FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
Commission File Number 1-13722
WHITMAN EDUCATION GROUP, INC.
FLORIDA 22-2246554
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4400 BISCAYNE BOULEVARD, MIAMI, FLORIDA 33137
-------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(305) 575-6534
- ----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No _____
Indicate the number of shares outstanding of each of issuer's classes
of common stock, as of the latest practicable date.
AS OF FEBRUARY 5, 1999, THERE WERE 13,285,198 SHARES OF COMMON STOCK
OUTSTANDING.
<PAGE>
WHITMAN EDUCATION GROUP, INC.
FORM 10-Q
DECEMBER 31, 1998
TABLE OF CONTENTS
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements................................... 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................... 16
Item 5. Other Information...................................... 16
Item 6. Exhibits and Reports on Form 8-K....................... 16
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1998
------------------ ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 2,039,003 $ 3,384,336
Accounts receivable, net ............................. 20,656,736 21,354,104
Inventories........................................... 1,659,382 1,614,455
Deferred income taxes................................. 2,308,043 1,471,043
Other current assets.................................. 2,052,014 1,158,841
------------ -----------
Total current assets.............................. 28,715,178 28,982,779
Property and equipment, net............................... 14,100,743 12,925,177
Marketable securities..................................... -- 262,500
Deposits and other assets, net............................ 1,386,074 1,431,188
Goodwill, net............................................. 9,992,180 10,219,525
------------ -----------
Total assets...................................... $54,194,175 $53,821,169
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 1,939,427 $ 1,268,306
Accrued expenses...................................... 4,597,469 2,115,220
Income taxes payable.................................. 405,482 107,133
Short-term notes payable.............................. 844,629 156,018
Current portion of capitalized lease obligations...... 1,113,918 1,061,767
Current portion of long-term debt..................... 461,617 354,401
Deferred tuition revenue.............................. 15,544,241 15,966,150
------------ -----------
Total current liabilities......................... 24,906,783 21,028,995
Other liabilities......................................... 509,446 609,708
Capitalized lease obligations............................. 3,666,881 2,535,673
Long-term debt............................................ 6,549,651 11,813,639
Commitments and contingencies
Stockholders' equity:
Common stock, no par value, authorized 100,000,000
shares issued and outstanding 13,284,898 shares at
December 31, 1998 and 13,193,582 shares at
March 31, 1998........................................ 21,349,069 21,183,554
Additional paid-in capital................................ 671,536 671,536
Accumulated deficit ...................................... (3,459,191) (3,995,978)
Accumulated other comprehensive loss...................... -- (25,958)
------------ -----------
Total stockholders' equity........................ 18,561,414 17,833,154
------------ -----------
Total liabilities and stockholders' equity $54,194,175 $53,821,169
============ ===========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
DECEMBER 31,
1998 1997
---------------- -----------------
<S> <C> <C>
Net revenues......................................... $19,010,639 $15,926,343
Costs and expenses:
Instructional and educational support............. 12,306,063 10,378,089
Selling and promotional........................... 2,318,051 2,089,036
General and administrative........................ 3,120,214 2,523,283
----------- -----------
Total costs and expenses............................. 17,744,328 14,990,408
----------- -----------
Income from operations............................... 1,266,311 935,935
Other (income) expense:
Interest expense.................................. 343,904 371,847
Interest income................................... (65,824) (49,347)
----------- -----------
Income before income tax provision................... 988,231 613,435
Income tax provision................................. -- --
----------- -----------
Net income .......................................... $ 988,231 $ 613,435
=========== ===========
Net income per share:
Basic............................................. $ .07 $ .05
=========== ===========
Diluted........................................... $ .07 $ .04
=========== ===========
Weighted average common shares outstanding:
Basic............................................. 13,247,716 12,919,832
=========== ===========
Diluted........................................... 13,661,481 14,410,889
=========== ===========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
DECEMBER 31,
1998 1997
---------------- --------------
<S> <C> <C>
Net revenues......................................... $53,077,672 $43,869,138
Costs and expenses:
Instructional and educational support............. 34,913,080 29,861,463
Selling and promotional........................... 7,409,017 6,273,904
General and administrative........................ 9,730,706 8,250,284
----------- -----------
Total costs and expenses............................. 52,052,803 44,385,651
----------- -----------
Income (loss) from operations........................ 1,024,869 (516,513)
Other (income) expense:
Interest expense.................................. 1,020,554 967,780
Interest income................................... (189,472) (138,319)
----------- -----------
Income (loss) before income tax benefit.............. 193,787 (1,345,974)
Income tax benefit .................................. 343,000 --
----------- -----------
Net income (loss).................................... $ 536,787 $(1,345,974)
=========== ===========
Net income (loss) per share:
Basic ............................................ $ .04 $ (.11)
=========== ===========
Diluted........................................... $ .04 $ (.11)
=========== ===========
Weighted average common shares outstanding:
Basic ............................................ 13,217,488 12,758,851
=========== ============
Diluted........................................... 13,803,602 12,758,851
=========== ============
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
DECEMBER 31,
1998 1997
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 536,787 $(1,345,974)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................ 3,061,469 2,536,087
Bad debt expense......................................... 2,530,741 1,962,925
Deferred tax provision................................... (837,000) --
Changes in operating assets and liabilities:
Restricted cash..................................... -- 511,927
Accounts receivable................................. (1,833,373) (3,830,374)
Inventories......................................... (44,927) (386,003)
Other current assets................................ (916,935) (601,293)
Deposits and other assets........................... (139,827) (63,312)
Accounts payable.................................... 671,121 (748,539)
Accrued expenses.................................... 2,482,249 (476,237)
Income taxes payable................................ 298,349 (6,153)
Deferred tuition revenue............................ (421,909) 2,065,854
Other............................................... (100,262) (149,887)
----------- -----------
Net cash provided by (used in) operating activities...... 5,286,483 (530,979)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.......................... (1,955,197) (3,279,249)
Net proceeds from sale of marketable securities............. 288,458 --
----------- -----------
Net cash used in investing activities....................... (1,666,739) (3,279,249)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit, long-term
borrowings and capital lease obligations................. 25,721,795 25,636,986
Principal payments on revolving line of credit,
long-term borrowings and other liabilities............... (30,852,387) (27,077,515)
Proceeds from short-term notes payable...................... -- 1,056,018
Proceeds from exercise of options and warrants.............. 165,515 1,608,813
----------- -----------
Net cash (used in) provided by financing activities......... (4,965,077) 1,224,302
----------- -----------
Decrease in cash and cash equivalents ...................... (1,345,333) (2,585,926)
Cash and cash equivalents at beginning of period .......... 3,384,336 3,853,932
----------- -----------
Cash and cash equivalents at end of period ................. $ 2,039,003 $ 1,268,006
=========== ===========
</TABLE>
Continued on the following page.
6
<PAGE>
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
DECEMBER 31,
1998 1997
----------------- --------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING
AND INVESTMENT ACTIVITIES:
Equipment acquired under capital leases................... $ 1,845,790 $ 1,219,306
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid............................................. $ 878,496 $ 877,887
=========== ===========
Income taxes paid......................................... $ 414,077 $ 1,343
=========== ===========
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
PART I - FINANCIAL INFORMATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and, in the
opinion of the management of Whitman, include all adjustments, which are of a
normal recurring nature, necessary for a fair presentation of financial position
and the results of operations and cash flows for the periods presented. However,
the financial statements do not include all information and footnotes required
for a presentation in accordance with generally accepted accounting principles.
These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and the notes thereto included or
incorporated by reference in Whitman's Form 10-K for the fiscal year ended March
31, 1998. The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the full year.
The accompanying financial statements include the accounts of Whitman
Education Group, Inc., and its wholly-owned subsidiaries, Ultrasound Technical
Services, Inc. ("Ultrasound Diagnostic Schools"), Sanford Brown College, Inc.
("Sanford-Brown College") and MDJB, Inc. ("Colorado Technical University"). All
intercompany accounts and transactions have been eliminated. Hereafter,
references to "Whitman" shall include collectively Whitman Education Group, Inc.
and its operating subsidiaries, Ultrasound Diagnostic Schools, Sanford-Brown
College and Colorado Technical University.
Whitman experiences seasonality in its quarterly results of operations
as a result of changes in the level of student enrollment. New enrollment in
Whitman's schools tends to be lower in the first and second fiscal quarters
covering the summer months which are traditionally associated with recess from
school. Costs are generally not significantly affected by the seasonal factors
on a quarterly basis. Accordingly, quarterly variations in net revenues will
result in fluctuations in income from operations on a quarterly basis.
2. EARNINGS PER SHARE
In fiscal 1998, Whitman adopted Statement of Financial Accounting
Standards No. 128, EARNINGS PER SHARE. All earnings per share amounts for all
periods have been presented, and where necessary, restated to conform to the
Statement 128 requirements.
8
<PAGE>
2. EARNINGS PER SHARE - (CONTINUED)
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- ----------------------------
1998 1997 1998 1997
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss)............... $ 988,231 $ 613,435 $ 536,787 $(1,345,974)
========== ========== ========= ===========
Denominator:
Denominator for basic
earnings per share -
weighted-average shares....... 13,247,716 12,919,832 13,217,488 12,758,851
Effect of dilutive securities:
Employee stock options.......... 365,906 964,783 499,667 --
Warrants........................ 47,859 526,274 86,447 --
----------- ----------- ---------- ------------
Dilutive potential common
shares........................ 413,765 1,491,057 586,114 --
----------- ----------- ---------- ------------
Denominator for diluted
earnings per share -
adjusted weighted -
average shares and
assumed conversions.......... 13,661,481 14,410,889 13,803,602 12,758,851
========== =========== ============ ============
Basic earnings (loss) per share......$ .07 $ .05 $ .04 $ (.11)
========== =========== ============ ============
Diluted earnings (loss) per share....$ .07 $ .04 $ .04 $ (.11)
========== =========== ============ ============
</TABLE>
3. COMPREHENSIVE LOSS
In fiscal 1999, Whitman adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." Statement 130 establishes
new rules for the reporting and display of comprehensive income and its
components. Statement 130 requires unrealized gains or losses on Whitman's
available-for-sale securities, which prior to its adoption were recorded
separately in stockholders' equity, to be included in "other comprehensive
loss."
