U.S.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
x ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2008
Commission File Number 000-51371
LINCOLN
EDUCATIONAL SERVICES CORPORATION
(Exact
name of registrant as specified in its charter)
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New
Jersey
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57-1150621
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(State
or other jurisdiction of incorporation or organization)
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(IRS
Employer Identification No.)
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200
Executive Drive, Suite 340
West
Orange, NJ 07052
(Address
of principal executive offices)
(973) 736-9340
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, no par value per share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes x
No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “accelerated filer,” “large accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
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Large
accelerated filer
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Accelerated
filer x
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Non-accelerated
filer
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Smaller
reporting company
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes No x
The
aggregate market value of the 4,556,925 shares of
common stock held by non-affiliates of the Registrant issued and outstanding as
of June 30, 2008, the last business day of the registrant’s most recently
completed second fiscal quarter was $52,997,038. This amount
is based on the closing price of the common stock on the Nasdaq Global Market of
$11.63 per share
on June 30, 2008. Shares of common stock held by executive officers and
directors and persons who own 5% or more of outstanding common stock have been
excluded since such persons may be deemed affiliates. This determination of
affiliate status is not a determination for any other
purpose.
The
number of shares of Registrant’s common stock outstanding as of March 11, 2009
was 26,092,361.
Documents Incorporated by
Reference
Portions
of the Proxy Statement for the Registrant’s 2009 Annual Meeting of Stockholders
are incorporated by reference in Part III of this Annual Report on
Form 10-K. With the exception of those portions that are specifically
incorporated by reference in this Annual Report on Form 10-K, such Proxy
Statement shall not be deemed filed as part of this Report or incorporated by
reference herein.
LINCOLN EDUCATIONAL SERVICES CORPORATION AND
SUBSIDIARIES
INDEX
TO FORM 10-K
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2008
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PART
I.
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1
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ITEM
1.
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1
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ITEM
1A.
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21
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ITEM
1B.
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29
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ITEM
2.
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30
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ITEM
3.
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31
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ITEM
4.
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31
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PART II.
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31
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ITEM
5.
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31
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ITEM
6.
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35
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ITEM
7.
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37
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ITEM
7A.
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50
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ITEM
8
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50
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ITEM
9.
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50
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ITEM
9A.
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50
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ITEM
9B.
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51
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PART III.
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52
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ITEM
10.
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52
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ITEM
11.
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52
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ITEM
12.
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52
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ITEM
13.
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52
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ITEM
14.
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52
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PART IV.
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53
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ITEM
15.
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53
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Forward-Looking
Statements
This Form
10-K contains “forward-looking statements,” within the meaning of Section 21E of
the Securities and Exchange Act of 1934, as amended, which include information
relating to future events, future financial performance, strategies,
expectations, competitive environment, regulation and availability of resources.
These forward-looking statements include, without limitation, statements
regarding: proposed new programs; expectations that regulatory developments or
other matters will not have a material adverse effect on our consolidated
financial position, results of operations or liquidity; statements concerning
projections, predictions, expectations, estimates or forecasts as to our
business, financial and operating results and future economic performance; and
statements of management’s goals and objectives and other similar expressions
concerning matters that are not historical facts. Words such as “may,” “should,”
“could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,”
“future,” “intends,” “plans,” “believes,” “estimates,” and similar expressions,
as well as statements in future tense, identify forward-looking
statements.
Forward-looking
statements should not be read as a guarantee of future performance or results,
and will not necessarily be accurate indications of the times at, or by, which
such performance or results will be achieved. Forward-looking statements are
based on information available at the time those statements are made and/or
management’s good faith belief as of that time with respect to future events,
and are subject to risks and uncertainties that could cause actual performance
or results to differ materially from those expressed in or suggested by the
forward-looking statements. Important factors that could cause such differences
include, but are not limited to:
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·
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actual or anticipated
fluctuations in our results of
operations;
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·
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our failure to comply with the
extensive regulatory framework applicable to our industry or our failure
to obtain timely regulatory approvals in connection with a change of
control of our company or acquisitions;
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·
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our success in updating and
expanding the content of existing programs and developing new programs in
a cost-effective manner or on a timely
basis;
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·
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risks associated with the opening
of new campuses;
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·
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risk associated with integration
of acquired schools;
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industry
competition;
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·
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our ability to continue to
execute our growth
strategies;
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·
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conditions and trends in our
industry;
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·
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general and economic conditions;
and
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·
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other factors discussed under the
headings “Business,” “Risk Factors” and “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations.”
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Forward-looking
statements speak only as of the date the statements are made. Except
as required under the federal securities laws and rules and regulations of the
SEC, we undertake no obligation to update or revise forward-looking statements
to reflect actual results, changes in assumptions or changes in other factors
affecting forward-looking information. We caution you not to unduly
rely on the forward-looking statements when evaluating the information presented
herein.
PART
I.
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ITEM 1.
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BUSINESS
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OVERVIEW
We are a
leading and diversified for-profit provider of career-oriented post-secondary
education as measured by total enrollment. We offer recent high school graduates
and working adults degree and diploma programs in five areas of study:
automotive technology, health sciences, skilled trades, business and information
technology and hospitality services. For the year ended December 31, 2008,
our automotive technology program, our health science program, our skilled
trades program, our business and information technology program, and our
hospitality services program accounted for approximately 35%, 32%, 14%, 9%, and
10%, respectively, of our average enrollment. We had 21,667 students enrolled as
of December 31, 2008 and our average enrollment for the year ended
December 31, 2008 was 20,006 students, an increase of 13.1% from our
average enrollment of 17,687 for the year ended December 31, 2007. For the
year ended December 31, 2008, our revenues were $376.9 million, which
represents an increase of 15.0% from the year ended December 31, 2007.
Excluding our acquisition of Briarwood College, or BRI, in December 2008,
our revenues and average enrollment would have increased by 14.7% and 13.0%,
respectively, compared to the year ended December 31, 2007. For the year
ended December 31, 2007, our revenues were $327.8 million, which
represented a 5.5% increase from the year ended December 31,
2006. Excluding our acquisition of New England Institute of
Technology at Palm Beach, Inc., or FLA, in May 2006, our revenues and average
enrollment in 2007 would have increased by 3.2% and decreased by 0.4%,
respectively, compared to the year ended December 31, 2006.
As of
December 31, 2008, we operated 36 campuses in 17 states. We operate our
campuses under the following six brand names: Lincoln Technical
Institute, Lincoln College of Technology,
Nashville Auto-Diesel College (“NADC”), Southwestern College, Euphoria
Institute of Beauty Arts and Sciences and Briarwood College. In
February 2007, we completed a re-branding initiative to consolidate 26 of our
schools under the Lincoln Technical Institute and Lincoln College of Technology
brand names, with the remaining schools continuing to operate under their
pre-existing names. Most of our campuses serve major metropolitan
markets and each typically offers courses in multiple areas of
study. Five of our campuses are destination schools, which attract
students from across the United States and, in some cases, from abroad. Our
other campuses primarily attract students from their local communities and
surrounding areas. All of our schools are nationally accredited and are eligible
to participate in federal financial aid programs by the U.S. Department of
Education, or DOE, and applicable state education agencies and accrediting
commissions which allow students to apply for and access federal student loans
as well as other forms of financial aid.
In May
2007, we announced a realignment pursuant to which we created separate
managerial oversight for two groups of educational programs:
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·
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Lincoln
Technical Group. The Lincoln Technical Group primarily focuses
on our automotive technology and skilled trades
programs.
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·
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Lincoln
Education Group. The Lincoln Education Group primarily focuses
on our health sciences, hospitality services and business and information
technology programs, as well as our online
programs.
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This
realignment is intended to promote efficiencies across our operations and
further enhance our ability to execute on our strategy.
On
December 1, 2008, we acquired the rights, title and interest in the assets used
in the conduct and operation of Briarwood College (“Briarwood”) for
approximately $10.5 million in cash, net of cash acquired. Briarwood
operates one campus in Southington, Connecticut, is regionally accredited
by the New England Association of Schools and Colleges (“NEASC”), and currently
offers two bachelor’s degree programs and 31 associate degree programs to
approximately 550 students as of December 31, 2008 from Connecticut and
surrounding states.
On
January 20, 2009, we completed the acquisition of four of the five institutions
comprising Baran Institute of Technology, or Baran, for approximately $24.9
million in cash, net of cash acquired, subject to contractual post closing
adjustments. Baran consists of five distinct institutions serving
approximately 1,900 students and offers associate and diploma programs in the
fields of automotive, skilled trades, health sciences and culinary
arts. The four institutions we acquired on January 20, 2009 are Baran
Institute of Technology, or BIT, Connecticut Culinary Institute, or CCI,
Americare School of Nursing, or ASN, and Engine City Technical Institute, or
ECTI. We also acquired the membership interests of Hartford Urban
Ventures, LLC and certain assets and assumed certain liabilities of Educational
Properties, LLC, which provide support services to Baran. We expect
to acquire the fifth Baran institution, Clemens College, for an additional $3.0
million in the second quarter of 2009.
We
believe that we provide our students with the highest quality career-oriented
training available for our areas of study in our markets. We offer programs in
areas of study that we believe are typically underserved by traditional
providers of post-secondary education and for which we believe there exists
significant demand among students and employers. Furthermore, we believe our
convenient class scheduling, career focused curricula and emphasis on job
placement offer our students valuable advantages that have been neglected by the
traditional academic sector. By combining substantial hands-on training with
traditional classroom-based training led by experienced instructors, we believe
we offer our students a unique opportunity to develop practical job skills in
key areas of expected job demand. We believe these job skills enable our
students to compete effectively for employment opportunities and to pursue
on-going salary and career advancement.
Our
principal business is providing post-secondary education. Accordingly, our
operations aggregate into one reporting segment.
DISCONTINUED
OPERATIONS
On July
31, 2007, our Board of Directors approved a plan to cease operations at three of
our campuses. As a result of that decision, we recognized a non-cash
impairment charge related to goodwill at these three campuses of approximately
$2.1 million as of June 30, 2007. Additionally, we determined that
certain long-lived assets would not be recoverable at June 30, 2007 and recorded
a non-cash charge of $0.9 million to reduce the carrying value of these assets
to their estimated fair value.
As of
September 30, 2007, all operations had ceased at these campuses, and
accordingly, the results of operations of these campuses have been reflected in
the accompanying statements of operations as “Discontinued Operations” for all
periods presented.
The
following amounts relate to discontinued operations at these three campuses (in
thousands):
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Year
Ended December 31,
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2007
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2006
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Revenue
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$ | 4,230 | $ | 10,876 | ||||
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Operating
Expenses
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(13,760 | ) | (13,493 | ) | ||||
| (9,530 | ) | (2,617 | ) | |||||
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Benefit
for income taxes
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(4,043 | ) | (1,085 | ) | ||||
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Loss
from discontinued operations
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$ | (5,487 | ) | $ | (1,532 | ) | ||
AVAILABLE
INFORMATION
Our
website is www.lincolnedu.com. We make
available on this website our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, annual proxy statement
on Schedule 14A and amendments to those reports as soon as reasonably
practicable after we electronically file or furnish such materials to the
Securities and Exchange Commission. You can access this information on our
website, free of charge, by clicking on “Investor Relations.” The information
contained on or connected to our website is not a part of this annual report on
Form 10-K.
BUSINESS
STRATEGY
Our goal
is to strengthen our position as a leading and diversified provider of
career-oriented post-secondary education by continuing to pursue the
following:
Maximize
Utilization of Existing Facilities. We
believe that by creating separate oversight for two groups of educational
programs, we are able to improve the day-to-day management, operational
efficiency and capacity utilization of our campuses. We are also
focused on improving capacity utilization through increased enrollments, and we
expect to continue investing in marketing resources to attract new
students.
Expand Existing
Areas of Study and Existing Facilities. We believe we can
leverage our operations to expand our program offerings in existing areas of
study and expand into new areas of study to capitalize on demand from students
and employers in our target markets. For example, in 2007 we began
offering courses in Licensed Practical Nursing at three of our New Jersey
campuses, and we believe we will be able to similarly expand our program
offerings at other campuses. We also expect to continue expanding
some of our existing facilities and relocating other facilities to expand
capacity. In 2008, we increased capacity at two of our
Southwestern College campuses and moved into a new and larger campus in
Brockton, Massachusetts.
Expand Geographic
Presence. We believe that we can leverage our marketing and recruiting
programs by opening additional campuses in selected markets and obtaining
greater market penetration. For example, in March 2006, we
established our presence in the New York metropolitan area with the opening of
our Queens, New York automotive school in partnership with the Greater New York
Area Automobile Dealers Association. In 2008, we expanded our
presence in Las Vegas with the opening of our third Euphoria campus in the north
end of Las Vegas which will enable us to better serve that market. We
believe we can also increase our student enrollments by entering selected new
geographic markets that we believe have significant growth potential and where
we can leverage our reputation and operating expertise.
Opportunistically
Pursue Strategic Acquisitions. We continue to
evaluate attractive acquisition candidates. In evaluating potential
acquisitions, we seek to identify schools that provide the potential for program
replication at our existing campuses, expand our program and degree offerings,
and extend our presence into markets with attractive growth
opportunities.
On
December 1, 2008, we acquired Briarwood College which strengthened our
position in Connecticut, by adding additional associate and bachelor’s degree
programs and has regional accreditation which we believe will enable us to serve
a new market and enhance our online programs.
Expand Online
Programs. We have offered online programs since
2005 with a view towards capitalizing on the rapidly growing demand for, and
flexibility provided by, online education alternatives. We launched
our first 100% online program in June 2006 and our second in December
2006. In 2008, we launched two associate degree programs and three
bachelor’s degree programs. We believe that our online programs are
an attractive option for students without the geographic or financial
flexibility to enroll in campus-based programs and will continue to broaden our
addressable market.
PROGRAMS AND AREAS OF
STUDY
We
structure our program offerings to provide our students with a practical,
career-oriented education and position them for attractive entry-level job
opportunities in their chosen fields. Our programs are designed to be completed
in 14 to 102 weeks. Tuition for programs ranges from $10,000 to $35,000,
depending on the length of the program and the area of study. As of December 31,
2008, all of our schools offer diploma and certificate programs, 18 of our
schools are currently approved to offer associate degree programs and two
schools are approved to offer a bachelor’s degree program. In order to
accommodate the schedules of our students and maximize classroom utilization, we
typically offer courses four to five days a week in three shifts per day and
start new classes every month. Also for those students who do not live near one
of our campuses or whose schedules prevent them from attending school we offer
several programs online. We update and expand our programs frequently
to reflect the latest technological advances in the field, providing our
students with the specific skills and knowledge required in the current
marketplace. Classroom instruction combines lectures and demonstrations by our
experienced faculty with comprehensive hands-on laboratory exercises in
simulated workplace environments.
The following table lists the programs
offered as of December 31,
2008 with the average
number of students enrolled in each area of study for the year ended
December 31, 2008:
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Program
Offered
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Area
of Study
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Bachelor's
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Associate
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Diploma
and Certificate
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Average
Enrollment
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Percent
of Total Enrollment
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Automotive
Technology
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-
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Auto
Service Management, Collision Repair, Diesel Technology, Diesel &
Truck Service Management
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Automotive
Mechanics, Automotive Technology, Collision Repair, Diesel Truck
Mechanics, Diesel Technology, Diesel & Truck Technology, Master
Automotive Technology
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7,034 | 35 | % | ||||||||
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Health
Sciences
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-
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Medical
Assisting Technology, Medical Administrative Assistant Technology, Dental
Office Management, Child Development, Health Information Coding, Medical
Office Management, Medical Assistant, Mortuary Science, Nuclear Medicine,
Occupational Therapy Assistant, Dental Hygeine, Dental Administrative
Assistant
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Medical
Administrative Assisting, Medical Assisting, Pharmacy Technology, Medical
Billing and Coding, Dental Assisting, Licensed Practical Nurse,
Phlebotomy, Child Development, Nuclear Medicine
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6,416 | 32 | % | ||||||||
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Skilled
Trades
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-
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Mechanical
/ Architectural Drafting, Electronics Engineering Technology, HVAC,
EST
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Electronic
Servicing, Electronics Engineering Technology, Electronics System
Technology, HVAC, Mechanical / Architectural Drafting, Electrician,
Welding
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2,783 | 14 | % | ||||||||
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Hospitality
Services
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Culinary
Management
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Culinary
Arts, Cosmetology Management, Food and Beverage, Baking and Pastry,
Culinary Management, Hotel Restraurant Management, Dietetic Technician,
Travel and Tourism
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Culinary
Arts, Baking & Pastry, Cosmetology, Aesthetics, Therapeutic, Massage
& Body Technology
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1,935 | 10 | % | ||||||||
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Business
and Information Technology
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Criminal
Justice, Funeral Service Management
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PC
Systems & Networking Technology, Network Systems Administration,
Business Administration, Criminal Justice, NCIS, Business Management,
Business Marketing, HR Management, Accounting, Broadcasting and
Communications, Fashion Merchandising, Paralegal
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Business
Administration, Network Systems Administrating, PC Support Technology,
Criminal Justice, Network Communications and Information
Systems
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1,838 | 9 | % | ||||||||
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Total:
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20,006 | 100 | % | |||||||||||
Automotive
Technology. Automotive technology represents our
largest area of study, with 35% of our total average student enrollment for the
year ended December 31, 2008. Our automotive technology programs are 24 to
92 weeks in length, with tuition rates of $10,000 to $35,000. We believe we are
a leading provider of automotive technology education in each of our local
markets. Graduates of our programs are qualified to obtain entry level
employment ranging from positions as technicians and mechanics to various
apprentice level positions. Our graduates are employed by a wide variety of
employers, ranging from automotive and diesel dealers, independent auto body
paint and repair shops, to trucking and construction companies.
We have
an arrangement with BMW that offers our automotive technology students the
opportunity to work for BMW through the Service Technician Education Program
(“STEP”). The STEP program is a "graduate" school program for individuals who
have successfully earned an automotive certification either at one of our
schools or any of our competitor's schools. Students who are admitted to the
STEP program have their tuition paid by BMW and upon successfully completing the
program are typically employed as BMW mechanics. The BMW STEP program commenced
at our Columbia, Maryland facility in 2004. Our arrangement with BMW signifies
our high quality education capabilities and is an attractive marketing
program.
As of
December 31, 2008, each of our Lincoln Technical Institute schools, with the
exception of our Allentown, Pennsylvania campus, offer programs in automotive
technology in addition to other technical programs. Lincoln College of
Technology (formerly Denver Automotive & Diesel College)
(“Denver LCT”) and Nashville Auto-Diesel College currently offer
programs exclusively in automotive technology. Denver LCT,
Nashville Auto-Diesel College, and our Lincoln College of Technology
schools in Grand Prairie, Texas and Indianapolis, Indiana are destination
schools, attracting students throughout the United States and, in some cases,
from abroad.
Health
Sciences. For the year ended December 31,
2008, health sciences represented our second largest area of study, representing
32% of our total average student enrollment. Our health science programs are 30
to 92 weeks in length, with tuition rates of $10,000 to $30,000. Graduates of
our programs are qualified to obtain positions such as licensed practical nurse,
medical administrative assistant, EKG technician, claims examiner and pharmacy
technician. Our graduates are employed by a wide variety of employers, including
hospitals, laboratories, insurance companies, doctors' offices and pharmacies.
Our medical assistant and medical administrative assistant programs are our
largest health science programs.
As of
December 31, 2008, we offered health science programs at 23 schools, including
five Southwestern College schools, Briarwood College, and 17 Lincoln
College of Technology and Lincoln Technical Institute schools.
Skilled
Trades. For the year ended December 31, 2008,
14% of our total average student enrollment was in our skilled trades programs.
Our skilled trades programs are 41 to 91 weeks in length, with tuition rates of
$16,000 to $29,000. Our skilled trades programs include electrician, heating,
ventilation and air conditioning repair, welding, drafting and computer-aided
design and electronic system technician. Graduates of our programs are qualified
to obtain entry level employment positions such as electrician, cable, wiring
and HVAC installer and servicer and drafting technician. Our graduates are
employed by a wide variety of employers, including residential and commercial
construction, telecommunications installation companies and architectural
firms.
In the
first quarter of 2008 we launched our first welding program. This
program was developed based on the National Center for Construction Education
and Research (“NCCER”) curriculum. NCCER
is a not-for-profit education foundation created to help address the critical
workforce shortage facing the construction industry and to develop
industry-driven standardized craft training programs with portable
credentials.
As of
December 31, 2008, we offered skilled trades programs at 13 of our 25 Lincoln
Technical Institute and Lincoln College of Technology campuses.
Hospitality
Services. For
the year ended December 31, 2008, 10% of our total average student
enrollment was in our hospitality services programs. Our hospitality services
programs are 14 to 98 weeks in length, with tuition rates of $10,000 to
$27,000. Our spa programs include therapeutic massage, cosmetology
and aesthetics. Graduates work in salons, spas, cruise ships or are
self-employed. We offer massage programs at 15 campuses and
cosmetology programs at five campuses. Our culinary graduates are
employed by restaurants, hotels, cruise ships and bakeries. As of
December 31, 2008, we offered culinary programs at the Florida Culinary
Institute and three Centers for Culinary Arts.
Business and
Information Technology. For the year ended
December 31, 2008, 9% of our total average student enrollment was in our
business and information technology programs, which include our diploma and
degree criminal justice programs. Our business and information technology
programs are 30 to 102 weeks in length, with tuition rates of $11,000 to
$27,000. We have focused our current IT program offerings on those
that are most in demand, such as our PC systems technician, network systems
administrator and business administration specialist programs. Our IT
and business graduates work in entry level positions for both small and large
corporations. Our criminal justice graduates work in the security
industry and for various government agencies and departments. As of
December 31, 2008, we offered these programs at 18 of our
campuses.
MARKETING AND STUDENT
RECRUITMENT
We
utilize a variety of marketing and recruiting methods to attract students and
increase enrollment. Our marketing and recruiting efforts are targeted at
potential students who are entering the workforce, or who are underemployed or
unemployed and require additional training to enter or re-enter the
workforce.
Marketing and
Advertising. Our marketing program utilizes
integrated advertising such as the Internet, television, and various print
media, direct mail, and event marketing campaigns. These campaigns
are enhanced by student and alumni referrals. Internet lead
generation is our most successful medium, built upon successful search engine
optimization and specific keywords. Our website leads incorporate
integrated campaigns that drive prospects to the website for lead
capture. Our internal systems enable us to closely monitor and track
the effectiveness of each advertisement on a daily or weekly basis and make
adjustments accordingly to enhance efficiency and limit our student acquisition
costs.
Referrals. Referrals
from current students, high school counselors and satisfied graduates and their
employers have historically represented over 20% of our new enrollments. Our
school administrators actively work with our current students to encourage them
to recommend our programs to potential students. We continue to build strong
relationships with high school guidance counselors and instructors by offering
annual seminars at our training facilities to further educate these individuals
on the strengths of our programs. Graduates who have gone on to enjoy success in
the workforce frequently recommend our programs, as do local business owners who
are pleased with the performance of our graduates whom they have
hired.
Recruiting. Our
recruiting efforts are conducted by a group of approximately 400 field-and
campus-based representatives who meet directly with potential students during
presentations conducted at high schools, in the potential student's home or
during a visit to one of our campuses.
Field-Based
Recruiting. Our
field-based recruiting representatives make presentations at high schools to
attract students to both our local and destination campuses. Our field-based
representatives also visit directly with potential students in their homes.
During 2008, we recruited approximately 21% of our students directly out of high
school.
Campus-Recruiting. When
a potential student is identified through our marketing and recruiting efforts,
one of our representatives is paired with the potential student to follow up on
an individual basis. Our media advertisements contain a unique toll-free number
and our telephone system automatically directs the call to the campus nearest to
the caller. At this point, a recruiting representative will respond to the
inquiry, typically within 24 hours. The representatives are trained to explain
in detail the opportunities available within each program and schedule an
appointment for the potential student to visit the school and tour the school's
facilities.
STUDENT ADMISSIONS,
ENROLLMENT AND RETENTION
Admissions. In
order to attend our schools, students must complete an application and pass an
entry examination. While each of our programs has different admissions criteria,
we screen all applications and counsel the students on the most appropriate
program to increase the likelihood that our students complete the requisite
coursework and obtain and sustain employment following graduation.
Enrollment. We
enroll students continuously throughout the year, with our largest classes
enrolling in late summer or early fall following high school graduation. We had
21,667 students enrolled as of December 31, 2008 and our average enrollment
for the year ended December 31, 2008 was 20,006 students, an increase of
13.1% from December 31, 2007. Excluding our acquisition of BRI in December
2008, our average student enrollment would have increased by 13.0%. Our average
student enrollment for the year ended December 31, 2007 was 17,687
students, an increase of 1.7% from December 31, 2006. Excluding
our acquisition of FLA in May 2006, our average enrollment for the year ended
December 31, 2007 would have decreased by 0.4%.
Retention. To maximize
student retention, the staff at each school is trained to recognize the early
warning signs of a potential drop and to assist and advise students on academic,
financial, employment and personal matters. We monitor our retention rates by
instructor, course, program and school. When we notice that a particular
instructor or program is experiencing a higher than normal dropout rate, we
quickly seek to determine the cause of the problem and attempt to correct it.
When we notice that a student is having trouble academically, we offer
tutoring.
JOB
PLACEMENT
We
believe that securing employment for our graduates is critical to our ability to
attract high quality students. In addition, high job placement rates result in
low student loan default rates, an important requirement for continued
participation in Title IV Programs. See "Regulatory Environment—Regulation of
Federal Student Financial Aid Programs." Accordingly, we dedicate significant
resources to maintaining an effective graduate placement program. Our
non-destination schools work closely with local employers to ensure that we are
training students with skills that employers need. Each school has an advisory
council made up of local employers who provide us with direct feedback on how
well we are preparing our students to succeed in the workplace. This enables us
to tailor our programs to the market. The placement staff in each of our
destination schools maintains databases of potential employers throughout the
country, allowing us to place students in their career field upon graduation. We
also have internship programs that provide our students with opportunities to
work with employers prior to graduation. For example, some of the students in
our automotive programs have the opportunity to complete a portion of their
hands-on training while working with a potential employer. In addition, some of
our allied health students are required to participate in an internship program
during which they work in the field as part of their career training. Students
that participate in these programs often go on to work for the same business
upon graduation. We also assist students with resume writing, interviewing and
other job search skills.
FACULTY AND
EMPLOYEES
We hire
our faculty in accordance with established criteria, including relevant work
experience, educational background and accreditation and state regulatory
standards. We require meaningful industry experience of our teaching staff in
order to maintain the quality of instruction in all of our programs and to
address current and industry-specific issues in our course content. In addition,
we provide intensive instructional training and continuing education, including
quarterly instructional development seminars, annual reviews, technical upgrade
training, faculty development plans and weekly staff meetings.
The staff
of each school typically includes a school director, a director of graduate
placement, an education director, a director of student services, a
financial-aid director, an accounting manager, a director of admissions and
instructors, all of whom are industry professionals with experience in our areas
of study.
As of
December 31, 2008, we had approximately 3,206 employees, including 793
full-time faculty and 663 part-time instructors. At six of our
campuses, the teaching professionals are represented by unions. These employees
are covered by collective bargaining agreements that expire between 2009 through
2012. We believe that we generally have good relationships with these unions and
our employees.
COMPETITION
The
for-profit, post-secondary education industry is highly competitive and highly
fragmented, with no one provider controlling significant market share. Direct
competition between career-oriented schools and traditional four-year colleges
or universities is limited. Thus, our main competitors are other for-profit,
career-oriented schools, as well as public and private two-year junior and
community colleges. Competition is generally based on location, the type of
programs offered, the quality of instruction, placement rates, reputation,
recruiting and tuition rates. Public institutions are generally able to charge
lower tuition than our schools, due in part to government subsidies and other
financial sources not available to for-profit schools. In addition, some of our
private competitors have a more extended or dense network of schools and
campuses than we do, which enables them to recruit students more efficiently
from a wider geographic area. Nevertheless, we believe that we are able to
compete effectively in our local markets because of the diversity of our program
offerings, quality of instruction, the strength of our brands, our reputation
and our success in placing students with employers.
We
compete with other institutions that are eligible to receive Title IV funding.
This includes four-year, not-for-profit public and private colleges and
universities, community colleges and all for-profit institutions whether they
are four years, two years or less. Our competition differs in each
market depending on the curriculum that we offer. For example, a school offering
automotive, allied health and skilled trades programs will have a different
group of competitors than a school offering allied health, business/IT and
skilled trades. Also, because schools can add new programs within six to
twelve months, new competitors can emerge relatively quickly. Moreover,
with the introduction of online learning, the number of competitors in each
market has increased because students can now stay local but learn from a
non-local institution.
Notwithstanding
the above, we mainly compete with community colleges and other career schools,
both for-profit and not-for-profit. We focus on programs that are in high
demand. We compete against community colleges by seeking to offer more frequent
start dates, more flexible hours, better instructional resources, more hands on
training, shorter program length and greater assistance with job placement. We
compete against the other career schools by seeking to offer a higher quality of
education, higher quality instructional equipment and a better overall value. On
average, each of our schools has at least three direct competitors and at least
a dozen indirect competitors. As we continue to add courses and degree programs,
our competitors within a given market increase and thus we face increased
competition.
ENVIRONMENTAL
MATTERS
We use
hazardous materials at our training facilities and campuses, and generate small
quantities of waste such as used oil, antifreeze, paint and car batteries. As a
result, our facilities and operations are subject to a variety of environmental
laws and regulations governing, among other things, the use, storage and
disposal of solid and hazardous substances and waste, and the clean-up of
contamination at our facilities or off-site locations to which we send or have
sent waste for disposal. We are also required to obtain permits for our air
emissions, and to meet operational and maintenance requirements. In the event we
do not maintain compliance with any of these laws and regulations, or are
responsible for a spill or release of hazardous materials, we could incur
significant costs for clean-up, damages, and fines or
penalties.
REGULATORY
ENVIRONMENT
Students
attending our schools finance their education through a combination of family
contributions, individual resources, private loans and federal financial aid
programs. Each of our schools participates in the federal programs of student
financial aid authorized under the Title IV Programs, which are
administered by the DOE. For the year ended December 31, 2008,
approximately 79% (calculated based on cash receipts) of our revenues were
derived from the Title IV Programs. Students obtain access to federal
student financial aid through a DOE prescribed application and eligibility
certification process. Student financial aid funds are generally made available
to students at prescribed intervals throughout their predetermined expected
length of study. Students typically use the funds received from the federal
financial aid programs to pay their tuition and fees. The transfer of funds from
the financial aid programs are to the student, who then applies those funds to
the cost of his or her education.
In
connection with the students' receipt of federal financial aid, our schools are
subject to extensive regulation by governmental agencies and licensing and
accrediting bodies. In particular, the Title IV Programs, and the
regulations issued thereafter by the DOE, subject us to significant regulatory
scrutiny in the form of numerous standards that each of our schools must satisfy
in order to participate in the various federal student financial aid programs.
To participate in the Title IV Programs, a school must be authorized to
offer its programs of instruction by the applicable state education agencies in
the states in which it is physically located, be accredited by an accrediting
commission recognized by the DOE and be certified as an eligible institution by
the DOE. The DOE will certify an institution to participate in Title IV Programs
only after the institution has demonstrated compliance with the Higher Education
Act of 1965, as amended, or HEA, and the DOE's extensive regulations regarding
institutional eligibility. The DOE defines an eligible institution to consist of
both a main campus and its additional locations, if any. Each of our schools is
either a main campus or an additional location of a main campus. Each of our
schools is subject to extensive regulatory requirements imposed by state
education agencies, accrediting commissions, and the DOE. Because the DOE
periodically revises its regulations and changes its interpretations of existing
laws and regulations, we cannot predict with certainty how Title IV Program
requirements will be applied in all circumstances. Our schools also participate
in other federal and state financial aid programs that assist students in paying
the cost of their education.
State
Authorization
Each of
our schools must be authorized by the applicable education agencies in the
states in which the school is physically located, and in some cases other
states, in order to operate and to grant degrees, diplomas or certificates to
its students. Some states have sought to assert jurisdiction over online
educational institutions that offer educational services to residents in the
state, notwithstanding the lack of a physical location in that
state. State agency authorization is also required in each state in
which a school is physically located in order for the school to become and
remain eligible to participate in Title IV Programs. If we are
found not to be in compliance with the applicable state regulation and a state
seeks to restrict one or more of our business activities within its boundaries,
we may not be able to recruit or enroll students in that state and may have to
stop providing services in that state, which could have a material adverse
effect on our business and results of operations. Currently, each of
our schools is authorized by the applicable state education agencies in the
states in which the school is physically located and in which it recruits
students.
Our
schools are subject to extensive, ongoing regulation by each of these states.
State laws typically establish standards for instruction, curriculum,
qualifications of faculty, location and nature of facilities and equipment,
administrative procedures, marketing, recruiting, financial operations, student
outcomes and other operational matters. State laws and regulations may limit our
ability to offer educational programs and to award degrees, diplomas or
certificates. Some states prescribe standards of financial responsibility that
are different from, and in certain cases more stringent than, those prescribed
by the DOE. Some states require schools to post a surety bond. We believe that
we have posted surety bonds on behalf of our schools and education
representatives with multiple states in a total amount of approximately
$13.7 million. These bonds are backed by $2.4 million of letters of
credit.
If any of
our schools fail to comply with state licensing requirements, they are subject
to the loss of state licensure or authorization. If any one of our schools lost
its authorization from the education agency of the state in which the school is
located, that school and its related main campus and/or additional locations
would lose its eligibility to participate in Title IV Programs, be unable
to offer its programs and we could be forced to close that school. If one of our
schools lost its state authorization from a state other than the state in which
the school is located, the school would not be able to recruit students in that
state. We believe that each of our schools is in substantial compliance with the
applicable education agency requirements in each state in which it is physically
located.
Due to
state budget constraints in certain states in which we operate, it is possible
that those states may reduce the number of employees in, or curtail the
operations of, the state education agencies that authorize our schools. A delay
or refusal by any state education agency in approving any changes in our
operations that require state approval could prevent us from making such changes
or could delay our ability to make such changes.
Accreditation
Accreditation
is a non-governmental process through which a school submits to ongoing
qualitative and quantitative review by an organization of peer institutions.
Accrediting commissions primarily examine the academic quality of the school's
instructional programs, and a grant of accreditation is generally viewed as
confirmation that the school's programs meet generally accepted academic
standards. Accrediting commissions also review the administrative and financial
operations of the schools they accredit to ensure that each school has the
resources necessary to perform its educational mission.
Accreditation
by an accrediting commission recognized by the DOE is required for an
institution to be certified to participate in Title IV Programs. In order
to be recognized by the DOE, accrediting commissions must adopt specific
standards for their review of educational institutions. As of December 31, 2008,
fifteen of our campuses are accredited by the Accrediting Commission of Career
Schools and Colleges of Technology or ACCSCT, nineteen of our campuses are
accredited by the Accrediting Council for Independent Colleges and Schools or
ACICS and one of our campuses is accredited by the New England Association of
Schools and Colleges or NEASC. All of these accrediting commissions are
recognized by the DOE. The following is a list of the dates on which each campus
was accredited by its accrediting commission and the date by which its
accreditation must be renewed.
Accrediting
Commission of Career Schools and Colleges of Technology Reaccreditation
Dates
|
School
|
Last
Accreditation Letter
|
Next
Accreditation
|
||
|
Philadelphia,
PA
|
December 4,
2008
|
May 1,
2013
|
||
|
Union,
NJ
|
June 4,
2004
|
February 1,
2009***
|
||
|
Mahwah,
NJ*
|
December
9, 2004
|
August 1,
2009
|
||
|
Melrose
Park, IL
|
March
11, 2005
|
November 1,
2009
|
||
|
Denver,
CO
|
September
8, 2006
|
February 1,
2011
|
||
|
Columbia,
MD
|
March 13,
2007
|
February 1,
2012
|
||
|
Grand
Prairie, TX
|
May 29,
2007
|
August 1,
2011
|
||
|
Allentown,
PA
|
January 1,
2007
|
January 1,
2012
|
||
|
Nashville,
TN
|
May
1, 2007
|
May 1,
2012
|
||
|
Indianapolis,
IN
|
December 5,
2008
|
November 1,
2012
|
||
|
New
Britain, CT
|
January 1,
2008
|
January 1,
2013
|
||
|
Shelton,
CT**
|
September 3,
2005
|
September 1,
2008***
|
||
|
Cromwell,
CT**
|
November 22,
2006
|
November 1,
2011
|
||
|
Hamden,
CT**
|
July
1, 2007
|
July 1,
2012
|
||
|
Queens,
NY*
|
June
30, 2008
|
June 30,
2012
|
|
*
|
Branch campus of main campus in
Union, NJ
|
|
**
|
Branch campus of main campus in
New
Britain,
CT
|
|
***
|
Currently going through
re-accreditation
|
Accrediting
Council for Independent Colleges and Schools Reaccreditation
Dates
|
School
|
Last
Accreditation Letter
|
Next
Accreditation
|
||
|
Brockton,
MA****
|
December
31, 2008
|
December
31, 2014
|
||
|
Lincoln,
RI
|
December
31, 2008
|
December
31, 2014
|
||
|
Lowell,
MA**
|
December 16,
2008
|
December
31, 2014
|
||
|
Somerville,
MA
|
December 16,
2008
|
December
31, 2014
|
||
|
Philadelphia
(Center City), PA*
|
April 23,
2007
|
December 31,
2012
|
||
|
Edison,
NJ
|
April 23,
2007
|
December 31,
2012
|
||
|
Marietta,
GA****
|
December
31, 2008
|
December
31, 2014
|
||
|
Mt.
Laurel, NJ*
|
April 23,
2007
|
December 31,
2012
|
||
|
Paramus,
NJ*
|
April 23,
2007
|
December 31,
2012
|
||
|
Philadelphia
(Northeast), PA*
|
April 23,
2007
|
December 31,
2012
|
||
|
Dayton,
OH
|
April 14,
2006
|
December 31,
2009
|
||
|
Cincinnati
(Vine Street), OH***
|
April 14,
2006
|
December 31,
2009
|
||
|
Cincinnati
(Northland Blvd.), OH***
|
April 14,
2006
|
December 31,
2009
|
||
|
Franklin,
OH***
|
April 14,
2006
|
December 31,
2009
|
||
|
Florence,
KY***
|
April 14,
2006
|
December 31,
2009
|
||
|
West
Palm Beach, FL
|
December
11, 2006
|
December
31, 2014
|
||
|
Summerlin,
NV****
|
December
16, 2008
|
December
31, 2014
|
||
|
Green
Valley, NV****
|
December
16, 2008
|
December
31, 2014
|
||
|
Aliante,
NV****
|
December
16, 2008
|
December
31, 2014
|
|
*
|
Branch campus of main campus in
Edison, NJ
|
|
**
|
Branch campus of main campus in
Somerville, MA
|
|
***
|
Branch campus of main campus in
Dayton, OH
|
|
****
|
Branch campus of main campus in
Lincoln, RI
|
New
England Association of Schools and Colleges and Reaccreditation
Dates
|
School
|
Last
Accreditation Letter
|
Next
Accreditation
|
||
|
Briarwood
College
|
November 31,
2006
|
November
31, 2011
|
If one of
our schools fails to comply with accrediting commission requirements, the
institution and its main and/or branch campuses are subject to the loss of
accreditation. If any one of our schools lost its accreditation, students
attending that school would no longer be eligible to receive Title IV
Program funding, and we could be forced to close that school. Any
institution required to submit retention data to the ACICS is required to obtain
prior permission from the ACICS for the initiation of any new program and new
branch campus or learning site.
Nature
of Federal and State Support for Post-Secondary Education
The
federal government provides a substantial part of the support for post-secondary
education through Title IV Programs, in the form of grants and loans to
students who can use those funds at any institution that has been certified as
eligible by the DOE. Most aid under Title IV Programs is awarded on the
basis of financial need, generally defined as the difference between the cost of
attending the institution and the expected amount a student and his or her
family can reasonably contribute to that cost. All recipients of Title IV
Program funds must maintain a satisfactory grade point average and progress in a
timely manner toward completion of their program of study. In addition, each
school must ensure that Title IV Program funds are properly accounted for
and disbursed in the correct amounts to eligible students.
Students
at our schools receive grants and loans to fund their education under the
following Title IV Programs: (1) the Federal Family Education Loan
program, (2) the Federal Pell Grant, or Pell, program, (3) the Federal
Supplemental Educational Opportunity Grant program, and (4) the Federal
Perkins Loan, or Perkins, program.
Federal Family
Education Loan. Under the Federal Family Education
Loan program, banks and other lending institutions make loans to students or
their parents. If a student or parent defaults on a loan, payment is guaranteed
by a federally recognized guaranty agency, which is then reimbursed by the DOE.
Students with financial need qualify for interest subsidies while in school and
during grace periods. For the year ended December 31, 2008, we derived
approximately 62% of our Title IV revenues (calculated based on cash
receipts) from the Federal Family Education Loan program.
Pell. Under
the Pell program, the DOE makes grants to students who demonstrate the greatest
financial need. For the year ended December 31, 2008, we derived
approximately 19% of our revenues (calculated based on cash receipts) from the
Pell program.
Federal
Supplemental Educational Opportunity
Grant. Under the Federal Supplemental Educational
Opportunity Grant program, the DOE issues grants which are designed to
supplement Pell grants for students with the greatest financial needs. An
institution is required to make a 25% matching contribution for all funds
received from the DOE under this program. For the year ended December 31,
2008, we received less than 1% of our revenues (calculated based on cash
receipts) from the Federal Supplemental Educational Opportunity Grant
program.
Perkins. Perkins
loans are made from a revolving institutional account, 75% of which is funded by
the DOE and the remainder by the institution. Each institution is responsible
for collecting payments on Perkins loans from its former students and lending
those funds to currently enrolled students. Defaults by students on their
Perkins loans reduce the amount of funds available in the applicable school's
revolving account to make loans to additional students, but the school does not
have any obligation to guarantee the loans or repay the defaulted amounts. For
the year ended December 31, 2008, we derived less than 1% of our revenues
(calculated based on cash receipts) from the Perkins program.
Other
Financial Assistance Programs
Some of
our students receive financial aid from federal sources other than Title IV
Programs, such as the programs administered by the U.S. Department of Veterans
Affairs and programs administered under the Workforce Investment Act. In
addition, many states also provide financial aid to our students in the form of
grants, loans or scholarships. The eligibility requirements for state financial
aid and these other federal aid programs vary among the funding agencies and by
program. Many states that provide financial aid to our students are facing
significant budgetary constraints. We believe that the overall level of state
financial aid for our students is likely to decrease in the near term, but we
cannot predict how significant any such reductions will be or how long they will
last.
In
addition to Title IV and other government-administered programs, all of our
schools participate in alternative loan programs for their students. Alternative
loans fill the gap between what the student receives from all financial aid
sources and what the student may need to cover the full cost of their education.
Students or their parents can apply to a number of different lenders for this
funding at current market interest rates.
Effective
February 2008, Sallie Mae, Inc. (“SLM”) terminated its tiered discount loan
agreement with us pursuant to which SLM provided private party loans to our
students. As a result, we continue to search for alternative
sub-prime loan providers but in the meantime we have decided to make financing
available to students through our internal funding sources.
Reorganization
We were
founded in 1946 as Lincoln Technical Institute, Inc. In February 2003,
we reorganized our corporate structure to create a holding company, Lincoln
Educational Services Corporation. The ownership of Lincoln Educational Services
Corporation was identical to that of Lincoln Technical Institute, Inc.
immediately prior to this reorganization. We subsequently began operating our
entire organization under the Lincoln Educational Services Corporation name;
however, before this reorganization, all of our interaction with the DOE, state
and federal regulators and accrediting agencies was conducted by Lincoln
Technical Institute, Inc.
Regulation
of Federal Student Financial Aid Programs
To
participate in Title IV Programs, an institution must be authorized to
offer its programs by the relevant state education agencies in the state in
which it is physically located, be accredited by an accrediting commission
recognized by the DOE and be certified as eligible by the DOE. The DOE will
certify an institution to participate in Title IV Programs only after the
institution has demonstrated compliance with the Higher Education Act of 1965,
as amended, HEA or Higher Education Act, and the DOE's extensive regulations
regarding institutional eligibility. The DOE defines an institution to consist
of both a main campus and its additional locations, if any. Under this
definition, for DOE purposes, we had the following 16 institutions as of
December 31, 2008, collectively consisting of 16 main campuses and 19
additional locations:
|
Brand
|
Main
Campus (es)
|
Additional
Location (s)
|
||
|
Lincoln
Technical Institute
|
Union,
NJ
|
Mahwah,
NJ
|
||
|
Queens,
NY
|
||||
|
Philadelphia,
PA
|
||||
|
Columbia,
MD
|
||||
|
Allentown,
PA
|
||||
|
Edison,
NJ
|
Mount
Laurel, NJ
|
|||
|
Paramus,
NJ
|
||||
|
Philadelphia,
PA (Center City)
|
||||
|
Northeast
Philadelphia, PA (Northeast)
|
||||
|
Somerville,
MA
|
Lowell,
MA
|
|||
|
Lincoln,
RI
|
Marietta,
GA*
|
|||
|
Brockton,
MA
|
||||
|
Henderson,
NV (Green Valley)**
|
||||
|
Las
Vegas, NV (Summerlin)**
|
||||
|
Las
Vegas, NV (Aliante)**
|
||||
|
New
Britain, CT
|
Shelton,
CT
|
|||
|
Cromwell,
CT
|
||||
|
Hamden,
CT
|
||||
|
Lincoln
College of Technology
|
Indianapolis,
IN
|
|||
|
Grand
Prairie, TX
|
||||
|
Melrose
Park, IL
|
||||
|
Denver,
CO
|
||||
|
West
Palm Beach, FL
|
||||
|
Nashville
Auto Diesel College
|
Nashville,
TN
|
|||
|
Southwestern
College
|
Dayton,
OH
|
Cincinnati,
OH (Vine Street)
|
||
|
Franklin,
OH
|
||||
|
Cincinnati,
OH (Northland Blvd.)
|
||||
|
Florence,
KY
|
||||
|
Briarwood
College
|
Southington,
CT
|
|
*
|
This campus operates under the
Lincoln College of Technology
brand.
|
|
**
|
These campuses operate under the
Euphoria Institute of Beauty Arts & Sciences
brands.
|
All of
our main campuses, including their additional locations, are currently certified
by the DOE to participate in the Title IV Programs. In
connection with our acquisitions of New England Technical Institute, and New
England Institute of Technology at Palm Beach, we have received in each case an
executed provisional program participation agreement from the DOE. In
connection with our acquisition of Briarwood College, we have received a
temporary provisional program participation agreement from the DOE which remains
in effect on a month-to-month basis until the DOE completes its review and
approval process for the change in ownership.
The DOE,
accrediting commissions and state education agencies have responsibilities for
overseeing compliance with Title IV Program requirements. As a result, each
of our schools is subject to detailed oversight and review, and must comply with
a complex framework of laws and regulations. Because the DOE periodically
revises its regulations and changes its interpretation of existing laws and
regulations, we cannot predict with certainty how the Title IV Program
requirements will be applied in all circumstances.
Significant
factors relating to Title IV Programs that could adversely affect us
include the following:
Congressional
Action. Political and budgetary concerns
significantly affect Title IV Programs. On August 14, 2008, the Higher
Education Opportunity Act, Public Law 110-315, reauthorized the Title IV HEA
programs through at least September 30, 2014. The HEA reauthorization among
other things revises the 90/10 Rule, as described below, revises the
calculation of an institution's cohort default rate, requires additional
disclosures and certifications with respect to non-Title IV alternative loans,
prohibits certain activities or relations between lenders and schools to
discourage preferential treatment of lenders based on factors not in students'
best interests, and makes other changes.
In
addition, Congress reviews and determines federal appropriations for
Title IV Programs on an annual basis. Congress can also make changes in the
laws affecting Title IV Programs in the annual appropriations bills and in
other laws it enacts between the Higher Education Act reauthorizations. Because
a significant percentage of our revenues are derived from Title IV
Programs, any action by Congress that significantly reduces Title IV
Program funding or the ability of our schools or students to participate in
Title IV Programs could reduce our student enrollment and our revenues.
Congressional action may also increase our administrative costs and require us
to modify our practices in order for our schools to comply fully with
Title IV Program requirements. The College Cost Reduction &
Access Act, which was signed into law in September 2007, cut approximately $22
billion in subsidies to federal student lenders and guarantors as an offset to
increases to federal financial aid. This resulted in significant
changes to the terms that alternative lending providers were willing to make and
resulted in the tiered discount programs.
The
College Cost Reduction & Access Act reduces payments to lenders and guaranty
agencies participating in the Federal Family Education Loan (FFEL) Program.
This, in turn, reduces the profitability of the FFEL Program and will make
access to these loans, as well as, private loans more difficult. The widening
sub-prime mortgage crisis has negatively impacted student
loans. Lenders are experiencing difficulty in securing funding from
the debt markets to make new student loans, however through the Ensuring
Continued Access to Student Loans Act the Department of Education will provide
liquidity support to FFEL lenders by purchasing loans and providing long term
financing for FFEL loans. This program is designed to continue access
to these funds for students and their parents.
On
February 17, 2009, President Obama signed the American Recovery and Reinvestment
Act which further increased the maximum Pell grant to $4,860 for the July 1,
2009 through June 30, 2010 award year. When these funds are combined
with the funding authorized and appropriated by the College Cost Reduction and
Access Act – which increased the maximum award by $490 – the maximum Pell award
will be $5,350 for the July 1, 2009 through June 30, 2010 award
year.
The "90/10
Rule." Under the HEA reauthorization, a
proprietary institution that derives more than 90% of its total revenue from the
Title IV programs for two consecutive fiscal years becomes immediately
ineligible to participate in the Title IV programs and may not reapply for
eligibility until the end of two fiscal years. An institution with revenues
exceeding 90% for a single fiscal year ending after August 14, 2008 will be
placed on provisional certification and may be subject to other enforcement
measures. Under prior law, an institution would immediately lose its
eligibility to participate in Title IV Programs if it derived more than 90% of
its revenue (calculated based on cash receipts) from those programs in any
fiscal year as calculated in accordance with DOE regulation s and would be
ineligible to apply to regain its eligibility until the following fiscal
year. If one of our institutions violated the 90/10 Rule and became
ineligible to participate in Title IV Programs but continue to disburse Title IV
Program funds, the DOE would require the institution to repay all Title IV
Program funds received by the institution after the effective date of the loss
of eligibility. Effective July 1, 2008, the annual Stafford loans available
for undergraduate students under the Federal Family Education Loan Program, or
FFEL, increased. This loan limit increase, coupled with recent increases in
grants from the Pell program and other Title IV loan limits, will result in some
of our schools experiencing an increase in the revenues they receive from the
Title IV programs. The HEA reauthorization provides some relief from this effect
by excluding portions of the loan limit increase from the Title IV component of
the 90/10 rule calculation.
We have
calculated that, for each of our 2008, 2007 and 2006 fiscal years, none of our
institutions derived more than 89.0% of its revenues from Title IV
Programs. For our 2008 fiscal year, our institutions' 90/10 Rule
percentages ranged from 69.7% to 89.0% except for Briarwood which was 45.5%. We
regularly monitor compliance with this requirement to minimize the risk that any
of our institutions would derive more than the maximum percentage of its
revenues from Title IV Programs for any fiscal year.
Student Loan
Defaults. An institution may lose its eligibility
to participate in some or all Title IV Programs if the rates at which the
institution's current and former students default on their federal student loans
exceed specified percentages. The DOE calculates these rates based on the number
of students who have defaulted, not the dollar amount of such defaults. The DOE
calculates an institution's cohort default rate (as defined by the DOE
regulations) on an annual basis as the rate at which borrowers scheduled to
begin repayment on their loans in one year default on those loans by the end of
the next year. An institution whose Federal Family Education Loan cohort default
rate is 25% or greater for three consecutive federal fiscal years loses
eligibility to participate in the Federal Family Education Loan and Pell
programs for the remainder of the federal fiscal year in which the DOE
determines that such institution has lost its eligibility and for the two
subsequent federal fiscal years. An institution whose Federal Family Education
Loan cohort default rate for any single federal fiscal year exceeds 40% may have
its eligibility to participate in all Title IV Programs limited, suspended
or terminated by the DOE. The HEA has been amended by the HEOA to
calculate the institution’s cohort default rate using a three year period,
effective for fiscal 2009 and beyond.
Under the
HEA reauthorization, an institution's cohort default rate is redefined to be
based on the rate at which its former students default on their FFEL loans over
a period of time that is one year longer than the period of time over which
rates currently are calculated. As a result, most institutions' respective
cohort default rates are expected to increase under the new provision, which
first would apply to cohort default rates calculated after October 1, 2011.
The DOE will not impose sanctions based on rates calculated under the new
provision until three consecutive years have been calculated under the new
method. Until that time, the DOE will continue to calculate rates
under the old method and impose sanctions based on those rates. The
HEOA also increases the cohort default three-year threshold from 25% to 30%
effective in fiscal year 2012. On September 15, 2008, the DOE published the
cohort default rate for each of our schools which range from 5.6% to
19.3%.
Federal
Family Education Loan Program
As of
December 31, 2008, none of our institutions has had a Federal Family Education
Loan cohort default rate (as defined by the DOE) of 25% or greater for any of
the federal fiscal years 2006, 2005 and 2004, the three most recent years for
which the DOE has published such rates. The following table sets forth the
Federal Family Education Loan cohort default rates for each of our 15 DOE
institutions as of December 31, 2008 for those fiscal years:
|
Institution
|
2006
|
2005
|
2004
|
|||||||||
|
Union,
NJ
|
10.8 | % | 9.9 | % | 7.6 | % | ||||||
|
Indianapolis,
IN
|
12.3 | % | 7.5 | % | 7.9 | % | ||||||
|
Philadelphia,
PA
|
15.0 | % | 9.2 | % | 12.8 | % | ||||||
|
Columbia,
MD
|
12.0 | % | 7.5 | % | 8.9 | % | ||||||
|
Allentown,
PA
|
10.1 | % | 11.5 | % | 7.0 | % | ||||||
|
Melrose
Park, IL
|
11.8 | % | 11.6 | % | 11.9 | % | ||||||
|
Grand
Prairie, TX
|
19.3 | % | 14.6 | % | 19.5 | % | ||||||
|
Edison,
NJ
|
14.5 | % | 6.7 | % | 3.3 | % | ||||||
|
Denver,
CO
|
11.1 | % | 7.0 | % | 8.4 | % | ||||||
|
Nashville,
TN
|
5.6 | % | 5.2 | % | 3.1 | % | ||||||
|
Lincoln,
RI
|
14.9 | % | 12.8 | % | 10.0 | % | ||||||
|
Somerville,
MA
|
12.3 | % | 8.5 | % | 10.6 | % | ||||||
|
Dayton,
OH
|
9.9 | % | 7.6 | % | 3.2 | % | ||||||
|
New
Britain, CT
|
11.2 | % | 4.6 | % | 4.6 | % | ||||||
|
West
Palm Beach, FL
|
9.9 | % | 4.7 | % | 8.2 | % | ||||||
| Southington, CT | 10.2 | % | 13.9 | % | 9.8 | % | ||||||
An
institution whose cohort default rate under the FFEL program is 25% or greater
for any one of the three most recent federal fiscal years does not meet the DOE
standards of administrative capability may be placed on provisional
certification status by the DOE.
Perkins
Loan Program
An
institution whose Perkins cohort default rate is 50% or greater for three
consecutive federal award years loses eligibility to participate in the Perkins
program for the remainder of the federal award year in which DOE determines that
the institution has lost its eligibility and for the two subsequent federal
award years. None of our institutions has had a Perkins cohort default rate of
50% or greater for any of the last three federal award years. The DOE also will
not provide any additional federal funds to an institution for Perkins loans in
any federal award year in which the institution's Perkins cohort default rate is
25% or greater. Denver LCT and NETI are our only institutions participating in
the Perkins program. Denver LCT’s cohort default rate was 35.7% for students
scheduled to begin repayment in the 2007-2008 federal award year. The DOE did
not provide any additional Federal Capital Contribution Funds for Perkins loans
to Denver LCT. Denver LCT continues to make loans out of its existing Perkins
loan fund. Lincoln Technical Institute (New Britain, CT) is provisionally
certified by the DOE based on its change in ownership and on a finding by the
DOE prior to the change in ownership that NETI had not transmitted certain data
related to the Perkins program to the National Student Loan Data System during
periods prior to the acquisition. Our New Britain, CT institution’s cohort
default rate was 14.1% for students scheduled to begin repayment in the
2007-2008 federal award year.
Financial
Responsibility Standards. All institutions
participating in Title IV Programs must satisfy specific standards of
financial responsibility. The DOE evaluates institutions for compliance with
these standards each year, based on the institution's annual audited financial
statements, as well as following a change in ownership resulting in a change of
control of the institution.
The most
significant financial responsibility measurement is the institution's composite
score, which is calculated by the DOE based on three ratios:
|
|
·
|
The equity ratio, which measures
the institution's capital resources, ability to borrow and financial
viability;
|
|
|
·
|
The primary reserve ratio, which
measures the institution's ability to support current operations from
expendable resources; and
|
|
|
·
|
The net income ratio, which
measures the institution's ability to operate at a
profit.
|
The DOE
assigns a strength factor to the results of each of these ratios on a scale from
negative 1.0 to positive 3.0, with negative 1.0 reflecting financial weakness
and positive 3.0 reflecting financial strength. The DOE then assigns a weighting
percentage to each ratio and adds the weighted scores for the three ratios
together to produce a composite score for the institution. The composite score
must be at least 1.5 for the institution to be deemed financially responsible
without the need for further oversight. If an institution's composite score is
below 1.5, but is at least 1.0, it is in a category denominated by the DOE as
"the zone." Under the DOE regulations, institutions that are in the zone are
deemed to be financially responsible for a period of up to three years but are
required to accept payment of Title IV Program funds under the cash
monitoring or reimbursement method of payment and to provide to the DOE timely
information regarding various oversight and financial events.
If an
institution's composite score is below 1.0, the institution is considered by the
DOE to lack financial responsibility. If the DOE determines that an institution
does not satisfy the DOE's financial responsibility standards, depending on its
composite score and other factors, that institution may establish its financial
responsibility on an alternative basis by, among other things:
|
|
·
|
Posting a letter of credit in an
amount equal to at least 50% of the total Title IV Program funds
received by the institution during the institution's most recently
completed fiscal year;
|
|
|
·
|
Posting a letter of credit in an
amount equal to at least 10% of such prior year's Title IV Program
funds, accepting provisional certification, complying with additional DOE
monitoring requirements and agreeing to receive Title IV Program
funds under an arrangement other than the DOE's standard advance funding
arrangement; and/or
|
|
|
·
|
Complying with additional DOE
monitoring requirements and agreeing to receive Title IV Program
funds under an arrangement other than the DOE's standard advance funding
arrangement.
|
The DOE
has evaluated the financial responsibility of our institutions on a consolidated
basis. We have submitted to the DOE our audited financial statements
for the 2006 and 2007 fiscal year reflecting a composite score of 1.7 and 1.8,
respectively, based upon our calculations, and that our schools meet the DOE
standards of financial responsibility. For the 2008 fiscal year, we have
calculated our composite score to be 1.8.
Beginning December 30, 2004 and for a
period of three years, all of our institutions were placed on "Heightened Cash
Monitoring, Type 1 status." As a result, we were subject to a less favorable
Title IV fund payment system that required us to credit student accounts before
drawing down Title IV funds and also required us to timely notify the DOE with
respect to certain enumerated oversight and financial events. The DOE has notified us that, as of
December 31, 2007, we are no longer subject to Heightened Cash Monitoring, Type
1 status.
Return of
Title IV Funds. An institution participating
in Title IV Programs must calculate the amount of unearned Title IV
Program funds that have been disbursed to students who withdraw from their
educational programs before completing them, and must return those unearned
funds to the DOE or the applicable lending institution in a timely manner, which
is generally within 45 days from the date the institution determines that
the student has withdrawn.
If an
institution is cited in an audit or program review for returning Title IV
Program funds late for 5% or more of the students in the audit or program review
sample, the institution must post a letter of credit in favor of the DOE in an
amount equal to 25% of the total amount of Title IV Program funds that
should have been returned for students who withdrew in the institution's
previous fiscal year.
School
Acquisitions. When a company acquires a school
that is eligible to participate in Title IV Programs, that school undergoes
a change of ownership resulting in a change of control as defined by the DOE.
Upon such a change of control, a school's eligibility to participate in
Title IV Programs is generally suspended until it has applied for
recertification by the DOE as an eligible school under its new ownership, which
requires that the school also re-establish its state authorization and
accreditation. The DOE may temporarily and provisionally certify an institution
seeking approval of a change of control under certain circumstances while the
DOE reviews the institution's application. The time required for the DOE to act
on such an application may vary substantially. DOE recertification of an
institution following a change of control will be on a provisional basis. Our
expansion plans are based, in part, on our ability to acquire additional schools
and have them certified by the DOE to participate in Title IV Programs. Our
expansion plans take into account the approval requirements of the DOE and the
relevant state education agencies and accrediting commissions.
Our
recent acquisition of Briarwood College resulted in a change in ownership
of said school requiring it to reapply for eligibility to participate in the
Title IV programs and for approvals from their accrediting and state
licensing agencies. Briarwood has received approval of the change in ownership
from its accrediting agency and from its state licensing agency. Briarwood has
also received a Temporary Provisional Program Participation Agreement, or
Temporary PPPA, from the DOE, and we believe that we have provided the
documentation necessary for the Temporary PPPA to remain in effect on a
month-to-month basis pending completion of the DOE's review.
While it
cannot be assured that the respective agencies will issue the required
approvals described above, we believe that we will be able to meet the
requirements necessary for obtaining these approvals.
Prior to
our acquisition of Briarwood, the American Board of Funeral Service Education
(“ABFSE”), the accrediting agency that accredits Briarwood’s Mortuary Sciences
program, placed the program on “show cause”. Briarwood submitted a response
on January 12, 2009 and hosted a follow-up visit from the agency on
February 8–10, 2009. ABFSE has informed us that they intend to review
Briarwood’s January response as well as the information obtained from the
agency’s February visit at their April 2009 meeting.
Change of
Control. In addition to school acquisitions, other types of
transactions can also cause a change of control. The DOE, most state education
agencies and our accrediting commissions have standards pertaining to the change
of control of schools, but these standards are not uniform. DOE regulations
describe some transactions that constitute a change of control, including the
transfer of a controlling interest in the voting stock of an institution or the
institution's parent corporation. For a publicly traded corporation, DOE
regulations provide that a change of control occurs in one of two ways:
(a) if a person acquires ownership and control of the corporation so that
the corporation is required to file a Current Report on Form 8-K with the
Securities and Exchange Commission disclosing the change of control or
(b) if the corporation has a shareholder that owns at least 25% of the
total outstanding voting stock of the corporation and is the largest shareholder
of the corporation, and that shareholder ceases to own at least 25% of such
stock or ceases to be the largest shareholder. These standards are subject to
interpretation by the DOE.
A
significant purchase or disposition of our common stock could be determined by
the DOE to be a change of control under this standard. Most of the states and
our accrediting commissions include the sale of a controlling interest of common
stock in the definition of a change of control although some agencies could
determine that the sale or disposition of a smaller interest would result in a
change of control. A change of control under the definition of one of these
agencies would require the affected school to reaffirm its state authorization
or accreditation. Some agencies would require approval prior to a sale or
disposition that would result in a change of control in order to maintain
authorization or accreditation. The requirements to obtain such
reaffirmation from the states and our accrediting commissions vary
widely.
A change
of control could occur as a result of future transactions in which our company
or schools are involved. Some corporate reorganizations and some changes in the
board of directors are examples of such transactions. Moreover, the potential
adverse effects of a change of control could influence future decisions by us
and our stockholders regarding the sale, purchase, transfer, issuance or
redemption of our stock. In addition, the adverse regulatory effect of a change
of control also could discourage bids for your shares of common stock and could
have an adverse effect on the market price of the Company’s shares.
Opening
Additional Schools and Adding Educational
Programs. For-profit educational institutions must
be authorized by their state education agencies and be fully operational for two
years before applying to the DOE to participate in Title IV Programs.
However, an institution that is certified to participate in Title IV
Programs may establish an additional location and apply to participate in
Title IV Programs at that location without reference to the two-year
requirement, if such additional location satisfies all other applicable DOE
eligibility requirements. Our expansion plans are based, in part, on our ability
to open new schools as additional locations of our existing institutions and
take into account the DOE's approval requirements.
A student
may use Title IV Program funds only to pay the costs associated with
enrollment in an eligible educational program offered by an institution
participating in Title IV Programs. Generally, an institution that is
eligible to participate in Title IV Programs may add a new educational
program without DOE approval if that new program leads to an associate level or
higher degree and the institution already offers programs at that level, or if
that program prepares students for gainful employment in the same or a related
occupation as an educational program that has previously been designated as an
eligible program at that institution and meets minimum length requirements. If
an institution erroneously determines that an educational program is eligible
for purposes of Title IV Programs, the institution would likely be liable
for repayment of Title IV Program funds provided to students in that
educational program. Our expansion plans are based, in part, on our ability to
add new educational programs at our existing schools. We do not believe that
current DOE regulations will create significant obstacles to our plans to add
new programs.
Some of
the state education agencies and our accrediting commission also have
requirements that may affect our schools' ability to open a new campus,
establish an additional location of an existing institution or begin offering a
new educational program. Any institution required to submit retention data
to the ACICS may be required to obtain prior permission from the ACICS for the
initiation of any new program or new branch campus or learning site. We do not
believe that these standards will create significant obstacles to our expansion
plans.
Administrative
Capability. The DOE assesses the administrative
capability of each institution that participates in Title IV Programs under
a series of separate standards. Failure to satisfy any of the standards may lead
the DOE to find the institution ineligible to participate in Title IV
Programs or to place the institution on provisional certification as a condition
of its participation. These criteria require, among other things, that the
institution:
|
|
·
|
Complies with all applicable
federal student financial aid
regulations;
|
|
|
·
|
Has capable and sufficient
personnel to administer the federal student financial aid
programs;
|
|
|
·
|
Has
adequate checks and balances in its system of internal
controls;
|
|
|
·
|
Divides
the function of authorizing and disbursing or delivering Title IV Program
Funds so that no office has the responsibility for both
functions;
|
|
|
·
|
Establishes
and maintains records required under the Title IV
regulations;
|
|
|
·
|
Develops
and applies an adequate system to identify and resolve discrepancies in
information from sources regarding a student’s application for financial
aid under Title IV;
|
|
|
·
|
Has acceptable methods of
defining and measuring the satisfactory academic progress of its
students;
|
|
|
·
|
Refers to the Office of the
Inspector General any credible information indicating that any applicant,
student, employee or agent of the school has been engaged in any fraud or
other illegal conduct involving Title IV
Programs;
|
|
|
·
|
Provides financial aid counseling
to its students; and
|
|
|
·
|
Submits
in a timely manner all reports and financial statements required by the
regulations.
|
Failure
by an institution to satisfy any of these or other administrative capability
criteria could cause the institution to lose its eligibility to participate in
Title IV Programs, which would have a material adverse effect on our
business and results of operations.
Other
standards provide that an institution may be found to lack administrative
capability and be placed on provisional certification if its student loan
default rate under the Federal Family Education Loan program is 25% or greater
for any of the three most recent federal fiscal years, or if its Perkins cohort
default rate exceeds 15% for any federal award year. None of our institutions
has a Federal Family Education Loan cohort default rate above 25% for any of the
three most recent fiscal years for which the DOE has published rates. Denver LCT
and NETI are our only institutions participating in the Perkins program. Denver
LCT 's cohort default rate was 35.7% for students scheduled to begin repayment
in the 2007-2008 federal award year. The DOE did not provide any additional
Federal Capital Contribution Funds for Perkins loans to Denver
LCT. Denver LCT continues to make loans out of its existing Perkins
loan fund. As was the case prior to our acquisition NETI, the institution
remains provisionally certified by the DOE based on its change in ownership and
on a finding by the DOE prior to the change in ownership that NETI had not
transmitted certain data related to the Perkins program to the National Student
Loan Data System during periods prior to the acquisition. NETI 's cohort default
rate was 14.1% for students scheduled to begin repayment in the 2007-2008
federal award year.
Ability to
Benefit Regulations. Under certain circumstances,
an institution may elect to admit non-high school graduates, or "ability to
benefit," students, into certain of its programs of study. In order for ability
to benefit students to be eligible for Title IV Program participation, the
institution must comply with the ability to benefit requirements set forth in
the Title IV Program requirements. The basic evaluation method to determine
that a student has the ability to benefit from the program is the student's
achievement of a minimum score on a test approved by the DOE and independently
administered in accordance with DOE regulations. The HEOA
provisions also permit students to demonstrate their ability to benefit and
become eligible to receive Title IV funds upon satisfactory completion of six
credit hours or the equivalent coursework. In addition to the
testing requirements, the DOE regulations also prohibit ability to benefit
student enrollments from constituting 50% or more of the total enrollment of the
institution. In 2008, the following schools were authorized to enroll “ability
to benefit” applicants: Southwestern College, New Britain, Cromwell, Shelton,
Hamden, Union, Mahwah, Indianapolis, Melrose Park, Grand Prairie, Somerville,
Denver, West Palm Beach, Center City Philadelphia, Northeast Philadelphia,
Paramus, Mt. Laurel, Marietta, Lowell, Edison, Brockton, Allentown, and
Summerlin.
Restrictions on
Payment of Commissions, Bonuses and Other Incentive
Payments. An institution participating in
Title IV Programs may not provide any commission, bonus or other incentive
payment based directly or indirectly on success in securing enrollments or
financial aid to any person or entity engaged in any student recruiting or
admission activities or in making decisions regarding the awarding of
Title IV Program funds. In November 2002, the DOE published new
regulations which attempt to clarify the "incentive compensation rule." Failure
to comply with the incentive compensation rule could result in loss of ability
to participate in Title IV Programs or in fines or liabilities. We believe
that our current compensation plans are in compliance with the Higher Education
Act and the DOE's new regulations, although we cannot assure you that the DOE
will not find deficiencies in our compensation plans.
Eligibility and
Certification Procedures. Each institution must
periodically apply to the DOE for continued certification to participate in
Title IV Programs. The institution must also apply for recertification when
it undergoes a change in ownership resulting in a change of control. The
institution also may come under DOE review when it undergoes a substantive
change that requires the submission of an application, such as opening an
additional location or raising the highest academic credential it
offers.
The DOE
may place an institution on provisional certification status if it determines
that the institution does not fully satisfy certain administrative and financial
standards or if the institution undergoes a change in ownership resulting in a
change of control. The DOE may withdraw an institution's provisional
certification with the institution having fewer due process protections than if
it were fully certified. In addition, the DOE may more closely review an
institution that is provisionally certified if it applies for approval to open a
new location, add an educational program, acquire another school or make any
other significant change. Provisional certification does not otherwise limit an
institution's access to Title IV Program funds. In connection with our
acquisitions of NETI, and New England Institute of Technology at Palm Beach, we
received in each case an executed provisional program participation agreement
from the DOE. In connection with our acquisition of
Briarwood College, we received a temporary provisional program
participation agreement from the DOE which
remains in effect until the DOE completes its review and approval process for
the change in ownership.
All
institutions are recertified on various dates for various amounts of
time. The following table sets forth the expiration dates for each of
our institutions' current program participation agreement as of December 31,
2008:
|
Institution
|
Expiration
Date of Current Program Participation Agreement
|
|
|
Allentown,
PA
|
March 31,
2014
|
|
|
Columbia,
MD
|
June 30,
2013
|
|
|
Philadelphia,
PA
|
September 30,
2013
|
|
|
Denver,
CO
|
December 31,
2009
|
|
|
Lincoln,
RI
|
March 31,
2014
|
|
|
Nashville,
TN
|
March 31,
2014
|
|
|
Somerville,
MA
|
March 31,
2014
|
|
|
Edison,
NJ
|
June 30,
2011
|
|
|
Union,
NJ
|
June 30,
2011
|
|
|
Grand
Prairie, TX
|
March 31,
2009**
|
|
|
Indianapolis,
IN
|
March 31,
2009**
|
|
|
Melrose
Park, IL
|
March 31,
2009**
|
|
|
Dayton,
OH
|
March 31,
2014
|
|
|
New
Britain, CT
|
March 31,
2009*
|
|
|
West
Palm Beach, FL
|
June 30,
2010*
|
|
|
Southington,
CT
|
January
31, 2009***
|
* Provisionally
certified
**
Currently going through re-certification
***
Temporary provisional certification extended on a month-to-month basis pending
completion of DOE change in ownership review and approval process
Compliance with
Regulatory Standards and Effect of Regulatory
Violations. Our schools are subject to audits,
program reviews, and site visits by various regulatory agencies, including the
DOE, the DOE's Office of Inspector General, state education agencies, student
loan guaranty agencies, the U.S. Department of Veterans Affairs and our
accrediting commissions. In addition, each of our institutions must retain an
independent certified public accountant to conduct an annual audit of the
institution's administration of Title IV Program funds. The institution
must submit the resulting audit report to the DOE for review.
The DOE
conducted a program review at Southwestern College (“SWC”) and issued an
initial program review report, dated February 6, 2008, in which it identified
potential instances of noncompliance with certain DOE
requirements. SWC responded to the DOE initial program review report
on April 3, 2008. In a letter, dated May 29, 2008, the DOE issued a
Final Program Review Determination and SWC refunded $0.2 million to the
DOE.
In a
letter received from the ACCSCT, dated July 7, 2008, we were informed of a “show
cause” regarding our Lincoln Technical Institute institution in Philadelphia,
Pennsylvania. An institution under “show cause” is required to
satisfy its accrediting agency within a prescribed period, typically 18 months,
that it has satisfactorily resolved the deficiency. We responded to
ACCSCT’s “show cause” request in September 2008. In a letter dated
December 5, 2008, ACCSCT informed us that the “show cause” order was
vacated.
If one of
our schools failed to comply with accrediting or state licensing requirements,
such school and its main and/or branch campuses could be subject to the loss of
state licensure or accreditation, which in turn could result in a loss of
eligibility to participate in Title IV Programs. If the DOE determined that
one of our institutions improperly disbursed Title IV Program funds or
violated a provision of the Higher Education Act or DOE regulations, the
institution could be required to repay such funds and related costs to the DOE
and lenders, and could be assessed an administrative fine. The DOE could also
place the institution on provisional certification and/or transfer the
institution to the reimbursement or cash monitoring system of receiving
Title IV Program funds, under which an institution must disburse its own
funds to students and document the students' eligibility for Title IV
Program funds before receiving such funds from the DOE. An
institution that is operating under this "Heightened Cash Monitoring, Type 1
status," is required to credit student accounts before drawing down funds under
Title IV Programs and to draw down funds in an amount no greater than the
previous disbursement to students and parents. Additionally, the institution's
compliance audit will be required to contain verification that this did occur
throughout the year. In addition to the above, the DOE has required us to comply
with certain requirements prescribed for institutions operating in "the zone,"
which is indicative of a composite score between 1.0 and 1.4. Those requirements
include providing timely information regarding any of the following oversight
and financial events:
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Any adverse action, including a
probation or similar action, taken against the institution by its
accrediting agency;
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Any event that causes the
institution, or related entity to realize any liability that was noted as
a contingent liability in the institution's or related entity's most
recent audit financial
statement;
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Any violation by the institution
of any loan agreement;
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Any
failure of the institution to make a payment in accordance with its debt
obligations that results in a creditor filing suit to recover funds under
those obligations;
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Any withdrawal of owner's equity
from institution by any means, including declaring a dividend;
or
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Any extraordinary losses, as
defined in accordance with Accounting Principles Board Opinion
No. 30.
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Operating
under the zone requirements may also require the institution to submit its
financial statement and compliance audits earlier than the date previously
required and require the institution to provide information about its current
operations and future plans. An institution that continues to fail to meet the
financial responsibility standards set by the DOE or does not comply with the
zone requirements may lose its eligibility to continue to participate in Title
IV funding. If eligibility is lost, the institution may be required
to post irrevocable letters of credit, for an amount determined by the DOE at a
minimum of 50% of the Title IV Program funds received by the institution during
its most recently completed fiscal year. The institution may also be required to
post irrevocable letters of credit at a minimum of 10% of such funds and be
provisionally certified and subject to other reporting and monitoring
requirements.
Significant
violations of Title IV Program requirements by us or any of our
institutions could be the basis for a proceeding by the DOE to limit, suspend or
terminate the participation of the affected institution in Title IV
Programs or to civil or criminal penalties. Generally, such a termination
extends for 18 months before the institution may apply for reinstatement of
its participation. There is no DOE proceeding pending to fine any of our
institutions or to limit, suspend or terminate any of our institutions'
participation in Title IV Programs.
We and
our schools are also subject to complaints and lawsuits relating to regulatory
compliance brought not only by our regulatory agencies, but also by third
parties, such as present or former students or employees and other members of
the public. If we are unable to successfully resolve or defend against any such
complaint or lawsuit, we may be required to pay money damages or be subject to
fines, limitations, loss of federal funding, injunctions or other penalties.
Moreover, even if we successfully resolve or defend against any such complaint
or lawsuit, we may have to devote significant financial and management resources
in order to reach such a result.
Lenders and
Guaranty Agencies. In 2008, six lenders provided
funding to more than 90% of the students at the schools we owned during that
year: Sallie Mae Education Trust, AMS Trust, Regions Bank, PNC Bank, Student
Funding Group, and Nelnet. While we believe that other lenders might be willing
to make federally guaranteed student loans to our students if loans were no
longer available from our current lenders, there can be no assurances in this
regard. In addition, the Higher Education Act requires the establishment of
lenders of last resort in every state to ensure that loans are available to
students at any school that cannot otherwise identify lenders willing to make
federally guaranteed loans to its students.
Our
primary guarantors for Title IV loans are USA Group, a subsidiary of Sallie
Mae, and New Jersey Higher Education Assistance Authority, an independent agency
of the State of New Jersey. These two agencies currently guarantee a majority of
the federally guaranteed student loans made to students enrolled at our schools.
There are six other guaranty agencies that guarantee student loans made to
students enrolled at our schools. We believe that other guaranty agencies would
be willing to guarantee loans to our students if any of the guaranty agencies
ceased guaranteeing those loans or reduced the volume of loans they guarantee,
although there can be no assurances in this regard.
Subsequent
Event. On January 20, 2009, we completed the acquisition of
four of the five institutions comprising Baran Institute of Technology, or
Baran, for approximately $24.9 million in cash, net of cash acquired, subject to
contractual post closing adjustments. Baran consists of five distinct
institutions serving approximately 1,900 students and offers associate and
diploma programs in the fields of automotive, skilled trades, health sciences
and culinary arts. The four institutions we acquired on January 20,
2009 are Baran Institute of Technology, or BIT, Connecticut Culinary Institute,
or CCI, Americare School of Nursing, or ASN, and Engine City Technical
Institute, or ECTI. We also acquired the membership interests of
Hartford Urban Ventures, LLC and certain assets and assumed certain liabilities
of Educational Properties, LLC, which provide support services to Baran.
We expect to acquire the fifth Baran institution, Clemens College, for an
additional $3.0 million in the second quarter of 2009.
Our
recent acquisition of the four Baran schools resulted in a change in ownership
of such schools requiring each of those schools and their campuses to reapply
for eligibility to participate in the Title IV programs and for approvals from
their accrediting and state licensing agencies. Each of the four
Baran schools has received a Temporary Provisional PPA allowing each to
resume its participation in the Title IV programs and we
have provided the documentation necessary for each Temporary Provisional
PPA to remain in effect on a month-to-month basis pending completion of the
DOE's review and decision to issue a Provisional Program Participation
Agreement.
Each of
BIT, CCI and ECTI have received Part 1 approval of the change in ownership
from their accrediting agency, the Accrediting Commission of Career Schools and
Colleges of Technology, or ACCSCT, and have applied for Part 2
approval under a process that takes place after the change in ownership under
applicable standards. Both BIT and CCI have received approval of the change in
ownership from the State of Connecticut Board of Governors for Higher Education.
ECTI has applied for approval of its change in ownership from the New Jersey
Department of Labor and Workforce Development under a process that takes place
after the change in ownership. ASN has received a provisional license from the
Commission for Independent Education of the Florida Department of Education and
is awaiting final approval of the change in ownership from that agency at its
March 2009 meeting. ASN has applied for approval of the change in ownership
with its accrediting agency, the Accrediting Bureau of Health Education Schools,
or ABHES, under a process that also takes place after the change in ownership
under applicable standards.
While we
cannot assure you that the respective agencies will issue the required approvals
described above, we believe that we will be able to meet the requirements
necessary for obtaining these approvals.
Prior to
our acquisition of the four Baran schools, the DOE notified those schools that
they did not meet DOE financial responsibility standards and, as a result, must
submit letters of credit to the DOE in the amount of $2.0 million and be
placed on heightened cash monitoring 1 status. The required letters of
credit have been submitted to the DOE and have an expiration date of
December 31, 2009. Prior to our acquisition of the ASN school, ABHES
directed the school to show cause why its accreditation should not be withdrawn
based upon a visit to the school's branch campus in St. Petersburg,
Florida. The school is required to submit a response to ABHES by April 1,
2009 and will have a subsequent opportunity to appear before an ABHES panel.
Subsequent to our acquisition of the school, we have engaged in a process to
respond to the show cause order and to work closely with ABHES to resolve any
potential issues.
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Item 1A.
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RISK
FACTORS
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The
following risk factors and other information included in this Form 10-K should
be carefully considered. The risks and uncertainties described below are not the
only ones we face. Additional risks and uncertainties not presently known to us
or that we currently believe are not material may also adversely affect our
business, financial condition, operating results, cash flows and
prospects.
RISKS RELATED TO OUR
INDUSTRY
Failure
of our schools to comply with the extensive regulatory requirements for school
operations could result in financial penalties, restrictions on our operations
and loss of external financial aid funding, which could affect our revenues and
impose significant operating restrictions on us.
Our
schools are subject to extensive regulation by federal and state governmental
agencies and by accrediting commissions. In particular, the Higher Education Act
of 1965, as amended, and the regulations promulgated thereunder by the DOE, set
forth numerous standards that our schools must satisfy to participate in various
federal student financial assistance programs under Title IV Programs. In
2008, we derived approximately 79% of our revenues, calculated based on cash
receipts, from Title IV Programs. To participate in Title IV Programs,
each of our schools must receive and maintain authorization by the applicable
education agencies in the state in which each school is physically located, be
accredited by an accrediting commission recognized by the DOE and be certified
as an eligible institution by the DOE. These regulatory requirements cover the
vast majority of our operations, including our educational programs, facilities,
instructional and administrative staff, administrative procedures, marketing,
recruiting, student performances and outcomes, financial operations and
financial condition. These regulatory requirements also affect our ability to
acquire or open additional schools, add new educational programs, expand
existing educational programs, and change our corporate structure and
ownership.
If any of
our schools fails to comply with applicable regulatory requirements, the school
and its related main campus and/or additional locations could be subject to the
loss of state licensure or accreditation, the loss of eligibility to participate
in and receive funds under the Title IV Programs, the loss of the ability
to grant degrees, diplomas and certificates, provisional certification, or the
imposition of liabilities or monetary penalties, each of which could adversely
affect our revenues and impose significant operating restrictions upon us. In
addition, the loss by any of our schools of its accreditation, its state
authorization or license, or its eligibility to participate in Title IV
Programs constitutes an event of default under our credit agreement, which we
and our subsidiaries entered into with a syndicate of banks on February 15,
2005. An event of default on our credit agreement could result in the
acceleration of all amounts then outstanding under our credit agreement. The
various regulatory agencies periodically revise their requirements and modify
their interpretations of existing requirements and restrictions. We cannot
predict with certainty how any of these regulatory requirements will be applied
or whether each of our schools will be able to comply with these requirements or
any additional requirements instituted in the future.
If
we or our eligible institutions do not meet the financial responsibility
standards prescribed by the DOE, as has occurred in the past, we may be required
to post letters of credit or our eligibility to participate in Title IV Programs
could be terminated or limited, which could significantly reduce our student
population and revenues.
To
participate in Title IV Programs, an eligible institution must satisfy specific
measures of financial responsibility prescribed by the DOE or post a letter of
credit in favor of the DOE and possibly accept other conditions on its
participation in Title IV Programs. Any obligation to post one or
more letters of credit would increase our costs of regulatory
compliance. Our inability to obtain a required letter of credit or
limitations on, or termination of, our participation in Title IV Programs could
limit our students' access to various government-sponsored student financial aid
programs, which could significantly reduce our student population and
revenues.
Each
year, based on the financial information submitted by an eligible institution
that participates in Title IV Programs, the DOE calculates three financial
ratios for the institution: an equity ratio, a primary reserve ratio and a net
income ratio. Each of these ratios is scored separately and then combined into a
composite score to measure the institution's financial responsibility. If the
composite score for an institution falls below thresholds established by the
DOE, the DOE could place the institution on provisional certification and/or
transfer the institution to the reimbursement or cash monitoring system of
receiving Title IV Program funds, under which an institution must disburse its
own funds to students and document the student's eligibility for Title IV
Program funds before receiving such funds from the DOE. If an
institution has a composite score between 1.0 and 1.4, the institution will
be required to operate under "Heightened Cash Monitoring, Type 1
status." If an institution's composite score is below 1.0, the
institution is considered by the DOE to lack financial responsibility and, as a
condition of Title IV Program participation, the institution may be required to,
among other things, post a letter of credit in an amount of at least 10 to 50
percent of the institution's annual Title IV Program participation for its most
recent fiscal year.
Based on
our calculations, the 2008 and 2007 financial statements reflect a composite
score of 1.8 for each year. However, because our composite scores for
2001 and 2002 were below 1.0 all of our institutions were placed on “Heightened
Cash Monitoring, Type 1 status” from December 30, 2004 through December 30,
2007. If we revert to this status in the future or fail to comply
with applicable DOE requirements, we may lose our eligibility for continued
participation in Title IV Programs or may be required to post irrevocable
letters of credit. In addition, a composite score under 1.0 in any future year
could have an adverse effect on our operations and would result in a default
under our credit agreement and could result in an acceleration of the debt under
our credit agreement.
If
we fail to demonstrate "administrative capability" to the DOE, our business
could suffer.
DOE
regulations specify extensive criteria an institution must satisfy to establish
that it has the requisite "administrative capability" to participate in
Title IV Programs. These criteria require, among other things, that the
institution:
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Comply with all applicable
Title IV regulations;
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Have capable and sufficient
personnel to administer Title IV
Programs;
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Has
adequate checks and balance in its system of internal
controls;
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Divides
the function of authorizing and disbursing or delivering Title IV Program
Funds so that no office has the responsibility for both
functions;
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Establishes
and maintains records required under the Title IV
regulations;
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Develops
and applies an adequate system to identify and resolve discrepancies in
information from sources regarding a student’s application for financial
aid under Title IV;
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Have acceptable methods of
defining and measuring the satisfactory academic progress of its
students;
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Provide financial aid counseling
to its students; and
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Submit in a timely manner all
reports and financial statements required by the
regulations.
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If an
institution fails to satisfy any of these criteria or any other DOE regulation,
the DOE may:
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Require the repayment of
Title IV funds;
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Impose a less favorable payment
system for the institution's receipt of Title IV
funds;
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Place the institution on
provisional certification status;
or
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Commence a proceeding to impose a
fine or to limit, suspend or terminate the participation of the
institution in Title IV
Programs.
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If we are
found not to have satisfied the DOE's "administrative capability" requirements,
one or more of our institutions, including its additional locations, could be
limited in its access to, or lose, Title IV Program funding. A decrease in
Title IV funding could adversely affect our revenues, as we received
approximately 79% of our revenues (calculated based on cash receipts) from
Title IV Programs in 2008.
We
are subject to fines and other sanctions if we pay impermissible commissions,
bonuses or other incentive payments to individuals involved in certain
recruiting, admissions or financial aid activities, which could increase our
cost of regulatory compliance and adversely affect our results of
operations.
A school
participating in Title IV Programs may not provide any commission, bonus or
other incentive payment based on directly or indirectly on success in enrolling
students or securing financial aid to any person involved in any student
recruiting or admission activities or in making decisions regarding the awarding
of Title IV Program funds. The law and regulations governing this
requirement do not establish clear criteria for compliance in all circumstances.
If we are found to have violated this law, we could be fined or otherwise
sanctioned by the DOE or we could face litigation filed under the qui tam provisions of the
Federal False Claims Act.
If we were involved in conflicts of
interest with student loan lenders, we could be subject to penalties and
otherwise suffer adverse impacts on our business.
