-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RCb3gfVLeCxrAqxMTe0TCspm4WE10KQ1ETp6b4ke0kx8CrddIWjArjt0QKPAz55P jgy7vzWY2F4anWAIy7s4kQ== 0000950131-97-006090.txt : 19971014 0000950131-97-006090.hdr.sgml : 19971014 ACCESSION NUMBER: 0000950131-97-006090 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 20 FILED AS OF DATE: 19971010 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAREER EDUCATION CORP CENTRAL INDEX KEY: 0001046568 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 393932190 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-37601 FILM NUMBER: 97693429 BUSINESS ADDRESS: STREET 1: 2800 WEST HIGGINS ROAD, SUITE 790 CITY: HOFFMAN ESTATES STATE: IL ZIP: 60195 BUSINESS PHONE: 8477813600 MAIL ADDRESS: STREET 1: 2800 WEST HIGGINS ROAD STREET 2: SUITE 790 CITY: HOFFMAN ESTATES STATE: IL ZIP: 60195 S-1 1 FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 10, 1997 REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- CAREER EDUCATION CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 610000 39-3932190 (STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.) INCORPORATION OR CLASSIFICATION CODE NO.) ORGANIZATION) 2800 WEST HIGGINS ROAD, SUITE 790, HOFFMAN ESTATES, ILLINOIS 60195, (847) 781- 3600 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ---------------- JOHN M. LARSON PRESIDENT AND CHIEF EXECUTIVE OFFICER CAREER EDUCATION CORPORATION 2800 WEST HIGGINS ROAD, SUITE 790, HOFFMAN ESTATES, ILLINOIS 60195, (847) 781- 3600 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: LAWRENCE D. LEVIN, ESQ DENNIS V. OSIMITZ, ESQ. MARK D. WOOD, ESQ. SIDLEY & AUSTIN KATTEN MUCHIN & ZAVIS ONE FIRST NATIONAL PLAZA 525 WEST MONROE STREET, SUITE 1600 CHICAGO, ILLINOIS 60603 CHICAGO, ILLINOIS 60661 (312) 853-7000 (312) 902-5200 ---------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: [_] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF AGGREGATE REGISTRATION SECURITIES TO BE REGISTERED OFFERING PRICE (1) FEE - ----------------------------------------------------------------------------------------------- Common Stock, $.01 par value.................................. $51,750,000 $15,682 - -----------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- (1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. ---------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED OCTOBER 10, 1997 Shares LOGO Common Stock ----------- The shares of Common Stock, $.01 par value (the "Common Stock"), of Career Education Corporation ("CEC" or the "Company") offered hereby (the "Offering") are being offered by the Company. Prior to the Offering, there has been no public market for the Common Stock. It is anticipated that the initial public offering price will be between $ and $ per share. For information relating to the factors considered in determining the initial offering price to the public, see "Underwriting." Application will be made to list the Common Stock on the Nasdaq National Market under the symbol "CECO." FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" ON PAGE 8 HEREIN. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS COMPANY(1) ---------- ------------- ----------- Per Share.................................. $ $ $ Total (2).................................. $ $ $
- -------------- (1) Before deduction of expenses payable by the Company estimated at $ . (2) The Company and certain stockholders of the Company have granted the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase a maximum of additional shares from the Company and a maximum of additional shares from such stockholders to cover over-allotments of shares. If the option is exercised in full, the total Price to Public will be $ , Underwriting Discounts and Commissions will be $ , Proceeds to Company will be $ , and proceeds to such stockholders will be $ . The shares of Common Stock are offered by the several Underwriters when, as and if delivered to and accepted by the Underwriters and subject to their right to reject orders in whole or in part. It is expected that the shares of Common Stock will be ready for delivery on or about , 1997, against payment in immediately available funds. CREDIT SUISSE FIRST BOSTON SMITH BARNEY INC. ABN AMRO CHICAGO CORPORATION Prospectus dated , 1997 [PHOTOGRAPHS AND CAPTIONS TO BE INSERTED HERE] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 [FRONT COVER GATEFOLD] PROGRAMS [PICTURE] The fields of Visual Communication and Design Technologies, i.e., CADD, Fashion Design and Merchandising, Interactive/Digital Media, Interior Design, Internet, Package Design, Print Media and Broadcasting, are pervasive in our society. With a focus on providing thorough knowledge of the techniques used to create and produce all forms of Visual Communication, our schools prepare today's graduates to succeed in these creative fields.What keeps our students at the leading edge of these technologies is their own creativityand imagination, coupled with the solid training offered by our schools. [PICTURE] The philosophy of our Business Studies program is to provide quality education that is relevant to the job market, implemented by an experienced and dedicated staff, and geared to those seeking a solid foundation in knowledge and skills. Our schools are driven to developing people for career positions using hands-on teaching techniques, externship positions and the latest technologies in a variety of fields, including the following: Accounting, Business Administration, Hotel and Restaurant Management, Marketing, Office Management, Secretarial, Travel, and Legal Executive Assistant. [FRONT COVER GATEFOLD] OF STUDY Our Computer Technologies programs emphasize the technical training, development, and preparation necessary for our graduates to succeed in the various computer technology fields. Whether it is Computer Programming, Computer Technical Support, Computer Information Management, Electronics, Network Management, PC/LAN or PC/Net, active learning and real-time training are a primary emphasis in our facilities. [PICTURE] The core of our Culinary Arts program is the hands-on teaching of cooking and baking skills as well as the theoretical knowledge that must underlie competency in [PICTURE] both fields. It endeavors to present students the different styles and experiences of the school's chefs and instructors, and to introduce students to a wide variety of equipment, all of which will prepare them for the area of the food service or hospitality industry they choose to enter. PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Company's Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus. Prospective investors should consider carefully, among other things, the information set forth under "Risk Factors" in this Prospectus. Unless otherwise indicated, all information in this Prospectus (i) reflects the consummation of the Transactions (as defined under "The Transactions") and (ii) assumes no exercise of the Underwriters' over-allotment option. See "The Transactions" and "Description of Capital Stock." As used in this Prospectus, unless the context indicates otherwise, the terms "Company" and "CEC" refer to Career Education Corporation and its subsidiaries, including all of their schools and campuses; the term "school" means a campus or group of campuses known by a single brand name (such as The Katharine Gibbs Schools or Al Collins Graphic Design School); the term "campus" means a single location of any school (such as the New York campus of The Katharine Gibbs Schools or the Al Collins Graphic Design School in Tempe, Arizona); and the term "institution" means a main campus and its additional locations, as such are defined under regulations of the United States Department of Education. THE COMPANY Career Education Corporation (the "Company" or "CEC") is one of the largest providers of private, for-profit postsecondary education in North America, with more than students enrolled as of October 31, 1997. CEC operates nine schools, with 18 campuses located in 13 states and two Canadian provinces. These schools enjoy long operating histories and offer a variety of bachelor's degree, associate degree and non-degree programs in career-oriented disciplines within the Company's core curricula of (i) computer technologies, (ii) visual communication and design technologies, (iii) business studies and (iv) culinary arts. CEC was founded in January 1994 by John M. Larson, the Company's President and Chief Executive Officer, who has over 23 years of experience in the career- oriented education industry. The Company was formed to capitalize on opportunities in the large and highly fragmented postsecondary school industry. Since its inception, CEC has completed nine acquisitions. The Company has acquired schools that it believes possess strong curricula, leading reputations and broad marketability but have been undermanaged from a marketing and financial standpoint. The Company seeks to apply its expertise in operations, marketing and curricula development, as well as its financial strength, to improve the performance of these schools. The schools acquired by the Company and their improved populations are summarized in the following table:
STUDENT POPULATION AT OCTOBER 31, YEAR DATE ------------------ SCHOOL FOUNDED ACQUIRED 1996 1997 % INCREASE ------ ------- -------- --------- --------- ---------- AL COLLINS GRAPHIC DESIGN SCHOOL ("Collins") 1978 1/94 936 % BROOKS COLLEGE ("Brooks") 1970 6/94 960 ALLENTOWN BUSINESS SCHOOL ("Allentown") 1869 7/95 781 BROWN INSTITUTE ("Brown") 1946 7/95 1,391 WESTERN CULINARY INSTITUTE ("Western Culinary") 1983 10/96 453 SCHOOL OF COMPUTER TECHNOLOGY ("SCT") (2 campuses) 1967 2/97 902 THE KATHARINE GIBBS SCHOOLS ("Gibbs") (7 campuses) 1911 5/97 2,920 INTERNATIONAL ACADEMY OF MER- CHANDISING & DESIGN (U.S.) ("IAMD-U.S.") (2 campuses) 1977 6/97 1,207 INTERNATIONAL ACADEMY OF MER- CHANDISING & DESIGN (CANADA) ("IAMD-Canada") (2 campuses) 1983 6/97 1,230
3 The Company's success in completing acquisitions and improving the financial performance of acquired schools has enabled it to achieve rapid growth. Net revenue has increased from $7.5 million in 1994 to $33.6 million in 1996. For the first six months of 1997, net revenue was $25.7 million. 1996 pro forma net revenue, reflecting the results of operations of schools the Company acquired in 1997, would have been $86.6 million. BUSINESS AND OPERATING STRATEGY The Company was founded based upon a business and operating strategy which it believes has enabled it to achieve significant improvements in the performance of its acquired schools. The Company believes this strategy will enable it to continue to capitalize on favorable economic, demographic and social trends which are driving demand for career-oriented education. These trends include increasing technological requirements for entry level jobs, growing numbers of high school students and greater recognition of the value of higher education. The key elements of this strategy are as follows: . Focusing on Core Curricula. The Company's schools offer educational programs principally in four career-related fields of study identified by the Company as areas with highly interested and motivated students, strong entry-level employment opportunities and ongoing career and salary advancement potential. . Adapting and Expanding Educational Programs. Each of the Company's schools strives to meet the changing needs of its students and the employment markets by regularly refining and adapting its existing educational programs, selectively duplicating successful programs from other CEC schools and introducing entirely new programs of study. . Direct Response Marketing. The Company seeks to increase school enrollment and profitability through intensive local, regional and national direct response marketing programs specifically crafted for each school to maximize that school's market penetration. . Improving Student Retention. The Company focuses substantial attention on student retention, as modest improvements in student retention rates can result in meaningful increases in school revenue and profitability. The Company strives to improve retention by treating students as valued customers. . Emphasizing Employment of Graduates. The Company devotes significant resources to graduate placement efforts because it believes that maintaining high employment rates for graduates of its schools enhances the overall reputation of the schools and their ability to attract new students. . Making Capital Investments. The Company makes substantial investments in its facilities and equipment to attract, retain and prepare students for the increasing technical demands of the workplace. . Emphasizing School Management Autonomy and Accountability. The Company provides significant operational autonomy and appropriate performance- based incentives to its campus-level managers. The Company believes these policies foster among these managers an important sense of personal responsibility for achieving campus performance objectives and provide the Company with a significant advantage in recruiting and retaining highly-motivated, entrepreneurial individuals. The Company believes that its application of this strategy has been a major factor in improving operations at the four schools owned by the Company as of July 1995: Allentown, Brooks, Brown and Collins. At these schools, the aggregate student population has increased % over the past two years, from 3,361 at October 31, 1995 to at October 31, 1997. In addition, approximately 88% of the available 1996 graduates of these schools obtained employment related to their program of study within six months of graduation. 4 GROWTH STRATEGY The Company believes it can achieve superior long-term growth in revenue and profitability through: . Expanding Existing Operations. Through the execution of its business and operating strategy, the Company intends to achieve growth at its existing campuses. . Acquiring Additional North American Schools. The Company intends to continue to acquire schools in the U.S. and Canada that have, among other things, leading reputations, broad marketability and demonstrated compliance with regulatory requirements and accreditation standards. The Company plans to acquire schools which it believes have been undermanaged and will benefit from the implementation of the Company's business and operating strategy. . Establishing New Campuses. The Company expects to open new campuses, most likely as additional locations of existing institutions, to capitalize on new markets or geographic regions that exhibit strong enrollment potential and/or the opportunity to establish a successful school operation in one of the Company's core curricula areas. . Entering New Service Areas. The Company plans to develop new services, such as distance learning (offering educational products and services for working adults through video, Internet and other distribution channels) and educational publishing (producing and marketing educational publications), which the Company believes offer strong long-term growth potential. Additionally, the Company plans to expand its contract training operations (providing customized training on a contract basis for business and government organizations). . Expanding Internationally. The Company may also acquire or establish operations outside North America where the Company believes significant opportunities exist. CEC was incorporated in Delaware on January 5, 1994. CEC's principal executive offices are located at 2800 West Higgins Road, Suite 790, Hoffman Estates, Illinois 60195 and its telephone number is (847) 781-3600. The address of the Company's web site is http://www.careered.com. Web sites for most of the Company's schools can be accessed through hyperlinks at the Company's web site. THE OFFERING Common Stock offered............... shares Common Stock to be outstanding after the Offering................ shares (1) Use of proceeds.................... Repayment of certain indebtedness, payment of dividends on Preferred Stock and general corporate purposes, including capital expenditures, possible future acquisitions of schools and working capital. See "Use of Proceeds." Proposed Nasdaq National Market symbol............................ CECO
- -------- (1) Excludes (i) shares of Common Stock issuable upon the exercise of outstanding options and (ii) an aggregate of shares of Common Stock reserved for issuance under the Career Education Corporation 1995 Stock Option Plan, the Career Education Corporation 1997 Employee Incentive Compensation Plan, the Career Education Corporation 1997 Non-Employee Directors' Stock Option Plan and the Career Education Corporation 1998 Employee Stock Purchase Plan (collectively, the "Stock Plans"). See "Management--Stock Plans" and "Description of Capital Stock." 5 SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA The following table sets forth certain consolidated financial and other operating data for the Company. This information should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. See "Unaudited Pro Forma Condensed Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
YEAR ENDED SIX MONTHS ENDED SIX MONTHS ENDED YEARS ENDED DECEMBER 31, DECEMBER 31, 1996 JUNE 30, JUNE 30, 1997 ----------------------------- ------------------ ----------------- ------------------ PRO PRO FORMA AS FORMA AS PRO ADJUSTED PRO ADJUSTED 1994(1) 1995 1996 FORMA(2) (2)(3) 1996 1997 FORMA(2) (2)(3) ---------- -------- -------- -------- -------- ------- -------- --------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Revenue: Tuition and registration fees, net................... $ 5,794 $ 16,330 $ 29,269 $78,997 $ $12,716 $ 23,073 $47,794 $ Other, net............. 1,692 3,066 4,311 7,600 2,074 2,579 3,901 ------- -------- -------- ------- ------- ------- -------- ------- ------- Total net revenue.... 7,486 19,396 33,580 86,597 14,790 25,652 51,695 Depreciation and amortization (4)....... 980 1,344 2,179 10,642 973 2,109 5,482 Income (loss) from operations............. (1,455) 390 2,375 (578) 91 1,511 989 Income (loss) before extraordinary item..... (1,589) 69 1,495 (5,517) (134) 316 (1,612) Extraordinary loss (5).. -- -- -- -- -- 418 -- ------- -------- -------- ------- ------- ------- -------- ------- ------- Net income (loss)....... (1,589) 69 1,495 (5,517) (134) (102) (1,612) ======= ======== ======== ======= ======= ======= ======== ======= ======= Income (loss) before extraordinary item attributable to common stockholders (6)....... (1,982) (804) 137 (5,517) (806) (693) (1,612) ======= ======== ======== ======= ------- ======= ======== ======= ------- Net income (loss) attributable to common stockholders (5)(6).... (1,982) (804) 137 (806) (1,111) ======= ======== ======== ======= ======= ======== ======= Pro forma income (loss) before extraordinary item(7)................ $ 1,495 $(5,517) $ $ 316 $(1,612) $ ======== ======= ======= ======== ======= ======= Pro forma income (loss) before extraordinary item per share attributable to common stockholders (7)(8).... $ $ $ $ $ $ ======== ======= ======= ======== ======= ======= OTHER DATA: EBITDA (9).............. $ (475) $ 1,741 $ 4,563 $10,072 $ $ 1,072 $ 3,627 $ 6,478 $ EBITDA margin (9)....... (6.3)% 9.0% 13.6% 11.6% % 7.2% 14.1% 12.5% % Cash flow provided by (used in): Operating activities... (1,000) 235 5,275 570 (2,797) (4,170) Investing activities... (2,372) (3,478) (9,518) (365) (38,192) (2,321) Financing activities... 6,014 4,566 8,076 (1,703) 42,936 126 Capital expenditures, net.................... 153 897 1,231 365 482 (2,321) Student population (10). 1,131 3,361 4,537 10,780 2,273 7,697 7,697 Number of campuses (11). 2 4 5 18 4 18 18 JUNE 30, 1997 ---------------------------- PRO FORMA AS PRO ADJUSTED ACTUAL FORMA(12) (12)(13) -------- --------- -------- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents.................................................... $ 9,745 $ 9,745 $ Working capital.............................................................. 3,750 3,750 Total assets................................................................. 100,767 100,767 Long-term debt, net of current maturities.................................... 47,651 47,651 Redeemable preferred stock and warrants...................................... 32,989 -- Total stockholders' investment............................................... 1,088 34,077
6 - -------- (1) Commencing January 5, 1994, the date of the Company's incorporation. (2) Gives effect to the Company's acquisitions of Western Culinary, SCT, Gibbs, IAMD-U.S. and IAMD-Canada and the Transactions (as defined under "The Transactions"), as if they had occurred at the beginning of each period presented. See "Unaudited Pro Forma Condensed Consolidated Financial Data." (3) Gives effect to the sale of shares of Common Stock offered hereby, at an assumed initial public offering price of $ per share, and the application of the estimated net proceeds therefrom as described in "Use of Proceeds," as if they had occurred as of the beginning of each period presented. See "Unaudited Pro Forma Condensed Consolidated Financial Data." (4) Amount includes depreciation of property and equipment, amortization of goodwill, student contracts and covenants not to compete and excludes the amortization of debt discount. (5) Represents the extraordinary loss of $418, net of a $233 tax benefit, resulting from the early extinguishment of debt during the six months ended June 30, 1997. See Note 4 of the Notes to the Company's Consolidated Financial Statements. (6) Includes reductions to income (loss) before extraordinary item for dividends paid or added to the redemption value of preferred stock, and the accretion to redemption value of preferred stock and warrants. See Note 2 of the Notes to the Company's Consolidated Financial Statements. (7) For the year ended December 31, 1996 and the six months ended June 30, 1997, pro forma income (loss) before extraordinary item is derived by eliminating the effect of dividends paid or accrued on preferred stock and the accretion to redemption value of preferred stock and warrants from historical income (loss) before extraordinary item attributable to common stockholders. (8) Pro forma weighted average number of common and common stock equivalent shares outstanding totaling and at December 31, 1996 and June 30, 1997, respectively, include the dilutive effect of (i) actual Common Stock outstanding, (ii) options and warrants issued during the last 12 months, (iii) common stock equivalents and (iv) shares of Common Stock to be issued upon the Transactions and assumes that shares (representing the approximate number of shares which are being sold by the Company at an assumed initial public offering price of $ per share to fund the estimated Dividend Payment (as defined under "Use of Proceeds") of $2,100) of the Common Stock being offered by the Company hereby were outstanding during the periods indicated. Pro forma as adjusted weighted average number of common and common stock equivalent shares outstanding totaling and at December 31, 1996 and June 30, 1997, respectively, also include shares of Common Stock issued in the Offering at an assumed initial public offering price of $ in order to repay indebtedness as described in "Use of Proceeds," as if the Offering had occurred as of January 1, 1996. See "The Transactions" and "Use of Proceeds." (9) For any period, EBITDA equals earnings before interest expense, taxes, depreciation and amortization (including amortization of debt discount), and EBITDA margin equals EBITDA as a percentage of net revenue. EBITDA and EBITDA margin are presented because the Company believes they allow for a more complete analysis of the Company's results of operations. EBITDA and EBITDA margin should not be considered as alternatives to, nor is there any implication that they are more meaningful than, any measure of performance or liquidity as promulgated under Generally Accepted Accounting Principles ("GAAP"). (10) Represents the total number of students attending the Company's schools (a) in the case of each full year, as of October 31, or (b) for the six months ended June 30, 1996 and 1997, as of June 30. (11) Represents the total number of campuses operated by the Company as of the end of the period. (12) Gives effect to the Transactions. (13) As adjusted to give effect to the sale of shares of Common Stock offered hereby at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and offering expenses, and the application of the net proceeds therefrom as described in "Use of Proceeds." 7 RISK FACTORS In addition to the other information contained in this Prospectus, the following risk factors should be considered carefully in evaluating the Company and its business before purchasing any shares of Common Stock offered hereby. This Prospectus contains certain forward-looking statements that are based on the beliefs of, as well as assumptions made by and information currently available to, the Company's management. The words "believe," "anticipate," "intend," "estimate," "expect" and similar expressions are intended to identify such forward-looking statements, but are not the exclusive means of identifying such statements. Such statements reflect the current views of the Company or its management and are subject to certain risks, uncertainties and assumptions, including, but not limited to, those set forth in the following Risk Factors. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, the Company's actual results, performance or achievements in 1997 and beyond could differ materially from those expressed in, or implied by, such forward- looking statements. The Company undertakes no obligation to release publicly any revisions to any such forward-looking statements that may reflect events or circumstances after the date of this Prospectus. DEPENDENCE ON FINANCIAL AID; POTENTIAL ADVERSE EFFECTS OF REGULATION Students attending the Company's schools finance their education through a combination of family contributions, individual resources (including earnings from full or part-time employment) and government-sponsored financial aid. The Company estimates that over 71% of the students at its U.S. schools receive some government-sponsored (federal or state) financial aid. For the 1996-97 award year (July 1, 1996 to June 30, 1997), approximately 81% of the Company's U.S. tuition and fee revenue was derived from some form of such financial aid received by the students of its schools. In addition, students attending IAMD- Canada receive government-sponsored financial aid. A reduction in U.S. or Canadian government funding levels could lead to lower enrollments at the Company's schools and require the Company to seek alternative sources of financial aid for students enrolled at its schools. If student enrollments are lowered or such alternative sources can not be arranged, the Company's business, results of operations and financial condition would be adversely affected. U.S. Financial Aid and Regulation The Company and its U.S. schools are subject to extensive regulation by federal and state governmental agencies and accrediting bodies. In particular, the Higher Education Act of 1965, as amended (the "HEA"), and the regulations promulgated thereunder by the United States Department of Education (the "DOE") subject the Company's U.S. schools to significant regulatory scrutiny on the basis of numerous standards that schools must satisfy in order to participate in the various federal student financial assistance programs under Title IV of the HEA (the "Title IV Programs"). Under the HEA and its implementing regulations, certain of these standards must be complied with on an institutional basis. For purposes of these standards, the regulations define an institution as a main campus and its additional locations (formerly referred to as branch campuses), if any. Under this definition, each of the Company's U.S. campuses is a separate institution, except for The Katharine Gibbs School in Piscataway, New Jersey, which is an additional location of The Katharine Gibbs School in Montclair, New Jersey, and the School of Computer Technology in Fairmont, West Virginia, which is an additional location of the School of Computer Technology in Pittsburgh, Pennsylvania. Among other things, the standards under the HEA and its implementing regulations with which the Company's U.S. institutions must comply: (i) require each institution to maintain a rate of default by its students on federally guaranteed or funded student loans that is below a specified rate, (ii) limit the proportion of an institution's revenue that may be derived from the Title IV Programs, (iii) establish certain financial responsibility and administrative capability standards, (iv) restrict the ability of an institution or its parent corporation to engage in certain types of transactions that would result in a change in ownership and control of that institution or corporation, (v) prohibit the payment of certain incentives to personnel engaged in student recruiting and admissions activities related to educational programs eligible for Title IV Program funds and (vi) require certain short-term educational programs to achieve stringent completion and placement outcomes in order to be eligible for Title IV Program funds. Under the rule concerning the 8 limitation on the amount of revenue that may be derived from the Title IV Programs, commonly referred to as the "85/15 Rule," an institution would be disqualified from participation in those programs if more than 85% of its revenue in any fiscal year was derived from the Title IV Programs. The Company has calculated that, since this requirement took effect in 1995, none of the Company's U.S. institutions has derived more than 82% of its revenue from the Title IV Programs for any fiscal year, and that for 1996 the range for the Company's U.S. institutions was from approximately 52% to approximately 82%. The Company is required to engage an independent auditor to conduct a compliance review of each U.S. institution's Title IV Program operations and to submit the results of such audits to the DOE on an annual basis. The Company has complied with its obligations in this regard on a timely basis. Based upon the most recent annual compliance audits of the Company's U.S. institutions and upon other reviews and audits by independent and governmental entities relating to compliance with the requirements established by the HEA and the regulations thereunder, the Company's institutions have been found to be in substantial compliance with the requirements for participating in the Title IV Programs, and the Company believes that its institutions continue to be in substantial compliance with those requirements. However, the DOE has asserted that the Company and certain of its institutions are not in compliance with certain financial responsibility requirements, as further discussed in "Company Compliance with Financial Responsibility Standards" below. Further, the DOE has raised a question regarding the method used to determine Federal Family Education Loan ("FFEL") eligibility for students enrolled in the Evening Legal Executive Assistant Program at The Katharine Gibbs School, Boston, Massachusetts ("Gibbs-Boston"). While communication with the DOE indicates that the DOE now agrees with the method used by the Company, a final determination has not yet been made. If the DOE does not agree with the Company's interpretation of the relevant regulation, it could impose liability or take other administrative action against Gibbs-Boston, which could have a material adverse effect on the Company's business, results of operations and financial condition. See "Financial Aid and Regulation." In addition, because the DOE periodically revises its regulations (e.g., the DOE is expected in the near future to propose new regulations with respect to financial responsibility standards) and changes its interpretation of existing laws and regulations, there can be no assurance that the DOE will agree with the Company's understanding of each Title IV Program requirement. The HEA mandates specific regulatory responsibilities for each of the following components of the higher education regulatory triad: (i) the federal government through the DOE; (ii) the non-governmental accrediting agencies recognized by the DOE (see "--Accreditation"); and (iii) state postsecondary education regulatory bodies (see "--State Authorization"). As in the case of the HEA and its implementing regulations, the regulations, standards and policies of the accrediting and state education regulatory bodies frequently change, and changes in, or new interpretations of, applicable laws, regulations or standards could have a material adverse effect on the schools' accreditation, authorization to operate in various states, permissible activities, receipt of funds under the Title IV Programs or costs of doing business. The Company's failure to maintain or renew any required regulatory approvals, accreditations or authorizations could have a material adverse effect on the Company's business, results of operations and financial condition. See "Financial Aid and Regulation--Federal Oversight of the Title IV Programs--Increased Regulatory Scrutiny." In the event of a determination by the DOE that one of the Company's institutions had improperly disbursed Title IV Program funds, the affected institution could be required to repay those funds and could be assessed an administrative fine of up to $25,000 per violation of the Title IV Program requirements. In addition, the DOE could transfer that institution from the "advance" system of payment of Title IV Program funds, under which an institution requests and receives funding from the DOE in advance based on anticipated needs, to the "reimbursement" system of payment, under which an institution must disburse funds to students and document their eligibility for Title IV Program funds before receiving funds from the DOE or from FFEL lenders. Violations of the Title IV Program requirements could also subject an institution or the Company to sanctions under the False Claims Act as well as other civil and criminal penalties. The failure by any of the Company's institutions to comply with applicable federal, state or accrediting agency requirements could result in the limitation, suspension or termination of that institution's ability to participate in the Title IV Programs or the 9 loss of state licensure or accreditation. Any such event could have a material adverse effect on the Company's business, results of operations and financial condition. There are no proceedings for any such purposes pending against any of the Company's institutions, and the Company has no reason to believe that any such proceeding is contemplated. See "Financial Aid and Regulation-- Federal Oversight of the Title IV Programs." Risk of Legislative Action The Title IV Programs are subject to significant political and budgetary pressures. The process of reauthorizing the HEA by the U.S. Congress, which takes place every five years, has begun and is expected to be completed in 1998. It is not possible to predict the outcome of the reauthorization process. Although there is no present indication that the Congress will decline to reauthorize the Title IV Programs, there can be no assurance that government funding for the Title IV Programs will continue to be available or maintained at current levels. A reduction in government funding levels could lead to lower enrollments at the Company's schools and require the Company to seek alternative sources of financial aid for students enrolled in its schools. Given the significant percentage of the Company's revenue that is indirectly derived from the Title IV Programs, the loss of or a significant reduction in Title IV Program funds available to students at the Company's schools could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, there can be no assurance that current requirements for student and institutional participation in the Title IV Programs will be unchanged or that one or more of the present Title IV Programs will not be replaced by other programs with materially different student or institutional eligibility requirements. Numerous changes to the HEA have been proposed by the DOE and other parties. Thus, the reauthorization process could result in revisions to the HEA that increase the compliance burden on the Company's institutions. For example, the DOE has circulated proposals to amend the HEA as follows: (i) to require all vocational programs of up to one year in length to establish a 70% completion and placement rate; (ii) to modify cohort default rate threshold provisions so that they apply with respect to the Federal Perkins Loan ("Perkins") program; and (iii) to require each institution that appeals high cohort default rates to post surety and be liable for loans and related costs if the institution's appeal is not successful. If the Company cannot comply with the provisions of the HEA, as revised during the reauthorization process, or if the cost of such compliance is excessive, the Company's business, results of operations and financial condition would be materially adversely affected. The DOE has also circulated proposals that would impact guaranty agencies and lenders which could impact the access of the Company's institutions and their students to FFEL program loans. Such proposals include, among other things, (i) requiring FFEL lenders to offer extended and graduated payment plans for borrowers and (ii) raising the level of lender risk-sharing from two to five percent. There can be no assurance that any legislation resulting from the DOE's current proposals will not include statutory language that is different from, or in addition to, that which is currently being proposed by the DOE or that in the future there will not be enacted other different legislation amending the HEA or otherwise impacting institutions, guaranty agencies or lenders. Student Loan Defaults The Company is substantially dependent on continued participation by its institutions in the student loan programs included in the Title IV Programs. For the 1996-97 award year (July 1, 1996 to June 30, 1997), federally guaranteed or funded student loans represented approximately 55% of the Company's U.S. tuition and fee revenue. Under the HEA, an institution could lose its eligibility to participate in some or all of the Title IV Programs if the defaults of its students on their FFEL or William D. Ford Federal Direct Loan ("FDL") loans exceed specified rates for specified periods of time. An institution's annual cohort default rate on FFEL or FDL loans, including a "weighted average" cohort default rate for institutions that participate in both loan programs, is calculated as the rate at which borrowers scheduled to begin repayment on such loans in one year default on those loans by the end of the following year. If an institution's cohort default rate is 25% or greater in any one of the three most recent federal fiscal years, the DOE may determine that the institution lacks administrative capability and may place that institution on "provisional certification" status for up to four years. Provisional 10 certification does not limit an institution's access to Title IV Program funds, but does subject that institution to closer review by the DOE and possible summary adverse action if that institution commits violations of the Title IV Program requirements. If an institution has cohort default rates of 25% or greater for three consecutive federal fiscal years, that institution will no longer be eligible to participate in the FFEL or FDL programs for the remainder of the federal fiscal year in which the determination of ineligibility is made and for the two subsequent federal fiscal years. An institution whose cohort default rate for any federal fiscal year exceeds 40% may have its eligibility to participate in all of the Title IV Programs limited, suspended or terminated. In addition, if an institution's cohort default rate for loans under the Perkins program exceeds 15% for any federal award year, the DOE may determine that the institution lacks administrative capability and place the institution on provisional certification status for up to four years. See "Financial Aid and Regulation--Federal Oversight of the Title IV Programs--Cohort Default Rates." None of the Company's institutions has published FFEL or FDL cohort default rates of 25% or greater for three consecutive federal fiscal years, and none has a published FFEL or FDL cohort default rate of 25% or greater for federal fiscal year 1994, which is the most recent year for which rates have been published. Two of the Company's institutions have had a cohort default rate exceeding 25% in one of the last three federal fiscal years for which such rates have been published. One of the Company's institutions, The Katharine Gibbs School, Norwalk, Connecticut ("Gibbs-Norwalk"), has a "prepublication" cohort default rate of 27.1% for federal fiscal year 1995. Such prepublication cohort default rate will be subject to revision by the DOE at the time that final rates are officially published, which is expected to occur in the fall of 1997. The Company has reviewed the data with which the federal fiscal year 1995 prepublication cohort default rate for Gibbs-Norwalk was calculated and, pursuant to DOE regulations, has filed the necessary documents to seek certain corrections in such data, but the Company expects the cohort default rate for Gibbs-Norwalk to exceed 25% when published as official. Nine of the Company's institutions have Perkins cohort default rates in excess of 15% for students who were scheduled to begin repayment in the 1996-1997 federal award year, the most recent year for which such rates have been calculated. These institutions are Allentown, Brown, Collins, Gibbs-Boston, Gibbs-Melville, Gibbs-Montclair, Gibbs-New York, Gibbs-Norwalk and Gibbs-Providence, which collectively accounted for approximately 59% of the Company's 1996 pro forma net revenue, reflecting the Company's acquisitions of Western Culinary, SCT, Gibbs, IAMD- U.S. and IAMD-Canada as if they had occurred as of January 1, 1996 ("1996 Pro Forma Net Revenue"). The Perkins program cohort default rates for these nine institutions ranged from 20.7% to 64.3%. Thus, these institutions could be placed on provisional certification status, which would subject them to closer review by the DOE and possible summary adverse action if they commit any violation of the Title IV Program requirements. To date, none of these institutions has been placed on such status solely for this reason. In 1995, the Gibbs institutions voluntarily chose to discontinue their participation in the Perkins program. The loss of eligibility to participate in any or all of the Title IV Programs by any of the Company's institutions could have a material adverse effect on the Company's business, results of operations and financial condition. Financial Responsibility Standards The HEA and its implementing regulations establish specific standards of financial responsibility that must be satisfied in order to qualify for participation in the Title IV Programs. Under such standards, an institution must: (i) have an acid test ratio (defined as the ratio of cash, cash equivalents and current accounts receivable to current liabilities) of at least 1:1 at the end of each fiscal year, (ii) have a positive tangible net worth at the end of each fiscal year and (iii) not have a cumulative net operating loss during its two most recent fiscal years that results in a decline of more than 10% of the institution's tangible net worth at the beginning of that two-year period. In order to make this determination, the DOE requires an institution annually to submit audited financial statements prepared on an accrual basis in accordance with Generally Accepted Accounting Principles ("GAAP"). The DOE may measure an institution's financial responsibility on the basis of the financial statements of the institution itself or the financial statements of the institution's parent company, and may also consider the financial condition of any other entity related to the institution. In reviewing the Company's acquisitions in the last 12 months, it has been the DOE's practice to measure financial responsibility on the basis of the financial statements of both the acquired institutions and the Company. In 1996, the DOE issued proposed 11 regulations that, if promulgated, would significantly revise the present financial responsibility requirements, primarily by replacing the three separate numeric ratios described above with a composite figure based on three new ratio calculations. The DOE has not yet issued new regulations in final form, but has stated its intent to do so by December 1, 1997 and to make the new regulations effective July 1, 1998. An institution that is determined by the DOE not to meet the standards of financial responsibility on the basis of failing to meet one or more of the specified numeric indicators is nonetheless entitled to participate in the Title IV Programs if it can demonstrate to the DOE that it is financially responsible on an alternative basis. An institution may do so by posting surety, either in an amount equal to 50% (or greater, as the DOE may require) of the total Title IV Program funds received by students enrolled at such institution during the prior year or in an amount equal to 10% (or greater, as the DOE may require) of such prior year's funds if the institution also agrees to transfer to the reimbursement system of payment for its Title IV Program funds. The DOE has interpreted this surety condition to require the posting of an irrevocable letter of credit in favor of the DOE. Alternatively, an institution may demonstrate, with the support of a statement from a certified public accountant and other information specified in the regulations, that it was previously in compliance with the numeric standards and that its continued operation is not jeopardized by its financial condition. See "Financial Aid and Regulation--Federal Oversight of the Title IV Programs--Financial Responsibility Standards." Company Compliance with Financial Responsibility Standards In its review of the Company's annual financial statements and interim balance sheets, as filed with the DOE in connection with the Company's applications for DOE certification of institutions acquired subsequent to September 1996 to allow such institutions to participate in the Title IV Programs, the DOE has questioned whether the Company's financial statements are acceptable and therefore an authoritative basis upon which to determine the Company's financial responsibility under the applicable DOE regulations. Specifically, the DOE has questioned the Company's accounting for certain direct marketing costs and courseware and other instructional materials. Further, the DOE has asserted that the Company did not satisfy the 1:1 acid test ratio based on its fiscal 1996 financial statements. The audited financial statements included in this Registration Statement have been restated to expense as incurred all direct marketing and advertising costs which had previously been deferred. This change in accounting method is disclosed in the audit opinion and footnotes to the financial statements and is permitted in accordance with Accounting Principles Board Opinion No. 20. In lieu of accepting the Company's previously filed 1996 audited financial statements, the DOE has offered the Company the alternative of posting an irrevocable letter of credit in favor of the Secretary of Education with respect to each institution the Company has acquired since September 1996 in a sum sufficient to secure the DOE's interest in the Title IV Program funds administered by the applicable institution. While the Company continues to disagree with the position taken by the DOE, in order to obtain certification of the institutions to resume participation in the Title IV Programs in a timely fashion, and thus to avoid any material interruption in Title IV Program funding for the acquired institutions, the Company has posted and currently has outstanding a letter of credit in the amount of $1.9 million, which expires on September 30, 1998, with respect to Western Culinary, and a letter of credit in the amount of $800,000, with an expiration date of July 31, 1998, with respect to SCT. The Company has agreed to the DOE's directive, dated September 9, 1997, to submit a letter of credit in the amount of $15.2 million, to expire on October 31, 1998, with respect to the six Gibbs institutions. Consequently, the six Gibbs institutions were certified to resume participation in the Title IV Programs as of October 1, 1997, and the Company must post the letter of credit with the DOE no later than November 9, 1997. In addition, the Company is considering the DOE's request to increase, no later than November 15, 1997, the letter of credit with respect to SCT by $721,000 in order to maintain SCT's eligibility to participate in the Title IV Programs. Further, upon the DOE's request, the Company is prepared to post an additional letter of credit with respect to IAMD-U.S., which the Company estimates will be in the range of $3.0 million to $5.0 million, in order to reestablish the eligibility of the two IAMD-U.S. institutions to participate in the Title IV Programs in the near future. 12 The original letters of credit for Western Culinary and SCT represented 50% of each institution's Title IV Program funding in the prior award year. In September 1997, the DOE increased the level of surety for SCT to, and established the level of surety of Gibbs at, 100% of the Title IV Program funds that students enrolled at each such institution received in the previous award year. Beginning in September 1997, the DOE has imposed a condition that, for up to the next 12 months, SCT and Gibbs may not disburse Title IV Program funds in excess of the sum secured by the applicable letter of credit for each institution. The DOE has advised the Company that the same conditions will apply to the IAMD-U.S. institutions, and any other institutions that the Company may acquire prior to a determination by the DOE that the Company satisfies the standards of financial responsibility when such institutions apply for recertification to participate in the Title IV Programs. As a result of the DOE's requirement that the Company provide letters of credit to secure the participation of newly acquired CEC institutions in the Title IV Programs, the Company will have to utilize approximately $22.6 million of availability under its credit agreement. In addition, if the DOE limits the aggregate dollar value of the Title IV Program participation of SCT, Gibbs and IAMD-U.S. to the amount of the letter of credit posted with respect to each such institution, such a limitation could significantly reduce the Company's ability to provide financial assistance to additional students at those institutions, which in turn could reduce the Company's ability to enroll such additional students. The inability of the Company to significantly increase aggregate enrollment at the newly-acquired institutions could have a material adverse effect on the Company's business, results of operations and financial condition and on its ability to generate sufficient liquidity to continue to fund growth in its operations and purchase other institutions. See "Management's Discussion and Analysis of Financial Condition and Results of Operation--Liquidity and Capital Resources." Subsequent to the October 1, 1997 certification of the Gibbs institutions and the restoration of their participation in the Title IV Programs, the Company and the DOE continue negotiations regarding the size and terms of the sureties to allow for growth in the Company's operations. Therefore, before the Company is required to post the expanded surety for SCT or any surety for Gibbs and IAMD-U.S., agreement may be reached to provide for a material reduction in the amounts and terms of such sureties and to provide a mechanism to allow the Company to utilize additional Title IV Program funds in the event of increased enrollments. However, there can be no assurance as to the outcome of such continued negotiations. As a result of the Offering, the Company expects to receive net proceeds of approximately $ , which will significantly enhance the Company's financial position. See "Use of Proceeds." The Company believes that such proceeds and the cash expected to be generated from operations during the remainder of 1997 will enable the Company and each of its U.S. subsidiaries to present audited 1997 financial statements which will satisfy each of the DOE's standards of financial responsibility, including the acid test ratio and tangible net worth test. Applicable law and regulations require the DOE to consider only an institution's most recent audited annual financial statements in making a determination of the institution's financial responsibility. Accordingly, the Company intends to seek the DOE's review of its audited 1997 financial statements on an expedited basis in the spring of 1998. Once the DOE has determined that the Company and its U.S. subsidiaries satisfy each of the DOE's standards of financial responsibility, applicable law and regulations require the DOE to release the Company from the requirement that it post the sureties described above and from the limitations on Title IV Program funding in excess of the surety amounts. However, there can be no assurance that the DOE will expedite its review of the Company's 1997 financial statements, or of the outcome of such review. Under a separate standard of financial responsibility, if an institution has made late Title IV Program refunds to students in its prior two years, the institution is required to post a letter of credit in favor of the DOE in an amount equal to 25% of the total Title IV Program refunds paid by the institution in its prior fiscal year. Based on this standard, since July 1, 1997, the Company has posted a total of $310,000 in additional letters of credit with respect to Brown, Collins, Gibbs-Montclair, Gibbs-New York, SCT and Western Culinary. As of July 1, 1997, this standard has been modified to exempt an institution if it has not been found to make late refunds to 5% or more of its students in either of the two most recent fiscal years and has not been cited for a reportable condition or material weakness in its internal controls related to late refunds in either of its two most recent fiscal years. The Company believes that its institutions satisfy this modified standard and intends to allow its current letters of credit for late refunds to expire without further action. 13 State Authorization In order to operate and award degrees, diplomas and certificates and to participate in the Title IV Programs, a campus must be licensed or authorized to offer its programs of instruction by the relevant agency of the state in which such campus is located. Each state has its own standards and requirements for licensure or authorization, which vary substantially among the states. Typically, state laws require that a campus demonstrate that it has the personnel, resources and facilities appropriate to its instructional programs. Each of the Company's U.S. campuses is licensed or authorized by the relevant agency of the state in which such campus is located. If any of the Company's campuses were to lose its state license or authorization, such campus would lose its eligibility to participate in the Title IV Programs, which could have a material adverse effect on the Company's business, results of operations and financial condition. See "Financial Aid and Regulation-- State Authorization." Accreditation In order to participate in the Title IV Programs, an institution must be accredited by an accrediting agency recognized by the DOE. 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. The three types of accrediting agencies are (i) national accrediting agencies, which accredit institutions on the basis of the overall nature of the institutions without regard to their locations, (ii) regional accrediting agencies, which accredit institutions located within their geographic areas, and (iii) specialized accrediting agencies, which accredit specific educational programs offered by an institution. An accrediting agency primarily examines the academic quality of an institution's educational programs, as well as the institution's administrative and financial operations. Certain states require institutions to maintain accreditation as a condition of continued authorization to grant degrees. The HEA specifies certain standards that each accrediting agency must utilize in reviewing institutions in order for such accrediting agency to be recognized by the DOE. Each of the Company's U.S. institutions is accredited by an accrediting agency recognized by the DOE, namely, the Accrediting Council for Independent Colleges and Schools ("ACICS"), the Accrediting Commission for Career Schools and Colleges of Technology ("ACCSCT"), and the Accrediting Commission for Community and Junior Colleges/Western Association of Schools and Colleges ("WASC/ACCJC"). If any of the Company's campuses were to lose its accreditation, such school would lose its eligibility to participate in the Title IV Programs, which could have a material adverse effect on the Company's business, results of operations and financial condition. See "Financial Aid and Regulation--Accreditation." The HEA requires accrediting agencies recognized by the DOE to review many aspects of an institution's operations to ensure that the education or training offered by the institution is of sufficient quality to achieve, for the duration of the accreditation period, the stated objective for which the education or training is offered. Under the HEA, a recognized accrediting agency must perform regular inspections and reviews of institutions of higher education, including unannounced site visits to institutions, such as the Company's schools, that provide career-oriented education and training. An accrediting agency may place an institution on "reporting" status in order to monitor one or more specified areas of the institution's performance. An institution placed on reporting status is required to report periodically to its accrediting agency on that institution's performance in the specified areas. While on reporting status, an institution may be limited in opening and commencing instruction at new locations without first receiving a waiver from its accrediting agency. Regulatory Consequences of a Change of Ownership or Control When the Company expands through the acquisition of an institution that is eligible to participate in the Title IV Programs, that institution undergoes a "change of ownership" that results in a "change of control," as defined in the HEA and applicable regulations. In such event, that institution becomes ineligible to participate in the Title IV Programs and may receive and disburse only previously committed Title IV Program funds to its students until it has applied for and received from the DOE recertification under the Company's ownership. Approval of an application for recertification must be based upon a determination by the DOE that the institution under its new ownership is in compliance with the requirements of institutional eligibility. The time required to 14 act on such an application can vary substantially and may take several months. If an institution is recertified following a change of ownership, it will be on a provisional basis. Provisional certification does not limit an institution's access to Title IV Program funds, but does subject that institution to closer review by the DOE and possible summary adverse action if that institution commits violations of the Title IV Program requirements. Each of the U.S. institutions acquired by the Company, other than IAMD-U.S., has undergone a recertification review under the Company's ownership and has been recertified to participate in the Title IV Programs in accordance with the DOE's change of ownership requirements and procedures. The DOE recertified such institutions within periods ranging from two and one-half to five months from the dates of their respective acquisitions. Of the U.S. institutions that have been recertified, 11 are presently participating in the Title IV Programs under provisional certification. With respect to IAMD-U.S., the Company has submitted to the DOE the application of IAMD-U.S. for recertification to participate in the Title IV Programs under the Company's ownership. IAMD-U.S. is waiting to receive such recertification so that it can resume its participation in the Title IV Programs. Under the HEA and its implementing regulations, a change of ownership resulting in a change in control would occur upon the transfer of a controlling interest in the voting stock of an institution or such institution's parent corporation. For a corporation such as the Company that is, prior to the Offering, neither publicly traded nor closely held (as defined under the HEA), a change of ownership resulting in a change in control would occur if any person either acquires or ceases to hold at least 25% of such corporation's total outstanding voting stock and that person gains or loses actual control of the corporation. With respect to a publicly-traded corporation, which the Company will be following consummation of the Offering, a change of ownership resulting in a change in control occurs when there is an event that would obligate that corporation to file a Current Report on Form 8-K with the Securities and Exchange Commission (the "Commission") disclosing a change of control. A change of ownership and control also could require an institution to reaffirm its state authorization and accreditation. The requirements of state and accrediting agencies with jurisdiction over the Company's schools vary widely in this regard. See "Financial Aid and Regulation--Federal Oversight of the Title IV Programs--Restrictions on Acquiring or Opening Additional Schools and Adding Educational Programs." If the Offering were determined to constitute a change of ownership resulting in a change in control, the Company would be required to reestablish the state authorization and accreditation of each of its U.S. campuses and apply to the DOE to reestablish the certification of each of its institutions to participate in the Title IV Programs. Based upon its review of the HEA, applicable federal regulations and applicable state and accrediting agency standards, the Company does not believe that the Offering will constitute a change of ownership resulting in a change in control for purposes of the HEA or a change of ownership and control for state authorization or accreditation purposes, except as identified immediately below. The Offering will constitute a change of ownership under the standards of ACICS, which provide that a change from a privately owned corporation to a publicly traded corporation is considered a change of ownership. As a result, ten of the Company's U.S. institutions will be subject to review by ACICS to reaffirm their accreditation. Also, ACCSCT will treat the Offering as a substantive change that requires its review. In addition, the Offering will constitute a change of ownership under the standards of the State of Arizona where the transfer of 20% or more of the stock of an institution or its parent corporation is considered a change of ownership, so that the Company will be required to reestablish the license of Collins. A significant delay in reobtaining or the failure to reobtain state authorization, accreditation or Title IV Program certification for any or all of the Company's institutions could have a material adverse effect on the Company's business, results of operations and financial condition. Once the Company is deemed to be publicly traded, the potential adverse implications of a change of ownership resulting in a change in control could influence future decisions by the Company and its stockholders regarding the sale, purchase, transfer, issuance or redemption of the Company's capital stock. Canadian Financial Aid and Regulation The Company estimates that approximately 81% of the students attending IAMD- Canada receive student financial assistance from Canadian federal and/or provincial financial aid programs. The total financial assistance 15 received from all Canadian sources in 1996 exceeded 78% of the revenue of IAMD-Canada and 7% of the Company's 1996 Pro Forma Net Revenue. Specifically, Canadian students, other than those who reside in the province of Quebec, are eligible to receive loans under the Canada Student Loan ("CSL") program. Students who are residents of the province of Quebec are eligible to receive loans from the Quebec Loans and Bursaries Program ("QLBP"). Students who are residents of the province of Ontario receive financial assistance under both the CSL program and the Ontario Student Loans Plan ("OSLP"). With respect to students who reside in the province of Ontario, the Ministry of Education and Training ("MET") provides financial assistance to eligible students through the Ontario Student Assistance Program ("OSAP"), which includes two main components, the CSL program and the OSLP program. To maintain its right to administer OSAP, an institution, such as the IAMD-Canada campus in Toronto, must, among other things, be registered and in good standing under the Private Vocational Schools Act ("PVSA") and abide by the rules, regulations and administrative manuals of the CSL, OSLP and other OSAP- related programs. During the first two years of initial eligibility, the institution must have its administration of OSAP independently audited, and full eligibility will not be granted unless these audits establish that the institution has properly administered OSAP. The institution can only administer CSL funds, and cannot administer OSLP funds, until it has gained full eligibility. Once an institution has gained OSAP eligibility, the institution must advise MET before it takes any material action that may result in its failure or inability to meet any rules, regulations or requirements related to OSAP. An institution cannot automatically acquire OSAP-designation through acquisition of other OSAP-eligible institutions. When there is a change of ownership, including a change in controlling interest, in a non-incorporated OSAP-eligible institution, MET will require evidence of the institution's continued capacity to properly administer the program before extending OSAP designation to the new owner. The Company does not believe that the Offering will be considered a change of ownership for purposes of OSAP. Given that MET periodically revises its regulations and other requirements and changes its interpretations of existing laws and regulations, there can be no assurance that MET will agree with the Company's understanding of each MET requirement. IAMD-Canada, in Toronto, is required to audit its OSAP administration annually, and MET is authorized to conduct its own audits of the administration of the OSAP programs by any OSAP-eligible institution. The Company has complied with these requirements on a timely basis. Based on the most recent annual compliance audits of IAMD-Canada, in Toronto, that institution has been found to be in substantial compliance with the requirements of OSAP and the Company believes that it continues to be in substantial compliance with these requirements. MET has the authority to take any measures it deems necessary to protect the integrity of the administration of OSAP. If MET deems a failure to comply to be minor, MET will advise the institution of the deficiency and provide the institution with the opportunity to remedy the asserted deficiency. If MET deems the failure to comply to be serious in nature, MET has the authority to: (i) condition the institution's continued OSAP designation upon the institution's meeting specific requirements during a specific time frame, (ii) refuse to extend the institution's OSAP eligibility to the OSLP program, (iii) suspend the institution's OSAP designation or (iv) revoke the institution's OSAP designation. In addition, when MET determines that any non-compliance in an institution's OSAP administration is serious, MET has the authority to contract with an independent auditor, at the expense of the institution, to conduct a full audit in order to quantify the deficiencies and to require repayment of all loan amounts. In addition, MET may impose a penalty up to the amount of the damages assessed in the independent audit. As noted above, IAMD-Canada, in Toronto, is subject to the PVSA. The Company may not operate a private vocational school in the province of Ontario unless such school is registered by the Superintendent under the PVSA. Upon payment of the prescribed fee and satisfaction of the conditions prescribed by the regulations under the PVSA and by the Private Vocational School Unit of the MET, an applicant or registrant such as IAMD-Canada, in Toronto, is entitled to registration or renewal of registration to conduct or operate a private vocational school unless the institution fails to meet certain general criteria concerning financial responsibility and conduct of the institution's operations. IAMD-Canada, in Toronto, is currently registered under the PVSA, and the 16 Company does not believe that there will be any impediment to renewal of such registration on an annual basis. If a corporation is convicted of violating the PVSA or the regulations under the PVSA, the maximum penalty that may be imposed on the corporation is $25,000. The PVSA provides that a "registration" is not transferable. However, the Private Vocational Schools Unit of the MET takes the position that a purchase of shares of a private vocational school does not invalidate the school's registration under the PVSA. The Company does not believe that the Offering will invalidate the registration of IAMD-Canada, in Toronto. As noted above, students who reside in the province of Quebec are eligible to receive funds under the QLBP subject to certain student eligibility criteria. Under this program, student financial assistance is initially provided in the form of a loan. In addition, IAMD-Canada, in Quebec, is subject to the Act Respecting Private Education ("ARPE"). In accordance with ARPE, a company may not operate a private educational institution without holding a permit issued by the Minister of Education ("Minister") for the institution itself and for the educational services to be provided. The Minister will issue the permit after consulting with the Commission Consultative de l'Enseignement Prive concerning the particular institution and the educational services to determine if such institution and services meet certain conditions. Permits cannot be transferred without the written authorization of the Minister, and any entity holding a permit must advise the Minister of any amalgamation, sale or transfer affecting such entity. The Minister, after consultation with the Commission, has the authority to modify or revoke a permit where the holder of the permit, among other things: (i) does not comply with the conditions, restrictions or prohibitions relating to the institution or (ii) is, or is about to become, insolvent. The legislative, regulatory and other requirements relating to student financial assistance programs in Ontario and Quebec are subject to change by applicable governments due to political and budgetary pressures, and any such change may affect the eligibility for student financial assistance of the students attending IAMD-Canada which, in turn, could materially adversely affect the Company's business, results of operations and financial condition. LIMITED OPERATING HISTORY; RISKS OF INTEGRATING ACQUISITIONS The Company was incorporated in January 1994 and has grown rapidly since that date. Although all the Company's current schools have been in existence for substantial periods of time, the Company itself has only a limited operating history upon which to evaluate the Company and its prospects. Particularly since 13 of the Company's 18 campuses have been acquired in 1997, the Company's campuses have operated together, as parts of a combined entity, for a very limited period of time. Although comprised of individuals with substantial education industry experience, the Company's senior executive team has somewhat limited experience in managing the Company's schools. In addition, the Company's rapid growth could place a strain on the Company's management, operations, employees and resources. There can be no assurance that the Company will be able to maintain or accelerate its current growth rate, effectively manage its expanding operations or achieve planned growth on a timely or profitable basis. If the Company is unable to manage its growth effectively, its business, results of operations, financial condition and regulatory compliance could be materially adversely affected. The anticipated benefits of the Company's most recent acquisitions may not be achieved unless the Company successfully integrates these schools into its operations and is able to effectively manage, market and apply its business strategy to these schools. 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 companies and on the application of the Company's business strategy to these schools could interrupt, or cause loss of momentum in, other ongoing activities of the Company, which could have a material adverse effect on the Company's business, results of operations, financial condition and regulatory compliance. See "Business--Overview." 17 RELIANCE ON AND RISKS OF ACQUISITION STRATEGY The Company expects to continue to rely on acquisitions as a key component of its strategy for growth. There can be no assurance that the Company will continue to be able to identify educational institutions that provide suitable acquisition opportunities or to acquire any such institutions on favorable terms. Furthermore, there can be no assurance that any acquired institutions can be successfully integrated into the Company's operations or be operated profitably. Acquisitions involve a number of special risks and challenges, including the diversion of management's attention, assimilation of the operations and personnel of acquired companies, adverse short-term effects on reported operating results, possible loss of key employees and difficulty of presenting a unified corporate image. Continued growth through acquisition may also subject the Company to unanticipated business or regulatory uncertainties or liabilities. No assurance can be given that any potential acquisition will succeed in enhancing the Company's business and will not ultimately have a material adverse effect on the Company. See "Business--Growth Strategy." When the Company acquires an existing school, a significant portion of the purchase price for such school typically will be allocated to goodwill and intangibles (e.g., non-competition agreements). The Company amortizes goodwill over a period of 40 years and intangible assets over periods of three to five years. In addition, the Company's acquisition of a school would constitute a change in ownership, resulting in a change of control with respect to such school for purposes of eligibility to participate in the Title IV Programs. Generally, the Company intends to acquire schools subject to the condition that they be recertified promptly for such eligibility by the DOE. The failure of the Company to manage its acquisition program effectively could have a material adverse effect on the Company's business, results of operations, financial condition and regulatory compliance. See "--Dependence on Financial Aid; Potential Adverse Effects of Regulation--Regulatory Consequences of a Change of Ownership or Control," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Financial Aid and Regulation--Federal Oversight of the Title IV Programs--Restrictions on Acquiring or Opening Additional Schools and Adding Educational Programs." RISKS ASSOCIATED WITH EXPANSION PLANS Although to date the Company has added new schools only through acquisitions, in the future the Company expects to develop, open and operate new schools, most likely as additional locations of existing schools, but possibly also as entirely separate, freestanding institutions. Establishing new schools would pose unique challenges and require the Company to make investments in management, capital expenditures, marketing expenses and other resources different, and in some cases greater, than those required with respect to the operation of acquired schools. In addition, in order to open a new school, the Company would be required to obtain appropriate state or provincial and accrediting agency authorizations and approvals. In addition, to be eligible for Title IV Program funding, such schools would need federal authorization and approvals. In the case of entirely separate, freestanding U.S. institutions, a minimum of two years' operating history would be required for them to be eligible for Title IV Program funding. Because the Company has not yet established a new school, there can be no certainty as to the Company's ability to be successful in any such endeavor or as to the ultimate profitability of any such school. Additionally, while the Company expects that its career-oriented school business will continue to provide the substantial majority of its revenue in the near term, the Company plans to expand its contract training business, currently only offered to a limited extent by a few of the Company's schools, and may also decide to provide other education- related services, such as distance learning or educational publishing. There can be no assurance as to what, if any, new service areas the Company will decide to enter nor as to the Company's ability to succeed in markets beyond its current career-oriented school business. Any failure of the Company to effectively manage the operations of newly established schools or service areas, or any diversion of management's attention from the Company's core career-oriented school operating activities, could have a material adverse effect on the Company's business, results of operations, financial condition and regulatory compliance. See "Business--Growth Strategy" and "Financial Aid and Regulation--Federal Oversight of the Title IV Programs-- Restrictions on Acquiring or Opening Additional Schools and Adding Educational Programs." The Company may also consider acquiring or establishing operations outside of the United States and Canada. See "--Risks of International Operations." 18 RISK ASSOCIATED WITH CHANGES IN MARKET NEEDS AND TECHNOLOGY Prospective employers of graduates of the Company's schools increasingly demand that their entry-level employees possess appropriate technological skills. Educational programs at these schools, particularly programs in computer technologies and visual communications, must keep pace with such shifting requirements. The inability of the Company to adequately respond to changes in industry requirements for whatever reason could have a material adverse effect on the Company's business, results of operations and financial condition. SEASONALITY The Company's results of operations fluctuate primarily as a result of changes in the level of student enrollment at the Company's schools. The Company's schools experience a seasonal increase in new enrollments in the fall, traditionally when the largest numbers of new high school graduates begin postsecondary education. Furthermore, although the Company encourages year-round attendance at all schools, Brooks has a traditional summer break for its fashion design and interior design students. As a result of these factors, total student enrollment and net revenue are typically highest in the fourth quarter (October through December) and lowest in the second quarter (April through June) of the Company's fiscal year. The Company's costs and expenses do not, however, fluctuate as significantly on a quarterly basis. The Company anticipates that these seasonal trends at its schools will continue. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Seasonality." COMPETITIVE MARKET The postsecondary education market is highly competitive. The Company's schools compete with traditional public and private two-year and four-year colleges and universities and other proprietary schools. Certain public and private colleges and universities, as well as other private career-oriented schools, may offer programs similar to those of the Company's schools. Although tuition at private nonprofit institutions is, on average, higher than tuition at CEC's schools, some public institutions are able to charge lower tuition than CEC's schools, due in part to government subsidies, government and foundation grants, tax-deductible contributions and other financial sources not available to proprietary schools. Some of the Company's competitors in both the public and private sectors have substantially greater financial and other resources than the Company. See "Business--Competition." RISKS OF INTERNATIONAL OPERATIONS Although the Company's operations have thus far been limited to the U.S. and Canada, the Company intends to explore opportunities outside those markets. There may be difficulties and complexities associated with any expansion by the Company into international markets, and there can be no assurance that the Company's strategies will succeed beyond the U.S. and Canada. International operations present inherent risks, including currency fluctuations, varying political and economic conditions, unanticipated changes in regulation, trade barriers, staffing and management problems and adverse tax consequences. Also, in expanding internationally, the Company would be required to comply with different, and potentially more onerous, regulatory requirements. There can be no assurance that such factors will not have a material adverse effect on the Company's business, results of operations or financial condition in the future. See "Business--Growth Strategy." OWNERSHIP AND SIGNIFICANT INFLUENCE OF PRINCIPAL STOCKHOLDERS After consummation of the Offering, Heller Equity Capital Corporation ("Heller"), Electra Investment Trust P.L.C. and Electra Associates, Inc. (collectively, "Electra"), and the current executive officers and directors of the Company, collectively, will own approximately % of the outstanding shares of Common Stock (approximately % if the Underwriters' over- allotment option is exercised in full). As a result of such concentration of ownership, if Heller, Electra and the current executive officers and directors of the Company, or some combination thereof, vote together, they will have the ability to control the policies and affairs of the Company and corporate actions requiring stockholder approval, including the election of all members of the 19 Company's Board of Directors. This concentration of ownership could have the effect of delaying, deferring or preventing a change of control of the Company, including any business combination with an unaffiliated party, and could also affect the price that investors might be willing to pay in the future for shares of Common Stock. See "Security Ownership of Certain Beneficial Owners and Management" and "Description of Capital Stock." FUTURE CAPITAL NEEDS The Company believes that funds from operations, cash on hand and investments, and borrowings under the $80 million credit agreement, dated as of May 30, 1997 and amended as of September 25, 1997 (the "Credit Agreement"), among the Company, as borrower, the lenders named therein and LaSalle National Bank, as agent, together with the net proceeds of the Offering, will be adequate to fund the Company's current operating plans for the foreseeable future. However, the Company may need additional debt or equity financing in order to carry out its strategy of growth through acquisition. The amount and timing of financing which the Company may need will vary principally depending on the timing and size of acquisitions and the sellers' willingness to provide financing themselves. To the extent that the Company requires additional financing in the future and is unable to obtain such additional financing, it may not be able to implement fully its growth strategy. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources." DEPENDENCE ON KEY PERSONNEL The Company's success to date has depended in large part on the skills and efforts of John M. Larson, the Company's co-founder, President and Chief Executive Officer, William A. Klettke, the Company's Senior Vice President and Chief Financial Officer, and the Company's other key personnel. Additionally, the Company's success depends, in large part, upon its ability to attract and retain highly qualified faculty, school presidents and administrators and corporate management. Due to the nature of the Company's business, it may be difficult to locate and hire qualified personnel, and to retain such personnel once hired. None of the Company's employees is subject to an employment or noncompetition agreement other than Mr. Larson and Lawrence Gross, the Company's Managing Director of Operations--Canadian School Group. The loss of the services of Mr. Larson, Mr. Klettke or any of the Company's other key personnel, or the failure of the Company to attract and retain other qualified and experienced personnel on acceptable terms, could have a material adverse effect on the Company's business, results of operations and financial condition. See "Management." NO PRIOR PUBLIC MARKET FOR COMMON STOCK Prior to the Offering, there has been no public market for the Common Stock and there can be no assurance that an active trading market will develop or be sustained after the Offering. The initial public offering price for the Common Stock will be determined by negotiations between the Company and the Underwriters, based upon several factors, and may not be indicative of the price that will prevail in the public market. There can be no assurance that the market price of the Common Stock will not decline from the initial public offering price. After consummation of the Offering, the market price of the Common Stock will be subject to fluctuations in response to a variety of factors, including quarterly variations in the Company's operating results, announcements of acquisitions by the Company or its competitors, new regulations or interpretations of regulations applicable to the Company's schools, changes in accounting treatments or principles and changes in earnings estimates by securities analysts, as well as general political economic and market conditions. The market price for the Common Stock may also be affected by the Company's ability to meet or exceed analysts' or "street" expectations, and any failure to meet such expectations, even if minor, could have a material adverse effect on the market price of the Common Stock. In addition, the stock market has from time to time experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of certain companies and that have often been unrelated to the operating performance of such companies. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against such a company. Any such litigation initiated against the Company could result in substantial costs and a diversion of management's attention and resources, which could have a material adverse effect on the Company's business, results of operations and financial condition. See "Underwriting." 20 ANTITAKEOVER EFFECTS OF CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS Upon consummation of the Offering, the Company's Board of Directors will have the authority to issue up to shares of undesignated preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the Company's stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock, while providing desirable flexibility in connection with possible financings, acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. The Company has no present plans to issue such shares of preferred stock. Further, certain provisions of the Company's Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws and of Delaware law could delay or make more difficult a merger, tender offer or proxy contest involving the Company. See "Description of Capital Stock." SHARES ELIGIBLE FOR FUTURE SALE The sale of a substantial number of shares of Common Stock, or the perception that such sales could occur, could adversely affect prevailing market prices for the Common Stock. Upon consummation of the Offering, the Company will have a total of shares of Common Stock outstanding, of which the shares offered hereby will be eligible for immediate sale in the public market without restriction unless such shares are held by "affiliates" of the Company within the meaning of Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"). The remaining shares of Common Stock outstanding upon completion of the Offering will be "restricted securities" within the meaning of Rule 144 under the Securities Act (the "Restricted Shares"), and of such Restricted Shares will be subject to lock-up agreements (the "Lock-Up Agreements") under which the holders of such shares agree that they will not, directly or indirectly, sell or otherwise dispose of any shares of Common Stock, or securities or other rights convertible into or exchangeable or exercisable for any shares of Common Stock, for 180 days after the date of the Offering without the prior written consent of Credit Suisse First Boston Corporation. An additional shares of Common Stock are issuable at various dates upon exercise of options heretofore granted to certain employees, officers, directors and consultants of the Company pursuant to stock option agreements. Upon expiration of the Lock-Up Agreements (or earlier upon the consent of Credit Suisse First Boston Corporation), of the currently outstanding Restricted Shares will be eligible for sale under Rule 144, subject to volume and other limitations of such rule. An additional Restricted Shares will then be eligible for sale without any volume or other limitations pursuant to Rule 144(k). Subject to the Lock-Up Agreements, the holders of Restricted Shares of Common Stock also have been accorded registration rights under the Securities Act. No prediction can be made as to the effect, if any, that future sales of shares, or the availability of shares for future sales, will have on the market price of the Common Stock prevailing from time to time or on the Company's ability to raise capital through an offering of its equity securities. See "Description of Capital Stock," "Shares Eligible for Future Sale" and "Underwriting." IMMEDIATE AND SUBSTANTIAL DILUTION The initial public offering price of the Common Stock offered hereby is substantially higher than the net book value of the currently outstanding Common Stock. Therefore, purchasers of the Common Stock offered hereby will experience immediate and substantial dilution in the net tangible book value of the Common Stock. See "Dilution." ABSENCE OF DIVIDENDS The Company has never declared or paid any cash dividends or distributions on its common stock. The Company currently intends to retain its earnings to finance future growth and therefore does not anticipate paying any cash dividends on the Common Stock in the foreseeable future. See "Dividend Policy." 21 THE TRANSACTIONS The Company's outstanding capital stock currently consists of (i) four classes of common stock: Class A Voting Common Stock, $.01 par value (the "Class A Common Stock"); Class B Voting Common Stock, $.01 par value (the "Class B Common Stock"); Class C Non-voting Common Stock, $.01 par value (the "Class C Common Stock"); and Class E Non-voting Common Stock, $.01 par value (the "Class E Common Stock") (the Class A Common Stock, Class B Common Stock, Class C Common Stock and Class E Common Stock are collectively referred to as the "Existing Common Stock"); and (ii) three classes of Preferred Stock: Preferred Stock, Series A, $.01 par value (the "Series A Preferred Stock"); Preferred Stock, Series C, $.01 par value (the "Series C Preferred Stock"); and Preferred Stock, Series D, $.01 par value (the "Series D Preferred Stock") (the Series A Preferred Stock, Series C Preferred Stock and Series D Preferred Stock are collectively referred to as the "Existing Preferred Stock"). Prior to the consummation of the Offering, (i) all Existing Common Stock will be converted into Class A Common Stock (which Class A Common Stock will become shares of Common Stock after the Certificate Amendment, as defined below); (ii) all outstanding warrants to purchase Class D Non-voting Common Stock, $.01 par value (the "Class D Common Stock"), and Class E Common Stock (collectively, the "Warrants") will be exercised (the "Warrant Exercise") for an aggregate of shares of Class D Common Stock (which Class D Common Stock will become shares of Common Stock after the Certificate Amendment) and shares of Class E Common Stock (which Class E Common Stock will become shares of Common Stock after the Certificate Amendment), respectively; and (iii) the Amended and Restated Certificate of Incorporation of the Company shall be amended to provide, among other things, for (a) only two classes of capital stock, consisting of the Common Stock and Preferred Stock, $.01 par value, (b) the conversion of all shares of Existing Common Stock into Common Stock at the rate of shares of Common Stock for every share of Existing Common Stock and (c) the conversion of each Existing Preferred Stock into Common Stock at a rate determined by dividing the liquidation value of the shares of Existing Preferred Stock by the initial public offering price of the Common Stock in the Offering (the "Preferred Stock Conversion") (the "Certificate Amendment" and, together with the Warrant Exercise, the "Transactions"). The consummation of the Offering and the Transactions are conditioned upon one another. PENDING ACQUISITION On September 26, 1997, the Company entered into an agreement to acquire the Los Angeles Culinary Institute ("LA Culinary") from Chefs Unlimited, Inc. Student population at LA Culinary currently is approximately 80 students. The cash purchase price for the proposed LA Culinary acquisition will not be material to the Company and will be provided by borrowings under the Credit Agreement. The completion of the proposed LA Culinary acquisition is subject to a number of conditions, including approval by the California Council for Private Postsecondary and Vocational Education. There can be no assurance as to when the proposed LA Culinary acquisition will be completed, if at all. 22 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered by the Company hereby, after deduction of the estimated underwriting discounts and commissions and offering expenses payable by the Company, are estimated to be approximately $ million, assuming an initial public offering price of $ per share (approximately $ million if the Underwriters exercise in full the over-allotment option granted to them by the Company and certain of its stockholders). The Company intends to use approximately $29.4 million of its net proceeds from the Offering to repay the outstanding revolving credit borrowings under the Credit Agreement (based upon amounts outstanding as of June 30, 1997), approximately $4.1 million to repay the remaining aggregate outstanding indebtedness on notes payable to the former shareholders of IAMD-U.S. and IAMD-Canada, approximately $2.1 million to pay the liquidation value of accrued paid-in-kind dividends on certain of its Existing Preferred Stock (based upon dividends accrued as of June 30, 1997) (the "Dividend Payment") and the remaining approximately $ million for general corporate purposes, including capital expenditures, possible future acquisitions of schools and working capital. From time to time, the Company is involved in the evaluation of, and discussions with, possible acquisition candidates, although the Company currently has no agreements, commitments or understandings with respect to any acquisitions, other than the Company's proposed LA Culinary acquisition. See "Pending Acquisition." The outstanding revolving credit borrowings under the Credit Agreement (including borrowings under a predecessor credit agreement refinanced through borrowings under the Credit Agreement) were incurred by the Company in connection with its acquisitions of Gibbs, IAMD-U.S. and IAMD-Canada. Interest is payable by the Company on outstanding obligations under the Credit Agreement at various rates, as defined in the Credit Agreement (see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources"), and these obligations are scheduled to mature on May 31, 2002. The notes payable to the former shareholders of IAMD-U.S. and IAMD-Canada were issued by the Company in connection with the acquisitions of these schools, bear interest at a rate of 7% per annum and mature on June 30, 2001. The notes payable to IAMD-U.S. and IAMD-Canada are subject to mandatory repayment upon consummation of the Offering. If the Underwriters exercise the over-allotment option granted to them by the Company and certain of its stockholders (the "Selling Stockholders"), the Company will not receive any proceeds from the sale of the shares sold by the Selling Stockholders. See "Security Ownership of Certain Beneficial Owners and Management." DIVIDEND POLICY The Company has never declared or paid any cash dividends or distributions on the Existing Common Stock. The Company does not anticipate paying cash dividends or other distributions on the Common Stock in the foreseeable future, but intends instead to retain any future earnings for reinvestment in its business. Any future determination to pay cash dividends will be at the discretion of the Company's Board of Directors and will be dependent upon the Company's financial condition, results of operations, capital requirements and such other factors as the Company's Board of Directors deems relevant. The Company is prohibited from paying any dividends on the Common Stock under the terms of the Credit Agreement. 23 CAPITALIZATION The following table sets forth the Company's cash and cash equivalents and capitalization (long-term debt plus stockholders' equity) (i) as of June 30, 1997, (ii) pro forma to reflect the Transactions and (iii) pro forma as adjusted to reflect the Transactions and the sale by the Company of shares of Common Stock offered hereby at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and offering expenses payable by the Company, and the application of the net proceeds therefrom to repay certain indebtedness and for the Dividend Payment as described under "Use of Proceeds." The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and the related notes thereto included elsewhere in this Prospectus.
JUNE 30, 1997 ------------------------------ PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- (DOLLARS IN THOUSANDS) Cash and cash equivalents....................... $ 9,745 $ 9,745 $ ======= ======= ======= Long-term debt, net of current maturities....... $47,651 $47,651 $ Redeemable preferred stock: Series A Preferred Stock, $.01 par value, 50,000 shares authorized, 7,852 shares outstanding, at redemption value, including $1,911 of unpaid dividends (1).......................................... 9,763 -- Series C Preferred Stock, $.01 par value, 5,000 shares authorized, 4,954 shares outstanding, at redemption value, including $0 of unpaid dividends (1).. 4,217 -- Series D Preferred Stock, $.01 per value, 25,000 shares authorized, 22,500 shares outstanding, at redemption value, including $159 of unpaid dividends (1).......................................... 17,717 -- Redeemable warrants: Exercisable into 23,636 shares of Class D Common Stock................................. 1,032 -- Exercisable into 3,514 shares of Class E Common Stock................................. 260 -- Stockholders' investment: Common Stock, $.01 par value, 1,100,000 shares authorized; 81,898 shares issued and outstanding, including 5,250 shares of Class A Common Stock, 5,100 shares of Class B Common Stock, 69,900 shares of Class C Common Stock, no shares of Class D Common Stock and 1,648 shares of Class E Common Stock, actual; shares issued and outstanding, pro forma and as adjusted (2).................... 1 1 Warrants...................................... 4,788 -- Additional paid-in capital.................... 60 37,837 Accumulated deficit........................... (3,761) (3,761) ------- ------- ------- Total stockholders' investment.............. 1,088 34,077 ------- ------- ------- Total capitalization........................ $81,728 $81,728 $ ======= ======= =======
- -------- (1) Pursuant to the Preferred Stock Conversion, shares of Preferred Stock will be converted into shares of Common Stock. (2) Does not include as of June 30, 1997 (i) shares of Common Stock issuable upon the exercise of outstanding options at a weighted average exercise price of $ per share and (ii) shares of Common Stock reserved for issuance under the Stock Plans (as defined under "Management--Stock Plans"). See "Management--Stock Plans," "Description of Capital Stock" and Note 1 of Notes to the Consolidated Financial Statements. 24 DILUTION The net tangible book value of the Company as of June 30, 1997, after giving effect to the Transactions, was approximately $ , or $ per share of Common Stock. Net tangible book value per share represents the amount of total tangible assets of the Company reduced by the amount of its total liabilities and divided by the total number of shares of Common Stock outstanding. After giving effect to the sale of the shares of Common Stock offered hereby at an assumed initial public offering price of $ per share, and after deducting estimated underwriting discounts and commissions and offering expenses payable by the Company, the pro forma net tangible book value of the Company as of June 30, 1997 would have been approximately $ , or $ per share of Common Stock. This represents an immediate increase in net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new stockholders. The following table illustrates this per share dilution: Assumed initial public offering price per share......... $ Net tangible book value per share as of June 30, 1997.. $ Increase per share attributable to pro forma adjustments........................................... -------- Pro forma net tangible book value per share as of June 30, 1997............................................... Increase per share attributable to new stockholders..... Pro forma net tangible book value per share as of June 30, 1997 after the Offering............................ -------- Dilution per share to new stockholders.................. $ ========
The following table summarizes, on a pro forma basis as of June 30, 1997, the difference between the existing stockholders and new investors with respect to the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price per share paid (before deducting estimated underwriting discounts and commissions and offering expenses payable by the Company):
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE --------------- --------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------- ------- ---------- ---------- --------- Existing stockholders....... % $ % $ New investors............... $ ------- ----- ---------- --------- Total................... 100.0% $ 100.0% ======= ===== ========== =========
The foregoing calculations do not give effect to, as of June 30, 1997, (i) shares of Common Stock issuable upon the exercise of outstanding warrants at a weighted average exercise price of $ per share and (ii) shares of Common Stock issuable upon the exercise of outstanding options at a weighted average exercise price of $ per share. To the extent any such options and warrants are exercised, there will be further dilution to new investors. See "Capitalization," "Management--Stock Plans," "Description of Capital Stock" and Note 15 of the Notes to the Company's Consolidated Financial Statements. 25 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA The following unaudited pro forma condensed consolidated statements of operations of the Company give effect to (1) the acquisitions of Western Culinary, SCT, Gibbs, IAMD-U.S. and IAMD-Canada (the "Acquisitions"), (2) the Transactions (as defined under "The Transactions") and (3) the sale by the Company of shares of Common Stock in the Offering and the application of the estimated net proceeds therefrom to repay certain indebtedness and for the Dividend Payment as set forth under "Use of Proceeds," as if they had occurred at the beginning of each period presented. The unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 1996 reflects the audited statements of operations of the Company, the unaudited historical statement of operations of SCT, Gibbs, IAMD-U.S. and IAMD-Canada for the year then ended and the unaudited historical statement of operations of Western Culinary for the nine months and 21 days ended October 21, 1996. The results of Western Culinary's operations from the date of its acquisition, October 21, 1996, have been included in the Company's historical financial statements. The unaudited pro forma condensed consolidated statement of operations for the six months ended June 30, 1997 includes the audited statements of operations of the Company and the unaudited historical statements of operations of IAMD-U.S. and IAMD-Canada for the six months ended June 30, 1997, of SCT for the two months ended February 28, 1997 and of Gibbs for the five months ended May 31, 1997. The historical results of operations of SCT and Gibbs have been included in the Company's financial statements subsequent to the dates of their acquisition. For the purpose of preparing the unaudited pro forma condensed consolidated statements of operations only, the historical statements of operations for IAMD-Canada described above were translated from Canadian dollars (IAMD-Canada's functional currency) to U.S. dollars at the approximate average exchange rate for the respective periods. The unaudited pro forma financial data are a presentation of historical results with accounting and other adjustments. The unaudited pro forma financial data do not reflect the effects of any of the anticipated changes to be made by the Company in its operations from the historical operations, are presented for informational purposes only and should not be construed to be indicating (i) the results of operations or the financial position of the Company that actually would have occurred had the Acquisitions, the Transactions and the Offering been consummated as of the dates indicated or (ii) the results of operations or the financial position of the Company in the future. The unaudited pro forma financial data reflect the Acquisitions using the purchase method of accounting. The acquired assets and liabilities of Western Culinary, SCT, Gibbs, IAMD-U.S. and IAMD-Canada are stated at values representing a preliminary allocation of the purchase cost based upon estimated fair market values at the dates of acquisition. The final purchase accounting allocations will be determined based upon final appraised values and are not expected to differ significantly from the estimates used herein. The following unaudited pro forma financial data and accompanying notes are qualified in their entirety by reference to, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations," the financial statements and notes thereto of CEC, IAMD-U.S. and IAMD-Canada and the other historical financial information included elsewhere in this Prospectus. 26 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL ---------------------------------------------------- WESTERN CULINARY (THROUGH OCTOBER 21, IAMD- IAMD- PRO FORMA OFFERING CEC 1996) SCT GIBBS U.S. CANADA ADJUSTMENTS PRO FORMA ADJUSTMENTS ------- ----------- ------ ------- ------ ------- ----------- --------- ----------- Revenue: Tuition and registration fees, net........ $29,269 $4,297 $6,206 $25,188 $6,404 $7,633 $ $78,997 $ Other, net........ 4,311 304 9 2,696 226 54 7,600 ------- ------ ------ ------- ------ ------ ------- ------- ------- Total net revenue........ 33,580 4,601 6,215 27,884 6,630 7,687 86,597 Operating Expenses: Educational services and facilities....... 14,404 697 2,063 11,085 2,970 2,479 33,698 General and administrative... 14,623 3,476 3,807 13,866 3,508 4,566 (1,011)(1) 42,835 Depreciation and amortization..... 2,178 18 205 2,275 478 430 5,058 (2)(3) 10,642 ------- ------ ------ ------- ------ ------ ------- ------- ------- Total operating expenses....... 31,205 4,191 6,075 27,226 6,956 7,475 4,047 87,175 Income (loss) from operations..... 2,375 410 140 658 (326) 212 (4,047) (578) Interest expense... 672 1 55 1,013 107 145 2,946 (4) 4,939 (8) ------- ------ ------ ------- ------ ------ ------- ------- ------- Income (loss) before provision (benefit) for income taxes... 1,703 409 85 (355) (433) 67 (6,993) (5,517) Provision (benefit) for income taxes.. 208 164 34 (142) (173) 27 (118)(5) -- (5) ------- ------ ------ ------- ------ ------ ------- ------- ------- Net Income (Loss).. 1,495 245 51 (213) (260) 40 (6,875) (5,517) Dividends paid or accrued on preferred stock.. (1,128) -- -- -- -- -- 1,128 (6)(11) -- Accretion to redemption value of preferred stock and warrants......... (230) -- -- -- -- -- 230 (6)(11) -- ------- ------ ------ ------- ------ ------ ------- ------- ------- Net income (loss) attributable to common stockholders...... $ 137 $ 245 $ 51 $ (213) $ (260) $ 40 $(5,517) $(5,517) $ ======= ====== ====== ======= ====== ====== ======= ======= ======= Net income (loss) per share attributable to common stockholders...... $ ======= Weighted average number of shares outstanding....... (7) (9) ======= ======= PRO FORMA AS ADJUSTED FOR THE OFFERING --------------- Revenue: Tuition and registration fees, net........ $ Other, net........ --------------- Total net revenue........ Operating Expenses: Educational services and facilities....... General and administrative... Depreciation and amortization..... --------------- Total operating expenses....... Income (loss) from operations..... Interest expense... --------------- Income (loss) before provision (benefit) for income taxes... Provision (benefit) for income taxes.. --------------- Net Income (Loss).. Dividends paid or accrued on preferred stock.. -- Accretion to redemption value of preferred stock and warrants......... -- --------------- Net income (loss) attributable to common stockholders...... $ =============== Net income (loss) per share attributable to common stockholders...... $ =============== Weighted average number of shares outstanding....... (7)(9) ===============
27 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL --------------------------------------------- SCT GIBBS PRO FORMA (THROUGH (THROUGH AS ADJUSTED FEBRUARY 28, MAY 31, IAMD- IAMD- PRO FORMA OFFERING FOR THE CEC 1997) 1997) U.S. CANADA ADJUSTMENTS PRO FORMA ADJUSTMENTS OFFERING ------- ------------ -------- ------ ------ ----------- --------- ----------- ----------- Revenue: Tuition and registration fees, net................... $23,073 $1,155 $11,606 $4,119 $7,841 $ $47,794 $ $ Other, net............ 2,579 -- 1,222 63 37 3,901 ------- ------ ------- ------ ------ ------- ------- ------- ------- Total net revenue... 25,652 1,155 12,828 4,182 7,878 51,695 Operating Expenses: Educational services and facilities........ 11,090 408 5,029 1,966 3,007 21,500 General and administrative........ 10,942 1,071 6,078 2,091 3,542 23,724 Depreciation and amortization.......... 2,109 6 901 387 649 1,430 (1)(2) 5,482 ------- ------ ------- ------ ------ ------- ------- ------- ------- Total operating expenses............ 24,141 1,485 12,008 4,444 7,198 1,430 50,706 Income (loss) from operations.......... 1,511 (330) 820 (262) 680 (1,430) 989 Interest expense....... 985 7 242 103 324 940 (3) 2,601 (7) ------- ------ ------- ------ ------ ------- ------- ------- ------- Income (loss) before provision for income taxes............... 526 (337) 578 (365) 356 (2,370) (1,612) Provision (benefit) for income taxes........... 210 (135) 231 (146) 142 (302)(4) -- (4) ------- ------ ------- ------ ------ ------- ------- ------- ------- Income (Loss) before extraordinary item..... 316 (202) 347 (219) 214 (2,068) (1,612) Dividends on preferred stock....... (738) -- -- -- -- 738 (5) -- Accretion to redemption value of preferred stock and warrants.............. (271) -- -- -- -- 271 (5) -- ------- ------ ------- ------ ------ ------- ------- ------- ------- Income (loss) before extraordinary item attributable to common stockholders........... $ (693) $ (202) $ 347 $ (219) $ 214 $(1,059) $(1,612) $ $ ======= ====== ======= ====== ====== ======= ======= ======= ======= Income (loss) before extraordinary item per share attributable to common stockholders.... $ (6) (8) $ (6)(8) ======= ======= Weighted average number of shares outstanding.. ======= ======= =======
28 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997 (IN THOUSANDS)
PRO FORMA AS ADJUSTED HISTORICAL PRO FORMA OFFERING FOR THE CEC (10) ADJUSTMENTS PRO FORMA ADJUSTMENTS OFFERING ---------- ----------- --------- ----------- ----------- ASSETS ------ Current assets.......... $ 19,154 $ -- $ 19,154 (8) $ Property and equipment, net of accumulated depreciation and amortization........... 47,088 -- 47,088 Other assets: Goodwill, net......... 20,208 -- 20,208 Covenants not to compete, net......... 12,627 -- 12,627 Other noncurrent assets............... 1,690 -- 1,690 -------- ------- -------- -------- -------- Total other assets.. 34,525 -- 34,525 -------- ------- -------- -------- -------- Total assets........ $100,767 $ -- $100,767 $ $ ======== ======= ======== ======== ======== LIABILITIES AND STOCKHOLDERS' INVESTMENT - ------------------------ Current liabilities..... $ 15,404 $ -- $ 15,404 (8) Long-term debt, net of current maturities..... 47,651 -- 47,651 (8) Deferred income tax liabilities............ 3,635 -- 3,635 -------- ------- -------- -------- -------- Total liabilities... 66,690 -- 66,690 Redeemable preferred stock and warrants..... 32,989 (32,989)(11) -- Stockholders' investment............. 1,088 32,989 (11) 34,077 -------- ------- -------- -------- -------- Total liabilities and stockholders' investment......... $100,767 $ -- $100,767 $ $ ======== ======= ======== ======== ========
29 NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA The following notes identify the pro forma adjustments made to the historical amounts in the unaudited pro forma condensed consolidated financial data: (1) Management fees charged to Western Culinary by its parent related to non- recurring business activities totaling $1.0 million have been eliminated. (2) The preliminary appraised values of the acquired fixed assets of Western Culinary, SCT, Gibbs, IAMD-U.S. and IAMD-Canada have been assigned to the respective assets. Depreciation of fixed assets based on appraised values and their remaining estimated useful lives, which range from one to 31 years, in excess of the historical amounts is recorded as an adjustment. (3) The historical intangible assets of Gibbs have been eliminated because new values were assigned to intangible assets at the date of acquisition. Intangible assets recorded in conjunction with the acquisitions of Western Culinary, SCT, Gibbs, IAMD-U.S. and IAMD-Canada include goodwill of $18.0 million, covenants not to compete of $13.2 million and student contracts of $52,000. Goodwill is amortized on a straight-line basis over its estimated useful life of 40 years. Covenants not to compete are amortized over their estimated useful lives, which range from three to five years, using the sum of years' digits method. Amortization expense has been adjusted to reflect the new values and amortization of these intangible assets for the entire periods presented, as opposed to historical amounts, which were only recorded from date of the acquisitions to the end of each period. (4) This adjustment represents additional interest expense associated with approximately $53.3 million of debt incurred to finance the acquisitions of Western Culinary, SCT, Gibbs, IAMD-U.S., and IAMD-Canada which would have been outstanding for the entire periods presented. Interest on bank borrowings is imputed assuming a 9% borrowing rate for the twelve months ended December 31, 1996 and the six months ended June 30, 1997. (5) Due to the historical losses experienced by the Company and the pro forma loss derived therefrom, the historical income tax provision/(benefit) has been eliminated, and no income tax benefit has been reflected in the unaudited pro forma consolidated condensed statements of operations for the year ended December 31, 1996 and the six months ended June 30, 1997. (6) Redeemable preferred stock (exclusive of accrued dividends) and warrants will be converted into Common Stock prior to the consummation of the Offering. Accrued dividends and any accretion to redemption value related to shares of preferred stock and warrants assumed to have been issued at the beginning of each period presented to consummate the acquisitions would be added back to income attributable to common shareholders to derive pro forma income attributable to common shareholders. Therefore, such amounts are eliminated. (7) Includes the dilutive effect of (i) actual Common Stock outstanding, (ii) options and warrants issued during the preceding twelve months, (iii) common stock equivalents and (iv) shares of Common Stock to be issued upon the Transactions (as defined under "The Transactions") and assumes that shares (representing the approximate number of shares which are being sold by the Company at an assumed initial public offering price of $ per share to fund the Dividend Payment (as defined in "Use of Proceeds") of $2.1 million) of the Common Stock being offered by the Company hereby were outstanding during the periods indicated. See "The Transactions" and "Use of Proceeds." (8) The Company's net proceeds from the Offering, estimated to be $ net of expenses and fees, will be applied as described in "Use of Proceeds." (9) This adjustment represents the increase in the weighted average shares outstanding related to proceeds from the issuance of shares of Common Stock to be sold by the Company in the Offering, assumed to be applied as described under "Use of Proceeds." (10) The historical balance sheet of the Company at June 30, 1997 includes the effect of all of the acquisitions because they were all consummated on or before June 30, 1997. (11) The redemption value of the preferred stock, except for the accrued dividends, will be converted into common stock. 30 SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA The following selected historical consolidated financial and other data are qualified by reference to, and should be read in conjunction with, the financial statements and related notes thereto appearing elsewhere in this Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The selected statement of operations data set forth below for the years ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1997 and the balance sheet data as of December 31, 1995 and 1996 and June 30, 1997 are derived from the audited financial statements of the Company included elsewhere in this Prospectus. The selected statement of operations data set forth below for the six months ended June 30, 1996 are derived from the unaudited financial statements of the Company included elsewhere in this Prospectus, which in the opinion of management have been prepared on the same basis as the audited financial statements and contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company's financial condition and results of operations for those periods. The balance sheet data as of December 31, 1994 are derived from audited financial statements of the Company which are not included in this Prospectus.
YEARS ENDED DECEMBER SIX MONTHS ENDED 31, JUNE 30, -------------------------- ------------------ 1994(1) 1995 1996 1996 1997 ------- ------- ------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Revenue: Tuition and registration fees, net.................... $ 5,794 $16,330 $29,269 $ 12,716 $ 23,073 Other, net.................... 1,692 3,066 4,311 2,074 2,579 ------- ------- ------- -------- -------- Total net revenue........... 7,486 19,396 33,580 14,790 25,652 ------- ------- ------- -------- -------- Operating Expenses: Educational services and facilities................... 3,074 8,565 14,404 6,320 11,090 General and administrative.... 4,887 9,097 14,622 7,406 10,942 Depreciation and amortization................. 980 1,344 2,179 973 2,109 ------- ------- ------- -------- -------- Total operating expenses.... 8,941 19,006 31,205 14,699 24,141 ------- ------- ------- -------- -------- Income (loss) from operations.. (1,455) 390 2,375 91 1,511 Interest expense............... 134 297 672 225 985 ------- ------- ------- -------- -------- Income (loss) before provision for taxes and extraordinary item.......................... (1,589) 93 1,703 (134) 526 Provision for income taxes..... -- 24 208 -- 210 ------- ------- ------- -------- -------- Income (loss) before extraordinary item............ (1,589) 69 1,495 (134) 316 Extraordinary loss on early extinguishment of debt (net of taxes of $233)................ -- -- -- -- 418 ------- ------- ------- -------- -------- Net income (loss).............. $(1,589) $ 69 $ 1,495 $ (134) $ (102) ======= ======= ======= ======== ======== Income (loss) attributable to common stockholders: Income (loss) before extraordinary item, as reported..................... (1,589) 69 1,495 (134) 316 Accrued dividends on preferred stock (2).......... (393) (777) (1,128) (557) (738) Accretion to redemption value of preferred stock and warrants (3)................. -- (96) (230) (115) (271) ------- ------- ------- -------- -------- Income (loss) before extraordinary item, attributable to common stockholders.................. (1,982) (804) 137 (806) (693) Extraordinary loss, net....... -- -- -- -- 418 ------- ------- ------- -------- -------- Net income (loss) attributable to common stockholders........ $(1,982) $ (804) $ 137 $ (806) $ (1,111) ======= ======= ======= ======== ======== OTHER DATA: EBITDA (4)..................... (475) 1,741 4,563 1,072 3,627 EBITDA margin (4).............. (6.3)% 9.0% 13.6% 7.2% 14.1% Cash flow provided by (used in): Operating activities.......... (1,000) 235 5,275 570 (2,797) Investing activities.......... (2,372) (3,478) (9,518) (365) (38,192) Financing activities.......... 6,014 4,566 8,076 (1,703) 42,936 Capital expenditures, net...... 153 897 1,231 365 482 Student population (5)......... 1,131 3,361 4,537 2,273 7,697 Number of campuses (6)......... 2 4 5 4 18
31
DECEMBER 31, ------------------------- JUNE 30, 1994 1995 1996 1997 ------- ------- ------- -------- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents..... $ 2,642 $ 3,965 $ 7,798 $ 9,745 Working capital.. 578 1,314 1,379 3,750 Total assets..... 11,704 23,584 36,208 100,767 Long-term debt, net of current maturities...... 1,890 6,725 13,783 47,651 Redeemable preferred stock and warrants.... 8,243 13,628 14,561 32,989 Total stockholders' investment...... (1,982) (2,756) (2,589) 1,088
- -------- (1) Commencing January 5, 1994, the date of the Company's incorporation. (2) Represents the dividends paid on, or added to the redemption value of outstanding preferred stock. See Note 2 of the Notes to the Company's Consolidated Financial Statements. (3) See Note 2 of the Notes to the Company's Consolidated Financial Statements. (4) For any period, EBITDA equals earnings before interest expense, taxes, depreciation and amortization (including amortization of debt discount), and EBITDA margin equals EBITDA as a percentage of net revenue. EBITDA and EBITDA margin are presented because the Company believes they allow for a more complete analysis of the Company's results of operations. EBITDA and EBITDA margin should not be considered as alternatives to, nor is there any implication that they are more meaningful than, any measure of performance or liquidity as promulgated under GAAP. (5) Represents the total student population at the Company's schools (a) in the case of each full year, as of October 31 and (b) in the case of the six months ended June 30, 1996 and 1997, as of June 30. (6) Represents the total number of campuses operated by the Company as of the end of the period. 32 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Selected Historical Consolidated Financial Data and the Company's Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. BACKGROUND AND OVERVIEW CEC is one of the largest providers of private, for-profit postsecondary education in North America, with more than students enrolled as of October 31, 1997. CEC operates nine schools, with 18 campuses located in 13 states and two Canadian provinces. These schools enjoy long operating histories and offer a variety of bachelor's degree, associate degree and non- degree programs in career-oriented disciplines within the Company's core curricula of (i) computer technologies, (ii) visual communication and design technologies, (iii) business studies and (iv) culinary arts. Net revenue, EBITDA and net income have increased in each of the years the Company has operated. Net revenue increased 349%, to $33.6 million in 1996, from $7.5 million in 1994; EBITDA increased to $4.6 million in 1996, from a loss of $0.5 million in 1994; and net income increased to $1.5 million in 1996, from a loss of $1.6 million in 1994. Student population at the Company's schools increased %, from approximately 3,361 students at October 31, 1995 to approximately students at October 31, 1997. During the period 1994 to 1996, the Company acquired five schools (Allentown, Brooks, Brown, Collins and Western Culinary). The Company has invested significant amounts of capital in the hiring of additional personnel and increased marketing and capital improvements at each of the acquired schools. The increased costs of personnel and marketing are expensed as incurred and are reflected in general and administrative expenses. Additional depreciation and amortization are reflected as a result of the capital improvements. The Company believes that EBITDA, while not a substitute for GAAP measures of operating results, is an important measure of the financial performance of the Company and its campuses. Management believes that EBITDA is particularly meaningful due principally to the role acquisitions have played in the Company's development. CEC's rapid growth through acquisitions has resulted in significant non-cash amortization expenses, because a significant portion of the purchase price of a school acquisition by CEC is generally allocated to goodwill and other intangible assets. In a number of the Company's recent acquisitions, a large portion of the purchase price has been allocated to non- competition agreements. As a result of its ongoing acquisition strategy, non- cash amortization expenses may continue to be substantial. The Company's principal source of revenue is tuition collected from its students. The academic year is at least 30 weeks in length, but varies both by individual school and program of study. The academic year is divided by term, which is determined by start dates which vary by school and program. Payment of each term's tuition may be made by full cash payment, financial aid and/or an installment payment plan. If a student withdraws from school prior to the completion of the term, the Company refunds a portion of the tuition already paid which is attributable to the period of the term that is not completed. Revenue is recognized ratably over the period of the student's program. The Company's campuses charge tuition at varying amounts, depending not only on the particular school, but also upon the type of program (i.e., diploma, associate or bachelor's) and the specific curriculum. Each of the Company's campuses typically implements one or more tuition increases annually. The sizes of these increases differ from year to year and among campuses and programs. Tuition at the Company's campuses as of October 31, 1997 represented an average increase of 5.2% over the same date in 1996. Other revenue consists of bookstore sales, placement fees (Gibbs only), dormitory and cafeteria fees (Brooks only), and restaurant revenue (Western Culinary only). Other revenue is recognized during the period services are rendered. 33 The Company categorizes its expenses as educational services and facilities, general and administrative and depreciation and amortization. Educational services and facilities expense generally consists of expense directly attributable to the educational activity of the schools, including salaries and benefits of faculty, academic administrators, and student support personnel, including financial aid personnel and registrars. Educational services and facilities expense also includes costs of educational supplies and facilities (including rents on school leases), certain costs of establishing and maintaining computer laboratories, costs of student housing (Brooks and SCT only) and all other physical plant and occupancy costs, with the exception of costs attributable to the Company's corporate offices. General and administrative expense includes salaries and benefits of personnel in recruitment, admissions, accounting, personnel, compliance, and corporate and school administration. Costs of promotion and development, advertising and production of marketing materials, and occupancy of the corporate offices are also included in this expense category. Depreciation and amortization includes costs associated with the depreciation of purchased computer laboratories, equipment, furniture and fixtures, courseware, owned facilities, capitalized equipment leases and amortization of intangible assets, primarily goodwill and non-competition agreements with previous owners of the schools. 1997 ACQUISITIONS In the first six months of 1997, the Company completed the following four acquisitions, each of which was accounted for as a purchase: On February 28, 1997, the Company acquired all of the outstanding capital stock of SCT for a purchase price of approximately $5.5 million, subject to adjustment. In addition, the Company paid $1.8 million to the former owners of SCT pursuant to non-competition agreements. Effective May 31, 1997, the Company acquired all of the outstanding capital stock of Gibbs for a purchase price of approximately $20.0 million, subject to adjustment. In addition, the Company paid $7.0 million to the former owner of Gibbs pursuant to a non-competition agreement. On June 30, 1997, the Company acquired all of the outstanding capital stock of IAMD-U.S. for a purchase price of $3.0 million, which amount may be increased by up to $5.0 million based on future revenues of IAMD-U.S. operations and which amount is otherwise subject to adjustment. In addition, the Company paid $2.0 million to the former owners of IAMD-U.S. pursuant to non-competition agreements. Also on June 30, 1997, the Company acquired all of the capital stock of IAMD- Canada for a purchase price of $6.5 million, subject to adjustment. In addition, the Company paid $2.0 million to the former owners of IAMD-Canada pursuant to non-competition agreements. 34 RESULTS OF OPERATIONS The following table summarizes the Company's operating results as a percentage of net revenue for the period indicated.