For the three months ended December 31, 1998 and 1997, total
comprehensive income was $988,231 and $457,810, respectively. For the nine
months ended December 31, 1998 and 1997, total comprehensive income was $536,787
and comprehensive losses were $1,439,724, respectively. On December 16, 1998, a
gain on the sale of marketable securities of $43,489 was realized.
9
<PAGE>
4. CONTINGENCIES
In August 1998, three former students of the diagnostic medical
ultrasound program of the Philadelphia Ultrasound Diagnostic School filed a
lawsuit against Whitman, Ultrasound Technical Services, Inc., a subsidiary of
Whitman that owns and operates the Ultrasound Diagnostic Schools, certain
current and former officers, directors and employees of Whitman and a former
consultant, styled CULLEN, ET AL. V. WHITMAN EDUCATION GROUP, INC., in the
United States District Court for the Eastern District of Pennsylvania (Civil
Action No. 98-CV-4076). The complaint alleged, among other things, certain state
and federal statutory violations, breach of contract and fraud and sought to
have the action certified as a class action encompassing certain students from
both the Philadelphia and Pittsburgh Ultrasound Diagnostic Schools. The
plaintiffs seek injunctive relief, compensatory, treble and punitive damages and
attorneys' fees and costs. In January 1999, plaintiffs amended their complaint
to expand the purported class to include students who attended the general
ultrasound program at any of the 15 Ultrasound Diagnostic Schools and received
federal financial aid during the alleged class period. A motion to dismiss by
Whitman was denied on February 3, 1999 without prejudice to raising the same
issues at a later stage of the litigation. Whitman believes the lawsuit is
without merit and intends to vigorously defend it. While the outcome cannot be
predicted with certainty, if determined adversely to Whitman, it could have a
material adverse effect on Whitman's financial position and results of
operations.
5. DISPOSITION OF HURON UNIVERSITY
On February 3, 1999, Colorado Technical University, Inc., an indirect
wholly-owned subsidiary of Whitman, entered into a Contribution Agreement
pursuant to which the assets and certain liabilities of its Huron University
campus in Huron, South Dakota will be transferred to Newco, Inc. a South
Dakota corporation formed by existing members of Huron University's management
team. In connection with the transaction, Colorado Technical University will
contribute the operating assets of Huron University and $500,000 to Newco, and
Newco will issue Colorado Technical University, Inc. convertible preferred stock
and assume the third party liabilities of Huron University. Under the terms of
the proposed transaction, the preferred stock is convertible into common stock
equal to 19.9% of the common equity of Newco. The preferred stock would have a
liquidation preference equal to the net value of the assets and cash contributed
by Colorado Technical University. Subject to the conversion right, the preferred
stock would be redeemable by Huron University for up to 10 years following the
transaction for an amount equal to the liquidation preference.
Completion of the transaction is subject to various conditions,
including the obtaining of adequate financing by the new ownership group, the
obtaining of all necessary state and other governmental agency approvals, the
attaining of independent accreditation of Huron University by the North Central
Association of Colleges and Schools and Huron University independently
qualifying for participation in federal Title IV student financial assistance
programs administered by the United States Department of Education. Subject to
the occurrence of these conditions, the parties will seek to close the
transaction in the second half of calendar 1999. There can be no assurance,
however, that any of the foregoing conditions will be satisfied. Accordingly,
there can be no assurance that the proposed transaction will, in fact, be
consummated.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the consolidated financial statements of Whitman, the related notes to
consolidated financial statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations included in Whitman's Form 10-K
for the year ended March 31, 1998 and the condensed consolidated financial
statements and the related notes to the condensed consolidated financial
statements included in Item 1 of this Quarterly Report on Form 10-Q. Except for
the historical matters contained herein, statements made in this report are
forward looking and are made pursuant to the safe harbor provisions of the
Securities Litigation Reform Act of 1995. Such statements may include, but are
not limited to, projections of revenues, income and cash flows, and Whitman's
financing needs and plans for future operations. Investors are cautioned that
forward looking statements involve risks and uncertainties, including, but not
limited to, regulatory, licensing and accreditation risks inherent in operating
proprietary post-secondary educational institutions and risks relating to
Whitman's ability to refinance or extend its revolving credit facility, which
may cause Whitman's actual results, performance or achievements to differ
materially from the forward looking statements made in the report or otherwise
made by or on behalf of Whitman. Factors that may affect future results include
the unanticipated operational impact of Year 2000 issues, the ultimate
resolution of legal proceedings involving Whitman and certain economic,
competitive, governmental and other factors discussed in this report and in
Whitman's filings with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain
statement of operations data to net revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- -------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net revenues............................. 100% 100% 100% 100%
---- ---- ---- ----
Costs and expenses:
Instructional and educational support 64.7 65.2 65.8 68.1
Selling and promotional............... 12.2 13.1 14.0 14.3
General and administrative............ 16.4 15.8 18.3 18.8
----- ----- ----- -----
Total costs and expenses................. 93.3 94.1 98.1 101.2
----- ----- ----- -----
Income (loss) from operations............ 6.7 5.9 1.9 (1.2)
Other (income) expense:
Interest expense...................... 1.8 2.3 1.8 2.2
Interest income....................... (.3) (.3) (.3) (.3)
------- -------- ------- --------
Income (loss) before income taxes........ 5.2 3.9 .4 (3.1)
Income tax benefit ...................... -- -- .6 --
------- -------- ------- --------
Net income (loss)........................ 5.2% 3.9% 1.0% (3.1)%
======== ========= ======= =========
</TABLE>
11
<PAGE>
THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THE THREE MONTHS ENDED DECEMBER
31, 1997
Net revenues increased by $3.1 million or 19.4% to $19.0 million for
the three months ended December 31, 1998 from $15.9 million for the three months
ended December 31, 1997. The increase was primarily due to an increase in
average student enrollment. Average student enrollment increased 16.2% overall
with the University Degree Division experiencing a 29.0% increase and the
Associate Degree Division experiencing an 8.7% increase.
The increase in student enrollment in the University Degree Division
was primarily due to increased enrollments at the Denver campus which was opened
in October 1996 and the Sioux Falls campus which was relocated to a larger
facility in August 1998, and the addition of new degree programs at each of the
three Colorado Technical University campuses. The increase in student enrollment
in the Associate Degree Division was primarily due to increased enrollments in
the medical assisting program offered by the Ultrasound Diagnostic Schools.
Instructional and educational support increased by $1.9 million or
18.6% to $12.3 million for the three months ended December 31, 1998 from $10.4
million for the three months ended December 31, 1997. The increase in
instructional and educational support expenses was primarily due to the increase
in direct costs necessary to support the increase in student population. The
increase in these direct costs consisted primarily of increases in payroll and
related benefits for faculty and staff, and an increase in occupancy costs
primarily related to expanded facilities and upgraded equipment. As a percentage
of net revenues, instructional and educational support expenses decreased to
64.7% for the three months ended December 31, 1998 as compared to 65.2% for the
three months ended December 31, 1997 due to a greater rate of increase in net
revenues than the rate of increase in such expenses necessary to support the
increase in enrollment.
Selling and promotional expenses increased by $0.2 million or 11.0% to
$2.3 million for the three months ended December 31, 1998 from $2.1 million for
the three months ended December 31, 1997. The increase in selling and
promotional expenses was primarily due to increased marketing and advertising
expenses necessary to support the growth in student enrollments. As a percentage
of net revenues, selling and promotional expenses decreased to 12.2% for the
three months ended December 31, 1998, as compared to 13.1% for the three months
ended December 31, 1997. This decrease was primarily due to a greater rate of
increase in net revenues than the rate of increase in such expenses at the
University Degree Division.
General and administrative expenses increased by $0.6 million or 23.7%
to $3.1 million for the three months ended December 31, 1998 from $2.5 million
for the three months ended December 31, 1997. As a percentage of net revenues,
general and administrative expenses were 16.4% and 15.8%, respectively, for the
three months ended December 31, 1998 and December 31, 1997. The increases in
general and administrative expenses were primarily due to an increase in
administrative costs necessary to support the growth in student population and
an increase in bad debt expense due to an increase in student receivables
resulting from an increase in student enrollment.
Whitman reported net income of $1.0 million for the three months ended
December 31, 1998 as compared to net income of $0.6 million for the three months
ended December 31, 1997. The increase in profitability was primarily due to an
increase in operating income of $0.2 million from the Associate Degree Division
and an increase of $0.2 million from the University Degree Division.
12
<PAGE>
NINE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THE NINE MONTHS ENDED DECEMBER
31, 1997
Net revenues increased by $9.2 million or 21.0% to $53.1 million for
the nine months ended December 31, 1998 from $43.9 million for the nine months
ended December 31, 1997. The increase was primarily due to an increase in
average student enrollment. Average student enrollment increased 19.5% overall
with the University Degree Division experiencing a 32.6% increase and the
Associate Degree Division experiencing a 12.6% increase.
The increase in student enrollment in the University Degree Division
was primarily due to increased enrollments at the Denver and Sioux Falls
campuses, and the addition of new degree programs at each of the three Colorado
Technical University campuses. The increase in student enrollment in the
Associate Degree Division was primarily due to increased enrollments in the
medical assisting programs offered by the Ultrasound Diagnostic Schools.
Instructional and educational support increased by $5.0 million or
16.9% to $34.9 million for the nine months ended December 31, 1998 from $29.9
million for the nine months ended December 31, 1997. The increase in
instructional and educational support expenses was primarily due to an increase
in payroll and related benefits for faculty and staff resulting from the growth
in student enrollments and an increase in occupancy costs resulting from the
upgrade of equipment and expansion of facilities at the Associate Degree
Division. As a percentage of net revenues, instructional and educational support
expenses decreased to 65.8% for the nine months ended December 31, 1998 as
compared to 68.1% for the nine months ended December 31, 1997 due to a greater
rate of increase in net revenues than the rate of increase in such expenses
necessary to support the increase in enrollment.