In 2007,
the New York Attorney General, several other attorneys-general, the United
States Senate and House of Representatives Education Committees, and the DOE all
launched investigations of potential conflicts of interest between university
officials and various private lending organizations that provide student
loans. Several universities and lending organizations have agreed to
pay fines to settle claims in this regard. In addition, several
financial aid officials at other universities have been suspended or placed on
leaves of absence. While no allegations have been raised concerning
our institutions, we received general requests for information from the offices
of two state attorneys-general. We have no reason to believe that any
of our employees have engaged in improper conduct in this regard. If
any such impropriety were found, we could be subject to penalties and other
adverse consequences.
If
our schools do not maintain their state authorizations and their accreditation,
they may not participate in Title IV Programs, which could adversely affect
our student population and revenues.
An
institution that grants degrees, diplomas or certificates must be authorized by
the appropriate education agency of the state in which it is located and, in
some cases, other states. Requirements for authorization vary substantially
among states. The school must be authorized by each state in which it is
physically located in order for its students to be eligible for funding under
Title IV Programs. Loss of state authorization by any of our schools from
the education agency of the state in which the school is located would end that
school's eligibility to participate in Title IV Programs and could cause us
to close the school.
A school
must be accredited by an accrediting commission recognized by the DOE in order
to participate in Title IV Programs. Accreditation is a non-governmental
process through which an institution submits to qualitative review by an
organization of peer institutions, based on the standards of the accrediting
agency and the stated aims and purposes of the institution, including achieving
and maintaining stringent retention, completion and placement outcomes. Certain
states require institutions to maintain accreditation as a condition of
continued authorization to grant degrees. The Higher Education Act requires
accrediting commissions recognized by the DOE to review and monitor many aspects
of an institution's operations and to take appropriate disciplinary action when
the institution fails to comply with the accrediting agency's standards. Loss of
accreditation by any of our main campuses would result in the termination of
eligibility of that school and all of its branch campuses to participate in
Title IV Programs and could cause us to close the school and its
branches.
Our
institutions would lose eligibility to participate in Title IV Programs if
the percentage of their revenues derived from those programs were too high,
which could reduce our student population and revenues.
Under the
HEA reauthorization, a proprietary institution that derives more than 90% of its
total revenue from the Title IV programs for two consecutive fiscal years
becomes immediately ineligible to participate in the Title IV programs and may
not reapply for eligibility until the end of two fiscal years. An
institution with revenues exceeding 90% for a single fiscal year ending after
August 14, 2008, will be placed on provisional certification and may be subject
to other enforcement measures. Under prior law, an institution would
immediately lose its eligibility to participate in Title IV Programs if it
derived more than 90% of its revenues (calculated based on cash receipts) from
those programs in any fiscal year as calculated in accordance with DOE
regulations and would be ineligible to apply to regain its eligibility until the
following fiscal year. Based on our calculations, none of our institutions
received more than 90% of its revenues in fiscal year 2008, and our institution
with the highest percentage received approximately 89.0% of its revenues, from
Title IV Programs. If one of our institutions violated the 90/10 Rule and
became ineligible to participate in Title IV Programs but continued to disburse
Title IV Program funds, the DOE would require the institution to repay all title
IV Program funds received by the institution after the effective date of the
loss of eligibility. If any of our institutions loses eligibility to participate
in Title IV Programs, that loss would cause an event of default under our
credit agreement, which could result in the acceleration of any indebtedness
then outstanding under our credit agreement, and would also adversely affect our
students' access to various government-sponsored student financial aid programs,
which could reduce our student population and revenues. These calculations are
required to be made based on cash receipts.
Our
institutions would lose eligibility to participate in Title IV Programs if
their former students defaulted on repayment of their federal student loans in
excess of specified levels, which could reduce our student population and
revenues.
An
institution of higher education, such as each of our institutions, loses its
eligibility to participate in some or all Title IV Programs if its former
students default on the repayment of their federal student loans in excess of
specified levels. If any of our institutions exceeds the official student loan
default rates published by the DOE, it will lose eligibility to participate in
Title IV Programs. That loss would adversely affect our students' access to
various government-sponsored student financial aid programs, which could reduce
our student population and revenues.
We
are subject to sanctions if we fail to correctly calculate and timely return
Title IV Program funds for students who withdraw before completing their
educational program, which could increase our cost of regulatory compliance and
decrease our profit margin.
An
institution participating in Title IV Programs must correctly calculate the
amount of unearned Title IV Program funds that have been credited to
students who withdraw from their educational programs before completing them and
must return those unearned funds in a timely manner, generally within
45 days of the date the institution determines that the student has
withdrawn. If the unearned funds are not properly calculated and timely
returned, we may have to post a letter of credit in favor of the DOE or may be
otherwise sanctioned by the DOE, which could increase our cost of regulatory
compliance and adversely affect our results of operations.
If
regulators do not approve our acquisition of a school that participates in
Title IV Programs, the acquired school would no longer be permitted to
participate in Title IV Programs, which could impair our ability to operate
the acquired school as planned or to realize the anticipated benefits from the
acquisition of that school.
If we
acquire a school that participates in Title IV Programs, we must obtain
approval from the DOE and applicable state education agencies and accrediting
commissions in order for the school to be able to continue operating and
participating in Title IV Programs. An acquisition can result in the
temporary suspension of the acquired school's participation in Title IV
Programs unless we submit to the DOE a timely and materially complete
application for recertification and the DOE issues a temporary provisional
program participation agreement. If we were unable to timely re-establish the
state authorization, accreditation or DOE certification of the acquired school,
our ability to operate the acquired school as planned or to realize the
anticipated benefits from the acquisition of that school could be impaired. In
connection with our acquisitions of New England Technical Institute and, New
England Institute of Technology at Palm Beach, we received in each case an
executed provisional program participation agreement from the DOE. In connection
with our acquisition of Briarwood College, we have received a temporary
provisional program participation agreement from the DOE which remains in effect
until the DOE completes its review and approval process for the change in
ownership.
If
regulators do not approve or delay their approval of transactions involving a
change of control of our company or any of our schools, our ability to
participate in Title IV Programs may be impaired.
If we or
any of our schools experience a change of control under the standards of
applicable state education agencies, our accrediting commissions or the DOE, we
or the affected schools must seek the approval of the relevant regulatory
agencies in order for us or the acquired school to maintain required state
licensure and accreditation and to participate in Title IV Programs.
Transactions or events that constitute a change of control of us include
significant acquisitions or dispositions of our common stock (including,
pursuant to DOE regulations, sales by a shareholder that owns at least 25%
of our total outstanding voting stock and is our largest shareholder, as a
result of which sales such shareholder ceases to own at least 25% of our
outstanding voting stock or ceases to be our largest shareholder) or significant
changes in the composition of our board of directors. Some of these transactions
or events may be beyond our control. Our failure to obtain, or a delay in
receiving, approval of any change of control from any state in which our schools
are located or other states as the case may be, our accrediting commissions or
the DOE could impair or result in the termination of our accreditation, state
licensure or ability to participate in Title IV Programs. Our failure to
obtain, or a delay in obtaining, approval of any change of control from any
state in which we do not have a school but in which we recruit students could
require us to suspend our recruitment of students in that state until we receive
the required approval. The potential adverse effects of a change of control with
respect to participation in Title IV Programs could influence future
decisions by us and our stockholders regarding the sale, purchase, transfer,
issuance or redemption of our stock. In addition, the adverse regulatory effect
of a change of control also could discourage bids for shares of our common stock
and could have an adverse effect on the market price of shares of our common
stock.
Congress
may change the law or reduce funding for Title IV Programs, which could
reduce our student population, revenues or profit margin.
Congress
periodically revises the Higher Education Act and other laws governing
Title IV HEA Programs and annually determines the funding level for each
Title IV Program. On August 14, 2008, the Higher Education Opportunity Act,
Public Law 110-315 was enacted. The HEA reauthorized the Title IV programs
through at least September 30, 2014. Any action by Congress that
significantly reduces funding for Title IV Programs or the ability of our
schools or students to receive funding through those programs could result in
increased administrative costs and decreased profit margin.
In
addition, current requirements for student and school participation in
Title IV Programs may change or one or more of the present Title IV
Programs could be replaced by other programs with materially different student
or school eligibility requirements. If we cannot comply with the provisions of
the Higher Education Act, as they may be revised, or if the cost of such
compliance is excessive, our revenues or profit margin could be adversely
affected.
In
February 2009, President Obama released a budget blueprint for federal fiscal
year 2010 that proposes that all new loans be originated through the Federal
Direct Loan Program rather than the FFEL Program. The Proposal has
not been passed by Congress and is subject to further amendment. If this
proposal were adopted, it could result in our institutions being required to
certify loans through the Federal Direct Loan Program rather than through the
Federal Family Education Loan Program. Our schools currently
participate in the Federal Direct Loan Programs.
Regulatory
agencies or third parties may conduct compliance reviews, bring claims or
initiate litigation against us. If the results of these reviews or claims are
unfavorable to us, our results of operations and financial condition could be
adversely affected.
Because
we operate in a highly regulated industry, we are subject to compliance reviews
and claims of noncompliance and lawsuits by government agencies and third
parties. If the results of these reviews or proceedings are unfavorable to us,
or if we are unable to defend successfully against third-party lawsuits or
claims, we may be required to pay money damages or be subject to fines,
limitations on the operations of our business, loss of federal funding,
injunctions or other penalties. Even if we adequately address issues raised by
an agency review or successfully defend a third-party lawsuit or claim, we may
have to divert significant financial and management resources from our ongoing
business operations to address issues raised by those reviews or defend those
lawsuits or claims. Prior to our acquisition of Briarwood, the American Board of
Funeral Service Education (“ABFSE”), the accrediting agency that accredits
Briarwood’s Mortuary Sciences program, placed the program on “show
cause”. Briarwood submitted a response on January 12, 2009 and hosted a
follow-up visit from the agency on February 8–10, 2009. ABFSE has informed
us that they intend to review Briarwood’s January response as well as the
information obtained from the agency’s February visit at their April 2009
meeting.
RISKS RELATED TO OUR
BUSINESS
If
we fail to effectively manage our growth, we may incur higher costs and expenses
than we anticipate in connection with our growth.
We have
experienced a period of significant growth since 1999. Our continued growth has
strained and may in the future strain our management, operations, employees or
other resources. We will need to continue to assess the adequacy of our staff,
controls and procedures to meet the demands of our continued growth. We may not
be able to maintain or accelerate our current growth rate, effectively manage
our expanding operations or achieve planned growth on a timely or profitable
basis. If we are unable to manage our growth effectively while maintaining
appropriate internal controls, we may experience operating inefficiencies that
likely will increase our expected costs.
We
may not be able to successfully integrate acquisitions into our business, which
may materially adversely affect our business, financial condition, results of
operations and could cause the market value of our common stock to
decline.
Since 1999, we have acquired a number
of schools and we intend to continue to grow our business through acquisitions
and internal expansion of our programs. The anticipated benefits of an
acquisition may not be achieved unless we successfully integrate the acquired
school or schools into our operations and are able to effectively manage, market
and apply our business strategy to any acquired schools. Integration challenges
include, among others, regulatory approvals, significant capital expenditures,
assumption of known and unknown liabilities and our ability to control costs.
The successful integration of future acquisitions may also require substantial
attention from our senior management and the senior management of the acquired
schools, which could decrease the time that they devote to the day-to-day
management of our business. The difficulties of integration may initially be
increased by the necessity of integrating personnel with disparate business
backgrounds and corporate cultures. Management's focus on the integration of
acquired schools and on the application of our business strategy to those
schools could interrupt or cause loss of momentum in our other ongoing
activities. Our
inability to properly manage or support the growth may have a material adverse
effect on our business, financial condition, and results of operations and could
cause the market value of our common stock to decline.
Failure
on our part to establish and operate additional schools or campuses or
effectively identify suitable expansion opportunities could reduce our ability
to implement our growth strategy.
As part
of our business strategy, we anticipate opening and operating new schools or
campuses. Establishing new schools or campuses poses unique challenges and
requires us to make investments in management and capital expenditures, incur
marketing expenses and devote financial and other resources that are different,
and in some cases greater than those required with respect to the operation of
acquired schools.
To open a
new school or campus, we would be required to obtain appropriate state and
accrediting commission approvals, which may be conditioned or delayed in a
manner that could significantly affect our growth plans. In addition, to be
eligible for federal Title IV Program funding, a new school or campus would
have to be certified by the DOE and would require federal authorization and
approvals. In the case of entirely separate, freestanding U.S. schools, a
minimum of two years' operating history is required to be eligible for
Title IV Program funding. We cannot be sure that we will be able to
identify suitable expansion opportunities to maintain or accelerate our current
growth rate or that we will be able to successfully integrate or profitably
operate any new schools or campuses. A failure by us to effectively identify
suitable expansion opportunities and to establish and manage the operations of
newly established schools or online offerings could slow our growth and make any
newly established schools or our online programs unprofitable or more costly to
operate than we had planned.
Our
success depends in part on our ability to update and expand the content of
existing programs and develop new programs in a cost-effective manner and on a
timely basis.
Prospective
employers of our graduates increasingly demand that their entry-level employees
possess appropriate technological skills. These skills are becoming more
sophisticated in line with technological advancements in the automotive, diesel,
information technology, or IT, skilled trades, healthcare industries and
hospitality services. Accordingly, educational programs at our schools must keep
pace with those technological advancements. The expansion of our existing
programs and the development of new programs may not be accepted by our
students, prospective employers or the technical education market. Even if we
are able to develop acceptable new programs, we may not be able to introduce
these new programs as quickly as our competitors or as quickly as employers
demand. If we are unable to adequately respond to changes in market requirements
due to financial constraints, unusually rapid technological changes or other
factors, our ability to attract and retain students could be impaired, our
placement rates could suffer and our revenues could be adversely
affected.
In
addition, if we are unable to adequately anticipate the requirements of the
employers we serve, we may offer programs that do not teach skills useful to
prospective employers or students seeking a technical or career-oriented
education which could affect our placement rates and our ability to attract and
retain students, causing our revenues to be adversely affected.
Risks
specific to our schools’ online campuses could have a material adverse effect on
our business.
Our
schools’ online campuses intend to increase student enrollment, and more
resources will be required to support this growth, including additional faculty,
admissions, academic, and financial aid personnel. This growth may place a
strain on the operational resources of our schools’ online campuses. Our
schools’ online campuses’ success depends, in part, on their ability to expand
the content of their programs, develop new programs in a cost-effective manner,
maintain good standings with their regulators and accreditors, and meet their
students’ needs in a timely manner. The expansion of our schools’ online
campuses’ existing programs and the development of new programs may not be
accepted by their students or the online education market, and new programs
could be delayed due to current and future unforeseen regulatory restrictions.
The performance and reliability of the program infrastructure at our schools’
online campuses is critical to the reputation of these campuses and the campuses
ability to attract and retain students. Any computer system error or failure, or
a sudden and significant increase in traffic on our computer networks that host
our schools’ online campuses, may result in the unavailability of our schools’
online campuses’ computer networks. Individual, sustained, or repeated
occurrences could significantly damage the reputation of our schools’ online
campuses and result in a loss of potential or existing students. Additionally,
our schools’ online campuses’ computer systems and operations are vulnerable to
interruption or malfunction due to events beyond our control, including natural
disasters and network and telecommunications failures. Any interruption to our
schools’ online campuses’ computer systems or operations could have a material
adverse effect on the ability of our schools’ online campuses to attract and
retain students.
Our
computer networks—either administrative network or those supporting educational
programs— may also be vulnerable to unauthorized access, computer hackers,
computer viruses, and other security threats. A user who circumvents security
measures could misappropriate proprietary information or cause interruptions or
malfunctions in our operations. Due to the sensitive nature of the information
contained on our networks, such as students’ grades, our networks may be
targeted by hackers. As a result, we may be required to expend significant
resources to protect against the threat of these security breaches or to
alleviate problems caused by these breaches.
We
may not be able to retain our key personnel or hire and retain the personnel we
need to sustain and grow our business.
Our
success has depended, and will continue to depend, largely on the skills,
efforts and motivation of our executive officers who generally have significant
experience within the post-secondary education industry. Our success also
depends in large part upon our ability to attract and retain highly qualified
faculty, school directors, administrators and corporate management. Due to the
nature of our business, we face significant competition in the attraction and
retention of personnel who possess the skill sets that we seek. In addition, key
personnel may leave us and subsequently compete against us. Furthermore, we do
not currently carry "key man" life insurance on any of our employees. The loss
of the services of any of our key personnel, or our failure to attract and
retain other qualified and experienced personnel on acceptable terms, could have
an adverse effect on our ability to operate our business efficiently and to
execute our growth strategy.
If
we are unable to hire, retain and continue to develop and train our employees
responsible for student recruitment, the effectiveness of our student recruiting
efforts would be adversely affected.
In order
to support revenue growth, we need to hire new employees dedicated to student
recruitment and retain and continue to develop and train our current student
recruitment personnel. Our ability to develop a strong student recruiting team
may be affected by a number of factors, including our ability to integrate and
motivate our student recruiters; our ability to effectively train our student
recruiters; the length of time it takes new student recruiters to become
productive; regulatory restrictions on the method of compensating student
recruiters; the competition in hiring and retaining student recruiters; and our
ability to effectively manage a multi-location educational organization. If we
are unable to hire, develop or retain our student recruiters, the effectiveness
of our student recruiting efforts would be adversely affected.
Competition
could decrease our market share and cause us to lower our tuition
rates.
The
post-secondary education market is highly competitive. Our schools compete for
students and faculty with traditional public and private two-year and four-year
colleges and universities and other proprietary schools, many of which have
greater financial resources than we do. Some traditional public and private
colleges and universities, as well as other private career-oriented schools,
offer programs that may be perceived by students to be similar to ours. Most
public institutions are able to charge lower tuition than our schools, due in
part to government subsidies and other financial resources not available to
for-profit schools. Some of our competitors also have substantially greater
financial and other resources than we have which may, among other things, allow
our competitors to secure strategic relationships with some or all of our
existing strategic partners or develop other high profile strategic
relationships, or devote more resources to expanding their programs and their
school network, or provide greater financing alternatives to their students, all
of which could affect the success of our marketing programs. In addition, some
of our competitors have a larger network of schools and campuses than we do,
enabling them to recruit students more effectively from a wider geographic area.
If we are unable to compete effectively with these institutions for students,
our student enrollment and revenues will be adversely affected.
We may be
required to reduce tuition or increase spending in response to competition in
order to retain or attract students or pursue new market opportunities. As a
result, our market share, revenues and operating margin may be decreased. We
cannot be sure that we will be able to compete successfully against current or
future competitors or that the competitive pressures we face will not adversely
affect our revenues and profitability.
We
may experience business interruptions resulting from natural disasters,
inclement weather, transit disruptions, or other events in one or more of the
geographic areas in which we operate.
We may
experience business interruptions resulting from natural disasters, inclement
weather, transit disruptions, or other events in one or more of the geographic
areas in which we operate. These events could cause us to close schools —
temporarily or permanently — and could affect student recruiting
opportunities in those locations, causing enrollment and revenues to
decline.
Our
financial performance depends in part on our ability to continue to develop
awareness and acceptance of our programs among high school graduates and working
adults looking to return to school.
The
awareness of our programs among high school graduates and working adults looking
to return to school is critical to the continued acceptance and growth of our
programs. Our inability to continue to develop awareness of our programs could
reduce our enrollments and impair our ability to increase our revenues or
maintain profitability. The following are some of the factors that could prevent
us from successfully marketing our programs:
|
|
·
|
Student dissatisfaction with our
programs and services;
|
|
|
·
|
Diminished access to high school
student populations;
|
|
|
·
|
Our failure to maintain or expand
our brand or other factors related to our marketing or advertising
practices; and
|
|
|
·
|
Our inability to maintain
relationships with automotive, diesel, healthcare, skilled trades and IT,
and hospitality
services
manufacturers and
suppliers.
|
If
students fail to pay their outstanding balances, our profitability will be
adversely affected.
We offer
a variety of payment plans to help students pay the portion of their education
expense not covered by financial aid programs. These balances are unsecured and
not guaranteed. As a result of SLM’s tiered discount loan program
termination, effective February 18, 2008, our internal gap financing between
Title IV and tuition has increased. Although we have reserved for
estimated losses related to unpaid student balances, losses in excess of the
amounts we have reserved for bad debts will result in a reduction in our
profitability.
An
increase in interest rates could adversely affect our ability to attract and
retain students.
Interest
rates have reached historical lows in recent years, creating a favorable
borrowing environment for our students. Much of the financing our students
receive is tied to floating interest rates. Increases in interest rates result
in a corresponding increase in the cost to our existing and prospective students
of financing their education which could result in a reduction in the number of
students attending our schools and could adversely affect our results of
operations and revenues. Higher interest rates could also contribute to higher
default rates with respect to our students' repayment of their education loans.
Higher default rates may in turn adversely impact our eligibility for
Title IV Program participation or the willingness of private lenders to
make private loan programs available to students who attend our schools, which
could result in a reduction in our student population.
Seasonal
and other fluctuations in our results of operations could adversely affect the
trading price of our common stock.
Our
results of operations fluctuate as a result of seasonal variations in our
business, principally due to changes in total student population. Student
population varies as a result of new student enrollment, graduations and student
attrition. Historically, our schools have had lower student populations in our
first and second quarters and we have experienced large class starts in the
third and fourth quarters and student attrition in the first half of the year.
Our second half growth is largely dependent on a successful recruiting season.
Our expenses, however, do not vary significantly over the course of the year
with changes in our student population and net revenues. We expect quarterly
fluctuations in results of operations to continue as a result of seasonal
enrollment patterns. Such patterns may change, however, as a result of
acquisitions, new school openings, new program introductions and increased
enrollments of adult students. These fluctuations may result in volatility or
have an adverse effect on the market price of our common stock.
Our
total assets include substantial intangible assets. The write-off of a
significant portion of unamortized intangible assets would negatively affect our
results of operations.
Our total
assets reflect substantial intangible assets. At December 31, 2008, goodwill and
identified intangibles, net, represented approximately 35.9% of total assets.
Intangible assets consist of goodwill and other identified intangible assets
associated with our acquisitions. On at least an annual basis, we assess whether
there has been an impairment in the value of goodwill and other intangible
assets with indefinite lives. If the carrying value of the tested asset exceeds
its estimated fair value, impairment is deemed to have occurred. In this
event, the amount is written down to fair value. Under current accounting
rules, this would result in a charge to operating earnings. Any determination
requiring the write-off of a significant portion of goodwill or unamortized
identified intangible assets would negatively affect our results of operations
and total capitalization, which could be material. Our annual
impairment analysis, performed as of December 31, 2008, did not result in an
impairment charge.
We
cannot predict our future capital needs, and if we are unable to secure
additional financing when needed, our operations and revenues would be adversely
affected.
We may
need to raise additional capital in the future to fund acquisitions, working
capital requirements, expand our markets and program offerings or respond to
competitive pressures or perceived opportunities. We cannot be sure that
additional financing will be available to us on favorable terms, or at all
particularly during times of uncertainty in the financial markets similar to
that which is currently being experienced. If adequate funds are not available
when required or on acceptable terms, we may be forced to forego attractive
acquisition opportunities, cease our operations and, even if we are able to
continue our operations, our ability to increase student enrollment and revenues
would be adversely affected.
Our
schools' failure to comply with environmental laws and regulations governing our
activities could result in financial penalties and other costs which could
adversely impact our results of operations.
We use
hazardous materials at some of our schools and generate small quantities of
waste, such as used oil, antifreeze, paint and car batteries. As a result, our
schools are subject to a variety of environmental laws and regulations
governing, among other things, the use, storage and disposal of solid and
hazardous substances and waste, and the clean-up of contamination at our
facilities or off-site locations to which we send or have sent waste for
disposal. In the event we do not maintain compliance with any of these laws and
regulations, or are responsible for a spill or release of hazardous materials,
we could incur significant costs for clean-up, damages, and fines or penalties
which could adversely impact our results of operations.
Approximately
25% of our schools are concentrated in the states of New Jersey and Pennsylvania
and a change in the general economic or regulatory conditions in these states
could increase our costs and have an adverse effect on our
revenues.
As of
December 31, 2008, we operated 36 campuses in 17 states. Nine of those
schools are located in the states of New Jersey and Pennsylvania. As a result of
this geographic concentration, any material change in general economic
conditions in New Jersey or Pennsylvania could reduce our student enrollment in
our schools located in these states and thereby reduce our revenues. In
addition, the legislatures in the states of New Jersey and/or Pennsylvania could
change the laws in those states or adopt regulations regarding private,
for-profit post-secondary coeducation institutions which could place additional
burdens on us. If we were unable to comply with any such new legislation, we
could be prohibited from operating in those jurisdictions, which could reduce
our revenues.
A
substantial decrease in student financing options, or a significant increase in
financing costs for our students, could have a material adverse affect on our
student population, revenues and financial results.
The
consumer credit markets in the United States have recently suffered from
increases in default rates and foreclosures on mortgages. Adverse
market conditions for consumer and federally guaranteed student loans could
result in providers of alternative loans reducing the attractiveness and/or
decreasing the availability of alternative loans to post-secondary students,
including students with low credit scores who would not otherwise be eligible
for credit-based alternative loans. Prospective students may find that these
increased financing costs make borrowing prohibitively expensive and abandon or
delay enrollment in post-secondary education programs. Private lenders could
also require that we pay them new or increased fees in order to provide
alternative loans to prospective students. If any of these scenarios were to
occur, our students’ ability to finance their education could be adversely
affected and our student population could decrease, which could have a material
adverse effect on our financial condition, results of operations and cash
flows.
In 2008,
six lenders provided funding to more than 90% of the students at the schools we
owned. In addition, the primary guarantors for the Title IV loans of
our students are USA Group, a subsidiary of Sallie Mae, and New Jersey Higher
Education Assistance Authority, an independent agency of the State of New
Jersey. These two agencies currently guarantee a majority of the federally
guaranteed student loans made to students enrolled at our schools. There are six
other guaranty agencies that guarantee student loans made to students enrolled
at our schools. While we believe that other lenders may be willing to make
federally guaranteed student loans to our students if loans were no longer
available from our current lenders, and that other guaranty agencies would be
willing to guarantee loans to our students if any of the current guarantee
agencies ceased guaranteeing those loans or reduced the volume of loans they
guarantee, we cannot assure you that we would be successful in locating
alternative lenders or guarantors. If such alternative lenders or
guarantors were not forthcoming, our enrollment and our results of operations
could be materially and adversely affected.
In
February 2008, Sallie Mae terminated its tiered discount loan program with
us. Students who obtained funding through Sallie Mae programs
continue to have access to funding either through alternative lenders or through
our own internal financing. However, if we opted to no longer provide
financing to our students and/or were unable to obtain other alternative loan
providers, our student population could decrease, which could have a material
adverse effect on our financial condition, results of operations and cash
flows.
In
addition, any actions by the U.S. Congress that significantly reduce funding for
Title IV Programs or the ability of our students to participate in these
programs, or establish different or more stringent requirements for our schools
to participate in Title IV Programs, could have a material adverse effect on our
student population, results of operations and cash flows.
Anti-takeover
provisions in our amended and restated certificate of incorporation, our amended
and restated bylaws and New Jersey law could discourage a change of control that
our stockholders may favor, which could negatively affect our stock
price.
Provisions
in our amended and restated certificate of incorporation and our amended and
restated bylaws and applicable provisions of the New Jersey Business Corporation
Act may make it more difficult and expensive for a third party to acquire
control of us even if a change of control would be beneficial to the interests
of our stockholders. These provisions could discourage potential takeover
attempts and could adversely affect the market price of our common stock. For
example, applicable provisions of the New Jersey Business Corporation Act may
discourage, delay or prevent a change in control by prohibiting us from engaging
in a business combination with an interested stockholder for a period of five
years after the person becomes an interested stockholder. Furthermore, our
amended and restated certificate of incorporation and amended and restated
bylaws:
|
|
·
|
Authorize the issuance of blank
check preferred stock that could be issued by our board of directors to
thwart a takeover attempt;
|
|
|
·
|
Prohibit cumulative voting in the
election of directors, which would otherwise allow holders of less than a
majority of stock to elect some
directors;
|
|
|
·
|
Require super-majority voting to
effect amendments to certain provisions of our amended and restated
certificate of
incorporation;
|
|
|
·
|
Limit who may call special
meetings of both the board of directors and
stockholders;
|
|
|
·
|
Prohibit stockholder action by
non-unanimous written consent and otherwise require all stockholder
actions to be taken at a meeting of the
stockholders;
|
|
|
·
|
Establish advance notice
requirements for nominating candidates for election to the board of
directors or for proposing matters that can be acted upon by stockholders
at stockholders' meetings;
and
|
|
|
·
|
Require that vacancies on the
board of directors, including newly created directorships, be filled only
by a majority vote of directors then in
office.
|
We
can issue shares of preferred stock without shareholder approval, which could
adversely affect the rights of common stockholders.
Our
amended and restated certificate of incorporation permits us to establish the
rights, privileges, preferences and restrictions, including voting rights, of
future series of our preferred stock and to issue such stock without approval
from our stockholders. The rights of holders of our common stock may suffer as a
result of the rights granted to holders of preferred stock that may be issued in
the future. In addition, we could issue preferred stock to prevent a change in
control of our company, depriving common stockholders of an opportunity to sell
their stock at a price in excess of the prevailing market price.
Our
principal stockholder owns a large percentage of our voting stock which allows
it to control substantially all matters requiring shareholder
approval.
Stonington
Partners Inc. II, or Stonington, our principal stockholder, directly or
indirectly holds approximately 58% of our outstanding shares. Accordingly, it
controls us through its ability to determine the outcome of the election of our
directors, to amend our certificate of incorporation and bylaws and to take
other actions requiring the vote or consent of stockholders, including mergers,
going private transactions and other extraordinary transactions, and the terms
of any of these transactions. The ownership positions of this stockholder may
have the effect of delaying, deterring or preventing a change in control or a
change in the composition of our board of directors. In addition, two members of
our board of directors are partners of Stonington. As a result, Stonington has
an added ability to influence certain matters, such as determining compensation
of our executive officers.
A
disposition by our principal stockholder of all or a significant portion of its
shares of our outstanding stock could impact the market price of our shares and
result in a change of control.
In light
of the termination provisions of its fund agreement, Stonington, our largest
stockholder, is currently considering its options with respect to its investment
in us, including selling its shares of our outstanding common stock, in one or
more transactions, over the next 12 to 24 months. A sale by Stonington of all or
a significant portion of its shares of our outstanding common stock, whether to
a single buyer, through open market sales or otherwise, could cause the price of
our common stock to decline. Such a sale could also result in a change of
control under the standards of the DOE and applicable state education agencies
and accrediting commissions. See “Business - Change of Control” and “Risk
Factors -- Risks Related to Our Industry.”
|
ITEM 1B.
|
UNRESOLVED STAFF
COMMENTS
|
None.
ITEM
2. PROPERTIES
As of
December 31, 2008, we leased all of our facilities, except for our West Palm
Beach, Florida campus, our Nashville, Tennessee campus, our Grand Prairie, Texas
campus and our Cincinnati (Tri-County) campus, which we own. Four of our
facilities (Union, New Jersey; Allentown, Pennsylvania; Philadelphia,
Pennsylvania; and Grand Prairie, Texas) were also accounted for by us under a
finance lease obligation. We continue to re-evaluate our facilities to maximize
our facility utilization and efficiency and to allow us to introduce new
programs and attract more students. As of December 31, 2008, all of our existing
leases expire between June 2009 and August 2023.
The
following table provides information relating to our facilities as of
December 31, 2008, including our corporate office:
|
Location
|
Brand
|
Approximate
Square Footage
|
||
|
Union,
New Jersey
|
Lincoln
Technical Institute
|
56,000
|
||
|
Mahwah,
New Jersey
|
Lincoln
Technical Institute
|
79,000
|
||
|
Allentown,
Pennsylvania
|
Lincoln
Technical Institute
|
26,000
|
||
|
Philadelphia,
Pennsylvania
|
Lincoln
Technical Institute
|
30,000
|
||
|
Columbia,
Maryland
|
Lincoln
Technical Institute
|
110,000
|
||
|
Grand
Prairie, Texas
|
Lincoln
Technical Institute
|
146,000
|
||
|
Queens,
New York
|
Lincoln
Technical Institute
|
48,000
|
||
|
Edison,
New Jersey
|
Lincoln
Technical Institute
|
64,000
|
||
|
Mt.
Laurel, New Jersey
|
Lincoln
Technical Institute
|
26,000
|
||
|
Philadelphia,
Pennsylvania
|
Lincoln
Technical Institute
|
29,000
|
||
|
Northeast
Philadelphia, Pennsylvania
|
Lincoln
Technical Institute
|
25,000
|
||
|
Paramus,
New Jersey
|
Lincoln
Technical Institute
|
27,000
|
||
|
Brockton,
Massachusetts
|
Lincoln
Technical Institute
|
22,000
|
||
|
Lincoln,
Rhode Island
|
Lincoln
Technical Institute
|
59,000
|
||
|
Lowell,
Massachusetts
|
Lincoln
Technical Institute
|
20,000
|
||
|
Somerville,
Massachusetts
|
Lincoln
Technical Institute
|
33,000
|
||
|
New
Britain, Connecticut
|
Lincoln
Technical Institute
|
35,000
|
||
|
Cromwell,
Connecticut
|
Lincoln
Technical Institute
|
12,000
|
||
|
Hamden,
Connecticut
|
Lincoln
Technical Institute
|
14,000
|
||
|
Shelton,
Connecticut
|
Lincoln
Technical Institute
|
42,000
|
||
|
Indianapolis,
Indiana
|
Lincoln College
of Technology
|
189,000
|
||
|
Melrose
Park, Illinois
|
Lincoln College
of Technology
|
77,000
|
||
|
Denver,
Colorado
|
Lincoln College
of Technology
|
78,000
|
||
|
Norcross,
Georgia
|
Lincoln College
of Technology
|
7,000
|
||
|
Marietta,
Georgia
|
Lincoln College
of Technology
|
30,000
|
||
|
Henderson,
Nevada*
|
Lincoln College
of Technology
|
27,000
|
||
|
West
Palm Beach, Florida
|
Lincoln College
of Technology and Florida Culinary Institute
|
117,000
|
||
|
Nashville,
Tennessee
|
Nashville Auto-Diesel College
|
278,000
|
||
|
Dayton,
Ohio
|
Southwestern
College
|
15,000
|
||
|
Franklin,
Ohio
|
Southwestern
College
|
14,000
|
||
|
Cincinnati,
Ohio
|
Southwestern
College
|
14,000
|
||
|
Cincinnati
(Tri-County), Ohio
|
Southwestern
College
|
35,000
|
||
|
Florence,
Kentucky
|
Southwestern
College
|
11,000
|
||
|
Toledo,
Ohio
|
Southwestern
College
|
16,000
|
||
|
Las
Vegas, Nevada
|
Euphoria
Institute
|
13,000
|
||
|
Henderson,
Nevada
|
Euphoria
Institute
|
20,000
|
||
|
North
Las Vegas, Nevada
|
Euphoria
Institute
|
12,000
|
||
|
Southington,
Connecticut
|
Briarwood College
|
113,000
|
||
|
West
Orange, New Jersey
|
Corporate
Office
|
47,000
|
*Operations
at this campus has ceased as of September 30, 2007.
We
believe that our facilities are suitable for their present intended
purposes.
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
In the
ordinary conduct of our business, we are subject to periodic lawsuits,
investigations and claims, including, but not limited to, claims involving
students or graduates and routine employment matters. Although we cannot predict
with certainty the ultimate resolution of lawsuits, investigations and claims
asserted against us, we do not believe that any currently pending legal
proceeding to which we are a party will have a material adverse effect on our
business, financial condition, results of operation or cash flows.
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
There
were no matters submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of
2008.
PART
II.
|
ITEM 5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
|
Market
for our Common Stock
Our
common stock is quoted on the Nasdaq Global Market under the symbol
“LINC”.
The
following table sets forth the range of high and low sales prices per share for
our common stock, as reported by the Nasdaq Global Market, for the periods
indicated:
|
Price
Range of Common Stock
|
||||||||
|
High
|
Low
|
|||||||
|
Fiscal
Year Ended December 31, 2008:
|
||||||||
|
First
Quarter
|
$ | 14.55 | $ | 11.62 | ||||
|
Second
Quarter
|
$ | 12.55 | $ | 10.79 | ||||
|
Third
Quarter
|
$ | 15.64 | $ | 11.23 | ||||
|
Fourth
Quarter
|
$ | 14.46 | $ | 10.75 | ||||
|
Price
Range of Common Stock
|
||||||||
|
High
|
Low
|
|||||||
|
Fiscal
Year Ended December 31, 2007:
|
||||||||
|
First
Quarter
|
$ | 14.21 | $ | 11.58 | ||||
|
Second
Quarter
|
$ | 15.79 | $ | 13.64 | ||||
|
Third
Quarter
|
$ | 15.60 | $ | 12.56 | ||||
|
Fourth
Quarter
|
$ | 15.43 | $ | 13.10 | ||||
On March
11, 2009, the last reported sale price of our common stock on the Nasdaq Global
Market was $16.79 per share. As of March 11, 2009, based on the
information provided by Continental Stock Transfer & Trust Company, there
were approximately 18 stockholders of record of our common stock.
Dividend
Policy
We have
never declared or paid dividends on our common stock and we do not anticipate
declaring or paying dividends on our common stock in the foreseeable
future. Instead, we currently anticipate that we will retain all of
our future earnings, if any, to fund the operation and expansion of our business
and to use as working capital and for other general corporate
purposes. Our board of directors will determine whether to pay cash
dividends in the future based on conditions then existing and the financial
responsibility standards prescribed by the DOE, as well as any economic and
other conditions that our board of directors may deem relevant. In
addition, our ability to declare and pay dividends is subject to certain
restrictions under our existing credit agreement.
Issuer
Purchases of Equity Securities
On April
1, 2008, our Board of Directors approved the repurchase of up to 1,000,000
shares of our common stock over the period of one year. The following
table outlines repurchases of our common stock during the quarter ended December
31, 2008:
|
Period
|
Total
Number of
Shares |
Average Price
Paid |
Total
Number
of |
Maximum
Number
of Shares
That
May
Yet
Be
Purchased
|
||||||||||||
|
October
1, 2008 -- October 31, 2008
|
-- | -- | -- | 400,000 | ||||||||||||
|
November
1, 2008 -- November 30, 2008
|
15,000 | $ | 13.90 | 15,000 | 385,000 | |||||||||||
|
December
1, 2008 -- December 31, 2008
|
-- | -- | -- | 385,000 | ||||||||||||
|
Total
|
15,000 | $ | 13.90 | 15,000 | 385,000 | |||||||||||
Stock
Performance Graph
This
stock performance graph compares the Company’s total cumulative stockholder
return on its common stock during the period from June 23, 2005 (the date on
which our common stock first traded on the Nasdaq Global Market) through
December 31, 2008 with the cumulative return on the Russell 2000 Index and a
Peer Issuer Group Index. The peer issuer group consists of the companies
identified below, which were selected on the basis of the similar nature of
their business. The graph assumes that $100 was invested on June 23, 2005, and
any dividends were reinvested on the date on which they were paid.
The
information provided under the heading "Stock Performance Graph" shall not be
considered "filed" for purposes of Section 18 of the Securities Exchange Act of
1934 or incorporated by reference in any filing under the Securities Act of 1933
or the Securities Exchange Act of 1934, except to the extent that the Company
specifically incorporates it by reference into a filing.
Companies
in the Peer Group include Apollo Group, Inc., Corinthian Colleges, Inc., Career
Education Corp., DeVry, Inc., ITT Educational Services, Inc., Strayer Education,
Inc. and Universal Technical Institute, Inc.
Securities
Authorized for Issuance under Equity Compensation Plans
The
Company has various equity compensation plans under which equity securities are
authorized for issuance. Information regarding these securities as of
December 31, 2008 is as follows:
|
|
|
|
Plan
Category
|
Number
of Securities to be issued upon exercise of outstanding options, warrants
and rights
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in
column
|
|||||||||
|
Equity
compensation plans approved by security holders
|
1,474,215 | $ | 9.98 | 603,336 | ||||||||
|
Equity
compensation plans not approved by security holders
|
- | - | - | |||||||||
|
Total
|
1,474,215 | $ | 9.98 | 603,336 | ||||||||
|
ITEM 6.
|
SELECTED FINANCIAL DATA
|
SELECTED
FINANCIAL INFORMATION
The
following table sets forth our selected historical consolidated financial and
operating data as of the dates and for the periods indicated. You should read
these data together with Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and the notes thereto included in Part II. Item 8 of this filing. The
selected historical consolidated statement of income data for each of the years
in the three-year period ended December 31, 2008 and historical
consolidated balance sheet data at December 31, 2008 and 2007 have been derived
from our audited consolidated financial statements which are included elsewhere
in this Form 10-K. The selected historical consolidated statements of income
data for the fiscal years ended December 31, 2005 and 2004 and historical
consolidated balance sheet data as of December 31, 2006, 2005 and 2004 have
been derived from our audited consolidated financial information not included in
this Form 10-K. Our historical results are not necessarily indicative of our
future results.
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
(In
thousands, except per share amounts)
|
||||||||||||||||||||
|
Statement
of Income Data, Year Ended December 31:
|
||||||||||||||||||||
|
Revenues
|
$ | 376,907 | $ | 327,774 | $ | 310,630 | $ | 287,368 | $ | 248,508 | ||||||||||
|
Cost
and expenses:
|
||||||||||||||||||||
|
Educational
services and facilities
|
153,530 | 139,500 | 129,311 | 114,161 | 97,439 | |||||||||||||||
|
Selling,
general and administrative (1)
|
187,722 | 162,396 | 151,136 | 138,125 | 124,034 | |||||||||||||||
|
(Gain)
loss on sale of assets
|
80 | (15 | ) | (435 | ) | (7 | ) | 368 | ||||||||||||
|
Total
costs and expenses
|
341,332 | 301,881 | 280,012 | 252,279 | 221,841 | |||||||||||||||
|
Operating
income
|
35,575 | 25,893 | 30,618 | 35,089 | 26,667 | |||||||||||||||
|
Other:
|
||||||||||||||||||||
|
Interest
income
|
113 | 180 | 981 | 775 | 104 | |||||||||||||||
|
Interest
expense (2)
|
(2,152 | ) | (2,341 | ) | (2,291 | ) | (2,892 | ) | (3,002 | ) | ||||||||||
|
Other
(loss) income
|
- | 27 | (132 | ) | 243 | 42 | ||||||||||||||
|
Income
from continuing operations before income taxes
|
33,536 | 23,759 | 29,176 | 33,215 | 23,811 | |||||||||||||||
|
Provision
for income taxes
|
13,341 | 9,932 | 12,092 | 12,931 | 9,904 | |||||||||||||||
|
Income
from continuing operations
|
20,195 | 13,827 | 17,084 | 20,284 | 13,907 | |||||||||||||||
|
Loss
from discontinued operations, net of income taxes
|
- | (5,487 | ) | (1,532 | ) | (1,575 | ) | (929 | ) | |||||||||||
|
Net
income
|
$ | 20,195 | $ | 8,340 | $ | 15,552 | $ | 18,709 | $ | 12,978 | ||||||||||
|
Basic
|
||||||||||||||||||||
|
Earnings
per share from continuing operations
|
$ | 0.80 | $ | 0.54 | $ | 0.67 | $ | 0.86 | $ | 0.64 | ||||||||||
|
Loss
per share from discontinued operations
|
- | (0.21 | ) | (0.06 | ) | (0.06 | ) | (0.04 | ) | |||||||||||
|
Net
income per share
|
$ | 0.80 | $ | 0.33 | $ | 0.61 | $ | 0.80 | $ | 0.60 | ||||||||||
|
Diluted
|
||||||||||||||||||||
|
Earnings
per share from continuing operations
|
$ | 0.78 | $ | 0.53 | $ | 0.65 | $ | 0.83 | $ | 0.60 | ||||||||||
|
Loss
per share from discontinued operations
|
- | (0.21 | ) | (0.05 | ) | (0.07 | ) | (0.04 | ) | |||||||||||
|
Net
income per share
|
$ | 0.78 | $ | 0.32 | $ | 0.60 | $ | 0.76 | $ | 0.56 | ||||||||||
|
Weighted
average number of common shares outstanding:
|
||||||||||||||||||||
|
Basic
|
25,308 | 25,479 | 25,336 | 23,475 | 21,676 | |||||||||||||||
|
Diluted
|
25,984 | 26,090 | 26,086 | 24,503 | 23,095 | |||||||||||||||
|
Other
Data:
|
||||||||||||||||||||
|
Capital
expenditures
|
$ | 20,166 | $ | 24,766 | $ | 19,341 | $ | 22,621 | $ | 23,813 | ||||||||||
|
Depreciation
and amortization from continuing operations
|
17,920 | 15,111 | 13,829 | 12,099 | 9,870 | |||||||||||||||
|
Number
of campuses
|
36 | 34 | 34 | 31 | 25 | |||||||||||||||
|
Average
student population
|
20,006 | 17,687 | 17,397 | 17,064 | 15,401 | |||||||||||||||
|
Balance
Sheet Data, At December 31:
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 15,234 | $ | 3,502 | $ | 6,461 | $ | 50,257 | $ | 41,445 | ||||||||||
|
Working
(deficit) capital (3)
|
(19,840 | ) | (17,952 | ) | (20,943 | ) | 8,531 | 4,570 | ||||||||||||
|
Total
assets
|
268,042 | 246,183 | 226,216 | 214,792 | 162,729 | |||||||||||||||
|
Total
debt (4)
|
10,174 | 15,378 | 9,860 | 10,768 | 46,829 | |||||||||||||||
|
Total
stockholders' equity
|
174,949 | 162,467 | 151,783 | 135,990 | 58,086 | |||||||||||||||
(1) Selling, general and
administrative expenses include (a) a $2.1 million charge for the year
ended December 31, 2004 to give effect to the one-time write-off of
deferred offering costs, (b) compensation costs of approximately $2.2
million, $1.8 million, $1.4 million, $1.3 million and
$1.8 million for the years ended December 31, 2008, 2007, 2006, 2005
and 2004, respectively, related to SFAS No. 123R, "Share Based Payment,"
(c) a $0.7 million one-time non-cash charge for the year ended
December 31, 2004 related to the timing of rent expense for our schools
during the period of construction of leasehold improvements and to align the
depreciation lives of our leasehold improvements to the terms of our
noncancellable leases, including renewal options, (d) a $0.5 million write-off
for the year ended December 31, 2005 resulting from our decision not to purchase
the site we had considered for expansion of our facility in Philadelphia,
Pennsylvania, (e) $0.9 million of re-branding cost for the year ended December
31, 2006, and (f) $0.9 million of acquisition costs incurred during the
year ended December 31, 2008 in connection with the acquisition of Baran which
was completed on January 20, 2009 and expensed in accordance with the transition
guidance for SFASB No. 141R.
(2) Interest expense
includes a $0.4 million non-cash charge for the year ended
December 31, 2005 resulting from the write-off of deferred finance costs
under our previous credit agreement.
(3)
Working (deficit)
capital is defined as current assets less current liabilities.
(4) Total debt consists of
long-term debt including current portion, capital leases, auto loans and a
finance obligation of $9.7 million for each of the years in the five-year
period ended December 31, 2008 incurred in connection with a sale-leaseback
transaction as further described in Note 9 to the consolidated financial
statements included in Part II. Item 8 of this Form 10-K.
|
ITEM 7.
|
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
|
You
should read the following discussion together with the “Selected Financial
Data,” “Forward Looking Statements” and the consolidated financial statements
and the related notes thereto included elsewhere in this Form 10-K. This
discussion contains forward-looking statements that are based on management’s
current expectations, estimates and projections about our business and
operations. Our actual results may differ materially from those currently
anticipated and expressed in such forward-looking statements as a result of a
number of factors, including those we discuss under “Risk Factors,” “Forward
Looking Statements” and elsewhere in this Form 10-K.
GENERAL
We are a
leading and diversified for-profit provider of career-oriented post-secondary
education. We offer recent high school graduates and working adults degree and
diploma programs in five areas of study: automotive technology, health sciences,
skilled trades, business and information technology and hospitality services.
Each area of study is specifically designed to appeal to and meet the
educational objectives of our student population, while also satisfying the
criteria established by industry and employers. The resulting diversification
limits dependence on any one industry for enrollment growth or placement
opportunities and broadens potential branches for introducing new programs. As
of December 31, 2008, we enrolled 21,667 students at our 36 campuses across 17
states. Our campuses primarily attract students from their local communities and
surrounding areas, although our five destination schools attract students from
across the United States, and in some cases, from abroad.
From 1999
through December 31, 2008, we increased our geographic footprint and added
18 additional schools through our acquisitions of: Denver Automotive &
Diesel College in 2000 (one school), Career Education Institute in 2001 (two
schools), Nashville Auto-Diesel College in 2003 (one school), Southwestern
College in 2004 (five schools), New England Technical Institute (four schools)
in January 2005, Euphoria Institute of Beauty Arts and Sciences (two schools) in
December 2005, New England Institute of Technology at Palm Beach, Inc. in May
2006 (two schools) and Briarwood College in December 2008 (one school). Our
campuses, a majority of which serve major metropolitan markets, are located
throughout the United States. Five of our campuses are destination schools,
which attract students from across the United States and, in some cases, from
abroad. Our other campuses primarily attract students from their local
communities and surrounding areas. All of our schools are nationally accredited
and are eligible to participate in federal financial aid programs. In connection
with each of our acquisitions of New England Technical Institute, New England
Institute of Technology at Palm Beach and Briarwood College, we received an
executed provisional program participation agreement in connection with the
acquisition, from the DOE.
Our
revenues consist primarily of student tuition and fees derived from the programs
we offer. Our revenues are reduced by our scholarships granted to our
students. We recognize revenues from tuition and one-time fees, such as
application fees, ratably over the length of a program, including internships or
externships that take place prior to graduation. We also earn revenues from our
bookstores, dormitories, cafeterias and contract training services. These
non-tuition revenues are recognized upon delivery of goods or as services are
performed and represent less than 10% of our revenues.
Tuition
varies by school and by program and on average we increase tuition once a year
by 2% to 5%. Our ability to raise tuition is influenced by the demand for our
programs and by the rate of tuition increase at other post-secondary schools. If
historical trends continue, we expect to be able to continue to raise tuition
annually at comparable rates.
We have
historically enjoyed revenue growth as a result of strategic acquisitions
coupled with organic growth. We have enjoyed organic growth every
year except for 2006. Our revenues increased 15.0% in 2008 and 5.5%
in 2007, over the prior years as we grew from 34 campuses at December 31,
2007 to 36 campuses at December 31, 2008. Our average student population
increased from 17,687 for the year ended December 31, 2007 to 20,006 for
the year ended December 31, 2008. While we expect to increase our revenues
and enrollment in the foreseeable future as a result of both organic growth and
strategic acquisitions, we can give no assurance as to our ability to continue
to increase our revenues at historical rates and expect our rate of revenue
increases to moderate over time as we become a larger and more mature
company.
Our
operating expenses, while also a function of our revenue growth, contain a high
fixed cost component. Our educational services and facilities expenses as a
percentage of revenues decreased to 40.7% in 2008 from 42.6% in 2007 and 41.6%
in 2006, and selling, general and administrative expenses increased as a
percentage of revenue to 49.9% in 2008 from 49.5% in 2007 and 48.7% in 2006. We
expect that in the future these expenses will decline slightly as a percentage
of revenues as we achieve better operating efficiencies and utilization at our
schools.
Our
revenues are directly dependent on our average number of students enrolled and
the courses in which they are enrolled. Our enrollment is influenced by the
number of new students starting, re-entering, graduating and withdrawing from
our schools. In addition, our programs range from 14 to 102 weeks and students
attend classes for different amounts of time per week depending on the school
and program in which they are enrolled. Because we start new students every
month, our total student population changes monthly. The number of students
enrolling or re-entering our programs each month is driven by the demand for our
programs, the effectiveness of our marketing and advertising, the availability
of financial aid and other sources of funding, the number of recent high school
graduates, the job market and seasonality. Our retention and graduation rates
are influenced by the quality and commitment of our teachers and student
services personnel, the effectiveness of our programs, the placement rate and
success of our graduates and the availability of financial aid. Although similar
courses have comparable tuition rates, the tuition rates vary among our numerous
programs. As more of our schools receive approval to offer associate degree
programs, which are longer than our diploma degree programs, we would expect our
average enrollment and the average length of stay of our students to
increase.
The
majority of students enrolled at our schools rely on funds received under
various government-sponsored student financial aid programs to pay a substantial
portion of their tuition and other education-related expenses. The largest of
these programs are Title IV Programs which represented approximately 79% of our
cash receipts relating to revenues in 2008.
We extend
credit for tuition and fees to many of our students that are in attendance in
our campuses. Our credit risk is mitigated through the student’s participation
in federally funded financial aid programs unless students withdraw prior to the
receipt by us of Title IV funds for those students. Under Title IV programs, the
government funds a certain portion of a students’ tuition, with the remainder,
referred to as “the gap,” financed by students themselves under private party
loans, including credit extended by us. The gap amount has continued to increase
over the last several years as we have raised tuition on average for the last
several years by 2% to 5% per year, while funds received from Title IV programs
have remained constant. Thus, a significant number of students are required to
finance amounts that could be as much as $15,000 per year.
We
entered into a tiered discount loan program agreement, effective September 1,
2007, with SLM Financial Corporation (“SLM”) to provide up to $16.0 million of
private non-recourse loans to qualifying students. Under this
agreement, we were required to pay SLM either 20% or 30% of all loans disbursed,
depending on each student borrower’s credit score. We were billed at
the beginning of each month based on loans disbursed during the prior month. For
the year ended December 31, 2008, $0.5 million of loans were disbursed,
resulting in a $0.1 million loss on sale of receivables. Loss on sale
of receivables is included in selling, general and administrative expenses in
our financial statements.
In
February 2008, SLM terminated its tiered discount loan program with
us. It is our understanding that SLM also terminated its tiered
discount loan programs with our peer companies. The College Cost Reduction &
Access Act, which was signed into law in September 2007, cut approximately $22
billion in subsidies to federal student lenders and guarantors as an offset to
increases in federal financial aid. This resulted in significant
changes to the terms that alternative lending providers including SLM were
willing to make and resulted in the termination of the tiered discount loan
programs described above. As a result of the costs associated with
these programs and, in anticipation of additional changes, we concluded that the
cost of using the tiered discount loan program was too high and would lead to
significant margin erosion over time and that we would be better served by
financing the gap between Title IV and tuition internally, while also examining
other alternative loan sources.
We
believe that SLM’s termination of its tiered discount loan program will continue
to have a limited impact on our business. Our current expectations
are that students who previously received funding through the program will
continue to have access to funding either through alternative lenders or through
our own internal financing.
The
additional financing that we are providing to students may expose us to greater
credit risk and can impact our liquidity. We believe that these risks are
however somewhat mitigated due to:
|
|
·
|
Annual
federal Title IV loan limits, including grants have
increased. Title IV funds represented 79% of our 2008 revenue
on a cash basis;
|
|
|
·
|
Our
internal financing is provided to students only after all other funding
resources have been exhausted; thus, by the time this funding is
available, students have completed approximately two-thirds of their
curriculum and are more likely to
graduate;
|
|
|
·
|
Funding
for students who interrupt their education is typically covered by Title
IV funds as long as they have been properly packaged for financial aid;
and
|
|
|
·
|
We
have an excellent collection history with our
graduates. Historically, 90% of all graduates have repaid their
balances in full.
|
For the
year ended December 31, 2008, approximately 79% of our revenue on a cash basis
was derived from Title IV funds, approximately 13% was derived from state grants
and cash payments made by students, and approximately 4% was funded under
third-party private loan programs, which included SLM programs. For
the year ended December 31, 2007, approximately 80% of our revenue on a cash
basis was derived from Title IV funds approximately 13% was derived from state
grants and cash payments made by students, and approximately 7% was funded under
third-party private loan programs, which include SLM programs. Of the
private loan programs funded during 2007, approximately 4.6% would be considered
sub-prime loans. The credit crisis that has impacted the financial
markets is expected to have a limited impact on our ability to continue to
finance our credit worthy students. There are a number of lenders
that will finance the Title IV funds or alternatively we may choose to finance
Title IV funds directly with the government under the government’s Direct Loan
Program. Additionally, we have several alternative lenders that will
provide private party loans to credit worthy students. In addition,
commencing in late 2007, we decided to assist students in financing the gap in
student tuition for which students are unable to obtain third-party
financing. As of December 31, 2008, we had outstanding loan
commitments to our students of $24.0 million as compared to $15.7 million at
December 31, 2007. Loan commitments, net of interest that would be
due on the loans through maturity, were $16.5 million at December 31, 2008 as
compared to $10.8 million at December 31, 2007. Assuming that our
historical trends continue, we expect that in 2009 our net incremental
investment in accounts receivable will not exceed $5.0 million.
As a
result of the above, during 2008 our bad debt expense as a percentage of
revenues increased to 5.7% from 5.3% and 4.9%, respectively, in 2007 and
2006.
All
institutions participating in Title IV Programs must satisfy specific standards
of financial responsibility. The DOE evaluates institutions for compliance with
these standards each year, based on the institution’s annual audited financial
statements, as well as following a change in ownership resulting in a change of
control of the institution.
Based on
audited financial statements for the 2008, 2007 and 2006 fiscal years our
calculations resulted in a composite score of 1.8, 1.8 and 1.7,
respectively.
The
operating expenses associated with an existing school do not increase
proportionally as the number of students enrolled at the school increases. We
categorize our operating expenses as (1) educational services and
facilities and (2) selling, general and administrative.
|
|
·
|
Major components of educational
services and facilities expenses include faculty compensation and
benefits, expenses of books and tools, facility rent, maintenance,
utilities, depreciation and amortization of property and equipment used in
the provision of education services and other costs directly associated
with teaching our programs and providing educational services to our
students.
|
|
|
·
|
Selling, general and
administrative expenses include compensation and benefits of employees who
are not directly associated with the provision of educational services
(such as executive management and school management, finance and central
accounting, legal, human resources and business development), marketing
and student enrollment expenses (including compensation and benefits of
personnel employed in sales and marketing and student admissions), costs
to develop curriculum, costs of professional services, bad debt expense,
rent for our corporate headquarters, depreciation and amortization of
property and equipment that is not used in the provision of educational
services and other costs that are incidental to our operations. All
marketing and student enrollment expenses are recognized in the period
incurred.
|
We use
advertising to attract a substantial portion of our yearly student enrollment.
While we utilize a mix of different advertising mediums, including television,
internet and direct mail, we rely heavily on television and internet
advertising. The cost of television advertising has been increasing faster than
the pace of student tuition increases and the cost of living index. Continued
increases in the cost of television advertising may have a material impact on
our operating margins.
During
the third quarter of 2007, we completed the roll-out of our new student
management and reporting system to all of our campuses. We believe that our
student management and reporting system will improve services to students and
our ability to integrate new schools into our operations, if and when new
schools are opened or acquired. The costs associated with the implementation of
this new system are included in selling, general and administrative expenses and
were approximately $0.6 million and $0.4 million, respectively, for the two
years ended December 31, 2007. No additional costs were incurred in
2008.
Costs
related to developing and starting-up new facilities are expensed as incurred.
Costs related to our start up facility in Queens, New York, which opened March
27, 2006, were approximately $0.9 million for 2006.
DISCONTINUED
OPERATIONS
On July
31, 2007, our Board of Directors approved a plan to cease operations at our
Plymouth Meeting, Pennsylvania, Norcross, Georgia and Henderson, Nevada
campuses. As a result, we reviewed the related goodwill and
long-lived assets for possible impairment in accordance with SFAS No. 142,
“Goodwill and Other Intangible
Assets,” and SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.”
As of
September 30, 2007, all operations had ceased at these campuses and,
accordingly, the results of operations of these campuses have been reflected in
the accompanying statements of operations as “Discontinued Operations” for all
periods presented.
The
results of operations at these three campuses for each of the two year period
ended December 31, 2007 were comprised of the following (in
thousands):
|
Year
Ended December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Revenue
|
$ | 4,230 | $ | 10,876 | ||||
|
Operating
Expenses
|
(13,760 | ) | (13,493 | ) | ||||
| (9,530 | ) | (2,617 | ) | |||||
|
Benefit
for income taxes
|
(4,043 | ) | (1,085 | ) | ||||
|
Loss
from discontinued operations
|
$ | (5,487 | ) | $ | (1,532 | ) | ||
ACQUISITIONS
Acquisitions
have been, and will continue to be, a component of our growth strategy. We have
a team of professionals who conduct financial, operational and regulatory due
diligence as well as a team that integrates acquisitions with our policies,
procedures and systems.
On
January 20, 2009, we completed the acquisition of four of the five institutions
comprising Baran Institute of Technology, or Baran, for approximately $24.9
million in cash, net of cash acquired, subject to contractual post closing
adjustments. Baran consists of five distinct institutions serving
approximately 1,900 students and offers associate and diploma programs in the
fields of automotive, skilled trades, health sciences and culinary
arts. The four institutions we acquired on January 20, 2009 are Baran
Institute of Technology, or BIT, Connecticut Culinary Institute, or CCI,
Americare School of Nursing, or ASN, and Engine City Technical Institute, or
ECTI. We also acquired the membership interests of Hartford Urban
Ventures, LLC and certain assets and assumed certain liabilities of Educational
Properties, LLC, which provide support services to Baran. We expect to
acquire the fifth Baran institution, Clemens College, for an additional $3.0
million in the second quarter of 2009.
On
December 1, 2008, we acquired all of the rights, title and interest in the
assets of Briarwood College (“BRI”) for approximately $10.5 million, net of
cash acquired. Briarwood is regionally accredited by the New England
Association of Schools and Colleges, and currently offers two bachelor’s degree
programs to approximately 550 students as of December 31, 2008 from Connecticut
and surrounding states.
On May
22, 2006, a wholly-owned subsidiary of the Company, acquired all of the
outstanding common stock of New England Institute of Technology at Palm Beach,
Inc., or FLA, for approximately $40.1 million. The purchase price was $32.9
million, net of cash acquired plus the assumption of a mortgage note for $7.2
million. The FLA purchase price has been allocated to identifiable net assets
with the excess of the purchase price over the estimated fair value of the net
assets acquired recorded as goodwill.
CRITICAL ACCOUNTING POLICIES
AND ESTIMATES
Our
discussions of our financial condition and results of operations are based upon
our consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America,
or GAAP. The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the period. On an ongoing
basis, we evaluate our estimates and assumptions, including those related to
revenue recognition, bad debts, fixed assets, goodwill and other intangible
assets, income taxes and certain accruals. Actual results could differ from
those estimates. The critical accounting policies discussed herein are not
intended to be a comprehensive list of all of our accounting policies. In many
cases, the accounting treatment of a particular transaction is specifically
dictated by GAAP and does not result in significant management judgment in the
application of such principles. There are also areas in which management's
judgment in selecting any available alternative would not produce a materially
different result from the result derived from the application of our critical
accounting policies. We believe that the following accounting policies are most
critical to us in that they represent the primary areas where financial
information is subject to the application of management's estimates, assumptions
and judgment in the preparation of our consolidated financial
statements.
Revenue
recognition. Revenues are derived primarily from
programs taught at our schools. Tuition revenues and one-time fees, such as
nonrefundable application fees, and course material fees are recognized on a
straight-line basis over the length of the applicable program, which is the
period of time from a student's start date through his or her graduation date,
including internships or externships that take place prior to graduation. If a
student withdraws from a program prior to a specified date, any paid but
unearned tuition is refunded. Refunds are calculated and paid in accordance with
federal, state and accrediting agency standards. Other revenues, such as
textbook sales, tool sales and contract training revenues are recognized as
services are performed or goods are delivered. On an individual student basis,
tuition earned in excess of cash received is recorded as accounts receivable,
and cash received in excess of tuition earned is recorded as unearned
tuition.
Allowance for
uncollectible accounts. Based upon experience and
judgment, we establish an allowance for uncollectible accounts with respect to
tuition receivables. We use an internal group of collectors, augmented by
third-party collectors as deemed appropriate, in our collection efforts. In
establishing our allowance for uncollectible accounts, we consider, among other
things, a student's status (in-school or out-of-school), whether or not
additional financial aid funding will be collected from Title IV Programs or
other sources, whether or not a student is currently making payments, and
overall collection history. Changes in trends in any of these areas may impact
the allowance for uncollectible accounts. The receivables balances of withdrawn
students with delinquent obligations are reserved for based on our collection
history. Although we believe that our reserves are adequate, if the financial
condition of our students deteriorates, resulting in an impairment of their
ability to make payments, additional allowances may be necessary, which will
result in increased selling, general and administrative expenses in the period
such determination is made.
Our bad
debt expense as a percentage of revenues for the years ended December 31,
2008, 2007 and 2006 was 5.7%, 5.3% and 4.9%, respectively. Our exposure to
changes in our bad debt expense could impact our operations. A 1% increase in
our bad debt expense as a percentage of revenues for the years ended
December 31, 2008, 2007 and 2006 would have resulted in an increase in bad
debt expense of $3.8 million, $3.3 million and $3.1 million,
respectively.
Because a
substantial portion of our revenues is derived from Title IV Programs, any
legislative or regulatory action that significantly reduces the funding
available under Title IV Programs or the ability of our students or schools to
participate in Title IV Programs could have a material effect on the
realizability of our receivables.
Goodwill. We
test our goodwill for impairment annually, or whenever events or changes in
circumstances indicate an impairment may have occurred, by comparing its fair
value to its carrying value. Impairment may result from, among other things,
deterioration in the performance of the acquired business, adverse market
conditions, adverse changes in applicable laws or regulations, including changes
that restrict the activities of the acquired business, and a variety of other
circumstances. If we determine that impairment has occurred, we are required to
record a write-down of the carrying value and charge the impairment as an
operating expense in the period the determination is made. In evaluating the
recoverability of the carrying value of goodwill and other indefinite-lived
intangible assets, we must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of the acquired assets.
Changes in strategy or market conditions could significantly impact these
judgments in the future and require an adjustment to the recorded
balances.
As
discussed in “Discontinued Operations” above, as a result of a decision to close
three of our campuses we conducted a review of our goodwill as of June 30,
2007. In connection with that review, we recognized a non-cash
impairment charge of approximately $2.1 million as of June 30,
2007. Goodwill represents a significant portion of our total assets.
As of December 31, 2008, goodwill was approximately $91.5 million, or 34.1%, of
our total assets. As of December 31, 2008 and 2007, we tested our
goodwill for impairment utilizing a market capitalization approach and
determined that we did not have an impairment.
Stock-based
compensation. We currently account for stock-based
employee compensation arrangements in accordance with the provisions of SFAS No.
123R, “Share Based
Payment.” Effective January 1, 2004, we elected to change our
accounting policies from the use of the intrinsic value method of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock-Based
Compensation" to the fair value-based method of accounting for options as
prescribed by SFAS No. 123 “Accounting for Stock-Based
Compensation”. As permitted under SFAS No. 148, "Accounting for Stock-Based
Compensation—Transitions and Disclosure—an amendment to SFAS Statement
No. 123," we elected to retroactively restate all periods presented.
Because no market for our common stock existed prior to our initial public
offering, our board of directors determined the fair value of our common stock
based upon several factors, including our operating performance, forecasted
future operating results, and our expected valuation in an initial public
offering.
Prior to
our initial public offering, we valued the exercise price of options issued to
employees using a market based approach. This approach took into consideration
the value ascribed to our competitors by the market. In determining the fair
value of an option at the time of grant, we reviewed contemporaneous information
about our peers, which included a variety of market multiples, including, but
not limited to, revenue, EBITDA, net income, historical growth rates and
market/industry focus. During 2004, the value we ascribed to stock options
granted was based upon our anticipated initial public offering as well as
discussions with our investment advisors. Due to the number of peer companies in
our sector, we believed using public company comparisons provided a better
indication of how the market values companies in the for-profit post secondary
education sector.
During
2005, we adopted the provisions of SFAS No. 123R, “Share Based Payment”. The
adoption of SFAS No. 123R did not have a material impact on our financial
statements.
The fair
value of the stock options used to compute stock-based compensation is the
estimated present value at the date of grant using the Black-Scholes option
pricing model. The weighted average fair values of options granted during 2008,
2007, and 2006 were $6.69, $6.78, and $9.68, respectively, using the following
weighted average assumptions for grants:
|
At
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
|
|||||||||
|
Expected
volatility
|
57.23 | % | 55.42 | % | 55.10 | % | ||||||
|
Expected
dividend yield
|
0 | % | 0 | % | 0 | % | ||||||
|
Expected
life (term)
|
6
Years
|
6
Years
|
6
Years
|
|||||||||
|
Risk-free
interest rate
|
2.76-3.29 | % | 4.36 | % | 4.13-4.84 | % | ||||||
|
Weighted-average
exercise price during the year
|
$ | 11.97 | $ | 11.96 | $ | 17.00 | ||||||
The
expected volatility considers the volatility of certain of our competitors’
common stock that has been traded for a period commensurate with the expected
life. The expected term of options granted represents the period of
time that options granted are expected to be outstanding. The risk-free rate
used is based on the published U.S. Treasury yield curve in effect at the time
of grant for instruments with a similar life. The dividend yield is
0% as we have never declared or paid dividends on our common stock and we do not
anticipate declaring or paying dividends on our common stock in the foreseeable
future.
Results
of Continuing Operations for the Three Years Ended December 31,
2008
The
following table sets forth selected consolidated statements of continuing
operations data as a percentage of revenues for each of the periods
indicated:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Revenues
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Costs
and expenses:
|
||||||||||||
|
Educational
services and facilities
|
40.7 | % | 42.6 | % | 41.6 | % | ||||||
|
Selling,
general and administrative
|
49.9 | % | 49.5 | % | 48.7 | % | ||||||
|
(Gain)
loss on sale of assets
|
0.0 | % | 0.0 | % | -0.1 | % | ||||||
|
Total
costs and expenses
|
90.6 | % | 92.1 | % | 90.1 | % | ||||||
|
Operating
income
|
9.4 | % | 7.9 | % | 9.9 | % | ||||||
|
Interest
expense, net
|
-0.6 | % | -0.7 | % | -0.5 | % | ||||||
|
Other
income
|
0.0 | % | 0.0 | % | 0.0 | % | ||||||
|
Income
from continuing operations before income taxes
|
8.8 | % | 7.2 | % | 9.4 | % | ||||||
|
Provision
for income taxes
|
3.5 | % | 3.0 | % | 3.9 | % | ||||||
|
Income
from continuing operations
|
5.3 | % | 4.2 | % | 5.5 | % | ||||||
Year
Ended December 31, 2008 Compared to Year Ended December 31,
2007
Revenues. Revenues
increased by $49.1 million, or 15.0%, to $376.9 million for 2008 from
$327.8 million for 2007. Approximately $1.0 million of this increase
was a result of our acquisition of Briarwood College (BRI), on December 1,
2008. Excluding BRI, the increase in revenues was primarily
attributable to a 13.0% increase in average student population, which increased
to 19,983 for the year ended December 31, 2008, from 17,687 for the year ended
December 31, 2007. Revenues were also favorably impacted during the
year by tuition increases, which averaged from 3.0% to 3.5%, and increases in
book and tool sales and interest income collected on student loans, which
increased by $0.7 million and $0.8 million, respectively, for the year ended
December 2008. Average revenue per student increased 1.5% for
the year ended December 31, 2008, from the year ended December 31, 2007,
primarily due to tuition increases during the year, offset by a shift in our
student population enrolled in lower tuition programs.
Historically,
our schools have lower student populations in our first and second quarters and
we have experienced large class starts in the third and fourth quarters. Our
second half growth is largely dependent on a successful high school recruiting
season. We recruit our high school students several months ahead of their
scheduled start dates, and thus, while we have visibility on the number of
students who have expressed interest in attending our schools, we cannot predict
with certainty the actual number of new student starts and its related impact on
revenue.
Educational
services and facilities expenses. Our educational
services and facilities expenses increased by $14.0 million, or 10.1%, to
$153.5 million for the year ended December 31, 2008 from
$139.5 million for the year ended December 31, 2007. BRI accounted for $0.5
million or, 0.4%, of this increase. Excluding BRI, the increase in educational
services and facilities expenses was primarily due to instructional expenses,
and books and tools expenses, which increased by $6.1 million, or 8.4%, and $3.6
million, or 20.9%, respectively, over the prior year. This increase was
attributable to a 12.4% increase in student starts for the year ended December
31, 2008 as compared to the prior year and the overall increase in student
population and higher tool sales during 2008 compared to 2007. We
began 2008 with approximately 1,400 more students than we had on January 1, 2007
and as of December 31, 2008 our population was approximately 3,600 higher than
as of December 31, 2007. The remainder of the increase in educational
services and facilities expenses was due to facilities expenses, which increased
by $3.8 million for the year ended December 31, 2008 over the prior
year. This increase was primarily due to an increase in depreciation
expense of $2.7 million resulting from higher capital expenditures during 2008
and 2007. The remainder of the increase in facilities expenses was
due to higher utilities, rent and repairs and maintenance expenses at our
campuses. Capital expenditures in 2008 included the renovation and
conversion of our former auto school in Grand Prairie, Texas to a skilled trades
school, as well as the opening of our new campus, Aliante, in North Las Vegas,
Nevada. Educational services and facilities expenses as a percentage
of revenues decreased to 40.7% of revenues for the year ended December 31, 2008
from 42.6% for the year ended December 31, 2007.
Selling, general
and administrative expenses. Our selling, general
and administrative expenses for the year ended December 31, 2008 were $187.7
million, an increase of $25.3 million, or 15.6%, from $162.4 million for
the year ended December 31, 2007. Approximately $0.3 million, or 1.2%, of this
increase was attributable to BRI. Excluding BRI, the increase in our selling,
general and administrative expenses for the year ended December 31, 2008 was
primarily due to a $1.9 million, or 13.4%, increase in student services, a $4.8
million, or 7.4%, increase in sales and marketing and an $18.3 million, or
22.0%, increase in administrative expenses as compared to the prior
year.
The
increase in student services was primarily due to increases in compensation and
benefit expenses attributed to additional financial aid and career services
personnel as a result of a larger student population during the year ended
December 31, 2008 as compared to the prior year. In addition, we expanded a
pilot program, which we began in 2007, to centralize the back office
administration of our financial aid department in an effort to improve the
effectiveness of our financial aid processing. This resulted in the
hiring of additional financial aid representatives during 2008.
The
increase in sales and marketing expense was due to (a) annual compensation
increases to sales representatives; (b) the hiring of additional sales
representatives; and (c) increased call center support for the year ended
December 31, 2008 as compared to the prior year. In addition, we increased our
marketing investments in an effort to continue to grow our student
population.
The
increase in administrative expenses was primarily due to (a) a $9.8 million
increase in compensation and benefits, resulting from annual compensation
increases, including increases in employee bonuses, stock compensation expense
and the cost of benefits provided to employees; (b) a $4.2 million
increase in bad debt expense; (c) $0.2 million refunded to the U.S. Department
of Education resulting from a program review at Southwestern College; (d) a $0.6
million increase in software maintenance expenses resulting from increased
software licenses for our student management system; (e) $0.9 million
of acquisition costs incurred in 2008 related to our acquisition of
Baran in January 2009 in accordance with the transitional guidance to SFAS No.
141; and (f ) $0.9 million of expenses incurred in connection with two
registration statements on Form S-3, filed with the SEC during 2008, and other
related expenses.
For year
ended December 31, 2008, our bad debt expense as a percentage of revenue was
5.7% as compared to 5.3% for the year ended December 31, 2007. This
increase was primarily attributable to higher accounts receivable due to an
increase of 13.0% in average student population for 2008 as compared to the same
period in 2007. The number of days sales outstanding for 2008
decreased to 25.4 days compared to 27.7 days for 2007, primarily due to the
timing of the collection of federal funds. Commencing in late
2007, we decided to assist students in financing the gap in student tuition for
which students were unable to obtain third-party financing. As of
December, 31, 2008, we had outstanding loan commitments to our students of $24.0
million as compared to $15.7 million at December 31, 2007. Loan
commitments, net of interest that would be due on the loans through maturity,
were $16.5 million at December 31, 2008 as compared to $10.8 million at December
31, 2007. Assuming that our historical trends continue, we expect
that in 2009 our net incremental investment in accounts receivable will not
exceed $5.0 million.
As a
percentage of revenues, selling, general and administrative expenses increased
to 49.9% of revenues for 2008 from 49.5% for 2007.
Net interest
expense. Our net interest expense for the year
ended December 31, 2008 decreased slightly to $2.0 million from $2.2 million for
the same period in 2007 due to lower interest rates as well as lower average
borrowings outstanding during the year.
Income
taxes. Our provision for income taxes for the year
ended December 31, 2008 was $13.3 million, or 39.8% of pretax income,
compared to $9.9 million, or 41.8% of pretax income for the year ended December
31, 2007. The decrease in our effective tax rate for the year ended December 31,
2008 was primarily attributable to shifts in state taxable income among various
states.
Year
Ended December 31, 2007 Compared to Year Ended December 31,
2006
Revenues. Revenues
increased by $17.1 million, or 5.5%, to $327.8 million for 2007 from
$310.6 million for 2006. Approximately $7.4 million of this increase
was a result of our acquisition of New England Institute of Technology at Palm
Beach, Inc. (FLA), on May 22, 2006. The remainder of the increase was due to
tuition increases, which ranged between 2% and 5% annually depending on the
program. For the year ended December 31, 2007, our average
undergraduate full-time student enrollment increased 1.7% to 17,687 compared to
17,397 for the year ended December 31, 2006. Excluding our acquisition of FLA,
our average undergraduate student enrollment decreased by 0.4% to 16,682 from
16,757 in 2006.
Historically,
our schools have lower student populations in our first and second quarters and
we have experienced large class starts in the third and fourth quarters. Our
second half growth is largely dependent on a successful high school recruiting
season. We recruit our high school students several months ahead of their
scheduled start dates, and thus, while we have visibility on the number of
students who have expressed interest in attending our schools, we cannot predict
with certainty the actual number of new student starts and its related impact on
revenue.
During
2006, we experienced erosion between the number of students who expressed an
interest in attending our schools and enrolled, and those that commenced
classes. Many of these prospective students chose immediate employment, rather
than pursuing education in the near term. Moreover, we believe the attractive
job market further elevated sensitivity levels regarding the affordability of
education. As a result of the above, our first half 2007 revenue was
negatively impacted by lower student populations at our
campuses. This was not offset until the third quarter of 2007 when we
experienced a 10.3% increase in student starts due to improved retention of
sales representatives, packaging our students for financial aid earlier in the
process and by extending our student outreach program.
Educational
services and facilities expenses. Our educational
services and facilities expenses increased by $10.2 million, or 7.9%, to
$139.5 million for 2007 from $129.3 million for 2006. Our acquisition
of FLA accounted for $3.0 million or 29.4% of this increase. Excluding FLA,
instructional expenses and books and tools expense increased by $1.1 million or
1.7% and $1.8 million or 11.9%, respectively, over the prior year primarily due
to increased compensation and benefits expenses and due to higher volumes of
sales for books and tools. The remainder of the increase in educational services
and facilities expenses was primarily due to facilities expenses which increased
$4.3 million over the prior year. Of this amount approximately $3.7 million
represents increases in facility costs and $0.6 million represents additional
depreciation expense during the year over prior year. The increase in
facilities costs is primarily due to a $1.0 million increase in rent expense in
2007 due to our expanded campus facilities at our Rhode Island, Southwestern and
Indianapolis campuses. We also experienced increased costs for insurance and
real estate taxes, which increased approximately $0.5 million from the prior
year, utilities which increased approximately $0.5 million over the prior year
and from repairs and maintenance expenses, which increased approximately $1.4
million over the prior year. Approximately $0.8 million of the
increase in repairs and maintenance was due to higher than normal repairs and
maintenance expenses at one of our schools. Educational services and
facilities expenses as a percentage of revenues increased to 42.6% of revenues
for 2007 from 41.6% for 2006.
Selling, general
and administrative expenses. Our selling, general
and administrative expenses for the year ended December 31, 2007 were $162.4
million, an increase of $11.3 million, or 7.5%, from $151.1 million for
2006. Approximately $4.1 million of this increase were attributed to our
acquisition of FLA. The remainder of the increase was primarily due to:
(a) a $1.0 million or 3.3% increase in sales expense resulting mainly from
yearly compensation increases; (b) a $0.6 million or 2.1%, increase in
marketing costs as a result of increased advertising expenses associated with
student leads and enrollment; and (c) a $5.2 million or 7.0% increase in
administrative expenses, over the prior year.
The
increase in marketing expenses during 2007 included a shift from television
advertising to internet based initiatives and from the re-launching of our
website during 2007. These initiatives increased student leads at a
lower cost per lead. Included in administrative expenses during 2007
are an upfront one time non-cash charge of $0.5 million incurred in connection
with the termination of certain lease agreements and a $0.6 million charge
incurred in connection with severance payments related to the separation of
employment of two executives. The remainder of the increase in
administrative expenses was attributable to a higher provision for bad debts in
2007 as compared to 2006. Bad debt expense, excluding FLA in 2007 increased by
$1.8 million from $14.9 million in 2006 to $16.7 million for the year ended
December 31, 2007. This increase was due to higher accounts receivable balances
throughout the year as compared to prior year, resulting from increased loans to
our students. The remainder of the increase in administrative
expenses is due to yearly compensation increases to existing personnel and
higher benefit costs during the year.
As a
percentage of revenue, selling, general and administrative expenses increased to
49.5% of revenues for 2007 from 48.7% for 2006.
Interest
income. Interest income decreased to $0.2 million
for the year ended December 31, 2007, a decrease of $0.8 million from interest
income of $1.0 million for 2006. The decrease in interest income for the year
was due to lower average cash balances during the year as compared to
2006.
Interest expense.
Interest expense was essentially flat year over year at $2.3 million,
respectively in 2007 and 2006 due to our average borrowings during 2007
remaining relatively flat with 2006.
Income
taxes. Our provision for income taxes for the year
ended December 31, 2007 was $9.9 million, or 41.8% of pretax income,
compared to $12.1 million, or 41.4% of pretax income for the year ended December
31, 2006. The increase in effective tax rate for the year ended December 31,
2007 is attributable to higher state income taxes during the
period.
LIQUIDITY AND CAPITAL
RESOURCES
Our
primary capital requirements are for facilities expansion and maintenance,
acquisitions and the development of new programs. Our principal sources of
liquidity have been cash provided by operating activities and borrowings under
our credit agreement. The following chart summarizes the principal elements of
our cash flow for each of the three years in the period ended December 31,
2008:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Net
cash provided by operating activities
|
$ | 54,176 | $ | 15,735 | $ | 15,258 | ||||||
|
Net
cash used in investing activities
|
$ | (31,205 | ) | $ | (23,830 | ) | $ | (52,160 | ) | |||
|
Net
cash provided by (used in) financing activities
|
$ | (11,239 | ) | $ | 5,136 | $ | (6,894 | ) | ||||
As of
December 31, 2008, we had cash and cash equivalents of $15.2 million,
representing an increase of approximately $11.7 million as compared to $3.5
million as of December 31, 2007. Historically, we have financed our
operating activities and organic growth primarily through cash generated from
operations. We have financed acquisitions primarily through borrowings
under our credit facility and cash generated from operations. During 2008,
we borrowed an additional $23.0 million to finance our working capital needs
during the first half of the year and repaid $28.0 million outstanding under our
credit facility in the second half of the year. We currently
anticipate that we will be able to meet both our short-term cash needs, as well
as our need to fund operations and meet our obligations beyond the next twelve
months with cash generated by operations, existing cash balances and, if
necessary, borrowings under our credit facility. On February 18, 2009, we sold
common stock in a public offering and received net proceeds of approximately
$14.0 million. In addition, we may also consider accessing the
financial markets again as a source of liquidity for capital requirements,
acquisitions and general corporate purposes to the extent such requirements are
not satisfied by cash on hand, borrowings under our credit facility or operating
cash flows. However, we cannot assure you that we will be able to
raise additional capital on favorable terms, if at all. At December
31, 2008, we had net borrowings available under our $100 million credit
agreement of approximately $95.9 million, including a $15.9 million sub-limit on
letters of credit. The line of credit matures February 15,
2010.
Our
primary source of cash is tuition collected from the students. The majority of
students enrolled at our schools rely on funds received under various
government-sponsored student financial aid programs to pay a substantial portion
of their tuition and other education-related expenses. The largest of these
programs are Title IV Programs which represented approximately 79% of our cash
receipts relating to revenues in 2008. Students must apply for a new loan for
each academic period. Federal regulations dictate the timing of disbursements of
funds under Title IV Programs and loan funds are generally provided by lenders
in two disbursements for each academic year. The first disbursement is usually
received approximately 31 days after the start of a student's academic year
and the second disbursement is typically received at the beginning of the
sixteenth week from the start of the student's academic year. Certain types of
grants and other funding are not subject to a 30-day delay. Our programs range
from 14 to 102 weeks. In certain instances, if a student withdraws from a
program prior to a specified date, any paid but unearned tuition or prorated
Title IV financial aid is refunded according to state and federal
regulations.
As
a result of the significance of the Title IV funds received by our students, we
are highly dependent on these funds to operate our business. Any reduction in
the level of Title IV funds that our students are eligible to receive or any
impact on our ability to be able to receive Title IV funds would have a
significant impact on our operations and our financial condition.
Operating
Activities
Year Ended
December 31, 2008 Compared to Year Ended December 31,
2007. Net cash provided by operating activities was $54.2
million for the year ended December 31, 2008 as compared to $15.7 million for
the year ended December 31, 2007. The $38.5 million increase in net cash
provided by operating activities was driven by an increase in net income of
approximately $11.9 million coupled with better collection on accounts
receivable as our days sales outstanding decreased from 27.7 to 25.4 due to,
among other things, the successful centralization of the back office
administration of our financial aid department. Additionally, during the year we
were favorably impacted by the timing of cash collections from federal fund
programs. The remainder of the increase was due to increases in cash
provided by other working capital items.
Year Ended
December 31, 2007 Compared to Year Ended December 31,
2006. Net cash provided by operating activities
increased to $15.7 million for 2007 from $15.3 million for 2006. This
increase of $0.4 million was primarily due to a reduction of approximately
$5.7 million in cash paid for income taxes during 2007 as compared to 2006
offset by a $3.7 million increase in accounts receivable at December 31,
2007 from December 31, 2006. The remainder of the decrease was
primarily due to decreases in cash used for working capital items during the
year offset by a decrease in net income during the year. The increase
in accounts receivable which represents 27.5 days revenues outstanding for 2007
as compared to 24.3 days revenue outstanding in 2006 is attributable to the
increase in loans that we provided to our students. As the gap
between the amount of funding provided by Title IV and tuition rates widens,
students are finding it increasingly difficult to finance on a short term basis
this portion of their tuition. This has resulted in an overall increase in the
term of loan programs established to assist students in financing this gap. In
an ongoing effort to help those students who are unable to obtain any additional
sources of financing, we assist students in financing a portion of their
tuition. Students that elect to participate in this financing option currently
have up to seven years to repay this obligation, an increase of up to two years
from the five year term that we previously offered our students in prior
years.
The increase in loans to our students
adversely impacts our accounts receivable, our allowance for doubtful accounts
and our cash flow from operations. Although we reserved for estimated losses
related to unpaid student balances, losses in excess of the amounts we have
reserved for bad debts will result in a reduction in our profitability and can
have an adverse impact on the results of our operations.
Investing
Activities
Our cash
used in investing activities was primarily related to capital expenditures and
the acquisition of BRI. Our capital expenditures included facility expansion,
leasehold improvements, improvements of classroom, furniture and shop training
equipment and student management operation systems. On December 1, 2008 we
acquired all the rights, title and interest in the assets of BRI for $10.5
million in cash, net of cash acquired. On May 22, 2006 we acquired all of the
outstanding common stock of FLA for $32.9 million in cash and the assumption of
a mortgage.
We
currently lease a majority of our campuses. We own the new Grand Prairie, Texas
campus, the FLA campuses, the Nashville campus and certain buildings in the SWC
campuses. As we execute our growth strategy, strategic acquisitions of campuses
may be considered. In addition, although our current growth strategy is to
continue our organic growth, strategic acquisitions of operations will be
considered. To the extent that these potential strategic acquisitions are large
enough to require financing beyond available cash from operations and borrowings
under our credit facilities, we may incur additional debt or issue additional
debt or equity securities.
Year Ended
December 31, 2008 Compared to the Year Ended December 31,
2007. Net cash used in investing activities
increased $7.4 million to $31.2 million for the year ended
December 31, 2008 from $23.8 million for the year ended
December 31, 2007. This increase was primarily attributable to a $10.5
million increase in cash used in the acquisition of Briarwood offset by a $4.6
million decrease in capital expenditures due to the timing of payments for the
year ended December 31, 2008 from the year ended December 31,
2007.
