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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(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, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 000-21567
QUEST EDUCATION CORPORATION
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 65-0038445
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1400 HEMBREE ROAD, SUITE 100, ROSWELL, GEORGIA 30076
(Address of principal executive offices) (Zip Code)
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(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. [ ]
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 21, 2000:
$61,839,187.
The number of shares outstanding of each of the registrant's classes of
common stock, as of June 21, 2000: 7,960,616 (one class).
DOCUMENTS INCORPORATED BY REFERENCE
None
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QUEST EDUCATION CORPORATION
FORM 10-K
INDEX
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PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 13
Item 3. Legal Proceedings........................................... 14
Item 4. Submission of Matters to a Vote of Security Holders......... 14
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 15
Item 6. Selected Financial Data..................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
Item 8. Financial Statements and Supplementary Data................. 30
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................. 30
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 31
Item 11. Executive Compensation...................................... 34
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 40
Item 13. Certain Relationships and Related Transactions.............. 41
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 43
Signatures.............................................................. 51
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PART I
ITEM 1. BUSINESS
OVERVIEW
We provide diversified career oriented postsecondary education to over
13,400 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, 2000, 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 20% growth in the number of high school enrollments from
approximately 13.5 million in 1994 to approximately 16.3 million in 2009,
- the increasing enrollment in postsecondary educational institutions (14.6
million in 1996 versus 12.1 million in 1980) 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 2000. 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 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 new diploma and degree programs, including a centrally
developed information technology diploma and degree program;
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1 Source: National Center for Educational Statistics, Digest of Education
Statistics, 1999
2 Source: Department of Education
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- replicating existing programs at selected schools where these 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 any 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 satisfy our general
acquisition criteria and 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. We
expect to open additional new schools in fiscal 2001.
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 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.
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INSTITUTIONAL
DATE PRINCIPAL DEGREE ACCREDITING
SCHOOL ACQUIRED CURRICULA(1) GRANTING(2) AGENCY(3)
------ -------- ------------------------ ----------- -------------
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Maric College.......................... 4/88 Healthcare/IT Associate ACCSCT
San Diego, CA
Maric College.......................... 4/88 Healthcare/IT Associate 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 Design Associate SACS/COC
Atlanta, GA Business/IT
Modern Technology College.............. 3/93 Healthcare Associate ACCSCT
North Hollywood, CA
Dominion College....................... 5/93 Business/IT Healthcare Associate ACICS
Roanoke, VA
</TABLE>
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<TABLE>
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INSTITUTIONAL
DATE PRINCIPAL DEGREE ACCREDITING
SCHOOL ACQUIRED CURRICULA(1) GRANTING(2) AGENCY(3)
------ -------- ------------------------ ----------- -------------
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Dominion College....................... 5/93 Business/IT Healthcare Associate ACICS
Harrisonburg, VA(5)
ICM School of Business and Medical
Careers.............................. 7/93 Business/IT Healthcare Associate ACICS
Pittsburgh, PA Healthcare
Ohio Institute of Photography & Image Technology Associate ACCSCT
Technology........................... 7/93
Dayton, OH Healthcare
California College of Technology....... 8/93 Fashion and Design IT Associate ACICS
Sacramento, CA
San Antonio College of Medical and
Dental
Assistants........................... 9/96 Healthcare/IT No ACCSCT
San Antonio, TX
San Antonio College of Medical and
Dental
Assistants........................... 9/96 Healthcare/IT No ACCSCT
McAllen, TX
Career Centers of Texas -- El Paso..... 9/96 Healthcare/IT No ACCSCT
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
CHI Institute.......................... 2/98 IT/Business/Healthcare/ Associate ACCSCT
Southampton, PA Electronic Engineering
CHI Institute.......................... 2/98 IT/Business/Healthcare/ Associate ACCSCT
Broomall, PA Electronic Engineering
Hesser College......................... 3/98 Business/Healthcare/IT/ Bachelor/ NEASC
Manchester, NH Criminal Justice Associate
Fashion and Design
Hesser College......................... 3/98 Healthcare/IT/ Bachelor/ NEASC
Salem, NH Criminal Justice Associate
Fashion and Design
Hesser College......................... 3/98 Business/Healthcare/ Bachelor/ NEASC
Nashua, NH IT/Criminal Justice Associate
Fashion and Design
Hesser College......................... 3/98 Business/Healthcare/ Bachelor/ NEASC
Portsmouth, NH IT/Criminal Justice Associate
Fashion and Design
Hesser College......................... N/A Business/Healthcare/ Bachelor/ NEASC
Concord, NH IT/Criminal Justice Associate
Fashion and Design
American Institute of Commerce......... 11/98 Business/IT Associate ACICS/NCA
Davenport, IA Healthcare
Hamilton College....................... 11/98 Business/IT Associate ACICS/NCA
Cedar Falls, IA Healthcare
Hamilton College....................... 11/98 Business/IT Associate ACICS/NCA
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>
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(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.
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(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) 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) 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
- medical and dental office manager
- home-health aid
- physical therapy
- patient care provider
The business programs provide education and are designed to prepare
students for entry-level positions in areas such as:
- accounting
- paralegal skills
- business management
- travel
- secretarial skills
The information technology programs provide computer skills and are also
designed to provide students with entry-level positions in such areas as:
- various specific applications
- Microsoft engineering
- hardware and software integration
- networking
- computer repair
- internet applications
Fashion and design programs prepare students for positions associated with
fashion merchandising, fashion design, and interior design, such as:
- buyers
- pattern makers
- display directors
- fashion designers
- fashion coordinators
- interior designers
Tuition and fees vary depending on the program offered and the location of
the school.
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The following table provides information at March 31, 2000 with respect to
the programs offered by our schools in each of the four principal fields
described above:
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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.......................................... 19 4,441 19 1,178 5,619
Business............................................ 12 313 18 2,446 2,759(1)
Information Technology.............................. 19 1,583 21 1,414 2,997
Fashion and Design.................................. -- -- 6 603 603
Other Programs...................................... 9 278 7 1,176 1,454(1)
----- ----- ------
Company Total............................. 6,615 6,817 13,432
===== ===== ======
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(1) Includes 159 students enrolled in bachelor degree business programs and 72
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. Our IT programs offer
our student a significant portion of their education in a computer lab
environment to prepare the student for actual information technology 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 daytime 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 a 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, 2000, total tuition for completion (on a full-time basis)
for the diploma programs offered by our schools ranged from $3,245 to $20,000,
for an associate degree program the tuition ranged from $14,538 to $28,000, and
for our bachelor degree program the tuition ranged from $20,640 to $34,560. In
addition to these tuition amounts, students at our schools typically must
purchase textbooks and supplies as part of their educational programs.
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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 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 district 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 by which their efforts result in student
enrollment. The results of these efforts 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 the
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
some other states, we are generally allowed to retain a greater percentage of
tuition than that provided for by the California formula.
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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.
As of March 31, 2000, since their respective acquisition, our schools have
graduated approximately 69,000 students, including 21,078 in fiscal 2000.
Based on data obtained from our students and their employers, we believe
that 78% and 77% 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 our 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, 2000, our schools employed approximately 585 full-time faculty
members (faculty members spending at least 20 hours per week teaching classes at
our schools) and 589 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, a director or assistant director of admissions, and a business
office administrator. 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, 2000, we had approximately 2,241 full and part-time
employees, including 80 people employed at our home office in Roswell, Georgia
and our four regional offices and 1,174 full and part-time faculty members. We
also employed 229 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 directors of admissions
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.
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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. 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 2000, approximately 71.3% 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 $3,125 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 2000, Pell grants to students represented approximately
$21,531,000, or 18.7%, of our net revenues.
The Federal Supplemental Educational Opportunity Grant program
provides for awards to exceptionally needy undergraduate students. The
amount of a 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 $1,355,000 and represented approximately 1.2% of our net
revenues in fiscal 2000.
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
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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 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 2000, all of our existing schools, with the
exception of the schools located in Iowa, participated in the Federal
Direct Student Loan Program. Federal Direct Student Loan Program and
Federal Family Educational Loan Stafford loans amounted to approximately
$56,519,000, or approximately 49.0% of our net revenues, in fiscal 2000.
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
institutions 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 $11,352,000, or approximately
9.8% of our net revenues, in fiscal 2000.
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 $516,000, or approximately 0.4% of our net
revenues, in fiscal 2000.
9
<PAGE> 12
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 1999-00 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.
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 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. A
10
<PAGE> 13
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
suspend or terminate eligibility 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 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 four most recent years.
A school whose Cohort Default Rate is 25% or more for the three consecutive
federal fiscal years ended September 30, 1997, 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, 1997. Additionally, based
on preliminary data released by the Department of Education in February 2000,
none of our schools had a Cohort Default Rate of 25% or more for the three
consecutive federal fiscal years ended September 30, 1998. 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.
Our schools would have to have Cohort Default Rates of 25% or more for
consecutive three year periods ending September 30, 2000 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 ended 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 2000. 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 Title IV Programs. These criteria
require, among other things, that the school comply with all
11
<PAGE> 14
applicable Title IV regulations, have capable and sufficient personnel to
administer the Title IV Programs, have acceptable methods of defining and
measuring the satisfactory academic progress of its students, provide financial
aid counseling to its students, timely submit all reports and financial
statements required by the regulations, and that the school's Cohort Default
Rate not equal or exceed 25% for any single fiscal year.
Failure to satisfy any of the criteria may lead the Department of Education
to determine that the school lacks the requisite administrative capability and
may subject the school to provisional certification when it seeks to renew its
certification as an eligible institution, or may subject it to a fine or to a
proceeding for the limitation, suspension, or termination of its participation
in Title IV Programs. Proceedings to fine, limit, suspend, or terminate an
institution are conducted before an independent hearing officer of the
Department of Education and are subject to appeal to the Secretary of Education,
prior to any sanction taking effect. Thereafter, judicial review may be sought
in the federal courts pursuant to the federal Administrative Procedures Act.
Six 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 the provisional certification
include a variety of reporting requirements. The material violation of these
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 the
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 our individual schools in the most recent fiscal year ranged from
approximately $268,000 to $5,248,000, and one-half of the total Title IV funds
received by all of our schools in the most recent fiscal year was $38,519,000.
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 provided 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 was 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
12
<PAGE> 15
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 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,
2000, our calculations result in a composite score of 2.2 on a consolidated
basis, with each individual institution included in the consolidating statements
having a composite score greater than 1.5.
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, 2000.