SIX MONTHS YEAR ENDED ENDED JUNE DECEMBER 31, 30, --------------------- ------------- 1994 1995 1996 1996 1997 ----- ----- ----- ----- ----- Revenue: Tuition and registration, net......... 77.4% 84.2% 87.2% 86.0% 89.9% Other, net............................ 22.6 15.8 12.8 14.0 10.1 ----- ----- ----- ----- ----- Net revenue......................... 100.0 100.0 100.0 100.0 100.0 ----- ----- ----- ----- ----- Operating expenses: Educational services and facilities... 41.1 44.2 42.9 42.7 43.2 General and administrative............ 65.2 46.9 43.5 50.1 42.7 Depreciation and amortization......... 13.1 6.9 6.5 6.6 8.2 ----- ----- ----- ----- ----- Total operating expenses............ 119.4 98.0 92.9 99.4 94.1 ----- ----- ----- ----- ----- Income (loss) from operations....... (19.4) 2.0 7.1 0.6 5.9 Interest expense........................ 1.8 1.5 2.0 1.5 3.8 Income (loss) before provision for taxes and extraordinary item......... (21.2) 0.5 5.1 (0.9) 2.1 Provision (benefit) for income taxes.... -- 0.1 0.6 -- 0.9 ----- ----- ----- ----- ----- Income (loss) before extraordinary item. (21.2) 0.4 4.5 (0.9) 1.2 Extraordinary loss on early extinguishment of debt (net of taxes).. -- -- -- -- (1.6) ----- ----- ----- ----- ----- Net income (loss)....................... (21.2) 0.4 4.5 (0.9) (0.4) ===== ===== ===== ===== ===== Net income (loss) attributable to common stockholders........................... (26.5)% (4.1)% 0.4% (5.4)% (4.3)% ===== ===== ===== ===== =====
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996 Revenue. Net tuition revenue increased 81% from $12.7 million in the first six months of 1996 to $23.1 million in the first six months of 1997, due to a 17% increase in the average number of students attending the schools which were owned by the Company during the 1996 period and tuition increases effective in 1997 for these schools, as well as added net tuition revenue of $7.3 million for schools acquired after 1996. Other net revenue increased 24%, from $2.1 million in the first six months of 1996 to $2.6 million in the first six months of 1997, due to an increase in student population for schools owned during the 1996 period and the addition of $0.3 million from schools acquired after the 1996 period. Educational Services and Facilities Expense. Educational services and facilities expense increased 75%, from $6.3 million in the first six months of 1996 to $11.1 million in the first six months of 1997. Of this increase, $2.7 million was attributable to the increase in student population for schools owned during the 1996 period and $2.1 million was attributable to the addition of educational services and facilities for schools acquired after the 1996 period. General and Administrative. General and administrative expense increased 48%, from $7.4 million in the first six months of 1996 to $10.9 million in the first six months of 1997. The increase was primarily attributable to costs totaling $0.2 million related to increased personnel at the corporate level to enhance the Company's infrastructure and increased advertising and marketing of $0.6 million for schools owned during the 1996 period, as well as the addition of $2.0 million of expenses for schools acquired after the 1996 period. The increase in advertising and marketing expenses reflects, in part, the fact that the former owners of the acquired schools had reduced their expenditures in these areas prior to their acquisition by the Company. 35 Depreciation and Amortization. Depreciation and amortization expense increased 117%, from $1.0 million in the first six months of 1996 to $2.1 million in the first six months of 1997. The increase was due to increased capital expenditures for schools owned during the 1996 period and related increased depreciation expense of $0.3 million in the first six months of 1997. Additionally, depreciation expense increased $0.3 million due to the depreciation expense for schools acquired after the 1996 period. Amortization expense increased 167%, from $0.3 million in the first six months of 1996 to $0.8 million in the first six months of 1997, primarily due to additional amortization of non-competition agreements for the acquisition of schools after the 1996 period. Interest Expense. Interest expense increased 338% from $0.2 million in the first six months of 1996 to $1.0 million in the first six months of 1997. The increase was primarily due to interest expense on borrowings used to finance the acquisition of schools after the 1996 period. Provision for Income Taxes. The provision for income taxes increased from an immaterial amount in the first six months of 1996 to $0.2 million in the first six months of 1997. Income before Extraordinary Item. Net income before extraordinary item increased to $0.3 million in the first six months of 1997 from a net loss of $0.1 million in the first six months of 1996. Extraordinary Item. During the first six months of 1997, the Company recorded an extraordinary expense of $0.4 million, net of tax, due to the early retirement of debt related to a credit facility which was terminated and replaced by the Company's current facility. Net Income (Loss). The Company had a net loss of $0.1 million in both the first six months of 1996 and the first six months of 1997. Net Income (Loss) Attributable to Common Stockholders. Net loss attributable to common stockholders decreased from a loss of $0.8 million in the first six months of 1996 to a loss of $1.1 million in the first six months of 1997. The primary reasons for this decrease were the extraordinary item referred to above; increased dividends on preferred stock, primarily due to the issuance of additional shares; and increased accretion in the redemption value of preferred stock and warrants as a result of the Company's growth. All outstanding preferred stock will convert into Common Stock and all outstanding warrants will be exercised prior to the consummation of the Offering. See "The Transactions." YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Revenue. Net tuition revenue increased 79%, from $16.3 million in 1995 to $29.3 million in 1996, due to a 28% increase in the average number of students attending the schools which were owned by the Company during 1995 and tuition increases effective in 1996 for these schools, as well as added net revenue of $1.1 million for schools acquired in 1996. Other net revenue increased 41%, from $3.1 million in 1995 to $4.3 million in 1996, due to an increase in student population for schools owned during 1995 and the addition of $0.1 million from schools acquired after 1995. Educational Services and Facilities Expense. Educational services and facilities expense increased 68%, from $8.6 million in 1995 to $14.4 million in 1996. Of this increase, $5.3 million was attributable to the increase in student population for schools owned during 1995 and $0.5 million was attributable to the addition of educational services and facilities for schools acquired in 1996. General and Administrative. General and administrative expense increased 61%, from $9.1 million in 1995 to $14.6 million in 1996. The increase was attributable to costs totaling $0.7 million related to increased personnel at the corporate level to enhance the infrastructure and increased advertising and marketing of $4.3 million for schools owned during 1995, as well as the addition of $0.5 million of expense for schools acquired in 1996. The increase in advertising and marketing expenses reflects, in part, the fact that the former owners of the acquired schools had reduced their expenditures in these areas prior to their acquisition by the Company. 36 Depreciation and Amortization. Depreciation and amortization expense increased 62%, from $1.3 million in 1995 to $2.2 million in 1996. The increase was due to increased capital expenditures for schools owned during 1995 and related increased depreciation expense of $0.7 million in 1996. Additionally, depreciation expense increased $0.1 million due to the depreciation expense for schools acquired in 1996. Amortization expense increased 14%, from $0.4 million in 1995 to $0.5 million in 1996, primarily due to additional amortization of non-competition agreements for the acquisition of schools in 1996. Interest Expense. Interest expense increased 126%, from $0.3 million in 1995 to $0.7 million in 1996. The increase was primarily due to interest expense on borrowings used to finance the acquisition of schools in 1996. Provision for Income Taxes. The provision for income taxes increased to $0.2 million in 1996 from an immaterial amount in 1995. Net Income. Net income increased from an immaterial amount in 1995 to $1.5 million in 1996, due to the factors discussed above. Net Income (Loss) Attributable to Common Stockholders. In 1996, net income attributable to common stockholders was $0.1 million, as compared to a net loss attributable to common stockholders of $0.8 million in 1995. This change was attributable to the factors discussed above, offset in part by increased dividends on preferred stock and increased accretion in the redemption value of preferred stock and warrants. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Revenue. Net tuition revenue increased 182%, from $5.8 million in 1994 to $16.3 million in 1995, due to a 35% increase in the average number of students attending the schools which were owned by the Company during 1994 and tuition increases effective in 1995 for these schools, as well as added net revenue of $5.4 million for schools acquired in 1995. Other net revenue increased 81%, from $1.7 million in 1994 to $3.1 million in 1995, due to an increase in student population for schools owned during 1994 and the addition of $0.2 million from schools acquired in 1995. Educational Services and Facilities Expense. Educational services and facilities expense increased 179%, from $3.1 million in 1994 to $8.6 million in 1995. Of this increase, $3.0 million was attributable to the increase in student population for schools owned during 1994 and $2.5 million was attributable to the addition of educational services and facilities for schools acquired in 1995. General and Administrative. General and administrative expense increased 86%, from $4.9 million in 1994 to $9.1 million in 1995. The increase was attributable to costs totaling $0.7 million related to increased personnel at the corporate level to enhance the infrastructure and increased advertising and marketing of $1.3 million for schools owned during 1994, as well as the addition of $2.2 million of expense for schools acquired in 1995. The increase in advertising and marketing expenses reflects, in part, the fact that the former owners of the acquired schools had reduced their expenditures in these areas prior to their acquisition by the Company. Depreciation and Amortization. Depreciation and amortization expense increased 37%, from $1.0 million in 1994 to $1.3 million in 1995. The increase was due to increased capital expenditures for schools owned during 1994 and related increased depreciation expense of $0.2 million in 1995. Additionally, the Company incurred a slight increase in depreciation and amortization expense related to schools acquired in 1995. Amortization expense decreased 26%, from $0.6 million in 1994 to $0.4 million in 1995, primarily due to accelerated amortization of student contract intangibles. Interest Expense. Interest expense increased 122%, from $0.1 million in 1994 to $0.3 million in 1995. The increase was primarily due to interest expense on borrowings used to finance the acquisition of schools in 1995. 37 Provision for Income Taxes. The provision for income taxes was immaterial in both 1994 and 1995. Net Income (Loss). The Company generated an immaterial amount of net income in 1995, as compared to a net loss of $1.6 million in 1994, due to the factors discussed above. Net Income (Loss) Attributable to Common Stockholders. Net loss attributable to common stockholders was $0.8 million in 1995, as compared to a net loss attributable to common stockholders of $2.0 million in 1994. This change was attributable to the factors discussed above, as well as increased dividends on preferred stock and increased accretion in the redemption value of preferred stock and warrants. SEASONALITY The Company's results of operations fluctuate primarily as a result of changes in the level of student enrollment at the Company's schools. The Company's schools experience a seasonal increase in new enrollments in the fall, traditionally when the largest numbers of new high school graduates begin postsecondary education. Furthermore, although the Company encourages year-round attendance at all schools, Brooks has a traditional summer break for its fashion design and interior design students. As a result of these factors, total student enrollment and net revenue are typically highest in the fourth quarter (October through December) and lowest in the second quarter (April through June) of the Company's fiscal year. The Company's costs and expenses do not, however, fluctuate as significantly on a quarterly basis. The Company anticipates that these seasonal trends at its schools will continue. LIQUIDITY AND CAPITAL RESOURCES Since its formation, the Company has financed its operating activities through cash generated from operations. Acquisitions have been financed through a combination of additional equity investments and credit facilities. Net cash provided by operating activities increased to $5.3 million in 1996 from $0.2 million in 1995 and $(1.0) million in 1994, due primarily to increases in depreciation and amortization and net income. Net cash used in operating activities was $2.8 million in the first six months of 1997, compared to net cash provided by operating activities of $0.6 million in the first six months of 1996, due primarily to post-acquisition expenditures relating to SCT and Gibbs, along with the suspension of Title IV funding for these schools while awaiting recertification. Capital expenditures increased to $1.2 million in 1996 from $0.9 million in 1995 and $0.2 million in 1994, and increased to $0.5 million in the first six months of 1997 as compared to $0.4 million in the first six months of 1996. These increases were primarily due to investments in capital equipment as a result of increasing student population. Capital expenditures are expected to continue to increase as new schools are acquired, student population increases and the Company continues to upgrade and expand current facilities and equipment. The Company does not have any material commitments for capital expenditures in 1998. The Company's net receivables as a percentage of net revenue decreased to 9% in 1996 from 14% in 1995 and 16% in 1994, and increased to 28% in the first six months of 1997 as compared to 10% in the first six months of 1996. These changes were primarily due to student receivables at acquired schools. Based upon past experience and judgment, the Company establishes an allowance for doubtful accounts with respect to tuition receivables. When a student withdraws, the receivable balance attributable to such student is charged to this allowance for doubtful accounts. The Company's historical bad debt expense as a percentage of revenue for the years ended December 31, 1994, 1995 and 1996 was 5%, 3% and 2%, respectively, and for the six months ended June 30, 1997 was 3%. On May 30, 1997, the Company entered into the Credit Agreement with LaSalle National Bank and prepaid approximately $21.2 million of revolving credit notes and term loans that were outstanding under its previous credit agreement. The Credit Agreement was amended and syndicated on September 25, 1997. Pursuant to the Credit Agreement, the Company can borrow $65 million under a revolving credit facility and $15 million under 38 a term loan, and obtain up to $20 million in outstanding letters of credit. Outstanding letters of credit reduce the revolving credit facility availability under the Credit Agreement. The Credit Agreement matures on May 30, 2002; however, availability under the revolving credit facility is reduced by $10 million on May 30, 2001. The term loan is payable in equal quarterly installments of $0.75 million, commencing September 30, 1997. The Company's borrowings under the Credit Agreement bear interest, payable quarterly, at either (i) a base rate equal to the greater of the (a) bank's prime rate plus .75% or (b) the federal funds rate plus .50%, or (ii) LIBOR plus 2.00%, at the election of the Company. Under the Credit Agreement, the Company is required, among other things, to maintain certain financial ratios with respect to debt to EBITDA, interest coverage and fixed coverage and to maintain a specified level of net worth. The Company is also subject to restrictions on, among other things, payment of dividends, disposition of assets and incurrence of certain additional indebtedness. The Company has pledged the stock of its subsidiaries as collateral for the repayment of obligations under the Credit Facility. At June 30, 1997, the Company had outstanding borrowings of $26.0 million under the revolving loan facility and $12.5 million under the term loan. Additionally, the Company had $11.5 million of outstanding letters of credit as of such date. The Company intends to use approximately $29.4 million of its net proceeds from the Offering to repay outstanding revolving credit borrowings under the Credit Agreement (based upon amounts outstanding as of June 30, 1997). The Company does not intend to use any of its net proceeds to repay outstanding borrowings under the term loan. The Company expects that its interest expense in the period following the Offering, assuming no material acquisitions during this period, will be lower, and will have a lesser proportionate impact on the Company's net income, as compared to the period prior to the Offering. The Company also intends to use approximately $4.1 million of its net proceeds from the Offering to repay the remaining aggregate outstanding indebtedness on notes payable to the former shareholders of IAMD-U.S. and IAMD- Canada, approximately $2.1 million for the Dividend Payment and the remaining approximately $ million for general corporate purposes, including capital expenditures, possible future acquisitions of schools and working capital. The DOE requires that Title IV Program funds collected by an institution for unbilled tuition be kept in separate cash or cash equivalent accounts until the students are billed for the portion of their program related to these Title IV Program funds. In addition, all funds transferred to the Company through electronic funds transfer programs are held in a separate cash account until certain conditions are satisfied. As of June 30, 1997, the Company held approximately $0.2 million in these separate accounts, which are reflected as restricted cash, to comply with these requirements. These restrictions on cash have not significantly affected the Company's ability to fund daily operations. The HEA and its implementing regulations require each higher education institution to meet an acid test ratio (defined as the ratio of cash, cash equivalents, restricted cash and certain accounts receivable to total current liabilities) of at least 1:1, calculated at the end of the institution's fiscal year. The acid test ratios of all of the Company's institutions met this DOE requirement at June 30, 1997. The Company's cash flow from operations on a long-term basis is dependent on the receipt of funds from the Title IV Programs. For 1996, the Company's U.S. institutions derived approximately 52% to approximately 82% of their respective tuition and fee revenue from the Title IV Programs. The HEA and its implementing regulations establish specific standards of financial responsibility that must be satisfied in order to qualify for participation in the Title IV Programs. In connection with the Company's acquisitions of Western Culinary, SCT, and Gibbs, the DOE has reviewed the Company's annual financial statements and questioned the Company's accounting treatment for certain direct marketing costs and courseware and other institutional materials and whether the Company's financial statements are acceptable for purposes of determining the Company's financial responsibility. Further, the DOE has asserted that the Company did not satisfy the 1:1 acid test ratio based on its fiscal 1996 financial statements. However, the Company has maintained the eligibility of Western Culinary and SCT to continue participating in the Title IV Programs by posting irrevocable letters of credit in the aggregate 39 amount of $2.7 million in favor of the DOE, which amount is set at approximately 50% of the Title IV Program funds received by students enrolled at Western Culinary in the prior award year. In September 1997, the DOE increased the level of surety for SCT to, and established the level of surety of Gibbs at, 100% of the Title IV Program funds received by students enrolled at each such institution in the prior award year. The Company must post, no later than November 9, 1997, a letter of credit in the amount of $15.2 million with respect to Gibbs and anticipates that it will be required to post a letter of credit in the approximate range of $3.0 million to $5.0 million with respect to IAMD-U.S., representing 100% of the Title IV Program funds received by IAMD- U.S. in the prior award year. In addition, the Company is considering the DOE's request to increase SCT's letter of credit by $721,000 to maintain its eligibility to participate in the Title IV Programs, which would have to be done no later than November 15, 1997. As of , 1997, after accounting for all these letters of credit in an aggregate amount of approximately $22.6 million and giving effect to the Offering and the application of the net proceeds therefrom as described under "Use of Proceeds," the Company's remaining credit availability under the Credit Agreement would be approximately $ . The Company believes that proceeds to the Company from the Offering and cash expected to be generated from operations during the remainder of 1997 will significantly enhance the Company's financial position and will enable the Company and each of its institutions to present audited 1997 financial statements which will satisfy the DOE's acid test ratio and tangible net worth requirements with respect to each of these institutions. The Company intends to seek the DOE's review of its audited 1997 financial statements on an expedited basis in the spring of 1998. Once the DOE has determined that the Company and its U.S. subsidiaries satisfy each of the DOE's standards of financial responsibility, applicable law and regulations require the DOE to release the Company from the requirement that it post the sureties and from the limitations on Title IV Program funding in excess of surety amounts. To the extent the letters of credit are reduced or eliminated, the Company will have additional availability under the Credit Agreement. The Company believes that it will have sufficient liquidity to increase the letters of credit should the DOE so require. However, there can be no assurance that, if required, the Company will be able to maintain its letters of credit or increase its letters of credit in the future. See "Risk Factors--Dependence on Financial Aid; Potential Adverse Effects of Regulation--Company Compliance with Financial Responsibility Standards" and "Financial Aid and Regulation--Federal Oversight of the Title IV Programs--Company Compliance with Financial Responsibility Standards." 40 BUSINESS OVERVIEW CEC is one of the largest providers of private, for-profit postsecondary education in North America, with more than students enrolled as of October 31, 1997. CEC operates nine schools, with 18 campuses located in 13 states and two Canadian provinces. These schools enjoy long operating histories and offer a variety of bachelor's degree, associate degree and non-degree programs in career-oriented disciplines within the Company's core curricula of (i) computer technologies, (ii) visual communication and design technologies, (iii) business studies and (iv) culinary arts. CEC was founded in January 1994 by John M. Larson, the Company's President and Chief Executive Officer, who has over 23 years of experience in the career- oriented education industry. The Company was formed to capitalize on opportunities in the large and highly fragmented postsecondary school industry. Since its inception, CEC has completed nine acquisitions. The Company has acquired schools that it believes possess strong curricula, leading reputations and broad marketability but have been undermanaged from a marketing and financial standpoint. The Company seeks to apply its expertise in operations, marketing and curricula development, as well as its financial strength, to improve the performance of these schools. The schools acquired by the Company and their improved enrollment are summarized in the following table:
STUDENT POPULATION AT OCTOBER 31, ------------------ YEAR DATE PRINCIPAL ASSOCIATE DEGREE % SCHOOL FOUNDED ACQUIRED CURRICULA (1) GRANTING (2) 1996 1997 INCREASE ------ ------- -------- -------------- ---------------- ---- ---- -------- AL COLLINS GRAPHIC DE- SIGN SCHOOL 1978 1/94 VC, CT Yes (3) Tempe, AZ 936 % BROOKS COLLEGE 1970 6/94 VC Yes Long Beach, CA 960 ALLENTOWN BUSINESS SCHOOL 1869 7/95 B, VC, CT, S Yes Allentown, PA 781 BROWN INSTI- TUTE 1946 7/95 VC, CT, RTB, E Yes Minneapolis, MN 1,391 WESTERN CULI- NARY INSTI- TUTE 1983 10/96 CA No Portland, OR 453 SCHOOL OF COM- PUTER TECH- NOLOGY 1967 2/97 CT, CA, LS Yes Fairmont, WV 165 Pittsburgh, PA 737 THE KATHARINE GIBBS SCHOOLS 1911 5/97 B, S, CT Yes Boston, MA 411 Melville, NY 353 Montclair, NJ 465 New York, NY 969 Norwalk, CT (4) 248 Piscataway, NJ (5) 217 Providence, RI (5) 257 INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (U.S.) 1977 6/97 VC, CT Yes (3) Chicago, IL 746 Tampa, FL 461 INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (CANADA) 1983 6/97 VC, CT No Montreal, PQ 396 Toronto, ON 834 ------- --------- Total . . . . . . . . . 10,780 ======= =========
- -------- (1) The programs offered by the Company's schools include visual communication and design technologies ("VC"), computer technologies ("CT"), business ("B"), radio and television broadcasting ("RTB"), electronics ("E"), culinary arts ("CA"), laser surgery technologies ("LS") and secretarial studies ("S"). (2) All of the Company's schools, other than Brooks and IAMD-U.S., in Tampa, also offer diploma (or certificate) programs. (3) Also offers bachelor's degrees. (4) The Gibbs campus in Norwalk, Connecticut, is now using the name Gibbs College. (5) Do not offer degree programs. 41 The Company's success in completing acquisitions and improving the financial performance of acquired schools has enabled it to achieve rapid growth. Net revenue has increased from $7.5 million in 1994 to $33.6 million in 1996. For the first six months of 1997, net revenue was $25.7 million. 1996 Pro Forma Net Revenue would have been $86.6 million. The Company's schools offer educational programs principally in four career- related fields of study -- (i) computer technologies (including Internet and intranet technologies), (ii) visual communication and design technologies, (iii) business studies and (iv) culinary arts -- identified by the Company as areas with highly interested and motivated students, strong entry-level employment opportunities and ongoing career and salary advancement potential. . Computer Technologies: These programs include PC/LAN, PC/Net, computer applications, computer information systems and computer programming. The Company recently extended the PC/Net program to Collins, commencing in August 1997. Diplomas can be earned at selected schools and associate degrees can be earned at Allentown, Brown, Collins, Gibbs-Melville and SCT. According to the U.S. Department of Labor, approximately 755,000 new jobs in the computer technology fields will be created by 2005. This represents an increase of approximately 91% over the number of similar jobs in 1994. . Visual Communication and Design Technologies: These programs include desktop publishing, graphic design, fashion design, interior design and graphic imaging and are offered at Allentown, Brown, Collins, IAMD-Canada and IAMD-U.S. In addition, Brooks added a visual communications program in the summer of 1996, which now has the largest enrollment of any of Brooks' programs. In addition to diplomas, which can be earned at selected schools, students in these fields can earn associate degrees at Allentown, Brooks, Brown, Collins and IAMD-U.S. and bachelor's degrees at Collins and IAMD-U.S. The U.S. Bureau of Labor Statistics projects growth of approximately 30%, a gain of over 80,000 jobs, for design-related occupations between 1994 and 2005. . Business Studies: These programs include business administration and business operations. Allentown and Gibbs offer diploma and associate degree programs in business-related areas of study. According to the U.S. Bureau of Labor Statistics, over two million new jobs will be created between 1994 and 2005 in the executive, administrative and managerial fields. . Culinary Arts: In these programs, students can earn a diploma in culinary arts at Western Culinary and an associate degree in culinary arts at SCT. The Company believes significant opportunities exist to offer culinary arts programs at other schools, on a contract training basis and in a short program format on weekends, and to offer additional related programs. The U.S. Department of Labor projects approximately 14% growth in the food preparation and service occupations by 2005. This represents an increase of over one million jobs from 1994. In addition to the core curricula, the Company's schools offer a number of other programs. These include secretarial and allied health (medical assisting and medical office management) programs at Allentown; broadcasting and electronics programs at Brown; laser surgery technology programs at SCT; and secretarial and hospitality programs at Gibbs. INDUSTRY BACKGROUND Based on estimates for 1995 by the DOE's National Center for Education Statistics (the "NCES"), postsecondary education is a $200 billion industry in the United States, with over 14 million students obtaining some form of postsecondary education. Of this total, approximately 1.5 million students are enrolled in approximately 3,000 proprietary postsecondary schools. Federal funds available to support postsecondary education exceed $40 billion dollars each year and have grown steadily over the last two decades. Additionally, the federal government guaranteed over $92 billion in student loans in 1996 and is expected to guarantee loans at comparable levels in the future. State, local and private funds for career-oriented training are also available. Several national economic, demographic and social trends are converging to contribute to growing demand for career-oriented school education: 42 Changes in Workplace Demands. The workplace is becoming increasingly knowledge-intensive. Rapid advances in technology have increased demands on employers and their employees, requiring many new workers to have some form of training or education beyond the high school level. The increasing technological requirements of entry level jobs are spurring demand for specialized training which, in many cases, is not provided by traditional two- and four-year colleges. The U.S. Department of Labor projects that jobs requiring some form of postsecondary training are expected to increase approximately 11% between 1994 and 2005. Furthermore, career-oriented schools generally have the ability to react quickly to the changing needs of the nation's business and industrial communities. Additionally, to meet the new workplace demands, many major companies are now using career-oriented institutions to provide customized training for their employees on a contractual basis. Small- to medium-sized companies are also using proprietary career-oriented schools to fill their needs for training to maintain or increase the skill levels of their employees. Increasing Numbers of High School Graduates. Currently, in the U.S., high school graduates alone represent over 2.5 million new prospective postsecondary students each year, the largest pool of potential enrollees. Over the 18 years prior to 1993, the number of high school graduates had been declining. However, this trend has changed favorably as children of the "baby boom" generation are entering their high school years. These members of the "echo boom," as it is commonly known, are expected to boost enrollment in postsecondary educational programs to as high as 16.4 million students by 2006, an increase of 15.5% from approximately 14.2 million in the fall of 1995. Growing Demand for Higher Education. High school graduates and adults are seeking higher education in increasing numbers. According to the U.S. Department of Commerce, approximately 63% of all 1995 high school graduates continued their education that same year, compared with 53% a decade earlier. The U.S. Department of Labor projects the number of jobs requiring at least an associate degree or higher to grow by more than 20% between 1994 and 2005. In addition, enrollment in postsecondary programs is expected to increase substantially as individuals seek to enhance their skills or re-train for new job requirements. In part because of the recent trend toward corporate downsizing, the NCES estimates that over the next several years initial enrollments in postsecondary education institutions by working adults will increase more rapidly than initial enrollments by recent high school graduates. The number of adults enrolled in higher-education programs in the United States is estimated by the NCES to reach 6.8 million by 1999, or 45% of the total number of people enrolled. Recognition of the Value of Higher Education. The Company believes that prospective students are increasingly recognizing the income premium and other improvements in career prospects associated with a postsecondary education. The U.S. Census Bureau reported that, in 1995, a full-time male worker with an associate degree earned an average of 37% more per year than a comparable worker with only a high school diploma, while a full-time male worker with a bachelor's degree earned an average of 72% more per year than a comparable worker with only a high school diploma. Independent research studies have demonstrated that prospective students consider these benefits in making their education decisions. Reduction in Public Education Funding. The reduction of federal, state or provincial and local funding of public educational institutions in recent years has forced educational institutions to cut back spending on general operations. As a result, some schools have become underfunded and overcrowded. This trend may provide an opportunity for proprietary postsecondary institutions to serve, at more competitive prices, the higher education needs of certain individuals who would have otherwise attended public schools. Decreasing Size of Military Forces. Due to defense budget cuts and the corresponding reduction in the U.S. armed forces, the U.S. military, a traditional provider of technical and career-oriented training, is able to provide fewer educational opportunities. According to the U.S. Department of Defense, the aggregate number of U.S. military personnel has declined by 32% since 1987, with the aggregate number of individuals on active duty in the U.S. military services declining from 2.2 million in 1987 to 1.5 million in 1996. This has left an educational void to be filled by other sources, including proprietary career-oriented schools. The Company believes that private, for-profit, career-oriented schools are uniquely positioned to take advantage of these national trends. The Company also believes that similar factors are creating a favorable climate for career- oriented postsecondary education in Canada and other international markets. 43 BUSINESS AND OPERATING STRATEGY The Company was founded based upon a business and operating strategy which it believes has enabled it to achieve significant improvements in the performance of its acquired schools. The Company believes this strategy will enable it to continue to capitalize on the favorable economic, demographic and social trends which are driving demand for career-oriented education, thereby strengthening its position as a premier, professionally managed system of career-oriented postsecondary educational institutions. The key elements of the Company's business and operating strategy are as follows: Focusing on Core Curricula. The Company's schools offer educational programs principally in four career-related fields of study: (i) computer technologies (including Internet and intranet technologies) (offered at 16 campuses); (ii) visual communication and design technologies (offered at three campuses); (iii) business studies (offered at eight campuses) and (iv) culinary arts (offered at three campuses). The Company perceives a growing demand by employers for individuals possessing skills in these particular fields. Accordingly, the Company believes there are many entry-level positions and ongoing career and salary advancement potential for individuals who have received advanced training in these areas. The Company recognizes that, largely as a result of these employment opportunities, the identified areas of study attract highly interested and motivated students. These students include both recent high school graduates and adults seeking formal training in these fields as well as degrees, diplomas and certificates evidencing their attainment of the knowledge and skills sought by employers. The Company's experience and expertise in these attractive areas of study enable it to differentiate itself from many of its competitors and to effectively tailor its acquisition and marketing plans. Adapting and Expanding Educational Programs. The Company strives to meet the changing needs of its students and the employment market. The Company continually refines and adapts its courses to ensure that both students and employers are satisfied with the quality and breadth of the Company's educational programs. Through various means, including student and employer surveys and curriculum advisory boards comprised of business community members, the Company's schools regularly evaluate their program offerings and consider revisions to existing classes and programs, as well as the introduction of new courses and programs of study within the Company's core curricula. The Company selectively duplicates programs that have been successful at other schools within the CEC system. For example, the Company recently introduced a visual communications program at Allentown similar to those already offered at Brooks, Collins, IAMD-U.S. and IAMD-Canada and introduced a computer technologies (PC/Net) program at Collins like those offered at Allentown, Brown and SCT. Direct Response Marketing. The Company seeks to increase school enrollment and profitability through intensive local, regional and national direct response marketing programs designed to maximize each school's market penetration. Because many of the Company's schools have been significantly undermarketed prior to their acquisition, the Company believes that major benefits can result from carefully crafted, targeted marketing programs that leverage schools' curriculum strength and brand name recognition. After every school acquisition, the Company designs a marketing program tailored to the particular school to highlight its strengths and to improve student lead generation and student enrollment rates. Management uses a diversified media, direct response approach, including direct mail, Internet-based advertising, infomercials, other television-based advertising, newspaper advertising and other print media, to attract targeted populations. The Company places particular emphasis on high school recruitment because this market typically produces a steady supply of new students. Improving Student Retention. The Company emphasizes the retention of students, from initial enrollment to completion of their courses of study, at each of its schools. Because, as at any postsecondary educational institution, a substantial portion of the Company's students never finish their educational programs for personal, financial or academic reasons, substantial increases in revenue and profitability can be achieved through modest improvements in student retention rates. The costs to the Company of a school's efforts to keep current students in school are much less than the expense of the marketing efforts associated with attracting new students; therefore, such student retention efforts, if successful, are extremely beneficial to operating results. The Company 44 strives to improve retention by treating students as valued customers. The Company considers student retention the responsibility of the entire staff of each school, from admissions to faculty and administration to career counseling services, and provides resources and support for the retention efforts developed by its local school administrators. School personnel typically employ an approach based upon establishing personal relationships with students; for example, students may receive a telephone call from a school counselor or faculty member if they miss classes. In addition, the Company's corporate staff regularly tracks retention rates at each school and provides feedback and support to the efforts of local school administrators. Emphasizing Employment of Graduates. The Company believes that the high rates of employment for graduates of its schools enhances the overall reputation of the schools as well as their ability to attract new students. Moreover, high placement rates lead to low student loan default rates, which are necessary to allow for the Company's schools continued participation in the Title IV Programs. Accordingly, the Company considers student placement to be a high priority and allocates a significant amount of time and resources to placement services. Due, at least in part, to this emphasis, 87% of the 1996 graduates of the Company's schools who were available for employment had found employment relating to their fields of study within six months of graduation. The Company is committed to maintaining or improving these graduate employment rates and newly acquired schools will be expected to meet similar graduate employment success standards. Making Capital Investments. The Company makes substantial annual investments in its facilities and equipment to attract, retain and prepare students for the increasing technical demands of the workplace. The students at each of the Company's campuses study in comfortable, modern facilities equipped with current, industry-specific equipment and technology. Emphasizing School Management Autonomy and Accountability. The Company provides significant autonomy and appropriate performance-based incentives to its campus-level managers, which the Company believes offers important benefits for the organization. The Company believes these policies foster among campus- level administrative personnel an important sense of personal responsibility for achieving campus performance objectives. The Company also believes its willingness to grant local autonomy provides the Company and its schools with a significant advantage in recruiting and retaining highly-motivated individuals with an entrepreneurial spirit. Management of each of the Company's campuses is principally in the hands of a campus president and local managers, who are accountable for the campuses' operations and profitability. Business strategy, finance and consolidation accounting functions are, however, centralized at the Company's executive offices in Hoffman Estates, Illinois. When a new school is acquired, the Company evaluates the capabilities of existing campus management personnel, and typically retains a significant portion, which contributes to the Company's ability to rapidly integrate acquired schools into its system. The Company also determines the acquired school's needs for additional or stronger managers in key areas and, where necessary, takes appropriate action by hiring new managers or assigning experienced staff to the school's campuses. The Company believes that its application of this comprehensive business and operating strategy has been a major factor in improving the operations of the four schools owned by the Company as of July 1995: Allentown, Brooks, Brown and Collins. At these schools, the aggregate number of students has increased % over the past two years, from 3,361 at October 31, 1995 to at October 31, 1997. GROWTH STRATEGY The Company believes it can achieve superior long-term growth in revenue and profitability by (i) expanding existing operations, (ii) acquiring additional schools in attractive North American markets, (iii) establishing new campuses, (iv) entering new service areas and (v) expanding internationally as follows: Expanding Existing Operations. The Company believes that the Company's existing 18 campuses can achieve significant internal growth in enrollment, revenue and profitability. The Company intends to accomplish this growth through the execution of its business and operating strategy, including all of the elements described above. 45 Acquiring Additional North American Schools. To date, the Company has grown by acquiring new schools in the U.S. and Canada and then applying its expertise in marketing and school management to increase enrollment, revenue and profitability at those schools. The Company expects that this process will continue to be an important element of its growth strategy. The Company makes selective acquisitions of for-profit, career-oriented schools which have a capable senior faculty and operations staff, as well as quality educational programs which stand to benefit from the Company's educational focus, marketing and operating strengths. The Company targets schools which it believes have the potential to generate superior financial performance. Generally, such schools demonstrate the following characteristics: . Success--Demonstrated ability to attract, retain and place students, while meeting applicable federal and state regulatory criteria and accreditation standards; . ""Schools of Choice"--Leading reputations in career-oriented disciplines within local, regional and national markets; . Marketable Curricula--Offering programs with high value-added content and relevant training to provide students with the skills necessary to obtain attractive jobs and advance in their selected fields; . Broad Marketability--Ability to attract students from each of the high school, adult, foreign and contract training market segments; and . Attractive Facilities and Geographic Locations--Providing geographically desirable locations and modern facilities to attract students and preparing them for the demands of the increasingly competitive work place. The Company believes that significant opportunities exist for growth through acquisition. Some opportunities result from institutions having limited resources to manage increasingly complex regulations or to fund the significant cost of developing new educational programs necessary to meet changing demands of the employment market. The Company believes that a substantial number of schools exhibiting the characteristics described above exist in the U.S. market and that such schools can be successfully integrated into the Company's marketing and administrative structure. The Company believes that there are also a significant number of potential acquisition candidates and opportunities for growth in Canada. The Company believes that favorable trends, similar to those occurring in the U.S., are positively affecting the Canadian career-oriented postsecondary education market, but that competition in Canada is not currently as intense as in the United States. Few of the largest U.S. operators of postsecondary career- oriented schools presently have a significant Canadian presence. The Company believes that, given its existing Canadian operations, it is well-positioned to take advantage of these opportunities. The Company analyzes potential acquisition targets for their long-term profit potential, enrollment potential and long-term demographic trends, concentration of likely employers within the region, level of competition, facility costs and availability and quality of management and faculty. The Company carefully investigates any potential acquisition target for its history of regulatory compliance, both as an indication of future regulatory costs and compliance issues and as an indication of the school's overall condition. Significant regulatory compliance issues in the school's past generally will remove a school from the Company's consideration as an acquisition candidate. After the Company has completed an acquisition of one or more schools, the Company immediately begins to apply its business strategy to boost enrollment and improve the acquired schools' profitability. The Company assists acquired schools in achieving their potential through a highly focused and active management role, as well as through capital contributions. The Company selectively commits resources to improve marketing, advertising, administration and regulatory compliance at each acquired school. Further resources may also be committed to enhance management depth. The Company retains acquired schools' brand names to take advantage of their established reputation in local, regional and/or national markets as "schools of choice." Enrollments at schools purchased by the Company have increased an average of % annually since their acquisitions. 46 By acquiring new schools, CEC is also able to realize economies of scale in terms of its management information systems, accounting and audit functions, employee benefits and insurance procurement. The Company also benefits from the exchange of ideas among school administrators regarding teacher training, student retention programs, recruitment, curriculum, financial aid and student placement programs. Establishing New Campuses. Although, to date, the Company has only added new campuses through acquisitions, in the future the Company expects to develop, open and operate new campuses itself. These new campuses will most likely be established as additional locations of existing institutions, but also may be established as entirely separate, free-standing institutions. Opening new campuses would enable the Company to capitalize on new markets or geographic locations that exhibit strong enrollment potential and/or the potential to establish a successful operation in one of the Company's core curricula areas. The Company believes that this strategy will allow it to continue to grow rapidly even if appropriate acquisition opportunities are not readily available. Entering New Service Areas. While the Company expects that its current career-oriented school operations will continue to provide the substantial majority of its revenue in the near term, the Company plans to develop new education-related services which the Company believes offer strong long-term growth potential. Among the service areas being actively considered are distance learning (offering educational products and services for working adults through video, Internet and other distribution channels) and educational publishing (producing and marketing educational publications). The Company also plans to expand its contract training business (providing customized training on a contract basis for business and government organizations), currently a limited part of the operations of a few of its schools. Though the Company has not yet actively targeted the growing market for contract training services, the Company believes that contract training can become a much more significant part of its business. Expanding Internationally. The Company believes that trends similar to those impacting the market for career-oriented postsecondary education in the U.S. and Canada are occurring outside of North America. As a result, the Company believes that there may be significant international opportunities in private, for-profit postsecondary education. To take advantage of these opportunities, the Company may acquire or establish operations outside North America. STUDENT RECRUITMENT The Company's schools seek to attract students with both the desire and ability to complete their academic programs. Therefore, to produce interest among potential students, each of the Company's schools engages in a wide variety of marketing activities. The Company believes that the reputation of its schools in local, regional and national business communities and the recommendations of satisfied former students are important factors contributing to success in recruiting new students. CEC works to strengthen the qualities that make its schools "schools of choice" within their geographic locations. Each school's admissions office is charged with marketing its school's programs through a combination of admissions representatives, direct mailings and radio, television and print media advertising, in addition to providing the information needed by prospective students to assist them in making their enrollment decisions. The Company's schools employ approximately 185 admissions representatives, each of whom focuses his or her efforts solely on the following areas: (i) out- of-area (correspondent) recruiting, (ii) high school recruiting or (iii) in- house (adult) recruiting. Correspondent representatives work with students who live outside of the immediate school area to generate interest through correspondence with potential enrollees who have learned of the school through regional or national advertising. The Company believes it is able to significantly boost enrollment by targeting students outside of the local population. High school recruiting representatives conduct informational programs at local secondary schools and follow up with interested students outside of school, either at their homes or on the CEC school campus. The interpersonal relationships formed with high school counselors 47 may have significant influence over a potential student's choice of school. CEC believes that the relationships of its schools' representatives with the counseling departments of high schools are good and that the brand awareness and placement rates of its schools assist representatives in gaining access to counselors. In-house representatives are also available to speak with prospective students who visit campuses and to respond to calls generated through the school's advertising campaigns. Representatives interview and advise students interested in specific careers to determine the likelihood of their success in completing their educational programs. The admissions representatives are full-time, salaried employees of the schools. Regulations of the DOE prevent the Company from giving its employees incentive compensation based, directly or indirectly, upon the number of students recruited. The Company also engages in significant direct mail campaigns. Mailing lists are purchased from a variety of sources, and brochures are mailed regularly during the course of the year, with frequency determined by the number of school starts in a given year. The Company believes direct mailings offer a fast and cost-effective way to reach a targeted population. In addition, each school develops advertising for a variety of media, including radio, television and the Internet, which is run locally, regionally and sometimes nationally. While multi-media advertising is generally more appropriate for local markets, certain initiatives have been successfully utilized on a national basis. CEC has found infomercials to be a particularly effective tool nationally because their length enables schools to convey a substantial amount of information about their students, their faculties, their facilities and, most importantly, their course offerings. The Company also believes that the personal flavor of the presentation typical of infomercials is well-suited to attracting potential applicants. As an additional marketing tool, all of the Company's schools have established web sites, which can be easily accessed for information about these schools and their educational programs. Although the Company retains independent advertising agencies, the Company designs and produces a portion of its direct marketing and multi-media advertising and communications in-house, through Market Direct, Inc., a wholly- owned subsidiary ("Market Direct"). While a majority of Market Direct's operations involve designing and producing advertising for the Company, Market Direct also provides these services to other businesses outside of the postsecondary education industry as opportunities arise. The Company closely monitors the effectiveness of its marketing efforts. The Company estimates that, in 1996, admissions representatives were responsible for attracting approximately 25% of student enrollments, direct mailings were responsible for approximately 14%, television, radio and print media advertising were responsible for approximately 41%, and the remaining approximately 20% was attributable to various other methods. STUDENT ADMISSIONS AND RETENTION The admissions and entrance standards of each school are designed to identify those students who are best equipped to meet the requirements of their chosen fields of study. The most important qualifications for students include a strong desire to learn, passion for their area of interest, initiative and a high likelihood of successfully completing their programs. These characteristics are generally identified through personal interviews by admissions representatives. The Company believes that a success-oriented student body results in higher retention and placement rates, increased satisfaction on the part of students and their employers and lower student default rates on government loans. To be qualified for admission to one of the Company's schools, each applicant must have a high school diploma or a General Education Development (GED) certificate. Many of the Company's schools also require that applicants obtain certain minimum scores on academic assessment examinations. For 1996, approximately 28% of entering students at the Company's campuses matriculated directly from high school. The Company recognizes that its ability to retain students until graduation is an important indicator of its success and that modest improvements in retention rates can result in meaningful increases in school revenue and profitability. As with other postsecondary educational institutions, many of the Company's students do not 48 complete their programs for a variety of personal, financial or academic reasons. As a result, student retention is considered an entire school's responsibility, from admissions to faculty and administration to career counseling services. To minimize student withdrawals, faculty and staff members at each of the Company's campuses strive to establish personal relationships with students. Each campus devotes staff resources to advising students regarding academic and financial matters, part-time employment and other matters that may affect their success. However, while there may be many contributors, each campus has one administrative employee specifically responsible for monitoring and coordinating the student retention efforts. In addition, the Company's senior management regularly tracks retention rates at each campus and provides feedback and support to appropriate local campus administrators. Shorter programs typically have higher completion rates than longer programs. CURRICULUM DEVELOPMENT AND FACULTY The Company believes that curriculum is the single most important component of its operations, because students choose, and employers recruit from, career- oriented schools based on the type and quality of technical education offered. The curriculum development efforts of the Company's schools are a product of their operating partnership with students and the business and industrial communities. The relationship of each of the Company's schools with the business community plays a significant role in the development and adaptation of school curriculum. Each school has one or more curriculum advisory boards comprised of members of the local and/or regional business community who are engaged in businesses directly related to the educational programs provided by the school. These boards provide valuable input to the school's education department, which allows the school to keep its curriculum current and provide graduates with the training and skills that these employers seek. CEC also endeavors to enhance and maintain the relevancy of its curriculum by soliciting ideas through student and employer surveys and by requiring students in selected programs to complete an internship during their school experience. CEC has developed a number of techniques designed both to gain valuable industry insight for ongoing curriculum development and enhance the overall student experience. These techniques include (i) classroom discussions with industry executives, (ii) part-time job placement within a student's industry of choice, and (iii) classroom case studies that are based upon actual industry issues. CEC's schools are in continuous contact with employers through their faculty, who are industry professionals. The schools hire a significant number of part- time faculty holding positions in business and industry because specialized knowledge is required to teach many of the schools' courses and to provide students with current, industry-specific training. The schedules of business and industry professionals often permit them to teach the many evening courses offered by the Company's schools. Unlike traditional four-year colleges, instructors in the Company's schools are not awarded tenure and are evaluated in part based upon student evaluations. As of October 31, 1997, the Company's schools employed approximately faculty members, of which approximately % were full-time employees of the Company and approximately % had been hired on a part-time, adjunct basis. SCHOOL ADMINISTRATION CEC provides significant operational autonomy and appropriate performance- based compensation to local school administrators who have demonstrated the ability to undertake such responsibility, based on the Company's belief that success is driven by performance at the local level through enrollment growth, student retention rates and placement rates. In addition, each CEC school requires, to a certain extent, different resources and operating tactics due to a variety of factors, including curriculum, demographics, geographic location and size. Management of each of the Company's schools is principally in the hands of a school president who has accountability for the school's operations and profitability. Each CEC school has five primary operating departments: admissions, financial aid, education, placement and accounting. 49 Business strategy, finance and consolidation accounting functions are centralized at the Company's corporate headquarters. CEC's corporate staff develops long-term and short-term operating strategies for the schools and works closely with local administrators to accomplish their goals and ensure adherence to Company strategy. CEC maintains stringent quality standards and controls at both the corporate and individual school levels. Activities at the corporate level include regular reporting processes which track the vital statistics of each school's operations, including enrollments, placements, leads, retention rates and financial data. These reports provide real-time statistics which allow management to monitor the performance of each campus. Each operating department at the campus level is also required to compile certain statistical reports at regular intervals, including reports on admissions, financial aid, academic performance and placement. CEC uses a number of quality and financial controls. Information is tracked through an advanced, PC-based management information system, which currently runs on a decentralized basis, but also allows centralized access to account information. TUITION AND FEES Effective with the fall of 1997, total tuition for completion (on a full-time basis) of a 12-month diploma program offered by the Company's schools ranges from $6,590 to $14,270, for completion of an associate degree program ranges from $15,000 to $22,770, and for completion of a bachelor's degree program ranges from $34,992 to $37,080. In addition to these tuition amounts, students at the Company's schools typically must purchase textbooks and supplies as part of their educational programs. The Company's institutions bill students for their tuition and other institutional charges based on the specific instructional format or formats of the school's educational programs. Each institution's refund policies must meet the requirements of the DOE and such institution's state and accrediting agencies. Generally, under the DOE's requirements, if a first-time student ceases attendance before the point in time that is 60% of the period of enrollment for which the student has been charged, the institution will refund institutional charges based on the amount of time for which the student paid but did not attend. After a student has attended 60% or more of the term, the institution will retain 100% of the institutional charges for that period of enrollment. After the student's first enrollment period, the institution refunds institutional charges for subsequent periods of enrollment based on the number of weeks remaining in the period of enrollment in which the student withdrew. Certain state refund requirements, where more beneficial to the students, are applied when determining refunds for students. GRADUATE EMPLOYMENT The Company believes that employment of graduates of its schools in occupations related to their fields of studies is critical to the reputation of the schools and their ability to continue to recruit students successfully. The Company believes that its schools' most successful form of recruiting is through referrals from satisfied graduates. A strong placement office is important to maintain and elevate the school's reputation, as well as managing the rate at which former students default on their loans. CEC devotes a significant amount of time and resources to student placement, which the Company believes to be the ultimate indicator of its success. The Company believes that its average placement rate (calculated according to the criteria discussed below), which was in excess of 85% for calendar year 1996 graduates, is attractive to prospective students and provides a competitive advantage. Student placement is a top priority of each CEC school beginning on the first day of student enrollment. This approach heightens the students' awareness of the placement department and keeps students focused on their goal--job placement within their field of choice. Moreover, each CEC school includes in its curriculum a career development course which provides instruction in the preparation of resumes, cover letters, networking and other essential communication tools. Placement office resources are regularly available to CEC school graduates. With such assistance, the Company's graduates find employment with a wide variety of businesses located not only in the schools' local markets but also regionally and nationally. 50 Each campus' placement department also plays a role in marketing the campus' curriculum to the business community to produce job leads for graduates. Approximately 50 employees work in the placement departments of the Company's campuses. Placement counselors participate in professional organizations, advisory boards, trade shows and community events to keep apprised of industry trends and maintain relationships with key employers. Partnerships with local and regional businesses are established through internships and curriculum development programs and facilitate placement of graduates in local and regional businesses. The placement department also assists current students in finding part-time jobs while attending school. These part-time placements often lead to permanent positions. Based on information received from graduating students and employers (by survey), the Company believes that students graduating from its schools during the fiscal years ended December 31, 1994, 1995 and 1996 obtained employment in fields related to their program of study as of June 30 or earlier of the year following their graduation as indicated below:
FISCAL YEAR ENDED DECEMBER 31, 1996 -------------------------------------- NUMBER OF % WHO OBTAINED SCHOOL AVAILABLE GRADUATES (1) EMPLOYMENT (2) ------ ----------------------- -------------- AL COLLINS GRAPHIC DESIGN SCHOOL Tempe, AZ...................... 261 82.4% ALLENTOWN BUSINESS SCHOOL Allentown, PA.................. 443 91.7 BROOKS COLLEGE Long Beach, CA................. 150 92.0 BROWN INSTITUTE Minneapolis, MN................ 634 87.1 WESTERN CULINARY INSTITUTE Portland, OR................... 363 97.0 SCHOOL OF COMPUTER TECHNOLOGY Fairmont, WV and Pittsburgh, PA............................ 135 93.9 THE KATHARINE GIBBS SCHOOLS Boston, MA..................... 174 90.8 Melville, NY................... 361 89.8 Montclair, NJ.................. 281 84.7 New York, NY................... 467 79.2 Norwalk, CT.................... 275 86.2 Piscataway, NJ................. 263 78.3 Providence, RI................. 180 80.6 INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (U.S.) Chicago, IL.................... 88 94.0 Tampa, FL...................... 90 95.6 INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (CANADA) Montreal, PQ................... 110 91.0 Toronto, ON.................... 241 87.0 ----- ---- TOTAL........................ 4,516 87.4% ===== ====
- -------- (1) Available graduates excludes students who are continuing their education, are in active military service or are disabled or deceased, as well as students from foreign countries who are legally ineligible to work in the United States. (2) Represents the percentage of available graduates who obtained employment related to their program of study within six months of graduation. 51 The reputation of the Gibbs schools allows them to charge fees to employers upon placement of many of its students. The Company's other schools do not currently receive such placement fees, nor, the Company believes, do any of the Company's principal proprietary competitors. The Company believes that, as an additional source of revenue, it may be able to replicate the Gibbs placement fee program at other CEC schools. TECHNOLOGY CEC is committed to providing its students access to the technology necessary for developing skills required to succeed in the careers for which they are training. Through regular consultation with business representatives, the Company ensures that all its schools provide their students with state-of- the-art computer hardware, computer software and equipment meeting industry- specific technical standards. In each program, students use the types of equipment that they will eventually use in their careers of choice. For example, graphic animation students use sophisticated computer multimedia animation and digital video editing equipment and supplies, and visual communication and design technologies students make significant use of technologies for computer-related design and layout and digital pre-press applications. EMPLOYEES As of October 31, 1997, CEC and its schools had a total of full-time and part-time employees. Neither the Company nor any of its schools has any collective bargaining agreements with its employees. The Company considers its relations with its employees to be good. COMPETITION The postsecondary education market, consisting in the U.S. of approximately 7,000 accredited universities, colleges and schools, is highly fragmented and competitive, with no single institution having a significant market share. CEC's schools compete with traditional public and private two-year and four- year colleges and universities, other proprietary schools and alternatives to higher education such as immediate employment and military service. Certain private and public colleges and universities may offer courses of study similar to those of the Company's schools. Some public institutions are able to charge lower tuition than the Company's schools due in part to government subsidies, government and foundation grants, tax-deductible contributions and other financial sources not available to proprietary schools. However, tuition at private, non-profit institutions is, on average, higher than the average tuition rates of the Company's schools. Other proprietary career-oriented schools also offer programs that compete with those of the Company's schools. The Company believes that its schools compete with other educational institutions principally based upon quality of their educational programs, reputation in the business community, costs of programs and employability of graduates. Some of the Company's competitors in both the public and private sectors may have substantially greater financial and other resources than the Company. Changes in the regulatory environment have stimulated consolidation in the postsecondary education industry. Regulations adopted in recent years have tightened standards for educational content, established stricter permissible student outcomes (i.e., completion, placement and federal loan default rates) and created more stringent standards for the evaluation of a school's financial responsibility and administrative capability. As a result, certain career-oriented schools have been forced to close because they lacked sufficient quality or financial resources or could not manage the increased regulatory burden. At the same time, despite increasing demand, potential new entrants face significant barriers to entry due to the highly regulated nature of the industry and the considerable expense of start-up operations. FACILITIES CEC's corporate headquarters are located in Hoffman Estates, Illinois, near Chicago, and its 18 campuses are located in 13 states and two Canadian provinces. Each campus contains teaching facilities, including modern classrooms, laboratories and, in the case of the schools with culinary arts programs, large, well-equipped kitchens. Admissions and administrative offices are also located at each campus. Additionally, Brooks' campus includes a dormitory and student cafeteria, and Western Culinary leases and operates three restaurants in conjunction with its culinary arts program. 52 The Company leases all of its facilities, except the primary Gibbs facility in Montclair, New Jersey, which is owned by the Company, and one building in Minneapolis, Minnesota, which is owned by the Company and which the Company intends to sell. The leases have remaining terms ranging from less than one to eleven years. The following table sets forth certain information as of September 30, 1997 with respect to the principal facilities of the Company:
APPROXIMATE FACILITY SQUARE FEET ------------------------------------------------------------- ----------- CEC CORPORATE HEADQUARTERS Hoffman Estates, IL........................................ 4,566 AL COLLINS GRAPHIC DESIGN SCHOOL Tempe, AZ.................................................. 51,000 ALLENTOWN BUSINESS SCHOOL Allentown, PA.............................................. 51,000 BROOKS COLLEGE Long Beach, CA............................................. 34,000 BROWN INSTITUTE Minneapolis, MN............................................ 118,000(1) WESTERN CULINARY INSTITUTE Portland, OR............................................... 26,000 SCHOOL OF COMPUTER TECHNOLOGY Fairmont, WV............................................... 9,500 Pittsburgh, PA............................................. 42,714 THE KATHARINE GIBBS SCHOOLS Boston, MA................................................. 26,999 Melville, NY............................................... 32,500 Montclair, NJ.............................................. 34,376 New York, NY............................................... 51,903 Norwalk, CT................................................ 17,000 Piscataway, NJ............................................. 16,745 Providence, RI............................................. 12,974 INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (U.S.) Chicago, IL................................................ 45,000 Tampa, FL.................................................. 29,500 INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (CANADA) Montreal, PQ............................................... 22,500(2) Toronto, ON................................................ 56,000
- -------- (1) Brown will move into this facility in October 1997. (2) IAMD-Canada, in Montreal, expects to move into a new 41,000 square foot leased facility in December 1997. The Company actively monitors facility capacity in light of current utilization and projected enrollment growth. The Company believes that the facilities occupied by most of its schools can accommodate expected near-term growth, but that certain of its schools may need to acquire additional space within the next few years. The Company believes that its schools can acquire any necessary additional capacity on reasonably acceptable terms. The Company devotes capital resources to facility improvements and expansions as necessary. LEGAL PROCEEDINGS CEC is subject to occasional lawsuits, investigations and claims arising out of the ordinary conduct of its business. Neither the Company nor any of its subsidiaries is a party to any legal proceeding which the Company believes to be material to the Company or its business. 53 On February 24, 1997, 39 former and current students in Brown's PC/LAN program brought a suit entitled Peter Alsides, et al. v. Brown Institute, Ltd. (Fourth Judicial District, Hennepin County, Minnesota) against Brown alleging breach of contract, fraud, and misrepresentation, violation of the Minnesota Consumer Fraud Act, violation of the Minnesota Deceptive Trade Practices Act and negligent misrepresentation. Plaintiffs allege that Brown failed to provide them with the education for which they contracted and which had been represented to them upon enrollment. Brown has answered the complaint, asserted defenses and the parties have exchanged written discovery. One other former student of Brown has commenced a separate individual action making similar claims. Brown believes that all of these claims are frivolous and without merit and is vigorously contesting the allegations. 54 FINANCIAL AID AND REGULATION ACCREDITATION Accreditation is a process through which an institution submits itself to qualitative review by an organization of peer institutions. Accrediting agencies primarily examine the academic quality of the instructional programs of an institution, and a grant of accreditation is generally viewed as certification that an institution's programs meet generally accepted academic standards. Accrediting agencies also review the administrative and financial operations of the institutions they accredit to ensure that each institution has the resources to perform its educational mission. Pursuant to provisions of the HEA, the DOE relies on accrediting agencies to determine whether institutions' educational programs qualify them to participate in the Title IV Programs. The HEA specifies certain standards that all recognized accrediting agencies must adopt in connection with their review of postsecondary institutions. Accrediting agencies that meet the DOE standards are recognized as reliable arbiters of educational quality. All of the Company's U.S. campuses are accredited by an accrediting agency recognized by the DOE. Twelve of the Company's campuses are accredited by the Accrediting Council for Independent Colleges and Schools ("ACICS"), three of the Company's campuses are accredited by the Accrediting Commission for Career Schools and Colleges of Technology ("ACCSCT") and one of the Company's campuses is accredited by the Accrediting Commission for Community and Junior Colleges of the Western Association of Schools and Colleges ("WASC/ACCJC"). In addition, four of the Company's campuses are accredited by the Foundation for Interior Design Education Research ("FIDER") and two of the Company's campuses are accredited by the American Culinary Federation Educational Institute Accrediting Commission ("ACFEI"); FIDER and ACFEI are not recognized by the DOE for Title IV Program eligibility purposes. The accrediting agencies for each of the Company's U.S. campuses are set forth in the following table:
ACCREDITING SCHOOL AGENCIES -------------------------------------------------------- ---------------- AL COLLINS GRAPHIC DESIGN SCHOOL Tempe, AZ............................................. ACCSCT ALLENTOWN BUSINESS SCHOOL Allentown, PA......................................... ACICS BROOKS COLLEGE Long Beach, CA........................................ WASC/ACCJC/FIDER BROWN INSTITUTE Minneapolis, MN....................................... ACCSCT WESTERN CULINARY INSTITUTE Portland, OR.......................................... ACCSCT/ACFEI SCHOOL OF COMPUTER TECHNOLOGY Fairmont, WV.......................................... ACICS Pittsburgh, PA........................................ ACICS/ACFEI THE KATHARINE GIBBS SCHOOLS Boston, MA............................................ ACICS Melville, NY.......................................... ACICS Montclair, NJ......................................... ACICS New York, NY.......................................... ACICS Norwalk, CT........................................... ACICS Piscataway, NJ........................................ ACICS Providence, RI........................................ ACICS INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (U.S.) Chicago, IL........................................... ACICS/FIDER Tampa, FL............................................. ACICS/FIDER
The HEA requires each recognized accrediting agency to submit to a periodic review of its procedures and practices by the DOE as a condition of its continued recognition. 55 The HEA requires accrediting agencies recognized by the DOE to review many aspects of an institution's operations to ensure that the education or training offered by the institution is of sufficient quality to achieve, for the duration of the accreditation period, the stated objective for which the education or training is offered. Under the HEA, a recognized accrediting agency must perform regular inspections and reviews of institutions of higher education, including unannounced site visits to institutions, that provide career-oriented education and training. An accrediting agency may place an institution on "reporting" status in order to monitor one or more specified areas of the institution's performance. An institution placed on reporting status is required to report periodically to its accrediting agency on that institution's performance in the specified areas. While on reporting status, an institution may be limited in opening and commencing teaching at new campuses without first receiving a waiver from its accrediting agency. STUDENT FINANCIAL ASSISTANCE Students attending the Company's schools finance their education through a combination of family contributions, individual resources (including earnings from full or part-time employment) and government-sponsored financial aid. The Company estimates that over 71% of the students at its U.S. schools receive some government-sponsored (federal or state) financial aid. For the 1996-97 award year (July 1, 1996 to June 30, 1997), approximately 81% of the Company's U.S. tuition and fee revenue was derived from some form of such financial aid received by the students of its schools. In addition, students attending IAMD- Canada receive government-sponsored financial aid. To provide students access to financial assistance available through the Title IV Programs, an institution, including its additional locations, must be (i) authorized to offer its programs of instruction by the relevant agency of the state in which it and its additional campuses, if any, are located, (ii) accredited by an accrediting agency recognized by the DOE and (iii) certified as eligible by the DOE. In addition, the institution must ensure that Title IV Program funds are properly accounted for and disbursed in the correct amounts to eligible students. Under the HEA and its implementing regulations, each of the Company's campuses that participates in the Title IV Programs must comply with certain standards on an institutional basis, as more specifically identified below. For purposes of these standards, the regulations define an institution as a main campus and its additional locations, if any. Under this definition, each of the Company's U.S. campuses is a separate institution, except for The Katharine Gibbs School in Piscataway, New Jersey, which is an additional location of The Katharine Gibbs School in Montclair, New Jersey, and the School of Computer Technology in Fairmont, West Virginia, which is an additional location of the School of Computer Technology in Pittsburgh, Pennsylvania. NATURE OF FEDERAL SUPPORT FOR POSTSECONDARY EDUCATION IN THE U.S. While many of the states support public colleges and universities primarily through direct state subsidies, the federal government provides a substantial part of its support for postsecondary education in the form of grants and loans to students who can use this support at any institution that has been certified as eligible by the DOE. The Title IV Programs have provided aid to students for more than 30 years and, since the mid-1960's, the scope and size of such programs have steadily increased. Since 1972, Congress has expanded the scope of the HEA to provide for the needs of the changing national student population by, among other things, (i) providing that students at proprietary institutions, such as the Company's institutions, are eligible for assistance under the Title IV Programs, (ii) establishing a program for loans to parents of eligible students, (iii) opening the Title IV Programs to part-time students, and (iv) increasing maximum loan limits and in some cases eliminating the requirement that students demonstrate financial need to obtain federally guaranteed student loans. Most recently, the FDL program was enacted, enabling students to obtain loans from the federal government rather than from commercial lenders. Students at the Company's institutions receive grants and loans to fund their education under several of the Title IV Programs, of which the two largest are the FFEL and the Federal Pell Grant ("Pell") program. The Company's institutions also participate in the Federal Supplemental Educational Opportunity Grant ("FSEOG") program, and some of them participate in the Perkins program and the Federal Work-Study ("FWS") program. One of the Company's institutions is an active participant in the FDL program. 56 Some aid under the Title IV Programs is awarded on the basis of financial need, generally defined under the HEA as the difference between the cost of attending an educational program and the amount a student 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. Pell. Pell grants are the primary component of the Title IV Programs under which the DOE makes grants to students who demonstrate financial need. Every eligible student is entitled to receive a Pell grant; there is no institutional allocation or limit. For the 1997-98 award year, Pell grants range from $400 to $2,700 per year. Amounts received by students enrolled in the Company's U.S. institutions in the 1996-97 award year under the Pell program equaled approximately 12% of the Company's U.S. tuition and fee revenue. FSEOG. FSEOG awards are designed to supplement Pell grants for the neediest students. FSEOG grants generally range in amount from $100 to $4,000 per year; however, the availability of FSEOG awards is limited by the amount of those funds allocated to an institution under a formula that takes into account the size of the institution, its costs and the income levels of its students. The Company is required to make a 25% matching contribution for all FSEOG program funds disbursed. Resources for this institutional contribution may include institutional grants, scholarships and other eligible funds (i.e., funds from foundations and other charitable organizations) and, in certain states, portions of state scholarships and awards. During the 1996-97 award year, the Company's required 25% institutional match was met by approximately $110,000 in funds from its institutions and approximately $177,000 in funds from state scholarships and grants and from foundations and other charitable organizations. Amounts received by students in the Company's institutions under the federal share of the FSEOG programs in the 1996-97 award year equaled approximately 1% of the Company's U.S. tuition and fee revenue. FFEL and FDL. The FFEL program consists of two types of loans, Stafford loans, which are made available to students regardless of financial need, and PLUS loans, which are made available to parents of students classified as dependents. Under the FDL program, students may obtain loans directly from the DOE rather than commercial lenders. The conditions on FDL loans are generally the same as on loans made under the FFEL program. Certain of the Company's institutions have been selected by the DOE to participate in the FDL program. Under the Stafford loan program, a student may borrow up to $2,625 for the first academic year, $3,500 for the second academic year and, in some educational programs, $5,500 for each of the third and fourth academic years. Students with significant financial need qualify for interest subsidies while in school and during grace periods. Students who are classified as independent can increase their borrowing limits and receive additional unsubsidized Stafford loans. Such students can obtain an additional $4,000 for each of the first and second academic years and, depending upon the educational program, an additional $5,000 for each of the third and fourth academic years. The obligation to begin repaying Stafford loans does not commence until six months after a student ceases enrollment as at least a half-time student. Amounts received by students in the Company's institutions under the Stafford program in the 1996-97 award year equaled approximately 44% of the Company's U.S. tuition and fee revenue. PLUS loans may be obtained by the parents of a dependent student in an amount not to exceed the difference between the total cost of that student's education (including allowable expenses) and other aid to which that student is entitled. Amounts received by students in the Company's institutions under the PLUS program in the 1996-97 award year equaled approximately 11% of the Company's U.S. tuition and fee revenue. The Company's schools and their students use a wide variety of lenders and guaranty agencies and have not experienced difficulties in identifying lenders and guaranty agencies willing to make federal student loans. Additionally, the HEA requires the establishment of lenders of last resort in every state to ensure that students at any institution that cannot identify such lenders will have access to the FFEL program loans. Perkins. Eligible undergraduate students may borrow up to $3,000 under the Perkins program during each academic year, with an aggregate maximum of $15,000, at a 5% interest rate and with repayment delayed until nine months after the borrower ceases to be enrolled on at least a half-time basis. Perkins loans are made available to those students who demonstrate the greatest financial need. Perkins loans are made from a revolving 57 account, 75% of which was initially capitalized by the DOE. Subsequent federal capital contributions in the same proportion may be received if an institution meets certain requirements. Each institution collects payments on Perkins loans from its former students and reloans those funds to currently enrolled students. Collection and disbursement of Perkins loans is the responsibility of each participating institution. During the 1996-97 award year, the Company collected approximately $543,000 from its former students in repayment of Perkins loans. In the 1996-97 award year, the Company's required matching contribution was approximately $47,000. The Perkins loans disbursed to students in the Company's institutions in the 1996-97 award year equaled approximately 1% of the Company's U.S. tuition and fee revenue. In 1995, the Gibbs institutions voluntarily chose to discontinue participation in the Perkins program. FWS. Under the FWS program, federal funds are made available to pay up to 75% of the cost of part-time employment of eligible students, based on their financial need, to perform work for the institution or for off-campus public or non-profit organizations. During the 1996-97 award year, the Company's institutions and other organizations provided matching contributions totaling approximately $70,000. At least 5% of an institution's FWS allocation must be used to fund student employment in community service positions. In general, FWS earnings are not used for tuition and fees. However, in the 1996-97 award year, the federal share of FWS earnings represented 0.2% of the Company's U.S. tuition and fee revenue. FEDERAL OVERSIGHT OF THE TITLE IV PROGRAMS The substantial amount of federal funds disbursed through the Title IV Programs coupled with the large numbers of students and institutions participating in those programs have led to instances of fraud, waste and abuse. As a result, the United States Congress has required the DOE to increase its level of regulatory oversight of institutions to ensure that public funds are properly used. Each institution which participates in the Title IV Programs must annually submit to the DOE an audit by an independent accounting firm of that institution's compliance with the Title IV Program requirements, as well as audited financial statements. The DOE also conducts compliance reviews, which include on-site evaluations, of several hundred institutions each year, and directs student loan guaranty agencies to conduct additional reviews relating to the FFEL programs. In addition, the Office of the Inspector General of the DOE conducts audits and investigations of institutions in certain circumstances. Under the HEA, accrediting agencies and state licensing agencies also have responsibilities for overseeing institutions' compliance with Title IV Program requirements. As a result, each participating institution, including each of the Company's institutions, is subject to frequent and detailed oversight and must comply with a complex framework of laws and regulations or risk being required to repay funds or becoming ineligible to participate in the Title IV Programs. Largely as a result of this increased oversight, the DOE has reported that more than 800 institutions have either ceased to be eligible for or have voluntarily relinquished their participation in some or all of the Title IV Programs since October 1, 1992. This has reduced competition among institutions with respect to certain markets and educational programs. Cohort Default Rates. A significant component of the Congressional initiative aimed at reducing fraud, waste and abuse was the imposition of limitations on participation in the Title IV Programs by institutions whose former students defaulted on the repayment of federally guaranteed or funded student loans at an "excessive" rate. Since the DOE began to impose sanctions on institutions with cohort default rates above certain levels, the DOE has reported that more than 600 institutions have lost their eligibility to participate in some or all of the Title IV Programs. However, many institutions, including all of the Company's institutions, have responded by implementing aggressive student loan default management programs aimed at reducing the likelihood of students failing to repay their loans in a timely manner. An institution's cohort default rates under the FFEL and FDL programs are calculated on an annual basis as the rate at which student borrowers scheduled to begin repayment on their loans in one federal fiscal year default on those loans by the end of the next federal fiscal year. An institution that participates in both the FFEL and FDL programs, including one of the Company's institutions, receives a single "weighted average" cohort default rate in place of an FFEL or FDL cohort default rate. Any institution whose cohort default rate equals or exceeds 25% for any one of the three most recent federal fiscal 58 years may be found by the DOE to lack administrative capability and, on that basis, placed on provisional certification status for up to four years. Provisional certification status does not limit an institution's access to Title IV Program funds, but does subject that institution to closer review by the DOE and possible summary adverse action if that institution commits violations of the Title IV Program requirements. Any institution whose cohort default rates equal or exceed 25% for three consecutive years will no longer be eligible to participate in the FFEL or FDL 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. In addition, an institution whose cohort default rate for any federal fiscal year exceeds 40% may have its eligibility to participate in all of the Title IV Programs limited, suspended or terminated. Since the calculation of cohort default rates involves the collection of data from many non-governmental agencies (i.e., lenders, private guarantors or servicers), as well as the DOE, the HEA provides a formal process for the review and appeal of the accuracy of cohort default rates before the DOE takes any action against an institution based on such rates. None of the Company's institutions has had a published cohort default rate of 25% or greater for three consecutive federal fiscal years, and none has a published cohort default rate of 25% or greater for federal fiscal year 1994, which is the most recent year for which rates have been published. For federal fiscal year 1994, the published cohort default rates for the Company's institutions ranged from a low of 7.1% to a high of 19.6%. The average cohort default rates for proprietary institutions nationally were 30.2%, 23.9% and 21.1% in federal fiscal years 1992, 1993 and 1994, respectively. Gibbs-Norwalk is the only one of the Company's institutions that received a prepublication cohort default rate for federal fiscal year 1995 that exceeds 25%, which prepublication rate is 27.1%. This federal fiscal year 1995 prepublication cohort default rate will be subject to revision by the DOE at the time that final rates are officially published, which is expected to occur in the fall of 1997. The Company has reviewed the data with which the federal fiscal year 1995 prepublication cohort default rate for Gibbs-Norwalk was calculated and, while the Company is seeking corrections to certain of that data pursuant to the DOE regulations, it expects the cohort default rate for Gibbs-Norwalk to exceed 25% when published as official. In addition, two of the Company's institutions have had an FFEL cohort default rate exceeding 25% in either federal fiscal years 1992 or 1993. To date, neither of these institutions has been placed on provisional certification status as a result of FFEL cohort default rates in excess of 25%. The following table sets forth the cohort default rates for the Company's institutions for federal fiscal years 1992, 1993 and 1994 and the prepublication cohort default rate of the institutions for federal fiscal year 1995:
COHORT DEFAULT PREPUBLICATION RATE 1995 COHORT ----------------- SCHOOL DEFAULT RATE 1994 1993 1992 - --------------------------------------------- -------------- ----- ----- ----- AL COLLINS GRAPHIC DESIGN SCHOOL Tempe, AZ.................................. 13.9% 19.3% 28.5% 20.0% ALLENTOWN BUSINESS SCHOOL Allentown, PA.............................. 10.8% 7.1% 14.9% 15.7% BROOKS COLLEGE Long Beach, CA............................. 18.2% 18.4% 16.2% 10.3% BROWN INSTITUTE Minneapolis, MN............................ 18.3% 19.6% 18.6% 19.7% WESTERN CULINARY INSTITUTE Portland, OR............................... 14.3% 11.4% 14.2% 26.1% SCHOOL OF COMPUTER TECHNOLOGY Pittsburgh, PA and Fairmont, WV............ 10.9% 9.3% 14.6% 16.5% THE KATHARINE GIBBS SCHOOLS Boston, MA................................. 19.3% 16.7% 18.6% 16.6% Melville, NY............................... 16.1% 17.8% 18.2% 19.1% Montclair, NJ and Piscataway, NJ........... 16.7% 16.0% 19.2% 18.6% New York, NY............................... 14.6% 18.9% 17.5% 20.5% Norwalk, CT................................ 27.1% 17.7% 24.0% 19.1% Providence, RI............................. 14.7% 13.1% 17.3% 13.8% INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (U.S.) Chicago, IL................................ 15.7% 13.3% 15.0% 10.4% Tampa, FL.................................. 13.3% 15.0% 17.3% 14.9%
59 In addition, if an institution's cohort default rate for loans under the Perkins program exceeds 15% for any federal award year (i.e., July 1 through June 30), that institution may be placed on provisional certification status for up to four years. Nine of the Company's institutions have Perkins cohort default rates in excess of 15% for students who were scheduled to begin repayment in the 1996-97 federal award year, the most recent year for which such rates have been calculated. These institutions are Allentown, Brown, Collins, Gibbs-Boston, Gibbs-Melville, Gibbs-Montclair, Gibbs-New York, Gibbs- Norwalk and Gibbs-Providence. The Perkins program cohort default rates for these nine institutions ranged from 20.7% to 64.3%. Thus, these institutions could be placed on provisional certification status, which would subject them to closer review by the DOE and possible summary adverse action if they commit any violation of the Title IV Program requirements. However, to date, none of these institutions has been placed on such status for this reason. Each of the Company's institutions has adopted a student loan default management plan. Those plans emphasize the importance of meeting loan repayment requirements and provide for extensive loan counseling, methods to increase student persistence and completion rates and graduate employment rates, and proactive borrower contacts after students cease enrollment. They may also include the use of external agencies to assist the institution with loan counseling and loan servicing if students cease attending the institution. Those activities are in addition to the loan servicing and collection activities of FFEL lenders and guaranty agencies and FDL servicers. Increased Regulatory Scrutiny The HEA provides for a three-part initiative, referred to as the Program Integrity Triad, intended to increase regulatory scrutiny of postsecondary education institutions. One part of the Program Integrity Triad expands the role of accrediting agencies in the oversight of institutions participating in the Title IV Programs. As a result, the accrediting agencies which review and accredit the Company's campuses have increased the breadth of such reviews and have expanded their examinations in such areas as financial responsibility and timeliness of student refunds. The Program Integrity Triad provisions also require each accrediting agency recognized by the DOE to undergo comprehensive periodic reviews by the DOE to ascertain whether such accrediting agency is adhering to required standards. Each accrediting agency that accredits any of the Company's campuses has been reviewed by the DOE under these provisions and has been approved for recognition by the DOE. A second part of the Program Integrity Triad tightened the standards to be applied by the DOE in evaluating the financial responsibility and administrative capability of institutions participating in the Title IV Programs. In addition, the Program Integrity Triad mandated that the DOE periodically review the eligibility and certification to participate in the Title IV Programs of every such eligible institution. By law, all institutions are required to undergo such a recertification review by the DOE by 1997 and every four years thereafter. Under these standards, each of the Company's institutions will be evaluated by the DOE more frequently than in the past. A denial of recertification would preclude an institution from continuing to participate in the Title IV Programs. A third part of the Program Integrity Triad required each state to establish a State Postsecondary Review Entity ("SPRE") to review certain institutions within that state to determine their eligibility to continue participating in the Title IV Programs. However, no SPREs are actively functioning. The United States Congress has declined to provide funding for the SPREs in appropriations legislation that has been signed into law and the DOE has not requested any future funding for the SPREs. In its most recent draft of proposals for the 1997 reauthorization of the HEA, the DOE has proposed that the Congress repeal the SPRE program. Financial Responsibility Standards All institutions participating in the Title IV Programs must satisfy a series of specific standards of financial responsibility. Institutions are evaluated for compliance with those requirements in several circumstances, including as part of the DOE's quadrennial recertification process and also annually as each institution submits its audited financial statements to the DOE. One standard requires each institution to demonstrate an acid test ratio (defined as the ratio of cash, cash equivalents and current accounts receivable to current liabilities) of at 60 least 1:1 at the end of each fiscal year. Another standard requires that each institution have a positive tangible net worth at the end of each fiscal year. A third standard prohibits any institution from having a cumulative net operating loss during its two most recent fiscal years that results in a decline of more than 10% of that institution's tangible net worth as measured at the beginning of that two-year period. In 1996, the DOE issued proposed regulations that, if promulgated, would significantly revise the present financial responsibility requirements, primarily by replacing the three separate numeric ratios described above with a composite score based on three new ratio calculations. The DOE has not yet issued new regulations in final form, but has stated its intent to do so by December 1, 1997 and to make the new regulations effective July 1, 1998. The DOE may measure an institution's financial responsibility on the basis of the financial statements of the institution itself or the financial statements of the institution's parent company, and may also consider the financial condition of any other entity related to the institution. In reviewing the Company's acquisitions in the last 12 months, it has been the DOE's practice to measure financial responsibility on the basis of the financial statements of both the institutions and the Company. An institution that is determined by the DOE not to meet the standards of financial responsibility on the basis of failing to meet one or more of the specified financial requirements is nonetheless entitled to participate in the Title IV Programs if it can demonstrate to the DOE that it is financially responsible on an alternative basis. An institution may do so by posting surety either in an amount equal to 50% (or greater, as the DOE may require) of the total Title IV Program funds received by students enrolled at such institution during the prior year or in an amount equal to 10% (or greater, as the DOE may require) of such prior year's funds if the institution also agrees to transfer to the reimbursement system of payment for its Title IV Program funds. The DOE has interpreted this surety condition to require the posting of an irrevocable letter of credit in favor of the DOE. Alternatively, an institution may demonstrate, with the support of a statement from a certified public accountant and other information specified in the regulations, that it was previously in compliance with the numeric standards and that its continued operation is not jeopardized by its financial condition. Company Compliance with Financial Responsibility Standards In its review of the Company's annual financial statements and interim balance sheets, as filed with the DOE in connection with the Company's applications for DOE certification of institutions acquired subsequent to September 1996 to allow such institutions to participate in the Title IV Programs, the DOE has questioned whether the Company's financial statements are acceptable and therefore an authoritative basis upon which to determine the Company's financial responsibility under the applicable DOE regulations. Specifically, the DOE has questioned the Company's accounting for certain direct marketing costs and courseware and other instructional materials. Further, the DOE has asserted that the Company did not satisfy the 1:1 acid test ratio based on its fiscal 1996 financial statements. The audited financial statements included in this Registration Statement have been restated to expense as incurred all direct marketing and advertising costs which had previously been deferred. This change in accounting method is disclosed in the audit opinion and footnotes to the financial statements and is permitted in accordance with Accounting Principles Board Opinion No. 20. In lieu of accepting the Company's previously filed 1996 audited financial statements, the DOE has offered the Company the alternative of posting an irrevocable letter of credit in favor of the Secretary of Education with respect to each institution the Company has acquired since September 1996 in a sum sufficient to secure the DOE's interest in the Title IV Program funds administered by the applicable institution. While the Company continues to disagree with the position taken by the DOE, in order to obtain certification of the institutions to resume participation in the Title IV Programs in a timely fashion, and thus to avoid any material interruption in Title IV Program funding for the acquired institutions, the Company has posted and currently has outstanding a letter of credit in the amount of $1.9 million, which expires on September 30, 1998, with respect to Western Culinary, and a letter of credit in the amount of $800,000, with an expiration date of July 31, 1998, with respect to SCT. The Company has agreed to the DOE's directive, dated September 9, 1997, to submit a letter of credit in the amount of $15.2 million, to expire on October 31, 1998, with respect to the six Gibbs institutions. 61 Consequently, the six Gibbs institutions were certified to resume participation in the Title IV Programs as of October 1, 1997, and the Company must post the letter of credit with the DOE no later than November 9, 1997. In addition, the Company is considering the DOE's request to increase, no later than November 15, 1997, the letter of credit with respect to SCT by $721,000 in order to maintain SCT's eligibility to participate in the Title IV Programs. Further, upon the DOE's request, the Company is prepared to post an additional letter of credit with respect to IAMD-U.S., which the Company estimates will be in the range of $3.0 million to $5.0 million, in order to reestablish the eligibility of the two IAMD-U.S. institutions to participate in the Title IV Programs in the near future. The original letters of credit for Western Culinary and SCT represented 50% of each institution's Title IV Program funding in the prior award year. In September 1997, the DOE increased the level of surety for SCT to, and established the level of surety of Gibbs at, 100% of the Title IV Program funds that students enrolled at each such institution received in the previous award year. Beginning in September 1997, the DOE has imposed a condition that, for up to the next 12 months, SCT and Gibbs may not disburse Title IV Program funds in excess of the sum secured by the applicable letter of credit for each institution. The DOE has advised the Company that the same conditions will apply to the IAMD-U.S. institutions, and any other institutions that the Company may acquire prior to a determination by the DOE that the Company satisfies the standards of financial responsibility when such institutions apply for recertification to participate in the Title IV Programs. As a result of the DOE's requirement that the Company provide letters of credit to secure the participation of newly acquired CEC institutions in the Title IV Programs, the Company will have to utilize approximately $22.6 million available under its credit agreement. In addition, if the DOE limits the aggregate dollar value of the Title IV Program participation of SCT, Gibbs and IAMD-U.S. to the amount of the letter of credit posted with respect to each such institution, such a limitation could significantly reduce the Company's ability to provide financial assistance to additional students at those institutions, which in turn could reduce the Company's ability to enroll such additional students. The inability of the Company to significantly increase aggregate enrollment at the newly-acquired institutions could have a material adverse effect on the Company's business, results of operations and financial condition and on its ability to generate sufficient liquidity to continue to fund growth in its operations and purchase other institutions. See "Management's Discussion and Analysis of Financial Condition and Results of Operation--Liquidity and Capital Resources." Subsequent to the October 1, 1997 certification of the Gibbs institutions and the restoration of their participation in the Title IV Programs, the Company and the DOE continue negotiations regarding the size and terms of the sureties to allow for growth in the Company's operations. Therefore, before the Company is required to post the expanded surety for SCT or any surety for Gibbs and IAMD-U.S., agreement may be reached to provide for a material reduction in the amounts and terms of such sureties and to provide a mechanism to allow the Company to utilize additional Title IV Program funds in the event of increased enrollments. However, there can be no assurance as to the outcome of such continued negotiations. As a result of the Offering, the Company expects to receive net proceeds of approximately $ , which will significantly enhance the Company's financial position. See "Use of Proceeds." The Company believes that such proceeds and the cash expected to be generated from operations during the remainder of 1997 will enhance its financial position and therefore enable the Company and each of its U.S. subsidiaries to present audited 1997 financial statements which will satisfy each of the DOE's standards of financial responsibility, including the acid test ratio and tangible net worth test. Applicable law and regulations require the DOE to consider only an institution's most recent audited annual financial statements in making a determination of the institution's financial responsibility. Accordingly, the Company intends to seek the DOE's review of its audited 1997 financial statements on an expedited basis in the spring of 1998. Once the DOE has determined that the Company and its U.S. subsidiaries satisfy each of the DOE's standards of financial responsibility, applicable law and regulations require the DOE to release the Company from the requirement that it post the sureties described above and from the limitations on Title IV Program funding in excess of the surety amounts. However, there can be no assurance that the DOE will expedite its review of the Company's 1997 financial statements, or of the outcome of such review. 62 Under a separate standard of financial responsibility, if an institution has made late Title IV Program refunds to students in its prior two years, the institution is required to post a letter of credit in favor of the DOE in an amount equal to 25% of the total Title IV Program refunds paid by the institution in its prior fiscal year. Based on this standard, since July 1, 1997, the Company has posted a total of $310,000 in additional letters of credit with respect to Brown, Collins, Gibbs-Montclair, Gibbs-New York, SCT and Western Culinary. As of July 1, 1997, this standard has been modified to exempt an institution if it has not been found to make late refunds to 5% or more of its students in either of the two most recent fiscal years and has not been cited for a reportable condition or material weakness in its internal controls related to late refunds in either of its two most recent fiscal years. The Company believes that its institutions satisfy this modified standard and intends to allow its current letters of credit for late refunds to expire without further action. Restrictions on Acquiring or Opening Additional Schools and Adding Educational Programs. An institution which undergoes a change of ownership resulting in a change in control, including all the institutions the Company has acquired or will acquire, must be reviewed and recertified for participation in the Title IV Programs under its new ownership. Pending recertification, the DOE suspends Title IV Program funding to that institution's students except for certain Title IV Program funds that were committed under the prior owner. If an institution is recertified following a change of ownership, it will be on a provisional basis. During the time an institution is provisionally certified, it may be subject to closer review by the DOE and to summary adverse action for violations of Title IV Program requirements, but provisional certification does not otherwise limit an institution's access to Title IV Program funds. In addition, the HEA generally requires that proprietary institutions be fully operational for two years before applying to participate in the Title IV Programs. However, under the HEA and applicable regulations, an institution that is certified to participate in the Title IV Programs may establish an additional location and apply to participate in the Title IV Programs at that location without reference to the two-year requirement, if such additional location satisfies all other applicable eligibility requirements. The Company's expansion plans are based, in part, on its ability to acquire schools that can be recertified and to open additional locations as part of its existing institutions. Generally, if an institution eligible to participate in the Title IV Programs adds an educational program after it has been designated as an eligible institution, the institution must apply to the DOE to have the additional program designated as eligible. However, an institution is not obligated to obtain DOE approval of an additional program that leads to an associate, baccalaureate, professional or graduate degree or which prepares students for gainful employment in the same or related recognized occupation as an educational program that has previously been designated as an eligible program at that institution and meets certain minimum length requirements. Furthermore, short-term educational programs, which generally consist of those programs that provide at least 300 but less than 600 clock hours of instruction, are eligible only for FFEL funding and only if they have been offered for a year and the institution can demonstrate, based on an attestation by its independent auditor, that 70% of all students who enroll in such programs complete them within a prescribed time and 70% of those students who graduate from such programs obtain employment in the recognized occupation for which they were trained within a prescribed time. Certain of the Gibbs institutions offer such short-term programs, but students enrolled in such programs represent a small percentage of the total enrollment of the Company's schools. To date, the applicable institutions have been able to establish that their short-term educational programs meet the required completion and placement percentages. In the event that an institution erroneously determines that an educational program is eligible for purposes of the Title IV Programs without the DOE's express approval, the institution would likely be liable for repayment of Title IV Program funds provided to students in that educational program. The Company does not believe that the DOE's regulations will create significant obstacles to its plans to add new programs. Certain of the state authorizing agencies and accrediting agencies with jurisdiction over the Company's campuses also have requirements that may, in certain instances, limit the ability of the Company to open a new campus, acquire an existing campus or establish an additional location of an existing institution or begin offering 63 a new educational program. The Company does not believe that those standards will have a material adverse effect on the Company or its expansion plans. The "85/15 Rule." Under a provision of the HEA commonly referred to as the "85/15 Rule," a proprietary institution, such as each of the Company's U.S. institutions, would cease being eligible to participate in the Title IV Programs if, on a cash accounting basis, more than 85% of its revenue for the prior fiscal year was derived from the Title IV Programs. Any institution that violates the 85/15 Rule immediately becomes ineligible to participate in the Title IV Programs and is unable to apply to regain its eligibility until the following fiscal year. The Company has calculated that, since this requirement took effect in 1995, none of the Company's U.S. institutions has derived more than 82% of its revenue from the Title IV Programs for any fiscal year, and that for 1996 the range for the Company's U.S. institutions was from approximately 52% to approximately 82%. For 1996, the independent auditors of the Company or prior owner, if applicable, examined management's assertion that each of the Company's U.S. institutions complied with these requirements and opined that such assertion was fairly stated in all material respects. The Company regularly monitors compliance with this requirement in order to minimize the risk that any of its U.S. institutions would derive more than 85% of its revenue from the Title IV Programs for any fiscal year. If an institution appears likely to approach the 85% threshold, the Company would evaluate the appropriateness of making changes in student funding and financing to ensure compliance with the 85/15 Rule. Restrictions on Payment of Bonuses, Commissions or Other Incentives. The HEA prohibits an institution from providing 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 recruitment, admission or financial aid awarding activity for programs eligible for Title IV Program funds. The Company believes that its current compensation plans are in compliance with HEA standards, although the regulations of the DOE do not establish clear criteria for compliance. STATE AUTHORIZATION Each of the Company's campuses is authorized to offer educational programs and grant degrees or diplomas by the state in which such campus is located. The level of regulatory oversight varies substantially from state to state. In some states, the campuses are subject to licensure by the state education agency and also by a separate higher education agency. State laws establish standards for instruction, qualifications of faculty, location and nature of facilities, financial policies and responsibility and other operational matters. State laws and regulations may limit the ability of the Company to obtain authorization to operate in certain states or to award degrees or diplomas or offer new degree programs. Certain states prescribe standards of financial responsibility that are different from those prescribed by the DOE. The Company believes that each of its campuses is in substantial compliance with state authorizing and licensure laws. CANADIAN REGULATION Canadian students, other than those who reside in the province of Quebec, are eligible to receive loans under the CSL program. Students who are residents of the province of Quebec are eligible to receive loans from the QLBP. Students from the province of Ontario receive financial assistance under both the CSL program and the OSLP program. CSL program loans are made by the Canadian federal government. With respect to students who reside in the province of Ontario, MET provides financial assistance to eligible students through OSAP, which includes two main components, the CSL program and the OSLP program. To maintain its right to administer OSAP, an institution, such as the IAMD-Canada campus in Toronto, must, among other things, be registered and in good standing under the PVSA and abide by the rules, regulations and administrative manuals of the CSL, OSLP and other OSAP-related programs. In order to attain initial eligibility, an institution must establish, among other things, that it has been in good standing under the PVSA for at least 12 months, that it has offered an eligible program for at least 12 months, and that it has graduated at least one class in an eligible program that satisfies specific requirements with respect to class size and graduation rate. 64 During the first two years of initial eligibility, the institution must have its administration of OSAP independently audited, and full eligibility will not be granted unless these audits establish that the institution has properly administered OSAP. The institution can only administer CSL funds, and cannot administer OSLP funds, until it has gained full eligibility. Once an institution has gained OSAP eligibility, the institution must advise MET before it takes any material action that may result in its failure or inability to meet any rules, regulations or requirements related to OSAP. In order for an OSAP-eligible institution to establish a new branch of an existing eligible institution, it must obtain an OSAP-designation from MET, either as a separate institution if the branch administers OSAP without the involvement of the main campus or as part of the same institution if OSAP is administered through the main campus of the institution. The Company does not believe that OSAP's requirements will create significant obstacles to its plans to acquire additional institutions or open new branches in Canada. Institutions participating in OSAP, such as the IAMD-Canada campus in Toronto, cannot submit applications for loans for students enrolled in educational programs that have not been designated as OSAP-eligible by MET. To be eligible, among other things, a program must be registered with the Private Vocational Schools unit, must be of a certain minimum length and must lead to a diploma or certificate. The Company does not anticipate that these program approval requirements will create significant problems with respect to its plans to add new educational programs. An institution cannot automatically acquire OSAP-designation through acquisition of other OSAP-eligible institutions. When there is a change of ownership, including a change in controlling interest, in a non-incorporated OSAP-eligible institution, MET will require evidence of the institution's continued capacity to properly administer the program before extending OSAP designation to the new owner. The Company does not believe that the Offering will be considered a change of ownership for purposes of OSAP. Given that MET periodically revises its regulations and other requirements and changes its interpretations of existing laws and regulations, there can be no assurance that MET will agree with the Company's understanding of each MET requirement. IAMD-Canada, in Toronto, is required to audit its OSAP administration annually and MET is authorized to conduct its own audits of the administration of the OSAP programs by any OSAP-eligible institution. The Company has complied with these requirements on a timely basis. Based on the most recent annual compliance audits of IAMD-Canada, in Toronto, that institution has been found to be in substantial compliance with the requirements of OSAP and the Company believes that it continues to be in substantial compliance with these requirements. MET has the authority to take any measures it deems necessary to protect the integrity of the administration of OSAP. If MET deems a failure to comply to be minor, MET will advise the institution of the deficiency and provide the institution with the opportunity to remedy the asserted deficiency. If MET deems the failure to comply to be serious in nature, MET has the authority to: (i) condition the institution's continued OSAP designation upon the institution's meeting specific requirements during a specific time frame; (ii) refuse to extend the institution's OSAP eligibility to the OSLP program; (iii) suspend the institution's OSAP designation or (iv) revoke the institution's OSAP designation. In addition, when MET determines that any non- compliance in an institution's OSAP administration is serious, MET has the authority to contract with an independent auditor, at the expense of the institution, to conduct a full audit in order to quantify the deficiencies and to require repayment of all loan amounts. In addition, MET may impose a penalty up to the amount of the damages assessed in the independent audit. As noted above, IAMD-Canada, in Toronto, is subject to the PVSA. The Company may not operate a private vocational school in the province of Ontario unless such school is registered under the PVSA. Upon payment of the prescribed fee and satisfaction of the conditions prescribed by the regulations under the PVSA and by the Private Vocational Schools Unit of the MET, an applicant or registrant such as IAMD-Canada, in Toronto, is entitled to registration or renewal of registration to conduct or operate a private vocational school unless: (1) it cannot reasonably be expected to be financially responsible in the conduct of the private vocational school; (2) the past conduct of the officers or directors provides reasonable grounds for belief that the operations 65 of the campus will not be carried on in accordance with relevant law and with integrity and honesty; (3) it can reasonably be expected that the course or courses of study or the method of training offered by the private vocational school will not provide the skill and knowledge requisite for employment in the vocation or vocations for which the applicant or registrant is offering instruction; or (4) the applicant is carrying on activities that are, or will be, if the applicant is registered, in contravention of the PVSA or the regulations under the PVSA. An applicant for registration to conduct or operate a private vocational school is required to submit with the application a bond in an amount determined in accordance with the regulations under the PVSA. IAMD-Canada, in Toronto, is currently registered under the PVSA, and the Company does not believe that there will be any impediment to renewal of such registration on an annual basis. The PVSA provides that a "registration" is not transferable. However, the Private Vocational Schools Unit of MET takes the position that a purchase of shares of a private vocational school does not invalidate the school's registration under the PVSA. The Company does not believe that the Offering will invalidate the registration of IAMD-Canada, in Toronto. If a corporation is convicted of violating the PVSA or the regulations under the PVSA, the maximum penalty that may be imposed on the corporation is $25,000. Students who reside in the province of Quebec are eligible to receive funds under the QLBP subject to certain student eligibility criteria. Under this program, student financial assistance is initially provided in the form of a loan. IAMD-Canada, in Quebec, is subject to the ARPE. In accordance with ARPE, the Company may not operate a private educational institution without holding a permit issued by the Minister for the institution itself and for the educational services to be provided. The Minister will issue the permit after consulting with the Commission Consultative de l'Enseignement Prive (the "Commission") concerning the particular institution and the educational services to determine if such institution and services meet certain conditions. Permits cannot be transferred without the written authorization of the Minister, and any entity holding a permit must advise the Minister of any amalgamation, sale or transfer affecting such entity. The Minister, after consultation with the Commission, has the authority to modify or revoke a permit where the holder of the permit, among other things: (i) does not comply with the conditions, restrictions or prohibitions relating to the institution or (ii) is, or is about to become, insolvent. The Minister must provide the institution with a chance to present its views before revoking a permit. The legislative, regulatory and other requirements relating to student financial assistance programs in Ontario and Quebec are subject to change by applicable governments due to political and budgetary pressures and any such change may affect the eligibility for student financial assistance of the students attending IAMD-Canada which, in turn, could materially adversely affect the Company's business, results of operations and financial condition. 66 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information with respect to the Company's executive officers, directors and nominee for director:
NAME AGE POSITION ------------------------ --- ------------------------------------------------------------ John M. Larson.......... 46 President, Chief Executive Officer, Secretary and Director William A. Klettke...... 45 Senior Vice President, Chief Financial Officer and Treasurer Robert E. Dowdell....... 52 Director Wallace O. Laub......... 72 Director Patrick K. Pesch........ 40 Director Scott D. Steele(1)...... 33 Director Todd H. Steele.......... 35 Director Thomas B. Lally......... 53 Nominee for Director
- -------- (1) Scott Steele has advised the Company that he intends to resign from the Board prior to consummation of the Offering. JOHN M. LARSON, the Company's founder, has served as President and Chief Executive Officer and a Director of the Company since January 1994. From July 1993 until the Company's formation, Mr. Larson served as a consultant to Heller, working with Heller to establish the Company. From January through May 1993, Mr. Larson served as the Eastern Regional Operating Manager of Educational Medical, Inc., which provides career-oriented postsecondary education. From 1989 until 1993, Mr. Larson served as the Senior Vice President of College Operations of Phillips Colleges, Inc., overseeing a nationwide system of 58 schools, which offered a wide range of academic programs. From March through September 1989, he served as Senior Vice President of Operations for the Geneva Companies, a mergers and acquisitions firm. From 1980 to 1989, Mr. Larson was Vice President of Marketing at National Education Centers, Inc., a subsidiary of National Education Corporation ("NEC"), where he managed the entire admissions program, including marketing and advertising efforts, with a team of approximately 500 employees. Mr. Larson has also served in marketing positions with DeVry Inc., at its Chicago and Kansas City campuses. Mr. Larson received a Bachelor's of Science in Business Administration from the University of California at Berkeley and has completed the Executive Management Program at Stanford University. WILLIAM A. KLETTKE has served as Senior Vice President and Chief Financial Officer of the Company since March 1996. From 1987 until 1995, Mr. Klettke was Executive Vice President and Chief Financial officer for ERO, Inc., a licensed distributor of children's toys. In these positions, Mr. Klettke was responsible for finance, accounting, MIS, human resources, forecasting, treasury, legal, acquisitions and two operating subsidiaries. From 1976 to 1987, Mr. Klettke served in various positions with The Enterprise Companies (a paint and coatings manufacturer), a subsidiary of Insilco, starting as an accountant and progressing to Senior Vice President of Finance and Administration. Mr. Klettke is a Certified Public Accountant and holds Bachelor's of Arts degrees in Psychology and Sociology from Baker University, a Bachelor's of Science in Accounting from Illinois State University, a Masters Degree in Management from Northwestern University. ROBERT E. DOWDELL has been a director of the Company since its inception in January 1994. From 1989 to present, Dowdell has served as Chief Executive Officer and director of Marshall & Swift, L.P., a publishing company. Mr. Dowdell is also a director of ADMS and LaQuinta Spring, L.P., in which he is the general partner. 67 WALLACE O. LAUB has been a director of the Company since October 1994. Mr. Laub was a co-founder of NEC, where he served as Executive Vice President and director from 1955 to 1993. From 1981 to 1990, Mr. Laub served as a director of the Distance Education Training Council, a trade association and accrediting agency for distance education companies. Mr. Laub is now retired. PATRICK K. PESCH has been a director of the Company since 1995. Mr. Pesch was designated as director of the Company by HECC. Since 1992, Mr. Pesch has served as a Senior Vice President of Heller Financial, Inc. ("HFI"), the parent of Heller Equity Capital Corporation ("HECC"), and also as an officer of HECC, managing a portfolio of loan and equity investments. Mr. Pesch also serves as a director of Kimpex, Inc., a Canadian company and as an officer and director of Amersig Graphics, Inc. SCOTT D. STEELE has been a director of the Company since October 1995. Mr. Steele was designated as a director of the Company by Electra Investment Trust P.L.C. ("EIT"). Since May 1993, he has been employed by Electra Fleming, Inc., an affiliate of EIT, making private equity investments, and he is currently a principal of Electra Fleming, Inc. From August 1992 to May 1993, Mr. Steele was an Associate with Coopers & Lybrand, providing corporate finance and advisory services. Mr. Steele is also a director of Family Bookstores Company, Inc., The Benjamin Company, Landmark Healthcare, Rehab Designs of America, American Medical Plans, Inc. and Stevens Aviation. TODD H. STEELE has been a director of the Company since its inception in January 1994. Mr. Steele was designated as a director of the Company by HECC. Since December 1996, he has served as Vice President of Baker, Fentress & Co., an investment company, making equity investments in private companies. From May 1990 to November 1996, he served as a Vice President of Heller Financial, Inc. and HECC, also making equity investments in private companies. THOMAS B. LALLY will become a director of the Company upon the consummation of the Offering. Mr. Lally has been designated to be a director of the Company by HECC. He has been the President of HECC since 1996 and an Executive Vice President of HFI since 1994, with direct responsibility for the asset quality oversight of HFI's portfolio of loan and equity investments. Mr. Lally joined HFI in 1974 and is currently a director of Kroy, Inc. None of the executive officers and directors are related to one another. CERTAIN OTHER SIGNIFICANT EMPLOYEES OF THE COMPANY The following information is supplied with respect to certain other significant employees of the Company. J. PATRICK ANDREWS has served as Director of Advertising of the Company since October 1995. From 1994 until he joined CEC corporate management, Mr. Andrews was Advertising Manager for two of the Company's schools, Collins and Brooks. For approximately 12 years prior to joining CEC, Mr. Andrews managed the advertising and marketing functions for Spartan, a 2,800 student school in Tulsa, Oklahoma. Mr. Andrews holds a Bachelor's of Arts in Journalism from the University of South Carolina and a Masters in Marketing from the University of Texas. DR. JON R. COOVER joined CEC as National Director of Marketing in May 1997, after serving for 14 months as Director of Education at the Company's largest school, Brown. Dr. Coover's background in private career education includes holding positions as Vice President of Marketing for the Rasmussen Business Colleges, Minneapolis, Minnesota; Vice President of Operations at Virginia College, Birmingham, Alabama; President of Dominion College, Roanoke, Virginia; President of Nettle Junior College, Sioux Falls, South Dakota; Co- Director of New York Restaurant School in New York City; and Regional Director with DeVry Institute of Technology. Dr. Coover holds a Bachelor's of Science degree in Business Administration and an M.B.A. from California Western University and a Ph.D. in Business from California Coast University. NICK FLUGE has served as Managing Director of Operations--Culinary Division (Portland, Pittsburgh and Fairmont) of the Company since July 1997. Mr. Fluge has served as Director and President of Western Culinary since 1989. From 1984 until 1988, Mr. Fluge was Director of Retail/Restaurants and a member of the 68 management team of Western Culinary. With over 20 years of experience in the hospitality/foodservice industry and as a Certified Culinary Educator with the American Culinary Federation, Mr. Fluge has chaired American Culinary Federation Food Salons, judged wine competitions and written columns for various periodicals, including The National Culinary Review. Mr. Fluge has been a Team Leader for the Accrediting Commission of Career Schools and Colleges of Technology (ACCSCT) since 1992. Mr. Fluge is a member of the Oregon Department of Education--Career College Division. Mr. Fluge holds a Bachelor's of Science degree in Political Science from Portland State University. LAWRENCE GROSS has served as Managing Director of Operations--Canadian School Group (Toronto and Montreal) of the Company since June 1997. Mr. Gross has been a Director and Manager of IAMD-Canada since 1981. He previously founded National Carpet Mills and other companies in the home furnishings industry. Mr. Gross is a graduate of the University of Chicago and earned his M.B.A. at the University of Toronto Graduate School of Business. JACOB P. GRUVER has served as Managing Director of Operations--Business School Group (Allentown, Boston, Melville, Montclair, New York, Norwalk, Piscataway and Providence) of the Company since May 1997. From August 1994 to May 1997, Mr. Gruver served as the Company's Director of Finance. From 1989 until joining the Company, Mr. Gruver was Vice President and Controller of Wyoming Technical Institute in Laramie, Wyoming, a moderately sized career- oriented school. In such positions, he managed all financial functions, including budgeting and implementation of management information/financial systems. From 1978 to 1989, Mr. Gruver audited career-oriented schools and other clients at a regional public accounting firm in Laramie, Wyoming. Mr. Gruver received a Bachelor's degree in Accounting from National College. PATRICIA KAPPER has served as Director of Education of the Company since August 1997. From 1990 until joining the Company, Ms. Kapper was Dean of Academic Affairs (Chief Academic Officer) of DeVry Institute of Technology, Addison, Illinois. From 1986 until 1990, Ms. Kapper held academic management positions with Milwaukee Area Technical College, from 1984 to 1986 as Associate Dean of Business and Graphic and Applied Arts and from 1986 to 1990 as Dean of Business and Graphic Arts. Ms. Kapper holds a Bachelor's of Arts degree in Business Education from the University of Wisconsin--Eau Claire, a Master of Science in Teaching degree from the University of Wisconsin--Whitewater, and is in the process of completing her dissertation for her doctorate in Adult Education at Northern Illinois University. JAMES R. MCELLHINEY was appointed Director of Regulatory Compliance of the Company in August 1997. Mr. McEllhiney served as Director of Education of the Company from August 1994 until August 1997. Prior to joining CEC corporate management in August 1994, Mr. McEllhiney was the Vice President of Academic Affairs for Phillips Colleges, Inc. In this position, Mr. McEllhiney managed regulatory compliance, including processing change of ownership applications for over 60 acquisitions, and oversaw corporate educational administration for this group of 92 schools. From 1975 to 1988, Mr. McEllhiney managed regulatory compliance and served as Chief Academic Officer for MetriData Computing, a 40 unit career-oriented school company. Prior to joining MetriData, Mr. McEllhiney was an instructor and Academic Dean at Northwood Institute. Mr. McEllhiney holds a Bachelor's of Science in Education and a Masters of Science in Psychology from Indiana State University. ROBERT W. NACHTSHEIM has served as Controller of the Company since December 1995. Mr. Nachtsheim joined CEC's corporate management with 19 years of accounting and financial analysis experience in multiple industries. From 1993 until 1995, Mr. Nachtsheim served as Controller for Century 21 North Central, Inc., overseeing the financial performance of 600 midwestern Century 21 franchises. His prior experience includes six years as the Director of Financial Analysis and Reporting for Newark Electronics, a nationwide electronics distributor, and 11 years with Amoco Corporation in various accounting positions. Mr. Nachtsheim holds a Bachelor's of Science degree in Accountancy from the University of Missouri and an M.B.A. in Finance from DePaul University. JASON L. ROBERTS has served as Director of Management Information Systems of the Company since August 1995. Mr. Roberts has several years of experience in proprietary school management and information technology. 69 From 1993 to 1995, Mr. Roberts was a computer and networking consultant working primarily with small businesses and proprietary schools. From 1991 to 1993, Mr. Roberts was the Director of MIS for Wyoming Technical Institute, a moderately sized automotive technology school owned by Phillips Colleges, Inc. Mr. Roberts holds a Bachelor's of Science degree in Management Information Systems from the University of Wyoming and has the industry recognized credential of Certified Netware Engineer. STEVE B. SOTRAIDIS has served as Managing Director of Operations-Visual Communications Group (Long Beach, Tempe, Minneapolis, Chicago and Tampa) of the Company since July 1, 1997. Mr. Sotraidis joined CEC's administrative management team in June 1994. Mr. Sotraidis joined Brooks College in 1970 and has managed Brooks' overall operations since 1975. Mr. Sotraidis holds a Bachelor of Science degree in Psychology and completed two years of graduate work in Industrial Psychology at California State University at Long Beach. MARK J. TOBIN has served as Director of Student Finance of the Company since March 1996. Mr. Tobin joined DeVry, Inc., in 1984 and, from 1989 until joining CEC corporate management, Mr. Tobin was Director of Student Finance for DeVry, Inc. In that position, Mr. Tobin was responsible for student finance policy development, technical and operations assistance and performance monitoring for the DeVry Institutes of Technology and the Keller Graduate School of Management. From 1984 to 1989, Mr. Tobin held corporate financial and management positions at DeVry, Inc. Prior to his tenure at DeVry, Inc. (1984- 1996), Mr. Tobin was Director of Financial Aid at Carthage College (1978-1984) and Marian College (1973-1978). Mr. Tobin holds a Bachelor of Arts degree in Psychology from Northeastern Illinois State College and a Master of Education degree in Student Personnel Work in Higher Education from Loyola University of Chicago. BOARD OF DIRECTORS The Company's Board of Directors is divided into three classes with staggered three-year terms. The terms of Messrs. Dowdell and Pesch expire at the annual meeting of the Company's stockholders in 1998, the terms of Messrs. Laub and Todd Steele expire at the annual meeting of the Company's stockholders in 1999, and the term of Mr. Larson expires at the annual meeting of the Company's stockholders in 2000. Mr. Lally's term will expire at the annual meeting of stockholders in 2000. At each annual meeting of the Company's stockholders, the successors to the directors whose terms expire at such annual meeting will be elected for a three-year term. ARRANGEMENTS FOR NOMINATION AS DIRECTOR In connection with sales of the Company's capital stock, the Company and certain of its stockholders, including Heller and Electra, entered into the Amended and Restated Stockholders' Agreement, dated as of July 31, 1995 and amended as of February 28, 1997 and May 30, 1997 (the "Stockholders' Agreement"), which provides, among other things, that the Board of Directors of the Company shall have six members, consisting, subject to certain conditions, of Larson, Dowdell, two persons designated by HECC, one person designated by Electra and one person designated by the other directors. The Stockholders' Agreement, including the rights and obligations of the aforementioned parties to designate directors, will terminate upon the consummation of the Offering. The Company and HECC are parties to an agreement, effective upon the consummation of the Offering, pursuant to which HECC will be entitled to designate two individuals for nomination to the Board of Directors. This agreement provides that the Company will, among other things, cause such individuals to be nominated and solicit proxies from the Company's stockholders to vote in favor of such nominees, and will appoint the HECC designees to the Compensation and Audit Committees of the Board. The number of directors HECC will be entitled to designate will be reduced to one if HECC no longer owns at least 25% of the aggregate voting power of the Company, and the agreement will terminate if HECC no longer owns at least 10% of the aggregate voting power of the Company. Messrs. Pesch and Lally will be the initial designees of Heller. 70 COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors has established an Audit Committee and a Compensation Committee. Both the Audit Committee and the Compensation Committee are currently composed entirely of directors who are not officers or employees of the Company. The Audit Committee generally has responsibility for recommending independent auditors to the Board of Directors for selection, reviewing the plan and scope of the annual audit, reviewing the Company's audit and control functions and reporting to the full Board of Directors regarding all of the foregoing. The members of the Audit Committee are Robert E. Dowdell, Patrick K. Pesch and Scott D. Steele. Scott Steele intends to resign from the Audit Committee prior to the consummation of the Offering, and Mr. Lally will join the Audit Committee. The Compensation Committee generally has responsibility for recommending to the Board guidelines and standards relating to the determination of executive compensation, reviewing the Company's executive compensation policies and reporting to the Board of Directors regarding the foregoing. The Compensation Committee also has responsibility for administering the Company's incentive compensation plans, determining the number of options to be granted to the Company's executive officers pursuant to such plans and reporting to the Board of Directors regarding the foregoing. The members of the Compensation Committee are Wallace O. Laub, Patrick K. Pesch and Scott D. Steele. Scott Steele intends to resign from the Compensation Committee prior to the consummation of the Offering, and Mr. Lally will join the Compensation Committee. COMPENSATION OF DIRECTORS Subsequent to the closing of the Offering, all directors who are not employees of the Company will be paid an annual fee of $6,000 and will be paid $1,000 for each Board meeting attended and $500 for each Board committee meeting attended. Non-employee directors are also reimbursed for their reasonable out-of-pocket expenses incurred in attending Board and committee meetings. The Company has adopted the Career Education Corporation Non- Employee Directors' Stock Option Plan, effective upon the closing of the Offering, providing for annual option grants to each director who is not an employee of the Company. See "--Stock Plans--1997 Directors Stock Option Plan." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Wallace O. Laub (collectively with Constance L. Laub, "Laub"), Patrick K. Pesch ("Pesch") and Scott D. Steele ("Scott Steele") served as the members of the Compensation Committee during 1996. The following information reflects a 100-for-one split of the Company's common stock effected as of July 31, 1995 and a 10-for-one split of the Company's Series C Preferred Stock effected as of July 26, 1996. It does not reflect the Transactions to be effected immediately prior to the consummation of the Offering, as described under "The Transactions." As of February 28, 1997, the Company entered into a Securities Purchase Agreement (the "February 1997 Agreement") with HECC, which as of October 31, 1997 beneficially owned % of the outstanding Common Stock of the Company; Electra Investment Trust P.L.C. ("EIT"), which as of October 31, 1997 owned, together with an affiliate, Electra Associates, Inc. ("EAP" and, collectively with EIT, "Electra"), % of the Common Stock of the Company; John M. Larson, the President and Chief Executive Officer and a director of the Company ("Larson"); William A. Klettke, the Senior Vice President, Chief Financial Officer and Treasurer of the Company ("Klettke"); Robert E. Dowdell, a director of the Company; and Laub. Pesch is an officer of HECC and a Vice President of HFI (collectively with HECC, "Heller"), the parent of HECC, and was designated as a director of the Company by HECC. Todd H. Steele ("Todd Steele"), who served as a Vice President of HFI and HECC from May 1990 to November 1996, was also designated as a director of the Company by Heller. Scott Steele is a principal of Electra Fleming Inc, an affiliate of EIT and EAP, and was designated as a director of the Company by EIT. 71 On February 28, 1997, pursuant to the February 1997 Agreement, the Company issued (i) 1,391 shares of Series D Preferred Stock and Warrants to purchase 1,655 shares of Class E Common Stock to HECC in exchange for total consideration of $1,391,000, (ii) 468 shares of Series D Preferred Stock and Warrants to purchase 558 shares of Class E Common Stock to Electra in exchange for total consideration of $468,000, (iii) 84 shares of Series D Preferred Stock and Warrants to purchase 99 shares of Series E Common Stock to Dowdell in exchange for total consideration of $84,000, (iv) 16 shares of Series D Preferred Stock and Warrants to purchase 19 shares of Class E Common Stock to Larson in exchange for total consideration of $16,000, (v) 15 shares of Series D Preferred Stock and Warrants to purchase 18 shares of Class E Common Stock to Klettke in exchange for total consideration of $15,000, (vi) 26 shares of Series D Preferred Stock and Warrants to purchase 31 shares of Class E Common Stock to Laub in exchange for total consideration of $26,000. On May 30, 1997, pursuant to the February 1997 Agreement, the Company issued (i) 3,995 shares of Series D Preferred Stock and Warrants to purchase 4,754 shares of Class E Common Stock to HECC in exchange for total consideration of $3,995,000, (ii) 1,348 shares of Series D Preferred Stock and Warrants to purchase 1,603 shares of Class E Common Stock to Electra in exchange for total consideration of $1,348,000, (iii) 44 shares of Series D Preferred Stock and Warrants to purchase 52 shares of Class E Common Stock to Larson in exchange for total consideration of $44,000, (iv) 42 shares of Series D Preferred Stock and Warrants to purchase 50 shares of Class E Common Stock to Klettke in exchange for total consideration of $42,000, (v) 71 shares of Series D Preferred Stock and Warrants to purchase 85 shares of Class E Common Stock to Laub in exchange for total consideration of $71,000. As of May 30, 1997, the Company entered into a Securities Purchase Agreement with Heller, Electra and Klettke (the "May 1997 Agreement" and, together with the February 1997 Agreement, the "1997 Agreements"). On May 30, 1997, pursuant to the May 1997 Agreement, the Company issued (i) 11,127 shares of Series D Preferred Stock and Warrants to purchase 26,842 shares of Class E Common Stock to Heller in exchange for total consideration of $11,127,000, (ii) 2,376 shares of Series D Preferred Stock and Warrants to purchase 5,732 shares of Class E Common Stock to Electra in exchange for total consideration of $2,376,000 and (iii) 122 shares of Series D Preferred Stock and Warrants to purchase 295 shares of Class E Common Stock to Klettke in exchange for total consideration of $122,000. On June 30, 1997, pursuant to the May 1997 Agreement, the Company issued 1,375 shares of Series D Preferred Stock and Warrants to purchase 3,317 shares of Class E Common Stock to Electra in exchange for total consideration of $1,375,000. The number of shares covered by each of the Warrants issued pursuant to the 1997 Agreements (collectively, the "Warrants") is subject to adjustment in certain events described therein. The Warrants have an exercise price of $.01 per share and expire on July 31, 2005. The holders of the Warrants are required to exercise them concurrently with the consummation of the Offering. It is expected that the exercise price of each of the Warrants will be paid by surrender of a portion of such Warrant. The Series D Preferred Stock issued pursuant to the 1997 Agreements (exclusive of accrued dividends) will be converted into shares of Common Stock at the rate of shares of Common Stock for each share of Series D Preferred Stock. See "The Transactions." The Company and Electra are parties to a Registration Rights Agreement, dated as of July 31, 1995 (the "Electra Registration Rights Agreement"). Under the Electra Registration Rights Agreement, Electra is entitled, subject to certain exceptions, to cause the Company to register shares of Common Stock held by Electra in any registration by the Company for its own account or for the account of other security holders. Additionally, at any time that the Company is eligible to use Commission Form S-3 for registration of securities (expected to initially occur on the first anniversary of this Prospectus), Electra will be entitled, subject to certain exceptions, to cause the Company to register shares held by Electra on a registration statement on Form S-3. The Company is required to pay certain expenses relating to any registration effected pursuant to the Electra Registration Rights Agreement and to indemnify Electra against certain liabilities, including liabilities under the Securities Act. 72 The Company and Heller are parties to a Registration Rights Agreement, dated as of October , 1997 (the "Heller Registration Rights Agreement"). Under the Heller Registration Rights Agreement, Heller is entitled, subject to certain exceptions, to cause the Company to register shares of Common Stock held by Heller in any registration by the Company for its own account or for the account of other security holders. Additionally, at any time that the Company is eligible to use Commission Form S-3 for registration of securities, Heller will be entitled, subject to certain exceptions, to cause the Company to register shares held by Heller on a registration statement on Form S-3. The Company is required to pay certain expenses relating to any registration effected pursuant to the Heller Registration Rights Agreement and to indemnify Heller against certain liabilities, including liabilities under the Securities Act. Pursuant to a Securities Purchase Agreement dated as of July 31, 1995, among the Company and Electra, the Company is required to pay Electra an annual portfolio administration fee in the amount of $75,000. This obligation will terminate upon the consummation of the Transactions as described under "The Transactions." The Company and Dowdell were parties to a Consulting and Non-Competition Agreement dated as of January 31, 1994 (the "Consulting Agreement") which provided, among other things, for Mr. Dowdell to provide consulting services related to the management and operations of the Company and prohibited Mr. Dowdell from engaging in certain activities competitive with the Company. In 1996, pursuant to the Consulting Agreement, the Company provided an aggregate of $50,000 in compensation to Mr. Dowdell. The Consulting Agreement expired on January 1, 1997. The Company has agreed that it will, upon consummation of the Offering and from the proceeds thereof, pay to certain holders of the Existing Preferred Stock, including Electra, Larson and Dowdell, amounts equal to the liquidation value of accrued paid-in-kind dividends on such Existing Preferred Stock. The amount payable to each holder will be determined by dividing the liquidation value attributable to dividends on the Existing Preferred Stock held by such holder by the public offering price of the Common Stock in the Offering. Based upon an assumed initial public offering price of $ per share, the Company anticipates paying approximately $ , $ and $ to Electra, Larson and Dowdell, respectively. See "Use of Proceeds." EXECUTIVE COMPENSATION The following table sets forth information with respect to all compensation paid by the Company for services rendered during the fiscal year ended December 31, 1996, to its Chief Executive Officer and the other executive officer of the Company (each, a "Named Executive Officer"). SUMMARY COMPENSATION TABLE
ANNUAL LONG TERM COMPENSATION COMPENSATION ---------------- ------------ SECURITIES ALL OTHER SALARY BONUS UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITIONS ($) ($) OPTIONS (#) ($) ---------------------------- ------ ------- ------------ ------------ John M. Larson, President and Chief Executive Officer........................... $185,417 $96,602 $6,951(1) William A. Klettke, Senior Vice President and Chief Financial Officer................. $116,667 $43,764 $2,996(2)
- -------- (1) Includes $6,615 in 401(k) matching contributions by the Company and $336 in term life insurance premium payments by the Company. (2) Includes $2,800 in 401(k) matching contributions by the Company and $196 in term life insurance premium payments by the Company. 73 OPTION GRANTS IN 1996 The following table contains information concerning the grant of stock options by the Company to the Named Executive Officers during 1996.