Year Ended
December 31,
2007
Compared to the Year Ended December 31,
2006. Net
cash used in investing activities decreased $28.4 million to
$23.8 million for the year ended December 31, 2007 from
$52.2 million for the year ended December 31, 2006. This decrease was
primarily attributable to a $32.9 million decrease in cash used in acquisitions
offset by a $5.4 million increase in capital expenditures for the year ended
December 31, 2007 from the year ended December 31, 2006.
Capital
expenditures are expected to increase in 2009 as we upgrade and expand current
equipment and facilities and open or expand new facilities to meet increased
student enrollment. We anticipate capital expenditures to range from 5% to 6% of
revenues in 2009 and expect to fund these capital expenditures with cash
generated from operating activities and, if necessary, with borrowings under our
credit facility.
Financing
Activities
Year Ended
December 31, 2008 Compared to the Year Ended December 31, 2007.
Net cash used in financing activities was $11.2 million for the year
ended December 31, 2008, as compared to net cash provided by financing
activities of $5.1 million for the year ended December 31, 2007. This
decrease of $16.4 million was attributable to the repayment of debt resulting in
a decrease in net borrowings of $10.0 million as compared to 2007 and to
repurchases of our common stock for $6.6 million during 2008.
On
February 18, 2009, we sold common stock in a public offering and received net
proceeds of approximately $14.0 million.
Year Ended
December 31,
2007
Compared to the Year Ended December 31,
2006. Net cash
provided by financing activities was $5.1 million for the year ended
December 31, 2007, as compared to net cash used in financing activities of
$6.9 million for the year ended December 31, 2006. This increase is
due to increased borrowings under our credit facility during 2007 to fund our
working capital needs.
On April
1, 2008, our Board of Directors approved the repurchase of up to 1,000,000
shares of our common stock over the period of one year. In 2008, we
repurchased 615,000 shares of our common stock for approximately $6.6
million.
On
February 15, 2005, we and our subsidiaries entered into a credit agreement
with a syndicate of banks, which expires February 15, 2010. This
credit agreement provides for a $100 million revolving credit facility with
a term of five years under which any outstanding borrowings bear interest at the
rate of adjusted LIBOR (as defined in the new credit agreement) plus a margin
that may range from 1.00% to 1.75% or a base rate (as defined in the new credit
agreement) plus a margin that may range from 0.00% to 0.25%. At December 31,
2008 we had no amounts outstanding under the credit facility. The
credit agreement permits the issuance of letters of credit up to an aggregate
amount of $20.0 million, the amount of which reduces the availability of
permitted borrowings under the credit facility.
Our
obligations and our subsidiaries’ obligations under the credit agreement are
secured by a lien on substantially all of our and our subsidiaries’ assets and
any assets that we and our subsidiaries may acquire in the future, including a
pledge of substantially all of the subsidiaries’ common stock. In addition to
paying interest on outstanding principal under the credit agreement, we are
required to pay a commitment fee to the lender with respect to the unused
amounts available under the credit agreement at a rate equal to 0.25% to 0.40%
per year, as defined.
The
credit agreement contains various covenants, including a number of financial
covenants. Furthermore, the credit agreement contains customary events of
default as well as an event of default in the event of the suspension or
termination of Title IV Program funding for our and our subsidiaries' schools
aggregating 10 % or more of our EBITDA (as defined in the new credit agreement)
or our and our subsidiaries' consolidated total assets and such suspension or
termination is not cured within a specified period. The following table sets
forth our long-term debt for the periods indicated:
|
As
of December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Credit
agreement
|
$ | - | $ | 5,000 | ||||
|
Finance
obligation
|
9,672 | 9,672 | ||||||
|
Automobile
loans
|
- | 16 | ||||||
|
Capital
leases-computers (with rates ranging from 8.5% to 8.7%)
|
502 | 690 | ||||||
|
Subtotal
|
10,174 | 15,378 | ||||||
|
Less
current maturities
|
(130 | ) | (204 | ) | ||||
|
Total
long-term debt
|
$ | 10,044 | $ | 15,174 | ||||
We
believe that our working capital, cash flow from operations, access to operating
leases and borrowings available from our amended credit agreement will provide
us with adequate resources for our ongoing operations through 2009 and our
currently identified and planned capital expenditures.
Contractual
Obligations
Long-Term
Debt and Lease Commitments. As of
December 31, 2008, our long-term debt consisted of the finance obligation in
connection with our sale-leaseback transaction in 2001 and amounts due under
capital lease obligations. We lease offices, educational
facilities and various equipment for varying periods through the year 2023 at
basic annual rentals (excluding taxes, insurance, and other expenses under
certain leases).
The
following table contains supplemental information regarding our total
contractual obligations as of December 31, 2008:
|
Payments
Due by Period
|
||||||||||||||||||||
|
Total
|
Less
than 1 year
|
2-3
years
|
4-5
years
|
After
5 years
|
||||||||||||||||
|
Capital
leases (including interest)
|
$ | 583 | $ | 167 | $ | 322 | $ | 94 | $ | - | ||||||||||
|
Operating
leases
|
140,810 | 17,840 | 31,182 | 28,290 | 63,498 | |||||||||||||||
|
Rent
on finance obligation
|
11,164 | 1,381 | 2,762 | 2,762 | 4,259 | |||||||||||||||
|
Total
contractual cash obligations
|
$ | 152,557 | $ | 19,388 | $ | 34,266 | $ | 31,146 | $ | 67,757 | ||||||||||
Capital
Expenditures. We have entered into commitments to
expand or renovate campuses. These commitments are in the range of $3.0 to $5.0
million in the aggregate and are due within the next 12 months. We expect to
fund these commitments from cash generated from operations.
OFF-BALANCE SHEET
ARRANGEMENTS
We had no
off-balance sheet arrangements as of December 31, 2008, except for our
letters of credit of $4.1 million which are primarily comprised of letters of
credit for the DOE and security deposits in connection with certain of our real
estate leases. These off-balance sheet arrangements do not adversely impact our
liquidity or capital resources.
RELATED PARTY
TRANSACTIONS
On May
12, 2008, we repurchased from Five Mile River Capital Partners and Steven W.
Hart an aggregate 100,000 shares of our common stock for $11.25 per share for a
total cost of $1.1 million. Hart Capital LLC is the managing member
of Five Mile River Capital Partners LLC, our second largest
stockholder. Steven W. Hart is the owner and president of Hart
Capital LLC and is a former member of our board of directors. At the
time of the transaction Hart Capital beneficially owned, through Five Mile River
Capital LLC, 8.3% of our outstanding shares of common stock.
On
October 15, 2007, we entered into a Separation and Release Agreement with
Lawrence E. Brown, our former Vice Chairman. Under this agreement Mr.
Brown’s employment terminated as of the close of business on October 31,
2007. For a period of 14 months following the date of separation of
employment, Mr. Brown continued to provide transitional services to us, not to
exceed ten hours per month. In consideration for a release of claims,
we paid Mr. Brown a lump sum cash payment of $0.5 million and reimbursed Mr.
Brown for the employer-portion of the premiums due for continuation of coverage
under COBRA through December 31, 2008. Mr. Brown was entitled to the
use of his automobile and reimbursement of associated costs by us through
December 31, 2008. In addition, pursuant to the terms of the
agreement, Mr. Brown agreed to be subject to certain restrictive covenants,
which, among other things, prohibited him for the duration of 14 months
following the date of separation of employment, from (i) competing against us
and (ii) soliciting our or any of our affiliates’ or subsidiaries’ employees,
consultants, clients or customers through December 31, 2008.
Pursuant
to the Employment Agreement between Shaun E. McAlmont and us, we agreed to pay
and reimburse Mr. McAlmont for the reasonable costs of his relocation from
Denver, Colorado to West Orange, New Jersey in the year ended December 31, 2006.
Such relocation assistance included our purchase of Mr. McAlmont’s home in
Denver, Colorado. The $0.5 million price paid for Mr. McAlmont’s home equaled
the average of the amount of two independent appraisers selected by us. This
amount is reflected in property, equipment and facilities in the accompanying
consolidated balance sheets.
SEASONALITY AND
TRENDS
Our net
revenues and operating results normally fluctuate as a result of seasonal
variations in our business, principally due to changes in total student
population. Student population varies as a result of new student enrollments,
graduations and student attrition. Historically, our schools have had lower
student populations in our first and second quarters and we have experienced
large class starts in the third and fourth quarters and student attrition in the
first half of the year. Our second half growth is largely dependent on a
successful high school recruiting season. We recruit our high school students
several months ahead of their scheduled start dates, and thus, while we have
visibility on the number of students who have expressed interest in attending
our schools, we cannot predict with certainty the actual number of new student
enrollments and the related impact on revenue. Our expenses, however, do not
vary significantly over the course of the year with changes in our student
population and net revenues. During the first half of the year, we make
significant investments in marketing, staff, programs and facilities to ensure
that we meet our second half of the year targets and, as a result, such expenses
do not fluctuate significantly on a quarterly basis. To the extent new student
enrollments, and related revenues, in the second half of the year fall short of
our estimates, our operating results could suffer. We expect quarterly
fluctuations in operating results to continue as a result of seasonal enrollment
patterns. Such patterns may change as a result of new school openings, new
program introductions, and increased enrollments of adult students and/or
acquisitions.
Similar
to many other for-profit post secondary education companies, the increase in our
average undergraduate enrollments in 2007 and 2006 did not meet our anticipated
growth rates. As a result of the slowdown in 2005, we entered 2006 with fewer
students enrolled than we had in January of 2005. This trend continued
throughout 2006 and resulted in a shortfall in the enrollments we were expecting
in the second half of 2006 and especially in the third quarter which has
accounted for a majority of our yearly starts. As a result we also entered 2007
with fewer students enrolled than we had in January 2006. This
trend continued during the first half of 2007 and reversed itself in the latter
half of the year as we benefited from the 2007 high school recruiting
season. The slowdown that has occurred in the for-profit post
secondary education sector appears to have had a greater impact on companies,
like ours, that are more dependent on their on-ground business as opposed to
on-line students. We believe that this slowdown was attributed to many factors,
including: (a) the economy; (b) the availability of student financing; (c)
dependency on television to attract students to our school; (d) turnover of our
sales representatives; and (e) increasing competition in the
marketplace.
As a
result of soft organic enrollment trends we experienced, we instituted numerous
initiatives and took steps to address and optimize our internal
operations. These initiatives coupled with the counter cyclicality of
our programs have now produced nine consecutive quarters of positive student
start growth and six consecutive quarters of enrollment growth. This
has resulted in us entering 2009 with approximately 3,100 more students on a
same school basis than we had on January 1, 2008. Because our revenue
stream is closely related to our enrollments, we believe that this will result
in revenue and net income growth in 2009.
RECENT ACCOUNTING
PRONOUNCEMENTS
In May
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 163, “Accounting for Financial Guarantee
Insurance Contracts – an interpretation of FASB Statement No. 60,” (“SFAS
No. 163”). SFAS No. 163 requires that an insurance enterprise
recognize a claim liability prior to an event of default when there is evidence
that credit deterioration has occurred in an insured financial
obligation. SFAS No. 163 is effective for us as of January 1,
2009. The implementation of this standard had no effect on our
consolidated financial statements.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles,” (“SFAS No. 162”). SFAS No. 162
identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements. SFAS
No. 162 was effective for us as of November 15, 2008. The
implementation of this standard had no effect on our consolidated financial
statements.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities,” (“SFAS No. 161”) – an amendment to FASB
Statement No. 133. SFAS No. 161 is intended to improve
financial standards for derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entity's financial position, financial performance, and cash
flows. Entities are required to provide enhanced disclosures about: (a) how and
why an entity uses derivative instruments; (b) how derivative instruments and
related hedged items are accounted for under SFAS No. 133 and its related
interpretations; and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash flows.
The Statement is effective for us as of January 1, 2009. The adoption of the
provision of SFAS No. 161 had no effect on our consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 141R, "Business Combinations"
(“SFAS No. 141R”). SFAS No. 141R establishes revised principles and
requirements for how we will recognize and measure assets and liabilities
acquired in a business combination. SFAS No. 141R requires, among other things,
transaction costs incurred in a business combination to be expensed, establishes
a new measurement date for valuing acquirer shares issued in consideration for a
business combination, and requires the recognition of contingent consideration
and pre-acquisition gain and loss contingencies. SFAS No. 141R was
effective for our business combinations completed on or after January 1,
2009. In accordance with the transition guidance of SFAS No. 141 R,
we elected to expense $0.9 million of costs incurred in 2008 related to an
acquisition which was completed in 2009.
In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
(“ARB”) No. 51" (“SFAS No. 160”). SFAS No. 160 establishes
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is
effective for us as of January 1, 2009. The adoption of the provision of SFAS
No. 160 had no effect on our consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“SFAS No. 159”), providing companies
with an option to report selected financial assets and liabilities at fair
value. SFAS No. 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 requires companies to provide additional
information that will help investors and other users of financial statements to
more easily understand the effect of our choice to use fair value on its
earnings. It also requires entities to display the fair value of those assets
and liabilities for which they have chosen to use fair value on the face of the
balance sheet. SFAS No. 159 became effective for us as of January 1, 2008;
however, we did not elect to utilize the option to report selected assets and
liabilities at fair value.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106, and 132(R)” (“SFAS No. 158”). Among other items, SFAS
No. 158 requires recognition of the overfunded or underfunded status of an
entity’s defined benefit postretirement plan as an asset or liability in the
financial statements, requires the measurement of defined benefit postretirement
plan assets and obligations as of the end of the employer’s fiscal year, and
requires recognition of the funded status of defined benefit postretirement
plans in other comprehensive income. We adopted SFAS No. 158 on December 31,
2006. The incremental effects of applying SFAS No. 158 on our
December 31, 2006 consolidated financial statements, on a line by line basis,
are as follows:
|
Balances
Before Adoption of Statement 158
|
Adjustments
|
Balances
After Adoption of Statement 158
|
||||||||||
|
Pension
plan assets, net
|
$ | 5,169 | $ | (4,062 | ) | $ | 1,107 | |||||
|
Deferred
income taxes
|
1,037 | 1,651 | 2,688 | |||||||||
|
Accumulated
other comprehensive income
|
- | 2,411 | 2,411 | |||||||||
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in GAAP, and expands disclosures about fair value
measurements. SFAS No. 157 does not require any new fair value measurements. The
provisions of SFAS No. 157 were effective for us as of January 1, 2008. The
adoption of the provision of SFAS No. 157 had no effect on our consolidated
financial statements.
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin (“SAB”) No. 108 which provides interpretive guidance on how the effects
of the carryover or reversal of prior year unrecorded misstatements should be
considered in quantifying a current year misstatement. SAB No. 108 became
effective for us as of January 1, 2007. The adoption of the provision of SAB No.
108 had no effect on our consolidated financial statements.
In June
2006, FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income
Taxes” (“FIN No. 48”). FIN No. 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s financial statements
in accordance with FASB SFAS No. 109, “Accounting for Income Taxes”,
which was adopted by us on January 1, 2007. FIN No. 48 prescribes a
recognition threshold and a measurement attribute for the financial statement
recognition and measurement of tax positions taken or expected to be taken in a
tax return. For those benefits to be recognized, a tax position must be
more-likely-than-not to be sustained upon examination by taxing authorities. The
amount recognized is measured as the largest amount of benefit that is greater
than 50 percent likely of being realized upon ultimate settlement. The adoption
of FIN No. 48 resulted in a negative cumulative effect adjustment to retained
earnings as of January 1, 2007 of approximately $0.1 million.
In March
2006, FASB issued SFAS No. 156, “Accounting for Servicing of
Financial Assets” (“SFAS No. 156”). SFAS No. 156 provides guidance
addressing the recognition and measurement of separately recognized servicing
assets and liabilities, common with mortgage securitization activities, and
provides an approach to simplify efforts to obtain hedge accounting treatment.
SFAS No. 156 was adopted on January 1, 2007. The adoption of the provision of
SFAS No. 156 had no effect on our consolidated financial
statements.
In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments” (“SFAS No. 155”). SFAS No. 155 is effective
beginning January 1, 2007. The adoption of the provision of SFAS No. 155 had no
effect on our consolidated financial statements.
Effect
of Inflation
Inflation
has not had and is not expected to have a significant effect on our
operations.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
We are
exposed to certain market risks as part of our on-going business
operations. We have a credit agreement with a syndicate of banks.
Our obligations under the credit agreement are secured by a lien on
substantially all of our assets and our subsidiaries and any assets that we or
our subsidiaries may acquire in the future, including a pledge of substantially
all of our subsidiaries’ common stock. Outstanding borrowings bear interest at
the rate of adjusted LIBOR plus 1.0% to 1.75%, as defined, or a base rate (as
defined in the credit agreement). As of December 31, 2008, we had no
amounts outstanding under the credit agreement. We initially funded our
acquisition of Baran with borrowings under our credit facility and may incur
additional borrowings to fund capital expenditures in 2009.
Based on
our outstanding debt balance as of December 31, 2008, a change of one percent in
the interest rate would not have caused a change in our interest expense.
Changes in interest rates could have an impact however on our operations, which
are greatly dependent on students’ ability to obtain financing. Any increase in
interest rates could greatly impact our ability to attract students and have an
adverse impact on the results of our operations. The remainder of our interest
rate risk is associated with miscellaneous capital equipment leases, which are
not material.
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY
DATA
|
See
“Index to Consolidated Financial Statements” on page F-1 on this Form
10-K.
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
ITEM 9A.
|
DISCLOSURE
CONTROLS AND
PROCEDURES
|
Evaluation of disclosure controls and
procedures
Our Chief
Executive Officer and Chief Financial Officer, after evaluating, together with
management, the effectiveness of our disclosure controls and procedures (as
defined in Securities Exchange Act Rule 13a-15(e)) as of December 31, 2008,
have concluded that our disclosure controls and procedures are effective to
reasonably ensure that material information required to be disclosed by us in
the reports that we file or submit under the Securities Exchange Act of 1934, as
amended is recorded, processed, summarized and reported within the time
periods specified by Securities and Exchange Commissions’ Rules and Forms and
that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure.
Internal Control Over Financial
Reporting
During
the quarter ended December 31, 2008, there has been no change in our internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
Management’s
Annual Report on Internal Control over Financial Reporting
The
management of Lincoln Educational Services Corporation (the “Company”) is
responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rule 13a-15(f) under the Securities Exchange
Act of 1934. The Company’s internal control system was designed to provide
reasonable assurance to the Company’s management and Board of Directors
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles.
Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2008, based on the framework set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated
Framework. Based on its assessment, management believes that, as of
December 31, 2008, the Company’s internal control over financial reporting is
effective.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
The
Company’s independent auditors, Deloitte & Touche LLP, an independent
registered public accounting firm, audited the Company’s internal control over
financial reporting as of December 31, 2008, as stated in their report included
in this Form 10-K that follows.
|
/s/ David F. Carney
|
|
|
David
F. Carney
|
|
|
Chairman
& Chief Executive Officer
|
|
|
March
12, 2009
|
|
|
/s/ Cesar Ribeiro
|
|
|
Cesar
Ribeiro
|
|
|
Chief
Financial Officer
|
|
|
March
12, 2009
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
|
|
None.
|
PART
III.
|
ITEM 10.
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
Directors
and Executive Officers
The
information required by this item is incorporated herein by reference to our
definitive Proxy Statement to be filed in connection with our 2009 Annual
Meeting of Shareholders.
Code
of Ethics
We have
adopted a Code of Conduct and Ethics applicable to our directors, officers
and employees and certain other persons, including our Chief Executive Officer
and Chief Financial Officer. A copy of our Code of Ethics is available on our
website at www.lincolnedu.com. If any
amendments to or waivers from the Code of Conduct are made, we will disclose
such amendments or waivers on our website.
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
Information
required by Item 11 of Part III is incorporated by reference to our
definitive Proxy Statement to be filed in connection with our 2009 Annual
Meeting of Shareholders.
|
ITEM 12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER
MATTERS
|
Information
required by Item 12 of Part III is incorporated by reference to our
definitive Proxy Statement to be filed in connection with our 2009 Annual
Meeting of Shareholders.
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
|
Information
required by Item 13 of Part III is incorporated by reference to our
definitive Proxy Statement to be filed in connection with our 2009 Annual
Meeting of Shareholders.
|
ITEM 14.
|
PRINCIPAL ACCOUNTING FEES AND
SERVICES
|
Information
required by Item 14 of Part III is incorporated by reference to our
definitive Proxy Statement to be filed in connection with our 2009 Annual
Meeting of Shareholders.
PART
IV.
|
ITEM 15.
|
EXHIBITS
AND FINANCIAL STATEMENT
SCHEDULE
|
|
1.
|
Financial
Statements
|
See
“Index to Consolidated Financial Statements” on page F-1 of this Form
10-K.
|
2.
|
Financial Statement
Schedule
|
See
“Index to Consolidated Financial Statements” on page F-1 of this Form
10-K.
|
3.
|
Exhibits Required by Securities
and Exchange Commission
Regulation S-K
|
|
Exhibit
Number
|
Description
|
|
|
3.1
|
Amended
and Restated Certificate of Incorporation of the Company
(1).
|
|
|
3.2
|
Amended
and Restated By-laws of the Company (2).
|
|
|
4.1
|
Stockholders’
Agreement, dated as of September 15, 1999, among Lincoln Technical
Institute, Inc., Back to School Acquisition, L.L.C. and Five Mile River
Capital Partners L.L.C. (1).
|
|
|
4.2
|
Letter
agreement, dated August 9, 2000, by Back to School Acquisition, L.L.C.,
amending the Stockholders’ Agreement (1).
|
|
|
4.3
|
Letter
agreement, dated August 9, 2000, by Lincoln Technical Institute, Inc.,
amending the Stockholders’ Agreement (1).
|
|
|
4.4
|
Management
Stockholders Agreement, dated as of January 1, 2002, by and among Lincoln
Technical Institute, Inc., Back to School Acquisition, L.L.C. and the
Stockholders and other holders of options under the Management Stock
Option Plan listed therein (1).
|
|
|
4.5
|
Assumption
Agreement and First Amendment to Management Stockholders Agreement, dated
as of December 20, 2007, by and among Lincoln Educational Services
Corporation, Lincoln Technical Institute, Inc., Back to School
Acquisition, L.L.C. and the Management Investors parties therein
(6).
|
|
|
4.6
|
Registration
Rights Agreement between the Company and Back to School Acquisition,
L.L.C. (2).
|
|
|
4.7
|
Specimen
Stock Certificate evidencing shares of common stock
(1).
|
|
|
10.1
|
Credit
Agreement, dated as of February 15, 2005, among the Company, the
Guarantors from time to time parties thereto, the Lenders from time to
time parties thereto and Harris Trust and Savings Bank, as Administrative
Agent (1).
|
|
|
10.2
|
Amended
and Restated Employment Agreement, dated as of February 1, 2007, between
the Company and David F. Carney (3).
|
|
|
Amendment
to Amended and Restated Employment Agreement, dated as of January 14,
2009, between the Company and David F. Carney.
|
||
|
10.4
|
Separation
and Release Agreement, dated as of October 15, 2007, between the Company
and Lawrence E. Brown (4).
|
|
|
10.5
|
Amended
and Restated Employment Agreement, dated as of February 1, 2007, between
the Company and Scott M. Shaw
(3).
|
|
Amendment
to Amended and Restated Employment Agreement, dated as of January 14,
2009, between the company and Scott M. Shaw.
|
||
|
10.7
|
Amended
and Restated Employment Agreement, dated as of February 1, 2007, between
the Company and Cesar Ribeiro (3).
|
|
|
Amendment
to Amended and Restated Employment Agreement, dated as of January 14,
2009, between the company and Cesar Ribeiro.
|
||
|
10.9
|
Amended
and Restated Employment Agreement, dated as of February 1, 2007, between
the Company and Shaun E. McAlmont (3).
|
|
|
Amendment
to Amended and Restated Employment Agreement, dated as of January 14,
2009, between the company and Shaun E. McAlmont.
|
||
|
10.11
|
Lincoln
Educational Services Corporation 2005 Long Term Incentive Plan
(1).
|
|
|
10.12
|
Lincoln
Educational Services Corporation 2005 Non Employee Directors Restricted
Stock Plan (1).
|
|
|
10.13
|
Lincoln
Educational Services Corporation 2005 Deferred Compensation Plan
(1).
|
|
|
10.14
|
Lincoln
Technical Institute Management Stock Option Plan, effective January 1,
2002 (1).
|
|
|
10.15
|
Form
of Stock Option Agreement, dated January 1, 2002, between Lincoln
Technical Institute, Inc. and certain participants (1).
|
|
|
10.16
|
Form
of Stock Option Agreement under our 2005 Long Term Incentive Plan
(7).
|
|
|
10.17
|
Form
of Restricted Stock Agreement under our 2005 Long Term Incentive Plan
(7).
|
|
|
10.18
|
Management
Stock Subscription Agreement, dated January 1, 2002, among Lincoln
Technical Institute, Inc. and certain management investors
(1).
|
|
|
10.19
|
Stockholder’s
Agreement among Lincoln Educational Services Corporation, Back to School
Acquisition L.L.C., Steven W. Hart and Steven W. Hart 2003 Grantor
Retained Annuity Trust (2).
|
|
|
10.20
|
Stock
Purchase Agreement, dated as of March 30, 2006, among Lincoln Technical
Institute, Inc., and Richard I. Gouse, Andrew T. Gouse, individually and
as Trustee of the Carolyn Beth Gouse Irrevocable Trust, Seth A. Kurn and
Steven L. Meltzer (5).
|
|
|
Stock
Purchase Agreement, dated as of January 20, 2009, among Lincoln Technical
Institute, Inc., NN Acquisition, LLC, Brad Baran, Barbara Baran, UGP
Education Partners, LLC, UGPE Partners Inc. and Merion Investment
Partners, L.P.
|
||
|
Stock
Purchase Agreement, dated as of January 20, 2009, among Lincoln Technical
Institute, Inc., NN Acquisition, LLC, Brad Baran, Barbara Baran, UGP
Education Partners, LLC, Merion Investment Partners, L.P. and, for certain
limited purposes only, UGPE Partners Inc.
|
||
|
Subsidiaries
of the Company.
|
||
|
Consent
of Independent Registered Public Accounting Firm.
|
||
|
Certification
of Chairman & Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
||
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
||
|
Certification
of Chairman & Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of
2002.
|
|
|
________________________________________________
|
|
(1)
|
Incorporated by reference to the
Company’s Registration Statement on Form S-1 (Registration No.
333-123664).
|
|
(2)
|
Incorporated
by reference to the Company’s Form 8-K dated June 28,
2005.
|
|
(3)
|
Incorporated
by reference to the Company’s Form 10-K for the year ended December 31,
2006.
|
|
(4)
|
Incorporated by reference to the
Company’s Form 8-K dated October 15,
2007.
|
|
(5)
|
Incorporated by reference to the
Company’s Form 10-Q for the quarterly period ended March 31,
2006.
|
|
(6)
|
Incorporated
by reference to the Company’s Registration Statement on Form S-3
(Registration No. 333-148406).
|
|
(7)
|
Incorporated
by reference to the Company’s Form 10-K for the year ended December 31,
2007.
|
|
*
|
Filed
herewith.
|
SIGNATURES
Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: March
13, 2009
|
LINCOLN
EDUCATIONAL SERVICES CORPORATION
|
|||
|
By:
|
/s/ Cesar Ribeiro
|
||
|
Cesar
Ribeiro
|
|||
|
Senior
Vice President, Chief Financial Officer and Treasurer
|
|||
|
(Principal
Accounting and Financial Officer)
|
|||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/ David F. Carney
|
Chief
Executive Officer and Chairman of the Board
|
March
13, 2009
|
||
| David F. Carney |
|
|||
|
/s/ Cesar Ribeiro
|
Senior
Vice President, Chief Financial Officer and Treasurer (Principal
Accounting and Financial Officer)
|
March
13, 2009
|
||
| Cesar Ribeiro |
|
|||
|
/s/ Peter S. Burgess
|
Director
|
March
13, 2009
|
||
| Peter S. Burgess |
|
|||
|
/s/ James J. Burke, Jr.
|
Director
|
March
13, 2009
|
||
| James J. Burke, Jr. |
|
|||
|
/s/ Celia H. Currin
|
Director
|
March
13, 2009
|
||
| Celia H. Currin | ||||
|
/s/
Paul E. Glaske
|
Director
|
March
13, 2009
|
||
| Paul E. Glaske |
|
|||
|
/s/
Charles F. Kalmbach
|
Director
|
March
13, 2009
|
||
| Charles F. Kalmbach | ||||
|
/s/ Alexis P. Michas
|
Director
|
March
13, 2009
|
||
| Alexis P. Michas | ||||
|
/s/ J. Barry Morrow
|
Director
|
March
13, 2009
|
||
| J. Barry Morrow |
|
|||
|
/s/ Jerry G. Rubenstein
|
Director
|
March
13, 2009
|
||
| Jerry G. Rubenstein |
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
Number
|
|
|
Reports
of Independent Registered Public Accounting Firm
|
F-2
|
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
F-4
|
|
Consolidated
Statements of Income for the years ended December 31, 2008, 2007 and
2006
|
F-6
|
|
Consolidated
Statements of Changes in Stockholders' Equity for the years ended December
31, 2008, 2007 and 2006
|
F-7
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2008, 2007 and
2006
|
F-8
|
|
Notes
to Consolidated Financial Statements
|
F-10
|
|
Item
15
|
|
|
Schedule
II-Valuation and Qualifying Accounts
|
F-29
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Lincoln
Educational Services Corporation
West
Orange, New Jersey
We have
audited the accompanying consolidated balance sheets of Lincoln Educational
Services Corporation and subsidiaries (the "Company") as of December 31, 2008
and 2007, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2008. Our audits also included the consolidated
financial statement schedule listed in the Index at Item 15. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements and financial statement schedule
based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Lincoln Educational Services Corporation and
subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2008, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such
consolidated financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
As
discussed in Note 2 to the consolidated financial statements, the Company
adopted the provisions of Financial Accounting Standards Board Interpretation
(“FIN”) No. 48, “Accounting
for Uncertainty in Income Taxes- an Interpretation of FASB Statement No.
109” on January 1, 2007.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company's internal control over financial
reporting as of December 31, 2008, based on the criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated March 13, 2009 expressed an
unqualified opinion on the Company's internal control over financial
reporting.
DELOITTE
& TOUCHE LLP
Parsippany,
New Jersey
March 12,
2009
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Lincoln
Educational Services Corporation
West
Orange, New Jersey
We have
audited the internal control over financial reporting of Lincoln Educational
Services Corporation and subsidiaries (the "Company") as of December 31, 2008,
based on criteria established in Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the
Company's internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on the criteria
established in Internal Control — Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s consolidated balance sheet as of
December 31, 2008 and the related consolidated statements of income, changes in
stockholders’ equity and cash flow and financial statement schedule for the year
ended December 31, 2008, and our report dated March 12, 2009 expressed an
unqualified opinion on those financial statements and schedule and included an
explanatory paragraph regarding the Company’s adoption of the provisions of
Financial Accounting Standards Board Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB Statement No. 109” on January 1,
2007.
DELOITTE
& TOUCHE LLP
Parsippany,
New Jersey
March 12,
2009
LINCOLN
EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share amounts)
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
ASSETS
|
||||||||
|
CURRENT
ASSETS:
|
||||||||
|
Cash
and cash equivalents
|
$ | 15,234 | $ | 3,502 | ||||
|
Restricted
cash
|
383 | - | ||||||
|
Accounts
receivable, less allowance of $13,914 and $11,244 at December 31, 2008 and
2007, respectively
|
22,857 | 23,286 | ||||||
|
Inventories
|
3,374 | 2,540 | ||||||
|
Deferred
income taxes, net
|
5,627 | 4,575 | ||||||
|
Due
from federal programs
|
828 | 6,087 | ||||||
|
Prepaid
expenses and other current assets
|
2,958 | 3,771 | ||||||
|
Total
current assets
|
51,261 | 43,761 | ||||||
|
PROPERTY,
EQUIPMENT AND FACILITIES - At cost, net of accumulated depreciation and
amortization of $83,345 and $82,931 at December 31, 2008 and 2007,
respectively
|
108,567 | 106,564 | ||||||
|
OTHER
ASSETS:
|
||||||||
|
Noncurrent
accounts receivable, less allowance of $824 and $159 at December 31, 2008
and 2007, respectively
|
3,326 | 1,608 | ||||||
|
Deferred
finance charges
|
632 | 827 | ||||||
|
Pension
plan assets, net
|
- | 1,696 | ||||||
|
Deferred
income taxes, net
|
7,080 | 5,500 | ||||||
|
Goodwill
|
91,460 | 82,714 | ||||||
|
Other
assets, net
|
5,716 | 3,513 | ||||||
|
Total
other assets
|
108,214 | 95,858 | ||||||
|
TOTAL
|
$ | 268,042 | $ | 246,183 | ||||
See notes
to consolidated financial statements.
LINCOLN
EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share amounts)
(Continued)
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
CURRENT
LIABILITIES:
|
||||||||
|
Current
portion of long-term debt and lease obligations
|
$ | 130 | $ | 204 | ||||
|
Unearned
tuition
|
38,806 | 34,810 | ||||||
|
Accounts
payable
|
12,349 | 13,721 | ||||||
|
Accrued
expenses
|
16,239 | 10,079 | ||||||
|
Income
taxes payable
|
3,263 | 1,460 | ||||||
|
Other
short-term liabilities
|
314 | 1,439 | ||||||
|
Total
current liabilities
|
71,101 | 61,713 | ||||||
|
NONCURRENT
LIABILITIES:
|
||||||||
|
Long-term
debt and lease obligations, net of current portion
|
10,044 | 15,174 | ||||||
|
Pension
plan liabilities, net
|
4,335 | - | ||||||
|
Accrued
rent
|
5,972 | 5,608 | ||||||
|
Other
long-term liabilities
|
1,641 | 1,221 | ||||||
|
Total
liabilities
|
93,093 | 83,716 | ||||||
|
COMMITMENTS
AND CONTINGENCIES
|
||||||||
|
STOCKHOLDERS'
EQUITY:
|
||||||||
|
Preferred
stock, no par value - 10,000,000 shares authorized, no shares issued and
outstanding at December 31, 2008 and 2007
|
- | - | ||||||
|
Common
stock, no par value - authorized 100,000,000 shares at December 31, 2008
and 2007, issued and outstanding 26,088,261 shares at December 31, 2008
and 25,888,348 shares at December 31, 2007
|
120,597 | 120,379 | ||||||
|
Additional
paid-in capital
|
15,119 | 12,378 | ||||||
|
Deferred
compensation
|
(3,619 | ) | (3,228 | ) | ||||
|
Treasury
stock at cost - 615,000 at December 31, 2008 and no shares at December 31,
2007
|
(6,584 | ) | - | |||||
|
Retained
earnings
|
55,219 | 35,024 | ||||||
|
Accumulated
other comprehensive loss
|
(5,783 | ) | (2,086 | ) | ||||
|
Total
stockholders' equity
|
174,949 | 162,467 | ||||||
|
TOTAL
|
$ | 268,042 | $ | 246,183 | ||||
See notes
to consolidated financial statements.
LINCOLN
EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
(In
thousands, except per share amounts)
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
REVENUES
|
$ | 376,907 | $ | 327,774 | $ | 310,630 | ||||||
|
COSTS
AND EXPENSES:
|
||||||||||||
|
Educational
services and facilities
|
153,530 | 139,500 | 129,311 | |||||||||
|
Selling,
general and administrative
|
187,722 | 162,396 | 151,136 | |||||||||
|
Loss
(gain) on sale of assets
|
80 | (15 | ) | (435 | ) | |||||||
|
Total
costs & expenses
|
341,332 | 301,881 | 280,012 | |||||||||
|
OPERATING
INCOME
|
35,575 | 25,893 | 30,618 | |||||||||
|
OTHER:
|
||||||||||||
|
Interest
income
|
113 | 180 | 981 | |||||||||
|
Interest
expense
|
(2,152 | ) | (2,341 | ) | (2,291 | ) | ||||||
|
Other
(loss) income
|
- | 27 | (132 | ) | ||||||||
|
INCOME
FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
|
33,536 | 23,759 | 29,176 | |||||||||
|
PROVISION
FOR INCOME TAXES
|
13,341 | 9,932 | 12,092 | |||||||||
|
INCOME
FROM CONTINUING OPERATIONS
|
20,195 | 13,827 | 17,084 | |||||||||
|
LOSS
FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES
|
- | (5,487 | ) | (1,532 | ) | |||||||
|
NET
INCOME
|
$ | 20,195 | $ | 8,340 | $ | 15,552 | ||||||
|
Basic
|
||||||||||||
|
Earnings
per share from continuing operations
|
$ | 0.80 | $ | 0.54 | $ | 0.67 | ||||||
|
Loss
per share from discontinued operations
|
- | (0.21 | ) | (0.06 | ) | |||||||
|
Net
income per share
|
$ | 0.80 | $ | 0.33 | $ | 0.61 | ||||||
|
Diluted
|
||||||||||||
|
Earnings
per share from continuing operations
|
$ | 0.78 | $ | 0.53 | $ | 0.65 | ||||||
|
Loss
per share from discontinued operations
|
- | (0.21 | ) | (0.05 | ) | |||||||
|
Net
income per share
|
$ | 0.78 | $ | 0.32 | $ | 0.60 | ||||||
|
Weighted
average number of common shares outstanding:
|
||||||||||||
|
Basic
|
25,308 | 25,479 | 25,336 | |||||||||
|
Diluted
|
25,984 | 26,090 | 26,086 | |||||||||
See notes
to consolidated financial statements
LINCOLN
EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In
thousands, except share amounts)
|
Accumulated
|
||||||||||||||||||||||||||||||||
|
Additional
|
Other
|
|||||||||||||||||||||||||||||||
|
Common
Stock
|
Paid-in
|
Deferred
|
Treasury
|
Retained
|
Comprehensive
|
|||||||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Compensation
|
Stock
|
Earnings
|
Loss
|
Total
|
|||||||||||||||||||||||||
|
BALANCE
- January 1, 2006
|
25,168,390 | $ | 119,453 | $ | 5,665 | $ | (360 | ) | $ | - | $ | 11,232 | $ | - | $ | 135,990 | ||||||||||||||||
|
Net
income
|
- | - | - | - | - | 15,552 | - | 15,552 | ||||||||||||||||||||||||
|
Reduction
in estimated stock issuance expenses
|
- | 150 | - | - | - | - | - | 150 | ||||||||||||||||||||||||
|
Stock-based
compensation expense
|
||||||||||||||||||||||||||||||||
|
Restricted
Stock
|
18,429 | - | 300 | (107 | ) | - | - | - | 193 | |||||||||||||||||||||||
|
Stock
Options
|
- | - | 1,231 | - | - | - | - | 1,231 | ||||||||||||||||||||||||
|
Tax
benefit of options exercised
|
- | - | 499 | - | - | - | - | 499 | ||||||||||||||||||||||||
|
Exercise
of stock options
|
263,876 | 579 | - | - | - | - | - | 579 | ||||||||||||||||||||||||
|
Initial
adoption of SFAS No. 158, net of taxes
|
- | - | - | - | - | - | (2,411 | ) | (2,411 | ) | ||||||||||||||||||||||
|
BALANCE
- December 31, 2006
|
25,450,695 | 120,182 | 7,695 | (467 | ) | - | 26,784 | (2,411 | ) | 151,783 | ||||||||||||||||||||||
|
Net
income
|
- | - | - | - | - | 8,340 | - | 8,340 | ||||||||||||||||||||||||
|
Initial
adoption of FIN 48
|
- | - | - | - | - | (100 | ) | - | (100 | ) | ||||||||||||||||||||||
|
Employee
pension plan, net of taxes
|
- | - | - | - | - | - | 325 | 325 | ||||||||||||||||||||||||
|
Stock-based
compensation expense
|
||||||||||||||||||||||||||||||||
|
Restricted
stock
|
217,565 | - | 3,155 | (2,761 | ) | - | - | - | 394 | |||||||||||||||||||||||
|
Stock
options
|
- | - | 1,455 | - | - | - | - | 1,455 | ||||||||||||||||||||||||
|
Tax
benefit of options exercised
|
- | - | 73 | - | - | - | - | 73 | ||||||||||||||||||||||||
|
Exercise
of stock options
|
220,088 | 197 | - | - | - | - | - | 197 | ||||||||||||||||||||||||
|
BALANCE
- December 31, 2007
|
25,888,348 | 120,379 | 12,378 | (3,228 | ) | - | 35,024 | (2,086 | ) | 162,467 | ||||||||||||||||||||||
|
Net
income
|
- | - | - | - | - | 20,195 | - | 20,195 | ||||||||||||||||||||||||
|
Employee
pension plan, net of taxes
|
- | - | - | - | - | - | (3,697 | ) | (3,697 | ) | ||||||||||||||||||||||
|
Stock-based
compensation expense
|
||||||||||||||||||||||||||||||||
|
Restricted
stock
|
123,477 | - | 1,487 | (391 | ) | - | - | - | 1,096 | |||||||||||||||||||||||
|
Stock
options
|
- | - | 1,105 | - | - | - | - | 1,105 | ||||||||||||||||||||||||
|
Purchase
of treasury stock
|
- | - | - | - | (6,584 | ) | - | - | (6,584 | ) | ||||||||||||||||||||||
|
Tax
benefit of options exercised
|
- | - | 331 | - | - | - | - | 331 | ||||||||||||||||||||||||
|
Net
share settlement for equity-based compensation
|
(13,512 | ) | - | (182 | ) | - | - | - | - | (182 | ) | |||||||||||||||||||||
|
Exercise
of stock options
|
89,948 | 218 | - | - | - | - | - | 218 | ||||||||||||||||||||||||
|
BALANCE
- December 31, 2008
|
26,088,261 | $ | 120,597 | $ | 15,119 | $ | (3,619 | ) | $ | (6,584 | ) | $ | 55,219 | $ | (5,783 | ) | $ | 174,949 | ||||||||||||||
See notes
to consolidated financial statements.
LINCOLN
EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
|
Net
income
|
$ | 20,195 | $ | 8,340 | $ | 15,552 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
17,920 | 15,741 | 14,866 | |||||||||
|
Amortization
of deferred finance charges
|
195 | 192 | 192 | |||||||||
|
Deferred
income taxes
|
(298 | ) | (2,761 | ) | (3,655 | ) | ||||||
|
Loss
(gain) on disposition of assets
|
80 | (15 | ) | (437 | ) | |||||||
|
Impairment
of goodwill and long-lived assets
|
- | 3,099 | - | |||||||||
|
Fixed
asset donations
|
- | (26 | ) | (22 | ) | |||||||
|
Provision
for doubtful accounts
|
21,642 | 17,767 | 15,590 | |||||||||
|
Stock-based
compensation expense
|
2,201 | 1,849 | 1,424 | |||||||||
|
Tax
benefit associated with exercise of stock options
|
(331 | ) | (73 | ) | - | |||||||
|
Deferred
rent
|
412 | 630 | 1,081 | |||||||||
|
(Increase)
decrease in assets, net of acquisitions:
|
||||||||||||
|
Accounts
receivable
|
(22,775 | ) | (21,465 | ) | (21,870 | ) | ||||||
|
Inventories
|
(824 | ) | (102 | ) | (587 | ) | ||||||
|
Prepaid
expenses and current assets
|
(338 | ) | (1,957 | ) | (374 | ) | ||||||
|
Due
from federal funds
|
5,259 | (6,644 | ) | - | ||||||||
|
Other
assets
|
306 | (740 | ) | 1,181 | ||||||||
|
Increase
(decrease) in liabilities, net of acquisitions:
|
||||||||||||
|
Accounts
payable
|
818 | (284 | ) | (1,441 | ) | |||||||
|
Other
liabilities
|
(1,533 | ) | 1,926 | (157 | ) | |||||||
|
Income
taxes payable/prepaid
|
2,134 | (1,181 | ) | (1,225 | ) | |||||||
|
Accrued
expenses
|
6,103 | (221 | ) | (870 | ) | |||||||
|
Unearned
tuition
|
3,010 | 1,660 | (3,990 | ) | ||||||||
|
Total
adjustments
|
33,981 | 7,395 | (294 | ) | ||||||||
|
Net
cash provided by operating activities
|
54,176 | 15,735 | 15,258 | |||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
|
Restricted
cash
|
(383 | ) | 920 | (920 | ) | |||||||
|
Capital
expenditures
|
(20,166 | ) | (24,766 | ) | (19,341 | ) | ||||||
|
Proceeds
from sale of property and equipment
|
46 | 16 | 973 | |||||||||
|
Net
share settlement for equity-based compensation
|
(182 | ) | - | - | ||||||||
|
Acquisitions,
net of cash acquired
|
(10,520 | ) | - | (32,872 | ) | |||||||
|
Net
cash used in investing activities
|
(31,205 | ) | (23,830 | ) | (52,160 | ) | ||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
|
Proceeds
from borrowings
|
23,000 | 26,500 | 14,000 | |||||||||
|
Payments
on borrowings
|
(28,000 | ) | (21,500 | ) | (21,214 | ) | ||||||
|
Proceeds
from exercise of stock options
|
218 | 197 | 579 | |||||||||
|
Tax
benefit associated with exercise of stock options
|
331 | 73 | 499 | |||||||||
|
Principal
payments under capital lease obligations
|
(204 | ) | (134 | ) | (908 | ) | ||||||
|
Purchase
of treasury stock
|
(6,584 | ) | - | - | ||||||||
|
Reduction
in estimated stock issuance expenses
|
- | - | 150 | |||||||||
|
Net
cash (used in) provided by financing activities
|
(11,239 | ) | 5,136 | (6,894 | ) | |||||||
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
11,732 | (2,959 | ) | (43,796 | ) | |||||||
|
CASH
AND CASH EQUIVALENTS—Beginning of year
|
3,502 | 6,461 | 50,257 | |||||||||
|
CASH
AND CASH EQUIVALENTS—End of year
|
$ | 15,234 | $ | 3,502 | $ | 6,461 | ||||||
LINCOLN
EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
(Continued)
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||||||
|
Cash
paid during the year for:
|
||||||||||||
|
Interest
|
$ | 1,998 | $ | 2,305 | $ | 2,243 | ||||||
|
Income
taxes
|
$ | 12,137 | $ | 10,148 | $ | 15,799 | ||||||
|
SUPPLEMENTAL
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
|
||||||||||||
|
Cash
paid during the period for:
|
||||||||||||
|
Fixed
assets acquired in capital lease transactions
|
$ | - | $ | 652 | $ | - | ||||||
|
Fixed
assets acquired in noncash transactions
|
$ | 1,430 | $ | 2,812 | $ | 101 | ||||||
See notes
to consolidated financial statements.
LINCOLN
EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
(In
thousands, except share and per share amounts and unless otherwise
stated)
|
1.
|
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Business
Activities—Lincoln Educational Services Corporation and Subsidiaries (the
"Company") is a diversified provider of career-oriented post-secondary
education. The Company offers recent high school graduates and working adults
degree and diploma programs in five principal areas of study: Automotive
Technology, Health Sciences (which includes programs for licensed practical
nursing (LPN), medical administrative assistants, medical assistants, pharmacy
technicians, medical coding and billing and dental assisting), Business and
Information Technology, Hospitality Services and Skilled Trades. We currently
have 36 schools in 17 states across the United States.
Principles of
Consolidation—The accompanying consolidated financial statements include
the accounts of Lincoln Educational Services Corporation and its wholly-owned
subsidiaries. All intercompany accounts and transactions have been
eliminated.
Revenue
Recognition—Revenue is derived primarily from programs taught at the
schools. Tuition revenue and one-time fees, such as nonrefundable application
fees, and course material fees are recognized on a straight-line basis over the
length of the applicable program. If a student withdraws from a program prior to
a specified date, any paid but unearned tuition is refunded. Other revenues,
such as textbook sales, tool sales and contract training revenues are recognized
as services are performed or goods are delivered. On an individual student
basis, tuition earned in excess of cash received is recorded as accounts
receivable, and cash received in excess of tuition earned is recorded as
unearned tuition. Refunds are calculated and paid in accordance with federal,
state and accrediting agency standards.
Other
Comprehensive Income— Other comprehensive income was as
follows:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Net
income
|
$ | 20,195 | $ | 8,340 | $ | 15,552 | ||||||
|
Employee
pension plan, net of taxes
|
(3,697 | ) | 325 | - | ||||||||
|
Other
comprehensive income
|
$ | 16,498 | $ | 8,665 | $ | 15,552 | ||||||
Cash and Cash
Equivalents—Cash and cash equivalents include all cash balances and
highly liquid short-term investments, which mature within three months of
purchase.
Restricted
Cash— Restricted cash represents amounts received from the federal and
state governments under various student aid grant and loan programs. These funds
are either received prior to the completion of the authorization and
disbursement process for the benefit of the student or immediately prior to that
authorization. Restricted funds are held in separate bank accounts. Once the
authorization and disbursement process is completed and authorization obtained,
the funds are transferred to unrestricted accounts, and these funds then become
available for use in the Company’s current operations. As of December
31, 2006, the Company was subject to Heightened Cash Monitoring, Type 1 Status
by the DOE, however as of December 30, 2007, the Company was no longer subject
to this restriction. Therefore, the Company had no restrictions on
cash at December 31, 2007. As of December 31, 2008, restricted cash
related to Connecticut State Grants of $0.4 million.
Accounts
Receivable—The Company reports accounts receivable at net realizable
value, which is equal to the gross receivable less an estimated allowance for
uncollectible accounts. Noncurrent accounts receivable represent
amounts due from graduates in excess of 12 months from the balance
sheet date.
Allowance for
uncollectible accounts—Based upon experience and judgment, we establish
an allowance for uncollectible accounts with respect to tuition receivables. We
use an internal group of collectors, augmented by third-party collectors as
deemed appropriate, in our collection efforts. In establishing our allowance for
uncollectible accounts, we consider, among other things, current and expected
econmic conditions, a student's status (in-school or out-of-school), whether or
not additional financial aid funding will be collected from Title IV Programs or
other sources, whether or not a student is currently making payments, and
overall collection history. Changes in trends in any of these areas may impact
the allowance for uncollectible accounts. The receivables balances of withdrawn
students with delinquent obligations are reserved for based on our collection
history.
Inventories—Inventories
consist mainly of textbooks, tools and supplies. Inventories are valued at the
lower of cost or market on a first-in, first-out basis.
Property,
Equipment and Facilities—Depreciation and
Amortization—Property, equipment and facilities are stated at cost. Major
renewals and improvements are capitalized, while repairs and maintenance are
expensed when incurred. Upon the retirement, sale or other disposition of
assets, costs and related accumulated depreciation are eliminated from the
accounts and any gain or loss is reflected in operating income. For financial
statement purposes, depreciation of property and equipment is computed using the
straight-line method over the estimated useful lives of the assets, and
amortization of leasehold improvements is computed over the lesser of the term
of the lease or its estimated useful life.
Rent
Expense—Rent expense related to operating leases where scheduled rent
increases exist, is determined by expensing the total amount of rent due over
the life of the operating lease on a straight-line basis. The difference between
the rent paid under the terms of the lease and the rent expensed on a
straight-line basis is included in accrued expenses and other long-term
liabilities on the accompanying consolidated balance sheets.
Deferred Finance
Charges—These charges consist of $0.2 million and $0.3 million
as of December 31, 2008 and 2007, respectively, related to the long-term
debt and $0.4 million as of December 31, 2008 and 2007, related to the
finance obligation. These amounts are being amortized as an increase in interest
expense over the respective life of the debt or finance obligation.
Advertising
Costs—Costs related to advertising are expensed as incurred and
approximated $33.8 million, $31.1 million and $28.9 million for
the years ended December 31, 2008, 2007 and 2006, respectively. These
amounts are included in selling, general and administrative expenses in the
consolidated statement of income.
Bonus
costs—The Company accrues the estimated cost of our bonus programs using
current financial and statistical information as compared to targeted financial
achievements and individual performance objectives. Although we believe our
estimated liability recorded for bonuses is reasonable, actual results could
differ and require adjustment of the recorded balance.
Goodwill and
Other Intangible Assets— The Company tests its goodwill for impairment
annually, or whenever events or changes in circumstances indicate an impairment
may have occurred, by comparing its fair value to its carrying value. Impairment
may result from, among other things, deterioration in the performance of the
acquired business, adverse market conditions, adverse changes in applicable laws
or regulations, including changes that restrict the activities of the acquired
business, and a variety of other circumstances. If the Company determines that
an impairment has occurred, it is required to record a write-down of the
carrying value and charge the impairment as an operating expense in the period
the determination is made. In evaluating the recoverability of the carrying
value of goodwill and other indefinite-lived intangible assets, the Company must
make assumptions regarding estimated future cash flows and other factors to
determine the fair value of the acquired assets. Changes in strategy or market
conditions could significantly impact these judgments in the future and require
an adjustment to the recorded balances.
As
discussed in Note 19, as a result of a decision to close three of our campuses
we conducted a review of our goodwill as of June 30, 2007. In
connections with that review, we recognized a non-cash impairment charge of
approximately $2.1 million as of June 30, 2007. At December 31,
2008 and 2007, the Company tested its goodwill for impairment utilizing a market
capitalization approach and determined that it did not have an
impairment.
Concentration of
Credit Risk—Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and student receivables.
The
Company places its cash and cash equivalents with high credit quality financial
institutions. The Company's cash balances with financial institutions typically
exceed the Federal Deposit Insurance limit of $100,000. The Emergency Economic
Stabilization Act of 2008 that was enacted October 3, 2008 temporarily raised
the FDIC insurance coverage to the first $250,000 of funds at member
banks. This temporary increase is scheduled to expire January 1,
2010. The Company's cash balances on deposit at December 31,
2008, exceeded the balance insured by the FDIC by approximately $12.9 million.
The Company has not experienced any losses to date on its invested
cash.
The
Company extends credit for tuition and fees to many of its students. The credit
risk with respect to these accounts receivable is mitigated through the
students' participation in federally funded financial aid programs unless
students withdraw prior to the receipt of federal funds for those students. In
addition, the remaining tuition receivables are primarily comprised of smaller
individual amounts due from students.
With
respect to student receivables, the Company had no significant concentrations of
credit risk as of December 31, 2008, and 2007.
Use of Estimates
in the Preparation of Financial Statements—The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the period. On an ongoing basis, the Company evaluates the estimates and
assumptions, including those related to revenue recognition, bad debts, fixed
assets, income taxes, benefit plans and certain accruals. Actual results
could differ from those estimates.
Stock Based
Compensation Plans—The Company accounts for its stock-based compensation
plans in accordance with Statement of Financial Accounting Standards (“SFAS”)
No. 123R, Share-Based
Payment. The Company measures the value of stock options on
the grant date at fair value, using the Black-Scholes option valuation
model. The Company amortizes the fair value, net of estimated
forfeitures, utilizing straight-line amortization of compensation expense over
the requisite service period of the grant.
Income
Taxes—Deferred
tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between financial statement carrying
amounts of assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of
changes in tax rates is recognized in income in the period that includes the
enactment date.
Impairment of
Long-Lived Assets—The Company reviews the
carrying value of our long-lived assets and identifiable intangibles for
possible impairment whenever events or changes in circumstances indicate that
the carrying amounts may not be recoverable. The Company evaluates long-lived
assets for impairment by examining estimated future cash flows. These cash flows
are evaluated by using weighted probability techniques as well as comparisons of
past performance against projections. Assets may also be evaluated by
identifying independent market values. If the Company determines that an asset’s
carrying value is impaired, it will record a write-down of the carrying value of
the asset and charge the impairment as an operating expense in the period in
which the determination is made.
As
discussed in Note 19, as a result of a decision to close three of our campuses
we conducted a review of our long-lived assets as of June 30,
2007. In connections with that review, we recognized a non-cash
impairment charge of approximately $0.9 million as of June 30,
2007.
Start-up
Costs—Costs
related to the start of new campuses are expensed as incurred.
|
2.
|
RECENT
ACCOUNTING PRONOUNCEMENTS
|
In May
2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 163,
“Accounting for Financial
Guarantee Insurance Contracts – an interpretation of FASB Statement No.
60,” (“SFAS No. 163”). SFAS No. 163 requires that an insurance
enterprise recognize a claim liability prior to an event of default when there
is evidence that credit deterioration has occurred in an insured financial
obligation. SFAS No. 163 is effective for the Company as of January
1, 2009. The implementation of this standard had no effect on the
Company’s consolidated financial statements.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles,” (“SFAS No. 162”). SFAS No. 162
identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements. SFAS
No. 162 was effective for the Company as of November 15, 2008. The
implementation of this standard had no effect on the Company’s consolidated
financial statements.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities,” (“SFAS No. 161”) – an amendment to FASB
Statement No. 133. SFAS No. 161 is intended to improve
financial standards for derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entity's financial position, financial performance, and cash
flows. Entities are required to provide enhanced disclosures about: (a) how and
why an entity uses derivative instruments; (b) how derivative instruments and
related hedged items are accounted for under SFAS No. 133 and its related
interpretations; and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance and cash flows. The
Statement is effective for the Company as of January 1, 2009. The adoption of
the provision of SFAS No. 161 had no effect on the Company’s consolidated
financial statements.
In
December 2007, the FASB issued SFAS No. 141R, "Business Combinations"
(“SFAS No. 141R”). SFAS No. 141R establishes revised principles and requirements
for how the Company will recognize and measure assets and liabilities acquired
in a business combination. SFAS 141R requires, among other things, transaction
costs incurred in a business combination to be expensed, establishes a new
measurement date for valuing acquirer shares issued in consideration for a
business combination, and requires the recognition of contingent consideration
and pre-acquisition gain and loss contingencies. SFAS No. 141R was
effective for business combinations completed on or after January 1,
2009. In accordance with the transition guidance of SFAS No. 141R,
the Company elected to expense $0.9 million of costs incurred in 2008 related to
an acquisition which was completed in 2009.
In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
(“ARB”) No. 51" (“SFAS No. 160”). SFAS No. 160 establishes
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is
effective for the Company as of January 1, 2009. The adoption of the
provision of SFAS No. 160R had no effect on the Company’s consolidated financial
statements.
In
February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial
Assets and Financial Liabilities” (“SFAS No. 159”), providing companies
with an option to report selected financial assets and liabilities at fair
value. SFAS No. 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 requires companies to provide additional
information that will help investors and other users of financial statements to
more easily understand the effect of the Company’s choice to use fair value on
its earnings. It also requires entities to display the fair value of those
assets and liabilities for which they have chosen to use fair value on the face
of the balance sheet. SFAS No. 159 became effective for the Company as of
January 1, 2008; however, the Company did not elect to utilize the option to
report selected assets and liabilities at fair value.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106, and 132(R)” (“SFAS No. 158”). Among other items, SFAS
No. 158 requires recognition of the overfunded or underfunded status of an
entity’s defined benefit postretirement plan as an asset or liability in the
financial statements, requires the measurement of defined benefit postretirement
plan assets and obligations as of the end of the employer’s fiscal year, and
requires recognition of the funded status of defined benefit postretirement
plans in other comprehensive income. The Company adopted SFAS No. 158
on December 31, 2006. The incremental effects of applying SFAS No.
158 on the Company’s December 31, 2006 consolidated financial statements, on a
line by line basis, are as follows:
|
Balances
Before Adoption of Statement 158
|
Adjustments
|
Balances
After Adoption of Statement 158
|
||||||||||
|
Pension
plan assets, net
|
$ | 5,169 | $ | (4,062 | ) | $ | 1,107 | |||||
|
Deferred
income taxes
|
1,037 | 1,651 | 2,688 | |||||||||
|
Accumulated
other comprehensive income
|
- | 2,411 | 2,411 | |||||||||
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in GAAP, and expands disclosures about fair value
measurements. SFAS No. 157 does not require any new fair value measurements. The
provisions of SFAS No. 157 were effective for the Company as of January 1, 2008.
The adoption of the provision of SFAS No. 157 had no effect on the Company’s
consolidated financial statements.
In
September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin (“SAB”) No. 108 which provides interpretive guidance on how
the effects of the carryover or reversal of prior year unrecorded misstatements
should be considered in quantifying a current year misstatement. SAB No. 108 is
effective for the Company as of January 1, 2007. The adoption of the provision
of SAB No. 108 had no effect on the Company’s consolidated financial
statements.
In June
2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income
Taxes” (“FIN No. 48”). FIN No. 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s financial statements
in accordance with FASB SFAS No. 109, “Accounting for Income Taxes”, which was
adopted by the Company on January 1, 2007. FIN No. 48 prescribes a recognition
threshold and a measurement attribute for the financial statement recognition
and measurement of tax positions taken or expected to be taken in a tax return.
For those benefits to be recognized, a tax position must be more-likely-than-not
to be sustained upon examination by taxing authorities. The amount recognized is
measured as the largest amount of benefit that is greater than 50 percent likely
of being realized upon ultimate settlement. The adoption of FIN No. 48 resulted
in a cumulative effect adjustment to retained earnings as of January 1, 2007 of
$0.1 million.
In March
2006, the FASB issued SFAS No. 156, “Accounting for Servicing of
Financial Assets” (“SFAS No. 156”). SFAS No. 156 provides guidance
addressing the recognition and measurement of separately recognized servicing
assets and liabilities, common with mortgage securitization activities, and
provides an approach to simplify efforts to obtain hedge accounting treatment.
SFAS No. 156 was adopted on January 1, 2007. The adoption of the provision of
SFAS No. 156 had no effect on the Company’s consolidated financial
statements.
In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments” (“SFAS No. 155”). SFAS No. 155 is effective
beginning January 1, 2007. The adoption of the provision of SFAS No. 155 had no
effect on the Company’s consolidated financial statements.
3.
FINANCIAL AID AND REGULATORY
COMPLIANCE
Financial
Aid
The
Company’s schools and students participate in a variety of government-sponsored
financial aid programs that assist students in paying the cost of their
education. The largest source of such support is the federal programs of student
financial assistance under Title IV of the Higher Education Act of 1965, as
amended, commonly referred to as the Title IV Programs, which are administered
by the U.S. Department of Education (or "DOE"). During the years ended
December 31, 2008, 2007 and 2006, approximately 79%, 80% and 80%,
respectively, of net revenues were indirectly derived from funds distributed
under Title IV Programs.
Regulatory
Compliance
To
participate in Title IV Programs, a school must be authorized to offer its
programs of instruction by relevant state education agencies, be accredited by
an accrediting commission recognized by the DOE and be certified as an eligible
institution by the DOE. For this reason, the schools are subject to extensive
regulatory requirements imposed by all of these entities. After the schools
receive the required certifications by the appropriate entities, the schools
must demonstrate their compliance with the DOE regulations of the Title IV
Programs on an ongoing basis. Included in these regulations is the requirement
that the Company must satisfy specific standards of financial responsibility.
The DOE evaluates institutions for compliance with these standards each year,
based upon the institution’s annual audited financial statements, as well as
following a change in ownership of the institution. Under regulations which took
effect July 1, 1998, the DOE calculates the institution's composite score
for financial responsibility based on its (i) equity ratio, which measures
the institution's capital resources, ability to borrow and financial viability;
(ii) primary reserve ratio, which measures the institution's ability to
support current operations from expendable resources; and (iii) net income
ratio, which measures the institution's ability to operate at a profit. This
composite score can range from -1 to +3.
An institution that does not meet the
DOE's minimum composite score requirements of 1.5 may establish its financial
responsibility by posting a letter of credit or complying with additional
monitoring procedures as defined by the DOE. Based on audited
financial statements for the 2008, 2007 and 2006 fiscal years our calculations
result in a composite score of 1.8, 1.8 and 1.7,
respectively. Beginning December 30, 2004 and for a period of three
years, all of our institutions were placed on "Heightened Cash Monitoring, Type
1 status." As a result, we were subject to a less favorable Title IV fund
payment system that required us to credit student accounts before drawing down
Title IV funds and also required us to timely notify the DOE with respect to
certain enumerated oversight and financial events. The DOE has notified us that, as of
December 31, 2007, we are no longer subject to Heightened Cash Monitoring, Type
1 Status.
For the
years ended December 31, 2008, 2007 and 2006 the Company was in compliance with
the standards established by the DOE requiring that no individual DOE reporting
entity can receive more than 90% of its revenue, determined on a cash basis,
from Title IV, HEA Program Funds.
4.
WEIGHTED AVERAGE
COMMON SHARES
The
weighted average numbers of common shares used to compute basic and diluted
income per share for the years ended December 31, 2008, 2007 and 2006,
respectively, in thousands, were as follows:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Basic
shares outstanding
|
25,308,144 | 25,478,614 | 25,335,591 | |||||||||
|
Dilutive
effect of stock options
|
675,852 | 611,759 | 750,798 | |||||||||
|
Diluted
shares outstanding
|
25,983,996 | 26,090,373 | 26,086,389 | |||||||||
For the
years ended December 31, 2008, 2007 and 2006, options to acquire 546,708,
608,208 and 288,500 shares, respectively, were excluded from the above table as
the result on reported earnings per share would have been
antidilutive.
|
5.
|
BUSINESS
ACQUISITIONS
|
On
December 1, 2008, the Company acquired all of the rights, title and interest in
the assets of Briarwood College (“BRI”) for approximately $10.5 million,
net of cash acquired. Briarwood is regionally accredited by the New
England Association of Schools and Colleges, and currently offers two bachelor’s
degree programs to approximately 550 students as of December 31, 2008 from
Connecticut and surrounding states. The BRI purchase price has been
preliminarily allocated to identifiable net assets with the excess of the
purchase price over the estimated fair value of the net assets acquired recorded
as goodwill. Accordingly, the allocation may be subject to revisions
when the Company receives final information including appraisals, valuations and
other analyses.
On May
22, 2006, the Company acquired all of the outstanding common stock of New
England Institute of Technology at Palm Beach, Inc. (“FLA”) for approximately
$40.1 million. The purchase price was $32.9 million, net of cash acquired plus
the assumption of a mortgage note for $7.2 million. The FLA purchase price has
been allocated to identifiable net assets with the excess of the purchase price
over the estimated fair value of the net assets acquired recorded as
goodwill.
The
consolidated financial statements include the results of operations from the
respective acquisition dates. The purchase price has been allocated to
identifiable net assets with the excess of the purchase price over the estimated
fair value of the net assets acquired recorded as goodwill. None of the
acquisitions were deemed material to the Company’s consolidated financial
statements.
The
following table summarizes the estimated fair value of assets acquired and
liabilities assumed of BRI at the date of acquisition:
|
December
1, 2008
|
||||
|
Property,
equipment and facilities
|
$ | 1,265 | ||
|
Goodwill
|
8,746 | |||
|
Identified
intangibles:
|
||||
|
Student
contracts
|
348 | |||
|
Trade
name
|
- | |||
|
Accreditation
|
1,000 | |||
|
Curriculum
|
1,300 | |||
|
Non-compete
|
- | |||
|
Other
assets
|
21 | |||
|
Current
assets, excluding cash acquired
|
195 | |||
|
Total
liabilities assumed
|
(2,355 | ) | ||
|
Cost
of acquisition, net of cash acquired
|
$ | 10,520 | ||
|
6.
|
GOODWILL AND OTHER
INTANGIBLES
|
Changes
in the carrying amount of goodwill during the years ended December 31, 2008
and 2007 are as follows (in thousands):
|
Goodwill
balance as of December 31, 2006
|
$ | 84,995 | ||
|
Goodwill
adjustments
|
(146 | ) | ||
|
Goodwill
impairment
|
(2,135 | ) | ||
|
Goodwill
balance as of December 31, 2007
|
82,714 | |||
|
Goodwill
acquired pursuant to business acquisition-BRI
|
8,746 | |||
|
Goodwill
balance as of December 31, 2008
|
$ | 91,460 |
As
described further in Note 19, during the year ended December 31, 2007, the
Company recorded a goodwill impairment charge as a result of its decision to
cease operations at three of its campuses.
Identified
intangible assets, which are included in other assets in the accompanying
consolidated balance sheets, consisted of the following:
|
At
December 31, 2008
|
At
December 31, 2007
|
|||||||||||||||||||
|
Weighted
Average Amortization Period (years)
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
||||||||||||||||
|
Student
Contracts
|
2 | $ | 2,563 | $ | 2,230 | $ | 2,215 | $ | 2,212 | |||||||||||
|
Trade
name
|
Indefinite
|
1,270 | - | 1,270 | - | |||||||||||||||
|
Accreditation
|
Indefinite
|
1,307 | - | 307 | - | |||||||||||||||
|
Curriculum
|
10 | 2,000 | 289 | 700 | 208 | |||||||||||||||
|
Non-compete
|
5 | 201 | 105 | 201 | 65 | |||||||||||||||
|
Total
|
$ | 7,341 | $ | 2,624 | $ | 4,693 | $ | 2,485 | ||||||||||||
The
increase in student contracts, accreditation and curriculum assets was due to
the acquisition of BRI on December 1, 2008.
Amortization
of intangible assets for the years ended December 31, 2008, 2007 and 2006 was
approximately $0.1 million, $0.3 million and $0.5 million,
respectively.
The
following table summarizes the estimated future amortization
expense:
|
Year Ending December 31,
|
||||
|
2009
|
$ | 414 | ||
|
2010
|
400 | |||
|
2011
|
216 | |||
|
2012
|
200 | |||
|
2013
|
200 | |||
|
Thereafter
|
710 | |||
| $ | 2,140 | |||
|
7.
|
PROPERTY, EQUIPMENT AND
FACILITIES
|
Property,
equipment and facilities consist of the following:
|
Useful
life (years)
|
At
December 31,
|
||||||||||
|
2008
|
2007
|
||||||||||
|
Land
|
-
|
$ | 13,563 | $ | 13,563 | ||||||
|
Buildings
and improvements
|
|
1-25
|
120,834 | 104,484 | |||||||
|
Equipment,
furniture and fixtures
|
|
1-12
|
|
55,604 | 61,102 | ||||||
|
Vehicles
|
1-7
|
1,137 | 2,120 | ||||||||
|
Construction
in progress
|
-
|
774 | 8,226 | ||||||||
| 191,912 | 189,495 | ||||||||||
|
Less
accumulated depreciation and amortization
|
(83,345 | ) | (82,931 | ) | |||||||
| $ | 108,567 | $ | 106,564 | ||||||||
Included
above in equipment, furniture and fixtures are assets acquired under capital
leases as of December 31, 2008 and 2007 of $4.5 million and
$6.6 million, respectively, net of accumulated depreciation of
$4.1 million and $5.9 million, respectively.
Included
above in buildings and improvements is capitalized interest as of
December 31, 2008 and 2007 of $0.6 million and $0.5 million,
respectively, net of accumulated depreciation of $0.2 million and
$0.1 million, respectively.
Depreciation and amortization expense
of property, equipment and facilities was $17.2 million, $14.5 million
and $13.0 million for the years ended December 31, 2008, 2007 and
2006, respectively.
|
8.
|
ACCRUED
EXPENSES
|
Accrued
expenses consist of the following:
|
At
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Accrued
compensation and benefits
|
$ | 11,915 | $ | 5,888 | ||||
|
Other
accrued expenses
|
4,324 | 4,191 | ||||||
| $ | 16,239 | $ | 10,079 | |||||
9. LONG-TERM DEBT AND LEASE
OBLIGATIONS
Long-term
debt and lease obligations consist of the following:
|
At
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Credit
agreement (a)
|
$ | - | $ | 5,000 | ||||
|
Finance
obligation (b)
|
9,672 | 9,672 | ||||||
|
Automobile
loans
|
- | 16 | ||||||
|
Capital
leases-computers (with rates ranging from 8.5% to 8.7%)
|
502 | 690 | ||||||
| 10,174 | 15,378 | |||||||
|
Less
current maturities
|
(130 | ) | (204 | ) | ||||
| $ | 10,044 | $ | 15,174 | |||||
(a) The
Company has a credit agreement with a syndicate of banks which expires February
15, 2010. Under the terms of the agreement, the syndicate provided the
Company with a $100 million credit facility. The credit agreement permits the
issuance of up to $20 million in letters of credit, the amount of which reduces
the availability of permitted borrowings under the agreement. At December 31,
2008, the Company had outstanding letters of credit aggregating
$4.1 million which is primarily comprised of letters of credit for the
Department of Education and real estate leases.
The
obligations of the Company under the credit agreement are secured by a lien on
substantially all of the assets of the Company and its subsidiaries and any
assets that it or its subsidiaries may acquire in the future, including a pledge
of substantially all of the subsidiaries’ common stock. Outstanding borrowings
bear interest at the rate of adjusted LIBOR plus 1.0% to 1.75%, as defined, or a
base rate (as defined in the credit agreement). In addition to paying interest
on outstanding principal under the credit agreement, the Company and its
subsidiaries are required to pay a commitment fee to the lender with respect to
the unused amounts available under the credit agreement at a rate equal to 0.25%
to 0.40% per year, as defined.
During
2008, the Company borrowed an additional $23.0 million under the credit
agreement. During the third quarter of 2008, the Company repaid a
total of $28.0 million, leaving no amounts outstanding as of December 31,
2008. Interest rates on the loans outstanding during the year ranged
from 3.46% to 7.25%.
During
2007, the Company had borrowed a total of $26.5 million under the current credit
agreement. Interest rates on the loans outstanding during the year
ranged from 6.32% to 8.25%. During the third quarter of 2007, the
Company had repaid a total of $21.5 million on the total debt incurred during
the year, leaving $5.0 million outstanding under the credit agreement as of
December 31, 2007. The interest rate on the $5.0 million was 7.25% at
December 31, 2007.
The
credit agreement contains various covenants which, among other things,
restricts, subject to certain exceptions, the Company's ability to incur
additional indebtedness, pay dividends and make certain acquisitions.
Furthermore, the credit agreement contains customary events of default as well
as an event of default in the event of the suspension or termination of Title IV
Program funding for the Company’s and its subsidiaries' schools aggregating 10%
or more of the Company’s EBITDA (as defined) or its consolidated total assets
and such suspension or termination is not cured within a specified period.
As of December 31, 2008, the Company was in compliance with the financial
covenants contained in the credit agreement.
(b) The
Company completed a sale and a leaseback of several facilities on
December 28, 2001, as discussed further in Note 17. The Company
retained a continuing involvement in the lease and as a result it is prohibited
from utilizing sale-leaseback accounting. Accordingly, the Company has treated
this transaction as a finance lease. Rent payments under this obligation for the
three years in the period ended December 31, 2008 were $1.4 million, $1.3
million and $1.3 million, respectively. These payments have been reflected in
the accompanying consolidated income statement as interest expense for all
periods presented since the effective interest rate on the obligation is greater
than the scheduled payments. The lease expiration date is January 25,
2017.
As of
December 31, 2008, the Company was in compliance with the financial
covenants contained in its borrowing agreements.
Scheduled
maturities of long-term debt and lease obligations at December 31, 2008 are
as follows:
|
Year ending December 31,
|
||||
|
2009
|
$ | 130 | ||
|
2010
|
135 | |||
|
2011
|
146 | |||
|
2012
|
91 | |||
|
2013
|
- | |||
|
Thereafter
|
9,672 | |||
| $ | 10,174 | |||
|
10.
|
SLM
FINANCIAL CORPORATION LOAN
AGREEMENT
|
The
Company entered into a Tiered Discount Loan Program agreement, effective
September 1, 2007, with SLM Financial Corporation (“SLM”) to provide up to $16.0
million of private non-recourse loans to qualifying students. Under
this agreement, the Company was required to pay SLM either 20% or 30% of all
loans disbursed, depending on each student borrower’s credit
score. The Company was billed at the beginning of each month based on
loans disbursed during the prior month. For the year ended December 31, 2008,
$0.5 million of loans were disbursed, resulting in a $0.1 million loss on sale
of receivables. Loss on sale of receivables is included in selling,
general and administrative expenses in the accompanying statements of
income.
In
January 2008, SLM notified the Company that it was terminating its tiered
discount loan program, effective February 18, 2008.
11. STOCKHOLDERS'
EQUITY
On June
8, 2005, the Company adopted the Lincoln Educational Services Corporation 2005
Long-Term Incentive Plan (the “LTIP”). The LTIP permits the granting of
stock options, restricted share units, performance share units, stock
appreciation rights and other equity awards, as determined by the Company’s
compensation committee. The compensation committee has the authority,
among other things, to determine eligibility to receive awards, the type of
awards to be granted, the number of shares of stock subject to, or cash amount
payable in connection with, the awards and the terms and conditions of each
award (including vesting, forfeiture, payment, exercisability and performance
periods and targets). The maximum number of shares of our common stock that may
be issued for all purposes under the LTIP is 1,000,000 shares plus any shares of
common stock remaining available for issuance under the Lincoln Technical
Institute Management Stock Option Plan (“2002 Plan”). Any shares of our common
stock that (i) correspond to awards under the LTIP or the 2002 Plan that are
forfeited or expire for any reason without having been exercised or settled or
(ii) are tendered or withheld to pay the exercise price of an award or to
satisfy a participant’s tax withholding obligations will be added back to the
maximum number of shares available for issuance under the LTIP.
Under the
Company’s LTIP, certain employees received restricted stock totaling 200,000
shares, valued at $2.9 million, on October 30, 2007; 80,000 shares, valued at
$1.0 million, on February 29, 2008; 8,000 shares, valued at $0.1 million, on May
2, 2008; and 8,000 shares, valued at $0.1 million, on May 5, 2008. As
of December 31, 2008, there were a total of 296,000 restricted shares awarded
and 40,000 shares vested under the LTIP. The restricted shares vest ratably on
the first through fifth anniversary of the grant date; however, there is no
vesting period on the right to vote or the right to receive dividends on these
restricted shares. The recognized restricted stock expense for the
years ended December 31, 2008 and 2007 was $0.8 million and $0.1 million,
respectively. The deferred compensation or unrecognized restricted stock expense
under the LTIP as of December 31, 2008 and 2007 was $3.2 million and $2.8
million, respectively.
Pursuant
to the Company’s 2005 Non-Employee Directors Restricted Stock Plan (the
“Non-Employee Directors Plan”), each non-employee director of the Company
receives an annual award of restricted shares of common stock on the date of the
Company’s annual meeting of shareholders. The number of shares
granted to each non-employee director is based on the fair market value of a
share of common stock on that date. The restricted shares vest
ratably on the first through third anniversary of the grant date; however, there
is no vesting period on the right to vote or the right to receive dividends on
these restricted shares. As of December 31, 2008, there were a total
of 84,954 shares awarded and 37,772 shares vested under the Non-Employee
Directors Plan. The recognized restricted stock expense for the years
ended December 31, 2008, 2007 and 2006 was $0.3 million,
respectively. The deferred compensation or unrecognized restricted
stock expense under the Non-Employee Directors Plan as of December 31, 2008 and
2007 was $0.4 million, respectively.
On April
1, 2008, the Company’s Board of Directors approved the repurchase of up to
1,000,000 shares of its common stock over the period of one year. The
purchases may be made in the open market or in privately negotiated transactions
from time to time as permitted by securities laws and other legal
requirements. The timing, manner, price and amount of any repurchases
will be determined by the Company in its discretion and will be subject to
economic and market conditions, stock price, applicable legal requirements and
other factors. The program may be suspended or discontinued at any
time. During the year ended December 31, 2008, the Company
repurchased 615,000 shares of its common stock for approximately $6.6 million at
an average price of $10.70 per share.
The fair
value of the stock options used to compute stock-based compensation is the
estimated present value at the date of grant using the Black-Scholes option
pricing model. The weighted average fair values of options granted during 2008,
2007, and 2006 were $6.69, $6.78, and $9.68, respectively, using the following
weighted average assumptions for grants:
|
At
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Expected
volatility
|
57.23 | % | 55.42 | % | 55.10 | % | ||||||
|
Expected
dividend yield
|
0 | % | 0 | % | 0 | % | ||||||
|
Expected
life (term)
|
6
Years
|
6
Years
|
6
Years
|
|||||||||
|
Risk-free
interest rate
|
2.76-3.29 | % | 4.36 | % | 4.13-4.84 | % | ||||||
|
Weighted-average
exercise price during the year
|
$ | 11.97 | $ | 11.96 | $ | 17.00 | ||||||
The
expected volatility considers the volatility of certain of our
competitors' common stock that has been traded for a period commensurate
with the expected life. The expected term of options granted
represents the period of time that options granted are expected to be
outstanding. The risk-free rate used is based on the published U.S. Treasury
yield curve in effect at the time of grant for instruments with a similar
life. The dividend yield is 0% as the Company has never declared or
paid dividends on our common stock and we do not anticipate declaring or paying
dividends on our common stock in the foreseeable future.
The
following is a summary of transactions pertaining to the option
plans:
|
Shares
|
Weighted
Average Exercise Price Per Share
|
Weighted
Average Remaining Contractual Term
|
Aggregate
intrinsic Value (in thousands)
|
||||||||||
|
Outstanding
December 31, 2005
|
1,839,173 | 7.26 | |||||||||||
|
Granted
|
256,000 | 17.00 | |||||||||||
|
Cancelled
|
(103,072 | ) | 13.98 | ||||||||||
|
Exercised
|
(263,876 | ) | 3.56 | $ | 3,444 | ||||||||
|
Outstanding
December 31, 2006
|
1,728,225 | 8.85 |
6.31
years
|
10,255 | |||||||||
|
Granted
|
185,500 | 11.96 | |||||||||||
|
Cancelled
|
(181,474 | ) | 12.02 | ||||||||||
|
Exercised
|
(220,088 | ) | 3.34 | 1,811 | |||||||||
|
Outstanding
December 31, 2007
|
1,512,163 | 9.65 |
5.83
years
|
9,156 | |||||||||
|
Granted
|
145,500 | 11.97 | |||||||||||
|
Cancelled
|
(93,500 | ) | 15.01 | ||||||||||
|
Exercised
|
(89,948 | ) | 2.43 | 1,018 | |||||||||
|
Outstanding
December 31, 2008
|
1,474,215 | 9.98 |
5.25
years
|
6,808 | |||||||||
|
Exercisable
as of December 31, 2008
|
1,154,633 | 8.92 |
4.42
years
|
6,506 | |||||||||
As of
December 31, 2008, we estimate that unrecognized pre-tax compensation expense
for all unvested stock option awards, in the amount of approximately $1.1
million which will be expensed over the weighted-average period of approximately
1.2 years. In 2009, 174,333 shares are expected to vest.
The
following table presents a summary of options outstanding at December 31,
2008:
|
At
December 31, 2008
|
||||||||||||||||||||||
|
Stock
Options Outstanding
|
Stock
Options Exercisable
|
|||||||||||||||||||||
|
Range
of Exercise Prices
|
Shares
|
Contractual
Weighted Average life (years)
|
Weighted
Average Price
|
Shares
|
Weighted
Exercise Price
|
|||||||||||||||||
| $ | 3.10 | 628,507 | 3.03 | $ | 3.10 | 628,507 | $ | 3.10 | ||||||||||||||
| $ | 4.00-$13.99 | 299,000 | 8.50 | 11.82 | 63,678 | 11.26 | ||||||||||||||||
| $ | 14.00-$19.99 | 429,208 | 6.15 | 15.26 | 375,048 | 14.97 | ||||||||||||||||
| $ | 20.00-$25.00 | 117,500 | 5.61 | 22.88 | 87,400 | 23.10 | ||||||||||||||||
| 1,474,215 | 5.25 | 9.98 | 1,154,633 | 8.92 | ||||||||||||||||||
|
12.
|
PENSION
PLAN
|
The
Company sponsors a noncontributory defined benefit pension plan covering
substantially all of the Company's union employees. Benefits are provided based
on employees' years of service and earnings. This plan was frozen on
December 31, 1994 for non-union employees.
The
following table sets forth the plan's funded status and amounts recognized in
the consolidated financial statements:
|
Year
Ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
CHANGES
IN BENEFIT OBLIGATIONS:
|
||||||||
|
Benefit
obligation-beginning of year
|
$ | 14,062 | $ | 14,624 | ||||
|
Service
cost
|
113 | 115 | ||||||
|
Interest
cost
|
893 | 831 | ||||||
|
Actuarial
(gain) loss
|
484 | (965 | ) | |||||
|
Benefits
paid
|
(558 | ) | (543 | ) | ||||
|
Benefit
obligation at end of year
|
14,994 | 14,062 | ||||||
|
CHANGE
IN PLAN ASSETS:
|
||||||||
|
Fair
value of plan assets-beginning of year
|
15,758 | 15,731 | ||||||
|
Actual
(loss) return on plan assets
|
(4,540 | ) | 570 | |||||
|
Benefits
paid
|
(559 | ) | (543 | ) | ||||
|
Fair
value of plan assets-end of year
|
10,659 | 15,758 | ||||||
|
FAIR
VALUE IN EXCESS OF BENEFIT OBLIGATION FUNDED STATUS:
|
$ | (4,335 | ) | $ | 1,696 | |||
Amounts
recognized in the consolidated balance sheets consist of:
|
At
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Noncurrent
assets
|
$ | - | $ | 1,696 | ||||
|
Noncurrent
liabilities
|
$ | (4,335 | ) | $ | - | |||
Amounts
recognized in accumulated other comprehensive loss consist of:
|
Year
Ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Accumulated
loss
|
$ | (9,567 | ) | $ | (3,537 | ) | ||
|
Deferred
income taxes
|
3,784 | 1,451 | ||||||
|
Accumulated
other comprehensive loss
|
$ | (5,783 | ) | $ | (2,086 | ) | ||
The
accumulated benefit obligation was $14.8 million and $13.9 million at December
31, 2008 and 2007, respectively.
The
following table provides the components of net periodic cost/(income) for the
plan:
|
Year
Ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
COMPONENTS
OF NET PERIODIC BENEFIT COST (INCOME)
|
||||||||
|
Service
cost
|
$ | 113 | $ | 115 | ||||
|
Interest
cost
|
894 | 831 | ||||||
|
Expected
return on plan assets
|
(1,233 | ) | (1,233 | ) | ||||
|
Recognized
net actuarial loss
|
228 | 223 | ||||||
|
Net
periodic benefit cost (income)
|
$ | 2 | $ | (64 | ) | |||
The
estimated net loss, transition obligation and prior service cost for the plan
that will be amortized from accumulated other comprehensive income into net
periodic benefit cost over the next year are ($0.8) million, $0 million and $0
million.
Fair
value of total plan assets by major asset category as of December
31:
|
2008
|
2007
|
|||||||
|
Equity
securities
|
42 | % | 49 | % | ||||
|
Fixed
income
|
48 | % | 37 | % | ||||
|
International
equities
|
10 | % | 14 | % | ||||
|
Cash
and equivalents
|
0 | % | 0 | % | ||||
|
Total
|
100 | % | 100 | % | ||||
Weighted-average
assumptions used to determine benefit obligations as of
December 31:
|
2008
|
2007
|
|||||||
|
Discount
rate
|
6.27 | % | 6.37 | % | ||||
|
Rate
of compensation increase
|
4.00 | % | 4.00 | % | ||||
Weighted-average
assumptions used to determine net periodic pension cost for years ended
December 31:
|
2008
|
2007
|
2006
|
||||||||||
|
Discount
rate
|
6.37 | % | 5.82 | % | 5.75 | % | ||||||
|
Rate
of compensation increase
|
4.00 | % | 4.00 | % | 4.00 | % | ||||||
|
Long-term
rate of return
|
8.00 | % | 8.00 | % | 8.00 | % | ||||||
As this
plan was frozen to non-union employees on December 31, 1994, the difference
between the benefit obligation and accumulated benefit obligation is not
significant in any year.
The
Company invests plan assets based on a total return on investment approach,
pursuant to which the plan assets include a diversified blend of equity and
fixed income investments toward a goal of maximizing the long-term rate of
return without assuming an unreasonable level of investment risk. The Company
determines the level of risk based on an analysis of plan liabilities, the
extent to which the value of the plan assets satisfies the plan liabilities and
the plan's financial condition. The investment policy includes target
allocations ranging from 30% to 70% for equity investments, 20% to 60% for fixed
income investments and 0% to 10% for cash equivalents. The equity portion of the
plan assets represents growth and value stocks of small, medium and large
companies. The Company measures and monitors the investment risk of the plan
assets both on a quarterly basis and annually when the Company assesses plan
liabilities.
The
Company uses a building block approach to estimate the long-term rate of return
on plan assets. This approach is based on the capital markets assumption that
the greater the volatility, the greater the return over the long term. An
analysis of the historical performance of equity and fixed income investments,
together with current market factors such as the inflation and interest rates,
are used to help make the assumptions necessary to estimate a long-term rate of
return on plan assets. Once this estimate is made, the Company reviews the
portfolio of plan assets and makes adjustments thereto that the Company believes
are necessary to reflect a diversified blend of equity and fixed income
investments that is capable of achieving the estimated long-term rate of return
without assuming an unreasonable level of investment risk. The Company also
compares the portfolio of plan assets to those of other pension plans to help
assess the suitability and appropriateness of the plan's
investments.
