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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14D-9
Solicitation/Recommendation Statement
Under Section 14(d)(4) of the
Securities Exchange Act of 1934
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QUEST EDUCATION CORPORATION
(Name of Subject Company)
QUEST EDUCATION CORPORATION
(Name of Person(s) Filing Statement)
Common Stock, Par Value $0.01 Per Share
(Title of Class of Securities)
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74835F 10 2
(CUSIP Number of Class of Securities)
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Gary D. Kerber
President and Chairman of the Board
Quest Education Corporation
1400 Hembree Road, Suite 100
Roswell, Georgia 30076
(770) 510-2000
(Name, Address and Telephone Number of Person Authorized to Receive Notice and
Communications on Behalf of the Person(s) Filing Statement)
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With a copy to:
Morris C. Brown, Esq.
Greenberg Traurig, P.A.
777 S. Flagler Drive, Suite 300-East
West Palm Beach, Florida 33401
(561) 650-7900
[_]Check the box if the filing relates solely to preliminary communications
made before the commencement of a tender offer.
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INTRODUCTION
This Solicitation/Recommendation Statement on Schedule 14D-9 (this "Schedule
14D-9") relates to an offer by Odyssey Acquisition Corp., a Delaware
corporation ("Purchaser") and a wholly-owned subsidiary of Kaplan, Inc.
("Parent"), to purchase all of the outstanding shares of Common Stock (as
defined below) and the associated Rights (as defined below) of Quest Education
Corporation, a Delaware corporation (the "Company"). Parent is a wholly-owned
subsidiary of The Washington Post Company, a Delaware corporation.
ITEM 1. SUBJECT COMPANY INFORMATION.
The name of the subject company is Quest Education Corporation, our
principal executive offices are located at 1400 Hembree Road, Suite 100,
Roswell, Georgia 30076 and our phone number is (770) 510-2000. This Schedule
14D-9 relates to our common stock, par value $0.01 per share (the "Common
Stock"), together with the associated rights (the "Rights") to purchase Series
A Junior Participating Preferred Stock, par value $.01 per share, issued
pursuant to the Preferred Share Purchase Rights Plan dated as of May 14, 1999
(as amended from time to time, the "Rights Agreement"), between the Company
and First Union Nation Bank, as rights agent (the "Rights Agent"). As of June
21, 2000, there were 7,960,616 shares of Common Stock outstanding.
ITEM 2. IDENTITY AND BACKGROUND OF FILING PERSON.
(a) Name and Address. The name, business address and business telephone
number of the Company, which is the person filing this statement, are set
forth in Item 1 above, which information is incorporated herein by reference.
(b) Tender Offer. This Schedule 14D-9 relates to the tender offer made by
Purchaser, disclosed in a Tender Offer Statement on Schedule TO dated June 28,
2000 (as amended or supplemented from time to time, the "Schedule TO"), to
purchase all the outstanding shares of Common Stock at a price (the "Offer
Price") of $18.35 per share, net to the seller in cash, without interest, upon
the terms and subject to the conditions set forth in the Offer to Purchase
dated June 28, 2000 (as amended or supplemented from time to time, the "Offer
to Purchase"), and the related Letter of Transmittal (which, together with any
amendments or supplements thereto, collectively constitute the "Offer"),
copies of which are filed as Exhibits (a)(1) and (a)(2) hereto, respectively,
and incorporated herein by reference.
The Offer is being made pursuant to an Agreement and Plan of Merger dated as
of June 26, 2000, among the Company, Parent and Purchaser (the "Merger
Agreement"), which provides for (i) the making of the Offer by Purchaser,
subject to the conditions set forth in the Offer and to the conditions and
upon the terms of the Merger Agreement and (ii) the subsequent merger of
Purchaser with and into the Company (the "Merger"). In the Merger, each share
of Common Stock outstanding at the Effective Time (as defined in the Merger
Agreement) will, by virtue of the Merger and without any action by the holder
thereof, be converted into the right to receive, without interest, an amount
in cash equal to the highest price paid per share of Common Stock pursuant to
the Offer (the "Merger Consideration") and each outstanding option will be
exchanged for a cash payment from the Company in any amount in cash equal to
the difference between $18.35 and the exercise price of the relevant option.
The Merger Agreement, a copy of which is filed as attached Exhibit (e)(1), is
summarized in Section 10 of the Offer to Purchase and incorporated herein by
reference.
In connection with the Merger Agreement, our directors, executive officers
and certain other stockholders have entered into agreements which, among other
things, and subject to certain exceptions, require each stockholder to tender
his, her or its shares of Common Stock in the Offer.
As set forth in the Schedule TO, the principal executive offices of
Purchaser and Parent are located at 888 Seventh Avenue, New York, New York
10106.
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ITEM 3. PAST CONTACTS, TRANSACTIONS, NEGOTIATIONS AND AGREEMENTS.
Except as set forth in the response to this Item 3 or in Annex A attached
hereto or as incorporated by reference herein, to our knowledge, there are no
material agreements, arrangements or understandings and no actual or potential
conflicts of interest between us or our affiliates and (1) our executive
officers, directors or affiliates; or (2) Purchaser or its respective
executive officers, directors or affiliates.
A summary of the material provisions of the Merger Agreement is included in
"Background of the Offer; Contacts with the Company; the Merger Agreement;
Other Agreements" in the Offer to Purchase, which is incorporated by reference
herein. The summary of the Merger Agreement in the Offer to Purchase is
qualified in its entirety by reference to the Merger Agreement.
Certain contracts, arrangements or understandings between us or our
affiliates and certain of our directors, executive officers and affiliates are
described in the Information Statement of the Company attached to this
schedule as Annex A (the "Information Statement"). The Information Statement
is being furnished to our stockholders pursuant to Section 14(f) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule
14f-1 issued under the Exchange Act in connection with Purchaser's right
(after acquiring at least 51% of the outstanding shares of Common Stock on a
fully-diluted basis pursuant to the Offer) to designate persons to our Board
of Directors (the "Purchaser Board") other than at a meeting of our
stockholders. The Information Statement is incorporated herein by reference.
As described in the Information Statement, to maximize stockholder value, we
had agreed with Gary D. Kerber, our President and Chairman of the Board, and
Vince Pisano, our Vice President and Chief Financial Officer, that if we are
sold for more than $10.00 per share, 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 by
which the purchase price per share exceeds $10.00 and we had also agreed to
pay them one year's salary if their employment was terminated within one year
after we experience a change in control. These Change of Control Agreements
are filed as Exhibits (e)(11) and (e)(12) hereto, respectively, and are
incorporated herein by reference. In connection with the Merger, the Change of
Control Agreements were amended to eliminate the one year's salary provision
and to limit the amounts paid under those agreements to the lesser of
(a) $1,127,686 with respect to Mr. Kerber and $847,742 with respect to Mr.