POTENTIAL REALIZABLE VALUE AT ASSUMED PERCENTAGE ANNUAL RATES OF NUMBER OF OF TOTAL STOCK PRICE SHARES OPTIONS APPRECIATION FOR UNDERLYING GRANTED TO EXERCISE OR OPTION TERM (3) OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ----------------------- NAME GRANTED (#) (1) FISCAL YEAR ($/SH) (2) DATE 5% ($) 10% ($) ---- --------------- ------------ ----------- ---------- ------ ---------- John M. Larson.......... William A. Klettke......
- -------- (1) The options granted to the Named Executive Officers in 1996 were granted under the Career Education Corporation 1995 Stock Option Plan. Each of these options is an incentive stock option and vests in five equal annual installments on each of the first five anniversaries of the grant date; provided, however, that these options became exercisable in full upon stockholder approval of the Offering. See "--Stock Plans--Career Education Corporation 1995 Stock Option Plan." (2) The exercise price of each option equals the fair market value of the option shares on the date of grant, as determined by the Company's Board of Directors based on the most recent price prior to the grant date at which the Company sold or agreed to sell Preferred Stock in capital raising transactions. (3) Potential realizable value is presented net of the option exercise price, but before any federal or state income taxes associated with exercise, and is calculated assuming that the fair market value on the date of the grant, which equals the exercise price, appreciates at the indicated annual rates (set by the Securities and Exchange Commission (the "Commission")), compounded annually, for the term of the option. The 5% and 10% assumed rates of appreciation are mandated by the rules of the Commission and do not represent the Company's estimate or projection of future increases in the price of the Common Stock. Actual gains are dependent on the future performance of the Common Stock and the option holder's continued employment throughout the vesting periods. The amounts reflected in the table may not necessarily be achieved. Using the assumed initial public offering price of $ for purposes of this calculation (pursuant to the rules of the Commission), the potential realizable values of the options granted in 1996 to Messrs. Larson and Klettke are approximately $ and $ , respectively, at a 5% assumed annual appreciation rate, and approximately $ and $ , respectively, at a 10% assumed annual appreciation rate. FISCAL YEAR-END OPTION VALUES The following table contains information regarding the Named Executive Officers' unexercised options as of December 31, 1996. Neither of the Named Executive Officers exercised any options during 1996.
NUMBER OF SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS AS OF DECEMBER 31, 1996 (#) OPTIONS AS OF DECEMBER 31, 1996 ($) (1) --------------------------------------- --------------------------------------- NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE ---- --------------------------------------- --------------------------------------- John M. Larson.......... / $ /$ William A. Klettke...... / /
- -------- (1) The value per option is calculated by subtracting the exercise price of the option from the fair market value of the option shares at December 31, 1996 of $ per share, as determined by the Company's Board of Directors based on the most recent price prior to December 31, 1996 at which the Company had sold Preferred Stock in capital raising transactions. EMPLOYMENT AGREEMENT The Company has entered into an Employment and Non-Competition Agreement with Mr. Larson, dated as of October 9, 1997 (the "Larson Employment Agreement"), which has an initial term ending July 31, 2000. The Larson Employment Agreement is subject to successive, automatic employer extensions if the Company gives written notice at least 90 days prior to the expiration date. The Larson Employment Agreement provides for an initial base salary of $250,000 plus bonus compensation established by the Company's Board of Directors. The Larson Employment Agreement provides for continuation of salary, bonus and benefits for one year following Mr. Larson's termination of employment with the Company, other than termination by the Company for "Cause" (as defined in the Larson Employment Agreement) or termination by Mr. Larson without "Good Reason" (as defined in the Larson Employment Agreement). Good Reason includes a Change of Control (as 74 defined in the Larson Employment Agreement) of the Company. The Larson Employment Agreement also prohibits Mr. Larson from disclosing confidential information and prohibits him from engaging in activities competitive with the Company for a period which includes the term of his employment with the Company or service as a director of the Company and continues for two years thereafter. However, if Mr. Larson's employment with the Company is terminated by the Company without "Cause" or by Mr. Larson for "Good Reason," the non-competition period will expire on the later of the termination of Mr. Larson's service as a director with the Company or six months after the termination of his employment. In such case, the Company may extend the non-competition period up to an additional 18 months if it pays Mr. Larson's base salary, a portion his of bonus and benefits during this additional period. If the term of the Larson Employment Agreement expires and the Company refuses its renewal or Mr. Larson refuses its renewal for Good Reason, the non-competition period will expire on the later of the termination of Mr. Larson's employment or the termination of his service as a director. In such case, the Company may extend the non- competition period for up to an additional two years if it pays Mr. Larson's base salary, a portion of his bonus and benefits during this additional period. STOCK PLANS Career Education Corporation 1995 Stock Option Plan Effective August 1, 1995, the Company's Board of Directors adopted the Career Education Corporation 1995 Stock Option Plan (the "1995 Plan"), pursuant to which options to acquire up to shares of Common Stock may be granted to employees, advisors, consultants and non-employee directors as may be determined by a committee of the Board of Directors (the "Option Committee"). The Compensation Committee of the Board of Directors serves as the Option Committee and administers the 1995 Plan and determines with respect to each grant the number of shares subject to the option, the exercise price, the period of the option and the time at which the option may be exercised, as well as any terms and conditions of the option amount. Exercise prices may not be less than the fair market value of the Common Stock as determined by the Option Committee as of the date of issuance of each stock option. Options may be granted as either (i) incentive stock options (as defined in the Code), for which the option price must be at least 100% of the fair market value of the shares subject to the option on the grant date (110% in the case of an option granted to a person holding more than 10% of the voting power of all classes of stock of the Company (a "10% Holder") and which are not exercisable after ten years from the grant date (five years in the event of an option granted to a 10% Holder), or (ii) non-qualified stock options, which are not subject to such restrictions. Career Education Corporation 1997 Employee Incentive Compensation Plan The Company's Board of Directors and stockholders have approved the adoption of the Career Education 1997 Employee Incentive Compensation Plan ("1997 Plan"), effective upon the consummation of the Offering. The 1997 Plan is a flexible plan that provides the Compensation Committee of the Board of Directors (the "Compensation Committee") broad discretion to fashion the terms of the awards to provide eligible participants with stock-based and performance-related incentives as the Committee deems appropriate. The 1997 Plan permits the issuance of awards in a variety of forms, including: (i) nonqualified and incentive stock options for the purchase of Common Stock, (ii) stock appreciation rights, (iii) restricted stock, (iv) deferred stock, (v) bonus stock and awards in lieu of obligations, (vi) dividend equivalents, (vii) other stock-based awards and (viii) performance awards and cash incentive awards. Options granted will provide for the purchase of Common Stock at prices determined by the Compensation Committee. The persons eligible to participate in the Employee Plan are officers, employees and consultants of the Company or any subsidiary of the Company who, in the opinion of the Committee, contribute to the growth and success of the Company or its subsidiaries. The purpose of the 1997 Plan is to promote the overall financial objectives of the Company and its stockholders by motivating eligible participants to achieve long-term growth in stockholder equity in the Company and to retain the association of these individuals. The 1997 Plan is administered by the Compensation Committee. 75 The 1997 Plan provides for the award of up to shares of Common Stock. At the discretion of the Compensation Committee, shares of Common Stock subject to an award under the 1997 Plan that remain unissued upon termination of such award, are forfeited or are received by the Company as consideration for the exercise or payment of an award may be reissued under the 1997 Plan. In the event of a stock dividend, stock split, recapitalization, sale of substantially all of the assets of the Company, reorganization or other similar event, the Compensation Committee will adjust the aggregate number of shares of Common Stock subject to the 1997 Plan and the number, class and price of shares subject to outstanding awards. Career Education Corporation Non-Employee Directors' Stock Option Plan The Company's Board of Directors and stockholders have approved the adoption of the Career Education Corporation Non-Employee Directors' Stock Option Plan (the "Directors' Plan"), effective upon the consummation of the Offering. The Directors' Plan grants nonqualified stock options for the purchase of Common Stock to directors who are not employees of the Company. Messrs. Dowdell, Laub, Pesch and Todd Steele will be the initial participants in the Directors' Plan. The purpose of the Directors' Plan is to promote the overall financial objectives of the Company and its stockholders by motivating directors to achieve long-term growth in stockholder equity in the Company, to further align the interest of such directors with those of the Company's stockholders and to retain the association of these directors. The Directors' Plan is administered by the Compensation Committee. The Directors' Plan provides for the award of up to shares of Common Stock. The Directors' Plan provides for (i) the grant of an option to purchase shares of Common Stock to each participant who is a non- employee director of the Company on the date of the closing of the Offering or, if after such closing date, the date such individual is first elected or appointed as a non-employee director of the Company and (ii) a grant of an option to purchase shares of Common Stock on the date of each regular annual stockholder meeting after the effective date of the Directors' Plan to each participant who is a non-employee director upon such date and either is continuing as a non-employee director subsequent to the meeting or who is elected at such meeting to serve as a non-employee director (other than a meeting in the year of such participant's initial election or appointment). Options granted under the Directors' Plan provide for the purchase of Common Stock at the fair market value on the date of grant. No stock option granted under the Directors' Plan may be exercisable later than the tenth anniversary date of its grant. Career Education Corporation 1998 Employee Stock Purchase Plan The Company's Board of Directors and stockholders have approved the adoption of the Career Education Corporation 1998 Employee Stock Purchase Plan (the "Stock Purchase Plan"), effective as of January 1, 1998. A total of shares of Common Stock have been reserved for issuance under the Stock Purchase Plan. The Stock Purchase Plan, which is intended to qualify under Section 423 of the Code, permits eligible employees of the Company to purchase Common Stock through payroll deductions with all such deductions credited to an account under the Stock Purchase Plan. Payroll deductions may not exceed $25,000 for all purchase periods within any calendar year. The Stock Purchase Plan operates on a calendar year basis. To be eligible to participate in the Stock Purchase Plan, an employee must file all requisite forms prior to a specified due date known as a "Grant Date." Initially, the first day of each calendar quarter of each year (January 1, April 1, July 1 and October 1) will be a Grant Date and the last day of each calendar quarter of each year (March 31, June 30, September 30 and December 31) will be an Exercise Date (an "Exercise Date"). However, the determination of the Grant Dates and the Exercise Dates are completely within the discretion of the Compensation Committee of the Board of Directors. On each Exercise Date, participants' payroll deductions credited to their accounts will be automatically applied to the purchase price of Common Stock at a price per share equal to 85% of the fair market value of the Common Stock on the Exercise Date. Employees may end their participation in the Stock Purchase Plan at any time during an offering period, and their payroll deductions to date will be refunded. Participation ends automatically upon termination of employment with the Company. 76 Employees are eligible to participate in the Stock Purchase Plan if they are customarily employed by the Company or a designated subsidiary for at least 20 hours per week and for more than five months in any calendar year. No person will be able to purchase Common Stock under the Stock Purchase Plan if such person, immediately after the purchase, would own stock possessing 5% or more of the total combined voting power or value of all outstanding shares of all classes of stock of the Company. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS Pursuant to the provisions of the Delaware General Corporation Law ("DGCL"), the Company will adopt certain provisions in its Amended and Restated Certificate of Incorporation which eliminate the personal liability of its directors to the Company or its stockholders for monetary damages for breach of their fiduciary duty as a director to the fullest extent permitted by the DGCL except for liability (i) for any breach of their duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for unlawful payments of dividends or unlawful stock repurchases or redemptions, or (iv) for any transaction from which the director derived an improper personal benefit. The provisions of the Company's Amended and Restated Certificate of Incorporation will not affect a director's responsibilities under any other laws, such as the federal securities laws or state or federal environmental laws. The Company's Amended and Restated Certificate of Incorporation will also contain provisions which require the Company to indemnify its directors, and permit the Company to indemnify its officers and employees, to the fullest extent permitted by Delaware law, including those circumstances in which indemnification would otherwise be discretionary, except that the Company shall not be obligated to indemnify any such person (i) with respect to proceedings, claims or actions initiated or brought voluntarily by any such person and not by way of defense, or (ii) for any amounts paid in settlement of an action indemnified against by the Company without the prior written consent of the Company. The Company has obtained directors' and officers' liability insurance and, prior to consummation of the Offering, the Company intends to enter into indemnity agreements with each of its directors providing for the indemnification described above. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In addition to the transactions described under "Compensation Committee Interlocks and Insider Participation," the Company has entered into the following arrangements with one of its executive officers: In December 1996, the Company issued 824 shares of Class E Common Stock and 70 shares of Series A Preferred Stock to William A. Klettke, the Company's Senior Vice President, Chief Financial Officer and Treasurer, in exchange for total consideration of $100,000. At that time, the Company made an interest- free loan in the amount of $100,000 to Mr. Klettke to be used to purchase these shares. This loan was repaid by Mr. Klettke in full in January 1997. The Company intends that any future transactions between the Company and its officers, directors and affiliates will be on terms no less favorable to the Company than can be obtained on an arm's length basis from unaffiliated third parties and that any transactions with such persons will be approved by a majority of the Company's outside directors or will be consistent with policies approved by such outside directors. 77 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table (including the Notes thereto) sets forth certain information regarding the beneficial ownership of the Common Stock as of October 31, 1997 (after giving effect to the Transactions) and as adjusted to reflect the sale of the shares of Common Stock being offered hereby by: (i) each person (or group of affiliated persons) known by the Company to beneficially own more than 5% of the outstanding shares of Common Stock, (ii) each director and director nominee of the Company, (iii) each of the Named Executive Officers, and (iv) all of the Company's directors and executive officers as a group. Unless otherwise indicated below, the persons in the table have sole voting and investment power with respect to all shares shown as beneficially owned by them.
SHARES OF COMMON STOCK SHARES OF COMMON BENEFICIALLY STOCK OWNED PRIOR TO BENEFICIALLY THE OFFERING OWNED AFTER THE (1)(2) OFFERING (1)(2) ----------------- -------------------- NAME (2) NUMBER PERCENT NUMBER PERCENT -------- --------- ------- --------- ------- Heller Equity Capital Corporation (3)............................... % % Electra Investment Trust P.L.C. (4)............................... Electra Associates, Inc. (4)....... The Provident Bank................. (5) John M. Larson (6)................. William A. Klettke (7)............. Robert E. Dowdell (8).............. (9) (9) Thomas B. Lally.................... Wallace O. Laub.................... Patrick K. Pesch................... Scott D. Steele.................... Todd H. Steele..................... All directors and executive officers as a group (7 persons)............
- -------- * Less than 1%. (1) Beneficial ownership is determined in accordance with the rules of the Commission. The number of shares beneficially owned by a person and the percentage ownership of that person includes shares of Common Stock subject to options or warrants held by that person that are currently exercisable or exercisable within 60 days of September 30, 1997. (2) Assumes no exercise of the Underwriters' over-allotment option. If the Underwriters' over-allotment option is exercised in full, the following stockholders will sell, pursuant to such option, the number of shares of Common Stock set forth opposite their names:
SHARES OF COMMON STOCK SHARES OF BENEFICIALLY COMMON STOCK OWNED PRIOR TO BENEFICIALLY THE OWNED AFTER THE OFFERING SHARES OFFERING --------------- TO BE --------------- NUMBER PERCENT SOLD NUMBER PERCENT ------- ------- ------- ------- ------- Mark A. Bounds.................... Brian A. Demkowicz................ John M. Goense.................... Ned Jesson........................ John H. Underwood.................
These stockholders are all former officers of HECC and received their shares from HECC pursuant to an equity plan. (3) The address of HECC is 500 West Monroe Street, Chicago, Illinois 60661. (4) The address of EIT and Electra Associates, Inc. ("EAI") is c/o EIT, 65 Kingsway, London, England WC2B 6QT. 78 (5) Assumes no exercise of the Underwriters' over-allotment option. If the over-allotment option is exercised in full, the total number of shares of Common Stock to be sold by Provident would be shares and it would own no shares of Common Stock after the Offering. (6) Includes shares of Common Stock which may be acquired by Larson upon the exercise of currently exercisable stock options. The address of Mr. Larson is c/o CEC, 2800 West Higgins Road, Hoffman Estates, Illinois 60195. (7) Includes shares of Common Stock which may be acquired by Klettke upon the exercise of currently exercisable stock options. (8) Includes shares of Common Stock held by Mr. Dowdell, as Custodian for Brian M. Dowdell under the Uniform Transfers to Minors Act; shares of Common Stock held by Mr. Dowdell, as Custodian for Sharon T. Dowdell under the Uniform Transfers to Minors Act; shares of Common Stock held by Robert E. Dowdell Defined Benefit Plan and Trust, under Agreement dated 12/9/96; shares of Common Stock held by Robert E. Dowdell and Grace C. Dowdell, as Trustees under Trust Agreement dated July 1, 1991; and shares of Common Stock which may be acquired by Mr. Dowdell upon the exercise of currently exercisable stock options. The address of Mr. Dowdell is 1951 Calle Roja, Santa Ana, California 92705. (9) Assumes no exercise of the Underwriters' over-allotment option. If the over-allotment option is exercised in full, the total number of shares of Common Stock to be sold by Mr. Dowdell would be shares and he would own shares of Common Stock, or % of the outstanding Common Stock, after the Offering. 79 DESCRIPTION OF CAPITAL STOCK Upon consummation of the Offering, the authorized capital stock of the Company will consist of shares of Common Stock, $.01 par value per share ("Common Stock"), and shares of Preferred Stock, $.01 par value per share ("Preferred Stock"). The following summary of certain provisions relating to the Common Stock and Preferred Stock does not purport to be complete and is subject to, and qualified in its entirety by, provisions of applicable law, and by the provisions of the Company's Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws that are included as exhibits to the Registration Statement of which this Prospectus is a part. COMMON STOCK As of , 1997, shares of Common Stock were outstanding and held by holders of record. shares of Common Stock will be outstanding upon consummation of the Offering. Subject to the rights of holders of preferred stock, the holders of outstanding shares of Common Stock are entitled to share ratably in dividends declared out of assets legally available therefor at such time and in such amounts as the Board of Directors may from time to time lawfully determine. Each holder of Common Stock is entitled to one vote for each share held. Subject to the rights of holders of any outstanding Preferred Stock, upon liquidation, dissolution or winding up of the Company, any assets legally available for distribution to stockholders as such are to be distributed ratably among the holders of the Common Stock at that time outstanding. All shares of Common Stock currently outstanding are, and all shares of Common Stock offered by the Company hereby when duly issued and paid for will be, fully paid and nonassessable, not subject to redemption and assessment and without conversion, preemptive or other rights to subscribe for or purchase any proportionate part of any new or additional issues of any class or of securities convertible into stock of any class. PREFERRED STOCK Preferred stock may be issued by the Company in series from time to time with such designations, relative rights, priorities, preferences, qualifications, limitations and restrictions thereof, to the extent that such are not fixed in the Company's Amended and Restated Certificate of Incorporation, as the Board of Directors determines. The rights, preferences, limitations and restrictions of different series of Preferred Stock may differ with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, sinking fund provisions and other matters. The Board of Directors may authorize the issuance of Preferred Stock which ranks senior to the Common Stock with respect to the payment of dividends and the distribution of assets on liquidation. In addition, the Board of Directors is authorized to fix the limitations and restrictions, if any, upon the payment of dividends on Common Stock to be effective while any shares of Preferred Stock are outstanding. The Board of Directors, without stockholder approval, may issue Preferred Stock with voting and conversion rights which could adversely affect the voting power of the holders of Common Stock. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no present intention to issue shares of Preferred Stock. CERTAIN CORPORATE PROVISIONS Upon the consummation of the Offering, the Company will be subject to the provisions of Section 203 of the DGCL. In general, this statute prohibits a publicly held Delaware corporation from engaging, under certain circumstances, in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person becomes an interested stockholder, unless either (i) prior to the date at which the stockholder became an interested stockholder the board of directors approved either the business combination or the transaction in which the person becomes an interested stockholder, (ii) the stockholder acquires more than 85% of the outstanding voting stock of the corporation (excluding shares held by directors who are officers or held in certain employee stock plans) upon consummation of the transaction in which the stockholder becomes an interested stockholder or (iii) the business combination is approved by the 80 board of directors and by two-thirds of the outstanding voting stock of the corporation (excluding shares held by the interested stockholder) at a meeting of the stockholders (and not by written consent) held on or subsequent to the date of the business combination. An "interested stockholder" is a person who, together with affiliates and associates, owns (or at any time within the prior three years did own) 15% or more of the corporation's voting stock. Section 203 defines a "business combination" to include, without limitation, mergers, consolidations, stock sales and asset based transactions and other transactions resulting in a financial benefit to the interested stockholder. A business combination by the Company with Heller or Electra would not be prohibited by Section 203. The Company's Certificate of Incorporation and Bylaws contain a number of provisions relating to corporate governance and to the rights of stockholders. Certain of these provisions may be deemed to have a potential "anti-takeover" effect in that such provisions may delay, defer or prevent a change of control of the Company. These provisions include (i) a requirement that stockholder action may be taken only at stockholder meetings; (ii) notice requirements in the Bylaws relating to nominations to the Board of Directors and to the raising of business matters at stockholders meetings; and (iii) the classification of the Board of Directors into three classes, each serving for staggered three year terms. See "Management--Executive Officers and Directors." TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is . SHARES ELIGIBLE FOR FUTURE SALE Prior to the Offering, there has been no public market for the Common Stock. Sales of substantial amounts of Common Stock in the public market, or the availability of such shares for sale, could adversely affect the market price of the Common Stock. Upon completion of the Offering, the Company will have an aggregate of shares of Common Stock outstanding, assuming no exercise of the Underwriters' over-allotment option and no exercise of outstanding options or warrants after . Of these shares, the shares sold in the Offering will be freely tradable without restriction or further registration under the Securities Act, unless held by "affiliates" of the Company, as that term is defined in Rule 144 promulgated under the Securities Act. The remaining shares of Common Stock outstanding upon completion of the Offering will be Restricted Shares. All directors and officers and certain other stockholders of the Company have agreed with the Underwriters that, for a period of 180 days from the date of this Prospectus, they will not offer to sell or otherwise sell, dispose of or grant rights with respect to any shares of Common Stock, now owned or hereafter acquired directly by such holders or with respect to which they have the power of disposition, otherwise than with the prior written consent of Credit Suisse First Boston Corporation. As a result of these contractual restrictions, notwithstanding possible earlier eligibility for sale under the provisions of Rules 144, 144(k) and 701 of the Securities Act, shares subject to Lock-Up Agreements will not be salable until the agreements expire or unless prior written consent is received from First Boston. Any early waiver of the Lock-Up Agreements by the underwriters, which, if granted, could permit sales of a substantial number of shares and could adversely affect the trading price of the Company's shares, may not be accompanied by an advance public announcement by the Company. See "Underwriting." Taking into account the Lock-Up Agreements, the number of shares that will be available for sale in the public market under the provisions of Rules 144 and 144(k), will be as follows: (i) approximately Restricted Shares will be eligible for sale immediately after the effective date of the Registration Statement, and (ii) the remaining Restricted Shares will become eligible for public resale following expiration of the Lock-Up Agreements, subject in some cases to vesting provisions and volume and manner of sale limitations. 81 In general, under Rule 144 a person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least one year, including persons who may be deemed "affiliates" of the Company, would be entitled to sell within any three-month period a number of shares that does not exceed the greater of one percent of the number of shares of Common Stock then outstanding or the average weekly trading volume of the Common Stock during the four calendar weeks preceding the filing of a Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about the Company. In addition, a person who is not deemed to have been an affiliate of the Company at any time during the 90 days preceding a sale, and who has beneficially owned for at least two years the shares proposed to be sold, would be entitled to sell such shares under Rule 144(k) without regard to the requirements described above. The Company is unable to estimate accurately the number of Restricted Shares that will be sold under Rule 144 because this will depend in part on the market price for the Common Stock, the personal circumstances of the seller and other factors. Pursuant to Rule 144 and upon expiration of the one-year holding period, an additional shares of Common Stock will be available for sale upon the exercise of outstanding warrants. As of , options to purchase shares were issued and outstanding under the Stock Plans. See "Management--Stock Plans." In addition, beginning 90 days after the date of this Prospectus, certain shares issued or issuable upon exercise of options granted by the Company prior to the effective date of the Registration Statement will also be eligible for sale in the public market pursuant to Rule 701 under the Securities Act, subject to the Lock-Up Agreements. In general, Rule 701 permits resales of shares issued pursuant to certain compensatory benefit plans and contracts commencing 90 days after the issuer becomes subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, in reliance upon Rule 144 but without compliance with certain restrictions, including the holding period requirements, contained in Rule 144. Following the Offering, the Company intends to file under the Securities Act one or more registration statements on Form S-8 to register all of the shares of Common Stock (i) subject to outstanding options and reserved for future option grants under the Stock Plans and (ii) that the Company intends to offer for sale to its employees pursuant to the Stock Purchase Plan. These registration statements are expected to become effective upon filing and shares covered by these registration statements will be eligible for sale, subject, in the case of affiliates only, to the restrictions of Rule 144, other than the holding period requirement, and subject to expiration of the lock-up agreements with the Underwriters. As of , 1997, outstanding options to acquire an aggregate of shares of Common Stock were currently exercisable. REGISTRATION RIGHTS The Company and Electra are parties to the Electra Registration Rights Agreement. Under the Electra Registration Rights Agreement, Electra is entitled, subject to certain exceptions, to cause the Company to register shares of Common Stock held by Electra in any registration by the Company for its own account or for the account of other security holders. Additionally, at any time that the Company is eligible to use Commission Form S-3 for registration of securities, Electra will be entitled, subject to certain exceptions, to cause the Company to register shares held by Electra on registration statement on Form S-3. As of October 31, 1997, Electra held shares covered by the Electra Registration Rights Agreement. The Company and Heller are parties to the Heller Registration Rights Agreement. Under the Heller Registration Rights Agreement, Heller is entitled, subject to certain exceptions, to cause the Company to register shares of Common Stock held by Heller in any registration by the Company for its own account or for the account of other security holders. Additionally, at any time that the Company is eligible to use Commission Form S-3 for registration of securities. Heller will be entitled, subject to certain exceptions, to cause the Company to register shares held by Heller on a registration statement on Form S-3. As of October 31, 1997, Heller held shares covered by the Registration Rights Agreement. See "Management--Compensation Committee Interlocks and Insider Participation." 82 Pursuant to a Warrant Agreement dated as of July 31, 1995, between the Company and Provident, the Company has agreed to include, subject to certain exceptions, shares of Common Stock held by The Provident Bank ("Provident") in any registration statement filed by the Company for its own account or for the account of other security holders. As of October 31, 1997, the shares of Common Stock underlying the Provident Warrants were covered by these registration rights, including shares to be sold pursuant to this Prospectus if the Underwriters exercise their over-allotment option in full. See "Security Ownership of Certain Beneficial Owners and Management." 83 UNDERWRITING Upon the terms and subject to the conditions contained in an Underwriting Agreement dated , 1997 (the "Underwriting Agreement"), the underwriters named below (the "Underwriters"), for whom Credit Suisse First Boston Corporation, Smith Barney Inc. and ABN AMRO Chicago Corporation are acting as representatives (the "Representatives"), have severally but not jointly agreed to purchase from the Company the following respective numbers of shares of Common Stock:
NUMBER OF UNDERWRITER SHARES ----------- --------- Credit Suisse First Boston Corporation.......................... Smith Barney Inc................................................ ABN AMRO Chicago Corporation.................................... --------- Total....................................................... =========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters will be obligated to purchase all the shares of Common Stock offered hereby (other than those shares covered by the over-allotment option described below) if any are purchased. The Underwriting Agreement provides that, in the event of a default by an Underwriter, in certain circumstances the purchase commitments of non- defaulting Underwriters may be increased or the Underwriting Agreement may be terminated. The Selling Stockholders have granted to the Underwriters an option, expiring at the close of business on the 30th day after the date of this Prospectus, to purchase up to an aggregate of additional shares from the Selling Stockholders at the initial public offering price, less the underwriting discount and commissions, all as set forth on the cover page of this Prospectus. Such option may be exercised only to cover over-allotments in the sale of the shares of Common Stock offered hereby. To the extent such option is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares of Common Stock as it was obligated to purchase pursuant to the Underwriting Agreement. The Company and the Selling Stockholders have been advised by the Representatives that the Underwriters propose to offer shares of Common Stock to the public initially at the public offering price set forth on the cover page of this Prospectus and, through the Representatives, to certain dealers at such price less a concession of $ per share, and the Underwriters and such dealers may allow a discount of $ per share on sales to certain other dealers. After the initial public offering, the public offering price and concession and discount to dealers may be changed by the Representatives. The Representatives have informed the Company that they do not expect discretionary sales by the Underwriters to exceed 5% of the shares of Common Stock being offered hereby. The Company, its officers and directors, the Selling Stockholders and certain other stockholders who, immediately following the consummation of the Offering, will own in the aggregate shares of Common Stock and vested and exercisable options to purchase an additional shares of Common Stock in the aggregate have agreed not to offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file or cause to be filed with the Commission a registration statement under the Securities Act relating to, any shares of Common Stock or securities or other rights convertible into or exchangeable or exercisable for any shares of Common Stock or publicly disclose the intention to make any such offer, sale, pledge, disposal or filing, without the prior written consent of Credit Suisse First Boston Corporation, for a period 84 of 180 days after the date of this Prospectus except, in the case of the Company issuance of Common Stock pursuant to the conversion or exchange of convertible or exchangeable securities or the exercise of warrants or options, in each case outstanding on the date of this Prospectus, or grants of employee stock options pursuant to the terms of a plan in effect on the date of the Prospectus or issuance of common stock pursuant to the exercise of such options. The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including civil liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make in respect thereof. ABN AMRO Chicago Corporation is affiliated with LaSalle National Bank, N.A. ("LaSalle"), which is a lender to the Company under the Credit Agreement, an $80 million revolving line of credit (see "Risk Factors-- Future Capital Needs"). LaSalle or its affiliates participate from time to time in various general financing and banking transactions for the Company and its affiliates. To date, LaSalle has advanced approximately $50 million to the Company under the terms of the Credit Agreement, approximately $29.4 million of which will be paid down with the proceeds of the Offering, and the Company is in compliance with the terms of the Credit Agreement. The decision of ABN AMRO Chicago Corporation to underwrite the Offering was made independently of LaSalle, which had no involvement in determining whether or when to underwrite the Offering or the terms of the Offering. ABN AMRO Chicago Corporation will not receive any benefit from the Offering other than its respective portion of the underwriting discounts and commissions payable by the Company. Since it is anticipated that more than 10% of the proceeds from the sale of the Common Stock, not including underwriting compensation, will be received by LaSalle in connection with the Credit Agreement, and LaSalle is an affiliate of ABN AMRO Chicago Corporation, a member of the National Association of Securities Dealers, Inc. (the "NASD") and one of the Underwriters, the Offering is being conducted pursuant to Rule 2710(c)(8) of the NASD. In accordance with such rule, Credit Suisse First Boston Corporation has agreed to act as a qualified independent underwriter pursuant to the requirements of Rule 2720(c)(3) of the NASD. In connection with Rule 2720(c)(3), the initial public offering price of the Common Stock will be set at a price which is no higher than that recommended by Credit Suisse First Boston Corporation, as a qualified independent underwriter. Moreover, Credit Suisse First Boston Corporation, as a qualified independent underwriter in connection with the Offering, has performed due diligence investigations and has reviewed and participated in the preparation of this Prospectus. The Company will apply for listing of the Common Stock on the Nasdaq National Market under the symbol "CECO." Prior to the Offering, there has been no public market for the Common Stock. Accordingly, the initial public offering price for the Shares will be determined by negotiation among the Company, the Selling Stockholders and the Representatives. In determining such price, consideration will be given to various factors, including market conditions for initial public offerings, the history of and prospects for the Company's business, the Company's past and present operations, its past and present earnings and current financial position, an assessment of the Company's management, the market for securities of companies in businesses similar to those of the Company, the general condition of the securities markets and other relevant factors. There can be no assurance, however, that the initial public offering price will correspond to the price at which the Common Stock will trade in the public market subsequent to the Offering or that an active trading market for the Common Stock will develop and continue after the Offering. The Representatives, on behalf of the Underwriters, may engage in over- allotment, stabilizing transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Exchange Act. Over- allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. Stabilizing transactions permit bids for and purchases of the Common Stock so long as the stabilizing bids do not exceed a specified maximum. Syndicate covering transactions involve purchases of the Common Stock in the open market after the distribution has been completed in order to cover syndicate short positions. Penalty 85 bids permit the Underwriters to reclaim a selling concession from a syndicate member when the Common Stock originally sold by such syndicate member is purchased in a stabilizing transaction or syndicate covering transaction to cover syndicate short position. Such stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of the Common Stock to be higher than it would otherwise be in the absence of such transactions. These transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. NOTICE TO CANADIAN RESIDENTS RESALE RESTRICTIONS The distribution of the Common Stock in Canada is being made only on a private placement basis exempt from the requirement that the Company and the Selling Stockholders prepare and file a prospectus with the securities regulatory authorities in each province where trades of Common Stock are effected. Accordingly, any resale of the Common Stock in Canada must be made in accordance with applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made in accordance with available statutory exemptions or pursuant to a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the Common Stock. REPRESENTATIONS OF PURCHASERS Each purchaser of Common Stock in Canada who receives a purchase confirmation will be deemed to represent to the Company and the Selling Stockholders and the dealer from whom such purchase confirmation is received that (i) such purchaser is entitled under applicable provincial securities laws to purchase such Common Stock without the benefit of a prospectus qualified under such securities laws, (ii) where required by law, that such purchaser is purchasing as principal and not as agent, and (iii) such purchaser has reviewed the text above under "Resale Restrictions." RIGHTS OF ACTION (ONTARIO PURCHASERS) The securities being offered are those of a foreign issuer and Ontario purchasers will not receive the contractual right of action prescribed by section 32 of the Regulation under the Securities Act (Ontario). As a result, Ontario purchasers must rely on other remedies that may be available, including common law rights of action for damages or rescission or rights of action under the civil liability provisions of the U.S. federal securities laws. ENFORCEMENT OF LEGAL RIGHTS All of the issuer's directors and officers as well as the experts named herein and the Selling Stockholders may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon the issuer or such persons. All or a substantial portion of the assets of the issuer and such persons may be located outside of Canada and as a result, it may not be possible to satisfy a judgment against the issuer or such persons in Canada or to enforce a judgment obtained in Canadian courts against such issuer or persons outside of Canada. NOTICE TO BRITISH COLUMBIA RESIDENTS A purchaser of Common Stock to whom the Securities Act (British Columbia) applies is advised that such purchaser is required to file with the British Columbia Securities Commission a report within ten days of the sale of any Common Stock acquired by such purchaser pursuant to the Offering. Such report must be in the form attached to British Columbia Securities Commission Blanket Order BOR #95/17, a copy of which may be obtained from the Company. Only one such report must be filed in respect of Common Stock acquired on the same date and under the same prospectus exemption. 86 TAXATION AND ELIGIBILITY FOR INVESTMENT Canadian purchasers of Common Stock should consult their own legal and tax advisors with respect to the tax consequences of an investment in the Common Stock in their particular circumstances and with respect to the eligibility of the Common Stock for investment by the purchaser under relevant Canadian Legislation. LEGAL MATTERS The validity of the Common Stock offered hereby and certain other legal matters will be passed upon for the Company by Katten Muchin & Zavis, Chicago, Illinois, a partnership including professional corporations. Certain legal matters in connection with the Offering will be passed upon for the Underwriters by Sidley & Austin, Chicago, Illinois. EXPERTS The Consolidated Financial Statements and schedules of the Company and its subsidiaries as of December 31, 1995, December 31, 1996 and June 30, 1997, and for each of the three years in the period ended December 31, 1996 and for the six months ended June 30, 1997, included in this Prospectus and elsewhere in the Registration Statement, have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. ADDITIONAL INFORMATION The Company has filed with the Commission in Washington, D.C., a Registration Statement on Form S-1 (of which this Prospectus is a part) under the Securities Act with respect to the Common Stock offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement and such exhibits and schedules. Statements contained in this Prospectus regarding the contents of any agreement or other document referred to are not necessarily complete, and in each instance, reference is made to a copy of such agreement or other document filed as an exhibit to the Registration Statement. Each such statement is qualified in all respects by such reference. The Registration Statement and the exhibits and schedules thereto may be inspected without charge at the public reference facilities maintained by the Commission, including at the Commission's Public Reference Room, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and at the Commission's Regional Offices at 7 World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies may be obtained at prescribed rates from the Public Reference Section of the Commission at its principal office in Washington, D.C. Such materials also may be accessed electronically by means of the Commission's web site at http://www.sec.gov. 87 INDEX TO FINANCIAL STATEMENTS
PAGE ---- CONSOLIDATED FINANCIAL STATEMENTS OF CAREER EDUCATION CORPORATION AND SUBSIDIARIES: Report of Independent Public Accountants............................ F-2 Consolidated Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997...................................................... F-3 Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1996 (unaudited) and June 30, 1997...................................... F-6 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1996 (unaudited) and June 30, 1997...................................... F-7 Consolidated Statements of Stockholders' Investment for the years ended December 31, 1994, 1995 and 1996, and the six months ended June 30, 1997...................................................... F-8 Notes to Consolidated Financial Statements.......................... F-10 CONSOLIDATED FINANCIAL STATEMENTS OF IAMD, LIMITED AND SUBSIDIARIES: Consolidated Balance Sheets as of June 30, 1996 and 1997............ F-34 Consolidated Statements of Operations for the years ended June 30, 1996 and 1997...................................................... F-35 Consolidated Statements of Cash Flows for the years ended June 30, 1996 and 1997...................................................... F-36 Consolidated Statements of Stockholders' Investment for the years ended June 30, 1996 and 1997....................................... F-37 Notes to Consolidated Financial Statements.......................... F-38 CONSOLIDATED FINANCIAL STATEMENTS OF THE INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (CANADA) LTD. AND SUBSIDIARY: Consolidated Balance Sheets as of August 31, 1996 and June 30, 1997. F-45 Consolidated Statements of Operations for the year ended August 31, 1996 and for the ten months ended June 30, 1997.................... F-46 Consolidated Statements of Cash Flows for the year ended August 31, 1996 and for the ten months ended June 30, 1997.................... F-47 Consolidated Statements of Stockholders' Investment for the year ended August 31, 1996 and for the ten months ended June 30, 1997... F-48 Notes to Consolidated Financial Statements.......................... F-49
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of Career Education Corporation: We have audited the accompanying consolidated balance sheets of CAREER EDUCATION CORPORATION (a Delaware corporation) AND SUBSIDIARIES as of December 31, 1995, December 31, 1996 and June 30, 1997 and the related consolidated statements of operations, stockholders' investment and cash flows for each of the three years in the period ended December 31, 1996 and six months ended June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Career Education Corporation and Subsidiaries as of December 31, 1995, December 31, 1996 and June 30, 1997 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 and six months ended June 30, 1997 in conformity with generally accepted accounting principles. As explained in Note 15 to the consolidated financial statements, the Company has given retroactive effect to the change in accounting for deferred marketing and advertising costs. Arthur Andersen LLP Chicago, Illinois October 7, 1997 F-2 CAREER EDUCATION CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31 JUNE 30 --------------- ----------------------- PRO FORMA 1995 1996 1997 1997 (NOTE 13) ------- ------- -------- -------------- ASSETS (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents (including restricted cash of $72, $0 and $186 at December 31, 1995 and 1996 and June 30, 1997, respectively)........ $ 3,965 $ 7,798 $ 9,745 $-- Receivables-- Students, net of allowance for doubtful accounts of $258, $455 and $1,026 at December 31, 1995 and 1996 and June 30, 1997, respectively...................... 2,414 2,159 5,007 -- From former owners of acquired businesses........................ -- 523 845 -- Stockholder........................ -- 100 -- -- Other.............................. 250 120 1,280 -- Inventories.......................... 167 213 427 -- Prepaid expenses and other current assets.............................. 505 725 1,207 -- Deferred income tax assets........... -- 194 643 -- ------- ------- -------- ---- Total current assets............. 7,301 11,832 19,154 -- ------- ------- -------- ---- PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization........................ 12,841 19,560 47,088 -- ------- ------- -------- ---- OTHER ASSETS: Deferred income tax assets........... -- 195 -- -- Intangible assets, net............... 2,813 3,407 32,835 -- Deposits............................. 113 154 467 -- Perkins program fund, net............ 225 262 274 -- Deferred financing costs, net........ 151 346 533 -- Organization costs, net.............. 140 452 416 -- ------- ------- -------- ---- Total other assets............... 3,442 4,816 34,525 -- ------- ------- -------- ---- TOTAL ASSETS........................... $23,584 $36,208 $100,767 $-- ======= ======= ======== ====
F-3 CAREER EDUCATION CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (DOLLARS IN THOUSANDS)
DECEMBER 31 JUNE 30 ------------- --------------------- PRO FORMA 1995 1996 1997 1997 (NOTE 13) ------ ------ ------ -------------- LIABILITIES AND STOCKHOLDERS' INVESTMENT (UNAUDITED) CURRENT LIABILITIES: Current maturities of long-term debt.......... $1,309 $2,676 $3,477 $-- Book overdraft................................ -- 683 388 -- Accounts payable.............................. 640 502 2,489 -- Accrued expenses-- Payroll and related benefits................ 505 678 922 -- Other....................................... 747 1,658 3,136 -- Deferred tuition revenue...................... 2,786 4,256 4,992 -- ------ ------ ------ ---- Total current liabilities................. 5,987 10,453 15,404 -- ------ ------ ------ ---- LONG TERM DEBT, net of current maturities shown above.......................................... 6,725 13,783 47,651 -- ------ ------ ------ ---- DEFERRED INCOME TAX LIABILITIES................. -- -- 3,635 -- ------ ------ ------ ---- COMMITMENTS AND CONTINGENCIES REDEEMABLE PREFERRED STOCK AND WARRANTS Redeemable Series A preferred stock, $0.01 par value; 50,000 shares authorized; 7,782 shares outstanding at December 31, 1995, 7,852 shares outstanding at December 31, 1996, and June 30, 1997, respectively, at redemption value including dividends of $1,911.......... 8,729 9,432 9,763 -- Redeemable Series B preferred stock, $0.01 par value; 1,000 shares authorized; no shares outstanding.................................. -- -- -- -- Redeemable Series C preferred stock, $0.01 par value; 5,000 shares authorized; 4,954 shares outstanding at December 31, 1995 and 1996, and June 30, 1997, at redemption value....... 4,065 4,259 4,217 -- Redeemable Series D preferred stock, $0.01 par value; 25,000 shares authorized; no shares outstanding at December 31, 1995 and 1996, 22,500 shares outstanding at June 30, 1997, at redemption value including dividends of $159......................................... -- -- 17,717 -- Warrants exercisable into 27,484 shares of Class D common stock at December 31, 1995 and 1996, and 23,636 shares of Class D common stock at June 30, 1997, at an exercise price of $0.01 per share, at estimated redemption value........................................ 834 870 1,032 -- Warrants exercisable into 3,514 shares of Class E common stock at June 30, 1997, at an exercise price of $0.01 per share, at estimated redemption value................... -- -- 260 -- ------ ------ ------ ---- Total redeemable preferred stock and warrants................................. 13,628 14,561 32,989 -- ------ ------ ------ ----
F-4 CAREER EDUCATION CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (DOLLARS IN THOUSANDS)
DECEMBER 31 JUNE 30 ---------------- ------------------------ PRO FORMA 1995 1996 1997 1997 (NOTE 13) ------- ------- -------- -------------- STOCKHOLDERS' INVESTMENT: (UNAUDITED) Class A common stock, $0.01 par value; 600,000 shares authorized; 5,250 shares issued and outstanding at December 31, 1995 and 1996, and June 30, 1997....... -- -- -- -- Class B common stock, $0.01 par value; 100,000 shares authorized; 5,100 shares issued and outstanding at December 13, 1995 and 1996, and June 30, 1997....... -- -- -- -- Class C common stock, $0.01 par value; 100,000 shares authorized; 69,900 shares issued and outstanding at December 31, 1995 and 1996, and June 30, 1997....... 1 1 1 -- Class D common stock, $0.01 par value; 100,000 shares authorized; no shares issued and outstanding at December 31, 1995 and 1996, and June 30, 1997..................... -- -- -- -- Class E common stock, $0.01 par value; 200,000 shares authorized; 824 issued and outstanding at December 31, 1995, 1,648 shares issued and outstanding at December 31, 1996, and June 30, 1997....... -- -- -- -- Warrants........................... -- -- 4,788 -- Additional paid-in capital......... 30 60 60 -- Accumulated deficit................ (2,787) (2,650) (3,761) -- ------- ------- -------- ---- Total stockholders' investment... (2,756) (2,589) 1,088 -- ------- ------- -------- ---- TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT.......................... $23,584 $36,208 $100,767 -- ======= ======= ======== ====
The accompanying notes are an integral part of these statements. F-5 CAREER EDUCATION CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED FOR THE SIX MONTHS DECEMBER 31 ENDED JUNE 30 ------------------------- ------------------- 1994 1995 1996 1996 1997 ------- ------- ------- ----------- ------- (UNAUDITED) REVENUE: Tuition and registration fees, net.................... $ 5,794 $16,330 $29,269 $12,716 $23,073 Other, net.................... 1,692 3,066 4,311 2,074 2,579 ------- ------- ------- ------- ------- Total net revenue......... 7,486 19,396 33,580 14,790 25,652 ------- ------- ------- ------- ------- OPERATING EXPENSES: Educational services and facilities................... 3,074 8,565 14,404 6,320 11,090 General and administrative.... 4,887 9,097 14,622 7,406 10,942 Depreciation and amortization................. 980 1,344 2,179 973 2,109 ------- ------- ------- ------- ------- Total operating expenses.. 8,941 19,006 31,205 14,699 24,141 ------- ------- ------- ------- ------- Income (loss) from operations............... (1,455) 390 2,375 91 1,511 ------- ------- ------- ------- ------- INTEREST EXPENSE............... 134 297 672 225 985 ------- ------- ------- ------- ------- Income (loss) before provision for income taxes and extraordinary item..................... (1,589) 93 1,703 (134) 526 PROVISION FOR INCOME TAXES..... -- 24 208 -- 210 ------- ------- ------- ------- ------- Income (loss) before extraordinary item....... (1,589) 69 1,495 (134) 316 EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT (net of taxes of $233, Note 4)........ -- -- -- -- 418 ------- ------- ------- ------- ------- NET INCOME (LOSS).............. $(1,589) $ 69 $ 1,495 $ (134) $ (102) ======= ======= ======= ======= ======= INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS (Note 2): Income (loss) before extraordinary item........... $(1,589) $ 69 $ 1,495 $ (134) $ 316 Dividends on preferred stock.. (393) (777) (1,128) (557) (738) Accretion to redemption value of preferred stock and warrants..................... -- (96) (230) (115) (271) ------- ------- ------- ------- ------- Income (loss) before extraordinary item attributable to common stockholders............. (1,982) (804) 137 (806) (693) Extraordinary loss............ -- -- -- -- 418 ------- ------- ------- ------- ------- Net income (loss) attributable to common stockholders............. $(1,982) $ (804) $ 137 $ (806) $(1,111) ======= ======= ======= ======= ======= PRO FORMA (UNAUDITED): Income (loss) before extraordinary item attributable to common stockholders, as reported.... $(1,982) $ (804) $ 137 $ (806) $ (693) Dividends on preferred stock...................... 393 777 1,128 557 738 Accretion to redemption value of preferred stock and warrants............... -- 96 230 115 271 ------- ------- ------- ------- ------- Pro forma income (loss) before extraordinary item attributable to common stockholders.................. $(1,589) $ 69 $ 1,495 $ (134) $ 316 ======= ======= ======= Extraordinary loss............ -- 418 ------- ------- Pro forma net income (loss) attributable to common stockholders.................. 1,495 (102) ======= ======= Pro forma income (loss) before extraordinary item per share.. $ -- $ -- ======= ======= Pro forma net income (loss) per share attributable to common stockholders.................. $ -- $ -- ======= ======= Pro forma weighted average number of common and common stock equivalent shares outstanding................... -- -- ======= =======
The accompanying notes are an integral part of these statements. F-6 CAREER EDUCATION CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED DECEMBER 31 JUNE 30 ------------------------- ----------------------------- 1994 1995 1996 1996 1997 ------- ------- ------- --------------- ------------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)..... $(1,589) $ 69 $ 1,495 $ (134) $ (102) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities-- Depreciation, amortization and debt discount...... 980 1,351 2,188 981 2,116 Warrants issued to a bank............... -- -- -- -- 180 Deferred income taxes.............. -- -- (273) 554 (203) Loss on sale of assets............. 2 -- -- -- -- Extraordinary loss.. -- -- -- -- 651 Changes in operating assets and liabilities, net of acquisitions-- Receivables, net.. (708) (869) 385 1,167 998 Inventories, prepaid expenses and other current assets........... (101) (246) (245) (95) (424) Deposits.......... (116) 33 8 (19) (9) Accounts payable.. (14) 118 (138) (221) 594 Accrued expenses.. (142) (233) 817 (720) (1,016) Deferred tuition 688 12 1,038 (943) (5,582) revenue.......... ------- ------- ------- ----------- ------------- Net cash provided by (used in) operating (1,000) 235 5,275 570 (2,797) activities..... ------- ------- ------- ----------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisitions, net of cash.......... (1,985) (1,622) (8,250) -- (37,717) Acquisition and organizational costs. (234) (959) -- -- -- Purchase of property and equipment, net... (153) (897) (1,231) (365) (482) Investment in Perkins -- -- (37) -- 7 program fund......... ------- ------- ------- ----------- ------------- Net cash used in investing (2,372) (3,478) (9,518) (365) (38,192) activities..... ------- ------- ------- ----------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock................ -- 30 -- -- 30 Issuance of warrants.. -- -- -- -- 4,788 Issuance of redeemable preferred stock and warrants............. 7,850 5,070 -- -- 17,557 Redemption of preferred stock...... -- (200) -- -- -- Dividends paid on preferred stock...... -- (207) (495) (248) (248) Equity and debt financing costs...... -- (535) (553) -- (542) Book overdraft........ -- -- 683 -- (295) Payments of long-term debt................. (1,836) (6,363) (1,309) (4,705) (313) Net proceeds from (repayment of) revolving credit facility............. -- 6,771 1,500 3,250 (8,246) Proceeds from term loan facility........ -- -- 8,250 -- 3,400 Repayments of term loan facility........ -- -- -- -- (11,650) Net proceeds from revolving loans under Credit Agreement..... -- -- -- -- 25,955 Proceeds from issuance of term loans under -- -- -- -- 12,500 Credit Agreement..... ------- ------- ------- ----------- ------------- Net cash provided by (used in) financing 6,014 4,566 8,076 (1,703) 42,936 activities..... ------- ------- ------- ----------- ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 2,642 1,323 3,833 (1,498) 1,947 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ -- 2,642 3,965 3,965 7,798 CASH AND CASH EQUIVALENTS, END OF YEAR................... $ 2,642 $ 3,965 $ 7,798 $ 2,467 $ 9,745 ======= ======= ======= =========== ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for-- Interest.............. $ 119 $ 327 $ 407 $ 225 $ 958 Taxes paid............ -- -- 80 -- 2,480 ======= ======= ======= =========== ============= NON-CASH INVESTING AND FINANCING ACTIVITIES: Accretion to redemption value of preferred stock and warrants............. $ -- $ 96 $ 230 $ 115 $ 271 Dividends on preferred stock added to liquidation value.... 393 570 632 309 490 ======= ======= ======= =========== =============
The accompanying notes are an integral part of these statements. F-7 CAREER EDUCATION CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
COMMON STOCK ------------------------------------------------------------------------------------------- CLASS A CLASS B CLASS C CLASS D CLASS E ---------------- ---------------- ---------------- ---------------- ---------------- 600,000 $0.01 100,000 $0.01 100,000 $0.01 100,000 $0.01 200,000 $0.01 SHARES PAR SHARES PAR SHARES PAR SHARES PAR SHARES PAR TOTAL AUTHORIZED VALUE AUTHORIZED VALUE AUTHORIZED VALUE AUTHORIZED VALUE AUTHORIZED VALUE AMOUNT ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- ------ BALANCE, January 5, 1994 -- $-- -- $-- -- $-- -- $-- -- $-- $-- Issuance of stock..... 5,250 53 5,100 51 69,900 699 -- -- -- -- 803 Dividends on preferred stock for the year... -- -- -- -- -- -- -- -- -- -- -- Net loss.............. -- -- -- -- -- -- -- -- -- -- -- ----- ---- ----- ---- ------ ---- --- ---- ----- ---- ---- BALANCE, December 31, 1994.................. 5,250 $ 53 5,100 $ 51 69,900 $699 -- $-- -- $-- $803 Issuance of stock and warrants............. -- -- -- -- -- -- -- -- 824 8 8 Dividends paid........ -- -- -- -- -- -- -- -- -- -- -- Dividends on preferred stock for the year... -- -- -- -- -- -- -- -- -- -- -- Preferred stock and warrant accretion.... -- -- -- -- -- -- -- -- -- -- -- Net income............ -- -- -- -- -- -- -- -- -- -- -- ----- ---- ----- ---- ------ ---- --- ---- ----- ---- ---- BALANCE, December 31, 1995.................. 5,250 53 5,100 51 69,900 699 -- -- 824 8 811 Issuance of stock..... -- -- -- -- -- -- -- -- 824 8 8 Dividends paid........ -- -- -- -- -- -- -- -- -- -- -- Dividends on preferred stock for the year... -- -- -- -- -- -- -- -- -- -- -- Preferred stock and warrant accretion.... -- -- -- -- -- -- -- -- -- -- -- Net income............ -- -- -- -- -- -- -- -- -- -- -- ----- ---- ----- ---- ------ ---- --- ---- ----- ---- ---- BALANCE, December 31, 1996.................. 5,250 53 5,100 51 69,900 699 -- -- 1,648 16 819 Issuance of warrants.. -- -- -- -- -- -- -- -- -- -- -- Dividends paid........ -- -- -- -- -- -- -- -- -- -- -- Dividends on preferred stock for the period. -- -- -- -- -- -- -- -- -- -- -- Preferred stock and warrant accretion.... -- -- -- -- -- -- -- -- -- -- -- Net loss.............. -- -- -- -- -- -- -- -- -- -- -- ----- ---- ----- ---- ------ ---- --- ---- ----- ---- ---- BALANCE, June 30, 1997. 5,250 $ 53 5,100 $ 51 69,900 $699 -- $-- 1,648 $ 16 $819 ===== ==== ===== ==== ====== ==== === ==== ===== ==== ====
The accompanying notes are an integral part of these statements. F-8 CAREER EDUCATION CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT (CONTINUED)
WARRANTS ---------- CLASS E ADDITIONAL TOTAL COMMON PAID-IN ACCUMULATED STOCKHOLDERS' STOCK CAPITAL DEFICIT INVESTMENT ---------- ---------- ----------- ------------- BALANCE, January 5, 1994...... $ -- $ -- $ -- $ -- Issuance of stock........... -- -- (795) 8 Dividends on preferred stock for the year............... -- -- (392,790) (392,790) Net loss.................... -- -- (1,589,171) (1,589,171) ---------- ------- ----------- ----------- BALANCE, December 31, 1994.... $ -- $ -- $(1,982,756) $(1,981,953) Issuance of stock........... -- 29,974 -- 29,982 Dividends paid.............. -- -- (206,800) (206,800) Dividends on preferred stock for the year............... -- -- (570,277) (570,277) Preferred stock and warrant accretion.................. -- -- (95,822) (95,822) Net income.................. -- -- 68,543 68,543 ---------- ------- ----------- ----------- BALANCE, December 31, 1995.... -- 29,974 (2,787,112) (2,756,327) Issuance of stock........... -- 29,974 -- 29,982 Dividends paid.............. -- -- (495,400) (495,400) Dividends on preferred stock for the year............... -- -- (632,417) (632,417) Preferred stock and warrant accretion.................. -- -- (229,975) (229,975) Net income.................. -- -- 1,494,666 1,494,666 ---------- ------- ----------- ----------- BALANCE, December 31, 1996.... -- 59,948 (2,650,238) (2,589,471) Issuance of warrants........ 4,788,563 -- -- 4,788,563 Dividends paid.............. -- -- (247,700) (247,700) Dividends on preferred stock for the period............. -- -- (490,493) (490,493) Preferred stock and warrant accretion.................. -- -- (270,642) (270,642) Net loss.................... -- -- (102,047) (102,047) ---------- ------- ----------- ----------- BALANCE, June 30, 1997........ $4,788,563 $59,948 $(3,761,120) $ 1,088,210 ========== ======= =========== ===========
F-9 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED) 1. DESCRIPTION OF THE BUSINESS Career Education Corporation (the "Company") was incorporated in January 1994, for the purpose of acquiring operations of various for-profit postsecondary schools. The Company manages and operates the educational institutions acquired through its wholly-owned subsidiaries, Al Collins Graphic Design School, Ltd. ("Collins"), Brooks College, Ltd. ("Brooks"), Allentown Business School, Ltd. ("Allentown"), Brown Institute, Ltd. ("Brown"), Western Culinary Institute, Inc. ("Western Culinary"), School of Computer Technology, Inc. ("SCT"), The Katherine Gibbs Schools, Inc. ("Gibbs"), IAMD, Limited and Subsidiaries, (The International Academy of Merchandising and Design; "IAMD-U.S."), and The International Academy of Merchandising & Design (Canada) Ltd. and Subsidiary ("IAMD-Canada"). The Collins campus is located in Tempe, Arizona, and offers associate and bachelor degrees in visual communications and a certificate in desktop publishing. The Brooks campus is located in Long Beach, California, and offers associate degrees in fashion design, fashion merchandising, interior design and visual communications. The Allentown campus is located in Allentown, Pennsylvania, and offers associate degrees in business administration, accounting, marketing, secretarial, fashion merchandising and medical-related fields, and offers diplomas in business operations, PC/LAN, office assistant and medical-related fields. The Brown campus is located in Minneapolis, Minnesota, and offers certificates and/or associate degrees in allied health, visual communications, business administration, information systems management, computer programming, electronics technology and radio/television broadcasting. The Western Culinary campus is located in Portland, Oregon, and offers diplomas in culinary arts. SCT is headquartered in Pittsburgh, Pennsylvania and has campuses in Pittsburgh, Pennsylvania and Fairmont, West Virginia and offers associate degrees and diplomas in computer technology, laser technology and specialized culinary arts. Gibbs is headquartered in New York, New York and has campuses located in various cities through out New York, New Jersey, and New England and offers associate degrees in secretarial arts and business administration. IAMD-U.S. has campuses located in Chicago, Illinois and Tampa, Florida. IAMD-Canada has campuses located in Toronto, Canada and Montreal, Canada. Both IAMD-U.S. and IAMD-Canada offer associate and bachelor degrees in various fields of merchandising management, fashion design, interior design, and computer graphics. 2. SIGNIFICANT ACCOUNTING POLICIES The financial statements and related notes thereto for the six months ended June 30, 1996 are unaudited and have been prepared on the same basis as the audited financial statements included herein. In the opinion of management, such unaudited financial statements include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the information set forth herein. Operating results for the six months ended June 30, 1997 are not necessarily indicative of results that may be expected for the fiscal year ended December 31, 1997. The principal accounting policies of the Company are as follows: a. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in the consolidation. The results of operations of all acquired businesses have been consolidated for all periods subsequent to the date of acquisition. b. Concentration of Credit Risk The Company extends unsecured credit for tuition to a significant portion of the students who are in attendance at the campuses operated by its subsidiaries. A substantial portion of credit extended to students is repaid through the student's participation in various federally funded financial aid programs under Title IV of F-10 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED) the Higher Education Act of 1965 ("Title IV Programs"), as amended. Approximately 70%, 73%, 72%, 72% and 64%, respectively, of the Company's net revenue was collected from Title IV Program funds in fiscal 1994, 1995 and 1996 and for the six months ended June 30, 1996 and 1997. The Company generally completes and approves the financial aid packet of each student who qualifies for financial aid prior to the student beginning class in an effort to enhance the collectibility of its unsecured credit. Transfers of funds from the financial aid programs to the Company are made in accordance with the United States Department of Education ("DOE") requirements. Changes in DOE funding federal student financial aid programs could impact the Company's ability to attract students. c. Cash and Cash Equivalents Cash and cash equivalents consists of cash in banks and certificates of deposit with maturities of less than 30 days. d. Restricted Cash Cash received from the U. S. Government under various student aid grant and loan programs is considered to be restricted. Restricted cash is held in separate bank accounts and does not become available for general use by the Company until the financial aid is credited to the accounts of students and the cash is transferred to an operating account. e. Perkins Matching Funds The Company participates in the Perkins Loan program in order to provide continuing long-term, low interest loans to qualifying students in need of financial assistance. Perkins loans are available on the basis of student financial need and are subject to the availability of Perkins loan funds at the institution. As previous borrowers repay their Perkins loans, their payments are used to fund new loans thus creating a permanent revolving loan fund. There is a 25% institutional matching requirement for Perkins loans. The Company carries its investments at cost, net of allowances for losses and collections. At December 31, 1995, December 31, 1996 and June 30, 1997, the Company had estimated that approximately $225,000, $262,000 and $274,000, respectively, of contributions to the program are expected to be returned if the program should cease. f. Marketing and Advertising Costs Marketing and advertising costs are expensed as incurred. Marketing and advertising costs included in general and administrative expenses were $971,000, $2,715,000, $3,494,000, $2,007,000 and $2,894,000 for the years ended December 31, 1994, December 31, 1995, December 31, 1996 and the six months ended June 30, 1996 and 1997, respectively. g. Inventories Inventories consisting principally of program materials, books and supplies are stated at the lower of cost, determined on a first-in, first-out, basis or market. h. Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are recognized utilizing the straight-line method over the related assets useful lives. Leasehold improvements and assets recorded under F-11 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED) capital leases are amortized on a straight-line basis over their estimated useful lives or lease terms, whichever is shorter. Maintenance, repairs and minor renewals and betterments are expensed; major improvements are capitalized. The estimated useful lives and cost basis of property and equipment at December 31, 1995, December 31, 1996 and June 30, 1997, are as follows (dollars in thousands):
DECEMBER 31, --------------- JUNE 30, 1995 1996 1997 LIFE ------- ------- -------- ---------- Buildings............................... $ 350 $ 350 $ 1,190 31 years Classroom equipment, courseware and other instructional materials................ 10,237 17,905 35,712 3-15 years Furniture, fixtures and equipment....... 2,653 2,926 9,696 3-10 years Leasehold improvements.................. 843 1,296 4,585 1-7 years Vehicles................................ 40 40 40 5 years ------- ------- ------- 14,123 22,517 51,223 Less-Accumulated depreciation and amor- tization............................... 1,282 2,957 4,135 ------- ------- ------- $12,841 $19,560 $47,088 ======= ======= =======
The gross cost of assets recorded under capital leases included above amounted to $39,000, $39,000 and $2,835,000 at December 31, 1995, December 31, 1996 and June 30, 1997, respectively. i. Intangible Assets Intangible assets include the excess of cost over fair market value of identifiable assets acquired through the business purchases described in Note 3. Goodwill and student contracts are being amortized on a straight-line basis over their estimated useful life. Covenants not-to-compete entered into before 1997 are being amortized on a straight-line basis over their useful life. Those entered into during 1997 and thereafter are being amortized on an accelerated method over their estimated useful life. At December 31, 1995, December 31, 1996 and June 30, 1997, the cost basis and useful lives of intangible assets consist of the following (dollars in thousands):
DECEMBER 31, ------------- JUNE 30, ESTIMATED 1995 1996 1997 LIVES ------ ------ -------- --------- Goodwill.................................... $2,592 $3,128 $20,445 40 years Covenants not-to-compete.................... 100 500 13,250 3-5 years Student contracts........................... 1,055 1,107 -- 1 year ------ ------ ------- 3,747 4,735 33,695 Less-Accumulated amortization............... 934 1,328 860 ------ ------ ------- $2,813 $3,407 $32,835 ====== ====== =======
On an ongoing basis, the Company reviews intangible assets and other long- lived assets for impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. To date, no such events or changes in circumstances have occurred. If such events or changes in circumstances occur, the Company will recognize an impairment loss if the undiscounted future cash flows expected to be generated by the asset (or acquired business) are less than the carrying value of the related asset. The impairment loss would adjust the asset to its fair value. F-12 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED) j. Organizational Costs Costs incurred in conjunction with the organization of the Company and its subsidiaries are being amortized on a straight-line basis over an estimated useful life of five years. Accumulated amortization as of December 31, 1995, December 31, 1996 and June 30, 1997, was $94,000, $153,000 and $215,000, respectively. k. Deferred Financing Costs Costs incurred in connection with obtaining financing are capitalized and amortized over the maturity period of the debt. Accumulated amortization as of December 31, 1995, December 31, 1996 and June 30, 1997, was $14,000, $59,000 and $69,000, respectively. l. Revenue Recognition Revenue is derived primarily from courses taught at the schools. Tuition revenue is recognized on a straight-line basis over the length of the applicable course. Dormitory and cafeteria revenues charged to students are recognized on a straight-line basis over the length of the students' program. Other dormitory and cafeteria revenues are recognized as earned. Textbook sales and other revenues are recognized as services are performed. If a student withdraws, future revenue is reduced by the amount of refund due to the student. Refunds are calculated in accordance with federal, state and accrediting agency standards. Deferred tuition revenue represents the portion of payments received but not earned and is reflected as a current liability in the accompanying consolidated balance sheets as such amount is expected to be earned within the next year. m. Management's Use of Estimates The preparation of financial statements in conformity with Generally Accepted Accounting Principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. n. Income Taxes The Company files a consolidated federal income tax return. The Company provides for deferred income taxes under the asset and liability method of accounting. This method requires the recognition of deferred income taxes based upon the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. o. Financial Instruments The carrying value for current assets and liabilities reasonably approximates their fair value due to their short maturity periods. The carrying value of the Company's debt obligations reasonably approximates fair value as the stated interest rate approximates current market interest rates of debt with similar terms. p. Accretion to Redemption Value of Preferred Stock and Warrants Accretion to redemption value of redeemable preferred stock and warrants represents the change in the redemption value of outstanding preferred stock and warrants in each period which is being accreted to its redemption value over the earliest period redemption can occur using the effective interest method. The redemption values are based on the estimated fair market values of the classes of stock and consider the amounts the Company has received for the sale of equity instruments, prices paid for acquired businesses and operations of the Company. F-13 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED) q. Pro Forma Income (Loss) before Extraordinary Item per Share Attributable to Common Stockholders, Supplemental Pro Forma Income (Loss) before Extraordinary Item per Share Attributable to Common Stockholders and Supplemental Pro Forma Net Income (Loss) per Share Attributable to Common Stockholders Pro forma income (loss) before extraordinary item per share available to common stockholders is based on the weighted average number of shares of common stock and common stock equivalents outstanding after giving retroactive adjustments for stock splits described in Notes 5 and 15 for all periods presented, retroactively reflects the shares of redeemable preferred stock and warrants converted into shares of common stock, retroactively reflects the conversion of all shares of common stock into Class A common stock and includes shares being sold in the offering to fund payment for the dividend as described in Note 15. Common stock equivalents represent stock options and warrants using the treasury stock method for all periods presented. All common stock options and warrants issued within one year prior to the initial public filing with a price below the estimated initial public offering price have been included as outstanding shares for all periods presented, reduced by the number of shares which could be purchased with proceeds from the exercise of the options and warrants. Supplemental pro forma loss before extraordinary item per share attributable to common stockholders for the year ended December 31, 1996 and for the six months ended June 30, 1997 of $ and $ respectively, is computed based upon (i) pro forma income (loss) before extraordinary item attributable to common stockholders adjusted for the reduction in interest expense (net of tax benefit) resulting from the application of net proceeds of the contemplated offering to reduce indebtedness of the Company and (ii) the pro forma weighted average number of shares of common stock outstanding adjusted to reflect the sale by the Company of approximately shares of common stock in the offering resulting in net proceeds sufficient to pay indebtedness as described in Note 15. Supplemental pro forma net income (loss) per share attributable to common stockholders of $ and $ for the year ended December 31, 1996 and for the six months ended June 30, 1997, respectively, is based upon the pro forma income (loss) before extraordinary item adjusted for the extraordinary loss on the early extinguishment of debt. r. Stock-Based Compensation Statement of Financial Accounting Standards No. 123, "Accounting for Stock- Based Compensation" ("SFAS No. 123"), was issued in October, 1995. SFAS No. 123 provides an alternative method of accounting for stock-based compensation arrangements, based on fair value of the stock-based compensation utilizing various assumptions regarding the underlying attributes of the options and stock, rather than the existing method of accounting for stock-based compensation which is provided in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). The Financial Accounting Standards Board encourages entities to adopt the fair-value based method but does not require adoption of this method. The Company will continue its current accounting policy and has adopted the disclosure-only provisions of SFAS No. 123 for options and warrants issued to employees and directors. Expense associated with stock options and warrants issued to non- employees/non-directors is recorded in accordance with SFAS No. 123. s. New Accounting Pronouncements Earnings Per Share In February 1997, the Financial Accounting Standards Board issued Financial Accounting Standard No. 128 ("SFAS No. 128"), addressing earnings per share. SFAS No. 128 changed the methodology of calculating earnings per share and renamed the two calculations, basic earnings per share (currently primary) and diluted earnings per share (currently fully diluted). The calculations differ by eliminating any common stock equivalents (such as stock options, warrants, and convertible preferred stock) from basic earnings per share and changes certain calculations when computing diluted earnings per share. The weighted average number of common shares for the basic earnings per common share calculation includes (i) all common stock outstanding during each F-14 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED) period presented, (ii) all common stock options and warrants issued within one year prior to the initial public filing with a price below the estimated initial public offering price, reduced by the number of shares which could be purchased with proceeds from the exercise of the options and warrants, (iii) the common stock that will be issued upon the preferred stock conversion, and (iv) the common stock that will be used to fund payment of the estimated dividends as described in Note 15. The weighted average number of common shares for the diluted earnings per common share calculation is based on similar assumptions and is adjusted for all other common stock equivalents that were outstanding during each period presented. SFAS No. 128 is effective for reporting periods ending after December 15, 1997. For the year ended December 31, 1996 and the six months ended June 30, 1997, had the Company calculated earnings per share using SFAS No. 128, the basic earnings per share would have been $ , and $ , respectively, and the diluted earnings per share would have been $ , and $ , respectively. The Company will adopt SFAS No. 128 on December 31, 1997. Capital Structure In February 1997, the Financial Accounting Standards Board issued SFAS No. 129, "Disclosure of Information about Capital Structure" ("SFAS No. 129"), which requires all companies to disclose all relevant information regarding their capital structure. SFAS No. 129 presentation is required for reporting periods ending after December 15, 1997. Based on the capital structure disclosures presented in the accompanying consolidated financial statements and notes thereto, the Company does not believe that any additional disclosures will be required as a result of adopting this pronouncement. Comprehensive Income In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), which establishes standards for reporting of comprehensive income. This pronouncement requires that all items recognized under accounting standards as components of comprehensive income, as defined in the pronouncement, be reported in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. The financial statement presentation required under SFAS No. 130 is effective for all fiscal years beginning after December 15, 1997. The Company will adopt SFAS No. 130 in 1998. As of June 30, 1997, the impact of adopting this pronouncement has not been determined; however, the Company will be affected by it because it maintains a subsidiary which has operations in Canada. Segment Reporting In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS No. 131"), which amends the requirements for a public enterprise to report financial and descriptive information about its reportable operating segments. Operating segments, as defined in the pronouncement, are components of an enterprise about which separate financial information is available that is evaluated regularly by the Company in deciding how to allocate resources and in assessing performance. The financial information is required to be reported on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments. The disclosures required by SFAS No. 131 are effective for all fiscal years beginning after December 15, 1997. The Company will adopt SFAS No. 131 in 1998. This pronouncement will have an effect on the Company's reporting in the subsequent periods; however, as of June 30, 1997, the impact of this pronouncement has not been determined. F-15 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED) t. Foreign Currency Translation The Company's wholly owned Canadian subsidiary, IAMD-Canada, acquired an entity with operations in Canada on June 30, 1997. For periods subsequent to June 30, 1997, revenues and expenses related to these operations will be translated at average exchange rates in effect at the time the underlying transactions occur. Transaction gains or losses will be included in income. Assets and liabilities of this subsidiary will be translated at year-end exchange rates with gains and losses resulting from such translation being included in stockholders' investment. 3. BUSINESS ACQUISITIONS COLLINS On January 31, 1994, Collins acquired certain assets and assumed certain liabilities of the Al Collins Graphic Design School. This acquisition was accounted for as a purchase and, accordingly, the purchased assets and assumed liabilities have been recorded at their estimated fair market values at the date of the acquisition. The purchase price of $2,260,000 exceeded the fair market value of assets acquired and liabilities assumed, resulting in goodwill of approximately $906,000. BROOKS On June 20, 1994, Brooks acquired certain assets and assumed certain liabilities of Brooks College. This acquisition was accounted for as a purchase and, accordingly, the purchased assets and assumed liabilities have been recorded at their estimated fair market values at the date of the acquisition. The purchase price of $4,100,000 exceeded the fair market value of assets acquired and liabilities assumed resulting in goodwill of approximately $1,075,000. ALLENTOWN AND BROWN On July 31, 1995, Brown acquired certain assets and assumed certain liabilities of Brown Institute Campus of National Education Centers, Inc., and Allentown acquired certain assets and assumed certain liabilities of Allentown Business School Campus of National Education Centers, Inc. These acquisitions were accounted for as purchases and, accordingly, the purchased assets and assumed liabilities have been recorded at their estimated fair market values at the date of the acquisition. The total purchase price of approximately $6,993,000, exceeded the fair market value of the assets acquired, resulting in goodwill of approximately $843,000. In connection with the purchase, the former owner of the schools entered into a three-year covenant not-to-compete agreement with the Company. WESTERN CULINARY On October 21, 1996, Western Culinary acquired certain assets and assumed certain liabilities of Western Culinary Institute, a wholly owned subsidiary of Phillips College, Inc. This acquisition was accounted for as a purchase and, accordingly, the purchased assets and assumed liabilities have been recorded at their estimated fair market values at the date of the acquisition. The purchase price, subject to certain adjustments, of approximately $8,000,000 exceeded the fair market value of net assets acquired, resulting in goodwill of approximately $646,000. In connection with the purchase, the former owner of the school entered into a four-year covenant not-to-compete agreement with the Company for a total price of $400,000. At closing, the Company paid $7,000,000 to the former owner, assumed a $150,000 obligation and deposited $1,250,000 into escrow. At December 31, 1996, the Company estimated that approximately $523,000 would be returned to the Company as a result of purchase price adjustments and has reflected such amount as due from former owners of acquired businesses in the accompanying December 31, 1996 consolidated balance sheet. This amount was collected in January 1997. F-16 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED) SCT On February 28, 1997, the Company, through SCT Acquisition, Ltd., acquired 100% of the outstanding shares of capital stock of School of Computer Technology, Inc. This acquisition was accounted for as a purchase and, accordingly, the acquired assets and assumed liabilities have been recorded at their estimated fair market values at the date of the acquisition. The estimated fair market values of certain assets are based upon preliminary appraisal reports. The purchase price, subject to certain modifications, of approximately $5,450,000 exceeded the estimated fair market value of net assets acquired, resulting in goodwill of approximately $3,032,000. In connection with the purchase, the former owners of the school each entered into three-year covenant not-to-compete agreements with the Company for a total price of $1,750,000. At closing, the Company paid $400,000 to the former owners, deposited $5,000,000 into escrow, and assumed a $1,800,000 note payable due to the former owners. Funds paid were raised through the issuance of $2,000,000 of Series D preferred stock and warrants and $3,400,000 of bank borrowings. The amount in escrow will be distributed, subject to certain adjustments for events occurring after the closing date, in 1997. Accordingly, subsequent adjustments to the purchase price may result in changes to the purchase price allocation. Management does not believe that such adjustments will be material. At June 30, 1997, the Company estimates that approximately $506,000 will be returned to the Company as a result of such purchase price adjustments and has reflected such amount as due from former owners of acquired businesses in the accompanying June 30, 1997 consolidated balance. GIBBS On May 31, 1997, the Company acquired 100% of the outstanding shares of capital stock of The Katharine Gibbs Schools, Inc. The Katharine Gibbs Schools, Inc. has seven wholly-owned subsidiaries, each of which owns and operates separate campuses. This acquisition was accounted for as a purchase and, accordingly, the acquired assets and assumed liabilities have been recorded at their estimated fair market values at the date of the acquisition. The estimated fair market values of certain assets are based upon preliminary appraisal reports. The purchase price, subject to certain modifications, of approximately $20,000,000 exceeded the fair market value of net assets acquired, resulting in goodwill of approximately $7,776,000. Subsequent adjustments to the purchase price may result in changes to the purchase price allocation. At June 30, 1997, the Company has reduced the purchase price by approximately $1,093,000 as a result of estimated purchase price adjustments. In connection with the purchase, the former owner of the schools also entered into a covenant not-to-compete agreement with the Company for a total price of $7,000,000. The covenant not-to-compete restricts the former owners' ability to own or operate certain types of for-profit postsecondary schools for five years. At closing, the Company paid $5,400,000 to the former owner and deposited $18,850,000 into escrow with borrowings of $12,500,000 from its new bank financing arrangement and $15,000,000 which was raised through the issuance of Series D preferred stock. The amount in escrow will be paid, subject to certain adjustments for events occurring after the closing date, in 1997. At June 30, 1997, the Company estimates that $1,657,000 is still owed to the seller. The Company has the right to rescind the transaction upon the occurrence of certain conditions, subject to the seller's right to cure. This right expires the earlier of November 30, 1997, or the issuance of applicable DOE approval notices. F-17 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED) IAMD-U.S. On June 30, 1997, the Company, through IAMD, Acquisition I, Ltd. acquired 100% of the outstanding shares of capital stock of IAMD, Limited for $3,000,000. Subsequent to the purchase, IAMD Acquisition I, Ltd. merged with and into IAMD, Limited and assumed its name ("IAMD-U.S."). The purchase price may be increased by up to $5,000,000 based upon the amount by which revenue of the acquired operations for the 12 month period ended June 30, 1998 exceeds $8,000,000, as provided for in an earn-out provision in the purchase agreement. IAMD-U.S. generated revenue of $7,493,000 for the year ended June 30, 1997. The purchase price of the acquisition is subject to certain modifications in addition to the earn-out provision. This acquisition was accounted for as a purchase and, accordingly, the acquired assets and assumed liabilities have been recorded at their estimated fair market values at the date of the acquisition. The estimated fair market values of certain assets are based upon preliminary appraisal reports. The purchase price, subject to certain modifications, exceeded the fair market value of net assets acquired, resulting in goodwill of approximately $1,968,000. At June 30, 1997, the Company estimates that the purchase price will be reduced by approximately $214,000 as a result of purchase price adjustments and has reflected such amount as due from former owners of acquired businesses in the accompanying June 30, 1997 consolidated balance sheet. In connection with the purchase, the former owners of the school also entered into covenant not-to-compete agreements with the Company in exchange for $2,000,000. The covenant not-to-compete restricts the former owners' ability to own or operate certain types of for-profit postsecondary schools for four years. On June 30, 1997, the Company paid $100,000 to the former owners, issued $1,500,000 in notes payable to the former owners and issued letters of credit totaling $3,400,000 to secure amounts owed to the former owners to consummate these transactions. The funds to consummate these transactions were obtained through the issuance of Series D preferred stock and warrants and bank borrowings. The notes, secured by letters of credit, bear interest, payable quarterly, at 7% per annum, and the entire principal balance is due on June 30, 2001 or earlier in the event of an initial public offering of the Company. The Company has the right to rescind the transaction upon the occurrence of certain conditions, subject to the seller's right to cure. This right expires the earlier of October 3, 1997 or the issuance of applicable DOE approval notices. IAMD-CANADA On June 30, 1997, the Company purchased 100% of the capital stock of IAMD- Canada for $6,500,000. This acquisition was accounted for as a purchase and, accordingly, the acquired assets and assumed liabilities have been recorded at their estimated fair market values at the date of the acquisition. The estimated fair market values of certain assets are based upon preliminary appraisal reports. The purchase price, subject to certain modifications, exceeded the fair market value of net assets acquired, resulting in goodwill of approximately $4,543,000. At June 30, 1997, the Company estimates that the purchase price will be decreased by approximately $125,000 as a result of purchase price adjustments and has reflected such amount as due from former owners of acquired businesses in the accompanying June 30, 1997 consolidated balance sheet. In connection with the purchase, the former owners of the school entered into covenant not-to-compete agreements with the Company in exchange for $2,000,000. The covenant not-to-compete restricts the former owners' ability to own or operate certain types of postsecondary vocational schools for four years. On June 30, 1997, the Company paid $3,820,000 to the former owners, deposited $2,120,000 into escrow, and issued $2,550,000 in notes payable to the former owners to consummate these transactions. The funds to F-18 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED) consummate these transactions were obtained through the issuance of Series D preferred stock and warrants and bank borrowings. The notes are secured by letters of credit, bear interest, payable quarterly, at 7% per annum, and the entire principal balance is due on June 30, 2001 or earlier in the event of an initial public offering of the Company. The following unaudited pro forma results of operations data for the years ended December 31, 1994, December 31, 1995 and December 31, 1996, and the six months ended June 30, 1997, assume the business acquisitions subsequent to January 1, 1995 described above occurred at the beginning of the year preceding the year of the acquisition. The pro forma results below are based on historical results of operations and do not necessarily reflect actual results that would have occurred. The pro forma results for the six months ended June 30, 1997, are not necessarily indicative of results that may be expected for the fiscal year ending December 31, 1997 (in thousands).