While the
Company does not expect to make any contributions to the plan in 2009, after
considering the funded status of the plan, movements in the discount rate,
investment performance and related tax consequences, the Company may choose to
make contributions to the plan in any given year.
The total
amount of the Company’s contributions paid under its pension plan was $0 for
each of the years ended December 31, 2008 and 2007, respectively. The net
periodic benefit expense was $2 thousand for the year ended December 31,
2008. The net periodic benefit income was $64 thousand for the year
ended December 31, 2007.
Information
about the expected benefit payments for the plan is as follows:
|
Year
Ending December 31,
|
||||
|
2009
|
$ | 733 | ||
|
2010
|
819 | |||
|
2011
|
847 | |||
|
2012
|
886 | |||
|
2013
|
974 | |||
|
Years
2014-2018
|
5,828 | |||
The
Company has a 401(k) defined contribution plan for all eligible employees.
Employees may contribute up to 15% of their compensation into the plan. The
Company will contribute an additional 30% of the employee's contributed amount
on the first 6% of compensation. For the years ended December 31, 2008,
2007 and 2006 the Company's expense for the 401(k) plan amounted to
$1.4 million, $1.2 million and $0.9 million,
respectively.
|
13.
|
INCOME
TAXES
|
Components
of the provision for income taxes from continuing operations were as
follows:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 10,960 | $ | 8,538 | $ | 12,585 | ||||||
|
State
|
2,679 | 2,484 | 3,162 | |||||||||
|
Total
|
13,639 | 11,022 | 15,747 | |||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
(159 | ) | (776 | ) | (2,908 | ) | ||||||
|
State
|
(139 | ) | (314 | ) | (747 | ) | ||||||
|
Total
|
(298 | ) | (1,090 | ) | (3,655 | ) | ||||||
|
Total
provision
|
$ | 13,341 | $ | 9,932 | $ | 12,092 | ||||||
The
components of the deferred tax assets are as follows:
|
At
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Deferred
tax assets
|
||||||||
|
Current:
|
||||||||
|
Accrued
vacation
|
$ | 117 | $ | 102 | ||||
|
Allowance
for bad debts
|
5,773 | 4,662 | ||||||
|
Total
current deferred tax assets
|
5,890 | 4,764 | ||||||
|
Deferred
tax liabilities
|
||||||||
|
Current:
|
||||||||
|
Accrued
student fees
|
(263 | ) | (189 | ) | ||||
|
Total
current deferred tax liabilities
|
(263 | ) | (189 | ) | ||||
|
Total
net current deferred tax assets
|
5,627 | 4,575 | ||||||
|
Noncurrent:
|
||||||||
|
Accrued
rent
|
2,530 | 2,455 | ||||||
|
Stock-based
compensation
|
2,390 | 2,048 | ||||||
|
Depreciation
|
8,360 | 7,554 | ||||||
|
Prepaid
pension asset
|
1,714 | - | ||||||
|
Sale
leaseback-deferred gain
|
2,067 | 2,025 | ||||||
|
Total
noncurrent deferred tax assets
|
17,061 | 14,082 | ||||||
|
Deferred
tax liabilities
|
||||||||
|
Noncurrent:
|
||||||||
|
Other
intangibles
|
(2,893 | ) | (2,294 | ) | ||||
|
Goodwill
|
(7,088 | ) | (5,592 | ) | ||||
|
Prepaid
pension cost
|
- | (696 | ) | |||||
|
Total
deferred tax liabilities
|
(9,981 | ) | (8,582 | ) | ||||
|
Total
net noncurrent deferred tax assets
|
7,080 | 5,500 | ||||||
|
Total
net deferred tax assets
|
$ | 12,707 | $ | 10,075 | ||||
The
difference between the actual tax provision and the tax provision that would
result from the use of the Federal statutory rate is as follows:
|
Year
Ended December 31,
|
||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
Income
from continuing operations before taxes
|
$ | 33,536 | $ | 23,759 | $ | 29,176 | ||||||||||||||||||
|
Expected
tax
|
$ | 11,737 | 35.0 | % | $ | 8,316 | 35.0 | % | $ | 10,212 | 35.0 | % | ||||||||||||
|
State
tax expense (net of federal benefit)
|
1,651 | 4.9 | 1,411 | 6.0 | 1,570 | 5.4 | ||||||||||||||||||
|
Other
|
(47 | ) | (0.1 | ) | 205 | 0.8 | 310 | 1.0 | ||||||||||||||||
|
Total
|
$ | 13,341 | 39.8 | % | $ | 9,932 | 41.8 | % | $ | 12,092 | 41.4 | % | ||||||||||||
The
Company adopted the FIN No. 48 in 2006. At that time the Company
established a liability of $0.1 million. In 2007 and 2008 there have
been no adjustments or settlements related to such uncertain tax
positions. Accordingly, at December 31, 2008, the Company’s liability
remained $0.1 million. The Company believes that it is reasonably
possible that the $0.1 million of unrecognized tax benefits associated with FIN
No. 48 will be resolved by December 31, 2009.
The
Company or one of its subsidiaries files income tax returns in the U.S. federal
jurisdiction, and various states. The Company is no longer subject to
U.S. federal income tax examinations for years before 2004 and generally, is no
longer subject to state and local income tax examinations by tax authorities for
years before 2003.
14. SEGMENT REPORTING
The
Company's principal business is providing post-secondary education. Accordingly,
the Company's operations aggregate into one reporting segment.
|
15.
|
RELATED PARTY
TRANSACTIONS
|
On May
12, 2008, the Company repurchased from Five Mile River Capital Partners and
Steven W. Hart an aggregate 100,000 shares of our common stock for $11.25 per
share for a total cost of $1.1 million. Hart Capital LLC is the
managing member of Five Mile River Capital Partners LLC, our second largest
stockholder. Steven W. Hart is the owner and president of Hart
Capital LLC and is a former member of our board of directors. At the
time of the transaction Hart Capital beneficially owned, through Five Mile River
Capital LLC, 8.3% of our outstanding shares of common stock.
On
October 15, 2007, the Company entered into a Separation and Release Agreement
with Lawrence E. Brown, our former Vice Chairman. Under this
agreement Mr. Brown’s employment terminated as of the close of business on
October 31, 2007. For a period of 14 months following the date of
separation of employment, Mr. Brown continued to provide transitional services
to the Company, not to exceed ten hours per month. In consideration
for a release of claims, the Company paid Mr. Brown a lump sum cash payment of
$0.5 million and reimbursed Mr. Brown for the employer-portion of the premiums
due for continuation of coverage under COBRA through December 31,
2008. Mr. Brown was entitled to the use of his automobile and
reimbursement of associated costs by us through December 31, 2008. In
addition, pursuant to the terms of the agreement, Mr. Brown agreed to be subject
to certain restrictive covenants, which, among other things, prohibited him for
the duration of 14 months following the date of separation of employment, from
(i) competing against the Company and (ii) soliciting the Company or any of our
affiliates’ or subsidiaries’ employees, consultants, clients or customers
through December 31, 2008.
Pursuant
to the Employment Agreement between Shaun E. McAlmont and the Company, the
Company agreed to pay and reimburse Mr. McAlmont the reasonable costs of his
relocation from Denver, Colorado to West Orange, New Jersey in the year ended
December 31, 2006. Such relocation assistance included the purchase by the
Company of Mr. McAlmont’s home in Denver, Colorado. The $0.5 million price paid
for Mr. McAlmont’s home equaled the average of the amount of two independent
appraisers selected by the Company. This amount is reflected in property,
equipment and facilities in the accompanying consolidated balance
sheets.
|
16.
|
DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES
|
On May
22, 2006, the Company assumed a mortgage note payable with an accompanying
interest rate swap (the “SWAP”) as part of the acquisition of the New England
Institute of Technology at Palm Beach, Inc. in the amount of $7.2 million.
The Company accounted for the interest rate swap agreement in accordance with
SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as
amended. Under the swap agreement, the Company paid a fixed rate tied to
the one month LIBOR rate until May 1, 2013 and received a variable rate of
6.48%. The SWAP was accounted for as an ineffective hedge as it did not
meet the requirements set forth under SFAS No. 133. Accordingly, other
income (loss) includes a loss of $0.2 million as of December 31,
2006. The Company repaid the mortgage note in November 2006. As a result
the SWAP agreement was terminated in 2006 and the Company received $0.2 million
for the fair market value.
17. COMMITMENTS AND CONTINGENCIES
Lease
Commitments—The Company leases office premises, educational facilities
and various equipment for varying periods through the year 2023 at basic annual
rentals (excluding taxes, insurance, and other expenses under certain leases) as
follows:
|
Year
Ending December 31,
|
Finance
Obligations
|
Operating
Leases
|
Capital
Leases
|
|||||||||
|
2009
|
$ | 1,381 | $ | 17,840 | $ | 167 | ||||||
|
2010
|
1,381 | 15,935 | 161 | |||||||||
|
2011
|
1,381 | 15,247 | 161 | |||||||||
|
2012
|
1,381 | 14,811 | 94 | |||||||||
|
2013
|
1,381 | 13,479 | - | |||||||||
|
Thereafter
|
4,259 | 63,498 | - | |||||||||
| 11,164 | 140,810 | 583 | ||||||||||
|
Less
amount representing interest
|
(11,164 | ) | - | (81 | ) | |||||||
| $ | - | $ | 140,810 | $ | 502 | |||||||
On
December 28, 2001, the Company completed a sale and a leaseback of four
owned facilities to a third party for net proceeds of approximately
$8.8 million. The initial term of the lease is 15 years with two
ten-year extensions. The lease is an operating lease that starts at
$1.2 million in the first year and increases annually by the consumer price
index. The lease includes an option near the end of the initial lease term to
purchase the facilities at fair value, as defined. This transaction is being
accounted for as a lease obligation. The net proceeds received have been
reflected in the consolidated balance sheet as a finance obligation. The lease
payments are included as a component of interest expense.
Rent
expense, included in operating expenses in the accompanying financial statements
for the three years ended December 31, 2008 is $17.2 million,
$16.7 million, and $15.7 million, respectively. Interest expense
related to the financing obligation in the accompanying financial statements for
the years ended December 31, 2008, 2007 and 2006 is $1.4 million, $1.3
million and $1.3 million, respectively.
Capital
Expenditures—The Company has entered into commitments to expand or
renovate campuses. These commitments are in the range of $3.0 to $5.0 million in
the aggregate and are due within the next 12 months.
Litigation and
Regulatory Matters—In the ordinary conduct of our business, we are
subject to periodic lawsuits, investigations and claims, including, but not
limited to, claims involving students or graduates and routine employment
matters. Although we cannot predict with certainty the ultimate resolution of
lawsuits, investigations and claims asserted against us, we do not believe that
any currently pending legal proceeding to which we are a party will have a
material adverse effect on our business, financial condition, results of
operation or cash flows.
Student
Loans—At December 31, 2008, the Company had outstanding net loan
commitments to its students to assist them in financing their education of
approximately $16.5 million.
Vendor
Relationship—On April 1, 2006, the Company entered into an agreement with
Snap-on Industrial (“Snap-on”) which expires on March 31, 2011. The
Company has agreed to grant Snap-on exclusive rights to our certain automotive
campuses to display advertising and to train our students with the exception of
one pre-existing vendor contract. The Company earns credits
that are redeemable for tools and equipment based on the number of automotive
graduates quarterly. In addition, credits are earned on our purchases as well as
purchases made by students enrolled in our automotive programs. Snap-on receivable for
credits not redeemed for the years ended December 31, 2008 and
2007 was $0.3 million and $0.5 million, respectively.
In
October 1, 2005, the Company entered into an agreement with Snap-on exclusively
for our Queens, NY campus opened March 27, 2006 which expires on November 30,
2011. We have agreed to grant Snap-on exclusive rights to in school advertising
and supplying all student training tools and equipment, as well as our
automotive equipment purchases. In exchange, Snap-on agreed to
advance tools and equipment needed to build out the school, not to exceed $1.0
million at list price. The equipment advance is offset by
credits earned through purchases by the Queens campus and their
students. Snap-on liability resulting from advanced equipment
received in excess of credits earned for the years ended December 31, 2008 and
2007, was $0.5 million and $0.6 million,
respectively.
Executive
Employment Agreements—The Company entered into employment contracts with
key executives that provide for continued salary payments if the executives are
terminated for reasons other than cause, as defined in the agreements. The
future employment contract commitments for such employees were
approximately $4.0
million at December 31, 2008.
Change in Control
Agreements—In the event of a change of control several key executives
will receive continue salary payments based on their employment
agreements.
Surety
Bonds—Each of our campuses must be authorized by the applicable state
education agency in which the campus is located to operate and to grant degrees,
diplomas or certificates to its students. The campuses are subject to extensive,
ongoing regulation by each of these states. In addition, our campuses are
required to be authorized by the applicable state education agencies of certain
other states in which our campuses recruit students. The Company is required to
post surety bonds on behalf of our campuses and education representatives with
multiple states to maintain authorization to conduct our business. At December
31, 2008, we have posted surety bonds in the total amount of approximately
$13.7 million.
18. UNAUDITED QUARTERLY FINANCIAL
INFORMATION
Quarterly
financial information for 2008 and 2007 is as follows (in thousands except per
share data):
|
Quarter
|
||||||||||||||||
|
2008
|
First
|
Second
|
Third
|
Fourth
|
||||||||||||
|
Revenues
|
$ | 84,047 | $ | 85,056 | $ | 100,481 | $ | 107,323 | ||||||||
|
Operating
income
|
1,249 | 2,686 | 10,391 | 21,248 | ||||||||||||
|
Net
income
|
484 | 1,241 | 5,706 | 12,763 | ||||||||||||
|
Income
per share:
|
||||||||||||||||
|
Basic
|
||||||||||||||||
|
Net
income per share
|
$ | 0.02 | $ | 0.05 | $ | 0.23 | $ | 0.51 | ||||||||
|
Diluted
|
||||||||||||||||
|
Net
income per share
|
$ | 0.02 | $ | 0.05 | $ | 0.22 | $ | 0.49 | ||||||||
|
Quarter
|
||||||||||||||||
|
2007
|
First
|
Second
|
Third
|
Fourth
|
||||||||||||
|
Revenues
|
$ | 76,170 | $ | 74,744 | $ | 86,566 | $ | 90,294 | ||||||||
|
Operating
(loss) income
|
(1,164 | ) | 1,966 | 8,079 | 17,013 | |||||||||||
|
(Loss)
income from continuing operations
|
(930 | ) | 768 | 4,370 | 9,620 | |||||||||||
|
Loss
from discontinued operations
|
(688 | ) | (2,468 | ) | (2,331 | ) | - | |||||||||
|
Net
(loss) income
|
(1,618 | ) | (1,700 | ) | 2,039 | 9,620 | ||||||||||
|
(Loss)
income per share:
|
||||||||||||||||
|
Basic
|
||||||||||||||||
|
(Loss)
earnings per share from continuing operations
|
$ | (0.04 | ) | $ | 0.03 | $ | 0.17 | $ | 0.38 | |||||||
|
Loss
per share from discontinued operations
|
(0.02 | ) | (0.10 | ) | (0.09 | ) | - | |||||||||
|
Net
(loss) income per share
|
$ | (0.06 | ) | $ | (0.07 | ) | $ | 0.08 | $ | 0.38 | ||||||
|
Diluted
|
||||||||||||||||
|
(Loss)
earnings per share from continuing operations
|
$ | (0.04 | ) | $ | 0.03 | $ | 0.17 | $ | 0.37 | |||||||
|
Loss
per share from discontinued operations
|
(0.02 | ) | (0.10 | ) | (0.09 | ) | - | |||||||||
|
Net
(loss) income per share
|
$ | (0.06 | ) | $ | (0.07 | ) | $ | 0.08 | $ | 0.37 | ||||||
19. DISCONTINUED
OPERATIONS
On July
31, 2007 the Company’s Board of Directors approved a plan to cease operations at
the Company’s Plymouth Meeting, Pennsylvania, Norcross, Georgia and Henderson,
Nevada campuses. As a result of the above decision, the Company
reviewed the related goodwill and long-lived assets for possible impairment in
accordance with SFAS No. 142, “Goodwill and Other Intangible
Assets,” and SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.”
As of
September 30, 2007, all operations had ceased at these campuses and,
accordingly, the results of operations of these campuses have been reflected in
the accompanying statements of operations as “Discontinued Operations” for all
periods presented.
The
results of operations at these three campuses for each of the two year period
ended December 31, 2007 were comprised of the following (in
thousands):
|
Year
Ended December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Revenue
|
$ | 4,230 | $ | 10,876 | ||||
|
Operating
Expenses
|
(13,760 | ) | (13,493 | ) | ||||
| (9,530 | ) | (2,617 | ) | |||||
|
Benefit
for income taxes
|
(4,043 | ) | (1,085 | ) | ||||
|
Loss
from discontinued operations
|
$ | (5,487 | ) | $ | (1,532 | ) | ||
20. SUBSEQUENT EVENTS
On
January 20, 2009, the Company completed the acquisition of four of the five
institutions comprising Baran Institute of Technology (“Baran”), for
approximately $24.9 million in cash, net of cash acquired, subject to
contractual post closing adjustments. Baran consists of five distinct
institutions serving approximately 1,900 students and offers associate and
diploma programs in the fields of automotive, skilled trades, health sciences
and culinary arts. The four institutions the Company acquired on
January 20, 2009 are Baran Institute of Technology (“BIT”), Connecticut Culinary
Institute (“CCI”), Americare School of Nursing (“ASN”), and Engine City
Technical Institute (“ECTI”). The Company also acquired the
membership interests of Hartford Urban Ventures, LLC and certain assets and
assumed certain liabilities of Educational Properties, LLC, which provide
support services to Baran. In connection with these acquisitions, the
Company recorded a charge of approximately $0.02 per share in the fourth quarter
of 2008 and for the year ended December 31, 2008 and we expect to record a
charge of approximately $0.01 per share in the first quarter of 2009 to reflect
the expenses related to the acquisitions.
On
February 18, 2009, we sold common stock in a public offering and received net
proceeds of approximately $14.0 million.
LINCOLN
EDUCATIONAL SERVICES CORPORATION
Schedule II—Valuation
and Qualifying Accounts
(in
thousands)
|
Description
|
Balance
at Beginning of Period
|
Charged
to Expense
|
Accounts
Written-off
|
Balance
at End of Period
|
||||||||||||
|
Allowance
accounts for the year ended:
|
||||||||||||||||
|
December
31, 2008
|
||||||||||||||||
|
Student
receivable allowance
|
$ | 11,403 | $ | 21,642 | $ | (18,307 | ) | $ | 14,738 | |||||||
|
December
31, 2007
|
||||||||||||||||
|
Student
receivable allowance
|
$ | 11,536 | $ | 17,767 | $ | (17,900 | ) | $ | 11,403 | |||||||
|
December
31, 2006
|
||||||||||||||||
|
Student
receivable allowance
|
$ | 7,647 | $ | 15,590 | $ | (11,701 | ) | $ | 11,536 | |||||||
F-29
EXHIBIT
10.3
[LINCOLN
EDUCATIONAL SERVICES CORPORATION LETTERHEAD]
January
14, 2009
Mr. David
F. Carney
c/o
Lincoln Educational Services Corporation
200
Executive Drive, Suite 340
West
Orange, New Jersey 07052
Dear
Dave:
Reference
is made to the Employment Agreement dated as of February 1, 2007 (the
“Employment Agreement”), between Lincoln Educational Services Corporation, a New
Jersey corporation (the “Company”) and you. Capitalized terms used
herein and not otherwise defined shall have the meanings ascribed to them in the
Employment Agreement. It is our mutual intention to amend the
Employment Agreement as set forth below, and accordingly, the parties hereto
agree as follows:
1.
Section 2.1 of the Employment Agreement is hereby deleted in its entirety and
the following inserted in its place:
“2.1 Position and
Duties. The Company hereby continues to employ the Executive,
and the Executive agrees to serve, as Chairman and Chief Executive Officer of
the Company through April 29, 2009 and Executive Chairman of the Company from
April 30, 2009 though the end of the Employment Period, upon the terms and
conditions contained in this Agreement. The Executive shall report to
the Board of Directors of the Company (the “Board”) and perform duties and
services for the Company commensurate with the Executive’s
position. Except as may otherwise be approved in advance by the Board
or the Compensation Committee of the Board (the “Committee”), the Executive
shall render his services exclusively to the Company during his employment under
this Agreement and shall devote substantially all of his working time and
efforts to the business and affairs of the Company.”
2.
Section 2.2 of the Employment Agreement is hereby deleted in its entirety and
the following inserted in its place:
“2.2 Term of
Employment. The Executive’s employment under this Agreement
shall terminate on December 31, 2010, unless terminated earlier pursuant to
Section 5 or extended pursuant to Section 6.1 (the “Employment
Period”).”
2.
Section 3.1 of the Employment Agreement is hereby deleted in its entirety and
the following inserted in its place:
“3.1 Base
Salary. Subject to the provisions of Sections 5 and 6, the
Executive shall be entitled to receive a base salary (the “Base Salary”) at a
rate of $425,000 per annum during the Employment Period, such rate to be
effective as of January 1, 2009. Such rate may be adjusted upwards,
but not downwards, from time-to-time by the Board or the Committee, in their
sole discretion. The Base Salary shall be paid in equal installments
on a biweekly basis or in accordance with the Company’s current payroll
practices, less all required deductions. The Base Salary shall be
pro-rated for any period of service less than a full year.”
This
letter agreement constitutes an amendment to all applicable provisions of the
Employment Agreement. All of the other provisions of the Employment
Agreement, that are not modified hereunder, shall remain in full force and
effect.
Please
confirm your agreement to the foregoing by signing the enclosed counterpart copy
of this letter in the space provided below and returning such signed counterpart
to the Company, whereupon, after full execution by both parties, this letter
will constitute an agreement between us.
|
Sincerely,
|
||||
|
Lincoln
Educational Services Corporation
|
||||
|
By:
|
/s/ James J. Burke, Jr.
|
|||
|
Name:
|
James
J. Burke, Jr.
|
|||
|
Title:
|
Chairman
of Compensation Committee
|
|||
|
Accepted
and Agreed:
|
||||
|
/s/ David F. Carney
|
||||
|
David
F. Carney
|
||||
|
Date:
January 19, 2009
|
||||
EXHIBIT
10.6
[LINCOLN
EDUCATIONAL SERVICES CORPORATION LETTERHEAD]
January
14, 2009
Mr. Scott
M. Shaw
c/o
Lincoln Educational Services Corporation
200
Executive Drive, Suite 340
West
Orange, New Jersey 07052
Dear
Scott:
Reference
is made to the Employment Agreement dated as of February 1, 2007 (the
“Employment Agreement”), between Lincoln Educational Services Corporation, a New
Jersey corporation (the “Company”) and you. Capitalized terms used
herein and not otherwise defined shall have the meanings ascribed to them in the
Employment Agreement. It is our mutual intention to amend the
Employment Agreement as set forth below, and accordingly, the parties hereto
agree as follows:
1.
Section 2.1 of the Employment Agreement is hereby deleted in its entirety and
the following inserted in its place:
“2.1 Position and
Duties. The Company hereby continues to employ the Executive,
and the Executive agrees to serve, as Executive Vice President and Chief
Administrative Officer of the Company, upon the terms and conditions contained
in this Agreement. The Executive shall report to the Chief Executive
Officer of the Company and perform duties and services for the Company
commensurate with the Executive’s position. Except as may otherwise be
approved in advance by the Board of Directors of the Company (the “Board”) or
the Compensation Committee of the Board (the “Committee”), the Executive shall
render his services exclusively to the Company during his employment under this
Agreement and shall devote substantially all of his working time and efforts to
the business and affairs of the Company.”
2.
Section 2.2 of the Employment Agreement is hereby deleted in its entirety and
the following inserted in its place:
“2.2 Term of
Employment. The Executive’s employment under this Agreement
shall terminate on December 31, 2010, unless terminated earlier pursuant to
Section 5 or extended pursuant to Section 6.1 (the “Employment
Period”).”
3.
Section 3.1 of the Employment Agreement is hereby deleted in its entirety
and the following inserted in its place:
“3.1 Base
Salary. Subject to the provisions of Sections 5 and 6, the
Executive shall be entitled to receive a base salary (the “Base Salary”) at a
rate of $325,000 per annum during the Employment Period, such rate to be
effective as of January 1, 2009. Such rate may be adjusted upwards,
but not downwards, from time-to-time by the Board or the Committee, in their
sole discretion. The Base Salary shall be paid in equal installments
on a biweekly basis or in accordance with the Company’s current payroll
practices, less all required deductions. The Base Salary shall be
pro-rated for any period of service less than a full year.”
This
letter agreement constitutes an amendment to all applicable provisions of the
Employment Agreement. All of the other provisions of the Employment
Agreement, that are not modified hereunder, shall remain in full force and
effect.
Please
confirm your agreement to the foregoing by signing the enclosed counterpart copy
of this letter in the space provided below and returning such signed counterpart
to the Company, whereupon, after full execution by both parties, this letter
will constitute an agreement between us.
|
Sincerely,
|
||||
|
Lincoln
Educational Services Corporation
|
||||
|
By:
|
/s/ David F. Carney
|
|||
|
Name:
|
David
F. Carney
|
|||
|
Title:
|
Chairman
& Chief Executive Officer
|
|||
|
Accepted
and Agreed:
|
||||
|
/s/ Scott M. Shaw
|
||||
|
Scott
M. Shaw
|
||||
|
Date:
January 19, 2009
|
||||
EXHIBIT
10.8
[LINCOLN
EDUCATIONAL SERVICES CORPORATION LETTERHEAD]
January
14, 2009
Mr. Cesar
Ribeiro
c/o
Lincoln Educational Services Corporation
200
Executive Drive, Suite 340
West
Orange, New Jersey 07052
Dear
Cesar:
Reference
is made to the Employment Agreement dated as of February 1, 2007 (the
“Employment Agreement”), between Lincoln Educational Services Corporation, a New
Jersey corporation (the “Company”) and you. Capitalized terms used
herein and not otherwise defined shall have the meanings ascribed to them in the
Employment Agreement. It is our mutual intention to amend the
Employment Agreement as set forth below, and accordingly, the parties hereto
agree as follows:
1.
Section 2.1 of the Employment Agreement is hereby deleted in its entirety and
the following inserted in its place:
“2.1 Position and
Duties. The Company hereby continues to employ the Executive,
and the Executive agrees to serve, as Senior Vice President and Chief Financial
Officer of the Company, upon the terms and conditions contained in this
Agreement. The Executive shall report to the Chief Executive Officer of
the Company and perform duties and services for the Company commensurate with
the Executive’s position. Except as may otherwise be approved in advance
by the Board of Directors of the Company (the “Board”) or the Compensation
Committee of the Board (the “Committee”), the Executive shall render his
services exclusively to the Company during his employment under this Agreement
and shall devote substantially all of his working time and efforts to the
business and affairs of the Company.”
2.
Section 2.2 of the Employment Agreement is hereby deleted in its entirety and
the following inserted in its place:
“2.2 Term of
Employment. The Executive’s employment under this Agreement
shall terminate on December 31, 2010, unless terminated earlier pursuant to
Section 5 or extended pursuant to Section 6.1 (the “Employment
Period”).”
3.
Section 3.1 of the Employment Agreement is hereby deleted in its entirety
and the following inserted in its place:
“3.1 Base
Salary. Subject to the provisions of Sections 5 and 6, the
Executive shall be entitled to receive a base salary (the “Base Salary”) at a
rate of $315,000 per annum during the Employment Period, such rate to be
effective as of January 1, 2009. Such rate may be adjusted upwards,
but not downwards, from time-to-time by the Board or the Committee, in their
sole discretion. The Base Salary shall be paid in equal installments
on a biweekly basis or in accordance with the Company’s current payroll
practices, less all required deductions. The Base Salary shall be
pro-rated for any period of service less than a full year.”
This
letter agreement constitutes an amendment to all applicable provisions of the
Employment Agreement. All of the other provisions of the Employment
Agreement, that are not modified hereunder, shall remain in full force and
effect.
Please
confirm your agreement to the foregoing by signing the enclosed counterpart copy
of this letter in the space provided below and returning such signed counterpart
to the Company, whereupon, after full execution by both parties, this letter
will constitute an agreement between us.
|
Sincerely,
|
||||
|
Lincoln
Educational Services Corporation
|
||||
|
By:
|
/s/ David F. Carney
|
|||
|
Name:
|
David
F. Carney
|
|||
|
Title:
|
Chairman
& Chief Executive Officer
|
|||
|
Accepted
and Agreed:
|
||||
|
/s/ Cesar Ribeiro
|
||||
|
Cesar
Ribeiro
|
||||
|
Date:
January 19, 2009
|
||||
EXHIBIT
10.10
[LINCOLN
EDUCATIONAL SERVICES CORPORATION LETTERHEAD]
January
14, 2009
Mr. Shaun
E. McAlmont
c/o
Lincoln Educational Services Corporation
200
Executive Drive, Suite 340
West
Orange, New Jersey 07052
Dear
Shaun:
Reference
is made to the Employment Agreement dated as of February 1, 2007 (the
“Employment Agreement”), between Lincoln Educational Services Corporation, a New
Jersey corporation (the “Company”) and you. Capitalized terms used
herein and not otherwise defined shall have the meanings ascribed to them in the
Employment Agreement. It is our mutual intention to amend the
Employment Agreement as set forth below, and accordingly, the parties hereto
agree as follows:
1.
Section 2.1 of the Employment Agreement is hereby deleted in its entirety and
the following inserted in its place:
“2.1 Position and
Duties. The Company hereby continues to employ the Executive,
and the Executive agrees to serve, as President and Chief Operating Officer of
the Company through April 29, 2009 and President and Chief Executive Officer of
the Company from April 30, 2009 though the end of the Employment Period, upon
the terms and conditions contained in this Agreement. The Executive
shall report to the Chief Executive Officer of the Company through April 29,
2009 and shall report to the Executive Chairman of the Company thereafter and
perform duties and services for the Company commensurate with the Executive’s
position. Except as may otherwise be approved in advance by the Board
of Directors of the Company (the “Board”) or the Compensation Committee of the
Board (the “Committee”), the Executive shall render his services exclusively to
the Company during his employment under this Agreement and shall devote
substantially all of his working time and efforts to the business and affairs of
the Company.”
2.
Section 2.2 of the Employment Agreement is hereby deleted in its entirety and
the following inserted in its place:
“2.2 Term of
Employment. The Executive’s employment under this Agreement
shall terminate on December 31, 2010, unless terminated earlier pursuant to
Section 5 or extended pursuant to Section 6.1 (the “Employment
Period”).”
2.
Section 3.1 of the Employment Agreement is hereby deleted in its entirety and
the following inserted in its place:
“3.1 Base
Salary. Subject to the provisions of Sections 5 and 6, the
Executive shall be entitled to receive a base salary (the “Base Salary”) at a
rate of $375,000 per annum during the Employment Period, such rate to be
effective as of January 1, 2009. Such rate may be adjusted upwards,
but not downwards, from time-to-time by the Board or the Committee, in their
sole discretion. The Base Salary shall be paid in equal installments
on a biweekly basis or in accordance with the Company’s current payroll
practices, less all required deductions. The Base Salary shall be
pro-rated for any period of service less than a full year.”
This
letter agreement constitutes an amendment to all applicable provisions of the
Employment Agreement. All of the other provisions of the Employment
Agreement, that are not modified hereunder, shall remain in full force and
effect.
Please
confirm your agreement to the foregoing by signing the enclosed counterpart copy
of this letter in the space provided below and returning such signed counterpart
to the Company, whereupon, after full execution by both parties, this letter
will constitute an agreement between us.
|
Sincerely,
|
||||
|
Lincoln
Educational Services Corporation
|
||||
|
By:
|
/s/ David F. Carney
|
|||
|
Name:
|
David
F. Carney
|
|||
|
Title:
|
Chairman
and Chief Executive Officer
|
|||
|
Accepted
and Agreed:
|
||||
|
/s/ Shaun E. McAlmont
|
||||
|
Shaun
E. McAlmont
|
||||
|
Date:
January 19, 2009
|
||||
EXHIBIT
10.21
STOCK
PURCHASE AGREEMENT
among
LINCOLN
TECHNICAL INSTITUTE, INC.,
NN
ACQUISITION, LLC,
BRAD
BARAN,
BARBARA
BARAN,
UGP
EDUCATION PARTNERS, LLC,
UGPE
PARTNERS, INC.
and
MERION
INVESTMENT PARTNERS, L.P.
Dated as
of January 20, 2009
Page
| ARTICLE I DEFINITIONS | |||
|
|
|
||
|
|
Section
1.01
|
Certain
Defined Terms
|
2
|
|
Section
1.02
|
Definitions
|
12
|
|
|
Section
1.03
|
Interpretation
and Rules of Construction
|
13
|
|
| ARTICLE II PURCHASE AND SALE | |||
|
Section
2.01
|
Purchase
and Sale of the BIT Shares and the HUV Interests
|
14
|
|
|
Section
2.02
|
Purchase
Price
|
14
|
|
|
Section
2.03
|
Deliveries
by the Sellers
|
15
|
|
|
Section
2.04
|
Deliveries
by the Purchaser
|
16
|
|
|
Section
2.05
|
Adjustment
of Purchase Price
|
17
|
|
|
Section
2.06
|
Escrow
|
19
|
|
|
Section
2.07
|
Withholding
|
19
|
|
| ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE SELLERS | |||
|
Section
3.01
|
Organization,
Authority and Qualification
|
20
|
|
|
Section
3.02
|
Subsidiaries
|
22
|
|
|
Section
3.03
|
Capitalization
|
23
|
|
|
Section
3.04
|
No
Conflict
|
24
|
|
|
Section
3.05
|
Governmental
Consents and Approvals
|
25
|
|
|
Section
3.06
|
Financial
Information; Books and Records; No Undisclosed Liabilities
|
25
|
|
|
Section
3.07
|
Receivables
|
26
|
|
|
Section
3.08
|
Conduct
in the Ordinary Course; Absence of Certain Changes, Events and
Conditions
|
26
|
|
|
Section
3.09
|
Litigation
|
29
|
|
|
Section
3.10
|
Compliance
with Laws
|
29
|
|
|
Section
3.11
|
Environmental
and Other Permits and Licenses; Related Matters
|
30
|
|
|
Section
3.12
|
No
Preferential Rights
|
31
|
|
|
Section
3.13
|
Material
Contracts
|
31
|
|
|
Section
3.14
|
Intellectual
Property
|
34
|
|
|
Section
3.15
|
Real
Property
|
34
|
|
|
Section
3.16
|
Tangible
Personal Property
|
36
|
|
|
Section
3.17
|
Employee
Benefit Matters
|
37
|
|
|
Section
3.18
|
Labor
Matters
|
39
|
|
|
Section
3.19
|
Assets
|
40
|
|
|
Section
3.20
|
Student
Lists
|
40
|
|
|
Section
3.21
|
Student
Financial Records
|
40
|
|
|
Section
3.22
|
Certain
Interests
|
41
|
|
|
Section
3.23
|
Taxes
|
41
|
|
|
Section
3.24
|
Insurance
|
42
|
|
|
Section
3.25
|
Educational
Approvals
|
43
|
|
|
Section
3.26
|
Compliance
with Educational Laws
|
43
|
|
|
Section
3.27
|
Employees
|
51
|
|
|
Section
3.28
|
Certain
Business Practices
|
52
|
|
|
Section
3.29
|
Brokers
|
52
|
|
|
Section
3.30
|
Acquisition
Obligations
|
52
|
|
|
Section
3.31
|
Payment
Obligations
|
52
|
|
|
Section
3.32
|
No
Other Representations
|
52
|
|
|
|
|
||
| ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND THE PURCHASER | |||
|
Section
4.01
|
Organization,
Authorization and Qualification of the Parent and the
Purchaser
|
52
|
|
|
Section
4.02
|
No
Conflict
|
54
|
|
|
Section
4.03
|
Governmental
Consents and Approvals
|
54
|
|
|
Section
4.04
|
Litigation
|
54
|
|
|
Section
4.05
|
Brokers
|
54
|
|
|
Section
4.06
|
No
Other Representations
|
54
|
|
| ARTICLE V ADDITIONAL AGREEMENTS | |||
|
Section
5.01
|
Access
to Information
|
55
|
|
|
Section
5.02
|
Regulatory
and Other Authorizations Post-Closing
|
56
|
|
|
Section
5.03
|
Use
of Intellectual Property
|
56
|
|
|
Section
5.04
|
Payments
on Behalf of Affiliates
|
56
|
|
|
Section
5.05
|
Employees
|
57
|
|
|
Section
5.06
|
Non-Competition
|
57
|
|
|
Section
5.07
|
Payment
Obligations
|
58
|
|
|
Section
5.08
|
Connecticut
Transfer Act
|
58
|
|
|
Section
5.09
|
Reimbursement
of Restricted Cash
|
58
|
|
|
Section
5.10
|
December
31, 2008 Financials
|
58
|
|
|
Section
5.11
|
Further
Action
|
58
|
|
| ARTICLE VI TAX MATTERS | |||
|
Section
6.01
|
Indemnity
|
59
|
|
|
Section
6.02
|
Returns
and Payments
|
60
|
|
|
Section
6.03
|
Refunds
|
60
|
|
|
Section
6.04
|
Contests
|
60
|
|
|
Section
6.05
|
Time
of Payment
|
61
|
|
|
Section
6.06
|
Tax
Cooperation and Exchange of Information
|
62
|
|
|
Section
6.07
|
Conveyance
Taxes
|
62
|
|
|
Section
6.08
|
Amended
Tax Returns
|
63
|
|
|
Section
6.09
|
Tax
Covenants
|
63
|
|
|
Section
6.10
|
Miscellaneous
|
63
|
|
| ARTICLE VII INDEMNIFICATION | |||
|
Section
7.01
|
Survival
of Representations and Warranties
|
64
|
|
|
Section
7.02
|
Indemnification
by the Sellers
|
65
|
|
|
Section
7.03
|
Indemnification
by the Parent and the Purchaser
|
66
|
|
ii
|
Section
7.04
|
Limits
on Indemnification
|
67
|
|
|
Section
7.05
|
Indemnification
Procedures
|
67
|
|
|
Section
7.06
|
Distributions
from Escrow Account
|
69
|
|
|
Section
7.07
|
Mitigation
|
69
|
|
|
Section
7.08
|
Sellers’
Representative
|
69
|
|
|
|
|
||
| ARTICLE VIII AMENDMENT AND WAIVER | |||
|
Section
8.01
|
Amendment
|
71
|
|
|
Section
8.02
|
Waiver
|
71
|
|
| ARTICLE IX GENERAL PROVISIONS | |||
|
Section
9.01
|
Expenses
|
71
|
|
|
Section
9.02
|
Notices
|
71
|
|
|
Section
9.03
|
Public
Announcements
|
73
|
|
|
Section
9.04
|
Severability
|
73
|
|
|
Section
9.05
|
Entire
Agreement
|
73
|
|
|
Section
9.06
|
Assignment
|
74
|
|
|
Section
9.07
|
No
Third Party Beneficiaries
|
74
|
|
|
Section
9.08
|
Governing
Law
|
74
|
|
|
Section
9.09
|
Waiver
of Jury Trial
|
74
|
|
|
Section
9.10
|
Specific
Performance
|
74
|
|
|
Section
9.11
|
Headings
|
74
|
|
|
Section
9.12
|
Counterparts
|
75
|
|
|
Section
9.13
|
Exhibits
and Disclosure Schedule
|
75
|
|
iii
STOCK
PURCHASE AGREEMENT (this “Agreement”), dated as
of January 20, 2009, among LINCOLN TECHNICAL INSTITUTE, INC., a New Jersey
corporation (the “Parent”), NN
ACQUISITION, LLC, a Delaware limited liability company and wholly owned
subsidiary of the Parent (the “Purchaser”), BRAD
BARAN (“Baran”), BARBARA
BARAN, UGP EDUCATION PARTNERS, LLC, a Delaware limited liability company (“UGP”), MERION
INVESTMENT PARTNERS, L.P., a Delaware limited partnership (“Merion”) and UGPE
PARTNERS, INC., a Delaware corporation (“UGPE”; each of Baran,
Barbara Baran, UGP, Merion and UGPE, a “Seller” and
collectively, the “Sellers”).
WHEREAS,
the Sellers own 100% of the issued and outstanding shares (the “BIT Shares”) of
common stock, no par value per share (the “BIT Common Stock”),
of Baran Institute of Technology, Inc., a Connecticut corporation (“BIT”);
WHEREAS,
Baran, UGPE and Merion own 100% of the limited liability company interests (the
“HUV
Interests”) of Hartford Urban Ventures, LLC, a Connecticut limited
liability company (“HUV”);
WHEREAS,
BIT owns 100% of each of Connecticut Culinary Institute, Inc., a Connecticut
corporation (“CCI”), Americare
Acquisition LLC, a Delaware limited liability company (“Americare”), and
Engine City Technical Institute, a New Jersey corporation (“Engine
City”);
WHEREAS,
BIT owns and operates a post-secondary educational institution in Connecticut
with one campus located in East Windsor, Connecticut (the “BIT Institution”),
that is engaged in the business of providing educational services with respect
to, among other things, autobody, automotive, commercial driver’s license
training, motorcycle technology, diesel technology, electrical technology,
heating, ventilation, air conditioning and refrigeration technology and welding
technology (the “BIT
Business”);
WHEREAS,
HUV is engaged in the business of leasing space to the Institutions (the “HUV
Business”);
WHEREAS,
CCI owns and operates a post-secondary educational institution in Connecticut
with two campuses located in Hartford, Connecticut and Suffield, Connecticut
(the “CCI
Institution”), that is engaged in the business of providing educational
services with respect to, among other things, culinary arts (the “CCI
Business”);
WHEREAS,
Americare owns and operates Americare School of Nursing, a post-secondary
educational institution in Florida with two campuses located in Fern Park,
Florida and St. Petersburg, Florida (the “Americare
Institution”), that is engaged in the business of providing educational
services with respect to, among other things, healthcare careers (the “Americare
Business”);
WHEREAS,
Engine City owns and operates a post-secondary educational institution in New
Jersey with one campus located in South Plainfield, New Jersey (the “Engine City
Institution”), that is engaged in the business of providing educational
services with respect to, among other things, diesel mechanics (the “Engine City
Business”);
WHEREAS,
the Sellers wish to sell to the Purchaser, and the Purchaser wishes to purchase
from the Sellers, the Shares (as hereinafter defined) and the HUV Interests,
upon the terms and subject to the conditions set forth herein;
WHEREAS,
Baran, UGP, Merion, the Parent and the Purchaser are simultaneously with the
execution of this Agreement entering into a Stock Purchase Agreement (the “Clemens Agreement”)
for the purchase of all of the outstanding stock of Hospitality Acquisition
Corporation (dba Clemens College), a Connecticut corporation (“Clemens”);
and
WHEREAS,
the employees of Educational Properties, LLC are used in connection with the
Businesses and the parties wish to transfer such employees and certain
liabilities in connection therewith to the Purchaser.
NOW,
THEREFORE, in consideration of the premises and the mutual agreements and
covenants hereinafter set forth, the parties hereby agree as
follows:
ARTICLE
I
DEFINITIONS
Section 1.01 Certain Defined
Terms. For purposes of this Agreement:
“ABHES” means the
Accrediting Bureau of Health Education Schools.
“Accounting
Principles” means the guidelines, rules and procedures described on Section 1.01(a) of the
Disclosure Schedule.
“Accrediting Body”
means any entity or organization, whether governmental, private or
quasi-private, whether foreign or domestic, which engages in the granting or
withholding of accreditation of post-secondary institutions in accordance with
standards and requirements relating to the performance, operations, financial
condition, and/or academic standards of such institutions, including the ACCSCT,
the ACFF, the ABHES and the ADA.
“ACCSCT” means the
Accrediting Commission of Career Schools and Colleges of
Technology.
“ACFF” means the
American Culinary Federation Foundation.
“Acquisition
Documents” means this Agreement, the Ancillary Agreements and any
certificate, report or other document delivered pursuant to this Agreement or
the transactions contemplated by this Agreement.
“Acquisition
Obligations” means the obligations (financial or otherwise) of BIT under
the Americare Agreement and the Engine City Agreement.
“Action” means any
Claim, action, suit, arbitration, proceeding or investigation by or before any
Governmental Authority or Educational Agency.
2
“ADA” means the
American Dental Association.
“Affiliate” means,
with respect to any specified Person, any other Person that directly, or
indirectly through one or more intermediaries, controls, is controlled by, or is
under common control with, such specified Person.
“Americare Agreement”
means the Asset Purchase Agreement dated August 8, 2007, as amended, by and
among BIT, Americare School of Nursing, Inc., Americare School of Nursing of St.
Pete, LLC Gerald Newman and Americare.
“Ancillary Agreements”
means the Escrow Agreement, the General Release, the Lease and the Assignments
of Lease.
“Assets” means the
assets and properties of the Companies and the Subsidiaries.
“Assignments of Lease”
means the Assignment of Lease with respect to each property set forth on Section 1.01(b) of the
Disclosure Schedule and entered into by the Purchaser and the
entity/entities listed opposite each such property on Section 1.01(b) of the
Disclosure Schedule.
“Business Day” means
any day that is not a Saturday, a Sunday or other day on which banks are
required or authorized by Law to be closed in New York, New York.
“Businesses” means,
collectively, the BIT Business, the HUV Business, the CCI Business, the
Americare Business and the Engine City Business.
“CCI Lease” means the
Lease, dated as of July 12, 2007, by and between Farmington Imlay Associates LLC
and CCI.
“CERCLA” means the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended.
“CERCLIS” means the
Comprehensive Environmental Response, Compensation and Liability Information
System, as updated through the Closing.
“Claims” means any and
all administrative, regulatory or judicial actions, suits, demands, demand
letters, claims, liens, notices of noncompliance or violation, investigations,
proceedings, consent orders or consent agreements, but excluding Educational
Claims.
“Closing” means the
closing of the transactions contemplated by this Agreement.
“Closing Balance
Sheet” means the balance sheet (including the related notes and schedules
thereto), dated as of the date hereof, prepared and delivered by the Purchaser
in accordance with Section 2.05 and
setting forth the consolidated Net Working Capital with respect to the Companies
and the Subsidiaries.
“Closing Date” means
the date on which the Closing occurs.
3
“Code” means the
Internal Revenue Code of 1986, as amended.
“Companies” means,
collectively, BIT and HUV. Each such company is referred to
individually as a “Company”.
“Companies IP
Licenses” means those (a) licenses of Intellectual Property by any
Company or any Subsidiary or an Affiliate of any Company or any Subsidiary to
third parties, (b) licenses of Intellectual Property by third parties to any
Company or any Subsidiary or an Affiliate of any Company or any Subsidiary and
(c) agreements between any Company or any Subsidiary and third parties relating
to the development or use of Intellectual Property, the development or
transmission of data, or the use, modification, framing, linking advertisement,
or other practices with respect to Internet web sites, in each case, that are
used or held for use in connection with the Businesses.
“Compliance Date”
means January 1, 2005.
“control” (including
the terms “controlled
by” and “under
common control with”), with respect to the relationship between or among
two or more Persons, means the possession, directly or indirectly or as trustee,
personal representative or executor, of the power to direct or cause the
direction of the affairs or management of a Person, whether through the
ownership of voting securities, as trustee, personal representative or executor,
by contract, credit arrangement or otherwise.
“Conveyance Taxes”
means all sales, use, value-added, transfer, stamp, stock transfer, real
property transfer or gains and similar Taxes and any transfer, recording,
registration and similar fees.
“Current Assets” means
cash, accounts receivable, inventories, prepaid expenses and other assets that
could be converted to cash in less than one year, in accordance with GAAP and
GAGAS.
“Current Liabilities”
means amounts owed for accounts payable, notes payable, line of credit, capital
lease obligations, unearned tuition, student deposits, deferred meal plan,
deferred housing costs, deferred promotional income, accrued expenses, deferred
tax liability and income tax payable and other liabilities that are due within
one year, in accordance with GAAP and GAGAS.
“Disclosure Schedule”
means the Disclosure Schedule, dated as of the date hereof, delivered by the
Sellers to the Purchaser in connection with this Agreement.
“ECAR” means
Eligibility and Certification Approval Report(s) issued to the
Institutions.
“Educational Agency”
means any Person, entity or organization, whether governmental, government
chartered, private, or quasi-private, that engages in granting or withholding
Educational Approvals for, administers financial assistance to or for students
of, or otherwise regulates, private post-secondary schools in accordance with
standards relating to performance, recruiting, operation, financial condition or
academic standards of such schools, including U.S. DOE, any Accrediting Body,
the Commission for Independent Education of the Florida Department of Education,
the State of New Jersey Department of Education and New Jersey Department of
Labor and Workforce Development, the State of Connecticut Board of Governors for
Higher Education, the Immigration and Naturalization Service of the United
States Department of Justice and the Department of Homeland
Security.
4
“Educational Approval”
means any license, permit, consent, franchise, approval, authorization,
certificate, U.S. DOE Approval or accreditation issued or required to be issued
by an Educational Agency to an Institution or to any campus or other facility
operated by such Institution with respect to any aspect of such Institution’s
operations subject to the oversight of such Educational Agency.
“Educational Claims”
means any and all administrative, regulatory or judicial actions, suits,
demands, demand letters, claims, liens, notices of noncompliance or violation,
investigations, program reviews, audits, proceedings, consent orders or consent
agreements arising out of the operation of an Institution or the application
thereto of any Educational Law or with respect to any Educational Approval
required to be held by such Institution under any Educational Law.
“Educational Law”
means any Law, regulation or binding standard issued or administered by, or
related to, any Educational Agency.
“Encumbrance” means
any security interest, pledge, hypothecation, mortgage, lien (including
environmental and Tax liens), violation, charge, lease, license, encumbrance,
servient easement, adverse claim, reversion, reverter, preferential arrangement
or restrictive covenant, condition or restriction of any kind, including any
restriction on the use, voting, transfer, receipt of income or other exercise of
any attributes of ownership.
“Engine City
Agreement” means the Stock Purchase Agreement, dated as of April 29,
2008, by and among Daniel Kasper, Engine City and BIT.
“Environment” means
surface waters, groundwaters, sediment, soil, subsurface strata and outdoor or
indoor ambient air.
“Environmental Claims”
means any Claims relating to any Environmental Law or any Environmental Permit,
including (a) any and all Claims by Governmental Authorities for
enforcement, cleanup, removal, response, remedial or other actions or damages
pursuant to any applicable Environmental Law and (b) any and all Claims by
any Person seeking damages, contribution, indemnification, cost recovery,
compensation or injunctive relief resulting from Hazardous Materials or arising
from alleged injury or threat of injury to health, safety or the
Environment.
“Environmental Laws”
means all Laws and any judicial or administrative interpretation thereof,
including any judicial or administrative order, consent decree or judgment,
relating to the Environment, health, safety, natural resources or Hazardous
Materials, including CERCLA; the Resource Conservation and Recovery Act,
42 U.S.C. § 6901 et seq.; the Hazardous
Materials Transportation Act, 49 U.S.C. § 5101 et seq.; the Clean Water
Act, 33 U.S.C. § 1251 et seq.; the Toxic
Substances Control Act, 15 U.S.C. § 2601 et seq.; the Clean Air
Act, 42 U.S.C. § 7401 et seq.; the Safe
Drinking Water Act, 42 U.S.C. § 300f et seq.; the Atomic
Energy Act, 42 U.S.C. § 2011 et seq.; the Federal
Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. § 136 et seq.; and the Federal
Food, Drug and Cosmetic Act, 21 U.S.C. § 301 et
seq.
5
“Environmental
Permits” means all permits, approvals, identification numbers, licenses
and other authorizations required under or issued pursuant to any applicable
Environmental Law.
“Escrow Account” means
the account established, designated and maintained by the Escrow Agent pursuant
to the terms of the Escrow Agreement.
“Escrow Agent” means
JPMorgan Chase Bank, National Association.
“Escrow Agreement”
means the Escrow Agreement executed by the Purchaser, the Seller’s
Representative and the Escrow Agent.
“Escrow Amount” means
$2,000,000.
“Estimated Closing Balance
Sheet” means the consolidated balance sheet (including the related notes
and schedules thereto) of the Companies and the Subsidiaries dated as of the
date hereof and prepared and delivered pursuant to Section
2.05(a).
“Exchange Act” means
the Securities Exchange Act of 1934, as amended.
“Excluded Taxes” means
(a) all Income Taxes owed by the Sellers or any of their Affiliates for any
period; (b) all Taxes relating to the Assets or any Company, Subsidiary or
Institution for any Pre-Closing Period, including the portion of a Straddle
Period ending on the Closing Date; (c) Taxes imposed on the Purchaser or
any of its Affiliates or any Company or Subsidiary as a result of any breach by
the Sellers or any of their present or past Affiliates of a warranty or
misrepresentation, or breach of any covenant relating to Taxes; (d) all Taxes
for which the Purchaser, its Affiliates or any Company or Subsidiary is liable
by reason of the Sellers, any Company or any Subsidiary being a member of a
consolidated, combined, unitary, affiliated or similar group that includes any
Person (other than a Company or a Subsidiary) prior to the Closing, by reason of
a Tax sharing, Tax indemnity or similar agreement entered into by any Company,
Subsidiary or any of their present or past Affiliates prior to the Closing
(other than this Agreement) or by reason of transferee or successor Liability
arising in respect of a transaction undertaken by any Company, Subsidiary or any
of their present or past Affiliates prior to the Closing; and (e) fifty percent
(50%) of all Conveyance Taxes payable in connection with the transactions
contemplated by this Agreement.
“GAAP” means United
States generally accepted accounting principles and practices in effect from
time to time applied consistently throughout the periods involved.
“GAGAS” means
generally accepted government auditing standards.
“General Release”
means the General Release and Discharge executed by the
Sellers.
6
“Governmental
Authority” means any United States federal, state, local, or similar
government, governmental, regulatory or administrative authority, agency or
commission or any court, tribunal, or judicial or arbitral body, but excluding
any Educational Agency.
“Governmental Order”
means any order, writ, judgment, injunction, decree, stipulation, determination
or award entered by or with any Governmental Authority.
“Hazardous Materials”
means (a) petroleum and petroleum products, radioactive materials,
asbestos-containing materials, mold, urea formaldehyde foam insulation,
transformers or other equipment that contain polychlorinated biphenyls and radon
gas; (b) any other chemicals, materials or substances defined as or
included in the definition of “hazardous substances,” “hazardous wastes,”
“hazardous materials,” “extremely hazardous wastes,” “restricted hazardous
wastes,” “toxic substances,” “toxic pollutants,” “contaminants” or “pollutants,”
or words of similar import, under any applicable Environmental Law; and
(c) any other chemical, material or substance which is regulated by, or
with respect to which liability may be imposed under, any Environmental
Law.
“HEA” means the Higher
Education Act of 1965, as amended, 20 U.S.C. § 1001 et seq., any amendments or
successor statutes thereto, and its implementing regulations.
“Income Taxes” means
Taxes imposed on or measured by reference to gross or net income or receipts,
and franchise, net worth, capital or other doing business Taxes.
“Indebtedness” means,
with respect to any Person, (a) all indebtedness of such Person, whether or
not contingent, for borrowed money; (b) all obligations of such Person for
the deferred purchase price of property or services; (c) all indebtedness
created or arising under any conditional sale or other title retention agreement
with respect to property acquired by such Person (even though the rights and
remedies of the seller or lender under such agreement in the event of default
are limited to repossession or sale of such property); (d) all obligations
of such Person as lessee under leases that have been or should be, in accordance
with GAAP, recorded as capital leases; (e) all obligations, contingent or
otherwise, of such Person under acceptance, Letter of Credit or similar
facilities; (f) all obligations of such Person to purchase, redeem, retire,
defease or otherwise acquire for value any capital stock of such Person or any
warrants, rights or options to acquire such capital stock, valued, in the case
of redeemable preferred stock, at the greater of its voluntary or involuntary
liquidation preference plus accrued and unpaid dividends; (g) all
Indebtedness of others referred to in clauses (a) through (f) above
guaranteed directly or indirectly in any manner by such Person; and (h) all
Indebtedness referred to in clauses (a) through (f) above secured by
(or for which the holder of such Indebtedness has an existing right, contingent
or otherwise, to be secured by) any Encumbrance on property (including accounts
and contract rights) owned by such Person, even though such Person has not
assumed or become liable for the payment of such Indebtedness. For
the avoidance of doubt, “Indebtedness” shall not include any intercompany
indebtedness among the Companies, the Subsidiaries and/or the
Institutions.
“Indemnified Party”
means a Purchaser Indemnified Party or a Seller Indemnified Party, as the case
may be.
7
“Indemnifying Party”
means the Sellers or the Indemnifying Purchasers, as the case may
be.
“Indemnifying
Purchasers” means the Purchaser and the Parent.
“Institutions” means,
collectively, the BIT Institution, the CCI Institution, the Americare
Institution and the Engine City Institution, including, in each case, any campus
or other facility at which any such Institution offers any portion of an
educational program. Each such institution is referred to
individually as an “Institution”.
“Intellectual
Property” means: (a) patents and patent applications; (b)
trademarks, service marks, domain names, trade dress, logos, trade names,
corporate names and slogans, together with the goodwill associated therewith;
(c) copyrights; (d) Software, data, databases, data rights and Internet
websites; (e) confidential and proprietary information, including trade secrets
and know-how; (f) advertising and promotional rights and rights to privacy and
publicity; (g) registrations and applications for registration of the foregoing,
including reissues, divisions, continuations, continuations-in-part, extensions,
renewals and reexaminations thereof; (h) all common law rights thereto; and (i)
proprietary rights in curricula, course design and educational
services.
“Inventory” means all
inventory, merchandise, goods and other personal property maintained, held or
stored by or for any Company or Subsidiary at the Closing, and any prepaid
deposits for any of the same.
“IRS” means the
Internal Revenue Service of the United States.
“Knowledge of the
Sellers” means the actual knowledge, after due inquiry, of Baran, Barbara
Baran, Stephen Schwartz, John Milne, Robert Miner, George Cinquegrana, Stan Lau
and Randy Rock.
“Law” means any United
States federal, state, local or similar statute, law, ordinance, regulation,
rule, code, order, or Accrediting Body standard, including any Educational
Law.
“Lease” means the
lease agreement, between the Educational Properties, LLC and the Purchaser with
respect to the property located at 1760 Mapleton Avenue, Suffield,
Connecticut.
“Leased Real Property”
means the real property leased by any Company or Subsidiary, as tenant, together
with, to the extent leased by any Company or Subsidiary, all buildings and other
structures, facilities or improvements currently or hereafter located thereon,
all fixtures, systems, equipment and items of personal property of any Company
or Subsidiary attached or appurtenant thereto and all easements, licenses,
rights and appurtenances relating to the foregoing.
“Letter of Credit”
means any instruments or documents issued by a bank guaranteeing the payment of
a customer’s drafts up to a stated amount for a specified
period.
8
“Liabilities” means
any and all debts, liabilities and obligations, whether accrued or fixed,
absolute or contingent, asserted or unasserted, matured or unmatured or
determined or determinable, including those arising under any Law (including any
Environmental Law or Educational Law), Action or Governmental Order and those
arising under any contract, agreement, arrangement, commitment or
undertaking.
“Licensed Intellectual
Property” means Intellectual Property licensed to any Company or
Subsidiary, an Affiliate of any Company or Subsidiary, or any Institution and
used or held for use in connection with the Businesses.
“Material Adverse
Effect” means any circumstance, change in or effect on any Business,
Institution, Company or Subsidiary that, individually or in the aggregate with
all other circumstances, changes in or effects on any Business, Institution,
Company or Subsidiary, is or is reasonably likely to be materially adverse to
the business, operations, assets, liabilities, results of operations or the
condition (financial or otherwise) of any Institution, Company or Subsidiary;
provided, however, that in no
event shall any of the following be deemed to constitute a Material Adverse
Effect: circumstances, changes or effects resulting from (a) the announcement of
the execution of this Agreement or compliance with the terms of, or the taking
of any action required by, this Agreement other than (i) pursuant to any
requirement to operate in the ordinary course of business consistent with past
practice or to make the representations and warranties of the Sellers accurate
or (ii) the consummation of the transactions contemplated hereby, (b) acts of
war, sabotage, terrorism, military actions or the escalation thereof, (c) a
change in applicable Laws, regulations or accounting rules after the date
hereof, (d) a change in general economic, political or financial market
conditions, or (e) a change in conditions generally applicable to the industry
in which any Institution, Company or Subsidiary operates except, in the case of
the foregoing clauses (b), (c), (d) and (e) where such circumstances, changes or
effects affect such Institution, Company or Subsidiary in a manner materially
disproportionate to other Persons in the industries in which the Institutions,
Companies and Subsidiaries conduct their business.
“Net Working Capital”
means the excess of consolidated Current Assets over consolidated Current
Liabilities for the Companies and the Subsidiaries, in accordance with GAAP and
GAGAS, as shown on the Estimated Closing Balance Sheet or the Closing Balance
Sheet, as the case may be.
“Owned Intellectual
Property” means Intellectual Property owned by any Company or any
Subsidiary, an Affiliate of any Company or any Subsidiary, or the Institutions
and used or held for use in connection with the Businesses.
“Owned Real Property”
means the real property owned by any Company or any Subsidiary, together with
all buildings and other structures, facilities or improvements currently or
hereafter located thereon, all fixtures, systems, equipment and items of
personal property of any Company or any Subsidiary attached or appurtenant
thereto and all easements, licenses, rights and appurtenances relating to the
foregoing.
9
“Permitted
Encumbrances” means such of the following as to which no enforcement,
collection, execution, levy or foreclosure proceeding shall have been commenced
and as to which no Company or Subsidiary is otherwise subject to civil or
criminal liability due to its existence: (a) (i) liens for Taxes,
assessments and governmental charges or levies not yet due and payable or (ii)
Taxes for which any Company or any Subsidiary is contesting in good faith, and
for which in the case of (i) and (ii) adequate reserves have been maintained in
accordance with GAAP; (b) Encumbrances imposed by Law, such as
materialmen’s, mechanics’, carriers’, workmen’s and repairmen’s liens and other
similar liens arising in the ordinary course of business securing obligations
that (i) are not overdue for a period of more than 30 days and
(ii) are not in excess of $5,000 in the case of a single
property or $10,000 in the aggregate at any time; (c) pledges or deposits
to secure obligations under workers’ compensation laws or similar legislation or
to secure public or statutory obligations; (d) zoning laws and ordinances,
minor survey exceptions, reciprocal easement agreements and other customary
encumbrances on or defects in title to real or personal property that
(i) were not incurred in connection with any Indebtedness, (ii) do not
render title to the property encumbered thereby unmarketable and (iii) do
not, individually or in the aggregate, materially adversely affect the value of
or the use of such property for its current and anticipated purposes; and (e)
liens securing rental payments under capital lease arrangements.
“Person” means any
individual, partnership, firm, corporation, limited liability company,
association, trust, unincorporated organization or other entity, as well as any
syndicate or group that would be deemed to be a person under
Section 13(d)(3) of the Exchange Act.
“Pre-Closing Period”
means any taxable period (or portion of a taxable period) ending on or prior to
the Closing Date.
“Preferred Stock”
means issued and outstanding shares of Series D 11% Redeemable Cumulative
Preferred Stock of BIT, Series E Convertible Preferred Stock of BIT and Series A
Convertible Preferred Stock of Engine City to be redeemed immediately prior to
the Closing.
“Purchase Price Bank
Accounts” means the bank accounts in the United States to be designated
by the Sellers in a written notice to the Purchaser at least one Business
Day before the Closing.
“Purchaser’s
Accountants” means Deloitte & Touche LLP, independent accountants of
the Purchaser.
“Real Property” means
the Leased Real Property and the Owned Real Property.
“Receivables” means
any and all accounts receivable (including Student Accounts Receivable), notes
and other amounts receivable from third parties, including customers and
employees, arising from the conduct of the Businesses before the Closing Date,
whether or not in the ordinary course, together with any unpaid financing
charges accrued thereon.
“Release” means
disposing, discharging, injecting, spilling, leaking, leaching, dumping,
emitting, escaping, emptying, seeping, placing and the like into or upon any
land or water or air or otherwise entering into the
Environment.
10
“Remedial Action”
means “remove”, “removal”, “remedy” or “remedial action” as those terms are
defined in Section 101(23) and (24) of the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. Section 9601.
“SEC” means the
Securities and Exchange Commission.
“Securities Act” means
the Securities Act of 1933, as amended.
“Sellers’ Accountants”
means Knutte & Associates, P.C.
“Shares” means the BIT
Shares.
“Software” means all
(i) computer programs, applications, systems and code, including software
implementations of algorithms, models and methodologies, and source code and
object code, (ii) Internet and intranet websites, databases and
compilations, including data and collections of data, whether machine-readable
or otherwise, (iii) development and design tools, library functions and
compilers, (iv) technology supporting websites, and the contents and
audiovisual displays of websites, and (v) documentation, other works of
authorship and media, including user manuals and training materials, relating to
or embodying any of the foregoing or on which any of the foregoing is
recorded.
“Straddle Period”
means any taxable period beginning on or prior to and ending after the Closing
Date.
“Student Accounts
Receivable” means any Company’s or any Subsidiary’s accounts receivable
for student tuition, fees and institutional charges (including U.S. DOE accounts
receivable) with respect to students currently attending the Institutions as of
the Closing Date, as determined in accordance with GAAP applied on a basis
consistent with the past practices of the Companies and the
Subsidiaries.
“Subsidiaries” means,
collectively, CCI, Americare and Engine City. Each such company is
referred to individually as a “Subsidiary”.
“Target Working
Capital” means $(6,240,651).
“Tax” or “Taxes” means any and
all taxes and other fees, levies, duties, tariffs, imposts and other charges
that are in the nature of taxes (together with any and all interest, penalties,
additions to tax and additional amounts imposed with respect thereto) imposed by
any Governmental Authority or taxing authority, including: taxes or
other charges on or with respect to income, franchises, windfall or other
profits, gross receipts, property, sales, use, capital stock, payroll,
employment, social security, workers’ compensation, unemployment compensation,
or net worth; taxes or other charges in the nature of excise, withholding, ad
valorem, stamp, transfer, value-added, or gains taxes.
“Tax Returns” means
all returns, computations, reports and statements required to be filed with any
Governmental Authority with respect to Taxes.
11
“Title IV” means Title
IV of the HEA and all definitional and other provisions set forth elsewhere in
the HEA that are referenced in Title IV or that relate to any Title IV
provision.
“Title IV Programs”
means the programs of federal student financial assistance administered pursuant
to Title IV of the HEA.
“TPPPA” means a
temporary provisional program participation agreement executed by the U.S. DOE
and issued to an Institution following the Closing for an interim period
allowing U.S. DOE’s further review of the Purchaser’s application for U.S. DOE
Approval of the Institution following a change in ownership.
“Treasury Regulations”
means the Treasury Regulations (including Temporary Treasury Regulations)
promulgated by the United States Department of Treasury with respect to the Code
or other federal tax statutes.
“U.S.” and “United States” means
the United States of America.
“U.S. DOE” means the
United States Department of Education.
“U.S. DOE
Approval” means a provisional program participation agreement issued
and countersigned by the Secretary of U.S. DOE, or his designee, in conjunction
with an accurate ECAR (but not including a TPPPA) that is complete and accurate
in all material respects, certifying an institution for participation in the
Title IV Programs that does not include any condition that would materially
impair the Parent’s operations.
Section
1.02 Definitions. The
following terms have the meanings set forth in the Sections set forth
below:
|
Definition
|
Location
|
|
“Agreement”
|
Preamble
|
|
“Americare”
|
Recitals
|
|
“Americare
Business”
|
Recitals
|
|
“Americare
Institution”
|
Recitals
|
|
“Ancillary
Lease Documents”
|
3.15(d)
|
|
“Audited
Financial Statements”
|
3.06(a)
|
|
“Baran”
|
Preamble
|
|
“Basket”
|
7.04(a)
|
|
“BIT”
|
Recitals
|
|
“BIT
Business”
|
Recitals
|
|
“BIT
Common Stock”
|
Recitals
|
|
“BIT
Institution”
|
Recitals
|
|
“BIT
Shares”
|
Recitals
|
|
“Cap”
|
7.04(a)
|
|
“CCI”
|
Recitals
|
|
“CCI
Business”
|
Recitals
|
|
“CCI
Institution”
|
Recitals
|
|
“Clemens”
|
Recitals
|
12
|
Definition
|
Location
|
|
“Clemens
Agreement”
|
Recitals
|
|
“Engine
City”
|
Recitals
|
|
“Engine
City Business”
|
Recitals
|
|
“Engine
City Institution”
|
Recitals
|
|
“ERISA”
|
3.17(a)
|
|
“Financial
Statements”
|
3.06(a)
|
|
“HUV”
|
Recitals
|
|
“HUV
Business”
|
Recitals
|
|
“HUV
Interests”
|
Recitals
|
|
“Independent
Accounting Firm”
|
2.05(c)(ii)
|
|
“Interim
Financial Statements”
|
3.06(a)
|
|
“Internal
Controls”
|
3.06(d)
|
|
“lease”
|
3.13(a)(xxiii)
|
|
“Loss”
|
7.02(a)
|
|
“Material
Contracts”
|
3.13(a)
|
|
“Merion”
|
Preamble
|
|
“Multiemployer
Plan”
|
3.17(b)
|
|
“Multiple
Employer Plan”
|
3.17(b)
|
|
“Non-Disclosure
Agreement”
|
5.01(a)
|
|
“Options”
|
3.15(d)
|
|
“Parent”
|
Preamble
|
|
“Plans”
|
3.17(a)(ii)
|
|
“Policy
Guidelines”
|
3.26(e)
|
|
“Purchase
Price”
|
2.02
|
|
“Purchaser”
|
Preamble
|
|
“Purchaser
Indemnified Party”
|
7.02(a)
|
|
“Required
Consents”
|
3.05
|
|
“Restricted
Business”
|
5.06(a)
|
|
“Restricted
Period”
|
5.06(a)
|
|
“Seller”
|
Preamble
|
|
“Seller
Indemnified Party”
|
7.03(a)
|
|
“Sellers”
|
Preamble
|
|
“Sellers’
Representative”
|
7.08(a)
|
|
“Tangible
Personal Property”
|
3.16(a)
|
|
“Third
Party Claim”
|
7.05(b)
|
|
“Transferred
Employee”
|
5.05(b)
|
|
“UGP”
|
Preamble
|
|
“UGPE”
|
Preamble
|
|
“WARN
Act”
|
3.17(g)
|
Section 1.03
Interpretation and Rules of
Construction. In
this Agreement, except to the extent otherwise provided or indicated, or that
the context otherwise requires:
13
(a) when
a reference is made in this Agreement to an Article, Section, Exhibit or
Schedule, such reference is to an Article or Section of, or a Schedule or
Exhibit to, this Agreement;
(b) the
table of contents and headings for this Agreement are for reference purposes
only and do not affect in any way the meaning or interpretation of this
Agreement;
(c) whenever
the words “include,” “includes” or “including” are used in this Agreement, they
are deemed to be followed by the words “without limitation”;
(d) the
words “hereof,” “herein” and “hereunder” and words of similar import, when used
in this Agreement, refer to this Agreement as a whole and not to any particular
provision of this Agreement;
(e) all
terms defined in this Agreement have the defined meanings when used in any
certificate or other document made or delivered pursuant hereto, unless
otherwise defined therein;
(f) the
definitions contained in this Agreement are applicable to the singular as well
as the plural forms of such terms;
(g) any
Law defined or referred to herein or in any agreement or instrument that is
referred to herein means such Law or statute as from time to time amended,
modified or supplemented, including by succession of comparable successor
Laws;
(h) references
to a Person are also to its successors and permitted assigns; and
(i) the
use of “or” is not intended to be exclusive unless expressly indicated
otherwise.
ARTICLE
II
PURCHASE
AND SALE
Section 2.01 Purchase and Sale of the BIT
Shares and the HUV Interests. Upon
the terms and subject to the conditions of this Agreement, on the date hereof,
the Sellers shall sell, assign, transfer, convey and deliver, or cause to be
sold, assigned, transferred, conveyed and delivered, to the Purchaser, the BIT
Shares and the HUV Interests, and the Purchaser shall purchase the BIT Shares
and the HUV Interests.
Section 2.02 Purchase
Price. Subject
to the adjustments set forth in Section 2.05,
the purchase price for the Shares, the HUV Interests and the covenants contained
in Section 5.06
shall be an amount in cash equal to Twenty-Eight Million Dollars ($28,000,000)
(the “Purchase
Price”) which shall be allocated $26,450,000 to the Shares, $250,000 to
the HUV Interests and $1,300,000 to the covenants contained in Section
5.06.
14
Section 2.03 Deliveries by the
Sellers. (a) On
or prior to the date hereof, the Sellers shall have delivered or caused to be
delivered to the Purchaser:
(i) stock
certificates evidencing the BIT Shares duly endorsed in blank, or accompanied by
stock powers duly executed in blank, in form satisfactory to the Purchaser and
with all required stock transfer tax stamps affixed;
(ii) instruments
of sale, transfer and conveyance evidencing and effecting the transfer of the
HUV Interests to the Purchaser, in form satisfactory to the
Purchaser;
(iii)
evidence in
the form of a Bill of Sale and Assumption Agreement that the assets listed on
Section
2.03(a)(iii)(1) of the Disclosure Schedule have been assigned to BIT and
the liabilities listed on Section 2.03(a)(iii)(2) of
the Disclosure Schedule have been assumed by BIT, in a form satisfactory
to the Purchaser;
(iv) a
counterpart of the Escrow Agreement, duly executed by the Sellers’
Representative;
(v) a
counterpart of the Lease, duly executed by Educational Properties,
LLC;
(vi) the
Assignments of Lease, each duly executed by all the parties
thereto;
(vii) the
General Release, duly executed by the Sellers;
(viii) a
receipt for the Purchase Price, less the Escrow Amount;
(ix) the
resignations, effective as of the Closing, of all of the directors and officers
of each Company and each Subsidiary, except for such persons as shall have been
designated in writing prior to the date hereof by the Purchaser to the
Sellers;
(x) a
copy of (i) the certificate of incorporation (or other similar organizational
document), as amended, of each Company and each Subsidiary, certified by the
Secretary of State in their respective jurisdictions of organization, as of a
date not earlier than five Business Days prior to the date hereof and
accompanied by a certificate of the Secretary or Assistant Secretary of such
Company or Subsidiary, dated as of the date hereof, stating that no amendments
have been made to such certificate of incorporation (or other similar
organizational document) since such date, and (ii) the by-laws of each Company
and each Subsidiary, certified by the Secretary or Assistant Secretary of such
Company or Subsidiary;
(xi) a
certificate of non-foreign status (in a form reasonably acceptable to the
Purchaser) pursuant to Section 1.1445-2(b)(2) of the Treasury Regulations of
each Seller (provided that if a Seller is a disregarded entity then such
certificate shall be provided by its sole beneficial owner);
(xii) a
good standing certificate for each Company and each Subsidiary from the
Secretary of State in their respective jurisdictions of organization and from
the Secretary of State in each other jurisdiction in which the operation of such
Company’s or Subsidiary’s business in such jurisdiction, requires such Company
or Subsidiary to qualify to do business as a foreign corporation, in each case
dated as of a date not earlier than five Business Days prior to the date
hereof;
15
(xiii)
a true and complete copy,
certified by the Secretary or an Assistant Secretary of each of UGP, Merion and
UGPE, of the resolutions duly and validly adopted by the board of
directors/managers of such Seller evidencing its authorization of the execution
and delivery of this Agreement and the Ancillary Agreements to which such Seller
is a party and the consummation of the transactions contemplated hereby and
thereby;
(xiv) a
certificate of the Secretary or an Assistant Secretary of each of UGP, Merion
and UGPE certifying the names and signatures of the officers of such Seller
authorized to sign this Agreement and the Ancillary Agreements and the other
documents to be delivered hereunder and thereunder;
(xv)
the Transfer of
Establishment – Form III executed by BIT;
(xvi) evidence
satisfactory to the Purchaser that (i) the Sellers shall have contributed, or
caused to be contributed, to the capital of each Company and Subsidiary, the
difference between (i) the intercompany Indebtedness owed by such Company or
Subsidiary to any Seller or its Affiliates (other than any Company or
Subsidiary) as of the Closing Date and (ii) the intercompany Indebtedness owed
by any Seller or its Affiliates (other than any Company or Subsidiary) to any
Company or Subsidiary as of the Closing Date, and all such intercompany
Indebtedness shall cease to exist and be of no further force or
effect;
(xvii)
evidence that all contracts or arrangements
between any Company, Subsidiary or Institution, on the one hand, and any Seller
or any Affiliate of any Seller (other than Clemens or a Company, Subsidiary or
Institution) shall have been terminated or amended to exclude any Company,
Subsidiary or Institution as a party thereto;
(xviii) an
executed Termination of Lease Agreement with respect to the CCI
Lease;
(xix) an
executed lease agreement between Farmington Imlay Associates LLC and the
Purchaser, in a form satisfactory to the Purchaser; and
(xx)
evidence of payment by the Sellers of each
amount set forth on Section 2.03(a)(xx) of the
Disclosure Schedules to the Person listed opposite such amount on Section 2.03(a)(xx) of the
Disclosure Schedules.
Section 2.04 Deliveries by the
Purchaser. (b) On
or prior to the date hereof, the Purchaser shall have delivered or caused to be
delivered to the Sellers:
(i) the
Purchase Price, less the Escrow Amount, in the manner set forth in Section 2.04(a)(i) of the
Disclosure Schedule, by wire transfer in immediately available funds to
the Purchase Price Bank Accounts;
16
(ii) a
counterpart of the Lease, duly executed by the Purchaser;
(iii) counterparts
of the Escrow Agreement, duly executed by the Purchaser and the Escrow
Agent;
(iv) a
true and complete copy of the written consent of the board of directors of the
Purchaser evidencing its authorization of the execution and delivery by the
Purchaser of this Agreement and the Ancillary Agreements to which the Purchaser
is a party and the consummation of the transactions contemplated hereby and
thereby;
(v) a
certificate of the Secretary or an Assistant Secretary of the Purchaser
certifying the names and signatures of the officers of the Purchaser authorized
to sign this Agreement and the Ancillary Agreements and the other documents to
be delivered hereunder and thereunder; and
(vi) the
Transfer of Establishment – Form III executed by the Purchaser.
(b) At
the Closing, the Purchaser shall deliver or cause to be delivered to the Escrow
Agent, in accordance with the Escrow Agreement, the Escrow Amount by wire
transfer in immediately available funds to the Escrow Account.
Section 2.05 Adjustment of Purchase
Price. The
Purchase Price shall be subject to adjustment on and after the date hereof as
specified in this Section
2.05:
(a) Estimated Closing Balance
Sheet. At least three Business Days prior to the date hereof,
the Sellers shall have delivered to the Purchaser the Estimated Closing Balance
Sheet. The Sellers shall have prepared the Estimated Closing Balance
Sheet in accordance with GAAP and GAGAS, and the Estimated Closing Balance Sheet
shall set forth the Sellers’ good faith estimate of the consolidated Net Working
Capital with respect to the Companies and the Subsidiaries as of the date
hereof. The Sellers shall make available to the Purchaser the work
papers used in preparing the Estimated Closing Balance Sheet. If the
Net Working Capital reflected on the Estimated Closing Balance Sheet exceeds the
Target Working Capital (or is negative by a lesser amount than the Target
Working Capital), then the Purchase Price payable by the Purchaser on the date
hereof shall be adjusted upwards in an amount equal to such excess (or amount by
which such Net Working Capital is a lesser negative amount than the Target
Working Capital). If the Net Working Capital reflected on the
Estimated Closing Balance Sheet is less than the Target Working Capital (or is
negative by a greater amount than the Target Working Capital), then the Purchase
Price payable by the Purchaser on the date hereof shall be adjusted downward in
an amount equal to such deficiency (or amount by which such Net Working Capital
is a greater negative amount than the Target Working Capital).
(b) Closing Balance
Sheet. On or prior to January 30, 2009, provided that the
Purchaser provides the assistance necessary for Sellers to complete such
statement, the Sellers shall deliver to the Purchaser a revised Estimated
Closing Balance Sheet, prepared in accordance with GAAP and GAGAS and setting
forth the Sellers’ good faith calculation of the consolidated Net Working
Capital with respect to the Companies and the Subsidiaries as of the date
hereof. The Sellers shall make available to the Purchaser the work
papers used in preparing such balance sheet. As promptly as
practicable, but in any event within 45 Business Days following the date hereof,
the Purchaser shall prepare and deliver to the Sellers’ Representative the
Closing Balance Sheet, prepared in accordance with GAAP and
GAGAS.
17
(c) Disputes. (i)
The Sellers’ Representative may dispute any amounts reflected on the Closing
Balance Sheet delivered by the Purchaser, but only on the basis that the amounts
reflected on such Closing Balance Sheet were not arrived at in accordance with
GAAP and GAGAS or were arrived at based on mathematical or clerical
error. If the Sellers’ Representative intends to dispute any such
amounts, the Sellers’ Representative shall notify the Purchaser and the
Purchaser’s Accountants in writing of each disputed item, specifying the amount
thereof in dispute and setting forth, in reasonable detail, the basis for such
dispute, within 30 Business Days of the delivery by the Purchaser of the Closing
Balance Sheet to the Sellers’ Representative. In the event of such a
dispute, the Sellers’ Representative and the Purchaser shall attempt to
reconcile the disputed amounts, and any resolution agreed by them as to such
disputed amounts shall be final, conclusive and binding on the parties
hereto.
(ii) If
the Sellers’ Representative and the Purchaser are unable to reach a resolution
with such effect within 30 Business Days of the receipt by the Purchaser and the
Purchaser’s Accountants of the Sellers’ Representative’s written notice of
dispute, the Sellers’ Representative and the Purchaser shall submit the items
remaining in dispute for resolution to an independent accounting firm of
national reputation mutually acceptable to the Sellers and the Purchaser (such
accounting firm being referred to herein as an “Independent Accounting
Firm”), which shall, within 30 Business Days after such submission,
determine and report to the Sellers’ Representative and the Purchaser upon such
remaining disputed items, and such determination shall be final, conclusive and
binding on the Sellers and the Purchaser. The fees and expenses of the
Independent Accounting Firm shall be allocated between the Sellers, on the one
hand, and the Purchaser, on the other hand, in the same proportion as the
aggregate amount of such remaining disputed items so submitted to the
Independent Accounting Firm that is unsuccessfully disputed by each such party
(as finally determined by the Independent Accounting Firm) bears to the total
amount of such remaining disputed items so submitted.
(ii) In
acting under this Section 2.05, the
Sellers’ Accountants, the Purchaser’s Accountants and the Independent Accounting
Firm shall be entitled to the privileges and immunities of
arbitrators.
(d) Purchase Price
Adjustment. (i) The Closing Balance Sheet shall be deemed
final upon the earliest to occur of (A) the Sellers’ Representative’s
failure to notify the Purchaser of a dispute by the 30th
Business Day after the Purchaser’s delivery of the Closing Balance Sheet to the
Sellers’ Representative, (B) the resolution of all disputes, pursuant to
Section 2.05(c)(i),
by the Sellers’ Accountants and the Purchaser’s Accountants and (C) the
resolution of all disputes, pursuant to Section 2.05(c)(ii),
by the Independent Accounting Firm.
18
(ii) If
the Net Working Capital reflected on the Estimated Closing Balance Sheet exceeds
the Net Working Capital reflected on the Closing Balance Sheet (or is negative
by a lesser amount than the Net Working Capital reflected on the Closing Balance
Sheet), then the Purchase Price shall be adjusted downward in an amount equal to
such excess (or amount by which such Net Working Capital is a lesser negative
amount than the Net Working Capital reflected on the Closing Balance Sheet), and
within five Business days of the Closing Balance Sheet being deemed final, the
Sellers’ Representative shall pay the amount of such excess to the Purchaser by
wire transfer in immediately available funds. If the Sellers’
Representative shall fail to pay the amount of such deficiency within the period
specified in the immediately preceding sentence, then the Purchaser may deliver
written notice to the Escrow Agent and the Sellers’ Representative specifying
such amount, and the Escrow Agent shall, within three Business Days of its
receipt of such notice and in accordance with the terms of the Escrow Agreement,
pay such amount to the Purchaser out of the Escrow Account by wire transfer in
immediately available funds. No failure of the Purchaser to deliver a
notice of the type specified in the immediately preceding sentence shall relieve
the Sellers’ Representative of the obligation to pay the amount of such
deficiency to the Purchaser.
(iii) If
the Net Working Capital reflected on the Estimated Closing Balance Sheet is less
than the Net Working Capital reflected on the Closing Balance Sheet (or is
negative by a greater amount than the Net Working Capital reflected on the
Closing Balance Sheet), then the Purchase Price shall be adjusted upward in an
amount equal to such deficiency (or amount by which such Net Working Capital is
a greater negative amount than the Net Working Capital reflected on the Closing
Balance Sheet), and within five Business days of the Closing Balance Sheet being
deemed final, the Purchaser shall pay the amount of such deficiency to the
Sellers, in the manner set forth in Section 2.04(a)(i) of the
Disclosure Schedule, by wire transfer in immediately available funds to
the Purchase Price Bank Accounts.
Section
2.06 Escrow. In
accordance with the terms of the Escrow Agreement, on the date hereof the
Purchaser shall deposit the Escrow Amount in the Escrow Account. The
Escrow Account shall be managed and paid out by the Escrow Agent in accordance
with the terms of the Escrow Agreement.
Section
2.07 Withholding. The
Purchaser shall be entitled at any time to deduct and withhold from any portion
of the Purchase Price otherwise payable pursuant to this Agreement such amounts
as Purchaser is required to deduct and withhold and pay over to applicable
taxing authorities with respect to the making of such payment under the Code or
any applicable provision of state or local Tax Law. To the extent
that amounts are so withheld by the Purchaser, the Purchaser shall pay over such
amounts to the applicable taxing authorities. To the extent that
amounts are so withheld by the Purchaser and paid over to the applicable taxing
authority, such amounts shall be treated for all purposes as having been paid to
the Sellers.
ARTICLE
III
REPRESENTATIONS
AND WARRANTIES OF THE SELLERS
As an
inducement to the Purchaser to enter into this Agreement, except as set forth in
the Disclosure Schedule (each section of which qualifies the
correspondingly numbered representation and warranty or covenant herein; provided, that the
disclosure of any fact or item in any Section of the Disclosure Schedule shall,
should the existence of such factor or item be relevant to any other Section, be
deemed to be disclosed with respect to that Section, so long as the relevance of
such disclosure to such other Section is reasonably apparent on the face of such
disclosure), each of the Sellers hereby, jointly and severally (except with
respect to Sections
3.01(b), (c), (d) and (e), pursuant to which each Seller represents and
warrants each statement therein only to the extent directly applicable to such
Seller), represents and warrants to the Purchaser and the Parent as
follows:
19
Section 3.01 Organization, Authority and
Qualification. (a) Each
Company is a corporation duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation and has all necessary
corporate power and authority to own, operate or lease the properties and assets
now owned, operated or leased by it and to carry on the Businesses as it has
been and is currently conducted. Each Company is duly licensed or
qualified to do business and is in good standing in each jurisdiction which the
properties owned or leased by it or the operation of any Institution makes such
licensing or qualification necessary, except to the extent that the failure to
be so licensed or qualified and in good standing would not (i) adversely affect
the ability of such Company to carry out its obligations under, and to
consummate the transactions contemplated by, this Agreement and the Ancillary
Agreements to which it is a party or (ii) otherwise have a Material Adverse
Effect. All corporate actions taken by each Company have been duly
authorized, and no Company has taken any action that in any respect conflicts
with, constitutes a default under, or results in a violation of, any provision
of its certificate of incorporation or by-laws. True and correct
copies of the certificate of incorporation and by-laws of each Company, each in
effect on the date hereof, have been delivered or made available by the Sellers
to the Purchaser.