<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 15,905
Andon College............................................. Stockton, CA 16,148
California College of Technology.......................... Sacramento, CA 17,045
Lincoln School of Commerce................................ Lincoln, NE 58,490(1)
Long Technology College................................... Phoenix, AZ 18,000
Maric College............................................. San Diego, CA 44,738
Maric College............................................. Vista, CA 20,397
Modern Technology College................................. North Hollywood, CA 24,303
Nebraska College of Business.............................. Omaha, NE 25,335
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 44,200
Dominion College.......................................... Harrisonburg, VA 9,403
Dominion College.......................................... Roanoke, VA 11,077
Hagerstown Business College............................... Hagerstown, MD 23,682
ICM School of Business and Medical Careers................ 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 19,300
NEW ENGLAND REGION SCHOOLS
Hesser College............................................ Manchester, NH 131,000(1)
Hesser College............................................ Nashua, NH 17,905
Hesser College............................................ Salem, NH 12,000
Hesser College............................................ Portsmouth, NH 12,000
Hesser College............................................ Concord, NH 12,8110
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
APPROXIMATE
OFFICE/SCHOOL LOCATION SQUARE FOOTAGE
------------- -------- --------------
<S> <C> <C>
MIDWEST REGION SCHOOLS
American Institute of Commerce............................ Davenport, IA 35,100
Hamilton College.......................................... Cedar Falls, IA 17,497
Hamilton College.......................................... Cedar Rapids, IA 20,000
Hamilton College.......................................... Des Moines, IA 30,583
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 $517,721 at March 31, 2000.
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 this kind of 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.
14
<PAGE> 17
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 2000:
Quarter ended June 30, 1999................................. $12.00 $7.25
Quarter ended September 30, 1999............................ 10.88 7.63
Quarter ended December 31, 1999............................. 10.00 7.25
Quarter ended March 31, 2000................................ 9.88 7.50
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
</TABLE>
As of June 21, 2000, there were approximately 83 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.
15
<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain consolidated financial and other
operating data for our 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 results of the
fiscal years ended March 31, 1997 and 1996 reflect a conformed year-end for the
Nebraska schools.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------
2000 1999 1998 1997 1996
-------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.................................... $115,256 $92,870 $59,676 $49,450 $43,347
School operating costs:
Cost of education and facilities.............. 53,568 41,677 27,087 23,151 19,651
Selling and promotional expenses.............. 16,993 12,651 8,644 7,531 6,534
General and administrative expenses........... 29,110 25,664 16,576 14,042 12,369
Amortization of goodwill and intangibles...... 1,740 1,521 1,285 886 883
Other expenses:(1)
Merger costs............................... -- -- -- 391 --
Legal defense and settlement costs......... -- -- -- -- 1,115
Loss on closure or relocation of schools... -- -- -- 144 50
Impairment of goodwill and intangibles..... -- -- -- -- 764
-------- ------- ------- ------- -------
Operating income................................ 13,845 11,357 6,084 3,305 1,981
Interest expense (income), net.................. 1,194 1,204 (253) 284 822
-------- ------- ------- ------- -------
Income before income taxes and extraordinary
item.......................................... 12,651 10,153 6,337 3,021 1,159
Provision (benefit) for income taxes............ 5,192 4,166 2,485 (845) 632
-------- ------- ------- ------- -------
Income before extraordinary item................ 7,459 5,987 3,852 3,866 527
Extraordinary item............................ -- -- -- 309 --
-------- ------- ------- ------- -------
Net income...................................... $ 7,459 $ 5,987 $ 3,852 $ 3,557 $ 527
======== ======= ======= ======= =======
PRO FORMA INCOME TAX DATA:(2)
Income before income taxes and extraordinary
item....................................... $ -- $ -- $ -- $ 3,021 $ 1,159
Provision for income taxes.................... -- -- -- 409 487
-------- ------- ------- ------- -------
Income before extraordinary item.............. -- -- -- 2,612 672
Extraordinary item, net of income taxes....... -- -- -- 309 --
======== ======= ======= ======= =======
Pro forma net income.......................... $ -- $ -- $ -- $ 2,303 $ 672
======== ======= ======= ======= =======
PER SHARE DATA:
Basic:
Net income before extraordinary item.......... $ 0.92 $ 0.74 $ 0.52 $ 0.58 $ 0.28
Net income.................................... $ 0.92 $ 0.74 $ 0.52 $ 0.51 $ 0.28
Diluted:
Net income before extraordinary item.......... $ 0.91 $ 0.73 $ 0.51 $ 0.41 $ 0.13
Net income.................................... $ 0.91 $ 0.73 $ 0.51 $ 0.36 $ 0.13
Weighted average number of shares (in
thousands)
Basic...................................... 8,089 8,043 7,382 4,484 2,371
Diluted.................................... 8,237 8,227 7,612 6,447 5,182
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:
Number of schools at end of period(3)........ 30 30 24 19 16
Number of students at end of period.......... 13,432 12,555 10,008 5,993 4,954
Number of new student starts during period... 15,411 12,872 8,410 7,358 6,706
Monthly withdrawal rate during period(4)..... 3.6% 3.2% 3.6% 4.2% 4.1%
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 6,665 $12,936 $21,446 $14,048 $ 3,209
Total current assets......................... 22,429 27,470 32,468 21,800 8,375
Total assets................................. 78,183 81,541 81,298 42,073 20,986
Notes payable and long term debt, including
current portion............................ 13,740 21,789 31,947 6,129 7,755
Total liabilities............................ 29,243 37,376 45,626 13,873 14,717
Total stockholders' equity................... 48,940 44,164 35,672 28,200 6,269
</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 two years ended March 31, 1997 include a pro forma presentation
that includes a provision for income taxes as if the merging entity had
operated as a C-Corporation and was combined with the Company for those
periods. The 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.
(3) Two schools in Virginia were combined in fiscal 1997; two schools located in
California were combined in fiscal 1998.
(4) Represents the percentage calculated by dividing (i) the number of students
who withdrew from the Company's schools in the period by (ii) the sum of the
number of students at each month-end in the period and the number of
students who withdrew in the period.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 our 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 our 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.
17
<PAGE> 20
GENERAL
We own and operate 30 schools in eleven states which together provide
diversified career oriented postsecondary education to over 13,400 students. We
derive our revenue almost entirely from tuition, fees, and charges paid by, or
on behalf of, our students. Most students at our 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 2000, approximately 71.3% of our cash
receipts were received from Title IV Programs.
Our revenue varies based on the aggregate student population, which is
influenced by the number of students attending our schools at the beginning of a
fiscal period; by the number of new students entering our schools during such
period; and by student retention rates. New students enter the schools' degree
granting programs four times a year and diploma courses every four to six weeks.
We believe that the size of our 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, 2000, we derived approximately 92% of
our net revenues from tuition. We recognize 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. This comparison can result in either an increase or
decrease in the final amount of revenue recognized, 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.
We incur expenses throughout a fiscal period in connection with the
operation of our 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 schools.
Selling and promotional expenses include admission representatives'
salaries and benefits, direct and indirect marketing expenses and advertising
expenses.
General and administrative expenses include schools', regional offices' and
home office's salaries and benefits, other direct and indirect costs of the
schools, regional offices, and home office, and the provision for losses on
accounts receivable.
Since our inception, we have pursued a strategy of growth through
acquisition. All but one of our schools have been acquired. Except in the case
of a pooling of interests, we record 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, we have 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. We also frequently
enters into non-competition agreements with the owners or employees of the
schools we acquire and generally record the cost of these non-competition
agreements as intangible assets which are amortized over their respective lives
which range from two to ten years. Effective July 1993, amortization is tax
deductible; however, amortization related to acquisitions consummated prior to
that date is only partially tax deductible on a current basis.
18
<PAGE> 21
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, 2000 and the data
is expressed as a percentage of the totals with respect to information for the
applicable fiscal year. We believe that this information includes all
adjustments (consisting solely of normal recurring adjustments) necessary for a
fair presentation of the quarterly information when read in conjunction with the
consolidated financial statements included elsewhere in this filing. The
operating results for any quarter are not necessarily indicative of the results
for any future period.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31, 2000
-------------------------------------
1ST QTR 2ND QTR 3RD QTR 4TH QTR
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues........................................... $24,122 $26,804 $30,006 $34,324
Percentage of fiscal year total........................ 20.9% 23.3% 26.0% 29.8%
Operating income....................................... $ 775 $ 1,544 $ 5,326 $ 6,200
Percentage of fiscal year total........................ 5.6% 11.1% 38.5% 44.8%
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31, 1999
-------------------------------------
1ST QTR 2ND QTR 3RD QTR 4TH QTR
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues........................................... $18,710 $20,419 $24,878 $28,863
Percentage of fiscal year total........................ 20.1% 22.0% 26.8% 31.1%
Operating income....................................... $ 480 $ 1,049 $ 4,621 $ 5,207
Percentage of fiscal year total........................ 4.3% 9.2% 40.7% 45.8%
</TABLE>
Our 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 our programs. New
enrollments in the 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. We believe we have been less
affected by this seasonal pattern than many other educational institutions
because we permit students to enroll in and begin programs in any month of the
year at most of our 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, our 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. We have not
experienced any material resistance to raising our tuition rates in the past
and, based on prior experience, anticipate that tuition increases will keep pace
with inflation in the foreseeable future. Since certain of our expenses do not
vary with student enrollment, quarterly variations in net revenues are amplified
at the income from operations level.
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<PAGE> 22
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,
---------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Net revenues................................................ 100.0% 100.0% 100.0%
School operating costs:
Cost of education and facilities.......................... 46.5 44.9 45.4
Selling and promotional................................... 14.7 13.6 14.4
General and administrative expenses....................... 25.3 27.6 27.8
Amortization of goodwill and intangibles.................... 1.5 1.6 2.2
----- ----- -----
Operating income............................................ 12.0 12.3 10.2
Interest expense (income), net.............................. 1.0 1.3 (0.4)
----- ----- -----
Income before provision for income taxes.................... 11.0 11.0 10.6
Provision for income taxes.................................. 4.5 4.5 4.2
----- ----- -----
Net income.................................................. 6.5% 6.5% 6.4%
===== ===== =====
</TABLE>
YEAR ENDED MARCH 31, 2000 COMPARED WITH YEAR ENDED MARCH 31, 1999
Net Revenues. Net revenues increased by $22,386, or 24.1%, to $115,256 for
the year ended March 31, 2000 from $92,870 for the year ended March 31, 1999.
Revenue growth was a result of (i) the full year impact of the five Iowa
schools, which were acquired in November 1998, and the new location in Concord,
New Hampshire which contributed a combined $14,570 in revenues and (ii) new
program enrollment which contributed $14,521 in additional revenue.
Cost of Education and Facilities. Cost of education and facilities
increased by $11,891, or 28.5%, to $53,568 for the year ended March 31, 2000
from $41,677 for the year ended March 31, 1999. This is principally the result
of the full year impact of the five Iowa schools, which were acquired in fiscal
1999, the new location in Concord, New Hampshire and costs related to increased
enrollments in those schools, the increased cost of new program implementation
and facility expansion. The cost of education and facilities as a percentage of
net revenue was 46.5% in fiscal 2000 compared with 44.9% in fiscal 1999.
Selling and Promotional. Selling and promotional expenses increased by
$4,342, or 34.3%, to $16,993 for the year ended March 31, 2000 from $12,651 for
the year ended March 31, 1999. This is principally a result of the promotion of
new programs and five Iowa schools acquired in fiscal 1999 and the new location
in Concord, New Hampshire. Selling and promotional expenses as a percentage of
net revenue were 14.7% in fiscal 2000 and 13.6% in fiscal 1999. The increase is
primarily attributable to the promotion of new programs.