FOR THE SIX MONTHS FOR THE YEARS ENDED ENDED DECEMBER 31 JUNE 30 ------------------------ ---------- 1994 1995 1996 1997 ------- ------- ------- ---------- (UNAUDITED) Net revenue.......................... $23,243 $32,175 $86,597 $51,695 Income (loss) before extraordinary item................................ (902) 1,070 (5,517) (1,612) Net income (loss).................... (902) 1,070 (5,517) (2,030)
F-19 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED) 4. DEBT Debt of the Company at December 31, 1995, December 31, 1996 and June 30, 1997, consists of the following:
DECEMBER 31 -------------- JUNE 30 1995 1996 1997 ------ ------- ------- (IN THOUSANDS) Borrowings under Credit Agreement with a syndicate of banks as discussed below-- Revolving loans....................................... $ -- $ -- $25,955 Term loan............................................. -- -- 12,500 Revolving credit notes with a bank, as discussed below, net of debt discount of $73,000 and $57,000, as of December 31, 1995 and December 31, 1996, respectively.. 6,698 8,182 -- Bank term loan, as discussed below...................... -- 8,250 -- Notes payable to former owner of Allentown Business School and Brown Institute; paid in January, 1996...... 1,286 -- -- Notes payable to former owners of SCT, bearing annual interest of 7%, interest only payable quarterly, principal due February 28, 2001, secured by bank letters of credit...................................... -- -- 1,800 Amount due to former owner of Gibbs, currently payable, non-interest-bearing and unsecured..................... -- -- 1,657 Notes payable to former owners of IAMD-U.S., bearing annual interest of 7%, interest only payable quarterly, principal due June 30, 2001 (or earlier upon the occurrence of an initial public offering), secured by bank letters of credit................................. -- -- 1,500 Amounts due to former owners of IAMD-U.S., currently payable, non-interest-bearing, secured by bank letters of credit.............................................. -- -- 3,400 Notes payable to former owners of IAMD-Canada, bearing annual interest of 7%, interest only payable quarterly, principal due June 30, 2001 (or earlier upon the occurrence of an initial public offering), secured by bank letters of credit................................. -- -- 2,550 Equipment under capital leases, discounted at interest rates ranging from 6.6% to 21.5%....................... 50 27 1,756 Other................................................... -- -- 10 ------ ------- ------- 8,034 16,459 51,128 Less--Current portion................................... 1,309 2,676 3,477 ------ ------- ------- $6,725 $13,783 $47,651 ====== ======= =======
On May 30, 1997, the Company and its subsidiaries entered into a new credit agreement (the Credit Agreement) with a bank and prepaid approximately $21,187,000 of outstanding revolving credit notes, term loans and other obligations under its previous credit agreement. On September 25, 1997, the Credit Agreement was amended and syndicated. The amended Credit Agreement provides for the Company and its subsidiaries to borrow up to an aggregate of $80,000,000 on a consolidated basis, including $65,000,000 under a revolving credit facility ("Revolving Loans") and $15,000,000 through a term loan facility ("Term Loan"), and the ability to obtain up to $20,000,000 in outstanding letters of credit. Outstanding letters of credit reduce revolving credit F-20 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED) facility availability under the amended Credit Agreement. The amended Credit Agreement matures on May 30, 2002; however, availability under the revolving credit facility is reduced by $10,000,000 on May 30, 2001. The Term Loan is payable in equal quarterly installments of $625,000. Beginning September 30, 1997, these quarterly installments may increase to a maximum of $750,000 if the Company borrows $15,000,000 under the amended term loan facility. The Company's borrowings under the amended Credit Agreement bear interest, payable quarterly, at the amended Credit Agreement's Base Rate (defined as the greater of the bank's prime rate plus 0.75%, 9.25% at June 30, 1997, or the Federal Funds Rate plus 0.50%, 6.87% at June 30, 1997) or at LIBOR plus 2% (7.9375% at June 30, 1997), at the Company's election. Interest rates are subject to change based upon the Company's funded debt levels relative to consolidated earnings before interest, taxes, depreciation and amortization on a pro forma basis for the last four fiscal quarters. The Company is also required to pay annual commitment fees of 0.375% on unused availability. At June 30, 1997, the Company had outstanding, under the amended Credit Agreement, $25,955,000 in revolving credit borrowings and a $12,500,000 term loan and had issued various letters of credit totaling approximately $11,545,000 (to meet certain Department of Education financial responsibility requirements and to guarantee certain purchase price payments). At June 30, 1997, borrowings totaling $13,455,000 were at the bank's prime rate plus 0.75%, and borrowings totaling $25,000,000 were at LIBOR plus 2%. During 1995, the Company and its subsidiaries entered into a credit agreement (the "Agreement") with a bank. The Agreement provided for the Company and its subsidiaries to borrow, on a consolidated basis, $8,000,000 under a revolving credit note and $12,000,000 through a term loan. In connection with the Agreement, the Company also issued warrants to purchase 2,199 shares of Class D common stock and recorded a debt discount of $79,977 for the value of the warrants. The debt discount is amortized over the five year maturity of the related debt. On May 30, 1997, in connection with entering into the Credit Agreement and prepaying all amounts outstanding under the Agreement, the Company expensed the remaining unamortized debt discount totaling $51,000, prepayment penalty fees totaling $294,000 and the remaining unamortized deferred financing costs totaling $306,000. The loss on the early extinguishment of debt of $651,000, net of related tax benefit of $233,000, has been reflected as an extraordinary item in the accompanying consolidated statement of operations for the six months ended June 30, 1997. At December 31, 1996, the Company, under the Agreement, had $8,239,057 outstanding under revolving credit notes and had issued various letters of credit totaling approximately $270,000 to meet certain Department of Education financial responsibility requirements. The revolving credit facility availability is reduced by these amounts. Amounts outstanding under the revolving credit notes bear interest either at the bank's prime rate plus 1.25% (9.50% at December 31, 1996), or LIBOR plus 3.5% (8.875% at December 31, 1996), and are reduced annually over a five-year period with the balance due in July, 2000. Interest is payable monthly. At December 31, 1996, $5,239,057 in borrowings were at the bank's prime rate plus 1.25%, and $3,000,000 in borrowings were at LIBOR plus 3.5% rate. The term loan is payable in 35 equal monthly installments beginning a year from the origination date of the term loan, October 21, 1996, with any unpaid balance due in full in July, 2000. Amounts outstanding bear monthly interest either at the bank's prime rate plus 1.25%, or LIBOR plus 3.5%. At December 31, 1996, the Company had $8,250,000 outstanding under the term loan. The Company and its subsidiaries have collectively guaranteed repayment of amounts outstanding under the Credit Agreement. In addition, the Company has pledged the stock of its subsidiaries as collateral for repayment of the debt. The Company may voluntarily make principal prepayments. Mandatory principal prepayments are required if the Company generates excess cash flows, as defined, sells certain assets, or upon the occurrence of certain other events. The Company is restricted from paying dividends, as defined, selling or disposing of certain assets or subsidiaries, making annual rental payments in excess of $14,000,000, and issuing F-21 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED) subordinated debt in excess of $5,000,000, among other things. The Company is required to maintain certain financial ratios, including a quarterly fixed coverage ratio of at least 1.25:1, a quarterly interest coverage ratio of at least 3:1, certain levels of consolidated tangible net worth, consolidated net worth, and funded debt to consolidated earnings before interest, taxes, depreciation, and amortization, on a pro forma basis for the last four fiscal quarters, of 3.75:1 through June 30, 1998, among others. At June 30, 1997, the Company was in compliance with the covenants of the Credit Agreement, as amended. As of June 30, 1997, the Company intends to refinance amounts owed to former owners of acquired businesses as noted above through availability under its amended Credit Agreement and, therefore, such amounts have been classified as long-term. At June 30, 1997, future annual principal payments of long-term debt mature as follows (in thousands): For the 12 months ended June 30, 1999........................................... $ 3,016 2000........................................... 2,705 2001........................................... 8,406 2002........................................... 2,511 2003 and thereafter............................ 31,013 ------- $47,651 =======
5. STOCKHOLDERS' INVESTMENT COMMON STOCK Class A and Class B common stock maintain voting rights while Class C, D and E common stock is nonvoting. Class B common stock is convertible into shares of Class A common stock at any time at the discretion of the holder at a ratio of 1:1. Class C common stock is convertible into shares of either Class A common stock or Class B common stock at any time at the discretion of the holder at a ratio of 1:1. Class D common stock is convertible into shares of Class A common stock, subject to certain restrictions. Class E common stock may only be converted into shares of Class A common stock upon the occurrence of certain events. In July 1995, the Company increased the number of authorized shares of common stock and completed a 100-for-1 stock split. The par value of the additional shares arising from these splits has been reclassified from additional paid in capital or accumulated deficit (as appropriate) to common stock. The stock splits have been retroactively reflected in the accompanying consolidated financial statements. All references to per share amounts in this report have been restated to reflect the stock splits. In 1996, the Company entered into a stock subscription agreement with an employee, whereby the employee may purchase up to $100,000 of common and preferred stock. A receivable and the common and preferred stock to be issued under the agreement have been recorded at December 31, 1996. This receivable was paid in February 1997. F-22 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED) 6. REDEEMABLE PREFERRED STOCK SERIES A Series A preferred stock has a stated value of $1,000 per share, and its holders are entitled to receive dividends at an annual rate of 7% of the liquidation value per share, as defined. Dividends are paid in equal semiannual installments on January 31 and July 31 of each year by increasing the liquidation value of the Series A preferred stock. The mandatory redemption value of the Series A preferred stock has been increased to reflect these dividends. The Company may call the Series A preferred stock at any time and is required to redeem the stock on August 31, 2003, at its liquidation value. The liquidation value is $1,000 per share plus dividends, as defined. Shares of Series A preferred stock were issued at $1,000 per share during 1995 and 1994. The Company also redeemed 138 shares of Series A preferred stock at $1,000 per share plus dividends during 1995. SERIES B Series B preferred stock has a stated value of $1,000 per share, and its holders are not entitled to any dividends on any outstanding shares. Series B preferred stock may be called at the option of the Company at any time and must be redeemed by the Company on August 31, 2003, at its liquidation value ($1,000 per share). At June 30, 1997, there were no shares of Series B preferred stock issued or outstanding. SERIES C Series C preferred stock has a stated value of $1,000 per share, and its holders are entitled to receive cash dividends at an annual rate of 10% of the liquidation value per share, as defined. Dividends are payable in equal quarterly installments on each March 31, June 30, September 30 and December 31. To the extent dividends are declared and not paid, they are added to the liquidation value. The Company has paid all dividends through June 30, 1997 on Series C preferred stock. The Company may call Series C preferred stock at any time and is required to redeem the stock, at its liquidation value, upon the earlier of July 31, 2003, a sale of substantially all of the assets of the Company or a qualified initial public offering. The liquidation value is $1,000 per share plus undeclared dividends, as defined. In July 1995, the Company issued shares of Series C preferred stocks and redeemable warrants described in Note 7. The proceeds, totaling $5,000,000, have been allocated to preferred stock and warrants based upon their relative market values after considering issuance costs. In July 1996, the Company increased the number of authorized shares of Series C preferred stock and completed a 10-for-1 stock split. The stock split has been retroactively reflected in the accompanying financial statements. SERIES D Series D preferred stock has a stated value of $1,000 per share, and its holders are entitled to receive dividends at an annual rate of 7% of the liquidation value per share, as defined. Dividends are paid in equal semiannual installments on January 31 and July 31 of each year by increasing the liquidation value of the Series D preferred stock. The mandatory redemption value of the Series D preferred stock has been increased to reflect these dividends. The Company may call the Series D preferred stock at any time and is required to redeem the stock on September 30, 2003, at its liquidation value. The liquidation value is $1,000 per share plus dividends, as defined. F-23 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED) On February 28, 1997, the Company entered into a securities purchase agreement with existing common and preferred stockholders to raise funds for acquisitions. The securities purchase agreement gives them the right to purchase up to 7,500 shares of Series D preferred stock for $1,000 per share and receive warrants, currently exercisable, for the purchase of 8,924 shares of Class E common stock at an exercise price of $.01 per share. Under the February 28, 1997, securities purchase agreement, the Company issued 2,000 shares of Series D preferred stock and warrants to purchase 2,380 shares of Class E common stock to existing stockholders in connection with the acquisition of the School of Computer Technology, Inc. On May 30, 1997, the Company issued the remaining 5,500 shares of Series D preferred stock and warrants to purchase 6,544 shares of Class E common stock to existing stockholders. The proceeds (totaling $7,500,000) were used for the acquisition of SCT and Gibbs and have been allocated to preferred stock and warrants based upon their relative market values after considering issuance costs. On May 30, 1997, the Company also entered into another securities purchase agreement with existing common and preferred stockholders to raise funds for additional acquisitions. The securities purchase agreement gives them the right to purchase up to an additional 15,000 shares of Series D preferred stock for $1,000 per share and receive warrants, currently exercisable, for the purchase of 36,186 shares of Class E common stock at an exercise price of $.01 per share. Under the May 30, 1997, securities purchase agreement, the Company issued 15,000 shares of Series D preferred stock and warrants to purchase 36,186 shares of Class E common stock to existing stockholders in connection with the acquisitions of Gibbs, IAMD-U.S. and IAMD-Canada. The proceeds, totaling $15,000,000, have been allocated to preferred stock and warrants based upon their relative market values after considering issuance costs. 7. REDEEMABLE WARRANTS In connection with the issuance of Series C preferred stock during 1995, the Company issued warrants exercisable into 25,285 shares of Class D common stock. These warrants, which are exercisable at any time, have an exercise price of $.01 per share and expire in July 2005. The number of warrants is subject to adjustment upon the occurrence of certain events. In any event, the total number of shares the warrant may be exercised into may not be reduced by more than 9,894 shares. Based upon the results of operations through June 30, 1997, the total number of shares of Class D common stock into which these warrants are exercisable was adjusted to be 23,636. The Company is required to redeem these warrants upon the occurrence of certain events and in any event no later than March 31, 2001, at a price based upon specified formulas and a valuation of the Company. The holder of the warrants is required to exercise them upon a qualified public offering, as defined. The Company is accreting the difference between the value of the warrants at the date of issuance and their expected redemption value over the period to the earliest date redemption can occur using the effective interest method. In connection with the Company's previous credit agreement entered into during 1995 (Note 4), the Company issued warrants exercisable into 2,199 shares of Class D common stock. The warrants, which are exercisable at any time, have an exercise price of $.01 per share and expire in July 2005. The number of warrants is subject to adjustment under certain circumstances. The warrants may be called by the Company at any time after one year and can be put to the Company after July 31, 2001, or upon occurrence of certain other events. Based upon the terms and provisions of the credit and warrant agreements, the Company assigned a value of $79,997 to these warrants. In connection with the sales of Series D preferred stock through the various securities F-24 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED) purchase agreements, the outstanding warrants to purchase 2,199 shares of Class D common stock were exchanged for warrants (with similar put and call features) to purchase 2,199 shares of Class E common stock and also increased to include additional warrants to purchase 1,315 shares of Class E common stock. The value of these additional warrants, totaling approximately $180,000 was recorded as interest expense in 1997. 8. STOCK OPTIONS AND WARRANTS STOCK OPTIONS During 1994, certain stockholders were granted options to purchase shares of common stock of the Company up to a total of approximately 13.5% of the outstanding shares of common stock. These options, which have an exercise price of $.01 per share, are earned and become exercisable based upon certain financial returns earned by certain stockholders and are subject to other conditions. As of June 30, 1997, options exercisable into 3,114 shares of common stock had been earned and issued. They vest over a five-year period. At December 31, 1995, December 31, 1996, and June 30, 1997, 440, 880, and 1,868 options, respectively, had vested. During 1995, the Company adopted the 1995 Stock Option Plan. The plan provides for the Company to grant up to 17,135 options exercisable into shares of Class E common stock to certain members of management. The options vest and become exercisable in five equal annual installments commencing with the first anniversary of the grant, and expire 10 years from the date of grant, or earlier under certain circumstances. All granted options become fully vested upon a qualified public offering, as defined. Stock option activity for the Company's 1995 Stock Option Plan for the years ended December 31, 1995 and 1996, and for the six months ended June 30, 1997, was as follows:
WEIGHTED AVERAGE EXERCISE SHARES PRICE RANGE PRICE ------ ------------- -------- Outstanding as of January 1, 1995........... -- $ -- $ -- Granted................................... 6,791 36.38 36.38 Cancelled................................. (996) 36.38 36.38 ------ Outstanding as of December 31, 1995......... 5,795 36.38 36.38 Granted................................... 3,298 36.38 36.38 ------ Outstanding as of December 31, 1996......... 9,093 36.38 36.38 Granted................................... 7,074 129.85-137.95 136.79 Cancelled................................. (285) 36.38 36.38 ------ Outstanding as of June 30, 1997............. 15,882 $36.38-137.95 $81.10 ====== ============= ====== Stock options exercisable at 1,102 $36.38 $36.38 December 31, 1996.......................... ====== ====== ====== June 30, 1997.............................. 1,558 $36.38 $36.38 ====== ====== ======
F-25 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED) The following table summarizes information about all stock options outstanding as of June 30, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------- ---------------------------- NUMBER NUMBER OUTSTANDING WEIGHTED WEIGHTED AVERAGE EXERCISABLE WEIGHTED AS OF AVERAGE REMAINING AT AVERAGE EXERCISE PRICE RANGES JUNE 30, 1997 EXERCISE PRICE CONTRACTUAL LIFE JUNE 30, 1997 EXERCISE PRICE - --------------------- ------------- -------------- ---------------- ------------- -------------- $0.01-$0.01............. 3,114 $ 0.01 6.6 1,868 0.01 $36.38-$36.38........... 8,808 36.38 8.6 1,558 36.38 $129.85-$137.95......... 7,074 136.79 10.0 -- -- ------ ------- ---- ----- ----- $0.01-$137.95........... 18,996 67.81 8.8 3,426 16.54 ====== ======= ==== ===== =====
For purposes of determining the pro forma effect of these options, the fair value of each option is estimated on the date of grant based on the Black- Scholes option pricing model assuming, among other things, no dividend yield, a range of risk-free interest rates of 5.7% to 6.8%, no volatility and an expected life of 10 years. The weighted average fair value of the options granted during the years ended December 31, 1995, December 31, 1996, and for the six months ended June 30, 1997, was approximately $16.58, $16.87 and $24.06, respectively. As of June 30, 1997, the remaining actual life of all options was approximately 9.2 years. WARRANTS In connection with the issuance of Class D preferred stock through the various securities purchase agreements, the Company issued warrants exercisable into a total of 45,110 shares of Class E common stock during 1997. These warrants, which are exercisable at any time, have an exercise price of $.01 per share and expire in July 2005. The number of warrants is subject to adjustment under certain circumstances. The Company may call the warrants, which were valued at approximately $6,204,000 on the date of their issuance, at any time after one year. The holders of these warrants are required to exercise them upon a qualified public offering, as defined. F-26 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED) A summary of warrant activity, including redeemable warrants, for the years ended December 31, 1995, December 31, 1996, and for the six months ended June 30, 1997, is as follows:
SHARES UNDER WARRANT -------------------------- CLASS D CLASS E COMMON STOCK COMMON STOCK ------------- ------------ SHARES PRICE SHARES PRICE ------ ----- ------ ----- Outstanding as of January 1, 1995................ -- $ -- -- $ -- Issued......................................... 27,484 0.01 -- -- ------ ------ Outstanding as of December 31, 1995.............. 27,484 0.01 -- -- Issued......................................... -- -- -- -- ------ ------ Outstanding as of December 31, 1996.............. 27,484 0.01 -- -- Issued......................................... -- -- 46,425 0.01 Cancelled...................................... (1,649) 0.01 -- -- Exchanged...................................... (2,199) 0.01 2,199 0.01 ------ ------ Outstanding as of June 30, 1997.................. 23,636 0.01 48,624 0.01 ====== ===== ====== ===== Warrants exercisable at December 31, 1996........ 27,484 $0.01 -- $ -- ====== ===== ====== ===== Warrants exercisable at June 30, 1997............ 23,636 $0.01 48,624 $0.01 ====== ===== ====== =====
The fair value of each warrant is estimated on the date of grant based on the Black-Scholes option pricing model assuming among other things, no dividend yield, a risk-free interest rate of 6.59%, an expected volatility of 0.70 and expected life of 8-10 years. The weighted average fair value of warrants to purchase Class D common stock issued during the year ended December 31, 1995, was approximately $36.38. As of June 30, 1997, the remaining contractual life of these warrants was approximately 8.1 years. The weighted average fair value of warrants to purchase Class E common stock issued for the six months ended June 30, 1997 was approximately $132.93. As of June 30, 1997, the remaining contractual life of these warrants was approximately 8.1 years. PRO FORMA RESULTS Had the Company accounted for its stock options in accordance with FASB No. 123, pro forma income (loss) before extraordinary item attributable to common stockholders and pro forma income (loss) before extraordinary item per share attributable to common stockholders would have been as follows:
DECEMBER 31 JUNE 30 ------------------ -------------------- 1995 1996 1996 1997 ------- ---------- ----------- -------- (UNAUDITED) Pro forma income (loss) before extraordinary item attributable to common stockholders.......... $64,441 $1,475,004 $(142,657) $302,341 Pro forma income (loss) before extraordinary item per share at- tributable to common stockhold- ers............................. $ $ $ $
F-27 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED) The pro forma disclosure is not likely to be indicative of pro forma results which may be expected in future years because of the fact that options vest over several years, pro forma compensation expense is recognized as the options vest and additional awards may also be granted. OTHER The Company has the right to purchase the shares of certain common and preferred stock upon the termination, disability or death of certain stockholders. 9. INCOME TAXES The provision for income taxes for the years ended December 31, 1994, December 31, 1995, December 31, 1996, and for the six months ended June 30, 1996 and 1997 consists of the following (in thousands):
FOR THE YEAR FOR THE SIX ENDED MONTHS ENDED DECEMBER 31 JUNE 30 -------------- ------------- 1994 1995 1996 1996 1997 ---- ---- ---- ------ ------ Current-- Federal........................................ $-- $-- $150 $ -- $ -- State and local................................ -- 24 260 -- 225 ---- ---- ---- ------ ------ Total current................................ -- 24 410 -- 225 ---- ---- ---- ------ ------ Deferred-- Federal........................................ -- -- (172) -- -- State and local................................ -- -- (30) -- (15) ---- ---- ---- ------ ------ Total deferred............................... -- -- (202) -- (15) ---- ---- ---- ------ ------ Total provision for income taxes................. $-- $ 24 $208 $ -- $ 210 ==== ==== ==== ====== ======
A reconciliation of the statutory U.S. federal income tax rate to the effective income tax rate for the years ended December 31, 1994, December 31, 1995, December 31, 1996, and for the six months ended June 30, 1996 and 1997, is as follows:
YEAR ENDED DECEMBER SIX MONTHS 31 ENDED JUNE 30 ---------------------- ----------------- 1994 1995 1996 1996 1997 ------ ------ ------ ----------- ----- (UNAUDITED) Statutory U.S. Federal income tax rate............................... 34.0% 34.0% 34.0% 34.0% 34.0% State income taxes, net of Federal benefit............................ 4.6% 17.0% 10.0% 8.8% 8.8% Permanent differences and other..... 1.4% (11.2%) 4.8% (2.8%) (2.8%) Valuation allowance................. (40.0%) (14.0%) (36.6%) (40%) -- % ------ ------ ------ ----- ----- Effective income tax rate........... -- % 25.8% 12.2% -- % 40.0% ====== ====== ====== ===== =====
F-28 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED) Components of deferred income tax assets and liabilities consist of the following at December 31, 1995, December 31, 1996, and June 30, 1997 (in thousands):
DECEMBER 31 JUNE 30 ------------- ------- 1995 1996 1997 ------- ---- ------- Deferred tax assets: Tax net operating loss carryforwards............... $ 967 $281 $ 796 Allowance for doubtful accounts.................... 103 182 410 Other.............................................. 114 49 322 ------- ---- ------ Total deferred tax assets........................ 1,184 512 1,528 ------- ---- ------ Deferred tax liabilities: Depreciation and amortization...................... 137 86 4,431 Other.............................................. 2 37 89 ------- ---- ------ Total deferred tax liabilities................... 139 123 4,520 Valuation allowance................................ (1,045) -- -- ------- ---- ------ Net deferred income tax.......................... $ -- $389 $2,992 ======= ==== ======
The Company has generated a tax net operating loss carryforward and has also purchased certain tax net operating loss carryforwards in connection with its business acquisitions. At June 30, 1997, such tax net operating loss carryforwards totalled $1,990,000 and begin to expire in 2010. 10. COMMITMENTS AND CONTINGENCIES CONSULTING AGREEMENT In conjunction with the acquisition of Collins, the Company entered into a three-year consulting agreement with one of the former stockholders. Under the terms of this agreement, which expired in January, 1997, the Company was obligated to compensate the former stockholder $135,000 per annum in exchange for consulting services. Total expenses under this agreement for the years ended December 31, 1994, December 31, 1995, December 31, 1996, and the six months ended June 30, 1996 and 1997 was $124,000, $135,000, $135,000, $68,000 and $11,000, respectively. LITIGATION The Company is subject to occasional lawsuits, investigations and claims arising out of the normal conduct of its business. In certain cases, claims against acquired businesses relating to events which occurred during the periods the Company did not own the acquired businesses are indemnified by the former owners. Management does not believe the outcome of any pending claims will have a material adverse impact on the Company's financial position or results of operations. LEASES The Company rents its school facilities and certain equipment under non- cancelable operating leases expiring at various dates through July, 2006. The facility leases require the Company to make monthly payments covering rent, taxes, insurance and maintenance costs. Rent expense, exclusive of taxes, insurance and maintenance of the facilities and equipment for the years ended December 31, 1994, December 31, 1995, and December 31, 1996, and for the six months ended June 30, 1996 and 1997, was approximately $595,000, $1,589,000, $2,649,000, $1,406,000, and $1,570,000, respectively. F-29 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED) Future minimum lease payments under these leases as of June 30, 1997, are as follows (in thousands):
CAPITAL OPERATING LEASES LEASES TOTAL ------- --------- ------- Remainder of-- 1997.......................................... $ 826 $ 5,550 $ 6,376 1998.......................................... 1,096 9,593 10,689 1999.......................................... 347 8,602 8,949 2000.......................................... 74 7,554 7,628 2001.......................................... 13 6,780 6,793 2002 and thereafter........................... 2 13,185 13,187 ------ ------- ------- 2,358 $51,264 $53,622 ======= ======= Less--Portion representing interest at a 602 weighted average rate of 21.9%................. ------ Principal payments.............................. 1,756 Less--Current portion........................... 977 ------ $ 779 ======
11. REGULATORY The Company and its U.S. schools are subject to extensive regulation by federal and state governmental agencies and accrediting bodies. In particular, the Higher Education Act of 1965, as amended (the "HEA"), and the regulations promulgated thereunder by the DOE subject the Company's U.S. schools to significant regulatory scrutiny on the basis of numerous standards that schools must satisfy in order to participate in the various federal student financial assistance programs under Title IV of the HEA (the "Title IV Programs"). Under the HEA and its implementing regulations, certain financial responsibility and other regulatory standards must be complied with on an institutional basis in order to qualify to participate in the Title IV Programs. Under such standards, each institution must, among other things: (i) have an acid test ratio (defined as the ratio of cash, cash equivalents, and current accounts receivable to current liabilities) of at least 1:1 at the end of each fiscal year, (ii) have a positive tangible net worth at the end of each fiscal year, (iii) not have a cumulative net operating loss during its two most recent fiscal years that results in a decline of more than 10% of the institution's tangible net worth at the beginning of that two-year period, (iv) collect 85% or less of its revenues from Title IV Program funds in any fiscal year, and (v) not have cohort default rates on federally funded or federally guaranteed student loans of 25% or greater for three consecutive federal fiscal years. Any regulatory violation could be the basis for the initiation of a suspension, limitation or termination proceeding against the Company or any of its U.S. institutions. To minimize risks associated with noncompliance with DOE requirements, the Company conducts periodic financial reviews of its subsidiaries. In 1996, the DOE issued proposed regulations that, if promulgated, would significantly revise the present financial responsibility requirements, primarily by replacing the three separate numeric ratios described above with a composite score based on the three new ratio calculations. The DOE has not yet issued new regulations in final form, but has stated its intent to do so by December 1, 1997 and to make the new regulations effective July 1, 1998. The process of reauthorizing the HEA by the U.S. Congress, which takes place every five years, has begun and is expected to be completed by 1998. It is not possible to predict the outcome of the reauthorization process. Although there is no present indication that the Congress will decline to reauthorize the Title IV Programs, there can be no assurance that government funding for the Title IV Programs will continue to be available or maintained at current levels, nor can there be assurance that current requirements for student and institutional participation in the Title IV Programs will be unchanged. Thus, the reauthorization process could result in revisions to the HEA that increase the compliance burden on the Company's institutions. A reduction in funding levels for federal student financial assistance programs could impact the Company's ability to attract students. F-30 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED) In order to operate and award degrees, diplomas and certificates and to participate in the Title IV Programs, a campus must be licensed or authorized to offer its programs of instruction by the relevant agency of the state in which such campus is located. Each of the Company's U.S. campuses is licensed or authorized by the relevant agency of the state in which such campus is located. In addition, in order to participate in the Title IV Programs, an institution must be accredited by an accrediting agency recognized by the DOE. Each of the Company's campuses is accredited by an accrediting agency recognized by the DOE. With each acquisition of an institution that is eligible to participate in the Title IV Programs, that institution undergoes a change of ownership that results in a change of control, as defined in the HEA and applicable regulations. In such event, that institution becomes ineligible to participate in the Title IV Programs and may receive and disburse only previously committed Title IV Program funds to its students until it has applied for and received from the DOE recertification under the Company's ownership. The Company is waiting to receive such recertification for IAMD-U.S. In its review of the Company's annual financial statements and interim balance sheets, as filed with the DOE in connection with the Company's applications for DOE certification of institutions acquired subsequent to September 1996, to allow such institutions to participate in the Title IV Programs, the DOE has questioned whether the Company's financial statements are acceptable and therefore an authoritative basis upon which to determine the Company's financial responsibility under the applicable DOE regulations. Specifically, the DOE has questioned the Company's accounting for certain direct marketing costs and courseware and other instructional materials. Further, the DOE has asserted that the Company did not satisfy the 1:1 acid test ratio based on its fiscal 1996 financial statements. The financial statements included herein have been restated to expense as incurred all direct marketing and advertising costs which had previously been deferred. This change in accounting method is permitted in accordance with Accounting Principles Board Opinion No. 20. (Note 14) In lieu of accepting the Company's previously filed 1996 audited financial statements, the DOE has offered the Company the alternative of posting an irrevocable letter of credit in favor of the Secretary of Education with respect to each institution the Company has acquired since September 1996 in a sum sufficient to secure the DOE's interest in the Title IV Program funds administered by the applicable institution. While the Company continues to disagree with the position taken by the DOE, in order to obtain certification of the institutions to resume participation in the Title IV Programs in a timely fashion, and thus to avoid any material interruption in Title IV Program funding for the acquired institutions, the Company has posted and currently has outstanding a letter of credit in the amount of $1.9 million, which expires on September 30, 1998, with respect to Western Culinary, and a letter of credit in the amount of $800,000, with an expiration date of July 31, 1998, with respect to SCT. The Company has agreed to the DOE's directive, dated September 9, 1997, to submit a letter of credit in the amount of $15.2 million, to expire on October 31, 1998, with respect to the six Gibbs institutions. Consequently, the six Gibbs institutions were certified to resume participation in the Title IV Programs as of October 1, 1997 and the Company must post the letter of credit with the DOE no later than November 9, 1997. In addition, the Company is considering the DOE's request to increase, no later than November 15, 1997, the letter of credit with respect to SCT by $721,000 in order to maintain SCT's eligibility to participate in the Title IV Programs. Further, upon the DOE's request, the Company is prepared to post an additional letter of credit with respect to IAMD-U.S., which the Company estimates will be in the range of $3.0 million to $5.0 million, in order to reestablish the eligibility of the two IAMD-U.S. institutions to participate in the Title IV Programs in the near future. The original letters of credit for Western Culinary and SCT represented 50% of each institution's Title IV Program funding in the prior award year. In September 1997, the DOE increased the level of surety for SCT to, F-31 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED) and established the level of surety of Gibbs at, 100% of the Title IV Program funds that students enrolled at each such institution received in the previous award year. Beginning in September 1997, the DOE has imposed a condition that, for up to the next 12 months, SCT and Gibbs may not disburse Title IV Program funds in excess of the sum secured by the applicable letter of credit for each institution. The DOE has advised the Company that the same conditions will apply to the IAMD-U.S. institutions, and any other institutions that the Company may acquire prior to a determination by the DOE that the Company satisfies the standards of financial responsibility when such institutions apply for recertification to participate in the Title IV Programs. The Company expects that the consummation of the offering described in Note 15 will significantly enhance its financial position. The Company believes that such proceeds and the cash expected to be generated from operations during the remainder of 1997 will enable the Company and each of its U.S. subsidiaries to present audited 1997 financial statements which will satisfy each of the DOE's standards of financial responsibility, including the acid test ratio and tangible net worth test. Applicable law and regulations require the DOE to consider only an institution's most recent audited annual financial statements in making a determination of the institution's financial responsibility. Accordingly, the Company intends to seek the DOE's review of its audited 1997 financial statements on an expedited basis in the spring of 1998. Once the DOE has determined that the Company and its U.S. subsidiaries satisfy each of the DOE's standards of financial responsibility, applicable law and regulations require the DOE to release the Company from the requirement that it post the sureties described above and from the limitations on Title IV Program funding in excess of the surety amounts. However, there can be no assurance that the DOE will expedite its review of the Company's 1997 financial statements, or of the outcome of such review. 12. RELATED-PARTY TRANSACTIONS The Company maintains short-term employment and consulting agreements with certain stockholders. Total expenses under these agreements were approximately $200,000, $292,000, $298,000, $113,000, and $200,000 for the years ended December 31, 1994, 1995, 1996 and the six months ended June 30, 1996 and 1997, respectively. In July 1995, the Company entered into an agreement with a stockholder whereby the stockholder provides certain consulting services to the Company. Total expenses under this agreement were $31,000, $75,000, $37,500 and $37,500 for the years ended December 31, 1995, 1996 and the six months ended June 30, 1996 and 1997, respectively. The Company has also entered into a stock subscription agreement with an employee, as discussed in Note 5. 13. EMPLOYEE BENEFIT PLAN The Company maintains a CEC contributory profit sharing plan established pursuant to the provisions of Section 401(k) of the Internal Revenue Code which provides retirement benefits for eligible employees of the Company. This plan requires matching contributions to eligible employees. The Company's matching contributions were $6,000, $89,000, $279,000, $130,000 and $183,000, for the years ended December 31, 1994, 1995, 1996 and the six months ended June 30, 1996 and 1997, respectively. F-32 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED) 14. CHANGE IN ACCOUNTING METHOD The Company had previously deferred certain marketing and advertising costs. In connection with the initial public offering, the Company changed its accounting for such costs to a more preferable method of expensing marketing and advertising costs as incurred. The Company has restated the accompanying financial statements for all periods presented. 15. SUBSEQUENT EVENTS AND PRO FORMA DATA (UNAUDITED) On October 10, 1997, the Company filed a registration statement on Form S-1 under the Securities and Exchange Act of 1933 to sell shares of its Class common stock in an initial public stock offering. The Company intends to pay a dividend of $ to holders of all series of preferred stock, repay outstanding revolving credit loans under its amended Credit Agreement totaling $ , and repay approximately $ of amounts owed to former owners of acquired businesses. The unaudited pro forma balance sheet and statement of operations information gives effect to (i) the conversion of all outstanding shares of all series of preferred stock into Class A common stock (ii) the conversion of all shares of common stock into Class A common stock and (iii) exercise of all warrants. No other contemplated transactions in connection with the proposed offering are included in the unaudited pro forma balance sheet. On , 1997, the Company adopted the Non-Employee Directors' Stock Option Plan. The plan provides for the Company to grant up to options exercisable into shares of common stock to certain nonemployee directors. Each person who is a director on the effective date shall become a participant and shall be granted an option to purchase shares of common stock. Each person who is subsequently elected as a director shall become a participant and shall, on his date of election, be granted an option to purchase shares of common stock. Each participant shall receive additional grants in subsequent years. On , 1997, the Company adopted the Stock Incentive Compensation Plan. The plan provides for the Company to grant stock options, stock appreciation rights, deferred stock and other awards (stock bonus and awards in lieu of obligations) which are exercisable into shares of common stock to certain directors, officers and employees of the Company. The option period of each stock option and the term of the stock appreciation right shall be fixed by the Company; provided that no stock option or appreciation right shall be exercisable more than ten years after the date of grant. Stock options may be either incentive stock options or nonqualified stock options. During any calendar year, stock options and stock appreciation rights to purchase no more than and , respectively, shares of common stock shall be granted to any participant. On 1997, the Company adopted the Employee Stock Purchase Plan. The plan provides for employees of the Company to purchase shares of common stock through payroll deductions (not to exceed $25,000 per person within any calendar year). In , 1997, the Company increased the number of authorized shares of common stock to and completed a -for-1 stock split. F-33 IAMD, LIMITED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1996 AND 1997
1996 1997 ---------- ---------- ASSETS CURRENT ASSETS: Cash................................................. $ 407,433 $ 25,869 Receivables-- Students, less allowance for doubtful accounts of approximately $83,500 and $56,000 in 1996 and 1997, respectively................................ 203,274 195,384 Other.............................................. 61,136 4,625 Refundable income taxes.............................. -- 180,749 Inventories.......................................... 43,751 59,765 Prepaid expenses and other current assets............ 69,277 30,445 Deferred income taxes................................ 183,800 215,927 ---------- ---------- Total current assets............................. 968,671 712,764 ---------- ---------- PROPERTY AND EQUIPMENT, net............................ 658,388 1,407,511 ---------- ---------- OTHER ASSETS: Deposits and other assets............................ 45,889 28,450 Cash surrender value of life insurance policy........ -- 35,869 Deferred income tax assets........................... 48,600 297,549 ---------- ---------- Total other assets............................... 94,489 361,868 ---------- ---------- TOTAL ASSETS........................................... $1,721,548 $2,482,143 ========== ========== LIABILITIES AND STOCKHOLDERS' INVESTMENT CURRENT LIABILITIES: Current maturities of long-term debt................. $ 227,811 $1,091,086 Accounts payable..................................... 145,549 125,439 Accrued expenses..................................... 120,692 181,712 Student deposits..................................... 592,252 934,135 ---------- ---------- Total current liabilities........................ 1,086,304 2,332,372 ---------- ---------- LONG-TERM LIABILITIES: Long-term debt, net of current maturities shown above............................................... 718,360 769,367 Deferred rent........................................ 174,980 258,331 ---------- ---------- Total long-term liabilities...................... 893,340 1,027,698 ---------- ---------- STOCKHOLDERS' INVESTMENT: Preferred stock, $100 par value; 1,450 shares authorized; 1,268 shares issued and outstanding..... 126,885 126,885 Common stock, no par value; 27,300 shares authorized; 20,360 shares issued and outstanding................ 848,220 848,220 Stockholder notes receivable......................... (143,850) -- Accumulated deficit.................................. (1,089,351) (1,853,032) ---------- ---------- Total stockholders' investment................... (258,096) (877,927) ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT......... $1,721,548 $2,482,143 ========== ==========
The accompanying notes are an integral part of these statements. F-34 IAMD, LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1996 AND 1997
1996 1997 ---------- ----------- REVENUE: Tuition and registration fees, net.................. $6,192,335 $ 6,849,785 Other, net.......................................... 152,891 642,900 ---------- ----------- Total net revenue................................. 6,345,226 7,492,685 ---------- ----------- OPERATING EXPENSES: Educational services and facilities................. 4,137,733 4,508,604 General and administrative.......................... 1,954,283 2,994,915 Depreciation and amortization....................... 304,339 679,318 ---------- ----------- Total operating expenses.......................... 6,396,355 8,182,837 ---------- ----------- Loss from operations.............................. (51,129) (690,152) OTHER EXPENSES: Interest expense.................................... 95,072 288,301 Loss on sale of property............................ -- 30,978 ---------- ----------- Total other expenses.............................. 95,072 319,279 ---------- ----------- Loss before benefit for income taxes.............. (146,201) (1,009,431) BENEFIT FOR INCOME TAXES.............................. (53,735) (389,600) ---------- ----------- NET LOSS.............................................. $ (92,466) $ (619,831) ========== ===========
The accompanying notes are an integral part of these statements. F-35 IAMD, LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1996 AND 1997
1996 1997 -------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss............................................... $(92,466) $ (619,831) Adjustments to reconcile net loss to net cash provided by operating activities-- Depreciation and amortization........................ 312,545 679,318 Deferred income taxes................................ 78,798 (281,076) Loss on sale of property............................. -- 30,978 Changes in operating assets and liabilities-- Receivables, net................................... (16,966) 64,401 Refundable income taxes............................ -- (180,749) Inventories........................................ 12,841 (16,014) Prepaid expenses and other current assets.......... (198,316) 38,832 Deposits and other assets.......................... (17,439) 17,439 Cash surrender value of life insurance policy...... -- (35,869) Accounts payable................................... 46,030 (20,110) Income taxes payable............................... (19,730) -- Accrued expenses................................... 54,272 61,020 Student deposits................................... 177,840 341,883 Deferred rent...................................... -- 83,351 -------- ---------- Net cash provided by operating activities........ 337,409 163,573 -------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment, net............... (85,642) (1,459,419) -------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under long-term debt........................ 25,000 1,450,236 Payments on long-term debt............................. (142,582) (535,954) Proceeds form issuance of capital lease................ 5,000 -- Obligations under capital leases....................... (108,446) -- -------- ---------- Net cash (used in) provided by financing activities...................................... (221,028) 914,282 -------- ---------- NET INCREASE (DECREASE) IN CASH.......................... 30,739 (381,564) CASH, BEGINNING OF YEAR.................................. 376,694 407,433 -------- ---------- CASH, END OF YEAR........................................ $407,433 $ 25,869 ======== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for-- Interest............................................. $ 85,428 $ 714,185 Taxes................................................ 85,218 318,393 ======== ========== Noncash financing activities-- Acquisition of machinery and equipment under capital leases.............................................. $101,164 $ -- Distribution of stockholders' notes receivable....... -- 143,850 ======== ==========
The accompanying notes are an integral part of these statements. F-36 IAMD, LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT FOR THE YEARS ENDED JUNE 30, 1996 AND 1997
PREFERRED STOCK COMMON STOCK ---------------------- ----------------------- STOCKHOLDERS' 1,450 SHARES $100 27,300 SHARES NO NOTES ACCUMULATED AUTHORIZED PAR VALUE AUTHORIZED PAR VALUE RECEIVABLE DEFICIT TOTAL ------------ --------- ------------- --------- ------------- ----------- --------- BALANCE, June 30, 1995.. 1,268 $126,885 20,360 $848,220 $(143,850) $ (996,885) $(165,630) Net loss............... -- -- -- -- -- (92,466) (92,466) ----- -------- ------ -------- --------- ----------- --------- BALANCE, June 30, 1996.. 1,268 126,885 20,360 848,220 (143,850) (1,089,351) (258,096) Stockholders' distribution.......... -- -- -- -- 143,850 (143,850) -- Net loss............... -- -- -- -- -- (619,831) (619,831) ----- -------- ------ -------- --------- ----------- --------- BALANCE, June 30, 1997.. 1,268 $126,885 20,360 $848,220 $ -- $(1,853,032) $(877,927) ===== ======== ====== ======== ========= =========== =========
The accompanying notes are an integral part of these statements. F-37 IAMD, LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 AND 1997 1. DESCRIPTION OF THE BUSINESS IAMD, Limited and Subsidiaries ("International Academy of Merchandising and Design" or the "Company") is headquartered in Chicago, Illinois, and has wholly owned subsidiaries which own and operate campuses in Chicago, Illinois, and Tampa, Florida, and bookstores at each campus. These private, postsecondary vocational schools are engaged in the instruction of merchandising and design programs leading toward associate and baccalaureate degrees in the fields of merchandising management, fashion design, interior design, advertising design, interactive media and computer graphics. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated. CONCENTRATION OF CREDIT RISK The Company extends unsecured credit for tuition to a significant number of students who are in attendance at the schools. A substantial portion of credit extended to students is repaid through the students' participation in federally funded financial aid programs. The Company generally completes and has approved the financial aid packet of each student who qualifies for financial aid prior to the student beginning class in an effort to enhance the collectibility of its unsecured credit. Transfers of funds from the financial aid programs to the Company are made in accordance with the United States Department of Education (the "DOE") requirements. The Company participates in various federal student financial aid programs under Title IV of the Higher Education Act of 1965 ("Title IV Programs"), as amended. Approximately 68% and 75% of the Company's revenue for the years ended June 30, 1996 and 1997 was collected from funds distributed under these programs. RESTRICTED CASH Cash received from the U.S. Government under various student aid grant and loan programs is considered to be restricted. Restricted cash is held in separate bank accounts and does not become available for general use by the Company until the financial aid is credited to the accounts of students and the cash is transferred to an operating account. As of June 30, 1997, there was no restricted cash. INVENTORIES Inventories consisting principally of program materials, books and supplies are stated at the lower of cost, determined on a first-in, first-out basis, or market. F-38 IAMD, LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1996 AND 1997 PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization are recognized by utilizing the straight-line method over their useful lives. Leasehold improvements and assets recorded under capital leases are amortized on a straight-line basis over their estimated useful lives or lease term, whichever is shorter. Maintenance, repairs, minor renewals, and betterments are expensed as incurred; major improvements are capitalized. The estimated useful lives and cost basis of property and equipment at June 30, 1996 and 1997, are as follows:
ASSET DESCRIPTION 1996 1997 LIFE ----------------- ---------- ---------- ---------- Classroom equipment, courseware and other instructional materials................. $2,037,766 $3,132,730 3-13 years Equipment and leasehold improvements..... 83,492 436,313 5 years ---------- ---------- 2,121,258 3,569,043 Less--accumulated depreciation........... 1,462,870 2,161,532 ---------- ---------- Property and equipment, net.............. $ 658,388 $1,407,511 ========== ==========
DEFERRED RENT OBLIGATIONS Certain of the Company's schools' facility leases included rental concessions, as defined in the various lease agreements. The Company recognizes rent expense on a straight-line basis over the terms of the various leases, ranging from 7 to 10 years. Rent expense recognized differs from the actual cash payments required to be made under these lease agreements. REVENUE RECOGNITION Revenue is derived primarily from courses taught at the schools. Tuition revenue is recognized on a straight-line basis over the length of the applicable course. Textbook sales and other revenues are recognized as services are performed. If a student withdraws, future revenue is reduced by the amount of the refund due to the student. Refunds are calculated in accordance with federal, state and accrediting agency standards. Student deposits represent payments received in excess of amounts billed and is reflected as a current liability on the balance sheet. USE OF ESTIMATES The preparation of financial statements, in conformity with Generally Accepted Accounting Principles, requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. F-39 IAMD, LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1996 AND 1997 3. LONG-TERM DEBT As of June 30, 1996 and 1997, debt of the Company is secured by inventory, chattel paper, accounts receivable, equipment and fixtures and is also guaranteed by the owners of IAMD, Limited and Subsidiaries and consists of the following:
1996 1997 -------- ---------- Notes payable to a bank, interest at 1% above the prime rate due August 1997 (8.5% at June 30, 1997)................................... $400,000 $ 700,000 Bank note payable, repaid in 1997.......................... 256,128 -- Bank note payable in monthly principal and interest in- stallments of $2,104, through December 1998, bearing interest at 9.25%.......... -- 36,919 Bank note payable in monthly principal and interest in- stallments of $12,213, through April 1998, bearing interest at 9.25%............. -- 137,890 Bank note payable in monthly principal and interest in- stallments of $32,984, through September 1999, bearing interest at 9.25%......... -- 823,638 Bank note payable in monthly principal and interest in- stallments of $4,873, through March 1999, bearing interest at 16.21%............ -- 95,807 Bank note payable in monthly principal and interest in- stallments of $805, through March 1999, bearing interest at 16.21%............ -- 15,838 Capital lease obligations-interest ranging from 9.25% to 18.9%, expiring through 1999.............................................. 290,043 50,361 -------- ---------- 946,171 1,860,453 Less-Current portion....................................... 227,811 1,091,086 -------- ---------- $718,360 $ 769,367 ======== ==========
At June 30, 1997, future principal payments of long-term debt mature as follows: 1998.............................. $1,091,086 1999.............................. 769,367 ---------- $1,860,453 ==========
LINE OF CREDIT The line of credit consists of a note payable to a bank collateralized by substantially all the Company's assets, bearing interest at 1% above prime rate (8.5% at June 30, 1997). Repayment of $400,000 of the line is due in August 1997, and in the event of a sale the Company, $300,000 is payable immediately upon the sale. All outstanding debt of the Company was repaid in connection with the sale of the Company (Note 8). 4. STOCKHOLDERS' INVESTMENT PREFERRED STOCK Holders of preferred stock are entitled to cumulative dividends at a rate of 18%. The Company may call preferred stock at any time after October 1992, at par plus accumulated dividends in arrears. F-40 IAMD, LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1996 AND 1997 STOCKHOLDERS' NOTES RECEIVABLE In 1991, the Company issued notes receivable totaling $143,850 to certain stockholders. The notes bear interest at 8.5% and were to be repaid upon demand. These notes receivable were transferred into escrow during 1997 in connection with the sale of the Company. This transaction was treated as a dividend to the stockholders of the Company. The amount is reflected as a reduction in accumulated deficit during 1997. 5. COMMITMENTS AND CONTINGENCIES REGULATORY The Company has federal financial assistance programs which are subject to ongoing program reviews by the Department of Education (the "DOE") and Title IV program audits by external auditors. Based upon the results of such audits and reviews, the Company may have to repay funds previously granted to its students through loans and grants, and pay interest, fines and/or penalties. Management believes such amounts would be minimal and does not expect them to have a material effect on the results of operations of the Company. The Company is also required to meet certain financial and other standards in order to qualify to participate in Title IV programs. These include maintaining an acid test ratio (defined as cash, cash equivalents, and current accounts receivable to current liabilities) of at least 1:1, having a positive tangible net worth at the end of each fiscal year, collecting less than 85% of its education revenues from Title IV funds on an annual basis, not having cumulative net operating losses during the most recent fiscal years that result in a decline of more than 10% of the Company's tangible net worth at the beginning of that two-year period, and having a student default rate on their federal student loans of not more than 25% for any three-year consecutive period, amongst others. At June 30, 1997, the Company was not in compliance with all of the regulatory requirements. OPERATING LEASE COMMITMENTS The Company leases its administrative and classroom facilities and certain equipment under noncancellable operating leases which expire at various times through 2006. The facility leases require the Company to make monthly payments covering rent, taxes, insurance and maintenance costs. Rent expense, exclusive of taxes, insurance, and maintenance of the facilities and equipment for the years ended June 30, 1996 and 1997, was approximately $738,773 and $1,136,889, respectively. Future minimum lease payments under these operating leases as of June 30, 1997, are as follows: Remainder of 1997........................... $ 639,598 1998........................................ 1,158,031 1999........................................ 1,186,389 2000........................................ 1,219,145 2001........................................ 1,254,001 Thereafter.................................. 2,937,869 ---------- Total..................................... $8,395,033 ==========
F-41 IAMD, LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1996 AND 1997 LITIGATION The Company is subject to occasional lawsuits, investigations and claims arising out of the normal conduct of its business. At June 30, 1997, the Company is not a party to any material legal action. 6. INCOME TAXES The Company files a consolidated tax return. The Company provides for deferred taxes under the asset and liability method for income taxes. Under this method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The benefit for income taxes for the years ended June 30, 1996 and 1997, included in the accompanying statements of income consists of the following:
1996 1997 -------- --------- Current-- Federal........................................... $ 10,256 $ (68,898) State and local................................... 14,807 (39,626) -------- --------- Total current................................... 25,063 (108,524) -------- --------- Deferred-- Federal........................................... (66,978) (238,914) State and local................................... (11,820) (42,162) -------- --------- Total deferred.................................. (78,798) (281,076) -------- --------- Total provision (benefit) for income taxes...... $(53,735) $(389,600) ======== =========
A reconciliation of the statutory U.S. federal income tax rate to the effective income tax rate for the years ended June 30, 1996 and 1997, is as follows:
1996 1997 ---- ---- Statutory U.S. federal income tax rate....................... 34.0% 34.0% State income taxes, net of federal benefit................... 4.6 4.6 Permanent difference and other............................... (1.9) -- ---- ---- Effective income tax rate.................................... 36.7% 38.6% ==== ====
F-42 IAMD, LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1996 AND 1997 At June 30, 1996 and 1997, deferred income taxes of the Company consist of the following:
1996 1997 -------- -------- Deferred tax assets-- Net operating loss carryforward..................... $ -- $204,000 Recruiting and marketing costs...................... 154,000 225,000 Deferred rent....................................... 59,400 103,000 Bad debt allowance.................................. 33,400 23,000 Other............................................... 200 7,976 -------- -------- Total deferred tax assets......................... 247,000 562,976 Deferred tax liabilities-- Depreciation........................................ (10,800) (10,800) Other............................................... (3,800) (38,700) -------- -------- Total deferred tax liabilities.................... (14,600) (49,500) -------- -------- Net deferred tax asset............................ $232,400 $513,476 ======== ========
Realization of deferred tax assets associated with the Company's future deductible temporary differences and net operating loss carryforwards is dependent upon generating sufficient taxable income prior to their expiration. Although realization of the deferred tax assets is not assured, management believes it is more likely than not that the deferred tax assets will be realized through future taxable income. Management will assess whether it remains more likely than not that the deferred tax assets will be realized. If management determines that is no longer more likely than not that the deferred tax assets will be realized, a valuation allowance will be required against some or all of the deferred tax assets. 7. RELATED-PARTY TRANSACTIONS A shareholder of the Company provides legal services for the Company. Total expenses billed to the Company for such services were $35,000 in 1997. 8. SUBSEQUENT EVENTS On June 30, 1997, the shareholders of IAMD, Limited sold 100% of the outstanding shares of capital stock of the Company to Career Education Corporation ("CEC") for $3,000,000. The purchase price may be increased by up to $5,000,000 based upon the amount by which revenue of the Company for the twelve-month period ended June 30, 1998, exceeds $8,000,000, as provided for in an earn-out provision in the purchase agreement. The purchase price of the acquisition is subject to certain modifications in addition to the earn-out provision. Also, in connection with the purchase, the former owners of the schools also entered into covenant not-to-compete agreements with CEC for total proceeds of $2,000,000. The covenants not-to-compete restrict the former owners' ability to own or operate certain types of postsecondary vocational schools for four years. In connection with the sale, CEC repaid all outstanding long-term debt of the Company. 9. RECLASSIFICATIONS Certain reclassifications have been made to the June 30, 1996 financial statements in order for them to be in conformity with the June 30, 1997 presentation. F-43 IAMD, LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1996 AND 1997 10. RESTATEMENT The Company had historically deferred certain marketing costs. During 1997, the Company changed its method of accounting for deferred marketing costs to the preferred method of expensing marketing costs as incurred. The Company has retroactively restated its statements of operations for the year ended June 30, 1996 and stockholders' investment as of June 30, 1996 to reflect the change in this method. The effect of this change was to reduce retained earnings by approximately $136,000, net of a deferred tax benefit of $91,000 as of June 30, 1995. F-44 INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (CANADA) LTD. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS AS OF AUGUST 31, 1996, AND JUNE 30, 1997
AUGUST 31, JUNE 30, 1996 1997 ---------- ---------- ASSETS CURRENT ASSETS: Cash................................................. $ -- $ 15,546 Receivables-- Student, less allowance for doubtful accounts of $35,000 and $56,000 at August 31, 1996, and June 30, 1997, respectively....................... 408,681 955,705 Other.............................................. 103,392 74,868 Stockholders' advances............................. 93,807 -- Deferred income tax assets........................... 34,279 51,002 Prepaid expenses and other current assets............ 173,808 54,667 ---------- ---------- Total current assets............................. 813,967 1,151,788 ---------- ---------- PROPERTY AND EQUIPMENT, NET............................ 1,559,588 2,498,768 ---------- ---------- OTHER ASSETS: Deposits............................................. 95,511 219,232 Deferred income tax assets........................... -- 300,276 ---------- ---------- Total other assets............................... 95,511 519,508 ---------- ---------- TOTAL ASSETS........................................... $2,469,066 $4,170,064 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Bank overdraft....................................... $ 70,571 $ 281,270 Current maturities of long-term debt................. 446,652 1,037,216 Accounts payable..................................... 630,698 545,853 Accrued expenses..................................... 136,915 533,431 Students deposits.................................... 499,680 957,326 ---------- ---------- Total current liabilities........................ 1,784,516 3,355,096 ---------- ---------- LONG-TERM LIABILITIES: Long-term debt, net of current maturities shown above............................................... 219,231 587,851 Deferred income tax liabilities...................... 9,078 -- Deferred rent........................................ 45,215 39,461 ---------- ---------- Total long-term debt............................. 273,524 627,312 ---------- ---------- STOCKHOLDERS' EQUITY: Common stock, no par value, unlimited shares authorized; 45,347 shares and 43,667 shares issued and outstanding at August 31, 1996, and June 30, 1997, respectively.............................. 298,547 206,743 Cumulative translation adjustment.................... (5,241) (7,946) Retained earning (deficit)........................... 117,720 (11,141) ---------- ---------- Total stockholders' equity....................... 411,026 187,656 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $2,469,066 $4,170,064 ========== ==========
The accompanying notes are an integral part of these statements. F-45 INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (CANADA) LTD. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED AUGUST 31, 1996, AND THE TEN MONTHS ENDED JUNE 30, 1997
AUGUST 31, JUNE 30, 1996 1997 ---------- ---------- REVENUE: Tuition and registration, net.......................... $7,279,325 $8,407,718 Other, net............................................. 30,658 9,234 ---------- ---------- Total net revenue.................................... 7,309,983 8,416,952 ---------- ---------- OPERATING EXPENSES: Educational services and facilities.................... 3,028,745 3,252,155 General and administrative............................. 3,355,940 4,119,594 Related party rent expense............................. 197,320 159,440 Depreciation and amortization.......................... 375,677 813,094 ---------- ---------- Total operating expenses............................. 6,957,682 8,344,283 ---------- ---------- Income from operations............................... 352,301 72,669 INTEREST EXPENSE......................................... 134,315 271,349 ---------- ---------- Income (loss) before provision (benefit) for taxes... 217,986 (198,680) PROVISION (BENEFIT) FOR INCOME TAXES..................... 92,349 (69,819) ---------- ---------- NET INCOME (LOSS)........................................ $ 125,637 $ (128,861) ========== ==========
The accompanying notes are an integral part of these statements. F-46 INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (CANADA) LTD. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED AUGUST 31, 1996, AND THE TEN MONTHS ENDED JUNE 30, 1997
AUGUST JUNE 30, 31, 1996 1997 --------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)..................................... $ 125,637 $ (128,861) Adjustments to reconcile net income (loss) to net cash provided by operating activities-- Deferred income taxes............................... (17,759) (326,077) Depreciation and amortization....................... 375,677 813,094 Changes in operating assets and liabilities-- Increase in receivables........................... (30,818) (518,500) (Increase) decrease in prepaid expenses and other current assets................................... (80,400) 119,141 Increase in deposits.............................. (18,844) (123,721) Increase in accounts payable and accrued expenses. 135,960 311,671 Increase in students' deposits.................... 329,218 457,646 Decrease in deferred rent......................... -- (5,754) --------- ---------- Net cash provided by operating activities....... 818,671 598,639 --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment, net.............. (556,660) (272,959) CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of capital lease obligations............... (271,929) (597,002) Bank overdraft........................................ 70,571 210,699 Repayment of bank loans............................... (38,682) (31,744) Deposits returned from Ministry of Education.......... 74,450 -- Stockholders' loans................................... -- 108,615 Stockholders' advances................................ (93,807) -- --------- ---------- Net cash used in financing activities........... (259,397) (309,432) --------- ---------- EFFECT OF EXCHANGE RATE CHANGES ON CASH................. (4,384) (702) NET (DECREASE) INCREASE IN CASH......................... (1,770) 15,546 CASH, BEGINNING OF YEAR................................. 1,770 -- --------- ---------- CASH, END OF YEAR....................................... $ -- $ 15,546 ========= ========== NONCASH INVESTING AND FINANCING ACTIVITIES: Equipment purchased through capital leases............ $ 422,683 $1,479,315 Share redemption and retirement....................... -- 91,804 ========= ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for-- Interest............................................ $ 134,315 $ 271,349 Taxes paid.......................................... 97,819 80,729 ========= ==========
The accompanying notes are an integral part of these statements. F-47 INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (CANADA) LTD. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEAR ENDED AUGUST 31, 1996, AND THE TEN MONTHS ENDED JUNE 30, 1997
UNLIMITED ADDITIONAL CUMULATIVE SHARES PAID-IN TRANSLATION RETAINED TOTAL AUTHORIZED CAPITAL ADJUSTMENT EARNINGS AMOUNT ---------- ---------- ----------- --------- --------- BALANCE, AUGUST 31, 1995................... 45,347 $298,547 $ 1,852 $ (7,917) $ 292,482 Net income............ -- -- -- 125,637 125,637 Cumulative translation adjustment........... -- -- (7,093) -- (7,093) ------ -------- ------- --------- --------- BALANCE, AUGUST 31, 1996................... 45,347 298,547 (5,241) 117,720 411,026 Share redemption and retirement........... (1,680) (91,804) -- -- (91,804) Cumulative translation adjustment........... -- -- (2,705) -- (2,705) Net income............ -- -- -- (128,861) (128,861) ------ -------- ------- --------- --------- BALANCE, JUNE 30, 1997.. 43,667 $206,743 $(7,946) $ (11,141) $ 187,656 ====== ======== ======= ========= =========
The accompanying notes are an integral part of these statements. F-48 INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (CANADA) LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 1996, AND JUNE 30, 1997 1. DESCRIPTION OF THE BUSINESS International Academy of Merchandising & Design (Canada) Ltd. ("the Company" or "IAMD-Canada") is located and operates a campus in Toronto, Ontario and has a wholly owned subsidiary (International Academy of Design Inc.), which operates a campus in Montreal, Quebec. These private, postsecondary vocational schools are engaged in the instruction of merchandising and design programs in the fields of merchandising management, fashion design, interior design, advertising design, interactive media and computer graphics. The assets and liabilities relating to the Montreal campus were transferred to International Academy of Design Inc. on September 1, 1996. Prior to that date, the operations of the Montreal campus were included as a division of the Company. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the consolidated accounts of the Company and its wholly owned subsidiary. All significant intercompany transactions and accounts have been eliminated. For presentation purposes, both periods reflect the Montreal accounts as being consolidated. The Company's accounts are recorded in Canadian dollars ("$CD") and the balance sheets at August 31, 1996 and June 30, 1997 have been translated to U.S. dollars at the exchange rate of 0.73 and 0.72. At August 31, 1996, and June 30, 1997, respectively. The income statements for the year ended August 31, 1996, and the ten months ended June 30, 1997, have been translated at an average annual exchange rate of 0.74 and 0.73, respectively. FINANCIAL AID The Company extends credit for tuition to a significant number of students who are in attendance at the schools. A substantial portion of credit extended to students is repaid through the students' participation in federally funded financial aid programs. Approximately 98% of Montreal's and 67% of Toronto's net revenue were collected from Canadian governmental funding. Governmental funding is provided by Canada Student Loans and State Loans from Ontario and Quebec. The Company pays an annual premium to an insurance company which provides an insurance policy to secure the governmental funding. The insurance policy insures liability amounts of $152,061 ($CD 210,000) for Toronto and $72,410 ($CD 100,000) for the Montreal campus. Shareholders have also issued personal guarantees related to such policies at June 30, 1997. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is recognized utilizing tax accelerated methods for financial reporting and income tax purposes over their estimated useful lives. Leasehold improvements and assets recorded under capital leases are amortized on a straight-line basis over their estimated useful lives or lease term, whichever is shorter. Maintenance, repairs and minor renewals and betterments are expensed as incurred; major F-49 INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (CANADA) LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) improvements are capitalized. The estimated useful lives and cost basis of property and equipment at August 31, 1996, and June 30, 1997, are as follows:
AUGUST 31, JUNE 30, ASSET DESCRIPTION 1996 1997 LIFE ----------------- ---------- ---------- --------- Furniture and fixtures..................... $ 337,233 $ 363,123 5-8 years Machinery and equipment.................... 1,105,535 1,100,636 4-6 years Leasehold improvements..................... 599,503 787,958 5 years Computer software.......................... -- 22,631 1 year Capital lease equipment.................... 958,085 2,460,635 4-6 years ---------- ---------- 3,000,356 4,734,983 Less--Accumulated depreciation............. 1,440,768 2,236,215 ---------- ---------- Property and equipment, net................ $1,559,588 $2,498,768 ========== ==========
DEFERRED RENT Certain of the Company's leases include rental concessions, as defined in the various lease agreements. The Company recognizes rent expense on a straight-line basis over the terms of the various leases, ranging from 2 to 7 years. Rent expense recognized differs from the actual cash payments required to be made under these lease agreements. REVENUE RECOGNITION Revenue is derived primarily from courses taught at the schools. Tuition revenue is recognized on a straight-line basis over the length of the applicable course. If a student withdraws, future revenue is reduced by the amount of the refund due to the student. Student deposits represent payments received in excess of amounts billed and are reflected as a current liability in the accompanying consolidated balance sheet. USE OF ESTIMATES The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. 3. LONG-TERM DEBT At August 31, 1996, and June 30, 1997, long-term debt of the Company consists of the following:
AUGUST JUNE 30, 31, 1996 1997 -------- --------- Business improvement loan, bearing interest at Canadian prime plus 1.5% (6.25% at June 30, 1997), requiring quar- terly principal payments of $1,267, secured by related as- sets, repaid in connection with the sale of the Company (Note 10)................................................. $ 10,233 $ 7,603 Business improvement loan, bearing interest at Canadian prime plus 1.5% (6.25% at June 30, 1997), requiring quar- terly principal payments of $2,595, secured by related as- sets, repaid in connection with the sale of the Company (Note 10)................................................. 68,095 38,981 Stockholder loans, bearing interest at 6.75%; repaid in connection with the sale of the Company (Note 10)......... -- 108,615 Capital lease obligation discounted at a weighted average interest rate of 16.0% and 24.5% at August 31, 1996 and June 30, 1997, respectively, secured by related equipment (Note 6).................................................. 587,555 1,469,868 -------- --------- 665,883 1,625,067 Less--Current portion...................................... 446,652 1,037,216 -------- --------- $219,231 $ 587,851 ======== =========
F-50 INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (CANADA) LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In February 1997, the Company amended its credit agreement with a Canadian bank. Under the amended agreement, the total amount the Company may borrow through operating lines of credit and business improvement loans cannot, at any time, exceed $243,117 ($CD 335,750). Amounts outstanding under lines of credit are limited to the lesser of $181,025 ($CD 250,000) or 75% of the receivables, as defined, less priority claims and receivables over 90 days. Outstanding borrowings under the line of credit and business improvement loans bear interest at the Canadian prime rate (4.75% at June 30, 1997) plus 1% and the Canadian prime rate (6.25% at June 30, 1997) plus 1.5%, respectively. Accounts receivable, inventory, equipment and all other assets serve as collateral for amounts outstanding under the agreement. Under the amended agreement, the Company must maintain certain covenants under the credit agreement including debt to effective equity ratio, as defined, of not more than 3:1, capital expenditures for the current fiscal year not to exceed $1,013,740 ($CD 1,400,000) and that no lien on present or future company assets can be obtained without the Bank's consent. 4. STOCKHOLDERS' EQUITY In fiscal 1996, the Company advanced $93,807 ($CD 126,000) to its stockholders. In 1997, the Company redeemed and retired 1,680 shares of common stock from these stockholders. The advances to stockholders were collected in exchange for these shares. 5. RELATED-PARTY TRANSACTIONS The Company leases one of its campus facilities from an entity with common ownership. Rent expense under this lease amounted to approximately $197,000 and $159,000 for the year ended August 31, 1996, and the ten months ended June 30, 1997, respectively. See stockholder loans as described in Note 3 and stockholder advances as discussed in Note 4. 6. COMMITMENTS AND CONTINGENCIES LEASES The Company leases equipment under capital leases expiring in various years through 2002. Also, the Company leases its facilities and certain equipment under operating leases through 2002. Rent expense, exclusive of taxes, insurance, and maintenance of the facilities and equipment for the year ended August 31, 1996, and the ten months ended June 30, 1997, was approximately $553,275 and $600,759, respectively. The following is a schedule by year of future minimum payments under these capital and operating leases:
CAPITAL OPERATING LEASES LEASES TOTAL ---------- ---------- ---------- Remainder of 1997........................ $ 613,911 $1,180,026 $1,793,937 1998..................................... 846,359 1,884,954 2,731,313 1999..................................... 199,862 1,375,332 1,575,194 2000..................................... 20,647 880,817 901,464 2001..................................... 5,634 868,599 874,233 Thereafter............................... 1,303 1,033,483 1,034,786 ---------- ---------- ---------- 1,687,716 $7,223,211 $8,910,927 ========== ========== Less--Portion representing interest at a weighted average interest rate of 24.53%......... 217,848 ---------- Equipment under capital leases........... 1,469,868 Less--Current portion.................... 882,017 ---------- $ 587,851 ==========
F-51 INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (CANADA) LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) AUGUST 31, 1996 AND JUNE 30, 1997 LITIGATION The Company is subject to occasional lawsuits, investigations and claims arising out of the normal conduct of its business. At June 30, 1997, the Company is not a party to any material legal action. 7. INCOME TAXES The Company provides for deferred taxes under the asset and liability method of accounting. This method requires the recognition of deferred income taxes based upon the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The income tax provision (benefit) for the year ended August 31, 1996, and the ten months ended June 30, 1997, consists of the following:
AUGUST JUNE 30, 31, 1996 1997 -------- -------- Current income taxes.................................. $110,108 $256,258 Deferred income taxes (benefit)....................... (17,759) (326,077) -------- -------- Net income tax provision (benefit).................... $ 92,349 $(69,819) ======== ========
A reconciliation of the statutory tax rate computed as weighted average of federal and provincial tax rates to the effective income tax rate for the year ended August 31, 1996, and the ten months ended June 30, 1997, consists of the following:
AUGUST 31, JUNE 30, 1996 1997 ---------- -------- Tax provision (benefit) for income taxes based on federal statutory tax rates......................... 29.1% (26.8)% Provincial income taxes, net of federal benefit...... 15.2 (15.2) Permanent difference and other....................... (1.9) 6.9 ---- ----- Effective income tax rate............................ 42.4% (35.1)% ==== =====
At August 31, 1996, and June 30, 1997, deferred income taxes consist of the following:
AUGUST 31, JUNE 30, 1996 1997 ---------- -------- Recruiting and marketing costs........................ $43,593 $ 51,002 Net operating loss carryforward....................... -- 311,390 Lease inducements..................................... 18,870 16,574 ------- -------- Total deferred tax assets........................... 62,463 378,966 ------- -------- Depreciation.......................................... 27,948 27,688 Other................................................. 9,314 -- ------- -------- Total deferred tax liabilities...................... 37,262 27,688 ------- -------- Total net deferred tax assets....................... $25,201 $351,278 ======= ========
F-52 INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (CANADA) LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) AUGUST 31, 1996 AND JUNE 30, 1997 Realization of deferred tax assets associated with the Company's future deductible temporary differences and net operating loss carryforwards is dependent upon generating sufficient taxable income prior to their expiration. Although realization of the deferred tax assets is not assured, management believes it is more likely than not that the deferred tax assets will be realized through future taxable income. Management will assess whether it remains more likely than not that the deferred tax assets will be realized. If management determines that is no longer more likely than not that the deferred tax assets will be realized, a valuation allowance will be required against some or all of the deferred tax assets. 8. BENEFIT PLAN The Company maintains a benefit plan for eligible employees. The plan requires matching contributions (58% of the costs) for eligible employees. The Company's matching contributions were $38,613 and $44,354 for the year and period ended August 31, 1996, and June 30, 1997, respectively. 9. NONRECURRING CHARGES During 1996, the Company identified an employee who was found to have defrauded the Company of approximately $87,000. The individual resigned from the Company. The Company has taken action to enhance internal controls to prevent such acts from occurring in the future. These expenses have been included in the accompanying statement of operations and are classified as general and administrative expenses. 10. SUBSEQUENT EVENTS On June 30, 1997, the shareholders of IAMD-Canada sold 100% of the outstanding shares of capital stock of the Company to Career Education Corporation ("CEC") for $6,500,000. In connection with the purchase, the former owners of the school also entered into covenant not-to-compete agreements with CEC for at total price of $2,000,000. The covenant not-to-compete agreements restrict the former owners' ability to own or operate certain types of postsecondary vocational schools for four years. The note payable to a former stockholder and all bank loans were repaid in connection with the sale. 11. RECLASSIFICATIONS Certain reclassifications have been made to the June 30, 1996 financial statements in order for them to be in conformity with the June 30, 1997 presentation. F-53 CAREER EDUCATION CORPORATION AND SUBSIDIARIES FINANCIAL STATEMENT SCHEDULE REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The Valuation and Qualifying Account Schedule is presented for purposes of additional analysis and is not a required part of the basic financial statements. This information has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Chicago, Illinois October 7, 1997 S-1 CAREER EDUCATION CORPORATION AND SUBSIDIARIES FINANCIAL STATEMENT SCHEDULE SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
BALANCE NET CHARGES AT TO INCREASE DUE BALANCE AT BEGINNING OPERATING TO END OF OF PERIOD EXPENSES ACQUISITIONS PERIOD --------- ----------- ------------ ---------- (IN THOUSANDS) Student receivable allowance activity for the year ended December 31, 1994............. $624 $ (91) $-- $ 533 Student receivable allowance activity for the year ended December 31, 1995............. 533 (433) 158 258 Student receivable allowance activity for the year ended December 31, 1996............. 258 167 30 455 Student receivable allowance activity for the six months ended June 30, 1997........... 455 378 193 1,026
S-2 - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR- MATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY UNDER- WRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEI- THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS COR- RECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE. ----------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ 3 Risk Factors.............................................................. 8 The Transactions.......................................................... 22 Pending Acquisition....................................................... 22 Use of Proceeds........................................................... 23 Dividend Policy........................................................... 23 Capitalization............................................................ 24 Dilution.................................................................. 25 Unaudited Pro Forma Condensed Consolidated Financial Data................. 26 Selected Historical Consolidated Financial and Other Data................. 31 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 33 Business.................................................................. 42 Financial Aid and Regulation.............................................. 56 Management................................................................ 69 Certain Relationships and Related Transactions............................ 79 Security Ownership of Certain Beneficial Owners and Management............ 80 Description of Capital Stock.............................................. 82 Shares Eligible for Future Sale........................................... 83 Underwriting.............................................................. 85 Notice to Canadian Residents.............................................. 87 Legal Matters............................................................. 88 Experts................................................................... 88 Additional Information.................................................... 88 Index to Financial Statements............................................. F-1 Financial Statement Schedule.............................................. S-1
----------- UNTIL , 1997 (25 DAYS AFTER THE DATE OF THE OFFERING), ALL DEALERS EF- FECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Shares LOGO Common Stock PROSPECTUS CREDIT SUISSE FIRST BOSTON SMITH BARNEY INC. ABN AMRO CHICAGO CORPORATION - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Set forth below is an estimate of the approximate amount of fees and expenses (other than underwriting commissions and discounts) payable by the Registrant in connection with the issuance and distribution of the Common Stock pursuant to the Prospectus contained in this Registration Statement. The Registrant will pay all of these expenses.
APPROXIMATE AMOUNT ----------- Securities and Exchange Commission registration fee........... $15,682 NASD filing fee............................................... 5,675 Nasdaq National Market application fee........................ * Accountants' fees and expenses................................ * Blue Sky fees and expenses.................................... * Legal fees and expenses....................................... * Transfer Agent and Registrar fees and expenses................ * Printing and engraving........................................ * Miscellaneous expenses........................................ * ------- Total..................................................... $ * =======
- -------- *To be provided by amendment All expenses other than the Securities and Exchange Commission registration fee and NASD filing fee are estimated. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Article XII of the Registrant's Amended and Restated Certificate of Incorporation will provide that the Registrant shall indemnify its directors to the full extent permitted by the General Corporation Law of the State of Delaware and may indemnify its officers and employees to such extent, except that the Registrant shall not be obligated to indemnify any such person (i) with respect to proceedings, claims or actions initiated or brought voluntarily by any such person and not by way of defense, or (ii) for any amounts paid in settlement of an action indemnified against by the Registrant without the prior written consent of the Registrant. Prior to consummation of the Offering, the Registrant will enter into indemnity agreements with each of its directors. These agreements may require the Registrant, among other things, to indemnify such directors against certain liabilities that may arise by reason of their status or service as directors, to advance expenses to them as they are incurred, provided that they undertake to repay the amount advanced if it is ultimately determined by a court that they are not entitled to indemnification, and to obtain directors' liability insurance if available on reasonable terms. In addition, Article XII of the Registrant's Amended and Restated Certificate of Incorporation will also provide that a director of the Registrant shall not be personally liable to the Registrant or its stockholders for monetary damages for breach of his or her fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Registrant or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for willful or negligent conduct in paying dividends or repurchasing stock out of other than lawfully available funds or (iv) for any transaction from which the director derives an improper personal benefit. Reference is made to Section 145 of the General Corporation Law of the State of Delaware which provides for indemnification of directors and officers in certain circumstances. II-1 The Registrant has purchased a directors' and officers' liability insurance policy. Under the terms of the Underwriting Agreement, the Underwriters have agreed to indemnify, under certain conditions, the Registrant, its directors, certain of its officers and persons who control the Company within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), against certain liabilities. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The following information reflects a 100-for-one split of the Registrant's common stock effected as of July 31, 1995 and a 10-for-one split of the Registrant's Series C Preferred Stock effected as of July 26, 1996. It does not reflect the Transactions to be effected immediately prior to the consummation of the Offering, as described in the Prospectus under the heading "The Transactions." On January 31, 1994, the Registrant issued (i) 500 shares of Class A Common Stock and 50 shares of Series A Preferred Stock to John M. Larson ("Larson") in exchange for total consideration of $50,000.50, (ii) 3,000 shares of Class A Common Stock and 300 shares of Series A Preferred Stock to Robert E. Dowdell ("Dowdell") in exchange for total consideration of $300,003, and (iii) an aggregate of 2,700 shares of Class B Common Stock, 27,300 shares of Class C Common Stock and 3,000 shares of Series A Preferred Stock to Heller Equity Capital Corporation and Heller Financial, Inc. (collectively, "Heller") in exchange for total consideration of $3,000,030. On June 20, 1994, the Registrant issued 45,000 shares of Class C Common Stock (2,400 shares of which converted into Class B Common Stock of the Registrant on June 27, 1994) and 4,500 shares of Series A Preferred Stock to Heller in exchange for total consideration of $4,500,045. On June 27, 1994, the Registrant issued (i) 250 shares of Class A Common Stock to Larson in exchange for consideration of $0.25, (ii) 1,500 shares of Class A Common Stock to Dowdell in exchange for consideration of $1.50, and (iii) 2,400 shares of Class B Common Stock to Heller as a result of a conversion of Heller's Class C Common Stock. On July 31, 1995, (i) pursuant to a Securities Purchase Agreement dated as of July 31, 1995, the Registrant issued 5,000 shares of Series C Redeemable Preferred Stock and Warrants to purchase 25,285 shares of Class D Common Stock to Electra Investment Trust P.L.C. and Electra Associates, Inc. (collectively, "Electra") in exchange for total consideration of $5,000,000.00, and (ii) as a condition to the obligations of The Provident Bank ("Provident") under a credit agreement with the Registrant, the Registrant issued Warrants to purchase 2,199 shares of Class D Common Stock to Provident. On September 1, 1995, the Registrant issued 824 shares of Class E Common Stock and 70 shares of Series A Preferred Stock to Wallace O. Laub and Constance L. Laub, as joint tenants (collectively, "Laub"), in exchange for total consideration of $99,982.06. In December 1996, the Registrant issued 824 shares of Class E Common Stock and 70 shares of Series A Preferred Stock to William A. Klettke ("Klettke") in exchange for total consideration of $99,982.06. On February 28, 1997, pursuant to a Securities Purchase Agreement dated as of February 28, 1997 (the "February 1997 Agreement"), the Registrant issued (i) 1,391 shares of Series D Preferred Stock and Warrants to purchase 1,655 shares of Class E Common Stock to Heller in exchange for total consideration of $1,391,000, (ii) 468 shares of Series D Preferred Stock and Warrants to purchase 558 shares of Class E Common Stock to Electra in exchange for total consideration of $468,000, (iii) 84 shares of Series D Preferred Stock and Warrants to purchase 99 shares of Series E Common Stock to Dowdell in exchange for total consideration of $84,000, (iv) 16 shares of Series D Preferred Stock and Warrants to purchase 19 shares of Class E Common Stock to Larson in exchange for total consideration of $16,000, (v) 15 shares of Series D Preferred Stock and Warrants to purchase 18 shares of Class E Common Stock to Klettke in exchange for total consideration of $15,000, (vi) 26 shares of Series D Preferred Stock and Warrants to purchase 31 shares of Class E Common Stock to Laub in exchange for total consideration of $26,000. II-2 On May 30, 1997, pursuant to the February 1997 Agreement, the Registrant issued (i) 3,995 shares of Series D Preferred Stock and Warrants to purchase 4,754 shares of Class E Common Stock to Heller in exchange for total consideration of $3,995,000, (ii) 1,348 shares of Series D Preferred Stock and Warrants to purchase 1,603 shares of Class E Common Stock to Electra in exchange for total consideration of $1,348,000, (iii) 44 shares of Series D Preferred Stock and Warrants to purchase 52 shares of Class E Common Stock to Larson in exchange for total consideration of $44,000, (iv) 42 shares of Series D Preferred Stock and Warrants to purchase 50 shares of Class E Common Stock to Klettke in exchange for total consideration of $42,000, (v) 71 shares of Series D Preferred Stock and Warrants to purchase 85 shares of Class E Common Stock to Laub in exchange for total consideration of $71,000. On May 30, 1997, pursuant to a Securities Purchase Agreement dated as of May 30, 1997 (the "May 1997 Agreement"), the Registrant issued (i) 11,127 shares of Series D Preferred Stock and Warrants to purchase 26,842 shares of Class E Common Stock to HECC in exchange for total consideration of $11,127,000, (ii) 2,376 shares of Series D Preferred Stock and Warrants to purchase 5,732 shares of Class E Common Stock to Electra in exchange for total consideration of $2,376,000 and (iii) 122 shares of Series D Preferred Stock and Warrants to purchase 295 shares of Class E Common Stock to Klettke in exchange for total consideration of $122,000. On June 30, 1997, pursuant to the May 1997 Agreement, the Registrant issued 1,375 shares of Series D Preferred Stock and Warrants to purchase 3,317 shares of Class E Common Stock to Electra in exchange for total consideration of $1,375,000. No underwriters were involved in any of the transactions described above. All of the securities issued in the foregoing transactions were issued by the Registrant in reliance upon the exemption from registration available under Section 4(2) of the Securities Act, including Regulation D promulgated thereunder. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS. 1* Form of Underwriting Agreement. 2.1 Asset Purchase Agreement dated as of September 30, 1996, among the Registrant, WCI Acquisition, Ltd., Phillips Educational Group of Portland, Inc., and Phillips Colleges, Inc. Schedules and exhibits to this Asset Purchase Agreement have not been included herewith, but will be furnished supplementally to the Commission upon request. 2.2 Stock Sale Agreement dated as of April 7, 1997, between K-III Prime Corporation, Inc. and the Registrant. Schedules and exhibits to this Stock Sale Agreement have not been included herewith, but will be furnished supplementally to the Commission upon request. 2.3 Stock Purchase Agreement dated as of June 30, 1997, among IAMD Acquisition I, Ltd. and Clem Stein, Jr., Marion Stein, Leonard Rutstein, Barbara Ann Scott King, Thomas V. King, William W. Wirtz and David Powell. Schedules and exhibits to this Stock Purchase Agreement have not been included herewith, but will be furnished supplementally to the Commission upon request. 2.4 Share Purchase Agreement dated as of June 30, 1997, among the Registrant and Clem Stein, Jr., Leonard Rutstein, Barbara Ann Scott King and Lawrence N. Gross. Schedules and exhibits to this Share Purchase Agreement have not been included herewith, but will be furnished supplementally to the Commission upon request. 3.1* Form of Amended and Restated Certificate of Incorporation of the Registrant. 3.2* Form of Amended and Restated By-laws of the Registrant. 4.1* Specimen stock certificate representing Common Stock. 4.2 Credit Agreement dated as of May 30, 1997 among the Registrant, as borrower, the lenders named therein and LaSalle National Bank, as agent, as amended. 5* Opinion of Katten Muchin & Zavis as to the legality of the securities being registered (including consent). 10.1* Career Education Corporation 1995 Stock Option Plan, as amended. 10.2* Form of Option Agreement under the Registrant's 1995 Stock Option Plan. 10.3* Career Education Corporation 1997 Employee Incentive Compensation Plan.
II-3 10.4* Form of Option Agreement under the Registrant's 1997 Employee Incentive Compensation Plan. 10.5* Career Education Corporation 1997 Non-Employee Directors' Stock Option Plan. 10.6* Form of Option Agreement under the Registrant's 1997 Non- Employee Directors' Stock Option Plan. 10.7* Career Education Corporation 1998 Employee Stock Purchase Plan. 10.8* Second Amended and Restated Option Agreement dated as of October , 1997, between the Registrant and John M. Larson. 10.9 Supplemental Option Agreement dated July 31, 1995, between the Registrant and John M. Larson. 10.10* Second Amended and Restated Option Agreement dated as of October, 1997, between the Registrant and Robert E. Dowdell. 10.11* Employment and Non-Competition Agreement dated as of October 9, 1997, between the Registrant and John M. Larson. 10.12* Form of Indemnification Agreement for Directors and Executive Officers. 10.13 Career Education Corporation Amended and Restated Stockholders' Agreement dated as of July 31, 1995, as amended on February 28, 1997 and May 30, 1997. 10.14* Registration Rights Agreement dated as of July 31, 1995, between the Registrant, Electra Investment Trust P.L.C. and Electra Associates, Inc. 10.15 Warrant Agreement dated as of July 31, 1995, between the Registrant and The Provident Bank, and related Warrant Certificate. 10.16 Securities Purchase Agreement dated as of July 31, 1995 among the Registrant, Electra Investment Trust P.L.C. and Electra Associates, Inc. (the "Electra 1995 Agreement"). 10.17 Form of Warrant Certificate issued pursuant to the Electra 1995 Agreement. 10.18 Securities Purchase Agreement dated as of February 28, 1997, among the Registrant, Heller Equity Capital Corporation, Electra Investment Trust P.L.C., Robert E. Dowdell, John M. Larson, Wallace O. Laub and Constance L. Laub and William A. Klettke (the "February 1997 Agreement"). 10.19 Securities Purchase Agreement dated as of May 30, 1997 among the Registrant, Heller Equity Capital Corporation, Electra Investment Trust P.L.C. and William A. Klettke (the "May 1997 Agreement"). 10.20 Form of Warrant Certificate issued pursuant to the February 1997 Agreement and the May 1997 Agreement. 10.21 Form of Management Fee Agreement between the Registrant and each of its subsidiaries. 10.22 Form of Tax Sharing Agreement between the Registrant and each of its subsidiaries. 10.23* Registration Rights Agreement dated as of October , 1997, between the Registrant and Heller Equity Capital Corporation. 10.24* Agreement dated as of October , 1997, between the Registrant and Heller Equity Capital Corporation, regarding designation of directors of the Registrant. 11* Statement regarding computation of per share earnings. 21 Subsidiaries of the Registrant. 23.1 Consent of Arthur Andersen LLP with respect to financial statements of the Registrant.
II-4 23.2* Consent of Katten Muchin & Zavis (contained in its opinion to be filed as Exhibit 5 hereto). 23.3 Consent of Thomas B. Lally 24 Power of Attorney (included on the signature page hereto). 27 Financial Data Schedule
- -------- *To be filed by amendment. (b) FINANCIAL STATEMENT SCHEDULES.
PAGE ---- Report of Independent Public Accountants S-1 Schedule II--Valuation and Qualifying Accounts S-2
ITEM 17. UNDERTAKINGS The Registrant hereby undertakes: (1) To provide to the Underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (2) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (3) For purposes of determining any liability under the Securities Act, (i) the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective and (ii) each post- effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CHICAGO, AND STATE OF ILLINOIS ON THE 9TH DAY OF OCTOBER, 1997. Career Education Corporation /s/ John M. Larson By: _________________________________ John M. Larson President and Chief Executive Officer POWER OF ATTORNEY EACH PERSON WHOSE SIGNATURE APPEARS BELOW HEREBY CONSTITUTES AND APPOINTS JOHN M. LARSON AND WILLIAM A. KLETTKE, AND EACH OF THEM, HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH FULL POWER OF SUBSTITUTION, TO SIGN ON HIS BEHALF, INDIVIDUALLY AND IN EACH CAPACITY STATED BELOW, ALL AMENDMENTS AND POST-EFFECTIVE AMENDMENTS TO THIS REGISTRATION STATEMENT ON FORM S-1 (INCLUDING ANY REGISTRATION STATEMENT FILED PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT OF 1933, AND ALL AMENDMENTS THERETO) AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO AND ANY OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, GRANTING UNTO SAID ATTORNEYS-IN-FACT AND AGENTS FULL POWER AND AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING REQUISITE AND NECESSARY TO BE DONE IN AND ABOUT THE PREMISES, AS FULLY AND TO ALL INTENTS AND PURPOSES AS EACH MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING EACH ACT THAT SAID ATTORNEYS-IN-FACT AND AGENTS MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE THEREOF. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED ON OCTOBER 9, 1997.
SIGNATURE TITLE --------- ----- /s/ John M. Larson President, Chief Executive Officer ___________________________________________ (Principal Executive Officer) and a John M. Larson Director /s/ William A. Klettke Senior Vice President and Chief Financial ___________________________________________ Officer (Principal Financial and William A. Klettke Accounting Officer) /s/ Robert E. Dowdell Director ___________________________________________ Robert E. Dowdell /s/ Wallace O. Laub Director ___________________________________________ Wallace O. Laub /s/ Patrick K. Pesch Director ___________________________________________ Patrick K. Pesch /s/ Scott D. Steele Director ___________________________________________ Scott D. Steele /s/ Todd Steele Director ___________________________________________ Todd Steele
II-6 EX-2.1 2 ASSET PURCHASE AGREEMENT DTD 9/30/96 EXHIBIT 2.1 ASSET PURCHASE AGREEMENT by and among CAREER EDUCATION CORPORATION, WCI ACQUISITION, LTD., PHILLIPS EDUCATIONAL GROUP OF PORTLAND, INC. and PHILLIPS COLLEGES, INC. Dated: September 30, 1996 TABLE OF CONTENTS
Page ---- 1. Certain Definitions...................................................... 1 2. Purchase and Sale of Assets; Assumed Liabilities......................... 8 2.1. Purchase and Sale of Assets................................... 8 2.2. Accounts Receivable and Deferred Tuition Balance.............. 9 2.3. Assumed Liabilities........................................... 10 2.4. Retention of Cash and Payment of Certain Operating Expenses Prior to Closing............................................. 12 2.5. Purchase Price................................................ 12 2.6. Closing....................................................... 16 2.7. Service Agreement............................................. 16 2.8. Accounts Payable.............................................. 16 2.9. EBITDA Adjustment............................................. 17 2.10. Employees..................................................... 17 2.11. Title IV Reimbursement........................................ 18 2.12. Funding of School Operations Pending DOE Approval............. 18 2.13. Refunds/Enrollment Contracts.................................. 19 2.14. Use of "Phillips Colleges, Inc." Name Marked on Inventories... 19 2.15. Prorations.................................................... 19 3. Closing Deliveries....................................................... 19 3.1. Deliveries to Purchaser....................................... 19 3.2. Closing Deliveries to Seller and Parent....................... 21 3.3. Closing Deliveries to Escrow, in respect of the Indemnity Escrow Amount and the Deferred Payment Escrow Amount......... 22 3.4. Post-Closing Covenants........................................ 22 4. Representations and Warranties of Seller and Parent...................... 25 4.1. Organization and Corporate Power.............................. 25 4.2. Ownership of Seller and School................................ 25 4.3. Capacity; Authorization; Binding Effect, Etc.................. 25 4.4. No Conflicts, Etc............................................. 26 4.5. Subsidiaries; Investments..................................... 26 4.6. Compliance with Laws; Licenses and Permits.................... 26 4.7. Recruitment; Admissions Procedures; Attendance; Reports....... 27 4.8. Cohort Default Rate........................................... 28 4.9. Title to the Assets........................................... 28 4.10. Material Miscellaneous Contracts.............................. 30 4.11. Tradenames; Confidential Information.......................... 30 4.12. Financial Statements.......................................... 31 4.13. Receivables................................................... 32
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4.14. Inventories................................................... 32 4.15. [Intentionally omitted]....................................... 32 4.16. Litigation, Etc............................................... 32 4.17. Insurance..................................................... 33 4.18. Environmental Matters......................................... 33 4.19. Employee Benefit Plans........................................ 34 4.20. Employment Matters............................................ 35 4.21. Tax Matters................................................... 36 4.22. Brokerage..................................................... 36 4.23. Affiliate Transactions........................................ 36 4.24. Absence of Certain Changes.................................... 36 4.25. Indebtedness.................................................. 37 4.26. Delivery of Documents......................................... 37 4.27. Disclosure.................................................... 38 5. Representations and Warranties of Purchaser and CEC...................... 38 5.1. Organization and Corporate Power.............................. 38 5.2. Capacity; Authorization, Binding Effect, Etc.................. 38 5.3. No Conflicts, Etc............................................. 39 5.4. Litigation.................................................... 39 5.5. Brokerage..................................................... 39 5.6. Title IV Program Liabilities.................................. 39 5.7. Disclosure.................................................... 40 6. Noncompetition; Non-Solicitation; Confidential Information, Exclusive Dealing................................................................. 40 6.1. Noncompetition Agreement...................................... 40 6.2. Non-Solicitation Agreement.................................... 40 6.3. Confidential Information...................................... 41 6.4. Remedies...................................................... 41 6.5. Scope of Restriction.......................................... 42 6.6. Termination Upon Recission.................................... 42 6.7. Additional Covenants of Seller and Parent Pending Closing..... 42 6.8. Key Employees................................................. 43 6.9. Exclusive Dealing............................................. 43 6.10. Additional Covenants of CEC and Purchaser Pending Closing..... 43 7. Conditions to Purchaser's Obligations.................................... 44 7.1. Cohort Default Rates.......................................... 44 7.2. Truth of Representations and Warranties....................... 44 7.3. Performance of Agreements..................................... 44 7.4. No Material Adverse Change.................................... 44 7.5. Litigation.................................................... 45 7.6. Proceedings................................................... 45 7.7. Consents and Approvals........................................ 45 7.8. Agreement with DOE............................................ 45
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8. Conditions to Seller's and Parent's Obligations.......................... 46 8.1. Truth of Representations and Warranties...................... 46 8.2. Performance of Agreements.................................... 46 8.3. Litigation................................................... 46 8.4. Proceedings.................................................. 46 8.5. Consents and Approvals....................................... 47 8.6. Agreement with DOE........................................... 47 9. Indemnification.......................................................... 47 9.1. Survival of Representations, Warranties, Covenants and Agreements.................................................. 47 9.2. Indemnification by Seller and Parent......................... 48 9.3. Indemnification by Purchaser................................. 48 9.4. Procedures................................................... 48 9.5. Prevailing Party to be Awarded Legal Fees.................... 49 9.6. Limitations on Amount of Indemnification Liability........... 49 9.7. Remedies..................................................... 49 9.8. Limitation on Personal Liability of Affiliates............... 50 9.9. Indemnity Escrow Amount...................................... 50 10. Recission of Transactions............................................... 50 11. Miscellaneous........................................................... 51 11.1. Termination.................................................. 51 11.2. Expenses..................................................... 52 11.3. Successors and Assigns....................................... 52 11.4. Severability................................................. 52 11.5. Counterparts................................................. 53 11.6. Descriptive Headings; Interpretation......................... 53 11.7. Governing Laws............................................... 53 11.8. Consent to Jurisdiction and Service of Process............... 53 11.9. Waiver of Jury Trial. Arbitration............................ 54 11.10. Notices...................................................... 54 11.11. Guaranty by CEC.............................................. 56 11.12. Entire Agreement............................................. 56
-iii- ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made as of September 30, 1996, by and among Career Education Corporation, a Delaware corporation ("CEC"), and WCI Acquisition, Ltd., a Delaware corporation and wholly-owned subsidiary of CEC ("Purchaser"), on the one hand, and Phillips Educational Group of Portland, Inc., an Oregon corporation ("Seller"), and Phillips Colleges, Inc., a Mississippi corporation of which Seller is a wholly- owned subsidiary ("Parent"), on the other hand. Except as otherwise indicated, capitalized terms used herein are defined in Section 1. BACKGROUND Seller is engaged in the operation of private, post-secondary schools, one of which is a culinary school located in Portland, Oregon known as Western Culinary Institute (the "School"). Purchaser has been organized for the purpose of acquiring the assets and goodwill of the School and assuming certain liabilities in connection therewith. Parent owns all of the outstanding capital stock of Seller and, subject to the terms and conditions set forth herein, has agreed to cause Seller to sell the assets constituting the School to Purchaser and to make certain representations and warranties, provide certain indemnifications, and enter into certain non-competition and other agreements in connection therewith. AGREEMENT NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants and agreements set forth herein, the parties hereto agree as follows: 1. Certain Definitions. For the purposes of this Agreement, the following terms have the meanings set forth below: "Accounts Payable Adjustment" shall have the meaning ascribed to such term in Section 2.8. "Accounts Payable Escrow Amount" shall have the meaning ascribed to such term in Section 2.5(b). "Accounts Receivable Adjustment" means (a) the difference between the Deferred Tuition Balance per the QA1 and the Student Receivable Balance per the QA1, plus (b) the Title IV Reimbursement Receivable, as of the Closing Date as determined pursuant to Section 2.2 in accordance with Schedule 2.2. "Accounts Receivable Escrow Amount" shall have the meaning ascribed to such term in Section 2.5(b). "Accrediting Body" means any entity or organization, which engages in granting or withholding accreditation for private post-secondary schools, in accordance with standards relating to the performance, operation, and/or financial condition of private post-secondary schools, and has granted Accreditation to the School as of the Closing Date, including the Accrediting Commission of Career Schools and Colleges of Technology and the Accrediting Commission of the American Culinary Federation Educational Institute. "Accreditation" means any authorization or similar approval granted by any Accrediting Body. "Additional Location" means any Facility where classes are regularly conducted by the School other than the Leased Facilities. "Affiliate" means, with respect to any Person, any individual related by blood or marriage to such Person or any Person controlling, controlled by or under common control with such Person. "Assets" shall have the meaning ascribed to such term in Section 2.1. "Assignment and Assumption Agreement" shall have the meaning ascribed to such term in Section 2.3(a). "Assumed Liabilities" shall have the meaning ascribed to such term in Section 2.3. "Best of Purchaser's knowledge" means the collective actual knowledge of the executive officers of Purchaser and CEC holding offices of vice- president or higher, following due inquiry of appropriate officers, employees and consultants of Purchaser and CEC. "Best of Seller's knowledge" means the collective actual knowledge of the executive officers of Seller and Parent holding offices of vice- president or higher, following due inquiry of appropriate officers, employees and consultants of Seller and Parent, and the president and the financial aid director of the School. "CEC" shall have the meaning ascribed to such term in the preamble to this Agreement. "Closing" shall have the meaning ascribed to such term in Section 2.6. "Closing Date" shall mean the date of the Closing. -2- "Closing Payment" shall have the meaning ascribed to such term in Section 2.5(a). "Competitive Activities" shall have the meaning ascribed to such term in Section 6.1. "Compliance Audit Escrow Amount" shall have the meaning ascribed to such term in Section 2.5(c). "Compliance Reports" shall have the meaning ascribed to such term in Section 4.7. "Confidential Information" shall have the meaning ascribed to such term in Section 6.3. "Curricula" means copyrighted and proprietary uncopyrighted materials used in any courses currently and solely offered at the School and owned by Seller. "Deferred Payment Escrow Amount" shall have the meaning ascribed to such term in Section 2.5(a). "Deferred Tuition Balance" means deferred tuition revenue of the School as of the Closing Date per the QA1 determined in accordance with the practices and procedures used to determine such amount for the calculation set forth on Schedule 2.2. "DOE" means the United States Department of Education and any successor agency administering student financial assistance under Title IV. "DOE Approval Notice" means a fully-executed Provisional Program Participation Agreement issued by DOE. "DOE Program Review Escrow Amount" shall have the meaning ascribed to such term in Section 2.5(c). "Earned Accounts Receivable" means "earned accounts receivable" of Parent, Seller or the School outstanding as of the Closing Date which relate to business conducted at the School prior to the Closing Date, calculated in accordance with Schedule 2.2 attached hereto, including without limitation the unpaid amounts of student financial assistance funds from any governmental or non-governmental sources, including funds administered under Title IV, due to Seller, Parent or the School in respect of instruction provided to students of the School prior to the Closing (including without limitation the Title IV Reimbursement Receivable). -3- "EBITDA" means the result of the following calculation for any period, with each item listed to be presented and calculated in accordance with the practices and procedures, and consistent with the methodology used to determine such amounts, in Schedule 2.9(a) attached hereto: (a) net income of the School ("Net Income"); plus (b) expenses identified as Management Fees and GAAP Management Fees deducted in the determination of Net Income, consistent with the methodology set forth on Schedule 2.9(a); plus (c) any provisions for (or minus any benefit from) income taxes, deducted (or added) in the determination of Net Income, consistent with the methodology set forth on Schedule 2.9(a); plus (d) expenses identified as Interest deducted in the determination of Net Income, consistent with the methodology set forth on Schedule 2.9(a); plus (e) amortization and depreciation deducted in the determination of Net Income, as identified in the report to be provided in accordance with Section 2.9(b) of this Agreement. "EBITDA Adjustment" means an amount equal to seventy-five percent (75%) of EBITDA for the Interim Period as determined and in accordance with Section 2.9 of this Agreement. "Environmental Law" means any present federal, state or local law, statute, rule, regulation or ordinance pertaining to any Hazardous Substance or otherwise pertaining to the environment or protection of any natural resources, including, without limitation, air, soil or water. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Escrow" shall have the meaning ascribed to such term in Section 2.5(a). "Escrow Agreement" shall have the meaning ascribed to such term in Section 2.5(a). "Excluded Assets" shall have the meaning ascribed to such term in Section 2.1. "Facility" shall mean any real property owned or operated by Seller solely and exclusively in relation to the activities of the School, including without limitation the Leased Facilities. "Financial Statements" means (i) the audited balance sheets and the related statements of income and retained earnings and related statements of cash flows, of the School, as at and for the fiscal years ended December 31, 1992 and 1993, (ii) the unaudited balance sheets and related statements of income for the School set forth in the audited consolidated financial statements and supplemental consolidating information of Parent and its subsidiaries, as at -4- and for the fiscal years ended December 31, 1994 and 1995, and (iii) the unaudited balance sheets and the related statements of income for the School (the "Interim Financial Statements") (a) prepared by Seller as at and for the six (6) month period ended June 30, 1996 and (b) prepared by Seller as at and for the eight (8) month period ended August 31, 1996 (the "Interim Balance Sheet Date"). "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants, and statements and pronouncements of the Financial Accounting Standards Board and the Emerging Issues Task Force (or any successor authority) that are applicable as of the date of determination, all as consistently applied in the preparation of the Financial Statements. "General Indemnity Escrow Amount" shall have the meaning ascribed to such term in Section 2.5(c). "Hazardous Substance" shall include any substances included within the definitions of "hazardous substances," "hazardous materials," "toxic substances," "waste" or similar terms in any applicable federal, state or local statute, ordinance, rule or regulation relating to environmental protection, remediation or liability, including clean air, clean water, waste disposal and hazardous substance transportation or disposal, including, without limitation, petroleum, asbestos, polychlorinated biphenyls, flammable explosives and radioactive materials. "Indemnity Escrow Amount" shall have the meaning ascribed to such term in Section 2.5(a). "Indemnifiable Losses" shall have the meaning ascribed to such term in Section 9.2. "Intellectual Property" means the patents, trademarks, tradenames (including the School's name), servicemarks, copyrights, know-how, Curricula and trade secrets owned by Seller and used exclusively in connection with the operation of the School, but excluding the names "Phillips Colleges" and "Western Business College," any derivatives thereof, and any trademarks, tradenames or servicemarks related thereto. "Interim Period" means the period commencing October 1, 1996, and ending on the Closing Date. "Investment" as applied to any Person means (i) any direct or indirect ownership by such Person of any notes, obligations, instruments, stock, -5- securities or ownership interest of any other Person, and (ii) any capital contribution by such Person to any other Person. "Leases" shall have the meaning ascribed to such term in Section 4.9(b). "Leased Facilities" shall have the meaning ascribed to such term in Section 4.9(b). "Licenses and Permits" shall have the meaning ascribed to such term in Section 4.6. "Material Miscellaneous Contracts" shall have the meaning ascribed to such term in Section 4.10. "Noncompetition Period" shall have the meaning ascribed to such term in Section 6.1. "Operations Statement" shall have the meaning ascribed to such term in Section 2.9. "Out-of-School Receivables Balances" means amounts not subject to refund, offset or similar reduction due as of the Closing Date from students who have withdrawn from the School prior to the Closing. "Parent" shall have the meaning ascribed to such term in the preamble to this Agreement. "Person" means an individual, a partnership, a corporation, an association, a limited liability company, a joint stock company, a trust, a joint venture, an unincorporated organization or other similar entity. "Plans" means all employee benefit plans, whether qualified or nonqualified, whether funded or unfunded and whether or not subject to ERISA, affecting employees of the School and all collective bargaining agreements relating to employee benefits affecting employees of the School with respect to which Seller or Parent may incur any future or contingent obligations, including, without limitation, all written plans relating to deferred compensation, pensions, profit sharing, retirement income or other benefits, stock purchase and stock option plans, bonus plans, severance arrangements, health benefits, retiree health benefits, insurance benefits and all other employee benefits or fringe benefits, including any employee welfare benefit plans and employee pension benefit plans within the meaning of Sections 3(1) and 3(2) of ERISA, and including any written plans with respect to provision of or reimbursement of expenses. -6- "Policy Guidelines" shall have the meaning ascribed to such term in Section 4.7. "Pre-Closing Financial Aid Irregularities" shall have the meaning ascribed to such term in Section 2.3(b). "Prepaid Tuition" means the obligations of the School in respect of Student Deposits and payments held by Seller or Parent as of the Closing Date which relate to the business and operations of the School to be conducted subsequent to the Closing Date, as calculated in accordance with Schedule 2.2. "Purchase Price" shall have the meaning ascribed to such term in Section 2.5. "Purchaser" shall have the meaning ascribed to such term in the preamble to this Agreement. "Purchaser Inadequacy" shall have the meaning ascribed to such term in Section 10. "QA1" means the student receivable subsidiary system currently in use by the Seller and Parent. "Retained Schools" shall have the meaning ascribed to such term in Section 6.1. "School" shall have the meaning ascribed to such term in the background section to this Agreement. "School's Accounts Payable" shall have the meaning ascribed to such term in Section 2.8. "Seller" shall have the meaning ascribed to such term in the preamble to this Agreement. "Seller Inadequacy" shall have the meaning ascribed to such term in Section 10. "Service Agreement" shall have the meaning ascribed to such term in Section 2.7(b). "Student Deposits" means any refundable deposits made by students of the School. "Student Receivable Balance" means the Student Receivable Balance of the School as of the Closing Date per the QA1 determined in accordance -7- with the practices and procedures used to determine such amount for the calculation set forth on Schedule 2.2. "Subsidiary" means any corporation of which the securities having a majority of the ordinary voting power in electing the board of directors are, at the time as of which any determination is being made, owned by a Person either directly or indirectly. "Taxes" means all taxes, levies or other like assessments, charges or fees, including, without limitation income, gross receipts, excise, property (including, without limitation, any special assessments), sales, license, payroll and franchise or other governmental taxes, imposed by the United States, or any state, county, local or foreign government or subdivision or agency thereof on Seller and/or any of its business activities; and such term shall include any interest, penalties or additions or other amounts payable in connection with any Taxes. "Title IV" means Chapter 28, Subchapter IV of the Higher Education Act of 1965, as amended, 20 U.S.C.A. (S) 1070a, and any amendments or successor statutes thereto. "Title IV Escrow Amount" shall have the meaning ascribed to such term in Section 2.5(b)(ii). "Title IV Reimbursement Receivable" means the Title IV Reimbursement Receivable of the School as of the Closing Date determined in accordance with the practices and procedures used to determine such amount for the calculation set forth on Schedule 2.2. "Tradenames" shall have the meaning ascribed to such term in Section 4.11(a). "Unearned Accounts Receivable" means all accounts receivable of Parent, Seller and the School outstanding as of the Closing Date which relate to the business conducted at the School which are not Earned Accounts Receivable and which are included in the Assets. 2. Purchase and Sale of Assets; Assumed Liabilities. 2.1. Purchase and Sale of Assets. Seller agrees to sell, transfer and convey to Purchaser at Closing all of Seller's assets, properties and business, tangible and intangible, used exclusively in connection with or otherwise necessary to the business and operations of the School, including without limitation, Unearned Accounts Receivable, deposits made by Seller relating to the School with third parties (including deposits made with landlords under the Leases), prepaid expenses (except as -8- identified on Schedule 2.1), leasehold interests (including interests in the Leased Facilities) and improvements, furniture, fixtures, equipment, personal property, inventory, supplies, licenses, permits, memberships, rights, franchises, Accreditations, program participation agreements and other approvals from any applicable Accrediting Body, the DOE, and any other board or agency or governmental entity from which approval is necessary for the operations of the School (provided, that such licenses, permits, memberships, rights, franchises, Accreditations, program participation agreements and other approvals shall be included in the Assets only to the extent the same are transferable to Purchaser), those contracts and agreements included in Assumed Liabilities, Seller's Intellectual Property, goodwill, and operating books and records (but excluding any records that relate in whole or in part to the Excluded Assets or Excluded Liabilities, corporate minute books, corporate or tax records or the original form of general ledgers and supporting documentation including, without limitation, original invoices and original personnel records, provided, that to the extent any of the foregoing records contain information which relates to the Assets, copies of the portions of such records relating to the Assets shall be included in the Assets), other than Excluded Assets (collectively the "Assets"), free and clear of all liens, claims, encumbrances, options, rights and restrictions other than Assumed Liabilities. "Excluded Assets" shall mean (a) cash (including, without limitation, cash in respect of Student Deposits and other Prepaid Tuition), cash equivalents, bank account balances, escrow account balances and other escrow account rights (excluding any amounts deposited into the Escrow pursuant hereto which will likewise not be considered Assets in this transaction), marketable securities, Earned Accounts Receivable, and Out-of- School Receivables Balances, (b) all assets subject to capitalized or operating leases which are not being assumed by Purchaser pursuant to Section 2.3 hereof or which Purchaser has not otherwise expressly agreed in writing to assume prior to the Closing Date, (c) any license, permit, membership, right, franchise, Accreditation, program participation agreement or approval from any Accrediting Body, the DOE or other board, agency or governmental entity which is not transferable by its terms, (d) intercompany accounts receivable between the School and its Affiliates, (e) books and records not required in connection with the operation of the School, (f) prepaid expenses identified on Schedule 2.1, and (g) other rights and assets specifically identified on Schedule 2.1. Purchaser agrees, on the terms and conditions set forth in this Agreement, to purchase from Seller at the Closing, the Assets, free and clear of all liens, claims, encumbrances, options, rights and restrictions other than Assumed Liabilities. 2.2. Accounts Receivable and Deferred Tuition Balance. (a) As soon as possible following the Closing, and in any event not later than thirty (30) days after the Closing Date, Purchaser shall cause Arthur Andersen, L.L.P. to complete an audit of the balance sheet of the School on a stand-alone basis as of the Closing Date. Purchaser shall deliver to Seller a copy of such audited balance sheet, together with (i) a report which presents, in summary, the Deferred Tuition Balance, the Student Receivable Balance, and the Title IV Reimbursement Receivable (each as determined in accordance with Schedule 2.2) and (ii) a calculation of the Accounts Receivable Adjustment in accordance with Schedule 2.2 hereto, within such thirty (30) day period. Such balance sheet and other documents shall be deemed to have 9 been accepted by, and be binding upon, Seller if Seller fails to deliver written objections to Purchaser within ten (10) business days after the receipt of such balance sheet and other documents. If Seller objects to such balance sheet and other documents, and such objections are not resolved to Seller's satisfaction within five (5) business days after delivery of such written objections, then Price Waterhouse, L.L.P., or another nationally recognized certified public accounting firm not otherwise engaged by either Seller or Purchaser or their Affiliates mutually selected by Seller and Purchaser (the "Independent Auditor") shall review such balance sheet and other documents, and all related work papers. Such review shall be completed by the Independent Auditor within ten (10) business days following its engagement, and the determinations of the Independent Auditor shall be final and binding upon all parties. The costs of the engagement of the Independent Auditor shall be borne by Seller, unless the Independent Auditor's determination results in an adjustment in Seller's favor of at least $38,000, in which event the costs of the engagement of the Independent Auditor shall be borne by Purchaser. (b) In the event the Accounts Receivable Adjustment calculation results in a determination of Prepaid Tuition the absolute value of which is greater than the Accounts Receivable Escrow Amount, Seller and Parent shall promptly pay to Purchaser in immediately available funds an amount equal to the difference between such amounts, which payment shall be in addition to the amount to be disbursed to Purchaser pursuant to Section 2.5(b)(i). (c) In the event that the Accounts Receivable Adjustment calculation results in a determination of Earned Accounts Receivable, Purchaser shall promptly pay to Seller or Parent, as designated by Seller, in immediately available funds the amount of such Earned Accounts Receivable, which payment shall be in addition to the amount to be disbursed to Seller or Parent pursuant to Section 2.5(b)(i); provided, that such payment shall be reduced by payments, if any, in respect of such Earned Accounts Receivable previously made to Seller or Parent pursuant to Section 2.11. 2.3. Assumed Liabilities. (a) Purchaser agrees at the Closing to assume and to perform, pay and discharge, when due, the following, and only the following, liabilities and obligations of Seller (the "Assumed Liabilities"): (i) all of Seller's obligations relating to the School in respect of student enrollment contracts and other executory contracts entered into with students, (ii) Seller's obligations under the Leases and the other contracts (including without limitation, the Material Miscellaneous Contracts), operating leases and other agreements reflected on the Schedules to this Agreement relating solely to the operation of the School (or, if not reflected on the Schedules to this Agreement, obligations under contracts, operating leases and other agreements relating solely to the School -10- pursuant to which the assumed obligations consist solely of future payment obligations which do not exceed $1,000 in the case of any single agreement or $12,000 in the aggregate) to the extent, in each case, that such obligations are not in material default, (iii) accounts payable with third party vendors that are not Affiliates incurred or made in the ordinary course of the School's business for equipment and textbooks with invoice dates on or subsequent to forty-five (45) days prior to the Closing, (iv) all existing mortgages, pledges, liens, claims, restrictions, encumbrances and security interests set forth on Schedule 2.3(a) attached hereto, (v) all liabilities imposed by the DOE, applicable state regulatory agencies, guaranty agencies and any other governmental or non-governmental entity, including, without limitation, Accrediting Bodies, related to periods from and after Closing, (vi) standard, ordinary course vacation, sick and personal pay benefits of employees of Seller to be hired by Purchaser hereunder which accrued and remain unpaid in the normal course of business on the Closing Date, (vii) other liabilities and obligations set forth on Schedule 2.3(a) attached hereto, and (viii) all liens for current Taxes not yet due and payable affecting the Assets (provided, that the obligation to pay such Taxes, to the extent accrued prior to the Closing Date and not specifically included in Assumed Liabilities, shall remain the obligation of Seller) and (ix) all liabilities for Taxes constituting transfer, sales and use taxes in connection with accounts payable included in Assumed Liabilities and Taxes relating to the period after Closing in connection with the Assumed Liabilities. In connection with the foregoing, Purchaser shall execute and deliver to Seller an Assignment and Assumption Agreement in the form of Exhibit A attached hereto (the "Assignment and Assumption Agreement"). (b) Except as expressly set forth in Section 2.3(a), Assumed Liabilities shall not include (i) any debt, obligation or liability of Seller, Parent or the School, or any claim against any of the foregoing, of any kind, whether known or unknown, contingent, absolute or otherwise, including, without limitation, any liability for Taxes (other than Taxes constituting transfer, sales and use taxes in connection with accounts payable included in Assumed Liabilities and Taxes relating to the period after Closing in connection with the Assumed Liabilities), (ii) any contingent or otherwise indeterminate liabilities of Seller or Parent relating to the conduct of Seller's business prior to Closing, and (iii) any other liability of Seller, Parent or the School not expressly assumed hereunder. It is expressly acknowledged that pursuant to the foregoing, and without limitation thereof, Purchaser shall not assume and shall not be responsible for any obligations or liabilities in respect of (i) pending or threatened litigation affecting Seller, Parent or the School as of the Closing Date, or arising out of actions occurring prior to the Closing Date, (ii) Plans of Seller or Parent, or (iii) financial aid irregularities relating to the operation of the School prior to the Closing Date, including, without limitation, any audit disallowances, improperly disbursed student financial assistance program funds -11- or similar determinations or actions ("Pre-Closing Financial Aid Irregularities"); provided, however, that Purchaser acknowledges that DOE will require Purchaser to assume, in accordance with the terms of that certain letter dated March, 12 1996 from DOE to Parent, a copy of which is attached hereto as Exhibit B, those Pre-Closing Financial Aid Irregularities related to Title IV that have not been identified at the time of the Closing, as a part of the process of Purchaser obtaining its DOE Approval Notice; and further provided, that such assumption of Pre- Closing Financial Aid Irregularities by Purchaser shall not relieve Seller and Parent of liability therefor or of their indemnification obligations in respect thereof pursuant to Section 9.2 of this Agreement). 