Pisano or (b) the maximum amount that can be paid without being subject to an
excise tax under the Internal Revenue Code. Also, in connection with the
Merger, Mr. Pisano and Mr. Kerber have entered into new employment agreements
with us which will be effective once the Merger is completed. A summary of the
material provisions of the new employment agreements is included in "Other
Agreements" in the Offer to Purchase, which is incorporated by reference
herein. The amendments to the Change of Control Agreements are filed as
Exhibits (e)(13) and (e)(6) hereto, and the new Employment Agreements are
filed as Exhibits (e)(3) and (e)(4) hereto, and are incorporated herein by
reference.
As described in the Information Statement, we had agreed with Mr. Kosentos
to pay him one year's base salary if we experience a change of control and he
chooses to terminate his employment within twelve months. This agreement was
superseded by his employment agreement with us which was entered into in
connection with the Merger and will be effective once the Merger is completed.
Mr. Kosentos' new employment agreement is filed as Exhibit (e)(5) hereto and
is incorporated herein by reference.
Simultaneously with our execution of the Merger Agreement, each of our
directors and executive officers executed and delivered an agreement to tender
his shares of Common Stock in the Offer and an irrevocable proxy to vote his
shares of Common Stock in favor of the Merger. For a description of these and
certain other contracts, agreements, arrangements or understandings and any
actual or potential conflicts of interests between us or our affiliates and
(1) our executive officers, directors or affiliates, or (2) Purchaser or its
respective executive officers, directors or affiliates, see "Background of the
Offer; Contacts with the Company; Merger Agreement; Other Agreements" in the
Offer to Purchase, which is incorporated by reference herein.
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The Merger Agreement provides that we will take all actions necessary and
appropriate to provide that, upon the Effective Time, each outstanding stock
option granted under any of our 1996 Stock Incentive Plan and Non-Employee
Director Stock Option Plan (collectively, the "Company Stock Option Plans") or
under any other plan or arrangement, each outstanding warrant and option to
purchase shares, whether or not then exercisable or vested, and each right to
purchase shares of Common Stock under our Employee Stock Purchase Plan (the
"Company Purchase Plan"), shall be cancelled and, in exchange therefor, each
holder of such Company stock option, warrant, option or right to purchase
shall receive an amount in cash in respect thereof, if any, equal to the
product of (i) the excess, if any, of the Merger Consideration over the per
share exercise price thereof and (ii) the number of shares subject thereto
(such payment to be net of applicable withholding taxes).
We have agreed to use our reasonable best efforts to obtain all necessary
waivers, consents or releases from holders of Company stock options, other
options, warrants and rights to purchase shares of Common Stock and shall take
any such action as may be reasonably necessary to give effect to, and to
accomplish the above transactions involving Company stock options.
ITEM 4. THE SOLICITATION OR RECOMMENDATION.
(a) Solicitation Recommendation.
At a meeting held on June 26, 2000, our Board of Directors (the "Board")
unanimously (i) approved the Merger Agreement, the Offer and the Merger, (ii)
determined that the Offer and the Merger are fair to, and in the best
interests of, holders of shares of our Common Stock and (iii) voted to
recommend that holders of shares of Common Stock tender their shares of Common
Stock pursuant to the Offer. Accordingly, the Board unanimously recommends
that the stockholders of the Company tender their shares of Common Stock
pursuant to the Offer. Copies of our letter to our stockholders communicating
the Board's recommendation and our joint press release with Parent announcing
the Merger Agreement and the transactions contemplated thereby are filed as
Exhibits (a)(3) and (a)(4) hereto, respectively, and are incorporated herein
by reference.
(b) Background.
In 1997, we retained Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ") to explore a possible acquisition or business combination. By early
1998, after several months of contacting possible candidates for such a
transaction, we determined that no potential transaction would give our
stockholders appropriate value and that we would continue to build our
business internally and by acquisition.
From time to time thereafter, we have been the subject of informal inquiries
regarding a possible acquisition or business combination. Although such
inquiries did not proceed beyond very preliminary stages, in February 2000, we
were approached by another educational institution through DLJ regarding a
possible combination. On February 13, 2000, representatives of that
institution and our representatives met in New York City where preliminary
discussions were conducted. Based on these discussions, we and the other
educational institution indicated our desire to consider such a transaction.
As a result, on the next day, we and the other educational institution
executed a confidentiality and standstill letter expiring on February 24,
2000. DLJ continued to advise us with respect to the proposed transaction.
Over the following days, information exchanges took place and we discussed
the possible transaction through DLJ. The letter expired by its terms without
any agreement being reached with regard to share values. Following the
expiration of the letter, we continued to discuss a possible transaction with
the other educational institution, but continued to be unable to agree with
respect to value. Shortly before we began our discussions with Purchaser, the
other institution's investment bankers informally provided us with a range of
value for the Company of $12.00 to $15.00 per share. We considered such a
range inadequate, and, in light of the failure of the long series of
discussions to produce any agreement, we considered the possibility of
successfully completing a transaction too remote to continue discussions with
that candidate after we received the offer described below. After we received
the offer described below, we also received an indication from another
educational institution indicating a willingness to discuss a transaction for
$11.50 per share in cash or $13.00 per share in stock. For the same reasons,
the Board of Directors did not continue discussions with that candidate.
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In late May 2000, Robert Greenberg, the Executive Vice President of Parent,
telephoned Gary Kerber, our Chief Executive Officer, to discuss a potential
transaction. Mr. Kerber was traveling at the time and thus, no conversation
ensued.
During the week of May 29, 2000, Robert Greenberg telephoned Gary Kerber to
set up a meeting between certain executives of Parent and certain of our
executives to discuss a potential transaction. A meeting was scheduled for
June 5, 2000.
On June 1, 2000, certain executives of Parent and on June 2, 2000, certain
executives of Parent, General Counsel of Parent and Donald E. Graham, Chairman
of the Board and Chief Executive Officer of The Washington Post Company, the
parent company of Parent, had discussions regarding the proposed terms of a
potential transaction.
On June 5, 2000, Jonathan N. Grayer, Chief Executive Officer and President
of Parent, Robert Greenberg, Ross Hamachek, the Chief Financial Officer of
Parent, and a representative of The Washington Post Company met with Gary
Kerber and Vince Pisano, our Chief Financial Officer, to discuss a potential
transaction. At the meeting, Parent made a proposal to acquire all of the
outstanding shares of our Common Stock and options to purchase shares of
Common Stock at a price of $18.60 per share, subject to due diligence and
satisfactory agreement between Parent and the Company on other aspects of the
potential transaction. On the same day, Parent entered into a nondisclosure
agreement with the Company.
On June 6, 2000, Gary Kerber and our outside general counsel, Morris Brown,
participated in a telephone call with our Board of Directors and investment
banking advisor, in which the Board of Directors authorized us to proceed with
discussions.