Selling and promotional expenses increased by $1.1 million or 18.1% to
$7.4 million for the nine months ended December 31, 1998 from $6.3 million for
the nine months ended December 31, 1997. The increase in selling and promotional
expenses was primarily due to increased marketing and advertising expenses
necessary to support the growth in student enrollments. As a percentage of net
revenues, selling and promotional expenses were 14.0% and 14.3%, respectively,
for the nine months ended December 31, 1998 and December 31, 1997.
General and administrative expenses increased by $1.5 million or 17.9%
to $9.7 million for the nine months ended December 31, 1998 from $8.2 million
for the nine months ended December 31, 1997. The increase in general and
administrative expenses was primarily due to an increase in administrative costs
necessary to support the growth in student enrollments and an increase in bad
debt expense due to an increase in student receivables resulting from an
increase in student enrollment. As a percentage of net revenues, general and
administrative expenses were 18.3% and 18.8%, respectively, for the nine months
ended December 31, 1998 and December 31, 1997.
Whitman reported net income of $0.5 million and a net loss of $1.3
million for the nine months ended December 31, 1998 and 1997, respectively. The
improvement to profitability was primarily due to an increase in operating
income of $1.9 million from the Associate Degree Division.
13
<PAGE>
SEASONALITY
Whitman experiences seasonality in its quarterly results of operations
as a result of changes in the level of student enrollment. New enrollment in
Whitman's schools tends to be lower in the first and second fiscal quarters
covering the summer months which are traditionally associated with recess from
school, with the greatest seasonal effect in the second quarter. Costs are
generally not significantly affected by the seasonal factors on a quarterly
basis. Accordingly, quarterly variations in net revenues will result in
fluctuations in income from operations on a quarterly basis.
The operating results of Huron University are significantly affected by
seasonality. As a more traditional university, Huron University experiences a
significant decline in revenues during the late spring and summer. This seasonal
impact was compounded in the first and second quarters of the current fiscal
year as a result of increased operating expenses at Huron University as compared
to the same quarters one year ago. Operating expenses at Huron University
increased during the third quarter of fiscal 1998 due to an increase in payroll
expenses for faculty and staff to improve the academic programs and to support
increased enrollment. The decline in net revenues at Huron University combined
with the increased level of operating expenses, which remained relatively
constant in the first and second quarters as compared to the third quarter of
the last fiscal year, resulted in operating losses of $0.4 million and $2.0
million, respectively, for the three and nine months ended December 31, 1998 as
compared to operating losses of $0.3 million and $1.0 million, respectively, for
the three and nine months ended December 31, 1997.
YEAR 2000 ISSUE
Whitman has implemented a process for identifying, prioritizing and
modifying or replacing certain computer and other systems and programs that may
be affected by the Year 2000 issue. Whitman is also monitoring the adequacy of
the manner in which certain third parties and third party vendors of systems are
attempting to address the Year 2000 issue. Whitman has substantially completed
an assessment of its computer systems and believes that with the modifications
made to existing software and the conversions made to new software, the Year
2000 issue will not pose significant operational problems to its information
systems. Whitman expects to complete testing of the Year 2000 issues by mid-year
1999, which is prior to any anticipated impact on Whitman's operating systems.
Whitman is highly dependent on student funding provided through Title
IV programs. Processing of student applications for this funding and actual
disbursement of a significant portion of these funds are accomplished through
the United States Department of Education's computer systems. According to the
United States Department of Education, their systems should be brought into
certifiable compliance in early 1999. However, Whitman is not able to reliably
assess their progress to date, and any problems in the United States Department
of Education's systems could result in interruption of funding for Whitman's
students. Any prolonged interruption would have a material adverse impact on
Whitman's business, results of operations, liquidity and financial condition.
Based on the assessment performed to date, costs of addressing
potential problems are not currently expected to have a material adverse impact
on Whitman's financial position, results of operations or cash flows in future
periods. While Whitman believes its process is designed to be successful,
because of the complexity of the Year 2000 issue, and the interdependence of
organizations using computer systems, it is possible that Whitman's efforts or
those of third parties with whom Whitman interacts, will not be successful or
satisfactorily completed in a timely fashion.
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YEAR 2000 ISSUE - (CONTINUED)
Based on the modifications and conversions of software made to date and
the assessment of embedded devices that have been identified at its facilities
to date, Whitman does not believe that contingency planning is warranted at this
time. The assessment of third parties external to Whitman is underway, and the
results of this assessment, when completed, may reveal the need for contingency
planning at a later date. Whitman will regularly evaluate the need for
contingency planning based on the progress and findings of the Year 2000
project.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at December 31, 1998 and March 31, 1998 were
$2.0 million and $3.4 million, respectively. The decrease in cash and cash
equivalents was primarily due to the net repayment of debt of $5.1 million and
the purchase of property and equipment of $1.9 million, offset by net cash
provided by operating activities of $5.3 million for the nine months ended
December 31, 1998. Whitman's working capital totalled $3.8 million at December
31, 1998 and $8.0 million at March 31, 1998.
Net cash of $5.3 million was provided by operating activities for the
nine months ended December 31, 1998 compared to net cash used in operating
activities of $0.5 million for the nine months ended December 31, 1997. The
increase of $5.8 million was primarily due to an increase in net income of $1.9
million and an increase in accounts payable and accrued expenses due to the
timing of payments.
Net cash of $1.7 million and $3.3 million was used for investing
activities for the nine months ended December 31, 1998 and 1997, respectively.
The decrease of $1.6 million was primarily due to a reduction in net cash used
for capital expenditures.
Net cash of $5.0 million was used in financing activities for the nine
months ended December 31, 1998, compared to net cash of $1.2 million provided by
financing activities for the nine months ended December 31, 1997. The increase
in cash used in financing activities was due to an increase of $5.1 million in
net payments on long-term borrowings.
Whitman has a revolving credit facility that matures in April 1999 in
the amount of $7.5 million. At December 31, 1998, Whitman had $5.3 million
outstanding and $1.7 million available under this facility. Borrowings under
this facility decreased by $2.0 million from the amounts outstanding at March
31, 1998. The amounts borrowed under the working capital facility for the nine
months ended December 31, 1998 were primarily used for operations, repayment of
debt and capital expenditures. Whitman intends to refinance or extend its
revolving credit facility on a long-term basis in fiscal 1999 under similar
terms and conditions. Whitman believes that with its working capital, its cash
flow from operations, its revolving credit facility and its expected increased
financings under capital lease obligations to fund capital expenditures, it will
have adequate resources to meet its anticipated operating requirements for the
foreseeable future.
15
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August 1998, three former students of the diagnostic medical
ultrasound program of the Philadelphia Ultrasound Diagnostic School filed a
lawsuit against Whitman, Ultrasound Technical Services, Inc., a subsidiary of
Whitman that owns and operates the Ultrasound Diagnostic Schools, certain
current and former officers, directors and employees of Whitman and a former
consultant, styled CULLEN, ET AL. V. WHITMAN EDUCATION GROUP, INC., in the
United States District Court for the Eastern District of Pennsylvania (Civil
Action No. 98-CV-4076). The complaint alleged, among other things, certain state
and federal statutory violations, breach of contract and fraud and sought to
have the action certified as a class action encompassing certain students from
both the Philadelphia and Pittsburgh Ultrasound Diagnostic Schools. The
plaintiffs seek injunctive relief, compensatory, treble and punitive damages and
attorneys' fees and costs. In January 1999, plaintiffs amended their complaint
to expand the purported class to include students who attended the general
ultrasound program at any of the 15 Ultrasound Diagnostic Schools and received
federal financial aid during the alleged class period. A motion to dismiss by
Whitman was denied on February 3, 1999 without prejudice to raising the same
issues at a later stage of the litigation. Whitman believes the lawsuit is
without merit and intends to vigorously defend it. While the outcome cannot be
predicted with certainty, if determined adversely to Whitman, it could have a
material adverse effect on Whitman's financial position and results of
operations.
ITEM 5. OTHER INFORMATION
On November 10, 1998, Colorado Technical University, Inc., an indirect
wholly-owned subsidiary of Whitman announced its intention to sell Huron
University. On February 3, 1999, Colorado Technical University, Inc. entered
into a definitive Contribution Agreement to accomplish the sale. Completion of
the transaction is subject to various conditions, including among others, the
independent eligibility of Huron University to participate in federal financial
aid programs and the separate accreditation of Huron University by the North
Central Association of Colleges and Schools. Accordingly, there can be no
assurance that the proposed transaction will, in fact, be consummated. For a
more detailed summary of the proposed transaction, see Note 5 to Condensed
Consolidated Financial Statements contained in Item 1 herein.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Contribution Agreement *
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
Whitman filed a report on Form 8-K on November 10, 1998
relating to the execution of a letter of intent to sell its Huron University
campus in Huron, South Dakota.
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* Certain exhibits and schedules to this document have not been filed. The
Registrant agrees to furnish a copy of any omitted schedule or exhibit to the
Securities and Exchange Commission upon request.
16
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WHITMAN EDUCATION GROUP, INC.
(Registrant)
By: /s/ FERNANDO L. FERNANDEZ
-------------------------------------
Fernando L. Fernandez
Vice President - Finance, Chief Financial Officer
and Treasurer
Date: February 9, 1999
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.1 Contribution Agreement
27 Financial Data Schedule
EXHIBIT 10.1
CONTRIBUTION AGREEMENT
CONTRIBUTION AGREEMENT dated as of ____________, 1999 by and among
Colorado Technical University, Inc., a Colorado corporation ("CTU"); Huron
University, Inc., a South Dakota corporation ("HUI"); Newco, Inc., a South
Dakota corporation and the sole shareholder of HUI ("Newco"); and David
O'Donnell, the sole shareholder of Newco ("Shareholder"). HUI, Newco and
Shareholder are collectively referred to herein as the "HUI Group".