(b) UGPE
is a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation and has all necessary corporate
power and authority to enter into this Agreement and the Ancillary Agreements to
which it is a party, to carry out its obligations hereunder and thereunder and
to consummate the transactions contemplated hereby and thereby. UGPE
is duly licensed or qualified to do business and is in good standing in each
jurisdiction which the properties owned or leased by it or the operation of its
business makes such licensing or qualification necessary, except to the extent
that the failure to be so licensed or qualified and in good standing would not
(i) adversely affect the ability of UGPE to carry out its obligations under, and
to consummate the transactions contemplated by, this Agreement and the Ancillary
Agreements to which it is a party or (ii) otherwise have a Material Adverse
Effect. The execution and delivery by UGPE of this Agreement and the
Ancillary Agreements to which it is a party, the performance by UGPE of its
obligations hereunder and thereunder and the consummation by UGPE of the
transactions contemplated hereby and thereby have been duly authorized by all
requisite corporate action. This Agreement has been, and upon their
execution the Ancillary Agreements to which UGPE is a party shall have been,
duly executed and delivered by UGPE and (assuming due authorization, execution
and delivery by the other parties hereto and thereto) this Agreement
constitutes, and upon their execution such Ancillary Agreements shall
constitute, legal, valid and binding obligations of UGPE, enforceable against
UGPE in accordance with their respective terms, except as the same may be
limited by applicable bankruptcy, insolvency (including all laws relating to
fraudulent transfers), reorganization, moratorium or similar laws affecting
creditors’ rights generally, now or hereafter in effect, and subject to the
effect of general principles of equity (regardless of whether considered in a
proceeding at law or in equity).
20
(c) UGP
is a limited liability company duly organized, validly existing and in good
standing under the laws of the jurisdiction of its formation and has all
necessary limited liability company power and authority to enter into this
Agreement and the Ancillary Agreements to which it is a party, to carry out its
obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby. UGP is duly licensed or qualified to
do business and is in good standing in each jurisdiction which the properties
owned or leased by it or the operation of its business makes such licensing or
qualification necessary, except to the extent that the failure to be so licensed
or qualified and in good standing would not (i) adversely affect the ability of
UGP to carry out its obligations under, and to consummate the transactions
contemplated by, this Agreement and the Ancillary Agreements to which it is a
party or (ii) otherwise have a Material Adverse Effect. The execution
and delivery by UGP of this Agreement and the Ancillary Agreements to which it
is a party, the performance by UGP of its obligations hereunder and thereunder
and the consummation by UGP of the transactions contemplated hereby and thereby
have been duly authorized by all requisite action on the part of UGP and its
members. This Agreement has been, and upon their execution the
Ancillary Agreements to which UGP is a party shall have been, duly executed and
delivered by UGP and (assuming due authorization, execution and delivery by the
other parties hereto and thereto) this Agreement constitutes, and upon their
execution such Ancillary Agreements shall constitute, legal, valid and binding
obligations of UGP, enforceable against UGP in accordance with their respective
terms, except as the same may be limited by applicable bankruptcy, insolvency
(including all laws relating to fraudulent transfers), reorganization,
moratorium or similar laws affecting creditors’ rights generally, now or
hereafter in effect, and subject to the effect of general principles of equity
(regardless of whether considered in a proceeding at law or in
equity).
(d) Merion
is a limited partnership duly organized, validly existing and in good standing
under the laws of the jurisdiction of its formation and has all necessary power
and authority to enter into this Agreement and the Ancillary Agreements to which
it is a party, to carry out its obligations hereunder and thereunder and to
consummate the transactions contemplated hereby and thereby. Merion
is duly licensed or qualified to do business and is in good standing in each
jurisdiction which the properties owned or leased by it or the operation of its
business makes such licensing or qualification necessary, except to the extent
that the failure to be so licensed or qualified and in good standing would not
(i) adversely affect the ability of Merion to carry out its obligations under,
and to consummate the transactions contemplated by, this Agreement and the
Ancillary Agreements to which Merion is a party or (ii) otherwise have a
Material Adverse Effect. The execution and delivery by Merion of this
Agreement and the Ancillary Agreements to which Merion is a party, the
performance by Merion of its obligations hereunder and thereunder and the
consummation by Merion of the transactions contemplated hereby and thereby have
been duly authorized by all requisite action on the part of Merion and its
partners. This Agreement has been, and upon their execution the
Ancillary Agreements to which Merion is a party shall have been, duly executed
and delivered by Merion, and (assuming due authorization, execution and delivery
by the other parties hereto and thereto) this Agreement constitutes, and upon
their execution such Ancillary Agreements shall constitute, legal, valid and
binding obligations of Merion, enforceable against Merion in accordance with
their respective terms, except as the same may be limited by applicable
bankruptcy, insolvency (including all laws relating to fraudulent transfers),
reorganization, moratorium or similar laws affecting creditors’ rights
generally, now or hereafter in effect, and subject to the effect of general
principles of equity (regardless of whether considered in a proceeding at law or
in equity).
21
(e) Each
of Baran and Barbara Baran is an individual and has all requisite right, power
and authority and full legal capacity to execute and deliver this Agreement and
the Ancillary Agreements to which Baran or Barbara Baran is a party, to perform
his or her obligations hereunder and thereunder, and to consummate the
transactions contemplated hereby and thereby. This Agreement has
been, and upon his execution the Ancillary Agreements to which Baran or Barbara
Baran is a party will be, duly and validly executed and delivered by Baran or
Barbara Baran, as the case may be, and (assuming due authorization, execution
and delivery by the other parties hereto and thereto) this Agreement
constitutes, and upon their execution such Ancillary Agreements shall
constitute, legal, valid and binding obligations of Baran or Barbara Baran,
enforceable against Baran or Barbara Baran in accordance with their respective
terms, except as the same may be limited by applicable bankruptcy, insolvency
(including all laws relating to fraudulent transfers), reorganization,
moratorium or similar laws affecting creditors’ rights generally, now or
hereafter in effect, and subject to the effect of general principles of equity
(regardless of whether considered in a proceeding at law or in
equity).
Section
3.02 Subsidiaries. (a) Section 3.02(a) of the
Disclosure Schedule sets forth for each Subsidiary its name, type of
entity, the jurisdiction and date of its incorporation or organization, its
authorized capital stock, partnership capital or equivalent, the number and type
of its issued and outstanding shares of capital stock, partnership interests or
similar ownership interests and the current ownership of such shares,
partnership interests or similar ownership interests.
(b) Except
as set forth on Section 3.02(b) of the
Disclosure Schedule, other than the Subsidiaries, there are no other
corporations, partnerships, joint ventures, associations or other entities in
which any Company or Subsidiary owns, of record or beneficially, any direct or
indirect equity or other interest or any right (contingent or otherwise) to
acquire the same. Other than the Subsidiaries, no Company or
Subsidiary is a member of (nor is any part of any Business conducted through)
any partnership and no Company or Subsidiary is a participant in any joint
venture or similar arrangement.
(c) Each
Subsidiary that is a corporation: (i) is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation, (ii) has all necessary power and authority to
own, operate or lease the properties and assets owned, operated or leased by
such Subsidiary and to carry on its business as it has been and is currently
conducted by such Subsidiary and (iii) is duly licensed or qualified to do
business and is in good standing in each jurisdiction in which the properties
owned or leased by it or the operation of its business makes such licensing or
qualification necessary, except to the extent that the failure to be so licensed
or qualified and in good standing would not (x) adversely affect the ability of
the Sellers to carry out their obligations under, and to consummate the
transactions contemplated by, this Agreement and the Ancillary Agreements or (y)
otherwise have a Material Adverse Effect. Each Subsidiary that is not
a corporation: (i) is duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization, (ii) has all
necessary power and authority to own, operate or lease the properties and assets
owned, operated or leased by such Subsidiary and to carry on its business as it
has been and is currently conducted by such Subsidiary and (iii) is duly
licensed or qualified to do business and is in good standing in each
jurisdiction in which the properties owned or leased by it or the operation of
its business makes such licensing or qualification necessary, except to the
extent that the failure to be so licensed or qualified and in good standing
would not (x) adversely affect the ability of the Sellers to carry out their
obligations under, and to consummate the transactions contemplated by, this
Agreement and the Ancillary Agreements or (y) otherwise have a Material Adverse
Effect.
22
(d) All
corporate or other actions taken by each Subsidiary have been duly authorized
and no Subsidiary has taken any action that in any respect conflicts with,
constitutes a default under, or results in a violation of any provision of its
certificate of incorporation or by-laws (or similar organizational
documents). True and complete copies of the certificate of
incorporation and by-laws (or similar organizational documents), in each case as
in effect on the date hereof, of each Subsidiary have been delivered or made
available by the Sellers to the Purchaser.
Section 3.03 Capitalization. (a) The
authorized capital stock or other ownership interests of each Company is set
forth in Section
3.03(a) of the Disclosure Schedule. All of the issued and
outstanding shares of capital stock or other ownership interests of each Company
are duly authorized, validly issued, fully paid and
nonassessable. None of the issued and outstanding Shares or HUV
Interests were issued in violation of any preemptive rights. Except
as set forth in Section 3.03(a) of the
Disclosure Schedule, there are no options, warrants, convertible
securities or other rights, agreements, arrangements or commitments of any
character relating to the Shares, the HUV Interests or obligating any Seller or
any Company to issue or sell any Shares or HUV Interests, or any other interest
in, any Company. There are no outstanding contractual obligations of
BIT or HUV to repurchase, redeem or otherwise acquire any shares of BIT Common
Stock or any HUV Interests, respectively, or to provide funds to, or make any
investment (in the form of a loan, capital contribution or otherwise) in, any
other Person. The Shares and the HUV Interests constitute all of the
issued and outstanding capital stock or other ownership interests of the
Companies and are owned of record and beneficially by the Sellers as set forth
in Section 3.03(a) of
the Disclosure Schedule free and clear of all Encumbrances, other than
Permitted Encumbrances. The Preferred Stock set forth in Section 3.03(a) of the
Disclosure Schedule shall have been redeemed as of the date
hereof. Upon consummation of the transactions contemplated by this
Agreement and registration of the Shares and the HUV Interests in the name of
the Purchaser in the stock or other records of the Companies, the Purchaser,
assuming it shall have purchased the Shares and the HUV Interests for value in
good faith and without notice of any adverse claim, will own all the issued and
outstanding capital stock or other ownership interests of each Company free and
clear of all Encumbrances, other than Permitted Encumbrances. Upon
consummation of the transactions contemplated by this Agreement, the Shares and
the HUV Interests will be fully paid and nonassessable. There are no
voting trusts, stockholder agreements, proxies or other agreements or
understandings in effect with respect to the voting or transfer of any of the
Shares or the HUV Interests.
(b) The
stock or other register of each Company accurately records: (i) the
name and address of each Person owning shares of capital stock or other
ownership interests of such Company and (ii) the certificate number of each
certificate evidencing shares of capital stock or other ownership interests
issued by such Company, the number of shares or other ownership interests
evidenced by each such certificate, the date of issuance thereof and, in the
case of cancellation, the date of cancellation.
23
(c) All
the outstanding shares of capital stock of each Subsidiary that is a corporation
are validly issued, fully paid, nonassessable and, except with respect to wholly
owned Subsidiaries, free of preemptive rights and are owned by BIT, whether
directly or indirectly, free and clear of all Encumbrances, other than Permitted
Encumbrances. There are no options, warrants, convertible securities
or other rights, agreements, arrangements or commitments of any character
relating to the capital stock of any Subsidiary or obligating any Seller, any
Company or any Subsidiary to issue or sell any shares of capital stock of, or
any other interest in, any Subsidiary. Except as set forth on Section 3.03(c) of the
Disclosure Schedule, there are no voting trusts, stockholder agreements,
proxies or other agreements or understandings in effect with respect to the
voting or transfer of any shares of capital stock of or any other interests in
any Subsidiary.
(d) The
stock or other register of each Subsidiary accurately records: (i)
the name and address of each Person owning shares of capital stock or other
ownership interests of such Subsidiary and (ii) the certificate number of each
certificate evidencing shares of capital stock or other ownership interests
issued by such Subsidiary, the number of shares or other ownership interests
evidenced by each such certificate, the date of issuance thereof and, in the
case of cancellation, the date of cancellation.
Section
3.04 No
Conflict. Assuming
that all consents, approvals, authorizations filings, notifications and other
actions described in Section 3.04 and
Section 3.05 of the Disclosure Schedule have been obtained or made, the
execution, delivery and performance by any Seller of this Agreement and the
Ancillary Agreements to which any Seller is a party do not and will not
(a) violate, conflict with or result in the breach of any provision of the
certificate of incorporation or by-laws of any Seller, Company or Subsidiary,
(b) conflict with or violate (or cause an event that could have a Material
Adverse Effect as a result of) any Law or Governmental Order applicable to any
Seller, Company or Subsidiary or any of their respective assets, properties or
businesses or (c) conflict with, result in any breach of, constitute a
default (or event that with the giving of notice or lapse of time, or both,
would become a default) under, require any consent under, or give to others any
rights of termination, amendment, acceleration, suspension, revocation or
cancellation of, or result in the creation of any Encumbrance, other than
Permitted Encumbrances, on any of the Shares, the HUV Interests or the Assets
pursuant to, any note, bond, mortgage or indenture, contract, agreement, lease,
sublease, license, permit, franchise or other instrument or arrangement to which
or any Seller, Company or Subsidiary is a party or by which any of the Shares,
the HUV Interests or the Assets is bound or affected, except, in the case of
this clause (c), to the extent that such conflicts, breaches, defaults or
other matters would not (i) adversely affect the ability of any Seller,
Company or Subsidiary to carry out its or his obligations under, and to
consummate the transactions contemplated by, this Agreement and the Ancillary
Agreements to which such Seller, Company or Subsidiary is a party or
(ii) otherwise have a Material Adverse Effect.
24
Section 3.05 Governmental Consents and
Approvals. Except
for the consents, approvals and notifications that must be obtained or given
prior to the Closing as set forth on Section 3.05 of the
Disclosure Schedule (the “Required Consents”),
the execution, delivery and performance by each Seller of this Agreement and
each Ancillary Agreement to which the such Seller is a party, as the case may
be, do not and will not require any consent, approval, authorization or other
order of, action by, filing with or notification to, any Governmental Authority
or Educational Agency. To the Knowledge of the Sellers, there is no
reason why all the Required Consents will not be received.
Section 3.06 Financial Information; Books
and Records; No Undisclosed Liabilities. (a) True
and complete copies of (i) the audited consolidated balance sheet of the
Companies and Clemens as of December 31, 2007, and the related audited
consolidated statements of income, retained earnings, shareholders’ equity and
changes in financial position of the Companies and Clemens, together with all
related notes and schedules thereto, accompanied by the reports thereon, if any,
of the Sellers’ Accountants (collectively referred to herein as the “Audited Financial
Statements”) and (ii) the unaudited consolidated balance sheet of
the Companies and Clemens for the nine-month period ending September 30, 2008
and the related consolidated financial statements of Companies and Clemens,
together with all related notes and schedules thereto (collectively referred to
herein as the “Interim
Financial Statements”) have been delivered or made available by the
Sellers to the Purchaser. The Audited Financial Statements and the
Interim Financial Statements are hereinafter collectively referred to as the
“Financial
Statements”. The Financial Statements (A) were prepared
in accordance with the books of account and other financial records of Clemens,
the Companies and the Subsidiaries, (B) present fairly, in all material
respects, the financial condition and results of operations of Clemens, the
Companies and the Subsidiaries as of the dates thereof or for the period covered
thereby (subject, in the case of the Interim Financial Statements, to normal
year-end adjustments), (C) have been prepared in accordance with GAAP and
GAGAS, on a basis consistent with the Accounting Principles and the past
practices of Clemens, the Companies and the Subsidiaries, and (D) include
all adjustments (consisting only of normal recurring accruals) that are
necessary for a fair presentation in all material respects of the financial
condition of Clemens, the Companies and the Subsidiaries and the results of the
operations of Clemens, the Companies and the Subsidiaries as of the dates
thereof or for the period covered thereby.
(b) The
books of account and other financial records of the Companies and the
Subsidiaries: (i) reflect all items of income and expense and all
assets and Liabilities required to be reflected therein in accordance with GAAP
applied on a basis consistent with the past practices of the Companies and the
Subsidiaries, respectively, (ii) are in all material respects complete and
correct, and do not contain or reflect any material inaccuracies or
discrepancies and (iii) have been maintained in accordance with good business
and accounting practices.
(c) The
minute books of the Companies and the Subsidiaries reflecting records of actions
taken by the shareholders or members, boards of directors/managers and all
committees of the boards of directors/managers of the Companies and the
Subsidiaries have been provided or made available to the Purchaser and are
complete and accurate in all material respects.
25
(d) The
Companies and the Subsidiaries have established and maintain a system of
internal accounting controls (“Internal Controls”)
sufficient to comply with all legal and accounting requirements applicable to
the Companies, the Subsidiaries and the Institutions and to provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in conformity with GAAP and GAGAS, subject to the
adjustments set forth in the Accounting Principles. Except as set
forth in Section
3.06(d) of the Disclosure Schedule, there are no significant deficiencies
or material weaknesses in the design or operation of such Internal Controls, and
the Companies and the Subsidiaries have not been advised by any independent
auditor or other third party that any such significant deficiency or material
weakness in such Internal Controls exists or existed. Except as set
forth in Section
3.06(d) of the Disclosure Schedule, no Company or any Subsidiary nor
any of their respective directors, officers, employees, auditors, accountants or
representatives has received or otherwise had or obtained knowledge of any
complaint, allegation, assertion or claim, whether written or oral, regarding
the accounting or auditing practices, procedures, methodologies or methods of
the Companies and the Subsidiaries or their respective Internal Controls,
including any complaint, allegation, assertion or claim that the Companies and
the Subsidiaries have engaged in questionable financial reporting, accounting or
auditing practices. There has not been any fraud, whether or not
material, that involves management or other employees who have a significant
role in the Internal Controls or, to the Knowledge of the Sellers, any
allegations or investigations of any such fraud.
(e) There
are no Liabilities of the Companies and the Subsidiaries, other than Liabilities
(i) reflected or reserved against in the Financial Statements, (ii) set
forth in Section
3.06(e) of the Disclosure Schedule, or (iii) incurred since
September 30, 2008 in the ordinary course of business, consistent with the past
practice of the Companies and the Subsidiaries and which do not and could not
have a Material Adverse Effect.
Section
3.07 Receivables. Set
forth in Section 3.07
of the Disclosure Schedule is an aged list of the Receivables as of
September 30, 2008. All Receivables arising from the date thereof
until the Closing have or will have arisen in the ordinary course of business
from bona fide transactions and constitute or will constitute only valid,
undisputed claims of any Company, Subsidiary or Institution, and no valid claims
of setoff or other defenses or counterclaims have been formally asserted with
respect thereto, other than normal cash discounts accrued in the ordinary course
of business consistent with the past practices of the Companies and the
Subsidiaries or as reserved for in the Financial Statements.
Section 3.08 Conduct in the Ordinary
Course; Absence of Certain Changes, Events and Conditions. Since
December 31, 2007, the Businesses have been conducted in the ordinary course
consistent with past practice. As amplification and not limitation of
the foregoing, since such date, except as set forth in Section 3.08 of the
Disclosure Schedule, no Company, Subsidiary or Institution
has:
(a) permitted
or allowed any of the Assets to be subjected in any material respect to any
Encumbrance, other than Permitted Encumbrances and Encumbrances that will be
released at or prior to the Closing;
26
(b) except
in the ordinary course of business consistent with past practice, discharged or
otherwise obtained the release of any Encumbrance related to any Company or
Subsidiary, or paid or otherwise discharged any material Liability related to
any Company or Subsidiary, other than current liabilities incurred in the
ordinary course of business consistent with past practice;
(c) written
down or written up in any material respect (or failed to write down or write up
in accordance with accounting methods consistent with past practice) the value
of any Inventory or Receivables or revalued in any material respect any of the
Assets other than in the ordinary course of business consistent with past
practices and in accordance with GAAP;
(d) made
any change in any method of accounting or accounting practice or policy used by
any Company or Subsidiary, other than such changes required by
GAAP;
(e) amended,
terminated, cancelled or compromised any material claims of any Company or
Subsidiary or waived any other rights of material value to any Company or
Subsidiary;
(f) sold,
transferred, leased, subleased or licensed to any Person, or abandoned or
otherwise disposed of any properties or assets, real, personal or mixed
(including leasehold interests and intangible property) of the Businesses other
than in the ordinary course of business consistent with past
practice;
(g) redeemed
any of the capital stock or declared, made or paid any dividends or
distributions (whether in cash, securities or other property) to the holder(s)
of capital stock of any Company or Subsidiary with respect to such capital
stock;
(h) merged
with, entered into a consolidation with or acquired an interest of 5% or more in
any Person or acquired a substantial portion of the assets or business of any
Person or any division or line of business thereof, or otherwise acquired any
material assets other than in the ordinary course of business consistent with
past practice;
(i)
made any
capital expenditure or commitment for any capital expenditure in excess of
$60,000 individually or $150,000 in the aggregate;
(j)
issued any
sales orders or otherwise agreed to make any purchases involving exchanges in
value in excess of $35,000 individually or $100,000 in the
aggregate;
(k) incurred
any Indebtedness in excess of $25,000 individually or $100,000 in the
aggregate;
(l)
made any loan to,
guaranteed any Indebtedness of, or otherwise incurred any Indebtedness on behalf
of, any Person;
(m) failed
to pay any creditor any material amount owed to such creditor when
due;
27
(n) (i) granted
or announced any increase in the wages, salaries, compensation, bonuses,
incentives, pension or other benefits payable by any Company or Subsidiary to
any of its employees, including any increase or change pursuant to any Plan, or
(ii) established or increased or promised to increase any benefits under
any Plan in either case, except as required by Law or involving ordinary
increases consistent with the past practices of the Companies and the
Subsidiaries;
(o) entered
into any agreement, arrangement or transaction with any directors, managers,
officers, employees, consultants, stockholders or members any Company,
Subsidiary or Institution (or with any relative, beneficiary, spouse or
Affiliate thereof);
(p) entered
into any agreement, arrangement or transaction with any Person or Governmental
Authority providing for the furnishing of services by any Company, Subsidiary or
Institution at a discount to rates or tuition amounts charged by such Company,
Subsidiary or Institution as of December 31, 2007;
(q) terminated,
discontinued, closed or disposed of any facility or other business operation, or
laid off any employees (other than layoffs of fewer than 50 employees in any
six-month period in the ordinary course of business consistent with past
practice) or implemented any early retirement, separation or other program
providing early retirement window benefits within the meaning of Section
1.401(a)-4 of the Treasury Regulations or announced or planned any such action
or program for the future;
(r) allowed
any permit required of any Company, Subsidiary or Institution by any
Governmental Authority or any Environmental Permit in connection with the
ownership or operation of the Businesses and the Institutions to lapse or
terminate or failed to renew any insurance policy or any such permit or
Environmental Permit that is scheduled to terminate or expire within 45 calendar
days of the Closing Date;
(s) failed
to maintain each Company’s, Subsidiary’s and Institution’s buildings, property
and equipment in good repair and operating condition, ordinary wear and tear
excepted;
(t) suffered
any casualty loss or damage with respect to any of the Assets which in the
aggregate have a replacement cost of more than $50,000, whether or not such loss
or damage shall have been covered by insurance;
(u)
amended or modified or
consented to the termination of any Material Contract or any Company’s,
Subsidiary’s or Institution’s rights thereunder;
(v) made
any material charitable contribution;
(w) suffered
any Material Adverse Effect;
(x) agreed,
whether in writing or otherwise, to take any of the actions specified in this
Section 3.08,
or granted any options to purchase, rights of first refusal, rights of first
offer or any similar rights or commitments with respect to any of the actions
specified in this Section 3.08, except
as expressly contemplated by this Agreement and the Ancillary
Agreements;
28
(y) failed
to comply in any material respect with or remain in material compliance with any
Educational Law applicable to such Company, Subsidiary, Institution, or the
Businesses, or to maintain in full force and effect any Educational Approval
necessary for the Businesses’ and the Institution’s existing operations and such
Company or Subsidiary has not received written notice from any Educational
Agency of any such failure;
(z) unless
required by applicable Law, made any material change in any of its established
practices or procedures for complying with any Educational Law;
(aa) made,
changed or revoked any material Tax election or settled or compromised any Tax
liability or consented to any claim or assessment relating to Taxes or any
waiver of the statute of limitations for any such claim or assessment, in each
case, with respect to the Assets or any Company or Subsidiary; or
(bb) not
shortened or lengthened the customary payment cycles for any of its payables or
receivables.
Section
3.09 Litigation. Except
as set forth in Section 3.09 of the
Disclosure Schedule, there are no Actions, Claims or Educational Claims
by or against any Company, Subsidiary or Institution (or by or against any
Seller or any Affiliate thereof and relating to the Businesses, the Companies,
the Subsidiaries or the Institutions) or affecting any of the Assets or the
Businesses pending before any Governmental Authority or Educational Agency (nor,
to the Knowledge of the Sellers, threatened to be brought by or before any
Governmental Authority or Educational Agency). Timely claims for
insurance with respect to all such Actions, Claims and Educational Claims set
forth in Section 3.09
of the Disclosure Schedule have been submitted by or on behalf of the
applicable Company, Subsidiary or Institution. None of the Sellers,
Companies, Subsidiaries or Institutions nor any of their respective assets and
properties, including the Assets, is subject to any Governmental Order or order
of any Educational Agency (nor, to the Knowledge of the Sellers, are any
Governmental Orders or orders of any Educational Agency threatened to be
imposed) that has or has had a Material Adverse Effect or could affect the
legality, validity or enforceability of this Agreement, any Ancillary Agreement
or the consummation of the transactions contemplated hereby or
thereby.
Section 3.10 Compliance with
Laws. (a) The
Companies, the Subsidiaries and the Institutions have conducted and continue to
conduct the Businesses in accordance in all material respects with all Laws
(excluding Educational Laws) and Governmental Orders applicable to the
Companies, the Subsidiaries and the Institutions or the Assets, and no Company,
Subsidiary or Institution is in violation in any material respect of any such
Law or Governmental Order. No Company, Subsidiary or Institution has,
in the last three years, received any written communication from any
Governmental Authority alleging that such Company, Subsidiary or Institution is
not in compliance in any material respect with any Law or Governmental Order
that has not been resolved.
29
(b) Section 3.10(b) of the
Disclosure Schedule sets forth a brief description of each Governmental
Order applicable to the Companies, the Subsidiaries, the Institutions or the
Assets, and no such Governmental Order has or has had a Material Adverse Effect
or could affect the legality, validity or enforceability of this Agreement, any
Ancillary Agreement or the consummation of the transactions contemplated hereby
or thereby.
Section 3.11 Environmental and Other
Permits and Licenses; Related Matters. Except
as set forth on Section 3.11(b)(ii) and (c)
of the Disclosure Schedule:
(a) Each
Company, Subsidiary and Institution is in compliance in all material respects
with all applicable Environmental Laws. Each Company, Subsidiary and
Institution has all material Environmental Permits required under Environmental
Law, all such permits are in full force and effect and each Company, Subsidiary
and Institution is in material compliance therewith.
(b) There
has been no Release of any Hazardous Material (i) by any Company, Subsidiary or
Institution, (ii) to the Knowledge of the Sellers, on the Real Property, (iii)
to the Knowledge of the Sellers, on any property formerly leased, used or
occupied by any Company, Subsidiary or Institution during the period of any
Company’s, Subsidiary’s or Institutions’ lease, use or occupancy thereof, or
(iv) on any property formerly owned by any Company, Subsidiary or Institution
during the period of any Company’s, Subsidiary’s or Institution’s ownership
thereof, in the case of (i), (ii), (iii) and (iv), that requires any Remedial
Action.
(c) There
are no Environmental Claims pending (or, to the Knowledge of the Sellers,
threatened) against any Company, Subsidiary or Institution, and there are no
circumstances that can reasonably be expected to form the basis of any such
Environmental Claim, including, to the Knowledge of the Sellers, with respect to
any off-site disposal location currently or formerly used by any Company,
Subsidiary or Institution or any of its predecessors or with respect to
previously owned or operated facilities.
(d) No
Company or Subsidiary is conducting, or has undertaken or completed or funded,
any Remedial Action relating to any Release or threatened Release of any
Hazardous Material at the Real Property or at any other site, location or
operation, either voluntarily or pursuant to the order of any Governmental
Authority or the requirements of any Environmental Law or Environmental
Permit.
(e)
To the
Knowledge of the Sellers, there is no asbestos or asbestos-containing material
on any of the Real Property that requires abatement, removal or encapsulation
pursuant to Environmental Law.
(f)
None of the Real
Property is listed or proposed for listing, nor to the Knowledge of the Sellers
does the Real Property adjoin any other property that is listed or proposed for
listing, on the National Priorities List or CERCLIS or on any analogous federal,
state or local list.
(g)
To the
Knowledge of the Sellers, there are no wetlands or any areas subject to any
legal requirement or restriction in any way related to wetlands (including
requirements or restrictions related to buffer or transition areas or open
waters) at or affecting the Real Property.
30
(h) The
Sellers have provided or made available to the Purchaser copies of (i) any
environmental assessment or audit reports or other similar studies or analyses
relating to the Businesses, the Real Property or the Companies or the
Subsidiaries in their possession, and (ii) all insurance policies issued at any
time that may provide coverage to any Company, Subsidiary or Institution for
environmental matters.
(i)
There
are no underground storage tanks, surface impoundments, septic tanks, pits,
sumps or lagoons in which Hazardous Materials are being or have been treated,
stored or disposed on the Real Property by the Sellers.
(j)
Except
with respect to the property located at 97 Newberry Road, East Windsor,
Connecticut, neither the execution of this Agreement or the Ancillary Agreements
nor the consummation of the transactions contemplated hereby or thereby will
require any Remedial Action or notice to or consent of any Governmental
Authority or third party pursuant to any applicable Environmental Law or
Environmental Permit.
(k) Except
with respect to Section 3.05 and
Section 3.08,
the representations set forth in this Section 3.11 are the
only representations with respect to environmental matters.
Section 3.12 No Preferential
Rights. There
is no contract, agreement or other arrangement granting any Person any
preferential right to purchase any of the Assets (other than in the ordinary
course of business consistent with past practice), or any of the Shares or the
HUV Interests.
Section 3.13 Material
Contracts. (a) Section 3.13(a) of the
Disclosure Schedule lists each of the following types of contracts and
agreements (including oral agreements) of each Company, Subsidiary and
Institution (such contracts and agreements, together with all contracts,
agreements, leases and subleases concerning the use, occupancy, management or
operation of any Leased Real Property (including all contracts, agreements,
leases and subleases relating to Intellectual Property and all contracts,
agreements, leases and subleases relating to Tangible Personal Property), being
“Material
Contracts”):
(i) each
contract or agreement, or related series of agreements, that cannot be cancelled
by a Company, Subsidiary or Institution on 30 days’ notice or less without
penalty or further payment and under the terms of which such Company, Subsidiary
or Institution: (A) is likely to pay or otherwise give consideration
of more than $25,000 in the aggregate during the calendar year ended December
31, 2009; (B) is likely to pay or otherwise give consideration of more than
$50,000 in the aggregate over the remaining term of such contract; (C) is
reasonably likely to be entitled to receive consideration of more than $25,000
in the aggregate during the calendar year ended December 31, 2009; or (D) is
likely to be entitled to receive consideration of more than $50,000 in the
aggregate over the remaining term of the contract;
(ii) all
advertising agency, sales promotion, market research, marketing, web site
creation and maintenance, consulting and advertising contracts and agreements to
which any Company, Subsidiary or Institution is a party and involving the
payment of consideration of more than $25,000 in the
aggregate;
31
(iii) all
management contracts and contracts with independent contractors or consultants
(or similar arrangements) to which any Company, Subsidiary or Institution is a
party and that are not cancelable without penalty or further payment and without
more than 30 days’ notice;
(iv) all
contracts and agreements relating to Indebtedness of any Company, Subsidiary or
Institution;
(v) all
contracts and agreements between any Company, Subsidiary or Institution, on the
one hand, and any Educational Agency, on the other hand, but excluding any
Educational Approval;
(vi) all
contracts and agreements that limit or purport to limit the ability of any
Company, Subsidiary or Institution to compete in any line of business or with
any Person or in any geographic area or during any period of time;
(vii) all
contracts and agreement between any Company, Subsidiary or Institution, on the
one hand, and any Seller or any Affiliate of any Seller (other than Clemens, a
Company, Subsidiary or Institution), on the other hand;
(viii) all
contracts and agreements between any Company, Subsidiary or Institution, on the
one hand, and any of its respective directors, managers, officers, employees,
stockholders or members (or any relative, beneficiary, spouse or Affiliate
thereof), on the other hand, other than any oral contracts of employment
terminable on no more than 30 days’ notice without penalty or further payment
obligation;
(ix)
all material contracts,
agreements and leases relating to the use, occupancy, management or operation of
the Leased Real Property;
(x)
all material
agreements included in the Companies IP Licenses (and exclusive of any
agreements or licenses included in the Companies IP Licenses that arise from the
purchase of any commercially available “off-the-shelf” computer software
products that are not material to the Businesses, or any other “shrink-wrap” or
“click-wrap” licenses or agreements that are included in the Companies IP
Licenses and that are not material to the Businesses);
(xi) all
agreements regarding any special pricing, discount or reduced tuition
arrangement including agreements providing for tuition or pricing that is
materially inconsistent with the tuition reflected in the enrollment agreements,
catalogs, and other written materials of any Company, Subsidiary or Institution
disseminated to students and prospective students;
(xii)
all joint venture,
community college, partnership or similar agreements involving a sharing of
profits, losses, costs or liabilities with any other Person;
32
(xiii)
all agreements with any
Third-Party Servicer, as that term is defined in 34 C.F.R. § 668.2;
(xiv)
all agreements in existence since the
Compliance Date under which any Company, Subsidiary or Institution provides or
has provided educational instruction on behalf of any other institution or
organization, or another institution provides or has provided educational
instruction on behalf of any Company, Subsidiary or Institution, including all
consortium, contractual, internship, externship or articulation
agreements;
(xv)
all agreements respecting
the funding of student scholarships;
(xvi) all
agreements under which any Company, Subsidiary or Institution is a
lender;
(xvii) all
agreements for the sale of tuition receivables;
(xviii)
all marketing agreements and agreements for student
recruiting and retention services (other than agreements with employees of
Clemens or any Company, Subsidiary or Institution);
(xix) all
agreements by which any Company, Subsidiary or Institution provides or
facilitates scholarships or grants;
(xx) all
agreements by which any Company, Subsidiary or Institution provides private
capital loans to students attending any Institution;
(xxi) all
agreements for student recruiting services whether entered into with an employee
or with third parties;
(xxii)
all amendments, supplements, and modifications
(whether oral or written) in respect of any of the foregoing; and
(xxiii) all
other contracts and agreements, whether or not made in the ordinary course of
business, the absence of which would have a Material Adverse
Effect.
For
purposes of this Agreement, the term “lease” shall include
any and all leases, subleases, sale/leaseback agreements or similar
arrangements.
(b) Except
as set forth in Section 3.13(b) of the
Disclosure Schedule, each Material Contract: (i) is valid and
binding on the Seller, Company, Institution or Subsidiary that is a party
thereto and, to the Knowledge of Sellers, on the other parties thereto and is in
full force and effect, (ii) does not require consent, approval or notice to any
third party as a result of the transactions contemplated by this Agreement and
the Ancillary Agreements, and (iii) assuming receipt of the Required Consents,
upon consummation of the transactions contemplated by this Agreement and the
Ancillary Agreements shall continue in full force and effect without penalty or
other adverse consequence. No Company, Subsidiary or Institution is
in breach of, or default under, any Material Contract and no Company, Subsidiary
or Institution has received written notice from any third party to any Material
Contract alleging or asserting any such breach or default or any notice of
termination or cancellation thereof.
33
(c) To
the Knowledge of the Sellers, no other party to any Material Contract is in
material breach thereof or default thereunder, and no Company, Subsidiary or
Institution has given any notice of termination, cancellation, breach or default
under any Material Contract.
(d) The
Sellers have made available to the Purchaser true and complete copies of all
written Material Contracts and has provided to the Purchaser a summary of all
oral Material Contracts (if any).
Section 3.14 Intellectual
Property. (a) Section 3.14(a) of the
Disclosure Schedule sets forth a true and complete list of (i) all
patents and patent applications, registered trademarks and trademark
applications, registered copyrights and copyright applications, and domain names
included in the Owned Intellectual Property, if any (ii) all Companies IP
Licenses, other than commercially available off-the-shelf computer software
products licensed pursuant to shrink-wrap or click-wrap licenses that are not
material to the Businesses or any other “shrink-wrap” or “click-wrap” licenses
or agreements that are included in the Companies IP Licenses and that are not
material to the Businesses, if any, and (iii) any other Owned Intellectual
Property material to the Businesses.
(b) The
conduct of the Businesses as currently conducted does not infringe,
misappropriate, or otherwise violate the Intellectual Property of any third
party, and no Claim has been asserted that the conduct of the Businesses as
currently conducted infringes, misappropriates or otherwise violates the
Intellectual Property of any third party. With respect to each item
of Owned Intellectual Property, a Company or Subsidiary is the exclusive owner
of the entire right, title and interest in and to such Intellectual Property
free and clear of any Encumbrances, other than Permitted Encumbrances, and is
entitled to use such Intellectual Property on an unrestricted basis in the
continued operation of the Businesses. With respect to each item of
Licensed Intellectual Property a Company or Subsidiary has the right to use such
Intellectual Property in the continued operation of the Businesses in accordance
with the terms of the Companies IP Licenses governing such Intellectual
Property.
(c) Except
as set forth in Section 3.14(c) of the
Disclosure Schedule, to the Knowledge of the Sellers, no Person is
engaging in any activity that infringes, dilutes, misappropriates, or otherwise
violates the Owned Intellectual Property. Each Companies IP License
is valid and enforceable, is binding on a Company, Institution or Subsidiary
and, to the Knowledge of the Sellers, on the other parties thereto, is in full
force and effect, and no party to any Companies IP License is in material breach
thereof or default thereunder.
Section
3.15 Real
Property. (a) No
Company or Subsidiary holds title to any Owned Real Property.
(b) Section 3.15(b) of the
Disclosure Schedule lists: (i) the street address of each
parcel of Leased Real Property and (ii) the identity of the lessor, lessee and
current occupant (if different from lessee) of each such parcel of Leased Real
Property.
34
(c) There
is no material violation of any Law (including any building, planning or zoning
law) relating to any of the Real Property. The Sellers have made
available to the Purchaser true, legible and complete copies of each deed for
each parcel of Leased Real Property and all the title insurance policies, title
reports, surveys, certificates of occupancy, environmental reports and audits,
appraisals, permits, other Encumbrances, title documents and other documents
relating to or otherwise affecting the Real Property, the operations of any
Company, Subsidiary or Institution thereon or any other uses
thereof. A Company, Subsidiary or Institution is in peaceful and
undisturbed possession of each parcel of Real Property, and there are no
contractual or legal restrictions that preclude or restrict the ability to use
the Real Property for the purposes for which it is currently being
used. All existing water, sewer, steam, gas, electricity, telephone,
cable, fiber optic cable, Internet access and other utilities required for the
construction, use, occupancy, operation and maintenance of the Real Property are
adequate for the conduct of the Businesses as they have been and currently are
conducted. There are no material latent defects or material adverse
physical conditions affecting the Real Property or any of the facilities,
buildings, structures, erections, improvements, fixtures, fixed assets and
personalty of a permanent nature annexed, affixed or attached to, located on or
forming part of the Real Property. No Company, Subsidiary or
Institution has leased any parcel or any portion of any parcel of Real Property
to any other Person and no other Person has any rights to the use, occupancy or
enjoyment thereof pursuant to any lease, license, occupancy or other agreement,
nor have the Sellers assigned its interest under any lease listed in Section 3.15(b) of the
Disclosure Schedule to any third party.
(d) Section 3.15(d) of the
Disclosure Schedule sets forth a true and complete list of all leases
relating to the Leased Real Property and any and all ancillary documents (the
“Ancillary Lease
Documents”) pertaining thereto (including all amendments, modifications,
supplements, exhibits, schedules, addenda and restatements thereto and thereof
and all consents, including consents for alterations, assignments and sublets,
documents recording variations, memoranda of lease, options, rights of
expansion, extension, first refusal and first offer and evidence of commencement
dates and expiration dates). Except as set forth in Section 3.15(d) of the
Disclosure Schedule, with respect to each of such leases, no Company,
Subsidiary or Institution has exercised or given any notice of exercise of, nor
has any lessor or landlord exercised or received any notice of exercise by a
lessor or landlord of, any option, right of first offer or right of first
refusal contained in any such lease or sublease, including any such option or
right pertaining to purchase, expansion, renewal, extension or relocation
(collectively, “Options”).
(e) The
interests of the Companies, Subsidiaries and Institutions in the Leased Real
Property to be transferred pursuant to this Agreement are sufficient in all
material respects for the continued conduct of the Businesses after the Closing
in substantially the same manner as conducted prior to the Closing.
(f) There
are no condemnation proceedings or eminent domain proceedings of any kind
pending or, to the Knowledge of the Sellers, threatened against the Leased Real
Property.
(g) (i)
All the Leased Real Property is occupied under a valid and current certificate
of occupancy or similar permit, (ii) the transactions contemplated by this
Agreement and the Ancillary Agreements will not require the issuance of any new
or amended certificate of occupancy, and (iii) to the Knowledge of the Sellers,
there are no facts that would prevent the Real Property from being occupied by
any Company, Subsidiary or Institution after the Closing in the same manner as
occupied by any Company, Subsidiary or Institution immediately prior to the
Closing.
35
(h) All
improvements on the Real Property constructed by or on behalf of any Company,
Subsidiary or Institution or constructed by or on behalf of any other Person,
were constructed in compliance in all material respects with all applicable Laws
(including any building, planning or zoning Laws) affecting such Real
Property.
(i)
No improvements on
the Real Property and none of the current uses and conditions thereof violate
any Encumbrance, applicable deed restrictions or other applicable covenants,
restrictions, agreements, existing site plan approvals, zoning or subdivision
regulations or urban redevelopment plans as modified by any duly issued
variances, and no permits, licenses or certificates pertaining to the ownership
or operation of all improvements on the Real Property, other than those which
are transferable with the Real Property, are required by any Governmental
Authority having jurisdiction over the Real Property.
(j)
All improvements on
any Real Property are wholly within the lot limits of such Real Property and do
not encroach on any adjoining premises or Encumbrance benefiting such Real
Property, and there are no encroachments on any Real Property or any easement or
property right or benefit appurtenant thereto by any improvements located on any
adjoining premises.
(k) There
have been no improvements of a value in excess of $10,000 in the aggregate made
to or constructed on any Real Property within the applicable period for the
filing of mechanics’ liens.
(l)
The rental set forth
in each lease of the Leased Real Property is the actual rental being paid, and
there are no separate agreements or understandings with respect to the
same.
(m) A
Company, Subsidiary or Institution has the full right to exercise any Options
contained in the leases pertaining to the Leased Real Property on the terms and
conditions contained therein and upon due exercise would be entitled to enjoy
the full benefit of such Options with respect thereto.
(n) Other
than the amounts listed on Section 2.03(a)(xx) of the
Disclosure Schedule there are no payments or Taxes currently due with
respect to any Leased Real Property or any real property leased by
Clemens.
Section 3.16 Tangible Personal
Property. (a) Section 3.16(a) of the
Disclosure Schedule lists each item or distinct group of equipment,
supplies, furniture, fixtures, personalty, books and other tangible personal
property (the “Tangible Personal
Property”) used at each Institution having an individual value equal to
or greater than $5,000.
36
(b) Section 3.16(b) of the
Disclosure Schedule sets forth a true and complete list of all leases for
Tangible Personal Property and any and all material ancillary documents
pertaining thereto (including all amendments, consents and evidence of
commencement dates and expiration dates) having an individual value equal to or
greater than $5,000.
Section 3.17 Employee Benefit
Matters.
(a) Plans and Material
Documents. Section 3.17(a) of the
Disclosure Schedule lists (i) all employee benefit plans (as defined
in Section 3(3) of the Employee Retirement Income Security Act of 1974
(“ERISA”)) and
all bonus, stock option, stock purchase, restricted stock, incentive, deferred
compensation, retiree medical or life insurance, supplemental retirement,
severance or other benefit plans, programs or arrangements, and all employment,
termination, severance or other contracts or agreements to which each Company or
Subsidiary is a party (other than any oral contracts of employment terminable on
no more than 30 days’ notice without penalty or further payment obligation),
with respect to which any Company or Subsidiary has any obligation or that are
maintained, contributed to or sponsored by any Company or Subsidiary for the
benefit of any current or former employee, officer, director or consultant of
any Company or Subsidiary (other than any oral contracts of employment
terminable on no more than 30 days’ notice without penalty or further payment
obligation) and (ii) any contracts, arrangements or understandings between
any Seller or any of its Affiliates and any employee or consultant of any
Company or Subsidiary, including any contracts, arrangements or understandings
relating to the sale of any Company or Subsidiary (collectively, the “Plans”). The
Sellers have made available to the Purchaser a complete and accurate copy of
each written Plan and a summary of the material terms of any unwritten Plan and
there are no other employee benefit plans, programs, arrangements or agreements,
whether formal or informal, whether in writing or not, to which any Company or
Subsidiary is a party, with respect to which any Company or Subsidiary has any
obligation or that are maintained, contributed to or sponsored by any Company or
Subsidiary for the benefit of any current or former employee, officer, director
or consultant of any Company or Subsidiary.
(b) Absence of Certain Types of
Plans. None of the Plans is a multiemployer plan (within the
meaning of Section 3(37) or 4001(a)(3) of ERISA) (a “Multiemployer Plan”)
or a single employer pension plan (within the meaning of Section 4001(a)(15) of
ERISA) for which any Company or any Subsidiary could incur liability under
Section 4063 or 4064 of ERISA (a “Multiple Employer
Plan”). None of the Plans provides for the payment of
separation, severance, termination or similar-type benefits to any Person or
obligates any Company or Subsidiary to pay separation, severance, termination or
similar-type benefits solely as a result of any transaction contemplated by this
Agreement or as a result of a “change in control”, within the meaning of such
term under Section 280G of the Code. None of the Plans provides
for or promises retiree medical, disability or life insurance benefits to any
current or former employee, officer or director of any Company or
Subsidiary. Each of the Plans is subject only to the Laws of the
United States or a political subdivision thereof.
(c) Compliance with Applicable
Law. Each Plan is now and has always been operated in all
material respects in accordance with the requirements of all applicable Law,
including ERISA and the Code. Each Company and Subsidiary has
performed all obligations required to be performed by it under, is not in any
respect in default under or in violation of, and has no knowledge of any default
or violation by any party to, any Plan. No Action is pending or, to
the Knowledge of the Sellers, threatened with respect to any Plan (other than
claims for benefits in the ordinary course), and no material fact or event
exists that could give rise to any such Action or claim.
37
(d) Qualification of Certain
Plans. Each Plan that is intended to be qualified under
Section 401(a) of the Code or Section 401(k) of the Code has received
a favorable determination letter from the IRS that it is so qualified, and each
trust established in connection with any Plan that is intended to be exempt from
federal income taxation under Section 501(a) of the Code has received a
determination letter from the IRS that it is so exempt, and no fact or event has
occurred since the date of such determination letter from the IRS to affect
adversely the qualified status of any such Plan or the exempt status of any such
trust. Each trust maintained or contributed to by any Company or
Subsidiary that is intended to be qualified as a voluntary employees’
beneficiary association and that is intended to be exempt from federal income
taxation under Section 501(c)(9) of the Code has received a favorable
determination letter from the IRS that it is so qualified and so exempt, and no
fact or event has occurred since the date of such determination by the IRS to
adversely affect such qualified or exempt status.
(e) Absence of Certain
Liabilities and Events. There has been no prohibited
transaction (within the meaning of Section 406 of ERISA or Section 4975 of the
Code) with respect to any Plan. No Company or Subsidiary has incurred
any liability for any penalty or tax arising under Section 4971, 4972, 4980,
4980B or 6652 of the Code or any liability under Section 502 of ERISA, and no
fact or event exists that could give rise to any such liability. No
Company or Subsidiary has incurred any liability under, arising out of or by
operation of Title IV of ERISA (other than liability for premiums to the Pension
Benefit Guaranty Corporation arising in the ordinary course), including any
liability in connection with (i) the termination or reorganization of any
employee benefit plan subject to Title IV of ERISA or (ii) the withdrawal from
any Multiemployer Plan or Multiple Employer Plan, and no fact or event exists
that could give rise to any such liability. No complete or partial
termination has occurred within the five years preceding the date hereof with
respect to any Plan. No reportable event (within the meaning of
Section 4043 of ERISA) has occurred or is expected to occur with respect to any
Plan subject to Title IV of ERISA. No Plan had an accumulated funding
deficiency (within the meaning of Section 302 of ERISA or Section 412 of the
Code), whether or not waived, as of the most recently ended plan year of such
Plan. None of the assets of any Company or Subsidiary is the subject
of any lien arising under Section 302(f) of ERISA or Section 412(n) of the Code;
no Company or Subsidiary has been required to post any security under Section
307 of ERISA or Section 401(a)(29) of the Code; and no fact or event exists
which could give rise to any such lien or requirement to post any such
security.
(f) Plan Contributions and
Funding. All contributions, premiums or payments required to
be made with respect to any Plan prior to the Closing Date have been or will be
made on or before their due dates. All such contributions have been
fully deducted for income tax purposes and no such deduction has been challenged
or disallowed by any Governmental Authority, and to the Knowledge of the
Sellers, no fact or event exists that could give rise to any such challenge or
disallowance.
38
(g) WARN
Act. Each Company and Subsidiary is in compliance with the
requirements of the Workers Adjustment and Retraining Notification Act (the
“WARN Act”) and
has no Liabilities pursuant to the WARN Act.
Section
3.18 Labor
Matters. (a) No
Company, Subsidiary or Institution is a party to any collective bargaining
agreement or other labor union contract applicable to persons employed by any
Company, Subsidiary or Institution, and to the Knowledge of the Sellers,
currently there are no organizational campaigns, petitions or other unionization
activities seeking recognition of a collective bargaining unit that could
materially affect any Company, Subsidiary or Institution.
(b) There
are no unfair labor practice complaints pending against any Company, Subsidiary
or Institution before the National Labor Relations Board or any other
Governmental Authority.
(c) Each
Company and Subsidiary is currently in compliance in all material respects with
all applicable Laws relating to the employment of labor, including those related
to wages, hours, collective bargaining and the payment and withholding of taxes
and other sums as required by the appropriate Governmental Authority and has
withheld and paid to the appropriate Governmental Authority or is holding for
payment not yet due to such Governmental Authority all amounts required to be
withheld from employees of any Company or Subsidiary and is not liable for any
arrears of wages, Taxes, penalties or other sums for failure to comply with any
of the foregoing.
(d) Each
Company and Subsidiary has paid in full to all its respective employees, or
adequately accrued for in accordance with GAAP, all wages, salaries,
commissions, bonuses, benefits and other compensation due to or on behalf of
such employees.
(e)
There is no
Claim with respect to payment of wages, salary or overtime pay that has been
asserted or is now pending or, to the Knowledge of the Sellers, threatened
before any Governmental Authority with respect to any Persons currently or
formerly employed by any Company or Subsidiary.
(f)
No
Company or Subsidiary is a party to, or otherwise bound by, any consent decree
with, or citation by, any Governmental Authority relating to employees or
employment practices.
(g) There
is no charge or proceeding with respect to a violation of any occupational
safety or health standard that has been asserted or is now pending or, to the
Knowledge of the Sellers, threatened, with respect to any Company or
Subsidiary.
(h) Except
as set forth in Section 3.18(h) of the
Disclosure Schedule, there is no charge of discrimination in employment
or employment practices, for any reason, including age, gender, race, religion
or other legally protected category, which has been asserted or is now pending
or, to the Knowledge of the Sellers, threatened before the United States Equal
Employment Opportunity Commission, or any other Governmental Authority, with
respect to any Company or Subsidiary.
39
Section
3.19 Assets. (a) Except
as set forth on Section 3.19(a) of the
Disclosure Schedule, each Company or Subsidiary has good and marketable
title to, or in the case of leased Assets and Licensed Intellectual Property, a
valid and subsisting leasehold interest in or lawful right to use, as
applicable, all the Assets, free and clear of all Encumbrances except Permitted
Encumbrances.
(b) A
Company or Subsidiary, as the case may be, owns, leases or has the legal right
to use, as applicable, all the properties and assets, including the Owned
Intellectual Property, the Licensed Intellectual Property, the Companies IP
Licenses, the Leased Real Property and the Tangible Personal Property, used or
intended to be used in the conduct of the Businesses or otherwise owned, leased
or used by a Company or any Subsidiary, and, with respect to contract rights, is
a party to and enjoys the right to the benefits of all contracts, agreements and
other arrangements used or intended to be used by the Company or any Subsidiary
or in or relating to the conduct of the Businesses, all of which properties,
assets and rights constitute Assets.
(c) The
Assets constitute all the properties, assets and rights forming a part of, used,
new or intended to be used in, and all such properties, assets and rights as are
necessary in the conduct of the Businesses, and at all times the Sellers have
caused the Assets to be maintained in accordance with good business practice,
and all the Assets are in good operating condition and repair and are suitable
for the purposes for which they are used and intended (subject to ordinary wear
and tear).
(d) The
Sellers have the complete and unrestricted power and unqualified right to sell,
assign, transfer, convey and deliver the Assets to the Purchaser without penalty
or other adverse consequences. Following the consummation of the
transactions contemplated by this Agreement and the execution of the instruments
of transfer contemplated by this Agreement, the Purchaser will own, with good,
valid and marketable title, or lease, under valid and subsisting leases, or
otherwise acquire the interests of the Sellers in the Assets, free and clear of
any Encumbrances, other than Permitted Encumbrances, and without incurring any
penalty or other adverse consequence, including any increase in rentals,
royalties, or license or other fees imposed as a result of, or arising from, the
consummation of the transactions contemplated by this Agreement.
Section
3.20 Student
Lists. (a) Section 3.20(a) of the
Disclosure Schedule lists the names and educational programs of all
students enrolled at each Institution as of the date hereof for the then current
academic period.
(b) Section 3.20(b) of the
Disclosure Schedule lists the names and intended educational programs of
all students enrolled at each Institution as of the date hereof for future
academic periods and not otherwise included in Section 3.20(a) of the
Disclosure Schedule.
Section 3.21 Student Financial
Records. True
and complete copies of the financial records for each student have been provided
or made available to the Purchaser by the Sellers.
40
Section 3.22 Certain
Interests. Except
as set forth in Section 3.22 of the
Disclosure Schedule, no director, manager, member, stockholder or officer
of any Seller, Company, Subsidiary or Institution, and no relative or spouse (or
relative of such spouse) who resides with, or is a dependent of, any such
Person:
(a) has
any direct or indirect financial interest in or with respect to (i) any
competitor or supplier of any Company, Subsidiary or Business or (ii) any other
party to any arrangement or contract (including a lease) relating to any
Company, Subsidiary or Business; provided, however, that the
ownership of securities representing no more than one percent of the outstanding
voting power of any competitor or supplier, and which are also listed on any
national securities exchange, shall not be deemed to be a “financial interest”
so long as the Person owning such securities has no other connection or
relationship with such competitor or supplier;
(b) owns,
directly or indirectly, in whole or in part, or has any other interest in any
tangible or intangible property which any Company, Subsidiary or Institution
uses or has used in the conduct of the Businesses or otherwise; or
(c) has
outstanding any Indebtedness to any Company, Subsidiary or
Institution.
Section
3.23 Taxes. (a) (i) All
Tax Returns required by applicable Law to be filed by or with respect to each
Company and each Subsidiary prior to the Closing Date have been or will be
timely filed; (ii) all Taxes required to be shown on such Tax Returns or
otherwise due prior to the Closing Date in respect of each Company and each
Subsidiary have been or will be timely paid; (iii) all such Tax Returns are
true, correct and complete in all material respects; (iv) no adjustment
relating to such Tax Returns has been proposed formally or informally by any
Governmental Authority, and no basis exists for any such adjustment;
(v) there are no pending or, to the Knowledge of the Sellers, threatened
Actions for the assessment or collection of Taxes against any Company or
Subsidiary; (vi) there are no Tax liens on
any assets of any Company or Subsidiary, other than Permitted Encumbrances;
(vii) no Seller nor any Affiliate of any Seller is a party to any agreement
or arrangement that would result, separately or in the aggregate, in the actual
or deemed payment by any Company or Subsidiary of any “excess parachute
payments” within the meaning of Section 280G of the Code (without regard to
Section 280G(b)(4) of the Code); (viii) no acceleration of the vesting
schedule for any property that is substantially unvested within the meaning of
the regulations under Section 83 of the Code will occur in connection with
the transactions contemplated by this Agreement; (ix) none of the Sellers
is a foreign person as such term is defined in Section 1445 of the Code;
(x) each Company and Subsidiary has properly and timely withheld,
collected and deposited all Taxes that are required to be withheld, collected
and deposited under applicable Law; (xi) no Company or
Subsidiary is doing business in or engaged in a trade or business in any
jurisdiction in which it has not filed all required Tax Returns, and no
notice or inquiry has been received from any jurisdiction in which Tax Returns
have not been filed by such Company or Subsidiary to the effect that the filing
of Tax Returns may be required; and (xii) no
Company or Subsidiary has been at any time a member of any consolidated,
unitary, combined, affiliated or similar group for Tax purposes (other than,
with respect to the Companies and the Subsidiaries, a group that includes only
Clemens or other Companies or Subsidiaries) or a member of any partnership or
joint venture or the holder of a beneficial interest in any trust for any period
for which the statute of limitations for any Tax has not
expired.
41
(b) (i) there are no
outstanding waivers or agreements extending the statute of limitations for any
period with respect to any Tax to which any Company or Subsidiary may be
subject; (ii) there are no requests for information currently outstanding
that could affect the Taxes of any Company or Subsidiary; (iii) there are
no proposed reassessments of any property owned by any Company or Subsidiary or
other proposals that could increase the amount of any Tax to which such Company
or Subsidiary would be subject; (iv) no power of attorney that is currently
in force has been granted with respect to any matter relating to Taxes that
could affect any Company or Subsidiary; (v) no Company or Subsidiary
(A) has an unrecaptured overall foreign loss within the meaning of
Section 904(f) of the Code, or (B) has participated in or cooperated
with an international boycott within the meaning of Section 999 of the
Code; (vi) no Company or Subsidiary has any (A) income reportable for
a period ending after the Closing but attributable to a transaction (e.g., an installment
sale) occurring in, or a change in accounting method made for, a period ending
on or prior to the Closing that resulted in a deferred reporting of income from
such transaction or from such change in accounting method (other than a deferred
intercompany transaction) or (B) deferred gain or loss arising out of any
deferred intercompany transaction; and (vii) no Indebtedness attributable to any
Company or Subsidiary is characterized as equity for federal income Tax
purposes.
(c) (i) Section 3.23(c) of the
Disclosure Schedule lists all income, information, franchise and similar
Tax Returns (federal, state, local and foreign) filed with respect to each
Company and Subsidiary for taxable periods ended on or after January 1, 2004,
indicates the most recent income, information, franchise or similar Tax Return
for each relevant jurisdiction for which an audit has been completed or the
statute of limitations has lapsed, and indicates all Tax Returns that currently
are the subject of audit; (ii) the Sellers have delivered or made available
to the Purchaser correct and complete copies of all federal, state and foreign
income, information, franchise and similar Tax Returns, examination reports, and
statements of deficiencies assessed against or agreed to by any Company or
Subsidiary since January 1, 2005; and (iii) the
Sellers have delivered or made available to the Purchaser a true and complete
copy of any tax-sharing or allocation agreement or arrangement involving any
Company or Subsidiary and a true and complete description of any such unwritten
or informal agreement or arrangement.
(d) On
the Estimated Closing Balance Sheet, reserves and allowances have been provided,
and on the Closing Balance Sheet, reserves and allowances will be provided, in
each case adequate to satisfy all Liabilities for Taxes relating to the
Companies and the Subsidiaries for all taxable periods through the Closing
(without regard to the materiality thereof).
Section
3.24 Insurance. All
material assets, properties and risks of each Company and Subsidiary are, and
for the past five years have been, covered by valid and, except for insurance
policies that have expired under their terms in the ordinary course, currently
effective insurance policies or binders of insurance (including general
liability insurance, property insurance and workers’ compensation insurance)
issued in favor of a Company or Subsidiary, as the case may be, in each case
with responsible insurance companies, in such types and amounts and covering
such risks as are consistent with customary practices and standards of companies
engaged in businesses and operations similar to those of such Company or
Subsidiary, as the case may be.
42
Section 3.25 Educational
Approvals. (a) Section 3.25(a) of the Disclosure
Schedule lists, with respect to each Company, Subsidiary and Institution,
each Educational Approval issued by any Educational Agency since the Compliance
Date to such Company, Subsidiary or Institution (i) with respect to any
educational program(s) offered by such Company, Subsidiary or Institution, (ii)
with respect to the authority of each Company, Subsidiary or Institution to
recruit students in any state where it engages employees or agents to recruit
students, and (iii) with respect to all locations, branches, campuses,
buildings, classrooms, learning sites, and facilities at which any portion of an
educational program is offered or taught in whole or in part by or in
association with such Institution. The Sellers have delivered or made
available to Purchaser complete and correct copies of all Educational
Approvals.
(b) The
current Educational Approvals set forth on Section 3.25(a) of the Disclosure
Schedule are in full force and effect, including provisional and
non-provisional certifications, and no proceeding for the suspension,
limitation, revocation, condition, restriction, withdrawal, termination or
cancellation of any of them is pending or, to the Knowledge of the Sellers, has
been threatened. There are no facts, circumstances or omissions
concerning any Company, Subsidiary or Institution that could result in such a
proceeding. No Company, Subsidiary or Institution has received any
notice that any of the Educational Approvals set forth on Section 3.25(a) of the Disclosure
Schedule will not be renewed (to the extent that renewal is required) and
there is no basis for any such nonrenewal (if applicable).
Section 3.26 Compliance with Educational
Laws. (a)
Since the Compliance Date, and except as set forth on Section 3.26(a) of the
Disclosure Schedule, each Company, Subsidiary and Institution has been
and is in compliance in all material respects with any and all applicable
Educational Laws.
(i)
Each
Company, Subsidiary and Institution currently hold and, since the Compliance
Date, have held all Educational Approvals required under all laws, rules,
regulations, standards and requirements of any Educational Agency, including all
Educational Approvals for each education program such Company, Subsidiary or
Institution has offered and for each campus, location, or facility where such
entity offered all or any portion of an educational program.
(ii) Since
the Compliance Date, each Company, Subsidiary and Institution has complied in
all material respects with the terms and conditions of all such Educational
Approvals. Since the Compliance Date, each Company, Subsidiary and
Institution has complied with all Educational Laws of all applicable Educational
Agencies.
(iii)
Since the
Compliance Date, each Company, Subsidiary and Institution has timely notified,
and obtained all required approvals from all applicable Educational Agencies for
each substantive change in such Company, Subsidiary or Institution, including
any addition of new education programs or changes in ownership, control or
governance.
43
(iv) Since
the Compliance Date, no Company, Subsidiary or Institution has received notice
that such Company, Subsidiary or Institution is in violation of any of the terms
or conditions of any Educational Approval or alleging the failure to hold or
obtain any Educational Approval. There are no facts or circumstances
concerning the operations or management of any Institution that reasonably could
result in the denial or delay in issuance of any Educational Approval to be
issued in connection with the consummation of the transactions contemplated
under this Agreement.
(v) Section 3.26(a)(v) of the Disclosure
Schedule lists each program pursuant to which financial assistance is
provided or, since the Compliance Date, has been provided, to or on behalf of
the students of each Institution.
(vi) The
facilities listed on Section 3.26(a)(vi) of the
Disclosure Schedule are and, since the Compliance Date, have been the
only addresses at which each Company, Subsidiary and Institution have offered
educational instruction or otherwise operated. With respect to any
facility that has closed or at which an Institution ceased operating
instruction, the relevant Company, Subsidiary and Institution materially
complied with all applicable laws and all Accrediting Body and Educational
Agency standards related to the closure or cessation of instruction at a
location or campus, including requirements for teaching out students from that
location or campus.
(b) Without
limiting the foregoing provisions in Section
3.26(a):
(i)
Each Company,
Subsidiary and Institution possess, and since the Compliance Date, has
possessed, all requisite Educational Approvals to operate such Institution in
each jurisdiction in which such Institution is located or in which they conduct
any operations or are otherwise required to obtain such Educational Approvals,
including providing educational services in person or via distance learning,
student marketing or recruiting.
(ii) Each
Institution is, and since the Compliance Date has been, fully or provisionally
certified by the U.S. DOE to participate in the Title IV Programs and is party
to, and in compliance with, a valid and effective Program Participation
Agreement with the U.S. DOE that is in full force and effect. No
Company, Subsidiary or Institution is subject to, or since the Compliance Date
has been, threatened with, any fine, limitation, suspension or termination
proceeding, or subject to any other action or proceeding by the U.S. DOE that
could result in the suspension, limitation, conditioning, or termination of
certification or eligibility, or a liability or fine. To the
Knowledge of the Sellers, there are no facts, circumstances, or omissions
concerning the Companies, Subsidiaries or Institutions that reasonably could
result in such an action by the U.S. DOE.
(iii) Each
Company, Subsidiary and Institution is, and since the Compliance Date have been,
in material compliance with all applicable rules, regulations and requirements
pertaining to the Institutions’ participation in the Title IV
Programs. To the Knowledge of the Sellers, there are no facts,
circumstances, or omissions concerning any Company, Subsidiary or Institution
that reasonably could result in a finding of material non-compliance with regard
to such rules, regulations and requirements. Without limiting the
foregoing:
44
(A) Since
the Compliance Date, each educational program offered by each Institution,
including programs involving externships, internships or consortium agreements,
was and is an eligible program in accordance with all applicable rules,
regulations and requirements, including the requirements of 34 C.F.R. § 668.8,
and each Company, Subsidiary and Institution have properly measured the length
of such educational programs for the purpose of disbursing Title IV Program
funding to students enrolled in each such program.
(B) Since
the Compliance Date, each Institution has possessed the Educational Approvals
necessary for each campus, branch, additional location and other facility or
site at which such Institution offered or students received all or part of an
educational program and at which students received funds under the Title IV
Programs. Since the Compliance Date, each Institution has been duly
qualified as a “proprietary institution of higher education” as defined at 34
C.F.R. § 600.5.
(C) Except
as set forth on Section 3.26(b)(iii)(C) of
the Disclosure Schedule, since the Compliance Date, no Company,
Subsidiary or Institution has received notice from the U.S. DOE or any
Educational Agency that such Company, Subsidiary or Institution lacked financial
responsibility or administrative capability for any period.
(D) Each
Institution is and has been financially responsible in accordance with the
provisions of 34 C.F.R. §§ 668.171-175 and any predecessor regulations for each
fiscal year ending on or after the Compliance Date.
(E) Since
the Compliance Date, no Company, Subsidiary or Institution has received notice
of a request by any Educational Agency or governmental entity that such Company,
Subsidiary or Institution post a Letter of Credit or other form of surety with
respect to such Institution for any reason, including any request for a Letter
of Credit based on late refunds pursuant to 34 C.F.R. § 668.173, 34 C.F.R. §
668.15 or any predecessor regulation.
(F) Except
as set forth on Section 3.26(b)(iii)(F) of
the Disclosure Schedule, since the Compliance Date, the U.S. DOE has not
placed any Company, Subsidiary or Institution on either the cash monitoring or
reimbursement methods of payment.
(G) Since
the Compliance Date, each Company, Subsidiary and Institution has timely filed
with the U.S. DOE all required compliance audits and audited financial
statements, including those required by 34 C.F.R. § 668.23 or any predecessor
regulation.
45
(H) Except
as listed in Section
3.26(b)(iii)(H) of the Disclosure Schedule, no audits, program reviews,
investigations or visits have been conducted by an Educational Agency or by a
Governmental Authority in connection with an Educational Approval or an
Institution since the Compliance Date, including but not limited to any U.S. DOE
or guaranty agency program reviews, U.S. DOE Office of Inspector General audits,
U.S. DOE Office of Inspector General investigations and Department of Justice
investigations. Except as listed in Section 3.26(b)(iii)(H) of
the Disclosure Schedule, there is no audit, program review,
investigation, or visit that remains pending or is scheduled to
occur. The Sellers have provided or made available to the Purchaser
true and complete copies of all correspondence, reports, determinations, audits
or other documents related to the items listed on Section 3.26(b)(iii)(H) of
the Disclosure Schedule.
(I)
Except as disclosed
on Section
3.26(b)(iii)(I) of the Disclosure Schedule, since the Compliance Date,
each Company, Subsidiary and Institution has calculated and paid refunds and
calculated dates of withdrawal and leaves of absence in material accordance with
all applicable rules, regulations and requirements, including the requirements
of 34 C.F.R. § 668.22, 34 C.F.R. § 682.605 and any predecessor
regulations.
(J)
Except
as listed in Section
3.26(b)(iii)(J) of the Disclosure Schedule, since the Compliance Date,
each Company, Subsidiary and Institution has disbursed and processed Title IV
Program funds in material accordance with all applicable rules, regulations and
requirements, including the requirements of 34 C.F.R. § 668.164, 34 C.F.R. §
682.604 and any predecessor regulations.
(K) Except
as listed in Section
3.26(b)(iii)(K) of the Disclosure Schedule, since the Compliance Date,
each Company, Subsidiary and Institution has properly determined students’
eligibility to obtain Title IV Program funds for which they are eligible prior
to disbursing, and have disbursed, all Title IV Program funds in material
accordance with all applicable rules, regulations and requirements, including
the requirements of 34 C.F.R. § 682.201, 34 C.F.R. § 668, Subpart C, and any
predecessor regulation.
(L) Since
the Compliance Date, each Company, Subsidiary and Institution has at all times
complied with the limitations in 34 C.F.R. § 600.7 on the number of courses that
the Institutions may offer by correspondence or telecommunications, the number
of students who may enroll in such courses, the number of students that were
incarcerated, and the number of students that had neither a high school diploma
nor the recognized equivalent of a high school diploma.
(M)
Section 3.26(b)(iii)(M) of
the Disclosure Schedule lists the official published cohort default rates
for each Institution calculated by the U.S. DOE and issued pursuant to 34 C.F.R.
§ 668.181-186 or predecessor regulations, for the federal fiscal years 2004,
2005 and 2006.
46
(N) No
Company, Subsidiary or Institution receives funds as a result of Federal Perkins
Loans.
(O) For
each fiscal year ending on or after the Compliance Date, no Company, Subsidiary
or Institution has derived more than ninety percent (90%) of its revenues from
Title IV Program funds, as determined in accordance with the applicable
provisions of the HEA and 34 C.F.R. § 600.5(d) and § 600.5(e) and guidance
issued thereunder. Section 3.26(b)(iii)(O) of
the Disclosure Schedule lists a correct statement of the percentage of
revenue from Title IV Program funds as determined in accordance with the
applicable provisions of the HEA and 34 C.F.R. § 600.5(d) and § 600.5(e) for
each of such fiscal years.
(iv) Except
as set forth on Section 3.26(b)(iv) of the
Disclosure Schedule, no Company, Subsidiary or Institution is, nor since
the Compliance Date, has been placed on probation, reporting, monitoring or
warning status with any Educational Agency, nor has any Institution been subject
to any adverse action by any Educational Agency (including being directed to
show cause why accreditation or other Educational Approval should not be
revoked, withdrawn, conditioned, suspended, or limited) to revoke, withdraw,
deny, suspend, condition or limit its accreditation or other Educational
Approval. To the Knowledge of the Sellers, there are no facts,
circumstances or omissions concerning any Company, Subsidiary or Institution
that reasonably could lead to any such actions by an Educational
Agency.
(v) Each
Company, Subsidiary and Institution has materially complied with all written
stipulations, conditions and other requirements imposed by any Educational
Agency at the time of, or since, the last issuance of any Educational Approval,
including but not limited to the timely filing of all required reports and
responses.
(vi) No
Company, Subsidiary or Institution provides, or since the Compliance Date, has
provided or contracted with any entity that provides, any commission, bonus or
other incentive payment based directly or indirectly on success in securing
enrollments or awarding financial aid to any persons or entities engaged in any
student recruiting or admissions activities or in making decisions regarding the
awarding of student financial aid.
(vii) Since
the Compliance Date, all student financial aid grants and loans, disbursements
and record keeping relating thereto have been completed by the Institutions in
material compliance with all federal and state requirements, and there are no
material deficiencies in respect thereto. Except as disclosed on
Section 3.26(b)(vii)
of the Disclosure Schedule, since the Compliance Date, the students at
each Institution have been funded in material accordance with the rules
regarding the proper time for disbursement and in the amount for which they were
eligible, and such students’ records conform in form and substance, in all
material respects, to all relevant regulatory requirements. All
appropriate reports and surveys have been accurately prepared, in all material
respects, and filed timely.
47
(viii) Since
the Compliance Date, no principal, affiliate (as those terms are defined in 34
C.F.R. Part 85), owner, shareholder, member, manager, trustee, or officer of any
Company, Subsidiary or Institution or any other individual or entity holding an
ownership interest in any Company, Subsidiary or Institution, whether legal or
equitable, is or has been a principal, affiliate, owner, shareholder or trustee
or held an ownership interest, whether legal or equitable, in any other
post-secondary institution (whether or not participating in the Title IV
Programs).
(ix) Except
as set forth on Section 3.26(b)(ix) of the
Disclosure Schedule, since the Compliance Date, no Company, Subsidiary or
Institution, nor any Person that exercises substantial control over any
Institution (as the term “substantial control” is defined in 34 C.F.R. §
668.174(c)(3)) or member of such Person’s family (as the term “family” is
defined in 34 C.F.R. § 668.174(c)(4)), alone or together, (A) exercises or
exercised substantial control over another school or third-party servicer (as
that term is defined in 34 C.F.R. § 668.2) that owes a liability for a violation
of a Title IV Program requirement or (B) owes a liability for a Title IV Program
violation.
(x) No
Company, Subsidiary or Institution, nor any Person or entity that exercises
substantial control over any Company, Subsidiary or Institution, or member of
such Person’s family, has filed for relief in bankruptcy or had entered against
it an order for relief in bankruptcy.
(xi) No
Company, Subsidiary, Institution or any of their employees has pled guilty to,
pled nolo contendere to, or been found guilty of, a crime involving the
acquisition, use or expenditure of funds under the Title IV Programs or been
judicially determined to have committed fraud involving Title IV Program
funds.
(xii) To
the Knowledge of the Sellers, no Company, Subsidiary or Institution employs nor,
since the Compliance Date, has employed in a capacity that involves the
administration of Title IV Program funds or the receipt of funds under the Title
IV Programs, any individual that has been convicted of, or has pled nolo
contendere or guilty to, a crime involving the acquisition, use, or expenditure
of federal, state, or local government funds, or has been administratively or
judicially determined to have committed fraud or any other material violation of
Law involving federal, state or local government funds. To the
Knowledge of the Sellers, no Company, Subsidiary or Institution has contracted
with any institution or third-party servicer that has been limited, suspended or
terminated under the HEA, for a reason involving the acquisition, use, or
expenditure of federal, state, or local government funds, or that has been
administratively or judicially determined to have committed fraud or any other
material violation of Law involving federal, state or local government
funds. To the Knowledge of the Sellers, no Company, Subsidiary or
Institution has contracted with or employed any individual, agency or
organization that has been, or whose officers or employees have been convicted
of, or pled nolo contendere or guilty to, a crime involving the acquisition,
use, or expenditure of federal, state, or local government funds, or have been
administratively or judicially determined to have committed fraud or any other
material violation of Law involving federal, state, or local government
funds.
48
(xiii) Except
as listed in Section
3.26(b)(xiii) of the Disclosure Schedule, no Company, Subsidiary or
Institution provides, or since the Compliance Date, has provided, any
educational instruction on behalf of any other institution or organization of
any sort other than such Institution. No other institution or
organization of any sort provides, or since the Compliance Date, has provided,
any educational instruction on behalf of such Institution.
(xiv)
No principal or, to the Knowledge of the
Sellers, affiliate of any Company, Subsidiary or Institution has been debarred
or suspended, or engaged in any activity that is a cause for debarment or
suspension, pursuant to the U.S. DOE regulations at 34 C.F.R. Part
85.
(c) Except
as listed in Section
3.26(c) of the Disclosure Schedule, no Company, Subsidiary or Institution
has received notice of any written student complaints or employee grievances
made to such Company, Subsidiary or Institution, or to any Accrediting Body or
Educational Agency, whether received from any current or former student or any
applicant, or received from any Educational Agency in relation to any such
complaint or grievance, or sent by or on behalf of such Company, Subsidiary or
Institution in regard to any such complaint, in each case (except as expressly
otherwise indicated), on or after the Compliance Date. The Sellers
have delivered or made available to the Purchaser correct and complete copies of
any such written complaint or grievance and related correspondence.
(d) The
Sellers have delivered or made available to the Purchaser true and materially
complete copies of all correspondence (excluding general correspondence
routinely sent to, or received from, any Educational Agency) received from or
sent by or on behalf of any Company, Subsidiary or Institution to any
Educational Agency to the extent such correspondence (i) was sent or received
since the Compliance Date or relates to any issue that remains pending, and (ii)
relates to (A) any notice that any Educational Approval is not in full force and
effect or that an event has occurred which constitutes or, with the giving of
notice or the passage of time or both, would constitute a breach or violation
thereunder; (B) any notice that any Company, Subsidiary, Institution, or any
Affiliate, employee, or agent of any Company, Subsidiary or Institution has
violated or is violating any Educational Law, including any law related to the
Title IV Programs, or any criterion, rule, standard, or other written guidance
of any applicable accrediting body, or any law, regulation, or requirement
related to maintaining and retaining in full force and effect any and all
Educational Approvals necessary for the existing operations of, and receipt of
financial assistance by, any Company, Subsidiary or Institution; (C) any audits,
program reviews, inquiries, investigations, or site visits conducted by any
Educational Agency, any guaranty agency, or any independent auditor reviewing
compliance by any Company, Subsidiary or Institution with any Educational Law or
Educational Approval; (D) the qualification of any Company, Subsidiary,
Institution or any Affiliate thereof for the receipt of financial assistance;
(E) any written notice of an intent to limit, suspend, terminate, revoke,
cancel, not renew, or condition the Educational Approvals of, or the provision
of financial assistance to, any Company, Subsidiary, Institution or to any
Institution’s students; (F) any written notice of an intent or threatened intent
to condition the provision of financial assistance to any Company, Subsidiary or
Institution on the posting of a Letter of Credit or other surety in favor of the
U.S. DOE; (G) written notice of an intent to provisionally certify the
eligibility of any Company, Subsidiary or Institution to participate in the
Title IV Programs; or (H) the placement or removal of any Company, Subsidiary or
Institution on or from the reimbursement method of payment or any method of
payment other than the advance payment method under the Title IV
Programs.
49
(e) Section 3.26(e) of the
Disclosure Schedule sets forth a complete list of all policy manuals and
other statements of procedures or instruction relating to (i) recruitment of
students at each Institution, including procedures for assisting in the
application by prospective students for direct or indirect funding under state
or Title IV Programs; (ii) admissions procedures, including any descriptions of
procedures for insuring compliance with federal, state and accrediting body
requirements applicable to such procedures; (iii) procedures for encouraging and
verifying attendance, minimum required attendance policies, and other relevant
criteria relating to course performance requirements and completion; and (iv)
procedures for processing, disbursing, and returning Title IV Program funds,
except as contained in the catalogs of each Company, Subsidiary or Institution
previously provided or made available to the Purchaser (collectively, the “Policy
Guidelines”). The Sellers have delivered or made available to
the Purchaser true, correct and materially complete copies of all Policy
Guidelines.
(f) Since
the Compliance Date, the operations of each Company, Subsidiary and Institution
has been conducted in material accordance with the Policy Guidelines which
comply in all material respects with all applicable rules, regulations and
requirements. Complete and correct books and records for all present
and past students attending each Institution have been maintained consistent
with the operations of a school business in all material
respects. All forms and records have been prepared, completed,
maintained and filed in material accordance with all applicable laws, and are
materially complete and correct.
(g) Since
the Compliance Date, no Company, Subsidiary or Institution has received any
written or oral notice of, and there is not any currently unresolved
investigation, review, audit, compliance review or site visit relating to any
Institution’s participation in and administration of the Title IV Programs or
other financial assistance programs or its compliance with the requirements of
any other Educational Agency. The Sellers have delivered or made
available to the Purchaser correct and complete copies of all annual federal
financial aid compliance audits and audited financial statements filed with the
U.S. DOE pursuant to 34 C.F.R. § 668.23 for all fiscal years ending after the
Compliance Date and have listed in Section 3.26(g) of the
Disclosure Schedule and provided or made available correct and complete
copies of all material correspondence related to any draft or final
investigative reports, program reviews, audits or compliance reviews received
from any other Educational Agency since the Compliance Date. Other
than the matters listed in Section 3.26(g) of the
Disclosure Schedule, to the Knowledge of the Sellers, there are no
current investigations, reviews or audits of the operation of the financial
assistance programs of the Institutions or any current investigation, review or
audit of any institution by any Educational Agency or other governmental
authority.
(h) Except
as set forth in Section 3.26(h) of the
Disclosure Schedule, there are no surety bonds or other forms of security
that any Company, Subsidiary or Institution have been required to file since the
Compliance Date with any Educational Agency with respect to its state
authorization, federal eligibility, recruiter permits or other
matters.
50
(i) No
Company, Subsidiary or Institution has paid or otherwise extended any points,
premiums, payments or additional interest of any kind to any eligible lender or
any other party to secure funds for making loans or induce a lender to make
loans to either the students or parents of students at any Institution or to a
particular category of students or their parents. No Institution or
any officer, employee or agent of any Company, Subsidiary or Institution has
solicited, accepted, or received, directly or indirectly, any benefit or item of
more than nominal value from or on behalf of a lending institution in connection
with educational loans for or on behalf of any Company’s, Subsidiary’s or
Institution’s students. No Company, Subsidiary or Institution has
received any written notice of any investigation by any Governmental Authority
or Educational Agency that any lender or marketing agent has provided, directly
or indirectly, points, premiums, payments, or other inducements to any Company,
Subsidiary, Institution, or any employee or agent of any Company or Subsidiary,
to secure applicants for Federal Family Education Loan Program
loans. No lender or marketing agent has provided, directly or
indirectly, points, premiums, payments, or other inducements to any Company,
Subsidiary or Institution, or any employee or agent of any Company, Subsidiary
or Institution, to secure applicants for Federal Family Education Loan Program
loans.
(j) Since
the Compliance Date, all employees of each Company, Subsidiary and Institution
engaged in student recruiting activities have maintained the necessary state
approvals to conduct such activities. Each Company, Subsidiary and
Institution has maintained material compliance with the rules and regulations
applicable to the recruitment of students.
(k) Since
the Compliance Date, each Company, Subsidiary and Institution has complied with
federal and state laws regarding misrepresentation including but not limited to
34 C.F.R. § 668 subpart F, and (i) have not included in its catalogs or
advertising literature reference to any Educational Approval which such Company,
Subsidiary or Institution did not at the time possess, and (ii) have not
misrepresented prospective or enrolled students that the academic programs
provided by such Company, Subsidiary or Institution prepare students for any
certification, licensure or employment test for which such Company, Subsidiary
or Institution is or was not qualified or authorized to prepare
students. Section 3.26(k) of the
Disclosure Schedule lists all certification, licensure or employment
tests for which each Company, Subsidiary and Institution represents its academic
programs prepare students.
(l) To
the Knowledge of the Sellers, there exists no fact or set of facts with respect
to the operation of any Institution prior to the Closing Date which could have a
negative effect on the ability of the Institution to obtain any Educational
Approval under the ownership of the Purchaser without such burdensome or unusual
conditions as, in the reasonable determination of the Purchaser, would
materially reduce the economic benefits that the Purchaser expects to receive
from the consummation of the transactions contemplated by this
Agreement.
Section
3.27 Employees. Section 3.27 of the
Disclosure Schedule lists the name, place of employment, the current
annual salary rates, bonuses, deferred or contingent compensation, pension,
accrued vacation, “golden parachute” and other like benefits paid or payable (in
cash or otherwise) in 2007 (except with respect to Engine City and Americare)
and 2008, the date of employment and a description of the position and job
function of each current salaried employee, officer, director, consultant or
agent of any Company, Subsidiary or Institution.
51
Section 3.28 Certain Business
Practices. No
Seller, Company, Subsidiary or Institution or any of their respective directors,
officers, agents, representatives or employees (in their capacity as directors,
officers, agents, representatives or employees) has: (a) used any
funds for unlawful contributions, gifts, entertainment or other unlawful
expenses relating to political activity in respect of the Businesses; (b)
directly or indirectly, paid or delivered any fee, commission or other sum of
money or item of property, however characterized, to any finder, agent, or other
party acting on behalf of or under the auspices of a governmental official or
Governmental Authority, in the United States or any other country, which is in
any manner illegal under any Law of the United States or any other country
having jurisdiction; or (c) made any other unlawful payment or given any other
unlawful consideration in respect of the Businesses.
Section
3.29 Brokers. No
broker, finder or investment banker is entitled to any brokerage, finder’s or
other fee or commission in connection with the transactions contemplated by this
Agreement or the Ancillary Agreements based upon arrangements made by or on
behalf of any Seller.
Section 3.30 Acquisition
Obligations. Except
as set forth on Section 3.30 of the
Disclosure Schedule, no Company or Subsidiary has any further Acquisition
Obligations.
Section 3.31 Payment
Obligations. The
Sellers have paid all outstanding amounts with respect to and satisfied in full,
and have delivered to the Purchaser “payoff” letters or similar release or
confirmations from third parties in forms reasonably satisfactory to the
Purchaser with respect to, the obligations set forth in Section 3.31 of the
Disclosure Schedule and, as of the date hereof, no Company or Subsidiary
has any Liability with respect to any such obligations.
Section 3.32 No Other
Representations. None
of the Sellers, or any of their respective affiliates, directors, officers,
employees, agents or representatives has made, or shall be deemed to have made,
and no Seller is liable for or bound in any manner by, any express or implied
representations, warranties, guaranties, promises or statements pertaining to
their business or any of their assets except as specifically set forth in this
Agreement or the Ancillary Agreements.
ARTICLE
IV
REPRESENTATIONS
AND WARRANTIES OF PARENT AND THE PURCHASER
As an
inducement to the Sellers to enter into this Agreement, the Parent and the
Purchaser hereby represents and warrants to the Sellers as
follows:
52
Section 4.01 Organization, Authorization
and Qualification of the Parent and the Purchaser. (a) The
Purchaser is a limited liability company duly organized and validly existing and
in good standing under the laws of the State of Delaware and has not conducted
any business operations except operations incident to the transactions
contemplated by this Agreement. As of the Closing, the Purchaser
shall not have any assets or Liabilities. The Purchaser has all
necessary power and authority to enter into this Agreement and the Ancillary
Agreements to which the Purchaser is a party, to carry out its obligations
hereunder and thereunder and to consummate the transactions contemplated hereby
and thereby. The execution and delivery by the Purchaser of this
Agreement and the Ancillary Agreements to which the Purchaser is a party, the
performance by the Purchaser of its obligations hereunder and thereunder and the
consummation by the Purchaser of the transactions contemplated hereby and
thereby have been duly authorized by all requisite action on the part of the
Purchaser. This Agreement has been, and upon their execution the
Ancillary Agreements to which the Purchaser is a party shall have been, duly
executed and delivered by the Purchaser, and (assuming due authorization,
execution and delivery by the other parties hereto and thereto) this Agreement
constitutes, and upon their execution such Ancillary Agreements shall
constitute, legal, valid and binding obligations of the Purchaser, enforceable
against the Purchaser in accordance with their respective terms, except as the
same may be limited by applicable bankruptcy, insolvency (including all laws
relating to fraudulent transfers), reorganization, moratorium or similar laws
affecting creditors’ rights generally, now or hereafter in effect, and subject
to the effect of general principles of equity (regardless of whether considered
in a proceeding at law or in equity).
(b)
The Parent is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has all necessary power and
authority to enter into this Agreement and the Ancillary Agreements to which the
Parent is a party, to carry out its obligations hereunder and thereunder and to
consummate the transactions contemplated by this Agreement and the Ancillary
Agreements. The Parent is duly licensed or qualified to do business
and is in good standing in each jurisdiction which the properties owned or
leased by it or the operation of its business makes such licensing or
qualification necessary, except to the extent that the failure to be so licensed
or qualified and in good standing would not (i) adversely affect the ability of
the Parent to carry out its obligations under, and to consummate the
transactions contemplated by, this Agreement and the Ancillary Agreements to
which the Parent is a party or (ii) otherwise have a material adverse effect on
the business, results of operations or financial condition of the
Parent. The execution and delivery by the Parent of this Agreement
and the Ancillary Agreements to which the Parent is a party, the performance by
the Parent of its obligations hereunder and thereunder and the consummation by
the Parent of the transactions contemplated by this Agreement and the Ancillary
Agreements have been duly authorized by all requisite action on the part of the
Parent, and, if required by Law, its shareholders. This Agreement has
been, and upon their execution the Ancillary Agreements to which the Parent is a
party shall have been, duly executed and delivered by the Parent, and (assuming
due authorization, execution and delivery by the other parties hereto and
thereto) this Agreement constitutes, and upon their execution such Ancillary
Agreements shall constitute, legal, valid and binding obligations of the Parent,
enforceable against the Parent in accordance with their respective terms, except
as the same may be limited by applicable bankruptcy, insolvency (including all
laws relating to fraudulent transfers), reorganization, moratorium or similar
laws affecting creditors’ rights generally, now or hereafter in effect, and
subject to the effect of general principles of equity (regardless of whether
considered in a proceeding at law or in equity).
