the other Borrower(s).
(e) Each Borrower waives all rights to notices of default
or nonperformance by any other Borrower under this Agreement. Each Borrower
further waives all rights to notices of the existence or the creation of new
indebtedness by any other Borrower.
(f) The Borrowers represent and warrant to the Agent and
Lenders that they each will derive benefit, directly and indirectly, from the
collective administration and availability of credit under this Agreement. The
Borrowers agree that neither the Agent nor any Lender will be required to
inquire as to the disposition by any Borrower of funds disbursed in accordance
with the terms of this Agreement.
(g) Each Borrower waives any right of subrogation,
reimbursement, indemnification and contribution (contractual, statutory or
otherwise), including without limitation, any claim or right of subrogation
under the Bankruptcy Code (Title 11 of the U.S. Code) or any successor statute,
which such Borrower may now or hereafter have against any other Borrower with
respect to the indebtedness incurred under this Agreement, unless and until this
Agreement is terminated and all obligations arising hereunder have been fully
paid and satisfied. Each Borrower further waives any right to enforce any remedy
which the Agent or Lender now have or may hereafter have against any other
Borrower, and waives any benefit of, and any right to participate in, any
security now or hereafter held by the Agent or Lenders.
12.10. One Agreement. This Agreement and any related security or
other agreements required by this Agreement, collectively:
(a) represent the sum of the understandings and
agreements among the Agent, Lenders and the Borrowers concerning this credit;
(b) replace any prior oral or written agreements among
the Agent, Lenders and the Borrowers concerning this credit; and
(c) are intended by the Agent, Lenders and the Borrowers
as the final, complete and exclusive statement of the terms agreed to by them.
In the event of any conflict between this Agreement and any other agreements
required by this Agreement, this Agreement will prevail.
12.11. Disposition of Schedules. Neither the Agent nor any Lender
will be obligated to return any schedules, invoices, statements, budgets,
forecasts, reports or other papers delivered by the Borrowers. The Agent and
each Lender will destroy or otherwise dispose of such materials at such time as
the Agent or such Lender, in its discretion, deems appropriate.
12.12. Credit Adjustments. Until the Agent exercises its rights to
collect the accounts receivable as provided under any security agreement
required under this Agreement, the Borrowers may continue their present policies
for credit adjustments.
38
<PAGE> 46
12.13. Verification of Receivables. The Agent may at any time, either
orally or in writing, request confirmation from any debtor of the current amount
and status of the accounts receivable upon which such debtor is obligated.
12.14. Indemnification. The Borrowers will indemnify and hold the
Agent and each Lender harmless from any loss, liability, damages, judgments, and
costs of any kind relating to or arising directly or indirectly out of (a) this
Agreement or any document required hereunder, (b) any credit extended or
committed by the Agent or Lenders to the Borrowers hereunder, (c) any claim,
whether well-founded or otherwise, that there has been a failure to comply with
any law regulating the Borrowers' sales or leases to or performance of services
for debtors obligated upon the Borrowers' accounts receivable and disclosures in
connection therewith, and (d) any litigation or proceeding related to or arising
out of this Agreement, any such document, any such credit, or any such claim.
This indemnity includes but is not limited to attorneys' fees (including the
allocated cost of in-house counsel). This indemnity extends to the Agent and
each Lender, their respective parents, their and their parent's subsidiaries and
all of their directors, officers, employees, agents, successors, attorneys, and
assigns. This indemnity will survive repayment of the Borrowers' obligations to
the Agent and Lenders and this Agreement's termination. All sums due to the
Agent and Lenders hereunder shall be obligations of the Borrowers, due and
payable immediately without demand.
12.15. Notices. All notices required under this Agreement shall be
personally delivered, delivered by reputable overnight courier service or sent
by first class mail, postage prepaid, to the addresses on the signature page of
this Agreement, or to such other addresses as the Agent, Lenders and the
Borrowers may specify from time to time in writing.
12.16. Headings. Article and paragraph headings are for reference
only and shall not affect the interpretation or meaning of any provisions of
this Agreement.
12.17. Counterparts. This Agreement may be executed in as many
counterparts as necessary or convenient, and by the different parties on
separate counterparts each of which, when so executed, shall be deemed an
original but all such counterparts shall constitute but one and the same
agreement.