RECITALS
A. CTU is a proprietary provider of career-oriented education to
primarily adult learners. Huron University, founded in 1883, was acquired by CTU
in 1996. Since that time, CTU has significantly improved Huron University's
faculty and staff and invested significant funds in upgrading Huron University's
classrooms and dormitories, all of which has resulted in increased student
enrollment.
B. During this time, however, Shareholder and CTU realized that there
were fundamental differences in the requirements of a campus, such as Colorado
Technical University's other three campuses, that serve working adults, and
Huron University that caters to more traditional younger adult students pursuing
degree-based higher education after high school.
C. As a result, Shareholder and CTU have concluded that Colorado
Technical University, Huron University, its students, the City of Huron and the
surrounding region would be best served if Huron University were once again
independently owned and governed and thus better able to pursue its separate
mission.
D. To accomplish this, Shareholder has formed HUI to own and operate
Huron University and CTU has agreed to contribute the operating assets and
liabilities relating to the business and operations of Huron University (the
"Business") and cash to HUI, and HUI has agreed to accept such assets and cash
and assume such liabilities on the terms and conditions set forth herein.
E. For United States federal income tax purposes, it is intended that
the transactions contemplated by this Agreement qualify as a non-taxable
transfer of property described in Section 351 of the Internal Revenue Code of
1986, as amended, and the Treasury Regulations thereunder.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein and for other good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties hereto agree as follows:
<PAGE>
ARTICLE I
DEFINITIONS
SECTION 1.01. DEFINED TERMS. As used herein, the terms below shall have
the following meanings. Any of these terms, unless the context otherwise
requires, may be used in the singular or plural depending upon the reference.
"ACCOUNTS" shall mean all accounts, accounts receivable, other
receivables, contract rights, chattel paper, insurance claims and proceeds and
notes receivable of CTU as of the Closing Date relating exclusively to the
Business.
"ACCREDITATION" shall mean accreditation by the NCA and all
licenses, permits, certifications, approvals, and other governmental and
regulatory authorizations required under all laws, rules and regulations
applicable to or affecting the Business or the Institution, exclusive of the
Certification.
"ASSETS" shall mean all of CTU's right, title and interest in
and to all properties, assets and rights of any kind, whether tangible or
intangible, real or personal, owned by CTU or in which CTU has any interest
whatsoever, which are used primarily in the Business, including without
limitation, the following (except to the extent any of same are specifically
listed as Excluded Assets):
(a) Accounts, refunds or deposits and prepaid expenses
relating exclusively to the Assets, including without
limitation, any prepaid insurance premiums;
(b) all Contract Rights;
(c) all Fixtures and Equipment;
(d) all Inventory;
(e) all Books and Records;
(f) the Insurance Policies to the extent HUI desires
such policies to be assigned;
(g) all Permits;
(h) all Miscellaneous Assets;
(i) all Other Rights;
(j) all Leases;
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(k) all goodwill of CTU related to the Business
(including all rights to the name "Huron
University");
(l) the Huron letter; and
(m) the Software License, to the extent assignable to
Huron without cost to CTU and to the extent such
assignment does not prohibit CTU from utilizing the
software at no cost for the purpose of obtaining
historical information.
"BOOKS AND RECORDS" shall mean all records pertaining to the
Assets, Assumed Liabilities, customers, or suppliers of the Business (but
specifically excluding the corporate minute books, corporate tax returns, stock
ledger and related items) provided that HUI shall make available to CTU such
Books and Records as CTU shall reasonably require after the Closing in the event
of an audit or similar matter.
"CERTIFICATION" shall mean certification by the U.S.
Department of Education for institutional participation in the programs of
student financial assistance pursuant to Title IV of the Higher Education Act of
1965, as amended.
"CLOSING DATE" shall be as defined in SECTION 3.01.
"CODE" shall mean the Internal Revenue Code of 1986, as the
same may be amended from time to time.
"CONTRACT" shall mean with respect to CTU any of the
agreements, contracts, Leases, HEI Lease, notes, loans, evidences of
indebtedness, purchase orders, letters of credit, franchise agreements,
undertakings, covenants not to compete, employment agreements, licenses,
instruments, obligations, commitments to which CTU is a party and which relate
exclusively to the Business or to which any of the Assets are subject, whether
oral or written, express or implied.
"CONTRACT RIGHTS" shall mean with respect to CTU all of CTU's
rights and obligations under the Contracts.
"ED" shall mean the U.S. Department of Education.
"ENCUMBRANCES" shall mean any claim, lien, pledge, option,
charge, easement, security interest, right-of-way, encumbrance or other right of
third parties, other than (a) liens for taxes and other governmental charges and
assessments which are not yet due and payable and (b) liens of landlords and
liens of carriers, warehousemen, mechanics and materialmen and other like liens
arising in the ordinary course of business for sums not yet due and payable.
"EXCLUDED ASSETS" shall mean the following assets of CTU:
(a) all cash, cash equivalents and bank accounts; (b) all Tax files and returns,
minute books and corporate seals; (c)
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all assets of CTU of every kind and description, tangible or intangible, which
are not related exclusively to the Business; (d) all Insurance Policies not
assigned to HUI pursuant to this Agreement; (e) all refunds of any Tax for which
CTU is liable pursuant to SECTION 6.05; and (f) CTU's employee benefit
agreements, plans or arrangements maintained by CTU or its affiliates on behalf
of Persons employed by CTU or its affiliates.
"FIXTURES AND EQUIPMENT" shall mean all of the furniture,
fixtures, furnishings, machinery and equipment, spare parts, supplies, vehicles
and other tangible personal property owned by CTU and used exclusively in the
Business.
"HEI LEASE" shall mean that certain real property lease dated
December 30, 1996, between CTU and Huron Education, Inc.
"HURON LETTER" shall mean all of CTU's rights, to the extent
assignable, under that certain letter dated December 30, 1996, from the City of
Huron to CTU regarding the City of Huron's commitment to contribute funds for
the abatement of asbestos and environmental problems at the Real Property.
"HURON UNIVERSITY" or "INSTITUTION" shall mean Huron
University in Huron, South Dakota.
"INSURANCE POLICIES" shall mean with respect to CTU the
insurance policies relating to the Assets and that certain key-man life
insurance policy on the life of David O'Donnell.
"INVENTORY" shall mean all of CTU's inventory and supplies
utilized exclusively in the Business and all other materials utilized
exclusively in connection with the Assets.
"LEASES" shall mean all of the leases of CTU or other
agreements or rights under which CTU is a lessee of, or holds or operates, any
machinery, equipment, vehicle or other tangible personal property owned by a
third Person and used exclusively in the Business.
"MISCELLANEOUS ASSETS" shall mean all employee records
relating to those employees to be employed by HUI as of the Closing; all
accounting information pertaining to the continued operations of the Business
and all media in which or on which any of the information, knowledge, data or
other records relating to the Assets may be related or stored; all computer
software relating to accounting and operations systems; all office and other
supplies; all warranties, claims and causes of action (and the benefit of any
and all collateral or security given in connection therewith) inuring to the
benefit of CTU relating exclusively to the Assets; and all other assets used
exclusively in connection with the Business not otherwise described in this
Agreement of any character whatsoever, whether personal, tangible or intangible,
wherever located, owned by CTU and related exclusively to the Business.
"NCA" shall mean the North Central Association of Colleges
and Schools.
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"OTHER RIGHTS" shall mean all assignable or conveyable rights
under licenses, permits, approvals, qualifications or the like relating directly
to the Business issued or to be issued prior to the Closing by any government or
by any governmental unit, agency, body or instrumentality whether Federal,
State, local, foreign or other.
"PERMITS" shall mean all licenses, permits and other
governmental authorizations necessary to carry on the Business as presently
conducted.
"PERSON" means any individuals, partnership, corporation,
limited liability company, business trust, joint stock company, unincorporated
association, joint venture, or other governmental authority or regulatory body.
"QUALIFIED PARTY" shall mean any Person that does not meet
the criteria set forth in 34 C.F.R. ss.668.15(c).
"REAL PROPERTY" shall mean the real property leased to CTU
pursuant to the HEI Lease.
"SOFTWARE LICENSE" shall mean CTU's right to use the Solomon
general ledger software.
"SUBSIDIARY" shall mean any Person in which Newco directly or
indirectly owns any equity interest.
"TAX" or "TAXES" shall mean all federal, state, local, foreign
and other taxes, assessments or other government charges, including, without
limitation, income, estimated income, business, occupation, franchise, property,
sales, transfer, use, employment, commercial rent or withholding taxes,
including interest, penalties and additions in connection therewith.
"TITLE IV PROGRAMS" shall mean the Programs of Student
Financial Assistance in effect under Title IV of the Higher Education Act of
1965, as amended.
ARTICLE II
CONTRIBUTION OF ASSETS
SECTION 2.01. CONTRIBUTION OF ASSETS; ASSUMPTION OF CERTAIN
LIABILITIES. Upon the terms and subject to the conditions herein set forth,
on the Closing Date:
(a) CTU shall contribute, convey, transfer, assign, and
deliver to HUI, and HUI shall acquire from CTU, the Assets.
(b) HUI shall assume and agree to discharge the following
obligations and liabilities of CTU (the "Assumed Liabilities"):
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(i) All liabilities, obligations and commitments of
CTU pursuant to the Contracts of CTU (including unearned
tuition and the obligation to teach), except to the extent a
Contract is not assignable pursuant to this Agreement;
(ii) all liabilities in respect of Taxes of CTU for
which HUI is liable pursuant to SECTION 6.05;
(iii) all liabilities and obligations related to,
associated with or arising out of the occupancy, operation,
use or control of the Real Property (including, without
limitation, all facilities, improvements, structures and
equipment thereon, surface water thereon or adjacent thereto
and soil or groundwater thereunder) or any conditions
whatsoever on, in, at, under or in the vicinity of such Real
Property;
(iv) all Title IV liabilities assessed against Huron
University by ED as a result of CTU's operation of Title IV
Programs, including liabilities arising from financial aid
audits; and
(v) all obligations and liabilities of CTU under all
outstanding indebtedness of CTU relating to the Business,
including indebtedness outstanding under CTU's loan from
Pueblo Bank in the original principal amount of $1.5 million
and CTU's loan from BankOne in the original principal amount
of $200,000, and all trade payables of the Business; and
(vi) all other obligations and liabilities of CTU
related to or arising out of the operation of the Business,
whether arising prior to the Closing Date or otherwise,
whether direct or indirect, known or unknown, absolute or
contingent.