General and Administrative. General and administrative expenses increased
by $3,445, or 13.4%, to $29,110 for the year ended March 31, 2000 from $25,664
for the year ended March 31, 1999, primarily due to the addition of five schools
in fiscal 1999. General and administrative expenses as a percentage of net
revenue decreased to 25.3% in fiscal 2000 compared to 27.6% in fiscal 1999 as a
result of our 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 $219, or 14.4%, to $1,740 for the year ended March 31,
2000 from $1,521 for the year ended March 31, 1999. The increase was primarily a
result of the amortization of goodwill arising from the acquisition of the five
Iowa schools. Amortization of goodwill and intangibles as percentage of net
revenue was 1.5% in fiscal 2000 compared to 1.6% in fiscal 1999 due to
amortization costs being spread over a larger revenue base.
Interest Expense, Net. Net interest expense decreased by $10 to $1,194 for
the year ended March 31, 2000 from $1,204 for the year ended March 31, 1999. The
change was principally due to the payment of
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<PAGE> 23
acquisition debt, which resulted in a decrease in interest expense, compared to
the prior year ended March 31, 1999. Interest expense as a percentage of revenue
was 1.0% in fiscal 2000 compared to 1.3% in fiscal 1999.
Income Taxes. The provision for income taxes increased by $1,026 to $5,192
for the year ended March 31, 2000 from an income tax provision of $4,166 for the
year ended March 31, 1999. Our effective tax rate for fiscal 2000 was 41.0%.
Income taxes as a percentage of revenue was 4.5% in fiscal 2000 and fiscal 1999.
Net Income. Net income increased to $7,459, or 24.6%, for the year ended
March 31, 2000 from net income of $5,987 for the year ended March 31, 1999. This
is primarily a result of increased revenue due to the acquisition of the five
Iowa schools and the addition of the Concord, New Hampshire location without a
proportionate increase in expense. Net income as a percentage of revenue was
6.5% in fiscal 2000 and fiscal 1999.
Other Operating Data. The number of new student starts at our schools
(including those acquired in fiscal 1999) during the year ended March 31, 2000
increased to 15,411 from 12,872 for the corresponding twelve months of the prior
year, a 19.7% increase. As of March 31, 2000, the number of students in
attendance increased 7.0% compared to the prior year end. The monthly student
withdrawal rate increased to 3.6% compared to a 3.2% for the prior year.
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.
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 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 our schools. The cost of education and facilities as a percentage of net
revenue was 44.9% in fiscal 1999 compared with 45.4% in fiscal 1998. The
decrease is primarily attributable to the more efficient use of facilities and
teaching personnel.
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 a result of the acquisition of
additional schools. Selling and promotional expenses as a percentage of net
revenue were 13.6% in fiscal 1999 and 14.4% in fiscal 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 fiscal 1999 compared to 27.8% in
fiscal 1998 as a result of our 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 our initial public offering on October 28, 1996. These funds were
utilized in the fiscal 1998 and 1999 acquisitions.
21
<PAGE> 24
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. Our 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.
Other Operating Data. The number of new student starts at our 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 "same
schools," defined as all schools except for those acquired in fiscal 1999 and a
school we 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 our
"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.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended March 31, 2000, we financed our operating activities
and capital requirements, including debt repayments, principally from cash
provided by operating activities. Cash provided by operating activities for
fiscal 2000 and fiscal 1999 was approximately $11,283 and $8,754, respectively.
Our principal sources of funds at March 31, 2000 were cash and cash equivalents
of $6,665 and net accounts receivable of $10,336. The $884 increase in net
accounts receivable experienced for the year ended March 31, 2000 was primarily
a result of an increase in revenue that was driven by higher student enrollment.
Historically, our investment activity has primarily consisted of capital
asset purchases and the purchase of schools. Capital expenditures, excluding
purchases of businesses, totaled $5,498 and $3,270 for fiscal 2000 and 1999,
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.
Our 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 us in Dayton, Ohio, Lincoln, Nebraska and Omaha,
Nebraska and Manchester, New Hampshire. We plan to continue to expand current
facilities, upgrade and replace equipment, and open new schools. We expect that
our fiscal 2001 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 our net
revenues are derived from Title IV Programs. Disbursement of Title IV Program
funds is dictated by federal regulations. For students enrolled in programs 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 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 were effective on July 1, 1998. The
new regulations apply to our fiscal years commencing April 1, 1999, and
thereafter. The regulations provided 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 was 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,
22
<PAGE> 25
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 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 the financial statements for the year ended March 31, 2000, our
calculations result in a composite score of 2.2 on a consolidated basis, with
each individual institution included in the consolidating statements having a
composite score greater than 1.5.
In the routine course of acquiring other schools, we 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 two to four
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. We have not acquired any schools since the new
regulations became effective and are unable to predict how long the process
allowing for temporary participation may take.
In connection with the CHI Institute Acquisition, we paid $1,500 in
February 1998 and $1,084 in May 1998, and issued shares of our Common Stock with
an aggregate value of $1,500 at the date of the acquisition. We 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. As of March
31, 2000, the principal amount outstanding was $3,300.
In connection with the Hesser Acquisition, we paid $2,000 in March 1998 and
$2,433 in June 1998, and issued shares of our Common Stock with an aggregate
value of $2,000 at the date of the acquisition. We made note payments to the
seller in fiscal 1999 of $11,250.
In connection with the Iowa Acquisition, we 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. We are
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.
As of March 31, 2000, the principal amount outstanding was $1,800.
We expect to make the note payments for the CHI Institute and Iowa with
cash on hand and borrowings under our bank facility.
We anticipated a need for additional debt or equity financing in order to
carry out our strategy of growth through acquisitions. In November 1998, we
amended our loan agreement increasing our loan facilities to up to $40,000. In
November 1999, per the Agreement, the available borrowing capacity was reduced
by $5,000 to $35,000. As of March 31, 2000, $27,500 was available under the
facility. Interest is charged on borrowings at different floating rates above
the London Inter-Bank Offered Rate ("LIBOR") depending on certain financial
conditions 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 our assets. We believe this facility will be adequate to
meet our financing needs for at least the next twelve months.
Effect of Inflation. We do not believe our operations have been materially
affected by inflation.
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<PAGE> 26
LETTER OF CREDIT
In connection with our purchase of five schools in Iowa in fiscal 1999, we
posted an irrevocable letter of credit with the Department of Education of
approximately $2,400 to guarantee any financial obligations the schools may
incur to the Department of Education such as the obligation to pay any refunds
coming due to current or former students of the institution. The letter of
credit expired October 30, 1999 and was not required to be renewed.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. This
bulletin provides guidance on the recognition, presentation and disclosure of
revenue in financial statements and, in accordance therewith, we will change our
method of recognizing revenues on certain nonrefundable fees charged to our
students. We have historically recognized revenues for the nonrefundable fees at
the time a student begins classes. Under the new method, the nonrefundable fees
will be recognized as revenue on a straight-line basis monthly over the semester
to which the nonrefundable fees relate. We will adopt the new method effective
April 1, 2000. The cumulative effect of this change in accounting will be to
decrease net income in the first quarter of fiscal 2001 by $1,026 or $0.13 per
share ($0.12 per diluted share). Had the new method of recognizing revenues from
nonrefundable fees been in effect during fiscal 2000 and 1999, net income would
have decreased $451 or $0.06 per share ($0.05 per diluted share) in fiscal 2000
and decreased $259 ($0.03 per basic and diluted share) in fiscal 1999.
During fiscal 2000, we adopted American Institute of Certified Public
Accountants Statement of Position 98-1 Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 allows
for the capitalization of software that has been purchased, internally developed
or modified solely to meet an entity's internal needs. Prior to fiscal 2000, we
expensed all internal use software related costs as incurred. The effect of
adopting SOP 98-1 was to increase income for the year ended March 31, 2000 by
$106 or $0.01 per basic and diluted share.
YEAR 2000 COMPLIANCE
The Year 2000 issue concerns the inability of information technology
systems and equipment utilizing microprocessors to recognize and process
date-sensitive information after 1999 due to the use of only the last two digits
to refer to a year. This problem could affect both computer software and
hardware and other equipment that relies on micro-processors. We spent
approximately $250,000 to replace and upgrade non-compliant systems and all of
our systems are now Year 2000 compliant. Additionally, there have been no Year
2000 problems experienced by the Company either directly or indirectly as a
result of third party participants such as vendors, financial institutions or
the Department of Education's Federal Direct Student Loan Program.
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 our 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
24
<PAGE> 27
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 our 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 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. We have not acquired any schools since
the new regulations became effective and are unable to predict how long the
process allowing for temporary participation may take.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have 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."
We had no holdings of derivative financial or commodity instruments at
March 31, 2000, and do not invest or intend to invest in derivative financial
instruments or derivative commodity instruments.
Substantially all of our indebtedness was incurred in connection with the
acquisitions of our schools, is payable to the sellers of those schools, and
bears a fixed interest rate. However, we are exposed to interest rate change
market risk with respect to our $35,000,000 credit facility with a financial
institution which is priced based on LIBOR plus a spread of 1.500% -- 2.375%
based on certain conditions. At March 31, 2000, $7,500,000 was outstanding under
our credit facility. Changes in LIBOR during the next twelve months will have a
positive or negative effect on our 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 our interest expense by
approximately $75,000 annually.
Our 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 2000, approximately 71.3% 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
25
<PAGE> 28
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.
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
the 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 these 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 the 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
$268,000 to $5,248,000, and one-half of the total Title IV funds received by all
our institutions in the most recent fiscal year was $38,519,000.
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 provided 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 was 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
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<PAGE> 29
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 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,
2000, our calculations result in a composite score of 2.2 on a consolidated
basis, with each individual institution included in the consolidating statements
having a composite score greater than 1.5.
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, 1997. Additionally,
based on preliminary data released by the Department of Education in February
2000, none of our institutions had a Cohort Default Rate of 25% or more for the
three consecutive federal fiscal years ended September 30, 1998. 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. Our institutions would have to have Cohort Default Rates of 25% or more
for consecutive three year periods ending September 30, 2000 and thereafter in
order to become vulnerable to termination of our Title IV student loan program
eligibility.
An institution whose Cohort Default Rate exceeds 40% for any single federal
fiscal year may have its eligibility to participate in all Title IV Programs
limited, suspended or terminated. If the Department of Education elects to
suspend or terminate eligibility 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
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<PAGE> 30
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 of these
events could have a material adverse effect on our business, results of
operations or financial condition. There are no proceedings for these purposes
pending against any of our institutions and we have no reason to believe that
any proceeding of the type 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 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
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<PAGE> 31
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 an acquisition into our existing operations and there can
be no assurance as to the timing or effect on our business of any 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 the school is often allocated to goodwill and
intangibles. Most of our acquisitions do not involve the purchase of
significant amounts of tangible property. 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 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 these 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 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
29
<PAGE> 32
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 our 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.