2.4. Retention of Cash and Payment of Certain Operating Expenses Prior to Closing. Seller and Parent have agreed and hereby represent and warrant that as of the date of this Agreement, Parent has or will have cash in an amount sufficient to repay to Seller sufficient amounts to permit the School to pay all its operating expenses currently outstanding or reasonably anticipated to be incurred prior to the Closing (including, without limitation, payroll expenses, payroll taxes and other employee-related expenses incurred in the ordinary course of the business of the School, and accounts payable to be paid prior to Closing in accordance with Section 2.8). Seller shall pay or cause to be paid all accrued but unpaid and undisputed payroll of the School (other than standard ordinary course vacation and sick or personal days which are included in Assumed Liabilities pursuant to Section 2.3), payroll taxes and other employee-related expenses and liabilities incurred in the ordinary course of the business of the School prior to Closing, and, within twenty (20) days of Closing, shall provide Purchaser with evidence satisfactory to Purchaser that such expenses and liabilities have been paid. 2.5. Purchase Price. (a) Amount and Payment. In full consideration for the sale of the Assets by Seller to Purchaser, and the other agreements of Seller and Parent hereunder, and in addition to the assumption of the Assumed Liabilities, Purchaser agrees to pay to Seller and Parent, in accordance with the directions of Seller and Parent, the sum of $8,250,000 (the "Purchase Price") subject to adjustment as set forth in Section 2.5(b), payable as follows: (i) $7,000,000 (the "Closing Payment") in cash, which amount shall be delivered to Seller or its designee by wire transfer of immediately available funds at Closing; (ii) $750,000 (the "Deferred Payment Escrow Amount"), which amount shall be deposited into an escrow account (the "Escrow"), established -12- pursuant and subject to the terms of an escrow agreement (the "Escrow Agreement"), in substantially the form of Exhibit C attached hereto, and which amount shall be disbursed in accordance with the terms of the Escrow Agreement and Section 2.5(b) below; (iii) $500,000 (the "Indemnity Escrow Amount"), which amount shall be deposited by Purchaser into the Escrow; and which amount shall be disbursed in accordance with the terms of the Escrow Agreement and Section 2.5(c) below. Purchaser's obligations to fund the Escrow in full at Closing pursuant to clauses (ii) and (iii) above shall not be subject to any right of offset against amounts Purchaser may claim it is owed under this Agreement; provided, that such obligation to fund the Escrow at Closing shall in no way limit Purchaser's rights to disbursement of proceeds from the Escrow in accordance with the terms of this Agreement and the Escrow Agreement, nor shall it limit Purchaser's rights to bring claims for indemnification pursuant to Section 9. (b) Disbursement of Deferred Payment Escrow Amount. The Deferred Payment Escrow Amount shall be disbursed from the Escrow, in accordance with and subject to the terms of the Escrow Agreement, as follows: (i) $380,000 (the "Accounts Receivable Escrow Amount"), less the absolute value of Prepaid Tuition, if any, resulting from the calculation of the Accounts Receivable Adjustment, shall be disbursed to Seller or its designee upon final determination of the Accounts Receivable Adjustment in accordance with Section 2.2(a), at which time the difference between $380,000 and the amount so disbursed to Seller or its designee shall be disbursed to Purchaser; (ii) $120,000 (the "Title IV Escrow Amount") shall be disbursed to Seller or its designee upon the earlier to occur of (A) delivery by DOE of a DOE Approval Notice to Purchaser or (B) ninety (90) days following the Closing Date; provided, that the escrow agent has not received a written certification from Purchaser prior to ninety (90) days after the Closing Date that Purchaser has grounds to and has elected to rescind the -13- transactions consummated hereunder in accordance with Section 10; (iii) $250,000 (the "Accounts Payable Escrow Amount"), less the Accounts Payable Adjustment, if any, shall be disbursed to Seller or its designee upon final determination of the Accounts Payable Adjustment in accordance with Section 2.8, at which time the difference between $250,000 and the amount so disbursed to Seller or its designee shall be disbursed to Purchaser to pay unpaid School's Accounts Payable in accordance with the terms of the Escrow Agreement. (c) Disbursement of Indemnity Escrow Amount. The Indemnity Escrow Amount shall be disbursed from the Escrow, in accordance with and subject to the terms of the Escrow Agreement, as follows: (i) $200,000 (the "Compliance Audit Escrow Amount") shall be disbursed to Seller or its designee upon completion of a compliance audit of the School covering the period July 1, 1995 through June 30, 1996 as required by the provisions of 34 C.F.R. (S) 668.23, which Purchaser shall complete and deliver to Seller no later than February 28, 1997; provided, however, in the event that such compliance audit establishes a claim for indemnification under Section 9.2 of this Agreement, the Compliance Audit Escrow Amount to be disbursed to Seller or its designee hereunder shall be reduced by an amount sufficient to satisfy such claim up to the amount of $200,000, which retained amount, less any amount necessary to satisfy such claim determined in accordance with Section 9, shall be released upon final resolution of such compliance audit claim in accordance with Section 9 and the Escrow Agreement, and provided further that in the event that the draft of such compliance audit establishes a potential liability in the amount of $10,000 or more, Purchaser will provide Seller with a copy of such draft compliance audit and an opportunity to resolve the potential liability prior to submission of the compliance audit to DOE; -14- (ii) $200,000 (the "General Indemnity Escrow Amount") shall be disbursed to Seller or its designee on the second (2nd) anniversary of the Closing Date; provided, however, that the General Indemnity Escrow Amount to be disbursed to Seller or its designee hereunder shall be reduced by an amount sufficient to satisfy any indemnification claims for which notice has been delivered in accordance with Section 9.4 of this Agreement up to the amount of $200,000, which retained amount, less any amount necessary to satisfy such claim(s) determined in accordance with Section 9, shall be released upon final resolution of such pending indemnification claims in accordance with Section 9 and the Escrow Agreement; and (iii) $100,000 (the "DOE Program Review Escrow Amount") shall be disbursed to Seller or its designee on the earlier of the following: (1) conduct of a program review of the School by DOE pursuant to which DOE does not assert Pre- Closing Financial Aid Irregularities, (2) in the event no DOE program review has commenced prior to the second (2nd) anniversary of the Closing Date, on the second (2nd) anniversary of the Closing Date, and (3) in the event a DOE program review has commenced prior to the second (2nd) anniversary of the Closing Date, fifteen (15) days following notice that the program review will not assert any Pre-Closing Financial Aid Irregularities; provided, however, in the event that Purchaser receives written notice that the program review will assert Pre- Closing Financial Aid Irregularities, the DOE Program Review Escrow Amount to be disbursed to Seller or its designee hereunder shall be reduced by an amount sufficient to satisfy any claims subject to indemnification related to the DOE Program Review for which notice has been delivered in accordance with Section 9.4 of this Agreement up to the amount of $100,000, which retained amount, less any amount necessary to satisfy such claims determined in accordance with Section 9, -15- shall be released upon final resolution of such pending claims in accordance with Section 9 and the Escrow Agreement. (d) Interest on Escrow. Interest accruing on all amounts deposited into the Escrow pursuant to this Agreement shall accrue for the benefit of the party hereunder to whom such amount is ultimately disbursed in accordance with the provisions of this Section 2.5 and the Escrow Agreement, and such interest shall be disbursed simultaneously with the disbursement of the applicable escrowed amount pursuant to the terms of this Agreement and the Escrow Agreement. (e) Allocation of Purchase Price. The aggregate Purchase Price shall be allocated as follows: (i) to all items of tangible personal property, including leasehold improvements, purchased from Seller $7,120,000; (ii) to the noncompetition covenant contained in Section 6.1, $400,000 (of which $300,000 shall be allocated to Parent and $100,000 to Seller); and (iii) to all other items of intangible personal property, including the Tradename, Confidential Information and goodwill, the balance of the Purchase Price. 2.6. Closing. Subject to the terms of this Section 2.6, the parties hereto shall close the purchase and sale of the Assets and the consummation of the other actions contemplated by this Agreement to occur in connection therewith at the closing (the "Closing"), which shall take place at the offices of Purchaser's counsel, Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd., 55 East Monroe Street, Suite 3700, Chicago, Illinois 60603, on October 4, 1996, or within five (5) days after such later date as all the conditions to the Closing set forth in Section 7 hereto have been satisfied, but in no event later than December 31, 1996, or such other date to which the parties hereto shall mutually agree in writing. 2.7. Service Agreement. At the Closing, Purchaser, Seller and Parent shall enter into a Service Agreement in substantially the form of Exhibit D attached hereto (the "Service Agreement"), providing for Seller and Parent to provide certain specified services during a transition period following the Closing not to exceed thirty (30) days in connection with the operation by Purchaser of the School, on the terms and in accordance with the conditions set forth in such Service Agreement. 2.8. Accounts Payable. Seller shall use its best efforts to pay in full, not later than ten (10) days following the Closing Date, all accounts payable of Seller relating to the School outstanding as of the Closing Date which are not subject to any good faith dispute concerning the amount or validity of such accounts payable and which relate to the business and operations of the School -16- prior to the Closing Date other than (i) accounts payable for equipment and textbooks with an invoice date forty-five (45) days or less prior to the Closing Date, which accounts payable are Assumed Liabilities pursuant to Section 2.3, and (ii) all accounts payable which Seller and Purchaser have agreed in writing prior to the Closing that Seller may contest in good faith, which shall nonetheless remain obligations of Seller and shall not be included in Assumed Liabilities (collectively, "School's Accounts Payable"). On the tenth day following the Closing Date, Seller and Purchaser shall mutually review the status of payment of all School's Accounts Payable (including, without limitation, any School's Accounts Payable invoiced after the Closing Date), and shall mutually determine the amount, if any, of School's Accounts Payable which remains unpaid, deducting therefrom all amounts paid by or on behalf of Seller in respect of accounts payable for equipment and textbooks with an invoice date forty-five (45) days or less prior to the Closing Date (the "Accounts Payable Adjustment"). Upon final determination of the Accounts Payable Adjustment in accordance with this Section 2.8, Seller and Purchaser shall deliver joint notice thereof to the escrow agent under the Escrow Agreement, who shall disburse the Accounts Payable Escrow Amount portion of the Deferred Payment Escrow Amount in accordance with the terms of Section 2.5(b) and the Escrow Agreement. Notwithstanding the foregoing, nothing herein shall relieve Seller of its obligation to pay any School's Accounts Payable in excess of the Accounts Payable Escrow Amount, nor of its obligation to pay any School's Accounts Payable not taken into account in determination of the Accounts Payable Adjustment. 2.9. EBITDA Adjustment. In the event the Closing occurs on or after October 1, 1996, as soon as possible following the Closing, and in any event not later than thirty (30) days after the last day of the month of the Closing Date, Seller shall deliver to Purchaser (a) an operations statement (the "Operations Statement") which reflects EBITDA for the Interim Period calculated consistent with the methodology of Schedule 2.9(a); and (b) a report which presents the amount of amortization and depreciation for the Interim Period in the form of Schedule 2.9(b). Promptly following receipt of the documents described in the preceding sentence, Seller and Parent shall pay to Purchaser in immediately available funds an amount equal to the EBITDA Adjustment. In the event the Closing occurs on or before September 30, 1996, this Section 2.9 shall be null and void, and of no force or effect. 2.10. Employees. At the Closing, Purchaser shall offer employment to all employees of Seller or Parent employed by Seller solely at the School in connection with the operation of the School, at the same salary paid to such employees immediately prior to the Closing Date, on the terms and subject to the conditions of Purchaser's employment standards and policies. Purchaser shall not assume any liability whatsoever with respect to any employees and former employees of Seller who do not accept employment with Purchaser, including, but not limited to, providing health continuation benefits pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1995, as amended ("COBRA"), and Seller shall retain, bear and discharge all liabilities with respect to all employees and former employees of Seller who do not accept employment with -17- Purchaser. Notwithstanding anything in this paragraph to the contrary, all employees who accept employment by Purchaser pursuant to the above shall be employed at will and may be terminated by Purchaser at any time, for any reason, or for no reason at all. Such employees who accept employment with Purchaser shall be entitled to other benefits on a basis substantially similar to those offered by Purchaser and its Affiliates to employees of comparable position, experience and seniority. Notwithstanding anything in the foregoing to the contrary, Purchaser shall retain the right to amend, modify or terminate any Purchaser Plan in accordance with its terms and applicable law. Notwithstanding the foregoing, Purchaser shall not assume any liability in respect of nor shall it be obligated to continue any Plans of Seller. With respect to each employee who accepts employment with Purchaser under the terms herein, Seller, through and subject to the terms of its Plans, shall be responsible for costs and expenses incurred prior to the Closing Date, and shall also be responsible for payment to such employees of wages accrued through the Closing Date, which wages shall be paid promptly following the Closing. Purchaser shall assume Seller's and Parent's obligations to employees of the School who accept employment with Purchaser with respect to accrued sick/personal days and vacation days earned prior to the Closing Date and shall include all such employees in a medical plan which provides for a waiver of waiting time and pre-existing conditions. Seller shall deliver any and all notices to be delivered to employees of the School in connection with the transactions contemplated by this Agreement as required by applicable state and local law. 2.11. Title IV Reimbursement. To the extent that following the Closing, under applicable DOE regulations, the School remains eligible to receive and retain certain Federal student financial assistance funds under Title IV relating to operation of the School prior to the Closing, including without limitation, Federal Pell Grant funds, Seller and Parent hereby agree that any such Title IV funds so received constitute Assets sold to Purchaser under this Agreement, unless such funds represent Earned Accounts Receivable. Purchaser further agrees to use commercially reasonable efforts to collect all Title IV funds which the School is eligible to receive following the Closing. As part of this commercially reasonable effort, during the sixty (60) day period following the Closing Date, Purchaser shall take all appropriate actions and make all requests necessary to collect or "draw" all Title IV funds owed to the School and shall promptly deliver to Seller upon receipt all such Title IV funds which are Earned Accounts Receivable. 2.12. Funding of School Operations Pending DOE Approval. From and after the date of the Closing and until the date the DOE approves resumption of Title IV funding for the School as operated by Purchaser pursuant to a DOE Approval Notice, Purchaser shall provide such working capital as necessary to enable the School to continue to operate in the same manner and at the same level of operations as Seller is currently operating the School. -18- 2.13. Refunds/Enrollment Contracts. Purchaser agrees to (a) abide by the refund policy in effect at the School prior to the Closing Date to the extent required by applicable federal or state law, or Accrediting Body requirements, and (b) honor student enrollment contracts entered into in the ordinary course of business of the School which are included in Assumed Liabilities. 2.14. Use of "Phillips Colleges, Inc." Name Marked on Inventories. In recognition of the fact that certain of the Assets constituting inventories may have imprinted or otherwise marked thereon the name "Phillips Colleges, Inc." or derivatives thereof, and trademarks and servicemarks relating thereto and certain associated logotypes, Parent and Seller hereby agree that Purchaser may use and distribute such inventories until they have been exhausted and hereby grant to Purchaser a non-exclusive, royalty-free license to use such names, trademarks, servicemarks and logotypes in connection therewith; provided, however, that Purchaser must place a notification on all such materials that Phillips Colleges, Inc. is no longer the owner of the School, identifying Purchaser as the new owner and stating the effective date of such change of ownership. 2.15. Prorations. Notwithstanding any provision of this Agreement to the contrary, Seller and Purchaser hereby agree that payments made or to be made pursuant to the Leases, including without limitation payments in respect of rent, common area maintenance fees, utilities and real estate taxes, shall be prorated as of the Closing Date. As soon as possible following the Closing, and in any event not later than thirty (30) days after the Closing Date, Purchaser and Seller shall agree on the amount of such prorations (which, in the case of real estate taxes, may be based on the most recently available tax bill), and promptly thereafter Purchaser shall pay to Seller, or Seller shall pay to Purchaser, as applicable, the net difference between prorations in favor of Seller and prorations in favor of Purchaser. In the event Seller and Purchaser are unable to reach agreement with respect to prorations as provided in the immediately preceding sentence, such matter shall be submitted to the Independent Auditor for final and binding determination in accordance with the procedures set forth in Section 2.2(a). 3. Closing Deliveries. 3.1. Deliveries to Purchaser. Seller agrees to deliver to Purchaser, at or before the Closing, each of the following, each of which constitutes a condition to Purchaser's obligation to consummate the purchase of the Assets and the assumption of the Assumed Liabilities. (a) Bill of Sale and Assignments. A bill of sale, assignments and other documents of conveyance or transfer of title, all in form reasonably satisfactory to Purchaser's counsel, executed by Seller and Parent, as appropriate; 19 (b) Service Agreement. The Service Agreement, executed by Seller and Parent; (c) Assignment and Assumption Agreement. The Assignment and Assumption Agreement, executed by Seller; (d) Escrow Agreement. The Escrow Agreement, executed by Seller and the relevant escrow agent thereunder; (e) Secretary's Certificate for Seller. A certificate, signed by the secretary or an assistant secretary of Seller, certifying appropriate authorizing resolutions of Seller's Board of Directors, the incumbency of Seller's officers executing this Agreement and the documents delivered in connection with the Closing, and the good standing of Seller in its state of incorporation and the State of Washington; (f) Secretary's Certificate for Parent. A certificate, signed by the secretary or an assistant secretary of Parent, certifying appropriate authorizing resolutions of Parent's Board of Directors, the incumbency of Parent's officers executing this Agreement and the documents delivered in connection with the Closing, and the good standing of Parent in its state of incorporation; (g) Closing Certificate. A certificate executed by Seller and Parent satisfying the requirements of Sections 7.2, 7.3 and 7.4 hereof; (h) Legal Opinion. Legal opinions of Seller's counsels, in substantially the forms of Exhibit E attached hereto, addressed to Purchaser and CEC; (i) Consents. Evidence satisfactory to Purchaser's counsel that those consents of third parties listed in Schedule 3.1(i) attached hereto, which are required by Purchaser to be obtained by Seller and Parent prior to the Closing, have been obtained; (j) Files and Documents. All keys and other items necessary to deliver possession to Purchaser of the Assets and full access to the Leased Facilities, including all files, records, data and documents relating to the School, the Assets and the Assumed Liabilities which are located at the offices of Seller or the School, but excluding files, records, data and documents relating in whole or in part to Excluded Assets (provided, that to the extent any of the foregoing materials contain information which relate to the Assets, copies of the portions of such materials relating to the Assets shall be included in the deliveries pursuant to this Section 3.1(j)); (k) Consent and Estoppel Certificates. Consent and estoppel certificates from the landlords of the Leased Facilities, certifying certain 20 factual matters relating to the Leases, including without limitation certification that there are no defaults under the Leases and the amounts of security deposits under the Leases, and consenting to the transfer of the relevant Leases to the Purchaser, in form and substance reasonably acceptable to Purchaser; (l) Other Documents. Such other documents relating to the transactions contemplated by this Agreement as Purchaser or its counsel may reasonably request. 3.2. Closing Deliveries to Seller and Parent Purchaser agrees to deliver to Seller and Parent, at or before the Closing, each of the following, each of which constitutes a condition to Seller's and Parent's obligation to consummate the sale of the Assets: (a) Assignment and Assumption Documents. The Assignment and Assumption Agreement and such other agreements and documents reasonably required by Seller's counsel evidencing Purchaser's assumption of the Assumed Liabilities; (b) Closing Payment. The Closing Payment required by Section 2.5(a) by wire transfer of immediately available funds; (c) Service Agreement. The Service Agreement, executed by Purchaser; (d) Escrow Agreement. The Escrow Agreement, executed by Purchaser and the relevant escrow agent thereunder; (e) Secretary's Certificate for Purchaser. A certificate, signed by the secretary or an assistant secretary of Purchaser, certifying appropriate authorizing resolutions of Purchaser's Board of Directors, the incumbency of Purchaser's officers executing this Agreement and the documents delivered in connection with the Closing, and the good standing of Purchaser in its state of incorporation and the States of Oregon and Washington; (f) Secretary's Certificate for CEC. A certificate, signed by the secretary or an assistant secretary of CEC, certifying appropriate authorizing resolutions of CEC's Board of Directors, the incumbency of CEC's officers executing this Agreement and the documents delivered in connection with the Closing, and the good standing of CEC in its state of incorporation. (g) Closing Certificate. A certificate executed by Purchaser and CEC satisfying the requirements of Section 8.1 and 8.2 hereof; 21 (h) Legal Opinion. A legal opinion of counsel for Purchaser and CEC, in substantially the form of Exhibit F attached hereto, addressed to Seller and Parent; and (i) Other Documents. Such other documents relating to the transactions contemplated by this Agreement as Seller, Parent, or their counsel may reasonably request. 3.3. Closing Deliveries to Escrow in respect of the Indemnity Escrow Amount and the Deferred Payment Escrow Amount. Purchaser agrees to deposit into the Escrow (by wire transfer of immediately available funds), at Closing, the Indemnity Escrow Amount and the Deferred Payment Escrow Amount, which amounts shall be disbursed in accordance with the terms, and subject to the conditions, of Section 2.5 hereof and the Escrow Agreement. Purchaser's obligations to fund the Escrow in full at Closing pursuant to Section 2.5(a) shall not be subject to any right of offset against amounts Purchaser may claim it is owed under this Agreement or any other agreements executed in connection with this Agreement; provided, that such obligation to fund the Escrow at Closing shall in no way limit Purchaser's rights to disbursement of proceeds from the Escrow in accordance with the terms of this Agreement and the Escrow Agreement, nor shall it limit Purchaser's right to bring claims for indemnification pursuant to Section 9. 3.4. Post-Closing Covenants. (a) Further Assurances. On or after the Closing Date, and without further consideration, Purchaser, CEC, Seller and Parent shall, from time to time at the request of any other party hereto, execute and deliver to such other party further instruments of conveyance, assignment and transfer of the Assets and assumption of the Assumed Liabilities, and shall take, or cause to be taken, such other actions as such other party may reasonably request for the more effective conveyance, assignment and transfer to Purchaser of the Assets or the assumption by Purchaser of any obligations in respect of the Assumed Liabilities, as applicable. Seller and Parent shall each lend its reasonable assistance to Purchaser in the reduction to possession of such Assets, in the exercise of rights with respect thereto and otherwise in the carrying out of the intentions and purposes of this Agreement. Purchaser and CEC shall each lend its reasonable assistance to Seller and Parent in obtaining releases for Seller and Parent in respect of any and all obligations in respect of the Assumed Liabilities. (b) Access to Employees. From and after the Closing Date, Purchaser shall afford to Seller and/or Parent, its officers, counsel, accountants and other authorized representatives access to Purchaser's employees who formerly were employed by Seller or Parent, at Seller's sole cost and expense and as reasonably required by Seller or Parent in connection with any claim, action, 22 litigation, program review, audit or other proceeding involving Seller, Parent or the School (other than any such claim, action, litigation or proceeding arising under this Agreement or in which Purchaser and Seller or any of their Affiliates are adverse parties). Purchaser shall use its reasonable efforts to cause such employees to cooperate with and assist Seller or Parent in the prosecution or defense of such claims, actions, litigations, program reviews, audits and other proceedings. Unless Purchaser consents (which consent shall not be unreasonably withheld), all such access shall take place only during normal business hours in a manner designed to minimize any interference with the operation of the School. (c) Administration of the Schools Prior to Disbursement of the Title IV Escrow Amount; Cooperation of Parties. From and after the Closing Date and until payment in full of the Title IV Escrow Amount, Purchaser, at Purchaser's sole cost and expense, shall administer and operate the School in material compliance with all federal, state and local laws, statutes, rules and regulations and Accrediting Body requirements and in accordance with all permits, accreditations, authorizations and agreements issued by or entered into with any federal, state or local governmental or quasi- governmental entity or any Accrediting Body regulating or otherwise relating to the administration and operation of the School. Subject to the terms and provisions of this Agreement, Purchaser and CEC shall use their commercially reasonable efforts in order to obtain any and all approvals from the DOE, any Accrediting Body and any other governmental or quasi- governmental entity that may be necessary or appropriate to vest in Purchaser the right and authority to administer and operate the School and to release Seller from further liability or obligations in connection with the Assumed Liabilities, including, without limitation, the issuance of the DOE Approval Notice and resumption of Title IV funding to the School, and Purchaser and Seller shall cooperate in order to obtain such approvals. (d) Performance of Assumed Liabilities. From and after the Closing Date, Purchaser shall diligently perform all of the Assumed Liabilities. Until such time as Seller has been released or discharged with respect to such Assumed Liabilities, Purchaser shall provide Seller or Parent, as applicable, with prompt notice of any assertion with respect to any such Assumed Liability of any alleged default, breach or other violation by Purchaser of any term, condition or covenant of such obligations, and Purchaser shall use commercially reasonably efforts to resolve, at Purchaser's sole cost and expense, any such alleged default, breach or other violation. Purchaser shall use good faith efforts to cause Seller or Parent, or both, as applicable, and any guarantor of any Assumed Liability, to be released and discharged with respect to such Assumed Liability. Nothing herein, however, shall be deemed to require that Purchaser terminate or renegotiate the terms of any agreement governing any of the Assumed Liabilities on terms that would have a material adverse effect on the School's business or operations. 23 (e) Access and Maintenance of Records. From and after the Closing Date, Purchaser shall afford to Parent and/or Seller, their officers, counsel, accountants and other authorized representatives, DOE and other regulatory authorities reasonable access to the School's books and records related to periods prior to the Closing Date during normal business hours and upon reasonable notice from Seller to Purchaser, as reasonably required by Seller or Parent in connection with (i) performance by Seller or Parent of any of Seller's or Parent's obligations with respect to any liabilities related to the School other than the Assumed Liabilities with respect thereto, (ii) any claim, action, litigation, program review, audit or other proceeding involving Seller, Parent or the School (other than any such claim, action, litigation, program review, audit or proceeding arising under this Agreement or otherwise in which Purchaser and Seller or any of their Affiliates are adverse parties) and (iii) Seller's preparation of its financial statements and tax returns. Subject to Section 6.3 hereof, Parent and Seller, at Parent's or Seller's expense, may make copies of any such records as may be necessary or appropriate for Seller's use in connection with the foregoing. From and after the Closing Date, Purchaser shall afford to DOE, applicable Accrediting Bodies and other regulatory authorities access to the School's books and records as required by applicable law or regulations. For a period of seven (7) years from the Closing Date or until the expiration of the record retention period under relevant Federal, state or Accrediting Body requirements, if longer, Purchaser shall not destroy or otherwise dispose of any books or records of the School related to periods prior to the Closing Date without prior notice to Seller. Seller shall have the option to take possession of any such books or records which Purchaser elects to dispose of or destroy. Notwithstanding the foregoing, Purchaser shall preserve and protect all books, documents, papers, computer programs and records pertaining in any manner to the administration by Parent or Seller of federal student financial assistance programs pursuant to Title IV with respect to the School for at least the period of time specified under applicable law and regulation. (f) Insurance. From and after the Closing Date and until the Deferred Payment Escrow Amount is paid in full, Purchaser shall maintain such insurance policies as are adequate, in both scope and amount, for the School. (g) Substitution of Undertakings. Purchaser shall use its good faith efforts to promptly substitute Purchaser's undertaking, guarantee, bond or other commitment for each undertaking, guarantee, bond or commitment, as the case may be, made by Seller, Parent or any of their Affiliates in support of or relating to any permit, contract, authorizations, Accreditation or license from any such entity pertaining exclusively to the School, except to the extent such undertaking, guarantee, bond or other commitment relates to permits, contracts, authorizations, Accreditations or licenses which are not or cannot be transferred to Purchaser pursuant to this Agreement. 24 4. Representations and Warranties of Seller and Parent. As a material inducement to Purchaser to enter into this Agreement and to purchase the Assets and assume the Assumed Liabilities, Seller and Parent hereby jointly and severally represent and warrant as of the date hereof that: 4.1. Organization and Corporate Power. Seller is a corporation, duly organized, validly existing and in good standing under the laws of the State of Oregon. Parent is a corporation, duly organized, validly existing and in good standing under the laws of the State of Mississippi. Seller is qualified to do business as a foreign corporation and is in good standing in the State of Washington and all other states in which the nature of Seller's operations require Seller to so qualify, except where failure to so qualify would not have a material adverse effect on the business or operations of the School. Each of Seller and Parent has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted, and to consummate the transactions contemplated hereby. Seller is not, and for the past five (5) years has not been, engaged in any business other than the operation of private, post-secondary vocational schools, including the School, and activities directly related thereto. The copies of Seller's articles of incorporation and bylaws which have been furnished to Purchaser reflect all amendments made thereto at any time prior to the date of this Agreement and are correct and complete. 4.2. Ownership of Seller and School. Seller is a wholly-owned Subsidiary of Parent. The School is owned and operated by Seller directly, and no other Person has any ownership interest in the School No other Person has any right, option, warrant, subscription or other arrangement to purchase shares of capital stock of Seller or to otherwise acquire any other equity interest in Seller or the School, other than security interests and liens of lenders which will be cured or removed no later than the Closing. 4.3. Capacity; Authorization; Binding Effect, Etc. Each of Seller and Parent has the power, legal capacity and authority to execute, deliver and perform this Agreement and each other document being executed in connection herewith to which it is a party. This Agreement has been, and each other document to be executed by Seller or Parent in connection herewith, as of the Closing, will have been, duly executed and delivered by Seller or Parent, or both, as appropriate, and (assuming the due authorization, execution and delivery hereof and thereof by Purchaser and CEC, as applicable), this Agreement is, and each such other document or agreement will be, a valid and binding obligation of Seller, or Parent, or both, as the case may be, enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally, and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity). 25 4.4. No Conflicts, Etc. Except as set forth in Schedule 4.4, the execution, delivery and performance of this Agreement and each other document being executed by Seller or Parent, or both, in connection herewith, and the consummation of the transactions contemplated hereby and thereby do not and will not: (a) to the best of Seller's knowledge, violate any provisions of law applicable to Seller or Parent; (b) except as set forth in Schedule 4.4 attached hereto, with or without the giving of notice or the passage of time, or both, conflict with or result in the breach of any provision of the articles of incorporation or bylaws of Seller or Parent, or any material instrument, license, agreement or commitment to which Seller or Parent is a party or by which any of their assets or properties are bound; (c) constitute a violation of any order, judgment or decree to which Seller or Parent is a party or by which any of their assets or properties is bound; or (d) to the best of Seller's knowledge, other than as set forth in Schedule 4.4, require any approval of, or filing or registration with, any governmental entity or Accrediting Body that is required to be obtained or made by Seller or Parent. 4.5. Subsidiaries; Investments. Seller has no Subsidiaries and has had no Subsidiaries during the five (5) years prior to the date hereof. 4.6. Compliance with Laws; Licenses and Permits. Except as set forth in Schedule 4.6(a) attached hereto, to the best of Seller's knowledge, neither Seller nor Parent is in violation of any law or any regulation or requirement which violation might reasonably be expected to have a material adverse effect upon the financial condition, operating results, Accreditation or business of the School, and neither Seller nor Parent has received notice of any such violation. Except as set forth in Schedule 4.6(a) attached hereto, neither Seller nor Parent has received any notice of any violations of the Occupational Safety and Health Act, as amended, or any similar state or local laws, rules or regulations, relating to the School. Seller currently maintains all licenses, Accreditations, certificates, permits, consents, authorizations, and other governmental or regulatory approvals (the "Licenses and Permits") necessary for Seller to conduct the business and operations of the School as presently being conducted, except where the failure to maintain any such Licenses and Permits would not have a material adverse effect on the operations or financial condition of the School. As of the date hereof, the School has no more than eighty-five percent (85%) of its revenues derived from Title IV funds as determined in accordance with 34 C.F.R. (S) 600.5(d) and has not had more than eighty-five percent (85%) of its revenues so derived since July 1, 1995. Schedule 4.6(b) attached hereto is a true, correct and complete list of all Licenses and Permits held by Seller and the governmental authority or Accrediting Body granting such Licenses and Permits. Except as set forth on Schedule 4.6(b), the Licenses and Permits are in full force and effect, and no proceedings for the suspension or cancellation of any of them is pending or, to the best of 26 Seller's knowledge, threatened. Seller has delivered to Purchaser copies of all such Licenses and Permits. Except as set forth on Schedule 4.6(b), Seller has received no notice that any of the Licenses and Permits will not be renewed and to the best of Seller's knowledge, there is no basis for nonrenewal. Seller is accredited by the Accrediting Commission of Career Schools and Colleges of Technology and the Accrediting Commission of the American Culinary Federation Educational Institute, is certified by the DOE as an eligible institution under Title IV and is a party to, and in compliance with, a valid program participation agreement with the DOE with respect to the operations of the School. Except as set forth in Schedule 4.6(c) attached hereto, Seller has not received any notice, not previously resolved, with respect to any alleged violation of the rules or regulations of the DOE or any applicable Accrediting Body in respect of the School, including sales and marketing activities, or the terms of any program participation agreement to which it is or was a party. If any such notices have been received and not resolved, Seller has disclosed their receipt and disposition to Purchaser in writing prior to the execution of this Agreement. Except as set forth on Schedule 4.6(c) attached hereto, Seller and Parent are not aware of any investigation or review of the School's student financial aid programs or any review of Accreditation of the School by any governmental entity or Accrediting Body. 4.7. Recruitment; Admissions Procedures; Attendance; Reports. Schedule 4.7(a) attached hereto is a complete list of all policy manuals and other statements of procedures or instruction relating to (a) recruitment of students for the School, including procedures for assisting in the application by prospective students for direct or indirect state or federal financial assistance; (b) admissions procedures, including any descriptions of procedures for insuring compliance with federal, state or Accrediting Body requirements applicable to such procedures; and (c) procedures for encouraging and verifying attendance, minimum required attendance policies, and other relevant criteria relating to course performance requirements and completion (collectively, the "Policy Guidelines"). Seller has delivered to Purchaser true, correct and complete copies of all Policy Guidelines. To the best of Seller's knowledge, and except as disclosed on Schedule 4.7(b) attached hereto or in any other schedule to this Agreement, Seller's operations with respect to the School have, in all material respects, been conducted in accordance with the Policy Guidelines and all relevant standards imposed by applicable Accrediting Bodies, and other agencies administering state or federal governmental financial assistance programs in which Seller participates, and other applicable laws or regulations. Seller and Parent have submitted all reports, audits, and other information, whether periodic in nature or pursuant to specific requests, for the School ("Compliance Reports") to all agencies or other entities with which such filings are required relating to its compliance with (i) applicable Accreditation standards governing its activities or (ii) laws or regulations governing programs pursuant to which the School or its students receive student financial assistance funding, except where failure to submit such Compliance Reports would not have a material adverse effect on the business or operations of the School. There are no articulation agreements pertaining to the operation of the School. To the best of Seller's knowledge, all forms and records of Seller and the School have been prepared, completed, maintained and filed in all material respects in accordance with all applicable federal and state laws and regulations, and are true and correct in all material respects. All financial aid grants and loans, disbursements and record keeping relating thereto have been completed in compliance with all federal and state requirements, and there are no material deficiencies in respect thereto. To the best of Seller's knowledge and except as previously disclosed in prior 27 audits by DOE, no student at the School has been funded prior to the date for which such student was eligible for funding, and such student's records conform in form and substance to all relevant regulatory requirements. 4.8. Cohort Default Rate. Schedule 4.8 attached hereto sets forth the published Federal Family Education Loan Program cohort default rate for the School, calculated in the manner prescribed by the DOE and issued to the School, for the federal fiscal years 1992 through 1994. To the best of Seller's knowledge, such schedule is materially accurate in all respects. 4.9. Title to the Assets. (a) Seller does not presently own, nor has it ever owned any real property, used solely in connection with the business and operations of the School. (b) The only real properties leased or otherwise used, operated or occupied by Seller or the School are the School's leased facilities (the "Leased Facilities") located at 1316 SW 13th Avenue, 1099 SW Columbia Street, and 1201-1239 SW Jefferson Street, Portland, Oregon 97201. The leases covering the Leased Facilities (the "Leases") are valid and in full force and effect and are enforceable in all material respects in accordance with their terms. (c) All of Seller's operations with respect to the School are conducted at the Leased Facilities, and all of the tangible Assets and records relating to intangible Assets of the School are or as of the Closing will be located at the Leased Facilities; provided, however, that certain records included in the Assets are in the possession of Global Financial Aid Services, Inc. ("Global") as agent for Seller and will remain in the possession of Global, which will retain the records as agent for Purchaser. Except as set forth on Schedule 4.9(c)(i), Seller is not under any contractual or other legal obligation and has not entered into any commitment to make capital improvements or alterations to the Leased Facilities. Seller and, to the best of Seller's knowledge, the landlord under the Leases, are not in default under the Leases, except for defaults due to non-payment which are disclosed on Schedule 4.9(c)(ii) and, to the best of Seller's knowledge, no event, act or omission has occurred which (with or without notice, the passage of time or the happening or occurrence of any other event) would result in a default thereunder. Seller enjoys peaceful and undisturbed possession under the Leases, and to the best of Seller's knowledge the Leased Facilities are not subject to any zoning, ordinance or other restrictions which would prohibit the use and enjoyment of the Leased Facilities in the manner in which the Leased Facilities are currently used. Seller and Parent have no knowledge of any condemnation proceedings relating to the Leased Facilities. To the best of Seller's knowledge, the Leased Facilities and Seller's use thereof 28 are in compliance in all material respects with all applicable laws, including without limitation, the Americans with Disabilities Act. (d) Except for the leased or licensed Assets set forth on Schedule 4.9(d) attached hereto, Seller has the power, legal capacity and authority to transfer, convey and deliver the Assets and Seller owns outright, and has good and marketable title to, all of the Assets, free and clear of all liens, claims and encumbrances, options, rights, and restrictions, other than Assumed Liabilities and liens for current taxes not yet due and payable and liens which will be released effective on or prior to the Closing Date. All leases for tangible personal property used by Seller in connection with the operation of the School are valid and in full force and effect and enforceable in all material respects in accordance with their terms. Except as set forth in Schedule 4.9(d) attached hereto, neither Seller nor, to the best of Seller's knowledge, any of the other parties thereto, is in default under any such lease or license, and no event, act or omission has occurred which (with or without notice, the passage of time or the happening or occurrence of any other event) would result in a default thereunder. (e) The equipment and machinery at the School which is owned or leased by Seller or Parent and used in connection with the operation of the School is listed on Schedule 4.9(e) attached hereto, and, to the best of Seller's knowledge, is in customary amounts maintained by Seller. Except as set forth in Schedule 4.9(e), neither Seller nor Parent has received notice of any violation of or default under any law, ordinance, order, regulation or requirement relating to any of the Assets which remains uncured or has not been resolved. (f) The School does not operate, nor during the past five (5) years has it operated, any Additional Location. (g) The Curricula constitutes all of the Curricula currently used in courses currently offered at the School. (h) Except for the name "Phillips Colleges" and any derivatives thereof, and any trademarks, Tradenames or servicemarks related thereto, the Intellectual Property constitutes all the patents, trademarks, Tradenames, servicemarks, copyrights, know-how, Curricula and trade secrets owned by Seller and used exclusively in connection with the operation of the School, and, except for leased or licensed Assets set forth on Schedule 4.9(d), constitutes all the patents, trademarks, servicemarks, copyrights, know-how, Curricula and trade secrets otherwise necessary to the business and operations of the School. 29 4.10. Material Miscellaneous Contracts. Schedule 4.10 attached hereto sets forth a true, complete and correct list of all material contracts, agreements, and commitments relating to the operation of the School (hereinafter collectively referred to as the "Material Miscellaneous Contracts") other than (a) the Leases, (b) leases and licenses listed on Schedule 4.9(d) attached hereto, and (c) Plans listed on Schedule 4.19 attached hereto. True, complete and correct copies of all Material Miscellaneous Contracts, together with all amendments thereto, have heretofore been delivered or otherwise made available to Purchaser. The Material Miscellaneous Contracts constitute legal, valid and binding obligations of Seller or Parent, as applicable, and to the best of Seller's knowledge, the other parties thereto, and to the best of Seller's knowledge are in full force and effect. Seller is not in material default or, to the best of Seller's knowledge, alleged to be in material default on any term of any such Material Miscellaneous Contract. Except as noted on Schedule 4.10 attached hereto, the consummation of the transactions contemplated by this Agreement does not require the consent or approval of any party to any Material Miscellaneous Contract. 4.11. Tradenames; Confidential Information. (a) All tradenames, trademarks or service marks used or useful in connection with the operation of the School, and all forms, derivatives and graphic presentations thereof, including forms of the tradename "Western Culinary Institute" (but excluding the tradenames "Phillips Colleges," "Western Business College" and any related trademarks or servicemarks) (collectively, the "Tradenames"), having material value to the operation of the School are set forth on Schedule 4.11(a) attached hereto. To the best of Seller's knowledge, Seller has exclusive right to the use of each Tradename as an assumed business name in the states in which such Tradename is used, and Schedule 4.11(a) sets forth all registrations (including the jurisdictions thereof) of each Tradename as a trademark, servicemark or assumed name. Except as set forth on Schedule 4.11(b), Seller has not licensed any other Person to use any Tradename. Neither Seller nor Parent has been sued or, to the best of Seller's knowledge, threatened with suit for infringement, violation or breach with respect to any Tradename, and to the best of Seller's knowledge, no basis exists for any such suit. Seller and Parent are not on notice of any infringement, violation or breach of the Tradename by any other Person. (b) To the best of Seller's knowledge, Seller has the right to use, free and clear of any claims or rights of any third party, all trade secrets, customer lists, know-how, Curricula and any other confidential information required for or used in the operation of the School. To the best of Seller's knowledge, neither Seller nor Parent is in any way making any unlawful or wrongful use of any Tradename, trade secret, customer list, know-how, Curricula or any other confidential information of any third party including, without limitation any 30 former employer of any present or past employee of Seller or Parent employed in connection with the operation of the School. 4.12. Financial Statements. Seller has previously furnished the Financial Statements to Purchaser. The balance sheets included in the Financial Statements present fairly the assets and liabilities of Seller relating to the School covered thereby as of the respective dates thereof, and the related statements of operations present fairly the results of operations of Seller relating to the School for the respective periods covered thereby. The Financial Statements have been prepared in accordance with GAAP (except that the Interim Financial Statements are not accompanied by all footnotes required by GAAP and are subject to customary year end adjustments), are correct and complete in all material respects and fairly present the financial position of the School as of the dates of such Financial Statements, and the results of operations and changes in financial position for the periods covered by such Financial Statements. Seller has maintained the School's books and records in accordance with applicable laws, rules and regulations and with GAAP, and such books and records are, and during the periods covered by the Financial Statements were, correct and complete in all material respects, fairly reflecting the income, expenses, assets and liabilities of the School. Except as set forth in Schedule 4.12 attached hereto, Seller is not required to provide any letters of credit, guaranty or other financial security arrangements in connection with any transactions, approvals or licenses in the ordinary course of operations of the School. As of the date hereof, Seller has no material indebtedness, liabilities or obligations of any nature, whether absolute, accrued, contingent or otherwise, which relate to the School other than: (a) those set forth or reserved against in the balance sheets included in the Financial Statements for the fiscal years then ended or disclosed in the footnotes to such Financial Statements, to the extent set forth, reserved against or in the case of footnote items, disclosed; (b) those set forth or reserved for in the Interim Financial Statements, or those which would have been disclosed in footnotes to such Interim Financial Statements, if footnotes had been prepared and which have been disclosed in writing to Purchaser, to the extent set forth, reserved against or, in the case of footnote items, disclosed; (c) except as set forth on Schedule 4.12(c) attached hereto, those incurred since the Interim Balance Sheet Date in the ordinary course of business and consistent in nature with past practice, or those which would have been disclosed in footnotes if footnotes had been prepared and which have been disclosed to Purchaser in writing, to the extent set forth, reserved or, in the case of footnote items, disclosed; and (d) those constituting Assumed Liabilities not required to be disclosed in financial statements prepared in accordance with GAAP. 31 There are no long-term fixed or contractual liabilities relating to the operation of the School which are required to be assumed by Purchaser in order to continue to operate the School in all material respects as presently operated by Seller, the annual expense of which are not reflected in the Financial Statements where required by GAAP or which are not otherwise disclosed or set forth in this Agreement or any schedule hereto or in the Assignment and Assumption Agreement. Other than obligations in respect of Prepaid Tuition, the School has no obligations in respect of refundable deposits. 4.13. Receivables. The student accounts receivable of Seller relating to the School, except to the extent of the allowance for cancellations and doubtful accounts set forth in the Financial Statements, are bona fide receivables, arose out of arms' length transactions in the normal and usual practices of Seller relating to the School, are recorded correctly on the applicable books and records of Seller and the School, and, to the best of Seller's knowledge, are collectable in accordance with prior experience in the ordinary course of business, subject in the case of certain receivables to reserves established for such receivables in the Financial Statements. To the best of Seller's knowledge, such receivables are not subject to any defense, counterclaim or setoff or trade discounts or credits not reflected in the Financial Statements (other than tuition refund policies administered in accordance with all applicable legal requirements and the applicable Policy Guidelines), and Seller and Parent have no knowledge of any facts or circumstances which would cause any of such receivables to have to be written down or written off in amounts which in the aggregate would be in excess of reserves established for such receivables in the Financial Statements. 4.14. Inventories. The only inventories maintained by Seller in connection with the operation of the School consist of supplies used in the ordinary course of business of the School. To the best of Seller's knowledge, such supplies are usable in all material respects in the ordinary and regular course of business, are in all material respects fit for the purpose for which they were purchased and, at the date of this Agreement, are in amounts consistent with Seller's customary practices. 4.15. [Intentionally omitted] 4.16. Litigation, Etc. Except as set forth in Schedule 4.16 attached hereto, there are no actions, suits, proceedings, orders, investigations, inquiries or claims pending or, to the best of Seller's knowledge, threatened against or affecting the School or Seller, at law or in equity, or before or by any governmental department, commission, board, bureau, agency or instrumentality or Accrediting Body; to the best of Seller's knowledge, neither Seller, Parent, nor the School is the subject of any governmental investigations or inquiries affecting the School (including inquiries as to the qualification to hold or receive any of the Licenses and Permits); and, to the best of Seller's knowledge, there is no basis for any of the foregoing. There are no other actions, suits, proceedings, orders, investigations or claims pending, or to the best of 32 Seller's knowledge, threatened in writing against or affecting Seller, Parent or their Affiliates generally (including claims with respect to any Plans) which if adversely decided would have a material adverse effect on the School or its properties taken as a whole. 4.17. Insurance. Schedule 4.17 attached hereto sets forth all insurance coverages maintained by Seller or Parent on the Leased Facilities, the other Assets, and the operations of the School, including a list of all policies or binders of fire, extended coverage, general and vehicular, fidelity and fiduciary liability, workers' compensation, key-man life and other similar insurance, and all binders for insurance to be purchased on or before Closing in order to replace policies expiring prior to the Closing. Copies of binders for such policies have been previously delivered to Purchaser. Except as set forth in Schedule 4.17 attached hereto, such policies and binders are in full force and effect, and there is no material breach or default with respect to any provision contained in any such policy or binder, and all premiums, to the extent due and payable, have been paid or the liability therefor properly accrued. Except as set forth in Schedule 4.17 attached hereto, there are no claims pending or threatened under any of said policies pertaining to the School or disputes with underwriters regarding coverage under such policies pertaining to the School. Except as set forth on Schedule 4.17, the execution and delivery of this Agreement will not result in the loss to Seller or Parent of any of the insurance policies listed, or impair the rights of Seller or Parent with respect to liabilities arising, in connection with the operation of the School prior to the Closing. Within five (5) years prior to the date hereof, neither Seller nor Parent has been denied insurance for the School, or been offered insurance for the School only at a commercially prohibitive premium. 4.18. Environmental Matters. In connection with the operations of the School, except as set forth in Schedule 4.18 attached hereto, neither Seller nor Parent has generated, transported, stored, treated or disposed of, nor has it allowed or arranged for any third persons to generate, transport, store, treat or dispose of, any Hazardous Substance to or at: (a) any location other than a site lawfully permitted to receive such Hazardous Substance for such purposes or (b) any location designated for remedial action pursuant to federal, state or local statute and relating to the environment or waste disposal; nor, to the best of Seller's knowledge, has Seller or Parent performed, arranged for or allowed by any method or procedure such transportation or disposal in contravention of any laws or regulations or in any other manner which may result in liability for contamination or threat of contamination of the environment in violation of any Environmental Law, except where such violation would not have a material adverse effect on the business or operations of the School. Except as set forth in 33 Schedule 4.18, attached hereto, to the best of Seller's knowledge, no generation, use, handling, storage, treatment, release, threat of release, discharge, spillage or disposal of any Hazardous Substance in violation of any Environmental Law, has occurred or is occurring at the Leased Facilities or, to the best of Seller's knowledge, any other Leased Facilities previously owned or operated by Seller. Except as set forth in Schedule 4.18 attached hereto, neither Seller nor Parent has received notification of, nor is it aware, of, any past or present failure by the School to comply with any Environmental Law, including without limitation the requirements of any permits, franchises, licenses or orders issued pursuant to any Environmental Law, applicable to the School or its operations. Except as set forth on Schedule 4.18, neither Seller nor Parent has received any notification, nor is it aware of, any past or present failure by Seller or Parent to comply in any material respect with any Environmental Law, including without limitation the requirements of any permits, franchises, licenses or orders issued pursuant to any Environmental Law applicable to the Seller's or Parent's operations other than the School, which failure may result in judicial, regulatory or other legal proceedings that would have a material adverse impact on the operations of the School or result in the imposition of any lien, claim, assessment or other encumbrance against the Assets. Except as set forth on Schedule 4.18, to the best of Seller's knowledge, the Leased Facilities do not contain asbestos or polychlorinated biphenyls or any underground storage tanks. Neither Seller nor the School has received notice from any governmental entity requiring any removal or other remediation with respect to asbestos or polychlorinated biphenyls located at the Leased Facilities. 4.19. Employee Benefit Plans. Schedule 4.19 attached hereto lists all Plans of Seller covering employees of the School that the Seller maintains, to which it contributes, or to which it has an obligation to contribute with respect to any current or former employee of the Seller, or with respect to which Seller otherwise is reasonably expected to have any liability or potential liability (whether or not any such Plan has terminated or whether or not any such Plan is or was maintained for current or former employees of Seller or current or former employees of any other member of the controlled group of companies (within the meaning of Internal Revenue Code Sections 414 (b) and (c)) of which Seller is or ever was a member. (a) Except as disclosed in Schedule 4.19, the Seller and Parent do not contribute to, or have not contributed to during the immediately preceding five (5) year period, or do not have any obligation to contribute to or otherwise have any liability or potential liability with respect to (i) any multiemployer plan as defined in (S) 4001, et seq. of ERISA, or (ii) any Plan of the type described in Sections 4063 and 4064 of ERISA or in Section 413(c) of the Internal Revenue Code (and regulations promulgated thereunder), or (iii) any Plan that is subject to the funding requirements of Section 412 of the Internal Revenue Code or Section 302 of ERISA, or (iv) any employee commission, bonus, or incentive compensation plan(s). (b) Each Plan that covers employees of the Seller and that is intended to be qualified under Section 401(a) of the Internal Revenue Code, and each trust (if any) forming a part thereof, has received a favorable determination letter, covering tax law changes up through and including the Tax Reform Act of 1986, as amended, from the Internal Revenue Service as to the qualification under the Internal Revenue Code of such Plan and the tax 34 exempt status of such related trust, and nothing has occurred since the date of such determination letter that could adversely affect the qualification of such Plan or the tax exempt status of such related trust. (c) No underfunded defined benefit plan has been, during the five years preceding the Closing Date, transferred out of the controlled group of companies (within the meaning of Internal Revenue Code Sections 414(b) and (c)) of which Seller is a member or was a member during such five (5) year period. (d) As of the date hereof, Seller does not maintain any employee welfare benefit plans, as defined in Section 3(1) of ERISA, which provide post-retirement benefits to former employees of Seller or the School or to current employees thereof after their termination of employment (including, without limitation, medical and life insurance benefits), other than as may be required by the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended and interpreted by regulations thereunder. 4.20. Employment Matters. Except as set forth in Schedule 4.20(a) attached hereto, to the best of Seller's knowledge, Seller and Parent are in compliance in all material respects with all federal, state and local laws, rules and regulations affecting employment and employment practices of Seller and Parent relating to the School, including terms and conditions of employment, employment discrimination and wages and hours, and neither Seller nor Parent is engaged in any unfair labor practices with respect to individuals employed by or providing services to Seller or Parent in connection with the operation of the School; neither Seller nor Parent is aware of, nor has either of them received any written or other notice of, any complaints against Seller or Parent with respect to individuals employed by or providing services to Seller or Parent in connection with the operation of the School pending before the National Labor Relations Board or any similar state or local labor agency; there are no labor strikes, slow-downs or stoppages or other labor troubles pending or, to the best of Seller's knowledge, threatened with respect to any individuals employed by or providing services to Seller or Parent in connection with operation of the School; to the best of Seller's knowledge no labor organization activities have occurred with respect to such employees during the past three (3) years; there are no collective bargaining agreements binding on Seller or Parent relating to the operation of the School; to the best of Seller's knowledge, no grievances have been asserted by any labor organization against Seller or Parent with respect to individuals employed by or providing services to Seller or Parent in connection with the operation of the School; and neither Seller nor Parent has experienced any work stoppage by such employees during the last three (3) years. Schedule 4.20(b) attached hereto contains a list of all employees of Seller and all material consultants to Seller or Parent (including, without limitation, sales representatives and other recruiters), other than attorneys and accountants, who are employed or providing services in connection with the operation of the School including: name; length of service; job title; rate of base salary, bonuses and other incentive compensation; and identifying all contracts, agreements, commitments and 35 arrangements, written or oral, with such employees or consultants. Sales representatives and other recruiters for the School, whether employed directly by or otherwise engaged by Seller or Parent, are licensed or registered in accordance with all applicable federal, state and local laws, rules and regulations. No such sales representative or other recruiter receives commissions, bonuses or other contingency payments based, directly or indirectly, on the enrollment of students by such individual. True, correct and complete copies of all agreements between Seller or Parent and such employees or consultants and all amendments thereto have been provided to Purchaser. Seller and Parent have performed all of their obligations under such agreements and are not in default or violation and, to the best of Seller's knowledge, the other parties thereto are not in default or violation, thereunder. 4.21. Tax Matters. Seller and Parent have completed and filed on or before the due dates thereof or within applicable extension periods all returns for Taxes related to the School required to be filed by either of them, and such returns are true and correct in all material respects. Seller and Parent have paid all Taxes shown to be due and payable on such returns to the extent that the same have become due and payable on or before the Closing. The last taxable year with respect to which the federal income tax returns of Seller or Parent have been examined by the Internal Revenue Service was 1994. Neither Seller nor Parent is a party to, nor to the best of Seller's knowledge, expected to become a party to, any pending or threatened action or proceeding, assessment or collection of Taxes by any governmental authority relating to the business and operations of the School. 4.22. Brokerage. Neither Seller nor Parent has retained any broker or finder, and neither will be obligated to pay any brokers' or finders' fee, in connection with the negotiation or consummation of the transactions contemplated by this Agreement, except for the retention of the management consulting firm of Alvarez & Marsal, Inc. ("A&M") by Parent and fees payable in connection therewith. Parent is responsible for fees payable to A&M in respect of the transactions contemplated by this Agreement. 4.23. Affiliate Transactions. Except as set forth in Schedule 4.23 attached hereto or as specifically contemplated hereby, no Affiliate of Seller or Parent is a party to any agreement, contract, commitment or transaction with Seller or Parent regarding the School, or has any material interest in any material property used in connection with the operations of the School. 4.24. Absence of Certain Changes. Except as contemplated by this Agreement or as set forth on Schedule 4.24 attached hereto, from the Interim Balance Sheet Date until the date hereof there has not been, occurred or arisen with respect to the School: 36 (a) any sale, lease, transfer, abandonment or other disposition of any right, title or interest in or to any of the properties or assets of Seller or Parent used in connection with the operations of the School (tangible or intangible), except in the ordinary course of business; (b) other than in the ordinary course of Seller's operation of the School and consistent with Seller's past and present business practices, (i) any approval or action to put into effect any increase in any compensation or benefits payable to any employee, director, agent or officer of Seller employed or providing services in connection with the operation of the School or any payment, grant or accrual to or for the benefit of any such employee, director, agent or officer of any bonus, service award, percentage compensation or other benefit, (ii) any adoption or amendment of any Plans, or any severance agreement or employment contract to which any such employee, director, agent or officer is a party or (iii) any entering into of any employment, deferred compensation or other agreements with respect to bonuses, service awards, percentage compensation or other benefits with any such employee, director, agent or officer; (c) any damage, destruction or loss, whether or not covered by insurance, materially adverse to the Assets; (d) any change in any material respect in the business policies or practices of Seller or Parent relating to the School or a failure of Seller or Parent to operate the School in the ordinary course with a view to preserving such business intact, to retaining the services of the present officers, employees and agents of Seller and Parent employed or providing services in connection with the operation of the School and with a view to preserving the business relationships of Seller, Parent and the School with, and the goodwill of, students, sales representatives, suppliers, Accrediting Bodies, governmental authorities and others; or (e) any agreement, whether in writing or otherwise, to take any action described in this Section 4.24. 4.25. Indebtedness. Schedule 4.25 attached hereto contains a true, correct and complete list of all indebtedness of Seller for borrowed money, including capitalized leases, relating to the business or operations of the School, and the balances owing thereunder as of the date hereof. 4.26. Delivery of Documents. True, correct and complete copies of all Leases, Material Miscellaneous Contracts, Plans, Policy Guidelines and other documents, instruments, agreements and records of Seller and Parent described on schedules to this Agreement and relating to the Assets, the 37 Assumed Liabilities, the representations and warranties of Seller and Parent contained in this Agreement or the operation of the School, have been delivered or made available to Purchaser. 4.27. Disclosure. Neither this Agreement, nor any of the schedules, exhibits, attachments, written statements, documents, certificates or other items prepared or supplied to Purchaser in writing by or on behalf of Seller or Parent with respect to the transactions contemplated hereby, contain any untrue statement of a material fact or omit a material fact necessary to make such statements not misleading in light of the circumstances in which such statements were made. 5. Representations and Warranties of Purchaser and CEC. As a material inducement to Seller and Parent to enter into this Agreement and to sell the Assets, Purchaser and CEC hereby represent and warrant as of the date hereof that: 5.1. Organization and Corporate Power. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and qualified to do business as a foreign corporation in each jurisdiction in which the character of the properties owned or leased by it or the nature of its operations requires, or as of the Closing will require, it so qualify, except where failure to so qualify would not have a material adverse effect on the business or operations of Purchaser. Purchaser has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted, and to consummate the transactions contemplated hereby. The copies of Purchaser's articles of incorporation and by-laws which have been furnished to Seller reflect all amendments made thereto at any time prior to the date of this Agreement and are correct and complete. CEC is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and qualified to do business as a foreign corporation in each jurisdiction in which the character of the properties owned or leased by it or the nature of its operations requires, or as of the Closing will require, it so qualify, except where failure to so qualify would not have a material adverse effect on the business or operations of CEC. CEC has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted, and to consummate the transactions contemplated hereby. The copies of CEC's articles of incorporation and by-laws which have been furnished to Seller reflect all amendments made thereto at any time prior to the date of this Agreement and are correct and complete. 5.2. Capacity; Authorization, Binding Effect, Etc. Each of CEC and Purchaser has the power, legal capacity and authority to execute, deliver and perform this Agreement and each other document being executed by it in connection herewith to which it is a party. This Agreement has been, and each such other document and agreement to be executed in connection herewith, as of the Closing, will have been, duly executed and delivered by CEC and Purchaser, or both, as appropriate, and (assuming the due authorization, execution and delivery hereof and thereof by Seller and -38- Parent, as applicable), this Agreement is, and each such other document or agreement will be, a valid and binding obligation of Purchaser or CEC, or both, as the case may be, enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally, and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity). 5.3. No Conflicts, Etc. The execution, delivery and performance of this Agreement by Purchaser or CEC and each other document being executed by Purchaser or CEC, in connection herewith, and the consummation of the transactions contemplated hereby and thereby do not and will not (a) to the best of Purchaser's knowledge, violate any provisions of law applicable to Purchaser or CEC; (b) except as set forth in Schedule 5.3 attached hereto, with or without the giving of notice or passage of time, or both, conflict with or result in the breach of any provision of the articles of incorporation or bylaws of Purchaser or CEC, or any material instrument, license, agreement or commitment to which Purchaser or CEC is a party or by which any of their assets or properties are bound; (c) constitute a violation of any order, judgment or decree to which Purchaser or CEC is a party or by which any of their assets or properties are bound; or (d) to the best of Purchaser's knowledge, other than as contemplated by Schedule 5.3, require any approval of, or filing or registration with, any governmental entity or Accrediting Body that is required to be obtained or made by Purchaser or CEC, other than approvals, filings and registrations which have been previously obtained or made, or which are required and will be obtained or made in the ordinary course of Purchaser's or CEC's business and operations. 5.4. Litigation. There are no actions, suits, proceedings, arbitrations, orders, governmental investigations, inquiries or claims pending against or, to the best of Purchaser's knowledge, threatened against or affecting Purchaser or CEC at law or in equity, or before or by any governmental department, commission, board, bureau, agency or instrumentality or Accrediting Body; seeking to enjoin, restrain or delay the consummation of the transactions contemplated by this Agreement and to the best of Purchaser's knowledge, there is no basis for the foregoing. 5.5. Brokerage. Neither Purchaser nor CEC has retained any broker or finder, and neither will be obligated to pay any brokers' or finders' fee, in connection with the negotiation or consummation of the transactions contemplated by this Agreement. 5.6. Title IV Program Liabilities. Neither Purchaser nor CEC, nor any of their Affiliates who exercises substantial control over any other private post-secondary school or other institution subject to Title IV, owes a liability for a violation of a Title IV program requirement that may reasonably be anticipated to be an impairment to certification of Purchaser under 34 C.F.R. Section 668.15(c). -39- 5.7. Disclosure. Neither this Agreement, nor any of the schedules, exhibits or attachments hereto prepared or supplied by Purchaser or CEC, or any documents, certificates or other written agreements delivered by or on behalf of Purchaser or CEC with respect to the transactions contemplated hereby, contain any untrue statement of material fact or omit a statement of material fact necessary to make such statements not misleading in light of the circumstances in which such statements were made. 6. Noncompetition; Non-Solicitation; Confidential Information, Exclusive Dealing. 6.1. Noncompetition Agreement. Seller and Parent agree that for a period commencing on the date hereof and ending four (4) years after the Closing Date (the "Noncompetition Period"), neither Seller nor Parent shall have any interest in or engage in, either directly or indirectly, as a manager, independent contractor, consultant, partner, participant or stockholder, any business, whether for profit or not- for-profit, that offers classes, courses or instruction in cooking or other culinary arts, restaurant operation or management, or similar activities, including without limitation any area of study or curriculum in which the School offers courses as of the Closing Date (the "Competitive Activities"), other than businesses engaged in such activities currently owned by Parent or one of its Subsidiaries. Seller and Parent hereby acknowledge that Purchaser intends to promote the School throughout the United States, and that the geographical scope of this Agreement is intended to encompass all Competitive Activities engaged in anywhere in the United States, its possessions and territories. Nothing herein shall prevent Parent from (a) continuing to own, operate and/or transfer or dispose of any of the other post-secondary vocational or career schools or assets used therein and owned by Parent or its Subsidiaries as of the date hereof which are not to be purchased hereunder (collectively the "Retained Schools"), or (b) owning less than five percent (5%) of the capital stock of a company whose stock is publicly traded and which is engaged in Competitive Activities. 6.2. Non-Solicitation Agreement. During the Noncompetition Period, Seller and Parent shall not, directly or indirectly, for their own behalf or on behalf of any Person, governmental entity or Accrediting Body, solicit, aid, or induce (a) any employee of Purchaser or its Affiliates to leave Purchaser or its Affiliates in order to accept employment with or render services for Seller or Parent or such Person, governmental entity or Accrediting Body or (b) any student, customer, client, vendor, lender, supplier or sales representative of Purchaser or its Affiliates or similar persons engaged in business with Purchaser or its Affiliates to discontinue the relationship or reduce the amount of business done with Purchaser or its Affiliates; provided, however, that nothing herein shall prohibit Seller or Parent from doing business with any vendors, lenders, suppliers or similar persons in connection with the business and operations of the Retained Schools or Parent's and Parent's Affiliates' other operations. For purposes hereof, Purchaser and its Affiliates shall -40- include CEC and each of its direct or indirect subsidiaries, whether now existing or subsequently created. 6.3. Confidential Information. Seller and Parent acknowledge and agree that they are in possession of Confidential Information (as defined herein) relating to the School. For purposes hereof, "Confidential Information" shall mean all proprietary or confidential information concerning the business, Curricula, properties and operations of the School, including, without limitation, all student and prospective student lists, supplier lists, know-how, trade secrets, business and marketing plans, techniques, forecasts, projections, budgets, unpublished financial statements, price lists, costs, computer programs, source and object codes, algorithms, data, and other original works of authorship, along with all information received from third parties and held in confidence by the School or Purchaser (including, without limitation, personnel files and student records). During the Noncompetition Period and at all times thereafter, Seller and Parent will hold the Confidential Information in the strictest confidence and will not disclose or make use of (directly or indirectly) the Confidential Information or any portion thereof to or on behalf of themselves or any third party, except (i) as required in the performance of Seller's and Parent's duties and obligations pursuant to the Service Agreement or this Agreement, (ii) as required by the order of any court or similar tribunal or any other governmental body or agency of appropriate jurisdiction; provided, however, that Seller and Parent shall, to the extent practicable, give Purchaser prior written notice of any such required disclosure and shall cooperate with Purchaser in obtaining a protective order or such similar protection as Purchaser may deem appropriate to preserve the confidential nature of such information. In addition, any Confidential Information common to both the School and Retained Schools may be used or transferred by Seller and Parent in connection with the operations and disposition of the Retained Schools. The foregoing obligations to maintain the Confidential Information shall not apply to any Confidential Information which is or, without any wrongful action by Seller or Parent, becomes generally available to the public. Upon termination of the Service Agreement, Seller and Parent shall promptly return to Purchaser (or, at Purchaser's written request, destroy) all physical embodiments of the Confidential Information (regardless of form or medium) in the possession of or under the control of Seller or Parent used exclusively in connection with the operation of the School and, to the extent requested by Purchaser in writing, copies or originals of all physical embodiments of the Confidential Information (regardless of form or medium) common to both the School and the Retained Schools (provided that information with respect solely to the Retained Schools may be excised from any such copies). Notwithstanding the foregoing, nothing in this Section 6.3 shall be construed to impair or restrict Seller's right to disclose to any Person, governmental entity or Accrediting Body information regarding the Retained Schools or Seller's or Parent's general corporate operations not specific to the School. 6.4. Remedies. The parties hereto each recognize that the other parties hereto will suffer irreparable injury in the event of a breach of the terms of this Section 6 by Seller or Parent. Notwithstanding any provision to the contrary contained herein, including without limitation -41- the provisions of Section 9, in the event of a breach of the terms of this Section 6, Purchaser shall be entitled, in addition to any other remedies and damages available and without proof of monetary or immediate damage, to a temporary and/or permanent injunction, without bond, to restrain the violation of this Section 6 by Seller or Parent and any Person, governmental entity or Accrediting Bodies acting for or in concert with Seller or Parent. 6.5. Scope of Restriction. The parties have attempted to limit the scope of the covenants set forth in this Section 6 to the extent necessary to provide Purchaser with the benefit of its purchase of the School from Seller. The parties recognize, however, that reasonable people may differ in making such determination. Consequently, the parties hereby agree that if the scope and duration of such covenants would, but for this provision, be deemed by a court of competent authority to be unreasonable or otherwise unenforceable, such court may modify such covenants to the extent that such court determines to be necessary in order to grant enforcement thereof as so modified, consistent with the original intent of the parties. 6.6. Termination Upon Recission. Upon any recission of the transactions contemplated hereby pursuant to Section 10, all provisions of this Section 6 shall be of no further force and effect on Seller and Parent with respect to the Confidential Information. 6.7. Additional Covenants of Seller and Parent Pending Closing. Pending the Closing, Seller and Parent shall cooperate fully with Purchaser, its officers, employees, representatives and agents in connection with accomplishing the satisfaction of all conditions to the Closing and with all other matters relating to the consummation of the transactions contemplated by this Agreement. Pending the Closing and subject to all the limitations contained in and provisions of the Family Educational Rights and Privacy Act of 1974, 20 U.S.C. (S) 1232g, as amended, and any other relevant requirements of federal or state law, Seller shall afford to all representatives of Purchaser reasonable access during normal business hours to the assets, properties, books, financial statements, work papers and records of Seller related to the School in order that Purchaser have full opportunity to make investigations of the School and the Assets. In addition, Seller shall use good faith efforts to assist Purchaser in obtaining any required accreditation from any Accrediting Body reasonably necessary for Purchaser's operation of the Schools, including furnishing Purchaser such necessary information and reasonable assistance as Purchaser may request in connection with its preparation of necessary filings, submissions or applications to any such Accrediting Body in connection with the transactions contemplated hereby. Furthermore, during the period from the date of this Agreement to the Closing Date, Seller and Parent shall conduct no business and incur or assume no liabilities or obligations of any kind or nature relating to the School, the Assets or this Agreement, except for such business, liabilities and obligations as may be conducted or incurred in the ordinary course of business of the School or as expressly permitted or required by the terms of this Agreement or as to which Purchaser may consent in writing. -42- Seller shall promptly notify Purchaser of any occurrence or event that would or is likely to make untrue any representation or warranty of Seller or Parent made in Section 4 as of the Closing Date, or which would or is likely to result in an inability to satisfy any condition set forth in Section 8. During the period from the date of this Agreement to the Closing Date, Seller shall conduct its operations at the School only according to its ordinary and usual course of business and use its good faith efforts to preserve intact its business organization, keep available the services of its employees and maintain satisfactory relationships with Accrediting Bodies, governmental authorities, suppliers, agents, students and others having business relationships with the School. Seller shall notify Purchaser of any unexpected emergency or other change in the normal course of the business of the School, and of any Accrediting Body or governmental complaints, investigations or hearings (or communications indicating that the same may be contemplated) or adjudicatory proceedings involving Seller, the Assets or the School, and shall keep Purchaser fully informed of such events and permit its representatives prompt access to all materials prepared in connection therewith, subject to the limitations contained in and the provisions of the Family Educational Rights and Privacy Act of 1974 and any other relevant requirements of federal or state law. 6.8. Key Employees. During the period from the date of this Agreement to the Closing Date, Seller and Parent shall use their good faith efforts to retain the services of all senior managerial employees of the School. During the period from the date of this Agreement to the Closing Date, Seller shall not offer any employee or sales representative of the School any other employment with Seller, any of the Retained Schools, Parent or any of their Affiliates without the prior written consent of Purchaser. 6.9. Exclusive Dealing. During the period from the date of this Agreement to the earlier of (a) the Closing Date or (b) the date of termination of this Agreement pursuant to Section 11.1 hereof, Seller and Parent shall not, directly or indirectly, encourage, initiate or engage in discussions or negotiations with, or (except as contemplated by this Agreement) provide any information to, any Person, other than Purchaser and CEC, concerning any proposed purchase of the School or the Assets or any similar transaction involving the School or Parent's or Seller's interest in the School. 6.10. Additional Covenants of CEC and Purchaser Pending Closing. CEC and Purchaser covenant and agree that from and after the date of this Agreement and until the earlier of the Closing Date or the termination of this Agreement pursuant to Section 11.1 hereof, Purchaser (a) shall use its good faith efforts to fulfill or satisfy, or cause to be fulfilled or satisfied, all of the conditions precedent to Seller's obligations to consummate and complete the transactions contemplated by this Agreement, including without limitation the sale of the School provided herein and to take all other steps and do all other things reasonably required to consummate this Agreement in accordance with its terms; (b) -43- shall not interfere with the performance by Seller or Parent of their obligations under this Agreement; and (c) shall promptly coordinate with Seller or Parent the preparation and filing of any preacquisition notification to the FTC with respect to the School required by the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended, if necessary. 7. Conditions to Purchaser's Obligations. The obligations of Purchaser to consummate the transactions contemplated by this Agreement are subject to the satisfaction, or to the waiver in writing by Purchaser, on or before the Closing Date, or such other date as is set forth herein, of the conditions set forth below: 7.1. Cohort Default Rates. Neither Seller nor Parent shall have received notification from the DOE at any time prior to the Closing Date that the School's Federal Family Education Loan Program cohort default rate for fiscal year 1994 is equal to or greater than twenty-five percent (25%). 7.2. Truth of Representations and Warranties. The representations and warranties of Seller and Parent contained in this Agreement and in any certificate delivered by Seller or Parent in accordance with the terms hereof shall be true and correct with respect to Seller and Parent in all material respects on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of such date (except to the extent such representations and warranties speak of a particular date and except to the extent that any failure to satisfy this requirement does not have a material adverse effect on the Assets, or the business or operations of the School, taken as a whole), and Seller and Parent shall have delivered to Purchaser a certificate, dated the Closing Date, to such effect. 7.3. Performance of Agreements. Each and all of the agreements of Seller and Parent to be performed on or before the Closing Date pursuant to the terms hereof shall have been fully performed in all material respects, each of the documents, agreements and other items to be delivered to Purchaser pursuant to Section 3.1 shall have been delivered, and Seller shall have delivered to Purchaser a certificate, dated the Closing Date, to such effect. 7.4. No Material Adverse Change. Since the date of this Agreement, there shall have been no material adverse change in the properties, business, assets, results of operations, or condition (financial or otherwise) of the School taken as a whole, and Seller shall have delivered to Purchaser a certificate, dated as of the Closing Date, to such effect. -44- 7.5. Litigation. No statute, law, regulation or order shall have been enacted, issued, promulgated or entered by any governmental entity and no injunction or order of any court or other governmental body or Accrediting Body shall have been entered, in either case, which prohibits or restricts the transactions contemplated hereby, and no action or proceeding shall have been instituted or threatened by any Person, governmental entity or Accrediting Body before a court or other governmental body or Accrediting Body, (i) seeking to restrain or prohibit any of the transactions contemplated hereby or (ii) challenging or questioning the right, title or interest of Seller in and to the Assets to be transferred under this Agreement or the right of Seller to transfer validly all of such right, title and interest in and to such Assets to Purchaser, except to the extent such events do not have a material adverse effect on the transactions contemplated by this Agreement. 7.6. Proceedings. All proceedings to be taken in connection with the transactions contemplated by this Agreement and all documents incident thereto shall be reasonably satisfactory, in all material respects, in form and substance to Purchaser and its counsel, and Purchaser shall have received copies of all such documents and other evidence as Purchaser or its counsel may reasonably request in order to establish the consummation of such transactions and the taking of all appropriate proceedings in connection therewith. 7.7. Consents and Approvals. Purchaser shall have obtained the consents and approvals set forth in Section 3.1(i). 7.8. Agreement with DOE. Parent shall have (a) entered into an agreement with DOE, which Agreement has become effective, settling certain disputes between Parent and DOE on terms consistent with that certain March 12, 1996 letter attached hereto as Exhibit B hereto and resolving, without further liability to Purchaser, all matters disclosed in Paragraph I.B of Schedule 4.6(a) and Paragraph B.1 of Schedule 4.16, (b) delivered a copy of such agreement to Purchaser, including the schedules and exhibits thereto (provided, that Parent may redact those provisions (and related schedules and exhibits) of such agreement not related to Purchaser's rights, obligations and liabilities as a successor owner of the School), and (c) delivered to Purchaser a certificate, signed by an officer of Parent, certifying (i) that all conditions to the effectiveness of such agreement have been satisfied, (ii) that the redacted copy of such agreement does not omit any provision relating to or otherwise affecting the limitations on liability of Purchaser as buyer of the School set forth therein, and (iii) that there are no agreements other than such agreement to which Seller and/or Parent and DOE are parties affecting the liability of Purchaser with respect to the School. -45- 8. Conditions to Seller's and Parent's Obligations. The obligations of Seller and Parent to consummate the transactions contemplated by this Agreement with respect to the School are subject to the satisfaction, or to the waiver in writing by Seller, on or before the Closing Date, of the following conditions: 8.1. Truth of Representations and Warranties. The representations and warranties of Purchaser and CEC contained in this Agreement and in any certificate delivered by Purchaser or CEC in accordance with terms hereof shall be true and correct in all material respects on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of such date (except to the extent such representations and warranties speak of a particular date and except to the extent that any failure to satisfy this requirement does not have a material adverse effect on the Assets, or the business or operations of the School, taken as a whole), and Purchaser and CEC shall have delivered to Seller a certificate, dated as of the Closing Date, to such effect. 8.2. Performance of Agreements. Each and all of the agreements of Purchaser to be performed on or before the Closing Date pursuant to the terms hereof shall have been fully performed in all material respects, and each of the documents, agreements and other items, to be delivered to Seller pursuant to Section 3.2 shall have been delivered, and Purchaser shall have delivered to Seller a certificate, dated the Closing Date, to such effect. 8.3. Litigation. No statute, law, regulation or order shall have been enacted, issued, promulgated or entered by any governmental entity and no injunction or order of any court or other governmental body or Accrediting Body shall have entered, in either case, which prohibits or restricts the transactions contemplated hereby, and no action or proceeding shall have been instituted or threatened by any Person, governmental entity or Accrediting Body before a court or other governmental body or Accrediting Body, (i) seeking to restrain or prohibit any of the transactions contemplated hereby, or (ii) unless Purchaser has agreed to waive its right to indemnification with respect thereto, challenging or questioning the right, title or interest of Seller to transfer validly all of such right, title and interest in and to the Assets to be transferred to Purchaser, except to the extent such events do not have a material adverse effect on the transactions contemplated by this Agreement. 8.4. Proceedings. All proceedings to be taken in connection with the transactions contemplated by this Agreement and all documents incident thereto shall be satisfactory in form and substance, in all material respects, to Seller, Parent and their counsel, and Seller and Parent shall have received copies of all such documents and other evidence as they or their counsel may -46- reasonably request in order to establish the consummation of such transactions and the taking of all appropriate proceedings in connection therewith. 8.5. Consents and Approvals. Seller and Parent shall have obtained the consents and approvals set forth in Schedule 3.1(i). 8.6. Agreement with DOE. Parent shall have entered into an agreement with DOE, which has become effective, settling certain disputes between Parent and DOE on terms consistent with that certain March 12, 1996 letter attached as Exhibit B hereto resolving, without further liability to Purchaser, all matters disclosed in Paragraph I.B of Schedule 4.6(a) and Paragraph B.1 of Schedule 4.16. 9. Indemnification. 9.1. Survival of Representations, Warranties, Covenants and Agreements. (a) All representations and warranties, and all obligations in respect of covenants and agreements of the parties, contained in this Agreement, including the schedules and exhibits attached hereto, and those contained in the Escrow Agreement, the Service Agreement, and the Assignment and Assumption Agreement, shall survive the Closing and any investigation at any time made by or on behalf of any party for a period of two (2) years following the Closing; provided, however, notwithstanding the foregoing, obligations in respect of covenants and agreements of the parties hereto to be performed after Closing shall survive until such covenants and agreements are fulfilled, performed or discharged in full and for a period of two (2) years thereafter. (b) Notwithstanding the provisions of Section 9.1(a) and except as provided below, all representations and warranties of the parties contained in this Agreement, including the schedules and exhibits hereto, and those contained in the Escrow Agreement, the Service Agreement, and the Assignment and Assumption Agreement, shall expire, terminate and be of no force and effect (or provide the basis for any claim), and no party shall have any obligation to indemnify under this Section 9 for any claim resulting from breach of any such representation or warranty unless written notice thereof is received within two (2) years after the Closing Date; provided, that the foregoing limitation shall not apply to the breach of any of the representations and warranties of Seller and Parent contained in Section 4.9(d) or the bill of sale to be delivered pursuant to Section 3.1(a). -47- 9.2. Indemnification by Seller and Parent. Seller and Parent hereby agree, jointly and severally, to indemnify and hold Purchaser and its Affiliates, and any director, officer, employee, agent, or advisor of any of them, harmless from, against and with respect to any and all demands, claims, actions or causes of action, assessments, liabilities, losses, costs, damages, penalties, charges or expenses, including, without limitation interest, penalties and reasonable counsel and accountants' fees, disbursements and expenses (collectively, "Indemnifiable Losses") arising out of, or related to, (a) any material breach by Seller or Parent of any representation, warranty, covenant or agreement made by Seller or Parent in this Agreement, including the schedules and exhibits hereto, and (b) any matter relating to the operation of the School prior to Closing other than Assumed Liabilities (including, without limitation, any Pre-Closing Financial Aid Irregularities); provided, that in no event shall Seller's and Parent's aggregate liability hereunder with respect to all Indemnifiable Losses arising under clause (a) above exceed the consideration paid to Seller and Parent under this Agreement; provided, further, that notwithstanding the foregoing, there shall be no limit on Seller's liability with respect to Indemnifiable Losses arising under clause (b) of this Section 9.2. 9.3. Indemnification by Purchaser. Purchaser hereby agrees to indemnify, defend and hold Seller, Parent and their Affiliates, and any director, officer, employee, agent or advisor of any of them, harmless from, against and with respect to any and all Indemnifiable Losses arising out of, or related to, (a) any material breach by Purchaser or CEC of any representation, warranty, covenant or agreement made by Purchaser or CEC in this Agreement, including the schedules and exhibits hereto, and (b) any matter relating to the operation of the School by Purchaser after Closing, including, without limitation, Purchaser's obligations in respect of the Assumed Liabilities. 9.4. Procedures. (a) Any claim under Section 9.2 or Section 9.3 shall be made in a written statement signed by the party seeking indemnification which shall specify in reasonable detail each individual item of Indemnifiable Loss and the estimated amount thereof, the date such item was claimed or the facts giving rise to such claim were discovered, the basis for any alleged liability and the nature of the breach or claim to which each such item is related. (b) If the indemnifying party does not pay the amount specified in any such statement within thirty (30) days after it has been delivered by the party seeking indemnification, the party seeking indemnification may enforce its right in accordance with law. (c) The party seeking indemnification shall give the indemnifying party prompt notice (but in no event later than ten (10) business days following receipt of written notice) of any third party claim, action or proceeding which -48- might give rise to liability of the indemnifying party for indemnification hereunder. If the indemnifying party contests any third party claim, it will have the option to defend, at the indemnifying party's expense, any such matter, provided that the indemnified party shall have the right, at its own cost and expense, to participate in the defense of such claim or, if the indemnifying party elects not to defend the claim, to conduct the defense on its own behalf. If the indemnifying party conducts the defense of a claim, neither party will enter into any settlement agreement without the other party's consent; provided, that the indemnified party shall not object to any proposed settlement which requires only the payment of money by the indemnifying party and does not involve any admissions or stipulations by the indemnified party or any injunctive or similar relief or any other contractual obligations affecting the indemnified party or its business and operations. The indemnified party shall cooperate with the indemnifying party in the defense, compromise or settlement of any claim for which indemnification is sought. If the indemnifying party elects not to conduct the defense of such claim, the indemnified party shall be permitted to settle or compromise any such claim on such terms as it deems appropriate and such settlement or compromise shall not prejudice its rights to indemnification hereunder. 9.5. Prevailing Party to be Awarded Legal Fees. In the event of any litigation, whether at law or in equity, arising out of this Agreement, the party prevailing in such litigation shall be entitled to receive, upon application to the court, its reasonable legal fees and expenses incurred in connection therewith. 9.6. Limitations on Amount of Indemnification Liability. Notwithstanding anything to the contrary contained herein, no party shall be obligated to pay the other any amounts for indemnification under Sections 9.2 or 9.3, until the aggregate amount which it or they would have been obligated to pay but for this Section 9.6 equals $50,000, whereupon the indemnifying party shall be obligated to pay all amounts for indemnification then owing by such indemnifying party, including the amounts aggregated to reach the $50,000 threshold; provided, that the foregoing shall not apply to Purchaser's obligation in respect of the payment of the Purchase Price or its obligations described in Section 2.15 or in Section 9.3(b), or to Seller's obligations described in Section 2.9 and Section 2.15, or Seller's and Parent's obligations described in Section 9.2(b), or to amounts deposited into the Escrow other than amounts deposited in respect of the General Indemnity Escrow Amount. 9.7. Remedies. Except for violations of Sections 6.1, 6.2 or 6.3 and the right to rescind under Section 10, any claim for any breach of representation, warranty, covenant or agreement, or any other claim, arising out of this Agreement, the Escrow Agreement, the Service Agreement, the Assignment and Assumption Agreement, the bill of sale to be delivered pursuant to Section -49- 3.1(a), or the transactions contemplated hereby or thereby, whether such claim may be asserted as a breach of contract, tort or otherwise, shall have as its sole remedy the indemnification provided in this Section 9, unless such breach results from gross negligence or willful misconduct. Notwithstanding the foregoing, nothing herein shall preclude any party from seeking injunctive or other equitable relief as may be reasonably necessary to protect its rights hereunder, including, without limitation, those rights and remedies specified in Section 6.4. 9.8. Limitation on Personal Liability of Affiliates. Notwithstanding anything in this Agreement to the contrary or anything arising out of the transactions contemplated hereby, no shareholder, partner, director, officer, employee, agent, manager or Affiliate of any party hereto (or any direct or indirect shareholder, partner, director, officer, employee, agent, manager or Affiliate of any of them) shall have any personal liability of any nature whatsoever to any party hereto as a result of a breach of any representation, warranty, covenant or agreement contained in this Agreement or the other documents executed and delivered in connection with the transactions contemplated hereby, including without limitation the Escrow Agreement, the Service Agreement, the Assignment and Assumption Agreement, and the bill of sale to be delivered pursuant to Section 3.1(a) or otherwise arising out of the transactions contemplated hereby; provided, however, that nothing herein shall limit any party's rights or remedies with respect to fraud claims arising out of or relating to such transactions; and further provided, that the foregoing limitations shall in no event apply to any of Parent, Seller, Purchaser or CEC. 9.9. Indemnity Escrow Amount. The obligations of Seller and Parent in respect of Indemnifiable Losses pursuant to this Section 9 shall be secured by and, to the extent sufficient funds are available therein, paid from, the Indemnity Escrow Amount portion of funds held in the Escrow established pursuant to Section 2.5. 10. Recission of Transactions. After Closing, in the event that DOE refuses to issue a DOE Approval Notice permitting resumption of Title IV funding to the School under Purchaser's ownership based solely on Pre-Closing Financial Aid Irregularities or the pre- Closing financial condition of the School or Seller (each, a "Seller Inadequacy"), Purchaser shall have the right and option, in its sole discretion, upon written notice delivered to Seller no later than fifteen (15) days after receipt by Purchaser of notice from DOE that such approval is denied, to rescind the transactions consummated under this Agreement. Upon Purchaser's election of recission pursuant to this Section 10, each of the parties hereto shall take such actions as may reasonably be required to restore the other parties to their respective positions as they existed immediately prior to Closing. Purchaser shall not have any right or option to rescind the transactions consummated under this Agreement after Closing for any reason other than as above stated, including, without limitation, DOE's refusal to issue a DOE Approval Notice based in whole or in part upon any characteristic(s) or conditions(s) of Purchaser or CEC or of any school (not -50- including the School) previously or currently owned or operated by Purchaser or CEC, including the administrative capability or financial responsibility of Purchaser, CEC, or any school (not including the School) previously or currently owned or operated by Purchaser or CEC (each, a "Purchaser Inadequacy") or DOE's issuance of a DOE Approval Notice which contains conditions upon Purchaser's, CEC's or the School's participation in Title IV. Notwithstanding the foregoing, in the event that DOE refuses to issue a DOE Approval Notice based in part upon one or more Seller Inadequacies and in part upon one or more Purchaser Inadequacies, and in the event Purchaser is able to cure or otherwise resolve such Purchaser Inadequacies to the satisfaction of DOE within thirty (30) days after receipt by Purchaser of initial written notice from DOE that a DOE Approval Notice will not be issued for such reasons, Purchaser shall have the right and option, in its sole discretion, upon written notice delivered to Seller no later than ten (10) days after receipt by Purchaser of notice from DOE that all Purchaser Inadequacies have been cured or otherwise resolved to the satisfaction of DOE, to rescind the transactions consummated under this Agreement. 11. Miscellaneous. 11.1. Termination. This Agreement may be terminated at any time prior to the Closing Date: (a) by mutual written consent of the Purchaser and the Seller; (b) prior to the Closing by Seller or Parent on the one hand or Purchaser or CEC on the other hand, if the other parties shall be in breach of any covenant, undertaking, or restriction contained herein, the breach of which shall have a material adverse effect on the transactions contemplated by this Agreement taken as a whole, and such breach has not been cured within ten (10) business days after giving written notice to the breaching party or parties of such breach; provided, that if such breach is, in the reasonable judgment of the non-breaching party, capable of being cured, but cannot reasonably be cured within such ten (10) business day period, no party shall be permitted to terminate this Agreement as a result of such breach so long as the breaching party is diligently pursuing cure of such breach; (c) by the Purchaser or the Seller if the Closing shall not have occurred on or before December 31, 1996 or if a statute, law, regulation or order shall have been enacted, issued, promulgated or entered by any governmental entity or an injunction or order of a court or other governmental body or Accrediting Body has been entered, in either case, which prohibits or restricts the transactions contemplated hereby or an action or proceeding shall have been instituted or threatened by any Person, governmental entity or Accrediting Body or pending before a court or other governmental body or Accrediting Body seeking to restrain or prohibit any of the transactions contemplated hereby; -51- (d) by the Purchaser if any of the conditions specified in Section 7 have not been met or waived prior to such time as such condition can no longer be satisfied; or (e) by the Seller if any of the conditions specified in Section 8 have not been met or waived prior to such time as such condition can no longer be satisfied. In the event of termination of this Agreement, this Agreement shall forthwith become null and void except for this Section 11.1 and Sections 9, 11.2, 11.3, 11.4, 11.5, 11.6, 11.7, 11.8, 11.9, 11.10, 11.11 and 11.12, pursuant to this Section 11.1, which shall remain in full force and effect and which shall survive such termination, and there shall be no liability on the part of any party hereto resulting from the failure of the parties to consummate the transactions contemplated herein, except that nothing herein shall relieve any party hereto from liability for any willful or intentional breach of this Agreement by such party occurring prior to the termination hereof. 11.2. Expenses. Each party hereto shall be liable for the payment of the fees and expenses incurred by such party or on such party's behalf in connection with the negotiation and execution of this Agreement and the consummation of the transactions contemplated by this Agreement, including, without limitation, legal, accounting, financial and tax advice, brokers, finders and other fees, expenses and commissions. Purchaser shall pay all transfer, sales and use taxes in connection with the sale of the Assets to Purchaser. 11.3. Successors and Assigns. This Agreement and the rights hereunder shall not be assignable or transferable without the prior written consent of all the parties hereto; provided, that notwithstanding the foregoing, this Agreement and the rights hereunder shall be assignable by Purchaser and CEC to their Affiliates and lenders, but no such assignment shall release Purchaser or CEC from any of their respective duties, liabilities or obligations pursuant to this Agreement. Except as otherwise expressly provided herein, all covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto whether so expressed or not. 11.4. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. -52- 11.5. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together shall constitute one and the same Agreement. 11.6. Descriptive Headings; Interpretation. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a Section of this Agreement. 11.7. Governing Laws. This Agreement shall be construed and enforced in accordance with, and all questions concerning the construction, validity, interpretation and performance of this Agreement shall be governed by, the laws of the State of Illinois without giving effect to provisions thereof regarding conflict of laws. 11.8. Consent to Jurisdiction and Service of Process. EACH PARTY HERETO CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF COOK, STATE OF ILLINOIS AND IRREVOCABLY AGREES THAT SUBJECT TO PURCHASER'S ELECTION, ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE OTHER RELATED DOCUMENTS SHALL BE LITIGATED IN SUCH COURTS. EACH PARTY HERETO ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NONCOVENIENS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. EACH PARTY HERETO DESIGNATES AND APPOINTS CT CORPORATION SYSTEM AND SUCH OTHER PERSON AS MAY HEREINAFTER BE SELECTED BY PURCHASER WHO IRREVOCABLY AGREE IN WRITING TO SO SERVE AS AGENT TO RECEIVE ON SUCH PARTY'S BEHALF SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT, SUCH SERVICE BEING HEREBY ACKNOWLEDGED BY EACH PARTY TO BE EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT. A COPY OF ANY SUCH PROCESS SO SERVED SHALL BE MAILED BY REGISTERED MAIL TO EACH PARTY AS PROVIDED HEREIN, EXCEPT THAT UNLESS OTHERWISE PROVIDED BY APPLICABLE LAW, ANY FAILURE TO MAIL SUCH COPY SHALL NOT AFFECT THE VALIDITY OF SERVICE OF PROCESS. IF ANY AGENT APPOINTED BY A PARTY REFUSES TO ACCEPT SERVICE, SUCH PARTY HEREBY AGREES THAT SERVICE UPON IT BY REGISTERED MAIL, RETURN RECEIPT REQUESTED SHALL CONSTITUTE SUFFICIENT NOTICE. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR -53- SHALL LIMIT THE RIGHT OF PURCHASER TO BRING PROCEEDINGS AGAINST SELLER OR PARENT IN THE COURTS OF OREGON OR MISSISSIPPI. 11.9. Waiver of Jury Trial. Arbitration. EACH PARTY HERETO HEREBY WAIVES ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION AND THE RELATIONSHIP THAT IS BEING ESTABLISHED. EACH PARTY HERETO ALSO WAIVES ANY BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF THE OTHER PARTIES. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THESE TRANSACTIONS, INCLUDING WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. EACH PARTY HERETO ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH PARTY HERETO FURTHER WARRANTS AND REPRESENTS THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE TRANSACTIONS CONTEMPLATED HEREBY. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 11.10. Notices. All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Agreement shall be in writing and shall be deemed to have been given (a) when delivered personally or sent by facsimile to the recipient, or (b) one (1) business day after the date such communication is sent to the recipient by reputable express courier service (charges prepaid). Such notices, demands and other communications shall be sent to the parties hereto at the addresses indicated below: -54- If to Purchaser: WCI Acquisition, Ltd. c/o Career Education Corporation 2800 West Higgins Road Hoffman Estates, Illinois 60195 Attention: John M. Larson, William Klettke Facsimile: (847) 781-3610 With copies to: D'Ancona & Pflaum 30 North LaSalle Street Suite 2900 Chicago, Illinois 60602 Attention: Michel J. Feldman Facsimile: (312) 580-0923 and Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd. 55 East Monroe Street Suite 3700 Chicago, Illinois 60603 Attention: Dennis B. Black, Esq. Facsimile: (312) 332-2196 If to Seller or Parent: Phillips Colleges, Inc. One Hancock Plaza - Suite 1408 Gulfport, Mississippi 39501 Attention: Joseph A. Bondi Facsimile: (601) 864-0519 and Joseph A. Bondi Alvarez & Marsal, Inc. 885 Third Avenue Suite 1700 New York, New York 10022-4802 Facsimile: (212) 230-3307 With copies to: Dow, Lohnes and Albertson 1200 New Hampshire Avenue, N.W. Suite 800 Washington, D.C. 20036-6802 Attention: Michael Goldstein Facsimile: (202) 776-2222 or to such other address or to the attention of such other Person as the recipient party has specified by prior written notice to the sending party. -55- 11.11. Guaranty by CEC. If Purchaser shall default in the due and punctual payment of its obligations or performance of its duties and obligations hereunder or any other agreement entered into by Purchaser in connection with the consummation of the transactions contemplated hereby, CEC shall forthwith pay, perform or cause to be paid or performed such duties and obligations. The obligations of CEC under this Section 11.11 shall not be conditioned or contingent upon the pursuit of any remedies against Purchaser or any other Person. To the maximum extent permitted by law, CEC hereby waives any right, whether legal, equitable, statutory or non-statutory, to require Seller or Parent to proceed or take any action against, or pursue any remedy with respect to, Purchaser or any other Person before Seller or Parent may enforce rights against CEC under this Section 11.11; provided, however, that the foregoing shall not be deemed a waiver of any actions, claims or defenses available to CEC, which shall include any actions, claims or defenses available to Purchaser with respect to any such matter for which Seller or Parent seeks to enforce this Section 11.11. Subject to the foregoing, the guaranty provided herein is an absolute, continuing, irrevocable and unconditional guaranty of CEC; provided that CEC's obligations in respect of claims made hereunder shall be subject to the same limitations as apply to Purchaser's duties and obligations, including without limitation the limitations set forth in Sections 9.6, 9.7 and 9.8. CEC recognizes that this guaranty is a material inducement to Seller's and Parent's entering into this Agreement and will not be affected, impaired or released by an extenuation, waiver or amendment of this Agreement or Purchaser's exercise of any rights granted under this Agreement. Notwithstanding any provision of this Agreement to the contrary, CEC's execution and delivery of this Agreement is solely for the purpose of evidencing its agreement to be bound by Section 5 and this Section 11.11. 11.12. Entire Agreement. Except as otherwise expressly set forth herein, this Agreement and the exhibits and schedules hereto embody the complete agreement and understanding among the parties and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way, including, without limitation, the Letter of Intent, dated July 5, 1996, as amended, between Parent and CEC. [signature page follows] -56- IN WITNESS WHEREOF, the parties hereby have executed this Agreement on the date first written above. SELLER: PHILLIPS EDUCATIONAL GROUP OF PORTLAND, INC., an Oregon corporation By /s/ JOSEPH A. BONDI --------------------------------------- Its President and Chief Executive Officer -------------------------------------- PARENT: PHILLIPS COLLEGES, INC., a Mississippi corporation By /s/ JOSEPH A. BONDI --------------------------------------- Its President and Chief Executive Officer -------------------------------------- PURCHASER: WCI ACQUISITION, LTD., a Delaware corporation By /s/ JOHN M. LARSON ------------------------------------ Its President/ CEO ----------------------------------- CAREER EDUCATION CORPORATION (For purposes of agreement to Sections 5 and 11 only): CAREER EDUCATION CORPORATION, a Delaware corporation By /s/ JOHN M. LARSON ------------------------------------ Its President/ CEO ----------------------------------- -57- LIST OF EXHIBITS Exhibit A - Assignment and Assumption Agreement Exhibit B - Letter dated March 12, 1996 from DOE to Parent Exhibit C - Form Escrow Agreement Exhibit D - Form of Service Agreement Exhibit E - Seller's Counsel Opinion Exhibit F - Purchaser's Counsel Opinion LIST OF SCHEDULES Schedule 2.1 - Excluded Prepaid Expenses and Other Excluded Assets Schedule 2.2 - Form of Calculation of Accounts Receivable Adjustment and Certain Other Calculations Schedule 2.3(a) - Assumed Liabilities Schedule 2.9(a) - Form of Operations Statement Schedule 2.9(b) - Form of Report of Depreciation and Amortization Schedule 3.1(i) - Seller's Consents Schedule 4.4 - Seller's Conflicts Schedule 4.6(a) - Compliance with Applicable Laws Schedule 4.6(b) - License and Permits Schedule 4.6(c) - Notices of Noncompliances and Investigations Schedule 4.7(a) - Policy Guidelines Schedule 4.7(b) - Noncompliance with Policy Guidelines Schedule 4.8 - Cohort Default Rates Schedule 4.9(c) - Defaults under Real Property Leases Schedule 4.9(d) - Leased or Licensed Assets Requiring Consent to Transfer; Defaults under Leases and Licenses Schedule 4.9(e) - List of Machinery and Equipment Schedule 4.10 - Material Miscellaneous Contracts Schedule 4.11(a) - Tradenames Schedule 4.11(b) - Licensed Tradenames Schedule 4.12 - Financial Security Arrangements Schedule 4.12(c) - Debts Incurred Since Interim Balance Sheet Date Schedule 4.16 - Litigation Schedule 4.17 - Insurance Schedule 4.18 - Environmental Matters Schedule 4.19 - Employee Benefit Plans Schedule 4.20(a) - Employment Issues Schedule 4.20(b) - List of Employees, Consultants and Other Service Providers Schedule 4.23 - Affiliate Transactions Schedule 4.24 - Changes Since Interim Balance Sheet Date Schedule 4.25 - Indebtedness Schedule 5.3 - Purchaser's Consents and Government Approvals -58- EX-2.2 3 STOCK SALE AGREEMENT DTD 4/07/97 Exhibit 2.2 STOCK SALE AGREEMENT AGREEMENT OF SALE, dated April 7, 1997 (this "Agreement") by and between K-III Prime Corporation, Inc., a corporation organized under the laws of the State of Delaware ("Seller" or "the Seller"), and Career Education Corporation, a corporation organized under the laws of the State of Delaware ("Purchaser" or "the Purchaser"). WHEREAS, The Katharine Gibbs Schools, Inc. (formerly known as K-III KG Holdings, Inc.), a Delaware corporation (the "Company"), is a wholly-owned subsidiary of Seller and each of the corporations listed on Appendix I is a direct wholly-owned subsidiary of the Company, which subsidiaries, with the Company, own and operate the network of Katharine Gibbs Schools; and WHEREAS, Purchaser desires to acquire, from Seller, the Schools by purchasing all of the outstanding securities of the Company. NOW, THEREFORE in consideration of the mutual covenants and agreements hereinafter set forth and subject to the terms and conditions hereof, the parties hereto agree as follows: I. Definitions. ----------- 1.01 Definitions. ----------- As used in this Agreement, the following terms shall have the respective meanings set forth below (such meanings to be equally applicable to both the singular and the plural forms of the terms defined): (a) "Closing" shall mean the closing of the transactions contemplated by this Agreement, which shall take place on such date as agreed upon by Seller and Purchaser, which date shall not be later than May 31, 1997, provided that the parties shall work in good faith to effectuate the Closing as soon as practicable. (b) "Closing Date" shall mean 11:59 P.M. New York City time on the date on which the Closing occurs. (c) "Shares" shall mean 1000 shares of Common Stock, $.01 par value, of the Company, all of which shares are owned by Seller on the date hereof, which constitute all of the issued and outstanding capital stock of the Company. (d) "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvement Act of 1976 and the rules and regulations thereunder, as in effect from time to time. (e) "School" shall mean each of the secretarial and business skills schools listed on Appendix II and "Schools" shall mean all thereof collectively. (f) "Subsidiary" shall mean each of the companies listed on Appendix I and "Subsidiaries" shall mean all thereof collectively. (g) "Best of Seller's Knowledge" or any similar term means the collective actual knowledge of the executive officers of Seller, the Company and each Subsidiary holding offices of vice-president or higher, following due inquiry of legal counsel to Sellers and the Company, and the President, the admissions director and the financial aid director of each School. (h) "Encumbrances" means any charge, claim, community property interest, condition, equitable interest, lien, mortgage, deed of trust, option, pledge, security interest, right of first refusal, or restriction of any kind, including any restriction on use, voting, transfer, receipt of income, or exercise of any other attribute of ownership. (i) " GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants, and statements and pronouncements of the Financial Accounting Standards Board and the Emerging Issues Task Force (or any successor authority) that are applicable as of 2 the date of determination, all as consistently applied in the preparation of the Financial Statements. (j) "Legal Requirement" means any federal, state, local, municipal or other constitution, law, statute, regulation, rule, ordinance, order, judgment, decree, or administrative order, to which Seller, the Company, the Subsidiaries or Purchaser are subject, as applicable. (k) "Person" means any individual, general or limited partnership, corporation (including any non-profit corporation), limited liability company, joint stock company, joint venture, trust, association, unincorporated organization, labor union, governmental entity or other similar entity. II. Sale of Shares and Purchase Price. --------------------------------- 2.01 Acquisition. Upon the terms and subject to the satisfaction of the conditions contained in this Agreement, Seller hereby agrees at the Closing to sell, assign, convey, transfer and deliver to Purchaser, and Purchaser hereby agrees at the Closing to purchase from Seller, the entire legal and equitable right, title and interest in and to the Shares. 2.02 Purchase Price. -------------- (a) On the terms and subject to the conditions set forth in this Agreement and in consideration of the agreement of the Seller to make the sale, assignment, conveyance, transfer and delivery of the Shares and the representations of Seller, Purchaser hereby agrees to pay or cause to be paid to Seller the sum of Twenty Million Dollars ($20,000,000) subject to adjustment pursuant to Section 2.03 (the "Purchase Price") which shall be paid as follows: Five Million Four Hundred Thousand Dollars ($5,400,000) (the "Closing Date Payment") shall be payable to Seller on the Closing Date, and Fourteen Million Six Hundred Thousand Dollars ($14,600,000) (the "Escrow Payment") shall be placed in an escrow account (the "Escrow") on the Closing Date to 3 be disbursed in accordance with the provisions of an escrow agreement (the "Escrow Agreement") substantially in the form of Exhibit A attached hereto. All payments shall be by wire transfer of immediately available Federal funds to an account designated in writing by Seller for that purpose. (b) In addition to the Purchase Price, Purchaser shall pay to Seller Seven Million Dollars ($7,000,000) (the "Non-Competition Payment") in consideration of Seller's execution of an agreement not to compete with Purchaser (the "Non- Competition Agreement") substantially in the form of Exhibit B attached hereto. In accordance with the terms of the Non-Competition Agreement, the Non- Competition Payment shall be placed in the Escrow on the Closing Date and distributed in accordance with the provisions of the Escrow Agreement. 2.03 Purchase Price Adjustment. ------------------------- (a) Excess/Deficiency. As computed based on the Final Closing Date Balance Sheet (as described below), if the total current liabilities exceed the sum of the net book value of net accounts receivable, net cash in the bank accounts of the Company available to Purchaser after the Closing and $665,000, the amount of that difference shall be the "Deficiency". If, on the other hand, the sum of the net book value of net accounts receivable, net cash in the bank accounts of the Company available to Purchaser after the Closing and $665,000 exceed the total current liabilities, the amount of that difference shall be the "Excess". (b) Effect of Excess or Deficiency. Following final determination of the Final Closing Date Balance Sheet pursuant to Section 2.03 (c), the Purchase Price shall be decreased dollar-for-dollar by the amount of the Deficiency, if any, or increased dollar-for-dollar by the amount of the Excess, if any. (c) Estimated Purchase Price Adjustment. No more than three days prior to the 4 Closing Date, Purchaser and Seller, acting in good faith and consistent with GAAP, the historical accounting practices, principles and cost accounting methods of Seller, the Company and the Subsidiaries consistently applied, shall agree to estimated entries for a consolidated balance sheet of the Company and the Subsidiaries as of the close of business on the Closing Date (the "Estimated Closing Date Balance Sheet"). Based on the Estimated Closing Date Balance Sheet, an estimated Excess or Deficiency (as the case may be) shall be computed in accordance with Section 2.03(a). If there is an estimated Deficiency, the Escrow Payment which Purchaser is obligated to deposit into the Escrow on the Closing Date shall be reduced dollar-for-dollar by the estimated Deficiency. If there is an estimated Excess, the Escrow Payment which Purchaser is obligated to deposit into the Escrow on the Closing Date shall be increased dollar-for-dollar by the amount of the estimated Excess. (d) Preliminary Closing Date Balance Sheet. As promptly as practicable following the Closing Date, Purchaser shall cause the Company to prepare and deliver to Seller the consolidated balance sheet of the Company and the Subsidiaries as of the close of business on the date of Closing (the "Preliminary Closing Date Balance Sheet"). Such Preliminary Closing Date Balance Sheet shall be prepared using GAAP, the historical accounting practices, principles and cost accounting methods of Seller, consistently applied in accordance with the December Balance Sheet (as defined in Section 5.05) and certified by Purchaser's independent certified public accountants ("Purchaser's Accountants") as fairly presenting the consolidated financial position of the Company and the Subsidiaries as of the Closing Date. Based on the Preliminary Closing Date Balance Sheet, Purchaser's Accountants shall also compute the Excess or Deficiency (as the case may be) in accordance with Section 2.03(a). Purchaser shall have the Preliminary Closing Date Balance Sheet and the accompanying report of Purchaser's Accountants 5 delivered to the Seller within sixty days (60) after the Closing Date. Seller and if Seller shall request, its certified public accountants ("Seller's Accountants"), shall be informed of and consulted in connection with the preparation and audit of the Preliminary Closing Date Balance Sheet prior to the certification thereof by Purchaser's Accountants. Seller (and Seller's Accountants) shall be given access to the books and records of the Company and the Subsidiaries for the purpose of verifying the Preliminary Closing Date Balance Sheet and the Excess or Deficiency, if any. (e) Final Determination of Excess or Deficiency. If Seller shall disagree with any item in the Preliminary Closing Date Balance Sheet or the computation of the Excess or Deficiency, Seller shall, within thirty (30) days after the date of receipt of the Preliminary Closing Date Balance Sheet, deliver to Purchaser written notice to the effect that it disagrees therewith and a statement of its basis for such disagreement. Absent the delivery to Purchaser of such written notice of disagreement, the Preliminary Closing Date Balance Sheet shall become the Final Closing Date Balance Sheet and the determination by Purchaser's Accountants of the Excess or Deficiency shall be conclusive. If Seller delivers a written notice of disagreement to Purchaser as described above and within the thirty (30) day period as required hereby, Seller shall then have the right to cause an inspection of the Preliminary Closing Date Balance Sheet to be conducted by Seller or Seller's Accountants. If Seller and Purchaser shall fail to reach agreement within thirty (30) days after receipt by Purchaser of such written notice from Seller, then a determination of the Final Closing Date Balance Sheet and a conclusive determination of the Excess or Deficiency shall be made by a certified public accounting firm jointly selected by Seller and Purchaser. If within five (5) days, Seller and Purchaser are unable to agree on selection of such certified public accountant, then the selection shall be made by the American 6 Arbitration Association in New York City ("AAA"). The fees and expenses of the jointly selected accounting firm and the AAA shall be born equally by the Seller and Purchaser. (f) Adjustment From Estimate. Upon determination of the Final Closing Date Balance Sheet, if the Excess or Deficiency as conclusively so determined is such that the estimated adjustment pursuant to Section 2.03(c) resulted in an overpayment to the Escrow by Purchaser, then the amount of such overpayment shall be paid by Seller to Purchaser (in the event that the Escrow has already been distributed) or shall be deducted from the deferred portion of the Purchase Price to be disbursed to Seller from the Escrow and shall instead be disbursed to Purchaser (in the event that the Escrow has not been distributed). If, on the other hand, the Excess or Deficiency as conclusively so determined is such that the estimated adjustment pursuant to Section 2.03(c) resulted in an underpayment to the Escrow by Purchaser, then the amount of such underpayment shall be paid by Purchaser to Seller simultaneously with the disbursement of the deferred portion of the Purchase Price from the Escrow. Any such payment shall be made by wire transfer of immediately available Federal funds to an account designated in writing by the party entitled to receive the payment. 7 III. Execution of Stock Sale Agreement. --------------------------------- 3.01 Stock Sale Agreement. This Agreement is being executed at the offices of K-III Communications Corporation, 745 Fifth Avenue, New York, New York 10151. IV. Closing. ------- 4.01 Deliveries by Seller. At the Closing, Seller shall deliver to Purchaser (unless previously delivered) the following: (a) Certificates as to the good standing of the Company and each Subsidiary and the payment of all franchise taxes and filing of required reports from the appropriate officials of the respective jurisdictions in which the Company and each Subsidiary is incorporated, which certificates shall be dated as of a date which is a reasonably close date to the Closing Date. (b) Certificates representing the Shares, duly endorsed in blank or with duly executed stock powers. (c) The certificates and opinion required under Section 8.01 hereof. (d) Resignation of each director and officer of the Company, each Subsidiary and the Katharine Gibbs Scholarship Foundation, dated as of the Closing Date. (e) The Non-Competition Agreement in substantially the form attached as Exhibit B. (f) A release of claims against the Company and the Subsidiaries in the form of Exhibit C attached hereto. (g) Evidence of release of the Company and the Subsidiaries from guarantees with respect to any debt of Seller or any of its affiliates (other than the Company and the Subsidiaries). (h) Such other documents as Purchaser may reasonably request evidencing the consummation of the transactions contemplated by this Agreement. (i) Guarantee of K-III Communications Corporation substantially in the form 8 attached as Exhibit D. 4.02 Deliveries by Purchaser. At the Closing, Purchaser will deliver to Seller (unless previously delivered) the following: (a) That portion of the Purchase Price to be delivered at closing pursuant to the provisions of Article II. (b) The certificates and opinion required under Section 8.02 hereof. (c) Resolutions of the Board of Directors of Purchaser authorizing the transaction contemplated by this Agreement. (d) Substitute letters of credit/surety bonds pursuant to Section 7.07. (e) Such other documents as Seller may reasonably request evidencing the consummation of the transactions contemplated hereby. V. Representation and Warranties of Seller. ---------------------------------------- Seller hereby represents and warrants to Purchaser on the date hereof as follows: 5.01 Organization, Standing and Qualification. Each of Seller, the Company, and each Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all requisite power and authority and is entitled to carry on its respective business as now being conducted and to own and operate its assets and to consummate the transactions contemplated by this Agreement. Each of Seller, the Company and each Subsidiary is duly qualified to do business as a foreign corporation in every jurisdiction listed on Schedule 5.01, which jurisdictions constitute every jurisdiction where failure to be so qualified would have a material adverse effect on its business or operations. Upon the execution of this Agreement, Seller is delivering to Purchaser true and complete copies of the Certificate of Incorporation and all amendments thereto, and the By-Laws, of Seller, the Company, and each 9 Subsidiary, as in effect on the date of this Agreement, each certified as complete and correct by the respective secretaries of Seller, the Company and each Subsidiary. 