SECTION 2.02. EXCLUDED LIABILITIES. HUI shall not assume, or otherwise
be responsible for, any of the following liabilities or obligations of CTU (the
"Excluded Liabilities"):
(i) all liabilities in respect of Taxes for
which CTU is liable pursuant to SECTION 6.05;
(ii) all liabilities or obligations in respect of
Excluded Assets;
(iii) all intercompany payables and other liabilities
or obligations of the Business to any affiliates of CTU; and
(iv) Title IV liabilities owed by CTU to ED for the
administration of Title IV programs at the Institution in the
periods of 1994 through 1996 for which EIEA America, Inc.
and/or Lansdowne University, Ltd. have established a Letter of
Credit with Farmers and Merchants Bank to reimburse CTU.
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<PAGE>
SECTION 2.03. ADDITIONAL CAPITAL CONTRIBUTIONS. CTU shall contribute to
HUI as additional capital contributions: (i) Five Hundred Thousand Dollars
($500,000) in cash or bank check at the Closing (the "Cash Amount"), and (ii)
within forty-five days (45) after the Closing Date, an additional cash amount
("Pre-Paid Cash") equal to the difference between the amount of cash collected
from students of the Business which is unearned as of the Closing Date and the
amount of accounts receivable of the Business related to the term in progress
which have been earned by the Business through the Closing Date (the Cash Amount
and the Pre-Paid Cash being collectively referred to as the "Capital
Contribution"). CTU and HUI shall cooperate to determine the amount of Pre-Paid
Cash from the Books and Records of CTU. CTU shall receive a credit against the
Capital Contribution otherwise due pursuant to this SECTION 2.03 for the full
amount paid by CTU as HUI Fees (as defined herein).
SECTION 2.04. CONSIDERATION. Newco shall issue to CTU 10,000 shares of
a newly designated and authorized series of redeemable convertible preferred
stock (the "Preferred Stock") of Newco, having a liquidation preference equal to
the sum of $3.3 million and the Capital Contribution, less the amount of assumed
liabilities set forth on SCHEDULE 2.04A (the "Liquidation Preference"). The
Preferred Stock will be convertible at any time by CTU into shares of Newco's
common stock, par value $100.00 per share (the "Common Stock") and shall have
the terms set forth in the form of Certificate of Designation of Newco's Series
I Preferred Stock attached as SCHEDULE 2.04B hereto (the "Certificate of
Designation"). The issuance of the Preferred Stock to CTU hereunder shall not be
registered under the Securities Act of 1933 (the "1933 Act") by reason of the
exemption provided by Section 4(2) thereunder; and such shares may not be
further transferred unless such transfer is registered under applicable
securities laws or such transfer qualifies for an exemption from registration.
The certificates evidencing the Preferred Stock to be issued to CTU shall be
legended to reflect the foregoing restriction.
SECTION 2.05. ALLOCATION OF CONSIDERATION. At the Closing, the parties
hereto shall allocate the Liquidation Preference among the Assets in accordance
with SCHEDULE 2.05 hereto. The parties hereto shall (a) prepare all required tax
returns and reports in a manner that is consistent with such allocation, (b)
file Internal Revenue Service Form 8594 in such manner, and (c) not voluntarily
take any position inconsistent therewith upon examination of any such tax
return, in any refund claim, in any litigation or otherwise with respect to such
income tax returns.
ARTICLE III
CLOSING
SECTION 3.01. CLOSING. Upon the terms and subject to the conditions set
forth herein, the closing of the transactions contemplated herein (the
"Closing") shall be held [____________] at 10:00 a.m. local time or such other
day when all of the conditions set forth in Articles VII and VIII are satisfied
(the "Closing Date") at the offices of Churchill Manolis Freeman Kludt &
Shelton, 333 Dakota Avenue South, 2nd Floor, Huron, South Dakota, 57350 unless
the parties hereto otherwise agree.
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SECTION 3.02. DELIVERIES AT CLOSING.
(a) INSTRUMENTS AND POSSESSION. To effect the transfer
referred to in SECTION 2.01 hereof, CTU shall, on the Closing Date, execute and
deliver to HUI:
(i) assignment documents, in form and substance
satisfactory to HUI, conveying in the aggregate all
personal property included in the Assets; and
(ii) such other instruments as shall be reasonably
requested by HUI to vest in HUI title in and to the
Assets in accordance with the provisions hereof.
(b) ASSUMPTION DOCUMENTS. Upon the terms and subject to the
conditions contained herein, on the Closing Date, HUI shall execute and deliver
to CTU instruments of assumption evidencing HUI's assumption of the Assumed
Liabilities.
(c) PREFERRED STOCK CERTIFICATES. On the Closing Date, Newco
shall deliver to CTU a certificate or certificates representing the Preferred
Stock.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF CTU
CTU hereby represents and warrants to, and covenants with the HUI Group
as follows:
SECTION 4.01. ORGANIZATION AND CAPITALIZATION. CTU is a corporation
duly organized, validly existing and in good standing under the laws of the
state of its incorporation.
SECTION 4.02. POWER AND AUTHORITY. CTU has all requisite corporate
power and authority to own, lease and operate its properties and to conduct its
business as presently conducted and is duly qualified or licensed as a foreign
corporation in good standing in each jurisdiction in which the character of its
properties or the nature of its business activities requires such qualification.
SECTION 4.03. AUTHORITY FOR AGREEMENT. The Board of Directors of CTU
has approved this Agreement and has authorized the execution and delivery and
performance hereof. CTU has full corporate power, authority and legal right to
enter into this Agreement and to consummate the transactions contemplated
hereby. This Agreement is a legal, valid and binding obligation of CTU,
enforceable against CTU in accordance with its terms, except as enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws affecting the enforcement of creditors' rights in general.
SECTION 4.04. NO VIOLATION TO RESULT. Except as set forth on SCHEDULE
4.04, the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby:
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(a) are not in violation or breach of, do not conflict with or
constitute a default under, and will not accelerate or permit the acceleration
of the performance required by, any of the terms of the charter documents or
by-laws of CTU or any Contract, note, debt instrument, security agreement or
mortgage, or any other contract or agreement, written or oral, to which CTU is a
party and which affects any of the Assets;
(b) will not be an event which, after notice or lapse of time
or both, will result in any such violation, breach, conflict, default, or
acceleration;
(c) will not result in a violation under any law, judgment,
decree, order, rule, regulation, Permit or other legal requirement of any
governmental authority, court or arbitration tribunal whether federal, state,
provincial, municipal or local (within the U.S. or otherwise) at law or in
equity, and applicable to CTU; and
(d) will not result in the creation or imposition of any new
Encumbrance in favor of any Person upon any of the Assets.
SECTION 4.05. TAXES. CTU has, with respect to the Business, prepared
(or caused to be prepared) and timely and properly filed (or caused to be timely
and properly filed) with the appropriate federal, state, provincial, municipal
or local authorities all tax returns, information returns and other reports
required to be filed and has paid or accrued (or caused to be so paid or
accrued) in full all Taxes, if any, due to, or claimed to be due by, any taxing
authority. With respect to Taxes directly related to the Business, CTU has not
executed or filed with any taxing authority any agreement extending the period
for assessment or collection of such Taxes.
SECTION 4.07. TITLE TO ASSETS. CTU has good and marketable title to
each of the Assets purported to be owned by it, free and clear of any and all
Encumbrances other than those evidenced by the Assumed Liabilities. As of the
Closing Date, CTU will transfer to HUI good and marketable title to such Assets
purported to be owned by it, free and clear of any and all Encumbrances other
than Encumbrances evidenced by the Assumed Liabilities.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE HUI GROUP
HUI, Newco and Shareholder hereby, jointly and severally, represent and
warrant to, and covenant with, CTU as follows:
SECTION 5.01. ORGANIZATION AND CAPITALIZATION OF HUI. Each of HUI and
Newco is a corporation duly organized, validly existing and in good standing
under the laws of the state of its incorporation.
SECTION 5.02. POWER AND AUTHORITY. Each of HUI and Newco has all
requisite corporate power and authority to own, lease and operate its properties
and to conduct its business as presently
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conducted and as proposed to be conducted and is duly qualified or licensed as a
foreign corporation in good standing in each jurisdiction in which the character
of its properties or the nature of its business activities requires such
qualification.
SECTION 5.03. AUTHORITY FOR AGREEMENT. The Board of Directors of HUI
and Newco have approved this Agreement and have authorized the execution and
delivery and performance hereof, including Newco's obligation to issue and
deliver the Preferred Stock, together with the issuance and delivery of Common
Stock upon conversion of the shares of Preferred Stock. Each of HUI and Newco
has full corporate power, authority and legal right to enter into this Agreement
and to consummate the transactions contemplated hereby. This Agreement is a
legal, valid and binding obligation of HUI, Newco and Shareholder enforceable
against each of them in accordance with its terms, except as enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditors' rights in general.
SECTION 5.04. NO VIOLATION TO RESULT. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby:
(a) are not in violation or breach of, do not conflict with or
constitute a default under, and will not accelerate or permit the acceleration
of the performance required by, any of the terms of the charter documents or
by-laws of HUI or Newco or any note, debt instrument, security agreement or
mortgage, or any other contract or agreement, written or oral, to which HUI,
Newco or Shareholder is a party or by which HUI, Newco or Shareholder or any of
their respective properties or assets are bound;
(b) will not be an event which, after notice or lapse of time
or both, will result in any such violation, breach, conflict, default, or
acceleration;
(c) will not result in violation under any law, judgment,
decree, order, rule, regulation or other legal requirement of any governmental
authority, court or arbitration tribunal whether federal, state, provincial,
municipal or local (within the U.S. or otherwise) at law or in equity, and
applicable to either HUI, Newco or Shareholder; and
(d) will not result in the creation or imposition of any
Encumbrance in favor of any Person upon any of the properties or assets of HUI
or Newco.