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<PAGE> 33
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 Quest as of March 31, 2000. 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............................. 61 Chairman, President, Chief Executive
Officer and a Director
Vince Pisano............................... 46 Vice President and Chief Financial Officer
Gerald T. Kosentos......................... 48 Vice President of Operations
Elaine Neely-Eacona........................ 47 Vice President of Financial Aid
Ellen L. Bernhardt......................... 49 Director of Operations -- Eastern Region
Linwood W. Galeucia........................ 55 President -- New England Region
Craig A. Wood.............................. 51 Director of Operations -- Western Region
K. Terry Guthrie........................... 57 Director of Accreditation
A. William Benham, Jr. .................... 38 Controller
Robert J. Cresci........................... 56 Director
Carl S. Hutman............................. 66 Director
Richard E. Kroon........................... 57 Director
William D. Ford............................ 72 Director
</TABLE>
GARY D. KERBER, age 61, has been President, Chief Executive Officer and a
Director 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 46, has been Vice President of Finance and Chief
Financial Officer 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 48, has been Vice President of Operations since
June 1997. From April 1997 through June 1997 he was Director of
Operations -- Central Region of Quest. From January 1995 to June 1997 he was
Director of ICM School of Business & Medical Careers, a wholly owned subsidiary
of Quest. 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 47 was appointed Vice President of Financial Aid
in March 1998. From 1990 until March 1998, she was Director of Financial Aid.
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 49, has been Director of Operations -- Eastern
Region 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 55, has been President of the New England Region
since March 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.
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<PAGE> 34
CRAIG A. WOOD, age 51, was appointed Director of Operations -- Western
Region in March 1998. From December 1997 to March 1998, Mr. Wood served as a
consultant. 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 57, 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. We acquired Ohio
Institute of Photography and Technology in July 1993.
A. WILLIAM BENHAM, JR., age 38, has been Controller since May 1995. From
1990 to May 1995, Mr. Benham was Assistant Controller.
ROBERT J. CRESCI, age 56, has been a Director 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
Sepracor, Inc., Aviva Petroleum Ltd., Film Roman, Inc., Castle Dental Centers,
Inc., Candlewood Hotel Co., Inc., SeraCare, Inc., Jfax.com, Inc., E-Stamp, Inc.
and several private companies.
CARL S. HUTMAN, age 66, has been a Director since 1988. From 1996 to 1999,
he was 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 since 1994. Since 1981, Mr.
Kroon has been managing partner of the Sprout Group and recently became its
Chairman. He also serves on the investment committees of several other private
equity funds affiliated with Donaldson, Lufkin and Jenrette. Mr. Kroon is a
director of several private companies and is Chairman and a director of the
National Venture Capital Association.
WILLIAM D. FORD, age 72, 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.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our officers,
directors and greater than 10% stockholders to file reports of ownership and
changes in ownership of our securities with the Securities and Exchange
Commission. Copies of the reports are required by SEC regulation to be furnished
to us. Based on our review of these reports, we believe that all reporting
persons complied with all filing requirements during the fiscal year ended March
31, 2000, except for the late filing of a Form 4 during January 2000 for Linwood
Galeucia. This filing was made through a Form 5 filed on April 18, 2000.
BOARD OF DIRECTORS
Under the Restated Certificate of Incorporation, as amended (the
"Certificate of Incorporation"), and the Bylaws (the "Bylaws") of Quest, the
Board of Directors consists of five directors or such greater or lesser
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<PAGE> 35
number as may be fixed from time to time by a majority of the total number of
directors which we would have if there were no vacancies on our Board of
Directors.
The Board has a standing Audit Committee and a standing Compensation
Committee. It does not have a Nominating Committee.
Messrs. Cresci (Chairman) and Hutman comprise the Audit Committee of the
Board of Directors, which is responsible for policies, procedures and other
matters relating to accounting, internal financial controls and financial
reporting, including the engagement of independent auditors and the planning,
scope, time and cost of any audit and any other services they may be asked to
perform, and also review with the auditors their report on our consolidated
financial statements following completion of each 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 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 of Quest and do not otherwise receive compensation from us 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 Quest. Directors who are also employees of
Quest receive no compensation for serving on the Board of Directors.
Non-Employee Directors are also entitled to receive options to purchase our
Common Stock. See "Non-Employee Directors' Stock Option Plan."
Non-Employee Directors' Stock Option Plan
On June 20, 1996, we adopted, and our 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 our
behalf by enlarging their personal stake in Quest. 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, 2000, options covering 70,000
shares were available for future grant under the Directors' Plan.
Each member of the Board of Directors who otherwise (i) is not currently an
employee, (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 in any capacity other than as a director is
eligible for the grant of stock options under the Directors' Plan. Currently,
all directors other than Mr. Kerber are eligible to participate in the
Directors' Plan.
On the date the Directors' Plan was adopted, each of the four existing
non-employee directors were each granted, contingent upon completion of the IPO,
options to purchase 25,000 shares of our Common Stock 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, the 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 and provided that a sufficient number of
shares remain available under the Directors' Plan, each year immediately
following the date of our annual meeting there automatically will be granted to
each
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<PAGE> 36
non-employee director who is then serving on the Board an option to purchase
3,000 shares of our Common Stock, 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).
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the annual and long-term compensation we
paid for services performed on our behalf for the last three completed fiscal
years (i.e., the fiscal years ended March 31, 2000, March 31, 1999 and March 31,
1998), with respect to those persons who were, as of March 31, 2000, our Chief
Executive Officer and the next four highest paid executive officers (the "Named
Executive Officers") who earned compensation greater than $100,000 in each 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............. 2000 $245,753 $186,188 $ -- 25,000 $2,400(2)
Chairman, President and 1999 215,634 416,110 -- 50,414 2,400(2)
Chief Executive 1998 195,909 120,828 -- 20,000 2,400(2)
Officer
Vince Pisano............... 2000 184,627 139,875 -- 25,000 --
Vice President of Finance 1999 162,025 312,655 -- 22,686 --
and Chief Financial 1998 147,197 90,784 -- 20,000 --
Officer
Gerald T. Kosentos......... 2000 170,769 129,375 -- 25,000
Vice President of 1999 149,885 270,750 -- --
Operations 1998 128,269 38,388 -- 78,833 --
Linwood Galeucia........... 2000 125,999 39,000 -- 15,000 --
President, New England 1999 119,999 87,613 -- -- --
Region 1998 5,770 -- -- -- --
Craig Wood................. 2000 125,330 51,644 -- 10,000 --
Director of Operations -- 1999 105,769 -- -- -- --
Western Region 1998 -- -- -- 20,000 --
</TABLE>
---------------
(1) Does not include the dollar value of perquisites and other personal
benefits.
(2) Consists solely of premiums we paid for a life insurance policy for Mr.
Kerber. Upon Mr. Kerber's death, we will receive no proceeds from the
policy.
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<PAGE> 37
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth all grants of options for our common stock
to the Named Executive Officers of the Company during the fiscal year ended
March 31, 2000. In addition, the table shows the hypothetical gains or "option
spreads" that would exist for the respective options. These gains are based on
assumed rates of annual compound stock price appreciation of 5% and 10% from the
date the options were granted over the full option terms.
OPTION GRANTS FOR FISCAL YEAR ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL
RATES
OF STOCK PRICE
NUMBER OF % OF TOTAL APPRECIATION
SECURITIES OPTIONS EXERCISE OR FOR OPTION TERM(2)
UNDERLYING GRANTED TO BASE PRICE EXPIRATION ---------------------
NAME OPTIONS EMPLOYEES ($/SHARE) DATE(1) 5% 10%
---- ---------- ---------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gary D. Kerber................... 25,000 9.5% $7.75 4/28/09 $121,848 $ 308,788
Vince Pisano..................... 25,000 9.5 7.75 4/28/09 121,848 308,788
Gerald T. Kosentos............... 25,000 9.5 7.75 4/28/09 121,848 308,788
Linwood W. Galeucia.............. 15,000 5.7 7.75 4/28/09 73,109 185,273
Craig Wood....................... 10,000 3.9 7.75 4/28/09 48,739 123,515
------- -------- ----------
Total.................. 100,000 $487,392 $1,235,152
======= ======== ==========
</TABLE>
---------------
(1) Expiration dates reflect the expiration date of the last vested installment
of each grant. We 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, 2000, 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, 2000
by the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED MARCH 31, 2000
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF VALUE REALIZED OPTIONS AT MARCH IN-THE-MONEY OPTIONS
SHARES OF SHARES 31, 2000 AT MARCH 31, 2000(1)
ACQUIRED ON ACQUIRED --------------------------- ---------------------------
NAME EXERCISE ON EXERCISE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gary D. Kerber............ 50,414 $ 72,470 135,594 60,333 $ 67,003 $ 38,623
Vince Pisano.............. 28,936 66,049 104,408 54,666 53,602 35,272
Gerald T. Kosentos........ -- -- 39,068 74,932 44,120 54,548
Linwood W. Galeucia....... -- -- -- 15,000 -- 13,125
Craig Wood................ -- -- 8,000 22,000 -- 8,750
------ -------- ------- ------- -------- --------
Total........... 79,350 $138,519 287,070 226,931 $164,725 $150,318
====== ======== ======= ======= ======== ========
</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.
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<PAGE> 38
1996 PERFORMANCE INCENTIVE PLAN AND 1998 AMENDMENT TO THE 1996 PERFORMANCE
INCENTIVE PLAN
In June 1996, our Board of Directors (the "Board") authorized, and our
stockholders approved, the 1996 Stock Incentive Plan for executive and other
employees of Quest, 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") (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 our
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, 2000, options for 373,487 shares of Common Stock were available for
grant. The purpose of the Stock Option Plan is to provide our employees
(including officers and directors who are also employees) and non-employee
consultants and advisors ("employees") with an increased incentive to make
significant and extraordinary contributions to our long-term performance and
growth, to join their interests with the interests of our shareholders, 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. 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 who in the judgment of the Administrator are
or will become responsible for our direction and financial success. Employees
include officers and directors who are also employees.
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 373,487 were available for grant as of March 31, 2000.
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 us.
Stock Options and Stock Appreciation Rights. Under 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
our voting stock or any subsidiary may not be less than 110% of the fair market
value of the stock on the date of grant.
Under 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
36
<PAGE> 39
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 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 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 us. If such employment or consultancy is
terminated by our action without cause or by agreement between us 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 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 our shareholders, to amend or revise the
terms of the Stock Option Plan at any time; however, no such amendment or
revision will, without the consent of the holder thereof, change the stock
option price (other than anti-dilution adjustments) or alter or impair any stock
option, stock appreciation right or restricted stock which has been previously
granted or awarded under the Stock Option Plan.
FEDERAL INCOME TAX CONSEQUENCES OF STOCK INCENTIVE PLANS
We understand 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,
37
<PAGE> 40
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, we 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 us 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 us 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 us 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. We will ordinarily
be entitled to a deduction, in the amount of the ordinary income recognized
by the Participant, for our taxable year in which the Participant
recognizes such income, provided that the amount constitutes reasonable
compensation.