5.02 Stock of Company and Subsidiaries: Ownership of Schools. Schedule 5.02(a) sets forth the number of outstanding shares, the par value thereof, and the record and beneficial owner of such shares for the Company and each Subsidiary. Except as set forth on Schedule 5.02(b), Seller or the Company owns all of the outstanding shares of the Company and each Subsidiary, respectively, free and clear of all Encumbrances whatsoever. Except as set forth on Schedule 5.02(a), there are no agreements, commitments (including without limitation any warrants, rights or similar arrangements) or employee benefits plans relating to the issuance, sale or transfer, purchase or redemption of any equity security or other security of the Company or any Subsidiary or providing for cash payments based upon the value of any equity securities of the Company or any Subsidiary. The Shares and all shares described on Schedule 5.02(a) are validly issued and outstanding, fully-paid and non-assessable, and were issued in compliance with all federal and state securities laws and other Legal Requirements. There are no shares of capital stock or other securities of the Company or any Subsidiary outstanding other than the Shares and the shares listed on Schedule 5.02(a). Except as set forth on Schedule 5.02(c) neither the Company nor any Subsidiary owns any stock of any other corporation other than that of the Subsidiaries. The Company has never had any subsidiaries or other material investments in other Persons other than the Subsidiaries. The Subsidiaries have never had any subsidiaries or other material investments other than the Schools. Except as set forth on Schedule 5.02(a) neither the Company nor any Subsidiary owns or has any agreement or commitment to acquire, any equity securities of any Person or other direct or indirect ownership interest in any other business. The Company and the Subsidiaries are not, and for the past three 10 (3) years have not been, engaged in any business other than the Schools. 5.03 Execution, Delivery and Performance of Agreement; Authority. Except as set forth on Schedule 5.03, neither the execution, delivery nor performance by Seller of this Agreement or the other agreements and instruments referred to in this Agreement that Seller is executing and delivering ("Seller's Additional Agreements") nor the consummation by Seller of the transactions contemplated hereby or thereby (a) will violate in any material fashion any Legal Requirement, or (b) will (with or without the giving of notice, the passage of time or both) violate, conflict with, or constitute a default, right to accelerate, or loss of rights under, or result in the creation of any material Encumbrance pursuant to (i) the Certificate of Incorporation or By-Laws of Seller, the Company or any Subsidiary or (ii) any material contract, commitment, agreement, lease, license, permit, mortgage, deed of trust or restriction of any kind to which Seller, the Company or any Subsidiary is a party or by which any of them or their respective properties or businesses may be bound, (c) will cause, or give any Person grounds to cause, the maturity of any material liability or obligation of Seller, the Company or any Subsidiary to be accelerated or will increase any such liability, (d) except as required as a result of the transfer of the Shares, require any approval of, filing with, or consent from any governmental authority or other third party that is required to be obtained or made by Seller, the Company or any Subsidiary with respect to which the failure to obtain such approval or consent or make such filing would have a material adverse effect on the Company or any Subsidiary (e) cause Purchaser, the Company or any Subsidiary, solely as a consequence of the transactions contemplated by this Agreement, to become subject to, or liable for payment of, any federal, state or local taxes outside of the ordinary course of business. This Agreement constitutes, and upon execution and delivery, the Seller's Additional Agreements will constitute, duly executed, valid and binding 11 obligations of Seller enforceable in accordance with their terms (except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium, receivership, conservatorship or other laws of general application or equitable principles that affect the right of creditors generally, or by limitations on the availability of the remedy of specific performance or injunctive relief (collectively, the "Bankruptcy Exceptions")). All proceedings or corporate action required to be taken by Seller to authorize, or otherwise relating to, the execution, delivery and performance of this Agreement and Seller's Additional Agreements and the consummation of the transactions contemplated hereby and thereby have been taken. Concurrently with the execution of this Agreement, Seller is delivering to Purchaser a copy of the resolutions of Seller, certified by the secretary of Seller, authorizing the execution, delivery and performance of this Agreement and Seller's Additional Agreements and the consummation of the transactions contemplated and thereby. No approval by the stockholders of Seller is required with the respect to the transactions contemplated by this Agreement or the other agreements and instruments referred to in this Agreement. 5.04 Books and Records Except as set forth on Schedule 5.04: (a) The minute books, stock record books, and other records of the Company and each Subsidiary, all of which have been made available to Purchaser, are substantially complete and correct and have been maintained in accordance with sound business practices, except where failure to so maintain such books and records would not have a material adverse effect upon the Company or any Subsidiary. (b) Each of the Company and each Subsidiary has maintained all of its accounting books and records in accordance with applicable Legal Requirements and GAAP, except where failure to so maintain such books and records would not have a material adverse effect upon the 12 Company, and such books and records are true, correct and complete in all material respects. (c) At the Closing, all books and records described in this Section 5.04 will be in the possession of the Company and the Subsidiaries. 5.05 Financial Statements. Seller has delivered, or will deliver prior to the fourteenth day following the date of this Agreement, to Purchaser the unaudited consolidated balance sheets of the Company and the audited balance sheets of the Subsidiaries as at December 31, 1996 (the "December Balance Sheet") and as at December 31, 1995, and unaudited consolidated statements of income of the Company and the audited statements of income of the Subsidiaries for the years ended December 31, 1995 and December 31, 1996, (collectively, the "Financial Statements") copies of which are attached hereto as Schedule 5.05(a). Except as set forth on Schedule 5.05(a), Seller represents and warrants that such balance sheets and statements of income fairly present the income, expenses, assets, liabilities and overall financial condition and results of operations of the Company and Subsidiaries on an unaudited consolidated basis and on an audited Subsidiary basis as at such dates or for such periods, all in accordance with GAAP, consistently applied. Except as set forth in Schedule 7.07(a), neither the Company nor any Subsidiary is required to provide any letters of credit, guaranty or other financial security arrangements in connection with any transactions, approvals or licenses in the ordinary course of operations of the Company or the Subsidiaries. Except as set forth on Schedule 5.05(b) attached hereto, as of the date hereof, neither the Company nor any Subsidiary has any material indebtedness, liabilities or obligations of any nature, whether absolute, accrued, contingent or otherwise, other than: (a) Those set forth or reserved against in the balance sheets included in the December Balance Sheet (and then only to the extent of such reserves); (b) Those incurred since the date of the December Balance Sheet in the ordinary course 13 of business and consistent in nature with past practice the effect of which is reflected in the Financial Statements or those prepared in accordance with GAAP if such footnotes had been prepared, and which have been disclosed to Purchaser in writing, to the extent set forth, reserved or, in the case of footnote items, disclosed; and (c) Those which are so immaterial as not to be required to be disclosed in financial statements or notes thereto prepared in accordance with GAAP. There are no long-term fixed or contractual liabilities relating to the operation of the Company or any Subsidiary, as presently operated, the annual expenses of which are not reflected in the December Balance Sheet or which are not otherwise expressly disclosed or set forth in this Agreement or the schedules hereto. Other than obligations in respect of deferred tuition revenue, neither the Company nor any Subsidiary has any material obligations in respect of refundable deposits. 5.06 Receivables. The accounts receivable (including, without limitation, student accounts receivable of the Company and each Subsidiary), except to the extent of the allowance for cancellations and doubtful accounts set forth in the December Balance Sheet, are bona fide receivables, arose out of arms' length transactions in the normal and usual practices of the Company and the Subsidiaries, and are recorded correctly on the applicable books and records of the Company and the Subsidiaries. To the best of Sellers' knowledge, the reserves established for such receivables in the December Balance Sheet are adequate. Seller shall not be liable for any receivable which is uncollected as a result of the transactions contemplated in this Agreement. 5.07 Supplies. Ordinary business supplies (including without limitation textbooks) of the Company, the Subsidiaries and the Schools, as of the date hereof, are in customary amounts appropriate and adequate to the operations of the Company, the Subsidiaries and the Schools. 14 5.08 Bank Accounts. Schedule 5.08 attached hereto sets forth a true, complete and correct list of the names of all banks and other financial institutions in which the Company or any Subsidiary has an account or safe deposit box, which list includes a description of such accounts, the account numbers and the names of all individuals authorized to draw thereon or have access thereto. 5.09 Absence of Undisclosed Liabilities. Except as and to the extent set forth on Schedule 5.09 or reflected or reserved against on the December Balance Sheet and except for liabilities and obligations that arose in the ordinary course of business since December 31, 1996, as of the date hereof, to the knowledge of Seller, neither the Company nor the Subsidiaries have any material debts, liabilities or obligations of any nature whatsoever that are material to the Company or any Subsidiary or if unpaid or unsatisfied would result in the closing of any of the Schools. 5.10 No Material Adverse Change. Except as and to the extent set forth on Schedule 5.10, since December 31, 1996, there has not been any material adverse change in the business or financial condition of the Company or any Subsidiary. 5.11 Litigation. Except as set forth on Schedule 5.11, to best of Seller's knowledge, there are no claims, legal actions, suits, arbitrations, governmental investigations or other legal or administrative proceedings in progress, pending or threatened against the Company or any of its Subsidiaries or the transactions contemplated by this Agreement, which if adversely determined (a) would have a material adverse effect on the Company or any Subsidiary or (b) would materially challenge the validity of this Agreement or any action taken or to be taken by Seller pursuant to this Agreement. 5.12 Compliance with Laws and Other Instruments. Except as set forth on Schedule 5.12, to the best of Seller's knowledge, the Company and the Subsidiaries have complied in all 15 material respects with all existing Legal Requirements that are material to their respective properties or operations. Except as set forth in Schedule 5.12, neither the ownership nor use by the Company or any of the Subsidiaries of their respective properties nor the conduct of their respective businesses conflicts in any material respect with the rights of any other Person or in any material respect violates, conflicts with or results in or, will in any material respect violate, conflict with or result in, a material default, right to accelerate or loss of rights under, any terms or provisions of any of their certificates of incorporation or by-laws as presently in effect, or any material Legal Requirement, Encumbrance, license, lease or other agreement to which the Company or any Subsidiary is a party or by which any of them or their respective properties or businesses may be bound. 5.13 Real Property. ------------- (a) The only real estate owned by the Company or any Subsidiary is listed on Schedule 5.13 (the "Real Property") (b) Schedule 5.13 sets forth a description of each lease for real property as to which the Company or Subsidiary is a party (the "Leases"). Other than the Real Property, during the past three (3) years, neither the Company nor and Subsidiary has owned, leased or operated any real estate other than property leased pursuant to the Leases. (c) Except as set forth in Schedule 5.13, the Leases are valid, binding and enforceable in accordance with their terms, and are in full force and effect; there are no existing material defaults under the Leases by the Company or any Subsidiary or, to the best of Seller's knowledge, the other party thereto; and no event has occurred which (whether with or without notice, lapse of time or both) would constitute a material default by the Company or any Subsidiary thereunder. (d) The copies of the Leases submitted to Purchaser for its review (all of which are 16 listed on Schedule 5.13) are true and correct copies thereof and constitute copies of all Leases providing for annual rental in excess of $12,000 per annum or a remaining term of one (1) year or longer from the date hereof under which the Company or any Subsidiary is a lessee or a lessor of real or personal property. 5.14 Title. ----- (a) Either the Company or the applicable Subsidiary has good title to the Real Property and to all personal property which is not the subject of a lease which is used in the operations of any of the Schools, and is material to the operations of any of the Schools including, without limitation, the assets reflected on the December Balance Sheet (except property sold after the December Balance Sheet date in the ordinary course of business), free and clear of all material Encumbrances except (i) as set forth in the December Balance Sheet or as otherwise expressly permitted by the terms hereof, or (ii) Encumbrances, if any, listed on Schedule 5.14 attached hereto. 5.15 Environmental ------------- To the best of Seller's knowledge, except as set forth on Schedule 5.15, neither the Company nor any Subsidiary has or is subject to any claim, obligation, liability, loss or expense of whatever kind or nature, contingent or otherwise, or is in material violation of any Legal Requirement pertaining to health, safety, hazardous substances, natural resources or environmental protection, including, but not limited to, asbestos regulations and occupational health and safety regulations, which material violation arises out of any act or omission of Seller, the Company or any of the Subsidiaries, their employees, agents or representatives or arises out of the ownership, use, control or operation by any of them of any plant, facility, site, area or property or from their release of any substance into the environment (the term "release" meaning any spilling, leaking, 17 pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing into the environment, and the term "environment" meaning air, soil and water, including without limitation any surface or ground water, drinking water supply, land, surface or subsurface strata, or the ambient air) and neither the Company nor any Subsidiary has received notice of, nor to the best of Seller's knowledge is there any valid basis for any of the foregoing, provided that the representation contained in this Section 5.15 does not include (x) any violation relating to premises leased by the Company or any Subsidiary unless such violation results directly from the operations conducted by the Company or any Subsidiary in such premises and (y) any matter which would have been disclosed if Purchaser had conducted a Phase I environmental audit at the premises in question. 5.16 Employee Benefits, Plans and Agreements. --------------------------------------- (a) Schedule 5.16(a) contains a true and complete list of each "employee benefit plan" (as defined in section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") and any other bonus, compensation, severance, incentive, sick pay, sick leave, vacation, nonqualified deferred compensation, termination, consulting, retainer or other plan, agreement, policy, trust fund or arrangement: maintained by or for the benefit of or contributed to, or with respect to which there is potential liability, by either the Company or any Subsidiary or any trade or business, whether or not incorporated (an "ERISA Affiliate"), that together with the Company and Subsidiaries would be deemed a single employer" within the meaning of section 4001 of ERISA or section 414 of the Internal Revenue Code of 1986 (the "Code") for the benefit of any employee or former employee of the Company or any Subsidiary or any ERISA Affiliate or their beneficiaries (the "Plans"), whether or not such Plan has terminated except for any arrangements or plans which will be paid by Seller or its parent company following the Closing unless Purchaser can reasonably 18 expect to have any liability with respect thereto. (b) With respect to each of the Plans (each of which is listed on Schedule 5.16(a)), Seller has heretofore delivered or made available to Purchaser true and complete copies of each of the following documents; (i) copy of the Plans (including all amendments thereto); (ii) a copy of all Summary Plan Descriptions (including any Summary of Material Modifications); (iii) a copy of the annual report together with all schedules and attachments thereto, if required under ERISA, with respect to each such Plan for the last year; (iv) if the Plan is funded through a trust or any third party funding vehicle, a copy of the trust or other funding agreement (including all amendments thereto) and the latest financial statements thereof; (v) the most recent determination letter received from the Internal Revenue Service with respect to each Plan that is intended to be qualified under Section 401 of the Code; (vi) the most recent determination Letter received from the Internal Revenue Service with respect to each Plan and related trust that is recognized as exempt under Section 501(c) of the Code; and (vii) the most recent valuation of the present and future obligations under each Plan that provides post-retirement or post-employment health, life, accident insurance or other "welfare type" benefits, if any; (viii) the three most recent actuarial reports for any Plans which are defined benefit plans; and (ix) with respect to any non-qualified deferred compensation plans, a copy of the 19 top hat or excess benefit filing with the Department of Labor, or the annual reports for the last three years. (c) The Pension Benefit Guaranty Corporation has not instituted proceedings to terminate any Plan and no condition exists that presents a material risk that such proceedings will be instituted. (d) Neither the Company nor any Subsidiary nor any ERISA Affiliate, nor any Plan, nor any trust created thereunder, nor any trustee, fiduciary or administrator thereof nor, to the best of Seller's knowledge, any other "disqualified person" (as defined in section 4975 of the Code) or "party-in- interest" (as defined in section 3(14) of ERISA), has engaged in a transaction in connection with which it or any Subsidiary or any ERISA Affiliate, any Plan, any such trust, or any trustee, fiduciary or administrator thereof, or any officer, director or employee of either the Company or any Subsidiary or an ERISA Affiliate or any party dealing with the Plans or any such trust, including but not limited, to any disqualified person or party-in-interest, as such terms are defined herein, could be subject to either a civil penalty assessed pursuant to section 409 or 502(i) of ERISA or a tax imposed pursuant to section 4975 or 4976 of the Code. (e) Full payment has been made, or will be made in accordance with section 404(a)(6) of the Code, of all amounts which Seller, the Company or any Subsidiary or any ERISA Affiliate is required to pay under the terms of each Plan as of the last day of the most recent plan year thereof ended prior to the date of this Agreement, and all such amounts properly accrued through the Closing Date with respect to the current plan year thereof will be paid by Seller, the Company, a Subsidiary or such ERISA Affiliate on or prior to the Closing Date; and none of the Plans or any trust established thereunder has incurred any "accumulated funding deficiency" (as defined in Section 302 of ERISA and section 412 of the Code), whether or not waived, as of the last day of the 20 most recent fiscal year of each of the Plans ended prior to the date of this Agreement and no excise taxes are due or owing because of any accumulated funding deficiency with respect to any prior fiscal year of any Plan. Furthermore, full payment has been made of all insurance premiums applicable to each Plan that Seller, the Company or any Subsidiary or any ERISA Affiliate was required to pay as of the last day of the most recent plan year thereof ended prior to the date of this Agreement, and all such insurance premiums properly accrued through the Closing Date with respect to the current plan year thereof will be paid by Seller, the Company, a Subsidiary or such ERISA Affiliate on or prior to the Closing Date. (f) None of the Plans is a "multi-employer plan," as such term is defined in sections 3(37)(A) and 4001(a)(3) of ERISA or section 414(f) of the Code, or a Plan of the type described in Sections 4063 and 4064 of ERISA or in Section 413(b) of the Code (and the regulations promulgated thereunder). (g) No plan is under audit by either the Internal Revenue Service, the Department of Labor or any other government agency and the Company or any ERISA Affiliate has not initiated any administrative proceeding with any of these agencies regarding any Plan. (h) No "reportable event" within the meaning of section 4043(b) of ERISA, other than any such reportable event with respect to which the 30-day notice requirement is waived pursuant to section 4043(a) of ERISA, has occurred or is expected to occur with respect to any Plan. (i) Nothing has occurred since the adoption of the Plans which resulted or could result in the revocation of the determination or loss of the qualification referred to in subsection (b)(iv) hereof. (j) Each of the Plans has been operated and administered in all material respects in accordance with applicable laws, including, but not limited to, ERISA and the Code. 21 (k) Except as set forth in Schedule 5.l6(k), and except for payments to be made by Seller and not the Company or any Subsidiary the consummation of the transactions contemplated by this Agreement will not (i) entitle any current or former employee or officer of the Company, any Subsidiary or any ERISA Affiliate to severance pay, unemployment compensation or any other payment, except as expressly provided in this Agreement, or (ii) accelerate the time of payment or vesting, or increase the amount of compensation due any such employee or officer. (l) There are no material pending or, to the knowledge of Seller, threatened claims by or on behalf of any of the Plans, by any employee or beneficiary covered under any such Plan, or otherwise involving any such Plan, any trustee, administrator or fiduciary thereof, the Company or any Subsidiary or any ERISA Affiliate or any officer, director or employee of the Company or any Subsidiary or any ERISA Affiliate with respect to any such Plan (other than routine claims for benefits). (m) No underfunded defined benefit plan has been, during the five year period prior to the closing date, transferred out of the controlled group of companies (within the meaning of Section 414 of the Code) of which the Company is a member. 5.17 Representations Regarding Tax Matters. ---- ------------------------------------- (a) The Company and the Subsidiaries (or an affiliate, including Seller) have duly and timely filed (including extensions), with the appropriate United States, state, local and other governmental agencies all tax returns and reports due on or before the date hereof and will duly and timely file (including extensions) (i) all such tax returns and reports due with respect to the Company and each of the Subsidiaries between the date hereof and the Closing Date, and (ii) all tax returns and reports relating to the Company and each of its Subsidiaries with respect to all periods prior to the Closing Date regardless of whether such tax returns and reports are due 22 before or after the Closing Date; such tax returns and reports have been prepared, or will be prepared, in accordance with all Legal Requirements and are, or will be, accurate and complete in all material respects; each of the Company and each of the Subsidiaries (or an affiliate) has paid, will pay in a timely manner (including extensions), or has made appropriate provisions, including the withholding of payroll taxes, for the payment of all taxes due and payable as reflected by such returns (it being understood that no representation is being made in this Section that all positions taken on all such returns and reports will ultimately be sustained). In particular, but without limitation, the income, deductions, gains, losses, credits and other relevant items of the Company and each of the Subsidiaries, for any taxable period ending on or before the Closing Date, and all taxable periods that include the Closing Date, but only with respect to the days in such period up to and including the Closing Date, have been, or will be, included in the Seller's consolidated federal income tax return in accordance with all Legal Requirements. All items of income and deduction arising on the Closing Date will be reflected in the tax returns filed with respect to that date. (b) The Company is, and shall continue to be through Closing Date, a "Section 338(h)(10) Target" within the meaning of (S)1.338(h)(10) - 1(c) of the Treasury Regulations. (c) Seller is a member of a "consolidated group" (as defined in Section 1502 of the Internal Revenue Code) of which K-III Communications Corporation is, and since Seller's formation has been, the Parent. (d) To the best of Seller's knowledge, the "inside basis" of the Seller for tax purposes is equal to the "outside basis." (e) There are no deferred intercompany transactions, reorganizations, or transactions involving stock and/or securities of Seller or any of its Subsidiaries. 23 5.18 Intellectual Property and Curricula. ----------------------------------- (a) Schedule 5.18 hereto contains an accurate and complete description of all copyrights, trademarks, service marks, trade names, assumed names and patents, and all applications therefor which are used in connection with the operations of, or otherwise relate to, the Schools (the "Trademarks") together with the record owner of each such Trademark. Schedule 5.18 hereto also sets forth all registrations (including the jurisdictions thereof) of each Trademark. Each Trademark is owned by the Company or the Subsidiary set forth on Schedule 5.18 as its owner, free and clear of all Encumbrances. None of Seller, the Company or any Subsidiary has been sued or, to the best of Seller's knowledge, threatened with suit for infringement, violation or breach with respect to any Trademark, and, to the best of Sellers' knowledge, no basis exists for any such suit. None of Seller, the Company or any Subsidiary is on notice of any infringement, violation or breach of any Trademark by any other Person. To the best of Seller's knowledge, the Company or a Subsidiary has the exclusive right to use each trade name included among the Trademarks as an assumed business name in the states in which such tradename is used. (b) To the best of Seller's knowledge, no curricula or course materials (the "Curricula") or other products used, distributed, marketed or sold by the Company or any Subsidiary, or any know-how, trade secrets, Trademarks, designs, styles, or designations used by the Company or any Subsidiary (all of the foregoing, excluding the Curricula, being referred to as the "Intellectual Property") infringes on any copyrights, trademarks, patents or other rights of any Person and neither Seller, the Company, nor any Subsidiary has received any claims that any such infringement has occurred. Except as set forth on Schedule 5.18, neither Seller, the Company nor any Subsidiary has granted, nor to the Seller's best knowledge are there any third parties who 24 claim to have been granted, the rights to any Intellectual Property or Curricula used, distributed, marketed or sold by the Company or any Subsidiary; and to the Seller's best knowledge there is no basis for any such claim or claims. The Intellectual Property constitutes all of the know-how, trade secrets, Trademarks, designs, styles and designations necessary to the operations of the Schools as presently conducted. 5.19 Contracts and Commitments. ------------------------- (a) Except as set forth in Schedule 5.19, neither the Company nor any Subsidiary is a party to or bound by any: (i) Loan or credit agreement providing for the extension of credit for borrowed money to employees; (ii) Service, employment, consulting, retainer or similar agreement which is not terminable on 90 days' notice or less without penalty or obligation to make payments by reason of such termination or which requires the payment of amounts in excess of $25,000 per annum or $5,000 upon severance; (iii) Covenant not to compete or confidentiality agreement which is material to the business, financial condition or results of operations of the Company or any Subsidiary; (iv) (a) Lease or similar agreement under which the Company or any Subsidiary is a lessor of, or makes available for use by any third party, any personal property owned by the Company or any Subsidiary, (b) continuing contract for the future purchase of materials, supplies or equipment, (c) management, service, printing, advertising, public relations, consulting or other similar type of contract in any one case that has an aggregate future liability in excess of $10,000 and that is not terminable by the Company or any Subsidiary on 90 days' or less notice for a cost of less than $10,000; 25 (v) option to purchase real property; (vi) agreement or contract under which the Company or any Subsidiary has borrowed any money or issued any note, bond, indenture or other evidence of indebtedness or directly or indirectly guaranteed indebtedness, liabilities or obligations of others (other than endorsements for the purpose of collection in the ordinary course of business) in an amount in excess of $10,000 in any one case or $50,000 in the aggregate; which will not be satisfied or released on or prior to the Closing Date. (vii) distribution or sales agreement which involved the payment of fees or commissions by the Company or any Subsidiary in excess of $5,000 in any one case or $25,000 in the aggregate, during the year ended December 31, 1996 (provided, that neither Seller, the Company nor any Subsidiary is party to any agreement providing for payment of commissions to sales representatives, whether employees or independent contractors); (viii) mortgage, pledge, security agreement, deed of trust or other document granting an Encumbrance (including Encumbrances upon properties acquired under conditional sales, capital leases or other title retention or security devices) any of which is material to the business, financial condition or results of operations of the Company or any Subsidiary; (ix) articulation agreement; and (x) any other agreement, contract, lease, license, commitment or instrument which was not made in the ordinary course of business and which involves future payments or performance valued in excess of $10,000 in any one case or $50,000 in the aggregate. (b) Each agreement, contract, lease, license, commitment or instrument of the Company or any Subsidiary described on Schedule 5.19 as an exception to subsection 5.19(a) above (the "Material Contracts") is a valid and binding obligation of the Company or such Subsidiary, 26 respectively, and, assuming that such Material Contract is a valid and binding obligation of the other party or parties thereto, is in full force and effect, except such Material Contracts that have been fully performed by each of the parties thereto and under which none of the parties thereto has any further rights or obligations, or except as disclosed on Schedule 5.19. Neither the Company nor any Subsidiary is and, to the knowledge of Seller, the other parties are not (in each case with or without the lapse of time or the giving of notice, or both) in breach or default in any respect under any Material Contract, beyond applicable grace periods, except for such breaches and defaults which, individually or in the aggregate, do not, and, insofar as reasonably can be foreseen, in the future will not, entitle a party to the Material Contract to terminate the Contract or claim damages in excess of $10,000 or have a material adverse effect upon the business or operations of the Company or any Subsidiaries. 5.20 Labor Matters. (a) Neither the Company nor any Subsidiary is a party to any collective bargaining agreement or is bound to any union or other similar employee representative. To the Seller's knowledge, with respect to the Company and the Subsidiaries, there are not (a) matters pending before the National Labor Relations Board or any similar state or local labor agency or (b) labor strikes, slowdowns or stoppages pending or threatened. (b) Schedule 5.20 lists all material written employee manuals, employment policies, contracts, agreements and other instruments which relate to, or arise out of, the employment of any person by the Company or any Subsidiary. Other than those disclosed in Schedule 5.20, neither the Company nor any Subsidiary has entered into any material employment agreements or other contracts or arrangements with respect to the performance of personal services. To the best of Seller's knowledge, the Company and each Subsidiary has performed all obligations required to be 27 performed by it under all contracts, agreements and other instruments described in Schedule 5.20. There are no provisions in any such contracts, agreements or other instruments which would in any way impact or restrict the Company or any Subsidiary as a result of the execution, delivery or performance of this Agreement. Neither the Company nor any Subsidiary is in default under any such contract, agreement or instrument and, to best of Seller's knowledge, no other party to any such contract, agreement or instrument is in default thereunder, nor does any condition exist which, with notice or lapse of time or both, would constitute a default thereunder by Seller or any Subsidiary or, to the best of Seller's knowledge, by any other party thereunder. Seller's representations herein relate to all material contracts, agreements and other instruments, whether written or oral, expressed or implied, to which the Company or any Subsidiary is a party or otherwise relating to or affecting any of their assets, properties, operations or employees. (c) Seller represents and warrants that no activity or proceeding of any labor organization (or representative thereof) to organize any unorganized employees of the Company or any Subsidiary, and no strike, slowdown, work stoppage, lockout or other collective labor actions by or with respect to any employees of the Company or any Subsidiary is in progress or has, to the knowledge of Seller, been threatened. (d) Except as set forth in the attached Schedule 5.11, Seller represents and warrants that there is no litigation, action, suit, investigation, claim, grievance, labor dispute, or other proceeding pending or, to the best of Seller's knowledge, threatened against or affecting the Company or any Subsidiary before any federal, state, local or other governmental or regulatory authority, any private agency or arbitrator, or between the Company or any of its Subsidiaries and any of the Company's or any Subsidiary's employees; and that Seller, the Company and each Subsidiary have complied with all Legal Requirements relating to the employment of labor, including the provisions thereof 28 relating to wages, hours, collective bargaining, and the payment of Social Security and other payroll and/or withholding taxes, and is not liable for any arrears of wages or any tax or penalty for failure to comply with any of the aforesaid Legal Requirements, including, but not limited to, the National Labor Relations Act, the Occupational Safety and Health Act of 1970, the Employee Retirement Income Security Act of 1974, Title VII of the Civil Rights Act of 1964, the Fair Labor Standards Act, the Age Discrimination in Employment Act of 1967, the Immigration Reform and Control Act of 1986, Executive Order 11246, or any similar Legal Requirements of the states in which the Schools operate and neither Seller nor the Company have knowledge of, or have received or been put on notice of any violation or alleged violation of any such Legal Requirement. Seller represents and warrants that nothing has come to the attention of Seller which would reasonably suggest that any present or former employee of the Company or any Subsidiary has or is likely to make any claim against Seller by virtue of any employment-related health defect or disease. (e) Purchaser does not assume any obligations of any kind with respect to any claim, demand, suit or liability with respect to any Workers' Compensation claim or Unemployment Compensation claim, if any, in process prior to the Closing Date, or which occur out of any accident or injury occurring prior to the Closing Date and Seller hereby represents and warrants that none so exist or if one arises after the Closing Date from injuries occurring prior to the Closing Date, it will indemnify Purchaser for any amounts expended as a result of such injury to employees of the Company or any Subsidiary. (f) The Company and the Subsidiaries have no knowledge of, and have not received or been put on notice of any material violation or alleged violation of any Legal Requirement. The Company and the Subsidiaries are not in default with respect to any material Legal Requirement or order, writ, judgment, award, or decree of any regulatory authority or private agency or arbitrator 29 applicable and material to the Company or any Subsidiary, or their respective assets, properties, operations or employees. (g) For the period from March 7, 1994 through the date hereof, the Company and each Subsidiary has been in compliance with the Worker Adjustment and Retraining Notification Act ("WARN") and any other similar applicable state and/or local laws regarding employees, and, if applicable, it provided its employees with such advance notice of termination of employment as required by WARN, or other applicable state or local laws. Seller hereby covenants to indemnify and hold Purchaser harmless from and against any and all claims, charges, suits, demands, damages or liability, arising out of or relating to the Company's or any Subsidiary's noncompliance with WARN or other applicable state or local laws to the extent such claims relate to actions taken by the Company or any Subsidiary during the period from March 7, 1994 through the date hereof. 5.21 Location of Assets. The tangible assets owned or leased by the Company or any Subsidiary are generally suitable and adequate and are located on the Real Estate or at one of the locations subject to the Leases. 5.22 Insurance. The policies of fire, liability, worker's compensation and other forms of insurance described in Schedule 5.22 hereto are in effect with respect to the Company and the Subsidiaries, shall stay in effect through the Closing Date and provide adequate insurance coverage with respect to the Company and each Subsidiary. 5.23 Recruitment; Admissions Procedures; Attendance; Reports; Refunds. Schedule 5.23(a) attached hereto is a complete list of all written policy manuals and other written statements of instruction relating to (a) recruitment of students for the Schools, including procedures for assisting in the application by prospective students for direct or indirect state or federal financial assistance; (b) admissions procedures, including any descriptions of procedures for 30 insuring compliance with Legal Requirements and ACICS requirements applicable to such procedures; and (c) procedures for encouraging and verifying attendance, minimum required attendance policies, and other relevant criteria relating to course performance requirements and completion (all of the foregoing, collectively, the "Policy Guidelines"). Seller has delivered or made available to Purchaser true, correct and complete copies of all Policy Guidelines. Except as disclosed on Schedule 5.23(b) attached hereto or in any other schedule to this Agreement, the operations of the Company, the Subsidiaries and each School have, in all material respects, been conducted in accordance with the Policy Guidelines and all relevant standards imposed by applicable accrediting bodies (including ACICS), and other agencies administering state or federal governmental financial assistance programs in which the Schools participate, and other applicable Legal Requirements. The Company and/or the applicable Subsidiary has submitted all reports, audits, and other information, whether periodic in nature or pursuant to specific requests, for the Schools ("Compliance Reports") to all agencies or other entities with which such filings are required relating to its compliance with (i) ACICS standards, (ii) Legal Requirements governing programs pursuant to which the Schools or their students receive student financial assistance funding, and (iii) all articulation agreements between the Schools and degree granting colleges and universities in effect as of the date hereof, except where failure to submit such Compliance Reports would not have a material adverse effect on the business or operations of the Company or any Subsidiary. All forms and records of each School have been prepared, completed, maintained and filed in all material respects in accordance with all applicable Legal Requirements, and are true and correct in all material respects. All financial aid grants and loans, disbursements and record keeping relating thereto have been completed in compliance with all Legal Requirements in all material respects, and there are no material deficiencies in respect thereto. 31 5.24 Refunds. To the best of Seller's knowledge, the Company and each Subsidiary is in compliance in all material respects with all laws, regulations, rules and requirements of Federal, state and local government and of accrediting organizations, with respect to student tuition and tuition refund policies that are material to any School. To the best of Sellers' knowledge and except (i) as previously disclosed in prior audits by DOE or (ii) to the extent that such finding or non-conformity would not have a material adverse affect on the Company or any Subsidiary, no student at any School has been funded prior to the date for which such student was eligible for funding, and such student's records conform in form and substance to all relevant regulatory requirements. Since January 1, 1995, there have been no material amounts claimed by any government agency or accrediting organization from the Company or any Subsidiary as a result of any self-evaluation study or audit which is not reflected on the December Balance Sheet or been paid. 5.25 Title IV and Accreditation Compliance. With the exception of the School in Piscataway, New Jersey which operates as a branch of the Montclair, New Jersey School, each School is certified by the DOE as an eligible institution under Title IV and is a party to, and to the best of Seller's knowledge is in compliance in all material respects, with, a valid program participation agreement with the DOE with respect to the operations of such School. Except as set forth in Schedule 5.25 attached hereto, none of the Seller, the Company or any Subsidiary has received any notice, not previously resolved without any ongoing liability, with respect to any alleged violation of the rules or regulations of the DOE or other governmental entity, or ACICS, by any School, including sales and marketing activities, or the terms of any program participation agreement to which any School is or was a party. If any such notices have been received and not resolved without any ongoing liability, Seller has disclosed its receipt and disposition to Purchaser 32 in writing prior to the execution of this Agreement. Except as set forth on Schedule 5.25 attached hereto, Seller is not aware of any investigation or review of the Company's or any Subsidiary's student financial aid programs or any review of accreditation of any School by any governmental entity or ACICS. As of the date hereof, no School has more than eighty-five percent (85%) of its revenues pursuant to Title IV Programs or derived from Title IV funds as determined in accordance with 34 C.F.R. (S) 600.5(d), and at no time after July 1, 1994 has more than eighty-five percent (85%) of the revenues of any School been pursuant to Title IV programs or derived from Title IV funds. 5.26 Cohort Default Rates. Schedule 5.26 attached hereto sets forth the published cohort default rate for each School, as stated by the DOE and issued to such School for each year in which such data is available. To the best of Seller's knowledge, such schedule is materially accurate in all respects. None of the Company or any Subsidiary has received any notice as to the calculation or amount of the cohort default rates for any School for the year ended September 30, 1995. 5.27 Licenses. Schedule 5.27 sets forth each and every material accreditation, license, permit and other similar regulatory approval issued by any Federal, state or local agency or private licensing or accrediting organization to which the Company or any Subsidiary is subject on the date hereof and which is material to the business of the Company or any Subsidiary (the "Licenses and Permits"). Except as set forth on Schedule 5.27, there are no Licenses and Permits relating to any School which either lapsed or were revoked since January 1, 1995. Each of the Company and the Subsidiaries currently maintain all material Licenses and Permits necessary to conduct its respective business and operations as presently being conducted, except where the failure to do so would not have a material adverse effect on its operations or financial condition. 33 No application made by the Company or any Subsidiary for any Licenses and Permits during the last three (3) years has been denied. Except as set forth on Schedule 5.27, none of the Company, Seller or any Subsidiary has received notice that any of the Licenses and Permits will not be renewed and to the best of Seller's knowledge, there is no basis for nonrenewal. 5.28 Grants and Aid. Schedule 5.28 sets forth, to Seller's knowledge, each and every type of student loan, grant, aid, tuition assistance, scholarship, guarantee or similar program pursuant to which students at any of the Schools received aid toward tuition during the period from and after January 1, 1995 and which is material to the business or financial condition of any School. 5.29 Transaction Approvals. To the best of Seller's knowledge, there exists no fact or circumstance attributable to Sellers, the Company or any Subsidiary that would cause DOE, ACICS, state educational regulatory authorities or any other governmental entity whose authorization, consent or similar approval is a requirement for the consummation of the transactions contemplated by this Agreement to refuse to deliver such authorization, consent or similar approval. 5.30 Delivery of Documents. True, correct and complete copies of all Leases, Material Contracts, Policy Guidelines and other documents, instruments, agreements and records of the Company and the Subsidiaries described on schedules to this Agreement or relating to the assets, liabilities and the operations of the Company and the Subsidiaries, the representations and warranties of Sellers contained in this Agreement or the operation of the Schools, have been delivered or made available to Purchaser. 5.31 Disclosure. Neither this Agreement, nor any of the schedules, exhibits, attachments, written statements, documents, certificates or other items supplied to Purchaser in writing by or on behalf of Seller with respect to the transactions contemplated hereby, contain any 34 untrue statement of a material fact or omit a material fact necessary to make such statements not misleading in light of the circumstances in which such statements were made. VI. Representations and Warranties of Purchaser. Purchaser represents and warrants to Seller on the date hereof as follows: 6.01 Execution, Delivery and Performance. This Agreement constitutes and upon execution and delivery the other agreements and instruments referred to in this Agreement that Purchaser is executing and delivering ("Purchaser's Additional Agreements") will constitute, valid and binding obligations of Purchaser enforceable in accordance with their terms (except as the enforceability thereof may be limited by the Bankruptcy Exceptions). Neither the execution, delivery or performance by Purchaser of this Agreement or Purchaser's Additional Agreements nor the consummation by Purchaser of the transactions contemplated hereby or thereby nor the consummation of the transactions herein or therein contemplated (a) will violate in any material fashion any statute or law or any rule, regulation, judgment, or order of any court or governmental authority, or (b) will violate, conflict with, or constitute a default, right to accelerate, or loss of rights under, or result in the creation of any material lien, charge or encumbrance pursuant to (i) the Certificate of Incorporation or By-Laws of Purchaser or (ii) any contract, commitment, agreement, lease, license, mortgage, deed of trust, or restriction of any kind to which Purchaser is a party or by which it or its properties or businesses may be bound or (c) will cause, or give any person grounds to cause, the maturity of any liability or obligation of the Purchaser to be accelerated or will increase any such liability. 6.02 Organization, Standing and Qualification of Purchaser. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite power and authority and is entitled to carry on its business as now being conducted; 35 is duly qualified to do business as a foreign corporation in every jurisdiction where failure to be so qualified would have a material adverse effect on its business or operations. 6.03 Shareholder Approval. No approval by the stockholders of Purchaser is required with respect to the transactions contemplated by this Agreement or the other agreements and instruments referred to in this Agreement. 6.04 Litigation. To the knowledge of Purchaser, there is no claim, legal action, suit, arbitration, governmental investigation, or other legal or administrative proceeding in progress or pending or, to the knowledge of Purchaser, threatened against Purchaser or the transactions contemplated by this Agreement, which if adversely determined would materially challenge the validity of this Agreement or any action taken or to be taken by Purchaser pursuant to this Agreement. 6.05 Purchase for Investment. Purchaser is purchasing the Shares for its own account for investment and not with a view to the distribution or resale thereof. 36 6.06 Purchaser's Examination. (a) Purchaser is purchasing the Schools as a going concern, and is not relying on any forecasted operating results or budgets prepared by or on behalf of Seller, the Company or the Subsidiaries but rather upon its own plan of operations and financial forecasts for the Schools; (b) Nothing has come to Purchaser's attention that indicates that any of the representations or warranties set forth in Article V are false, incorrect or inaccurate; and (c) No representation or warranty is being made by any of the Seller, the Company or any Subsidiary or any of their respective representatives as to the future operations or prospects of the businesses of the Schools. 6.07 Transaction Approvals. To the best of Purchaser's knowledge there exists no fact or circumstance attributable to Purchaser or any of its affiliates that would cause the DOE, ACICS, state educational regulatory authorities or any governmental entity whose authorization, consent or similar approval is a requirement for Purchaser to operate the schools or receive Title IV funds or for the consummation of the transactions contemplated by this Agreement, to refuse to deliver such consent, authorization or similar approval such that the Schools may operate in a manner substantially similar to their operations immediately prior to the Closing. VII. Covenants of Purchaser and Seller. 7.01 Governmental Filings. Seller and Purchaser will cooperate in preparing, and will each promptly file, their respective Pre-Merger Notification and Report Forms and any other information and documents required under the HSR Act, and each will promptly notify the other of any communication with respect to such filings from the United States Department of Justice or the Federal Trade Commission. Promptly following the execution of this Agreement, Seller and Purchaser agree to cooperate to take all acts and execute all documents as may be necessary to 37 receive approval under or exception from HSR for the purchase of the Shares from Seller as contemplated under this Agreement. All filing fees connected with such process shall be paid by Seller with one-half of such fees to be reimbursed to Seller by Purchaser at Closing. 7.02 Books and Records. For a period of seven years (7) after the Closing Date, no party shall destroy (or permit the destruction of) any of the books and records pertaining specifically to Seller, the Company, or any Subsidiary in such party's possession that may be required by any other party in connection with any tax audit, examination or other proceeding without first offering them to the other party in writing at least thirty (30) days prior to the date of their proposed destruction. Each party shall retain such records for longer than seven (7) years if notice is given by the other party within such seven (7) year period of any such proceeding requiring the records. After the date hereof, any party may inspect and make copies from such books and records related in any way to the Company, the Subsidiaries or the Schools which relates to their operations prior to the Closing in the possession of the other party on reasonable notice and at reasonable times. 7.03 Further Assurance. Purchaser and Seller each agrees that from and after the Closing Date, it shall use its reasonable efforts to obtain all consents and authorizations of third parties and to make all filings with and give all notices to third parties and execute all documents which may be necessary or reasonably required in order to more effectively transfer, convey and assign to Purchaser all of the business, assets, liabilities and property of the Company and the Subsidiaries as contemplated by this Agreement; provided, however, that this Section 7.03 shall not apply to licenses, accreditations, governmental approvals or third party sources for student tuition. 7.04 Operation of the Schools. Except as expressly contemplated by this Agreement, during the period from the date of this Agreement to the Closing Date (the "Interim Period"), Seller will cause the Company and each Subsidiary to (a) conduct its business and 38 operations according to its ordinary and usual course of business including, without limitation, the continuation of the Company's and Subsidiaries' zero balance cash management system, (b) use its reasonable efforts to preserve substantially intact its business organization, (c) use its reasonable efforts to keep available the services of its present officers and employees and to preserve present relationships with all parties having significant business dealings with it, (d) execute and deliver a sublease of any equipment which is leased to Seller but used and paid for by the Company or any Subsidiary, and (e) comply with all Legal Requirements in all material respects. Without limiting the generality of the foregoing, and, except as otherwise expressly provided in this Agreement, during the Interim Period, without the prior written consent of the Purchaser, which consent shall not unreasonably be withheld or delayed, Seller will cause the Company and each Subsidiary not to: (i) (a) create, incur or assume any long-term debt (including obligations in respect of capital leases in excess of $50,000 in the aggregate), or create, incur or assume any short-term debt which shall not be released, discharged or satisfied on or prior to the Closing; or (b) assume, guarantee, endorse or otherwise become liable or responsible (whether directly, contingently or otherwise) for the obligations of any other person; provided that the Company and each Subsidiary may endorse negotiable instruments in the ordinary course of business; (ii) increase in any manner the compensation of any of its directors, officers or other employees, except any such increase, granted in the ordinary course of business in accordance with its customary practices (which shall include normal periodic performance reviews and related compensation and benefit increases), or materially increase the rate or terms of any bonus, insurance, pension or other employee benefit plan, payment or arrangement made to, for or with any such directors, officers or key employees; or (iii) enter into any material agreement, commitment or transaction not in the ordinary 39 course of business (including, without limitation, any borrowing, capital expenditure or capital financing in excess of $50,000). 7.05 Public Announcements. Seller and Purchaser will consult with each other before issuing any report, statement or press releases or otherwise making any public statements with respect to this Agreement and the transactions contemplated hereby and neither of them shall issue any such report, statement or press release or make any such public statement prior to such consultation and the approval of the other party, except as in the reasonable judgment of counsel for the party may be required by law or may be appropriate in order to discharge its legally mandated disclosure obligations, in which case such party shall advise and confer with the other party before issuing any such report, statement or press release. 7.06 State Licenses. Upon execution of this Agreement, Purchaser agrees to use its best efforts, including incurring such costs as are necessary, to obtain all state licenses necessary for Purchaser to operate the Schools; provided, however, that Purchaser's failure or inability to obtain or continue any such licenses or accreditation shall not excuse Purchaser from its obligations under this Agreement including, without limitation, its obligation to purchase the Shares. Seller further agrees to sign, or cause the Company and each Subsidiary to sign, all documents necessary to obtain the foregoing licenses and accreditation, provided that neither Seller, the Company nor any Subsidiary shall be obligated to sign any documents obligating it to pay any monies prior to the Closing or to take any actions or refrain from taking any actions. 7.07 Guarantees, Letters of Credit, Surety Bonds. Schedule 7.07(a) sets forth a description of all guarantees issued by Seller or Seller's parent company as to certain obligations of the Company or the Subsidiaries to third parties, including, without limitation, lessors and state governments (the "Guarantees"). Purchaser agrees prior to the Closing Date to use its reasonable 40 best efforts (excluding payments or delivery of collateral by Purchaser or delivery of guarantees from parties other than Purchaser) to have Seller released from all Guarantees. In the event Purchaser is unable to obtain any of such releases prior to the Closing Date, Purchaser shall deliver to Seller at Closing an indemnification agreement, together with a security bond, letter of credit or other instrument backstopping such indemnification, indemnifying and holding harmless Seller from and against any and all loss, liability or damage arising out of or relating to its obligations under the Guarantees in form and substance reasonably satisfactory to Seller. Schedule 7.07(b) sets forth letters of credit and surety bonds issued for the benefit of the Company or any of the Subsidiaries (together, the "LCS"). Purchaser shall provide substitute letters of credit or surety bonds at Closing which will enable Seller to receive delivery of the LCS undrawn by the recipients. Notwithstanding the foregoing, in no event shall Purchaser be required to pay monies in excess of $50,000 per annum in the aggregate in order to obtain the bonds and letters of credit required pursuant to the preceding sentence of this Section 7.07. 7.08 Intercompany Accounts. Effective as of the close of business on the day preceding the date on which the Closing occurs, Seller shall cause all accounts payable or accounts receivable between Seller or any of Seller's affiliates (other than the Company and its Subsidiaries), on the one hand, and the Company or any Subsidiary, on the other hand (except for receivables due to the Company or the Subsidiaries from their respective employees, which receivables are listed on Schedule 7.08 attached hereto), to be eliminated in such a manner as to cause neither a taxable gain nor a taxable loss to the Company or any Subsidiary. 7.09 Election to Treat Sale of Shares as Sale of Assets. Seller agrees, if so directed by the Purchaser, to join with Purchaser in making an election under Section 338(h)(10) of the Code (and any corresponding elections under state and 41 local tax law) (collectively, an "Election") with respect to the purchase and sale of the stock of the Company hereunder. 7.10 Tax Returns. Seller shall be responsible for the preparation of all tax returns for periods ending on or before the Closing Date. Purchaser shall cooperate in the preparation of those returns. Purchaser shall be responsible for the preparation of all tax returns for periods ending after the Closing Date. Each of Seller and Purchaser will give the other party access to any records in its possession (or its affiliates possession) that the other party may reasonably request in order to prepare its tax returns. Each of Seller and Purchaser agrees not to destroy (or permit to be destroyed) any such records without first giving notice to the other party hereto and granting the party receiving such notice a reasonable opportunity to take possession of such records. 7.11 Employees. (a) Purchaser agrees that all employees of the Company and the Subsidiaries will be entitled to enroll in Purchaser's Group Medical and Hospitalization Plan and that coverage thereunder shall be effective without any pre-existing limitation condition exclusions from and after the Closing Date. (b) Seller agrees to be responsible for and pay to the affected persons in accordance with the severance policies of the Company and its Subsidiaries as in effect on the date of the Agreement (the "KGS Severance Policy") an amount equal to severance benefits accruing for service through the Closing Date to those employees of the Company or the Subsidiaries whose employment is terminated by Purchaser, the Company or any Subsidiary within the later of ninety (90) days after the Closing Date and thirty (30) days following issuance of a DOE approval notice as defined in Section 11.01 in circumstances requiring the payment of severance benefits to such employee as determined under the KGS Severance Policy. In no event shall any employee who receives or is 42 entitled to receive severance from Seller under this provision receive severance under a program of Purchaser. (c) Purchaser agrees to recognize years of service with the Company or any Subsidiary or any of their predecessors for purposes of service and vesting as required under any fringe benefit or other plan maintained for the benefit of employees of the Company or any Subsidiary after the Closing except for any grants under Purchaser's stock option programs. 7.12 Due Diligence. For a period of fourteen days from the date of this Agreement, Purchaser shall have the right to conduct a due diligence review of the Company with respect to the following items: accounting, corporate records, contracts, litigation, environmental issues, student population, financial aid records, current class starts and marketing information. This review shall be conducted at reasonable times and under reasonable circumstances and Seller shall cooperate fully with such review. Seller shall furnish the representatives of Purchaser during such period with all such information and copies of such documents concerning the matters subject to the review as such representatives may reasonably request and cause Seller's officers, employees and agents to cooperate fully with such representatives, and to make full disclosure to Purchaser of all material facts affecting the matters subject to the review. 7.13 Conduct of Business Through Closing From the date hereof through and including the Closing Date, and except as may otherwise be expressly provided for in this Agreement: (a) Seller shall conduct the business of the Company in a manner consistent with past practice and shall not engage in any transaction or enter into any material agreement or commitment outside the ordinary course of business; (b) Seller shall not knowingly take any action, or fail to take any action, which would 43 make any representation or warranty contained in this Agreement materially untrue or prevent any condition to closing of the transactions contemplated hereby from being satisfied provided, however, Seller shall not be required to take any action out of the ordinary course of business which requires the expenditure of more than $50,000; (c) Seller shall not (i) permit or cause any material change in the business or financial condition of the Company and Subsidiaries; (ii) make any commitment for capital expenditures which, individually or in the aggregate, exceed Fifty Thousand Dollars ($50,000) without the prior written consent of Purchaser, (iii) make any material changes in any method of marketing, management or operation; (iv) amend any contracts, waive any rights under any contracts or enter into any contract that is not assignable to Purchaser without the consent of the other party thereto, (v) agree or commit (whether in writing or otherwise) to do any of the foregoing after the Closing Date, in each instance without the prior written consent of Purchaser. (d) Seller shall, with respect to the Company and Subsidiaries, maintain in full force and effect all insurance existing as of the date hereof. (e) except upon the prior written consent of Purchaser, Seller shall not settle, discharge, pay or otherwise satisfy any claims or causes of action (absolute, accrued, contingent or otherwise) other than in the ordinary course of business, nor shall Seller agree or commit to do any of the foregoing after the Closing Date without the prior written consent of Purchaser. (f) Seller promptly shall notify Purchaser of, and furnish Purchaser with any information Purchaser may reasonably request with respect to, the occurrence of any event or the existence of any fact that would result in Seller's representations and warranties not being true in all material respects. 44 7.14 Other Offers. Until May 31, 1997, Seller and/or its directors, officers, affiliates and advisors shall not, directly or indirectly, (i) take any action to solicit, initiate, encourage, accept or agree to any negotiations regarding any Acquisition Proposal (as defined below); (ii) disclose any non- public information relating to the Company, the Subsidiaries or the Schools in connection with any Acquisition Proposal; or (iii) afford access to the assets, books or records of the Company, the Subsidiaries, or the Schools to, any person that, to the best of their knowledge, may be considering making, or has made, an Acquisition Proposal. The term "Acquisition Proposal" means any offer or proposal for, or any indication of interest in, the acquisition of the issued and outstanding capital stock or the assets of the Company or any Subsidiary or any material portion thereof, other than the transactions contemplated by this Agreement. The Seller and/or its directors, officers, affiliates and advisors shall forthwith terminate all pending negotiations with respect to any Acquisition Proposal by any person other than the Purchaser. 7.15 Estoppel Certificates. From the date of this Agreement through the Closing Date, with respect to the leases of real property in the name of the Company or any of the Subsidiaries, Seller shall use reasonable commercial efforts to obtain estoppel certificates from the lessors, provided however that such efforts need not include the expenditure of any monies by Seller. 7.16 Transaction Approvals. Immediately following the execution of this Agreement, Purchaser and Seller agree to work together to inform the DOE, all relevant state governmental authorities and all relevant accrediting agencies (the "Regulators") of the transactions contemplated by this Agreement. The parties shall solicit input from the Regulators regarding the process of obtaining approvals for Purchaser to operate the Company and each of the 45 Subsidiaries including, without, limitation approval for a resumption of Title IV funding. The parties shall use their best efforts to persuade the Regulators that all necessary approvals be granted as soon as possible after the Closing Date and to determine whether such approvals are likely to be forthcoming. 7.17 Purchaser's Licensing. Purchaser agrees that it will at all times, prior to a recision pursuant to Section 11 of this Agreement including, without limitation, during any Cure Period as defined in Section 11.02, use commercially reasonable efforts to secure all state, accrediting agency and DOE Approval Notices necessary to permit the resumption of Title IV funds and will not knowingly take or fail to take any commercially reasonable action which could jeopardize granting of any such approvals, provided however, Purchaser shall not be required to take any action that would change in any material manner the way the Schools were operated prior to the Closing Date nor shall Purchaser be required to take any action inconsistent with the other provisions of this Agreement including, without limitation, Section XI. 7.18 The CEC Interim Period. During the period beginning on the Closing Date and ending on the termination of Purchaser's conditional right to rescind pursuant to Section XI (the "CEC Interim Period"): (a) Purchaser will provide Company with working capital (i) in amounts consistent with ordinary practice in the twelve (12) months preceding the closing adjusted for the fact that Title IV funds may be unavailable during this period and (ii) to sustain the operations of the Company and each of the Subsidiaries. (b) Purchaser shall conduct the business of the Company in a manner consistent with past practice and shall not engage in any transaction or enter into any material agreement or commitment outside the ordinary course of business; 46 (c) Purchaser shall, with respect to the Company and Subsidiaries, maintain adequate insurance equivalent in all material respects to that in place immediately prior to the Closing Date; (d) Except upon the prior written consent of Seller, which consent shall not be unreasonably withheld, Purchaser shall not (i) permit or cause any material adverse change in the business or financial condition of the Company and Subsidiaries; (ii) make any commitment for capital expenditures, not previously planned, which, individually or in the aggregate, exceed Fifty Thousand Dollars ($50,000), (iii) make any material changes in any method of marketing, management or operation; (iv) amend any material contracts, waive any rights under any material contracts or enter into any material contract that is not assignable to Seller without the consent of the other party thereto, (v) agree or commit (whether in writing or otherwise) to do any of the foregoing after the Closing Date, unless such agreement is expressly conditioned on the termination of or Purchaser's failure to exercise Purchaser's right to rescind pursuant to Section XI; (vi) settle, discharge, pay or otherwise satisfy any claims or causes of action (absolute, accrued, contingent or otherwise) other than in the ordinary course of business, nor shall Purchaser agree or commit to do any of the foregoing after the Closing Date. 7.19 Purchaser's Financing. Purchaser shall use reasonable commercial efforts to secure the financing necessary to consummate the transactions contemplated by this Agreement. VIII. Conditions to Closing. 8.01 Conditions Precedent to Purchaser's Obligations. The obligation of Purchaser to consummate the transactions contemplated by this Agreement is subject to the fulfillment, at the option of Purchaser, at or prior to the Closing Date, of the following conditions: 47 (a) Bring-Down of Representations and Warranties. Purchaser shall have received a certificate of a duly authorized officer of Seller stating that the representations and warranties of Seller made in Article V of this Agreement are true in all material respects at and as of the Closing Date, except for representations and warranties specifically relating to a time or times other than the date hereof and except for changes permitted by, or necessitated by compliance with, this Agreement, with the same force and effect as if made on the Closing Date and all covenants and agreements required under this Agreement to be performed and complied with by Seller on or before the Closing Date have been performed and complied with in all material respects. (b) Opinion. Purchaser shall have received an opinion of Seller's in-house legal counsel in form reasonably satisfactory to Purchaser as to the matters set forth in Sections 5.01, 5.02, and 5.03. (c) No Material Adverse Change. Except for transactions permitted by in Article VII of this Agreement, since the date of this Agreement, there shall have been no material change in the business or financial condition of the Company or any Subsidiary and there shall have been no legal actions, suits, arbitrations, governmental investigations or other legal or administrative proceedings in progress, pending or threatened against Seller, the Company or any of the Subsidiaries or the transactions contemplated by this Agreement, which if adversely determined would have a material adverse effect on the Company or any Subsidiary, or would materially challenge the validity of this Agreement or any action taken or to be taken by Seller pursuant to this Agreement. (d) Incumbency Certificate. Purchaser shall have received a certificate of the secretary of Seller verifying the due election, authorization and incumbency of the officers of Seller executing this Agreement or any other agreement contemplated herein to be executed by 48 Seller. (e) Consents. Purchaser shall have received the consent to the transactions contemplated hereby from each party to the Leases and the Material Contracts described on Schedules 5.13 and 5.19 whose consent is required under such agreements and where the failure to obtain such consent would have a material adverse impact on the Company or any of the Subsidiaries. (f) Performance of Agreements. Each and all of the agreements of Seller to be performed on or before the Closing Date pursuant to the terms hereof shall have been performed in all material respects (including, without limitation, the delivery of all documents required to be delivered to Purchaser pursuant to Section 4.01 hereof). 8.02 Conditions Precedent to Seller's Obligations. The obligation of Seller to consummate the transactions contemplated by this Agreement is subject to the fulfillment, at the option of Seller, at or prior to the Closing Date, of the following conditions: (a) Bring-Down of Representations and Warranties. Seller shall have received a certificate from a duly authorized officer of Purchaser stating that the representations and warranties of Purchaser made in Article VI of this Agreement are true in all material respects at and as of the Closing Date, except for representations and warranties specifically relating to a time or times other than the date hereof and except for changes permitted by, or necessitated by compliance with, this Agreement, with the same force and effect as if made on the Closing Date and all covenants and agreements required under this Agreement to be performed and complied with by Purchaser on or before the Closing Date have been performed and complied with in all material respects. (b) Seller shall have received an opinion of Purchaser's legal counsel in form reasonably satisfactory to Seller to the matters set forth in Sections 6.01 and 6.02. 49 (c) Seller shall have received a copy of the resolutions of Purchaser, certified by the secretary of Purchaser, authorizing the execution, delivery and performance of this Agreement and Purchaser's Additional Agreements and the consummation of the transactions contemplated hereby and thereby. (d) Seller shall have received adequate assurances from Purchaser that until the termination of Purchaser's right to rescind pursuant to Section XI Seller will provide working capital (i) in amounts consistent with ordinary practice in the twelve (12) months preceding the Closing adjusted for the fact that Title IV funds may be unavailable during this period and (ii) sufficient to sustain the operations of the Company and each of the Subsidiaries. 8.03 HSR Approval. As a further condition precedent to the respective obligations of the parties hereunder, the waiting period required after the filing by Seller and Purchaser of their respective HSR Act Pre-Merger Notification and Report Forms, including any extensions of such period, shall have expired. IX. Indemnification. 9.01 Indemnification by Seller. Seller agrees to indemnify and hold harmless Purchaser, the Company and each of the Subsidiaries against and in respect of: (a) Any and all damage, loss or liability resulting from (i) any misrepresentation or breach of warranty of Seller set forth in this Agreement or (ii) non-fulfillment of any covenant or agreement, on the part of Seller, under this Agreement or any other agreements or instruments delivered by Seller in connection herewith; (b) Any and all loss, liability or damage suffered or incurred by reason of or in connection with any claim for finder's fee or brokerage or other commission arising by reason of any services rendered to Seller by UBS Securities L.L.C. or alleged to have been rendered by any 50 other person to or at the instance of Seller with respect to this Agreement or any of the transactions contemplated hereby; and (c) All litigation pending as of the Closing Date including, without limitation, those matters listed on Schedule 5.11. (d) Any and all damage, loss or liability suffered or incurred by reason of, or in connection with, any third party claim against the Company or any Subsidiary arising out of any event or events occurring prior to the Closing Date, regardless of whether such matters result from a breach of a representation or warranty by Seller; (e) Any and all actions, suits, proceedings, assessments, judgments, and all reasonable costs and reasonable legal and other expenses incidental to the enforcement of any of the foregoing. 9.02 Further Indemnification by Seller. Without limiting the generality of the foregoing Section 9.01 and notwithstanding the provisions of Section 9.06 hereof, Seller agrees to indemnify and hold harmless Purchaser against and in respect of: (a) Indemnification for Certain Tax Liabilities. (i) Seller shall indemnify and hold harmless Purchaser from and against any liability, loss or damage incurred by Purchaser, the Company, or any of the Subsidiaries, and any transferee, officer, director, stockholder or employee of the foregoing, from and against the payment of any and all Tax Liabilities (as that term is defined in clause (ii) below), and for all out-of-pocket costs and expenses (including reasonable attorneys' fees) incurred by Purchaser, the Company or any Subsidiary and any transferee, officer, director, stockholder or employee of the foregoing, in connection with any action for enforcement of Seller's obligations under this paragraph in which Purchaser, the Company or a Subsidiary is the prevailing party. (ii) For purposes of this Section 9.02(a), the term "Tax Liabilities" or "Tax Liability" 51 shall mean any and all liabilities of Seller, the Company, or the Subsidiaries for taxes (including liabilities incurred by reason of the Company or the Subsidiaries being a member of any affiliated group (as defined in Section 1504(a) of the Code) for any time up to and including the Closing Date), whether federal, state, county, local or foreign, based upon or measured by income, and all profits, franchise, gross receipts, withholding, payroll, stamp, sales, use, employment, occupation, property, excise, recapture, value-added, unitary and other taxes (including, without limitation, interest, additions to tax, additional amounts, or penalties thereon or penalties for failure to file a return or report, and taxes resulting from any election pursuant to Section 338 of the Code in connection with the sale of the Shares pursuant hereto), imposed from time to time by any taxing authority, except liabilities reflected on the Final Closing Date Balance Sheet for the purpose of determining the purchase price adjustment pursuant to Section 2.03 (but only to the extent of the amount at which such liabilities are actually reflected thereon). Such Tax Liabilities include, without limitation, liability imposed in the capacity of transferee or successor or with respect to any group of corporations or joint venture of which the Company or any of the Subsidiaries have been a member at any time up to and including the Closing Date. Such Tax Liabilities also shall include, without limitation, any and all liabilities for taxes resulting from any transaction pursuant to this Agreement, including, without limitation, any liability arising from the Company, or any of the Subsidiaries ceasing to be a member of the affiliated group including Seller, or any failure of the Company or any of the Subsidiaries to be included in any consolidated, combined or unitary tax return with Seller, any and all tax liabilities attributable to the Election contemplated under Section 7.09 of this Agreement, and any and all tax liabilities arising as a result of the distribution of appreciated real or other property by the Company to the Seller or an affiliate of the Seller, which liabilities shall be the sole responsibility of Seller. If Seller breaches any of the obligations under 52 Section 7.09 of this Agreement and Purchaser, the Company or any Subsidiary incurs liability for taxes by reason of an Election, Seller will indemnify and hold harmless Purchaser, the Company or any Subsidiary from any such tax liability to the extent such tax liability exceeds what it would have been had Seller not breached such obligation. Seller also will indemnify and hold harmless Purchaser, the Company or any Subsidiary against all Tax Liabilities of Seller and any other corporation (other than the Company or the Subsidiaries) affiliated with Seller, as a result of S 1.1502-6 of the Treasury Regulations or any similar provisions of Federal, state or local law. (iii) In the event that a claim shall be made by the Internal Revenue Service ("IRS") or any other taxing authority for Tax Liabilities which claim, if successful, may result in an obligation on the part of Seller to indemnify Purchaser, the Company or any Subsidiary, and any transferee, officer, directors, stockholder or employee of the foregoing, pursuant to this Section 9.02(a), Seller shall have sole control over the conduct of a contest undertaken by Seller under this clause (iii) or other disposition of such claim, provided, however, that in the event that Seller receives notice of any such claim; Seller (A) shall promptly notify Purchaser in writing of such claim (specifying in reasonable detail the basis of such claim, action, or suit and facts pertaining thereto) and of any action taken or proposed to be taken from time to time by the IRS or any other taxing authority in respect thereto, (B) shall have reasonably determined, and agreed in writing, that such claim, if determined adversely to Purchaser, the Company or any Subsidiary, would result in a Tax Liability for which Seller is required to indemnify Purchaser against under this Section 9.02(a), (C) shall keep Purchaser informed of the progress of any such contest or any such other disposition, and (D) if such claim is to be contested by filing a claim for refund, shall provide the funds sufficient to pay any tax attributable to such claim, together with any penalties, additions to tax, additional amounts, or interest attributable to such tax, necessary to be paid to proceed with such 53 claim for refund. In the event that Seller receives a settlement offer which is acceptable to Seller or decides to make any settlement offer to the IRS or any other taxing authority with respect to contest undertaken by Seller under this subparagraph, Seller shall notify Purchaser thereof. Purchaser shall, and shall cause the Company and each Subsidiary to, cooperate in any contest as and to the extent reasonably requested by Seller, and Seller shall reimburse Purchaser's out-of-pocket costs and expenses (including reasonable attorneys' and accounting fees) incurred by it, the Company or any Subsidiary in connection with such cooperation or participation in the defense, or compromise of any asserted claims or demands. Notwithstanding anything to the contrary herein, Seller shall pay to the party being indemnified, on an after-tax basis, the amount of any Tax Liabilities payable hereunder, no later than the date on which the obligation for such Tax Liability is the subject of a final determination (as that term is hereinafter defined) and the amount of all costs that the indemnified party has incurred in connection with the preceding sentence. For purposes of this Section 9.02(a), a "final determination" shall be deemed to occur with respect to a proposed adjustment when (A) there is a decision, judgment, decree or other order by any court of competent jurisdiction, which decision, judgment, decree or other order has become final, binding and is non-appealable, (B) there is a closing agreement entered into with Seller's prior consent made under section 7121 of the Code or other administrative settlement entered into with Seller's prior consent with the IRS or other taxing authority, or (C) if the Tax Liability has been paid, when the time for instituting a claim for refund in respect thereto has expired, or, if a claim was filed and Purchaser gave timely notice thereof to Seller and the time for instituting suit with respect thereto has expired. Upon receipt by Purchaser, the Company or any Subsidiary of a refund or credit of any tax paid by it in respect of which Seller has provided the funds to pay such tax, any refund received or credited with respect to such claim and any interest which is attributable to such refund, and which is paid 54 by the taxing authority, shall be paid to Seller forthwith upon receipt thereof. Purchaser shall notify Seller forthwith of any Tax Liability claim of which Purchaser becomes aware. (vi) Upon receipt by Purchaser, the Company or any Subsidiary of a refund or credit of any tax, and interest attributable thereto, with respect to a taxable period (or part thereof) ending on or before the Closing Date, such refund or credit shall be paid to Seller forthwith upon receipt thereof by Purchaser, the Company or any Subsidiary, unless such tax refund or credit is reflected on the Final Closing Date Balance Sheet. If, for any reason, there is a claim that any such refund or credit which has been paid over to Seller, and interest attributable thereto, is required to be repaid to any taxing authority, Seller shall indemnify Purchaser, the Company or any Subsidiary, on an after-tax basis, for any resultant taxes, interest, penalties, additions to tax, additional amounts, assessments or deficiencies, which indemnity shall be in conformity with the applicable provisions of this Section 9.02(a). Seller shall be responsible for the preparation of all tax returns for all taxable periods ending on or prior to the Closing Date. Purchaser, the Company and Subsidiaries shall cooperate in the filing of such tax returns. Purchaser, the Company, and the Subsidiaries shall be responsible for the preparation of all tax returns for all taxable periods ending after the Closing Date. Seller shall cooperate in the filing of such tax returns. (b) Any and all reasonable costs and reasonable legal and other expenses incidental to the enforcement of any of the foregoing. 9.03 Indemnification by Purchaser. Purchaser agrees to indemnify and hold harmless Seller against and in respect of: (a) Any and all damage, loss or liability resulting from any misrepresentation, breach of warranty or non-fulfillment of any covenant or agreement on the part of Purchaser under this 55 Agreement or any other agreements or instruments delivered to Seller in connection herewith; (b) Any and all loss, liability or damage suffered or incurred by Seller by reason of or in connection with any claim for finder's fee or brokerage or other commission arising by reason of any services alleged to have been rendered to or at the instance of Purchaser with respect to this Agreement or any of the transactions contemplated hereby; and (c) Any and all actions, suits, proceedings, assessments, judgments, and all reasonable costs and reasonable legal and other expenses incidental to the enforcement of any of the foregoing. 9.04 Third Party Claims. (a) In order for Purchaser or Seller, as the case may be, to be entitled to any indemnification provided for under this Agreement in respect of, arising out of or involving a claim made by any person, firm, governmental authority or corporation other than Purchaser or Seller, or their respective successors, assigns or affiliates (a "Third Party Claim") against the indemnified party, such indemnified party must notify the indemnifying party in writing of the Third Party Claim promptly after receipt by such indemnified party of notice of the Third Party Claim. Thereafter, the indemnified party shall deliver to the indemnifying party, within ten (10) business days after receipt by such indemnified party's receipt thereof, copies of all notices relating to the Third Party Claim. (b) If a Third Party Claim is made against an indemnified party, the indemnifying party will be entitled to participate in the defense thereof and, if it so chooses, to assume the defense thereof with counsel selected by the indemnifying party (provided such counsel is not reasonably objected to by the indemnified party). Should the indemnifying party elect to assume the defense of a Third Party Claim, the indemnifying party will not be liable to the indemnified 56 party for any legal expenses subsequently incurred by the indemnified party in connection with the defense thereof. If the indemnifying party elects to so participate in or assume the defense of a Third Party Claim, the indemnified party will fully cooperate with the indemnifying party in connection with such defense. (c) In no event will the indemnified party admit any liability with respect to, or settle, compromise or discharge, any Third Party Claim without the indemnifying party's prior written consent, and the indemnified party will agree to any settlement, compromise or discharge of Third Party Claim which the indemnifying party may recommend and which releases the indemnified party completely in connection with such Third Party Claim; provided, that such recommended settlement, compromise or discharge does not impose any restrictions on future activities of the indemnified party or its affiliates or may be reasonably anticipated to have a material adverse impact on the business or operations of the indemnified party or its affiliates. (d) In the event the indemnifying party shall assume the defense of any Third Party Claim, the indemnified party shall be entitled to participate in (but not control) such defense with its own counsel at its own expense. If the indemnifying party does not assume the defense of any such Third Party Claim, the indemnified party may defend the same in such manner as it may deem appropriate, including, but not limited to, settling such claim or litigation after giving five days' prior written notice to the indemnifying party setting forth the terms and conditions of settlement. 9.05 Survival. All representations and warranties, covenants and agreements made by the parties in this Agreement shall survive only through the eighteen (18) months anniversary of the Closing Date, provided however, that (a) the representations and warranties in Sections 5.29 and 6.07 shall survive only through the termination of Purchaser's right to rescind this 57 transaction pursuant to Section XI, and (b) the representations and warranties in Section 5.02 with respect to title to the Shares and the obligation to indemnify and hold harmless pursuant to Section 9.02 shall survive indefinitely. 9.06 Conditions to Indemnification. Notwithstanding any provision of this Agreement to the contrary, Seller shall have no liability under Section 9.01 and Purchaser shall have no liability under Section 9.03 except to the extent that the aggregate amount of claims, losses, liabilities, damages or expenses (collectively, the "Damages") of the party seeking indemnification based thereon or resulting therefrom is Three Hundred Thousand Dollars ($300,000) in the aggregate and then only to the extent Damages exceed such $300,000 threshold; provided, that the foregoing limitations shall not apply to (i) any claim under Section 9.01(a) based upon breach by Seller of the representations and warranties set forth in Section 5.02, (ii) any claim under Section 9.01(b) or 9.03(b) or (iii) any claim under Section 9.01(c). Furthermore, notwithstanding any provision of this Agreement to the contrary, in no event shall either party's liability under this Article IX exceed in the aggregate an amount in excess of the Purchase Price. 9.07 Exclusive Remedy. Following the Closing Date and except as required to enforce Purchaser's rights and remedies pursuant to Section XI, the right of indemnification pursuant to this Agreement shall constitute the sole and exclusive remedy of each of the parties hereto in the event of a breach of representation, warranty, covenant or agreement set forth herein by the other party. X. Termination and Abandonment. 10.01 Termination. This Agreement may be terminated at any time prior to the Closing Date: 58 (a) By mutual consent of Seller and Purchaser; or (b) By either Seller or Purchaser at any time after June 30, 1997, if any condition to the other parties' obligations set forth in Article VIII hereof is not satisfied by such date; (c) By Purchaser, on or before the fourteenth day after the date of this Agreement, if, in Purchaser's reasonable judgment, the results of Purchaser's due diligence review, conducted pursuant to Section 7.12 hereof, are not satisfactory; (d) By Purchaser, on or before the twenty-first day after the date of this Agreement, if, in Purchaser's reasonable judgment, Purchaser has not obtained satisfactory commitments from all sources of financing, debt and/or equity, for the transactions contemplated by this Agreement; (e) By Seller, during a period which shall run from the twenty-first day following the date of this Agreement through the thirty-first day after the date of this Agreement, if, in Seller's reasonable judgment, satisfactory financing commitments from all sources of financing, debt and/or equity, for the transactions contemplated by this Agreement, are not satisfactory. (f) By Purchaser or Seller, on or before the twenty-first day after the date of this Agreement, if in Purchaser or Seller's reasonable judgment, the parties have received unfavorable indications regarding the likelihood of obtaining necessary approvals regarding the transition of the Schools from the Regulators. 10.02 Procedure and Effect of Termination. In the event of termination of this Agreement and abandonment of the transactions contemplated hereby by either or both of the parties pursuant to Section 10.01, written notice thereof shall forthwith be given to the other party and this Agreement shall terminate and the transactions contemplated hereby shall be abandoned, without further action by either of the parties hereto. If this Agreement is terminated 59 as provided herein: (a) upon request therefor, Purchaser will redeliver all documents, work papers and due diligence materials relating to Company or any Subsidiary relating to the transactions contemplated hereby, whether obtained before or after the execution hereof, to the party furnishing the same; (b) no party hereto shall have any liability or further obligation to any other party to this Agreement except (i) for any breach of a covenant or agreement of such party contained in this Agreement and (ii) as stated specifically in this Agreement; and (c) all filings, applications and other submissions made pursuant to this Agreement shall, to the extent practicable, be withdrawn from the agency or other person to which made. XI. Conditional Recision -------------------- 11.01 Definition. "DOE Approval Notice" shall mean a provisional program participation agreement issued to Purchaser and executed by DOE. 11.02 Conditional Recision by Purchaser. (a) Subject to Seller's right to cure as set forth below, and for a period equal to six (6) months from the Closing Date, Purchaser shall have the right and option to rescind the transactions contemplated by this Agreement under the following conditions (the "Recision Conditions"): (i) DOE issues to Purchaser a denial of its application for a DOE Approval Notice and advises the Purchaser and Seller that such denial is based wholly or in material part on any financial aid irregularities, including, without limitation, audit or program review disallowances and improperly disbursed student financial assistance funds, relating to the operation of any School prior to the Closing ("Seller Pre-Closing Financial Aid Irregularities") 60 or any other pre-Closing condition of any School, the Company, Seller or any of their affiliates, the existence of which condition constitutes a breach by Seller of its representations and warranties set forth in this Agreement (each a "Seller Inadequacy"); or (ii) DOE issues to Purchaser a DOE Approval Notice or DOE Approval Notices which require the posting of a letter of credit or letters of credit by Purchaser of more than $9,000,000 in the aggregate and DOE advises the Purchaser and Seller that the requirement of the letter of credit or letters of credit is based wholly or in material part on any Seller Pre-Closing Financial Aid Irregularity or Seller Inadequacy. (b) Purchaser shall notify Seller within five (5) days of Purchaser's receipt of notice of the occurrence of a Recision Condition. Seller shall have for sixty (60) days from such notice to Seller (the "Cure Period") the right, but not the obligation, to cure any Recision Condition by (i) inducing DOE to issue a DOE Approval Notice or DOE Approval Notices which require the posting of a letter of credit or letters of credit by Purchaser in an amount no more than $9,000,000 in the aggregate; or (ii) inducing DOE to issue a letter expressly stating that no Seller Pre-Closing Financial Aid Irregularity or Seller Inadequacy has caused DOE either (A) to fail to issue a DOE Approval Notice or (B) to issue a DOE Approval Notice or Approval Notices which require the posting of a letter of credit or letters of credit of more than $9,000,000 in the aggregate. If Seller fails to cure the Recision Condition within the Cure Period and Purchaser elects to exercise its right to rescind, Purchaser shall notify Seller of such election within seven (7) days of the end of the Cure Period. 61 11.03 Recision Procedure. (a) In the event that Purchaser exercises its right of recision, Purchaser shall immediately turn over operating control of Company, the Schools and the Subsidiaries to Seller. A date no later than ten (10) days following the date on which Purchaser notifies Seller of Purchaser's election to rescind shall be set by agreement of the parties on which to close the recision (the "Recision Closing Date"). On the Recision Closing Date: (i) Purchaser shall deliver to Seller certificates representing the Shares, duly endorsed in blank or with duly executed stock powers, resignation of each officer and director of the Company, each Subsidiary and the Katharine Gibbs Scholarship Foundation, dated as of the Recision Closing Date and shall take all other actions necessary to effect the recision in all respects as soon as possible; (ii) Seller shall wire to Purchaser in immediately available funds an amount equal to the Closing Date Payment and shall take all other actions necessary to effect the recision in all respects as soon as possible including, without limitation, agreeing to the disbursement of funds in the Escrow to Purchaser, provided that any sums in the Escrow established in accordance with the provisions of Section 2.02(a) of this Agreement shall not be released until the completion of the accounts resolution in subparagraph (b) below (b) Within thirty (30) days of the Recision Closing Date, Purchaser shall provide Seller with an accounting of all working capital amounts used by the Company and each of the Subsidiaries from the Closing Date through the date of recision and the amount of cash received by the Company, each of the Subsidiaries and the Schools during that same period (the "CEC Ownership Accounts"). (c) If Seller disagrees with any item in the CEC Ownership Accounts, Seller 62 shall, within thirty (30) days after the date of receipt of the CEC Ownership Accounts, deliver to Purchaser written notice to the effect that it disagrees therewith and a statement of its basis for such disagreement. Absent the delivery to Purchaser of such written notice of disagreement, the CEC Ownership Accounts shall become final. In the event that the working capital amounts invested exceed the cash received, Seller shall pay to Purchaser the difference. In the event the cash received exceeds the working capital amounts, Purchaser shall pay to Seller the difference. If Seller delivers a written notice of disagreement to Purchaser as described above and within the thirty (30) day period as required hereby, Seller shall then have the right to cause an inspection of the CEC Ownership Accounts to be conducted by Seller or Seller's Accountants. If Seller and Purchaser fail to reach agreement within thirty (30) days after receipt by Purchaser of such written notice from Seller, then a final determination of the CEC Ownership Accounts shall be made by a certified public accounting firm jointly selected by Seller and Purchaser. If within five (5) days after such 30-day period, Seller and Purchaser are unable to agree on such a firm, then the selection shall be made by the AAA. The fees and expenses of the jointly selected accounting firm and the AAA shall be borne equally by the Seller and Purchaser. (d) Within ten (10) days of a final determination of the CEC Ownership Accounts, Purchaser and Seller shall jointly execute instructions to the Escrow Agent to release the escrowed funds to Purchaser less any amounts owed to Seller pursuant to the adjustment in 11.03(c) which amounts shall be distributed to Seller. If, pursuant to the adjustment in 11.03(c), Seller owes Purchaser additional monies, such monies shall be paid from Seller to Purchaser by wire transfer in immediately available funds at the time of the escrow distribution. 11.04 Termination of Right to Rescind. Purchaser's right to rescind shall become null and void upon the earlier of: 63 (a) the issuance of all applicable DOE Approval Notices with a requirement of a letter of credit or letters of credit of no more than $9,000,000 in the aggregate. (b) the six month anniversary of the Closing Date if neither of the Recision Conditions in Section 11.02 have occurred. Within five (5) days of the termination of Purchaser's right to rescind, Purchaser and Seller shall jointly execute instructions to the escrow agent to release all funds in the Escrow established in accordance with section 2.02(a) to Seller subject to any adjustments pursuant to Section 2.03 to the extent that any such adjustments have been made prior to the termination of the right to rescind but no payment has been made in respect of such adjustments. No disbursement of funds from the Escrow shall be delayed as a result of any pending adjustments pursuant to Section 2.03. 11.05 Exclusive Remedy. Notwithstanding anything in this Agreement to the contrary, Purchaser's exclusive remedy to the existence of a Recision Condition and the underlying breach of a representation or warranty giving rise to such Recision Condition, shall be recision as set forth in Section XI, provided that the foregoing shall not be construed to prevent Purchaser from seeking indemnification pursuant to Section IX for any breach of representation or warranty not known to Purchaser at the time of the termination of its right to rescind hereunder. XII. Miscellaneous. 12.01 Headings. All headings in this Agreement are for convenience only and are not part of the substance of this Agreement. 12.02 Entire Agreement. This Agreement contains the entire agreement between Purchaser and Seller with respect to the subject matter hereof and supersedes all prior 64 agreements relating to the same subject matter, except for the confidentiality agreement executed by Purchaser and relating to the transactions contemplated by this Agreement, the provisions of which shall remain in full force and effect. 12.03 Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York without giving effect to the conflicts of law provisions thereof. 12.04 Severability. If any one or more of the provisions of this Agreement shall be determined to be invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions of this Agreement shall not be impaired in any way. 12.05 Notices. All notices, requests, demands, specifications and other communications under or in connection with this Agreement shall be in writing, shall be personally delivered or sent by registered or certified mail, or, to the extent receipt is confirmed, by telecopy and shall be deemed to have been given or made when received at the following offices: If to Purchaser: Career Education Corporation 2800 West Higgins Road Hoffman Estates, Illinois 60195 Attention: John M. Larson, William Klettke Facsimile: (847) 781-3610 65 Copies to: D'Ancona & Pflaum 30 North LaSalle Street Suite 2900 Chicago, Illinois 60602 Attention: Michel J. Feldman Facsimile: (312) 580-0923 and Goldberg, Kohn, Bell, Black Rosenbloom & Moritz, Ltd. 55 East Monroe Street Suite 3700 Chicago, Illinois 60603 Attention: Dennis B. Black, Esq. Facsimile: (312) 332-2196 If to Seller: K-III Communications Corporation 745 Fifth Avenue New York, NY 10151 Attn: Beverly C. Chell Facsimile: (312) 745-0199 Copy to: K-III Communications Corporation 745 Fifth Avenue New York, NY 10151 Attn: Christopher Fraser, Esq. Facsimile: (212) 745-0131 12.06 Binding Effect, Amendment. This Amendment shall bind and inure to the benefit of the parties to this Agreement and their respective successors and assigns. This Agreement may be amended, modified or supplemented only in a writing executed by Purchaser and Seller. 12.07 Assignment. This Agreement may not be assigned by Seller or Purchaser without the prior written consent of the other in each instance. Any purported assignment without the prior written consent of the other party shall be void. 66 12.08 Expenses. Purchaser and Seller shall each pay their own expenses with respect to this Agreement and the transactions contemplated by this Agreement. 12.09 Third Party Beneficiaries. The covenants, agreement, representations and warranties of Seller and Purchaser are made or given solely for the benefit of the other party. It is not intended by the parties hereto that any third party, including, without limitation, any employees of Seller, the Company or any Subsidiary be or is a beneficiary of any of such covenants, agreements, representations or warranties. 67 IN WITNESS WHEREOF, this Agreement has been executed by Seller and Purchaser by their respective officers thereunto duly authorized as of the date appearing at the head of the first page hereof. K-III PRIME CORPORATION, INC. By: /s/ BEVERLY C. CHELL -------------------------- Vice Chairman CAREER EDUCATION CORPORATION By: /s/ JOHN M. LARSON -------------------------- CEO 68 List of Exhibits, Appendices and Schedules ------------------------------------------
Exhibit A.......................................................Escrow Agreement Exhibit B..............................................Non-Competition Agreement Exhibit C.......................................................Seller's Release Exhibit D..........................Guarantee of K-III Communications Corporation Appendix I..........................................................Subsidiaries Appendix II..............................................................Schools Schedule 5.01......................................................Jurisdictions Schedule 5.02(a)............................Company Shares and Subsidiary Shares Schedule 5.02(b)..........................................Encumbrances on Shares Schedule 5.02(c)...............................................Other Stock Owned Schedule 5.03...........................................Conflicts with Agreement Schedule 5.04..................................................Books and Records Schedule 5.05(a)............................................Financial Statements Schedule 5.05(b).....................................................Liabilities Schedule 5.08......................................................Bank Accounts Schedule 5.09............................................Undisclosed Liabilities Schedule 5.10...........................................Material Adverse Changes Schedule 5.11.........................................................Litigation Schedule 5.12.........................................................Compliance Schedule 5.13...........................................Real Property and Leases Schedule 5.14..............................................Encumbrances on Title Schedule 5.15......................................................Environmental Schedule 5.16(a)..........................................Employee Benefit Plans Schedule 5.16(k)....................................................Compensation Schedule 5.18..............................................Intellectual Property Schedule 5.19..........................................................Contracts Schedule 5.20......................................................Labor Matters Schedule 5.22..........................................................Insurance Schedule 5.23(a).................................................School Policies Schedule 5.23(b)....................................School Policy Non-Compliance Schedule 5.25..............................Title IV and Accreditation Compliance Schedule 5.26...............................................Cohort Default Rates Schedule 5.27...........................................................Licenses Schedule 5.28....................................................Grants and Aids Schedule 7.07(a)......................................................Guarantees Schedule 7.07(b)..................................Letters of Credit/Surety Bonds Schedule 7.08...............................................Employee Receivables
EX-2.3 4 STOCK PURCHASE AGREEMENT DTD 6/30/97 EXHIBIT 2.3 STOCK PURCHASE AGREEMENT by and among IAMD ACQUISITION I, LTD., AS PURCHASER, and CLEM STEIN, JR., MARION STEIN, LEONARD RUTSTEIN, BARBARA ANN SCOTT KING, THOMAS V. KING, WILLIAM W. WIRTZ AND DAVID POWELL, AS SELLERS Dated: June 30, 1997 TABLE OF CONTENTS
Page ---- 1. Certain Definitions............................................................................. 1 2. Sale And Transfer Of Shares; Assets and Liabilities Of the Company At Closing................... 9 2.1. Purchaser and Sale of Shares.......................................................... 9 2.2. Purchase Price; Payment............................................................... 9 2.3. Company Assets and Liabilities; Purchase Price Adjustment............................. 10 2.4. Earnout............................................................................... 12 2.5. Closing............................................................................... 14 2.6. Funding of School Operations Pending DOE Approval..................................... 14 2.7. Participation of Employees in CEC Plans............................................... 14 2.8. Actions to be Taken with Respect to Company Plans..................................... 14 3. Closing Deliveries.............................................................................. 15 3.1. Deliveries to Purchaser............................................................... 15 3.2. Closing Deliveries to Sellers......................................................... 17 3.3. Post-Closing Covenants................................................................ 18 4. Representations and Warranties of Sellers....................................................... 20 4.1. Organization and Good Standing of the Company and its Subsidiaries; Accreditation....................................................................... 20 4.2. Ownership of the Company, the Subsidiaries and the Schools............................ 21 4.3. Capacity; Authorization; Binding Effect, Etc.......................................... 21 4.4. No Conflicts, Etc..................................................................... 22 4.5. Investments........................................................................... 23 4.6. Capitalization........................................................................ 23 4.7. Book and Records...................................................................... 24 4.8. Compliance with Laws; Licenses and Permits............................................ 25 4.9. Recruitment; Admissions Procedures; Attendance; Financial Aid; Reports................ 26 4.10. Cohort Default Rate.................................................................. 27 4.11. Title to the Assets.................................................................. 27 4.12. Material Miscellaneous Contracts..................................................... 29 4.13. Tradenames; Confidential Information................................................. 29 4.14. Financial Statements................................................................. 30 4.15. Receivables.......................................................................... 31 4.16. Inventories.......................................................................... 32 4.17. Bank Accounts........................................................................ 32 4.18. Litigation, Etc...................................................................... 32 4.19. Insurance............................................................................ 33 4.20. Environmental Matters................................................................ 34 4.21. Employee Benefit Plans............................................................... 34 4.22. Employment Matters................................................................... 36
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4.23. Labor Relations; Compliance..........................................................38 4.24. Tax Matters..........................................................................39 4.25. Brokerage............................................................................40 4.26. Affiliate Transactions...............................................................40 4.27. Absence of Certain Changes...........................................................41 4.28. Indebtedness.........................................................................42 4.29. Conduct of Business Since Interim Balance Sheet Date.................................42 4.30. Approvals............................................................................42 4.31. Delivery of Documents................................................................42 4.32. Disclosure...........................................................................42 5. Representations and Warranties of Purchaser.....................................................43 5.1. Organization and Corporate Power......................................................43 5.2. Capacity; Authorization, Binding Effect, Etc..........................................43 5.3. No Conflicts, Etc.....................................................................43 5.4. Litigation............................................................................44 5.5. Brokerage.............................................................................44 5.6. Title IV Program Liabilities..........................................................44 5.7. Approvals.............................................................................44 5.8. Disclosure............................................................................44 5.9. Purchaser's Knowledge; Resources of Purchaser.........................................45 5.10. Maintenance of Insurance.............................................................45 6. Additional Covenants of the Parties.............................................................45 6.1. Confidential Information..............................................................45 6.2. Additional Covenants of Sellers Pending Closing.......................................47 6.3. Employees.............................................................................48 6.4. Exclusive Dealing.....................................................................48 6.5. Additional Covenants of Purchaser Pending Closing.....................................48 6.6. Initial Public Offering...............................................................48 7. Conditions to Purchaser's Obligations...........................................................48 7.1. Due Diligence Review..................................................................49 7.2. Audited Financial Statements, Acid Test Ratio and Cohort Default Rates................49 7.3. Financing.............................................................................49 7.4. Truth of Representations and Warranties...............................................49 7.5. Performance of Agreements.............................................................50 7.6. No Material Adverse Change............................................................50 7.7. Litigation............................................................................50 7.8. Accrediting Bodies Approval...........................................................50 7.9. Proceedings...........................................................................51 7.10. Financial Aid Compliance Audit.......................................................51 7.11. [Intentionally Omitted]..............................................................51 7.12. Consents and Approvals...............................................................51 7.13. Environmental Assessment.............................................................51
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7.14. Acquisition of The International Academy of Merchandising and Design (Canada), Ltd.......................................................................51 8. Conditions to Sellers' Obligations...............................................................52 8.1. Truth of Representations and Warranties................................................52 8.2. Performance of Agreements..............................................................52 8.3. Litigation.............................................................................52 8.4. Proceedings............................................................................52 8.5. Acquisition of The International Academy of Merchandising and Design (Canada), Ltd........................................................................53 9. Indemnification; Remedies........................................................................53 9.1. Survival; Right to Indemnification Not Affected By Knowledge...........................53 9.2. Indemnification and Payment of Damages by Sellers......................................53 9.3. Indemnification and Payment of Damages by Purchaser....................................55 9.4. Limitations on Amount..................................................................55 9.5. Liability of Individual Sellers; Breaches by Individual Sellers........................56 9.6. Further Limitations on Remedies........................................................56 9.7. Procedures.............................................................................57 9.8. Prevailing Party to be Awarded Legal Fees..............................................58 9.9. Offset.................................................................................58 10. Recission of Transactions.........................................................................59 10.1. Right to Recission....................................................................59 10.2. Reasonable Efforts....................................................................60 11. Miscellaneous.....................................................................................61 11.1. Termination...........................................................................61 11.2. Expenses..............................................................................62 11.3. Successors and Assigns................................................................62 11.4. Severability..........................................................................62 11.5. Counterparts..........................................................................62 11.6. Descriptive Headings; Interpretation..................................................62 11.7. Governing Laws........................................................................63 11.8. Consent to Jurisdiction and Service of Process........................................63 11.9. Waiver of Jury Trial..................................................................63 11.10. Notices..............................................................................64 11.11. Entire Agreement; Release............................................................65 11.12. Waiver...............................................................................65
-iii- STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made as of June 30, 1997, by and between IAMD Acquisition I, Ltd., a Delaware corporation ("Purchaser"), and Clem Stein, Jr. ("C. Stein"), Marion Stein ("M. Stein"), Leonard Rutstein ("Rutstein"), Barbara Ann Scott King ("B. King"), Thomas V. King ("T. King"), William W. Wirtz ("Wirtz") and David Powell ("Powell"). C. Stein, M. Stein, Rutstein, B. King, T. King, Wirtz and Powell are referred herein collectively as "Sellers." Except as otherwise indicated, capitalized terms used herein are defined in Section 1. BACKGROUND Sellers are the sole record and beneficial owners of one-hundred percent (100%) of the issued and outstanding shares (the "Shares") of capital stock of IAMD, Limited, an Illinois corporation (the "Company"). The Company, through its wholly-owned subsidiaries International Academy of Merchandising and Design, Ltd., an Illinois corporation ("IAMD-Chicago"), and International Academy of Merchandising and Design, Inc., a Florida corporation ("IAMD-Tampa"), owns and operates private-post secondary schools in Chicago, Illinois and Tampa, Florida which provide degree and certificate granting programs in commercial design and merchandising (collectively, the "Schools"). In connection with the operation of the Schools, the Company also owns and operates student bookstores (the "Bookstores") on each School campus through its wholly-owned subsidiary, Academy Bookstore, Inc., an Illinois corporation ("IAMD-Bookstore"). IAMD- Chicago, IAMD-Tampa and IAMD-Bookstore are sometimes referred to collectively as the "Subsidiaries." Purchaser is a wholly-owned subsidiary of Career Education Corporation, a Delaware corporation ("CEC"), which owns and operates private, post-secondary schools throughout the United States. Sellers desire to sell, and Purchaser desires to purchase, the Shares, for the consideration and on the terms set forth in this Agreement. AGREEMENT NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants and agreements set forth herein, the parties hereto agree as follows: 1. Certain Definitions. ------------------- For the purposes of this Agreement, the following terms have the meanings set forth below: "Accrediting Bodies" means the Accrediting Council for Independent Colleges and Schools and the Foundation for Interior Design Education Research ("FIDER"). "Accreditation" means any license, permit, registration, authorization or similar approval granted by any Accrediting Body. "Adjusted Balance Sheet" shall have the meaning ascribed to such term in Section 2.3(b). "Advertising Budget" shall have the meaning ascribed to such term in Section 2.4(d). "Affiliate" means, with respect to any Person, any individual related by blood or marriage to such Person or any Person controlling, controlled by or under common control with such Person. "Audit Report" shall have the meaning ascribed to such term in Section 2.3(b). "Best of Purchaser's knowledge" means the collective actual knowledge of the executive officers of Purchaser and CEC holding offices of vice- president or higher, following due inquiry of appropriate officers, employees and consultants of Purchaser and CEC. "Best of Sellers' knowledge" means the collective actual knowledge of Sellers and the executive officers of the Company and each Subsidiary holding offices of vice-president or higher, following due inquiry of appropriate officers, employees and consultants of each such entity, including without limitation, in the case of the Schools, the director, the admissions director and the financial aid director of each of them. "Bookstores" shall have the meaning ascribed to such term in the background section of this Agreement. "Canada Acquisition" shall have the meaning ascribed to such term in Section 7.14. "CEC" shall have the meaning ascribed to such term in the background section to this Agreement. "Closing" shall have the meaning ascribed to such term in Section 2.5. "Closing Balance Sheet" shall have the meaning ascribed to such term in Section 3.1(i). "Closing Date" shall mean the date of the Closing. "Closing Payment" shall have the meaning ascribed to such term in Section 2.2(a). -2- "Code" means the Internal Revenue Code of 1986, as amended, or any successor law, and regulations issued by the IRS pursuant to that Code or any successor code. "Company" shall have the meaning ascribed to such term in the background section of this Agreement. "Compliance Reports" shall have the meaning ascribed to such term in Section 4.9. "Confidential Information" shall have the meaning ascribed to such term in Section 6.1. "Curricula" means copyrighted and proprietary uncopyrighted materials used in any courses offered at either of the Schools. "Damages" shall have the meaning ascribed to such term in Section 9.2. "Deferred Payment" shall have the meaning ascribed to such term in Section 2.2(b). "Deferred Payment Date" shall have the meaning ascribed to such term in Section 2.2(b). "Deferred Payment Letter of Credit" shall have the meaning ascribed to such term in Section 2.2. "Deficiency" shall have the meaning ascribed to such term in Section 2.3(a). "Designated Liabilities" shall have the meaning ascribed to such term in Section 4.11(d). "DOE" means the United States Department of Education and any successor agency administering student financial assistance under Title IV. "DOE Approval Notice" means a fully-executed Provisional Program Participation Agreement issued and executed by DOE. "Earnout Amount" shall have the meaning ascribed to such term in Section 2.4(a). "Earnout Calculation" shall have the meaning ascribed to such term in Section 2.4(b). -3- "Earnout Period" shall have the meaning ascribed to such term in Section 2.4(a). "Employee Benefit Plan" means any (a) qualified or nonqualified Employee Pension Benefit Plan (including any Multiemployer Plan), (b) Employee Welfare Benefit Plan, or (c) fringe benefit plan, policy, program, and arrangement, whether or not subject to ERISA and whether or not funded, and includes, but is not limited to, plans described in Section 3(3) of ERISA. "Employee Pension Benefit Plan" means any employee pension benefit plan as described in Section 3(2) of ERISA, that is subject to Title IV of ERISA, that is subject to Title IV of ERISA, including a Multiemployer Plan. "Employee Welfare Benefit Plan" means any employee welfare plan as described in Section 3(1) of ERISA. "Encumbrance" means any charge, claim, community property interest, condition, equitable interest, lien, option, pledge, security interest, right of first refusal, or restriction of any kind, including any restriction on use, voting, transfer, receipt of income, or exercise of any other attribute of ownership, but in the case of leased property does not include the rights of Lessor thereof under the lease therefor. "Enforceable in accordance with its terms" or similar language shall be deemed to mean enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally, and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity). "Environmental Law" means any Legal Requirement pertaining to any Hazardous Substance or otherwise pertaining to the environment or protection of any natural resources, including, without limitation, air, soil or water. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor law, and regulations and rules issued pursuant to that Act or any successor law. "Excess" shall have the meaning ascribed to such term in Section 2.3(a). "401(k) Plan" shall have the meaning ascribed to such term in Section 2.8. -4- "Facility" means any real property now or previously owned, leased or operated by the Company or any Subsidiary, including without limitation the Leased Facilities. "Final Balance Sheet" means the balance sheet which under Section 2.3(b) is deemed to be the "Final Balance Sheet." "Financial Statements" means (i) the audited balance sheets and the related statements of income and changes in financial position of the Company as at and for the fiscal years ended June 30, 1994, 1995 and 1996, and (iii) the unaudited consolidated balance sheet and the related statement of income for the Company (the "Interim Financial Statements") (a) prepared by the Company's accountants as at and for the six (6) month period ended December 31, 1996 and (b) prepared by Seller as at and for the ten (10) month period ended April 30, 1997 (the "Interim Balance Sheet Date"). "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants, and statements and pronouncements of the Financial Accounting Standards Board and the Emerging Issues Task Force (or any successor authority) that are applicable as of the date of determination, all as consistently applied in the preparation of the Financial Statements. "Governmental Body" means any (a) federal, state, local, municipal, foreign, or other government; (b) governmental or quasi-governmental authority of any nature (including any governmental agency, branch, bureau, department, official, or entity and any court or other tribunal); and (c) body exercising, or entitled to exercise, any administrative, executive, judicial, legislative, police, regulatory, or taxing authority or power of any nature. "Guaranty" shall have the meaning ascribed to such term in Section 2.2. "Hazardous Substance" shall include any substances included within the definitions of "hazardous substances," "hazardous materials," "toxic substances," "waste" or similar terms in any applicable federal, state or local statute, ordinance, rule or regulation relating to environmental protection, remediation or liability, including clean air, clean water, waste disposal and hazardous substance transportation or disposal, including, without limitation, petroleum, asbestos, polychlorinated biphenyls, flammable explosives and radioactive materials. "IAMD-Bookstore" shall have the meaning ascribed to such term in the background section of this Agreement. -5- "IAMD-Chicago" shall have the meaning ascribed to such term in the background section of this Agreement. "IAMD-Tampa" shall have the meaning ascribed to such term in the background section of this Agreement. "Indemnification Threshold" shall have the meaning ascribed to such term in Section 9.6. "Independent Auditor" shall have the meaning ascribed to such term in Section 2.3(b). "Initial Public Offering" means an initial underwritten public offering and sale for cash by CEC of its common stock pursuant to a "firm commitment" underwriting agreement and a registration statement declared effective by the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Securities Act"); provided, that the term Initial Public Offering shall not include the registration of an offer and sale of the common stock of CEC (i) to the employees of CEC or its subsidiaries or other persons providing services to CEC or its subsidiaries pursuant to any Plan registered on Form S-8 or a successor form, or (ii) relating to a merger, acquisition or other transaction of the type described in Rule 145 of the Securities Act or any successor rule registered on Form S-4 or a successor form. "Intellectual Property" means the patents, trademarks, logos, tradenames (including, without limitation, the Company's name, each Subsidiary's name, each School's name and the Bookstores' name), servicemarks, copyrights, know-how, logos and trade secrets owned by the Company or any Subsidiary, or used in connection with the operation of the Schools or the Bookstores. "Investment" as applied to any Person means (i) any direct or indirect ownership by such Person of any notes, obligations, instruments, stock, securities or other ownership interest of any other Person, and (ii) any capital contribution by such Person to any other Person. "IRS" means the United States Internal Revenue Service or any successor agency, and, to the extent relevant, the United States Department of the Treasury. "Leases" shall have the meaning ascribed to such term in Section 4.11(b). "Leased Facilities" shall have the meaning ascribed to such term in Section 4.11(b). -6- "Legal Requirement" means any foreign, federal, state, local, municipal or other constitution, law, statute, regulation, rule, ordinance, order, administrative order, principle of common law, or treaty to which Sellers, the Company, any Subsidiary or Purchaser are subject, as applicable. "Licenses and Permits" shall have the meaning ascribed to such term in Section 4.8. "Material Miscellaneous Contracts" shall have the meaning ascribed to such term in Section 4.12. "Multiemployer Plan" means any Multiemployer Plan, as defined in Sections 3(37) and 4001(A)(3) of ERISA. "Net Worth" shall have the meaning ascribed to such term in Section 2.3(a). "Noncompetition Agreements" shall have the meaning ascribed to such term in Section 3.1(c). "Noncompetition Payments" shall have the meaning ascribed to such term in Section 3.1(c). "Note Letters of Credit" shall have the meaning ascribed the such term in Section 2.2(c). "PBGC" means the Pension Benefit Guaranty Corporation, or any successor thereto. "Permitted Encumbrances" shall have the meaning ascribed to such term in Section 4.11(d). "Person" means any individual, general or limited partnership, corporation (including any non-profit corporation), limited liability company, joint stock company, joint venture, trust, association, unincorporated organization, labor union, Governmental Body, the Accrediting Bodies or other similar entity. "Plans" shall have the meaning ascribed to such term in Section 4.21. "Policy Guidelines" shall have the meaning ascribed to such term in Section 4.9. "Pre-Closing Financial Aid Irregularities" shall have the meaning ascribed to such term in Section 9.2(d). -7- "Proceeding" means any action, claim, arbitration, audit, hearing, investigation, inquiry, litigation, suit (whether civil, criminal, administrative, investigative, or informal) or other proceeding commenced, brought, conducted, or heard by or before, or otherwise involving, any Governmental Body or arbitrator. "Purchase Price" shall have the meaning ascribed to such term in Section 2.2. "Purchaser" shall have the meaning ascribed to such term in the preamble to this Agreement. "Purchaser's Accountant" shall have the meaning ascribed to such term in Section 2.3(b). "Reportable Event" means any event described in Section 4043 of ERISA, as amended, whether or not waived. "Revenues" shall have the meaning ascribed to such term in Section 2.4(a). "Schools" shall have the meaning ascribed to such term in the background section to this Agreement. "Securities Act" means the Securities Act of 1933, as amended, or any successor law, and regulations and rules issued pursuant to that Act or any successor law. "Sellers" shall have the meaning ascribed to such term in the preamble to this Agreement. "Seller Notes" shall have the meaning ascribed to such term in Section 2.2(c). "Sellers' Release" shall have the meaning ascribed to such term in Section 3.1(b). "Shares" shall have the meaning ascribed to such term in the background section to this Agreement. "Show Cause Order" shall have the meaning ascribed to such term in Section 3.3(b). "Subsidiaries" shall have the meaning ascribed to such term in the background section to this Agreement. -8- "Taxes" means all taxes, levies or other like assessments, charges or fees, including, without limitation income, gross receipts, excise, goods and services, transfer, capital, property (including, without limitation, any special assessments), sales, license, payroll and franchise or other taxes, imposed by any Governmental Body on the Company and/or any of its business activities; and such term shall include any interest, penalties, fines or additions or other amounts payable in connection with any Taxes. "Threshold Amount" shall have the meaning ascribed to such term in Section 2.3(a). "Title IV" means Subchapter IV of the Higher Education Act of 1965, as amended, 20 U.S.C.A. (S) 1070a, et seq., and any amendments or successor statutes thereto. "Tradenames" shall have the meaning ascribed to such term in Section 4.13(a). Immediately following the signature pages of this Agreement is an index of the Exhibits and Schedules attached hereto. 2. Sale and Transfer of Shares; Assets and Liabilities of the Company at Closing. 2.1. Purchaser and Sale of Shares. Subject to the terms and conditions of this Agreement, Sellers hereby agree to sell, transfer, assign, convey and deliver the Shares to Purchaser, and Purchaser hereby agrees to purchase, acquire and accept the Shares from Sellers, at the Closing. 2.2. Purchase Price; Payment. In full consideration of the sale of the Shares by Sellers to Purchaser, and the other agreements of the parties hereunder, and subject to adjustment following the Closing in accordance with Section 2.3, and for the Earnout Amount in accordance with Section 2.4 the aggregate purchase price (the "Purchase Price") for the Shares is $3,000,000, which shall be payable as follows: (a) $100,000 (the "Closing Payment"), which amount shall be delivered to Sellers in accordance with Schedule 2.2 attached hereto by wire transfer of immediately available funds at the Closing. (b) $1,400,000 (the "Deferred Payment"), which amount, subject to reduction in accordance with Section 2.3, shall be delivered to Sellers in accordance with Schedule 2.2 attached hereto on the later of (i) twenty-one (21) days following issuance to Purchaser of a DOE Approval Notice and resumption of Title IV funding of student financial aid programs for each of -9- the Schools and (ii) completion of the Final Balance Sheet (the "Deferred Payment Date"). The rights of Sellers to payment of the Deferred Payment and the Noncompetition Payments directly or pursuant to the Deferred Payment Letter of Credit shall be subject to Purchaser's offset rights pursuant to Section 9.9 of this Agreement; and (c) $1,500,000, which amount shall be evidenced by, and payable in accordance with, Purchaser's notes made in favor of Sellers (the "Seller Notes") in substantially the form of Exhibit A attached hereto and in accordance with Schedule 2.2 attached hereto, which Seller Notes shall bear interest (before default) at the rate of seven percent (7.0%) per annum payable quarterly in arrears, and after default at the rate of nine percent (9.0%) per annum, and subject to acceleration as therein provided, shall be due and payable in full on the fourth anniversary of the Closing Date. The Seller Notes shall be delivered simultaneously with the Closing Payment. The Seller Notes shall be secured by letters of credit in an aggregate amount equal to the amount of the Seller Notes and four (4) months interest thereunder issued by LaSalle National Bank (the "Note Letters of Credit") in substantially the form of Exhibit B attached hereto, which Note Letters of Credit shall be delivered to Sellers at the Closing. The rights of Sellers to payment pursuant to the Seller Notes and/or the Note Letters of Credit shall be subject to Purchaser's offset rights as provided in Section 9.9 (b) of this Agreement. In addition to the Purchase Price, Purchaser shall pay to Sellers the Noncompetition Payments in the aggregate amount of $2,000,000, as provided for in the Noncompetition Agreements, in accordance with Schedule 3.1(c) hereto, which Noncompetition Payments shall be made, subject to any rights to offset as provided in Section 9.9, on the Deferred Payment Date in accordance with the terms and conditions of the Noncompetition Agreements. The Deferred Payment and the Noncompetition Payments shall be secured by a letter of credit in an aggregate amount equal to $3,400,000 issued by LaSalle National Bank (the "Deferred Payment Letter of Credit") for the benefit of Michael J. Zdeb, as Escrow Agent, substantially in the form of Exhibit C hereto, which Deferred Payment Letter of Credit will be delivered to Michael J. Zdeb, as Escrow Agent at the Closing. Furthermore, simultaneously with the delivery of the Closing Payment, Purchaser shall deliver to Sellers a Guaranty (the "Guaranty") from CEC in the form of Exhibit D attached hereto providing for the guaranty of performance by Purchaser of its obligations hereunder to make the Deferred Payment and to make the Noncompetition Payments. 