On June 7, 2000, Ross Hamachek sent to Gary Kerber a list of discussion
points for a subsequent telephone conversation regarding the potential
transaction. Mr. Kerber then telephoned Mr. Hamachek and they discussed the
points, and Mr. Kerber informed Mr. Hamachek that he had had a telephonic
discussion with certain of our representatives and that we were authorized to
proceed with discussions with Parent regarding the potential transaction.
During the period from June 5, 2000 through June 26, 2000, representatives
of Parent and the legal and accounting advisors to Parent conducted a due
diligence review of the Company. In addition, during this period
representatives of Parent also visited certain of our schools and the legal
advisors to Parent and our legal advisors negotiated the terms of the Merger
Agreement.
After discussions relating to the information supplied to Parent by the
Company, on the evening of June 25, 2000 and the morning of June 26, 2000,
Jonathan Grayer and Gary Kerber negotiated a $0.25 per share price reduction.
On June 26, 2000, our Board of Directors held a special meeting at which all
of the members were present. DLJ made a presentation regarding certain
financial analyses it had performed in connection with its review of the Offer
and Merger, and rendered its oral and written opinion that subject to certain
assumptions and qualifications, the consideration to be received by the
holders of our Common Stock in the Offer and Merger pursuant to the Merger
Agreement was fair to such holders from a financial point of view.
Representatives of Greenberg Traurig also gave an update on the various legal
aspects of the transaction. At the conclusion of this meeting, our Board of
Directors unanimously approved the Offer, the Merger and the Merger Agreement,
determined that the Offer, the Merger and the Merger Agreement are fair to and
in the best interests of our stockholders, and recommended that our
stockholders accept the Offer and tender their Shares pursuant thereto.
The Merger Agreement was finalized and executed on June 26, 2000, and a
joint press release announcing the proposed Offer and the Merger was issued on
June 27, 2000.
On June 28, 2000, Parent and Purchaser commenced the Offer.
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(c) Reasons.
In making the determinations and recommendations set forth in subparagraph
(a) above, the Board considered a number of factors, including, without
limitation, the following:
(i) the amount and form of consideration to be received by our
stockholders in the Offer and the Merger;
(ii) our prospects and the risks and benefits inherent in remaining
independent, including increasing competition in the postsecondary
education industry;
(iii) the possible alternatives to the Offer and the Merger (including
the possibility of continuing to operate the Company as an independent
entity) and other potential business combination transactions as well as
discussions with other of our potential acquirers, the possibility that
other potential acquirers would offer greater value for the Company, the
range of possible benefits to our stockholders of such alternatives and the
timing and likelihood of accomplishing the goal of any of such
alternatives;
(iv) information with regard to our financial condition, results of
operations, business and prospects, the regulatory approvals required to
consummate the Offer and the Merger as well as current economic and market
conditions (including current conditions in the industry in which we
compete);
(v) the historical and recent trading activity and market prices of
shares of our Common Stock and the fact that the Offer and the Merger will
enable the holders of shares of our Common Stock to realize a premium of
98.5% over $9.24, the average closing price of the Common Stock for the 30
trading days ended June 26, 2000;
(vi) the fact that the Merger Agreement permits us to furnish information
to, and enter into discussions or negotiations with, any person that makes
an unsolicited bona fide written proposal to acquire us pursuant to a
merger, consolidation, share exchange, business combination, tender or
exchange offer or other similar transaction if, (A) our Board of Directors
determines in good faith (after consultation with its financial advisor)
that the proposal would, if consummated, result in a transaction more
favorable to our stockholders from a financial point of view than the
transactions contemplated by the Merger Agreement, (B) our Board of
Directors further determines in good faith after consultation with its
financial adviser and outside counsel that the proposal is as likely to be
consummated, taking into account the legal, financial, regulatory, and
other aspects of such proposal, as the transactions contemplated hereby,
and, after consultation with its outside counsel, that the failure to do so
would cause our Board of Directors to breach its fiduciary duties to the
Company or our stockholders under applicable law (any such proposal, a
"Superior Proposal"), (C) no information is so furnished, and no such
discussions or negotiations are held, prior to the execution by the
receiving party and us of a confidentiality agreement on terms no less
favorable to us than those contained in the Confidentiality Agreement (as
defined in the Merger Agreement), and (D) such actions are not in violation
of the Merger Agreement;
(vii) the fact that the Merger Agreement permits our Board of Directors
to withdraw or modify its approval or recommendation of the Offer and the
Merger if, prior to the acceptance for payment of shares of Common Stock
pursuant to the Offer, in connection with an acquisition proposal, the
Board of Directors determines in good faith (A) after having received
advice from outside counsel, that the failure to take such action would be
a breach of the fiduciary duties of the Board under applicable law and (B)
that the acquisition proposal constitutes a Superior Proposal (as defined
above);
(viii) the fact that the Offer and the Merger provide for a prompt cash
tender offer for all of the shares of Common Stock to be followed by the
Merger for the same consideration, thereby enabling our stockholders, at
the earliest possible time, to obtain the benefits of the transaction in
exchange for their shares of Common Stock;
(ix) the financial analysis and presentation of DLJ to our Board on June
26, 2000, and the oral and written opinion of DLJ on June 26, 2000, the
date the Board adopted the Merger Agreement, to the effect
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that, as of such date, and based upon and subject to certain assumptions,
limitations and qualifications stated in such opinion, the $18.35 per share
cash consideration to be received by holders of shares of Common Stock
pursuant to the Merger Agreement was fair, from a financial point of view,
to such holders. The full text of DLJ's written opinion, dated June 26,
2000, which sets forth the assumptions made, matters considered and
limitations on the review undertaken by DLJ, is attached hereto as Exhibit
(e)(2) and is incorporated herein by reference. DLJ's opinion is directed
only to the fairness, from a financial point of view, of the cash
consideration to be received in the Offer and the Merger by holders of
shares of Common Stock and is not intended to constitute, and does not
constitute, a recommendation as to whether any stockholder should tender
shares of Common Stock pursuant to the Offer. Holders of shares of Common
Stock are urged to read such opinion carefully in its entirety;
(x) the high likelihood that the proposed acquisition would be
consummated, in light of the fact that the Offer and Merger are not subject
to any financing contingencies and the financial strength of Purchaser and
Parent;
(xi) the belief of our Board of Directors that the combined company would
provide advancement opportunities for our employees and the fact that
certain key employees would be entering into employment agreements to be
effective after the Merger is completed; and
(xii) the terms of the Merger Agreement, including the parties'
representations, warranties and covenants and the conditions to their
respective obligations.