Withholding Payments. If, upon exercise of a Nonqualified Option or
stock appreciation right, or upon the award of restricted stock or the
expiration of restrictions applicable to restricted stock, or upon a
disqualifying disposition of shares acquired upon exercise of an Incentive
Option, we must pay amounts for income tax withholding, then in the
Committee's sole discretion, either we 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 reimburse us 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
38
<PAGE> 41
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 us 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, we 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 our Board of Directors 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, which plan may be
implemented only with the consent of our Board of Directors. In reviewing these
plans, the Compensation Committee of the Board of Directors has considered the
appropriateness of the goals presented in light of our past performance and
prospects and the reasonableness of the projected compensation in light of our
size and potential income levels. The term of the Employment Agreement continues
until terminated by either Mr. Kerber or us, with or without cause; provided,
however, that if we terminate the Employment Agreement without cause, we 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.
To maximize shareholder value, we have agreed with Mr. Kerber and Mr.
Pisano that if we are sold and they have made a good faith effort to complete
the transaction as intended, we will pay them pro rata based on their then
current cash compensation, the sum of $500,000 plus 2% of the amount that the
purchase price exceeds a minimum amount. We have also agreed to pay them one
year's salary if their employment is terminated within one year after we
experience a change in control.
The company has no formal bonus program for its key employees. Bonus
payments were made to key employees based on the achievement of agreed upon
performance objectives or as a part of the recruitment process. Our fiscal 2001
bonus plan for Messrs. Kerber, Pisano and Kosentos provides for a bonus pool of
approximately $56,000 to $907,000 to be distributed among them if identified
annual earnings per share goals ranging from $1.04 to $1.19 are met. For each
$.01 per share increase beyond $1.19 per share, the pool would be increased by
approximately 8.3% of their total base pay for fiscal 2001. We have agreed with
Mr. Kosentos to pay him one year's base salary if we experience a change in
control and he chooses to terminate his employment within twelve months.
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<PAGE> 42
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The table below sets forth, as of June 21, 2000, certain information
regarding beneficial ownership of the shares of our Common Stock by (i) each
person known by us 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 of our executive
officers and directors 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 11.6%
Sprout Technology Fund(3)................................... 19,889 *
DLJ Venture Capital Fund II, L.P(3)......................... 54,921 *
Wellington Management Co., Ltd(4)........................... 808,000 10.2%
Stadium Capital Management LLC(5)........................... 564,900 7.1%
Matador Capital Management(6)............................... 434,150 5.5%
Gary D. Kerber(7, 8)........................................ 480,870 6.0%
Vince Pisano(7, 9).......................................... 285,904 3.6%
Gerald T. Kosentos(7, 10)................................... 56,535 *
Elaine Neely-Eacona(7, 11).................................. 22,947 *
Ellen L. Bernhardt(7, 12)................................... 39,667 *
Linwood W. Galeucia(7, 13).................................. 94,266 1.2%
Craig A. Wood(7, 14)........................................ 10,000 *
K. Terry Guthrie(7, 15)..................................... 12,333 *
A. William Benham(7, 16).................................... 20,349 *
Robert J. Cresci(17)........................................ 34,000 *
Carl S. Hutman(18).......................................... 34,340 *
Richard E. Kroon(19)........................................ 34,000 *
William D. Ford(20)......................................... 14,800 *
All executive officers and directors as a group (13
persons).................................................. 1,122,053 14.1%
</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 21, 2000 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 21, 2000 (7,960,616) plus any shares subject to options held by the
person in question that are exercisable within 60 days after June 21, 2000.
(3) The address of Sprout Capital V, Sprout Technology Fund and DLJ Venture
Capital Fund II, L.P. is 277 Park Avenue, 21st Floor, New York, New York
10172.
(4) The address of Wellington Management Co., Ltd is 75 State Street, Boston,
Massachusetts 02109.
(5) The address of Stadium Capital Management LLC is 430 Cowper Street, Suite
200, Palo Alto, California 94501.
(6) The address of Matador Capital Management is 200 1st Avenue North, Suite
203, St. Petersburg, Florida 33701.
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<PAGE> 43
(7) The address of the employees is c/o Quest Education Corporation, 1400
Hembree Road, Suite 100, Roswell, Georgia 30076.
(8) Includes 150,594 shares of Common Stock that may be purchased upon the
exercise of options that are exercisable within 60 days of the date of this
table.
(9) Includes 116,908 shares of Common Stock that may be purchased upon the
exercise of options that 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.
(10) Includes 56,535 shares of Common Stock that may be purchased upon the
exercise of options that are exercisable within 60 days of the date of this
table.
(11) Includes 17,125 shares of Common Stock that may be purchased upon the
exercise of options that are exercisable within 60 days of the date of this
table.
(12) Includes 39,667 shares of Common Stock that may be purchased upon the
exercise of options that are exercisable within 60 days of the date of this
table.
(13) Includes 3,000 shares of Common Stock that may be purchased upon the
exercise of options that are exercisable within 60 days of the date of this
table.
(14) Includes 10,000 shares of Common Stock that may be purchased upon the
exercise of options that are exercisable within 60 days of the date of this
table.
(15) Includes 11,000 shares of Common Stock that may be purchased upon the
exercise of options that are exercisable within 60 days of the date of this
table.
(16) Includes 16,376 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. Cresci, a director of Quest, 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 34,000 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. Hutman's address is 3265 NW 62nd Lane, Boca Raton, Florida 33496.
Includes 34,000 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.
(19) 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 34,000 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.
(20) Mr. Ford's address is 312 Eighth Street SE, Washington, D.C. 23003.
Includes 14,800 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 2000, or formerly, an officer or employee of Quest or any
subsidiary of Quest.
In July 1991, we entered into a Securities Purchase Agreement, dated July
21, 1991, as amended (the "Securities Purchase Agreement"), among Quest 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
41
<PAGE> 44
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 our 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 our Board of Directors,
with Mr. Cresci abstaining. At completion of the IPO, the Pecks Managed Entities
beneficially owned more than five percent of the issued and outstanding Common
Stock of Quest. In addition, Robert J. Cresci, who is a director of Quest, 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 our Board of Directors. 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, we 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, we 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, Quest, 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 our Common Stock for the election to the Board of Directors
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), we shall use our best efforts to effect the
registration under the Securities Act of Common Stock at such holders' request.
We are only required to undertake two such registrations. In the event of a
registration initiated by us or by any of our other stockholders holding
registration rights, we have 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 us, and
Pecks Managed Entities' participation will be subject to a priority cut-back as
provided for in the Registration Rights Agreement. We agreed to pay all expenses
in connection with such registrations. See "Certain Transactions."
CERTAIN TRANSACTIONS
For information regarding transactions among Quest, the Pecks Managed
Entities and Robert J. Cresci, who is a director, see "Compensation Committee
Interlocks and Insider Participation."
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<PAGE> 45
In connection with the acquisitions of two CHI Institute Schools and four
Hesser College Schools, we pledged the stock of the acquiring subsidiaries to
secure indebtedness. As of the date of March 31, 2000, the principal amount of
such indebtedness was $3,300,000.
On March 13, 1998, we 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 our Common Stock were issued to the two shareholders of
Hesser. We 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 such shares to sell their shares
in the public market.
With respect to each transaction between Quest and an affiliate of Quest, a
majority of the disinterested members of the Board of Directors determined that
such transactions were on terms at least as fair as if they had been consummated
with unrelated third parties. The Board of Directors has adopted a policy that
prior to entering into any transaction with a related party, a similar
determination must be made with respect to such transaction by a majority of our
disinterested directors.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS (indexed as F-1 to F-20)
Report of Independent Auditors
Consolidated Balance Sheets as of March 31, 2000 and 1999
Consolidated Statements of Income for the years ended March 31, 2000,
1999 and 1998
Consolidated Statements of Stockholders' Equity for the years ended
March 31, 2000, 1999 and
1998
Consolidated Statements of Cash Flows for the years ended March 31, 2000,
1999 and 1998
Notes to Consolidated Financial Statements
(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
-------- -----------
<C> <C> <S>
3.1(a)* -- Restated Certificate of Incorporation of EMI Acquisition
Corp. (See Exhibit 3.1(a) to Amendment No. 1 to Registration
Statement on Form S-1 filed with the Commission on September
20, 1996.)
3.1(b)* -- Certificate of Amendment of Certificate of Incorporation of
EMI Acquisition Corp. (See Exhibit 3.1(b) to Amendment No. 3
to Registration Statement on Form S-1 filed with the
Commission on October 22, 1996.)
3.1(c)* -- Second Amendment to Restated Certificate of Incorporation of
Educational Medical, Inc. (See Exhibit 3.1(c) to Amendment
No. 3 to Registration Statement on Form S-1 filed with the
Commission on October 22, 1996.)
</TABLE>
43
<PAGE> 46
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
-------- -----------
<C> <C> <S>
3.1(d)* -- Third Amendment to Restated Certificate of Incorporation of
Educational Medical, Inc. (See Exhibit 3.1(d) to Amendment
No. 3 to Registration Statement on Form S-1 filed with the
Commission on October 22, 1996.)
3.1(e)* -- Fourth Amendment to Restated Certificate of Incorporation of
Educational Medical, Inc. (See Exhibit 3.1(e) to Amendment
No. 3 to Registration Statement on Form S-1 filed with the
Commission on October 22, 1996.)
3.1(f)* -- Fifth Amendment to Restated Certificate of Incorporation of
Educational Medical, Inc. (See Exhibit 3.1(f) to Amendment
No. 3 to Registration Statement on Form S-1 filed with the
Commission on October 22, 1996.)
3.1(g)* -- Sixth Amendment to Restated Certificate of Incorporation of
Educational Medical, Inc. (See Exhibit 3.1(g) to Amendment
No. 3 to Registration Statement on Form S-1 filed with the
Commission on October 22, 1996.)
3.1(h)* -- Seventh Amendment to Restated Certificate of Incorporation
of Educational Medical, Inc. (See Exhibit 3.1(h) to
Amendment No. 3 to Registration Statement on Form S-1 filed
with the Commission on October 22, 1996.)
3.1(i)* -- Eighth Amendment to Restated Certificate of Incorporation of
Educational Medical, Inc. (See Exhibit 3.1(i) to Amendment
No 3 to Registration Statement on Form S-1 filed with the
Commission on October 22, 1996.)
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.) Amendment No. 3
4.1* -- Form of Common Stock Certificate. (See Exhibit 4.1 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.)
</TABLE>
44
<PAGE> 47
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
-------- -----------
<C> <C> <S>
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.)
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.)
</TABLE>
45
<PAGE> 48
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
-------- -----------
<C> <C> <S>
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
Dayton, N.A., (Mortgagee), guaranteed by the Company. (See
Exhibit 10.26 to Registration Statement on Form S-1 filed
with the Commission on August 8, 1996.)
10.27* -- Pledge Agreement, dated as of July 14, 1993, among the
Company, Ohio Institute of Photography and Technology, Inc.
and OIOPT Acquisition Corp. (See Exhibit 10.27 to
Registration Statement on Form S-1 filed with the Commission
on August 8, 1996.)