2.3. Company Assets and Liabilities; Purchase Price Adjustment. (a) Sellers agree that the consolidated net worth of the Company and the Subsidiaries at and as of Closing as calculated in accordance with -10- GAAP (the "Net Worth") shall not be less than ($650,000) (the "Threshold Amount"). The amount of the Net Worth set forth in the Final Balance Sheet shall be deemed to be the Net Worth for the purposes of this Section 2.3(a). If the Final Balance Sheet sets forth Net Worth of less than the Threshold Amount, the amount of that difference shall be the "Deficiency" and the Deferred Payment (and, as a result thereof, the Purchase Price) shall be reduced by an amount equal to the Deficiency. If, however, the Final Balance Sheet sets forth Net Worth of more than the Threshold Amount, the amount of that difference shall be the "Excess". The Excess, if any, shall be remitted to Sellers in accordance with Schedule 2.2 hereto subject to offset as provided in Section 9.9, on the Deferred Payment Date. (b) Purchaser shall cause Arthur Andersen, L.L.P. (the "Purchaser's Accountant") to complete an audit of the Closing Balance Sheet delivered by Sellers pursuant to Section 3.1(j), and to deliver to Purchaser the written report (the "Audit Report") of Purchaser's Accountant with respect to such audit, as soon as possible following the Closing and in any event not later than forty-five (45) days after the Closing Date. Such Audit Report shall state the adjustments, if any, to such Closing Balance Sheet which in the opinion of Purchaser's Accountant would be necessary to be made so that with such adjustments such Closing Balance Sheet would accurately set forth the Net Worth, and, if any such adjustments are so stated, shall contain or be accompanied by an adjusted consolidated balance sheet (the "Adjusted Balance Sheet") of the Company and the Subsidiary reflecting such adjustments. Purchaser shall deliver to Sellers a copy of such Audit Report together with a copy of the Adjusted Balance Sheet, if any, forthwith after Purchaser's receipt of same and in any event within such forty-five (45) day period. Upon Sellers' request, Purchaser shall cause the Purchaser's Accountant to provide to Sellers or their representative access to the working papers of Purchaser's Accountant with respect to such Audit Report, and the Sellers or their representative shall be entitled to make copies thereof. If there is an Adjusted Balance Sheet, then such Adjusted Balance Sheet shall be deemed to be the "Final Balance Sheet" unless the Sellers object in writing to such deeming within fifteen (15) days after their receipt of the Adjusted Balance Sheet. If there is such an objection by Sellers and the disputes between the Sellers and the Purchaser in that regard are not resolved to the satisfaction of the parties within fifteen (15) days after the date upon which Purchaser receives such written objection of the Sellers, then another nationally recognized firm of independent accountants not otherwise engaged by Sellers or Purchaser (or their respective Affiliates) mutually selected by Sellers and Purchaser or appointed by a court of competent jurisdiction upon application therefor (the "Independent Auditor") shall review the Closing Balance Sheet delivered by Sellers pursuant to Section 3.1(j), the Adjusted Balance Sheet, the said Audit Report of the Purchaser's Accountants and all -11- related working papers of the Purchaser's Accountant, and if requested by the Sellers to do so shall make such other examinations and investigations as the Independent Auditor considers to be necessary in order to form an opinion as to the Net Worth. If requested by the Sellers or the Purchaser, on written notice to either of them, the Independent Auditor shall consider submissions by the parties in accordance with rules and procedures established by the Independent Auditor in that regard. The review of the Independent Auditor shall be completed as soon as is practicable. If the Independent Auditor shall be of the view that the Adjusted Balance Sheet does not correctly set forth the Net Worth, then the Independent Auditor shall prepare and deliver to the parties a fresh consolidated balance sheet of the Company and the Subsidiary which in the view of the Independent Auditor correctly sets forth the Net Worth and such fresh balance sheet shall thereupon be deemed to be the "Final Balance Sheet." The Final Balance Sheet howsoever deemed shall be final and binding upon all parties. The costs of the engagement of the Independent Auditor shall be borne by the Sellers unless the Independent Auditor's determination results in an adjustment in Sellers' favor of at least $100,000, in which case the costs of the engagement of the Independent Auditor shall be borne by Purchaser. If an Adjusted Balance Sheet is not delivered to Sellers within forty-five (45) days next following the Closing Date or the Audit Report of the Purchaser's Accountant is such that no Adjusted Balance Sheet is prepared, then the Closing Balance Sheet delivered by Sellers pursuant to Section 3.1(j) hereof shall be deemed to be the "Final Balance Sheet." Subject to the next sentence, on the Deferred Payment Date, the Purchaser shall pay Sellers that portion of the Deferred Payment and Noncompetition Payments which is not subject to dispute or offset as provided in Section 9.9, in accordance with Schedule 2.2. Notwithstanding anything contained in this Agreement to the contrary, Purchaser shall not be required to pay any portion of the Deferred Payment or the Noncompetition Payment which is subject to dispute or offset, as provided in Section 9.9 until any such dispute or offset right is resolved. Subject to Section 2.3(b) with respect to the costs of engagement of the Independent Auditor, each party hereto shall bear its own costs and expenses, including attorneys' fees, incurred in connection with any dispute under this Section 2.3. 2.4. Earnout (a) In the event that the Revenues earned by the Company and its Subsidiaries (as hereinafter defined) for the twelve month period commencing on July 1, 1997 and ending on June 30, 1998 (the "Earnout Period") exceed $8,000,000, Sellers shall be entitled to an earnout (the "Earnout Amount") as set forth on Schedule 2.4(a) attached hereto. In the event that the Company's Revenues for the Earnout Period are between two revenue numbers described -12- on Schedule 2.4, (a) the Earnout Amount shall be calculated by interpolating using the two corresponding Earnout Amounts described on Schedule 2.4(a) on a linear basis. For purposes hereof, "Revenues" shall mean gross tuition income earned minus tuition adjustments (student refunds) plus other income (all associated fees) plus consolidated Bookstore sales less the cost of goods sold by the Bookstores: all as determined in accordance with GAAP. Increases in tuition rates during the Earnout Period will count in determining the Revenues for purposes of calculating the Earnout Amount. (b) Purchaser shall provide Sellers with a calculation of the Revenues for the Earnout Period and of the Earnout Amount on or before July 20, 1998 (the "Earnout Calculation"). Purchaser shall pay the Earnout Amount set forth in the Earnout Calculation to Michael Zdeb as Escrow Agent, within thirty (30) days after delivery of the Earnout Calculations. If Sellers object in writing to the Earnout Amount within fifteen (15) days after receipt of the Earnout Calculation and the disputes between the Sellers and Purchaser in that regard are not resolved to the satisfaction of the parties within fifteen (15) days after the date upon which Purchaser receives such written objection of Sellers, then an Independent Auditor shall review the Earnout Calculation, including the Revenues for the Earnout Period and all related work papers in order to form an opinion as to the Revenues for the Earnout Period. The review of the Independent Auditor shall be completed as soon as practicable. If the Independent Auditor shall be of the view that the Revenues are not correctly stated in the Earnout Calculation, the Independent Auditor shall prepare a calculation of the Revenues which shall be final and binding upon all parties. The remaining part of the Earnout, if any, shall be paid within thirty (30) days after receipt by Sellers and Purchaser of the Independent Auditors calculation of Revenues. The costs of the engagement of the Independent Auditor shall be borne by the Sellers unless the Independent Auditor's determination results in an adjustment to the Earnout Amount in Sellers' favor of at least $100,000, in which case, the costs of the engagement of the Independent Auditor shall be borne by Purchaser. (c) Subject to the next sentence, thirty (30) days after delivery of the Earnout Calculation, the Purchaser shall pay Sellers that portion of the Earnout Amount which is not subject to dispute or offset (as provided in Section 9.9), to Michael Zdeb as Escrow Agent. Notwithstanding anything contained in this Agreement to the contrary, Purchaser shall not be required to pay any portion of the Earnout Amount which is subject to dispute or offset (as provided in Section 9.9) until any such dispute or offset right is resolved. Subject to Section 2.4(b) with respect to the costs of engagement of the Independent Auditor, each party hereto shall bear its own costs and expenses, including attorneys' fees, incurred in connection with any dispute under this Section 2.4. -13- By execution of the signature page hereto, CEC shall guaranty payment of the Earnout Amount in accordance with the terms of this Section 2.4. In addition, CEC will commit to cause the Schools to spend at least ninety-five percent (95%) of the advertising expenditures included in the budget (the "Advertising Budget") for the period from July 1, 1997 through June 30, 1998 attached hereto as Schedule 2.4(d). In addition, during the Earnout Period, the Schools would not force part-time students to enroll in full-time programs and part-time enrollments would still be permitted, however, the Schools would begin a gradual admissions program to encourage new enrollees to enroll on a full-time basis. Commencing with the June, 1998 start, the Schools would no longer be required to permit part-time students. In the event of failure of the Schools to spend at least ninety-five percent (95%) of the Advertising Budget in the aggregate during the Earnout Period, the Earnout Amount shall be $5,000,000. 2.5. Closing. The parties hereto shall close the purchase and sale of the Shares and the consummation of the other actions contemplated by this Agreement to occur in connection therewith at the closing (the "Closing"), which shall take place at the offices of Purchaser's counsel, Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd., 55 East Monroe Street, Suite 3700, Chicago, Illinois 60603, on June 30, 1997, or such other date to which the parties hereto shall mutually agree in writing. 2.6. Funding of School Operations Pending DOE Approval. From and after the date of the Closing and until the date the DOE approves resumption of Title IV funding for each of the Schools as operated by Purchaser pursuant to a DOE Approval Notice, Purchaser shall provide such working capital to the Company as Purchaser determines to be necessary to enable each Subsidiary to continue to operate in substantially the same manner and at substantially the same level of operations as the Company is currently operating such Subsidiary. 2.7. Participation of Employees in CEC Plans. Purchaser hereby agrees, and Sellers hereby acknowledge, that following the Closing (and subject to the requirements of applicable law), employees of the Company and the Subsidiaries may commence participation in the Career Education Corporation 401(k) Plan in accordance with the terms and conditions thereof or at such earlier time as may be specifically authorized by resolution of the Board of Directors of CEC. 2.8. Actions to be Taken with Respect to Company Plans. Sellers will take appropriate action to freeze the International Academy of Merchandising & Design 401(k) Savings Plan (the "401(k) Plan") effective as of the Closing Date. Sellers will commence taking the steps necessary to file an application for, and receive, an IRS determination letter for the 401(k) Plan and will indemnify and hold harmless the Indemnified Persons for, and will pay to the Indemnified Persons, any and all -14- cost, liabilities, penalties, taxes or Damages arising out of, or in connection with, receipt of the determination letter and/or the operation of the 401(k) Plan. Sellers hereby agree to indemnify and hold harmless the Indemnified Person for, and will pay to the Indemnified Persons, any and all cost, liabilities, penalties, taxes or Damages related to the failure to procure an IRS determination letter from the effective date of the 401(k) Plan. 3. Closing Deliveries. 3.1. Deliveries to Purchaser. Sellers agree to deliver to Purchaser, at the Closing, each of the following, each of which constitutes a condition to Purchaser's obligation to consummate the purchase of the Shares: (a) Certificates for Shares. Certificates representing the Shares, duly endorsed (or accompanied by duly executed stock powers), for transfer to Purchaser; (b) Releases from Sellers. A release in substantially the form of Exhibit E, executed by Sellers (the "Sellers' Release"); (c) Noncompetition Agreements. Noncompetition agreements in substantially the form of Exhibit F, each executed by one or more of the Sellers, as applicable (collectively, the "Noncompetition Agreements"), providing for the payments to Sellers in the aggregate amount of $2,000,000 in accordance with Schedule 3.1(c) attached hereto (the "Noncompetition Payments"), in consideration for the Sellers' performance of the covenants and obligations set forth in their respective Noncompetition Agreements, which Noncompetition Payments shall be paid to Sellers simultaneously with disbursement of the Deferred Payment pursuant to Section 2.2(b) in accordance with the terms and conditions of the Noncompetition Agreements; (d) Escrow Agreement. A fully executed copy of the Escrow Agreement pursuant to which Michael J. Zdeb is appointed as Escrow Agent for the Deferred Payment Letter of Credit. (e) Secretary's Certificates for the Company and each Subsidiary. A certificate, signed by the secretary or an assistant secretary of the Company, certifying the articles of incorporation and bylaws of the Company, appropriate authorizing resolutions of the Company's Board of Directors, the incumbency of the Company's directors and officers, and the good standing of the Company in its state of incorporation and the States of Illinois and Florida, and a certificate for each Subsidiary, signed by the secretary or an assistant secretary of such Subsidiary, certifying the articles of incorporation and bylaws of such Subsidiary, the incumbency of such Subsidiary's directors and officers, and the good standing of such Subsidiary in the state of its incorporation and each -15- other state where the nature of its operations require it to qualify to do business as a foreign corporation; (f) Closing Certificate. A certificate executed by Sellers satisfying the requirements of Sections 7.4, 7.5 and 7.6 hereof; (g) Legal Opinion. A legal opinion of Seller's counsel, Childress & Zdeb, Ltd., in substantially the form of Exhibit G attached hereto, addressed to Purchaser and Purchaser's lender; (h) Consents. Evidence satisfactory to Purchaser's counsel that each consent of a third party listed in Schedule 3.1(h) attached hereto, which consents are required by Purchaser to be obtained by Sellers prior to the Closing, have been obtained and remain in full force and effect, unless the obligation to obtain such consent has been specifically waived in writing by Purchaser; (i) Payoff Letters. Payoff letters in respect of the Designated Liabilities, together with appropriately executed UCC termination statements for all liens in respect thereof; (j) Closing Financial Information. An estimated consolidated balance sheet of the Company and the Subsidiaries (the "Closing Balance Sheet") calculated as of 5:00 p.m. Chicago time on the business day immediately preceding the Closing Date prepared in the same manner and using the same procedures as the preliminary closing balance sheet attached hereto as Schedule 3.1(j) except that the $2,000 foundation asset and the receivables from shareholders shall be removed from the Closing Balance Sheet, accompanied by schedules in reasonable detail showing cash balances in all bank accounts of the Company and each Subsidiary, and all of their respective outstanding accounts payable, together with a calculation of estimated Net Worth; (k) Consent and Estoppel Certificates. Except to the extent waived in writing by Purchaser, consent and estoppel certificates from the landlords of the Leased Facilities, certifying certain factual matters relating to the Leases, including without limitation certification that there are no defaults under the Leases and the amounts of security deposits under the Leases, and consenting to the transfer of the Shares to the Purchaser, in form and substance reasonably acceptable to Purchaser and its lenders; (l) Resignations. A resignation by each of the Sellers from their positions as directors and officers of the Company and, where applicable, the Subsidiaries, which resignations shall become effective simultaneously with the Closing, and acknowledgment that their respective employment -16- agreements, if any, have been terminated without any further obligation due from the Company or any Subsidiary or the Purchaser or CEC; (m) Bank Accounts. A list of all operating and other bank accounts of the Company and each Subsidiary, together with documentation of the removal of all directors and officers resigning pursuant to Section 3.1(l) as signatories for such accounts; and (n) Other Documents. Such other documents relating to the transactions contemplated by this Agreement as Purchaser or its counsel may reasonably request, including, without limitation, to the extent not waived in writing by Purchaser, documents specified as Sellers' closing deliveries on the Closing Checklist in the form of Exhibit H attached hereto. 3.2. Closing Deliveries to Sellers. Purchaser agrees to deliver to Sellers at the Closing, each of the following, each of which constitutes a condition to Sellers' obligations to consummate the sale of the Shares: (a) Closing Payment. The Closing Payment required by Section 2.2(a) by wire transfer of immediately available funds; (b) Seller Notes. The Seller Notes, executed by Purchaser; (c) Guaranty. The Guaranty, executed by CEC; (d) Noncompetition Agreements. The Noncompetition Agreements, executed by Purchaser; (e) Letters of Credit. The Note Letters of Credit and the Deferred Payment Letter of Credit; (f) Termination of Sellers' Guarantees. Evidence of the termination or release of the guarantees of Sellers described on Schedule 3.2(f) attached hereto, or, to the extent any such termination or release cannot be obtained prior to Closing despite Purchaser's and CEC's best efforts, delivery by Purchaser and CEC of an indemnification of the applicable Seller or Sellers' obligations thereunder, in either case in form and substance reasonably satisfactory to Sellers; (g) Secretary's Certificate for Purchaser. A certificate, signed by the secretary or an assistant secretary of Purchaser, certifying the articles of incorporation and bylaws of Purchaser, appropriate authorizing resolutions of Purchaser's Board of Directors, the incumbency of Purchaser's officers executing this Agreement and the documents delivered in connection with the -17- Closing, and the good standing of Purchaser in its state of incorporation and the States of Illinois and Florida; (h) Closing Certificate. A certificate executed by Purchaser satisfying the requirements of Sections 8.1 and 8.2 hereof; (i) Legal Opinion. A legal opinion of counsel for Purchaser, Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd., in substantially the form of Exhibit I attached hereto, addressed to Sellers; and (j) Other Documents. Such other documents relating to the transactions contemplated by this Agreement as Sellers or their counsel may reasonably request, including, without limitation, documents specified as Purchaser's closing deliveries on the Closing Checklist. 3.3. Post-Closing Covenants. (a) Further Assurances. On or after the Closing Date, and without further consideration, Purchaser and Sellers shall, from time to time at the request of any other party hereto, execute and deliver to such other party further documents and instruments evidencing the consummation of the transactions contemplated by this Agreement as such other party may reasonably require including, without limitation, instruments of conveyance, assignment and transfer of the Shares. The party requesting the execution and delivery of such further documents and instruments shall pay the reasonable out-of-pocket costs and expenses of all other parties hereto in connection therewith. (b) Administration of the Company Prior to Disbursement of the Deferred Payment; Cooperation of Parties. From and after the Closing Date and until payment in full of the Deferred Payment and the Noncompetition Payments, or recission of the transactions contemplated hereby in accordance with Section 10, Purchaser, at Purchaser's sole cost and expense, shall administer and operate the Company, the Subsidiaries and the Schools in material compliance with all Legal Requirements and Accrediting Bodies requirements, and in accordance with all permits, Accreditations, authorizations and agreements issued by or entered into with any Governmental Body or Accrediting Bodies regulating or otherwise relating to the administration and operation of the Company, the Subsidiaries or the Schools. Subject to the terms and provisions of this Agreement, Purchaser shall use its commercially reasonable efforts in order to obtain any and all approvals from the DOE, the Accrediting Bodies and any other Governmental Body that may be necessary or appropriate to vest in Purchaser the right and authority to administer and operate the Schools and the Bookstores, and Purchaser and Sellers shall cooperate in order to obtain such approvals. During the period from the date of the Closing -18- Date through the date on which Purchaser's right to rescind the transactions contemplated hereby has expired or otherwise terminated (the "Rescission Termination Date"), Purchaser shall cause the Company and the Subsidiaries to conduct their operations only according to the Company's and Subsidiaries' ordinary course of business, and the Purchaser shall use its good faith efforts to preserve intact the Company's and the Subsidiaries' business organization, maintain adequate cash reserves to pay operating expenses in the ordinary course of business, keep available the services of the employees and maintain satisfactory relationships with the Accrediting Bodies, Governmental Bodies, suppliers, agents, students and others having business relationships with the Company and the Subsidiaries; provided, however, that the foregoing shall not prohibit Sellers from causing the Company and its subsidiaries to implement new marketing strategies not to exceed $300,000, reasonable personnel changes, employment and occupational safety policies, capital expenditures not to exceed $250,000, actions necessary to obtain the withdrawal of the show cause order dated April 25, 1997, issued by the Accrediting Bodies (the "Show Cause Order") and such other changes as many be reasonably anticipated to improve the Schools. Purchaser shall promptly notify Sellers of any material change in the normal course of business of the Company or the Subsidiaries, and of any Accrediting Bodies or Governmental Body, and of any investigations or hearings (or communications indicating that the same may be contemplated) or adjudicatory proceedings involving the Company or the Subsidiaries, and shall keep Sellers fully informed of such events and permit Sellers representatives prompt access to all materials prepared in connection therewith, subject to relevant Legal Requirements. (c) Access and Maintenance of Records. From and after the Closing Date, Purchaser shall afford to Sellers, their counsel, accountants and other authorized representatives reasonable access to each of the Company's, the Subsidiaries' and the Schools' books and records related to periods prior to the Closing Date during normal business hours and upon reasonable notice from Sellers to Purchaser, as reasonably required by Sellers in connection with (i) performance by Sellers of any of Sellers' obligations (whether directly or by virtue of their indemnification obligations) pursuant to this Agreement, (ii) any claim, action, litigation, program review, audit or other proceeding involving any one or more of the Sellers (other than any such claim, action, litigation, program review, audit or proceeding arising under this Agreement or in which Purchaser and/or the Company and the Subsidiaries, on one hand, and Sellers or any of their Affiliates, on the other hand, are adverse parties and to which a privilege would apply) and (iii) Sellers preparation of their tax returns. Sellers, at Sellers' expense, may make copies of any such records as may be necessary or appropriate for Sellers' use (subject to Section 6.1 hereof) in connection with the foregoing. From and after the Closing Date, Purchaser shall afford to DOE, the Accrediting Bodies and other regulatory authorities access to the Company's and -19- each Subsidiary's books and records as required by applicable law or regulations. For a period of seven (7) years from the Closing Date or until the expiration of the record retention period under relevant Legal Requirements or Accrediting Bodies requirements, if longer, Purchaser shall not destroy or otherwise dispose of any books or records of the Company or any Subsidiary related to periods prior to the Closing Date. Notwithstanding the foregoing, Purchaser shall preserve and protect all books, documents, papers, computer programs and records pertaining in any manner to the administration by the Company or any Subsidiary of federal student financial assistance programs pursuant to Title IV with respect to the Schools for at least the period of time specified under applicable Legal Requirements. 4. Representations and Warranties of Sellers. As a material inducement to Purchaser to enter into this Agreement and to purchase the Shares, Sellers hereby represent and warrant as of the date hereof (except where another particular date is specified, in which event Sellers hereby represent as of such date) that: 4.1. Organization and Good Standing of the Company and its Subsidiaries; Accreditation. (a) The Company is a corporation, duly organized, validly existing and in good standing under the laws of the State of Illinois. The Company is qualified to do business as a foreign corporation and in good standing in all other states in which the nature of its operations require it so qualify, except where failure to so qualify would not have a material adverse effect on its business or operations. IAMD-Chicago is a corporation duly organized, validly existing and in good standing under the laws of the State of Illinois. IAMD-Chicago is qualified to do business as a foreign corporation and is in good standing in all other states in which the nature of its operations require it to so qualify, except where failure to so qualify would not have a material adverse effect on its business or operations. IAMD-Tampa is a corporation duly organized, validly existing and in good standing under the laws of the State of Florida. IAMD-Tampa is qualified to do business as a foreign corporation and is in good standing in all other states in which the nature of its operations require it to so qualify, except where failure to so qualify would not have a material adverse effect on its business or operations. IAMD-Bookstore is a corporation duly organized, validly existing and in good standing under the laws of the State of Illinois. IAMD-Bookstore is qualified to do business as a foreign corporation and is in good standing in the State of Florida and in all other jurisdictions in which the nature of its operations require it to so qualify, except where failure to so qualify would not have a material adverse effect on its business or operations. Each of the Company and the Subsidiaries has all requisite power and authority to own, lease and operate its properties and -20- assets, to carry on its business as now conducted, and to consummate the transactions contemplated hereby. The Company and the Subsidiaries are not, and for the past five (5) years have not been, engaged in any business other than the operation of the Schools and the Bookstores, and activities directly related thereto. The copies of the Company's and the Subsidiaries' articles of incorporation and bylaws which have been furnished by Sellers to Purchaser reflect all amendments made thereto at any time prior to the date of this Agreement and are correct and complete. (b) The Accrediting Bodies represent all accrediting bodies under which the Schools are regulated or are required to be regulated and to the best of Sellers' knowledge, except for the DOE and state licensing agencies, there are no other accrediting entities or bodies under which the Schools are regulated or are required to be regulated. 4.2. Ownership of the Company, the Subsidiaries and the Schools. ---------------------------------------------------------- (a) The Subsidiaries are owned and operated by the Company directly, and no other Person has any ownership interest in any Subsidiary. The Schools and the Bookstores are owned directly by the applicable Subsidiary, and no other Person has any ownership interest in the Schools or the Bookstores. No Person other than Purchaser has any right, option, warrant, subscription or other arrangement to purchase shares of capital stock of the Company (or any of the Subsidiaries) or to otherwise acquire any other equity interest in the Company (or any of the Subsidiaries) or the Schools or the Bookstores. (b) The Shares are is owned by each Seller directly, and no other Person other than Sellers has any direct or indirect ownership interest in the Company and except for agreements which will be canceled prior to closing, no Person, other than Purchaser, has any right, option, warrant, subscription, or other arrangement to purchase shares of capital stock of the Company or to otherwise acquire any other equity interest in the Company. 4.3. Capacity; Authorization; Binding Effect, Etc. -------------------------------------------- Each Seller hereby represents and warrants that he or she has the unrestricted and absolute power, legal capacity and authority to execute, deliver and perform this Agreement and each other document being executed in connection herewith to which he or she is a party. Such Seller hereby further represents and warrants that this Agreement has been, and each other document to be executed by such Seller in connection herewith, as of the Closing, will have been, duly executed and delivered by such Seller and (assuming the due authorization, execution and delivery hereof and thereof by Purchaser and any other parties thereto), this Agreement is, and each such other document or agreement will be, a -21- valid and binding obligation of such Seller, as the case may be, enforceable against him or her in accordance with its terms. 4.4. No Conflicts, Etc. ----------------- (a) Except as set forth in Schedule 4.4, the execution, delivery and performance of this Agreement and each other document being executed by Sellers or any of them in connection herewith, and the consummation of the transactions contemplated hereby and thereby, do not and will not: (a) contravene, conflict with, or result in a violation of (i) any provision of the articles of incorporation or bylaws of the Company or any of the Subsidiaries; or (ii) any resolution adopted by the board of directors or the stockholders of the Company or any of the Subsidiaries; (b) contravene, conflict with or violate any Legal Requirement applicable to the Company, any of its Subsidiaries, the Schools, the Bookstores or any of their respective assets or properties; (c) with or without the giving of notice or the passage of time, or both, conflict with or result in the breach or termination, of, or default under, any provision of the articles of incorporation or bylaws of the Company or any of the Subsidiaries, or any material instrument, license, permit, authorization, agreement or commitment to which the Company, any of the Subsidiaries the Schools, or the Bookstores are a party or by which any of their assets or properties are bound; (d) constitute a violation of any order, judgment or decree to which the Company, the Subsidiaries, the Schools, or the Bookstores, are a party or by which any of their assets or properties is bound; or (e) require any approval of, filing or registration with, or consent from any Governmental Body or Accrediting Bodies that is required to be obtained or made by the Company, the Subsidiaries, the Schools, or the Bookstores; (f) cause Purchaser, the Company or any Subsidiary to become subject to, or liable for the payment of, any Taxes outside of the ordinary course of business relating to periods prior to the Closing Date, or transfer taxes under any state or local law attributable to the purchase and sale of the Shares. Except as set forth on Schedule 4.4, none of the Company, any of its Subsidiaries, the Schools, the Bookstores or any Seller is or will be required to give any notice or obtain any consent, approval or other authorization from any Person in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereunder. (b) The execution, delivery and performance of this Agreement and each other document being executed by each Seller in connection herewith, and the consummation of the transactions contemplated hereby and thereby, do not and will not: (a) contravene, conflict with or violate any Legal Requirement applicable to such Seller; (b) with or without the giving of notice or the passage of time, or both, conflict with or result in the breach of termination, of, or default under, or any material instrument, license, permit, authorization, agreement or commitment to which such Seller is a party or by -22- which any of his or her assets or properties are bound; (c) constitute a violation of any order, judgment or decree to which such Seller is a party or by which any of his or her assets or properties is bound; or (d) required any approval of, filing or registration with, or consent from any Governmental Body or Accrediting Bodies that is required to be obtained or made by such Seller. Except as set forth on Schedule 4.4, such Seller is not or will not be required to give any notice or obtain any consent, approval or other authorization from any Person in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereunder by such Seller. 4.5. Investments. ----------- Except as provided for on Schedule 4.5 hereto, the Company has, and during the five (5) years prior to the date hereof has had, no Investment, in any Person other than the Subsidiaries. None of the Subsidiaries has, and during the five (5) years prior to the date hereof has had, any Investment in any other Person. 4.6. Capitalization. -------------- The capitalization of the Company and the Subsidiaries is as follows: (a) (i) The authorized equity securities of the Company consist of (aa) Twenty-Seven Thousand Three Hundred (27,300) shares of common stock, par value $.00 per share, of which Twenty-Thousand Three Hundred and Sixty (20,360) shares are issued and outstanding to the Sellers as set forth on Schedule 4.6 and One Thousand Four Hundred and Fifty (1,450) shares of preferred stock, $1.00 par value per share, designated as callable, cumulative non-voting preferred shares, of which 1268 shares are issued and outstanding as set forth in Schedule 4.6. Such issued and outstanding securities collectively constitute the Shares. (ii) Each Seller at the moment immediately prior to consummation of the Closing will be, the record and beneficial owners and holders of the Shares set forth next to such Seller's name in Schedule 4.6, free and clear of all Encumbrances, other than those Encumbrances set forth in Schedule 4.6 which Encumbrances shall be removed prior to or simultaneously with the Closing. (b) The authorized equity securities of IAMD-Chicago consist of One Hundred (100) shares of common stock, par value $.00 per share, of which One Hundred (100) shares are issued and outstanding to the Company. The Company is, and at the moment immediately prior to consummation of the Closing will be, the record and beneficial owner and holder of all such equity securities of IAMD-Chicago, free and clear of all Encumbrances. (c) The authorized equity securities of IAMD-Tampa consist of One Hundred (100) shares of common stock, par value $.00 per share, of which -23- One Hundred (100) shares are issued and outstanding to the Company. The Company is, and at the moment immediately prior to consummation of the Closing will be, the record and beneficial owner and holder of all such equity securities, free and clear of all Encumbrances. (d) The authorized equity securities of IAMD-Bookstore consist of Ten Thousand (10,000) shares of common stock, par value $.00 per share, of which One Thousand (1,000) shares are issued and outstanding to the Company. The Company is, and at the moment immediately prior to consummation of the Closing will be, the record and beneficial owner and holder of all such equity securities, free and clear of all Encumbrances. Except as set forth in Schedule 4.6, no legend or other reference to any purported Encumbrance appears upon any certificate representing equity securities of the Company or any of its Subsidiaries. All of the outstanding equity securities of the Company and each of its Subsidiaries have been duly authorized and validly issued and are fully paid and nonassessable. Except as set forth in Schedule 4.6, there are no agreements (other than shareholders' agreements which will be terminated prior to, or in connection with, the Closing), commitments (including without limitation any options, warrants, rights or similar arrangements) or Plans relating to the issuance, sale, or transfer of any equity securities or other securities of the Company or any of its Subsidiaries or providing for cash payments based upon the value of any equity securities of the Company or any of its Subsidiaries. None of the outstanding equity securities or other securities of the Company or any of its Subsidiaries was issued in violation of the Securities Act or any other Legal Requirement. None of the Company or any of its Subsidiaries owns, or has any agreement or commitment to acquire, any equity securities or other securities of any Person, or any direct or indirect equity or ownership interest in any other business or Person. 4.7. Book and Records. ---------------- Except as set forth on Schedule 4.7: (a) The minute books, stock record books, and other records of the Company and each of its Subsidiaries, all of which are being made available to Purchaser, are complete and correct and have been maintained in accordance with sound business practices, including the maintenance of an adequate system of internal controls, except where failure to so maintain such books and records would not have a material adverse effect upon the Company or any of its Subsidiaries. (b) The minute books of the Company and each of its Subsidiaries contain accurate and complete records of all meetings held of, and corporate action taken by, their respective stockholders, boards of directors, and committees of their respective boards of directors, and no meeting of any such stockholders, boards of directors, or committees has been held for which -24- minutes have not been prepared and are not contained in such minute books, except where failure to so prepare and maintain such minutes would not have a material adverse effect on the Company or any of its Subsidiaries. (c) The Company and each of its Subsidiaries has maintained all of its accounting books and records in accordance with applicable Legal Requirements and GAAP, except where failure to so maintain such books and records would not have a material adverse effect upon the Company or any of its Subsidiaries, and such books and records are true, correct and complete in all material respects. (d) At the Closing, all books and records described in this Section 4.7 will be in the possession of the Company or one of the Subsidiaries, as applicable. 4.8. Compliance with Laws; Licenses and Permits. ------------------------------------------ Except as set forth in Schedule 4.8(a) attached hereto, none of the Company, the Subsidiaries, or the Sellers is in violation of any Legal Requirement which violation might reasonably be expected to have a material adverse effect upon the financial condition, operating results, Accreditation or business of the Company, or any of the Subsidiaries, the Schools, or the Bookstores, individually or in the aggregate, and none of the Company, the Subsidiaries, or the Sellers has received notice of any such violation. None of the Company, the Subsidiaries, or the Sellers has received any notice of any violations of the Occupational Safety and Health Act, as amended, or any similar state or local Legal Requirement, relating to the Company, or any of the Subsidiaries or the Schools. The Company and each of the Subsidiaries currently maintains all licenses, Accreditations, certificates, permits, consents, authorizations, and other governmental or regulatory approvals (the "Licenses and Permits") necessary to conduct the business and operations of the Company and the Subsidiaries as presently being conducted, except where the failure to maintain any such Licenses and Permits would not have a material adverse effect on the operations or financial condition of the Company, or any of the Subsidiaries. As of the date hereof, no School has more than eighty-five percent (85%) of its revenues pursuant to Title IV Programs or derived from Title IV funds as determined in accordance with 34 C.F.R. (S) 600.5(d), and at no time during the past two (2) years have more than eighty-five percent (85%) of the revenues of either School, been pursuant to Title IV programs or derived from Title IV funds. The Company, and each Subsidiary, has duly filed all reports and returns required to be filed by it with all Governmental Bodies and the Accrediting Bodies , except where failure to file any such report or return would not have a material adverse effect on the Company or any of its Subsidiaries, the Schools or the Bookstores. No application made by the Company or any of the Subsidiaries for any Licenses and Permits during the last five (5) years has been denied. Schedule 4.8(b) attached hereto is a true, correct and complete list of all Licenses and Permits held by the Company and the Subsidiaries, and the Governmental Body or Accrediting Bodies granting each such License and Permit. Except as set forth on Schedule 4.8(b), the Licenses and -25- Permits are in full force and effect, and no proceedings for the suspension or cancellation of any of them is pending or, to the best of Sellers' knowledge, threatened. Sellers have delivered to Purchaser copies of all such Licenses and Permits. Except as set forth on Schedule 4.8(b), none of the Company, the Subsidiaries, the Schools, the Bookstores, or any Seller, has received notice that any of the Licenses and Permits will not be renewed and to the best of Sellers' knowledge, there is no basis for nonrenewal, except for the financial basis, as fully described on Schedule 4.8(c) hereto. Each Subsidiary has all Accreditations from the Accrediting Bodies required to conduct the business of the School operated by it, as presently conducted, and such School is certified by the DOE as an eligible institution under Title IV and is a party to, and in compliance with, a valid, unconditional program participation agreement with the DOE. Except as set forth in Schedule 4.8(c) attached hereto, none of the Company, any of the Subsidiaries, or any Seller, has received any notice, not previously resolved in full without any material liability, with respect to any alleged violation of the rules or regulations of the DOE the Accrediting Bodies, in respect of the Schools, including sales and marketing activities, or the terms of any program participation agreement to which it is or was a party. Except as set forth on Schedule 4.8(c) attached hereto, Sellers are not aware of any investigation or review of the Schools' student financial aid programs or any review of Accreditation of either School by any Governmental Body or Accrediting Bodies. 4.9. Recruitment; Admissions Procedures; Attendance; Financial Aid; -------------------------------------------------------------- Reports. - ------- Schedule 4.9(a) attached hereto is a complete list of all current policy manuals and other statements of procedures or instruction relating to (a) recruitment of students for the Schools, including procedures for assisting in the application by prospective students for direct or indirect state or federal financial assistance; (b) admissions procedures, including any descriptions of procedures for insuring compliance with federal, state or Accrediting Bodies requirements applicable to such procedures; (c) procedures for encouraging and verifying attendance, minimum required attendance policies, and other relevant criteria relating to course performance requirements and completion; and (d) compliance with Legal Requirements relating to financial aid programs (collectively, the "Policy Guidelines"). Sellers have delivered to Purchaser true, correct and complete copies of all Policy Guidelines. Except as disclosed on Schedule 4.9(b) attached hereto or in any other schedule to this Agreement, the operations of the Company and the Subsidiaries have, in all material respects, been conducted substantially in accordance with the Policy Guidelines (as then in effect) and all relevant standards imposed by the Accrediting Bodies, and other agencies administering state or federal governmental financial assistance programs in which the Company, the Subsidiaries or the Schools participate, and other applicable Legal Requirements. The Company has submitted all reports, audits, and other information, whether periodic in nature or pursuant to specific requests, for the Company, the Subsidiaries and the Schools ("Compliance Reports") to all agencies or other entities with which such filings are required relating to its compliance with (i) applicable Accreditation standards, (ii) Legal Requirements governing programs pursuant to which either of the Schools or its students receive student -26- financial assistance funding, and (iii) all articulation agreements between the Schools and degree granting colleges and universities in effect as of the date hereof, except where failure to submit such Compliance Reports would not have a material adverse effect on the business or operations of the Company, or any Subsidiary. All forms and records of the Company and the Subsidiaries have been prepared, completed, maintained and filed in all material respects in accordance with all applicable Legal Requirements, and are true and correct in all material respects. All financial aid grants and loans, disbursements and record keeping relating thereto have been completed in compliance with all federal and state requirements, and there are no material deficiencies in respect thereto. To the best of Sellers' knowledge and except as previously disclosed in prior audits by DOE, no student at either of the Schools has been funded prior to the date for which such student was eligible for funding, and such student's records conform in form and substance to all relevant regulatory requirements. 4.10. Cohort Default Rate. Schedule 4.10 attached hereto sets forth the published cohort default rate for each School, calculated in the manner prescribed by the DOE and issued to such School, of all students attending such School receiving assistance pursuant to Title IV programs for the fiscal years June 30, 1992 through June 30, 1995. To the best of Sellers' knowledge, such schedule is materially accurate in all respects. None of the Company, the Subsidiaries, the Schools or any Seller has received any notice as to the calculation or amount of the cohort default rates for the Schools for the year ended June 30, 1996. 4.11. Title to the Assets. (a) The Company does not presently own, nor has it ever owned, any real property. (b) Schedule 4.11(b) sets forth a list of the real properties leased or otherwise used, operated or occupied by the Company or any of its Subsidiaries (the "Leased Facilities"). The leases covering the Leased Facilities (the "Leases") are also described on Schedule 4.11(b). (c) All of the tangible assets and records relating to intangible assets of the Company and the Subsidiaries, are or as of the Closing will be delivered to Purchaser or located at the Leased Facilities. Neither the Company nor any Subsidiary is under any contractual or other legal obligation or has entered into any commitment to make capital improvements or alterations to the Leased Facilities. To the best of Sellers' knowledge, the Leases are in full force and effect and are enforceable in accordance with their terms. The Company and/or the applicable Subsidiary and, to the best of Sellers' knowledge, the landlords, are not in default under the Leases and, to the best of Sellers' knowledge, no event, act or omission has occurred which (with or without notice, the passage of time or the happening or occurrence of any other event) would result in a default -27- thereunder. The Company and/or the applicable Subsidiary enjoys peaceful and undisturbed possession under the Leases, and to the best of Sellers' knowledge the Leased Facilities are not subject to any zoning, ordinance or other restrictions which would prohibit the use and enjoyment of the Leased Facilities in the manner in which the Leased Facilities are currently used. Sellers have no knowledge of any condemnation proceedings relating to the Leased Facilities. To the best of Sellers' knowledge, the Leased Facilities, and the use thereof by the Company, the Subsidiaries and the Schools are in compliance in all material respects with all Legal Requirements, including without limitation, the Americans with Disabilities Act. (d) Except for the leased or licensed assets and properties set forth on Schedule 4.11(d)(i) attached hereto, the Company or one of the Subsidiaries owns outright, and has good and marketable title to, all of assets and properties used in connection with the operation of the Schools and the Bookstores, free and clear of Encumbrances other than Encumbrances set forth on Schedule 4.11(d)(ii) ("Permitted Encumbrances"), encumbrances set forth on Schedule 4.11(d)(iii) to be released or terminated prior to or in connection with the Closing ("Designated Liabilities"), and liens for current taxes not yet due and payable. All leases for tangible personal property used by the Company or any Subsidiary in connection with their operations are valid and in full force and effect and enforceable in all material respects in accordance with their terms. Except as set forth in Schedule 4.11(d)(i) attached hereto, no such lease is a capital lease, and neither the Company nor any Subsidiary, or, to the best of Sellers' knowledge, any of the other parties thereto, is in default under any such lease or license, and no event, act or omission has occurred which (with or without notice, the passage of time or the happening or occurrence of any other event) would result in a default thereunder. (e) The tangible assets (other than the Leased facilities) which are owned or leased by the Company or the Subsidiaries are listed on Schedule 4.11(e) attached hereto, and, to the best of Sellers' knowledge, are in good operating condition, order and repair, useable in the ordinary course of business consistent with past practice, subject to ordinary wear and tear, and are sufficient and adequate for all current operations. None of the Company, the Subsidiaries or any Seller has received notice of any violation of or default under any Legal Requirement or requirement relating to any of such assets which remains uncured or has not been resolved. (f) Except as set forth on Schedule 4.11(f), other than the Leased Facilities, the Company does not operate, nor during the past five (5) years has it owned, leased or operated, any Facility. (g) The Curricula constitutes all of the Curricula currently used in courses currently offered at the Schools. -28- (h) The Intellectual Property constitutes all the patents, trademarks, Tradenames, servicemarks, copyrights, know-how and trade secrets owned by the Company or any Subsidiary, or used in connection with their operations, and except for leased or licensed assets and properties set forth on Schedule 4.11(d)(i), constitutes all the patents, trademarks, logos, tradenames, servicemarks, copyrights, know-how and trade secrets used by the Company and the Subsidiaries. 4.12. Material Miscellaneous Contracts. Schedule 4.12 attached hereto sets forth a true, complete and correct list of all contracts, agreements, and commitments relating to the operations of the Company or the Subsidiaries (hereinafter collectively referred to as the "Material Miscellaneous Contracts") (a) requiring aggregate payments after the date hereof in excess of $5,000 or with a term expiring one (1) year or later after the date hereof, or (b) including confidentiality, noncompetition, nonsolicitation option or similar provisions, other than (x) the Leases, (y) leases and licenses listed on Schedule 4.11(d)(i) attached hereto, and (z) Plans listed on Schedule 4.21 attached hereto. True, complete and correct copies of all Material Miscellaneous Contracts, together with all amendments thereto, have heretofore been delivered or otherwise made available to Purchaser. The Material Miscellaneous Contracts constitute legal, valid and binding obligations of the Company, or one of the Subsidiaries, as applicable, and to the best of Sellers' knowledge, the other parties thereto, and to the best of Sellers' knowledge are in full force and effect. None of Company or any of the Subsidiaries is in material default or, to the best of Sellers' knowledge, alleged to be in material default on any term of any such Material Miscellaneous Contract. Except as noted on Schedule 4.12 attached hereto, the consummation of the transactions contemplated by this Agreement does not require the consent or approval of any party to any Material Miscellaneous Contract. 4.13. Tradenames; Confidential Information. (a) All tradenames, logos, trademarks or service marks used or useful in connection with the operations of the Company, or the Subsidiaries, and all forms, derivatives and graphic presentations thereof, including forms of the tradename "International Academy of Merchandising and Design" and related trademarks and servicemarks (collectively, the "Tradenames"), having material value to the operations of the Company or the Subsidiaries are set forth on Schedule 4.13(a) attached hereto. To the best of Sellers' knowledge, the Company and the Subsidiaries have the exclusive right to the use of each Tradename as an assumed business name in the states in which such Tradename is used, and Schedule 4.13(a) sets forth all registrations (including the jurisdictions thereof) of each Tradename as a trademark, servicemark or assumed name. The Company has not licensed any other Person to use any Tradename. None of the Company, the Subsidiaries, or any Seller, has been sued or, to the best of Sellers' knowledge, threatened with suit for infringement, violation or -29- breach with respect to any Tradename, and to the best of Sellers' knowledge, no basis exists for any such suit. None of the Company, the Subsidiaries or any Seller is on notice of any infringement, violation or breach of any Tradename by any other Person. (b) To the best of Sellers' knowledge, the Company and the Subsidiaries have the right to use, free and clear of any claims or rights of any third party, all Intellectual Property (subject in the case of computer programs to the license agreements in that regard), customer lists, Curricula and any other proprietary or confidential information required for or used in the operations of the Subsidiaries. To the best of Sellers' knowledge, none of the Company, the Subsidiaries, or any Seller is in any way making any unlawful or wrongful use of any tradename, trade secret, customer list, know-how, curricula or any other proprietary or confidential information of any third party including, without limitation, any former employer of any present or past employee of the Company or any Subsidiary. 4.14. Financial Statements. Sellers have previously furnished the Financial Statements to Purchaser. The balance sheets included in the Financial Statements present fairly, in accordance with GAAP, the assets and liabilities of the Company and the Subsidiaries as of the respective dates thereof, and the related statements of operations present fairly, in accordance with GAAP, the results of operations of the Company and the Subsidiaries for the respective periods covered thereby. The Financial Statements have been prepared in accordance with GAAP (except that the Interim Financial Statements are not accompanied by all footnotes required by GAAP and are subject to customary year end adjustments), are correct and complete in all material respects and fairly present the financial position of the Company and the Subsidiaries as of the dates of such Financial Statements, and the results of operations and changes in financial position for the periods covered by such Financial Statements. The Company and the Subsidiaries maintained their financial books and records in accordance with applicable Legal Requirements and (except for usual statement date adjustments) in accordance with GAAP, and such books and records are, and during the periods covered by the Financial Statements were, correct and complete in all material respects, fairly reflecting the income, expenses, assets and liabilities of the Company and the Subsidiaries. On the date of the balance sheet forming a part of the Interim Financial Statements, the Company and the Subsidiaries had no liabilities which were required to be set forth in a balance sheet prepared in accordance with GAAP that were not included in such balance sheet. Except as set forth in Schedule 4.14 attached hereto, neither the Company nor the Subsidiaries are required to provide any letters of credit, guarantee or other financial security arrangements in connection with any transactions approvals or licenses in the ordinary course of operations of the Company or the Subsidiaries nor is the Company or any Subsidiary bound by, party to or subject to any agreement, contract, or commitment providing for the guarantee, indemnification, assumption or endorsement or any like commitment with respect to the obligations, liabilities (contingent or otherwise) or -30- indebtedness of any Person. As of the date hereof, neither the Company nor any Subsidiary has any material indebtedness, liabilities or obligations of any nature, whether absolute, accrued, contingent or otherwise, whether known or unknown, other than: (a) those set forth or reserved against in the balance sheets included in the Financial Statements for the fiscal years then ended or disclosed in the footnotes to such Financial Statements, to the extent set forth, reserved against or in the case of footnote items, disclosed; (b) those set forth or reserved against in the Interim Financial Statements, or those which would have been disclosed in footnotes to such Interim Financial Statements, if footnotes had been prepared and which have been disclosed in writing to Purchaser, to the extent set forth, reserved against or, in the case of footnote items, disclosed; (c) except as set forth on Schedule 4.14(c) attached hereto, those incurred since the Interim Balance Sheet Date in the ordinary course of business and consistent in nature with past practice, or those which would have been disclosed in footnotes if footnotes had been prepared and which have been disclosed to Purchaser in writing, to the extent set forth, reserved or, in the case of footnote items, disclosed; (d) those set forth on Schedule 4.14(c); and (e) those not required to be disclosed in financial statements or notes thereto prepared in accordance with GAAP. There are no long-term fixed or contractual liabilities relating to the operation of the Company or the Subsidiaries, as presently operated by the Company, the annual expenses of which are not reflected in the Financial Statements where required by GAAP or which are not otherwise disclosed or set forth in this Agreement or one or more of the schedules hereto. Other than obligations in respect of prepaid tuition neither the Company nor any Subsidiary has any obligations in respect of refundable deposits. 4.15. Receivables. The accounts receivable (including, without limitation, student accounts receivables) of the Company and the Subsidiaries, except to the extent of the allowance for cancellations and doubtful accounts set forth in the Final Balance Sheet, are bona fide receivables, arose out of arms' length transactions in the normal and usual practices of the Company or the Subsidiaries, as applicable, are recorded correctly on the applicable books and records of the Company and the Subsidiaries, and, to the best of Sellers' knowledge, are collectable in full in the ordinary course of business, subject in the case of certain receivables to reserves established for such receivables in the Final Balance Sheet. To the best of Sellers' knowledge, such receivables are not subject to any defense, counterclaim or setoff or trade discounts or credits not reflected in the Final Balance Sheet (other than -31- tuition refund policies administered in accordance with all applicable Legal Requirements and the applicable Policy Guidelines), and Sellers have no knowledge of any facts or circumstances which would cause any of such receivables to have to be written down or written off in amounts which in the aggregate would be in excess of reserves established for such receivables in the Final Balance Sheet. 4.16. Inventories. The only inventories maintained by the Company and the Subsidiaries consist of supplies used in the ordinary course of business (and, in the case of IAMD-Bookstore, books and school supplies) and are reflected on the Financial Statements as "inventories." Such supplies will be reflected at cost on the Final Balance Sheet, are usable in the ordinary and regular course of business, are in all material respects fit and sufficient for the purpose for which they were purchased and, at the date of this Agreement, are in customary amounts appropriate to the Company's operation of the Schools and the Bookstores. All excess or obsolete items have been written off. 4.17. Bank Accounts. Schedule 4.17 attached hereto sets forth a true, complete and correct list of the names of all banks and other financial institutions in which the Company or any Subsidiary has an account or safe deposit box, which list includes a description of such accounts, the account numbers and the names of all individuals authorized to draw thereon or have access thereto. 4.18. Litigation, Etc. (a) Except as set forth in Schedule 4.18 (a) attached hereto, there are no (a) judgments, decrees, injunctions, rulings, awards or orders of any Governmental Body or the Accrediting Bodies against or affecting the Company, any Subsidiary, the Schools or the Bookstores, and (b) Proceedings, pending or, to the best of each Sellers' knowledge, threatened against or affecting the Company, any Subsidiary, the Schools or the Bookstores, at law or in equity, or before or by any Governmental Body or Accrediting Bodies; to the best of Sellers' knowledge, none of the Company, any Subsidiary, the Schools or the Bookstores, are the subject of any investigations or inquiries by any Governmental Body affecting the Company, any Subsidiary, the Schools or the Bookstores, (including inquiries as to the qualification to hold or receive any of the Licenses and Permits); and, to the best of Sellers' knowledge, there is no basis for any of the foregoing. There are no other Proceedings pending, or to the best of Sellers' knowledge, threatened against or affecting the Company, the Subsidiaries, or their Affiliates generally (including claims with respect to any Employee Benefit Plans) which if adversely decided would have a material adverse effect on the Company, the Subsidiaries, the Schools or the Bookstores, or their assets taken as a whole. -32- (b) Except as set forth in Schedule 4.18(b) attached hereto, there are no (a) judgments, decrees, injunctions, rulings, awards or orders of any Governmental Body or Accrediting Bodies against or affecting any Seller or any such Seller's interest in the Company, and (b) Proceedings, pending or, to the best of each Seller's knowledge, threatened against or affecting such Seller's interest in the Company or the Schools or such Seller, at law or in equity, or before or by any Governmental Body or Accrediting Bodies; to the best of such Seller's knowledge, such Seller is not the subject of any investigations or inquiries by any Governmental Body affecting the Company or the Subsidiary (including inquiries as to the qualification to hold or receive any of the Licenses and Permits); and, to the best of such Seller's knowledge, there is no basis for any of the foregoing. There are no other Proceedings pending, or to the best of Seller's knowledge, threatened against or affecting such Seller (including claims with respect to any Employee Benefit Plans) which if adversely decided would have a material adverse effect on the Company, the Subsidiaries, the Schools or their assets taken as a whole. 4.19. Insurance. Schedule 4.19 attached hereto sets forth all insurance coverages now or previously maintained by the Company and the Subsidiaries on the Leased Facilities, the assets and the operations of the Company and the Subsidiaries, including a list of all policies or binders of fire, extended coverage, general and vehicular, fidelity and fiduciary liability, workers' compensation, key-man life and other similar insurance, and all binders for insurance to be purchased on or before Closing in order to replace policies expiring prior to the Closing. Copies of such policies have been previously delivered to Purchaser. Except as set forth in Schedule 4.19 attached hereto, such policies and binders are in full force and effect, and there is no material breach or default with respect to any provision contained in any such policy or binder, and all premiums, to the extent due and payable, have been paid or the liability therefor properly accrued. Except for amounts deductible and self-insured retainers under such policies of insurance, the Company and the Subsidiaries have not been, prior to the date hereof, subject to liability as a self-insurer. Except as set forth in Schedule 4.19 attached hereto, there are no claims pending or threatened under any of said policies pertaining to the Company or the Subsidiaries or disputes with underwriters regarding coverage under such policies pertaining to the Company or the Subsidiaries. Except as set forth on Schedule 4.19, neither the execution, delivery and performance of this Agreement, nor the consummation of the transactions contemplated hereby, will result in the loss to the Company or the Subsidiaries of any of the insurance policies listed, or impair the rights of the Company or the Subsidiaries with respect to liabilities arising, in connection with the operations of the Company and Subsidiaries prior to the Closing. Within five (5) years prior to the date hereof, neither the Company nor any Subsidiary has been denied insurance, or been offered insurance only at a commercially prohibitive premium. -33- 4.20. Environmental Matters. Except as set forth in Schedule 4.20 attached hereto, none of the Company or the Subsidiaries have generated, transported, stored, treated or disposed, nor has either of them allowed or arranged for any third persons to generate, transport, store, treat or dispose of, any Hazardous Substance to or at: (a) any location other than a site lawfully permitted to receive such Hazardous Substance for such purposes or (b) any location designated for remedial action pursuant to federal, state or local statute and relating to the environment or waste disposal; nor, to the best of Sellers' knowledge, has the Company or the Subsidiaries performed, arranged for or allowed by any method or procedure such transportation or disposal in contravention of any Legal Requirements or in any other manner which may result in liability for contamination or threat of contamination of the environment in violation of any Environmental Law, except where such violation would not have a material adverse effect on the business or operations of the Company or the Subsidiaries. Except as set forth in Schedule 4.20, attached hereto, to the best of Sellers' knowledge, no generation, use, handling, storage, treatment, release, threat of release, discharge, spillage or disposal of any Hazardous Substance in violation of any Environmental Law, has occurred or is occurring at the Leased Facilities or, to the best of Sellers' knowledge, any other Facility previously owned or operated by the Company or any Subsidiary. Except as set forth in Schedule 4.20 attached hereto, none of the Company, the Subsidiaries, or Sellers has received notification of, nor is it aware, of, any past or present failure by the Company or the Subsidiaries, to comply with any Environmental Law, including without limitation the requirements of any permits, franchises, licenses or orders issued pursuant to any Environmental Law, applicable to the Company or the Subsidiaries, or their operations. Except as set forth on Schedule 4.20, none of the Company, the Subsidiaries or Sellers has received any notification, nor are any of them aware of, any past or present failure by the Company or the Subsidiaries to comply in any material respect with any Environmental Law, which failure may result in judicial, regulatory or other legal proceedings that would have a material adverse impact on the operations of the Company or the Subsidiaries or result in the imposition of any Encumbrance against the Company's or any Subsidiaries' assets. Except as set forth on Schedule 4.20, to the best of Sellers' knowledge, the Leased Facilities do not contain asbestos or polychlorinated biphenyls or any underground storage tanks. None of the Company, the Subsidiaries or Sellers has received notice from any Governmental Body requiring any removal or other remediation with respect to asbestos or polychlorinated biphenyls located at the Leased Facilities. 4.21. Employee Benefit Plans. Schedule 4.21(a) lists all Employee Benefit Plans (the "Plans") that the Company or any Subsidiary maintains to which the Company or any Subsidiary contributes or to which the Company or any Subsidiary has an obligation to contribute with respect to any current or former employee of the Company or any Subsidiary, or with respect to which the Company or any Subsidiary otherwise is reasonably expected to have any liability or potential liability (whether or not such plan has terminated or whether or not such plan is or was maintained for current or former employees of the Company or any -34- Subsidiary or current or former employees of any other member of the controlled group of the Company or any Subsidiary (within the meaning of Section 414 of the Code). (a) Except as disclosed on Schedule 4.21(b), the Company or any Subsidiary does not contribute to, have any obligation to contribute to or otherwise have any liability or potential liability with respect to (i) any Multiemployer Plan, (ii) any Employee Benefit Plan of the type described in Sections 4063 and 4064 of ERISA or in Section 413(c) of the Code (and regulations promulgated thereunder) (iii) any voluntary employee beneficiary as described in Section 501(c)(9) of the Code or (iv) any employee welfare benefit plan which provides health, accident, or life insurance benefits to current or future retirees or current or former employees, their spouses or dependents other than in accordance with Section 4980(B) of the Code or applicable state continuation coverage law. (b) To the best of Sellers' knowledge and except as set forth in Schedule 4.21(b), each Plan and all related trusts, insurance contracts and funds, comply in form and in operation with all applicable laws and regulations, including, but not limited to, ERISA and the Code. No person has engaged in any transaction with respect to any Plan which could subject the Company or any Subsidiary, any trustee, and any administrator of any Plan, or any party dealing with any Plan, or Buyer to any tax or penalty imposed by ERISA or the Code. No actions, suits, claims or demands with respect to the Plans (other than routine claims for benefits) are pending or threatened and, except as set forth in Schedule 4.21(b), Sellers have no knowledge of any facts which could give rise, or be expected to give rise, to any actions, suits, claims or demands. Except as set forth in Schedule 4.21(b), no Plan that is subject to the funding requirements of Section 412 of the Code or Section 302 of ERISA has incurred any "accumulated funding deficiency" whether or not waived. Except as set forth in Schedule 4.22(b), no liability to the PBGC (except for routine payment of premiums) has been, or is expected to be, incurred with respect to any Plan subject to Title IV of ERISA, no Reportable Event has occurred with respect to any such Plan and the PBGC has not commenced or threatened the termination of any Plan. No lien arising under Section 302(f) of ERISA or Section 412(n) of the Code has arisen and the Company or any Subsidiary has not been required to post any security under Section 307 of ERISA or Section 401(a)(29) of the Code, and Sellers have no knowledge of any facts which could be expected to give rise to any such lien or security. (c) Except as provided on Schedule 4.21(b), each Plan, and its related trust (if any), which is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter from the IRS as to the qualification under the Code of the Plan and the tax-exempt status of such related trust, and, to the best of Sellers' knowledge, nothing has occurred, including, but not limited to, the failure to make any required amendments, -35- that could adversely affect the qualification of the Plan or the tax-exempt status of such trust. (d) Neither the Company nor any Subsidiary is or ever has been a party to any defined benefit plan. (e) Except as disclosed in Schedule 4.21(b), no Plan requires the Company or any Subsidiary to pay separation, severance, termination or other such benefits solely as a result of any transaction contemplated by this Agreement or solely as a result of a "Change in Control" as such term is defined in Section 280G of the Code. The Company has complied in all material respects with the requirements of Section 4980B of the Code and Part VI of Subtitle B of Title I of ERISA. (f) With respect to each Plan, all contributions which are due (including employer contributions and employee salary reduction contributions) have been paid to such Employee Benefit Plan, and all contributions for prior plan years which are not yet due, and with respect to the current plan year for the period ending on the Closing Date, have been made or accrued, and with respect to the Employee Welfare Benefit Plans, all premiums or other payments which are due as of the Closing Date have been paid. (g) Except as noted on Schedule 4.21(b), with respect to each Plan, Sellers have provided Buyer with true, complete and correct copies, to the extent applicable, of: (i) all documents pursuant to which the Plans are maintained, funded and administered, (including, but not limited to, applicable trust documents), (ii) the three most recent annual reports (IRS Form 5500 series) (with attachments), (iii) the three most recent actuarial reports, (iv) the three most recent financial statements, (v) all governmental rulings, determinations, and opinions (and pending request for governmental rulings, determinations, and opinions), if any. 4.22. Employment Matters. (a) Except as set forth in Schedule 4.22(a) attached hereto, (i) to the best of Sellers' knowledge, the Company and the Subsidiaries are in compliance in all material respects with all Legal Requirements relating to employment and employment practices, including terms and conditions of employment, employment discrimination and wages and hours, and none of the Company or the Subsidiaries are engaged in any unfair labor practices with respect to individuals employed by or providing services to the Company or the Subsidiaries; (ii) none of the Company, the Subsidiaries or Sellers are aware of, nor has any of them received any written or other notice of, any complaints against the Company or the Subsidiaries with respect to individuals employed by or providing services to the Company or the Subsidiaries pending -36- before the National Labor Relations Board or any similar state or local labor agency; (iii) there are no labor strikes, slow-downs or stoppages or other labor troubles pending or, to the best of Sellers' knowledge, threatened with respect to any individuals employed by or providing services to the Company or the Subsidiaries; to the best of Sellers' knowledge no labor organization activities have occurred with respect to such employees during the past three (3) years; (iv) there are no collective bargaining agreements binding on the Company or the Subsidiaries; (v) no grievances have been asserted by any labor organization against the Company or the Subsidiaries with respect to individuals employed by or providing services to the Company or the Subsidiaries; (vi) and none of the Company or the Subsidiaries has experienced any work stoppage by such employees during the last three (3) years. Schedule 4.22(a) attached hereto contains a list of all employees of the Company and the Subsidiaries and all material consultants to the Company and the Subsidiaries (including, without limitation, sales representatives and other recruiters), other than attorneys and accountants, who are employed or providing services in connection with the operation of the Company or the Subsidiaries including: name; length of service; job title; rate of base salary, bonuses and other incentive compensation; and identifying all contracts, agreements, commitments and arrangements, written or oral, with such employees or consultants. Sales representatives and other recruiters for the Company and the Subsidiaries, whether employed directly by or otherwise engaged by the Company or the Subsidiaries, are licensed or registered in accordance with all applicable Legal Requirements. No such sales representative or other recruiter receives commissions, bonuses or other contingency payments based, directly or indirectly, on the enrollment of students by such individual. True, correct and complete copies of all agreements between the Company or any Subsidiary and such employees or consultants and all amendments thereto have been provided to Purchaser. The Company and the Subsidiaries have performed all of their obligations under such agreements and are not in default or violation and, to the best of Sellers' knowledge, the other parties thereto are not in default or violation, thereunder. (b) Except as set forth on Schedule 4.22(b), no employee, officer or director of the Company or any Subsidiary is a party to, or is otherwise bound by, any agreement or arrangement, including any confidentiality, noncompetition, or proprietary rights agreement, that in any way adversely affects or will affect (i) the performance of his duties as an employee, officer or director of the Company or such Subsidiary, or (ii) the ability of the Company or any Subsidiary to conduct its business, including without limitation the operation of the Schools and the Bookstores. To best of Sellers' knowledge, no employee of the Company listed on Schedule 4.22(b) intends to terminate his or her employment with the Company. -37- (c) Except as set forth on Schedule 4.22(c), there are no retired employees or directors of the Company or the Subsidiaries, or their dependents, receiving benefits or scheduled to receive benefits in the future from the Company or any Subsidiary. Except as set forth on Schedule 4.22(c), none of the Company, the Subsidiaries, or any Seller is party to any severance or other agreements with employees, former employees or former owners of the Company. (d) Schedule 4.22(d) lists all employee manuals and employment policies of the Company and the Subsidiaries. Except as set forth in Schedule 4.22(d), the Company or the applicable subsidiary has performed all its duties and obligations through the date hereof pursuant to such manuals and policies. (e) The Company has no "leased employees" for purposes of Section 414(n) of the Code. 4.23. Labor Relations; Compliance None of the Company, the Subsidiaries or the Schools has been nor is any of them a party to any collective bargaining or other labor contract. Except as set forth on Schedule 4.23, there has not been, there is not presently pending or existing, and to the best of Sellers' knowledge, there is not threatened, (a) any strike, slowdown, picketing, work stoppage, or employee grievance process, (b) any Proceeding against or affecting the Company, the Subsidiaries or the Schools relating to the alleged violation of any Legal Requirement pertaining to labor relations or employment matters, including any charge or complaint filed by an employee or union with the National Labor Relations Board, the Equal Employment Opportunity Commission, the Occupational Health and Safety Administration, or any comparable state or federal Governmental Body, organizational activity, or other labor or employment dispute against or affecting the Company, the Subsidiaries, the Schools or their premises, or (c) any application for certification of a collective bargaining agent. To the best of Sellers' knowledge, no event has occurred or circumstance exists that could provide the basis for any work stoppage or other labor dispute involving the Company or the Subsidiaries. There is no lockout of any employees by the Company or the Subsidiaries, and no such action is contemplated. The Company and the Subsidiaries have complied in all respects with all Legal Requirements relating to employment, equal employment opportunity, nondiscrimination, immigration, wages, hours, benefits, collective bargaining, the payment of social security and similar taxes, occupational safety and health, and plant closing, except where the failure to comply would not have a material adverse effect upon the Company, the Subsidiaries or their assets. The Company and the Subsidiaries are in compliance with the Worker Adjustment and Retraining Notification Act ("WARN") and any other similar applicable state and/or local laws regarding employees, and, where applicable, have provided its employees with such advance notice of termination of employment as required by WARN, or other applicable state or local laws, except where the failure to comply or provide notice would not have a material adverse effect upon the Company, the Subsidiaries or their respective assets. -38- Except as set forth on Schedule 4.23, none of the Company or the Subsidiaries is subject to any award, decision, injunction, judgment, ruling or verdict, requiring the payment of any compensation, damages, taxes, fines, penalties, or other amounts, however designated, for failure to comply with any of the foregoing Legal Requirements. 4.24. Tax Matters. (a) Except as disclosed on Schedule 4.24(a), (i) Each of the Company and the Subsidiaries has filed or caused to be filed in the prescribed manner and on or before the due dates therefor or within applicable extension periods all Tax Returns that are or were required to be filed by the Company or the Subsidiaries, either separately or as a member of a group of corporations, pursuant to applicable Legal Requirements. (ii) Sellers have delivered or made available to Purchaser copies of all such Tax Returns of the Company and the Subsidiaries, filed since January 1, 1993. (iii) Each of the Company and the Subsidiaries has paid, or made provision for the payment of, all Taxes that have or may have become due from the Company and the Subsidiaries, pursuant to such Tax Returns or otherwise, or pursuant to any assessment received by the Company or any Subsidiary, except such Taxes, if any, as are listed in Schedule 4.24(a) and are being contested in good faith and as to which adequate reserves (determined in accordance with GAAP) have been provided in the Final Balance Sheet. (b) The United States federal and state income tax returns of the Company and the Subsidiaries have been audited by the IRS, or are closed by the applicable statute of limitations for all taxable years through the fiscal year ended June 30, 1992. Schedule 4.24(b) contains a complete and accurate list of all audits of all such Tax Returns, including a reasonably detailed description of the nature and outcome of each audit. All deficiencies proposed as a result of such audits have been paid, reserved against, settled, or, as described in Schedule 4.24(b), are being contested in good faith by appropriate proceedings. Schedule 4.24(b) describes all adjustments to the United States federal income Tax Returns filed by the Company and the Subsidiaries or any consolidated group of corporations including the Company for all taxable years since the fiscal year ended June 30, 1993, and the resulting deficiencies proposed by the IRS. Except as described in Schedule 4.24(b), none of the Company, any Subsidiary or any Seller has given or been requested to give waivers or extensions (or is or would be subject to a waiver or extension given by any other Person) of any statute of limitations relating to the payment of -39- Taxes of the Company and the Subsidiaries or for which the Company or the Subsidiaries may be liable. Except as set forth and described in Schedule 4.24(b), there is no Proceeding and no assessment, reassessment or request for information in progress, or, to the best of Sellers knowledge, threatened, against or affecting any Subsidiary in respect of Taxes nor are any issues under discussion with any taxing authority relating to any matters which could result in claims for additional Taxes. (c) The charges, accruals, and reserves with respect to Taxes on the Interim Financial Statements are adequate (determined in accordance with GAAP) and are at least equal to the Company's and the Subsidiaries' liability for Taxes relating to periods through the date hereof. To the best of Seller's knowledge, there exists no proposed tax assessment against the Company or any Subsidiary except as disclosed in the Interim Financial Statements or in Schedule 4.24(c). No consent to the application of Section 341(f)(2) of the Code has been filed with respect to any property or assets held, acquired, or to be acquired by the Company or any Subsidiary. All Taxes that the Company or the Subsidiaries are or were required by Legal Requirements to withhold or collect have been duly withheld or collected and, to the extent required, have been paid to the proper Governmental Body or other Person. (d) All Tax Returns filed by (or that include on a consolidated basis) the Company and the Subsidiaries, or any of them, are true, correct, and complete in all material respects. There is no tax sharing agreement that will require any payment by the Company or any Subsidiary after the date of this Agreement. The Company is not, nor since September 1, 1987 has it been, an "S" corporation. 4.25. Brokerage. Neither Sellers nor the Company (or any of their Affiliates) has retained any broker or finder, and neither will be obligated to pay any brokers' or finders' fee, in connection with the negotiation or consummation of the transactions contemplated by this Agreement. 4.26. Affiliate Transactions. Except as set forth in Schedule 4.26 attached hereto or as specifically contemplated hereby, no Affiliate of any one or more of the Sellers is a party to any agreement, contract, commitment or transaction with the Company or the Subsidiaries, or has any material interest in any material property used in connection with the operations of the Company or the Subsidiaries. -40- 4.27. Absence of Certain Changes. Except as contemplated by this Agreement or as set forth on Schedule 4.27 attached hereto, from the Interim Balance Sheet Date until the date hereof there has not been, occurred or arisen: (a) any sale, lease, transfer, abandonment or other disposition of any right, title or interest in or to any of the properties or assets of the Company or the Subsidiaries (tangible or intangible), except in the ordinary course of business; (b) other than in the ordinary course of the Company's and the Subsidiaries' operations and consistent with the Company's and the Subsidiaries' past and present business practices, (i) any approval or action to put into effect any increase in any compensation or benefits payable to any employee, director, agent or officer of the Company or any Subsidiary, or any payment, grant or accrual to or for the benefit of any such employee, director, agent or officer of any bonus, service award, percentage compensation or other benefit, (ii) any adoption or amendment of any Plans, or any severance agreement or employment contract to which any such employee, director, agent or officer is a party or (iii) any entering into of any employment, deferred compensation or other agreements with respect to bonuses, service awards, percentage compensation or other benefits with any such employee, director, agent or officer; (c) any material adverse change in the financial condition, assets, liabilities (absolute, accrued, contingent or otherwise), business prospects, reserves or operations of the Company or the Subsidiaries which would have a material adverse effect; (d) any damage, destruction or loss, whether or not covered by insurance, materially adverse to the assets, business, or operations of the Company or the Subsidiaries; (e) any change in any material respect in the business policies or practices of the Company or the Subsidiaries or a failure of the Subsidiaries to operate the Schools and the Bookstores in the ordinary course with a view to preserving such businesses intact, to retaining the services of the present officers, employees and agents and with a view to preserving the business relationships of the Company and the Subsidiaries, including without limitation business relationships of the Schools with, and the goodwill of, students, sales representatives, suppliers, the Accrediting Bodies, Governmental Bodies and others; or -41- (f) any written agreement, or otherwise binding agreement, to take any action described in this Section 4.27. 4.28. Indebtedness. Schedule 4.28 attached hereto contains a true, correct and complete list of all indebtedness of the Company and the Subsidiaries for borrowed money, including capitalized leases, and the balances owing thereunder as of the date hereof. 4.29. Conduct of Business Since Interim Balance Sheet Date. From the Interim Balance Sheet Date to the date of this Agreement, the Company and the Subsidiaries have conducted their operations only according to their ordinary and usual course of business, and the Company and the Subsidiaries have used their best efforts to preserve intact the Company's and the Subsidiaries' business organizations, keep the services of its employees and maintain satisfactory relationships with the Accrediting Bodies, suppliers, agents, students and others having business relationships with the Company and the Subsidiaries. Notwithstanding the foregoing, the Company shall be permitted to redeem shares of its capital stock, make distributions to its stockholders in respect of such redemptions, distribute to the shareholders or an escrow account those certain subscription notes receivable reflected in the Financial Statements and pay other compensation to its stockholders and Affiliates; provided, that such activities shall not result in the breach of any representation or warranty of Sellers hereunder. 4.30. Approvals. To the best of Sellers' knowledge, there exists no fact or circumstance attributable to Sellers, the Company, the Subsidiaries or the Schools that would cause DOE, any other Governmental Body or Accrediting Bodies whose authorization, consent or similar approval is a requirement for the consummation of the transactions contemplated by this Agreement to refuse to deliver such authorization, consent or similar approval which have not been disclosed to Purchaser prior to Closing. 4.31. Delivery of Documents. True, correct and complete copies of all Leases, Material Miscellaneous Contracts, Plans, Policy Guidelines and other documents, instruments, agreements and records of the Company and the Subsidiaries described on schedules to this Agreement or relating to the assets, liabilities and the operations of the Company and the Subsidiaries, or the representations and warranties of Sellers contained in this Agreement, have been delivered or made available to Purchaser. 4.32. Disclosure. This Agreement, together with the schedules, exhibits, and attachments hereto, do not contain any untrue statement of a material fact or omit to state a material fact -42- necessary to make such statements not misleading in light of the circumstances in which such statements were made. 5. Representations and Warranties of Purchaser. As a material inducement to Sellers to enter into this Agreement and to sell the Shares, Purchaser hereby represents and warrants as of the date hereof that: 5.1. Organization and Corporate Power. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Purchaser is qualified to do business as a foreign corporation in each jurisdiction in which the nature of its operations requires, or as of the Closing will require, it so qualify, except where failure to so qualify would not have a material adverse effect on its business or operations. Purchaser has all requisite corporate power and authority to own and operate its properties and assets, to carry on its business as now conducted, and to consummate the transactions contemplated hereby. The copies of Purchaser's articles of incorporation and by-laws which have been furnished by Purchaser to Sellers reflect all amendments made thereto at any time prior to the date of this Agreement and are correct and complete. 5.2. Capacity; Authorization, Binding Effect, Etc. Purchaser has the unrestricted and absolute power, legal capacity and authority to execute, deliver and perform this Agreement and each other document being executed by it in connection herewith to which it is a party. This Agreement has been, and each such other document and agreement to be executed in connection herewith, as of the Closing, will have been, duly executed and delivered by Purchaser and (assuming the due authorization, execution and delivery hereof and thereof by Sellers and any other parties thereto), this Agreement is, and each such other document or agreement will be, a valid and binding obligation of Purchaser, enforceable against it in accordance with its terms. 5.3. No Conflicts, Etc. Except as set forth in Schedule 5.3, the execution, delivery and performance of this Agreement by Purchaser, and each other document being executed by Purchaser, in connection herewith, and the consummation of the transactions contemplated hereby and thereby do not and will not (a) contravene, conflict with, or result in violation of (i) any provision of the articles of incorporation or bylaws of Purchaser, or (ii) any resolution adopted by the board of directors or stockholders of Purchaser or CEC, (b) contravene, violate or conflict with any Legal Requirement applicable to Purchaser or CEC, (c) with or without the giving of notice, the passage of time, or both, conflict with, or result in the breach or termination of, or default under, any provisions of any material instrument, license, permit, authorization, agreement or commitment to which Purchaser or CEC is a party or by which their assets are bound, (d) constitute a violation of any order, judgment or decree to which Purchaser or CEC is a party or by which their assets or properties are -43- bound; or (e) except as set forth in Schedule 5.3, require any approval of, or filing or registration with, any Governmental Body or Accrediting Bodies that is required to be obtained or made by Purchaser or CEC, other than approvals, filings and registrations which have been previously obtained or made, or which are required and will be obtained or made in the ordinary course of Purchaser's and CEC's business and operations. 5.4. Litigation. There are no Proceedings pending against or, to the best of Purchaser's knowledge, threatened against or affecting Purchaser or CEC at law or in equity, or before or by any Governmental Body or Accrediting Bodies seeking to enjoin, restrain or delay the consummation of the transactions contemplated by this Agreement and to the best of Purchaser's knowledge, there is no basis for the foregoing. 5.5. Brokerage. Neither Purchaser nor CEC has retained any broker or finder, and neither will be obligated to pay any brokers' or finders' fee, in connection with the negotiation or consummation of the transactions contemplated by this Agreement. 5.6. Title IV Program Liabilities. Neither Purchaser nor CEC, nor any of their Affiliates who exercises substantial control over any other private post-secondary school or other institution subject to Title IV, owes a liability for a violation of a Title IV program requirement that may reasonably be anticipated to be an impairment to certification of Purchaser under 34 C.F.R. Section 668.15(c). 5.7. Approvals. To the best of Purchaser's knowledge, there exists no fact or circumstances attributable to Purchaser, CEC or its subsidiaries that would cause DOE, any other Governmental Body or Accrediting Bodies whose authorization, consent or similar approval is a requirement for the consummation of the transactions contemplated by this Agreement to refuse to deliver such authorization, consent or similar approvals. 5.8. Disclosure. Neither this Agreement, nor any of the schedules, exhibits or attachments hereto prepared or supplied by Purchaser, or any documents, certificates or other written agreements delivered by or on behalf of Purchaser with respect to the transactions contemplated hereby, contain any untrue statement of material fact or omit a statement of material fact necessary to make such statements not misleading in light of the circumstances in which such statements were made. -44- 5.9. Purchaser's Knowledge; Resources of Purchaser. To the best of Purchaser's knowledge, there exists no fact or circumstance that would cause any representation or warranty of Sellers to be materially incorrect or untrue. Purchaser represents that Purchaser and its corporate parent, CEC, have adequate resources to complete the transactions contemplated hereby. 5.10. Maintenance of Insurance. From and after the Closing Date and until all amounts payable to Sellers hereunder are paid in full, Purchaser shall maintain such insurance policies as are adequate and reasonable in the sole discretion of Purchaser, in both scope and amount, for the Company and the Subsidiaries. 6. Additional Covenants of the Parties. 6.1. Confidential Information. (a) Each Seller acknowledges and agrees that such Seller is in possession of Confidential Information (as defined herein) relating to the Company and the Subsidiaries. For purposes hereof, "Confidential Information" shall mean all proprietary or confidential information concerning the business, Intellectual Property, Curricula, and other properties and operations of the Company and the Subsidiaries, including, without limitation, all student and prospective student lists, supplier lists, know-how, trade secrets, business and marketing plans, techniques, forecasts, projections, budgets, unpublished financial statements, price lists, costs, computer programs, source and object codes, algorithms, data, and other original works of authorship, along with all information received from third parties and held in confidence by the Company, the Subsidiaries or such Seller (including, without limitation, personnel files and student records). Each Seller agrees that he or she will hold the Confidential Information in the strictest confidence and will not disclose or make use of (directly or indirectly) the Confidential Information or any portion thereof, except (i) as required in the performance of such Seller's duties and obligations pursuant to the Noncompetition Agreements, this Agreement or any employment agreement with the Purchaser, the Company, the Subsidiaries or any Affiliate of any of them, (ii) as required by the order of any court or similar tribunal or any other Governmental Body of appropriate jurisdiction; provided, however, that Sellers shall, to the extent practicable, give Purchaser prior written notice of any such required disclosure and shall cooperate with Purchaser in obtaining a protective order or such similar protection as Purchaser may deem appropriate to preserve the confidential nature of such information, (iii) disclosure to professional advisors of the Sellers, provided however such Sellers must advise the professional advisors of the confidential nature of such information, -45- and (iv) disclosure for use in and/or the purpose of a dispute or in a Proceeding with the Purchaser or any of the Sellers in connection with the obligations and transactions hereunder. The foregoing obligations to maintain the Confidential Information shall not apply to any Confidential Information which is or, without any wrongful action by Sellers, becomes generally available to the public. Upon consummation of the sale of the Shares to Purchaser, each Seller shall have delivered to Purchaser (directly or to the Company or the Subsidiaries) all physical embodiments of the Confidential Information (regardless of form or medium) in the possession of or under the control of such Seller. The parties hereto each recognize that the other parties hereto will suffer irreparable injury in the event of a breach of the terms of this Section 6.1 by a Seller. Notwithstanding any provision to the contrary contained herein, including without limitation the provisions of Section 9, in the event of a breach of the terms of this Section 6.1, Purchaser shall be entitled, in addition to any other remedies and damages available and without proof of monetary or immediate damage, to a temporary and/or permanent injunction, without bond, to restrain the violation of this Section 6.1 by any Seller or any Person acting for or in concert with a Seller. Upon any rescission of the transactions contemplated hereby pursuant to Section 10, all provisions of this Section 6.1 shall be of no further force and effect on Sellers with respect to the Confidential Information. (b) In the event of recission of the transactions contemplated hereby pursuant to Section 10, Purchaser agrees that thereafter it shall hold (and shall cause its Affiliates to hold) the Confidential Information in the strictest confidence and that it shall not disclose or make use of (or permit its Affiliates to disclose or make use of) the Confidential Information or any portion thereof, except (i) as required in the performance of Purchaser's duties and obligations pursuant to this Agreement, (ii) as required by the order of any court or similar tribunal or any other Governmental Body of appropriate jurisdiction; provided, however, that Purchaser shall, to the extent practicable, give Sellers prior written notice of any such required disclosure and shall cooperate with Sellers in obtaining a protective order or such similar protection as Sellers may deem appropriate to preserve the confidential nature of such information. The foregoing obligations to maintain the Confidential Information shall not apply to any Confidential Information which is or, without any wrongful action by Purchaser, becomes generally available to the public. The parties hereto each recognize that the other parties hereto will suffer irreparable injury in the event of a breach of the terms of this Section 6.1(b) by Purchaser. Notwithstanding any provision to the contrary contained herein, including without limitation the provisions of Section 9, in the event of a breach of the terms of this Section 6.1(b), Sellers shall be entitled, in addition to any other remedies and damages available and without proof of monetary or immediate damage, to a temporary and/or permanent injunction, without bond, to restrain the violation of this -46- Section 6.1(b) by Purchaser or any Person acting for or in concert with Purchaser. Notwithstanding any provision to the contrary contained herein, this Section 6.2(b) shall apply only in the event of a recission of the transactions contemplated hereby pursuant to Section 10. 6.2. Additional Covenants of Sellers Pending Closing. Pending the Closing, Sellers shall cooperate fully with Purchaser, its officers, employees, representatives and agents in connection with accomplishing the satisfaction of all conditions to the Closing and with all other matters relating to the consummation of the transactions contemplated by this Agreement. Pending the Closing and subject to all the limitations contained in and provisions of the Family Educational Rights and Privacy Act of 1974, 20 U.S.C. (S) 1232g, as amended, and any other relevant Legal Requirements, Sellers shall afford to all representatives of Purchaser reasonable access during normal business hours to the assets, properties, books, financial statements, work papers and records of the Company and the Subsidiaries in order that Purchaser have full opportunity to make investigations thereof. In addition, Sellers shall, and shall cause the Company and the Subsidiaries to, use good faith efforts to assist Purchaser in obtaining any required Accreditation from the Accrediting Bodies reasonably necessary for Purchaser's operation of the Schools, including furnishing Purchaser such necessary information and reasonable assistance as Purchaser may request in connection with its preparation of necessary filings, submissions or applications to the Accrediting Bodies and any Governmental Bodies in connection with the transactions contemplated hereby. In addition, Sellers shall use their best efforts to obtain the consents and approvals set forth in Section 3.1(g). Furthermore, during the period from the date of this Agreement to the Closing Date, neither the Company nor the Subsidiaries shall conduct any business or incur or assume any liabilities or obligations of any kind, except for such business, liabilities and obligations as may be conducted or incurred in the ordinary course of business of the Company and the Subsidiaries or as expressly permitted or required by the terms of this Agreement or as to which Purchaser may consent in writing. During the period from the date of this Agreement to the Closing Date, Sellers shall use their good faith efforts to preserve intact the business organization of the Company and the Subsidiaries, to pay operating expenses in the ordinary course of business, to keep available the services of their employees, and to maintain satisfactory relationships between the Company and the Subsidiaries, and the Accrediting Bodies, Governmental Bodies, suppliers, agents, students and others having business relationships with the Company or the Subsidiaries. Sellers shall promptly notify Purchaser of any occurrence or event that would or is likely to make untrue any representation or warranty of Sellers made in Section 4 as of the Closing Date, or which would or is likely to result in an inability to satisfy any condition set forth in Sections 7 or 8. Notwithstanding the foregoing, the Company shall be permitted to redeem shares of its capital stock, make distributions to its stockholders in respect of such redemptions, and pay other compensation to its stockholders and Affiliates; provided, that such activities shall not result in the breach of any representation of warranty of Sellers hereunder. -47- 6.3. Employees. During the period from the date of this Agreement to the Closing Date, Sellers shall cause the Company and the Subsidiaries to use their good faith efforts to retain the services of all senior managerial employees of the Company and the Subsidiaries. During the period from the date of this Agreement to the Closing Date, none of the Company, the Subsidiaries or the Sellers shall offer any employee or sales representative of the Company or the Subsidiaries any other employment with Sellers, the Company or the Subsidiaries, or any of their Affiliates, without the prior written consent of Purchaser. 6.4. Exclusive Dealing. During the period from the date of this Agreement to the earlier of (a) the Closing Date or (b) the date of termination of this Agreement pursuant to Section 11.1 hereof, Sellers and their Affiliates shall not and shall not permit the Company or the Subsidiaries to, directly or indirectly, encourage, initiate or engage in discussions or negotiations with, or (except as contemplated by this Agreement) provide any information to, any Person, other than Purchaser and CEC, concerning any proposed purchase of the Company, the Subsidiaries or the Schools or the Bookstores, or any similar transaction involving the Company, the Subsidiaries, the Schools or the Bookstores, or Sellers' interest in any of them. 6.5. Additional Covenants of Purchaser Pending Closing. Purchaser covenants and agrees that from and after the date of this Agreement, and until the earlier of the Closing Date or the termination of this Agreement pursuant to Section 11.1 hereof, Purchaser (a) shall use its good faith efforts to fulfill or satisfy, or cause to be fulfilled or satisfied, all of the conditions precedent to Sellers' obligations to consummate and complete the transactions contemplated by this Agreement, including without limitation the sale of the Shares provided herein, and to take all other steps and do all other things reasonably required to consummate this Agreement in accordance with its terms; and (b) shall not interfere with the performance by Sellers of their obligations under this Agreement. 6.6. Initial Public Offering. In the event that CEC engages in an Initial Public Offering of its common stock at any time prior to the third anniversary of the Closing Date, CEC shall use its best efforts (which best efforts shall not, however, include the expenditure of more than nominal amounts of money by CEC), to reserve up to one and one-quarter percent (1.25%) of the total shares offered in such Initial Public Offering for purchase by Sellers. 7. Conditions to Purchaser's Obligations. The obligations of Purchaser to consummate the transactions contemplated by this Agreement are subject to the satisfaction, or to the waiver in writing by Purchaser, -48- on or before the Closing Date, or, where applicable, such other date as is set forth herein, of the conditions set forth below: 7.1. Due Diligence Review. Purchaser shall have completed and shall be satisfied with the results of its due diligence review of the Company and the Subsidiaries, including, without limitation, review of the Company's and the Subsidiaries' assets, properties, business, financial condition and business prospects, legal and accounting review of all liabilities and contingencies, Facility visits, regulatory compliance analysis (including financial aid administration and cohort default rates), assessment of relations with the Accrediting Bodies and Governmental Bodies, access to lenders for student loan programs, and completion of a satisfactory market analysis. 7.2. Audited Financial Statements, Acid Test Ratio and Cohort Default Rates. Purchaser shall have received audited financial statements for the Company and the Subsidiaries for the years ended June 30, 1994, 1995 and 1996 and evidence that each of the Schools was in compliance with the "Acid Test Ratio" as applied by the DOE pursuant to 34 C.F.R. (S) 668:15 (1994) as of such dates, that each of the Schools has a positive tangible net worth in accordance with the method for calculating such amount employed by DOE pursuant to 34 C.F.R. (S) 668.15 (1994) and that each of the Schools has not had operating losses for any of such fiscal years. In addition, none of the Company, the Subsidiaries or the Schools shall have received notification from the DOE at any time prior to the Closing Date that either School's cohort default rate is equal to or greater than twenty-five percent (25%). 7.3. Financing. Purchaser shall have obtained approval for the transactions contemplated by this Agreement and equity and/or debt financing from its present financing sources (a) in an amount sufficient to pay the Purchase Price and to pay the Noncompetition Payments, and (b) upon terms satisfactory to Purchaser, CEC and CEC's stockholders, and consistent with satisfying financial requirements of the DOE, applicable state regulators and the Accrediting Bodies. 7.4. Truth of Representations and Warranties. The representations and warranties of Sellers contained in this Agreement and in any certificate delivered by Sellers in accordance with the terms hereof shall be true and correct in all material respects on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of such date (except to the extent such representations and warranties speak of a particular date and except to the extent that any failure to satisfy this requirement would not have a material adverse effect on the business assets, or operations of the Company or any of the Subsidiaries), and Sellers shall have delivered to Purchaser a certificate, dated the Closing Date, to such effect. -49- 7.5. Performance of Agreements. Each and all of the agreements of Sellers to be performed on or before the Closing Date pursuant to the terms hereof shall have been fully performed in all material respects, each of the documents, agreements and other items to be delivered to Purchaser pursuant to Section 3.1 shall have been delivered, and Sellers shall have delivered to Purchaser a certificate, dated the Closing Date, to such effect. 7.6. No Material Adverse Change. Since the date of this Agreement, there shall have been no material adverse change in the properties, business, assets, results of operations, condition (financial or otherwise) or business prospects of the Company or the Subsidiaries, individually or in aggregate, there shall have been no material deviation in the Company's or the Subsidiaries working capital position (other than its cash position) since the Interim Balance Sheet Date, and Sellers shall have delivered to Purchaser a certificate, dated as of the Closing Date, to such effect. 7.7. Litigation. No Legal Requirement shall have been enacted, issued, promulgated or entered by any Governmental Body and no injunction or order of any court or other Governmental Body or Accrediting Bodies shall have been entered, in either case, which prohibits or restricts the transactions contemplated hereby, and no Proceeding shall have been instituted or threatened by any Person before a court or other Governmental Body or Accrediting Bodies: (i) seeking to restrain or prohibit any of the transactions contemplated hereby or (ii) challenging or questioning the right, title or interest of Sellers in and to the Shares to be transferred under this Agreement or the right of Sellers to transfer validly all of such right, title and interest in and to such Shares to Purchaser. 7.8. Accrediting Bodies Approval. To the extent available prior to Closing, the approvals of any applicable state regulatory agency with jurisdiction over the Schools and the Accrediting Bodies for the consummation of the transactions contemplated by this Agreement with respect to the Schools, including approval for issuance of licenses to Purchaser to operate the Schools, shall have been received, shall continue in full force and effect, and shall not contain terms and conditions which, as a result of facts or circumstances attributable solely to Sellers, or to the condition of the Company, the Subsidiaries or the Schools prior to Closing, in Purchaser's reasonable judgment reduce or are reasonably likely to reduce the economic benefit to Purchaser and its Affiliates that Purchaser anticipated to receive from the consummation of the transactions contemplated hereby, or would impose burdensome restrictions or limitations on the activities of Purchaser or its Affiliates unrelated to the Schools. Obtaining DOE approval for the resumption of Title IV funding for the Schools as operated by Purchaser shall not be a condition to Purchaser's obligations to consummate -50- the transactions contemplated by this Agreement so long as there is no indication as of the Closing Date that DOE approval will not or cannot be obtained. 7.9. Proceedings. All proceedings to be taken in connection with the transactions contemplated by this Agreement and all documents incident thereto shall be reasonably satisfactory, in all material respects, in form and substance to Purchaser and its counsel, and Purchaser shall have received copies of all such documents and other evidence as Purchaser or its counsel may reasonably request in order to establish the consummation of such transactions and the taking of all appropriate proceedings in connection therewith. 7.10. Financial Aid Compliance Audit. Sellers shall have delivered to Purchaser a copy of its financial aid compliance audit report submitted to DOE for the regulatory year ended June 30, 1996, which report shall be satisfactory to Purchaser. Purchaser acknowledges that it has received a copy of such report and that such report is satisfactory to Purchaser. 7.11. [Intentionally Omitted] 7.12. Consents and Approvals. Sellers shall have obtained the consents and approvals set forth in Section 3.1(h), and such consents and approvals shall remain in full force and effect. 7.13. Environmental Assessment. Purchaser shall have received a Phase I environmental site assessment for each of the Leased Facilities, which assessments shall be satisfactory to Purchaser. Purchaser acknowledges that it has received such assessments and that such assessments are satisfactory to Seller. 7.14. Acquisition of The International Academy of Merchandising and Design (Canada), Ltd. All conditions to the closing of the acquisition (the "Canada Acquisition") of The International Academy of Merchandising and Design (Canada), Ltd. ("IAMD-Canada") by CEC pursuant to that certain Share Purchase Agreement (the "Canada Purchase Agreement") of event date herewith by and among CEC and the stockholders of IAMD-Canada, shall have been satisfied or waived, and the Canada Acquisition shall close simultaneously with the Closing hereunder. -51- 8. Conditions to Sellers' Obligations. The obligations of Sellers to consummate the transactions contemplated by this Agreement are subject to the satisfaction, or to the waiver in writing by Sellers, on or before the Closing Date, or, where applicable, such other date as is set forth herein, of the following conditions: 8.1. Truth of Representations and Warranties. The representations and warranties of Purchaser contained in this Agreement and in any certificate delivered by Purchaser in accordance with the terms hereof shall be true and correct in all material respects on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of such date (except to the extent such representations and warranties speak of a particular date and except to the extent that any failure to satisfy this requirement would not have a material adverse effect on the business, assets or operations of Purchaser), and Purchaser shall have delivered to Sellers a certificate, dated as of the Closing Date, to such effect. 8.2. Performance of Agreements. Each and all of the agreements of Purchaser to be performed on or before the Closing Date pursuant to the terms hereof shall have been fully performed in all material respects, and each of the documents, agreements and other items, to be delivered to Sellers pursuant to Section 3.2 shall have been delivered, and Purchaser shall have delivered to Sellers a certificate, dated the Closing Date, to such effect. 8.3. Litigation. No Legal Requirement shall have been enacted, issued, promulgated or entered by any Governmental Body and no injunction or order of any court or other Governmental Body or Accrediting Bodies shall have been entered, in either case, which prohibits or restricts the transactions contemplated hereby, and no Proceeding shall have been instituted or threatened by any Person before a court or other Governmental Body or Accrediting Bodies; (i) seeking to restrain or prohibit any of the transactions contemplated hereby, or (ii) unless Purchaser has agreed to waive its right to indemnification with respect thereto, challenging or questioning the right, title or interest of Sellers to transfer validly all of such right, title and interest in and to the Shares to be transferred to Purchaser. 8.4. Proceedings. All proceedings to be taken in connection with the transactions contemplated by this Agreement and all documents incident thereto shall be reasonably satisfactory in form and substance, in all material respects, to Sellers and their counsel, and Sellers shall have received copies of all such documents and other evidence as they or their counsel may -52- reasonably request in order to establish the consummation of such transactions and the taking of all appropriate proceedings in connection therewith. 8.5. Acquisition of The International Academy of Merchandising and Design (Canada), Ltd. All conditions to the closing of the Canada Acquisition shall have been satisfied or waived, and the Canada Acquisition shall close simultaneously with the Closing hereunder. 9. Indemnification; Remedies. 9.1. Survival; Right to Indemnification Not Affected By Knowledge. All representations, warranties, covenants, and obligations in this Agreement, or in any other certificate or document delivered pursuant to this Agreement, will survive the Closing as provided herein. Subject to Section 5.9 hereof, the right to indemnification, through the payment of Damages based on a breach of such representations, warranties, covenants and obligations, will not be affected by any investigation conducted at any time before or after the execution of this Agreement or the Closing Date with respect to the accuracy or inaccuracy of, or compliance with, any such representation, warranty, covenant or obligation except as provided in this Agreement. 9.2. Indemnification and Payment of Damages by Sellers. Sellers, will indemnify and hold harmless Purchaser for, and will pay to the Purchaser the amount of, any actual loss, liability, claim, damage (excluding any and all punitive, exemplary, or consequential damages), expense (including costs of investigation and defense and reasonable attorney's fees), whether or not involving a third-party claim, suffered or incurred by the Purchaser (including all Damages suffered or incurred by the Company or any Subsidiary which would not have been suffered or incurred if there had been no breach of any representation, warrant or covenant made by Sellers under this Agreement or in any other document delivered by Sellers pursuant to this Agreement (collectively, "Damages"), arising, directly or indirectly, from or in connection with: (a) any breach of any representation or warranty made by Sellers in this Agreement or in any other document delivered by Sellers pursuant to this Agreement; (b) any breach by any Seller of any covenant in or obligation of, any Seller in this Agreement or any other document delivered by such Seller pursuant to his Agreement; (c) any claim by any person for brokerage or finder's fees or commissions or similar payments based upon any agreement or understanding alleged to have been made by any such Person with any Seller or the Company -53- or any Subsidiary (or any Person acting on their behalf) in connection with any of the transactions contemplated by this Agreement; or (d) (i) any debt, obligation or liability of the Company or any Subsidiary, or any claim against any of them, of any kind, whether known or unknown, contingent, absolute or otherwise affecting the Company or any Subsidiary which resulted from or arose out of the operation of the Company or the Subsidiaries prior to Closing, to the extent (A) not disclosed in this Agreement (including any of the Schedules hereto) or reflected or disclosed in the balance sheets forming a part of the Financial Statements (including without limitation, any liability for Taxes (other than Taxes not yet due and payable in the amounts reflected on the Final Closing Balance Sheet, Taxes constituting sales taxes in connection with accounts payable reflected on the Final Closing Balance Sheet and Taxes relating to the period after Closing not resulting from any breach of representation or warranty of Sellers hereunder)); (B) not taken into account in determining Net Worth (as defined in Section 2.3(a); or (C) not arising under any non-material contract; (ii) the Designated Liabilities; (iii) financial aid irregularities relating to operation of the Schools that occurred or relate to activities or actions occurring prior to the Closing, including without limitation any liabilities resulting from or arising out of any show cause order (including the Show Cause Order), any audit review disallowances, improperly disbursed student financial assistance program funds or similar determinations ("Pre-Closing Financial Aid Irregularities") or the cost of responding to any audits, program reviews or other investigations which disclose material Pre-Closing Financial Aid Irregularities, whether such audit or investigation is in progress as of the Closing Date or commences after the Closing or (iv) litigation affecting the Company or any Subsidiary pending or threatened as of Closing. (e) notwithstanding anything contained in Section 4.21 or Schedule 4.21(a) or 4.21(b) any Damages, penalties or taxes arising out of or in connection with the formation, operations and termination of its Employee Benefit Plans prior to Closing (including, but not limited to, the termination and operation of the International Academy of Merchandising & Design, Ltd. Employees' Profit Sharing Plan, the failure to file IRS Forms 5500 and the distribution of assets from the International Academy of Merchandising & Design, Ltd. Employees' Profit Sharing Plan and related to the failure to procure an IRS determination letter from the effective date of the 401(k) Plan), to the extent not taken into account in determining Net Worth. Sellers will prepare and file the final IRS Form 5500 for the International Academy of Merchandising & Design, Ltd. Employees' Profit Sharing Plan under the Department of Labor's delinquent filers program. -54- 9.3. Indemnification and Payment of Damages by Purchaser. Purchaser will indemnify and hold harmless Sellers, and will pay to Sellers the amount of any Damages arising from or in connection with: (a) any breach of any representation or warranty made by Purchaser in this Agreement or in any certificate delivered by Purchaser pursuant to this Agreement; (b) any breach by Purchaser of any covenant or obligation of Purchaser in this Agreement; or (c) any claim by any Person for brokerage or finder's fees or commissions or similar payments based upon any agreement or understanding alleged to have been made by such Person with Purchaser or CEC (or any Person acting on their behalf) in connection with any of the transactions contemplated by this Agreement. 9.4. Limitations on Amount. (a) Notwithstanding any provisions of this Agreement to the contrary, Sellers will have no liability with respect to the matters described in clause (a), clause (b), or clause (d) of Section 9.2 other than for (i) Damages up to the aggregate amount of fifty percent (50%) of the total value of consideration received by Sellers for which claims are made on or before the eighteen (18) month anniversary of the Closing, and (ii) Damages up to the aggregate amount of $1,500,000 for which claims are made after the eighteen (18) month anniversary and on or before the four (4) year anniversary of the Closing; provided that in no event shall the total liability of Sellers for indemnification pursuant to clause (a), clause (b) and clause (d) of Section 9.2 exceed fifty percent (50%) of the total value of consideration received by Sellers in the aggregate ("Indemnification Cap") and further provided that in the event that there is an adjustment of the Purchase Price pursuant to Section 2.3 hereof, the Indemnification Cap shall be similarly adjusted by an amount equal to fifty percent (50%) of such adjustment to the Purchase Price but in no event shall such adjustment to the Indemnification Cap exceed $200,000. (b) Notwithstanding Section 9.4(a), in the event of (i) any breach of any Sellers' representations and warranties of which any Seller had actual knowledge at any time prior to the date on which such representation and warranty is made; or (ii) any intentional breach by Sellers of any covenant or obligation, or (iii) any indemnification rights under Section 9.2(e), Sellers will be liable for all Damages with respect to such breaches or indemnification rights provided that in no event shall the total liability of any Seller under this Agreement exceed the total value of consideration received by such Seller. -55- 9.5. Liability of Individual Sellers; Breaches by Individual Sellers. (a) Notwithstanding any provision of this Section 9 to the contrary, in the event of any breach of the provisions of Sections 4.2(b), 4.3, 4.4(b), 4.6(a)(ii) or 4.18(b) resulting from the acts or capacity of, or knowledge or belief of, one or more specific Sellers (in their capacity as shareholders, as opposed to corporate directors, officers, employees or agents), only the particular Seller or Sellers whose acts or capacity, or knowledge or belief are the basis for such breach shall be liable pursuant to Section 9.2 to indemnify Purchaser for Damages resulting therefrom; provided that in no event shall the total liability of any Seller under this Agreement exceed the total value of consideration received by such Seller. (b) Except as provided in Section 9.5(a), each individual Seller's liability in respect of any claim for Damages shall be limited to an amount equal to the product of: (1) a fraction (i) the numerator of which is the total value of the consideration received by such Seller hereunder and (ii) the denominator of which is the total consideration paid to all Sellers hereunder, multiplied by (2) the total amount of such Damages, provided, however, that the indemnification amount shall not exceed the total value of the consideration received by such Seller hereunder. 9.6. Further Limitations on Remedies. (a) Except in connection with the enforcement of their respective rights pursuant to Section 10 hereof or as otherwise expressly provided herein, any claim by any party hereto arising out of or relating in anyway to this Agreement shall have as its sole remedy the indemnification provided by this Section 9. Notwithstanding the foregoing, nothing herein shall preclude any party from seeking to exercise or enforce any rights under any other agreements executed in connection with the transactions contemplated by this Agreement or injunctive or other equitable relief as may be necessary or desirable to protect its rights hereunder. Sellers hereby acknowledge and agree that no waiver or release by the Company or any Subsidiary, or any of them, executed or issued on or prior to the Closing shall constitute a waiver, release or limitation in any way of the provisions of this Section 9. (b) Except for Damages based upon or arising out of a breach of representation or warranty subject to Section 9.5(a) hereof, Sellers shall not be liable for indemnification for Damages until the amount of Damages exceeds, in the aggregate, the sum of $100,000 (the "Indemnification Threshold"). (c) All Damages shall be determined net of any tax benefit or economic benefit to the Purchaser, Company, or any Subsidiary, arising in respect of or as a result of the matters for which the Damages are claimed; or -56- insurance proceeds derived (or reasonably expected to be derived) by the party or parties indemnified hereunder in respect thereof. (d) In the event of a recission of the transactions contemplated hereby, Purchaser's sole remedy shall be as set forth in Section 10 and Purchaser shall have no right to indemnity hereunder. (e) Notwithstanding anything to the contrary contained herein, in no event shall any party be entitled to recover more than once for the same matter. 9.7. Procedures. (a) Any claim under Section 9.2 or Section 9.3 shall be made in a written statement signed by the party seeking indemnification which shall specify in reasonable detail each individual item of Damage and the estimated amount thereof, the date such item was claimed or the facts giving rise to such claim were discovered, the basis for any alleged liability and the nature of the breach or claim to which each such item is related. (b) If the indemnifying party does not pay the amount specified in any such statement within thirty (30) days after it has been delivered by the party seeking indemnification, the party seeking indemnification may enforce its right in accordance with law. (c) The party seeking indemnification in respect of any third party claim shall give the indemnifying party prompt notice of any Proceeding which might give rise to liability of the indemnifying party for indemnification hereunder; provided, that failure to give the indemnifying party prompt notice will not relieve such indemnifying party of any liability to the indemnified party hereunder, except to the extent the indemnifying party demonstrates that the defense of such action is prejudiced by the indemnified party's failure to give such notice. If the indemnifying party contests any third party claim, it will have the option to defend, at the indemnifying party's expense, any such matter, provided that the indemnified party (or in the case of the Company or any Subsidiary, that entity itself) shall have the right, at its own cost and expense, to participate in the defense of such claim or, if the indemnifying party elects not to defend the claim, to conduct the defense on its own behalf. If the indemnifying party conducts the defense of a claim, neither party (or in the case of the Company or any Subsidiary, that entity itself) will enter into any settlement agreement without the other party's consent; provided, that the indemnified party (or in the case of the Company or any Subsidiary, that entity itself) shall not object to any proposed settlement which requires only the payment of money by the indemnifying party and does not involve any admissions or stipulations by the indemnified party or any injunctive or similar relief or any other contractual obligations affecting the indemnified party the Company, any Subsidiary, the -57- Schools, the Bookstores or their respective business and operations. The indemnified party shall cooperate (and the Purchaser shall cause the Company or the Subsidiary to cooperate) with the indemnifying party in the defense, compromise or settlement of any claim for which indemnification is sought. If the indemnifying party elects not to conduct the defense of such claim, the indemnified party (or in the case of the Company or any Subsidiary, that entity itself) shall be permitted to settle or compromise any such claim on such terms as it deems appropriate and such settlement or compromise shall not prejudice the rights to indemnification hereunder. (d) Notwithstanding Section 9.7(c), if an indemnified party determines in good faith that there is a reasonable probability that a Proceeding may adversely affect it or its affiliates other than as a result of monetary damages for which it would be entitled to indemnification under this Agreement, the indemnified party may, by notice to the indemnifying party, assume the exclusive right to defend, compromise, or settle such Proceeding, but the indemnifying party will not be bound by any determination of a Proceeding so defended or any compromise or settlement effected without its consent (which may not be unreasonably withheld). (e) A claim for indemnification for any matter not involving a third- party claim may be asserted by notice to the party from whom indemnification is sought. 9.8. Prevailing Party to be Awarded Legal Fees. In the event of any litigation, whether at law or in equity, arising out of this Agreement, the party prevailing in such litigation shall be entitled to receive, upon application to the court, its reasonable legal fees and expenses incurred in connection therewith. 9.9. Offset. (a) Purchaser's obligations pursuant to the Seller Note shall be subject to the offset rights set forth therein. (b) Purchaser's obligations to pay the Deferred Payment, the Noncompetition Payments and the Earnout Amount shall be subject to offset for alleged Damages according to the following provisions: (i) Purchaser's allegation of Damages shall be made in good faith and shall not include any amount reflected in the Final Balance Sheet or in the first instance of a Claim for Damages be for amounts which in the aggregate are less than the Indemnification Threshold; -58- (ii) Purchaser shall submit a notice of a claim for indemnification in respect of such Damages to Sellers (or to the Seller or Sellers from whom it claims indemnification if not proportionate as to all Sellers). The manner and procedure for making such claim and the resolution thereof shall be as provided in Sections 9.6 and 9.7 hereof. (iii) With respect to offsets for alleged Damages against the Deferred Payment and the Noncompetition Payment only, until the claim for Damages is resolved by a written agreement of the parties or final, unappealable judgment issued by a court or similar tribunal of competent jurisdiction ("Resolution"), Purchaser shall maintain a letter of credit for the benefit of the Seller or Sellers in respect of whom the claim was made in an amount equal to the claim of Damages. Such letter of credit may include the Deferred Payment Letter of Credit if the then stated date of expiry is extended as hereinafter provided or a fresh letter of credit. At least thirty (30) days prior to the stated date of expiry of the Letter of Credit ("Replaced Letter of Credit") then most recently delivered to Seller or Sellers in respect of whom the claim exists, Purchaser shall cause there to be delivered to such Seller or Sellers either (1) a written extension by the issuer of the Replaced Letter of Credit of the then stated date of expiry of the Replaced Letter of Credit whereby such then stated date of expiry is extended by at least six (6) months, or (2) a fresh Letter of Credit in replacement for the Replaced Letter of Credit, which fresh Letter of Credit shall be in substantially the form of the Replaced Letter of Credit, issued by LaSalle National Bank or a bank of credit worthiness at least equal to LaSalle National Bank and have a stated date of expiry which is at least six (6) months following the then stated date of expiry of the Replaced Letter of Credit. (c) It is understood for the sake of clarity, that the recovery of damages, whether by offset or otherwise, is subject to the limitations of Sections 9.4 and 9.5, and that this Section 9.9 is not intended to convey any rights to recover sums in excess of such limits. 10. Recission of Transactions. 10.1. Right to Recission In the event that the DOE has not issued to Purchaser a DOE Approval Notice permitting resumption of Title IV funding to either School as operated by Purchaser based in whole or in part upon: (i) a Pre-Closing Financial Aid Irregularity (as Defined in Section 9.2(d)), (ii) the pre-closing financial condition of either of the Schools, -59- any Subsidiary, the Company or the Sellers, or (iii) in the event that the DOE Approval Notice contains a condition which is not subject to curing, such as in the case of failure to satisfy the operating loss standard at 34 C.F.R. (S)668.15(b)(7)(i)(B), or imposes restrictions or limitations on Purchaser which are reasonably and in good faith determined by the Purchaser to impose unduly burdensome restrictions or limitations on the activities of Purchaser or its Affiliates related or unrelated to the Schools ((i), (ii) and (iii) collectively, the "Conditions"), Purchaser shall have the option, upon written notice, which notice shall state the Conditions upon which such rescission is based, delivered no later than ninety-five (95) days after the Closing, to rescind the transactions otherwise consummated under this Agreement. If Purchaser does not deliver any such notice on or before the ninety-fifth day following the date of the Closing, such right of rescission shall terminate. Purchaser hereby agrees that if the DOE Approval Notice is conditioned upon Purchaser posting a letter of credit or bond for an amount not to exceed $1,000,000, during the ninety-five (95) day approval period or during the thirty (30) day cure period (as discussed below) such condition shall be fulfilled by Purchaser and shall not be deemed to constitute a basis for rescission. Upon Purchaser's election of rescission hereunder, each of the parties hereto shall immediately take such actions as may reasonably be required to restore the other parties to their respective positions as they existed prior to Closing. In the event of a rescission hereunder, among other things and by way of illustration, all amounts advanced by Purchaser or its Affiliates to fund the operation of the Schools and Subsidiaries after the Closing (whether as debt or equity) or as payments of consideration for the transaction shall be reimbursed by Sellers, and all non-competition agreements executed by the parties shall be deemed void ab initio and all further obligations of Purchaser and Sellers pursuant to this Agreement shall be terminated. Furthermore, and notwithstanding any provision to the contrary herein, in the event Purchaser elects to rescind the transactions consummated under this Agreement pursuant to this Section 10.1, Sellers shall have thirty (30) days from the receipt of written notice of such election to cure or otherwise resolve, at Sellers' sole cost and expense, the Condition or Conditions upon which Purchaser's election to rescind is based and to cause the issuance of DOE Approval Notices to the Schools without such Conditions. If Sellers elect to attempt to cure such Conditions and obtain such issuance during such thirty (30) day period, Purchaser's election of rescission shall be tolled for such thirty (30) day period. If at the end of such thirty (30) day period Sellers have been unable to cure such Conditions and obtain the DOE Approval Notices without such Conditions, Purchaser shall have fifteen (15) days thereafter to elect to rescind the transaction, in no event however, shall Sellers have another thirty (30) day period in which to attempt to cure the Conditions. 10.2. Reasonable Efforts. Purchaser agrees that during the period from the Closing Date through the date of receipt of the DOE Approval Notices as described above or through the date ninety-five (95) days after the Closing Date, Purchaser shall use its reasonable efforts and in good -60- faith will seek to obtain such approval, including without limitation providing sufficient additional capital to the Company or the provision of letters of credit as required by the DOE so that based on each School's opening balance sheet as of the Closing the financial requirements set forth in 34 CFR 668.15 (b)(7)(i)(A) and (C) are satisfied. Except as related to the satisfaction of the financial requirements of such regulation or as required by Section 2.6 hereof and the last sentence of the first paragraph of Section 10.1, Purchaser shall not be obligated to provide additional capital or provide credit support in order to cure or otherwise satisfy any Condition. Purchaser shall provide Sellers, upon request, with information concerning the status of the approval process. 11. Miscellaneous. 11.1. Termination. This Agreement may be terminated at any time prior to the Closing Date: (a) by mutual written consent of the Purchaser and the Sellers; (b) prior to the Closing by Sellers or Purchaser, if the other party shall be in breach of any covenant, undertaking, or restriction contained herein, the breach of which shall have a material adverse effect on the transactions contemplated by this Agreement taken as a whole, and such breach has not been cured within ten (10) business days after giving written notice to the breaching party or parties of such breach; provided, that if such breach is, in the reasonable judgment of the non-breaching party, capable of being cured, but cannot reasonably be cured within such ten (10) business day period, no party shall be permitted to terminate this Agreement as a result of such breach so long as the breaching party is diligently pursuing cure of such breach; (c) by Purchaser or Sellers if the Closing shall not have occurred on or before June 30, 1997 or if a Legal Requirement shall have been enacted, issued, promulgated or entered by any Governmental Body or an injunction or order of a court or other Governmental Body or Accrediting Bodies has been entered, in either case, which prohibits or restricts the transactions contemplated hereby or an action or proceeding shall have been instituted or threatened by any Person or pending before a court or other Governmental Body or Accrediting Bodies seeking to restrain or prohibit any of the transactions contemplated hereby; (d) by the Purchaser if any of the conditions specified in Section 7 have not been met or waived prior to such time as such condition can no longer be satisfied; or (e) by the Sellers if any of the conditions specified in Section 8 have not been met or waived prior to such time as such condition can no longer be satisfied. -61- In the event of termination of this Agreement, this Agreement shall forthwith become null and void except for this Section 11 and Section 9, which sections shall remain in full force and effect and which shall survive such termination. 11.2. Expenses. Each party hereto shall be liable for the payment of the fees and expenses incurred by such party or on such party's behalf in connection with the negotiation and execution of this Agreement and the consummation of the transactions contemplated by this Agreement, including, without limitation, legal, accounting, financial and tax advice, brokers, finders and other fees, expenses and commissions. Sellers shall pay all transfer, sales and use taxes resulting from the sale of the Shares to Purchaser. 11.3. Successors and Assigns. This Agreement and the rights hereunder shall not be assignable or transferable without the prior written consent of all the parties hereto provided however, that Purchaser shall be permitted to collaterally assign this Agreement and all rights hereunder to its lender(s). Except as otherwise expressly provided herein, all covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto whether so expressed or not. Notwithstanding the foregoing, the provisions of this Agreement which are for Purchaser's benefit are also for the benefit of, and enforceable by, any subsequent owner of the Company, the Subsidiaries or the Schools, or any of them if, such subsequent owner is an Affiliate of Purchaser or CEC. Except as otherwise expressly provided herein, there are no third party beneficiaries of this Agreement. 11.4. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. 11.5. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together shall constitute one and the same Agreement. 11.6. Descriptive Headings; Interpretation. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a Section of this Agreement. -62- 11.7. Governing Laws. This Agreement shall be construed and enforced in accordance with, and all questions concerning the construction, validity, interpretation and performance of this Agreement shall be governed by, the laws of the State of Illinois without giving effect to provisions thereof regarding conflict of laws. 11.8. Consent to Jurisdiction and Service of Process. EACH PARTY HERETO CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF COOK, STATE OF ILLINOIS AND IRREVOCABLY AGREES THAT, UPON THE MOVING PARTY'S ELECTION, ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE OTHER RELATED DOCUMENTS SHALL BE LITIGATED IN SUCH COURTS. EACH PARTY HERETO ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NONCOVENIENS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. A PROCESS MAILED BY REGISTERED MAIL TO EACH PARTY HEREBY ACKNOWLEDGED BY EACH PARTY TO BE EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF PURCHASER TO BRING PROCEEDINGS AGAINST SELLERS, OR ANY OF THEM, IN THE COURTS OF ANY OTHER JURISDICTION. 11.9. Waiver of Jury Trial. EACH PARTY HERETO HEREBY WAIVES ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION AND THE RELATIONSHIP THAT IS BEING ESTABLISHED. EACH PARTY HERETO ALSO WAIVES ANY BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF THE OTHER PARTIES. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THESE TRANSACTIONS, INCLUDING WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. EACH PARTY HERETO ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED -63- FUTURE DEALINGS. EACH PARTY HERETO FURTHER WARRANTS AND REPRESENTS THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE TRANSACTIONS CONTEMPLATED HEREBY. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 11.10. Notices. All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Agreement shall be in writing and shall be deemed to have been given (a) when delivered personally or sent by facsimile to the recipient, or (b) one (1) business day after the date such communication is sent to the recipient by reputable express courier service (charges prepaid). Such notices, demands and other communications shall be sent to the parties hereto at the addresses indicated below: If to Purchaser: Career Education Corporation 2800 West Higgins Road Hoffman Estates, Illinois 60195 Attention: John M. Larson, William Klettke Facsimile: (847) 781-3610 With copies to: D'Ancona & Pflaum 30 North LaSalle Street, Suite 2900 Chicago, Illinois 60602 Attention: Michel J. Feldman Facsimile: (312) 580-0923 and Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd. 55 East Monroe Street, Suite 3700 Chicago, Illinois 60603 Attention: Dennis B. Black, Esq. Facsimile: (312) 332-2196 If to Sellers: As set forth on Schedule 11.10 hereto. or to such other address or to the attention of such other Person as the recipient party has specified by prior written notice to the sending party. -64- 11.11. Entire Agreement; Release. (a) Except as otherwise expressly set forth herein and except for the Canada Purchase Agreement, this Agreement and the exhibits and schedules hereto embody the complete agreement and understanding by and among the parties and their respective Affiliates, and supersede and preempt any prior understandings, agreements or representations by or among the parties and their respective Affiliates, written or oral, which may have related to the subject matter hereof in any way, including, without limitation, that certain letter agreement dated February 11, 1997 between CEC and IAMD, Ltd. (as representative for Sellers). (b) The Sellers and their respective agents, heirs, representatives, successors and assigns, on the one hand, and the Purchaser and its affiliates, including CEC, and their respective officers, directors, stockholders, agents, representatives, successors and assigns, on the other hand, hereby agree that this Agreement constitutes a settlement of all disputes among the parties with respect to the subject matter hereof and hereby release and hold harmless the other from any and all claims, liabilities, damages, costs and expenses arising out of or pertaining to any prior understanding, agreement or negotiation related to the subject matter hereof. 11.12. Waiver. Notwithstanding anything to the contrary contained herein, no waiver by any party hereto of any right or remedy hereunder shall be deemed to constitute a waiver by such party of any other right or remedy hereunder or to create a course of conduct. -65- IN WITNESS WHEREOF, the parties hereby have executed this Agreement on the date first written above. SELLERS: /s/ CLEM STEIN, JR. ------------------------------------------- Clem Stein, Jr. /s/ MARION STEIN ------------------------------------------- Marion Stein /s/ LEONARD RUTSTEIN ------------------------------------------- Leonard Rutstein /s/ BARBARA ANN SCOTT KING ------------------------------------------- Barbara Ann Scott King /s/ THOMAS V. KING ------------------------------------------- Thomas V. King /s/ WILLIAM W. WIRTZ ------------------------------------------- William W. Wirtz /s/ DAVID POWELL ------------------------------------------- David Powell PURCHASER: IAMD ACQUISITION I, LTD., a Delaware corporation By: /s/ WILLIAM A. KLETTKE --------------------------------------- Its: Senior Vice President --------------------------------------- -66- UNDERTAKING Career Education Corporation hereby executes this Agreement for the limited purpose of acknowledging and agreeing to be bound by the provisions of the Agreement directly applicable to Career Education Corporation, including without limitation Section 6.6 and of guaranteeing the Purchaser's obligations with respect to the Earnout Amount pursuant to Section 2.4 and of abiding by the covenants with respect to the Advertising Budget set forth in Schedule 2.4(d). CAREER EDUCATION CORPORATION By /s/ WILLIAM A. KLETTKE -------------------------------- Its Senior Vice President -------------------------------- -67- LIST OF EXHIBITS AND SCHEDULES Exhibit A - Form of Seller Note Exhibit B - Form of Note Letter of Credit Exhibit C _ Form of Deferred Payments Letter of Credit Exhibit D - Form of Guaranty Exhibit E - Form of Sellers' Release Exhibit F - Form of Noncompetition Agreement Exhibit G - Form of Sellers' Counsel Opinion Exhibit H - Form of Closing Checklist Exhibit I - Form of Purchaser's Counsel Opinion LIST OF SCHEDULES Schedule 2.2 - Payment of Purchase Price, Allocations among Sellers Schedule 2.4(a) Earnout Targets Schedule 2.4(d) Advertising Budget Schedule 3.1(c) - Noncompetition Payments, Allocations among Sellers Schedule 3.1(h) - Seller's Required Consents Schedule 3.1(j) - Preliminary Closing Balance Sheet Schedule 3.2(f) - List of Guarantees to be Terminated Schedule 4.4 - Seller's Conflicts Schedule 4.5 - Investments Schedule 4.6 - Capitalization Schedule 4.7 - Books & Records Schedule 4.8(a) - Compliance with Laws Schedule 4.8(b) - License and Permits Schedule 4.8(c) - Investigations Schedule 4.9(a) - List of Policy Guideline Documentation Schedule 4.9(b) - Material Deviations from Policy Guidelines Schedule 4.10 - Cohort Default Rate Schedule 4.11(b) - Leased Real Property Schedule 4.11(d)(i) - Leased and Licensed Assets Schedule 4.11(d)(ii) - Permitted Encumbrances Schedule 4.11(d)(iii)- Designated Liabilities Schedule 4.11(e) - List of Tangible Assets Schedule 4.11(f) - Other Facilities Schedule 4.12 - Material Miscellaneous Contracts Schedule 4.13(a) - Tradenames Schedule 4.14 - Financial Security Arrangements Schedule 4.14(c) - Debts Incurred Since Interim Balance Sheet Date Schedule 4.17 - List of Bank Accounts Schedule 4.18(a) - Litigation