The foregoing discussion of the information and factors considered by our
Board of Directors is not intended to be exhaustive, but includes the material
factors considered by the Board of Directors. In view of the variety of
factors considered in connection with its evaluation of the Offer and the
Merger, the Board of Directors did not find it practicable to, and did not,
quantify or otherwise assign relative weights to the specific factors or
determine that any factor was of particular importance. Rather, the Board
viewed its position and recommendations as being based on the totality of the
information presented to and considered by it. In addition, it is possible
that different members of our Board assigned different weights to the various
factors described above.
(d) Intent to Tender.
Concurrently with our execution of the Merger Agreement, (i) each of our
outside directors and Sprout Capital V, Sprout Technology Fund and DLJ Venture
Capital Fund II, L.P. executed the Tender and Voting Agreement to accept the
Offer and tender to Purchaser all shares of Common Stock beneficially owned by
him or it and to vote his or its shares in favor of the Merger; and (ii)
certain of our executive officers executed the Tender and Option Agreement to
accept the Offer and tender to Purchaser all shares of Common Stock
beneficially owned by him or her and to vote his or her shares in favor of the
Merger, and granting to Purchaser an option to purchase his or her shares of
Common Stock on the terms and conditions set forth in such Tender and Option
Agreement. The Tender and Voting Agreement and the Tender and Option Agreement
are filed as Exhibits (e)(7) and (e)(8) hereto, respectively, and are
incorporated herein by reference.
To our knowledge after reasonable inquiry, our affiliates and subsidiaries
currently intend to tender all Common Stock held of record or beneficially
(other than Common Stock held directly or indirectly by other public
companies, as to which we have no knowledge) by them pursuant to the Offer or
to vote in favor of the Merger. The foregoing does not include any Common
Stock over which, or with respect to which, any such executive officer,
director, affiliate or subsidiary acts in a fiduciary or representative
capacity or is subject to the instructions of a third party with respect to
such tender.
ITEM 5. PERSON/ASSETS, RETAINED, EMPLOYED, COMPENSATED OR USED.
Pursuant to a letter dated July 30, 1997, we formally retained DLJ as our
exclusive financial advisor in connection with the sale, merger, consolidation
or other business combination involving all or a substantial amount of the
business, securities or assets of the Company. Pursuant to the terms of DLJ's
engagement, we
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have agreed to pay DLJ for its services an aggregate financial advisory fee of
approximately $3,700,000 payable upon consummation of the Offer and the
Merger. We also have agreed to reimburse DLJ, upon DLJ's request from time to
time, for all out-of-pocket expenses, including the reasonable fees and
expenses of counsel DLJ incurs in connection with its engagement, and to
indemnify DLJ and certain related parties against certain liabilities,
including liabilities under the federal securities laws, arising out of DLJ's
engagement.
Affiliates of DLJ own in the aggregate approximately 12.5% of the Company,
and an officer of an affiliate of DLJ is a member of the board of directors of
the Company.
DLJ has in the past provided investment banking services to us unrelated to
the Offer and the Merger. In the ordinary course of business, DLJ and its
affiliates may actively trade or hold our securities for their own account and
those of their customers and, accordingly, may at any time hold a long or
short position in such securities.
The Company selected DLJ as its financial advisor because DLJ is an
internationally recognized investment banking firm that has substantial
experience providing strategic advisory services. As part of its investment
banking and financial advisory business, DLJ is continuously engaged in the
valuation of businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. In addition, DLJ is a full
service securities firm engaged in securities trading, brokerage and financing
activities.
A summary of the material provisions of the agreement with Allen & Company,
in its capacity as Dealer Manager, is included in the Offer to Purchase and
incorporated herein by reference.
A summary of the material provisions of the agreement with Corporate
Investor Communications, Inc., in its capacity as Information Agent, is
included in the Offer to Purchase and incorporated herein by reference.
A summary of the material provisions of the agreement with First Chicago
Trust Company of New York, a division of EquiServe, in its capacity as
Depositary, is included in the Offer to Purchase and incorporated herein by
reference.
Except as disclosed herein, neither the Company nor any person acting on our
behalf currently intends to employ, retain or compensate any person to make
solicitations or recommendations to our stockholders on its behalf concerning
the Offer.
ITEM 6. INTEREST IN SECURITIES OF THE SUBJECT COMPANY.
During the past 60 days, neither the Company nor any of our subsidiaries
nor, to the best of our knowledge, any of our executive officers, directors or
affiliates, have effected a transaction in shares of Common Stock, except that
Gary D. Kerber, President and Chairman of the Board, gifted an aggregate of
10,000 shares to five members of his family on June 23, 2000 and Vince Pisano,
Vice President and Chief Financial Officer, gifted 538 shares to a high school
sports organization with which he is associated on June 23, 2000.
ITEM 7. PURPOSES OF THE TRANSACTION AND PLANS OR PROPOSALS.
Other than as set forth in this Schedule 14D-9, we are not currently
undertaking or engaged in any negotiations in response to the Offer that
relate to (1) a tender offer for or other acquisition of our securities by us,
any of our subsidiaries or any other person; (2) an extraordinary transaction,
such as a merger, reorganization or liquidation, involving us or any of our
subsidiaries; (3) a purchase, sale or transfer of a material amount of assets
by us or any of our subsidiaries; (4) any material change in the present
dividend rate or policy, or (5) any material change in our indebtedness or
capitalization.
Except as described above or in Item 3 of this Schedule 14D-9, there are no
transactions, board resolutions, agreements in principle or signed contracts
in response to the Offer which relate to or would result in one or more of the
matters referred to in this Item 7.
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ITEM 8. ADDITIONAL INFORMATION.
(a) Information Provided Pursuant to Rule 14f-1 Under the Exchange Act.
The Information Statement attached as Annex A to this Schedule 14D-9 is
being furnished to our stockholders in connection with Purchaser's right
(after acquiring at least 51% of the outstanding shares of Common Stock on a
fully-diluted basis pursuant to the Offer) to designate persons to our Board
of Directors other than at a meeting of our stockholders, and such information
is incorporated by reference herein.
(b) Regulatory Approvals.
For information regarding governmental and regulatory approvals required in
order to consummate the Offer and the Merger, including pre-merger
notifications under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, see "Certain Legal Matters and Regulatory Approvals" in the Offer
to Purchase which is incorporated by reference herein.
(c) The Company's Rights Agreement.
Pursuant to the Rights Agreement, upon the earlier of (a) the close of
business on the tenth day following a public announcement that a person or
group of affiliated or associated persons has acquired beneficial ownership of
15% or more of the outstanding shares of Common Stock (an "Acquiring Person")
or (b) the close of business on the tenth business day after the date of the
commencement of, or the first public announcement of the intention of any
person to commence, a tender offer or exchange offer the consummation of which
would result in that person becoming an Acquiring Person (the earliest of such
dates being the "Distribution Date"), the Rights become exercisable and trade
separately from the Common Stock. After the Distribution Date, in certain
events, each holder of each of the Rights (other than the Acquiring Person)
will thereafter have the right to receive, upon exercise, that number of
shares of Common Stock having a market value equal to two times the exercise
price of the Right. Following a Stock Acquisition Date (as defined in the
Rights Agreement), upon the happening of certain events, each holder of each
of the Rights (other than the Acquiring Person) will thereafter have the right
to receive, upon exercise, common stock of the acquiring company having a
market value equal to two times the exercise price of the Right. In general,
the Rights may be redeemed at a price of $0.005 per Right at any time prior to
a person becoming an Acquiring Person. The Rights Agreement is filed as
Exhibit (e)(9) hereto, and is incorporated by reference herein.