SECTION 5.05. CAPITALIZATION. The entire authorized capital stock of
Newco consists of 50,000 shares of Common Stock and 50,000 shares of preferred
stock, $100.00 par value, of which 25,000 shares are designated as Series I
Preferred Stock and 25,000 shares are designated as Series II Preferred Stock.
As of the date hereof, there are 10 shares of Common Stock and no shares of
Preferred Stock issued and outstanding. All of the 10 shares of Common Stock of
Newco issued and outstanding as of the date hereof are owned beneficially and of
record by Shareholder. As of the date hereof, Newco has reserved out of its
authorized shares of Common Stock an adequate number of shares of Common Stock
for issuance upon conversion of the shares of Preferred Stock to be issued
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pursuant to this Agreement. All of the issued and outstanding shares of Common
Stock have been duly authorized and validly issued and are fully paid and
nonassessable. Except as set forth on SCHEDULE 5.05 or otherwise provided in
this Agreement, (a) no subscription, warrant, option, convertible security or
other rights (contingent or otherwise) or commitments of any character to
purchase or acquire any shares of capital stock of Newco is authorized or
outstanding, (b) Newco has no obligation (contingent or otherwise) to issue any
subscription, warrant, option, convertible security or other such right or to
issue or distribute to holders of any shares of its capital stock any evidences
of indebtedness or assets of Newco, and (c) Newco has no obligation (contingent
or otherwise) to purchase, redeem or otherwise acquire any shares of its capital
stock or any interest therein or to pay any dividend or make any other
distribution in respect thereof. There are no outstanding or authorized stock
appreciation, phantom stock or similar rights with respect to Newco. All of the
issued and outstanding shares of Common Stock and Preferred Stock of Newco have
been and will be offered, issued and sold by Newco in compliance with applicable
federal and state securities laws. The consummation of the transactions
contemplated in this Agreement will not give rise to any preemptive rights or
antidilution rights exerciseable by any holder of capital stock of Newco.
SECTION 5.06. PREFERRED STOCK. The Preferred Stock, when issued and
delivered pursuant to this Agreement, and the shares of Common Stock issuable
upon conversion of the Preferred Stock, will be duly authorized, validly issued,
fully paid, nonassessable and free of preemptive rights. When issued and
delivered pursuant to this Agreement, CTU will receive good title to such
Preferred Stock, free and clear of all liens, security interests, pledges,
charges, Encumbrances, shareholders' agreements and voting trusts. Newco will
take any corporate action which may be necessary in order that Newco may validly
and legally issue fully paid and nonassessable Common Stock upon conversion of
the Preferred Stock.
SECTION 5.07. SUBSIDIARIES. HUI is the only Subsidiary of Newco. Newco
has good and marketable title to all of the equity interests it purports to own
of HUI, free and clear in each case of any Encumbrance, and all such interests
have been duly issued and are fully paid and nonassessable. There are no
outstanding warrants, options, or other rights or commitments of any character
to subscribe for or purchase from Newco or HUI, or obligating HUI to issue, any
additional equity interests in HUI or any securities convertible into or
exchangeable for such equity interests.
SECTION 5.08. NO PRIOR ACTIVITIES. Neither Newco nor HUI have incurred
any liabilities or obligations, except those incurred in connection with their
incorporation or with the negotiation and consummation of this Agreement and the
transactions contemplated hereby. Neither Newco nor HUI have engaged in any
business or activities of any type or kind whatsoever, or entered into any
agreements with any Person, and are not subject to or bound by any obligations
or undertakings which are not contemplated by this Agreement or incurred in
connection with their incorporation.
SECTION 5.09. CHARTER AND BYLAWS. A true and complete copy of the
charter, as amended, and Bylaws, as amended, of Newco and HUI have been
delivered to CTU.
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ARTICLE VI
COVENANTS
SECTION 6.01. ACCESS TO PROPERTIES AND RECORDS. Shareholder
acknowledges that, as President of CTU, he is familiar with the operations of
the Business, the value of the Assets and the status of the Assumed Liabilities
and that he is familiar with the financial condition and operating history of
the Business. Nevertheless, CTU hereby authorizes Shareholder, in his capacity
as President of CTU, to afford to the other officers, employees, attorneys,
accountants and other authorized representatives of HUI, free and full access to
all of CTU's assets, properties, Books and Records, and employees relative to
the Business in order to afford HUI as full an opportunity of review,
examination and investigation as HUI shall desire to make of the affairs of the
Business, and HUI shall be permitted to make extracts from, or take copies of,
such Books and Records or other documentation as may be reasonably necessary;
and CTU shall furnish or cause to be furnished to HUI such reasonable financial
and operating data and other information about the Business, which any of HUI's
respective officers, employees, attorneys, accountants or other authorized
representatives may request; provided HUI and its agents shall not unreasonably
interfere with the operations of the Business.
SECTION 6.02. PUBLIC ANNOUNCEMENTS. HUI and CTU will consult with each
other with respect to any announcement to the public or any statement to their
employees (and students in the case of CTU) generally concerning or relating to
the transactions contemplated hereby. Prior to the Closing Date neither HUI, nor
CTU will make any announcement to the public without the prior written consent
of the other, except for announcements which CTU believes to be required by
applicable securities laws or stock exchange rules.
SECTION 6.03. TRANSFERRED EMPLOYEES. Effective as of the Closing Date,
HUI shall offer employment to all employees of the Business who are employed on
the Closing Date, including those who are on short-term disability leave. CTU
shall cooperate with HUI in the orderly transfer of the Transferred Employees to
HUI. As of 11:59 p.m. immediately prior to the Closing Date, CTU shall cease all
benefit accruals in any of its employee benefit plans attributed to Transferred
Employees. In administering employee benefit plans for the Transferred Employees
after the Closing Date, HUI will credit each Transferred Employee solely for
vesting and eligibility purposes with all years of service of such Transferred
Employee credited for such purpose with the Business. Without limiting the
generality of the foregoing, no waiting period or exclusion from coverage of any
pre-existing medical condition shall apply to the Transferred Employees'
participation in any employee benefit plan of HUI after the Closing Date if such
Transferred Employee was a participant in CTU's benefit plans for at least
thirty days prior to the date of employment of such Transferred Employee by HUI.
The parties hereto expressly acknowledge that CTU shall not be liable for (i)
any claims arising out of or accruing under any employee benefit plans of HUI or
Newco or otherwise to or in respect of any Transferred Employees terminated by
HUI or Newco for any reason on or after the Closing Date, including without
limitation, any severance benefits or termination payments or (ii) any liability
triggered under any unemployment compensation or other government-mandated
benefits relating to the termination of any Transferred Employee on or after the
Closing Date.
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SECTION 6.04. SECURITIES LAW COMPLIANCE. The HUI Group hereby jointly
and severally covenant and agree that all issuances and offers of Common Stock
or other securities of Newco have been and will be conducted in compliance with
applicable federal and state securities laws. Shareholder, Newco and HUI hereby
jointly and severally indemnify and hold CTU and its affiliates and agents
harmless from and against any and all liabilities, losses, damages, claims,
costs and expenses arising out of or due to the issuance of any Common Stock or
other securities of Newco.
SECTION 6.05. TAXES.
(a) CTU shall be liable for and shall pay all Taxes (whether
assessed or unassessed) applicable to the Business or the Assets, in each case
attributable to periods (or portions thereof) ending on or prior to the Closing
Date. HUI shall pay all Taxes (whether assessed or unassessed) applicable to the
Business or the Assets, in each case attributable to periods (or portions
thereof) beginning after the Closing Date. For purposes of this SECTION 6.05(A),
any period beginning before and ending after the Closing Date shall be treated
as two partial periods, one ending on the Closing Date and the other beginning
after the Closing Date.
(b) Notwithstanding SECTION 6.05(A), any Tax (including,
without limitation, a sales Tax, use Tax, real property transfer or gains Tax or
documentary stamp Tax) directly attributable to the sale or transfer of the
Assets shall be paid one-half by CTU and one-half by HUI. CTU and HUI agree to
timely sign and deliver such certificates or forms as may be necessary or
appropriate to establish an exemption from (or otherwise reduce), or make a
report with respect to, such Taxes.
(c) CTU or HUI, as the case may be, shall provide
reimbursement for any Tax paid by one party all or a portion of which is the
responsibility of the other party in accordance with the terms of this SECTION
6.05. Within a reasonable time prior to the payment of any said Tax, the party
paying such Tax shall give notice to the other party of the Tax payable and the
portion which is the liability of each party, although failure to do so will not
relieve the other party from its liability hereunder.
SECTION 6.06. PREFERRED STOCK. At or before the Closing, HUI shall
cause to be duly executed and filed with the Office of the Secretary of the
State of South Dakota, the Certificate of Designation for the Company's Series I
Preferred Stock, in the form attached as SCHEDULE 2.04B hereto.
SECTION 6.07. CONSENTS OF THIRD PARTIES; GOVERNMENTAL APPROVALS.
(a) HUI and CTU will use their best efforts to secure, before
the Closing Date, the consent, approval or waiver, from any party to a Contract,
to assign or transfer any such Contract to HUI or to otherwise satisfy the
conditions set forth in SECTION 7.04 and to obtain the release of CTU from
liability in respect thereof; provided that neither CTU nor HUI shall have any
obligation to offer or pay any consideration in order to obtain any such
consents or approvals.
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(b) During the period prior to the Closing Date, CTU and HUI
shall act diligently and reasonably, and shall cooperate with each other and use
their best efforts to secure any consents and approvals of any governmental or
regulatory authority required to be obtained by them in order to assign or
transfer any Permits to HUI or to permit the consummation of the transactions
contemplated by this Agreement.
SECTION 6.08. RESIGNATION OF SHAREHOLDER. Shareholder shall resign,
effective as of the Closing Date, all positions he holds as either an officer or
director of CTU or MDJB, Inc., and shall serve as President of HUI and
Chancellor of Huron University.