12.18. Amendment and Restatement. This Agreement constitutes an
amendment and restatement of the Amended and Restated Business Loan Agreement,
dated as of March 13, 1998, between Borrowers (or certain of them, as the case
may be) and NationsBank, as successor to Bank of America, FSB (the "First
Restated Loan Agreement"), which itself constituted an amendment and restatement
of that certain Business Loan Agreement, dated as of February 25, 1997, between
Borrowers (or certain of them) and Bank of America, FSB (the "original Loan
Agreement"). The execution and delivery of this Agreement shall not constitute a
novation, waiver, release or modification of any rights, claims or remedies of
NationsBank under the First Restated Loan Agreement, the original Loan Agreement
or otherwise, or any indebtedness or other obligations owing to NationsBank
under the First Restated Loan Agreement, the original Loan Agreement or
otherwise, based on any facts or events occurring or existing prior to the
execution and delivery of this Agreement.
12.19. Setoff: Sharing of Setoffs. Each Lender agrees that if it
shall, by exercising any right of setoff or counterclaim or resort to collateral
security or otherwise, receive payment of a
39
<PAGE> 47
proportion of the aggregate amount of the principal and interest owing with
respect to the Advances held by it, which is greater than the proportion
received by any other Lender in respect of the aggregate amount of all principal
and interest owing with respect to the Advances held by such other Lender, the
Lender receiving such proportionately greater payment shall purchase such
participations in the Advances owing to such other Lenders, and such other
adjustments shall be made, as may be required so that all such payments of
principal and interest with respect to the Advances owing to such other Lenders
shall be shared by the Lenders pro rata; provided that (i) nothing in this
Section shall impair the right of any Lender to exercise any right of setoff or
counterclaim it may have and to apply the amount subject to such exercise to the
payment of indebtedness of the Borrowers other than the obligations, and (ii) if
all or any portion of such payment received by the purchasing Lender is
thereafter recovered from such purchasing Lender, such purchase from each other
Lender shall be rescinded and such other Lender shall repay to the purchasing
Lender the purchase price of such participation to the extent of such recovery
together with an amount equal to such other Lender's ratable share (according to
the proportion of (x) the amount of such other Lender's required repayment to
(y) the total amount so recovered from the purchasing Lender) of any interest or
other amount paid or payable by the purchasing Lender in respect of the total
amount so recovered. Each of obligers agrees, to the fullest extent it may
effectively do so under applicable law, that any holder of a participation in
any Advance, whether or not acquired pursuant to the foregoing arrangements, may
exercise rights of setoff or counterclaim and other rights with respect to such
participation as fully as if such holder of a participation were a direct
creditor of obligers in the amount of such participation.
40
<PAGE> 48
This Agreement is executed as of the date stated at the top of the first page.
"AGENT" "BORROWERS"
NATIONSBANK, N.A. QUEST EDUCATION CORPORATION
By: By:
---------------------------- ------------------------------
Name: Melinda M. Bergbom Name: Vince Pisano
Title: Senior Vice President Title: Vice President
Address where notice to Attest
the Agent are to be sent: ------------------------------
Name: Morris C. Brown
Title: Secretary
600 Peachtree Street, N.E. Address where notices to:
Atlanta, Georgia 30308 the Borrowers are to be sent:
"LENDERS"
1327 Northmeadow Parkway, Suite 132
NATIONSBANK, N.A. Roswell, Georgia 30076
By:
----------------------------
Name: Melinda M. Bergbom
Title: Senior Vice President
Commitment: $40,000,000
Address for notices: 600 Peachtree Street
Atlanta, Georgia 30308
41
<PAGE> 49
ANDON COLLEGES, INC.
By:
-----------------------------
Name: Vince Pisano
Title: Vice President
Attest:
-----------------------------
Name: Morris C. Brown
Title: Secretary
Chief executive office:
1327 Northmeadow Parkway
Suite 132
Roswell, Georgia 30076
CALIFORNIA ACADEMY OF MERCHANDISING,
ART AND DESIGN, INC.
By:
-----------------------------
Name: Vince Pisano
Title: Vice President
Attest:
-----------------------------
Name: Morris C. Brown
Title: Secretary
Chief executive office:
1327 Northmeadow Parkway
Suite 132
Roswell, Georgia 30076
42
<PAGE> 50
DBS ACQUISITION CORP.
By:
-----------------------------
Name: Vince Pisano
Title: Vice President
Attest:
-----------------------------
Name: Morris C. Brown
Title: Secretary
Chief executive office:
1327 Northmeadow Parkway
Suite 132
Roswell, Georgia 30076
DEST EDUCATION CORPORATION
By:
-----------------------------
Name: Vince Pisano
Title: Vice President
Attest:
-----------------------------
Name: Morris C. Brown
Title: Secretary
Chief executive office:
1327 Northmeadow Parkway
Suite 132
Roswell, Georgia 30076
43
<PAGE> 51
ICM ACQUISITION CORP.