The Company and the Rights Agent amended the Rights Agreement on June 26,
2000 to provide, among other things, that, so long as the Merger Agreement has
not been terminated, no Distribution Date or Stock Acquisition Date will be
deemed to have occurred, neither Purchaser, Parent nor any of their affiliates
or associates will be deemed to have become an Acquiring Person, and no "flip-
in event" or "flip-over event" as described in the Rights Agreement will be
deemed to have occurred, in each case by reason of execution or delivery of
the Merger Agreement, the making of the Offer, the acceptance for payment of
shares of Common Stock by Purchaser pursuant to the Offer, and the
consummation of the Merger. Amendment No. 1 to the Rights Agreement is filed
as Exhibit (e)(10) hereto, and is incorporated by reference.
(d) Short Form Merger.
Under the General Corporation Law of the State of Delaware ("Delaware Law"),
if Purchaser acquires, pursuant to the Offer or otherwise, at least 90% of the
then outstanding shares of Common Stock, Purchaser will be able to approve the
Merger without a vote of our stockholders. In such event, Parent, Purchaser
and the Company have agreed to take, at the request of Purchaser, all
necessary and appropriate action to cause the Merger to become effective as
promptly as reasonably practicable after such acquisition, without a meeting
of our stockholders. If, however, Purchaser does not acquire at least 90% of
the outstanding shares pursuant to the Offer or otherwise and a vote of our
stockholders is required under Delaware Law, a significantly longer period of
time would be required to effect the Merger.
8
<PAGE>
(e) Appraisal Rights.
No appraisal rights are available in connection with the Offer. However, if
the Merger is consummated, stockholders who have not tendered their shares of
Common Stock will have certain rights under Delaware Law to dissent from the
Merger and demand appraisal of, and to receive payment in cash of the fair
value of, their shares. Stockholders who perfect such rights by complying with
the procedures set forth in Section 262 of the Delaware Law ("Section 262")
will have the "fair value" of their shares of Common Stock (exclusive of any
element of value arising from the accomplishment or expectation of the Merger)
determined by the Delaware Court of Chancery and will be entitled to receive a
cash payment equal to such fair value. In addition, such dissenting
stockholders would be entitled to receive payment of a fair rate of interest
from the date of consummation of the Merger on the amount determined to be the
fair value of their shares. In determining the fair value of the shares of
Common Stock, the court is required to take into account all relevant factors.
Accordingly, such determination could be based upon considerations other than,
or in addition to, the market value of the shares, including, among other
things, asset values and earning capacity. In Weinberger v. UOP, Inc., the
Delaware Supreme Court stated, among other things, that "proof of value by any
techniques or methods which are generally considered acceptable in the
financial community and otherwise admissible in court" should be considered in
an appraisal proceeding. The Weinberger court also noted that under Section
262, fair value is to be determined "exclusive of any element of value arising
from the accomplishment or expectation of the merger." In Cede & Co. v.
Technicolor, Inc., however, the Delaware Supreme Court stated that, in the
context of a two-step cash merger, "to the extent that value has been added
following a change in majority control before cash-out, it is still value
attributable to the going concern," to be included in the appraisal process.
As a consequence, the value so determined in any appraisal proceeding could be
the same, more or less than the purchase price per share of the Common Stock
in the Offer or the Merger Consideration.
In addition, several decisions by Delaware courts have held that, in certain
circumstances, a controlling stockholder of a company involved in a merger has
a fiduciary duty to other stockholders which requires that the merger be fair
to such other stockholders. In determining whether a merger is fair to
minority stockholders, Delaware courts have considered, among other things,
the type and amount of consideration to be received by the stockholders and
whether there was fair dealing among the parties. The Delaware Supreme Court
stated in Weinberger and Rabkin v. Philip A. Hunt Chemical Corp. that the
remedy ordinarily available to minority stockholders in a cash-out merger is
the right to appraisal described above. However, a damages remedy or
injunctive relief may be available if a merger is found to be the product of
procedural unfairness, including fraud, misrepresentation or other misconduct.
As disclosed in the Offer to Purchase, Parent does not intend to object,
assuming the proper procedures are followed, to the exercise of appraisal
rights by any stockholder and the demand for appraisal of, and payment in cash
for the fair value of, the shares of Common Stock. Parent intends, however, to
cause the Company, as the surviving corporation after the Merger, to argue in
an appraisal proceeding that, for purposes of such proceeding, the fair value
of each share is less than or equal to the Merger Consideration. In this
regard, stockholders should be aware that opinions of investment banking firms
as to the fairness from a financial point of view (including Donaldson, Lufkin
& Jenrette Securities Corporation) are not necessarily opinions as to "fair
value" under Section 262.
The foregoing summary of the rights of dissenting stockholders under
Delaware Law does not purport to be a complete statement of the procedures to
be followed by stockholders desiring to exercise any appraisal rights under
Delaware Law. The preservation and exercise of appraisal rights require strict
adherence to the applicable provisions of Delaware Law.
9
<PAGE>
(f) Other Material Information.
The information contained in all of the Exhibits referred to in Item 9 below
is incorporated by reference herein.
ITEM 9. EXHIBITS.
<TABLE>
<C> <C> <S>
* (a)(1) Offer to Purchase dated June 28, 2000.
*+ (a)(2) Letter of Transmittal.
* (a)(3) Letter to Stockholders of the Company dated June 28, 2000.
+ (a)(4) Joint Press Release issued by Parent, The Washington Post
Company and the Company on June 27, 2000.(1)
+ (a)(5) Summary Advertisement as published in the Washington Post on
June 28, 2000.
+ (e)(1) Agreement and Plan of Merger dated as of June 26, 2000, among
Parent, Purchaser and the Company.
* (e)(2) Opinion of Donaldson, Lufkin & Jenrette Securities Corporation
to the Board of Directors of the Company dated June 26, 2000.
(e)(3) Employment Agreement dated June 26, 2000 between Gary D. Kerber
and the Company.
(e)(4) Employment Agreement dated June 26, 2000 between Vince Pisano
and the Company.
(e)(5) Employment Agreement dated June 26, 2000 between Gerald T.
Kosentos and the Company.
(e)(6) Amendment to Change of Control Agreement dated June 26, 2000
between Vince Pisano and the Company.