SECTION 6.09. BEST EFFORTS TO OBTAIN CERTIFICATION AND ACCREDITATION.
The parties hereto shall use their best efforts to obtain Certification and
Accreditation for Huron University upon the Closing. In this regard, the parties
hereto shall diligently pursue Certification and Accreditation through prompt,
timely and complete filings of the requisite documents and properly and promptly
responding to inquiries of the ED and the NCA. CTU and the HUI Group shall
provide to the ED and the NCA, and to all state regulatory agencies and
accrediting bodies, all information reasonably required or reasonably requested
by any of such agencies or bodies, and each of CTU and the HUI Group shall use
their best efforts to satisfy promptly all requirements and demands of the ED,
the NCA or any such agency or body requisite to obtaining Certification and
Accreditation, whether absolute or provisional. With respect to the ED, HUI
shall, as soon as practicable after execution of this Agreement but in no event
later than June 1, 1999, submit a Preacquisition Review Application ("PRA") to
the ED for a Preacquisition Review of HUI. CTU shall cooperate in the
preparation and filing of the PRA and the parties shall jointly use their best
efforts to obtain from the ED the responsive letter described in SECTION 7.06
herein.
SECTION 6.10. BEST EFFORTS. Subject to the terms and conditions
provided in this Agreement, each of the parties shall use its best efforts in
good faith to take or cause to be taken as promptly as practicable all actions
that are within its power to cause to be fulfilled those conditions precedent to
its obligations or the obligations of the other parties to consummate the
transactions contemplated by this Agreement that are dependent upon its actions,
including with respect to the HUI Group, HUI Group's best efforts to cause the
condition set forth in SECTION 8.05 to be satisfied.
ARTICLE VII
CONDITIONS TO THE HUI GROUP'S OBLIGATIONS
All obligations of the HUI Group under this Agreement are subject to
the fulfillment and satisfaction, prior to or at the time at which the Closing
Date is scheduled to occur, of each of the following conditions precedent, any
one or more of which may be waived by HUI in writing.
SECTION 7.01. REPRESENTATIONS AND WARRANTIES TRUE AT THE CLOSING DATE.
At the Closing Date, the representations and warranties of CTU contained in this
Agreement will be true and correct in all material respects at and as of such
time, and at the Closing Date, CTU shall have delivered to HUI a certificate to
such effect signed by the President of CTU.
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SECTION 7.02. CTU'S PERFORMANCE. Each of the obligations of CTU to be
performed on or before the Closing Date pursuant to the terms of this Agreement
shall have been duly performed in all material respects at the Closing Date, and
at the Closing Date, CTU shall have delivered to HUI a certificate to such
effect signed by the President of CTU
SECTION 7.03. OPINION OF CTU'S COUNSEL. HUI shall have been furnished
an opinion or opinions of counsel to CTU, dated the Closing Date, in form
substantially as set forth on SCHEDULE 7.03 hereto.
SECTION 7.04. ASSIGNMENT OF CONTRACTS. CTU shall have received consents
under all material Contracts comprising the Assets which require the consent of
any Person to the assignment thereof either by the terms thereof or as a matter
of law for their assumption or performance by HUI.
SECTION 7.05. NCA ACCREDITATION. HUI shall have received an indication
from NCA that it will grant institutional Accreditation for Huron University
upon the Closing.
SECTION 7.06. PREACQUISITION REVIEW. HUI shall have received a letter
from ED indicating that a Preacquisition Review has been completed and in
substance, indicating that there is nothing in the information submitted which
would prevent the Institution from being recertified following the Closing.
ARTICLE VIII
CONDITIONS TO CTU'S OBLIGATIONS
All obligations of CTU under this Agreement are subject to the
fulfillment and satisfaction, prior to or at the time at which the Closing Date
is scheduled to occur, of each of the following conditions, any one or more of
which may be waived in writing by CTU.
SECTION 8.01. REPRESENTATIONS AND WARRANTIES TRUE AT THE CLOSING DATE.
At the Closing Date, the representations and warranties of the HUI Group
contained in this Agreement will be true and correct in all material respects at
and as of such time, and at the Closing Date, HUI shall have delivered to CTU a
certificate to such effect signed by the President of HUI and Newco.
SECTION 8.02. HUI'S PERFORMANCE. Each of the obligations of HUI to be
performed by it on or before the Closing Date pursuant to the terms of this
Agreement shall have been duly performed in all material respects at the Closing
Date, and at the Closing Date, the HUI Group shall have delivered to CTU a
certificate to such effect signed by the President of HUI and Newco.
SECTION 8.03. OPINION OF THE HUI GROUP'S COUNSEL. CTU shall have been
furnished an opinion or opinions of counsel to the HUI Group, dated the Closing
Date, in form substantially as set forth on SCHEDULE 8.03 hereto.
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SECTION 8.04. EMPLOYMENT AGREEMENTS. Shareholder shall have executed
and delivered to CTU an amendment to his existing employment agreement with CTU
and John Zing shall have executed and delivered to CTU an Employment Agreement
with CTU, substantially in the forms attached as SCHEDULE 8.04A AND 8.04B
hereto, providing for Shareholder and Mr. Zing to assist CTU in its management
transition and other operational and strategic matters.
SECTION 8.05. ADDITIONAL CAPITAL. Newco shall have received
commitments, in form and substance satisfactory to CTU, to purchase Common
Stock in an amount of at least $1.85 million.
SECTION 8.06. HEI LEASE. CTU and its affiliates shall have been
unconditionally released from all obligations under the HEI Lease.
SECTION 8.07. NCA ACCREDITATION. HUI shall have received an indication
from NCA that it will grant institutional Accreditation for Huron University
upon the Closing.
SECTION 8.08. PREACQUISITION REVIEW. HUI shall have received a letter
from ED indicating that a Preacquisition Review has been completed and that HUI
or Newco will be able to obtain Certification for the Institution in a timely
manner following the Closing.
ARTICLE IX
PERFORMANCE SUBSEQUENT TO CLOSING
SECTION 9.01. COVENANTS OF HUI PENDING EXPIRATION OF CONDITION
SUBSEQUENT. HUI covenants and agrees with CTU that from and after the Closing
and until the satisfaction or expiration of the condition subsequent described
in SECTION 9.04 hereof (the "Condition Subsequent") or the exercise of the
Recission Right (as defined in Section 9.04 below), unless otherwise agreed in
writing by CTU and except as set forth on SCHEDULE 9.01 hereto, HUI (i) shall
not mortgage, pledge, assign, sell or otherwise transfer any of the Assets other
than in the ordinary course of HUI's business, (ii) shall conduct the business,
operations, activities and practices of the Institution and the Business herein
acquired by HUI in the usual and ordinary course, consistent with past
practices, (iii) shall use its best efforts to preserve the business
organization of the Business intact, keep available to itself and the Business
the services of the Transferred Employees, and preserve for itself and CTU the
goodwill of the suppliers, students and others with whom CTU, with respect to
the Business, or HUI has a business relationship, (iv) shall maintain the
tangible property in the same condition as it now exists, ordinary usage, wear
and tear excepted, (v) shall not breach any agreements necessary for its
operations, and (vi) shall not enter into any contract or commitment the
performance of which may extend beyond the expiration of the Condition
Subsequent, except those made in the ordinary course of business, the terms of
which are consistent with past practice.
SECTION 9.02. FINANCIAL CONDITION. Until the satisfaction of the
Condition Subsequent or HUI's exercise of the Rescission Right, HUI and Newco
shall maintain sufficient, unimpaired equity capital as shall be acceptable to
the ED and other governmental, quasi-governmental, or accrediting agency
authorities including satisfaction of all applicable financial responsibility
regulations and
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standards, so as to provide reasonable assurances that HUI and Newco shall be
financially capable of obtaining HUI's Accreditations and Certifications and
performing its obligations hereunder.
SECTION 9.03. ADMINISTRATION IN ACCORDANCE WITH REGULATIONS,
ACCREDITATIONS AND CERTIFICATIONS. Until the satisfaction of the Condition
Subsequent or HUI's exercise of the Rescission Right, HUI and Newco shall
administer and operate the Institution in accordance with all material federal
and state laws, statutes, rules and regulations and in accordance with all
permits, accreditations, authorizations and agreements issued by or entered into
with any federal, state or local government, quasi-governmental or accrediting
agency in any way regulating or otherwise relating to the administration and
operation of the Institution. Subject to the terms and provisions of this
Agreement, HUI shall use its best efforts to obtain any and all approvals from
the ED, any state education regulatory authority and any other governmental
quasi-governmental or accrediting agency that may be necessary or appropriate to
vest in HUI the right and authority to administer and operate the Institution
and to verify HUI for participation in Title IV Programs in the same manner and
to the same extent as CTU with respect to the Business prior to the transactions
contemplated hereunder.
SECTION 9.04. CONDITION SUBSEQUENT TO OBLIGATIONS OF HUI.
Notwithstanding anything to the contrary contained in this Agreement, if within
90 calendar days after the Closing Date, the ED fails to grant Certification,
whether absolutely or provisionally, for Huron University to participate in the
Title IV Programs, HUI may, at its option, terminate and rescind this Agreement
(the "Rescission Right") by giving CTU written notice to such effect, within 5
days after the expiration of such period; provided that such rescission can be
and is effected within 30 days of such notice and in a manner so as to restore
CTU's use and ownership of the Business and the Assets in the same state and in
the same form and character as it was immediately prior to the Closing Date
(except for transactions occurring since the Closing Date in accordance with the
covenant described in SECTION 9.01 and except that in the event the Real
Property is transferred to a different owner, the parties hereto acknowledge and
understand that there will be a different lessor of the Real Property, but that
the terms and provisions of the any lease of the Real Property to CTU will be no
less favorable to CTU than those provided currently in the HEI Lease) and permit
CTU to operate the Business immediately after the Rescission Date in the same
manner as the Business was conducted by CTU immediately prior to the Closing
Date. If subsequent to such election the Institution is recertified, CTU shall
reimburse HUI for the Title IV Program funds attributable to and received for
such period. Immediately upon triggering the condition subsequent set forth in
this Section, the parties shall work cooperatively and in good faith to rescind
the transfer of the Assets and assumption of the Assumed Liabilities in the
manner and to the extent herein contemplated, including immediately seeking
reinstitution of all of CTU's Accreditations, prompt reconveyance of the Assets
and Assumed Liabilities to CTU, and preservation of the goodwill of the business
of the Institution. Without limiting the generality of the foregoing, upon any
rescission of the purchase of the Assets pursuant to this Section: (a) CTU shall
deliver to Newco the certificates representing the Preferred Stock; (b) HUI
shall pay to CTU cash in an amount equal to (i) the Cash Amount, plus (ii) an
amount of cash equal to the difference between the amount of cash collected from
students of HUI which is unearned as of the date the Assets and Assumed
Liabilities are reconveyed (the "Rescission Date") (including
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Pre-Paid Cash which is unearned, if any) and the amount of accounts receivable
of HUI related to the term in progress which have been earned by HUI through the
Recission Date; and (c) HUI shall reconvey the Assets to CTU.