By:
-----------------------------
Name: Vince Pisano
Title: Vice President
Attest:
-----------------------------
Name: Morris C. Brown
Title: Secretary
Chief executive office:
1327 Northmeadow Parkway
Suite 132
Roswell, Georgia 30076
HBC ACQUISITION CORP.
By:
-----------------------------
Name: Vince Pisano
Title: Vice President
Attest:
-----------------------------
Name: Morris C. Brown
Title: Secretary
Chief executive office:
1327 Northmeadow Parkway
Suite 132
Roswell, Georgia 30076
44
<PAGE> 52
MARIC LEARNING SYSTEMS
By:
-----------------------------
Name: Vince Pisano
Title: Vice President
Attest:
-----------------------------
Name: Morris C. Brown
Title: Secretary
Chief executive office:
1327 Northmeadow Parkway
Suite 132
Roswell, Georgia 30076
MTSX ACQUISITION CORP.
By:
-----------------------------
Name: Vince Pisano
Title: Vice President
Attest:
-----------------------------
Name: Morris C. Brown
Title: Secretary
Chief executive office:
1327 Northmeadow Parkway
Suite 132
Roswell, Georgia 30076
45
<PAGE> 53
OIOPT ACQUISITION CORP.
By:
-----------------------------
Name: Vince Pisano
Title: Vice President
Attest:
-----------------------------
Name: Morris C. Brown
Title: Secretary
Chief executive office:
1327 Northmeadow Parkway
Suite 132
Roswell, Georgia 30076
PALO VISTA COLLEGE OF NURSING AND
ALLIED HEALTH SCIENCES, INC.
By:
-----------------------------
Name: Vince Pisano
Title: Vice President
Attest:
-----------------------------
Name: Morris C. Brown
Title: Secretary
Chief executive office:
1327 Northmeadow Parkway
Suite 132
Roswell, Georgia 30076
46
<PAGE> 54
SACMD ACQUISITION CORP.
By:
-----------------------------
Name: Vince Pisano
Title: Vice President
Attest:
-----------------------------
Name: Morris C. Brown
Title: Secretary
Chief executive office:
1327 Northmeadow Parkway
Suite 132
Roswell, Georgia 30076
SCOTTSDALE EDUCATIONAL CENTER FOR
ALLIED HEALTH CAREERS, INCORPORATED
By:
-----------------------------
Name: Vince Pisano
Title: Vice President
Attest:
-----------------------------
Name: Morris C. Brown
Title: Secretary
Chief executive office:
1327 Northmeadow Parkway
Suite 132
Roswell, Georgia 30076
47
<PAGE> 55
NEBRASKA ACQUISITION CORP.
By:
-----------------------------
Name: Vince Pisano
Title: Vice President
Attest:
-----------------------------
Name: Morris C. Brown
Title: Secretary
Chief executive office:
1327 Northmeadow Parkway
Suite 132
Roswell, Georgia 30076
CHI ACQUISITION CORP.
By:
-----------------------------
Name: Vince Pisano
Title: Vice President
Attest:
-----------------------------
Name: Morris C. Brown
Title: Secretary
Chief executive office:
1327 Northmeadow Parkway
Suite 132
Roswell, Georgia 30076
48
<PAGE> 56
NEW HAMPSHIRE ACQUISITION CORP.
By:
-----------------------------
Name: Vince Pisano
Title: Vice President
Attest:
-----------------------------
Name: Morris C. Brown
Title: Secretary
Chief executive office:
1327 Northmeadow Parkway
Suite 132
Roswell, Georgia 30076
COMPUTER HARDWARE SERVICE COMPANY,
INC.
By:
-----------------------------
Name: Vince Pisano
Title: Vice President
Attest:
-----------------------------
Name: Morris C. Brown
Title: Secretary
Chief executive office:
1327 Northmeadow Parkway
Suite 132
Roswell, Georgia 30076
49
<PAGE> 57
HESSER, INC.
By:
-----------------------------
Name: Vince Pisano
Title: Vice President
Attest:
-----------------------------
Name: Morris C. Brown
Title: Secretary
Chief executive office:
1327 Northmeadow Parkway
Suite 132
Roswell, Georgia 30076
Chief executive office:
1327 Northmeadow Parkway
Suite 132
Roswell, Georgia 30076
50
<PAGE> 58
Schedule 9.16
QUEST EDUCATION CORPORATION f/k/a EDUCATIONAL MEDICAL, INC.
LIST OF SUBSIDIARIES
Registrant: Quest Education Corporation f/k/a Educational Medical, Inc.