+ (e)(7) Tender and Voting Agreement dated June 26, 2000, between
Purchaser and certain directors and stockholders of the Company.
+ (e)(8) Tender and Option Agreement dated June 26, 2000, between
Purchaser and certain executives of the Company.
(e)(9) Rights Agreement, dated May 14, 1999 between the Company and
First Union National Bank, as Rights Agent (incorporated by
reference from the Company's Form 8-K filed on May 21, 1999).
(e)(10) Amendment No. 1 to the Rights Agreement dated as of June 26,
2000 between the Company and First Union National Bank, as
Rights Agent.
(e)(11) Change of Control Agreement dated January 8, 1998 between Gary
D. Kerber and Educational Medical, Inc. (now known as the
Company).
(e)(12) Change of Control Agreement dated January 8, 1998 between Vince
Pisano and Educational Medical, Inc. (now known as the Company).
(e)(13) Amendment to Change of Control Agreement dated June 26, 2000
between Gary D. Kerber and the Company.
</TABLE>
--------
* Included in materials delivered to our stockholders.
+ Filed as an exhibit to Purchaser's Tender Offer Statement on Schedule TO
dated June 28, 2000, and incorporated herein by reference.
(1) Filed as an exhibit to the Company's Schedule 14D-9-C on June 27, 2000.
10
<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify that
the information set forth in this statement is true, complete and correct.
Quest Education Corporation
/s/ Gary D. Kerber
By: _________________________________
Name: Gary D. Kerber
Title: Chairman of the Board,
President and Chief
Executive Officer
June 28, 2000
11
<PAGE>
ANNEX A
QUEST EDUCATION CORPORATION
1400 Hembree Road, Ste. 100
Roswell, Georgia 30076
Information Statement Pursuant to Section 14(f)
of the Securities Exchange Act of 1934, as Amended,
and Rule 14f-1 Thereunder
No Vote or Other Action of the Company's Stockholders Is Required
in Connection with this Information Statement. No Proxies Are Being
Solicited and You Are Requested Not to Send a Proxy to the Company.
This Information Statement is being mailed on or about June 28, 2000, as a
part of the Solicitation/Recommendation Statement on Schedule 14D-9 (the
"Schedule 14D-9") of Quest Education Corporation ("Quest") to the holders of
record of shares of our Common Stock, par value $0.01 per share (the "Common
Stock"). You are receiving this Information Statement in connection with the
possible election of persons designated by Odyssey (as defined below) to a
majority of the seats on our Board of Directors (the "Board"). Capitalized
terms used herein and not otherwise defined herein shall have the meanings
assigned in the Schedule 14D-9.
On June 26, 2000, Quest, Kaplan, Inc., a Delaware corporation ("Kaplan") and
Odyssey Acquisition Corp., a Delaware corporation ("Odyssey"), entered into an
Agreement and Plan of Merger dated as of June 26, 2000 (the "Merger
Agreement"), in accordance with the terms and subject to the conditions of
which Odyssey commenced the Offer. The Offer is scheduled to expire at 12:00
Midnight, New York City time, on Wednesday, July 26, 2000, unless the Offer is
extended.
The Merger Agreement requires us to cause the directors designated by
Odyssey to be elected to the Board under the circumstances described therein
following consummation of the Offer.
This Information Statement is required by Section 14(f) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 14f-1
thereunder. You are urged to read this Information Statement carefully. You
are not, however, required to take any action at this time.
The information contained in the Information Statement (including
information incorporated by reference) concerning Odyssey and Odyssey
Designees (as defined herein) has been furnished to us by Odyssey and we
assume no responsibility for the accuracy or completeness of such information.
GENERAL INFORMATION REGARDING THE COMPANY
The shares of Common Stock are the only class of our voting securities
outstanding. As of June 21, 2000, there were 7,964,283 shares of Common Stock
outstanding. The Board currently consists of five members. Each share of
Common Stock is entitled to one vote. Our officers serve at the discretion of
the Board.
A-1
<PAGE>
INFORMATION WITH RESPECT TO PURCHASER DESIGNEES
The Merger Agreement provides that, promptly following the purchase of, and
payment for, a number of shares of Common Stock that satisfies the Minimum
Condition as defined in the Merger Agreement, and from time to time
thereafter, Odyssey shall be entitled to designate the number of directors
(the "Odyssey Designees"), rounded up to the next whole number, on our Board
that equals the product of the total number of directors on the Board (giving
effect to the election of any additional directors pursuant to this sentence),
and the percentage that the number of shares of Common Stock beneficially
owned by Kaplan or Odyssey following such purchase bears to the total number
of shares of Common Stock then outstanding, and we shall take all action
within our power to cause Odyssey's Designees to be elected or appointed to
the Board, including, without limitation, at Odyssey's election, increasing
the number of directors, and seeking and accepting resignations of incumbent
directors. The Merger Agreement also provides that, at such time, we shall use
our best efforts to cause individual directors designated by Odyssey to
constitute the number of members, rounded up to the next whole number, on (i)
each committee of the Board, and (ii) each board of directors of each of our
subsidiaries, and each committee thereof, that represents the same percentage
as such individuals represent on the Board. Notwithstanding the foregoing, in
the event that Odyssey Designees are to be appointed or elected to the Board,
until the Effective Time (as defined in the Merger Agreement), such board of
directors shall have at least one director who is a director on the date of
the Merger Agreement and who is not an officer of Quest.
The Merger Agreement provides that, following the election or appointment of
Odyssey Designees, in accordance with the immediately preceding paragraph and
prior to the Effective Time, the approval of those of our directors who were
directors on the date of the Merger Agreement and who are not officers of
Quest shall be required to authorize any termination of the Merger Agreement
by us, any amendment thereto requiring action by our board of directors, any
amendment of our Certificate of Incorporation or Bylaws, any extension of time
for performance of any obligation or action thereunder by Kaplan or Odyssey
any waiver of compliance with any of the agreements or conditions contained
therein for our benefit and any material transaction with Kaplan, Odyssey or
any of their affiliates.
Odyssey has informed us that it will choose the Odyssey Designees from the
persons listed below. Odyssey has informed us that each of the Odyssey
Designees has consented to act as a director, if so designated. Biographical
information concerning each of the Odyssey Designees is presented below.
Unless otherwise indicated below, each occupation set forth opposite an
individual's name refers to employment with Odyssey The current business
address of each person is 888 Seventh Avenue, New York, New York 10106.
<TABLE>
<CAPTION>
Age; Position With Purchaser or Affiliate; 5-
Name and Business Address Year Employment History
------------------------- ---------------------------------------------
<C> <S>
Jonathan N. Grayer.......... Jonathan N. Grayer, 35, has been President and
Chief Executive Officer of Kaplan, Inc. since
July 1994 and a Director of Parent since January
1995. He also serves on the Board of Directors
of Walden Media and Information Technology Fund,
L.P. and VarsityBooks.com Inc.