SECTION 9.05. DISBURSEMENT OF TITLE IV FUNDS. CTU agrees that
immediately prior to the Closing Date, CTU will disburse Title IV funds in
accordance with 34 C.F.R. ss. 668.26. HUI expressly acknowledges that
documentation establishing HUI's eligibility and certification to participate in
the programs administered under Title IV must be issued by the U.S. Department
of Education before HUI may participate in the federal student financial
assistance programs under Title IV.
ARTICLE X
TERMINATION
SECTION 10.01. TERMINATION. Notwithstanding anything herein or
elsewhere to the contrary, this Agreement may be terminated at any time prior
to Closing:
(a) by CTU or HUI if the Closing Date shall not have taken
place on or prior to December 31, 1999 (the "Termination Date"); or
(b) by CTU at any time in its sole discretion if any of the
representations or warranties of the HUI Group in this Agreement are not in all
material respects true, accurate and complete or if any of the HUI Group
breaches in any material respect any covenant contained in this Agreement,
provided that such misrepresentation or breach is not cured within ten business
days after notice thereof, but in any event prior to the Termination Date;
(c) by HUI at any time in its sole discretion if any of the
representations or warranties of CTU in this Agreement are not in all material
respects true, accurate and complete or if CTU breaches in any material respect
any covenant contained in this Agreement, provided that such misrepresentation
or breach is not cured within ten business days after notice thereof, but in any
event prior to the Termination Date;
(d) by CTU at any time after June 30, 1999, if CTU reasonably
believes that either the NCA or the ED will not certify or accredit the
Institution at any time or in a timely manner; or
(e) by CTU at any time after April 30, 1999, if Newco has not
received commitments, in form and substance satisfactory to CTU, to purchase
Common Stock in an amount of at least $1.85 million.
SECTION 10.02. NOTICE; EFFECT OF TERMINATION. If this Agreement is
terminated pursuant to SECTION 10.01, written notice thereof shall promptly be
given by the party electing such termination to the other party and, subject to
the expiration of the cure periods provided in clauses (b) and (c) of SECTION
10.01, if any, this Agreement shall terminate without further actions by the
parties and
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no party shall have any further obligations under this Agreement; provided that
any termination of this Agreement pursuant this Section shall not relieve any
party from any liability for the breach of any representation, warranty or
covenant contained in this Agreement or be deemed to constitute a waiver of any
remedy available for such breach. Notwithstanding the termination of this
Agreement, the respective obligations of the parties under SECTIONS 11.02,
11.06, 11.09 and 11.10 shall survive the termination of this Agreement.
ARTICLE XI
MISCELLANEOUS
SECTION 11.01. SUCCESSORS, ASSIGNS AND THIRD PARTIES. This Agreement
shall inure to the benefit of and be binding upon the parties hereto and their
respective successors and assigns; provided, however, that none of the parties
hereto may make any assignment of this Agreement or any interest herein without
the prior written consent of the other parties hereto provided that CTU may
trade or assign all or part of its interest in the Preferred Stock at any time
to a Qualified Party without the consent of any of the HUI Group; provided,
however, that in the event CTU desires to sell all or a portion of its interest
in the Preferred Stock to an unaffiliated Person (the "Offeree") it shall first
offer the HUI Group the right, exercisable for ten days after receipt of notice
from CTU, to purchase all, but not less than all, of the offered shares of
Preferred Stock at the same price and on the same terms as those offered to the
Offeree; provided, that the HUI Group shall have thirty days from the receipt of
the above-referenced notice from CTU to complete the purchase of the Offering
Shares. Except as provided herein, nothing herein expressed or implied is
intended or shall be construed to confer upon or give to any Person, firm or
corporation, other than the parties hereto and their respective successors and
assigns, any rights or remedies under or by reason of this Agreement.
SECTION 11.02. GOVERNING LAW. This Agreement shall in all respects be
interpreted, construed and governed by and in accordance with the internal
substantive laws of the State of South Dakota, disregarding principles of
conflict of laws and the like.
SECTION 11.03. SEVERABILITY. Each section, subsection and lesser
section of this Agreement constitutes a separate and distinct undertaking,
covenant and/or provision hereof. In the event that any provision of this
Agreement shall finally be determined to be unlawful, such provision shall be
deemed severed from this Agreement, but every other provision of this Agreement
shall remain in full force and effect and such unlawful provision shall be
interpreted as closely as possible to the manner in which it was written.
SECTION 11.04. CERTAIN WORDS. Words such as "herein," "hereof,"
"hereby," "hereunder" and words of similar import refer to this Agreement as a
whole and not to any particular section or subsection of this Agreement.
Whenever the word "including" is used herein, it shall be deemed to be followed
by the words "without limitation."
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SECTION 11.05. NOTICES. Except as otherwise expressly provided herein,
any notice, consent, or other communication required or permitted to be given
hereunder shall be in writing, delivered by certified mail or a national
overnight delivery services and shall be deemed to have been given when
received, and shall be addressed as follows:
<TABLE>
<S> <C> <C>
(a) If to the HUI Group: Huron University
333 Ninth St. SW
Huron, South Dakota 57350
Attn: Mr. David O'Donnell
with a copy to: Churchill Manolis Freeman Kludt & Shelton
P.O. Box 176
Huron, South Dakota 57350
Attn: George Manolis
(b) If to CTU: Whitman Education Group
4000 Biscayne Boulevard, 6th Floor
Miami, Florida 33137
Attn: Richard B. Salzman, Esq.
Vice President - Legal Affairs and
General Counsel
with a copy to: Stearns Weaver Miller Weissler
Alhadeff & Sitterson, P.A.
150 West Flagler St., Suite 2200
Miami, Florida 33130
Attn: Steven D. Rubin, Esq.
</TABLE>
or at such other address or addresses as the party addressed may from time to
time designate in writing. Any communication dispatched by telegram or telex
shall be confirmed by letter.
SECTION 11.06. EXPENSES. Except as otherwise provided in Article
XI, all legal and other costs and expenses incurred in connection herewith and
the transactions contemplated hereby shall be paid by the party incurring such
expenses; provided, however, that CTU shall pay reasonable attorney's fees
incurred by the HUI Group (the "HUI Fees") in connection with this transaction.
SECTION 11.07. HEADINGS. The headings in this Agreement are
intended solely for convenience of reference and shall be given no effect in
the construction or interpretation of this Agreement.
SECTION 11.08. COUNTERPARTS. This Agreement may be executed in two
or more counterparts, each of which shall be deemed an original but all of which
shall constitute the same agreement.
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SECTION 11.09. LITIGATION; PREVAILING PARTY. In the event of any
litigation with regard to this Agreement, the prevailing party shall be entitled
to receive from the non-prevailing party and the non-prevailing party shall pay
upon demand all reasonable fees and expenses of counsel for the prevailing
party.
SECTION 11.10. INJUNCTIVE RELIEF. It is possible that remedies at
law may be inadequate and, therefore, the parties hereto shall be entitled to
equitable relief including, without limitation, injunctive relief, specific
performance or other equitable remedies in addition to all other remedies
provided hereunder or available to the parties hereto at law or in equity.
SECTION 11.11. ENTIRE AGREEMENT. This Agreement contains every
obligation and understanding between the parties relating to the subject matter
hereof and merges all prior discussions, negotiations and agreements, if any,
between them, and none of the parties shall be bound by any representations,
warranties, covenants, or other understandings, other than as expressly provided
or referred to herein.
SECTION 11.12. WAIVER AND AMENDMENT. Any representation, warranty,
covenant, term or condition of this Agreement which may legally be waived, may
be waived, or the time of performance thereof extended, at any time by the party
hereto entitled to the benefit thereof, and any term, condition or covenant
hereof may be amended by the parties hereto at any time. Any such waiver,
extension or amendment shall be evidenced by an instrument in writing executed
on behalf of the appropriate party by a person who, to the extent applicable,
has been authorized by its Board of Directors to execute waivers, extensions or
amendments on its behalf. No waiver by any party hereto, whether express or
implied, of its rights under any provision of this Agreement shall constitute a
waiver of such party's rights under such provisions at any other time or a
waiver of such party's rights under any other provision of this Agreement. No
failure by any party hereto to take any action against any breach of this
Agreement or default by another party shall constitute a waiver of the former
party's right to enforce any provision of this Agreement or to take action
against such breach or default or any subsequent breach or default by such other
party.
-21-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their signatures
to be affixed to this Agreement as of the date first above written.
COLORADO TECHNICAL UNIVERSITY, INC.,
A COLORADO CORPORATION
By: ________________________________________
Name: David O'Donnell
Title: President
HURON UNIVERSITY, INC.,
A SOUTH DAKOTA CORPORATION
By: ________________________________________
Name: David O'Donnell
Title: President
NEWCO, INC., A SOUTH DAKOTA CORPORATION
By: ________________________________________
Name: David O'Donnell
Title: President
____________________________________________
DAVID O'DONNELL, INDIVIDUALLY
-22-
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