(c) To
the knowledge of the Parent and the Purchaser, there exists no fact or set of
facts with respect to the Purchaser that would reasonably be likely to have a
negative effect on the ability of any Institution to obtain the approval of the
change in ownership by any Educational Agency listed in Section 4.03 of the
Disclosure Schedule.
53
Section
4.02 No
Conflict. Assuming
the making and obtaining of all filings, notifications, consents, approvals,
authorizations and other actions referred to in Section 4.03 of the
Disclosure Schedule, except as may result from any facts or circumstances
relating solely to the Seller, the execution, delivery and performance by the
Parent and the Purchaser of this Agreement and the Ancillary Agreements to which
the Parent or the Purchaser is a party, as the case may be, do not and will not
(a) violate, conflict with or result in the breach of any provision of the
certificate of formation or limited liability agreement of the Parent or the
Purchaser, (b) conflict with or violate any Law or Governmental Order
applicable to the Parent or the Purchaser or (c) conflict with, or result
in any breach of, constitute a default (or event that with the giving of notice
or lapse of time, or both, would become a default) under, require any consent
under, or give to others any rights of termination, amendment, acceleration,
suspension, revocation or cancellation of, any note, bond, mortgage or
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or arrangement to which the Parent or the Purchaser is a party or to
which any of its assets or properties are bound or affected, which would
materially and adversely affect the ability of the Parent or the Purchaser to
carry out their obligations under, and to consummate the transactions
contemplated by, this Agreement or the Ancillary Agreements to which the Parent
or the Purchaser is a party, as the case may be.
Section 4.03 Governmental Consents and
Approvals. Except
for the Required Consents or as otherwise set forth on Section 4.03 of the
Disclosure Schedule, the execution, delivery and performance by the
Parent and the Purchaser of this Agreement and each Ancillary Agreement to which
the Parent or the Purchaser is a party, as the case may be, do not and will not
require any consent, approval, authorization or other order of, action by,
filing with, or notification to any Governmental Authority or Educational
Agency. To the knowledge of the Parent and the Purchaser there is no
reason why all the Required Consents or the consents listed on Section 4.03 of the
Disclosure Schedule will not be received.
Section
4.04 Litigation. No
Action by or against the Parent or the Purchaser is pending or, to the knowledge
of the Parent or the Purchaser, threatened, that could affect the legality,
validity or enforceability of this Agreement, any Ancillary Agreement or the
consummation of the transactions contemplated hereby or thereby.
Section
4.05 Brokers. No
broker, finder or investment banker is entitled to any brokerage, finder’s or
other fee or commission in connection with the transactions contemplated by this
Agreement or the Ancillary Agreements based upon arrangements made by or on
behalf of the Parent or the Purchaser.
Section 4.06 No Other
Representations. None
of the Parent, the Purchaser, or any of their affiliates, directors, officers,
employees, agents or representatives has made, or shall be deemed to have made,
and neither the Parent nor the Purchaser is liable for or bound in any manner
by, any express or implied representations, warranties, guaranties, promises or
statements pertaining to their business or any of their assets except as
specifically set forth in this Agreement or the Ancillary
Agreements.
54
ARTICLE
V
ADDITIONAL
AGREEMENTS
Section 5.01 Access to
Information.
(a) Subject
to Section 6.06
(relating to Tax matters), until the later of (i) seven years after the
Closing and (ii) the expiration of the relevant record retention period
under any Governmental Authority or Educational Agency requirements, none of the
Sellers, the Companies, the Subsidiaries, the Purchaser or the Parent will
destroy or otherwise dispose of any of the books, records, files or documents in
its possession that relate to the Companies, Subsidiaries or Institutions for
the periods prior to the Closing without giving the other party hereto at least
90 days’ prior written notice and an opportunity, at such other party’s
cost and expense, to take possession or make extracts or copies
thereof. “Books, records, files or documents” shall include copies of
any insurance policies, testing logs, applications for admission, all student
records, including student accounts, accreditation reports, personnel files,
financial statements, operational reports, policies and procedures,
correspondence, all reports prepared for or provided to any Governmental
Authority or Educational Agency, all records retained pursuant to relevant
Governmental Authority or Educational Agency requirements and any other books,
records, files or documents. After the Closing Date, each party
hereto shall permit the other party, its officers, counsel, accountants and
other authorized representatives during normal business hours and on reasonable
prior written notice, to have access to and examine and make copies of any
books, records, files or documents in its possession that relate to or concern
the Institutions or their operations for the periods prior to the Closing;
provided that such access does not unreasonably interfere with the operations of
the party providing such access; provided, further, that the party requesting
access to such books, records, files or documents will bear any costs, other
than wages and salaries and employee benefits of relevant personnel, of
obtaining such access. All information obtained shall be kept
confidential in accordance with the Non-Disclosure Agreement, dated June 6,
2008, by and between Lincoln Educational Services Corporation and BIT, as
amended on July 23, 2008 and the Non-Disclosure Agreement, dated July 10, 2008,
by and among Lincoln Educational Services Corporation, BIT and UGP (the “Non-Disclosure
Agreement”).
(b) Each
Seller agrees to, and shall cause its agents, representatives, employees,
officers and directors to, keep confidential all nonpublic information in their
possession regarding the Assets, any Company, Subsidiary, Institution or
Business (including any information made available to the Sellers pursuant to
this Section 5.01)
unless the Parent and the Purchaser consent to such disclosure; provided, however, that no
Seller will be required to maintain as confidential any information that
(i) becomes generally available to the public other than as a result of
disclosure by any Seller or any of their respective agents, representatives,
employees, officers and directors in breach of this Agreement; (ii) is
subsequently received by any Company, Subsidiary or Institution or any of their
Affiliates or representatives from a third party that is not under any
obligation of confidentiality to the Parent or the Purchaser with respect to
such information or (iii) is required to be disclosed pursuant to the terms of a
valid subpoena or order by any Governmental Authority or Educational Agency or
under any Law or other legal requirement; provided further that, in the
event that any Seller or any such agent, representative, employee, officer or
director becomes legally compelled to disclose any such information, (A)
such Seller shall provide the Purchaser with prompt written notice of such
requirement so that the Purchaser may seek a protective order or other remedy or
waive compliance with this Section 5.01 and
(B) in the event that such protective order or other remedy is not obtained
or the Purchaser waives compliance with this Section 5.01,
furnish only that portion of such confidential information which is legally
required to be provided and exercise its best efforts to obtain assurances that
confidential treatment will be accorded such information.
55
Section 5.02 Regulatory and Other
Authorizations Post-Closing. (a) The
Sellers shall cooperate fully with the Purchaser at the Purchaser’s expense and
use all commercially reasonable efforts in good faith to assist the Purchaser in
obtaining all Required Consents and any other authorizations, consents, orders
and approvals (including any authorizations, consents, orders and approvals
listed in Section 4.03 of the
Disclosure Schedule) that may be or become necessary for its execution
and delivery of, and the performance of its obligations pursuant to, this
Agreement, the Ancillary Agreements; provided, however, that no
Seller shall have any obligation to give any guaranty or other consideration of
any nature in connection with any authorizations, consents, orders and
approvals. The Sellers agree to provide to the Purchaser such
information as any Educational Agencies or the other parties may require, in
connection with their review of any related application. The Sellers
agree to cooperate at the Purchaser’s expense after the Closing to assist the
Purchaser to obtain or renew any Educational Approvals or any other necessary
authorizations and approvals from Governmental Authorities or Educational
Agencies with respect to the Institutions, including obtaining U.S. DOE
Approvals on a provisional basis after the Closing Date.
(b) The
Sellers shall cooperate at the Purchaser’s expense and use all commercially
reasonable efforts, in good faith, to assist the Purchaser in prosecuting and
expediting any necessary applications in respect of the Institutions’ continued
participation in the Title IV Programs.
(c) The
Sellers and the Purchaser agree that, in the event that any consent, approval or
authorization necessary or desirable to preserve for the Businesses, the
Companies or any Subsidiary any right or benefit under any lease, license,
contract, commitment or other agreement or arrangement to which the Sellers, the
Companies or any Subsidiary is a party is not obtained prior to the date hereof,
the Sellers will , at the Purchaser’s expense, subsequent to the date hereof,
cooperate with the Purchaser, the Companies or any such Subsidiary in attempting
to obtain such consent, approval or authorization as promptly thereafter as
practicable.
Section 5.03 Use of Intellectual
Property. The
Sellers acknowledge that, from and after the date hereof, (a) the applicable
Owned Intellectual Property shall be owned by the Purchaser, a Company or a
Subsidiary, that no Seller nor any of their Affiliates shall have any rights in
such Owned Intellectual Property and that no Seller nor any of their Affiliates
will contest the ownership or validity of any rights of the Purchaser or any
Company or Subsidiary in or to such Owned Intellectual Property, and (b) no
Seller nor any of their Affiliates shall use any of the applicable Owned
Intellectual Property or Licensed Intellectual Property.
Section 5.04 Payments on Behalf of
Affiliates. Payments
made or received by the Purchaser pursuant to Article II or Article VII hereof
shall, in appropriate circumstances, be made on behalf of, or received in trust
for the benefit of, the relevant Affiliate of the Purchaser. The
Purchaser may direct in writing any such payment to be made by or to the
appropriate Affiliate, and the Sellers shall comply with any such direction
received at least two Business Days prior to the date such payment is
due.
56
Section
5.05 Employees. (a) As
of the date hereof, all existing employment agreements to which any Company or
Subsidiary is a party shall be terminated.
(b) The
Purchaser shall make an offer of employment, effective as of the date hereof to
all of the employees of Educational Properties, LLC as listed on Section 5.05 of the
Disclosure Schedule (each a “Transferred
Employee”). The medical, dental and health plans of the
Purchaser or its Affiliate applicable to each Transferred Employee (A) shall not
contain any exclusions for pre-existing conditions, (B) shall cover as of the
date hereof each Transferred Employee who was covered by a comparable Plan
immediately prior to the date hereof and (C) shall credit each Transferred
Employee for the 2009 plan year of such Company or Subsidiary with all
deductibles and co-payments applicable to the portion of such plan year
occurring prior to the date hereof. In addition, the Purchaser or its
Affiliate shall grant each Transferred Employee full credit for all periods of
employment with any Seller, Company or Subsidiary for eligibility, vesting and
accrual purposes under the employee benefit plans of the Purchaser or its
Affiliate applicable to such Transferred Employee (except that this sentence
shall not obligate the Purchaser or any of its Affiliates to grant benefit
accrual service under any defined benefit pension plan for any period of
employment occurring prior to the date hereof); provided, however, that such
crediting of service shall not operate to duplicate any benefit to any such
employee or the funding for any such benefit.
Section 5.06 Non-Competition. (a) Each
of Baran and Barbara Baran hereby agrees that, for a period of three years after
the date hereof (the “Restricted Period”),
he or she shall not engage, directly or indirectly, in any business anywhere in
the United States that provides products or services of the kind provided by the
Businesses and the Institutions as of the date hereof (a “Restricted Business”)
or, without the prior written consent of the Purchaser (such consent not to be
unreasonably withheld) and the Parent, directly or indirectly, own an interest
in, manage, operate, join, control, lend money or render financial or other
assistance to or participate in or be connected with, as an officer, employee,
partner, shareholder, consultant or otherwise, any Restricted Business; provided, however, that each of
Baran and Barbara Baran may own, directly or indirectly, solely as an
investment, up to 2% of any class of any securities traded on a national
securities exchange of any business that engages in the Restricted
Business. Nothing contained in this Section 5.06(a) shall
prohibit Baran or Barbara Baran from conducting the Clemens business as it is
being conducted on the date hereof.
(b) As
a separate and independent covenant, each of Baran and Barbara Baran agrees
that, for the Restricted Period, such Seller will in no way, directly or
indirectly, interfere with or attempt to interfere with any officers, employees,
representatives or agents of the Businesses and the Institutions in a manner
relating to the Businesses that adversely affects such person’s performance of
duties with respect to the Businesses, or induce or attempt to induce any of
them to leave the employ of the Purchaser or the Institutions or violate the
terms of their contracts, or any employment arrangements, with the Purchaser;
provided, however, that the
foregoing will not prohibit a general solicitation to the public of general
advertising.
57
(c) The
individual Restricted Period with respect to Baran or Barbara Baran,
respectively, shall be extended by the length of any period during which such
individual is in breach of the terms of this Section 5.06.
(d) Each
of Baran and Barbara Baran acknowledges that the covenants set forth in this
Section 5.06 are
an essential element of this Agreement and that, but for his or her agreement to
comply with these covenants, the Parent and the Purchaser would not have entered
into this Agreement. Each of Baran and Barbara Baran acknowledges
that this Section 5.06
constitutes an independent covenant that shall not be affected by performance or
nonperformance of any other provision of this Agreement by the Parent or the
Purchaser. Each of Baran and Barbara Baran has independently
consulted with his or her respective counsel and after such consultation agrees
that the covenants set forth in this Section 5.06 are
reasonable and proper.
Section 5.07 Payment
Obligations. On
the date hereof, the Sellers shall pay all outstanding amounts with respect to
and satisfy in full, and shall deliver to the Purchaser “payoff” letters or
similar releases or confirmations from third parties in forms reasonably
satisfactory to the Purchaser with respect to, the obligations set forth in
Section 5.07 of the
Disclosure Schedule.
Section 5.08 Connecticut Transfer
Act. In
connection with the sale of the Shares of BIT to the Purchaser, the Sellers
shall, at the Sellers’ sole cost and expense, comply with the Connecticut
Transfer Act, including conducting or funding any investigation or Remedial
Action required thereunder, with respect to the property located at 97 Newberry
Road, East Windsor, Connecticut.
Section 5.09 Reimbursement of Restricted
Cash. If
prior to December 31, 2009 the Purchaser, or any of its Affiliates, is no longer
required to maintain the Letter of Credit issued on behalf of Americare in favor
of the U.S. DOE, at the time such Letter of Credit is released, the Purchaser
shall release all collateral supporting the existing Letter of Credit and
shall deliver to the Sellers that amount of cash (not to exceed $361,604)
reflected in the “restricted cash” line item in the Financial Statements that is
allocable to such Letter of Credit, in the manner set forth in Section 2.04(a)(i) of the
Disclosure Schedule , within three Business Days of such
release.
Section 5.10 December 31, 2008
Financials. On
or prior to January 30, 2009, provided that the Purchaser provides the
assistance necessary for Sellers to complete such documents, the Sellers shall
deliver to the Purchaser, the unaudited consolidated balance sheet of the
Companies and Clemens for the three-month period ending December 31, 2008 and
the related consolidated financial statements of Companies and Clemens, together
with all related notes and schedules thereto.
Section 5.11 Further
Action. Each
of the parties hereto shall use all reasonable efforts to take, or cause to be
taken, all appropriate action, do or cause to be done all things necessary,
proper or advisable under applicable Law, and to execute and deliver such
documents and other papers, as may be required to carry out the provisions of
this Agreement and consummate and make effective the transactions contemplated
by this Agreement.
58
ARTICLE
VI
TAX
MATTERS
Section
6.01 Indemnity. (a) The
Sellers agree to indemnify and hold harmless, on a joint and several basis, the
Purchaser, the Companies and the Subsidiaries against Excluded Taxes and, except
as otherwise provided in Section 6.04, against
any loss, damage, liability or expense, including reasonable fees for attorneys
and other outside consultants incurred in contesting or otherwise in connection
with any such Taxes; provided, however, that the
Sellers shall only be liable for a particular Tax to the extent in excess of the
amount specifically identified and reserved for such Tax for purposes of, and
taken into account in computing, Net Working Capital; provided, further, that any
indemnity obligations in respect of Income Taxes of the Sellers shall be several
but not joint. All Taxes payable under this Section 6.01 shall
first be satisfied from the Escrow Amount.
(b)
In the case
of Taxes that are payable with respect to a Straddle Period, the portion of any
such Tax that is allocable to the portion of the Straddle Period ending on the
date of the Closing shall be:
(i)
in the case of Taxes
that are either (x) based upon or related to income or receipts, or
(y) imposed in connection with any sale or other transfer or assignment of
property (real or personal, tangible or intangible) (other than conveyances
pursuant to this Agreement, as provided under Section 6.07),
deemed equal to the amount which would be payable if the taxable year ended on
the date of the Closing; and
(ii) in
the case of Taxes imposed on a periodic basis with respect to the assets of the
Companies and the Subsidiaries or otherwise measured by the level of any item,
deemed to be the amount of such Taxes for the entire period (or, in the case of
such Taxes determined on an arrears basis, the amount of such Taxes for the
immediately preceding period), multiplied by a fraction, the numerator of which
is the number of calendar days in the period ending on the date of the Closing
and the denominator of which is the number of calendar days in the entire
Straddle Period. Any credit or refund resulting from an overpayment
of Taxes for a Straddle Period shall be prorated based upon the method employed
in this Section
6.01(b) taking into account the type of the Tax to which the refund
relates. In the case of any Tax based upon or measured by capital
(including net worth or long-term debt) or intangibles, any amount thereof
required to be allocated under this Section 6.01(b)
shall be computed by reference to the level of such items on the date of the
Closing. All determinations necessary to effect the foregoing
allocations shall be made in a manner consistent with prior practice of the
Companies and the Subsidiaries.
59
Section 6.02 Returns and
Payments. (a) From
the date of this Agreement through and after the Closing, the Sellers shall
prepare and file or otherwise furnish in proper form to the appropriate
Governmental Authority (or cause to be prepared and filed or so furnished) in a
timely manner all Tax Returns relating to the Companies and the Subsidiaries, as
applicable, that are due on or before or relate to any taxable period ending on
or before the Closing Date (and the Purchaser shall do the same with respect to
any Straddle Period). Tax Returns of the Companies and the
Subsidiaries not yet filed for any taxable period that begins before the Closing
Date shall be prepared in a manner consistent with past practices employed with
respect to the Companies and the Subsidiaries (except to the extent that counsel
for the Sellers, the Companies or the Subsidiaries renders a legal opinion that
there is no reasonable basis in law therefor or determines that a Tax Return
cannot be so prepared and filed without being subject to
penalties). With respect to any such Tax Return required to be filed
by the Purchaser or the Sellers, for a taxable period that ends on or before, or
includes, the Closing Date, the filing party shall provide the other party with
a copy of such completed Tax Return and, if applicable, a statement certifying
the amount of Tax shown on such Tax Return that is allocable to such other party
pursuant to Section 6.01(b),
together with appropriate supporting information and schedules at least 20
Business Days prior to the due date (including any extension hereof) for the
filing of such Tax Return, and such other party shall have the right to review
and comment on such Tax Return and statement prior to the filing of such Tax
Return (which comments the filing party shall consider in good
faith).
(b) The
Sellers shall pay, or cause to be paid, when due and payable all Taxes with
respect to the Companies and the Subsidiaries, as applicable, for any taxable
period ending on or before the Closing Date, and the Purchaser shall so pay or
cause to be paid Taxes for any Straddle Period (subject to its right of
indemnification from the Sellers by the date set forth in Section 6.05 for
Taxes attributable to the portion of any Straddle Period that ends on the
Closing Date pursuant to Sections 6.01(a) and
6.01(b)). Notwithstanding
the foregoing, the Sellers shall only be liable for a particular Tax of a
Company or any Subsidiary for any Pre-Closing Period or portion of a Straddle
Period that ends on the Closing Date to the extent that the amount of such Tax
exceeds the amount specifically identified and reserved for purposes of, and
taken into account in computing, Net Working Capital.
Section
6.03 Refunds. Any
Tax refund (including any interest with respect thereto) relating to the
Companies and the Subsidiaries for any Pre-Closing Period, other than Tax
refunds to the extent of the amount included in Net Working Capital, shall be
the property of the Sellers, and if received by the Purchaser or any Company or
Subsidiary shall be paid over promptly to the Sellers (in the manner set forth
in Section 2.04(a)(i)
of the Disclosure Schedule). Notwithstanding the foregoing,
(a) any Tax refund (or equivalent benefit to the Sellers through a
reduction in Tax liability) for any Pre-Closing Period arising out of the
carryback of a loss or credit incurred by any Company or Subsidiary in any
Post-Closing Period shall be the property of the Purchaser and, if received by
the Sellers, shall be paid over promptly to the Purchaser; and (b) if a taxing
authority subsequently disallows any refund with respect to which the Sellers
have received a payment pursuant to this Section 6.03, the
Sellers shall promptly pay (or cause to be paid) to the Purchaser the full
amount of such refund (including any interest with respect
thereto).
Section
6.04 Contests. (a) After
the Closing, the Purchaser shall promptly notify the Sellers’ Representative in
writing of any written notice of a proposed assessment or claim in an audit or
administrative or judicial proceeding of the Purchaser or any Company or
Subsidiary which, if determined adversely to the taxpayer, would be grounds for
indemnification under this Article VI;
provided, however, that the
failure to give such notice will not affect the Purchaser’s right to
indemnification under this Article VI except to
the extent, if any, that, but for such failure, the Sellers could have avoided
all or a portion of the Tax liability in question.
60
(b) In
the case of an audit or administrative or judicial proceeding that relates to
taxable periods ending on or before the Closing Date, provided that, and only to
the extent that, the Sellers acknowledge in writing their liability under this
Agreement to hold the Purchaser, the Companies and the Subsidiaries harmless
against the full amount of any adjustment which may be made as a result of such
audit or proceeding, the Sellers’ Representative shall have the right at his
expense to participate in and control the conduct of such audit or proceeding;
the Purchaser also may participate in any such audit or proceeding at its own
expense and, if the Sellers’ Representative does not assume the defense of any
such audit or proceeding, the Purchaser may defend the same in such manner as it
may deem appropriate, including settling such audit or proceeding after fifteen
days prior written notice to the Sellers’ Representative setting forth the terms
and conditions of settlement. Notwithstanding anything to the
contrary contained in Section 7.05, in the
event that issues relating to a potential adjustment for which the Sellers have
acknowledged liability are required to be contested in the same audit or
proceeding as separate issues relating to a potential adjustment for which the
Purchaser would be liable, the Purchaser shall have the right, at its expense,
to control the audit or proceeding with respect to the latter issues; provided, however, that the
Purchaser shall not have the right to settle any such matter without the consent
of the Sellers’ Representative, which consent shall not be unreasonably
withheld.
(c) Notwithstanding
anything to the contrary contained in Section 6.04, with
respect to issues relating to a potential adjustment for which both the Sellers
(as evidenced by their written acknowledgement under this Section 6.04)
and the Purchaser or any Company or Subsidiary could be liable, (i) both
the Sellers’ Representative and the Purchaser may participate in the audit or
proceeding; (ii) the audit or proceeding shall be controlled by that party
which would bear the burden of the greater portion of the sum of the adjustment
and any corresponding adjustments that may reasonably be anticipated for future
taxable periods; and (iii) the controlling party shall not settle any such
matter without the consent of the non-controlling party (which consent shall not
be unreasonably withheld). The principle set forth in this Section 6.04(c) also
shall govern for purposes of deciding any issue that must be decided jointly
(including choice of judicial forum) in situations in which separate issues are
otherwise controlled under this Article VI by
the Purchaser and the Sellers’ Representative.
(d) With
respect to any Tax audit or proceeding for a taxable period that begins before
the Closing Date, neither the Purchaser nor the Sellers’ Representative shall
enter into any compromise or agree to settle any claim pursuant to such audit or
proceeding which would adversely affect the other party for such taxable period
or a subsequent taxable period without the written consent of the other party,
which consent may not be unreasonably withheld. The Purchaser and the
Sellers’ Representative agree to cooperate, and the Purchaser agrees to cause
the Companies and the Subsidiaries to cooperate, in the defense against or
compromise of any claim in any such audit or proceeding.
Section 6.05 Time of
Payment. Payment
by the Sellers of any amounts due under this Article VI in
respect of Taxes shall be made (a) at least three Business Days before the
due date of the applicable estimated or final Tax Return required to be filed by
the Purchaser on which is required to be reported income for a taxable period
ending after the Closing Date for which the Sellers are responsible under Sections 6.01(a) and
6.01(b) without
regard to whether the Tax Return shows overall net income or loss for such
period or (b) within three Business Days following an agreement between the
Sellers’ Representative and the Purchaser that an indemnity amount is payable,
an assessment of a Tax by a taxing authority, or a “determination” as defined in
Section 1313(a) of the Code. If liability under this Article VI is in
respect of costs or expenses other than Taxes, payment by the Sellers of any
amounts due under this Article VI shall
be made within five Business Days after the date when the Sellers’
Representative has been notified by the Purchaser that the Sellers have a
liability for a determinable amount under this Article VI and is provided
with calculations or other materials supporting such liability.
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Section 6.06 Tax Cooperation and Exchange
of Information. The
Sellers and the Purchaser shall provide each other with such cooperation and
information as either of them reasonably may request of the other (and the
Purchaser shall cause the Companies and the Subsidiaries to provide such
cooperation and information) in (a) filing any Tax Return, amended Tax Return or
claim for refund, (b) determining a liability for Taxes or a right to a refund
of Taxes, (c) participating in or conducting any audit or other proceeding in
respect of Taxes, or (d) making representations to or furnishing information to
parties subsequently desiring to purchase any part of the Assets, the Business
or any Company or Subsidiary from the Purchaser. Such cooperation and
information shall include providing copies of relevant Tax Returns or portions
thereof, together with related work papers and documents relating to rulings or
other determinations by taxing authorities. The Sellers and the
Purchaser shall make themselves (and their respective employees) reasonably
available on a mutually convenient basis to provide explanations of any
documents or information provided under this Section
6.06. Notwithstanding anything to the contrary in Section 5.01, each
Seller and the Purchaser shall retain all Tax Returns, work papers and all
material records or other documents in its possession (or in the possession of
its Affiliates) relating to Tax matters of the Companies and the Subsidiaries
for any taxable period that includes the date of the Closing and for all prior
taxable periods until the later of (i) the expiration of the statute of
limitations of the taxable periods to which such Tax Returns and other documents
relate, without regard to extensions, and (ii) six years following the due
date (without extension) for such Tax Returns. After such time,
before any Seller or the Purchaser shall dispose of any such documents in his,
her or its possession (or in the possession of Affiliates), the other parties
shall be given an opportunity, after 90 days prior written notice, to remove and
retain all or any part of such documents as such other party may select (at such
other party’s expense). Any information obtained under this Section 6.06
shall be kept confidential, except as may be otherwise necessary in connection
with the filing of Tax Returns or claims for refund or in conducting an audit or
other proceeding.
Section 6.07
Conveyance
Taxes. The
Sellers, on the one hand, and the Purchaser, on the other hand, shall each be
liable for and shall hold the other harmless against, on a joint and several
basis in the case of the Sellers, 50% of any Conveyance Taxes which become
payable in connection with the transactions contemplated by this
Agreement. The Sellers, after the review and consent by the
Purchaser, shall file such applications and documents as shall permit any such
Conveyance Taxes to be assessed and paid on or prior to the Closing in
accordance with any available pre-sale filing procedure. The
Purchaser shall execute and deliver all instruments and certificates necessary
to enable the Sellers to comply with the foregoing. The Purchaser
shall complete and execute a resale or other exemption certificate with respect
to the inventory items sold hereunder, and shall provide the Sellers with an
executed copy thereof.
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Section 6.08 Amended Tax
Returns. (a) Any
amended Tax Return of either Company or any of the Subsidiaries or claim for Tax
refund on behalf of either Company or any of the Subsidiaries for any period
ending on or prior to the Closing Date may be filed, or caused to be filed, by
the Sellers’ Representative; provided that the Sellers’ Representative shall
not, without the prior written consent of the Purchaser (which consent shall not
be unreasonably withheld), make or cause to be made, any such filing, to the
extent such filing, if accepted, reasonably might change the Tax Liability of
the Purchaser for any period ending after the Closing
Date. Notwithstanding the foregoing, the Purchaser may amend any Tax
Return to the extent such amendment would not adversely affect or increase the
Sellers’ liability for any Tax or adversely affect the Sellers’ claim for any
Tax refund.
(b) Any
amended Tax Return of either Company or any of the Subsidiaries or claim for Tax
refund on behalf of either Company or any of the Subsidiaries for any period
ending after the Closing Date shall be filed, or caused to be filed, only by the
Purchaser; provided that the Purchaser shall not, without the prior written
consent of the Sellers’ Representative (which consent shall not be unreasonably
withheld), make or cause to be made, any such filing, to the extent such filing,
if accepted, reasonably might change the Tax Liability of the Sellers for (i)
any period ending on or prior to the Closing Date or (ii) any portion of a
Straddle Period ending on the Closing Date.
Section
6.09 Tax
Covenants.
(a) The
Purchaser covenants that without obtaining the prior written consent of the
Sellers’ Representative it will not, and will not cause or permit either
Company, the Subsidiaries or any Affiliate of Purchaser, to (i) take any action
on the Closing Date other than in the ordinary course of business that could
give rise to any Tax liability of Sellers or any indemnification obligation of
Sellers under Section
7.02, or (ii) make a material Tax election under Section 338(g) of the
Code with respect to the transactions contemplated hereby.
(b) After
the Closing Date, the Purchaser, the Companies and/or the Subsidiaries will not,
without obtaining the written consent of the Sellers’ Representative (which
consent shall not be unreasonably withheld), agree to the waiver or any
extension of the statute of limitations relating to any Taxes of any Company or
Subsidiary for any Pre-Closing Period (other than Taxes with respect to any
Straddle Period) other than extensions of time to file Tax Returns obtained in
the ordinary course. Notwithstanding the foregoing, if the Sellers do
not respond to a request for written consent from the Purchaser within five
days, the Sellers will be irrevocably deemed to consent to such waiver or
extension.
Section
6.10 Miscellaneous. (a) The
Sellers and the Purchaser agree to treat all payments made by either of them to
or for the benefit of the other (including any payments to any Company or
Subsidiary) under this Article VI,
under other indemnity provisions of this Agreement and for any
misrepresentations or breaches of warranties or covenants as adjustments to the
Purchase Price and that such treatment shall govern for purposes hereof except
to the extent that the Laws of a particular jurisdiction provide
otherwise.
(b) All
payments payable under any tax sharing agreement or arrangement (other than this
Agreement) between any Seller, on the one hand, and any Company or Subsidiary,
on the other hand, for any taxable period ending on or prior to the Closing Date
shall be calculated on a basis consistent with past practice and shall be
payable in full prior to the Closing. Any such tax sharing agreement
or arrangement (other than this Agreement) between any Seller and any Company or
Subsidiary shall be terminated prior to the Closing.
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(c) Notwithstanding
any provisions in this Agreement to the contrary, the obligations of the Sellers
to indemnify and hold harmless the Purchaser and the Companies and Subsidiaries
pursuant to this Article VI, and
the representations and warranties contained in Section 3.23,
shall terminate at the close of business on the 60th day following the
expiration of the applicable statute of limitations with respect to the Tax
liabilities in question (giving effect to any waiver, mitigation or extension
thereof).
(d) From
and after the date of this Agreement, no Seller shall, without the prior written
consent of the Purchaser (which may, in its sole and absolute discretion,
withhold such consent), make, or cause or permit to be made, any Tax election
that would materially affect any Company or Subsidiary.
(e) For
purposes of this Article VI, “the
Purchaser” and “a Seller,” respectively, shall include each member of the
affiliated group of corporations of which it is or becomes a member (other than
any Company or Subsidiary, except to the extent expressly
referenced).
(f) The
Purchaser shall be entitled to recover professional fees and related costs that
it may reasonably incur to enforce the provisions of this Article VI.
(g) Notwithstanding
anything to the contrary in this Agreement, the rights and obligations of the
parties with respect to indemnification for any and all Tax matters shall be
governed solely by this Article
VI.
ARTICLE
VII
INDEMNIFICATION
Section 7.01 Survival of Representations
and Warranties. (a) The
representations and warranties of the Sellers contained in this Agreement and
the Ancillary Agreements to which any Seller is a party shall survive the
Closing for 15 months from the Closing Date; provided, however, that
(i) the representations and warranties made pursuant to Section 3.01
(Organization), Section 3.03
(Capitalization) and Section
3.29 (Brokers) shall survive indefinitely, (ii) the
representations and warranties dealing with Tax matters shall survive as
provided in Section
6.10(c) hereof, (iii) the representations and warranties made
pursuant to Section 3.11
(Environmental), Section 3.26
(Compliance With Educational Laws) and Section 3.25
(Education Approvals) shall survive the Closing for 36 months from the Closing
Date. Neither the period of survival nor the liability of the Sellers
with respect to the Sellers’ representations and warranties shall be reduced by
any investigation made at any time by or on behalf of the
Purchaser. If written notice of a claim has been given prior to the
expiration of the applicable representations and warranties by the Purchaser to
the Sellers, then the relevant representations and warranties shall survive as
to such claim until such claim has been finally resolved.
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(b) The
representations and warranties of the Parent and the Purchaser contained in this
Agreement and the Ancillary Agreements to which the Parent or the Purchaser is a
party shall survive the Closing for 15 months from the Closing
Date. Neither the period of survival nor the liability of the Parent
or the Purchaser with respect to such party’s representations and warranties
shall be reduced by any investigation made at any time by or on behalf of the
Sellers. If written notice of a claim has been given prior to the
expiration of the applicable representations and warranties by the Sellers to
the Parent or the Purchaser, then the relevant representations and warranties
shall survive as to such claim until such claim has been finally
resolved.
Section 7.02 Indemnification by the
Sellers. (a) The
Parent, the Purchaser and their respective Affiliates, and the officers,
directors, employees and agents of the foregoing (each a “Purchaser Indemnified
Party”) shall be indemnified and held harmless, on a joint and several
basis, by the Sellers for and against any and all Liabilities, Taxes, losses,
damages, claims, costs and expenses, interest, awards, judgments and penalties
(including reasonable attorneys’ fees and expenses) actually suffered or
incurred by them (including any Action brought or otherwise initiated by any of
them) (hereinafter a “Loss”) arising out of
or resulting from:
(i)
the
breach of any representation or warranty made by any Seller contained in any
Acquisition Document (it being understood that such representations and
warranties shall be interpreted without giving effect to any limitations or
qualifications as to “materiality” (including the word “material”) or “Material
Adverse Effect” set forth therein);
(ii) the
breach of any covenant or agreement by any Seller contained in any Acquisition
Document;
(iii) any
and all Losses suffered or incurred by the Purchaser, or any Company or
Subsidiary by reason of, or in connection with, any claim or cause of action of
any third party to the extent arising out of any action, inaction, event,
condition, liability or obligation of any Seller or the Businesses occurring or
existing prior to the date hereof;
(iv) any
Liability arising from or relating to the CCI Lease;
(v) any
Liability relating to BIT’s compliance with the Connecticut Transfer Act,
including any Liability relating to or arising from BIT’s status as the
certifying party;
(vi) any
Liability relating to the Acquisition Obligations, other than those disclosed on
Section 3.30 of the
Disclosure Schedule;
(vii) any
Environmental Claim arising from or relating to any action, omission, condition
or circumstance occurring, failing to occur or existing on or prior to the
Closing that relates in any way to Engine City; any Release of Hazardous
Materials at, to, on or from the Engine City Institution that occurs on or prior
to the Closing, including any pre-Closing or post-Closing migration of such
Release and any Remedial Action whenever conducted relating to such Release; and
any violation of or non-compliance with any Environmental Law or Environmental
Permit by Engine City that occurs pre-Closing, including any post-Closing
continuation of such violation or non-compliance except to the extent such
continuation was caused by the negligence of the Purchaser; or
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(viii)
any and all Losses (A) arising out of or
resulting from the termination of employment, for any reason at any time prior
to the date six months following the Closing Date, of any of the employees of
any Company or Subsidiary listed on Section 7.02(a)(viii)(A) of
the Disclosure Schedule, which Losses arise pursuant to any arrangements
made with such employees prior to Closing or (B) in respect of or relating to
(y) the Transferred Employees for periods on or prior to the Closing Date, other
than those assumed liabilities listed on Section 7.02(a)(viii)(B) of
the Disclosure Schedule or (z) any current or former employees of, or
other service providers to, Educational Properties, LLC other than the
Transferred Employees.
(b) Subject
to Section
7.04, to the extent that the undertakings of the Sellers set forth in
this Section 7.02 may
be unenforceable, the Sellers shall contribute the maximum amount that it is
permitted to contribute under applicable Law to the payment and satisfaction of
all Losses incurred by the Purchaser Indemnified Parties.
(c) The
joint and several liability of all of the Sellers set forth in Sections 6.01(a) or
7.02(a) shall
only apply to Losses to the extent that such Losses may be satisfied from the
funds remaining in the Escrow Account. For all Losses (i) in excess
of the funds remaining in the Escrow Account or (ii) which arise under Sections 6.01(a) or
7.02(a) after disbursement of the funds remaining in the Escrow Account,
subject to any limitations set forth in Section 7.04, only
Baran, Barbara Baran, UGP and UGPE (and no other Seller) shall be jointly and
severally liable for such Losses. Notwithstanding anything to the
contrary set forth hereinabove, with respect to any Losses suffered pursuant to
a breach described in Section 7.02(a)(ii),
each Seller shall be liable severally, and not jointly, based upon which Seller
is responsible for such Losses, and the Purchaser shall only be entitled to
pursue indemnification for such Losses from such breaching Seller (and no other
Seller).
Section 7.03 Indemnification by the
Parent and the Purchaser. (a) The
Sellers and their officers, directors, employees and agents (each a “Seller Indemnified
Party”) shall be indemnified and held harmless by each of the Parent and
the Purchaser, jointly and severally, for and against any and all Losses arising
out of or resulting from:
(i)
the breach of any
representation or warranty made by the Parent or the Purchaser contained in this
Agreement or any of the Ancillary Agreements to which the Parent or the
Purchaser is a party; or
(ii)
the breach of any covenant
or agreement by the Parent or the Purchaser contained in this Agreement or any
of the Ancillary Agreements to which the Parent or the Purchaser is a
party.
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(b) To
the extent that the undertakings of the Parent or the Purchaser set forth in
this Section 7.03 may
be unenforceable, the Parent or the Purchaser shall contribute the maximum
amount that it is permitted to contribute under applicable Law to the payment
and satisfaction of all Losses incurred by the Seller Indemnified
Parties.
Section 7.04 Limits on
Indemnification. (a) Notwithstanding
anything to the contrary contained in this Agreement, (a) the Sellers shall not
be liable to any Purchaser Indemnified Party for any claim for indemnification
pursuant to Section
7.02(a)(i) and Section 7.02(a)(iii),
unless and until the aggregate amount of indemnifiable Losses which may be
recovered by the Purchaser Indemnified Party under this Agreement (together with
the amounts of indemnifiable Losses which may be recovered by the Purchaser
Indemnified Party under the Clemens Agreement) equals or exceeds $300,000 (the
“Basket”),
after which the Sellers shall be liable only for those Losses under Section 7.02(a)(i)
and Section
7.02(a)(iii) of this Agreement and Section 8.02(a)(i)
and Section
8.02(a)(iii) of the Clemens Agreement in excess of the Basket, and (b)
the maximum amount of indemnifiable Losses which may be recovered by the
Purchaser Indemnified Parties pursuant to Section 7.02(a)(i)
and Section
7.02(a)(iii) of this Agreement and Section 8.02(a)(i)
and Section
8.02(a)(iii) of the Clemens Agreement, as applicable, shall be $5,000,000
(the “Cap”). Notwithstanding
the foregoing, the Basket and the Cap limitations set forth in this Section 7.04 shall
not apply with respect to Tax matters.
(b) Notwithstanding
anything to the contrary contained in this Agreement, (a) the Parent and the
Purchaser shall not be liable to any Seller Indemnified Party for any claim for
indemnification pursuant to Section 7.03(a)(i),
unless and until the aggregate amount of indemnifiable Losses which may be
recovered by the Seller Indemnified Party under this Agreement (together with
the amounts of indemnifiable Losses which may be recovered by the Seller
Indemnified Party under the Clemens Agreement) equals or exceeds the Basket,
after which the Parent and the Purchaser shall be liable only for those Losses
under Section
7.03(a)(i) of this Agreement and Section 8.03(a)(i) of
the Clemens Agreement in excess of the Basket, and (b) the maximum amount of
indemnifiable Losses which may be recovered by the Seller Indemnified Parties
pursuant to Section
7.03(a)(i) of this Agreement and Section 8.03(a)(i) of
the Clemens Agreement shall be the Cap.
(c) Notwithstanding
Section 7.02 or
Section 7.03,
no Indemnified Party shall be entitled to indemnification under this Article VII with
respect to any amounts taken into consideration in computing any adjustment to
the Purchase Price pursuant to Section
2.05.
(d) The
remedies provided in Section 6.01 and this
Article VII
shall constitute the exclusive remedies of the parties hereto at law following
the Closing for any breach of a representation, warranty or covenant contained
in this Agreement or any other Acquisition Document and the parties hereto waive
any other remedy which they or any other person entitled to be indemnified
pursuant to Section
6.01 or this Article VII may have
at law with respect to any breach of any such representation, warranty or
covenant.
Section 7.05 Indemnification
Procedures. (a) An
Indemnified Party shall give the Indemnifying Party notice of any matter that an
Indemnified Party has determined has given or could give rise to a right of
indemnification under this Agreement, within 30 days of such determination,
stating the amount of the Loss, if known, and method of computation thereof, and
containing a reference to the provisions of this Agreement in respect of which
such right of indemnification is claimed or arises.
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(b) If
an Indemnified Party shall receive notice of any Action, audit, demand or
assessment (each, a “Third Party Claim”)
against it or which may give rise to a claim for a Loss under this Article VII, within
30 days of the receipt of such notice, the Indemnified Party shall give the
Indemnifying Party notice of such Third Party Claim; provided, however, that the
failure to provide such notice shall not release the Indemnifying Party from any
of its obligations under this Article VII except to
the extent that the Indemnifying Party is materially prejudiced by such failure
and shall not relieve the Indemnifying Party from any other obligation or
Liability that it may have to any Indemnified Party otherwise than under this
Article
VII. If the Indemnifying Party acknowledges in writing its
obligation to indemnify the Indemnified Party hereunder against any Losses that
may result from such Third Party Claim, then the Indemnifying Party shall be
entitled to assume and control the defense of such Third Party Claim at its
expense and through counsel of its choice if it gives written notice of its
intention to do so to the Indemnified Party within ten days of the receipt of
notice from the Indemnified Party of such Third Party Claim; provided, however, that if
there exists or is reasonably likely to exist a conflict of interest based upon
the opinion of counsel of such Indemnified Party that would make it
inappropriate in the judgment of the Indemnified Party in its reasonable
discretion for the same counsel to represent both the Indemnified Party and the
Indemnifying Party, then the Indemnified Party shall be entitled to retain its
own counsel, at the expense of the Indemnifying Party; provided, however, that the
Indemnified Party shall only be entitled to retain one separate counsel for
which the Indemnified Party reasonably determined counsel is
required. In the event that the Indemnifying Party exercises the
right to undertake any such defense against any such Third Party Claim as
provided above, the Indemnified Party shall cooperate with the Indemnifying
Party in such defense and make available to the Indemnifying Party, at the
Indemnifying Party’s expense, all witnesses, pertinent records, materials and
information in the Indemnified Party’s possession or under the Indemnified
Party’s control relating thereto as is reasonably required by the Indemnifying
Party. Similarly, in the event the Indemnified Party is, directly or
indirectly, conducting the defense against any such Third Party Claim, the
Indemnifying Party shall cooperate with the Indemnified Party in such defense
and make available to the Indemnified Party, at the Indemnifying Party’s
expense, all such witnesses, records, materials and information in the
Indemnifying Party’s possession or under the Indemnifying Party’s control
relating thereto as is reasonably required by the Indemnified
Party. No such Third Party Claim may be settled by the Indemnifying
Party without the prior written consent of the Indemnified Party, which consent
shall be given or withheld by the Indemnified Party in its sole discretion,
provided that
if such settlement is a purely economic settlement that involves the full
release of the Indemnified Party and the Indemnifying Party agrees to pay all
amounts payable pursuant to such settlement, the Indemnified Party’s consent
will not be unreasonably withheld. Notwithstanding the foregoing, if
an Indemnified Party reasonably believes an adverse determination with respect
to any Educational Claim could adversely affect any Educational Approval of an
Institution or an Institution’s ability to participate fully in the Title IV
Programs, the Indemnified Party may, by notice to the Indemnifying Party, assume
the exclusive right to defend, compromise, or settle such matter, provided that
the Indemnifying Party shall not be bound by a settlement effected without its
consent (which may not be unreasonably withheld).
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Section 7.06 Distributions from Escrow
Account. Subject
to Section 6.01
and Section
7.07 below, all Losses payable under this Article VII and Section 6.01(a) shall
first be satisfied by the Escrow Amount. In the event that
(a) the Sellers shall not have objected to the amount claimed by the
Purchaser for indemnifications with respect to any Loss in accordance with the
procedures set forth in the Escrow Agreement or (b) the Sellers have
delivered notice of its disagreement as to the amount of any indemnification
requested by the Purchaser and either (i) the Sellers, on the one hand, and
the Purchaser, on the other hand, shall have subsequent to the giving of such
notice, mutually agreed that the Sellers are obligated to indemnify the
Purchaser for a specified amount and the Purchaser and the Sellers’
Representative shall have so jointly notified the Escrow Agent or (ii) a final
nonappealable judgment shall have been rendered by the court having jurisdiction
over the matters relating to such claim by the Purchaser for indemnification
from the Sellers and the Escrow Agent shall have received in the case of
clause (i) above, written instructions from the Sellers’ Representative and
the Purchaser or, in the case of clause (ii) above, a copy of the final
nonappealable judgment of the court, the Escrow Agent shall deliver to the
Purchaser from the Escrow Account any amount determined to be owed to the
Purchaser under this Article VII in
accordance with the Escrow Agreement. If and to the extent the Escrow
Amount is insufficient to cover any amount determined to be owed to the
Purchaser under Section 6.01(a) or
this Article VII,
then Baran, Barbara Baran, UGP and UGPE (and no other Seller) shall pay the
amount of such deficiency to the Purchaser by wire transfer in immediately
available funds to a bank account designated by the Purchaser, subject to the
provisions of Section 7.06.
Section
7.07 Mitigation. Notwithstanding
the indemnification requirements of the Sellers set forth in Section 7.02, in the
event that (a) any of the Purchaser Indemnified Parties intends to seek
indemnification for Losses under Section 7.02 and (b)
such Losses are recoverable by the Purchaser Indemnified Parties under the
Americare Agreement or the Engine City Agreement, such Purchaser Indemnified
Party must first seek recovery under the Americare Agreement or the Engine City
Agreement, as applicable, for such Losses to the same extent as they would if
such Losses were not subject to indemnification hereunder; provided, that
nothing in this Section 7.07 shall
release the Sellers from their obligations under Section
7.02.
Section 7.08 Sellers’
Representative. (a) By
the execution and delivery of this Agreement, each of the Sellers hereby
irrevocably constitutes and appoints Baran, as the true and lawful agent and
attorney in fact (in such capacity, the “Sellers’
Representative”) of the Sellers with full power of substitution to act in
the name, place and stead of the Sellers with respect to this Agreement, the
Escrow Agreement and the transactions contemplated hereby and thereby as the
Sellers’ Representative may deem appropriate, and to act on behalf of the
Sellers in any litigation or arbitration involving this Agreement or the Escrow
Agreement, do or refrain from doing all such further acts and things, and
execute all such documents as the Sellers’ Representative shall deem necessary
or appropriate in connection with the transactions contemplated by this
Agreement and the Escrow Agreement, including the power:
(i) to
act for the Sellers with regard to matters pertaining to the determination of
the Purchase Price, the adjustment to the Purchase Price and pertaining to the
indemnification referred to in this Agreement, including the power to settle any
indemnity claim on behalf of the Sellers and to transact matters of
litigation;
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(ii) to
execute and deliver all ancillary agreements, certificates and documents that
the Sellers’ Representative deems necessary or appropriate in connection with
the consummation of the transactions contemplated by this Agreement and the
Escrow Agreement;
(iii)
to receive funds and give
receipts for funds, including in respect of any adjustments to the Purchase
Price or any amounts distributed under the Escrow Agreement;
(iv)
to do or refrain from doing any
further act or deed on behalf of the Sellers that the Sellers’ Representative
deems necessary or appropriate in its sole discretion relating to the subject
matter of this Agreement or the Escrow Agreement as fully and completely as the
Sellers could do if personally present;
(v)
to receive service
of process in connection with any claims under this Agreement or the Escrow
Agreement; and
(vi)
to accept notices in accordance with Section
9.02.
(b) Baran
hereby agrees and consents to his appointment as the Sellers’ Representative
pursuant to this Section 7.08,
effective as of the date of this Agreement. The appointment of the
Sellers’ Representative shall be deemed coupled with an interest and shall be
irrevocable, and the Purchaser and any other Person may conclusively and
absolutely rely, without inquiry, upon any action or decision of the Sellers’
Representative in all matters referred to herein. All actions and
decisions of Sellers’ Representative shall be binding and conclusive on each
Seller. All notices required to be made or delivered by the Purchaser
to the Sellers and shall be made to the Sellers’ Representative for the benefit
of the Sellers and shall discharge in full all notice requirements of the
Purchaser to the Sellers with respect thereto. The Sellers hereby
confirm all that the Sellers’ Representative shall do or cause to be done by
virtue of its appointment as the Sellers’ Representative of the
Sellers. The Sellers’ Representative shall act for the Sellers on all
of the matters set forth in this Agreement and the Escrow Agreement in the
manner the Sellers’ Representative believes to be in the best interest of the
Sellers and consistent with the obligations under this Agreement and the Escrow
Agreement, but the Sellers’ Representative shall not be responsible to the
Sellers for any loss or damages the Sellers may suffer by the performance by the
Sellers’ Representative of its duties under this Agreement or the Escrow
Agreement, other than loss or damage arising from intentional violation of the
law by the Sellers’ Representative of his duties under this Agreement or the
Escrow Agreement.
(c) If
any individual Seller should die or become incapacitated, if any trust or estate
should terminate or if any other similar event should occur, any action taken by
the Sellers’ Representative pursuant to this Section 7.08 shall be
valid as if such death or incapacity, termination or other event had not
occurred, regardless of whether or not the Sellers’ Representative or the
Purchaser shall have received notice of such death, incapacity, termination or
similar event. The Person appointed as Sellers’ Representative may
resign as such at any time on not less than five Business Days’ notice to the
Sellers and the Parent. A vacancy in the position of Sellers’
Representative shall be filled by a Person determined by the holders of a
majority in interest of the amount then held in the Escrow
Account.
70
ARTICLE
VIII
AMENDMENT
AND WAIVER
Section
8.01 Amendment. This
Agreement may not be amended or modified except (a) by an instrument in writing
signed by or on behalf of the parties hereto or (b) by a waiver in accordance
with Section
8.02.
Section
8.02 Waiver. Any
party hereto may (a) extend the time for the performance of any of the
obligations or other acts of another party, (b) waive any inaccuracies in the
representations and warranties of another party contained herein or in any
document delivered by another party pursuant hereto or (c) waive compliance with
any of the agreements of another party or conditions to such party’s obligations
contained herein. Any such extension or waiver shall be valid only if
set forth in an instrument in writing signed by the party or parties to be bound
thereby. Any waiver of any term or condition shall not be construed
as a waiver of any subsequent breach or a subsequent waiver of the same term or
condition, or a waiver of any other term or condition of this
Agreement. The failure of any party to assert any of its rights
hereunder shall not constitute a waiver of any of such rights. All
rights and remedies existing under this Agreement are cumulative to, and not
exclusive of, any rights or remedies otherwise available.
ARTICLE
IX
GENERAL
PROVISIONS
Section
9.01 Expenses. Except
as otherwise specified in this Agreement, all costs and expenses, including fees
and disbursements of counsel, financial advisors and accountants, incurred in
connection with this Agreement and the transactions contemplated by this
Agreement shall be paid by the party incurring such costs and expenses, whether
or not the Closing shall have occurred.
Section
9.02 Notices. All
notices, requests, claims, demands and other communications hereunder shall be
in writing and shall be given or made (and shall be deemed to have been duly
given or made upon receipt) by delivery in person, by nationally recognized
overnight courier service, by telecopy, by facsimile, by email or by registered
or certified mail (postage prepaid, return receipt requested) to the respective
parties at the following addresses (or at such other address for a party as
shall be specified in a notice given in accordance with this Section
9.02):
|
|
(a)
|
if
to the Sellers Representative:
|
Brad
Baran
25
Cobtail Way
Simsbury,
CT 06070
Telephone: (203)
494-6134
Facsimile: (860)
627-4308
71
|
|
(b)
|
if
to the Sellers
|
Brad and
Barbara Baran
25
Cobtail Way
Simsbury,
CT 06070
Telephone: (203)
494-6134
Facsimile: (860)
627-4308
UGP
Education Partners, LLC
Two
Greenwich Office Park
Greenwich,
CT 06831
Telephone: (203)
422-0650
Facsimile: (203)
422-0659
Attention: Stan
Lau
Merion
Investment Partners, L.P.
Merion
Building, Suite 210
700 S.
Henderson Rd.
King of
Prussia, PA 19406
Facsimile: (610)
965-1654
Attention: William
M. Means
UGPE
Partners, Inc.
Two
Greenwich Office Park
Greenwich,
CT 06831
Telephone: (203)
422-0650
Facsimile: (203)
422-0659
Attention: Stan
Lau
with a
copy to:
Blank
Rome LLP
405
Lexington Avenue
New York,
NY 10174
Telephone: (212)
885-5435
Facsimile: (212)
885-5001
Attention: Peter
Schnur, Esq.
and
Updike,
Kelly & Spellacy, P.C.
One State
Street
Hartford,
CT 06103
Telephone:
(860) 548-2651
Attention: David
E. Sturgess, Esq.
72
|
|
(c)
|
if
to the Parent or the Purchaser:
|
NN
Acquisition, LLC
c/o
Lincoln Educational Services Corporation
200
Executive Drive
West
Orange, NJ 07052
Telephone: (973)
736-9340
Facsimile: (973)
243-0841
Attention: David
F. Carney, Chairman and Chief Executive Officer
with a
copy to:
Shearman
& Sterling LLP
599
Lexington Avenue
New York,
NY 10022-6069
Telephone: (212)
848-4000
Facsimile: (646)
848-8966
Attention: Eliza
W. Swann, Esq.
Section 9.03 Public
Announcements. No
party hereto shall make, or cause to be made, any press release or public
announcement in respect of this Agreement or the transactions contemplated by
this Agreement or otherwise communicate with any news media without the prior
written consent of the other parties, and the parties shall cooperate as to the
timing and contents of any such press release or public
announcement.
Section
9.04 Severability. If
any term or other provision of this Agreement is invalid, illegal or incapable
of being enforced by any Law or public policy, all other terms and provisions of
this Agreement shall nevertheless remain in full force and effect for so long as
the economic or legal substance of the transactions contemplated by this
Agreement is not affected in any manner materially adverse to any
party. In addition, if any one or more of the provisions contained in
this Agreement is for any reason held to be excessively broad as to duration,
geographical scope, activity or subject, it is to be construed by limiting and
reducing it, so as to be enforceable to the extent compatible with the
applicable Law as it then appears. Upon such determination that any
term or other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible in an
acceptable manner in order that the transactions contemplated by this Agreement
are consummated as originally contemplated to the greatest extent
possible.
Section 9.05 Entire
Agreement. This
Agreement, the Ancillary Agreements and the Non-Disclosure Agreement constitute
the entire agreement of the parties hereto with respect to the subject matter
hereof and thereof and supersede all prior agreements and undertakings, both
written and oral, between the Sellers on the one hand, and the Parent and the
Purchaser, on the other hand, with respect to the subject matter hereof and
thereof.
73
Section
9.06 Assignment. This
Agreement may not be assigned by any party hereto by operation of law or
otherwise without the express written consent of the other parties hereto (which
consent may be granted or withheld in the sole discretion of such parties);
provided, that
the Purchaser may assign this Agreement or any of its rights and obligations
hereunder to one or more Affiliates of the Purchaser without the consent of the
Sellers.
Section 9.07 No Third Party
Beneficiaries. This
Agreement shall be binding upon and inure solely to the benefit of the parties
hereto and their permitted assigns and nothing herein, express or implied, is
intended to or shall confer upon any other Person, including any union or any
employee or former or retired employee of any Seller or spouse or dependents of
such Persons, any legal or equitable right, benefit or remedy of any nature
whatsoever, including any rights of employment for any specified period, under
or by reason of this Agreement.
Section
9.08 Governing
Law. This
Agreement shall be governed by, and construed in accordance with, the laws of
the State of New York applicable to contracts executed in and to be performed
entirely within that State. All Actions arising out of or relating to
this Agreement shall be heard and determined exclusively in any New York state
or federal court. The parties hereto hereby (a) submit to the
exclusive jurisdiction of any state or federal court sitting in the State of New
York for the purpose of any Action arising out of or relating to this Agreement
brought by any party hereto, and (b) irrevocably waive, and agree not to
assert by way of motion, defense, or otherwise, in any such Action, any claim
that it is not subject personally to the jurisdiction of the above-named courts,
that its property is exempt or immune from attachment or execution, that the
Action is brought in an inconvenient forum, that the venue of the Action is
improper, or that this Agreement or the transactions contemplated by this
Agreement may not be enforced in or by any of the above-named
courts.
Section 9.09 Waiver of Jury
Trial. Each
of the parties hereto hereby waives to the fullest extent permitted by
applicable Law any right it may have to a trial by jury with respect to any
litigation directly or indirectly arising out of, under or in connection with
this Agreement or the transactions contemplated by this
Agreement. Each of the parties hereto (a) certifies that no
representative, agent or attorney of any other party has represented, expressly
or otherwise, that such other party would not, in the event of litigation, seek
to enforce that foregoing waiver and (b) acknowledges that neither it nor
the other parties hereto has been induced to enter into this Agreement and the
transactions contemplated by this Agreement, as applicable, by, among other
things, the mutual waivers and certifications in this Section
9.09.
Section 9.10 Specific
Performance. Each
party hereto agrees and acknowledges that remedies at law for any breach of its
or his obligations under this Agreement are inadequate and will cause
irreparable harm and that in addition thereto, the non-breaching parties shall
be entitled to seek equitable relief, including injunction and specific
performance, to prevent or cure the violation of any party’s obligations
hereunder.
Section
9.11 Headings. The
descriptive headings contained in this Agreement are included for convenience of
reference only and shall not affect in any way the meaning or interpretation of
this Agreement.
74
Section
9.12 Counterparts. This
Agreement may be executed and delivered (including by facsimile transmission) in
two or more counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an original, but
all of which taken together shall constitute one and the same
agreement.
Section 9.13 Exhibits and Disclosure
Schedule. The
Exhibits to this Agreement and the Disclosure Schedule are a part of this
Agreement as if set forth in full herein.
75
IN
WITNESS WHEREOF, the Parent, the Purchaser and the Sellers and the have caused
this Agreement to be executed by their respective officers thereunto duly
authorized, as of the date first written above.
|
LINCOLN
TECHNICAL INSTITUTE, INC.
|
|||
|
By:
|
/s/ David F. Carney | ||
|
Name:
David F. Carney
|
|||
|
Title:
CEO
|
|||
|
NN
ACQUISITION, LLC
|
|||
|
By:
|
/s/ David F. Carney | ||
|
Name:
David F. Carney
|
|||
|
Title:
CEO
|
|||
|
BRAD
BARAN
|
|||
| /s/ Brad Baran | |||
|
BARBARA
BARAN
|
|||
| /s/ Barbara Baran | |||
|
UGP
EDUCATION PARTNERS, LLC
|
|||
|
By:
|
/s/ George V. Cinquegrana | ||
|
Name:
George V. Cinquegrana
|
|||
|
Title:
Partner
|
|||
|
MERION
INVESTMENT PARTNERS, L.P.
|
|||
|
By: MERION
FINANCIAL PARTNERS, L.P.,
|
|||
| Its General Partner | |||
|
By: MERION
FUND MANAGEMENT, LLC
|
|||
| Its General Partner | |||
|
By:
|
/s/ William M. Means | ||
|
Name:
William M. Means
|
|||
|
Title:
Managing Partner
|
|||
|
UGPE
PARTNERS, INC.
|
|||
|
By:
|
/s/ George V. Cinquegrana | ||
|
Name:
George V. Cinquegrana
|
|||
|
Title:
Partner
|
|||
76
EXHIBIT
10.22
STOCK
PURCHASE AGREEMENT
among
LINCOLN
TECHNICAL INSTITUTE, INC.,
NN
ACQUISITION, LLC,
BRAD
BARAN,
UGP
EDUCATION PARTNERS, LLC,
MERION
INVESTMENT PARTNERS, L.P.
and, for
certain limited purposes only,
UGPE
PARTNERS, INC.
Dated as
of January 20, 2009
Page
|
ARTICLE
I
|
DEFINITIONS
|
|
|
|
||
|
Section
1.01
|
Certain
Defined Terms
|
1
|
|
Section
1.02
|
Definitions
|
11
|
|
Section
1.03
|
Interpretation
and Rules of Construction
|
12
|
|
ARTICLE
II
|
PURCHASE
AND SALE
|
|
|
Section
2.01
|
Purchase
and Sale of the Shares
|
13
|
|
Section
2.02
|
Purchase
Price
|
13
|
|
Section
2.03
|
Closing
|
13
|
|
Section
2.04
|
Deliveries
by the Sellers
|
13
|
|
Section
2.05
|
Deliveries
by the Purchaser
|
14
|
|
Section
2.06
|
Adjustment
of Purchase Price
|
15
|
|
Section
2.07
|
Escrow
|
17
|
|
Section
2.08
|
Withholding
|
17
|
|
ARTICLE
III
|
REPRESENTATIONS
AND WARRANTIES OF THE SELLERS AND UGPE
|
|
|
Section
3.01
|
Organization,
Authority and Qualification
|
17
|
|
Section
3.02
|
Subsidiaries
|
20
|
|
Section
3.03
|
Capitalization
|
20
|
|
Section
3.04
|
No
Conflict
|
21
|
|
Section
3.05
|
Governmental
Consents and Approvals
|
21
|
|
Section
3.06
|
Financial
Information; Books and Records; No Undisclosed Liabilities
|
22
|
|
Section
3.07
|
Receivables
|
23
|
|
Section
3.08
|
Conduct
in the Ordinary Course; Absence of Certain Changes, Events and
Conditions
|
23
|
|
Section
3.09
|
Litigation
|
26
|
|
Section
3.10
|
Compliance
with Laws
|
26
|
|
Section
3.11
|
Environmental
and Other Permits and Licenses; Related Matters
|
26
|
|
Section
3.12
|
No
Preferential Rights
|
28
|
|
Section
3.13
|
Material
Contracts
|
28
|
|
Section
3.14
|
Intellectual
Property
|
30
|
|
Section
3.15
|
Real
Property
|
31
|
|
Section
3.16
|
Tangible
Personal Property
|
33
|
|
Section
3.17
|
Employee
Benefit Matters
|
33
|
|
Section
3.18
|
Labor
Matters
|
35
|
|
Section
3.19
|
Assets
|
36
|
|
Section
3.20
|
Student
Lists
|
36
|
|
Section
3.21
|
Student
Financial Records
|
37
|
|
Section
3.22
|
Certain
Interests
|
37
|
|
Section
3.23
|
Taxes
|
37
|
|
Section
3.24
|
Insurance
|
38
|
|
Section
3.25
|
Educational
Approvals
|
39
|
|
Section
3.26
|
Compliance
with Educational Laws
|
39
|
|
Section
3.27
|
Employees
|
47
|
|
Section
3.28
|
Certain
Business Practices
|
47
|
|
Section
3.29
|
Brokers
|
48
|
|
Section
3.30
|
No
Other Representations
|
48
|
|
|
||
|
ARTICLE
IV
|
REPRESENTATIONS
AND WARRANTIES OF PARENT AND THE PURCHASER
|
|
|
Section
4.01
|
Organization,
Authorization and Qualification of the Parent and the
Purchaser
|
48
|
|
Section
4.02
|
No
Conflict
|
49
|
|
Section
4.03
|
Governmental
Consents and Approvals
|
50
|
|
Section
4.04
|
Litigation
|
50
|
|
Section
4.05
|
Financing
|
50
|
|
Section
4.06
|
Brokers
|
50
|
|
Section
4.07
|
No
Other Representations
|
50
|
|
ARTICLE
V
|
ADDITIONAL
AGREEMENTS
|
|
|
Section
5.01
|
Conduct
of Business Prior to the Closing
|
50
|
|
Section
5.02
|
Access
to Information
|
51
|
|
Section
5.03
|
Regulatory
and Other Authorizations; Notices and Consents
|
52
|
|
Section
5.04
|
Notice
of Developments
|
53
|
|
Section
5.05
|
No
Solicitation or Negotiation
|
54
|
|
Section
5.06
|
Use
of Intellectual Property
|
54
|
|
Section
5.07
|
Intercompany
Arrangements
|
54
|
|
Section
5.08
|
Payments
on Behalf of Affiliates
|
54
|
|
Section
5.09
|
Employees
|
55
|
|
Section
5.10
|
Non-Competition
|
55
|
|
Section
5.11
|
Payment
Obligations
|
55
|
|
Section
5.12
|
Reimbursement
of Restricted Cash
|
55
|
|
Section
5.13
|
Preferred
Stock
|
56
|
|
Section
5.14
|
UGPE
Guarantee
|
56
|
|
Section
5.15
|
December
31, 2008 Financials
|
56
|
|
Section
5.16
|
Further
Action
|
56
|
|
ARTICLE
VI
|
TAX
MATTERS
|
|
|
Section
6.01
|
Indemnity
|
56
|
|
Section
6.02
|
Returns
and Payments
|
57
|
|
Section
6.03
|
Refunds
|
58
|
|
Section
6.04
|
Contests
|
58
|
|
Section
6.05
|
Time
of Payment
|
59
|
|
Section
6.06
|
Tax
Cooperation and Exchange of Information
|
59
|
|
Section
6.07
|
Conveyance
Taxes
|
60
|
|
Section
6.08
|
Amended
Tax Returns
|
60
|
|
Section
6.09
|
Tax
Covenants
|
61
|
|
Section
6.10
|
Miscellaneous
|
61
|
ii
|
ARTICLE
VII
|
CONDITIONS
TO CLOSING
|
|
|
|
||
|
Section
7.01
|
Conditions
to Obligations of the Sellers
|
62
|
|
Section
7.02
|
Conditions
to Obligations of the Parent and the Purchaser
|
62
|
|
ARTICLE
VIII
|
INDEMNIFICATION
|
|
|
Section
8.01
|
Survival
of Representations and Warranties
|
63
|
|
Section
8.02
|
Indemnification
by the Sellers
|
64
|
|
Section
8.03
|
Indemnification
by the Parent and the Purchaser
|
65
|
|
Section
8.04
|
Limits
on Indemnification
|
65
|
|
Section
8.05
|
Indemnification
Procedures
|
66
|
|
Section
8.06
|
Distributions
from Escrow Account
|
67
|
|
Section
8.07
|
Sellers’
Representative
|
67
|
|
ARTICLE
IX
|
TERMINATION,
AMENDMENT AND WAIVER
|
|
|
Section
9.01
|
Termination
|
69
|
|
Section
9.02
|
Effect
of Termination
|
70
|
|
Section
9.03
|
Amendment
|
70
|
|
Section
9.04
|
Waiver
|
70
|
|
ARTICLE
X
|
GENERAL
PROVISIONS
|
|
|
Section
10.01
|
Expenses
|
70
|
|
Section
10.02
|
Notices
|
70
|
|
Section
10.03
|
Public
Announcements
|
72
|
|
Section
10.04
|
Severability
|
72
|
|
Section
10.05
|
Entire
Agreement
|
72
|
|
Section
10.06
|
Assignment
|
73
|
|
Section
10.07
|
No
Third Party Beneficiaries
|
73
|
|
Section
10.08
|
Governing
Law
|
73
|
|
Section
10.09
|
Waiver
of Jury Trial
|
73
|
|
Section
10.10
|
Specific
Performance
|
73
|
|
Section
10.11
|
Headings
|
73
|
|
Section
10.12
|
Counterparts
|
74
|
|
Section
10.13
|
Exhibits
and Disclosure Schedule
|
74
|
Exhibits
Exhibit A
– Form of Assignment of Lease
Exhibit B
– Form of General Release
iii
STOCK
PURCHASE AGREEMENT (this “Agreement”), dated as
of January 20, 2009, among LINCOLN TECHNICAL INSTITUTE, INC., a New Jersey
corporation (the “Parent”), NN
ACQUISITION, LLC, a Delaware limited liability company and wholly owned
subsidiary of the Parent (the “Purchaser”), BRAD
BARAN (“Baran”)
UGP EDUCATION PARTNERS, LLC, a Delaware limited liability company (“UGP”), MERION
INVESTMENT PARTNERS, L.P., a Delaware limited partnership (“Merion”; each of
Baran, UGP and Merion, a “Seller” and
collectively, the “Sellers”), and, for
certain limited purposes only, UGPE PARTNERS, INC., a Delaware corporation
(“UGPE”).
WHEREAS,
the Sellers own 100% of the issued and outstanding shares (the “Shares”) of common
stock, $0.01 par value per share (the “Clemens Common
Stock”), of Hospitality Acquisition Corporation (dba Clemens College), a
Connecticut corporation (the “Company”);
WHEREAS,
the Company owns and operates a post-secondary educational institution in
Connecticut with one campus located in Suffield, Connecticut (the “Institution”), that
is engaged in the business of providing educational services with respect to,
among other things, hospitality management and culinary arts management (the
“Business”);
WHEREAS,
the Sellers wish to sell to the Purchaser, and the Purchaser wishes to purchase
from the Sellers, the Shares, upon the terms and subject to the conditions set
forth herein (the “Acquisition”);
WHEREAS,
the Sellers, UGPE Partners, Inc., Barbara Baran, the Parent and the Purchaser
are simultaneously with the execution of this Agreement entering into a Stock
Purchase Agreement (the “BIT Agreement”) for
the purchase of all of the outstanding limited liability company interests of
Hartford Urban Ventures, LLC, a Connecticut limited liability company (“HUV”), and all of the
outstanding stock of Baran Institute of Technology, Inc., a Connecticut
corporation (“BIT”; and together
with the Company and HUV, the “Companies”), as well
as its subsidiaries, Connecticut Culinary Institute, Inc., a Connecticut
corporation (“CCI”), Americare
Acquisition LLC, a Delaware limited liability company (“Americare”), and
Engine City Technical Institute, a New Jersey corporation (“Engine City”; and
together with CCI and Americare, the “Subsidiaries”);
and
WHEREAS,
for certain limited purposes only, UGPE has agreed to be a party to this
Agreement.
NOW,
THEREFORE, in consideration of the premises and the mutual agreements and
covenants hereinafter set forth, the parties hereby agree as
follows:
ARTICLE
I
DEFINITIONS
Section 1.01
Certain Defined
Terms. For
purposes of this Agreement:
“ABHES” means the
Accrediting Bureau of Health Education Schools.
“Accounting
Principles” means the guidelines, rules and procedures described on Section 1.01(a) of the
Disclosure Schedule.
“Accrediting Body”
means any entity or organization, whether governmental, private or
quasi-private, whether foreign or domestic, which engages in the granting or
withholding of accreditation of post-secondary institutions in accordance with
standards and requirements relating to the performance, operations, financial
condition, and/or academic standards of such institutions, including the ACCSCT,
the ABHES and the CIHE.
“ACCSCT” means the
Accrediting Commission of Career Schools and Colleges of
Technology.
“Acquisition
Documents” means this Agreement, the Ancillary Agreements and any
certificate, report or other document delivered pursuant to this Agreement or
the transactions contemplated by this Agreement.
“Action” means any
Claim, action, suit, arbitration, proceeding or investigation by or before any
Governmental Authority or Educational Agency.
“Affiliate” means,
with respect to any specified Person, any other Person that directly, or
indirectly through one or more intermediaries, controls, is controlled by, or is
under common control with, such specified Person.
“Ancillary Agreements”
means the Escrow Agreement, the General Release and the Assignments of
Lease.
“Assets” means the
assets and properties of the Company.
“Assignments of
Lease” means the Assignment of Lease, in the form attached hereto as
Exhibit A, with
respect to each property set forth in Section 1.01(b) of the
Disclosure Schedule and entered into by the Purchaser and the
entity/entities listed opposite each such property on Section 1.01(b) of the
Disclosure Schedule.
“Business Day” means
any day that is not a Saturday, a Sunday or other day on which banks are
required or authorized by Law to be closed in New York, New York.
“CERCLA” means the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended.
“CERCLIS” means the
Comprehensive Environmental Response, Compensation and Liability Information
System, as updated through the Closing.
“CIHE” means the
Commission on Institutions of Higher Education of the New England Association of
Schools and Colleges.
“Claims” means any and
all administrative, regulatory or judicial actions, suits, demands, demand
letters, claims, liens, notices of noncompliance or violation, investigations,
proceedings, consent orders or consent agreements, but excluding Educational
Claims.
2
“Closing Balance
Sheet” means the balance sheet (including the related notes and schedules
thereto), dated as of the Closing Date, prepared and delivered by the Purchaser
in accordance with Section 2.06 and
setting forth the Net Working Capital with respect to the Company.
“Code” means the
Internal Revenue Code of 1986, as amended.
“Company IP Licenses”
means those (a) licenses of Intellectual Property by the Company or an Affiliate
of the Company to third parties, (b) licenses of Intellectual Property by third
parties to the Company or an Affiliate of the Company and (c) agreements between
the Company and third parties relating to the development or use of Intellectual
Property, the development or transmission of data, or the use, modification,
framing, linking advertisement, or other practices with respect to Internet web
sites, in each case, that are used or held for use in connection with the
Business.
“Compliance Date”
means January 1, 2005.
“control” (including
the terms “controlled
by” and “under
common control with”), with respect to the relationship between or among
two or more Persons, means the possession, directly or indirectly or as trustee,
personal representative or executor, of the power to direct or cause the
direction of the affairs or management of a Person, whether through the
ownership of voting securities, as trustee, personal representative or executor,
by contract, credit arrangement or otherwise.
“Conveyance Taxes”
means all sales, use, value-added, transfer, stamp, stock transfer, real
property transfer or gains and similar Taxes and any transfer, recording,
registration and similar fees.
“Current Assets” means
cash, accounts receivable, inventories, prepaid expenses and other assets that
could be converted to cash in less than one year, in accordance with GAAP and
GAGAS.
“Current Liabilities”
means amounts owed for accounts payable, notes payable, line of credit, capital
lease obligations, unearned tuition, student deposits, deferred meal plan,
deferred housing costs, deferred promotional income, accrued expenses, deferred
tax liability and income tax payable and other liabilities that are due within
one year, in accordance with GAAP and GAGAS.
“Disclosure Schedule”
means the Disclosure Schedule, dated as of the date hereof, delivered by the
Sellers to the Purchaser in connection with this Agreement.
“ECAR” means
Eligibility and Certification Approval Report(s) issued to the
Institution.
“Educational Agency”
means any Person, entity or organization, whether governmental, government
chartered, private, or quasi-private, that engages in granting or withholding
Educational Approvals for, administers financial assistance to or for students
of, or otherwise regulates, private post-secondary schools in accordance with
standards relating to performance, recruiting, operation, financial condition or
academic standards of such schools, including U.S. DOE, any Accrediting Body,
the State of Connecticut Board of Governors for Higher Education, the
Immigration and Naturalization Service of the United States Department of
Justice and the Department of Homeland Security.
3
“Educational Approval”
means any license, permit, consent, franchise, approval, authorization,
certificate, U.S. DOE Approval or accreditation issued or required to be issued
by an Educational Agency to the Institution or to any campus or other facility
operated by the Institution with respect to any aspect of the Institution’s
operations subject to the oversight of such Educational Agency.
“Educational Claims”
means any and all administrative, regulatory or judicial actions, suits,
demands, demand letters, claims, liens, notices of noncompliance or violation,
investigations, program reviews, audits, proceedings, consent orders or consent
agreements arising out of the operation of the Institution or the application
thereto of any Educational Law or with respect to any Educational Approval
required to be held by the Institution under any Educational Law.
“Educational Law”
means any Law, regulation or binding standard issued or administered by, or
related to, any Educational Agency.
“Encumbrance” means
any security interest, pledge, hypothecation, mortgage, lien (including
environmental and Tax liens), violation, charge, lease, license, encumbrance,
servient easement, adverse claim, reversion, reverter, preferential arrangement
or restrictive covenant, condition or restriction of any kind, including any
restriction on the use, voting, transfer, receipt of income or other exercise of
any attributes of ownership.
“Environment” means
surface waters, groundwaters, sediment, soil, subsurface strata and outdoor or
indoor ambient air.
“Environmental Claims”
means any Claims relating to any Environmental Law or any Environmental Permit,
including (a) any and all Claims by Governmental Authorities for
enforcement, cleanup, removal, response, remedial or other actions or damages
pursuant to any applicable Environmental Law and (b) any and all Claims by
any Person seeking damages, contribution, indemnification, cost recovery,
compensation or injunctive relief resulting from Hazardous Materials or arising
from alleged injury or threat of injury to health, safety or the
Environment.
“Environmental Laws”
means all Laws and any judicial or administrative interpretation thereof,
including any judicial or administrative order, consent decree or judgment,
relating to the Environment, health, safety, natural resources or Hazardous
Materials, including CERCLA; the Resource Conservation and Recovery Act,
42 U.S.C. § 6901 et seq.; the Hazardous
Materials Transportation Act, 49 U.S.C. § 5101 et seq.; the Clean Water
Act, 33 U.S.C. § 1251 et seq.; the Toxic
Substances Control Act, 15 U.S.C. § 2601 et seq.; the Clean Air
Act, 42 U.S.C. § 7401 et seq.; the Safe
Drinking Water Act, 42 U.S.C. § 300f et seq.; the Atomic
Energy Act, 42 U.S.C. § 2011 et seq.; the Federal
Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. § 136 et seq.; and the Federal
Food, Drug and Cosmetic Act, 21 U.S.C. § 301 et
seq.
4
“Environmental
Permits” means all permits, approvals, identification numbers, licenses
and other authorizations required under or issued pursuant to any applicable
Environmental Law.
“Escrow Account” means
the account established, designated and maintained by the Escrow Agent pursuant
to the terms of the Escrow Agreement.
“Escrow Agent” means
JPMorgan Chase Bank, National Association.
“Escrow Agreement”
means the Escrow Agreement executed by the Purchaser, the Seller’s
Representative and the Escrow Agent.
“Escrow Amount” means
$2,000,000.
“Estimated Closing Balance
Sheet” means the balance sheet (including the related notes and schedules
thereto) for the Company dated as of the Closing Date and prepared and delivered
pursuant to Section
2.06(a).
“Exchange Act” means
the Securities Exchange Act of 1934, as amended.
“Excluded Taxes” means
(a) all Income Taxes owed by the Sellers or any of their Affiliates for any
period; (b) all Taxes relating to the Assets or the Company or the
Institution for any Pre-Closing Period, including the portion of a Straddle
Period ending on the Closing Date; (c) Taxes imposed on the Purchaser or
any of its Affiliates or any of the Companies or Subsidiaries as a result of any
breach by the Sellers or any of their present or past Affiliates of a warranty
or misrepresentation, or breach of any covenant relating to Taxes; (d) all Taxes
for which the Purchaser, its Affiliates or the Company is liable by reason of
the Sellers, the Company being a member of a consolidated, combined, unitary,
affiliated or similar group that includes any Person prior to the Closing, by
reason of a Tax sharing, Tax indemnity or similar agreement entered into by the
Company or any of its present or past Affiliates prior to the Closing (other
than this Agreement) or by reason of transferee or successor Liability arising
in respect of a transaction undertaken by the Company or any of its present or
past Affiliates prior to the Closing; and (e) fifty percent (50%) of all
Conveyance Taxes payable in connection with the transactions contemplated by
this Agreement.
“GAAP” means United
States generally accepted accounting principles and practices in effect from
time to time applied consistently throughout the periods involved.
“GAGAS” means
generally accepted government auditing standards.
“General Release”
means the General Release and Discharge, in the form attached hereto as Exhibit B, to be
executed by the Sellers at the Closing.
5
“Governmental
Authority” means any United States federal, state, local, or similar
government, governmental, regulatory or administrative authority, agency or
commission or any court, tribunal, or judicial or arbitral body, but excluding
any Educational Agency.
“Governmental Order”
means any order, writ, judgment, injunction, decree, stipulation, determination
or award entered by or with any Governmental Authority.
“Hazardous Materials”
means (a) petroleum and petroleum products, radioactive materials,
asbestos-containing materials, mold, urea formaldehyde foam insulation,
transformers or other equipment that contain polychlorinated biphenyls and radon
gas; (b) any other chemicals, materials or substances defined as or
included in the definition of “hazardous substances,” “hazardous wastes,”
“hazardous materials,” “extremely hazardous wastes,” “restricted hazardous
wastes,” “toxic substances,” “toxic pollutants,” “contaminants” or “pollutants,”
or words of similar import, under any applicable Environmental Law; and
(c) any other chemical, material or substance which is regulated by, or
with respect to which liability may be imposed under, any Environmental
Law.
“HEA” means the Higher
Education Act of 1965, as amended, 20 U.S.C. § 1001 et seq., any amendments or
successor statutes thereto, and its implementing regulations.
“Income Taxes” means
Taxes imposed on or measured by reference to gross or net income or receipts,
and franchise, net worth, capital or other doing business Taxes.
“Indebtedness” means,
with respect to any Person, (a) all indebtedness of such Person, whether or
not contingent, for borrowed money; (b) all obligations of such Person for
the deferred purchase price of property or services; (c) all indebtedness
created or arising under any conditional sale or other title retention agreement
with respect to property acquired by such Person (even though the rights and
remedies of the seller or lender under such agreement in the event of default
are limited to repossession or sale of such property); (d) all obligations
of such Person as lessee under leases that have been or should be, in accordance
with GAAP, recorded as capital leases; (e) all obligations, contingent or
otherwise, of such Person under acceptance, Letter of Credit or similar
facilities; (f) all obligations of such Person to purchase, redeem, retire,
defease or otherwise acquire for value any capital stock of such Person or any
warrants, rights or options to acquire such capital stock, valued, in the case
of redeemable preferred stock, at the greater of its voluntary or involuntary
liquidation preference plus accrued and unpaid dividends; (g) all
Indebtedness of others referred to in clauses (a) through (f) above
guaranteed directly or indirectly in any manner by such Person; and (h) all
Indebtedness referred to in clauses (a) through (f) above secured by
(or for which the holder of such Indebtedness has an existing right, contingent
or otherwise, to be secured by) any Encumbrance on property (including accounts
and contract rights) owned by such Person, even though such Person has not
assumed or become liable for the payment of such Indebtedness. For
the avoidance of doubt, “Indebtedness” shall not include any intercompany
indebtedness among the Companies, the Subsidiaries and/or the
Institutions.
“Indemnified Party”
means a Purchaser Indemnified Party or a Seller Indemnified Party, as the case
may be.
6
“Indemnifying Party”
means the Sellers or the Indemnifying Purchasers, as the case may
be.
“Indemnifying
Purchasers” means the Purchaser and the Parent.
“Institutions” means,
collectively, (i) the Institution, (ii) the post-secondary educational
institution in Connecticut with one campus located in East Windsor, Connecticut
owned and operated by BIT, (iii) Americare School of Nursing, a post-secondary
educational institution in Florida with two campuses located in Fern Park,
Florida and St. Petersburg, Florida owned and operated by Americare and (iv) the
post-secondary educational institution in New Jersey with one campus located in
South Plainfield, New Jersey owned and operated by Engine City, including, in
each case, any campus or other facility at which any such institution offers any
portion of an educational program.
“Intellectual
Property” means: (a) patents and patent applications; (b)
trademarks, service marks, domain names, trade dress, logos, trade names,
corporate names and slogans, together with the goodwill associated therewith;
(c) copyrights; (d) Software, data, databases, data rights and Internet
websites; (e) confidential and proprietary information, including trade secrets
and know-how; (f) advertising and promotional rights and rights to privacy and
publicity; (g) registrations and applications for registration of the foregoing,
including reissues, divisions, continuations, continuations-in-part, extensions,
renewals and reexaminations thereof; (h) all common law rights thereto; and (i)
proprietary rights in curricula, course design and educational
services.
“Inventory” means all
inventory, merchandise, goods and other personal property maintained, held or
stored by or for the Company at the Closing, and any prepaid deposits for any of
the same.
“IRS” means the
Internal Revenue Service of the United States.
“Knowledge of the
Sellers” means the actual knowledge, after due inquiry, of Baran, Barbara
Baran, Stephen Schwartz, John Milne, Robert Miner, George Cinquegrana, Stan Lau
and Randy Rock.
“Law” means any United
States federal, state, local or similar statute, law, ordinance, regulation,
rule, code, order, or Accrediting Body standard, including any Educational
Law.
“Leased Real Property”
means the real property leased by the Company, as tenant, together with, to the
extent leased by the Company, all buildings and other structures, facilities or
improvements currently or hereafter located thereon, all fixtures, systems,
equipment and items of personal property of the Company attached or appurtenant
thereto and all easements, licenses, rights and appurtenances relating to the
foregoing.
“Letter of Credit”
means any instruments or documents issued by a bank guaranteeing the payment of
a customer’s drafts up to a stated amount for a specified
period.
7
“Liabilities” means
any and all debts, liabilities and obligations, whether accrued or fixed,
absolute or contingent, asserted or unasserted, matured or unmatured or
determined or determinable, including those arising under any Law (including any
Environmental Law or Educational Law), Action or Governmental Order and those
arising under any contract, agreement, arrangement, commitment or
undertaking.
“Licensed Intellectual
Property” means Intellectual Property licensed to the Company, an
Affiliate of the Company, or the Institution and used or held for use in
connection with the Business.
“Material Adverse
Effect” means any circumstance, change in or effect on the Business, the
Institution, or the Company that, individually or in the aggregate with all
other circumstances, changes in or effects on the Business, the Institution, or
the Company, is or is reasonably likely to be materially adverse to the
business, operations, assets, liabilities, results of operations or the
condition (financial or otherwise) of the Institution or the Company; provided, however, that in no
event shall any of the following be deemed to constitute a Material Adverse
Effect: (a) circumstances, changes or effects resulting from (i) the
announcement of the execution of this Agreement or compliance with the terms of,
or the taking of any action required by, this Agreement other than (A) pursuant
to any requirement to operate in the ordinary course of business consistent with
past practice or to make the representations and warranties of the Sellers
accurate or (B) the consummation of the transactions contemplated hereby, (ii)
acts of war, sabotage, terrorism, military actions or the escalation thereof,
(iii) a change in applicable Laws, regulations or accounting rules after the
date hereof, (iv) a change in general economic, political or financial market
conditions, (v) a change in conditions generally applicable to the industry in
which the Institution or Company operates except, in the case of the foregoing
clauses (ii), (iii), (iv) and (v) where such circumstances, changes or effects
affect the Institution or the Company in a manner materially disproportionate to
other Persons in the industries in which the Institution and the Company
conducts their business or (b) circumstances, changes or effects that do not or
would not reasonably be expected to result in aggregate Losses to the Company or
the Institution of less than One Million Dollars ($1,000,000).
“Net Working Capital”
means the excess of Current Assets over Current Liabilities for the Company, in
accordance with GAAP and GAGAS, as shown on the Estimated Closing Balance Sheet
or the Closing Balance Sheet, as the case may be.
“Owned Intellectual
Property” means Intellectual Property owned by the Company, an Affiliate
of the Company, or the Institution and used or held for use in connection with
the Business.
“Owned Real Property”
means the real property owned by the Company, together with all buildings and
other structures, facilities or improvements currently or hereafter located
thereon, all fixtures, systems, equipment and items of personal property of the
Company attached or appurtenant thereto and all easements, licenses, rights and
appurtenances relating to the foregoing.