Andrew Rosen................ Andrew Rosen, 39, has been Executive Vice
President and Chief Operating Officer of Parent
since February 1998. From 1995 to 1998, he was a
Vice President and then Executive Vice President
of Parent.
Ross Hamachek............... Ross Hamachek, 57, has been Senior Vice
President and Chief Financial Officer of Parent
since March 2000. He joined Parent in August
1999 as Senior Vice President, Corporate
Strategy. For more than five years before
joining Kaplan, he was Vice President of
Planning and Development for The Washington Post
Company.
</TABLE>
A-2
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table provides information regarding the executive officers
and directors of Quest. Biographical information for each of the persons set
forth in the table is presented below.
<TABLE>
<CAPTION>
Name Age Title
---- --- -----
<C> <C> <S>
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.
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.
A-3
<PAGE>
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 Bridgeport Machines, Inc., EIS International, Inc., Sepracor, Inc., Arcadia
Financial, Ltd., Aviva Petroleum Ltd., Film Roman, Inc., Castle Dental
Centers, Inc., Candlewood Hotel Co., Inc., SeraCare, Inc. and several private
companies.
Carl S. Hutman, age 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 Quest 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.
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 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.
A-4
<PAGE>
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 stockholders 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 the
Company's 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 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 three existing non-
employee directors were each granted, contingent upon completion of our 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 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).
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 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.
A-5
<PAGE>
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
such year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation
Compensation(1) Awards
----------------- Securities
Name and Principal Fiscal Other Annual Underlying Options All Other
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 $2,400(2)
Chairman, President and 1999 215,634 416,110 -- 50,414 2,400(2)
Chief Executive Officer 1998 195,909 120,828 -- 20,000 2,400(2)
Vince Pisano............ 2000 184,627 139,875 -- 25,000 --
Vice President of
Finance and 1999 162,025 312,655 -- 22,686 --
Chief Financial Officer 1998 147,197 90,784 -- 20,000 --
Gerald T. Kosentos...... 2000 170,769 129,375 -- 25,000
Vice President of 1999 149,885 270,750 -- --
Operations 1998 128,269 38,388 -- 78,833 --
Linwood Galeucia........ 2000 125,999 39,000 -- 15,000 --
President, New England 1999 119,999 87,613 -- -- --
Region 1998 5,770 -- -- -- --
Craig Wood.............. 2000 125,330 51,644 -- 10,000 --
Director of
Operations-- 1999 105,769 -- -- -- --
Western Region 1998 -- -- -- 20,000 --
</TABLE>
--------
(1) Does not include the dollar value of perquisites and other personal
benefits.
(2) Consists solely of premiums we paid for a life insurance policy for Mr.
Kerber. Upon Mr. Kerber's death, we will receive no proceeds from such
policy.
A-6
<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth all grants of options for our common stock to
the Named Executive Officers of Quest during the fiscal year ended March 31,
2000. In addition, the table shows the hypothetical gains or "option spreads"
that would exist for the respective options. These gains are based on assumed
rates of annual compound stock price appreciation of 5% and 10% from the date
the options were granted over the full option terms.
OPTION GRANTS FOR FISCAL YEAR ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------------------------
Potential
Realizable Value at
Assumed Annual
Rates of Stock
Number of % of Total Exercise Price Appreciation
Securities Options or Base For Option Term(2)
Underlying Granted to Price Expiration -------------------
Name Options Employees ($/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 $1,235,602
======= ======== ==========
</TABLE>
--------
(1) Expiration dates reflect the expiration date of the last vested
installment of each grant. We generally schedule 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.
A-7
<PAGE>
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 Value of Unexercised
Number of Underlying Unexercised In-the-Money Options at
Shares Value Realized Options at March 31, 2000 March 31, 2000(1)
Acquired on of Shares ------------------------- -------------------------
Name Exercise Acquired 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 $138,519 314,237 233,931 $282,010 $164,743
====== ======== ======= ======= ======== ========
</TABLE>
--------
(1) The dollar value of the unexercised options has been calculated by
determining the difference between the fair market value of the securities
underlying the options and the exercise or base price of the option at
exercise or fiscal year-end, respectively.
1996 Performance Incentive Plan and 1998 Amendment to the 1996 Performance
Incentive Plan
In June 1996, 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 stockholders. 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 stockholders, 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.
A-8
<PAGE>
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 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 stockholder 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;
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<PAGE>
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 stockholders, 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, 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
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<PAGE>
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 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 such 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.
Change of Control Agreements
To maximize stockholder value, we have agreed with Mr. Kerber and Mr. Pisano
that if we are sold for more than $10.00 per share, 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 by which the purchase price per share exceeds $10.00. 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.
A-11
<PAGE>
REPORT OF COMPENSATION COMMITTEE
General Philosophy on Executive Compensation
Quest's executive compensation program is administered by the Compensation
Committee (the "Committee"), which is composed of three non-employee
directors. The Committee is responsible for establishing and administering the
policies which govern both annual compensation and equity ownership programs.
All decisions by the Committee relating to the compensation of our executive
officers are reviewed by the full board of directors. This report is submitted
by the Committee and addresses our policies for fiscal 2000 as they apply to
Gary D. Kerber, our President and Chief Executive Officer and the other
executive officers.
Overview and Philosophy
The goals of our executive compensation program are to:
. provide competitive compensation that will help attract, retain and
reward highly qualified executives who contribute to our long-term
success.
. align management's interests with our success by placing a portion of
the executive's compensation at risk in relation to our performance.
. align management's interests with stockholders by including long-term
equity incentives.
The Committee believes that our executive compensation program provides an
overall level of compensation that is competitive within its industry and
among companies of comparable size and complexity. To ensure that compensation
is competitive, we regularly compare our compensation practices with those of
other similar companies and sets our compensation guidelines based on this
review. The Committee also seeks to achieve an appropriate balance of the
compensation paid to a particular individual and the compensation paid to
other executives both inside Quest and at comparable companies and attempts to
maintain an appropriate mix of salary and incentive compensation. While
compensation data are useful guides for comparative purposes, we believe that
a successful compensation program also requires the application of judgment
and subjective determinations of individual performance.
Executive Compensation Program
Our executive compensation program consists of base salary, periodic
incentive compensation and long-term equity incentives in the form of stock
options. Executive officers also are eligible to participate in certain
benefit programs which are generally available to all of our employees, such
as medical insurance programs, life insurance programs and 401(k) plans.