10.28* -- Asset Purchase Agreement, dated as of June 23, 1993, among
the Company, OIOPT Acquisition Corp., Ohio Institute of
Photography and Technology, Inc., K. Terry Guthrie, Richard
L. Cretcher, Stephen T. McLain, Gerald D. Guthrie and James
R. Madden. (See Exhibit 10.28 to Registration Statement on
Form S-1 filed with the Commission on August 8, 1996.)
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.)
</TABLE>
46
<PAGE> 49
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
-------- -----------
<C> <C> <S>
10.36* -- Letter Agreement, dated April 6, 1995 between the Company
and Equitable Securities Corporation amending the maturity
date of Warrant No. E-007. (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.)
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.)
</TABLE>
47
<PAGE> 50
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
-------- -----------
<C> <C> <S>
10.51* -- Amendment to Mortgage Loan 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.)
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.)
</TABLE>
48
<PAGE> 51
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
-------- -----------
<C> <C> <S>
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
Form8-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,
1999. (See Exhibit 10.76 to Form 10-K filed with the
Commission on June 29, 1999.)
10.77** -- Letter Agreement between the Company and Gary D. Kerber
dated as of January 8, 1998.
10.78** -- Letter Agreement between the Company and Vince Pisano dated
as of January 8, 1998.
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.)
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.
49
<PAGE> 52
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> <C>
Allowance for doubtful accounts:
Year ended March 31, 2000...... $4,043,465 $3,584,609 $ -- $4,030,214 $3,597,860(2)
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)
</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.
50
<PAGE> 53
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 26, 2000
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 26, 2000
----------------------------------------------------- Officer and Chairman of the
Gary D. Kerber Board (Principal Executive
Officer)
/s/ VINCE PISANO Vice President and Chief June 26, 2000
----------------------------------------------------- Financial Officer
Vince Pisano
/s/ ROBERT J. CRESCI Director June 26, 2000
-----------------------------------------------------
Robert J. Cresci
/s/ CARL S. HUTMAN Director June 26, 2000
-----------------------------------------------------
Carl S. Hutman
/s/ WILLIAM D. FORD Director June 26, 2000
-----------------------------------------------------
William D. Ford
/s/ RICHARD E. KROON Director June 26, 2000
-----------------------------------------------------
Richard E. Kroon
</TABLE>
51
<PAGE> 54
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
Report of Independent Auditors.............................. F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 2000 and
1999................................................... F-3
Consolidated Statements of Income for the years ended
March 31, 2000, 1999 and 1998.......................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended March 31, 2000, 1999 and 1998.............. F-5
Consolidated Statements of Cash Flows for the years ended
March 31, 2000, 1999 and 1998.......................... F-6
Notes to Consolidated Financial Statements................ F-7
</TABLE>
F-1
<PAGE> 55
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 as of March 31, 2000 and 1999, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended March 31, 2000. Our audits also
included the financial statement schedule listed in the Index at Item 14(d).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Quest Education
Corporation and subsidiaries at March 31, 2000 and 1999, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended March 31, 2000, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Atlanta, Georgia
May 12, 2000
F-2
<PAGE> 56
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,664,801 $12,936,466
Trade accounts receivable, less allowance for doubtful
accounts of $2,419,562 and $2,412,029, respectively.... 10,336,142 9,451,674
Notes receivable, less allowance for doubtful accounts of
$518,850 and $1,296,600, respectively.................. 518,850 1,296,600
Prepaid expenses and other current assets................. 3,591,260 2,724,014
Income taxes receivable................................... 1,308,707 --
Deferred income tax assets................................ 579,458 1,060,862
----------- -----------
Total current assets.............................. 22,999,218 27,469,616
Notes receivable, less allowance for doubtful accounts of
$659,448 and $334,836, respectively....................... 659,449 334,836
Property and equipment, net................................. 17,787,268 15,830,496
Deferred debt issuance costs, net of accumulated
amortization of $300,667 and $219,803, respectively....... 102,015 204,051
Covenants not to compete, net of accumulated amortization of
$1,778,241 and $1,642,291, respectively................... 898,151 1,034,101
Goodwill and other intangible assets, net of accumulated
amortization of $10,860,503 and $9,358,231,
respectively.............................................. 34,887,563 35,065,331
Deferred income tax assets.................................. 521,745 1,091,951
Other assets................................................ 327,481 510,202
----------- -----------
Total assets...................................... $78,182,890 $81,540,584
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 154,032 $ 63,473
Accrued compensation...................................... 2,897,939 2,996,082
Other accrued expenses.................................... 1,726,321 1,871,749
Deferred tuition income................................... 10,119,001 8,498,186
Current portion of notes payable and long-term debt....... 1,877,706 2,524,252
Income taxes payable...................................... -- 1,522,194
----------- -----------
Total current liabilities......................... 16,774,999 17,475,936
Notes payable and long-term debt, less current portion...... 11,862,276 19,264,558
Other liabilities........................................... 605,423 635,936
----------- -----------
Total liabilities................................. 29,242,698 37,376,430
Stockholders' equity:
Preferred stock, authorized 5,000,000 shares, none issued
and outstanding........................................ -- --
Common stock, $.01 par value -- authorized 15,000,000
shares; 7,960,616 and 8,220,287 shares issued and
outstanding, respectively.............................. 79,606 82,203
Additional paid-in capital on common stock................ 33,558,842 36,239,242
Retained earnings......................................... 15,301,744 7,842,709
Total stockholders' equity........................ 48,940,192 44,164,154
----------- -----------
Total liabilities and stockholders' equity........ $78,182,890 $81,540,584
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 57
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------
2000 1999 1998
------------ ----------- -----------
<S> <C> <C> <C>
Net revenues........................................... $115,255,733 $92,870,264 $59,675,509
School operating costs:
Cost of education and facilities..................... 53,568,304 41,676,975 27,086,555
Selling and promotional.............................. 16,993,048 12,650,746 8,643,485
Provision for losses on accounts and notes
receivable........................................ 3,584,609 2,469,746 1,151,669
General and administrative expenses.................. 25,525,145 23,194,656 15,424,764
Amortization of goodwill and intangibles............. 1,740,258 1,521,480 1,284,552
------------ ----------- -----------
Operating income..................................... 13,844,369 11,356,661 6,084,484
Interest expense (income), net (net of interest
income of $219,876 in 2000 and $572,725 in 1999
and net of interest expense of $282,870 in
1998)............................................. 1,193,616 1,204,002 (252,750)
------------ ----------- -----------
Income before provision for income taxes............. 12,650,753 10,152,659 6,337,234
Provision for income taxes........................... 5,191,718 4,165,522 2,484,773
------------ ----------- -----------
Net income........................................... $ 7,459,035 $ 5,987,137 $ 3,852,461
============ =========== ===========
Earning per share:
Basic................................................ $ 0.92 $ 0.74 $ 0.52
============ =========== ===========
Weighted average common shares outstanding........... 8,088,587 8,043,303 7,382,307
============ =========== ===========
Diluted.............................................. $ 0.91 $ 0.73 0.51
============ =========== ===========
Weighted average common shares outstanding........... 8,236,804 8,226,966 7,612,155
============ =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 58
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN RETAINED
CAPITAL ON EARNINGS
COMMON COMMON (ACCUMULATED TREASURY
STOCK STOCK DEFICIT) STOCK TOTAL
------- ----------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1997............ $74,181 $30,222,776 $(1,996,889) $(100,000) $28,200,068
Issuance of common stock in
connection with acquisitions....... 3,544 3,496,456 -- -- 3,500,000
Exercise of common stock options..... 351 119,101 -- -- 119,452
Common treasury shares retired....... (349) (99,651) -- 100,000 --
Shares returned from escrow and
retired............................ (432) 432 -- -- --
Net income........................... -- -- 3,852,461 -- 3,852,461
------- ----------- ----------- --------- -----------
BALANCE AT MARCH 31, 1998............ 77,295 33,739,114 1,855,572 -- 35,671,981
Exercise of common stock options..... 648 175,847 -- -- 176,495
Issuance of common stock in
connection with secondary
offering........................... 4,260 2,324,281 -- -- 2,328,541
Net income........................... -- -- 5,987,137 -- 5,987,137
------- ----------- ----------- --------- -----------
BALANCE AT MARCH 31, 1999............ 82,203 36,239,242 7,842,709 -- 44,164,154
Issuance of common stock in
connection with employee stock
purchase plan...................... 142 110,142 -- -- 110,284
Exercise of common stock options..... 1,219 616,877 -- -- 618,096
Common shares repurchased and
retired............................ (3,958) (3,407,419) -- -- (3,411,377)
Net income........................... -- -- 7,459,035 -- 7,459,035
------- ----------- ----------- --------- -----------
BALANCE AT MARCH 31, 2000............ $79,606 $33,558,842 $15,301,744 $ -- $48,940,192
======= =========== =========== ========= ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 59
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------
2000 1999 1998
------------ ------------ -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................................ $ 7,459,035 $ 5,987,137 $ 3,852,461
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation........................................ 3,541,660 2,288,567 1,617,897
Amortization of other assets........................ 1,740,258 1,656,570 1,284,552
Provision for losses on accounts and notes
receivable....................................... 3,584,609 2,469,746 1,151,669
Deferred income taxes............................... 1,051,610 327,825 430,460
Changes in operating assets and liabilities, net of
assets acquired and liabilities assumed:
Restricted cash.................................. -- 384,295 --
Trade accounts receivable........................ (4,469,077) (6,886,819) 22,255
Income taxes receivable.......................... (1,308,707) -- 155,542
Notes receivable................................. 453,137 (552,409) (1,478,790)
Prepaid expenses and other current assets........ (867,246) 220,331 (756,631)
Other assets..................................... 182,721 (247,494) 155,269
Accounts payable and accrued expenses............ (153,012) 78,634 (3,133,196)
Deferred tuition income.......................... 1,620,815 1,871,546 (1,438,135)
Income taxes payable............................. (1,522,194) 1,522,194 --
Other liabilities................................ (30,513) (366,529) 495,932
------------ ------------ -----------
Net cash provided by operating activities............. 11,283,096 8,753,594 2,359,285
INVESTING ACTIVITIES:
Purchases of businesses, net of cash acquired......... -- (39,394) 2,192,983
Purchases of property and equipment................... (5,498,432) (3,270,480) (2,199,621)
Net addition to goodwill and intangibles.............. (1,324,504) -- --
------------ ------------ -----------
Net cash used in investing activities................. (6,822,936) (3,309,874) (6,638)
FINANCING ACTIVITIES:
Proceeds from long-term debt.......................... 13,200,000 4,000,000 9,000,000
Principal payments on acquisition notes payable....... (19,014,620) (16,904,297) (3,984,017)
Payments on other amounts due to sellers.............. (2,234,208) (3,517,602) --
Issuance of common stock.............................. 110,284 2,328,541 --
Repurchase and retirement of common stock............. (3,411,377) -- --
Proceeds from exercise of common stock options........ 618,096 176,495 119,452
Increase in deferred financing costs.................. -- (36,173) (90,189)
------------ ------------ -----------
Net cash (used in) provided by financing activities... (10,731,825) (13,953,036) 5,045,246
------------ ------------ -----------
(Decrease) increase in cash and cash equivalents...... (6,271,665) (8,509,316) 7,397,893
Cash and cash equivalents at beginning of year........ 12,936,466 21,445,782 14,047,889
------------ ------------ -----------
Cash and cash equivalents at end of year.............. $ 6,664,801 $ 12,936,466 $21,445,782
============ ============ ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 60
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
1. ORGANIZATION AND NATURE OF BUSINESS
Quest Education Corporation ("Quest") operates diversified career-oriented
postsecondary education schools. We offer degree and, in certain locations,
diploma programs through our 30 schools located in 11 states. Our 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 23%, 17%, 15%, 12% and 10% of our fiscal 2000 net revenues
were derived from our schools in California, New Hampshire, Pennsylvania, Iowa
and Texas, respectively. No other schools in a single state represented over 10%
of net revenues for the year ended March 31, 2000. Approximately 71.3% of our
fiscal 2000 cash receipts were derived from Title IV programs as provided for by
the Higher Education Act of 1965, as amended.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Quest and our
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 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
Cash equivalents consist of overnight investments in a bank. These
investments are recorded at cost, which approximates market. We consider
investments with maturities of three months or less at the date of purchase to
be cash equivalents for purposes of the statement of cash flows.