8
“Permitted
Encumbrances” means such of the following as to which no enforcement,
collection, execution, levy or foreclosure proceeding shall have been commenced
and as to which the Company is otherwise subject to civil or criminal liability
due to its existence: (a) (i) liens for Taxes, assessments and
governmental charges or levies not yet due and payable or (ii) Taxes for which
the Company is contesting in good faith, and for which in the case of (i) and
(ii) adequate reserves have been maintained in accordance with GAAP;
(b) Encumbrances imposed by Law, such as materialmen’s, mechanics’,
carriers’, workmen’s and repairmen’s liens and other similar liens arising in
the ordinary course of business securing obligations that (i) are not
overdue for a period of more than 30 days and (ii) are not in excess
of $5,000 in the
case of a single property or $10,000 in the aggregate at any time;
(c) pledges or deposits to secure obligations under workers’ compensation
laws or similar legislation or to secure public or statutory obligations;
(d) zoning laws and ordinances, minor survey exceptions, reciprocal
easement agreements and other customary encumbrances on or defects in title to
real or personal property that (i) were not incurred in connection with any
Indebtedness, (ii) do not render title to the property encumbered thereby
unmarketable and (iii) do not, individually or in the aggregate, materially
adversely affect the value of or the use of such property for its current and
anticipated purposes; and (e) liens securing rental payments under capital lease
arrangements.
“Person” means any
individual, partnership, firm, corporation, limited liability company,
association, trust, unincorporated organization or other entity, as well as any
syndicate or group that would be deemed to be a person under
Section 13(d)(3) of the Exchange Act.
“Pre-Closing Period”
means any taxable period (or portion of a taxable period) ending on or prior to
the Closing Date.
“Preferred Stock”
means issued and outstanding shares of Series A Preferred Stock of the Company
and Series B Convertible Preferred Stock of the Company to be redeemed
immediately prior to the Closing.
“Purchase Price Bank
Accounts” means the bank accounts in the United States to be designated
by the Sellers in a written notice to the Purchaser at least one Business
Day before the Closing.
“Purchaser’s
Accountants” means Deloitte & Touche LLP, independent accountants of
the Purchaser.
“Real Property” means
the Leased Real Property and the Owned Real Property.
“Receivables” means
any and all accounts receivable (including Student Accounts Receivable), notes
and other amounts receivable from third parties, including customers and
employees, arising from the conduct of the Business before the Closing Date,
whether or not in the ordinary course, together with any unpaid financing
charges accrued thereon.
“Release” means
disposing, discharging, injecting, spilling, leaking, leaching, dumping,
emitting, escaping, emptying, seeping, placing and the like into or upon any
land or water or air or otherwise entering into the
Environment.
9
“Remedial Action”
means “remove”, “removal”, “remedy” or “remedial action” as those terms are
defined in Section 101(23) and (24) of the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. Section 9601.
“SEC” means the
Securities and Exchange Commission.
“Securities Act” means
the Securities Act of 1933, as amended.
“Sellers’ Accountants”
means Knutte & Associates, P.C.
“Software” means all
(i) computer programs, applications, systems and code, including software
implementations of algorithms, models and methodologies, and source code and
object code, (ii) Internet and intranet websites, databases and
compilations, including data and collections of data, whether machine-readable
or otherwise, (iii) development and design tools, library functions and
compilers, (iv) technology supporting websites, and the contents and
audiovisual displays of websites, and (v) documentation, other works of
authorship and media, including user manuals and training materials, relating to
or embodying any of the foregoing or on which any of the foregoing is
recorded.
“Straddle Period”
means any taxable period beginning on or prior to and ending after the Closing
Date.
“Student Accounts
Receivable” means the Company’s accounts receivable for student tuition,
fees and institutional charges (including U.S. DOE accounts receivable) with
respect to students currently attending the Institution as of the Closing Date,
as determined in accordance with GAAP applied on a basis consistent with the
past practices of the Company.
“Target Working
Capital” means $185,683.
“Tax” or “Taxes” means any and
all taxes and other fees, levies, duties, tariffs, imposts and other charges
that are in the nature of taxes (together with any and all interest, penalties,
additions to tax and additional amounts imposed with respect thereto) imposed by
any Governmental Authority or taxing authority, including: taxes or
other charges on or with respect to income, franchises, windfall or other
profits, gross receipts, property, sales, use, capital stock, payroll,
employment, social security, workers’ compensation, unemployment compensation,
or net worth; taxes or other charges in the nature of excise, withholding, ad
valorem, stamp, transfer, value-added, or gains taxes.
“Tax Returns” means
all returns, computations, reports and statements required to be filed with any
Governmental Authority with respect to Taxes.
“Title IV” means Title
IV of the HEA and all definitional and other provisions set forth elsewhere in
the HEA that are referenced in Title IV or that relate to any Title IV
provision.
“Title IV Programs”
means the programs of federal student financial assistance administered pursuant
to Title IV of the HEA.
10
“TPPPA” means a
temporary provisional program participation agreement executed by the U.S. DOE
and issued to the Institution following the Closing for an interim period
allowing U.S. DOE’s further review of the Purchaser’s application for U.S. DOE
Approval of the Institution following a change in ownership.
“Treasury Regulations”
means the Treasury Regulations (including Temporary Treasury Regulations)
promulgated by the United States Department of Treasury with respect to the Code
or other federal tax statutes.
“U.S.” and “United States” means
the United States of America.
“U.S. DOE” means the
United States Department of Education.
“U.S. DOE
Approval” means a provisional program participation agreement issued
and countersigned by the Secretary of U.S. DOE, or his designee, in conjunction
with an accurate ECAR (but not including a TPPPA) that is complete and accurate
in all material respects, certifying an institution for participation in the
Title IV Programs that does not include any condition that would materially
impair the Parent’s operations.
Section
1.02 Definitions. The
following terms have the meanings set forth in the Sections set forth
below:
|
Definition
|
Location
|
|
“Acquisition”
|
Recitals
|
|
“Agreement”
|
Preamble
|
|
“Americare”
|
Recitals
|
|
“Ancillary
Lease Documents”
|
3.15(d)
|
|
“Baran”
|
Preamble
|
|
“Basket”
|
8.04(a)
|
|
“BIT”
|
Recitals
|
|
“BIT
Agreement”
|
Recitals
|
|
“Business”
|
Recitals
|
|
“Cap”
|
8.04(a)
|
|
“CCI”
|
Recitals
|
|
“Closing”
|
2.03
|
|
“Closing
Date”
|
2.03
|
|
“Company”
|
Recitals
|
|
“Companies”
|
Recitals
|
|
“Engine
City”
|
Recitals
|
|
“ERISA”
|
3.17(a)
|
|
“Financial
Statements”
|
3.06(a)
|
|
“HUV”
|
Recitals
|
|
“Independent
Accounting Firm”
|
2.06(c)(ii)
|
|
“Internal
Controls”
|
3.06(d)
|
|
“Institution”
|
Recitals
|
|
“lease”
|
3.13(a)
|
|
“Loss”
|
8.02(a)
|
11
|
“Material
Contracts”
|
3.13(a)
|
|
“Merion”
|
Preamble
|
|
“Multiemployer
Plan”
|
3.17(b)
|
|
“Multiple
Employer Plan”
|
3.17(b)
|
|
“Non-Disclosure
Agreement”
|
5.02(b)
|
|
“Options”
|
3.15(d)
|
|
“Parent”
|
Preamble
|
|
“Plans”
|
3.17(a)(ii)
|
|
“Policy
Guidelines”
|
3.26(e)
|
|
“Purchase
Price”
|
2.02
|
|
“Purchaser”
|
Preamble
|
|
“Purchaser
Indemnified Party”
|
8.02(a)
|
|
“Required
Consents”
|
3.05
|
|
“Restricted
Business”
|
5.10(a)
|
|
“Restricted
Period”
|
5.10(a)
|
|
“Seller”
|
Preamble
|
|
“Seller
Indemnified Party”
|
8.03(a)
|
|
“Sellers”
|
Preamble
|
|
“Sellers’
Representative”
|
8.07(a)
|
|
“Shares”
|
Recitals
|
|
“Subsidiaries”
|
Recitals
|
|
“Tangible
Personal Property”
|
3.16(a)
|
|
“Third
Party Claim”
|
8.05(b)
|
|
“UGP”
|
Preamble
|
|
“UGPE”
|
Preamble
|
|
“WARN
Act”
|
3.17(g)
|
Section 1.03
Interpretation
and Rules of Construction. In
this Agreement, except to the extent otherwise provided or indicated, or that
the context otherwise requires:
(a) when
a reference is made in this Agreement to an Article, Section, Exhibit or
Schedule, such reference is to an Article or Section of, or a Schedule or
Exhibit to, this Agreement;
(b) the
table of contents and headings for this Agreement are for reference purposes
only and do not affect in any way the meaning or interpretation of this
Agreement;
(c) whenever
the words “include,” “includes” or “including” are used in this Agreement, they
are deemed to be followed by the words “without limitation”;
(d) the
words “hereof,” “herein” and “hereunder” and words of similar import, when used
in this Agreement, refer to this Agreement as a whole and not to any particular
provision of this Agreement;
(e) all
terms defined in this Agreement have the defined meanings when used in any
certificate or other document made or delivered pursuant hereto, unless
otherwise defined therein;
12
(f) the
definitions contained in this Agreement are applicable to the singular as well
as the plural forms of such terms;
(g) any
Law defined or referred to herein or in any agreement or instrument that is
referred to herein means such Law or statute as from time to time amended,
modified or supplemented, including by succession of comparable successor
Laws;
(h) references
to a Person are also to its successors and permitted assigns; and
(i) the
use of “or” is not intended to be exclusive unless expressly indicated
otherwise.
ARTICLE
II
PURCHASE
AND SALE
Section 2.01
Purchase and
Sale of the Shares. Upon
the terms and subject to the conditions of this Agreement, at the Closing, the
Sellers shall sell, assign, transfer, convey and deliver, or cause to be sold,
assigned, transferred, conveyed and delivered, to the Purchaser, the Shares, and
the Purchaser shall purchase the Shares.
Section 2.02
Purchase
Price. Subject
to the adjustments set forth in Section 2.06,
the purchase price for the Shares and the covenants contained in Section 5.10 shall be
an amount in cash equal to Three Million Dollars ($3,000,000) (the “Purchase Price”)
which shall be allocated $2,800,000 to the Shares and $200,000 to the covenants
contained in Section
5.10.
Section
2.03 Closing. Subject
to the terms and conditions of this Agreement, the sale and purchase of the
Shares contemplated by this Agreement shall take place at a closing (the “Closing”) to be held
at the offices of Shearman & Sterling LLP, 599 Lexington Avenue, New
York, New York at 10:00 A.M., New York time (a) within the first five
Business Days of the month following the month in which the satisfaction or
waiver of the conditions to the obligations of the parties set forth in Article VII has
occurred, or (b) at such other time or on such other date as the Sellers and the
Purchaser may mutually agree upon in writing (the date on which the Closing
takes place being the “Closing
Date”).
Section 2.04
Deliveries by
the Sellers. (a) On
or prior to the Closing Date, the Sellers shall have delivered or caused to be
delivered to the Purchaser:
(i) stock
certificates evidencing the Shares duly endorsed in blank, or accompanied by
stock powers duly executed in blank, in form satisfactory to the Purchaser and
with all required stock transfer tax stamps affixed;
(ii) the
Assignments of Lease, each duly executed by all the parties
thereto;
(iii) the
General Release, duly executed by the Sellers;
13
(iv)
a receipt for the Purchase
Price;
(v)
the resignations, effective as of the
Closing, of all of the directors and officers of the Company, except for such
persons as shall have been designated in writing prior to the Closing Date by
the Purchaser to the Sellers;
(vi)
a certificate of non-foreign status (in a
form reasonably acceptable to the Purchaser) pursuant to Section 1.1445-2(b)(2)
of the Treasury Regulations of each Seller (provided that if a Seller is a
disregarded entity then such certificate shall be provided by its sole
beneficial owner);
(vii) a
copy of (i) the certificate of incorporation (or other similar organizational
document), as amended, of the Company, certified by the Secretary of State in
its jurisdiction of organization, as of a date not earlier than five Business
Days prior to the Closing Date and accompanied by a certificate of the Secretary
or Assistant Secretary of the Company, dated as of the Closing Date, stating
that no amendments have been made to such certificate of incorporation (or other
similar organizational document) since such date, and (ii) the by-laws of the
Company, certified by the Secretary or Assistant Secretary of the
Company;
(viii)
a good standing certificate for the Company from the
Secretary of State in its jurisdiction of organization and from the Secretary of
State in each other jurisdiction in which the operation of the Company’s
business in such jurisdiction, requires the Company to qualify to do business as
a foreign corporation, in each case dated as of a date not earlier than five
Business Days prior to the Closing Date;
(ix) a
certificate of the Secretary or an Assistant Secretary of each of UGP and Merion
certifying the names and signatures of the officers of such Seller authorized to
sign this Agreement and the Ancillary Agreements and the other documents to be
delivered hereunder and thereunder; and
(x) such
other certificates and documents that the Purchaser is entitled to receive from
the Sellers pursuant to Section 7.02 as a
condition of the Purchaser’s obligations to consummate the
Acquisition.
Section 2.05
Deliveries by the
Purchaser. (a) On
or prior to the Closing Date, the Purchaser shall have delivered or caused to be
delivered to the Sellers:
(i)
the Purchase Price, in the manner set
forth in Section
2.05(a)(i) of the Disclosure Schedule, by wire transfer in immediately
available funds to the Purchase Price Bank Accounts;
(ii)
a certificate of the Secretary or an
Assistant Secretary of the Purchaser certifying the names and signatures of the
officers of the Purchaser authorized to sign this Agreement and the Ancillary
Agreements and the other documents to be delivered hereunder and
thereunder;
14
(iii) a
true and complete copy, certified by the Secretary or an Assistant Secretary of
the Purchaser, of the resolutions duly and validly adopted by the board of
managers of the Purchaser, evidencing its authorization of the execution and
delivery of this Agreement and the Ancillary Agreements to which the Purchaser
is a party and the consummation of the transactions contemplated hereby and
thereby subject only to the conditions set forth herein;
(iv) such
other certificates and documents that the Sellers are entitled to receive from
the Purchaser pursuant to Section 7.01 as a
condition of the Sellers’ obligations to consummate the
Acquisition.
(b)
On the date hereof (and pursuant to the BIT
Agreement), the Purchaser shall deliver or cause to be delivered to the Escrow
Agent, in accordance with the Escrow Agreement, the Escrow Amount by wire
transfer in immediately available funds to the Escrow Account.
Section 2.06
Adjustment of
Purchase Price. The
Purchase Price shall be subject to adjustment on and after the date hereof as
specified in this Section
2.06:
(a)
Estimated Closing Balance
Sheet. At least five Business Days prior to the Closing Date,
the Sellers shall deliver to the Purchaser the Estimated Closing Balance
Sheet. The Sellers shall prepare the Estimated Closing Balance Sheet
in accordance with GAAP and GAGAS, and the Estimated Closing Balance Sheet shall
set forth the Sellers’ good faith estimate of the Net Working Capital of the
Company as of the Closing Date. The Sellers shall make available to
the Purchaser the work papers used in preparing the Estimated Closing Balance
Sheet. If the Net Working Capital reflected on the Estimated Closing
Balance Sheet exceeds the Target Working Capital, then the Purchase Price
payable by the Purchaser at the Closing shall be adjusted upwards in an amount
equal to such excess. If the Net Working Capital reflected on the
Estimated Closing Balance Sheet is less than the Target Working Capital, then
the Purchase Price payable by the Purchaser at the Closing shall be adjusted
downward in an amount equal to such deficiency.
(b)
Closing Balance
Sheet. Within 30 Business Days following the Closing Date, the
Sellers shall deliver to the Purchaser a revised Estimated Closing Balance
Sheet, prepared in accordance with GAAP and GAGAS and setting forth the Sellers’
good faith calculation of the Net Working Capital with respect to the Company as
of the Closing Date. The Sellers shall make available to the
Purchaser the work papers used in preparing such balance sheet. As
promptly as practicable, but in any event within 45 Business Days following the
Closing Date, the Purchaser shall prepare and deliver to the Sellers’
Representative the Closing Balance Sheet, prepared in accordance with GAAP and
GAGAS.
(c)
Disputes. (i)
The Sellers’ Representative may dispute any amounts reflected on the Closing
Balance Sheet delivered by the Purchaser, but only on the basis that the amounts
reflected on such Closing Balance Sheet were not arrived at in accordance with
GAAP and GAGAS or were arrived at based on mathematical or clerical
error. If the Sellers’ Representative intends to dispute any such
amounts, the Sellers’ Representative shall notify the Purchaser and the
Purchaser’s Accountants in writing of each disputed item, specifying the amount
thereof in dispute and setting forth, in reasonable detail, the basis for such
dispute, within 30 Business Days of the delivery by the Purchaser of the Closing
Balance Sheet to the Sellers’ Representative. In the event of such a
dispute, the Sellers’ Representative and the Purchaser shall attempt to
reconcile the disputed amounts, and any resolution agreed by them as to such
disputed amounts shall be final, conclusive and binding on the parties
hereto.
15
(ii)
If the Sellers’ Representative and the Purchaser
are unable to reach a resolution with such effect within 30 Business Days of the
receipt by the Purchaser and the Purchaser’s Accountants of the Sellers’
Representative’s written notice of dispute, the Sellers’ Representative and the
Purchaser shall submit the items remaining in dispute for resolution to an
independent accounting firm of national reputation mutually acceptable to the
Sellers and the Purchaser (such accounting firm being referred to herein as an
“Independent
Accounting Firm”), which shall, within 30 Business Days after such
submission, determine and report to the Sellers’ Representative and the
Purchaser upon such remaining disputed items, and such determination shall be
final, conclusive and binding on the Sellers and the Purchaser. The fees and
expenses of the Independent Accounting Firm shall be allocated between the
Sellers, on the one hand, and the Purchaser, on the other hand, in the same
proportion as the aggregate amount of such remaining disputed items so submitted
to the Independent Accounting Firm that is unsuccessfully disputed by each such
party (as finally determined by the Independent Accounting Firm) bears to the
total amount of such remaining disputed items so submitted.
(iii) In
acting under this Section 2.06, the
Sellers’ Accountants, the Purchaser’s Accountants and the Independent Accounting
Firm shall be entitled to the privileges and immunities of
arbitrators.
(d) Purchase Price
Adjustment. (i) The Closing Balance Sheet shall be deemed
final upon the earliest to occur of (A) the Sellers’ Representative’s
failure to notify the Purchaser of a dispute by the 30th
Business Day after the Purchaser’s delivery of the Closing Balance Sheet to the
Sellers’ Representative, (B) the resolution of all disputes, pursuant to
Section 2.06(c)(i),
by the Sellers’ Accountants and the Purchaser’s Accountants and (C) the
resolution of all disputes, pursuant to Section 2.06(c)(ii),
by the Independent Accounting Firm.
(ii)
If the Net Working Capital reflected on the
Estimated Closing Balance Sheet exceeds the Net Working Capital reflected on the
Closing Balance Sheet, then the Purchase Price shall be adjusted downward in an
amount equal to such excess, and within five Business days of the Closing
Balance Sheet being deemed final, the Sellers’ Representative shall pay the
amount of such excess to the Purchaser by wire transfer in immediately available
funds. If the Sellers’ Representative shall fail to pay the amount of
such deficiency within the period specified in the immediately preceding
sentence, then the Purchaser may deliver written notice to the Escrow Agent and
the Sellers’ Representative specifying such amount, and the Escrow Agent shall,
within three Business Days of its receipt of such notice and in accordance with
the terms of the Escrow Agreement, pay such amount to the Purchaser out of the
Escrow Account by wire transfer in immediately available funds. No
failure of the Purchaser to deliver a notice of the type specified in the
immediately preceding sentence shall relieve the Sellers’ Representative of the
obligation to pay the amount of such deficiency to the
Purchaser.
16
(iii) If
the Net Working Capital reflected on the Estimated Closing Balance Sheet is less
than the Net Working Capital reflected on the Closing Balance Sheet, then the
Purchase Price shall be adjusted upward in an amount equal to such deficiency,
and within five Business days of the Closing Balance Sheet being deemed final,
the Purchaser shall pay the amount of such deficiency to the Sellers, in the
manner set forth in Section 2.05(a)(i) of the
Disclosure Schedule, by wire transfer in immediately available funds to
the Purchase Price Bank Accounts.
Section
2.07 Escrow. In
accordance with the terms of the Escrow Agreement, on the date hereof (and
pursuant to the BIT Agreement) the Purchaser shall deposit the Escrow Amount in
the Escrow Account. The Escrow Account shall be managed and paid out
by the Escrow Agent in accordance with the terms of the Escrow
Agreement.
Section
2.08 Withholding. The
Purchaser shall be entitled at any time to deduct and withhold from any portion
of the Purchase Price otherwise payable pursuant to this Agreement such amounts
as Purchaser is required to deduct and withhold and pay over to applicable
taxing authorities with respect to the making of such payment under the Code or
any applicable provision of state or local Tax Law. To the extent
that amounts are so withheld by the Purchaser, the Purchaser shall pay over such
amounts to the applicable taxing authorities. To the extent that
amounts are so withheld by the Purchaser and paid over to the applicable taxing
authority, such amounts shall be treated for all purposes as having been paid to
the Sellers.
ARTICLE
III
REPRESENTATIONS
AND WARRANTIES OF THE SELLERS AND UGPE
As an
inducement to the Purchaser to enter into this Agreement, except as set forth in
the Disclosure Schedule (each section of which qualifies the
correspondingly numbered representation and warranty or covenant herein; provided, that the
disclosure of any fact or item in any Section of the Disclosure Schedule shall,
should the existence of such factor or item be relevant to any other Section, be
deemed to be disclosed with respect to that Section, so long as the relevance of
such disclosure to such other Section is reasonably apparent on the face of such
disclosure), each of the Sellers hereby, jointly and severally (except with
respect to Sections 3.01(b), (c) and (d), pursuant to
which each Seller represents and warrants each statement therein only to the
extent directly applicable to such Seller), and, solely with respect to Section 3.01(e), UGPE
hereby, represents and warrants to the Purchaser and the Parent as
follows:
Section 3.01
Organization,
Authority and Qualification. (a) The
Company is a corporation duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation and has all necessary
corporate power and authority to own, operate or lease the properties and assets
now owned, operated or leased by it and to carry on the Business as it has been
and is currently conducted. The Company is duly licensed or qualified
to do business and is in good standing in each jurisdiction which the properties
owned or leased by it or the operation of the Institution makes such licensing
or qualification necessary, except to the extent that the failure to be so
licensed or qualified and in good standing would not (i) adversely affect the
ability of the Company to carry out its obligations under, and to consummate the
transactions contemplated by, this Agreement and the Ancillary Agreements to
which it is a party or (ii) otherwise have a Material Adverse
Effect. All corporate actions taken by the Company have been duly
authorized, and the Company has not taken any action that in any respect
conflicts with, constitutes a default under, or results in a violation of, any
provision of its certificate of incorporation or by-laws. True and
correct copies of the certificate of incorporation and by-laws of the Company,
each in effect on the date hereof, have been delivered or made available by the
Sellers to the Purchaser.
17
(b)
UGP is a limited liability company duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
formation and has all necessary limited liability company power and authority to
enter into this Agreement and the Ancillary Agreements to which it is a party,
to carry out its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby. UGP is duly licensed or
qualified to do business and is in good standing in each jurisdiction which the
properties owned or leased by it or the operation of its business makes such
licensing or qualification necessary, except to the extent that the failure to
be so licensed or qualified and in good standing would not (i) adversely affect
the ability of UGP to carry out its obligations under, and to consummate the
transactions contemplated by, this Agreement and the Ancillary Agreements to
which it is a party or (ii) otherwise have a Material Adverse
Effect. The execution and delivery by UGP of this Agreement and the
Ancillary Agreements to which it is a party, the performance by UGP of its
obligations hereunder and thereunder and the consummation by UGP of the
transactions contemplated hereby and thereby have been duly authorized by all
requisite action on the part of UGP and its members. This Agreement
has been, and upon their execution the Ancillary Agreements to which UGP is a
party shall have been, duly executed and delivered by UGP and (assuming due
authorization, execution and delivery by the other parties hereto and thereto)
this Agreement constitutes, and upon their execution such Ancillary Agreements
shall constitute, legal, valid and binding obligations of UGP, enforceable
against UGP in accordance with their respective terms, except as the same may be
limited by applicable bankruptcy, insolvency (including all laws relating to
fraudulent transfers), reorganization, moratorium or similar laws affecting
creditors’ rights generally, now or hereafter in effect, and subject to the
effect of general principles of equity (regardless of whether considered in a
proceeding at law or in equity).
(c)
Merion is a limited partnership duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
formation and has all necessary power and authority to enter into this Agreement
and the Ancillary Agreements to which it is a party, to carry out its
obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby. Merion is duly licensed or qualified
to do business and is in good standing in each jurisdiction which the properties
owned or leased by it or the operation of its business makes such licensing or
qualification necessary, except to the extent that the failure to be so licensed
or qualified and in good standing would not (i) adversely affect the ability of
Merion to carry out its obligations under, and to consummate the transactions
contemplated by, this Agreement and the Ancillary Agreements to which Merion is
a party or (ii) otherwise have a Material Adverse Effect. The
execution and delivery by Merion of this Agreement and the Ancillary Agreements
to which Merion is a party, the performance by Merion of its obligations
hereunder and thereunder and the consummation by Merion of the transactions
contemplated hereby and thereby have been duly authorized by all requisite
action on the part of Merion and its partners. This Agreement has
been, and upon their execution the Ancillary Agreements to which Merion is a
party shall have been, duly executed and delivered by Merion, and (assuming due
authorization, execution and delivery by the other parties hereto and thereto)
this Agreement constitutes, and upon their execution such Ancillary Agreements
shall constitute, legal, valid and binding obligations of Merion, enforceable
against Merion in accordance with their respective terms, except as the same may
be limited by applicable bankruptcy, insolvency (including all laws relating to
fraudulent transfers), reorganization, moratorium or similar laws affecting
creditors’ rights generally, now or hereafter in effect, and subject to the
effect of general principles of equity (regardless of whether considered in a
proceeding at law or in equity).
18
(d)
Baran is an individual and has all requisite right,
power and authority and full legal capacity to execute and deliver this
Agreement and the Ancillary Agreements to which he is a party, to perform his
obligations hereunder and thereunder, and to consummate the transactions
contemplated hereby and thereby. This Agreement has been, and upon
his execution the Ancillary Agreements to which Baran is a party will be, duly
and validly executed and delivered by Baran and (assuming due authorization,
execution and delivery by the other parties hereto and thereto) this Agreement
constitutes, and upon their execution such Ancillary Agreements shall
constitute, legal, valid and binding obligations of Baran, enforceable against
Baran in accordance with their respective terms, except as the same may be
limited by applicable bankruptcy, insolvency (including all laws relating to
fraudulent transfers), reorganization, moratorium or similar laws affecting
creditors’ rights generally, now or hereafter in effect, and subject to the
effect of general principles of equity (regardless of whether considered in a
proceeding at law or in equity). The failure of the spouse of Baran
to be a party or signatory to this Agreement shall not (i) prevent Baran from
performing his obligations and consummating the transactions contemplated
hereunder or (ii) prevent this Agreement from constituting the legal, valid and
binding obligation of Baran in accordance with its terms.
(e)
(i) UGPE is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation and has all necessary corporate power and authority to enter into
this Agreement and the Ancillary Agreements to which it is a party, to carry out
its obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby. UGPE is duly licensed or qualified
to do business and is in good standing in each jurisdiction which the properties
owned or leased by it or the operation of its business makes such licensing or
qualification necessary, except to the extent that the failure to be so licensed
or qualified and in good standing would not (i) adversely affect the ability of
UGPE to carry out its obligations under, and to consummate the transactions
contemplated by, this Agreement and the Ancillary Agreements to which it is a
party or (ii) otherwise have a Material Adverse Effect. The execution
and delivery by UGPE of this Agreement and the Ancillary Agreements to which it
is a party, the performance by UGPE of its obligations hereunder and thereunder
and the consummation by UGPE of the transactions contemplated hereby and thereby
have been duly authorized by all requisite corporate action. This
Agreement has been, and upon their execution the Ancillary Agreements to which
UGPE is a party shall have been, duly executed and delivered by UGPE and
(assuming due authorization, execution and delivery by the other parties hereto
and thereto) this Agreement constitutes, and upon their execution such Ancillary
Agreements shall constitute, legal, valid and binding obligations of UGPE,
enforceable against UGPE in accordance with their respective terms, except as
the same may be limited by applicable bankruptcy, insolvency (including all laws
relating to fraudulent transfers), reorganization, moratorium or similar laws
affecting creditors’ rights generally, now or hereafter in effect, and subject
to the effect of general principles of equity (regardless of whether considered
in a proceeding at law or in equity).
19
(ii) Assuming
that all consents, approvals, authorizations filings, notifications and other
actions described in Section 3.04 and Section
3.05 of the Disclosure Schedule have been obtained or made, the
execution, delivery and performance by UGPE of this Agreement and the Ancillary
Agreements to which it is a party do not and will not (A) violate, conflict with
or result in the breach of any provision of the certificate of incorporation or
by-laws of UGPE, (B) conflict with or violate (or cause an event that could have
a Material Adverse Effect as a result of) any Law or Governmental Order
applicable to UGPE or any of its assets, properties or businesses or (C)
conflict with, result in any breach of, constitute a default (or event that with
the giving of notice or lapse of time, or both, would become a default) under,
require any consent under, or give to others any rights of termination,
amendment, acceleration, suspension, revocation or cancellation of, or result in
the creation of any Encumbrance, other than Permitted Encumbrances, on any of
the Shares or the Assets pursuant to, any note, bond, mortgage or indenture,
contract, agreement, lease, sublease, license, permit, franchise or other
instrument or arrangement to which UGPE is a party or by which any of the Shares
or the Assets is bound or affected, except, in the case of this clause (C), to
the extent that such conflicts, breaches, defaults or other matters would not
(1) adversely affect the ability of UGPE to carry out its obligations under, and
to consummate the transactions contemplated by, this Agreement and the Ancillary
Agreements to which UGPE is a party or (2) otherwise have a Material Adverse
Effect.
(iii) Except
for the Required Consents, the execution, delivery and performance by UGPE of
this Agreement and each Ancillary Agreement to which it is a party do not and
will not require any consent, approval, authorization or other order of, action
by, filing with or notification to, any Governmental Authority or Educational
Agency. To the knowledge of UGPE, there is no reason why all the
Required Consents will not be received.
Section
3.02 Subsidiaries. There
are no other corporations, partnerships, joint ventures, associations or other
entities in which the Company owns, of record or beneficially, any direct or
indirect equity or other interest or any right (contingent or otherwise) to
acquire the same. The Company is not a member of (nor is any part of
the Business conducted through) any partnership and the Company is not a
participant in any joint venture or similar arrangement.
Section 3.03
Capitalization. (a) The
authorized capital stock or other ownership interests of the Company is set
forth in Section
3.03(a) of the Disclosure Schedule. All of the issued and
outstanding shares of capital stock or other ownership interests of the Company
are duly authorized, validly issued, fully paid and
nonassessable. None of the issued and outstanding Shares were issued
in violation of any preemptive rights. Except for the Preferred Stock
and as set forth in Section 3.03(a) of the
Disclosure Schedule, there are no options, warrants, convertible
securities or other rights, agreements, arrangements or commitments of any
character relating to the Shares or obligating any Seller or the Company to
issue or sell any Shares, or any other interest in, the
Company. There are no outstanding contractual obligations of the
Company to repurchase, redeem or otherwise acquire any shares of Clemens Common
Stock or to provide funds to, or make any investment (in the form of a loan,
capital contribution or otherwise) in, any other Person. The Shares
constitute all of the issued and outstanding capital stock or other ownership
interests of the Company and are owned of record and beneficially by the Sellers
as set forth in Section 3.03(a) of the
Disclosure Schedule free and clear of all Encumbrances, other than
Permitted Encumbrances. Upon consummation of the transactions
contemplated by this Agreement and registration of the Shares in the name of the
Purchaser in the stock or other records of the Company, the Purchaser, assuming
it shall have purchased the Shares for value in good faith and without notice of
any adverse claim, will own all the issued and outstanding capital stock or
other ownership interests of the Company free and clear of all Encumbrances,
other than Permitted Encumbrances. Upon consummation of the
transactions contemplated by this Agreement, the Shares will be fully paid and
nonassessable. There are no voting trusts, stockholder agreements,
proxies or other agreements or understandings in effect with respect to the
voting or transfer of any of the Shares.
20
(b) The
stock or other register of the Company accurately records: (i) the
name and address of each Person owning shares of capital stock or other
ownership interests of the Company and (ii) the certificate number of each
certificate evidencing shares of capital stock or other ownership interests
issued by the Company, the number of shares or other ownership interests
evidenced by each such certificate, the date of issuance thereof and, in the
case of cancellation, the date of cancellation.
Section
3.04 No
Conflict. Assuming
that all consents, approvals, authorizations filings, notifications and other
actions described in Section 3.04 and
Section 3.05 of the Disclosure Schedule have been obtained or made, the
execution, delivery and performance by any Seller of this Agreement and the
Ancillary Agreements to which any Seller is a party do not and will not
(a) violate, conflict with or result in the breach of any provision of the
certificate of incorporation or by-laws of any Seller or the Company,
(b) conflict with or violate (or cause an event that could have a Material
Adverse Effect as a result of) any Law or Governmental Order applicable to any
Seller or the Company or any of their respective assets, properties or
businesses or (c) conflict with, result in any breach of, constitute a
default (or event that with the giving of notice or lapse of time, or both,
would become a default) under, require any consent under, or give to others any
rights of termination, amendment, acceleration, suspension, revocation or
cancellation of, or result in the creation of any Encumbrance, other than
Permitted Encumbrances, on any of the Shares or the Assets pursuant to, any
note, bond, mortgage or indenture, contract, agreement, lease, sublease,
license, permit, franchise or other instrument or arrangement to which any
Seller or the Company is a party or by which any of the Shares or the Assets is
bound or affected, except, in the case of this clause (c), to the extent
that such conflicts, breaches, defaults or other matters would not
(i) adversely affect the ability of any Seller or the Company to carry out
its or his obligations under, and to consummate the transactions contemplated
by, this Agreement and the Ancillary Agreements to which such Seller or the
Company is a party or (ii) otherwise have a Material Adverse
Effect.
Section 3.05
Governmental Consents and
Approvals. Except
for the consents, approvals and notifications that must be obtained or given
prior to the Closing as set forth on Section 3.05 of the
Disclosure Schedule (the “Required Consents”),
the execution, delivery and performance by each Seller of this Agreement and
each Ancillary Agreement to which such Seller is a party, as the case may be, do
not and will not require any consent, approval, authorization or other order of,
action by, filing with or notification to, any Governmental Authority or
Educational Agency. To the Knowledge of the Sellers, there is no
reason why all the Required Consents will not be received.
21
Section 3.06
Financial
Information; Books and Records; No Undisclosed Liabilities. (a) True
and complete copies of (1) the unaudited balance sheet of the Company for
the fiscal year ended December 31, 2007, and the related unaudited statements of
income, retained earnings, shareholders’ equity and changes in financial
position of the Company, together with all related notes and schedules thereto
and (2) the unaudited balance sheet of the Company for the nine-month period
ending September 30, 2008 and the related financial statements of the Company,
together with all related notes and schedules thereto (collectively referred to
herein as the “Financial
Statements”) have been delivered or made available by the Sellers to the
Purchaser. The Financial Statements (A) were prepared in
accordance with the books of account and other financial records of the Company,
(B) present fairly, in all material respects, the financial condition and
results of operations of the Company as of the dates thereof or for the period
covered thereby, (C) have been prepared in accordance with GAAP and GAGAS,
on a basis consistent with the Accounting Principles and the past practices of
the Company, and (D) include all adjustments (consisting only of normal
recurring accruals) that are necessary for a fair presentation in all material
respects of the financial condition of the Company and the results of the
operations of the Company as of the dates thereof or for the period covered
thereby.
(b) The
books of account and other financial records of the Company: (i)
reflect all items of income and expense and all assets and Liabilities required
to be reflected therein in accordance with GAAP applied on a basis consistent
with the past practices of the Company, respectively, (ii) are in all material
respects complete and correct, and do not contain or reflect any material
inaccuracies or discrepancies and (iii) have been maintained in accordance with
good business and accounting practices.
(c) The
minute books of the Company reflecting records of actions taken by the
shareholders or members, boards of directors/managers and all committees of the
boards of directors/managers of the Company have been provided or made available
to the Purchaser and are complete and accurate in all material
respects.
(d) The
Company has established and maintains a system of internal accounting controls
(“Internal
Controls”) sufficient to comply with all legal and accounting
requirements applicable to the Company and the Institution and to provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in conformity with GAAP and GAGAS, subject
to the adjustments set forth in the Accounting Principles. Except as
set forth in Section
3.06(d) of the Disclosure Schedule, there are no significant deficiencies
or material weaknesses in the design or operation of such Internal Controls, and
the Company has not been advised by any independent auditor or other third party
that any such significant deficiency or material weakness in such Internal
Controls exists or existed. Except as set forth in Section 3.06(d) of the
Disclosure Schedule, neither the Company nor any of its respective
directors, officers, employees, auditors, accountants or representatives has
received or otherwise had or obtained knowledge of any complaint, allegation,
assertion or claim, whether written or oral, regarding the accounting or
auditing practices, procedures, methodologies or methods of the Company or its
Internal Controls, including any complaint, allegation, assertion or claim that
the Company has engaged in questionable financial reporting, accounting or
auditing practices. There has not been any fraud, whether or not
material, that involves management or other employees who have a significant
role in the Internal Controls or, to the Knowledge of the Sellers, any
allegations or investigations of any such fraud.
22
(e) There
are no Liabilities of the Company, other than Liabilities (i) reflected or
reserved against in the Financial Statements, (ii) set forth in Section 3.06(e) of the
Disclosure Schedule, or (iii) incurred since September 30, 2008 in
the ordinary course of business, consistent with the past practice of the
Company and which do not and could not have a Material Adverse
Effect.
Section
3.07 Receivables. Set
forth in Section 3.07
of the Disclosure Schedule is an aged list of the Receivables as of
September 30, 2008. All Receivables arising from the date thereof
until the Closing have or will have arisen in the ordinary course of business
from bona fide transactions and constitute or will constitute only valid,
undisputed claims of the Company or the Institution, and no valid claims of
setoff or other defenses or counterclaims have been formally asserted with
respect thereto, other than normal cash discounts accrued in the ordinary course
of business consistent with the past practices of the Company or as reserved for
in the Financial Statements.
Section 3.08
Conduct in the
Ordinary Course; Absence of Certain Changes, Events and
Conditions. Since
December 31, 2007, the Business has been conducted in the ordinary course
consistent with past practice. As amplification and not limitation of
the foregoing, since such date, except as set forth in Section 3.08 of the
Disclosure Schedule, neither the Company nor the Institution
has:
(a) permitted
or allowed any of the Assets to be subjected in any material respect to any
Encumbrance, other than Permitted Encumbrances and Encumbrances that will be
released at or prior to the Closing;
(b) except
in the ordinary course of business consistent with past practice, discharged or
otherwise obtained the release of any Encumbrance related to the Company or paid
or otherwise discharged any material Liability related to the Company, other
than current liabilities incurred in the ordinary course of business consistent
with past practice;
(c) written
down or written up in any material respect (or failed to write down or write up
in accordance with accounting methods consistent with past practice) the value
of any Inventory or Receivables or revalued in any material respect any of the
Assets other than in the ordinary course of business consistent with past
practices and in accordance with GAAP;
(d) made
any change in any method of accounting or accounting practice or policy used by
the Company, other than such changes required by GAAP;
23
(e)
amended, terminated, cancelled or compromised any
material claims of the Company or waived any other rights of material value to
the Company;
(f)
sold, transferred, leased, subleased or licensed
to any Person, or abandoned or otherwise disposed of any properties or assets,
real, personal or mixed (including leasehold interests and intangible property)
of the Business other than in the ordinary course of business consistent with
past practice;
(g) redeemed
any of the capital stock or declared, made or paid any dividends or
distributions (whether in cash, securities or other property) to the holder(s)
of capital stock of the Company with respect to such capital stock;
(h) merged
with, entered into a consolidation with or acquired an interest of 5% or more in
any Person or acquired a substantial portion of the assets or business of any
Person or any division or line of business thereof, or otherwise acquired any
material assets other than in the ordinary course of business consistent with
past practice;
(i)
made any capital expenditure or commitment
for any capital expenditure in excess of $10,000 individually or $50,000 in the
aggregate;
(j)
issued any sales orders or otherwise agreed
to make any purchases involving exchanges in value in excess of $10,000
individually or $50,000 in the aggregate;
(k)
incurred any Indebtedness in excess of
$10,000 individually or $50,000 in the
aggregate;
(l)
made any loan to, guaranteed any Indebtedness of, or
otherwise incurred any Indebtedness on behalf of, any Person;
(m) failed
to pay any creditor any material amount owed to such creditor when
due;
(n) (i) granted
or announced any increase in the wages, salaries, compensation, bonuses,
incentives, pension or other benefits payable by the Company to any of its
employees, including any increase or change pursuant to any Plan, or
(ii) established or increased or promised to increase any benefits under
any Plan in either case, except as required by Law or involving ordinary
increases consistent with the past practices of the Company;
(o) entered
into any agreement, arrangement or transaction with any directors, officers,
employees, consultants, or stockholders of the Company or the Institution (or
with any relative, beneficiary, spouse or Affiliate thereof);
(p) entered
into any agreement, arrangement or transaction with any Person or Governmental
Authority providing for the furnishing of services by the Company or the
Institution at a discount to rates or tuition amounts charged by the Company or
the Institution as of December 31, 2007;
24
(q) terminated,
discontinued, closed or disposed of any facility or other business operation, or
laid off any employees (other than layoffs of fewer than 50 employees in any
six-month period in the ordinary course of business consistent with past
practice) or implemented any early retirement, separation or other program
providing early retirement window benefits within the meaning of Section
1.401(a)-4 of the Treasury Regulations or announced or planned any such action
or program for the future;
(r)
allowed any permit required of the Company
or the Institution by any Governmental Authority or any Environmental Permit in
connection with the ownership or operation of the Business and the Institution
to lapse or terminate or failed to renew any insurance policy or any such permit
or Environmental Permit that is scheduled to terminate or expire within 45
calendar days of the Closing Date;
(s)
failed to maintain the Company’s and the
Institution’s buildings, property and equipment in good repair and operating
condition, ordinary wear and tear excepted;
(t)
suffered any casualty loss or damage with respect
to any of the Assets which in the aggregate have a replacement cost of more than
$20,000, whether or not such loss or damage shall have been covered by
insurance;
(u) amended
or modified or consented to the termination of any Material Contract or the
Company’s or the Institution’s rights thereunder;
(v) made
any material charitable contribution;
(w) suffered
any Material Adverse Effect;
(x)
agreed, whether in writing or otherwise, to
take any of the actions specified in this Section 3.08, or
granted any options to purchase, rights of first refusal, rights of first offer
or any similar rights or commitments with respect to any of the actions
specified in this Section 3.08, except
as expressly contemplated by this Agreement and the Ancillary
Agreements;
(y) failed
to comply in any material respect with or remain in material compliance with any
Educational Law applicable to the Company, the Institution, or the Business, or
to maintain in full force and effect any Educational Approval necessary for the
Business’ and the Institution’s existing operations and the Company has not
received written notice from any Educational Agency of any such
failure;
(z)
unless required by applicable Law, made any
material change in any of its established practices or procedures for complying
with any Educational Law;
(aa) made,
changed or revoked any material Tax election or settled or compromised any Tax
liability or consented to any claim or assessment relating to Taxes or any
waiver of the statute of limitations for any such claim or assessment, in each
case, with respect to the Assets or the Company; or
25
(bb) not
shortened or lengthened the customary payment cycles for any of its payables or
receivables.
Section
3.09 Litigation. Except
as set forth in Section 3.09 of the
Disclosure Schedule, there are no Actions, Claims or Educational Claims
by or against the Company, or the Institution (or by or against any Seller or
any Affiliate thereof and relating to the Business, the Company or the
Institution) or affecting any of the Assets or the Business pending before any
Governmental Authority or Educational Agency (nor, to the Knowledge of the
Sellers, threatened to be brought by or before any Governmental Authority or
Educational Agency). Timely claims for insurance with respect to all
such Actions, Claims and Educational Claims set forth in Section 3.09 of the
Disclosure Schedule have been submitted by or on behalf of the Company or
the Institution. Neither the Sellers, the Company, or the Institution
nor any of their respective assets and properties, including the Assets, is
subject to any Governmental Order or order of any Educational Agency (nor, to
the Knowledge of the Sellers, are any Governmental Orders or orders of any
Educational Agency threatened to be imposed) that has or has had a Material
Adverse Effect or could affect the legality, validity or enforceability of this
Agreement, any Ancillary Agreement or the consummation of the transactions
contemplated hereby or thereby.
Section 3.10
Compliance with
Laws. (a) The
Company and the Institution have conducted and continue to conduct the Business
in accordance in all material respects with all Laws (excluding Educational
Laws) and Governmental Orders applicable to the Company and the Institution or
the Assets, and neither the Company nor the Institution is in violation in any
material respect of any such Law or Governmental Order. Neither the
Company nor the Institution has, in the last three years, received any written
communication from any Governmental Authority alleging that such Company or the
Institution is not in compliance in any material respect with any Law or
Governmental Order that has not been resolved.
(b) Section 3.10(b) of the
Disclosure Schedule sets forth a brief description of each Governmental
Order applicable to the Company, the Institution or the Assets, and no such
Governmental Order has or has had a Material Adverse Effect or could affect the
legality, validity or enforceability of this Agreement, any Ancillary Agreement
or the consummation of the transactions contemplated hereby or
thereby.
Section 3.11
Environmental
and Other Permits and Licenses; Related Matters.
(a)
The Company and the Institution are in
compliance in all material respects with all applicable Environmental
Laws. The Company and the Institution have all material Environmental
Permits required under Environmental Law, all such permits are in full force and
effect and the Company and the Institution are in material compliance
therewith.
(b)
There has been no Release of any
Hazardous Material (i) by the Company or the Institution, (ii) to the Knowledge
of the Sellers, on the Real Property, (iii) to the Knowledge of the Sellers, on
any property formerly leased, used or occupied by the Company or the Institution
during the period of the Company’s or the Institution’s lease, use or occupancy
thereof, or (iv) on any property formerly owned by the Company or the
Institution during the period of the Company’s or the Institution’s ownership
thereof, in the case of (i), (ii), (iii) and (iv), that requires any Remedial
Action.
26
(c)
There are no Environmental Claims pending
(or, to the Knowledge of the Sellers, threatened) against the Company or the
Institution, and there are no circumstances that can reasonably be expected to
form the basis of any such Environmental Claim, including, to the Knowledge of
the Sellers, with respect to any off-site disposal location currently or
formerly used by the Company or the Institution or any of its predecessors or
with respect to previously owned or operated facilities.
(d)
The Company is not conducting, or has
undertaken or completed or funded, any Remedial Action relating to any Release
or threatened Release of any Hazardous Material at the Real Property or at any
other site, location or operation, either voluntarily or pursuant to the order
of any Governmental Authority or the requirements of any Environmental Law or
Environmental Permit.
(e)
To the Knowledge of the Sellers,
there is no asbestos or asbestos-containing material on any of the Real Property
that requires abatement, removal or encapsulation pursuant to Environmental
Law.
(f)
None of the Real Property is listed or proposed
for listing, nor to the Knowledge of the Sellers does the Real Property adjoin
any other property that is listed or proposed for listing, on the National
Priorities List or CERCLIS or on any analogous federal, state or local
list.
(g)
To the Knowledge of the Sellers,
there are no wetlands or any areas subject to any legal requirement or
restriction in any way related to wetlands (including requirements or
restrictions related to buffer or transition areas or open waters) at or
affecting the Real Property.
(h)
The Sellers have provided or made available
to the Purchaser copies of (i) any environmental assessment or audit reports or
other similar studies or analyses relating to the Business, the Real Property or
the Company in their possession, and (ii) all insurance policies issued at any
time that may provide coverage to the Company or the Institution for
environmental matters.
(i)
There are no underground storage
tanks, surface impoundments, septic tanks, pits, sumps or lagoons in which
Hazardous Materials are being or have been treated, stored or disposed on the
Real Property by the Sellers.
(j)
Neither the execution of this Agreement or
the Ancillary Agreements nor the consummation of the transactions contemplated
hereby or thereby will require any Remedial Action or notice to or consent of
any Governmental Authority or third party pursuant to any applicable
Environmental Law or Environmental Permit.
(k)
Except with respect to Section 3.05 and
Section 3.08,
the representations set forth in this Section 3.11 are the
only representations with respect to environmental matters.
27
Section 3.12
No Preferential
Rights. There
is no contract, agreement or other arrangement granting any Person any
preferential right to purchase any of the Assets (other than in the ordinary
course of business consistent with past practice), or any of the
Shares.
Section 3.13
Material
Contracts. (a) Section 3.13(a) of the
Disclosure Schedule lists each of the following types of contracts and
agreements (including oral agreements) of the Company and the Institution (such
contracts and agreements, together with all contracts, agreements, leases and
subleases concerning the use, occupancy, management or operation of any Leased
Real Property (including all contracts, agreements, leases and subleases
relating to Intellectual Property and all contracts, agreements, leases and
subleases relating to Tangible Personal Property), being “Material
Contracts”):
(i)
each contract or agreement, or related
series of agreements, that cannot be cancelled by the Company or the Institution
on 30 days’ notice or less without penalty or further payment and under the
terms of which the Company or the Institution: (A) is likely to pay
or otherwise give consideration of more than $25,000 in the aggregate during the
calendar year ended December 31, 2009; (B) is likely to pay or otherwise give
consideration of more than $50,000 in the aggregate over the remaining term of
such contract; (C) is reasonably likely to be entitled to receive consideration
of more than $25,000 in the aggregate during the calendar year ended December
31, 2009; or (D) is likely to be entitled to receive consideration of more than
$50,000 in the aggregate over the remaining term of the contract;
(ii)
all advertising agency, sales promotion,
market research, marketing, web site creation and maintenance, consulting and
advertising contracts and agreements to which the Company or the Institution is
a party and involving the payment of consideration of more than $25,000 in the
aggregate;
(iii) all
management contracts and contracts with independent contractors or consultants
(or similar arrangements) to which the Company or the Institution is a party and
that are not cancelable without penalty or further payment and without more than
30 days’ notice;
(iv) all
contracts and agreements relating to Indebtedness of the Company or the
Institution;
(v)
all contracts and agreements between
the Company or the Institution, on the one hand, and any Educational Agency, on
the other hand, but excluding any Educational Approval;
(vi) all
contracts and agreements that limit or purport to limit the ability of the
Company or the Institution to compete in any line of business or with any Person
or in any geographic area or during any period of time;
(vii) all
contracts and agreement between the Company or the Institution, on the one hand,
and any Seller or any Affiliate of any Seller (other than the other Companies,
the Subsidiaries or the other Institutions), on the other hand;
28
(viii) all
contracts and agreements between the Company or the Institution, on the one
hand, and any of its directors, managers, officers, employees, stockholders or
members (or any relative, beneficiary, spouse or Affiliate thereof), on the
other hand, other than any oral contracts of employment terminable on no more
than 30 days’ notice without penalty or further payment obligation;
(ix) all
material contracts, agreements and leases relating to the use, occupancy,
management or operation of the Leased Real Property;
(x) all
material agreements included in the Company IP Licenses (and exclusive of any
agreements or licenses included in the Company IP Licenses that arise from the
purchase of any commercially available “off-the-shelf” computer software
products that are not material to the Business, or any other “shrink-wrap” or
“click-wrap” licenses or agreements that are included in the Company IP Licenses
and that are not material to the Business);
(xi) all
agreements regarding any special pricing, discount or reduced tuition
arrangement including agreements providing for tuition or pricing that is
materially inconsistent with the tuition reflected in the enrollment agreements,
catalogs, and other written materials of the Company or the Institution
disseminated to students and prospective students;
(xii) all
joint venture, community college, partnership or similar agreements involving a
sharing of profits, losses, costs or liabilities with any other
Person;
(xiii) all
agreements with any Third-Party Servicer, as that term is defined in 34 C.F.R. §
668.2;
(xiv) all
agreements in existence since the Compliance Date under which the Company or the
Institution provides or has provided educational instruction on behalf of any
other institution or organization, or another institution provides or has
provided educational instruction on behalf of the Company or the Institution,
including all consortium, contractual, internship, externship or articulation
agreements;
(xv) all
agreements respecting the funding of student scholarships;
(xvi) all
agreements under which the Company or the Institution is a lender;
(xvii) all
agreements for the sale of tuition receivables;
(xviii) all
marketing agreements and agreements for student recruiting and retention
services (other than agreements with employees of the other Companies, the
Subsidiaries or the other Institutions);
(xix)
all agreements by which the Company or the Institution
provides or facilitates scholarships or grants;
29
(xx) all
agreements by which the Company or the Institution provides private capital
loans to students attending the Institution;
(xxi) all
agreements for student recruiting services whether entered into with an employee
or with third parties;
(xxii) all
amendments, supplements, and modifications (whether oral or written) in respect
of any of the foregoing; and
(xxiii) all
other contracts and agreements, whether or not made in the ordinary course of
business, the absence of which would have a Material Adverse
Effect.
For
purposes of this Agreement, the term “lease” shall include
any and all leases, subleases, sale/leaseback agreements or similar
arrangements.
(b) Except
as set forth in Section 3.13(b) of the
Disclosure Schedule, each Material Contract: (i) is valid and
binding on the Seller, the Company or the Institution that is a party thereto
and, to the Knowledge of Sellers, on the other parties thereto and is in full
force and effect, (ii) does not require consent, approval or notice to any third
party as a result of the transactions contemplated by this Agreement and the
Ancillary Agreements, and (iii) assuming receipt of the Required Consents, upon
consummation of the transactions contemplated by this Agreement and the
Ancillary Agreements shall continue in full force and effect without penalty or
other adverse consequence. Neither the Company nor the is in breach
of, or default under, any Material Contract and neither the Company nor the
Institution has received written notice from any third party to any Material
Contract alleging or asserting any such breach or default or any notice of
termination or cancellation thereof.
(c) To
the Knowledge of the Sellers, no other party to any Material Contract is in
material breach thereof or default thereunder, and neither the Company nor the
Institution has given any notice of termination, cancellation, breach or default
under any Material Contract.
(d) The
Sellers have made available to the Purchaser true and complete copies of all
written Material Contracts and has provided to the Purchaser a summary of all
oral Material Contracts (if any).
Section 3.14
Intellectual
Property. (a) Section 3.14(a) of the
Disclosure Schedule sets forth a true and complete list of (i) all
patents and patent applications, registered trademarks and trademark
applications, registered copyrights and copyright applications, and domain names
included in the Owned Intellectual Property, if any (ii) all Company IP
Licenses, other than commercially available off-the-shelf computer software
products licensed pursuant to shrink-wrap or click-wrap licenses that are not
material to the Business or any other “shrink-wrap” or “click-wrap” licenses or
agreements that are included in the Company IP Licenses and that are not
material to the Business, if any, and (iii) any other Owned Intellectual
Property material to the Business.
(b) The
conduct of the Business as currently conducted does not infringe,
misappropriate, or otherwise violate the Intellectual Property of any third
party, and no Claim has been asserted that the conduct of the Business as
currently conducted infringes, misappropriates or otherwise violates the
Intellectual Property of any third party. With respect to each item
of Owned Intellectual Property, the Company is the exclusive owner of the entire
right, title and interest in and to such Intellectual Property free and clear of
any Encumbrances, other than Permitted Encumbrances, and is entitled to use such
Intellectual Property on an unrestricted basis in the continued operation of the
Business. With respect to each item of Licensed Intellectual Property
the Company has the right to use such Intellectual Property in the continued
operation of the Business in accordance with the terms of the Company IP
Licenses governing such Intellectual Property.
30
(c) Except
as set forth in Section 3.14(c) of the
Disclosure Schedule, to the Knowledge of the Sellers, no Person is
engaging in any activity that infringes, dilutes, misappropriates, or otherwise
violates the Owned Intellectual Property. Each Company IP License is
valid and enforceable, is binding on the Company or the Institution and, to the
Knowledge of the Sellers, on the other parties thereto, is in full force and
effect, and no party to any Company IP License is in material breach thereof or
default thereunder.
Section 3.15
Real
Property. (a) The
Company does not hold title to any Owned Real Property.
(b) Section 3.15(b) of the
Disclosure Schedule lists: (i) the street address of each
parcel of Leased Real Property and (ii) the identity of the lessor, lessee and
current occupant (if different from lessee) of each such parcel of Leased Real
Property.
(c) There
is no material violation of any Law (including any building, planning or zoning
law) relating to any of the Real Property. The Sellers have made
available to the Purchaser true, legible and complete copies of each deed for
each parcel of Leased Real Property and all the title insurance policies, title
reports, surveys, certificates of occupancy, environmental reports and audits,
appraisals, permits, other Encumbrances, title documents and other documents
relating to or otherwise affecting the Real Property, the operations of the
Company or the Institution thereon or any other uses thereof. The
Company or the Institution is in peaceful and undisturbed possession of each
parcel of Real Property, and there are no contractual or legal restrictions that
preclude or restrict the ability to use the Real Property for the purposes for
which it is currently being used. All existing water, sewer, steam,
gas, electricity, telephone, cable, fiber optic cable, Internet access and other
utilities required for the construction, use, occupancy, operation and
maintenance of the Real Property are adequate for the conduct of the Business as
they have been and currently are conducted. There are no material
latent defects or material adverse physical conditions affecting the Real
Property or any of the facilities, buildings, structures, erections,
improvements, fixtures, fixed assets and personalty of a permanent nature
annexed, affixed or attached to, located on or forming part of the Real
Property. Neither the Company nor the Institution has leased any
parcel or any portion of any parcel of Real Property to any other Person and no
other Person has any rights to the use, occupancy or enjoyment thereof pursuant
to any lease, license, occupancy or other agreement, nor have the Sellers
assigned its interest under any lease listed in Section 3.15(b) of the
Disclosure Schedule to any third party.
31
(d) Section 3.15(d) of the
Disclosure Schedule sets forth a true and complete list of all leases
relating to the Leased Real Property and any and all ancillary documents (the
“Ancillary Lease
Documents”) pertaining thereto (including all amendments, modifications,
supplements, exhibits, schedules, addenda and restatements thereto and thereof
and all consents, including consents for alterations, assignments and sublets,
documents recording variations, memoranda of lease, options, rights of
expansion, extension, first refusal and first offer and evidence of commencement
dates and expiration dates). Except as set forth in Section 3.15(d) of the
Disclosure Schedule, with respect to each of such leases, neither the
Company, nor the Institution has exercised or given any notice of exercise of,
nor has any lessor or landlord exercised or received any notice of exercise by a
lessor or landlord of, any option, right of first offer or right of first
refusal contained in any such lease or sublease, including any such option or
right pertaining to purchase, expansion, renewal, extension or relocation
(collectively, “Options”).
(e) The
interests of the Company and the Institution in the Leased Real Property to be
transferred pursuant to this Agreement are sufficient in all material respects
for the continued conduct of the Business after the Closing in substantially the
same manner as conducted prior to the Closing.
(f) There
are no condemnation proceedings or eminent domain proceedings of any kind
pending or, to the Knowledge of the Sellers, threatened against the Leased Real
Property.
(g) (i)
All the Leased Real Property is occupied under a valid and current certificate
of occupancy or similar permit, (ii) the transactions contemplated by this
Agreement and the Ancillary Agreements will not require the issuance of any new
or amended certificate of occupancy, and (iii) to the Knowledge of the Sellers,
there are no facts that would prevent the Real Property from being occupied by
the Company or the Institution after the Closing in the same manner as occupied
by the Company or the Institution immediately prior to the Closing.
(h) All
improvements on the Real Property constructed by or on behalf of the Company or
the Institution or constructed by or on behalf of any other Person, were
constructed in compliance in all material respects with all applicable Laws
(including any building, planning or zoning Laws) affecting such Real
Property.
(i)
No improvements on the Real Property and
none of the current uses and conditions thereof violate any Encumbrance,
applicable deed restrictions or other applicable covenants, restrictions,
agreements, existing site plan approvals, zoning or subdivision regulations or
urban redevelopment plans as modified by any duly issued variances, and no
permits, licenses or certificates pertaining to the ownership or operation of
all improvements on the Real Property, other than those which are transferable
with the Real Property, are required by any Governmental Authority having
jurisdiction over the Real Property.
(j)
All improvements on any Real Property are
wholly within the lot limits of such Real Property and do not encroach on any
adjoining premises or Encumbrance benefiting such Real Property, and there are
no encroachments on any Real Property or any easement or property right or
benefit appurtenant thereto by any improvements located on any adjoining
premises.
32
(k)
There have been no improvements of a value
in excess of $10,000 in the aggregate made to or constructed on any Real
Property within the applicable period for the filing of mechanics’
liens.
(l)
The rental set forth in each lease of the
Leased Real Property is the actual rental being paid, and there are no separate
agreements or understandings with respect to the same.
(m) The
Company or the Institution has the full right to exercise any Options contained
in the leases pertaining to the Leased Real Property on the terms and conditions
contained therein and upon due exercise would be entitled to enjoy the full
benefit of such Options with respect thereto.
Section 3.16
Tangible
Personal Property. (a) Section 3.16(a) of the
Disclosure Schedule lists each item or distinct group of equipment,
supplies, furniture, fixtures, personalty, books and other tangible personal
property (the “Tangible Personal
Property”) used at the Institution having an individual value equal to or
greater than $5,000.
(b) Section 3.16(b) of the
Disclosure Schedule sets forth a true and complete list of all leases for
Tangible Personal Property and any and all material ancillary documents
pertaining thereto (including all amendments, consents and evidence of
commencement dates and expiration dates) having an individual value equal to or
greater than $5,000.
Section 3.17
Employee
Benefit Matters. (a) Plans and Material
Documents. Section 3.17(a) of the
Disclosure Schedule lists (i) all employee benefit plans (as defined
in Section 3(3) of the Employee Retirement Income Security Act of 1974
(“ERISA”)) and
all bonus, stock option, stock purchase, restricted stock, incentive, deferred
compensation, retiree medical or life insurance, supplemental retirement,
severance or other benefit plans, programs or arrangements, and all employment,
termination, severance or other contracts or agreements to which the Company is
a party (other than any oral contracts of employment terminable on no more than
30 days’ notice without penalty or further payment obligation), with respect to
which the Company has any obligation or that are maintained, contributed to or
sponsored by the Company for the benefit of any current or former employee,
officer, director or consultant of the Company (other than any oral contracts of
employment terminable on no more than 30 days’ notice without penalty or further
payment obligation) and (ii) any contracts, arrangements or understandings
between any Seller or any of its Affiliates and any employee or consultant of
the Company, including any contracts, arrangements or understandings relating to
the sale of the Company (collectively, the “Plans”). The
Sellers have made available to the Purchaser a complete and accurate copy of
each written Plan and a summary of the material terms of any unwritten Plan and
there are no other employee benefit plans, programs, arrangements or agreements,
whether formal or informal, whether in writing or not, to which the Company is a
party, with respect to which the Company has any obligation or that are
maintained, contributed to or sponsored by the Company for the benefit of any
current or former employee, officer, director or consultant of the
Company.
33
(b) Absence of Certain Types of
Plans. None of the Plans is a multiemployer plan (within the
meaning of Section 3(37) or 4001(a)(3) of ERISA) (a “Multiemployer Plan”)
or a single employer pension plan (within the meaning of Section 4001(a)(15) of
ERISA) for which the Company could incur liability under Section 4063 or 4064 of
ERISA (a “Multiple
Employer Plan”). None of the Plans provides for the payment of
separation, severance, termination or similar-type benefits to any Person or
obligates the Company to pay separation, severance, termination or similar-type
benefits solely as a result of any transaction contemplated by this Agreement or
as a result of a “change in control”, within the meaning of such term under
Section 280G of the Code. None of the Plans provides for or
promises retiree medical, disability or life insurance benefits to any current
or former employee, officer or director of the Company. Each of the
Plans is subject only to the Laws of the United States or a political
subdivision thereof.
(c) Compliance with Applicable
Law. Each Plan is now and has always been operated in all
material respects in accordance with the requirements of all applicable Law,
including ERISA and the Code. The Company has performed all
obligations required to be performed by it under, is not in any respect in
default under or in violation of, and has no knowledge of any default or
violation by any party to, any Plan. No Action is pending or, to the
Knowledge of the Sellers, threatened with respect to any Plan (other than claims
for benefits in the ordinary course), and no material fact or event exists that
could give rise to any such Action or claim.
(d) Qualification of Certain
Plans. Each Plan that is intended to be qualified under
Section 401(a) of the Code or Section 401(k) of the Code has received
a favorable determination letter from the IRS that it is so qualified, and each
trust established in connection with any Plan that is intended to be exempt from
federal income taxation under Section 501(a) of the Code has received a
determination letter from the IRS that it is so exempt, and no fact or event has
occurred since the date of such determination letter from the IRS to affect
adversely the qualified status of any such Plan or the exempt status of any such
trust. Each trust maintained or contributed to by the Company that is
intended to be qualified as a voluntary employees’ beneficiary association and
that is intended to be exempt from federal income taxation under
Section 501(c)(9) of the Code has received a favorable determination letter
from the IRS that it is so qualified and so exempt, and no fact or event has
occurred since the date of such determination by the IRS to adversely affect
such qualified or exempt status.
(e)
Absence of Certain
Liabilities and Events. There has been no prohibited
transaction (within the meaning of Section 406 of ERISA or Section 4975 of the
Code) with respect to any Plan. The Company has not incurred any
liability for any penalty or tax arising under Section 4971, 4972, 4980, 4980B
or 6652 of the Code or any liability under Section 502 of ERISA, and no fact or
event exists that could give rise to any such liability. The Company
has not incurred any liability under, arising out of or by operation of Title IV
of ERISA (other than liability for premiums to the Pension Benefit Guaranty
Corporation arising in the ordinary course), including any liability in
connection with (i) the termination or reorganization of any employee benefit
plan subject to Title IV of ERISA or (ii) the withdrawal from any Multiemployer
Plan or Multiple Employer Plan, and no fact or event exists that could give rise
to any such liability. No complete or partial termination has
occurred within the five years preceding the date hereof with respect to any
Plan. No reportable event (within the meaning of Section 4043 of
ERISA) has occurred or is expected to occur with respect to any Plan subject to
Title IV of ERISA. No Plan had an accumulated funding deficiency
(within the meaning of Section 302 of ERISA or Section 412 of the Code), whether
or not waived, as of the most recently ended plan year of such
Plan. None of the assets of the Company is the subject of any lien
arising under Section 302(f) of ERISA or Section 412(n) of the Code; the Company
has not been required to post any security under Section 307 of ERISA or Section
401(a)(29) of the Code; and no fact or event exists which could give rise to any
such lien or requirement to post any such security.
34
(f)
Plan Contributions and
Funding. All contributions, premiums or payments required to
be made with respect to any Plan prior to the Closing Date have been or will be
made on or before their due dates. All such contributions have been
fully deducted for income tax purposes and no such deduction has been challenged
or disallowed by any Governmental Authority, and to the Knowledge of the
Sellers, no fact or event exists that could give rise to any such challenge or
disallowance.
(g) WARN
Act. The Company is in compliance with the requirements of the
Workers Adjustment and Retraining Notification Act (the “WARN Act”) and has no
Liabilities pursuant to the WARN Act.
Section 3.18
Labor
Matters. (a) Neither
the Company nor the Institution is a party to any collective bargaining
agreement or other labor union contract applicable to persons employed by the
Company or the Institution, and to the Knowledge of the Sellers, currently there
are no organizational campaigns, petitions or other unionization activities
seeking recognition of a collective bargaining unit that could materially affect
the Company or the Institution.
(b) There
are no unfair labor practice complaints pending against the Company or the
Institution before the National Labor Relations Board or any other Governmental
Authority.
(c) The
Company is currently in compliance in all material respects with all applicable
Laws relating to the employment of labor, including those related to wages,
hours, collective bargaining and the payment and withholding of taxes and other
sums as required by the appropriate Governmental Authority and has withheld and
paid to the appropriate Governmental Authority or is holding for payment not yet
due to such Governmental Authority all amounts required to be withheld from
employees of the Company and is not liable for any arrears of wages, Taxes,
penalties or other sums for failure to comply with any of the
foregoing.
(d) The
Company has paid in full to all its respective employees, or adequately accrued
for in accordance with GAAP, all wages, salaries, commissions, bonuses, benefits
and other compensation due to or on behalf of such employees.
(e) There
is no Claim with respect to payment of wages, salary or overtime pay that has
been asserted or is now pending or, to the Knowledge of the Sellers, threatened
before any Governmental Authority with respect to any Persons currently or
formerly employed by the Company.
(f)
The Company is not a party to, or otherwise
bound by, any consent decree with, or citation by, any Governmental Authority
relating to employees or employment practices.
35
(g) There
is no charge or proceeding with respect to a violation of any occupational
safety or health standard that has been asserted or is now pending or, to the
Knowledge of the Sellers, threatened, with respect to the Company.
(h) Except
as set forth in Section 3.18(h) of the
Disclosure Schedule, there is no charge of discrimination in employment
or employment practices, for any reason, including age, gender, race, religion
or other legally protected category, which has been asserted or is now pending
or, to the Knowledge of the Sellers, threatened before the United States Equal
Employment Opportunity Commission, or any other Governmental Authority with
respect to the Company.
Section
3.19 Assets. (a) Except
as set forth on Section 3.19(a) of the
Disclosure Schedule, the Company has good and marketable title to, or in
the case of leased Assets and Licensed Intellectual Property, a valid and
subsisting leasehold interest in or lawful right to use, as applicable, all the
Assets, free and clear of all Encumbrances except Permitted
Encumbrances.
(b) The
Company owns, leases or has the legal right to use, as applicable, all the
properties and assets, including the Owned Intellectual Property, the Licensed
Intellectual Property, the Company IP Licenses, the Leased Real Property and the
Tangible Personal Property, used or intended to be used in the conduct of the
Business or otherwise owned, leased or used by the Company, and, with respect to
contract rights, is a party to and enjoys the right to the benefits of all
contracts, agreements and other arrangements used or intended to be used by the
Company or in or relating to the conduct of the Business, all of which
properties, assets and rights constitute Assets.
(c) The
Assets constitute all the properties, assets and rights forming a part of, used,
new or intended to be used in, and all such properties, assets and rights as are
necessary in the conduct of the Business, and at all times the Sellers have
caused the Assets to be maintained in accordance with good business practice,
and all the Assets are in good operating condition and repair and are suitable
for the purposes for which they are used and intended (subject to ordinary wear
and tear).
(d) The
Sellers have the complete and unrestricted power and unqualified right to sell,
assign, transfer, convey and deliver the Assets to the Purchaser without penalty
or other adverse consequences. Following the consummation of the
transactions contemplated by this Agreement and the execution of the instruments
of transfer contemplated by this Agreement, the Purchaser will own, with good,
valid and marketable title, or lease, under valid and subsisting leases, or
otherwise acquire the interests of the Sellers in the Assets, free and clear of
any Encumbrances, other than Permitted Encumbrances, and without incurring any
penalty or other adverse consequence, including any increase in rentals,
royalties, or license or other fees imposed as a result of, or arising from, the
consummation of the transactions contemplated by this Agreement.
Section 3.20
Student
Lists. (a) Section 3.20(a) of the
Disclosure Schedule lists the names and educational programs of all
students enrolled at the Institution as of the date hereof for the then current
academic period.
36
(b) Section 3.20(b) of the
Disclosure Schedule lists the names and intended educational programs of
all students enrolled at the Institution as of the date hereof for future
academic periods and not otherwise included in Section 3.20(a) of the
Disclosure Schedule.
Section 3.21
Student
Financial Records. True
and complete copies of the financial records for each student have been provided
or made available to the Purchaser by the Sellers.
Section 3.22
Certain
Interests. Except
as set forth in Section 3.22 of the
Disclosure Schedule, no director, manager, member, stockholder or officer
of any Seller, the Company or the Institution, and no relative or spouse (or
relative of such spouse) who resides with, or is a dependent of, any such
Person:
(a) has
any direct or indirect financial interest in or with respect to (i) any
competitor or supplier of the Company or the Business or (ii) any other party to
any arrangement or contract (including a lease) relating to the Company or the
Business; provided, however, that the
ownership of securities representing no more than one percent of the outstanding
voting power of any competitor or supplier, and which are also listed on any
national securities exchange, shall not be deemed to be a “financial interest”
so long as the Person owning such securities has no other connection or
relationship with such competitor or supplier;
(b) owns,
directly or indirectly, in whole or in part, or has any other interest in any
tangible or intangible property which the Company or the Institution uses or has
used in the conduct of the Business or otherwise; or
(c) has
outstanding any Indebtedness to the Company or the Institution.
Section
3.23 Taxes. (a) (i) All
Tax Returns required by applicable Law to be filed by or with respect to the
Company prior to the Closing Date have been or will be timely filed;
(ii) all Taxes required to be shown on such Tax Returns or otherwise due
prior to the Closing Date in respect of the Company have been or will be timely
paid; (iii) all such Tax Returns are true, correct and complete in all
material respects; (iv) no adjustment relating to such Tax Returns has been
proposed formally or informally by any Governmental Authority, and no basis
exists for any such adjustment; (v) there are no pending or, to the
Knowledge of the Sellers, threatened Actions for the assessment or collection of
Taxes against the Company; (vi) there are no Tax liens on
any assets of the Company, other than Permitted Encumbrances; (vii) no
Seller nor any Affiliate of any Seller is a party to any agreement or
arrangement that would result, separately or in the aggregate, in the actual or
deemed payment by the Company of any “excess parachute payments” within the
meaning of Section 280G of the Code (without regard to
Section 280G(b)(4) of the Code); (viii) no acceleration of the vesting
schedule for any property that is substantially unvested within the meaning of
the regulations under Section 83 of the Code will occur in connection with
the transactions contemplated by this Agreement; (ix) none of the Sellers
is a foreign person as such term is defined in Section 1445 of the Code;
(x) the Company has properly and timely withheld, collected and deposited
all Taxes that are required to be withheld, collected and deposited under
applicable Law; (xi) the Company is
not doing business in or engaged in a trade or business in any jurisdiction in
which it has not filed all required Tax Returns, and no notice or inquiry
has been received from any jurisdiction in which Tax Returns have not been filed
by the Company to the effect that the filing of Tax Returns may be required; and
(xii) the Company has not been at any time a member of any
consolidated, unitary, combined, affiliated or similar group for Tax purposes
(other than, with respect to the Company, a group that includes only other
Companies or Subsidiaries) or a member of any partnership or joint venture or
the holder of a beneficial interest in any trust for any period for which the
statute of limitations for any Tax has not expired.
37
(b)
(i) there are no
outstanding waivers or agreements extending the statute of limitations for any
period with respect to any Tax to which the Company may be subject;
(ii) there are no requests for information currently outstanding that could
affect the Taxes of the Company; (iii) there are no proposed reassessments
of any property owned by the Company or other proposals that could increase the
amount of any Tax to which the Company would be subject; (iv) no power of
attorney that is currently in force has been granted with respect to any matter
relating to Taxes that could affect the Company; (v) the Company
(A) does not have an unrecaptured overall foreign loss within the meaning
of Section 904(f) of the Code, or (B) has not participated in or
cooperated with an international boycott within the meaning of Section 999
of the Code; (vi) the Company has no (A) income reportable for a
period ending after the Closing but attributable to a transaction (e.g., an installment
sale) occurring in, or a change in accounting method made for, a period ending
on or prior to the Closing that resulted in a deferred reporting of income from
such transaction or from such change in accounting method (other than a deferred
intercompany transaction) or (B) deferred gain or loss arising out of any
deferred intercompany transaction; and (vii) no Indebtedness attributable to the
Company is characterized as equity for federal income Tax purposes.
(c)
(i) Section 3.23(c) of the
Disclosure Schedule lists all income, information, franchise and similar
Tax Returns (federal, state, local and foreign) filed with respect to the
Company for taxable periods ended on or after January 1, 2004, indicates the
most recent income, information, franchise or similar Tax Return for each
relevant jurisdiction for which an audit has been completed or the statute of
limitations has lapsed, and indicates all Tax Returns that currently are the
subject of audit; (ii) the Sellers have delivered or made available to the
Purchaser correct and complete copies of all federal, state and foreign income,
information, franchise and similar Tax Returns, examination reports, and
statements of deficiencies assessed against or agreed to by the Company since
January 1, 2005; and
(iii) the Sellers have delivered or made available to the Purchaser a true
and complete copy of any tax-sharing or allocation agreement or arrangement
involving the Company and a true and complete description of any such unwritten
or informal agreement or arrangement.
(d)
On the Estimated Closing Balance Sheet, reserves and allowances
have been provided, and on the Closing Balance Sheet, reserves and allowances
will be provided, in each case adequate to satisfy all Liabilities for Taxes
relating to the Company for all taxable periods through the Closing (without
regard to the materiality thereof).
Section
3.24 Insurance. All
material assets, properties and risks of the Company are, and for the past five
years have been, covered by valid and, except for insurance policies that have
expired under their terms in the ordinary course, currently effective insurance
policies or binders of insurance (including general liability insurance,
property insurance and workers’ compensation insurance) issued in favor of the
Company, as the case may be, in each case with responsible insurance companies,
in such types and amounts and covering such risks as are consistent with
customary practices and standards of companies engaged in businesses and
operations similar to those of the Company.
38
Section 3.25
Educational
Approvals. (a) Section 3.25(a) of the Disclosure
Schedule lists, with respect to the Company and the Institution, each
Educational Approval issued by any Educational Agency since the Compliance Date
to the Company or the Institution (i) with respect to any educational program(s)
offered by the Company or the Institution, (ii) with respect to the authority of
the Company or the Institution to recruit students in any state where it engages
employees or agents to recruit students, and (iii) with respect to all
locations, branches, campuses, buildings, classrooms, learning sites, and
facilities at which any portion of an educational program is offered or taught
in whole or in part by or in association with the Institution. The
Sellers have delivered or made available to Purchaser complete and correct
copies of all Educational Approvals.
(b) The
current Educational Approvals set forth on Section 3.25(a) of the Disclosure
Schedule are in full force and effect, including provisional and
non-provisional certifications, and no proceeding for the suspension,
limitation, revocation, condition, restriction, withdrawal, termination or
cancellation of any of them is pending or, to the Knowledge of the Sellers, has
been threatened. There are no facts, circumstances or omissions
concerning the Company or the Institution that could result in such a
proceeding. Neither the Company nor the Institution have received any
notice that any of the Educational Approvals set forth on Section 3.25(a) of the Disclosure
Schedule will not be renewed (to the extent that renewal is required) and
there is no basis for any such nonrenewal (if applicable).
Section 3.26 Compliance with Educational
Laws. (a) Since the Compliance Date, and except as set forth on Section 3.26(a) of the
Disclosure Schedule, the Company and the Institution has been and is in
compliance in all material respects with any and all applicable Educational
Laws.
(i)
The Company and the Institution currently
hold and, since the Compliance Date, have held all Educational Approvals
required under all laws, rules, regulations, standards and requirements of any
Educational Agency, including all Educational Approvals for each education
program the Company or the Institution has offered and for each campus,
location, or facility where such entity offered all or any portion of an
educational program.
(ii)
Since the Compliance Date, the Company and
the Institution have complied in all material respects with the terms and
conditions of all such Educational Approvals. Since the Compliance
Date, the Company and the Institution have complied with all Educational Laws of
all applicable Educational Agencies.
(iii) Since
the Compliance Date, the Company and the Institution have timely notified, and
obtained all required approvals from all applicable Educational Agencies for
each substantive change in the Company or the Institution, including any
addition of new education programs or changes in ownership, control or
governance.
39
(iv) Since
the Compliance Date, neither the Company nor the Institution has received notice
that the Company or the Institution is in violation of any of the terms or
conditions of any Educational Approval or alleging the failure to hold or obtain
any Educational Approval. There are no facts or circumstances
concerning the operations or management of the Institution that reasonably could
result in the denial or delay in issuance of any Educational Approval to be
issued in connection with the consummation of the transactions contemplated
under this Agreement.
(v) Section 3.26(a)(v) of the Disclosure
Schedule lists each program pursuant to which financial assistance is
provided or, since the Compliance Date, has been provided, to or on behalf of
the students of the Institution.
(vi) The
facilities listed on Section 3.26(a)(vi) of the
Disclosure Schedule are and, since the Compliance Date, have been the
only addresses at which the Company, and the Institution have offered
educational instruction or otherwise operated. With respect to any
facility that has closed or at which the Institution ceased operating
instruction, the Company and the Institution materially complied with all
applicable laws and all Accrediting Body and Educational Agency standards
related to the closure or cessation of instruction at a location or campus,
including requirements for teaching out students from that location or
campus.
(b) Without
limiting the foregoing provisions in Section
3.26(a):
(i)
The Company and the Institution possess,
and since the Compliance Date, have possessed, all requisite Educational
Approvals to operate the Institution in each jurisdiction in which the
Institution is located or in which they conduct any operations or are otherwise
required to obtain such Educational Approvals, including providing educational
services in person or via distance learning, student marketing or
recruiting.
(ii)
The Institution is, and since the Compliance Date
has been, fully or provisionally certified by the U.S. DOE to participate in the
Title IV Programs and is party to, and in compliance with, a valid and effective
Program Participation Agreement with the U.S. DOE that is in full force and
effect. Neither the Company nor the Institution is subject to, or
since the Compliance Date has been, threatened with, any fine, limitation,
suspension or termination proceeding, or subject to any other action or
proceeding by the U.S. DOE that could result in the suspension, limitation,
conditioning, or termination of certification or eligibility, or a liability or
fine. To the Knowledge of the Sellers, there are no facts,
circumstances, or omissions concerning the Company or the Institution that
reasonably could result in such an action by the U.S. DOE.
(iii) The
Company and the Institution are, and since the Compliance Date have been, in
material compliance with all applicable rules, regulations and requirements
pertaining to the Institution’s participation in the Title IV
Programs. To the Knowledge of the Sellers, there are no facts,
circumstances, or omissions concerning the Company or the Institution that
reasonably could result in a finding of material non-compliance with regard to
such rules, regulations and requirements. Without limiting the
foregoing:
40
(A)
Since the Compliance Date, each educational
program offered by the Institution, including programs involving externships,
internships or consortium agreements, was and is an eligible program in
accordance with all applicable rules, regulations and requirements, including
the requirements of 34 C.F.R. § 668.8, and the Company and the Institution have
properly measured the length of such educational programs for the purpose of
disbursing Title IV Program funding to students enrolled in each such
program.
(B)
Since the Compliance Date, the Institution has
possessed the Educational Approvals necessary for each campus, branch,
additional location and other facility or site at which the Institution offered
or students received all or part of an educational program and at which students
received funds under the Title IV Programs. Since the Compliance
Date, the Institution has been duly qualified as a “proprietary institution of
higher education” as defined at 34 C.F.R. § 600.5.
(C)
Except as set forth in Section 3.26(b)(iii)(C) of
the Disclosure Schedule, since the Compliance Date, neither the Company
nor the Institution has received notice from the U.S. DOE or any Educational
Agency that the Company or the Institution lacked financial responsibility or
administrative capability for any period.
(D)
The Institution is and has been financially
responsible in accordance with the provisions of 34 C.F.R. §§ 668.171-175 and
any predecessor regulations for each fiscal year ending on or after the
Compliance Date.
(E)
Since the Compliance Date, neither the Company
nor the Institution has received notice of a request by any Educational Agency
or governmental entity that the Company or the Institution post a Letter of
Credit or other form of surety with respect to the Institution for any reason,
including any request for a Letter of Credit based on late refunds pursuant to
34 C.F.R. § 668.173, 34 C.F.R. § 668.15 or any predecessor
regulation.
(F)
Except as set forth on Section 3.26(b)(iii)(F) of
the Disclosure Schedule, since the Compliance Date, the U.S. DOE has not
placed the Company or the Institution on either the cash monitoring or
reimbursement methods of payment.
(G)
Since the Compliance Date, the Company and the
Institution has timely filed with the U.S. DOE all required compliance audits
and audited financial statements, including those required by 34 C.F.R. § 668.23
or any predecessor regulation.
(H)
Except as listed in Section 3.26(b)(iii)(H) of
the Disclosure Schedule, no audits, program reviews, investigations or
visits have been conducted by an Educational Agency or by a Governmental
Authority in connection with an Educational Approval or the Institution since
the Compliance Date, including but not limited to any U.S. DOE or guaranty
agency program reviews, U.S. DOE Office of Inspector General audits, U.S. DOE
Office of Inspector General investigations and Department of Justice
investigations. Except as listed in Section 3.26(b)(iii)(H) of
the Disclosure Schedule, there is no audit, program review,
investigation, or visit that remains pending or is scheduled to
occur. The Sellers have provided or made available to the Purchaser
true and complete copies of all correspondence, reports, determinations, audits
or other documents related to the items listed on Section 3.26(b)(iii)(H) of
the Disclosure Schedule.
41
(I)
Except as disclosed on Section 3.26(b)(iii)(I) of
the Disclosure Schedule, since the Compliance Date, the Company and the
Institution have calculated and paid refunds and calculated dates of withdrawal
and leaves of absence in material accordance with all applicable rules,
regulations and requirements, including the requirements of 34 C.F.R. § 668.22,
34 C.F.R. § 682.605 and any predecessor regulations.
(J)
Except as listed in Section 3.26(b)(iii)(J) of
the Disclosure Schedule, since the Compliance Date, the Company and the
Institution have disbursed and processed Title IV Program funds in material
accordance with all applicable rules, regulations and requirements, including
the requirements of 34 C.F.R. § 668.164, 34 C.F.R. § 682.604 and any predecessor
regulations.
(K)
Except as listed in Section 3.26(b)(iii)(K) of
the Disclosure Schedule, since the Compliance Date, the Company and the
Institution have properly determined students’ eligibility to obtain Title IV
Program funds for which they are eligible prior to disbursing, and have
disbursed, all Title IV Program funds in material accordance with all applicable
rules, regulations and requirements, including the requirements of 34 C.F.R. §
682.201, 34 C.F.R. § 668, Subpart C, and any predecessor
regulation.
(L)
Since the Compliance Date, the Company and
the Institution have at all times complied with the limitations in 34 C.F.R. §
600.7 on the number of courses that the Institution may offer by correspondence
or telecommunications, the number of students who may enroll in such courses,
the number of students that were incarcerated, and the number of students that
had neither a high school diploma nor the recognized equivalent of a high school
diploma.
(M) Section 3.26(b)(iii)(M) of
the Disclosure Schedule lists the official published cohort default rates
for the Institution calculated by the U.S. DOE and issued pursuant to 34 C.F.R.
§ 668.181-186 or predecessor regulations, for the federal fiscal years 2004,
2005 and 2006.
(N)
Neither the Company nor the
Institution receives funds as a result of Federal Perkins
Loans.
42
(O)
For each fiscal year ending on or after the
Compliance Date, neither the Company nor the Institution has derived more than
ninety percent (90%) of its revenues from Title IV Program funds, as determined
in accordance with the applicable provisions of the HEA and 34 C.F.R. § 600.5(d)
and § 600.5(e) and guidance issued thereunder. Section 3.26(b)(iii)(O) of
the Disclosure Schedule lists a correct statement of the percentage of
revenue from Title IV Program funds as determined in accordance with the
applicable provisions of the HEA and 34 C.F.R. § 600.5(d) and § 600.5(e) for
each of such fiscal years.
(iv) Except
as set forth on Section 3.26(b)(iv) of the
Disclosure Schedule, neither the Company nor the Institution is, nor
since the Compliance Date, has been placed on probation, reporting, monitoring
or warning status with any Educational Agency, nor has the Institution been
subject to any adverse action by any Educational Agency (including being
directed to show cause why accreditation or other Educational Approval should
not be revoked, withdrawn, conditioned, suspended, or limited) to revoke,
withdraw, deny, suspend, condition or limit its accreditation or other
Educational Approval. To the Knowledge of the Sellers, there are no
facts, circumstances or omissions concerning the Company or the Institution that
reasonably could lead to any such actions by an Educational Agency.
(v) The
Company and the Institution have materially complied with all written
stipulations, conditions and other requirements imposed by any Educational
Agency at the time of, or since, the last issuance of any Educational Approval,
including but not limited to the timely filing of all required reports and
responses.
(vi) Neither
the nor the Institution provides, or since the Compliance Date, has provided or
contracted with any entity that provides, any commission, bonus or other
incentive payment based directly or indirectly on success in securing
enrollments or awarding financial aid to any persons or entities engaged in any
student recruiting or admissions activities or in making decisions regarding the
awarding of student financial aid.