1. Andon Colleges, Inc. d/b/a Andon College, Andon College at Modesto
2. California Academy of Merchandising, Art and Design, Inc. f/k/a CAMAD
Acquisition Corp. d/lo/a California Academy of Fashion Merchandising,
Art and Design
3. CHI Acquisition Corp. d/b/a CHI Institutes
4. DBS Acquisition Corp. f/k/a A-DBS Acquisition Corp. d/bra Dominion
College (previously d/b/a Dominion Business School)
5. DEST Education Corporation d/b/a Andon College, Andon College at
Stockton, (DEST is 100% owned by Andon Colleges, Inc. which is 100%
owned by Quest Education Corporation f/k/a Educational Medical, Inc.)
6. HBC Acquisition Corp. d/b/a Hagerstown Business College
7. ICM Acquisition Corp. d/b/a ICM School of Business
8. Iowa College Acquisition Corporation d/b/a American Institutes of
Commerce and Hamilton Colleges.
9. Maric Learning Systems, Inc. d/b/a Maric College of Medical Careers
(San Diego)
10. MTSX Acquisition Corp. d/b/a Modem Technology School of X-Ray and Modem
Technology College
11. Nebraska Acquisition Corp. d/b/a (l) Lincoln School of Commerce and (2)
Nebraska School of Business
12. New Hampshire Acquisition Corp. d/b/a Hesser Colleges
13. OIOPT Acquisition Corp. d/b/a Ohio Institute of Photography and
Technology
14. Palo Vista College of Nursing and Allied Health Sciences, Inc. d/b/a
Maric College of Medical Careers (Vista)
15. SACMD Acquisition Corp. d/b/a (1) Career Centers of Texas - El Paso and
(2) San Antonio College of Medical and Dental Assistants
16. Scottsdale Educational Center for Allied Health Careers, Inc. d/b/a
Long Medical Institute
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
on Form S-3 No. 333-33025, Form S-3 No. 333-47775 Form S-3 No. 333-54251 and
Form S-8 No. 333-32809 and related prospectuses of Quest Education Corporation
of our report dated May 10, 1999, with respect to the consolidated financial
statements and schedule of Quest Education Corporation included in the Annual
Report (Form 10-K) for the year ended March 31, 1999.
/s/ Ernst & Young, LLP
Atlanta, Georgia
June 29, 1999
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion of our report dated April 18, 1997 with respect
to the audited combined financial statements of Educational Management, Inc. and
Wikert and Rhude, general partnership, as of December 31, 1996 and 1995 and for
each of the three years in the period ended December 31, 1996, our reports dated
May 16, 1997 with respect to the balance sheet of Nebraska College of Business
(a division of Nebraska Acquisition Corp., a wholly-owned subsidiary of Quest
Education Corporation f/k/a Educational Medical, Inc.) as of March 31, 1997 and
the balance sheet of Lincoln School of Commerce (a division of Nebraska
Acquisition Corp., a wholly-owned subsidiary of Quest Education Corporation
f/k/a Educational Medical, Inc.) as of March 31, 1997 in the Annual Report on
Form 10-K for Quest Education Corporation for the year ended March 31, 1999 and
to the incorporation by reference of such report in the Registration Statements
on Form S-3 No. 333-33025, Form S-3 No. 333-45707 Form S-3 No. 333-54251 and
Form S-8 No. 333-32809 and related prospectuses of Quest Education Corporation.
/s/ WINTHER, STAVE & CO., LLP
Spencer, Iowa
June 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF QUEST EDUCATION CORP FOR THE TWELVE MONTHS ENDED MARCH
31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> MAR-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 12,936,466
<SECURITIES> 0
<RECEIVABLES> 15,126,575
<ALLOWANCES> 4,043,465
<INVENTORY> 0
<CURRENT-ASSETS> 27,469,616
<PP&E> 25,049,336
<DEPRECIATION> 9,218,840
<TOTAL-ASSETS> 81,540,584
<CURRENT-LIABILITIES> 17,475,936
<BONDS> 0
0
0
<COMMON> 82,203
<OTHER-SE> 44,081,951
<TOTAL-LIABILITY-AND-EQUITY> 81,540,584
<SALES> 92,870,264
<TOTAL-REVENUES> 92,870,264
<CGS> 77,522,377
<TOTAL-COSTS> 77,522,377
<OTHER-EXPENSES> 1,521,480
<LOSS-PROVISION> 2,469,746
<INTEREST-EXPENSE> 1,204,002
<INCOME-PRETAX> 10,152,659
<INCOME-TAX> 4,165,522
<INCOME-CONTINUING> 5,987,137
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,987,137
<EPS-BASIC> 0.74
<EPS-DILUTED> 0.73
</TABLE>