At March 31, 2000 and 1999, we held $5,019,839 and $12,596,312,
respectively, in cash balances at certain financial institutions which amounts
were in excess of the $100,000 federally insured amounts. We monitor the
financial condition of these institutions since we are exposed to credit risk
for such excess amounts; however, at this time we do not believe any of these
institutions present such risk.
Notes Receivable
Notes receivable consist primarily of promissory notes issued to students
as a result of the loss of federal loan eligibility due to the change of
ownership regulations. Such notes have varying interest rates, 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.
F-7
<PAGE> 61
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-Lived Assets
We monitor 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, we
assesses the recoverability of the respective assets by determining whether the
carrying values of such assets will be recovered through undiscounted expected
future cash flows. Should we determine that the carrying values of the
respective assets are not recoverable we 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, less accumulated depreciation.
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.
Estimated useful lives for financial reporting purposes are as follows:
<TABLE>
<S> <C>
Buildings and building improvements......................... 20 - 30 years
Equipment, furniture and fixtures........................... 3 - 7 years
</TABLE>
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. As discussed in Note
3, Impact of Recently Issued Accounting Standards, effective April 1, 2000, we
will change our method of recognizing revenues from such nonrefundable fees.
We are generally required to refund a portion of a student's unearned
tuition upon withdrawal from one of our schools. The amount of tuition, if any,
that may be retained by us after payment of any potential refund is immediately
recognized as revenue.
Deferred tuition income represents the portion of student tuitions received
in advance of completion of the course of study.
Income Taxes
We use 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
F-8
<PAGE> 62
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assets and liabilities measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse.
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,
----------------------------------
2000 1999 1998
------- ---------- -----------
<S> <C> <C> <C>
Capital leases...................................... $46,000 $ 62,000 $ 392,000
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
Issuance of common stock in connection with
acquisitions...................................... -- -- 3,500,000
</TABLE>
Advertising
Advertising costs are expensed as incurred. We incurred approximately
$9,420,000, $6,822,000 and $4,503,000 in advertising costs for the years ended
March 31, 2000, 1999 and 1998, respectively.
Stock-Based Compensation
We use the intrinsic value method of accounting for our stock-based
compensation awards. Accordingly, compensation expense is measured and recorded
if the exercise price of the stock options (or other awards) is below the fair
value of our common stock on the date of grant. We disclose 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").
Earnings Per Share
We compute earnings per share in accordance with SFAS No. 128, "Earnings
per Share."
3. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
No. 101"). SAB No. 101 provides guidance on the recognition, presentation and
disclosure of revenue in financial statements and, in accordance therewith, we
will change our method of recognizing revenues on certain nonrefundable fees
charged to our students. We have historically recognized revenues for such
nonrefundable fees at the time a student begins classes. Under the new method,
such nonrefundable fees will be recognized as revenue on a straight-line basis
monthly over the semester to which the nonrefundable fees relate. We will adopt
the new method effective April 1, 2000. Based on information available to us, we
believe the cumulative effect of this change in accounting will be to decrease
net income in the first quarter of fiscal 2001 by approximately $1,026,000 or
$0.13 per share ($0.12 per diluted share). We also believe, had the new method
of recognizing revenues from nonrefundable fees been in effect during fiscal
2000 and 1999, net income would have decreased approximately $451,000 or $0.06
per share ($0.05 per diluted share) in fiscal 2000 and decreased approximately
$259,000 ($0.03 per diluted share) in fiscal 1999.
During fiscal 2000, we adopted American Institute of Certified Public
Accountants Statement of Position 98-1 Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 allows
for the capitalization of software that has been purchased, internally developed
or modified solely to meet an entity's internal needs. Prior to fiscal 2000, we
expensed all internal
F-9
<PAGE> 63
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
use software related costs as incurred. The effect of adopting SOP 98-1 was to
increase income for the year ended March 31, 2000 by $106,000, or $0.01 per
basic and diluted share.
4. REGULATORY MATTERS
We derive a substantial portion of our net revenues from financial aid
received by our 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 as amended ("HEA"). In
order to continue to participate in Title IV Programs, we must comply with
complex standards set forth in the HEA and the regulations promulgated
thereunder ("Regulations"). Among other things, these Regulations require our
schools to exercise due diligence in approving and disbursing funds and
servicing loans, limit the proportion of cash receipts of our schools derived
from Title IV Programs to no more than 90% 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 our schools participate in Title IV Programs and we believe we
are in compliance with the Regulations.
The failure of any of our schools to comply with the requirements of the
HEA or the Regulations could result in the restriction or loss by us or such
school of its ability to participate in Title IV Programs. If the Department
determines that any of our schools is not financially responsible, the
Department may require that we 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 an individual
school in our most recent fiscal year ranged from $.3 million to $5.2 million
and one-half of the aggregate Title IV funds received by all of our schools in
the most recent fiscal year equaled $38.5 million.
In November 1997, the Department published new regulations regarding
financial responsibility which became effective on July 1, 1998. The new
regulations apply to our fiscal years commencing April 1, 1999, and thereafter,
however, the regulations provided 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 former
regulations, whichever was more favorable. The new standards replace the
previously required acid test ratio, tangible net worth standard and 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 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 years, subject to more rigorous financial aid disbursement and
financial monitoring requirements of the Department. Based on our interpretation
of the application of these new standards to our financial statements for the
year ended March 31, 2000, our calculations result in a composite score of 2.2
on a consolidated basis, with each individual institution included in the
consolidating financial statements having a composite score greater than 1.5.
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.
F-10
<PAGE> 64
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. ACQUISITIONS
During the fiscal years ended March 31, 1999 and 1998, we 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 excess of cost over acquired net assets of the
businesses acquired has been recorded as intangible assets and is being
amortized on a straight line basis.
The following summarizes key information relevant to the fiscal 1999 and
1998 acquisitions:
IOWA ACQUISITION
On November 30, 1998, we 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
operations of the Iowa Acquisition are included in our consolidated
statement of income effective November 30, 1998.
In addition, the former sellers of the Iowa Acquisition owed us
$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 consolidated 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, we 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 our
Common Stock. The results of operations of the Hesser Acquisition are
included in our 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.
CHI INSTITUTE ACQUISITION
On February 14, 1998, we 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 our Common Stock. The results of
operations of the CHI Institute Acquisition are included in our
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.
F-11
<PAGE> 65
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 our 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 our 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.
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
2000 1999
------------ -----------
<S> <C> <C>
Land and land improvements................................. $ 791,568 $ 791,568
Buildings and building improvements........................ 7,656,136 7,123,778
Equipment, furniture and fixtures.......................... 17,199,825 13,059,040
Leasehold improvements..................................... 4,823,249 4,074,950
------------ -----------
30,470,778 25,049,336
Less accumulated depreciation and amortization............. (12,683,510) (9,218,840)
------------ -----------
$ 17,787,268 $15,830,496
============ ===========
</TABLE>
F-12
<PAGE> 66
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Bank lines of credit, monthly interest-only payments,
matures November 30, 2001. As of March 31, 2000,
$27,500,000 was available under the lines of credit(a).... $ 7,500,000 $13,000,000
9% mortgage payable to a bank, due in monthly installments
of principal and interest, secured by land and building of
one school................................................ 518,141 560,365
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................ 5,600,000 7,834,208
8% to 12% capital leases, payable periodically through
September 2002, secured by equipment...................... 121,841 394,237
----------- -----------
13,739,982 21,788,810
Less current portion........................................ (1,877,706) (2,524,252)
----------- -----------
$11,862,276 $19,264,558
=========== ===========
</TABLE>
---------------
(a) In November 1998, we entered into an Amended and Restated Loan Agreement
(the "Agreement") with a major U.S. Bank (the "Bank"). The Agreement
increased our 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. In November 1999,
per the Agreement, the available borrowing capacity by was reduced by
$5,000,000 to $35,000,000. Interest is charged on borrowings at different
floating rates above LIBOR depending on certain financial conditions of the
Company (7.63% at March 31, 2000). 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 our assets.
Aggregate maturities of long-term debt at March 31, 2000 are as follows:
<TABLE>
<S> <C>
Fiscal year ending March 31, 2001........................... $ 1,877,706
2002...................................................... 1,824,097
2003...................................................... 9,050,567
2004...................................................... 453,535
2005...................................................... 258,429
Thereafter................................................ 275,648
-----------
$13,739,982
===========
</TABLE>
Interest paid during the years ended March 31, 2000, 1999 and 1998 was
approximately $1,465,000, $1,499,000 and $254,000, respectively.
8. STOCKHOLDERS' EQUITY
1998 Offering
On July 2, 1998, we completed a secondary offering. A total of 2,000,000
shares were sold at $8.75 per share which included 126,001 shares sold by us and
1,873,999 shares sold by certain selling stockholders. We
F-13
<PAGE> 67
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
received none of the proceeds from the sale of shares by the selling
stockholders. In connection with the secondary offering, we 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 us in July 1998 at
$8.75 per share. Our net proceeds from the sale of shares from the secondary
public offering and over-allotments were approximately $3.5 million. We 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 were used to repay promissory notes
payable to sellers of various schools acquired.
Preferred Stock
We have authorized 5,000,000 shares of Preferred Stock; terms will be set
upon issuance.
Common Stock
As of March 31, 2000, we reserved the following numbers of shares of Common
Stock for future issuance related to the following:
<TABLE>
<S> <C>
Common stock purchase warrants.............................. 83,665
Stock options............................................... 1,441,577
---------
1,525,242
=========
</TABLE>
Common Stock Purchase Warrants
In connection with the issuance of Convertible Preferred Stock in fiscal
1991, a third party was granted warrants to purchase 26,667 shares of Common
Stock exercisable at $3.60 per share. These warrants expired on July 31, 1999.