(vii)
Since the Compliance Date, all student financial aid
grants and loans, disbursements and record keeping relating thereto have been
completed by the Institution in material compliance with all federal and state
requirements, and there are no material deficiencies in respect
thereto. Except as disclosed on Section 3.26(b)(vii) of the
Disclosure Schedule, since the Compliance Date, the students at the
Institution have been funded in material accordance with the rules regarding the
proper time for disbursement and in the amount for which they were eligible, and
such students’ records conform in form and substance, in all material respects,
to all relevant regulatory requirements. All appropriate reports and
surveys have been accurately prepared, in all material respects, and filed
timely.
(viii)
Since the Compliance Date, no principal, affiliate (as
those terms are defined in 34 C.F.R. Part 85), owner, shareholder, member,
manager, trustee, or officer of the Company or the Institution or any other
individual or entity holding an ownership interest in the Company or the
Institution, whether legal or equitable, is or has been a principal, affiliate,
owner, shareholder or trustee or held an ownership interest, whether legal or
equitable, in any other post-secondary institution (whether or not participating
in the Title IV Programs).
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(ix) Except
as set forth on Section 3.26(b)(ix) of the
Disclosure Schedule, since the Compliance Date, neither the Company nor
the Institution, nor any Person that exercises substantial control over the
Institution (as the term “substantial control” is defined in 34 C.F.R. §
668.174(c)(3)) or member of such Person’s family (as the term “family” is
defined in 34 C.F.R. § 668.174(c)(4)), alone or together, (A) exercises or
exercised substantial control over another school or third-party servicer (as
that term is defined in 34 C.F.R. § 668.2) that owes a liability for a violation
of a Title IV Program requirement or (B) owes a liability for a Title IV Program
violation.
(x)
Neither the Company nor the
Institution, nor any Person or entity that exercises substantial control over
the Company or the Institution, or member of such Person’s family, has filed for
relief in bankruptcy or had entered against it an order for relief in
bankruptcy.
(xi) Neither
the Company nor the Institution nor any of their employees has pled guilty to,
pled nolo contendere to, or been found guilty of, a crime involving the
acquisition, use or expenditure of funds under the Title IV Programs or been
judicially determined to have committed fraud involving Title IV Program
funds.
(xii) To
the Knowledge of the Sellers, neither the Company nor the Institution employs
nor, since the Compliance Date, has employed in a capacity that involves the
administration of Title IV Program funds or the receipt of funds under the Title
IV Programs, any individual that has been convicted of, or has pled nolo
contendere or guilty to, a crime involving the acquisition, use, or expenditure
of federal, state, or local government funds, or has been administratively or
judicially determined to have committed fraud or any other material violation of
Law involving federal, state or local government funds. To the
Knowledge of the Sellers, neither the Company nor the Institution has contracted
with any institution or third-party servicer that has been limited, suspended or
terminated under the HEA, for a reason involving the acquisition, use, or
expenditure of federal, state, or local government funds, or that has been
administratively or judicially determined to have committed fraud or any other
material violation of Law involving federal, state or local government
funds. To the Knowledge of the Sellers, neither the Company nor the
Institution has contracted with or employed any individual, agency or
organization that has been, or whose officers or employees have been convicted
of, or pled nolo contendere or guilty to, a crime involving the acquisition,
use, or expenditure of federal, state, or local government funds, or have been
administratively or judicially determined to have committed fraud or any other
material violation of Law involving federal, state, or local government
funds.
(xiii) Except
as listed in Section
3.26(b)(xiii) of the Disclosure Schedule, neither the nor the Institution
provides, or since the Compliance Date, has provided, any educational
instruction on behalf of any other institution or organization of any sort other
than the Institution. No other institution or organization of any
sort provides, or since the Compliance Date, has provided, any educational
instruction on behalf of the Institution.
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(xiv) No
principal or, to the Knowledge of the Sellers, affiliate of the Company or the
Institution has been debarred or suspended, or engaged in any activity that is a
cause for debarment or suspension, pursuant to the U.S. DOE regulations at 34
C.F.R. Part 85.
(c)
Except as listed in Section 3.26(c) of the
Disclosure Schedule, neither the Company nor the Institution has received
notice of any written student complaints or employee grievances made to the
Company or the Institution, or to any Accrediting Body or Educational Agency,
whether received from any current or former student or any applicant, or
received from any Educational Agency in relation to any such complaint or
grievance, or sent by or on behalf of the Company or the Institution in regard
to any such complaint, in each case (except as expressly otherwise indicated),
on or after the Compliance Date. The Sellers have delivered or made
available to the Purchaser correct and complete copies of any such written
complaint or grievance and related correspondence.
(d)
The Sellers have delivered or made available to the Purchaser true and
materially complete copies of all correspondence (excluding general
correspondence routinely sent to, or received from, any Educational Agency)
received from or sent by or on behalf of the Company or the Institution to any
Educational Agency to the extent such correspondence (i) was sent or received
since the Compliance Date or relates to any issue that remains pending, and (ii)
relates to (A) any notice that any Educational Approval is not in full force and
effect or that an event has occurred which constitutes or, with the giving of
notice or the passage of time or both, would constitute a breach or violation
thereunder; (B) any notice that the Company, the Institution, or any Affiliate,
employee, or agent of the Company or the Institution has violated or is
violating any Educational Law, including any law related to the Title IV
Programs, or any criterion, rule, standard, or other written guidance of any
applicable accrediting body, or any law, regulation, or requirement related to
maintaining and retaining in full force and effect any and all Educational
Approvals necessary for the existing operations of, and receipt of financial
assistance by, the Company or the Institution; (C) any audits, program reviews,
inquiries, investigations, or site visits conducted by any Educational Agency,
any guaranty agency, or any independent auditor reviewing compliance by the
Company or the Institution with any Educational Law or Educational Approval; (D)
the qualification of the Company, the Institution or any Affiliate thereof for
the receipt of financial assistance; (E) any written notice of an intent to
limit, suspend, terminate, revoke, cancel, not renew, or condition the
Educational Approvals of, or the provision of financial assistance to, the
Company, the Institution or to the Institution’s students; (F) any written
notice of an intent or threatened intent to condition the provision of financial
assistance to the Company or the Institution on the posting of a Letter of
Credit or other surety in favor of the U.S. DOE; (G) written notice of an intent
to provisionally certify the eligibility of the Company or the Institution to
participate in the Title IV Programs; or (H) the placement or removal of the
Company or the Institution on or from the reimbursement method of payment or any
method of payment other than the advance payment method under the Title IV
Programs.
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(e)
Section 3.26(e) of the
Disclosure Schedule sets forth a complete list of all policy manuals and
other statements of procedures or instruction relating to (i) recruitment of
students at the Institution, including procedures for assisting in the
application by prospective students for direct or indirect funding under state
or Title IV Programs; (ii) admissions procedures, including any descriptions of
procedures for insuring compliance with federal, state and accrediting body
requirements applicable to such procedures; (iii) procedures for encouraging and
verifying attendance, minimum required attendance policies, and other relevant
criteria relating to course performance requirements and completion; and (iv)
procedures for processing, disbursing, and returning Title IV Program funds,
except as contained in the catalogs of the Company or the Institution previously
provided or made available to the Purchaser (collectively, the “Policy
Guidelines”). The Sellers have delivered or made available to
the Purchaser true, correct and materially complete copies of all Policy
Guidelines.
(f)
Since the Compliance Date, the operations of the Company and the
Institution have been conducted in material accordance with the Policy
Guidelines which comply in all material respects with all applicable rules,
regulations and requirements. Complete and correct books and records
for all present and past students attending the Institution have been maintained
consistent with the operations of a school business in all material
respects. All forms and records have been prepared, completed,
maintained and filed in material accordance with all applicable laws, and are
materially complete and correct.
(g)
Since the Compliance Date, neither the Company nor the Institution has
received any written or oral notice of, and there is not any currently
unresolved investigation, review, audit, compliance review or site visit
relating to the Institution’s participation in and administration of the Title
IV Programs or other financial assistance programs or its compliance with the
requirements of any other Educational Agency. The Sellers have
delivered or made available to the Purchaser correct and complete copies of all
annual federal financial aid compliance audits and audited financial statements
filed with the U.S. DOE pursuant to 34 C.F.R. § 668.23 for all fiscal years
ending after the Compliance Date and have listed in Section 3.26(g) of the
Disclosure Schedule and provided or made available correct and complete
copies of all material correspondence related to any draft or final
investigative reports, program reviews, audits or compliance reviews received
from any other Educational Agency since the Compliance Date. Other
than the matters listed in Section 3.26(g) of the
Disclosure Schedule, to the Knowledge of the Sellers, there are no
current investigations, reviews or audits of the operation of the financial
assistance programs of the Institution or any current investigation, review or
audit of any institution by any Educational Agency or other governmental
authority.
(h)
Except as set forth in Section 3.26(h) of the
Disclosure Schedule, there are no surety bonds or other forms of security
that the Company or the Institution have been required to file since the
Compliance Date with any Educational Agency with respect to its state
authorization, federal eligibility, recruiter permits or other
matters.
(i)
Neither the Company nor the Institution has paid or otherwise extended
any points, premiums, payments or additional interest of any kind to any
eligible lender or any other party to secure funds for making loans or induce a
lender to make loans to either the students or parents of students at the
Institution or to a particular category of students or their
parents. Neither the Institution nor any officer, employee or agent
of the Company or the Institution has solicited, accepted, or received, directly
or indirectly, any benefit or item of more than nominal value from or on behalf
of a lending institution in connection with educational loans for or on behalf
of the Company’s or the Institution’s students. Neither the Company
nor the Institution has received any written notice of any investigation by any
Governmental Authority or Educational Agency that any lender or marketing agent
has provided, directly or indirectly, points, premiums, payments, or other
inducements to the Company, the Institution, or any employee or agent of the
Company, to secure applicants for Federal Family Education Loan Program
loans. No lender or marketing agent has provided, directly or
indirectly, points, premiums, payments, or other inducements to the Company or
the Institution, or any employee or agent of the Company or the Institution, to
secure applicants for Federal Family Education Loan Program
loans.
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(j)
Since the Compliance Date, all employees of the
Company and the Institution have engaged in student recruiting activities have
maintained the necessary state approvals to conduct such
activities. The Company and the Institution have maintained material
compliance with the rules and regulations applicable to the recruitment of
students.
(k)
Since the Compliance Date, the Company and
the Institution have complied with federal and state laws regarding
misrepresentation including but not limited to 34 C.F.R. § 668 subpart F, and
(i) have not included in its catalogs or advertising literature reference to any
Educational Approval which the Company or the Institution did not at the time
possess, and (ii) have not misrepresented prospective or enrolled students that
the academic programs provided by such Company or the Institution prepare
students for any certification, licensure or employment test for which the
Company or the Institution is or was not qualified or authorized to prepare
students. Section 3.26(k) of the
Disclosure Schedule lists all certification, licensure or employment
tests for which the Company and the Institution represents its academic programs
prepare students.
(l)
To the Knowledge of the Sellers,
there exists no fact or set of facts with respect to the operation of the
Institution prior to the Closing Date which could have a negative effect on the
ability of the Institution to obtain any Educational Approval under the
ownership of the Purchaser without such burdensome or unusual conditions as, in
the reasonable determination of the Purchaser, would materially reduce the
economic benefits that the Purchaser expects to receive from the consummation of
the transactions contemplated by this Agreement.
Section
3.27 Employees. Section 3.27 of the
Disclosure Schedule lists the name, place of employment, the current
annual salary rates, bonuses, deferred or contingent compensation, pension,
accrued vacation, “golden parachute” and other like benefits paid or payable (in
cash or otherwise) in 2007 and 2008, the date of employment and a description of
the position and job function of each current salaried employee, officer,
director, consultant or agent of the Company or the Institution.
Section 3.28
Certain
Business Practices. None
of the Sellers, the Company or the Institution or any of their respective
directors, officers, agents, representatives or employees (in their capacity as
directors, officers, agents, representatives or employees) has: (a)
used any funds for unlawful contributions, gifts, entertainment or other
unlawful expenses relating to political activity in respect of the Business; (b)
directly or indirectly, paid or delivered any fee, commission or other sum of
money or item of property, however characterized, to any finder, agent, or other
party acting on behalf of or under the auspices of a governmental official or
Governmental Authority, in the United States or any other country, which is in
any manner illegal under any Law of the United States or any other country
having jurisdiction; or (c) made any other unlawful payment or given any other
unlawful consideration in respect of the Business.
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Section 3.29
Brokers. No
broker, finder or investment banker is entitled to any brokerage, finder’s or
other fee or commission in connection with the transactions contemplated by this
Agreement or the Ancillary Agreements based upon arrangements made by or on
behalf of any Seller.
Section 3.30
No Other
Representations. None of the Sellers, or any of their
respective affiliates, directors, officers, employees, agents or representatives
has made, or shall be deemed to have made, and no Seller is liable for or bound
in any manner by, any express or implied representations, warranties,
guaranties, promises or statements pertaining to their business or any of their
assets except as specifically set forth in this Agreement or the Ancillary
Agreements.
ARTICLE
IV
REPRESENTATIONS
AND WARRANTIES OF PARENT AND THE PURCHASER
As an
inducement to the Sellers to enter into this Agreement, the Parent and the
Purchaser hereby represents and warrants to the Sellers as follows:
Section 4.01
Organization,
Authorization and Qualification of the Parent and the
Purchaser. (a) The Purchaser is a limited liability
company duly organized and validly existing and in good standing under the laws
of the State of Delaware and has not conducted any business operations except
operations incident to the transactions contemplated by this
Agreement. As of the Closing, the Purchaser shall not have any assets
or Liabilities. The Purchaser has all necessary power and authority
to enter into this Agreement and the Ancillary Agreements to which the Purchaser
is a party, to carry out its obligations hereunder and thereunder and to
consummate the transactions contemplated hereby and thereby. The
execution and delivery by the Purchaser of this Agreement and the Ancillary
Agreements to which the Purchaser is a party, the performance by the Purchaser
of its obligations hereunder and thereunder and the consummation by the
Purchaser of the transactions contemplated hereby and thereby have been duly
authorized by all requisite action on the part of the Purchaser. This
Agreement has been, and upon their execution the Ancillary Agreements to which
the Purchaser is a party shall have been, duly executed and delivered by the
Purchaser, and (assuming due authorization, execution and delivery by the other
parties hereto and thereto) this Agreement constitutes, and upon their execution
such Ancillary Agreements shall constitute, legal, valid and binding obligations
of the Purchaser, enforceable against the Purchaser in accordance with their
respective terms, except as the same may be limited by applicable bankruptcy,
insolvency (including all laws relating to fraudulent transfers),
reorganization, moratorium or similar laws affecting creditors’ rights
generally, now or hereafter in effect, and subject to the effect of general
principles of equity (regardless of whether considered in a proceeding at law or
in equity).
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(b)
The Parent is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has all necessary power and authority to enter into this Agreement and the
Ancillary Agreements to which the Parent is a party, to carry out its
obligations hereunder and thereunder and to consummate the transactions
contemplated by this Agreement and the Ancillary Agreements. The
Parent is duly licensed or qualified to do business and is in good standing in
each jurisdiction which the properties owned or leased by it or the operation of
its business makes such licensing or qualification necessary, except to the
extent that the failure to be so licensed or qualified and in good standing
would not (i) adversely affect the ability of the Parent to carry out its
obligations under, and to consummate the transactions contemplated by, this
Agreement and the Ancillary Agreements to which the Parent is a party or (ii)
otherwise have a material adverse effect on the business, results of operations
or financial condition of the Parent. The execution and delivery by
the Parent of this Agreement and the Ancillary Agreements to which the Parent is
a party, the performance by the Parent of its obligations hereunder and
thereunder and the consummation by the Parent of the transactions contemplated
by this Agreement and the Ancillary Agreements have been duly authorized by all
requisite action on the part of the Parent, and, if required by Law, its
shareholders. This Agreement has been, and upon their execution the
Ancillary Agreements to which the Parent is a party shall have been, duly
executed and delivered by the Parent, and (assuming due authorization, execution
and delivery by the other parties hereto and thereto) this Agreement
constitutes, and upon their execution such Ancillary Agreements shall
constitute, legal, valid and binding obligations of the Parent, enforceable
against the Parent in accordance with their respective terms, except as the same
may be limited by applicable bankruptcy, insolvency (including all laws relating
to fraudulent transfers), reorganization, moratorium or similar laws affecting
creditors’ rights generally, now or hereafter in effect, and subject to the
effect of general principles of equity (regardless of whether considered in a
proceeding at law or in equity).
(c)
To the knowledge of the Parent and the
Purchaser, there exists no fact or set of facts with respect to the Purchaser
that would reasonably be likely to have a negative effect on the ability of the
Institution to obtain the approval of the change in ownership by any Educational
Agency listed in Section 4.03 of the
Disclosure Schedule.
Section
4.02 No
Conflict. Assuming the making and obtaining of all filings,
notifications, consents, approvals, authorizations and other actions referred to
in Section 4.03
of the Disclosure Schedule, except as may result from any facts or
circumstances relating solely to the Seller, the execution, delivery and
performance by the Parent and the Purchaser of this Agreement and the Ancillary
Agreements to which the Parent or the Purchaser is a party, as the case may be,
do not and will not (a) violate, conflict with or result in the breach of
any provision of the certificate of formation or limited liability agreement of
the Parent or the Purchaser, (b) conflict with or violate any Law or
Governmental Order applicable to the Parent or the Purchaser or
(c) conflict with, or result in any breach of, constitute a default (or
event that with the giving of notice or lapse of time, or both, would become a
default) under, require any consent under, or give to others any rights of
termination, amendment, acceleration, suspension, revocation or cancellation of,
any note, bond, mortgage or indenture, contract, agreement, lease, license,
permit, franchise or other instrument or arrangement to which the Parent or the
Purchaser is a party or to which any of its assets or properties are bound or
affected, which would materially and adversely affect the ability of the Parent
or the Purchaser to carry out their obligations under, and to consummate the
transactions contemplated by, this Agreement or the Ancillary Agreements to
which the Parent or the Purchaser is a party, as the case may
be.
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Section 4.03
Governmental Consents and
Approvals. Except for the Required Consents or as otherwise
set forth on Section 4.03 of the
Disclosure Schedule, the execution, delivery and performance by the
Parent and the Purchaser of this Agreement and each Ancillary Agreement to which
the Parent or the Purchaser is a party, as the case may be, do not and will not
require any consent, approval, authorization or other order of, action by,
filing with, or notification to any Governmental Authority or Educational
Agency. To the knowledge of the Parent and the Purchaser there is no
reason why all the Required Consents or the consents listed on Section 4.03 of the
Disclosure Schedule will not be received.
Section
4.04 Litigation. No
Action by or against the Parent or the Purchaser is pending or, to the knowledge
of the Parent or the Purchaser, threatened, that could affect the legality,
validity or enforceability of this Agreement, any Ancillary Agreement or the
consummation of the transactions contemplated hereby or thereby.
Section
4.05 Financing. The
Purchaser has or will have available, prior to the Closing, sufficient funds
necessary to consummate the transactions contemplated by this Agreement and the
Ancillary Agreements and acknowledges and affirms that it is not a condition to
Closing or any of its other obligations under this Agreement that the Purchaser
obtain financing for or relating to any of the transactions contemplated by this
Agreement and the Ancillary Agreement.
Section
4.06 Brokers. No
broker, finder or investment banker is entitled to any brokerage, finder’s or
other fee or commission in connection with the transactions contemplated by this
Agreement or the Ancillary Agreements based upon arrangements made by or on
behalf of the Parent or the Purchaser.
Section 4.07
No Other
Representations. None of the Parent, the Purchaser, or any of
their affiliates, directors, officers, employees, agents or representatives has
made, or shall be deemed to have made, and neither the Parent nor the Purchaser
is liable for or bound in any manner by, any express or implied representations,
warranties, guaranties, promises or statements pertaining to their business or
any of their assets except as specifically set forth in this Agreement or the
Ancillary Agreements.
ARTICLE
V
ADDITIONAL
AGREEMENTS
Section 5.01
Conduct of Business Prior to the
Closing. (a) The Sellers covenant and agree that,
between the date hereof and the Closing Date, except as specifically permitted
elsewhere in this Agreement, the Company shall not, and the Sellers shall cause
the Institution not to, conduct the Business other than in the ordinary course
and consistent with past practice. Without limiting the generality of
the foregoing, the Sellers shall cause the Company and the Institution to
(i) not take any action with respect to any Leased Real Property that would
impair or affect in any material respect the Company’s and the Institution’s
continued ability to use any Leased Real Property; (ii) exercise, but only
after notice to the Purchaser and receipt of the Purchaser’s prior written
approval, any rights of renewal pursuant to the terms of any of the leases set
forth on Section
3.15(b) of the Disclosure Schedule and any Ancillary Lease Documents that
by their terms would otherwise expire; and (iii) not engage in any
practice, take any action, fail to take any action or enter into any transaction
that could cause any representation or warranty of the Sellers regarding the
Company, the Business or the Institution to be untrue in any material respect or
result in a breach of any covenant made by the Sellers in this
Agreement.
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(b) Except
as described in Section 5.01(b) of the
Disclosure Schedule, the Sellers covenant and agree that, between the
date hereof and the Closing Date, without the prior written consent of the
Purchaser, no Seller and neither the Company nor the Institution will do any of
the things specified in the second sentence of Section 3.08
(including clauses (a) through (bb) thereof), subject to the
exceptions set forth therein.
Section 5.02
Access to
Information. (a) From the date hereof until the
Closing Date, upon reasonable prior notice, the Sellers shall cause their and
the Company’s and the Institution’s officers, directors, employees, agents,
representatives, accountants and counsel to: (i) afford the
officers, employees, agents, accountants, counsel, financing sources and
representatives of the Purchaser and the Parent reasonable access, during normal
business hours, to the offices, properties, plants, other facilities and books
and records of the Company and the Institution, and to those officers,
directors, employees, agents, accountants, managers, personnel and counsel of
the Sellers, the Company and the Institution who have any knowledge relating to
the Institution as they may reasonably request from time to time, provided that such
access does not unreasonably interfere with the operations of the party
providing such access; (ii) furnish to the officers, employees, agents,
accountants, counsel, financing sources and representatives of the Purchaser and
the Parent such additional financial and operating data and other information
regarding the assets, properties and Liabilities of the Company and the
Institution (or legible copies thereof) as they may from time to time reasonably
request; and (iii) otherwise cooperate with the Purchaser, the Parent, and their
representatives in connection with their due diligence investigation or
negotiations in connection with the consummation of the transactions
contemplated hereby. Notwithstanding the foregoing, the Sellers shall
not be required to provide access to any information or take any other action
that would constitute a waiver of the attorney-client privilege.
(b) Subject
to Section 6.06
(relating to Tax matters), until the later of (i) seven years after the
Closing and (ii) the expiration of the relevant record retention period
under any Governmental Authority or Educational Agency requirements, none of the
Sellers, the Company, the Purchaser or the Parent will destroy or otherwise
dispose of any of the books, records, files or documents in its possession that
relate to the Company or the Institution for the periods prior to the Closing
without giving the other party hereto at least 90 days’ prior written
notice and an opportunity, at such other party’s cost and expense, to take
possession or make extracts or copies thereof. “Books, records, files
or documents” shall include copies of any insurance policies, testing logs,
applications for admission, all student records, including student accounts,
accreditation reports, personnel files, financial statements, operational
reports, policies and procedures, correspondence, all reports prepared for or
provided to any Governmental Authority or Educational Agency, all records
retained pursuant to relevant Governmental Authority or Educational Agency
requirements and any other books, records, files or documents. After
the Closing Date, each party hereto shall permit the other party, its officers,
counsel, accountants and other authorized representatives during normal business
hours and on reasonable prior written notice, to have access to and examine and
make copies of any books, records, files or documents in its possession that
relate to or concern the Institution or their operations for the periods prior
to the Closing; provided that such
access does not unreasonably interfere with the operations of the party
providing such access; provided, further, that the
party requesting access to such books, records, files or documents will bear any
costs, other than wages and salaries and employee benefits of relevant
personnel, of obtaining such access. All information obtained shall
be kept confidential in accordance with the Non-Disclosure Agreement, dated June
6, 2008, by and between Lincoln Educational Services Corporation and BIT, as
amended on July 23, 2008 and the Non-Disclosure Agreement, dated July 10, 2008,
by and among Lincoln Educational Services Corporation, BIT and UGP (the “Non-Disclosure
Agreement”).
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(c) Each
Seller agrees to, and shall cause its agents, representatives, employees,
officers and directors to, keep confidential all nonpublic information in their
possession regarding the Assets, the Company, the Institution or Business
(including any information made available to the Sellers pursuant to this Section 5.02)
unless the Parent and the Purchaser consent to such disclosure; provided, however, that no
Seller will be required to maintain as confidential any information that
(i) becomes generally available to the public other than as a result of
disclosure by any Seller or any of their respective agents, representatives,
employees, officers and directors in breach of this Agreement; (ii) is
subsequently received by the Company or the Institution or any of their
Affiliates or representatives from a third party that is not under any
obligation of confidentiality to the Parent or the Purchaser with respect to
such information or (iii) is required to be disclosed pursuant to the terms of a
valid subpoena or order by any Governmental Authority or Educational Agency or
under any Law or other legal requirement; provided further that, in the
event that any Seller or any such agent, representative, employee, officer or
director becomes legally compelled to disclose any such information, (A)
such Seller shall provide the Purchaser with prompt written notice of such
requirement so that the Purchaser may seek a protective order or other remedy or
waive compliance with this Section 5.02 and
(B) in the event that such protective order or other remedy is not obtained
or the Purchaser waives compliance with this Section 5.02,
furnish only that portion of such confidential information which is legally
required to be provided and exercise its best efforts to obtain assurances that
confidential treatment will be accorded such information.
Section 5.03
Regulatory and Other
Authorizations; Notices and Consents. (a) The
Sellers shall cooperate fully with the Purchaser and use all commercially
reasonable efforts in good faith to assist the Purchaser in obtaining all
Required Consents and any other authorizations, consents, orders and approvals
(including any authorizations, consents, orders and approvals listed in Section 4.03 of the
Disclosure Schedule) that may be or become necessary for its execution
and delivery of, and the performance of its obligations pursuant to, this
Agreement and the Ancillary Agreements; provided, however, that no
Seller shall have any obligation to give any guaranty or other consideration of
any nature in connection with any authorizations, consents, orders and
approvals. The Sellers agree to provide to the Purchaser such
information as any Educational Agencies or other parties may require, in
connection with their review of any related application. The Sellers
agree to cooperate before and after the Closing at the Purchaser’s expense to
assist the Purchaser to obtain or renew any Educational Approvals or any other
necessary authorizations and approvals from Governmental Authorities or
Educational Agencies with respect to the Institution, including obtaining U.S.
DOE Approvals on a provisional basis after the Closing Date.
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(b)
The Sellers shall give promptly such
notices to third parties and use all commercially reasonable efforts, in good
faith, to obtain such third party consents and estoppel certificates as the
Purchaser may deem reasonably necessary in connection with the transactions
contemplated by this Agreement and the Ancillary Agreements; provided, however, that no
Seller shall have any obligation to give any guaranty or other consideration of
any nature in connection with any such consents or estoppel
certificates.
(c)
The Purchaser shall cooperate and use all
commercially reasonable efforts, in good faith, to assist the Sellers in giving
such notices to third parties and obtaining such third-party consents and
estoppel certificates; provided, however, that the
Purchaser shall have no obligation to give any guarantee or other consideration
of any nature in connection with any such notice, consent or estoppel
certificate or to consent to any change in the terms of any agreement or
arrangement that the Purchaser in its reasonable discretion may deem adverse to
the interests of the Purchaser or the Institution.
(d)
The Sellers shall cooperate and use all
commercially reasonable efforts, in good faith, to assist the Purchaser in
prosecuting and expediting any necessary applications in respect of the
Institution’s continued participation in the Title IV Programs.
(e)
The Sellers and the Purchaser agree that, in the
event that any consent, approval or authorization necessary or desirable to
preserve for the Business or the Company any right or benefit under any lease,
license, contract, commitment or other agreement or arrangement to which the
Sellers or the Company is a party is not obtained prior to the date hereof, the
Sellers will, subsequent to the date hereof, cooperate with the Purchaser or the
Company in attempting to obtain such consent, approval or authorization as
promptly thereafter as practicable.
Section 5.04
Notice of
Developments. Prior to the Closing, (a) the Sellers shall
promptly notify the Parent in writing within three Business Days of all events,
circumstances, facts and occurrences arising subsequent to the date of this
Agreement that will result in any breach of a representation, warranty or
covenant of the Sellers in this Agreement relating to the Company, the Business
or the Institution or that will have the effect of making any representation or
warranty of the Sellers in this Agreement relating to the Company, the Business
or the Institution untrue or incorrect in any material respect and (b) the
Parent shall promptly notify the Sellers in writing within three Business Days
of all events, circumstances, facts and occurrences arising subsequent to the
date of this Agreement that could result in any breach of a representation,
warranty or covenant of any party to this Agreement or that could have the
effect of making any representation or warranty of any party to this Agreement
untrue or incorrect in any respect.
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Section 5.05
No Solicitation or
Negotiation. Each Seller agrees that, between the date of this
Agreement and the earlier of (a) the Closing and (b) the termination of this
Agreement in accordance with its terms, such Seller (or any of
its respective Affiliates, officers, members, managers,
representatives or agents) will not (i) solicit, initiate, consider, encourage
or accept any other proposals or offers from any Person (A) relating to any
acquisition or purchase of all or any portion of the capital stock of the
Company or the assets and properties of the Company, (B) to enter into any
merger, consolidation or other business combination with the Company or the
Business or (C) to enter into a recapitalization, reorganization or any other
extraordinary business transaction involving or otherwise relating to the
Company or the Business or (ii) participate in any discussions, conversations,
negotiations or other communications regarding, or furnish to any other Person
any information with respect to, or otherwise cooperate in any way, assist or
participate in, facilitate or encourage, any effort or attempt by any Person to
seek to do any of the foregoing. Each Seller immediately shall cease
and cause to be terminated, and shall not resume, all existing discussions,
conversations, negotiations and other communications with any Person conducted
heretofore with respect to any of the foregoing. Each Seller agrees
not to, and to cause the Company not to, without the prior written consent of
the Purchaser, release, without the prior written consent of the Purchaser, any
Person from, or waive any provision of, any confidentiality or standstill
agreement to which any Seller or the Company is a party.
Section 5.06
Use of Intellectual
Property. The Sellers acknowledge that, from and after the
Closing Date, (a) the applicable Owned Intellectual Property shall be owned by
the Purchaser or the Company, that no Seller nor any of their Affiliates shall
have any rights in such Owned Intellectual Property and that no Seller nor any
of their Affiliates will contest the ownership or validity of any rights of the
Purchaser or the Company in or to such Owned Intellectual Property, and (b) no
Seller nor any of their Affiliates shall use any of the applicable Owned
Intellectual Property or Licensed Intellectual Property.
Section 5.07
Intercompany
Arrangements. (a) Prior to the Closing Date, the
Sellers shall cause any contract or arrangement that is disclosed (or should
have been disclosed) in response to Section 3.13(a)(vii)
on Section 3.13 of the
Disclosure Schedule to be terminated or otherwise amended to exclude the
Company as a party thereto.
(b)
Immediately prior to the Closing Date, the Sellers shall
contribute, or caused to be contributed, to the capital of the Company, the
difference between (i) the intercompany Indebtedness owed by the Company to any
Seller or its Affiliates as of the Closing Date and (ii) the intercompany
Indebtedness owed by any Seller or its Affiliates to the Company as of the
Closing Date, and all such intercompany Indebtedness shall cease to exist and be
of no further force or effect.
Section 5.08
Payments on Behalf of
Affiliates. Payments made or received by the Purchaser
pursuant to Article
II or Article
VIII hereof shall, in appropriate circumstances, be made on behalf of, or
received in trust for the benefit of, the relevant Affiliate of the
Purchaser. The Purchaser may direct in writing any such payment to be
made by or to the appropriate Affiliate, and the Sellers shall comply with any
such direction received at least two Business Days prior to the date such
payment is due.
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Section
5.09 Employees. As
of the Closing Date, all existing employment agreements to which the Company is
a party shall be terminated.
Section 5.10
Non-Competition. (a) Baran
hereby agrees that, for a period of three years after the Closing Date (the
“Restricted
Period”), he shall not engage, directly or indirectly, in any business
anywhere in the United States that provides products or services of the kind
provided by the Business and the Institution as of the Closing Date (a “Restricted Business”)
or, without the prior written consent of the Purchaser and the Parent (such
consent not to be unreasonably withheld), directly or indirectly, own an
interest in, manage, operate, join, control, lend money or render financial or
other assistance to or participate in or be connected with, as an officer,
employee, partner, shareholder, consultant or otherwise, any Restricted
Business; provided, however, that Baran
may own, directly or indirectly, solely as an investment, up to 2% of any class
of any securities traded on a national securities exchange of any business that
engages in the Restricted Business.
(b)
As a separate and independent covenant,
Baran agrees that, for the Restricted Period, he will in no way, directly or
indirectly, interfere with or attempt to interfere with any officers, employees,
representatives or agents of the Business and the Institution in a manner
relating to the Business that adversely affects such person’s performance of
duties with respect to the Business, or induce or attempt to induce any of them
to leave the employ of the Purchaser or the Institution or violate the terms of
their contracts, or any employment arrangements, with the Purchaser; provided,
however, that the foregoing will not prohibit a general solicitation to the
public of general advertising.
(c)
The Restricted Period with respect to Baran shall be
extended by the length of any period during which he is in breach of the terms
of this Section 5.10.
(d)
Baran acknowledges that the covenants set forth
in this Section 5.10 are
an essential element of this Agreement and that, but for his agreement to comply
with these covenants, the Parent and the Purchaser would not have entered into
this Agreement. Baran acknowledges that this Section 5.10
constitutes an independent covenant that shall not be affected by performance or
nonperformance of any other provision of this Agreement by the Parent or the
Purchaser. Baran has independently consulted with his counsel and
after such consultation agrees that the covenants set forth in this Section 5.10 are
reasonable and proper.
Section 5.11
Payment
Obligations. On or before the Closing Date, the Sellers shall
pay all outstanding amounts with respect to and satisfy in full, and shall
deliver to the Purchaser “payoff” letters or similar releases or confirmations
from third parties in forms reasonably satisfactory to the Purchaser with
respect to, the obligations set forth in Section 5.11 of the
Disclosure Schedule.
Section 5.12
Reimbursement of Restricted
Cash. If prior to December 31, 2009 the Purchaser, or any of
its Affiliates, is no longer required to maintain any Letter of Credit issued on
behalf of Clemens in favor of the U.S. DOE, then at the time such Letter of
Credit is released, the Purchaser shall deliver to the Sellers that amount of
cash (not to exceed $74,425) equal to the face value of such Letter of Credit in
the manner set forth in Section 2.05(a)(i) of the
Disclosure Schedule, within three Business Days of such
release. The amount so delivered shall be delivered out of the
proceeds of the withdrawal of the Certificate of Deposit currently in place
securing such Letter of Credit, and in no event shall any Seller take any action
to cause the withdrawal of such Certificate of Deposit.
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Section 5.13
Preferred
Stock. Simultaneously with the Closing, the Sellers shall
cause all Preferred Stock of the Company to be converted or redeemed, so that no
such Preferred Stock shall remain outstanding.
Section 5.14
UGPE
Guarantee. UGPE hereby (a) absolutely, unconditionally and
irrevocably guarantees all of the payment obligations of UGP under this
Agreement and the Ancillary Agreements to which UGP is a party, and (b)
unconditionally and irrevocably waives any right to revoke this guarantee and
acknowledges that this guarantee is continuing in nature and applies to all
obligations of UGP under this Agreement and the Ancillary
Agreements. The obligations of UGPE under or in respect of this
guarantee are independent of the guaranteed obligations, and a separate action
or actions may be brought and prosecuted against UGPE to enforce this guarantee,
irrespective of whether any action is brought against UGP or whether UGP is
joined in any such action or actions.
Section 5.15
December 31, 2008
Financials. On or prior to January 30, 2009, provided that the
Purchaser provides the assistance necessary for Sellers to complete such
documents, the Sellers shall deliver to the Purchaser, the unaudited balance
sheet of the Company for the three-month period ending December 31, 2008 and the
related financial statements of the Company, together with all related notes and
schedules thereto.
Section 5.16
Further
Action. Each of the parties hereto shall use all reasonable
efforts to take, or cause to be taken, all appropriate action, do or cause to be
done all things necessary, proper or advisable under applicable Law, and to
execute and deliver such documents and other papers, as may be required to carry
out the provisions of this Agreement and consummate and make effective the
transactions contemplated by this Agreement.
ARTICLE
VI
TAX
MATTERS
Section
6.01 Indemnity. (a) The
Sellers agree to indemnify and hold harmless, on a joint and several basis, the
Purchaser, the Company against Excluded Taxes and, except as otherwise provided
in Section
6.04, against any loss, damage, liability or expense, including
reasonable fees for attorneys and other outside consultants incurred in
contesting or otherwise in connection with any such Taxes; provided, however, that the
Sellers shall only be liable for a particular Tax to the extent in excess of the
amount specifically identified and reserved for such Tax for purposes of, and
taken into account in computing, Net Working Capital; provided, further, that any
indemnity obligations in respect of Income Taxes of the Sellers shall be several
but not joint. All Taxes payable under this Section 6.01 shall
first be satisfied from the Escrow Amount.
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(b) In
the case of Taxes that are payable with respect to a Straddle Period, the
portion of any such Tax that is allocable to the portion of the Straddle Period
ending on the date of the Closing shall be:
(i)
in the case of Taxes that are either
(x) based upon or related to income or receipts, or (y) imposed in
connection with any sale or other transfer or assignment of property (real or
personal, tangible or intangible) (other than conveyances pursuant to this
Agreement, as provided under Section 6.07), deemed
equal to the amount which would be payable if the taxable year ended on the date
of the Closing; and
(ii)
in the case of Taxes imposed on a periodic basis
with respect to the assets of the Company or otherwise measured by the level of
any item, deemed to be the amount of such Taxes for the entire period (or, in
the case of such Taxes determined on an arrears basis, the amount of such Taxes
for the immediately preceding period), multiplied by a fraction, the numerator
of which is the number of calendar days in the period ending on the date of the
Closing and the denominator of which is the number of calendar days in the
entire Straddle Period. Any credit or refund resulting from an
overpayment of Taxes for a Straddle Period shall be prorated based upon the
method employed in this Section 6.01(b)
taking into account the type of the Tax to which the refund
relates. In the case of any Tax based upon or measured by capital
(including net worth or long-term debt) or intangibles, any amount thereof
required to be allocated under this Section 6.01(b)
shall be computed by reference to the level of such items on the date of the
Closing. All determinations necessary to effect the foregoing
allocations shall be made in a manner consistent with prior practice of the
Company.
Section 6.02
Returns and
Payments. (a) From the date of this Agreement
through and after the Closing, the Sellers shall prepare and file or otherwise
furnish in proper form to the appropriate Governmental Authority (or cause to be
prepared and filed or so furnished) in a timely manner all Tax Returns relating
to the Company, as applicable, that are due on or before or relate to any
taxable period ending on or before the Closing Date (and the Purchaser shall do
the same with respect to any Straddle Period). Tax Returns of the
Company not yet filed for any taxable period that begins before the Closing Date
shall be prepared in a manner consistent with past practices employed with
respect to the Company (except to the extent that counsel for the Sellers or the
Company renders a legal opinion that there is no reasonable basis in law
therefor or determines that a Tax Return cannot be so prepared and filed without
being subject to penalties). With respect to any such Tax Return
required to be filed by the Purchaser or the Sellers, for a taxable period that
ends on or before, or includes, the Closing Date, the filing party shall provide
the other party with a copy of such completed Tax Return and, if applicable, a
statement certifying the amount of Tax shown on such Tax Return that is
allocable to such other party pursuant to Section 6.01(b),
together with appropriate supporting information and schedules at least 20
Business Days prior to the due date (including any extension hereof) for the
filing of such Tax Return, and such other party shall have the right to review
and comment on such Tax Return and statement prior to the filing of such Tax
Return (which comments the filing party shall consider in good
faith).
(b)
The Sellers shall pay, or cause to be paid,
when due and payable all Taxes with respect to the Company, as applicable, for
any taxable period ending on or before the Closing Date, and the Purchaser shall
so pay or cause to be paid Taxes for any Straddle Period (subject to its right
of indemnification from the Sellers by the date set forth in Section 6.05 for
Taxes attributable to the portion of any Straddle Period that ends on the
Closing Date pursuant to Sections 6.01(a) and
6.01(b)). Notwithstanding
the foregoing, the Sellers shall only be liable for a particular Tax of the
Company for any Pre-Closing Period or portion of a Straddle Period that ends on
the Closing Date to the extent that the amount of such Tax exceeds the amount
specifically identified and reserved for purposes of, and taken into account in
computing, Net Working Capital.
57
Section
6.03 Refunds. Any
Tax refund (including any interest with respect thereto) relating to the Company
for any Pre-Closing Period, other than Tax refunds to the extent of the amount
included in Net Working Capital, shall be the property of the Sellers, and if
received by the Purchaser or the Company shall be paid over promptly to the
Sellers (in the manner set forth in Section 2.05(a)(i) of the
Disclosure Schedule). Notwithstanding the foregoing,
(a) any Tax refund (or equivalent benefit to the Sellers through a
reduction in Tax liability) for any Pre-Closing Period arising out of the
carryback of a loss or credit incurred by the Company in any Post-Closing Period
shall be the property of the Purchaser and, if received by the Sellers, shall be
paid over promptly to the Purchaser; and (b) if a taxing authority subsequently
disallows any refund with respect to which the Sellers have received a payment
pursuant to this Section 6.03, the
Sellers shall promptly pay (or cause to be paid) to the Purchaser the full
amount of such refund (including any interest with respect
thereto).
Section
6.04 Contests.
(a)
After the Closing, the Purchaser shall
promptly notify the Sellers’ Representative in writing of any written notice of
a proposed assessment or claim in an audit or administrative or judicial
proceeding of the Purchaser or the Company which, if determined adversely to the
taxpayer, would be grounds for indemnification under this Article VI;
provided, however, that the
failure to give such notice will not affect the Purchaser’s right to
indemnification under this Article VI except to
the extent, if any, that, but for such failure, the Sellers could have avoided
all or a portion of the Tax liability in question.
(b)
In the case of an audit or
administrative or judicial proceeding that relates to taxable periods ending on
or before the Closing Date, provided that, and only to the extent that, the
Sellers acknowledge in writing their liability under this Agreement to hold the
Purchaser and the Company harmless against the full amount of any adjustment
which may be made as a result of such audit or proceeding, the Sellers’
Representative shall have the right at his expense to participate in and control
the conduct of such audit or proceeding; the Purchaser also may participate in
any such audit or proceeding at its own expense and, if the Sellers’
Representative does not assume the defense of any such audit or proceeding, the
Purchaser may defend the same in such manner as it may deem appropriate,
including settling such audit or proceeding after fifteen days prior written
notice to the Sellers’ Representative setting forth the terms and conditions of
settlement. Notwithstanding anything to the contrary contained in
Section 8.05,
in the event that issues relating to a potential adjustment for which the
Sellers have acknowledged liability are required to be contested in the same
audit or proceeding as separate issues relating to a potential adjustment for
which the Purchaser would be liable, the Purchaser shall have the right, at its
expense, to control the audit or proceeding with respect to the latter issues;
provided, however, that the
Purchaser shall not have the right to settle any such matter without the consent
of the Sellers’ Representative, which consent shall not be unreasonably
withheld.
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(c)
Notwithstanding anything to the
contrary contained in Section 6.04, with
respect to issues relating to a potential adjustment for which both the Sellers
(as evidenced by their written acknowledgement under this Section 6.04)
and the Purchaser or the Company could be liable, (i) both the Sellers’
Representative and the Purchaser may participate in the audit or proceeding;
(ii) the audit or proceeding shall be controlled by that party which would
bear the burden of the greater portion of the sum of the adjustment and any
corresponding adjustments that may reasonably be anticipated for future taxable
periods; and (iii) the controlling party shall not settle any such matter
without the consent of the non-controlling party (which consent shall not be
unreasonably withheld). The principle set forth in this Section 6.04(c) also
shall govern for purposes of deciding any issue that must be decided jointly
(including choice of judicial forum) in situations in which separate issues are
otherwise controlled under this Article VI by
the Purchaser and the Sellers’ Representative.
(d)
With respect to any Tax audit or proceeding for a
taxable period that begins before the Closing Date, neither the Purchaser nor
the Sellers’ Representative shall enter into any compromise or agree to settle
any claim pursuant to such audit or proceeding which would adversely affect the
other party for such taxable period or a subsequent taxable period without the
written consent of the other party, which consent may not be unreasonably
withheld. The Purchaser and the Sellers’ Representative agree to
cooperate, and the Purchaser agrees to cause the Company to cooperate, in the
defense against or compromise of any claim in any such audit or
proceeding.
Section 6.05
Time of
Payment. Payment by the Sellers of any amounts due under this
Article VI
in respect of Taxes shall be made (a) at least three Business Days before
the due date of the applicable estimated or final Tax Return required to be
filed by the Purchaser on which is required to be reported income for a taxable
period ending after the Closing Date for which the Sellers are responsible under
Sections
6.01(a) and 6.01(b) without
regard to whether the Tax Return shows overall net income or loss for such
period or (b) within three Business Days following an agreement between the
Sellers’ Representative and the Purchaser that an indemnity amount is payable,
an assessment of a Tax by a taxing authority, or a “determination” as defined in
Section 1313(a) of the Code. If liability under this Article VI is in
respect of costs or expenses other than Taxes, payment by the Sellers of any
amounts due under this Article VI shall
be made within five Business Days after the date when the Sellers’
Representative has been notified by the Purchaser that the Sellers have a
liability for a determinable amount under this Article VI and is provided
with calculations or other materials supporting such liability.
Section 6.06
Tax Cooperation and Exchange of
Information. The Sellers and the Purchaser shall provide each
other with such cooperation and information as either of them reasonably may
request of the other (and the Purchaser shall cause the Company to provide such
cooperation and information) in (a) filing any Tax Return, amended Tax Return or
claim for refund, (b) determining a liability for Taxes or a right to a refund
of Taxes, (c) participating in or conducting any audit or other proceeding in
respect of Taxes, or (d) making representations to or furnishing information to
parties subsequently desiring to purchase any part of the Assets, the Business
or the Company from the Purchaser. Such cooperation and information
shall include providing copies of relevant Tax Returns or portions thereof,
together with related work papers and documents relating to rulings or other
determinations by taxing authorities. The Sellers and the Purchaser
shall make themselves (and their respective employees) reasonably available on a
mutually convenient basis to provide explanations of any documents or
information provided under this Section
6.06. Notwithstanding anything to the contrary in Section 5.02, each
Seller and the Purchaser shall retain all Tax Returns, work papers and all
material records or other documents in its possession (or in the possession of
its Affiliates) relating to Tax matters of the Company for any taxable period
that includes the date of the Closing and for all prior taxable periods until
the later of (i) the expiration of the statute of limitations of the
taxable periods to which such Tax Returns and other documents relate, without
regard to extensions, and (ii) six years following the due date (without
extension) for such Tax Returns. After such time, before any Seller
or the Purchaser shall dispose of any such documents in his, her or its
possession (or in the possession of Affiliates), the other parties shall be
given an opportunity, after 90 days prior written notice, to remove and retain
all or any part of such documents as such other party may select (at such other
party’s expense). Any information obtained under this Section 6.06
shall be kept confidential, except as may be otherwise necessary in connection
with the filing of Tax Returns or claims for refund or in conducting an audit or
other proceeding.
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Section 6.07
Conveyance
Taxes. The Sellers, on the one hand, and the Purchaser, on the
other hand, shall each be liable for and shall hold the other harmless against,
on a joint and several basis in the case of the Sellers, 50% of any Conveyance
Taxes which become payable in connection with the transactions contemplated by
this Agreement. The Sellers, after the review and consent by the
Purchaser, shall file such applications and documents as shall permit any such
Conveyance Taxes to be assessed and paid on or prior to the Closing in
accordance with any available pre-sale filing procedure. The
Purchaser shall execute and deliver all instruments and certificates necessary
to enable the Sellers to comply with the foregoing. The Purchaser
shall complete and execute a resale or other exemption certificate with respect
to the inventory items sold hereunder, and shall provide the Sellers with an
executed copy thereof.
Section 6.08
Amended Tax
Returns. (a) Any amended Tax Return of the Company
or claim for Tax refund on behalf of either Company for any period ending on or
prior to the Closing Date may be filed, or caused to be filed, by the Sellers’
Representative; provided that the Sellers’ Representative shall not, without the
prior written consent of the Purchaser (which consent shall not be unreasonably
withheld), make or cause to be made, any such filing, to the extent such filing,
if accepted, reasonably might change the Tax Liability of the Purchaser for any
period ending after the Closing Date. Notwithstanding the foregoing,
the Purchaser may amend any Tax Return to the extent such amendment would not
adversely affect or increase the Sellers’ liability for any Tax or adversely
affect the Sellers’ claim for any Tax refund.
(b)
Any amended Tax Return of the Company or
claim for Tax refund on behalf of the Company for any period ending after the
Closing Date shall be filed, or caused to be filed, only by the Purchaser;
provided that the Purchaser shall not, without the prior written consent of the
Sellers’ Representative (which consent shall not be unreasonably withheld), make
or cause to be made, any such filing, to the extent such filing, if accepted,
reasonably might change the Tax Liability of the Sellers for (i) any period
ending on or prior to the Closing Date or (ii) any portion of a Straddle Period
ending on the Closing Date.
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Section 6.09
Tax
Covenants.
(a)
The Purchaser covenants that without
obtaining the prior written consent of the Sellers’ Representative it will not,
and will not cause or permit either Company or any Affiliate of Purchaser, to
(i) take any action on the Closing Date other than in the ordinary course of
business that could give rise to any Tax liability of Sellers or any
indemnification obligation of Sellers under Section 8.02, or (ii)
make a material Tax election under Section 338(g) of the Code with respect to
the transactions contemplated hereby.
(b)
After the Closing Date, the Purchaser, the
Company will not, without obtaining the written consent of the Sellers’
Representative (which consent shall not be unreasonably withheld), agree to the
waiver or any extension of the statute of limitations relating to any Taxes of
the Company for any Pre-Closing Period (other than Taxes with respect to any
Straddle Period) other than extensions of time to file Tax Returns obtained in
the ordinary course. Notwithstanding the foregoing, if the Sellers do
not respond to a request for written consent from the Purchaser within five
days, the Sellers will be irrevocably deemed to consent to such waiver or
extension.
Section 6.10
Miscellaneous. (a) The
Sellers and the Purchaser agree to treat all payments made by either of them to
or for the benefit of the other (including any payments to the Company) under
this Article VI,
under other indemnity provisions of this Agreement and for any
misrepresentations or breaches of warranties or covenants as adjustments to the
Purchase Price and that such treatment shall govern for purposes hereof except
to the extent that the Laws of a particular jurisdiction provide
otherwise.
(b)
All payments payable under any tax sharing
agreement or arrangement (other than this Agreement) between any Seller, on the
one hand, and the Company, on the other hand, for any taxable period ending on
or prior to the Closing Date shall be calculated on a basis consistent with past
practice and shall be payable in full prior to the Closing. Any such
tax sharing agreement or arrangement (other than this Agreement) between any
Seller and the Company shall be terminated prior to the Closing.
(c)
Notwithstanding any provisions in
this Agreement to the contrary, the obligations of the Sellers to indemnify and
hold harmless the Purchaser and the Company pursuant to this Article VI, and
the representations and warranties contained in Section 3.23,
shall terminate at the close of business on the 60th day following the
expiration of the applicable statute of limitations with respect to the Tax
liabilities in question (giving effect to any waiver, mitigation or extension
thereof).
(d)
From and after the date of this Agreement,
no Seller shall, without the prior written consent of the Purchaser (which may,
in its sole and absolute discretion, withhold such consent), make, or cause or
permit to be made, any Tax election that would materially affect the
Company.
(e)
For purposes of this Article VI, “the
Purchaser” and “a Seller,” respectively, shall include each member of the
affiliated group of corporations of which it is or becomes a member (other than
the Company except to the extent expressly referenced).
61
(f)
The Purchaser shall be entitled to recover
professional fees and related costs that it may reasonably incur to enforce the
provisions of this Article VI.
(g)
Notwithstanding anything to the contrary in this
Agreement, the rights and obligations of the parties with respect to
indemnification for any and all Tax matters shall be governed solely by this
Article
VI.
ARTICLE
VII
CONDITIONS
TO CLOSING
Section 7.01
Conditions to Obligations of the
Sellers. The obligations of the Sellers to consummate the
Acquisition shall be subject to the fulfillment or waiver, at or prior to the
Closing, of each of the following conditions:
(a)
Representations, Warranties
and Covenants. The representations and warranties of the
Parent and the Purchaser contained in this Agreement shall have been true and
correct when made and shall be true and correct in all material respects as of
the Closing, in each case with the same force and effect as if made as of the
Closing Date, other than such representations and warranties as are made as of
another date which shall be true and correct in all material respects as of such
date; the covenants and agreements contained in this Agreement to be complied
with by the Parent and the Purchaser on or before the Closing Date shall have
been complied with in all material respects, and the Sellers shall have received
a certificate from the Parent and the Purchaser to such effect signed,
respectively, by a duly authorized officer thereof;
(b)
No
Order. No Governmental Authority shall have enacted, issued,
promulgated, enforced or entered any Law or Governmental Order which is in
effect and has the effect of making the Acquisition illegal or otherwise
restraining or prohibiting consummation of the Acquisition; and
(c)
Ancillary
Agreements. The Parent and the Purchaser, as applicable, shall
have executed and delivered to the Sellers counterparts to the Ancillary
Agreements.
Section 7.02
Conditions to Obligations of the
Parent and the Purchaser. The obligations of the Parent and
the Purchaser to consummate the Acquisition shall be subject to the fulfillment
or waiver, at or prior to the Closing, of each of the following
conditions:
(a)
Representations, Warranties
and Covenants. The representations and warranties of the
Sellers contained in this Agreement shall have been true and correct when made
and shall be true and correct as of the Closing Date, with the same force and
effect as if made as of the Closing Date (other than such representations and
warranties as are made as of another date, which shall be true and correct as of
such date) except where the failure of such representations and warranties to be
true and correct (without giving effect to any “materiality” or “Material
Adverse Effect” qualification) would not individually or in the aggregate have a
Material Adverse Effect; the covenants and agreements contained in this
Agreement to be complied with by the Sellers on or before the Closing Date shall
have been complied with in all material respects; and the Purchaser shall have
received a certificate of each Seller to such effect signed by a duly authorized
officer thereof;
62
(b)
No
Order. No Governmental Authority shall have enacted, issued,
promulgated, enforced or entered any Law or Governmental Order which is in
effect and has the effect of making the Acquisition illegal or otherwise
prohibiting consummation of the Acquisition;
(c)
Resolutions of UGP and
Merion. The Purchaser shall have received a true and complete
copy, certified by the Secretary or an Assistant Secretary of each of UGP and
Merion, of the resolutions duly and validly adopted by the board of
directors/managers of such Seller, as applicable, evidencing its authorization
of the execution and delivery of this Agreement and the Ancillary Agreements to
which such Seller is a party and the consummation of the transactions
contemplated hereby and thereby;
(d)
Consents and
Approvals. The CIHE shall have approved the substantive change
application, in form and substance satisfactory to the Purchaser;
(e)
No Material Adverse
Effect. No event or events shall have occurred, which,
individually or in the aggregate, have, or would reasonably be expected to have
a Material Adverse Effect with respect to the Company;
(f) Ancillary
Agreements. The Sellers shall have executed and delivered to
the Purchaser counterparts to the Ancillary Agreements; and
(g)
Preferred
Stock. No Preferred Stock with respect to the Company shall be
outstanding.
ARTICLE
VIII
INDEMNIFICATION
Section 8.01
Survival of Representations and
Warranties. (a) The representations and warranties
of the Sellers contained in this Agreement and the Ancillary Agreements to which
any Seller is a party shall survive the Closing for 15 months from the Closing
Date; provided,
however, that
(i) the representations and warranties made pursuant to Section 3.01
(Organization), Section 3.03
(Capitalization) and Section
3.29 (Brokers) shall survive indefinitely, (ii) the
representations and warranties dealing with Tax matters shall survive as
provided in Section
6.10(c) hereof, (iii) the representations and warranties made
pursuant to Section 3.11
(Environmental), Section 3.26
(Compliance With Educational Laws) and Section 3.25
(Education Approvals) shall survive the Closing for 36 months from the Closing
Date. Neither the period of survival nor the liability of the Sellers
with respect to the Sellers’ representations and warranties shall be reduced by
any investigation made at any time by or on behalf of the
Purchaser. If written notice of a claim has been given prior to the
expiration of the applicable representations and warranties by the Purchaser to
the Sellers, then the relevant representations and warranties shall survive as
to such claim until such claim has been finally resolved.
63
(b)
The representations and warranties of the
Parent and the Purchaser contained in this Agreement and the Ancillary
Agreements to which the Parent or the Purchaser is a party shall survive the
Closing for 15 months from the Closing Date. Neither the period of
survival nor the liability of the Parent or the Purchaser with respect to such
party’s representations and warranties shall be reduced by any investigation
made at any time by or on behalf of the Sellers. If written notice of
a claim has been given prior to the expiration of the applicable representations
and warranties by the Sellers to the Parent or the Purchaser, then the relevant
representations and warranties shall survive as to such claim until such claim
has been finally resolved.
Section 8.02
Indemnification by the
Sellers. (a) The Parent, the Purchaser and their
respective Affiliates, and the officers, directors, employees and agents of the
foregoing (each a “Purchaser Indemnified
Party”) shall be indemnified and held harmless, on a joint and several
basis, by the Sellers for and against any and all Liabilities, Taxes, losses,
damages, claims, costs and expenses, interest, awards, judgments and penalties
(including reasonable attorneys’ fees and expenses) actually suffered or
incurred by them (including any Action brought or otherwise initiated by any of
them) (hereinafter a “Loss”) arising out of
or resulting from:
(i)
the breach of any representation or
warranty made by any Seller contained in any Acquisition Document (it being
understood that such representations and warranties shall be interpreted without
giving effect to any limitations or qualifications as to “materiality”
(including the word “material”) or “Material Adverse Effect” set forth
therein);
(ii)
the breach of any covenant or agreement by
any Seller contained in any Acquisition Document;
(iii) any
and all Losses suffered or incurred by the Purchaser, or the Company by reason
of, or in connection with, any claim or cause of action of any third party to
the extent arising out of any action, inaction, event, condition, liability or
obligation of any Seller or the Business occurring or existing prior to the
Closing Date; or
(iv) any
and all Losses arising out of or resulting from the termination of employment,
for any reason at any time prior to the date six months following the Closing
Date, of any of the employees of the Company listed on Section 8.02(a)(iv) of the
Disclosure Schedule, which Losses arise pursuant to any arrangements made
with such employees prior to Closing.
(b)
Subject to Section 8.04, to the
extent that the undertakings of the Sellers set forth in this Section 8.02 may
be unenforceable, the Sellers shall contribute the maximum amount that it is
permitted to contribute under applicable Law to the payment and satisfaction of
all Losses incurred by the Purchaser Indemnified Parties.
(c)
The joint and several liability of all of the
Sellers set forth in Sections 6.01(a) or
8.02(a) shall
only apply to Losses to the extent that such Losses may be satisfied from the
funds remaining in the Escrow Account. For all Losses (i) in excess
of the funds remaining in the Escrow Account or (ii) which arise under Sections 6.01(a) or
8.02(a) after disbursement of the funds remaining in the Escrow Account,
subject to any limitations set forth in Section 8.04, only
Baran and UGP (and no other Seller) shall be jointly and severally liable for
such Losses. Notwithstanding anything to the contrary set forth
hereinabove, with respect to any Losses suffered pursuant to a breach described
in Section
8.02(a)(ii), each Seller shall be liable severally, and not jointly,
based upon which Seller is responsible for such Losses, and the Purchaser shall
only be entitled to pursue indemnification for such Losses from such breaching
Seller (and no other Seller).
64
Section 8.03
Indemnification by the Parent
and the Purchaser. (a) The Sellers and their
officers, directors, employees and agents (each a “Seller Indemnified
Party”) shall be indemnified and held harmless by each of the Parent and
the Purchaser, jointly and severally, for and against any and all Losses arising
out of or resulting from:
(i)
the breach of any representation or warranty made
by the Parent or the Purchaser contained in this Agreement or any of the
Ancillary Agreements to which the Parent or the Purchaser is a party;
or
(ii)
the breach of any covenant or agreement by the
Parent or the Purchaser contained in this Agreement or any of the Ancillary
Agreements to which the Parent or the Purchaser is a party.
(b)
To the extent that the undertakings of the
Parent or the Purchaser set forth in this Section 8.03 may
be unenforceable, the Parent or the Purchaser shall contribute the maximum
amount that it is permitted to contribute under applicable Law to the payment
and satisfaction of all Losses incurred by the Seller Indemnified
Parties.
Section 8.04
Limits on
Indemnification. (a) Notwithstanding anything to
the contrary contained in this Agreement, (a) the Sellers shall not be liable to
any Purchaser Indemnified Party for any claim for indemnification pursuant to
Section
8.02(a)(i) and Section 8.02(a)(iii),
unless and until the aggregate amount of indemnifiable Losses which may be
recovered by the Purchaser Indemnified Party under this Agreement (together with
the amount of indemnifiable Losses which may be recovered by the Purchaser
Indemnified Party under the BIT Agreement) equals or exceeds $300,000 (the
“Basket”),
after which the Sellers shall be liable only for those Losses under Section 8.02(a)(i)
and Section
8.02(a)(iii) of this Agreement and Section 7.02(a)(i)
and Section
7.02(a)(iii) of the BIT Agreement in excess of the Basket, and (b) the
maximum amount of indemnifiable Losses which may be recovered by the Purchaser
Indemnified Parties pursuant to Section 8.02(a)(i)
and Section
8.02(a)(iii) of this Agreement and Section 7.02(a)(i)
and Section
7.02(a)(iii) of the BIT Agreement, as applicable, shall be $5,000,0000
(the “Cap”). Notwithstanding
the foregoing, the Basket and the Cap limitations set forth in this Section 8.04 shall
not apply with respect to Tax matters.
(b)
Notwithstanding anything to the contrary
contained in this Agreement, (a) the Parent and the Purchaser shall not be
liable to any Seller Indemnified Party for any claim for indemnification
pursuant to Section
8.03(a)(i), unless and until the aggregate amount of indemnifiable Losses
which may be recovered by the Seller Indemnified Party under this Agreement
(together with the amount of indemnifiable Losses which may be recovered by the
Seller Indemnified Party under the BIT Agreement) equals or exceeds the Basket,
after which the Parent and the Purchaser shall be liable only for those Losses
under Section
8.03(a)(i) of this Agreement and Section 7.03(a)(i) of
the BIT Agreement in excess of the Basket, and (b) the maximum amount of
indemnifiable Losses which may be recovered by the Seller Indemnified Parties
pursuant to Section
8.03(a)(i) of this Agreement and Section 7.03(a)(i) of
the BIT Agreement shall be the Cap.
65
(c)
Notwithstanding Section 8.02 or Section 8.03, no
Indemnified Party shall be entitled to indemnification under this Article VIII with
respect to any amounts taken into consideration in computing any adjustment to
the Purchase Price pursuant to Section
2.06.
(d)
The remedies provided in Section 6.01 and this
Article VIII
shall constitute the exclusive remedies of the parties hereto at law following
the Closing for any breach of a representation, warranty or covenant contained
in this Agreement or any other Acquisition Document and the parties hereto waive
any other remedy which they or any other person entitled to be indemnified
pursuant to Section
6.01 or this Article VIII may have
at law with respect to any breach of any such representation, warranty or
covenant.
Section 8.05
Indemnification
Procedures. (a) An Indemnified Party shall give the
Indemnifying Party notice of any matter that an Indemnified Party has determined
has given or could give rise to a right of indemnification under this Agreement,
within 30 days of such determination, stating the amount of the Loss, if known,
and method of computation thereof, and containing a reference to the provisions
of this Agreement in respect of which such right of indemnification is claimed
or arises.
(b)
If an Indemnified Party shall receive notice of any Action,
audit, demand or assessment (each, a “Third Party Claim”)
against it or which may give rise to a claim for a Loss under this Article VIII, within
30 days of the receipt of such notice, the Indemnified Party shall give the
Indemnifying Party notice of such Third Party Claim; provided, however, that the
failure to provide such notice shall not release the Indemnifying Party from any
of its obligations under this Article VIII except
to the extent that the Indemnifying Party is materially prejudiced by such
failure and shall not relieve the Indemnifying Party from any other obligation
or Liability that it may have to any Indemnified Party otherwise than under this
Article
VIII. If the Indemnifying Party acknowledges in writing its
obligation to indemnify the Indemnified Party hereunder against any Losses that
may result from such Third Party Claim, then the Indemnifying Party shall be
entitled to assume and control the defense of such Third Party Claim at its
expense and through counsel of its choice if it gives written notice of its
intention to do so to the Indemnified Party within ten days of the receipt of
notice from the Indemnified Party of such Third Party Claim; provided, however, that if
there exists or is reasonably likely to exist a conflict of interest based upon
the opinion of counsel of such Indemnified Party that would make it
inappropriate in the judgment of the Indemnified Party in its reasonable
discretion for the same counsel to represent both the Indemnified Party and the
Indemnifying Party, then the Indemnified Party shall be entitled to retain its
own counsel, at the expense of the Indemnifying Party; provided, however, that the
Indemnified Party shall only be entitled to retain one separate counsel for
which the Indemnified Party reasonably determined counsel is
required. In the event that the Indemnifying Party exercises the
right to undertake any such defense against any such Third Party Claim as
provided above, the Indemnified Party shall cooperate with the Indemnifying
Party in such defense and make available to the Indemnifying Party, at the
Indemnifying Party’s expense, all witnesses, pertinent records, materials and
information in the Indemnified Party’s possession or under the Indemnified
Party’s control relating thereto as is reasonably required by the Indemnifying
Party. Similarly, in the event the Indemnified Party is, directly or
indirectly, conducting the defense against any such Third Party Claim, the
Indemnifying Party shall cooperate with the Indemnified Party in such defense
and make available to the Indemnified Party, at the Indemnifying Party’s
expense, all such witnesses, records, materials and information in the
Indemnifying Party’s possession or under the Indemnifying Party’s control
relating thereto as is reasonably required by the Indemnified
Party. No such Third Party Claim may be settled by the Indemnifying
Party without the prior written consent of the Indemnified Party, which consent
shall be given or withheld by the Imdemnified Party in its sole discretion,
provided that
if such settlement is a purely economic settlement that involves the full
release of the Indemnified Party and the Indemnifying Party agrees to pay all
amounts payable pursuant to such settlement, the Indemnified Party’s consent
will not be unreasonably withheld. Notwithstanding the foregoing, if
an Indemnified Party reasonably believes an adverse determination with respect
to any Educational Claim could adversely affect any Educational Approval of the
Institution or an Institution’s ability to participate fully in the Title IV
Programs, the Indemnified Party may, by notice to the Indemnifying Party, assume
the exclusive right to defend, compromise, or settle such matter, provided that
the Indemnifying Party shall not be bound by a settlement effected without its
consent (which may not be unreasonably withheld).
66
Section 8.06
Distributions from Escrow
Account. Subject to Section 8.07 below,
all Losses payable under this Article VIII and
Section 6.01(a)
shall first be satisfied by the Escrow Amount. In the event that
(a) the Sellers shall not have objected to the amount claimed by the
Purchaser for indemnifications with respect to any Loss in accordance with the
procedures set forth in the Escrow Agreement or (b) the Sellers have
delivered notice of its disagreement as to the amount of any indemnification
requested by the Purchaser and either (i) the Sellers, on the one hand, and
the Purchaser, on the other hand, shall have subsequent to the giving of such
notice, mutually agreed that the Sellers are obligated to indemnify the
Purchaser for a specified amount and the Purchaser and the Sellers’
Representative shall have so jointly notified the Escrow Agent or (ii) a final
nonappealable judgment shall have been rendered by the court having jurisdiction
over the matters relating to such claim by the Purchaser for indemnification
from the Sellers and the Escrow Agent shall have received in the case of
clause (i) above, written instructions from the Sellers’ Representative and
the Purchaser or, in the case of clause (ii) above, a copy of the final
nonappealable judgment of the court, the Escrow Agent shall deliver to the
Purchaser from the Escrow Account any amount determined to be owed to the
Purchaser under this Article VIII in
accordance with the Escrow Agreement. If and to the extent the Escrow
Amount is insufficient to cover any amount determined to be owed to the
Purchaser under Section 6.01(a) or
this Article VIII,
then Baran and UGP (and no other Seller) shall pay the amount of such deficiency
to the Purchaser by wire transfer in immediately available funds to a bank
account designated by the Purchaser, subject to the provisions of Section 8.06.
Section 8.07
Sellers’
Representative. (a) By the execution and delivery
of this Agreement, each of the Sellers and UGPE hereby irrevocably constitutes
and appoints Baran, as the true and lawful agent and attorney in fact (in such
capacity, the “Sellers’
Representative”) of the Sellers and UGPE with full power of substitution
to act in the name, place and stead of the Sellers and UGPE with respect to this
Agreement, the Escrow Agreement and the transactions contemplated hereby and
thereby as the Sellers’ Representative may deem appropriate, and to act on
behalf of the Sellers and UGPE in any litigation or arbitration involving this
Agreement or the Escrow Agreement, do or refrain from doing all such further
acts and things, and execute all such documents as the Sellers’ Representative
shall deem necessary or appropriate in connection with the transactions
contemplated by this Agreement and the Escrow Agreement, including the
power:
67
(i)
to act for the Sellers and UGPE with regard to
matters pertaining to the determination of the Purchase Price, the adjustment to
the Purchase Price and pertaining to the indemnification referred to in this
Agreement, including the power to settle any indemnity claim on behalf of the
Sellers and UGPE and to transact matters of litigation;
(ii)
to execute and deliver all ancillary
agreements, certificates and documents that the Sellers’ Representative deems
necessary or appropriate in connection with the consummation of the transactions
contemplated by this Agreement and the Escrow Agreement;
(iii) to
receive funds and give receipts for funds, including in respect of any
adjustments to the Purchase Price or any amounts distributed under the Escrow
Agreement;
(iv) to
do or refrain from doing any further act or deed on behalf of the Sellers and
UGPE that the Sellers’ Representative deems necessary or appropriate in its sole
discretion relating to the subject matter of this Agreement or the Escrow
Agreement as fully and completely as the Sellers and UGPE could do if personally
present;
(v)
to receive service of process in connection with any
claims under this Agreement or the Escrow Agreement; and
(vi) to
accept notices in accordance with Section
10.02.
(b)
Baran hereby agrees and consents to his
appointment as the Sellers’ Representative pursuant to this Section 8.07,
effective as of the date of this Agreement. The appointment of the
Sellers’ Representative shall be deemed coupled with an interest and shall be
irrevocable, and the Purchaser and any other Person may conclusively and
absolutely rely, without inquiry, upon any action or decision of the Sellers’
Representative in all matters referred to herein. All actions and
decisions of Sellers’ Representative shall be binding and conclusive on each
Seller and UGPE. All notices required to be made or delivered by the
Purchaser to the Sellers or UGPE and shall be made to the Sellers’
Representative for the benefit of the Sellers and UGPE and shall discharge in
full all notice requirements of the Purchaser to the Sellers and UGPE with
respect thereto. The Sellers and UGPE hereby confirm all that the
Sellers’ Representative shall do or cause to be done by virtue of its
appointment as the Sellers’ Representative of the Sellers and
UGPE. The Sellers’ Representative shall act for the Sellers and UGPE
on all of the matters set forth in this Agreement and the Escrow Agreement in
the manner the Sellers’ Representative believes to be in the best interest of
the Sellers and UGPE and consistent with the obligations under this Agreement
and the Escrow Agreement, but the Sellers’ Representative shall not be
responsible to the Sellers or UGPE for any loss or damages the Sellers or UGPE
may suffer by the performance by the Sellers’ Representative of its duties under
this Agreement or the Escrow Agreement, other than loss or damage arising from
intentional violation of the law by the Sellers’ Representative of his duties
under this Agreement or the Escrow Agreement.
68
(c)
If any individual Seller should die or become
incapacitated, if any trust or estate should terminate or if any other similar
event should occur, any action taken by the Sellers’ Representative pursuant to
this Section
8.07 shall be valid as if such death or incapacity, termination or other
event had not occurred, regardless of whether or not the Sellers’ Representative
or the Purchaser shall have received notice of such death, incapacity,
termination or similar event. The Person appointed as Sellers’
Representative may resign as such at any time on not less than five Business
Days’ notice to the Sellers, UGPE and the Parent. A vacancy in the
position of Sellers’ Representative shall be filled by a Person determined by
the holders of a majority in interest of the amount then held in the Escrow
Account.
ARTICLE
IX
TERMINATION,
AMENDMENT AND WAIVER
Section
9.01 Termination. With
respect to the Acquisition, this Agreement may be terminated at any time prior
to the Closing:
(a)
by either the Sellers or the Purchaser if the
Closing shall not have occurred on or before May 15, 2009; provided, however, that the
right to terminate this Agreement under this Section 9.01(a)
shall not be available to a party whose failure to fulfill any obligation under
this Agreement shall have been the cause of, or shall have resulted in, the
failure of the Closing to occur on or prior to such date;
(b)
by the Purchaser, upon a material breach of
any representation, warranty, covenant or agreement of the Sellers regarding the
Company, the Business or the Institution set forth in this Agreement, or if any
representation or warranty of the Sellers regarding the Company, the Business or
the Institution shall have become untrue, in either case such that the
conditions set forth in Section 7.02
would not be satisfied; provided, however, that if such
breach is curable by the Sellers through the exercise of their reasonable best
efforts within 30 days of its receipt of the Purchaser’s written notice of
such breach, then the Purchaser may not terminate this Agreement pursuant to
this Section 9.01(b)
prior to the expiration of such 30-day period;
(c)
by the Sellers, upon a material breach of
any representation, warranty, covenant or agreement of the Purchaser set forth
in this Agreement, or if any representation or warranty of the Purchaser shall
have become untrue, in either case such that the conditions set forth in Section 7.01
would not be satisfied; provided, however, that if such
breach is curable by the Purchaser through the exercise of its reasonable best
efforts within 30 days of its receipt of the Sellers’ written notice of
such breach, then the Sellers may not terminate this Agreement pursuant to this
Section 9.01(c)
prior to the expiration of such 30-day period;
69
(d)
by either the Sellers or the Purchaser in
the event that any Governmental Authority shall have issued a Governmental Order
or taken any other action restraining, enjoining or otherwise prohibiting the
Acquisition and such Governmental Order or other action shall have become final
and nonappealable; or
(e) by
the mutual written consent of the Sellers and the Purchaser.
Section 9.02
Effect of
Termination. In the event of termination of this Agreement as
provided in Section
9.01, with respect to the Acquisition only, this Agreement shall
forthwith become void and there shall be no liability on the part of any party
hereto relating to or arising out of the Acquisition except (i) as set forth in
Article X and
(ii) that nothing herein shall relieve any party from liability for any breach
of this Agreement.
Section
9.03 Amendment. This
Agreement may not be amended or modified except (a) by an instrument in
writing signed by or on behalf of the parties hereto or (b) by a waiver in
accordance with Section 9.04.
Section
9.04 Waiver. Any
party hereto may (a) extend the time for the performance of any of the
obligations or other acts of another party, (b) waive any inaccuracies in
the representations and warranties of another party contained herein or in any
document delivered by another party pursuant hereto or (c) waive compliance
with any of the agreements of another party or conditions to such party’s
obligations contained herein. Any such extension or waiver shall be
valid only if set forth in an instrument in writing signed by the party or
parties to be bound thereby. Any waiver of any term or condition
shall not be construed as a waiver of any subsequent breach or a subsequent
waiver of the same term or condition, or a waiver of any other term or condition
of this Agreement. The failure of any party to assert any of its
rights hereunder shall not constitute a waiver of any of such
rights. All rights and remedies existing under this Agreement are
cumulative to, and not exclusive of, any rights or remedies otherwise
available.
ARTICLE
X
GENERAL
PROVISIONS
Section
10.01 Expenses. Except
as otherwise specified in this Agreement, all costs and expenses, including fees
and disbursements of counsel, financial advisors and accountants, incurred in
connection with this Agreement and the transactions contemplated by this
Agreement shall be paid by the party incurring such costs and expenses, whether
or not the Closing shall have occurred.
Section
10.02 Notices. All
notices, requests, claims, demands and other communications hereunder shall be
in writing and shall be given or made (and shall be deemed to have been duly
given or made upon receipt) by delivery in person, by nationally recognized
overnight courier service, by telecopy, by facsimile, by email or by registered
or certified mail (postage prepaid, return receipt requested) to the respective
parties at the following addresses (or at such other address for a party as
shall be specified in a notice given in accordance with this Section 10.02):
70
|
|
(a)
|
if
to the Sellers Representative:
|
Brad
Baran
25
Cobtail Way
Simsbury,
CT 06070
Telephone: (203)
494-6134
Facsimile: (860)
627-4308
|
|
(b)
|
if
to the Sellers
|
Brad
Baran
25
Cobtail Way
Simsbury,
CT 06070
Telephone: (203)
494-6134
Facsimile: (860)
627-4308
UGP
Education Partners, LLC
Two
Greenwich Office Park
Greenwich,
CT 06831
Telephone: (203)
422-0650
Facsimile: (203)
422-0659
Attention: Stan
Lau
Merion
Investment Partners, L.P.
Merion
Building, Suite 210
700 S.
Henderson Rd.
King of
Prussia, PA 19406
Facsimile: (610)
965-1654
Attention: William
M. Means
with a
copy to:
Blank
Rome LLP
405
Lexington Avenue
New York,
NY 10174
Telephone: (212)
885-5435
Facsimile: (212)
885-2001
Attention: Peter
Schnur, Esq.
and
Updike,
Kelly & Spellacy, P.C.
One State
Street
Hartford,
CT 06103
Telephone:
(860) 548-2651
Attention: David
E. Sturgess, Esq.
71
|
|
(c)
|
if
to the Parent or the Purchaser:
|
NN
Acquisition, LLC
c/o
Lincoln Educational Services Corporation
200
Executive Drive
West
Orange, NJ 07052
Telephone: (973)
736-9340
Facsimile: (973)
243-0841
Attention: David
F. Carney, Chairman and Chief Executive Officer
with a
copy to:
Shearman
& Sterling LLP
599
Lexington Avenue
New York,
NY 10022-6069
Telephone: (212)
848-4000
Facsimile: (646)
848-8966
Attention: Eliza
W. Swann, Esq.
Section 10.03
Public
Announcements. No party hereto shall make, or cause to be
made, any press release or public announcement in respect of this Agreement or
the transactions contemplated by this Agreement or otherwise communicate with
any news media without the prior written consent of the other parties, and the
parties shall cooperate as to the timing and contents of any such press release
or public announcement.
Section
10.04 Severability. If
any term or other provision of this Agreement is invalid, illegal or incapable
of being enforced by any Law or public policy, all other terms and provisions of
this Agreement shall nevertheless remain in full force and effect for so long as
the economic or legal substance of the transactions contemplated by this
Agreement is not affected in any manner materially adverse to any
party. In addition, if any one or more of the provisions contained in
this Agreement is for any reason held to be excessively broad as to duration,
geographical scope, activity or subject, it is to be construed by limiting and
reducing it, so as to be enforceable to the extent compatible with the
applicable Law as it then appears. Upon such determination that any
term or other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible in an
acceptable manner in order that the transactions contemplated by this Agreement
are consummated as originally contemplated to the greatest extent
possible.
Section 10.05
Entire
Agreement. This Agreement, the Ancillary Agreements and the
Non-Disclosure Agreement constitute the entire agreement of the parties hereto
with respect to the subject matter hereof and thereof and supersede all prior
agreements and undertakings, both written and oral, between the Sellers on the
one hand, and the Parent and the Purchaser, on the other hand, with respect to
the subject matter hereof and thereof.
72
Section
10.06 Assignment. This
Agreement may not be assigned by any party hereto by operation of law or
otherwise without the express written consent of the other parties hereto (which
consent may be granted or withheld in the sole discretion of such parties);
provided, that
the Purchaser may assign this Agreement or any of its rights and obligations
hereunder to one or more Affiliates of the Purchaser without the consent of the
Sellers.
Section 10.07
No Third Party
Beneficiaries. This Agreement shall be binding upon and inure
solely to the benefit of the parties hereto and their permitted assigns and
nothing herein, express or implied, is intended to or shall confer upon any
other Person, including any union or any employee or former or retired employee
of any Seller or spouse or dependents of such Persons, any legal or equitable
right, benefit or remedy of any nature whatsoever, including any rights of
employment for any specified period, under or by reason of this
Agreement.
Section
10.08 Governing
Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York applicable to contracts
executed in and to be performed entirely within that State. All
Actions arising out of or relating to this Agreement shall be heard and
determined exclusively in any New York state or federal court. The
parties hereto hereby (a) submit to the exclusive jurisdiction of any state
or federal court sitting in the State of New York for the purpose of any Action
arising out of or relating to this Agreement brought by any party hereto, and
(b) irrevocably waive, and agree not to assert by way of motion, defense,
or otherwise, in any such Action, any claim that it is not subject personally to
the jurisdiction of the above-named courts, that its property is exempt or
immune from attachment or execution, that the Action is brought in an
inconvenient forum, that the venue of the Action is improper, or that this
Agreement or the transactions contemplated by this Agreement may not be enforced
in or by any of the above-named courts.
Section 10.09
Waiver of Jury
Trial. Each of the parties hereto hereby waives to the fullest
extent permitted by applicable Law any right it may have to a trial by jury with
respect to any litigation directly or indirectly arising out of, under or in
connection with this Agreement or the transactions contemplated by this
Agreement. Each of the parties hereto (a) certifies that no
representative, agent or attorney of any other party has represented, expressly
or otherwise, that such other party would not, in the event of litigation, seek
to enforce that foregoing waiver and (b) acknowledges that neither it nor
the other parties hereto has been induced to enter into this Agreement and the
transactions contemplated by this Agreement, as applicable, by, among other
things, the mutual waivers and certifications in this Section 10.09.
Section 10.10
Specific
Performance. Each party hereto agrees and acknowledges that
remedies at law for any breach of its or his obligations under this Agreement
are inadequate and will cause irreparable harm and that in addition thereto, the
non-breaching parties shall be entitled to seek equitable relief, including
injunction and specific performance, to prevent or cure the violation of any
party’s obligations hereunder.
Section
10.11 Headings. The
descriptive headings contained in this Agreement are included for convenience of
reference only and shall not affect in any way the meaning or interpretation of
this Agreement.
73
Section
10.12 Counterparts. This
Agreement may be executed and delivered (including by facsimile transmission) in
two or more counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an original, but
all of which taken together shall constitute one and the same
agreement.
Section 10.13
Exhibits and Disclosure
Schedule. The Exhibits to this Agreement and the Disclosure
Schedule are a part of this Agreement as if set forth in full
herein.
74
IN
WITNESS WHEREOF, the Parent, the Purchaser and the Sellers and the have caused
this Agreement to be executed by their respective officers thereunto duly
authorized, as of the date first written above.
|
LINCOLN
TECHNICAL INSTITUTE, INC.
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|||
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By:
|
/s/ David F. Carney | ||
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Name:
David F. Carney
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|||
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Title:
CEO
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|||
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NN
ACQUISITION, LLC
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|||
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By:
|
/s/ David F. Carney | ||
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Name:
David F. Carney
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|||
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Title:
CEO
|
|||
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BRAD
BARAN
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|||
| /s/ Brad Baran | |||
|
UGP
EDUCATION PARTNERS, LLC
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|||
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By:
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/s/ George V. Cinquegrana | ||
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Name:
George V. Cinquegrana
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|||
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Title:
Partner
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|||
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MERION
INVESTMENT PARTNERS, L.P.
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|||
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By: MERION
FINANCIAL PARTNERS, L.P.,
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|||
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Its
General Partner
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|||
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By: MERION
FUND MANAGEMENT, LLC
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|||
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Its
General Partner
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|||
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By:
|
/s/ William M. Means | ||
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Name:
William M. Means
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|||
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Title:
Managing Partner
|
|||
IN
WITNESS WHEREOF, for purposes of Sections 3.01(e), 5.14 and
8.07 only, UGPE has caused this Agreement to be executed by its
respective officer thereunto duly authorized, as of the date first written
above.
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UGPE
PARTNERS, INC.
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|||
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By:
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/s/ George V. Cinquegrana | ||
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Name:
George V. Cinquegrana
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|||
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Title:
Partner
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|||
EXHIBIT
21.1
Subsidiaries of the
Company
The
following is a list of Lincoln Educational Services Corporation’s subsidiaries
as of December 31, 2008:
|
Name
|
Jurisdiction
|
|
Lincoln
Technical Institute, Inc. (wholly owned)
|
New
Jersey
|
|
New
England Acquisition LLC (wholly owned)
|
Delaware
|
|
Southwestern
Acquisition LLC (wholly owned)
|
Delaware
|
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Nashville
Acquisition, LLC (wholly owned through Lincoln Technical Institute,
Inc.)
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Delaware
|
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Euphoria
Acquisition, LLC (wholly owned through Lincoln Technical Institute,
Inc.)
|
Delaware
|
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New
England Institute of Technology at Palm Beach, Inc. (wholly owned through
Lincoln Technical Institute, Inc.)
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Florida
|
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LCT
Acquisition, LLC (wholly owned through Lincoln Technical Institute,
Inc.)
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Delaware
|
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Florida
Acquisition, LLC (wholly owned)
|
Delaware
|
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ComTech
Services Group Inc. (wholly owned through Lincoln Technical Institute,
Inc.)
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New
Jersey
|
EXHIBIT
23
Consent
of Independent Registered Public Accounting Firm
We
consent to the incorporation by reference in Registration Statement No.
333-126066, 333-132749 and 333-138715 on Form S-8 and in Registration Statement
No. 333-148406 and 333-152854 on Form S-3 of our reports dated March 12, 2009
relating to the consolidated financial statements and financial statement
schedule of Lincoln Educational Services Corporation and subsidiaries ( the
“Company”) (which report
expressed an unqualified opinion and includes an explanatory paragraph relating
to the adoption of the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes”), and the effectiveness of internal control over financial
reporting appearing in the Annual Report on Form 10-K of Lincoln Educational
Services Corporation for the year ended December 31, 2008.
DELOITTE
& TOUCHE LLP
Parsippany,
New Jersey
March 12,
2009
EXHIBIT
31.1
CERTIFICATION
I, David
F. Carney, certify that:
|
1.
|
I
have reviewed this annual report on Form 10-K of Lincoln Educational
Services Corporation;
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
4.
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and
have:
|
(a) Designed
such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed
such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
|
5.
|
The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
|
(a) All
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial
reporting.
Date:
March 13, 2009
|
/s/ David F. Carney
|
|
|
David
F. Carney
|
|
|
Chairman
& Chief Executive Officer
|
EXHIBIT
31.2
CERTIFICATION
I, Cesar
Ribeiro, certify that:
|
1.
|
I
have reviewed this annual report on Form 10-K of Lincoln Educational
Services Corporation;
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
4.
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and
have:
|
(a) Designed
such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed
such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
|
5.
|
The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
|
(a) All
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial
reporting.
Date:
March 13, 2009
|
/s/ Cesar Ribeiro
|
|
|
Cesar
Ribeiro
|
|
|
Chief
Financial Officer
|
EXHIBIT
32
CERTIFICATION
Pursuant
to 18 U.S.C. 1350 as adopted by
Section 906
of the Sarbanes-Oxley Act of 2002
Each of
the undersigned, David F. Carney, Chairman and Chief Executive Officer of
Lincoln Educational Services Corporation (the “Company”), and Cesar Ribeiro,
Chief Financial Officer of the Company, has executed this certification in
connection with the filing with the Securities and Exchange Commission of the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31 2008
(the “Report”).
Each of
the undersigned hereby certifies that, to his respective knowledge:
1. The
Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
2. The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
Date:
March 13, 2009
|
/s/ David F. Carney
|
|
|
David
F. Carney
|
|
|
Chairman
& Chief Executive Officer
|
|
|
/s/ Cesar Ribeiro
|
|
|
Cesar
Ribeiro
|
|
|
Chief
Financial Officer
|