Base Salary
At the beginning of each fiscal year, the Committee establishes an annual
salary plan for our senior executive officers based on recommendations made by
our Chief Executive Officer. The Committee attempts to set base salary
compensation within our perceived range of salaries of executive officers with
comparable qualifications, experience and responsibilities at other companies
in the same or similar businesses and of comparable size and success. The
Committee has reviewed compensation for comparable positions by reviewing
published compensation data as part of its efforts to set the annual cash
compensation for our executives. The Committee has attempted to base salary
determinations both upon our financial performance and upon the individual's
performance as measured by certain subjective non-financial objectives. These
non-financial objectives include the individual's contribution to Quest as a
whole, including his or her ability to motivate others, develop the skills
necessary to grow as we mature, recognize and pursue new business
opportunities and initiate programs to enhance our growth and success.
A-12
<PAGE>
Annual and Long-Term Incentive Compensation
We have no formal bonus program for our 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 that a bonus pool ranging
from $57,000 to $907,000 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.
Our stock option plan is designed to promote the identity of long-term
interests between our employees and our stockholders and to assist in the
retention of executives. The size of option grants is generally intended by
the Committee to reflect the executive's position with Quest and his or her
contributions to Quest. Stock options generally vest over a period not to
exceed five years from the date of the grant in order to encourage key
employees to continue in the employ of Quest. Stock options are granted at an
option price equal to the fair market value of our Common Stock on the date of
grant; however, we reserve the right to grant stock options having exercise
prices less than the fair market value of the Common Stock on the date of
grant, to modify the terms of existing options and to reprice the options as
an incentive for employees to remain with Quest.
Benefits
Our executive officers are entitled to receive life and medical insurance
benefits on the same basis as other full-time employees of the company. They
are also eligible to participate in our 401(k) plan.
The amount of perquisites, as determined in accordance with the rules of the
Securities Exchange Commission relating to executive compensation, did not
exceed $50,000 or 10% of salary and bonus for fiscal 1999 for any of the
executive officers.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
In fiscal 2000, Mr. Kerber, the company's President and Chief Executive
Officer, received a salary of $245,753, which represented his base salary for
1999 and a bonus of $186,188. In addition, he received an incentive grant of
options to purchase 25,000 shares of our common stock at an exercise price of
$7.75. The amount of Mr. Kerber's base salary is set annually by the Board of
Directors. See "Employment Agreement" for a description of the employment
agreement between Mr. Kerber and the company. See Annual and Long Term
Incentive Compensation.
A-13
<PAGE>
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(m)
Section 162(m) of the Internal Revenue Code disallows a tax deduction to
public corporations for compensation over $1,000,000 paid for any fiscal year
to the corporation's chief executive officer or to any of the four other most
highly compensated executives officers. The deductibility of executive
compensation in excess of the limit set in Section 162(m) of the Internal
Revenue Code 1986, as amended, was not a factor in the Committee's
determination of 1999 compensation levels. The Committee will continue to
review the company's executive compensation plans to determine what changes,
if any, may be advisable in connection with Section 162(m).
COMPENSATION COMMITTEE
Richard E. Kroon
Robert J. Cresci
William D. Ford
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 Committee was at any time during
fiscal 2000, or formerly, an officer or employee of Quest or any subsidiary of
Quest.
A-14
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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 DLS 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>
(7) The address of the employees is c/o Quest Education Corporation, 1400
Hembree Road, Suite 100, Roswell, GA 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
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
stockholders 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
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<PAGE>
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.
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PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder return of our
Common Stock from October 28, 1996 (the date that trading in the Common Stock
commenced on the Nasdaq National Market ("Nasdaq") to March 31, 2000 with (a)
the Nasdaq Stock Market Index and (b) an index comprised of the common stock
of seven other education companies (the "Self Determined Peer Group"). The
comparison assumes that $100 was invested on October 28, 1996 in our Common
Stock and in each of the comparison indices, and assumes reinvestment of
dividends. We have historically reinvested earnings in the growth of our
business and have not paid cash dividends on our Common Stock.
[PERFORMANCE GRAPH APPEARS HERE]
Cumulative Value of $100 Investment
<TABLE>
<CAPTION>
10/29/96 3/31/97 3/31/98 3/31/99 3/31/00
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Nasdaq Stock Market................ $100.00 $101.96 $154.61 $208.02 $388.17
Self-Determined Peer Group......... $100.00 $ 95.88 $146.35 $200.25 $153.40
Quest Education Corporation........ $100.00 $112.20 $116.25 $ 91.25 $ 86.25
</TABLE>
Self Determined Peer Group consists of Computer Learning Centers, DeVry Inc.,
Education Management Corp., ITT Educational Services, Strayer Education Inc.,
Whitman Education Group Inc. and Edutrek International Inc.
A-18
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <C> <S>
* (a)(1) Offer to Purchase dated June 28, 2000.
*+ (a)(2) Letter of Transmittal.
* (a)(3) Letter to Stockholders of the Company dated June 28, 2000.
+ (a)(4) Joint Press Release issued by Parent, The Washington Post
Company and the Company on June 27, 2000.(1)
+ (a)(5) Summary Advertisement as published in the Washington Post on
June 28, 2000.
+ (e)(1) Agreement and Plan of Merger dated as of June 26, 2000, among
Parent, Purchaser and the Company.
* (e)(2) Opinion of Donaldson, Lufkin & Jenrette Securities Corporation
to the Board of Directors of the Company dated June 26, 2000.
(e)(3) Employment Agreement dated June 26, 2000 between Gary D. Kerber
and the Company.
(e)(4) Employment Agreement dated June 26, 2000 between Vince Pisano
and the Company.
(e)(5) Employment Agreement dated June 26, 2000 between Gerald T.
Kosentos and the Company.
(e)(6) Amendment to Change of Control Agreement dated June 26, 2000
between Vince Pisano and the Company.
+ (e)(7) Tender and Voting Agreement dated June 26, 2000, between
Purchaser and certain directors and stockholders of the Company.
+ (e)(8) Tender and Option Agreement dated June 26, 2000, between
Purchaser and certain executives of the Company.
(e)(9) Rights Agreement, dated May 14, 1999 between the Company and
First Union National Bank, as Rights Agent (incorporated by
reference from the Company's Form 8-K filed on May 21, 1999).
(e)(10) Amendment No. 1 to the Rights Agreement dated as of June 26,
2000 between the Company and First Union National Bank, as
Rights Agent.
(e)(11) Change of Control Agreement dated January 8, 1998 between Gary
D. Kerber and Educational Medical, Inc. (now known as the
Company).
(e)(12) Change of Control Agreement dated January 8, 1998 between Vince
Pisano and Educational Medical, Inc. (now known as the Company).
(e)(13) Amendment to Change of Control Agreement dated June 26, 2000
between Gary D. Kerber and the Company.
</TABLE>
--------
* Included in materials delivered to our stockholders.
+ Filed as an exhibit to Purchaser's Tender Offer Statement on Schedule TO
dated June 28, 2000, and incorporated herein by reference.
(1) Filed as an exhibit to the Company's Schedule 14D-9-C on June 27, 2000.
A-19