At the time of our initial public offering ("IPO") in fiscal 1997, warrants
to purchase 16,667 shares of Common Stock at $10 per share were issued to a
third party. These warrants expire on October 28, 2001 and are outstanding as of
March 31, 2000.
In October 1998, we 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.
Share Rights Program
Effective May 21, 1999, we adopted a Share Rights Program which is commonly
known as a "Poison Pill Plan". In addition, 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 our company.
Repurchase of Common Stock
We repurchased and retired 395,800 common shares during the year ended
March 31, 2000 at an aggregate cost of $3,411,377 under a stock repurchase
program approved by the Board of Directors on May 3, 1999.
9. STOCK OPTION PLANS
We grant employees and non-employee directors options to purchase our
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.
F-14
<PAGE> 68
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of our employee and non-employee director stock
option activity, and related information for the years ended March 31, is as
follows:
<TABLE>
<CAPTION>
NUMBER OF RANGE OF WEIGHTED AVERAGE
SHARES EXERCISE PRICES EXERCISE PRICE
--------- --------------- ----------------
<S> <C> <C> <C>
Outstanding at March 31, 1997................ 821,499 $2.40 - $11.50 $7.04
Granted.................................... 277,333 7.06 - 9.88 9.34
Exercised.................................. (34,662) 2.40 - 4.00 3.45
Canceled/forfeited......................... (38,166) 3.60 - 11.50 7.40
---------
Outstanding at March 31, 1998................ 1,026,004 2.40 - 11.50 7.77
Granted.................................... 121,087 5.81 - 8.25 6.50
Exercised.................................. (64,757) 2.40 - 10.00 2.73
Canceled/forfeited......................... (124,541) 2.40 - 11.50 5.39
---------
Outstanding at March 31, 1999................ 957,793 2.40 - 11.50 8.26
Granted.................................... 276,500 7.75 - 9.38 7.76
Exercised.................................. (120,880) 2.40 - 5.81 5.03
Canceled/forfeited......................... (45,533) 3.60 - 11.50 9.49
---------
Outstanding at March 31, 2000................ 1,067,880 2.40 - 11.50 8.44
=========
</TABLE>
The following table summarizes information about employee and director
stock options outstanding and exercisable at March 31, 2000 by exercise price:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------- -------------------
WEIGHTED
NUMBER AVERAGE
OUTSTANDING AT REMAINING NUMBER
RANGE OF MARCH 31, CONTRACTUAL EXERCISABLE AT
EXERCISE PRICES 2000 LIFE MARCH 31, 2000
--------------- -------------- ----------- -------------------
<S> <C> <C> <C>
$2.40 - $ 4.00............................... 135,547 3.69 years 112,047
7.06 - 8.50............................... 363,833 7.61 years 78,734
9.38 - 11.50............................... 568,500 5.56 years 396,000
--------- -------
1,067,880 586,781
========= =======
</TABLE>
Options to purchase 586,781, 418,537 and 431,038 shares of Common Stock
were exercisable at March 31, 2000, 1999 and 1998, respectively. Options
available for future grant totaled 373,487, 604,454 and 101,000 at March 31,
2000, 1999 and 1998, respectively.
Employee Stock Purchase Plan
In September 1998, our shareholders approved an employee stock purchase
plan ("ESPP"). The ESPP allows employees to purchase shares of our Common Stock
at six-month intervals through payroll deductions. For shares purchased, the
purchase price is the lower of 85% of the fair market value of the Common Stock
on the first day of the offering period or 85% of the market price of the Common
Stock on the last business day of the exercise period.
The ESPP is a qualified plan under Section 423 of the Internal Revenue Code
and meets the requirements of a non-compensatory plan. The amount paid for
shares purchased may not exceed 10% of the employee's annual compensation or
$25,000 based on calculating the market price of the Common Stock at the
beginning of each offering period.
At March 31, 2000, 14,249 shares of Common Stock had been purchased under
the ESPP at an aggregate cost of $110,284.
F-15
<PAGE> 69
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Non-Employee Director Stock Option Plan
We have 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 our behalf by increasing their personal stake in Quest.
The maximum number of options that may be granted under the Directors' Plan is
200,000. As of March 31, 2000, 70,000 options were available for future grant.
Each member of our Board of Directors who otherwise (i) is not currently an
employee, (ii) is not a former employee still receiving compensation for prior
services, and (iii) is not currently receiving compensation from us 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 our Common Stock 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 the 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 our stockholders and provided that a sufficient number of shares remain
available under the Directors' Plan, each year immediately following the date of
the annual meeting, we will automatically grant to each non-employee director
who is then serving on the Board an option to purchase 3,000 shares of our
Common Stock, which options will be immediately vested.
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 we had accounted for our 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, 2000, 1999 and 1998, respectively: (i)
dividend yield of 0%; (ii) expected volatility of .445, .806 and .514; (iii)
risk-free interest rates of 5.11%, 4.55% and 6.09% and (iv) expected life of
5.87, 5.37 and 5.65 years. The weighted average fair value of options granted
under our stock option plans was $3.85, $4.29 and $5.60 for the years ended
March 31, 2000, 1999 and 1998, 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 our 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-16
<PAGE> 70
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 stock options is amortized to expense over the options'
vesting period. Our pro forma information using SFAS No. 123 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Pro forma net income............................... $6,820,933 $5,687,154 $3,510,440
Pro forma earnings per share:
Basic............................................ 0.84 0.70 0.48
Diluted.......................................... 0.83 0.69 0.46
</TABLE>
10. INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal.......................................... $3,519,092 $3,262,042 $1,701,104
State............................................ 621,016 575,655 353,209
---------- ---------- ----------
4,140,108 3,837,697 2,054,313
Deferred:
Federal.......................................... 893,868 278,651 453,453
State............................................ 157,742 49,174 (22,993)
---------- ---------- ----------
1,051,610 327,825 430,460
---------- ---------- ----------
$5,191,718 $4,165,522 $2,484,773
========== ========== ==========
</TABLE>
A reconciliation of the provision for income taxes computed at the
statutory federal income tax rate on income before extraordinary item to our
effective income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Federal............................................ $4,301,068 $3,451,904 $2,154,659
State, net of federal income tax benefit........... 427,011 471,093 237,077
Permanent differences.............................. 309,060 263,975 36,006
Other, net......................................... 154,579 (21,450) 57,031
---------- ---------- ----------
$5,191,718 $4,165,522 $2,484,773
========== ========== ==========
</TABLE>
F-17
<PAGE> 71
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 our deferred income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Deferred income tax assets:
Non-compete agreements and other intangibles.............. $ 644,548 $ 755,530
Property and equipment.................................... -- 165,798
Allowance for doubtful accounts........................... 1,134,595 1,617,388
Accrued expenses and other liabilities.................... -- 21,210
Other, net................................................ -- 50,000
---------- ----------
Total deferred income tax assets.................. 1,779,143 2,609,926
Deferred income tax liabilities:
Prepaid expenses.......................................... (441,057) (457,113)
Property and equipment.................................... (143,180) --
Accrued expenses.......................................... (93,703) --
---------- ----------
Total deferred income tax liabilities............. (677,940) (457,113)
---------- ----------
Net deferred income tax assets.............................. $1,101,203 $2,152,813
========== ==========
</TABLE>
Income tax payments of approximately $7,005,000, $2,382,000 and $2,130,000
were made in the years ended March 31, 2000, 1999 and 1998, respectively.
11. LEASES
We lease 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 $7,430,000,
$5,775,000 and $4,396,000 for the years ended March 31, 2000, 1999 and 1998,
respectively.
Approximate future minimum lease payments under noncancelable operating
leases in effect at March 31, 2000 are as follows:
<TABLE>
<S> <C>
Year ending March 31,
2001...................................................... $ 7,589,000
2002...................................................... 6,353,000
2003...................................................... 5,641,000
2004...................................................... 5,040,000
2005...................................................... 3,655,000
Thereafter................................................ 7,489,000
-----------
$35,767,000
===========
</TABLE>
12. EMPLOYEE BENEFIT PLAN
We sponsor 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. We match a portion of such contributions
up to a maximum percentage of the employees' compensation. Our contributions to
the plan and to predecessor plans assumed in the Iowa
F-18
<PAGE> 72
QUEST EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Acquisition were approximately $492,000, $255,000 and $111,000 for the years
ended March 31, 2000, 1999 and 1998, respectively.
13. OTHER EXPENSES
Contingencies
On January 12, 1998, and prior to the acquisition, 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 we agreed to pay a total of $175,000 ($100,000 was paid by our
insurance carrier) 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 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 our financial condition or results of operations.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
We use the following methods and assumptions in estimating its fair value
disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported on the
consolidated balance sheets for cash and cash equivalents 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 our notes payable and
long-term debt are estimated using discounted cash flow analyses, based on our
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, 2000 and 1999, the estimated fair values of our notes payable and
long-term debt approximate their carrying values.
F-19
<PAGE> 73
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, 2000, 1999, and 1998:
<TABLE>
<CAPTION>
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Numerator:
Net income............................................... $7,459,035 $5,987,137 $3,852,461
========== ========== ==========
Denominator:
Denominator for basic earnings per share-weighted average
shares................................................ 8,088,587 8,043,303 7,382,307
Effect of dilutive securities:
Options.................................................. 134,129 163,438 214,145
Warrants................................................. 14,088 20,225 15,703
---------- ---------- ----------
Dilutive potential common shares(1)........................ 148,217 183,663 229,848
---------- ---------- ----------
Denominator for diluted earnings per share-adjusted
weighted average shares.................................. $8,236,804 $8,226,966 $7,612,155
========== ========== ==========
Earnings per share:
Basic.................................................... $ 0.92 $ 0.74 $ 0.52
========== ========== ==========
Diluted.................................................. $ 0.91 $ 0.73 $ 0.51
========== ========== ==========
</TABLE>
---------------
(1) Warrants and stock options to purchase 110,896, 18,500 and 665,500 shares of
common stock at March 31, 2000, 1999 and 1998, respectively, were
outstanding but were not included in the computation of diluted earnings per
share because the exercise price was greater than the average market price
of the common shares and, therefore, the effect would be antidilutive.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for the fiscal years ended March 31, 2000 and 1999 (in thousands, except per
share data):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 2000
-----------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues....................................... $24,122 $26,804 $30,006 $34,324
Operating income................................... 775 1,544 5,326 6,200
Net income......................................... 309 721 2,880 3,549
Earnings per share data:
Basic............................................ 0.04 0.09 0.36 0.45
Diluted.......................................... 0.04 0.09 0.36 0.44
</TABLE>
<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
Operating income................................... 480 1,049 4,621 5,207
Net income......................................... 84 423 2,492 2,988
Earnings per share data:
Basic............................................ 0.01 0.05 0.31 0.36
Diluted.......................................... 0.01 0.05 0.30 0.36
</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-20