Schedule 4.18(b) - Judgments Schedule 4.19 - Insurance Schedule 4.20 - Environmental Matters Schedule 4.21(a) - Employee Benefit Plans Schedule 4.21(b) - Benefit Obligations Schedule 4.22(a) - List of Employees, Consultants and Other Service Providers; Compliance with Legal Requirements Schedule 4.22(b) - Confidentiality, Noncompetition and Proprietary Rights Agreements Schedule 4.22(c) - Retired Employees and Directors; Severance Agreements Schedule 4.22(d) - Employee Manuals and Employment Policies Schedule 4.23 - Labor Relations; Compliance Schedule 4.24(a) - Tax Matters Schedule 4.24(b) - Tax Audits and Filing Extension Requests Schedule 4.24(c) - Interim Financial Statements Schedule 4.26 - Affiliate Transactions Schedule 4.27 - Absence of Certain Changes Schedule 4.28 - Indebtedness Schedule 5.3 - Purchaser's Consents and Governmental Approvals Schedule 11.10 _ Addresses for Notices to Sellers
-69- EX-2.4 5 SHARE PURCHASE AGREEMENT DTD 6/30/97 EXHIBIT 2.4 SHARE PURCHASE AGREEMENT BY AND AMONG CAREER EDUCATION CORPORATION, AS PURCHASER, AND CLEM STEIN, JR., LEONARD RUTSTEIN, BARBARA ANN SCOTT KING, AND LAWRENCE N. GROSS, AS SELLERS DATED: JUNE 30, 1997 TABLE OF CONTENTS
PAGE ---- 1. Certain Definitions..................................................................... 1 2. Sale and Transfer of Shares; Assets and Liabilities of the Company at Closing........... 9 2.1. Purchase and Sale of Shares................................................... 9 2.2. Purchase Price; Payment....................................................... 9 2.3. Company Assets and Liabilities; Purchase Price Adjustment..................... 10 2.4. Closing. 12 2.5. Section 116 Certificates...................................................... 12 3. Closing Deliveries...................................................................... 13 3.1. Deliveries to Purchaser....................................................... 13 3.2. Closing Deliveries to Sellers................................................. 16 3.3. Other Closing Deliveries...................................................... 17 3.4. Post-Closing Covenants........................................................ 17 4. Representations and Warranties of Sellers............................................... 18 4.1. Incorporation and Organization of the Company and the Subsidiary.............. 19 4.2. Ownership of the Company, the Subsidiary and the Schools...................... 19 4.3. Capacity; Authorization; Binding Effect, Etc.................................. 20 4.4. No Conflicts, Etc............................................................. 20 4.5. Investments................................................................... 21 4.6. Capitalization................................................................ 21 4.7. Book and Records.............................................................. 22 4.8. Compliance with Laws; Licenses and Permits.................................... 23 4.9. Recruitment; Admissions Procedures; Attendance; Financial Aid; Reports........ 24 4.10. Regulatory Requirements...................................................... 25 4.11. Title to the Assets.......................................................... 25 4.12. Material Miscellaneous Contracts............................................. 26 4.13. Tradenames; Confidential Information......................................... 27 4.14. Financial Statements......................................................... 28 4.15. Receivables.................................................................. 29 4.16. Inventories.................................................................. 30 4.17. Bank Accounts................................................................ 30 4.18. Litigation, Etc.............................................................. 30 4.19. Insurance.................................................................... 31 4.20. Environmental Matters........................................................ 31 4.21. Employee Benefit Plans....................................................... 32 4.22. Employment Matters........................................................... 33 4.23. Labor Relations; Compliance.................................................. 35 4.24. Tax Matters.................................................................. 36 4.25. Brokerage.................................................................... 38
-i- 4.26. Affiliate Transactions........................................................ 38 4.27. Absence of Certain Changes.................................................... 38 4.28. Indebtedness.................................................................. 39 4.29. Conduct of Business Since Interim Balance Sheet Date.......................... 39 4.30. Accrediting Body Approvals.................................................... 40 4.31. Delivery of Documents......................................................... 40 4.32. Disclosure.................................................................... 40 4.33. Residence of Sellers.......................................................... 40 5. Representations and Warranties of Purchaser.............................................. 40 5.1. Organization and Corporate Power.............................................. 40 5.2. Capacity; Authorization, Binding Effect, Etc.................................. 41 5.3. No Conflicts, Etc............................................................. 41 5.4. Litigation.................................................................... 41 5.5. Brokerage..................................................................... 42 5.6. Accrediting Body Approvals.................................................... 42 5.7. Disclosure.................................................................... 42 5.8. Purchaser's Knowledge; Resources of Purchaser................................. 42 5.9. Maintenance of Insurance...................................................... 42 6. Additional Covenants of the Parties...................................................... 42 6.1. Confidential Information...................................................... 42 6.2. Additional Covenants of Sellers Pending Closing............................... 44 6.3. Employees..................................................................... 45 6.4. Exclusive Dealing............................................................. 45 6.5. Additional Covenants of Purchaser Pending Closing............................. 45 6.6. Initial Public Offering....................................................... 45 7. Conditions to Purchaser's Obligations.................................................... 46 7.1. Due Diligence Review.......................................................... 46 7.2. Financing..................................................................... 46 7.3. Truth of Representations and Warranties....................................... 46 7.4. Performance of Agreements..................................................... 46 7.5. No Material Adverse Change.................................................... 47 7.6. Litigation.................................................................... 47 7.7. Accrediting Body Approval..................................................... 47 7.8. Proceedings................................................................... 48 7.9. Financial Aid Compliance Audit................................................ 48 7.10. Consents and Approvals........................................................ 48 7.11. Environmental Assessment...................................................... 48 7.12. Investment Canada Act......................................................... 48 7.13. Corporate Matters Pertaining to Company....................................... 49 7.14. Subsidiary Corporate Matters.................................................. 49 7.15. Lease on 31 Wellesley Property................................................ 49
-ii- 8. Conditions to Sellers' Obligations...................................................... 49 8.1. Truth of Representations and Warranties....................................... 49 8.2. Performance of Agreements..................................................... 50 8.3. Litigation.................................................................... 50 8.4. Proceedings................................................................... 50 8.5. Lease on 31 Wellesley Property................................................ 50 9. Indemnification Remedies................................................................ 50 9.1. Survival; Right to Indemnification Not Affected By Knowledge.................. 50 9.2. Indemnification and Payment of Damages by Sellers............................. 51 9.3. Indemnification and Payment of Damages by Purchaser........................... 52 9.4. Limitations on Amount......................................................... 52 9.5. Liability of Individual Sellers; Breaches by Individual Sellers............... 53 9.6. Further Limitations on Remedies............................................... 53 9.7. Procedures.................................................................... 54 9.8. Prevailing Party to be Awarded Legal Fees..................................... 55 9.9. Offset........................................................................ 56 9.10. Agreements Concerning Pending Litigation.................................... 56 10. Fraud Claim............................................................................ 59 11. Miscellaneous.......................................................................... 60 11.1. Termination.................................................................. 60 11.2. Expenses..................................................................... 61 11.3. Successors and Assigns....................................................... 61 11.4. Severability................................................................. 61 11.5. Counterparts................................................................. 61 11.6. Descriptive Headings; Interpretation......................................... 62 11.7. Governing Laws............................................................... 62 11.8. Consent to Jurisdiction and Service of Process............................... 62 11.9. Waiver of Jury Trial......................................................... 62 11.10. Notices..................................................................... 63 11.11. Sellers' Representative..................................................... 64 11.12. Entire Agreement............................................................ 64 11.13. Currency.................................................................... 65 11.14. English Language............................................................ 65 11.15. Announcements............................................................... 65 11.16. Time of the Essence......................................................... 65 11.17. Waiver...................................................................... 65
-iii- SHARE PURCHASE AGREEMENT THIS SHARE PURCHASE AGREEMENT (this "AGREEMENT") is made as of June 30, 1997, by and between Career Education Corporation, a Delaware corporation ("PURCHASER"), and Clem Stein, Jr. ("STEIN"), Leonard Rutstein ("RUTSTEIN"), Barbara Ann Scott King ("KING"), and Lawrence N. Gross ("GROSS"). C. Stein, Rutstein, B. King, and Gross are referred herein collectively as "SELLERS." Except as otherwise indicated, capitalized terms used herein are defined in Section 1. - --------- BACKGROUND Sellers are the registered and beneficial owners of one-hundred percent (100%) of the issued and outstanding shares (the "SHARES") in the capital of International Academy of Merchandising & Design (Canada) Ltd., an Ontario corporation (the "COMPANY"). The Company owns and operates a private- vocational school in Toronto, Ontario, and through its wholly-owned subsidiary, Academie Internationale du Design Inc. (a/k/a International Academy of Design Inc.) a Quebec corporation ("IAMD-MONTREAL") owns and operates a private vocational school in Montreal, Quebec, both of which provide certificate granting programs in commercial design and merchandising (collectively, the "SCHOOLS"). IAMD-Montreal is sometimes referred to as the "SUBSIDIARY." Sellers desire to sell, and Purchaser desires to purchase, the Shares, for the consideration and on the terms set forth in this Agreement. AGREEMENT NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants and agreements set forth herein, the parties hereto agree as follows: 1. CERTAIN DEFINITIONS. ------------------- For the purposes of this Agreement, the following terms have the meanings set forth below: "ACCREDITING BODY" means any Person, entity or organization, whether governmental, government chartered, private or quasi-private, which engages in granting or withholding Accreditation for the Schools, in accordance with standards relating to the performance, operation, financial condition and/or academic standards relating to the Schools, including, without limitation, the Superintendent and the Private Vocational School Review Board under the Private Vocational Schools Act (Ontario) and the regulations thereunder, and the Minister of Education (Quebec) under an Act respecting private education (Quebec) and the regulations thereunder. "ACCREDITATION" means any license, permit, registration, authorization or similar approval granted to or in respect of the Schools by an Accrediting Body. "ADJUSTED BALANCE SHEET" shall have the meaning ascribed to such term in Section 2.3(b). "AFFILIATE" means, with respect to any Person, any individual related by blood or marriage to such Person or any Person controlling, controlled by or under common control with such Person. "AGREEMENT" shall have the meaning ascribed to such term in the Preamble. "AUDIT REPORT" shall have the meaning ascribed to such term in Section 2.3(b). "BEST OF PURCHASER'S KNOWLEDGE" means the collective actual knowledge of the executive officers of Purchaser holding offices of vice-president or higher, following due inquiry of appropriate officers, employees and consultants of Purchaser. "BEST OF SELLERS' KNOWLEDGE" means the collective actual knowledge of Sellers and the executive officers of the Company and the Subsidiary holding offices of vice-president or higher, following due inquiry of appropriate officers, employees and consultants of each such entity, including without limitation, in the case of the Schools, Larry Gross, the president, the director of admissions (Montreal), the director of admissions (Toronto) and the financial aid director (Toronto) and Financial Aid Officer (Montreal). "CERTIFICATE DEADLINE DATE" shall have the meaning ascribed to such term in Section 2.5(b). ------------- "CLOSING" shall have the meaning ascribed to such term in Section 2.4. ----------- "CLOSING BALANCE SHEET" shall have the meaning ascribed to such term in Section 3.1(j). -------------- "CLOSING DATE" shall mean the date of the Closing. "CLOSING PAYMENT" shall have the meaning ascribed to such term in Section 2.2(a). -------------- "COMPANY" shall have the meaning ascribed to such term in the background section of this Agreement. -2- "COMPLIANCE REPORTS" shall have the meaning ascribed to such term in Section 4.9. ----------- "CONFIDENTIAL INFORMATION" shall have the meaning ascribed to such term in Section 6.1(a). ------------- "CURRICULA" means copyrighted and proprietary uncopyrighted materials used in any courses offered at either of the Schools. "DAMAGES" shall have the meaning ascribed to such term in Section 9.2. ----------- "DEFICIENCY" shall have the meaning ascribed to such term in Section ------- 2.3(a). ------ "EMPLOYEE BENEFIT PLAN" means any: (a) stock option plan, stock purchase plan, incentive plan, deferred compensation plan, profit-sharing plan and other similar benefit, plan or arrangement; and (b) insurance plan, health plan, welfare plan, disability plan, pension plan, retirement plan, travel plan, hospitalization plan, medical plan, dental plan, legal plan, counseling plan, eye care plan and other similar benefit, plan or arrangement. "ENCUMBRANCE" means any charge, claim, community property interest, condition, equitable interest, hypothecation, lien, mortgage, option, pledge, security interest, servitude, right of first refusal, or restriction of any kind, including any restriction on use, voting, transfer, receipt of income, or exercise of any other attribute of ownership, but in the case of leased property does not include the rights of the lessors thereof under the respective leases therefor. "ENFORCEABLE IN ACCORDANCE WITH ITS TERMS" or similar language shall be deemed to mean enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally, and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity). "ENVIRONMENTAL LAW" means any Legal Requirement pertaining to any Hazardous Substance or otherwise pertaining to the environment or protection of any natural resources, including, without limitation, air, soil or water. "ESCROW" shall have the meaning ascribed to such term in Section ------- 2.2(b). ----- "ESCROW AGREEMENT" shall have the meaning ascribed to such term in Section 2.2(b). ------------- -3- "EXCESS" shall have the meaning ascribed to such term in Section ------- 2.3(a). ------ "FACILITY" means any real property now or previously owned, leased or operated by the Company or the Subsidiary, including without limitation the Leased Facilities. "FINAL BALANCE SHEET" means the balance sheet which under Section ------- 2.3(B) is deemed to be the "FINAL BALANCE SHEET." ------ "FINANCIAL STATEMENTS" means (i) the audited balance sheets and the related statements of income and changes in financial position of the Company as at and for the fiscal years ended August 31, 1994, 1995 and 1996, and (ii) the unaudited consolidated balance sheet and the related statement of income of the Company (the "INTERIM FINANCIAL STATEMENTS") prepared by the Company on behalf of the Sellers as at and for the nine (9) month period ended May 31, 1997 (the "INTERIM BALANCE SHEET DATE"). "GAAP" means generally accepted accounting principles from time to time approved by the Canadian Institute of Chartered Accountants (or any successor authority) that are applicable as of the date of determination, all as consistently applied in the preparation of the Financial Statements. "GOVERNMENTAL BODY" means any (a) federal, state, provincial, local, municipal, foreign, or other government; (b) governmental or quasi- governmental authority of any nature (including any governmental agency, branch, bureau, department, official, or entity and any court or other tribunal); and (c) body exercising, or entitled to exercise, any administrative, executive, judicial, legislative, police, regulatory, or taxing authority or power of any nature. "GROSS INDEBTEDNESS" shall have the meaning ascribed to such term in Section 3.1(i). -------------- "HAZARDOUS SUBSTANCE" shall include any substance included within the definitions of "hazardous substances," "hazardous materials," "toxic substances," "waste" or similar terms in any applicable federal, state, provincial, or local statute, ordinance, rule or regulation relating to environmental protection, remediation or liability, including clean air, clean water, waste disposal and hazardous substance transportation or disposal, including, without limitation, petroleum, asbestos, polychlorinated biphenyls, flammable explosives and radioactive materials. "HOLDBACK" shall have the meaning ascribed to such term in Section ------- 2.2(b). ------ -4- "IAMD" shall have the meaning ascribed to such term in Section 7.13. ------------ "IAMD-MONTREAL" shall have the meaning ascribed to such term in the background section of this Agreement. "INCOME TAX ACT (CANADA)" means, collectively, the Income Tax Act, R.S.C. 1985 (5th Supp.), the Income Tax Application Rules, 1971, S.C. 1970- 71-72 c.63 and the Income Tax Regulations, as amended to date, and where a reference is made to a provision of the Income Tax Act (Canada), it shall be deemed to include where applicable, the Income Tax Application Rules, the Income Tax Regulations, any Notice of Ways and Means Motion or Bill tabled to date in the House of Commons to the extent that it results in a subsequent amendment to the Income Tax Act (Canada), the Income Tax Application Rules or the Income Tax Regulations, or any press release or publicly disseminated statement made to date by the Minster of Finance, pertaining to an intended amendment to the Income Tax Act, the Income Tax Application Rules or the Income Tax Regulations", to the extent that such amendment is subsequently enacted. "INDEMNIFICATION THRESHOLD" shall have the meaning ascribed to such term in Section 9.6(a). -------------- "INDEPENDENT AUDITOR" shall have the meaning ascribed to such term in Section 2.3(b). -------------- "INITIAL PUBLIC OFFERING" means an initial public offering and sale for cash by Purchaser of its common stock pursuant to a "firm commitment" underwriting agreement and a registration statement declared effective by the Securities and Exchange Commission under the United States Securities Act of 1933, as amended (the "SECURITIES ACT"); provided, that the term -------- Initial Public Offering shall not include the registration of an offer and sale of the common stock of Purchaser (i) to the employees of Purchaser or its subsidiaries or other persons providing services to Purchaser or its subsidiaries pursuant to any Plan registered on Form S-8 or a successor form, or (ii) relating to a merger, acquisition or other transaction of the type described in Rule 145 of the Securities Act or any successor rule registered on Form S-4 or a successor form. "INTELLECTUAL PROPERTY" means the patents, trademarks, logos, tradenames (including, without limitation, the Company's name, the Subsidiary's name, and each Schools' name), servicemarks, copyrights, know- how, and trade secrets owned by the Company or the Subsidiary or any other Person and used in connection with the operation of the Schools. -5- "INVESTMENT" as applied to any Person means (i) any direct or indirect ownership by such Person of any notes, obligations, instruments, stock, securities or other ownership interest of any other Person, and (ii) any capital contribution by such Person to any other Person. "LEASES" shall have the meaning ascribed to such term in Section ------- 4.11(b). ------- "LEASED FACILITIES" shall have the meaning ascribed to such term in Section 4.11(b). --------------- "LEGAL REQUIREMENT" means any foreign, federal, state, provincial, local, municipal or other constitution, law, statute, regulation, rule, ordinance, order, administrative order, principle of common law, or treaty to which Sellers, the Company, the Subsidiary or Purchaser are subject, as applicable. "LETTERS OF CREDIT" shall have the meaning ascribed to such term in Section 2.2(c). -------------- "LICENSES AND PERMITS" shall have the meaning ascribed to such term in Section 4.8. ----------- "MATERIAL MISCELLANEOUS CONTRACTS" shall have the meaning ascribed to such term in Section 4.12. ------------ "ME" means the Quebec Minister of Education and any successor administering student financial assistance under An Act Respecting Financial Assistance for Students (Quebec) and regulations thereunder, as amended. "MET" means the Ontario Ministry of Education and Training and any successor administering student financial assistance under (a) the Ministry of Colleges and Universities Act (Ontario), Regulation 774, as amended; and (b) the Canada Student Financial Assistance Act and the regulations thereunder and the Canada Students Loans Act and the regulations thereunder. "NET WORTH" shall have the meaning ascribed to such term in Section ------- 2.3(a). ------ "NONCOMPETITION AGREEMENTS" shall have the meaning ascribed to such term in Section 3.1(c). -------------- "NONCOMPETITION PAYMENTS" shall have the meaning ascribed to such term in Section 3.1(c). -------------- "NON-RESIDENT SELLERS" shall have the meaning ascribed to such term in Section 2.5. ----------- -6- "PERMITTED ENCUMBRANCES" shall have the meaning ascribed to such term in Section 4.11(d). --------------- "PERSON" means any individual, general or limited partnership, corporation (including any non-profit corporation), limited liability company, joint stock company, joint venture, trust, association, unincorporated organization, labor union, Governmental Body, Accrediting Body or other similar entity. "PLANS" shall have the meaning ascribed to such term in Section 4.21. ------------ "POLICY GUIDELINES" shall have the meaning ascribed to such term in Section 4.9. ----------- "PRE-CLOSING FINANCIAL AID IRREGULARITIES" shall have the meaning ascribed to such term in Section 9.2(d). -------------- "PROCEEDING" means any action, claim, arbitration, audit, hearing, investigation, inquiry, litigation, suit (whether civil, criminal, administrative, investigative, or informal) or other proceeding commenced, brought, conducted, or heard by or before, or otherwise involving, any Governmental Body or arbitrator. "PURCHASE PRICE" shall have the meaning ascribed to such term in Section 2.2. ----------- "PURCHASER" shall have the meaning ascribed to such term in the preamble to this Agreement. "PURCHASER'S ACCOUNTANT" shall have the meaning ascribed to such term in Section 2.3(b). -------------- "SCHOOLS" shall have the meaning ascribed to such term in the background section to this Agreement. "SECURITIES ACT" means the United States Securities Act of 1933, as amended, or any successor law, and regulations and rules issued pursuant to that Act or any successor law. "SELLERS" shall have the meaning ascribed to such term in the preamble to this Agreement. "SELLER NOTES" shall have the meaning ascribed to such term in Section ------- 2.2(c). ------ -7- "SELLERS' RELEASE" shall have the meaning ascribed to such term in Section 3.1(b). -------------- "SHARES" shall have the meaning ascribed to such term in the background section to this Agreement. "STOCK PURCHASE AGREEMENT" means the stock purchase agreement of even date herewith by and among IAMD Acquisition I, Ltd., a Delaware corporation and the stockholders of IAMD Limited, an Illinois corporation, executed substantially contemporaneously with the execution of this Agreement. "SUBSIDIARY" shall have the meaning ascribed to such term in the background section to this Agreement. "TAX RETURNS" means all reports, elections, tax returns and tax forms required to be filed by the Company, the Subsidiary and/or any of their business activities under the provisions of any applicable Legal Requirement and any tax forms required to be filed by the Company, the Subsidiary and/or any of their business activities, whether in connection with a tax return or not, under the provisions of any applicable Legal Requirement. "TAXES" means all taxes payable by the Company, the Subsidiary and/or any of their business activities under the Income Tax Act (Canada) and all taxes, levies or other like assessments, charges or fees, including, without limitation income, gross receipts, excise, goods and services, value added, transfer, capital, property (including, without limitation, any special assessments), sales, license, payroll and franchise or other taxes and import and customs duties, imposed by any Governmental Body on the Company and/or the Subsidiary and/or any of their business activities; and such term shall include any interest, penalties, fines or additions or other amounts payable in connection with any Taxes. "THRESHOLD AMOUNT" shall have the meaning ascribed to such term in Section 2.3(a). -------------- "TRADENAMES" shall have the meaning ascribed to such term in Section ------- 4.13(a). ------- Immediately following the signature pages of this Agreement is an index of the Exhibits and Schedules attached hereto. -8- 2. SALE AND TRANSFER OF SHARES; ASSETS AND LIABILITIES OF THE COMPANY AT --------------------------------------------------------------------- CLOSING. ------- 2.1. PURCHASE AND SALE OF SHARES. --------------------------- Subject to the terms and conditions of this Agreement, Sellers hereby agree to sell, transfer, assign, convey and deliver the Shares to Purchaser, and Purchaser hereby agrees to purchase, acquire and accept the Shares from Sellers, at the Closing. 2.2. PURCHASE PRICE; PAYMENT. ----------------------- In full consideration of the sale of the Shares by Sellers to Purchaser, and the other agreements of the parties hereunder, and subject to adjustment following the Closing in accordance with Section 2.3, the aggregate ----------- purchase price (the "PURCHASE PRICE") for the Shares is $6,500,000, which, subject to Section 2.5, plus the sum of $2,000,000 hereinafter in this section ----------- provided for shall be payable as follows: (a) $3,826,625 (the "CLOSING PAYMENT"), $22,000 of which shall be delivered by Purchaser to the Company on behalf of Sellers as payment on account of the $30,000 (Cdn) owed by them for the purchase of the LaPierre Claim (as defined in Section 10) and $3,804,625 of which ---------- shall be delivered to Sellers in accordance with Schedule 2.2 by wire ------------ transfer of immediately available funds at the Closing; (b) $2,123,375 (the "HOLDBACK") which amount shall be deposited in immediately available funds into an escrow account with Chicago Title & Trust Co. (the "ESCROW") established pursuant and subject to the terms of the escrow agreement (the "ESCROW AGREEMENT") in substantially the form of Exhibit A attached hereto, and which amount, --------- subject to reduction in accordance with Sections 2.3 and 2.5, and the ------------ --- offset pursuant to Section 9.9 of this Agreement, shall be disbursed ----------- to Sellers in accordance with the Escrow Agreement; and (c) $2,550,000, which amount shall be evidenced by, and payable in accordance with, Purchaser's notes made in favor of Sellers (the "SELLER NOTES") in substantially the form of Exhibit B attached hereto --------- and in accordance with Schedule 2.2 attached hereto, which Seller ------------ Notes shall bear interest (before default) at the rate of seven percent (7.0%) per annum payable quarterly in arrears, and after default at the rate of nine percent (9.0%) per annum and subject to the accelerations therein provided, shall be due and payable in full on the fourth anniversary of the Closing Date. The Seller Notes shall be delivered simultaneously with the Closing Payment. The Seller Notes shall be secured by letters of credit, in an aggregate amount equal to the amount of the Seller Notes and four (4) months interest thereunder, issued by LaSalle National Bank (collectively the "LETTERS OF CREDIT") in substantially the form of Exhibit C attached hereto, --------- which Letters of Credit shall be -9- delivered to Sellers at the Closing. The rights of Sellers to payment pursuant to the Seller Notes shall be subject to Purchaser's offset rights as provided in Section 9.9 of this Agreement. ----------- In addition to the Purchase Price, Purchaser shall pay to Sellers the Noncompetition Payments in the aggregate amount of $2,000,000, as provided for in the Noncompetition Agreements, in accordance with Schedule 3.1(c) hereto, --------------- which Noncompetition Payments shall be made simultaneously with the Closing Payment. 2.3. COMPANY ASSETS AND LIABILITIES; PURCHASE PRICE ADJUSTMENT. --------------------------------------------------------- (a) Sellers agree that the consolidated net worth of the Company and the Subsidiary at and as of Closing as calculated in accordance with GAAP (the "NET WORTH") shall not be less than $400,000 (the "THRESHOLD AMOUNT"). The amount of the Net Worth set forth in the Final Balance Sheet shall be deemed to be the Net Worth for the purposes of this Section 2.3(a). If the Final Balance Sheet sets forth -------------- Net Worth of less than the Threshold Amount, the amount of that difference shall be the "DEFICIENCY" and the Holdback (and, as a result thereof, the Purchase Price) shall be reduced by an amount equal to the Deficiency. If, however, the Final Balance Sheet sets forth Net Worth of more than the Threshold Amount, the amount of that difference shall be the "EXCESS". The Excess, if any, shall, subject to any rights of offset, be promptly remitted to Sellers in accordance with Schedule 3.1(c). --------------- (b) Purchaser shall cause Arthur Andersen, L.L.P. (the "PURCHASER'S ACCOUNTANT") to complete an audit of the Closing Balance Sheet delivered by Sellers pursuant to Section 3.1(j), and to deliver -------------- to Purchaser the written report (the "AUDIT REPORT") of Purchaser's Accountant with respect to such audit, as soon as possible following the Closing and in any event not later than forty-five (45) days after the Closing Date. Such Audit Report shall state the adjustments, if any, to such Closing Balance Sheet which in the opinion of Purchaser's Accountant would be necessary to be made so that with such adjustments such Closing Balance Sheet would accurately set forth the Net Worth, and if any such adjustments are so stated shall contain or be accompanied by an adjusted consolidated balance sheet (the "ADJUSTED BALANCE SHEET") of the Company and the Subsidiary reflecting such adjustments. Purchaser shall deliver to Sellers a copy of such Audit Report together with a copy of the Adjusted Balance Sheet, if any, forthwith after Purchaser's receipt of same and in any event within such forty-five (45) day period. Upon Sellers' request, Purchaser shall cause the Purchaser's Accountant to provide to Sellers or their representative access to the working papers of Purchaser's Accountant with respect to such Audit Report, and the Sellers or their representative shall be entitled to make copies thereof. If there is an Adjusted Balance Sheet, then such Adjusted Balance Sheet shall be -10- deemed to be the "FINAL BALANCE SHEET" unless the Sellers object in writing to such deeming within fifteen (15) days after their receipt of the Adjusted Balance Sheet. If there is such an objection by Sellers and the disputes between the Sellers and the Purchaser in that regard are not resolved to the satisfaction of the Sellers within fifteen (15) days after the date upon which Purchaser receives such written objection of the Sellers, then another nationally recognized firm of chartered accountants not otherwise engaged by Sellers or Purchaser (or their respective Affiliates) mutually selected by Sellers and Purchaser or appointed by a court of competent jurisdiction upon application therefor (the "INDEPENDENT AUDITOR") shall review the Closing Balance Sheet delivered by Sellers pursuant to Section 3.1(j), the Adjusted Balance Sheet, the said Audit Report -------------- of the Purchaser's Accountants and all related working papers of the Purchaser's Accountant, and if requested by the Sellers to do so shall make such other examinations and investigations as the Independent Auditor considers to be necessary in order to form an opinion as to the Net Worth. If requested by the Sellers or the Purchaser on written notice to the other of them, the Independent Auditor shall consider submissions by the parties in accordance with rules and procedures established by the Independent Auditor in that regard. The review of the Independent Auditor shall be completed as soon as is practicable. If the Independent Auditor shall be of the view that the Adjusted Balance Sheet does not correctly set forth the Net Worth, then the Independent Auditor shall prepare and deliver to the parties a fresh consolidated balance sheet of the Company and the Subsidiary which in the view of the Independent Auditor correctly sets forth the Net Worth and such fresh balance sheet shall thereupon be deemed to be the "FINAL BALANCE SHEET." The Final Balance Sheet howsoever deemed shall be final and binding upon all parties. The costs of the engagement of the Independent Auditor shall be borne by the Sellers unless the Independent Auditor's determination results in an adjustment in Sellers' favor of at least $100,000, in which event the costs of the engagement of the Independent Auditor shall be borne by the Purchaser. If an Adjusted Balance Sheet is not delivered to the Sellers within forty-five (45) days next following the Closing Date or the Audit Report of the Purchaser's Accountant is such that no Adjusted Balance Sheet is prepared, then the Closing Balance Sheet delivered by Sellers pursuant to Section 3.1(j) hereof shall be deemed to be the "FINAL -------------- BALANCE SHEET." Forthwith after a balance sheet is deemed to be the Final Balance Sheet, the parties shall in writing direct the Escrow Agent under the Escrow Agreement to disburse the $500,000 plus accrued interest thereon in accordance with their respective entitlements thereto (which entitlements shall be set forth in such direction); provided, however, if the Purchaser claims an offset against such amount pursuant to Section 9.9(b) such direction shall set forth the -------------- amount claimed as such offset. -11- Notwithstanding anything contained in this Agreement to the contrary, Purchaser shall not be required to pay any portion of the Holdback (excluding however that portion of the Holdback relating to the tax withholding pursuant to Section 116 of the Income Act (Canada)) until any and all disputes pursuant to - ----------- this Section 2.3 are resolved. Subject to Section 2.3 with respect to the costs ----------- ----------- of engagement of the Independent Auditor, each party hereto shall bear its own costs and expenses, including attorneys' fees, incurred in connection with any dispute under this Section 2.3. ----------- 2.4. CLOSING. ------- The parties hereto shall close the purchase and sale of the Shares and the consummation of the other actions contemplated by this Agreement to occur in connection therewith at the closing (the "CLOSING"), which shall take place at the offices of Purchaser's counsel, Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd., 55 East Monroe Street, Suite 3700, Chicago, Illinois 60603, on June 30, 1997, or such other date to which the parties hereto shall mutually agree in writing. 2.5. SECTION 116 CERTIFICATES. ------------------------ With the exception of Gross, each of the other Sellers (the "NON- RESIDENT SELLERS") shall use all reasonable efforts to deliver to Purchaser, on the day prior to the Closing Date, the certificates required pursuant to (S) 116 of the Income Tax Act (Canada) to permit Purchaser to pay the Purchase Price without any obligations pursuant to the Income Tax Act (Canada) to withhold or remit any portion thereof or any liability for failing to do so, failing which: (a) each of the Non-Resident Sellers shall continue to use all reasonable efforts to obtain the certificates required pursuant to (S) 116 of the Income Tax Act (Canada); (b) if certificates required pursuant to (S) 116 of the Income Tax Act (Canada), in form and substance satisfactory to Purchaser, acting reasonably, are not received by Purchaser at or before 5:00 p.m. (Toronto time) on the 28th day after the last day of the calendar month in which the Closing occurs (the "CERTIFICATE DEADLINE DATE") and if there is no Final Balance Sheet determined in accordance with Section 2.3 by such time and date, Purchaser shall following the ----------- Certificate Deadline Date remit to Revenue Canada the amount required pursuant to (S) 116 of the Income Tax Act (Canada) in respect of the Shares and the payment to Revenue Canada of such amount shall be credited towards, and shall be deemed to have been paid to each of the Non-Resident Sellers in partial satisfaction of, the Holdback; provided that if the certificates required pursuant to (S) 116 of the Income Tax Act (Canada) are received by Purchaser after Closing but before the Certificate Deadline Date, Purchaser shall pay the Holdback to each of the Non-Resident Sellers in -12- accordance with Section 2.2(b) without any deduction for withholding tax -------------- under (S) 116 of the Income Tax Act (Canada); and (c) if the Final Balance Sheet has been determined in accordance with Section 2.3 at or before 5:00 p.m. (Toronto time) on the ----------- Certificate Deadline Date and certificates required pursuant to (S) 116 of the Income Tax Act (Canada), in form and substance satisfactory to Purchaser, acting reasonably, are not received by Purchaser by such time and date, Purchaser shall pay each of the Non-Resident Sellers the amount of the Holdback less the amount required pursuant to (S) 116 of the Income Tax Act (Canada) to be remitted to Revenue Canada in respect of the Shares, and Purchaser shall, following the Certificate Deadline Date, remit to Revenue Canada the amount required pursuant to (S) 116 of the Income Tax Act (Canada) in respect of the Shares and the payment to Revenue Canada of such amount shall be credited towards, and shall be deemed to have been paid to each of the Non- Resident Sellers in partial satisfaction of, the Holdback provided that Purchaser shall have no further responsibilities to the Non- Resident Sellers in connection with such payment to Revenue Canada; provided further that if the certificates required pursuant to (S) 116 of the Income Tax Act (Canada) are received by Purchaser after the determination of the Final Closing Balance Sheet but before the Certificate Deadline Date, Purchaser shall pay the balance of the Holdback to each of the Non-Resident Sellers without any deduction for withholding tax under (S) 116 of the Income Tax Act (Canada). (d) if Revenue Canada should assess or threaten to assess Purchaser for a liability pursuant to subsection 116(5) of the Income ----------------- Tax Act (Canada) because the cost of the Shares to the Purchaser exceeds the "certificate limit" (as defined in the Income Tax Act (Canada)), such liability shall be considered a third party claim against Purchaser subject to Section 9 hereof. However, for purposes --------- of Section 9, the claim pursuant to this subparagraph shall be --------- considered a breach of a covenant under Section 9.2(b) only in respect -------------- of the Non-Resident Seller whose payment is the subject of the liability assessed against Purchaser; such claim shall not be subject to the limitation of Section 9.6(b). -------------- 3. CLOSING DELIVERIES. ------------------ 3.1. DELIVERIES TO PURCHASER. ----------------------- Sellers agree to deliver to Purchaser, at the Closing, each of the following, each of which constitutes a condition to Purchaser's obligation to consummate the purchase of the Shares: -13- (a) Certificates for Shares. Certificates representing the ----------------------- Shares, duly endorsed (or accompanied by duly executed stock powers), for transfer to Purchaser; (b) Releases from Sellers. A release in substantially the form --------------------- of Exhibit D, executed by Sellers (the "SELLERS' RELEASE"); --------- (c) Noncompetition Agreements. Noncompetition agreements in ------------------------- substantially the form of Exhibit E, each executed by one or more of --------- the Sellers, a applicable (collectively, the "NONCOMPETITION AGREEMENTS"), providing for the payments to Sellers in the aggregate amount of $2,000,000 in accordance with Schedule 3.1(c) attached --------------- hereto (the "NONCOMPETITION PAYMENTS"), in consideration for the Sellers' performance of the covenants and obligations set forth in their respective Noncompetition Agreements, which Noncompetition Payments shall be paid to Sellers; subject to Section 2.5 and the ----------- Escrow Agreement, simultaneously with disbursement of the Closing Payment pursuant to Section 2.2(a) in accordance with the terms and -------------- conditions of the Noncompetition Agreements; (d) Escrow Agreement. The Escrow Agreement, executed by the ---------------- Purchaser, Sellers and the relevant escrow agent thereunder; (e) Secretary's Certificates for the Company and the Subsidiary. ----------------------------------------------------------- A certificate, signed by the secretary or an assistant secretary of the Company, certifying the articles of incorporation and bylaws of the Company, appropriate authorizing resolutions of the Company's Board of Directors, the incumbency of the Company's directors and officers, and the status or compliance of the Company in the Provinces of Ontario and Quebec, and, as necessary, wherever else qualified to conduct its business, and a certificate for the Subsidiary, signed by the secretary or an assistant secretary of the Subsidiary, certifying the articles of incorporation and bylaws of the Subsidiary, the incumbency of the Subsidiary's directors and officers, and the status or compliance of the Subsidiary in the Province of Quebec, and as necessary, wherever else qualified to conduct its business; (f) Closing Certificate. A certificate executed by Sellers ------------------- satisfying the requirements of Sections 7.4, 7.5 and 7.6 hereof; ------------ --- --- (g) Legal Opinion. Legal opinion of Goodman, Phillips & ------------- Vineberg and Lapointe, Rosenstein in form satisfactory to Purchaser, addressed to Purchaser and Purchaser's lenders; (h) Consents. Evidence satisfactory to Purchaser's counsel that -------- each consent of a third party listed in Schedule 3.1(h) attached --------------- hereto, which consents are required by Purchaser to be obtained by Sellers prior to the -14- Closing, have been obtained and remain in full force and effect, unless the obligation to obtain such consent has been specifically waived in writing by Purchaser; (i) Evidence of Gross Indebtedness. Evidence of the amount of ------------------------------ the Company's indebtedness to Gross satisfactory to Purchaser (the "GROSS INDEBTEDNESS") (j) Closing Financial Information. An estimated consolidated ----------------------------- balance sheet of the Company and the Subsidiary calculated as of 5:00 p.m. Toronto time on the business day immediately preceding the Closing Date prepared as described in Section 2.3(a), a copy of which -------------- shall be attached hereto as Schedule 3.1(j) (the "CLOSING BALANCE --------------- SHEET"), accompanied by schedules in reasonable detail showing cash balances in all bank accounts of the Company and each Subsidiary, and all of their respective outstanding accounts payable, together with a calculation of estimated Net Worth; (k) Consent and Estoppel Certificates. Except to the extent --------------------------------- waived in writing by Purchaser, Consent and estoppel certificates from the landlords of the Leased Facilities, certifying certain factual matters relating to the Leases, including without limitation certification that there are no defaults under the Leases and the amounts of security deposits under the Leases, consenting to the grant of security interests in the Leases to Purchaser's senior secured creditor, and consenting to the transfer of the Shares to the Purchaser, in form and substance reasonably acceptable to Purchaser and its lenders; (l) Resignations. A resignation by each of the Sellers from ------------ their positions as directors and officers of the Company and, where applicable, the Subsidiary, which resignations shall become effective simultaneously with the Closing, and acknowledgment that their respective employment agreements, if any, have been terminated without any further obligation due from the Company or the Subsidiary or the Purchaser; (m) Bank Accounts. A list of all operating and other bank ------------- accounts of the Company and the Subsidiary, together with documentation of the removal of all directors and officers resigning pursuant to Section 3.1(l) as signatories for such accounts; -------------- (n) Certificates. Such tax certificates as required pursuant to ------------ Section 2.5, hereof; and ----------- (o) Payment for Lapierre Claim. Payment of the $30,000 (Cdn) for -------------------------- the Lapierre Claim described in Section 10 hereof; and ---------- (p) Other Documents. Such other documents relating to the --------------- transactions contemplated by this Agreement as Purchaser or its counsel may -15- reasonably request, including, without limitation, to the extent not waived in writing by the Purchaser, documents specified as Sellers' closing deliveries on the Closing Checklist in the form of Exhibit F --------- attached hereto. 3.2. CLOSING DELIVERIES TO SELLERS. ----------------------------- Purchaser agrees to deliver to Sellers at the Closing, each of the following, each of which constitutes a condition to Sellers' obligations to consummate the sale of the Shares: (a) Closing Payment. The Closing Payment required by Section --------------- ------- 2.2(a) by wire transfer of immediately available funds; ------ (b) Seller Notes. The Seller Notes, executed by Purchaser; ------------ (c) Letters of Credit. The Letters of Credit, executed by the ----------------- issuer thereof; (d) Noncompetition Agreements. The Noncompetition Agreements, ------------------------- executed by Purchaser; (e) Escrow Agreement. The Escrow Agreement, executed by ---------------- Purchaser and the relevant escrow agent thereunder; (f) Termination of Guarantees. Evidence of the termination or ------------------------- release of the guarantees of Sellers described on Schedule 3.2(f) --------------- attached hereto, or, to the extent any such termination or release cannot be obtained prior to the Closing, delivery by Purchaser of an indemnification of the applicable Seller or Sellers' obligations thereunder, in either case in form and substance reasonably satisfactory to Sellers; (g) Secretary's Certificate for Purchaser. A certificate, signed ------------------------------------- by the secretary or an assistant secretary of Purchaser, certifying the articles of incorporation and bylaws of Purchaser, appropriate authorizing resolutions of Purchaser's Board of Directors, the incumbency of Purchaser's officers executing this Agreement and the documents delivered in connection with the Closing, and the good standing of Purchaser in its state of incorporation and the State of Illinois; (h) Closing Certificate. A certificate executed by Purchaser ------------------- satisfying the requirements of Sections 8.1 and 8.2 hereof; ------------ --- (i) Legal Opinion. A legal opinion of counsel for Purchaser, ------------- Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd., in substantially the form of Exhibit G attached hereto, addressed to --------- Sellers; and -16- (j) Other Documents. Such other documents relating to the --------------- transactions contemplated by this Agreement as Sellers or their counsel may reasonably request, including, without limitation, documents specified as Purchaser's closing deliveries on the Closing Checklist. 3.3. OTHER CLOSING DELIVERIES. ------------------------ (a) Delivery into Escrow. Purchaser agrees to deposit into the -------------------- Escrow (by wire transfer of immediately available funds), at Closing, $3,123,375 which amounts shall be disbursed in accordance with Section ------- 2.2(b). ------ (b) Payment to Gross. Purchaser agrees to repay in full on ---------------- behalf of the Company to Gross (by wire transfer of immediately available funds), at Closing the Gross Indebtedness. (c) Indemnification for 56 Wellesley Street Guaranty. Purchaser ------------------------------------------------ hereby agrees to indemnify and hold Sellers harmless from and against any and all out-of-pocket costs incurred by them arising under Sellers' Guaranty contained in one of the various leases of the 56 Wellesley Street West property. 3.4. POST-CLOSING COVENANTS. ---------------------- (a) Further Assurances. On or after the Closing Date, and ------------------ without further consideration, Purchaser and Sellers shall, from time to time at the request of any other party hereto, execute and deliver to such other party further documents and instruments evidencing the consummation of the transactions contemplated by this Agreement and/or any of the obligations created hereby or pursuant hereto, as such other party may reasonably require including, without limitation, instruments of conveyance, assignment and transfer of the Shares. The party requesting the execution and delivery of such further documents and instruments shall pay the reasonable out of pocket costs and expenses of all other parties hereto in connection therewith. (b) Administration of the Company Prior to Disbursement of the ---------------------------------------------------------- Holdback; Cooperation of Parties. From and after the Closing Date and -------------------------------- until payment in full of the Holdbacks, Purchaser, at Purchaser's sole cost and expense, shall administer and operate the Company, the Subsidiary and the Schools in material compliance with all Legal Requirements and Accrediting Body requirements, and in accordance with all permits, Accreditations, authorizations and agreements issued by or entered into with any Governmental Body or any Accrediting Body regulating or otherwise relating to the administration and operation of the Company, the Subsidiary or the Schools. Subject to the terms and provisions of this Agreement, Purchaser shall use its -17- commercially reasonable efforts in order to obtain any and all approvals from the MET and the ME, any Accrediting Body and any other Governmental Body that may be necessary or appropriate to vest in Purchaser the right and authority to administer and operate the Schools, and Purchaser and Sellers shall cooperate in order to obtain such approvals. (c) Access and Maintenance of Records. From and after the --------------------------------- Closing Date, Purchaser shall afford to Sellers, their counsel, accountants and other authorized representatives reasonable access to each of the Company's, the Subsidiary's and the Schools' books and records related to periods prior to the Closing Date during normal business hours and upon reasonable notice from Sellers to Purchaser, as reasonably required by Sellers in connection with (i) performance by Sellers of any of Sellers' obligations (whether directly or by virtue of their indemnification obligations) pursuant to this Agreement, (ii) any claim, action, litigation, program review, audit or other proceeding involving any one or more of the Sellers (other than any such claim, action, litigation, program review, audit or proceeding arising under this Agreement or in which Purchaser and/or the Company and the Subsidiary, on one hand, and Sellers or any of their Affiliates, on the other hand, are adverse parties and to which a privilege would apply) and (iii) Sellers preparation of their tax returns. Sellers, at Sellers' expense, may make copies of any such records as may be necessary or appropriate for Sellers' use (subject to Section 6.1 hereof) in connection with the foregoing. For a period ----------- of seven (7) years from the Closing Date or until the expiration of the record retention period under relevant Legal Requirements or Accrediting Body requirements, if longer, Purchaser shall not destroy or otherwise dispose of any books or records of the Company or the Subsidiary related to periods prior to the Closing Date. Notwithstanding the foregoing, Purchaser shall preserve and protect all books, documents, papers, computer programs and records pertaining in any manner to the administration by the Company or the Subsidiary of student financial assistance programs with respect to the Schools for at least the period of time specified under applicable Legal Requirements. 4. REPRESENTATIONS AND WARRANTIES OF SELLERS. ----------------------------------------- As a material inducement to Purchaser to enter into this Agreement and to purchase the Shares, Sellers hereby represent and warrant as of the date hereof (except where another particular date is specified, in which event Sellers hereby represent as of such date) that: 4.1. INCORPORATION AND ORGANIZATION OF THE COMPANY AND THE SUBSIDIARY. ---------------------------------------------------------------- The Company is a corporation, duly incorporated, organized and subsisting under the laws of the Province of Ontario. The Company is qualified to do business as a corporation in the Province of Quebec, and all other jurisdictions in which the nature of its -18- operations require it to register or otherwise qualify as an extra-provincial corporation, except where failure to register or so qualify would not have a material adverse effect on its business or operations. IAMD-Montreal is a corporation duly incorporated, organized and subsisting under the laws of the Province of Quebec. IAMD-Montreal is qualified to do business as an extra- provincial corporation and in good standing in all other jurisdictions in which the nature of its operations require it to so qualify, except where failure to so qualify would not have a material adverse effect on its business or operations. Each of the Company and the Subsidiary has all requisite power and authority to own and operate its properties and assets, to carry on its business as now conducted, and to consummate the transactions contemplated hereby. The Company and the Subsidiary are not, and for the past five (5) years have not been, engaged in any business other than the operation of the Schools, and activities directly related thereto. The copies of the Company's and the Subsidiary's articles of incorporation and bylaws which have been furnished by Sellers to Purchaser reflect all amendments made thereto at any time prior to the date of this Agreement and are correct and complete. The failure of the Company to be registered in Quebec did not and will not have a material adverse effect on the Company, the subsequently organized Quebec Subsidiary, or the Schools. 4.2. OWNERSHIP OF THE COMPANY, THE SUBSIDIARY AND THE SCHOOLS. -------------------------------------------------------- (a) The Subsidiary is owned and operated by the Company directly, and no other Person has any ownership interest in the Subsidiary. The School in Toronto is owned directly by the Company and the School in Montreal is owned directly by the Subsidiary, and no other Person has any ownership interest in the Schools. No Person other than Purchaser has any right, option, warrant, subscription or other arrangement to purchase shares in the capital of the Company (or the Subsidiary) or to otherwise acquire any other equity interest in the Company (or the Subsidiary) or the Schools. The transfer by the Company of assets to the Subsidiary was sufficient to transfer good and valid title to such assets to the Subsidiary, free and clear of any Encumbrances. (b) The Shares are owned by each Seller directly, and no other Person has direct or indirect ownership interest in the Company and no Person, other than the Purchaser, has any right, option, warrant, subscription or other arrangement to purchase shares of capital stock of the Company or to otherwise acquire any other equity interest in the Company. 4.3. CAPACITY; AUTHORIZATION; BINDING EFFECT, ETC. -------------------------------------------- Each Seller hereby represents and warrants that he or she individually has the unrestricted and absolute power, legal capacity and authority to execute, deliver and perform this Agreement and each other document being executed in connection herewith to which he or she is a party. Such Seller hereby further individually represents and warrants that this Agreement has been, and each other document to be executed by such Seller in connection herewith, as of the Closing, will have been, duly executed and delivered by -19- Sellers or such Seller, and (assuming the due authorization, execution and delivery hereof and thereof by Purchaser and any other parties thereto), this Agreement is, and each such other document or agreement will be, a valid and binding obligation of such Seller, as the case may be, enforceable against him or her in accordance with its terms. 4.4. NO CONFLICTS, ETC. ----------------- (a) Except as set forth in Schedule 4.4, the execution, delivery ------------ and performance of this Agreement and each other document being executed by Sellers or any of them in connection herewith, and the consummation of the transactions contemplated hereby and thereby, do not and will not: (a) contravene, conflict with, or result in a violation of (i) any provision of the articles of incorporation or bylaws of the Company or the Subsidiary; or (ii) any resolution adopted by the board of directors or the shareholders of the Company or the Subsidiary; (b) contravene, conflict with or violate any Legal Requirement applicable to the Company, the Subsidiary or the Schools or any of their respective assets or properties; (c) with or without the giving of notice or the passage of time, or both, conflict with or result in the breach or termination, of, or default under, any provision of the articles of incorporation or bylaws of the Company or the Subsidiary, or any material instrument, license, permit, authorization, agreement or commitment to which the Company, the Subsidiary or the Schools, are a party or by which any of their assets or properties are bound; (d) constitute a violation of any order, judgment or decree to which the Company, the Subsidiary, or the Schools, are a party or by which any of their assets or properties is bound; or (e) require any approval of, filing or registration with, or consent from any Governmental Body or Accrediting Body that is required to be obtained or made by the Company, the Subsidiary or the Schools; (f) cause the Company or the Subsidiary to become subject to, or liable for the payment of, any Taxes outside of the ordinary course of business relating to periods prior to the Closing Date, or transfer taxes under any state, province or local law attributable to purchase of the Shares by Purchaser, except as result of the current taxation year of the Company and the Subsidiary ending by virtue of the Closing of the transactions contemplated hereby. Except as set forth on Schedule 4.4, none of the Company, the Subsidiary, the Schools or any ------------ Seller is or will be required to give any notice or obtain any consent, approval or other authorization from any Person in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereunder. (b) The execution, delivery and performance of this Agreement and each other document being executed by each Seller in connection herewith, and the consummation of the transactions contemplated hereby and thereby, do not and will not: (a) contravene, conflict with or violate any Legal Requirement applicable to such Seller; (b) with or without the giving of notice or the passage of time, or both, conflict with or result in the breach or -20- termination, of, or default under, or any material instrument, license, permit, authorization, agreement or commitment to which such Seller is a party or by which any of his or her assets or properties are bound; (c) constitute a violation of any order, judgment or decree to which such Seller is a party or by which any of his or her assets or properties is bound; or (d) require any approval of, filing or registration with, or consent from any Governmental Body or Accrediting Body that is required to be obtained or made by such Seller. Except as set forth on Schedule 4.4, such Seller is not or ------------ will not be required to give any notice or obtain any consent, approval or other authorization from any Person in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereunder by such Seller. 4.5. INVESTMENTS. ----------- The Company has, and during the five (5) years prior to the date hereof has had, no Investment, in any Person other than the Subsidiary. The Subsidiary does not have, and during the five (5) years prior to the date hereof has not had, any Investment in any other Person. 4.6. CAPITALIZATION. -------------- The capitalization of the Company and the Subsidiary is as follows: (a) (i) The authorized equity securities of the Company consist of an unlimited number of common shares, of which forty-three thousand six hundred sixty seven (43,667) shares are issued and outstanding to the Sellers as set forth on Schedule 4.6. Such issued and outstanding ------------ securities constitute the "SHARES". (ii) Sellers are, and at the moment immediately prior to consummation of the Closing will be, the record and beneficial owners and holders of the Shares, free and clear of all Encumbrances. (b) The authorized equity securities of IAMD-Montreal consist of an unlimited number of Class A, Class B, Class C, Class D, Class E, and Class F shares, of which one hundred (100) Class A shares and Seven Thousand Two Hundred Forty One (7,241) Class E shares are issued and outstanding to the Company. The Company is, and at the moment immediately prior to consummation of the Closing will be, the record and beneficial owner and holder of all such equity securities of IAMD- Montreal, free and clear of all Encumbrances. Except as set forth in Schedule 4.6, no legend or other reference to any ------------ purported Encumbrance appears upon any certificate representing equity securities of the Company or the Subsidiary. All of the outstanding equity securities of the Company and the Subsidiary have been duly authorized and validly issued and are fully paid and nonassessable. Except as set forth in Schedule 4.6, there are no agreements, (other - ------------ -21- than shareholders' agreements which will be terminated prior to, or in connection with, the Closing), commitments (including without limitation any options, warrants, rights or similar arrangements) or Plans relating to the issuance, sale, or transfer of any equity securities or other securities of the Company or the Subsidiary or providing for cash payments based upon the value of any equity securities of the Company or the Subsidiary. None of the outstanding equity securities or other securities of the Company or the Subsidiary was issued in violation of the Securities Act, any Canadian securities legislation or any other Legal Requirement. Neither the Company (except for its ownership of the outstanding shares of the Subsidiary) nor any of the Subsidiary owns, or has any agreement or commitment to acquire, any equity securities or other securities of any Person, or any direct or indirect equity or ownership interest in any other business. 4.7. BOOK AND RECORDS. ---------------- Except as set forth on Schedule 4.7: ------------ (a) The minute books, share record books, and other records of the Company and the Subsidiary, all of which are being made available to Purchaser, are complete and correct and have been maintained in accordance with sound business practices, including the maintenance of an adequate system of internal controls, except where failure to so maintain such books and records would not have a material adverse effect upon the Company or the Subsidiary. (b) The minute books of the Company and the Subsidiary contain accurate and complete records of all meetings held of, and corporate action taken by, their respective shareholders, boards of directors, and committees of their respective boards of directors, and no meeting of any such shareholders, boards of directors, or committees has been held for which minutes have not been prepared and are not contained in such minute books, except where failure to so prepare and maintain such minutes would not have a material adverse effect on the Company or any of its Subsidiaries. (c) The Company and the Subsidiary have maintained all of its accounting books and records in accordance with applicable Legal Requirements and GAAP, except where failure to so maintain such books and records would not have a material adverse effect upon the Company or the Subsidiary, and such books and records are true, correct and complete in all material respects. (d) At the Closing, all books and records described in this Section 4.7 will be in the possession of the Company or the ----------- Subsidiary, as applicable. -22- 4.8. COMPLIANCE WITH LAWS; LICENSES AND PERMITS. ------------------------------------------ Except as set forth in Schedule 4.8(a) attached hereto, none of the --------------- Company, the Subsidiary, or the Sellers is in violation of any Legal Requirement which violation might reasonably be expected to have a material adverse effect upon the financial condition, operating results, Accreditation or business of the Company, or the Subsidiary or the Schools, and none of the Company, the Subsidiary, or the Sellers has received notice of any such violation. None of the Company, the Subsidiary, or the Sellers has received any notice of any violations of the Occupational Health and Safety Act, as amended, or any other occupational health or safety act or any similar Legal Requirement, relating to the Company or the Subsidiary. The Company and the Subsidiary currently maintain all licenses, Accreditations, certificates, permits, consents, authorizations, and other governmental or regulatory approvals (the "LICENSES AND PERMITS") necessary to conduct the business and operations of the Company and the Subsidiary as presently being conducted, except where the failure to maintain any such Licenses and Permits would not have a material adverse effect on the operations or financial condition of the Company or the Subsidiary or the Schools. Each of the Company and the Subsidiary has duly filed all reports and returns required to be filed by it with all Governmental Bodies and the Accrediting Body except where failure to file any such report or return would not have a material adverse effect on the Company or its Subsidiary. No application made by the Company or the Subsidiary for any Licenses and Permits during the last five (5) years has been denied except for requests made to the ME to introduce a new program, which requests were not granted, as listed on Schedule 4.8(d) hereto. Schedule 4.8(b) attached hereto is a true, correct and - --------------- --------------- complete list of all Licenses and Permits held by the Company and the Subsidiary, and the Governmental Body or Accrediting Body granting each such License and Permit. Except as set forth on Schedule 4.8(b), the Licenses and --------------- Permits are in full force and effect, and no proceedings for the suspension or cancellation of any of them is pending or, to the best of Sellers' knowledge, threatened. Sellers have delivered to Purchaser copies of all such Licenses and Permits. Except as set forth on Schedule 4.8(b), none of the Company or the --------------- Subsidiary, or any Seller, has received notice that any of the Licenses and Permits will not be renewed and to the best of Sellers' knowledge, there is no basis for nonrenewal. Each of the Company and the Subsidiary has all Accreditations from Accrediting Bodies and all surety bonds sufficient and in effect which are required to conduct the business of the School operated by it, as presently conducted. Except as set forth in Schedule 4.8(c) attached hereto, --------------- none of the Company, or the Subsidiary, or any Seller, has received any notice, not previously resolved in full without any material liability, with respect to any alleged violation of the rules or regulations of the MET or ME or any applicable Accrediting Body, in respect of the Schools, including sales and marketing activities, or the terms of any program participation agreement to which it is or was a party. Except as set forth on Schedule 4.8(c) attached --------------- hereto, Sellers are not aware of any investigation, and/or review of the Schools' student financial aid programs or any review of Accreditation of either School by any Governmental Body or Accrediting Body. -23- 4.9. RECRUITMENT; ADMISSIONS PROCEDURES; ATTENDANCE; FINANCIAL AID; -------------------------------------------------------------- REPORTS. - ------- Schedule 4.9(a) attached hereto is a complete list of all policy --------------- manuals and other statements of procedures or instruction of the Company or the Subsidiary or of ME and MET in the possession of the Company or the Subsidiary relating to (a) recruitment of students for the Schools, including procedures for assisting in the application by prospective students for direct or indirect provincial or federal financial assistance; (b) admissions procedures, including any descriptions of procedures for insuring compliance with federal, provincial or Accrediting Body requirements applicable to such procedures; (c) procedures for encouraging and verifying attendance, minimum required attendance policies, and other relevant criteria relating to course performance requirements and completion; and (d) compliance with Legal Requirements relating to financial aid programs (collectively, the "POLICY GUIDELINES"). Sellers have delivered to Purchaser true, correct and complete copies of all Policy Guidelines. Except as disclosed on Schedule 4.9(b) attached hereto or in any other schedule to this --------------- Agreement, the operations of the Company and the Subsidiary have, in all material respects, been conducted substantially in accordance with the Policy Guidelines (as then in effect) and all relevant standards imposed by applicable Accrediting Bodies, and other agencies administering provincial or federal governmental financial assistance programs in which the Company or the Subsidiary participate, and other applicable Legal Requirements. The Company has submitted all reports, audits, and other information, whether periodic in nature or pursuant to specific requests, for the Company, the Subsidiary and the Schools ("COMPLIANCE REPORTS") to all agencies or other entities with which such filings are required relating to its compliance with (i) applicable Accreditation standards, and (ii) Legal Requirements governing programs pursuant to which either of the Schools or its students receive student financial assistance funding except where failure to submit such Compliance Reports would not have a material adverse effect on the business or operations of the Company, or the Subsidiary or the Schools. There are no articulation agreements between the Schools and degree granting colleges and universities in effect and no such agreements are necessary for the business or operations of the Company or the Subsidiary. All forms and records of the Company and the Subsidiary have been prepared, completed, maintained and filed in all material respects in accordance with all applicable Legal Requirements, and are true and correct in all material respects. All financial aid grants and loans, disbursements and record keeping relating thereto have been completed in compliance with all federal and provincial requirements, and there are no material deficiencies in respect thereto. To the best of Sellers' knowledge and except as previously disclosed in prior audits by MET or ME, no student at either of the Schools has been funded prior to the date for which such student was eligible for funding, and such student's records conform in form and substance to all relevant regulatory requirements. 4.10. REGULATORY REQUIREMENTS. ----------------------- The ME and the MET represent all Accrediting Bodies under which the Schools are regulated or required to be regulated and there are no other governmental, -24- regulatory or accrediting entities under which the Schools are regulated or required to be regulated. 4.11. TITLE TO THE ASSETS. ------------------- (a) Neither the Company nor the Subsidiary presently owns, or has ever owned, any real property. (b) Schedule 4.11(b) sets forth a list of the real properties ---------------- leased or otherwise used, operated or occupied by the Company or the Subsidiary (the "LEASED FACILITIES"). The leases covering the Leased Facilities (the "LEASES"), which are also described on Schedule -------- 4.11(b) are valid and in full force and effect and are enforceable in ------- all material respects in accordance with their terms. (c) All of the tangible assets and records relating to intangible assets of the Company and the Subsidiary are or as of the Closing will be delivered to Purchaser or located at the Leased Facilities. Except as disclosed or summarized in Schedule 4.11(c), neither the Company ---------------- nor the Subsidiary is under any contractual or other legal obligation or has entered into any commitment to make capital improvements or alterations to the Leased Facilities. The Company and/or the applicable Subsidiary and, to the best of Sellers' knowledge, the landlords, are not in default under the Leases and, to the best of Sellers' knowledge, no event, act or omission has occurred which (with or without notice, the passage of time or the happening or occurrence of any other event) would result in a default thereunder. The Company and/or the applicable Subsidiary enjoys peaceful and undisturbed possession under the Leases, and to the best of Sellers' knowledge the Leased Facilities are not subject to any zoning, ordinance or other restrictions which would prohibit the use and enjoyment of the Leased Facilities in the manner in which the Leased Facilities are currently used. Sellers have no knowledge of any condemnation proceedings relating to the Leased Facilities. To the best of Sellers' knowledge, the Leased Facilities, and the use thereof by the Company, the Subsidiary and the Schools are in compliance in all material respects with all Legal Requirements. (d) Except for the leased or licensed assets and properties set forth on Schedule 4.11(d)(i) attached hereto, the Company or the ------------------- Subsidiary owns outright, and has good and marketable title to, all of assets and properties used in connection with the operation of the Schools, free and clear of Encumbrances other than Encumbrances set forth on Schedule 4.11(d)(ii) ("PERMITTED ENCUMBRANCES"), and liens -------------------- for current taxes not yet due and payable. All leases for tangible personal property used by the Company or any Subsidiary in connection with their operations are valid and in full force and effect and enforceable in all material respects in accordance with their terms. Except as set forth in Schedule 4.11(d)(i) attached hereto, no such ------------------- lease is a capital lease, and neither the Company nor any Subsidiary, or, to the best of Sellers' knowledge, -25- any of the other parties thereto, is in default under any such lease or license, and no event, act or omission has occurred which (with or without notice, the passage of time or the happening or occurrence of any other event) would result in a default thereunder. (e) The tangible assets (other than the Leased Property) which are owned or leased by the Company or the Subsidiary and with individual values of $5,000 or more are listed or reflected on Schedule 4.11(e) attached hereto, and, to the best of Sellers' ---------------- knowledge, are in good operating condition, order and repair, useable in the ordinary course of business consistent with past practice, subject to ordinary wear and tear, and with the additional equipment already ordered, are sufficient and adequate for all current operations. None of the Company, the Subsidiary or any Seller has received notice of any violation of or default under any Legal Requirement or requirement relating to any of such assets which remains uncured or has not been resolved. (f) Other than as listed on Schedule 4.11(f) hereto and the ---------------- Leased Facilities, the Company does not operate, nor during the past five (5) years has it owned, leased or operated, any Facility. (g) The Curricula constitutes all of the Curricula currently used in courses currently offered at the Schools. (h) The Intellectual Property constitutes all the patents, trademarks, logos, Tradenames (as defined in Section 4.13(a) herein), --------------- servicemarks, copyrights, know-how, logos and trade secrets owned by the Company or the Subsidiary, or used in connection with their operations, and except for leased or licensed assets and properties set forth on Schedule 4.11(d)(i), constitutes all the patents, ------------------- trademarks, logos, Tradenames, servicemarks, copyrights, know-how and trade secrets otherwise necessary to the business and operations of the Company and the Subsidiary. 4.12. MATERIAL MISCELLANEOUS CONTRACTS. -------------------------------- Schedule 4.12 attached hereto sets forth a true, complete and correct ------------- list of all material contracts, agreements, and commitments relating to the operations of the Company or the Subsidiary (hereinafter collectively referred to as the "MATERIAL MISCELLANEOUS CONTRACTS") (a) requiring aggregate payments after the date hereof in excess of $5,000 or with a term expiring one (1) year or later after the date hereof, or (b) including confidentiality, noncompetition, nonsolicitation option or similar provisions, other than (w) the Leases, (x) leases and licenses listed on Schedule 4.11(d)(i) attached hereto, ------------------- (y) Plans listed on Schedule 4.21 attached hereto and (z) teachers' contracts ------------- entered into in the ordinary course of business on standard terms and conditions. True complete and correct copies of all Material Miscellaneous Contracts, together with all amendments thereto, have heretofore been delivered or otherwise made available to Purchaser. The -26- Material Miscellaneous Contracts constitute legal, valid and binding obligations of the Company, or the Subsidiary, as applicable, and to the best of Sellers' knowledge, the other parties thereto, and to the best of Sellers' knowledge are in full force and effect. None of Company or any of the Subsidiaries is in material default or, to the best of Sellers' knowledge, alleged to be in material default on any term of any such Material Miscellaneous Contract. Except as noted on Schedule 4.12 attached hereto, the consummation of the transactions ------------- contemplated by this Agreement does not require the consent or approval of any party to any Material Miscellaneous Contract. 4.13. TRADENAMES; CONFIDENTIAL INFORMATION. ------------------------------------ (a) All tradenames, logos, trademarks or service marks used in connection with the operations of the Company, the Subsidiary or the Schools, and all forms, derivatives and graphic presentations thereof, including forms of the tradename "International Academy of Merchandising and Design" and related trademarks, logos and servicemarks (collectively, the "TRADENAMES"), having material value to the operations of the Company or the Subsidiary are set forth on Schedule 4.13(a) attached hereto. To the best of Sellers' knowledge, ---------------- the Company and the Subsidiary have the exclusive right to the use of each Tradename as an assumed business name in the province in which such Tradename is used, and Schedule 4.13(a) sets forth all ---------------- registrations (including the jurisdictions thereof) of each Tradename as a trademark, servicemark or assumed name. The Company has not licensed any other Person to use any Tradename. None of the Company, the Subsidiary, or any Seller, has been sued or, to the best of Sellers' knowledge, threatened with suit for infringement, violation or breach with respect to any Tradename, and to the best of Sellers' knowledge, no basis exists for any such suit. None of the Company, the Subsidiary or any Seller is on notice of any infringement, violation or breach of any Tradename by any other Person. (b) To the best of Sellers' knowledge, the Company and the Subsidiary have the right to use, free and clear of any claims or rights of any third party, all Intellectual Property (subject in the case of computer programs to the license agreements in that regard), customer lists, Curricula and any other proprietary or confidential information required for or used in the operations of the Schools. To the best of Sellers' knowledge, none of the Company, the Subsidiary, or any Seller is in any way making any unlawful or wrongful use of any tradename, trade secret, customer list, know-how, curricula or any other proprietary or confidential information of any third party including, without limitation, any former employer of any present or past employee of the Company or the Subsidiary. -27- 4.14. FINANCIAL STATEMENTS. -------------------- Sellers have previously furnished the Financial Statements to Purchaser. The balance sheets included in the Financial Statements present fairly, in accordance with GAAP, the assets and liabilities of the Company and the Subsidiary as of the respective dates thereof, and the related statements of operations present fairly, in accordance with GAAP, the results of operations of the Company and the Subsidiary for the respective periods covered thereby (subject to the proviso that the Quebec subsidiary was formed in 1996). The Financial Statements have been prepared in accordance with GAAP (except that the Interim Financial Statements are not accompanied by all footnotes required by GAAP and are subject to customary year end adjustments), are correct and complete in all material respects and fairly present the financial position of the Company and the Subsidiary as of the dates of such Financial Statements, and the results of operations and changes in financial position for the periods covered by such Financial Statements. The Company and the Subsidiary maintained their financial books and records in accordance with applicable Legal Requirements and (except for usual statement date adjustments) in accordance with GAAP, and such books and records are, and during the periods covered by the Financial Statements were, correct and complete in all material respects, fairly reflecting the income, expenses, assets and liabilities of the Company and the Subsidiary. On the date of the balance sheet forming a part of the Interim Financial Statements, the Company and the Subsidiary had no liabilities which were required to be set forth in a balance sheet prepared in accordance with GAAP but that were not included in such balance sheet. Except as set forth in Schedule 4.14 attached hereto, neither the Company nor the Subsidiary are - ------------- required to provide any letters of credit, guarantees or other financial security arrangements in connection with any transactions, approvals or licenses in the ordinary course of operations of the Company or the Subsidiary nor is the Company or the Subsidiary bound by, party to or subject to any agreement, contract or commitment providing for the guarantee, indemnification, assumption or endorsement or any like commitment with respect to the obligations, liabilities (contingent or otherwise) or indebtedness of any Person. As of the date hereof, neither the Company nor the Subsidiary has any material indebtedness, liabilities or obligations of any nature, whether absolute, accrued, contingent or otherwise, whether known or unknown, other than: (a) those set forth or reserved against in the balance sheets included in the Financial Statements for the fiscal years then ended or disclosed in the footnotes to such Financial Statements, to the extent so disclosed; (b) those set forth or reserved against in the Interim Financial Statements, or those which would have been disclosed in footnotes to such Interim Financial Statements, if footnotes had been prepared and which have been disclosed in writing to Purchaser, to the extent set forth, reserved against or, in the case of footnote items, disclosed; (c) except as set forth on Schedule 4.14(c) attached hereto, ---------------- those incurred since the Interim Balance Sheet Date in the ordinary course of -28- business and consistent in nature with past practice, or those which would have been disclosed in footnotes if footnotes had been prepared and which have been disclosed to Purchaser in writing, to the extent set forth, reserved or, in the case of footnote items, disclosed; (d) those set forth on Schedule 4.14(c); and ---------------- (e) those not required to be disclosed in financial statements or notes thereto prepared in accordance with GAAP. There are no long-term fixed or contractual liabilities relating to the operation of the Company or the Subsidiary, as presently operated by the Company, the annual expenses of which are not reflected in the Financial Statements where required by GAAP or which are not otherwise disclosed or set forth in this Agreement or one or more of the schedules hereto. Other than obligations in respect of prepaid tuition neither the Company nor the Subsidiary has any obligations in respect of refundable deposits. 4.15. RECEIVABLES. ----------- The accounts receivable (including, without limitation, student accounts receivables) of the Company and the Subsidiary, except to the extent of the allowance for cancellations and doubtful accounts set forth in the Final Balance Sheet, are bona fide Receivables, arose out of arms' length transactions in the normal and usual practices of the Company or the Subsidiary, as applicable, are recorded correctly on the applicable books and records of the Company and the Subsidiary, and, to the best of Sellers' knowledge, are collectable in full in the ordinary course of business, subject in the case of certain Receivables to reserves established for such Receivables in the Final Balance Sheet. To the best of Sellers' knowledge, such Receivables are not subject to any defense, counterclaim or setoff or trade discounts or credits not reflected in the Final Balance Sheet (other than tuition refund policies administered in accordance with all applicable Legal Requirements and the applicable Policy Guidelines), and Sellers have no knowledge of any facts or circumstances which would cause any of such Receivables to have to be written down or written off in amounts which in the aggregate would be in excess of reserves established for such Receivables in the Final Balance Sheet. 4.16. INVENTORIES. ----------- The only inventories maintained by the Company and the Subsidiary consists of supplies used in the ordinary course of business and are reflected on the Financial Statements as "inventories." Such supplies will be reflected at the lesser of the cost or realizable value to the extent thereof on the Final Balance Sheet and to that extent are usable in the ordinary and regular course of business, are in all material respects fit and sufficient for the purpose for which they were purchased and, at the date of this Agreement, are in customary amounts appropriate to the Company's operation of the Schools. All excess or obsolete items have been written off. -29- 4.17. BANK ACCOUNTS. ------------- Schedule 4.17 attached hereto sets forth a true, complete and correct ------------- list of the names of all banks and other financial institutions in which the Company or the Subsidiary has an account or safe deposit box, which list includes a description of such accounts, the account numbers and the names of all individuals authorized to draw thereon or have access thereto. 4.18. LITIGATION, ETC. ---------------- (a) Except as set forth in Schedule 4.18(a) attached hereto, ---------------- there are no (a) judgments, decrees, injunctions, rulings, awards or orders of any Governmental Body or Accrediting Body against or affecting the Company, or the Subsidiary or the Schools and (b) Proceedings, pending or, to the best of Sellers' knowledge, threatened against or affecting the Company, the Subsidiary, or the Schools, at law or in equity, or before or by any Governmental Body or Accrediting Body; to the best of Sellers' knowledge, none of the Company, the Subsidiary or the Schools are the subject of any investigations or inquiries by any Governmental Body affecting the Company or the Subsidiary (including inquiries as to the qualification to hold or receive any of the Licenses and Permits); and, to the best of Sellers' knowledge, there is no basis for any of the foregoing. There are no other Proceedings pending, or to the best of Sellers' knowledge, threatened against or affecting the Company, the Subsidiary, or their Affiliates generally (including claims with respect to any Employee Benefit Plans) which if adversely decided would have a material adverse effect on the Company, the Subsidiary, the Schools, or their assets taken as a whole. (b) Except as set forth in Schedule 4.18(b) attached hereto, ---------------- there are no (a) judgments, decrees, injunctions, rulings, awards or orders of any Governmental Body or Accrediting Body against or affecting any Seller or such Seller's interest in the Company, or (b) Proceedings, pending or, to the best of Sellers' knowledge, threatened against or affecting any Seller's interest in the Company or the Schools or any Seller, at law or in equity, or before or by any Governmental Body or Accrediting Body; to the best of Seller's knowledge, such Seller is not the subject of any investigations or inquiries by any Governmental Body affecting such Seller (including claims with respect to any Employee Benefit Plans) which if adversely decided would have a material adverse effect on the Company, the Subsidiary or their assets taken as a whole. 4.19. INSURANCE. --------- Schedule 4.19 attached hereto sets forth all insurance coverages now ------------- maintained by the Company and the Subsidiary on the Leased Facilities, the assets and the operations of the Company and the Subsidiary, including a list of all policies or binders of -30- fire, extended coverage, general and vehicular, fidelity and fiduciary liability, workers' compensation, key-man life and other similar insurance, and all binders for insurance to be purchased on or before Closing in order to replace policies expiring prior to the Closing. Copies of such policies have been previously delivered to Purchaser. Except as set forth in Schedule 4.19 ------------- attached hereto, such policies and binders are in full force and effect, and there is no material breach or default with respect to any provision contained in any such policy or binder, and all premiums, to the extent due and payable, have been paid or the liability therefor properly accrued. Except for amounts deductible and self-insured retainers under such policies of insurance, the Company and the Subsidiary have not been, prior to the date hereof, subject to liability as a self-insurer. Except as set forth in Schedule 4.19 attached ------------- hereto, there are no claims pending or threatened under any of said policies pertaining to the Company or the Subsidiary or disputes with underwriters regarding coverage under such policies pertaining to the Company, the Subsidiary or the Schools. Except as set forth on Schedule 4.19, neither the execution, ------------- delivery and performance of this Agreement, nor the consummation of the transactions contemplated hereby, will result in the loss to the Company or the Subsidiary of any of the insurance policies listed, or impair the rights of the Company or the Subsidiary with respect to liabilities arising, in connection with the operations of the Company and Subsidiary prior to the Closing. Within five (5) years prior to the date hereof, neither the Company nor the Subsidiary has been denied insurance, or been offered insurance only at a commercially prohibitive premium. 4.20. ENVIRONMENTAL MATTERS. --------------------- Except as set forth in Schedule 4.20 attached hereto, neither the ------------- Company nor the Subsidiary has generated, transported, stored, treated or disposed, nor has either of them allowed or arranged for any third persons to generate, transport, store, treat or dispose of, any Hazardous Substance to or at: (a) any location other than a site lawfully permitted to receive such Hazardous Substance for such purposes or (b) any location designated for remedial action pursuant to federal, state, provincial or local statute and relating to the environment or waste disposal; nor, to the best of Sellers' knowledge, has the Company or the Subsidiary performed, arranged for or allowed by any method or procedure such transportation or disposal in contravention of any Legal Requirements or in any other manner which may result in liability for contamination or threat of contamination of the environment in violation of any Environmental Law, except where such violation would not have a material adverse effect on the business or operations of the Company or the Subsidiary. Except as set forth in Schedule 4.20, attached hereto, to the best of Sellers' ------------- knowledge, no generation, use, handling, storage, treatment, release, threat of release, discharge, spillage or disposal of any Hazardous Substance in violation of any Environmental Law, has occurred or is occurring at the Leased Facilities or, to the best of Sellers' knowledge, any other Facility previously owned or operated by the Company or the Subsidiary. Except as set forth in Schedule 4.20 ------------- attached hereto, neither the Company, the Subsidiary, nor any Sellers has received notification of, nor is it aware, of, any past or present failure by the Company or the Subsidiary to comply with any Environmental Law, including without limitation the requirements of any permits, franchises, licenses or orders -31- issued pursuant to any Environmental Law, applicable to the Company or the Subsidiary or their operations. Except as set forth on Schedule 4.20, none of ------------- the Company or the Subsidiary or Sellers has received any notification, nor is it aware of, any past or present failure by the Company or the Subsidiary to comply in any material respect with any Environmental Law, which failure may result in judicial, regulatory or other legal proceedings that would have a material adverse impact on the operations of the Company or the Subsidiary or result in the imposition of any Encumbrance against the Company's or the Subsidiary's assets. Except as set forth on Schedule 4.20, to the best of ------------- Sellers' knowledge, the Leased Facilities do not contain asbestos or polychlorinated biphenyls or any underground storage tanks. None of the Company, the Subsidiary, or Sellers has received notice from any Governmental Body requiring any removal or other remediation with respect to asbestos or polychlorinated biphenyls located at the Leased Facilities. 4.21. EMPLOYEE BENEFIT PLANS. ---------------------- (a) Schedule 4.21(a) lists all Employee Benefit Plans (the ---------------- "PLANS") that the Company or any Subsidiary maintains to which the Company or any Subsidiary contributes or to which the Company or any Subsidiary has an obligation to contribute with respect to any current or former employee of the Company or any Subsidiary, or with respect to which the Company or any Subsidiary otherwise is reasonably expected to have any liability or potential liability, whether or not such plan has terminated or whether or not such plan is or was maintained for current or former employees of the Company or any Subsidiary or current or former employees of any other member of the controlled group of the Company or any Subsidiary. (b) Except as disclosed on Schedule 4.21(b), neither the Company ---------------- nor the Subsidiary contributes to, has any obligation to contribute to or otherwise has any liability or potential liability with respect to any Employee Benefit Plan. (c) No Plan requires Sellers, the Company or the Subsidiary to pay separation, severance, termination or other such benefits solely as a result of any transaction contemplated by this Agreement or solely as a result of a "change in control" of the Company or such Subsidiary. (d) With respect to each Plan, all premiums which are due (including employer contributions and employee salary deduction contributions) have been paid to such Plan, and all premiums with respect to the current plan year for the period ending on the Closing Date, have been made or accrued. No Plan has any material unfunded liabilities. (e) With respect to each Plan, Seller has provided Purchaser with true, complete and correct copies, to the extent applicable, of: (i) all -32- documents pursuant to which the Plans are maintained, funded and administered. (f) The Company does not have nor has it at any time had any obligations or liabilities with respect to any pension, retirement arrangement or deferred profit sharing plan for the benefit of its employees or former employees. 4.22. EMPLOYMENT MATTERS. ------------------ (a) Except as set forth in Schedule 4.22(a) attached hereto, (i) ---------------- to the best of Sellers' knowledge, the Company and the Subsidiary are in compliance in all material respects with all Legal Requirements relating to employment and employment practices, including terms and conditions of employment, employment discrimination and wages and hours, and none of the Company or the Subsidiary are engaged in any unfair labor practices with respect to individuals employed by or providing services to the Company or the Subsidiary; (ii) none of the Company, the Subsidiary or Sellers are aware of, nor has any of them received any written or other notice of, any complaints against the Company or the Subsidiary with respect to individuals employed by or providing services to the Company or the Subsidiary pending before the Ontario Labour Relations Board, the Quebec Labour Court, a Quebec labour commissioner or the Quebec Commission des relations du travail or any similar provincial or local labor agency or otherwise; (iii) there are no labor strikes, slow-downs or stoppages or other labor troubles pending or, to the best of Sellers' knowledge, threatened with respect to any individuals employed by or providing services to the Company or the Subsidiary; to the best of Sellers' knowledge no labor organization activities have occurred with respect to such employees during the past three (3) years; (iv) there are no collective bargaining agreements binding on the Company or the Subsidiary; (v) no labor organization or employee association represents employees of the Company or the Subsidiary and there have been no attempts made by any labour organization or employee association to organize such employees; nor, to the best of Seller's knowledge, are any such attempts being made, (vi) no grievances have been asserted by any labor organization against the Company or the Subsidiary with respect to individuals employed by or providing services to the Company or the Subsidiary; and (vii) neither the Company nor the Subsidiary has experienced any work stoppage by such employees during the last three (3) years. Schedule 4.22(a) attached ---------------- hereto contains a list of all employees of the Company and the Subsidiary and all material consultants to the Company and the Subsidiary (including, without limitation, sales representatives and other recruiters), other than attorneys and accountants, who are employed or providing services in connection with the operation of the Company or the Subsidiary including: name; length of service; job title and job description; rate of base salary, bonus, vacation entitlements, commissions, -33- fees and other incentive compensation; and identifying all contracts, agreements, commitments and arrangements, written or oral, with such employees or consultants. None of the contracts, agreements, commitments and arrangements, written or oral, with such employees or consultants requires the Company or the Subsidiary to pay separation, severance, termination or other such benefits solely as a result of a "change in control" in the Company or the Subsidiary. Sales representatives and other recruiters for the Company and the Subsidiary, whether employed directly by or otherwise engaged by the Company or the Subsidiary, are licensed or registered in accordance with all applicable Legal Requirements. Except as provided for on Schedule 4.22(a) hereto, no such sales representative or other ---------------- recruiter receives commissions, bonuses or other contingency payments based, directly or indirectly, on the enrollment of students by such individual. True, correct and complete copies of all written agreements or descriptions of oral agreements, if any between the Company or the Subsidiary and such employees or consultants and all amendments thereto have been provided to Purchaser. The Company and the Subsidiary has performed all of their obligations under such agreements and are not in default or violation and, to the best of Sellers' knowledge, the other parties thereto are not in default or violation, thereunder. (b) Except as set forth on Schedule 4.22(b), no employee, officer ---------------- or director of the Company or the Subsidiary is a party to, or is otherwise bound by, any agreement or arrangement, including any confidentiality, noncompetition, or proprietary rights agreement, that in any way adversely affects or will affect (i) the performance of his or her duties as an employee, officer or director of the Company or the Subsidiary, or (ii) the ability of the Company or the Subsidiary to conduct its business, including without limitation the operation of the Schools. To best of Sellers' knowledge, no employee of the Company listed on Schedule 4.22(b) intends to terminate his or her employment ---------------- with the Company. (c) Except as set forth on Schedule 4.22(c), there are no retired ---------------- employees or directors of the Company or the Subsidiary, or their dependents, receiving benefits or scheduled to receive benefits in the future from the Company or the Subsidiary. Except as set forth on Schedule 4.22(c), neither the Company, the Subsidiary, nor any Seller ---------------- is party to any severance or other agreements with employees, former employees or former owners of the Company. (d) Schedule 4.22(d) lists all employee manuals and employment ---------------- policies of the Company and the Subsidiary. Except as set forth in Schedule 4.22(d), the Company or the applicable subsidiary has ---------------- performed all its duties and obligations through the date hereof pursuant to such manuals and policies. -34- (e) The Company and the Subsidiary have paid or accrued all required payroll-related contributions, remittances, assessments and taxes including QPP/CPP, EIC, ITA, EHT, CSST, CNT and WCB payments and none of the Company or the Subsidiary are subject to any complaints, investigations, penalties, interest charges or assessments in connection with such payroll-related payments. 4.23. LABOR RELATIONS; COMPLIANCE --------------------------- None of the Company, the Subsidiary or the Schools has been nor is any of them a party to any collective bargaining or other labor contract. Except as set forth on Schedule 4.23(a), there has not been, there is not presently ---------------- pending or existing, and to the best of Sellers' knowledge, there is not threatened, (a) any strike, slowdown, picketing, work stoppage, or employee grievance process, (b) any Proceeding against or affecting the Company, the Subsidiary or the Schools relating to the alleged violation of any Legal Requirement pertaining to labor relations or employment matters, including any charge or complaint or appeal filed by an employee or union with or under the Ontario Labour Relations Board, the Quebec Labour Court, a Quebec labour commissioner, the Quebec Commission des relations du travail, the Ontario Human Rights Commission, the Quebec Human Rights Commission, the Ontario Pay Equity Commission, the Ontario Occupational Health and Safety Act, the Quebec Occupational Health and Safety Act, the Ontario Employment Standards Act, the Quebec Labour Standards Act, the Ontario Workers' Compensation Appeals Tribunal, the Commission de la sante et de la securite du travail du Quebec and the Quebec Manpower Vocational Training and Qualification Act or any comparable provincial or federal Governmental Body, organizational activity, or other labor or employment dispute against or affecting the Company, the Subsidiary, the Schools or their premises, or (c) any application for certification of a collective bargaining agent. To the best of Sellers' knowledge, no event has occurred or circumstance exists that could provide the basis for any work stoppage or other labor dispute involving the Company or the Subsidiary. There is no lockout of any employees by the Company or the Subsidiary, and no such action is contemplated. The Company and the Subsidiary have complied in all respects with all Legal Requirements relating to employment, equal employment opportunity, nondiscrimination, immigration, wages, hours, benefits, collective bargaining, the payment of social security and similar taxes, occupational safety and health, and plant closing, except where the failure to comply would not have a material adverse effect upon the Company, the Subsidiary or their assets. Except as set forth on Schedule 4.23(b), none of the Company or the Subsidiary ---------------- is subject to any award, decision, injunction, judgment, ruling or verdict, requiring the payment of any compensation, damages, taxes, fines, penalties, or other amounts, however designated, for failure to comply with any of the foregoing Legal Requirements. Except as set forth on Schedule 4.18(a), 4.18(b) ------------------------- or 4.23(c), there are no wrongful employee dismissal disputes or statutory - ---------- complaints against the Company or the Subsidiary against dismissals made for good and sufficient cause. -35- 4.24. TAX MATTERS. ----------- (a) Except as disclosed on Schedule 4.24(a), ---------------- (i) Each of the Company and the Subsidiary has filed or caused to be filed in the prescribed manner and on or before the due dates therefor or within applicable extension periods all Tax Returns that are or were required to be filed by the Company or the Subsidiary, pursuant to applicable Legal Requirements. (ii) Sellers have delivered or made available to Purchaser copies of all such Tax Returns of the Company and the Subsidiary, filed since January 1, 1993. (iii) Each of the Company and Subsidiary has paid, or made provision for the payment of, all Taxes that have or may have become due from the Company and the Subsidiary, pursuant to such Tax Returns or otherwise, or pursuant to any assessment received by the Company or any Subsidiary, except such Taxes, if any, as are listed in Schedule 4.24(a) and are being contested in good ---------------- faith and as to which adequate reserves (determined in accordance with GAAP) will be provided in the Final Balance Sheet. The accrual for Taxes on the Final Balance Sheet will be sufficient to pay the Taxes payable as a result of the taxation year of the Company and the Subsidiary ending as a result of the transactions contemplated hereby. (iv) The Company and the Subsidiary have complied with all registration, reporting, collection and remittance requirements in respect of all federal and provincial sales tax legislation, including, but not limited to, the Excise Tax Act (Canada), An Act respecting the Quebec sales tax and the Retail Sales Tax Act (Ontario). The Company and the Subsidiary have on hand all invoices, purchase orders and all such other documents as are necessary to report any claims for input tax credits or refunds claimed or to be claimed pursuant to the Excise Tax Act (Canada) or an Act respecting Quebec sales tax. (b) The Canadian federal and provincial income Tax Returns of the Company and the Subsidiary have been assessed by the applicable taxing authorities, or are closed by the applicable statute of limitations, for all taxation years through the most recently completed taxation years. The federal tax assessments are statute barred from reassessment for all years ending prior to April 15, 1993. Schedule -------- 4.24(b) contains a complete and accurate list of all audits of all ------- such Tax Returns, including a reasonably detailed description of the nature and outcome of each audit. All deficiencies proposed as a result of such audits have been paid, reserved against, settled, or, as described in -36- Schedule 4.24(b), are being contested in good faith by appropriate ---------------- proceedings. Schedule 4.24(b) describes all adjustments to date to the ---------------- income Tax Returns filed by the Company and the Subsidiary for all taxation years since 1993, and the resulting deficiencies proposed by the applicable taxing authorities. Except as described in Schedule -------- 4.24(b), there are no agreements, waivers or other arrangements ------- providing for, and none of the Company, the Subsidiary or any Seller has given or been requested to give, waivers or extensions of any statute of limitations relating to any assessment or reassessment of Taxes, the filing of any Tax Return or the payment of Taxes of the Company or the Subsidiary or for which the Company or the Subsidiary may be liable. Except as set forth and described in Schedule 4.24(b), ---------------- there is no Proceeding and no assessment, reassessment or request for information in progress, pending or, to the best of Sellers' knowledge, threatened against or affecting the Company or the Subsidiary in respect of Taxes nor are any issues under discussion with any taxing authority relating to any matters which could result in claims for additional Taxes. (c) The charges, accruals, and reserves with respect to Taxes on the Interim Financial Statements are adequate (determined in accordance with GAAP) as at the respective dates of the balance sheets forming a part thereof and are at least equal to the Company's and the Subsidiary's liability for Taxes accrued through those dates. The charges, accruals and reserves with respect to Taxes on the Final Balance Sheet will be adequate and at least equal to the Company's and the Subsidiary's liability for Taxes through the Closing or arising as a result of the Closing. To the best of Sellers' knowledge, there exists no proposed tax assessment or reassessment against the Company or any Subsidiary except as disclosed in the Interim Financial Statements or in Schedule 4.24(c). All Taxes that the Company or the ---------------- Subsidiary are or were required by Legal Requirements to withhold or collect have been duly withheld or collected and, to the extent required, have been paid to the proper Governmental Body or other Person. (d) All Tax Returns respectively filed by the Company and the Subsidiary are true, correct, and complete in all material respects and each of the Company and the Subsidiary has made complete and accurate disclosure in such Tax Returns and in all materials accompanying such Tax Returns. 4.25. BROKERAGE. --------- Neither Sellers nor the Company (or any of their Affiliates) has retained any broker or finder, and neither will be obligated to pay any brokers' or finders' fee, in connection with the negotiation or consummation of the transactions contemplated by this Agreement. -37- 4.26. AFFILIATE TRANSACTIONS. ---------------------- Except as set forth in Schedule 4.26 attached hereto or as ------------- specifically contemplated hereby, no Affiliate of any one or more of the Sellers is a party to any agreement, contract, commitment or transaction with the Company or the Subsidiary, or has any material interest in any material property used in connection with the operations of the Company or the Subsidiary which will survive the Closing. 4.27. ABSENCE OF CERTAIN CHANGES. -------------------------- Except as contemplated by this Agreement or as set forth on Schedule -------- 4.27 attached hereto, from the Interim Balance Sheet Date until the date hereof - ---- there has not been, occurred or arisen: (a) any sale, lease, transfer, abandonment or other disposition of any right, title or interest in or to any of the properties or assets of the Company or the Subsidiary (tangible or intangible), except in the ordinary course of business; (b) other than in the ordinary course of the Company's and the Subsidiary's operations and consistent with the Company's and the Subsidiary' past and present business practices, (i) any approval or action to put into effect any increase in any compensation or benefits payable to any employee, director, agent or officer of the Company or the Subsidiary, or any payment, grant or accrual to or for the benefit of any such employee, director, agent or officer of any bonus, service award, percentage compensation or other benefit, (ii) any adoption or amendment of any Plans, or any severance agreement or employment contract to which any such employee, director, agent or officer is a party or (iii) any entering into of any employment, deferred compensation or other agreements with respect to bonuses, service awards, percentage compensation or other benefits with any such employee, director, agent or officer; (c) any material adverse change in the financial condition, assets, liabilities (absolute, accrued, contingent or otherwise), business prospects, reserves or operations of the Company or the Subsidiary which would have a material adverse effect; (d) any capital expenditure by the Company or the Subsidiary; (e) any damage, destruction or loss, whether or not covered by insurance, materially adverse to the assets, business, or operations of the Company or the Subsidiary; (f) any change in any material respect in the business policies or practices of the Company or the Subsidiary or a failure of the Company or the -38- Subsidiary to operate the Schools in the ordinary course with a view to preserving such businesses intact, to retaining the services of the present officers, employees and agents, except for Sellers other than Gross, and with a view to preserving the business relationships of the Company and the Subsidiary, including without limitation business relationships of the Schools with, and the goodwill of, students, sales representatives, suppliers, Accrediting Bodies, Governmental Bodies and others; or (g) any written agreement, or otherwise binding agreement, to take any action described in this Section 4.27. ------------ 4.28. INDEBTEDNESS. ------------ Schedule 4.28 attached hereto contains a true, correct and complete ------------- list of all indebtedness of the Company and the Subsidiary for borrowed money, including capital leases, and the balances owing thereunder as of the date hereof. 4.29. CONDUCT OF BUSINESS SINCE INTERIM BALANCE SHEET DATE. ---------------------------------------------------- Except as set forth in Schedule 4.29 hereto, from the Interim Balance ------------- Sheet Date to the date of this Agreement, the Company and the Subsidiary have conducted their operations only according to their ordinary and usual course of business, and the Company and the Subsidiary have used their best efforts to preserve intact the Company's and the Subsidiary's business organizations, keep the services of its employees and maintain satisfactory relationships with Accrediting Bodies, suppliers, agents, students and others having business relationships with the Company and the Subsidiary. 4.30. ACCREDITING BODY APPROVALS. -------------------------- To the best of Sellers' knowledge, there exists no fact or circumstance attributable to Sellers, the Company, the Subsidiary or the Schools that would cause MET or ME or any other Governmental Body or the Accrediting Body whose authorization, consent or similar approval is a requirement for the consummation of the transactions contemplated by this Agreement or the continuation for the Schools to be fully eligible for governmental programs of student financial assistance at levels not materially less than the levels for which the Schools have been eligible in the most recent academic year to refuse to deliver such authorization, consent or similar approval. 4.31. DELIVERY OF DOCUMENTS. --------------------- True, correct and complete copies of all Leases, Material Miscellaneous Contracts, Plans, Policy Guidelines and other documents, instruments, agreements and records of the Company and the Subsidiary described on schedules to this Agreement or relating to the assets, liabilities and the operations of the Company and the Subsidiary, or the representations and warranties of Sellers contained in this Agreement, have been delivered or made available to Purchaser. -39- 4.32. DISCLOSURE. ---------- This Agreement, together with the schedules, exhibits and attachments hereto, do not contain any untrue statement of a material fact or omit to state a material fact necessary to make such statements not misleading in light of the circumstances in which such statements were made. 4.33. RESIDENCE OF SELLERS. -------------------- Each of the Sellers, with the exception of Gross, is a "non-resident" of Canada within the meaning of the Income Tax Act (Canada). Lawrence N. Gross is a resident of Canada within the meaning of the Income Tax Act (Canada). 5. REPRESENTATIONS AND WARRANTIES OF PURCHASER. ------------------------------------------- As a material inducement to Sellers to enter into this Agreement and to sell the Shares, Purchaser hereby represents and warrants as of the date hereof that: 5.1. ORGANIZATION AND CORPORATE POWER. -------------------------------- Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Purchaser is qualified to do business as a foreign corporation in each jurisdiction in which the nature of its operations requires, or as of the Closing will require, it to so qualify, except where failure to so qualify would not have a material adverse effect on its business or operations. Purchaser has all requisite corporate power and authority to own and operate its properties and assets, to carry on its business as now conducted, and to consummate the transactions contemplated hereby. The copies of Purchaser's articles of incorporation and by-laws which have been furnished by Purchaser to Sellers reflect all amendments made thereto at any time prior to the date of this Agreement and are correct and complete. 5.2. CAPACITY; AUTHORIZATION, BINDING EFFECT, ETC. --------------------------------------------- Purchaser has the unrestricted and absolute power, legal capacity and authority to execute, deliver and perform this Agreement and each other document being executed by it in connection herewith to which it is a party. This Agreement has been, and each such other document and agreement to be executed in connection herewith, as of the Closing, will have been, duly executed and delivered by Purchaser and (assuming the due authorization, execution and delivery hereof and thereof by Sellers and any other parties thereto), this Agreement is, and each such other document or agreement will be, a valid and binding obligation of Purchaser, enforceable against it in accordance with its terms. 5.3. NO CONFLICTS, ETC. ------------------ Except as set forth in Schedule 5.3, the execution, delivery and ------------ performance of this Agreement by Purchaser, and each other document being executed by Purchaser, in -40- connection herewith, and the consummation of the transactions contemplated hereby and thereby do not and will not (a) contravene, conflict with, or result in violation of (i) any provision of the articles of incorporation or bylaws of Purchaser, or (ii) any resolution adopted by the board of directors or stockholders of Purchaser, (b) contravene, violate or conflict with any Legal Requirement applicable to Purchaser, (c) with or without the giving of notice, the passage of time, or both, conflict with, or result in the breach or termination of, or default under, any provisions of any material instrument, license, permit, authorization, agreement or commitment to which Purchaser is a party or by which their assets are bound, (d) constitute a violation of any order, judgment or decree to which Purchaser is a party or by which their assets or properties are bound; or (e) except as set forth in Schedule 5.3, require any ------------ approval of, or filing or registration with, any Governmental Body or Accrediting Body that is required to be obtained or made by Purchaser, other than approvals, filings and registrations which have been previously obtained or made, or which are required and will be obtained or made in the ordinary course of Purchaser's and Purchaser's business and operations. 5.4. LITIGATION. ---------- There are no Proceedings pending against or, to the best of Purchaser's knowledge, threatened against or affecting Purchaser at law or in equity, or before or by any Governmental Body or Accrediting Body seeking to enjoin, restrain or delay the consummation of the transactions contemplated by this Agreement and to the best of Purchaser's knowledge, there is no basis for the foregoing. 5.5. BROKERAGE. --------- Purchaser has not retained any broker or finder, and neither will be obligated to pay any brokers' or finders' fee, in connection with the negotiation or consummation of the transactions contemplated by this Agreement. 5.6. ACCREDITING BODY APPROVALS. -------------------------- To the best of Purchaser's knowledge, there exists no fact or circumstances attributable to Purchaser, or its subsidiaries that would cause MET, or the ME, any other Governmental Body or the Accrediting Body whose authorization, consent or similar approval is a requirement for the consummation of the transactions contemplated by this Agreement or the continuation of the Schools to be fully eligible for governmental programs of student financial assistance at levels not materially less than the levels for which the Schools have been eligible in the most recent academic year, to refuse to deliver such authorization, consent or similar approval. 5.7. DISCLOSURE. ---------- Neither this Agreement, nor any of the schedules, exhibits or attachments hereto prepared or supplied by Purchaser, or any documents, certificates or other written agreements delivered by or on behalf of Purchaser with respect to the transactions -41- contemplated hereby, contain any untrue statement of material fact or omit a statement of material fact necessary to make such statements not misleading in light of the circumstances in which such statements were made. 5.8. PURCHASER'S KNOWLEDGE; RESOURCES OF PURCHASER. --------------------------------------------- To the best of Purchaser's knowledge, there exists no fact or circumstance that would cause any representation or warranty of Sellers to be materially incorrect or untrue. Purchaser represents that Purchaser has adequate resources to complete the transactions contemplated hereby. 5.9. MAINTENANCE OF INSURANCE. ------------------------ From and after the Closing Date and until all amounts payable to Sellers hereunder are paid in full, Purchaser shall maintain such insurance policies as are adequate and reasonable in the sole discretion of Purchaser in both scope and amount for the Company and the Subsidiary. 6. ADDITIONAL COVENANTS OF THE PARTIES. ----------------------------------- 6.1. CONFIDENTIAL INFORMATION. ------------------------ (a) Each Seller acknowledges and agrees that such Seller is in possession of Confidential Information (as defined herein) relating to the Company and the Subsidiary. For purposes hereof, "CONFIDENTIAL INFORMATION" shall mean all proprietary or confidential information concerning the business, Intellectual Property, Curricula, and other properties and operations of the Company and the Subsidiary, including, without limitation, all student and prospective student lists, supplier lists, know-how, trade secrets, business and marketing plans, techniques, forecasts, projections, budgets, unpublished financial statements, price lists, costs, computer programs, source and object codes, algorithms, data, and other original works of authorship, along with all information received from third parties and held in confidence by the Company, the Subsidiary or such Seller (including, without limitation, personnel files and student records). Each Seller agrees that such Seller will hold the Confidential Information in the strictest confidence and will not disclose or make use of (directly or indirectly) the Confidential Information or any portion thereof to or on behalf of themselves or any third party, except (i) as required in the performance of such Seller's duties and obligations pursuant to the Noncompetition Agreements, this Agreement or any employment agreement with Purchaser, the Company, the Subsidiary or any Affiliate of any of them, (ii) as required by the order of any court or similar tribunal or any other Governmental Body of appropriate jurisdiction; provided, however, that Sellers shall, to the extent practicable, give Purchaser prior written notice of any such required disclosure and shall cooperate with -42- Purchaser in obtaining a protective order or such similar protection as Purchaser may deem appropriate to preserve the confidential nature of such information, (iii) disclosure to professional advisors of the Seller, provided, however such Seller must advise the professional -------- advisors of the confidential nature of such information, and (iv) disclosure for use in or the purposes of a dispute or in a Proceeding with the Purchaser or any of the other Sellers in connection with the obligations and transactions hereunder . The foregoing obligations to maintain the Confidential Information shall not apply to any Confidential Information which is or, without any wrongful action by Sellers, becomes generally available to the public. Upon consummation of the sale of the Shares to Purchaser, each Seller shall have delivered to Purchaser (directly or to the Company or the Subsidiary) all physical embodiments of the Confidential Information (regardless of form or medium) in the possession of or under the control of that Seller. The parties hereto each recognize that the other parties hereto will suffer irreparable injury in the event of a breach of the terms of this Section 6.1(a) by a Seller. Notwithstanding any -------------- provision to the contrary contained herein, including without limitation the provisions of Section 9, in the event of a breach of --------- the terms of this Section 6.1(a), Purchaser shall be entitled, in -------------- addition to any other remedies and damages available and without proof of monetary or immediate damage, to a temporary and/or permanent injunction, without bond, to restrain the violation of this Section ------- 6.1(a) by any Seller or any Person acting for or in concert with any ------ Seller. 6.2. ADDITIONAL COVENANTS OF SELLERS PENDING CLOSING. ----------------------------------------------- Pending the Closing, Sellers shall cooperate fully with Purchaser, its officers, employees, representatives and agents in connection with accomplishing the satisfaction of all conditions to the Closing and with all other matters relating to the consummation of the transactions contemplated by this Agreement. Pending the Closing and subject to all the limitations contained in any relevant Legal Requirements, Sellers shall afford to all representatives of Purchaser reasonable access during normal business hours to the assets, properties, books, financial statements, work papers and records of the Company and the Subsidiary in order that Purchaser have full opportunity to make investigations thereof. In addition, Sellers shall, and shall cause the Company and the Subsidiary to, use good faith efforts to assist Purchaser in obtaining any required Accreditation from any Accrediting Body reasonably necessary for Purchaser's operation of the Schools, including furnishing Purchaser such necessary information and reasonable assistance as Purchaser may request in connection with its preparation of necessary filings, submissions or applications to any such Accrediting Body and any Governmental Bodies in connection with the transactions contemplated hereby. In addition, Sellers shall use their best efforts to obtain the consents and approvals set forth in Section 3.1(h). -------------- Furthermore, during the period from the date of this Agreement to the Closing Date, neither the Company nor the Subsidiary shall conduct any business or incur or assume any liabilities or obligations of any kind, except for such business, liabilities and obligations as may be conducted or incurred in the ordinary course of business of the Company and the Subsidiary or as expressly permitted or required by the -43- terms of this Agreement or as to which Purchaser may consent in writing. Purchaser hereby consents to the Company continuing with its improvements at 56 Wellesley Street West, Toronto, Canada, leasing additional equipment (as referenced to in one or more of the Schedules hereto) and receiving cash advances from Gross. During the period from the date of this Agreement to the Closing Date, Sellers shall use their good faith efforts to preserve intact the business organization of the Company and the Subsidiaries, to pay operating expenses in the ordinary course of business, to keep available the services of their employees, and to maintain satisfactory relationships between the Company and the Subsidiary, and the Accrediting Body, Governmental Bodies, suppliers, agents, students and others having business relationships with the Company or the Subsidiary. Sellers shall promptly notify Purchaser of any occurrence or event that would or is likely to make untrue any representation or warranty of Sellers made in Section 4 as of the Closing Date, or which would or is likely to --------- result in an inability to satisfy any condition set forth in Sections 7 or 8. ---------- - Notwithstanding the foregoing, the Company shall be permitted to redeem shares of its capital stock, make distributions to its shareholders in respect of such redemptions, and pay other compensation to its shareholders and Affiliates; provided, that such activities shall not result in the breach of any - -------- representation or warranty of Sellers hereunder. 6.3. EMPLOYEES. --------- During the period from the date of this Agreement to the Closing Date, Sellers shall cause the Company and the Subsidiary to use their good faith efforts to retain the services of all senior managerial employees of the Company and the Subsidiary. During the period from the date of this Agreement to the Closing Date, none of the Company, the Subsidiary or the Sellers shall offer any employee or sales representative of the Company or the Subsidiary any other employment with Sellers, the Company or the Subsidiary, or any of their Affiliates, without the prior written consent of Purchaser. 6.4. EXCLUSIVE DEALING. ----------------- During the period from the date of this Agreement to the earlier of (a) the Closing Date or (b) the date of termination of this Agreement pursuant to Section 11.1 hereof, Sellers and their Affiliates shall not and shall not ------------ permit the Company or the Subsidiary to, directly or indirectly, encourage, initiate or engage in discussions or negotiations with, or (except as contemplated by this Agreement) provide any information to, any Person, other than Purchaser, concerning any proposed purchase of the Company, the Subsidiary or the Schools, or any similar transaction involving the Company, the Subsidiary or the Schools, or Sellers' interest in any of them. 6.5. ADDITIONAL COVENANTS OF PURCHASER PENDING CLOSING. ------------------------------------------------- Purchaser covenants and agrees that from and after the date of this Agreement, and until the earlier of the Closing Date or the termination of this Agreement pursuant to Section 11.1 hereof, Purchaser (a) shall use its good ------------ faith efforts to fulfill or -44- satisfy, or cause to be fulfilled or satisfied, all of the conditions precedent to Sellers' obligations to consummate and complete the transactions contemplated by this Agreement, including without limitation the sale of the Shares provided herein, and to take all other steps and do all other things reasonably required to consummate this Agreement in accordance with its terms; and (b) shall not interfere with the performance by Sellers of their obligations under this Agreement. 6.6. INITIAL PUBLIC OFFERING. ----------------------- In the event that Purchaser engages in an Initial Public Offering of its common stock at any time prior to the third anniversary of the Closing Date, Purchaser shall use its best efforts (which best efforts shall not, however, include the expenditure of more than nominal amounts of money by Purchaser), to reserve up to one and one-quarter percent (1.25% in the aggregate) of the total shares offered in such Initial Public Offering for purchase by Sellers. Each Seller shall be eligible to purchase up to its pro rata twenty-five (25%) portion of the one and one quarter percent (1.25%) whether or not any other Seller elects to purchase such stock. 7. CONDITIONS TO PURCHASER'S OBLIGATIONS. ------------------------------------- The obligations of Purchaser to consummate the transactions contemplated by this Agreement are subject to the satisfaction, or to the waiver in writing by Purchaser, on or before the Closing Date, or, where applicable, such other date as is set forth herein, of the conditions set forth below: 7.1. DUE DILIGENCE REVIEW. -------------------- Purchaser shall have completed and shall be satisfied with the results of its due diligence review of the Company the Subsidiary and the Schools, including, without limitation, review of the Company's and the Subsidiary' assets, properties, business, financial condition and business prospects, legal and accounting review of all liabilities and contingencies, Facility visits, regulatory compliance analysis (including financial aid administration and cohort default rates), assessment of relations with Accrediting Bodies and Governmental Bodies, access to lenders for student loan programs, and completion of a satisfactory market analysis. 7.2. FINANCING. --------- Purchaser shall have obtained approval for the transactions contemplated by this Agreement and equity and/or debt financing from its present financing sources (a) in an amount sufficient to pay the Purchase Price and to pay the Noncompetition Payments, and (b) upon terms satisfactory to Purchaser, and its stockholders, and consistent with satisfying financial requirements of the MET or, the ME, other applicable federal and provincial regulators and the applicable Accrediting Bodies. -45- 7.3. TRUTH OF REPRESENTATIONS AND WARRANTIES. --------------------------------------- The representations and warranties of Sellers contained in this Agreement and in any certificate delivered by Sellers in accordance with the terms hereof shall be true and correct in all material respects on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of such date (except to the extent such representations and warranties speak of a particular date and except to the extent that any failure to satisfy this requirement would not have a material adverse effect on the business assets, or operations of the Company or any of the Subsidiary), and Sellers shall have delivered to Purchaser a certificate, dated the Closing Date, to such effect. 7.4. PERFORMANCE OF AGREEMENTS. ------------------------- Each and all of the agreements of Sellers to be performed on or before the Closing Date pursuant to the terms hereof shall have been fully performed in all material respects, each of the documents, agreements and other items to be delivered to Purchaser pursuant to Section 3.1 shall have been delivered, and ----------- Sellers shall have delivered to Purchaser a certificate, dated the Closing Date, to such effect. 7.5. NO MATERIAL ADVERSE CHANGE. -------------------------- Since the date of this Agreement, there shall have been no material adverse change in the properties, business, assets, results of operations, condition (financial or otherwise) or business prospects of the Company or the Subsidiary, there shall have been no material deviation in the Company's or the Subsidiary's working capital position (other than its cash position) since the Interim Balance Sheet Date, and Sellers shall have delivered to Purchaser a certificate, dated as of the Closing Date, to such effect. 7.6. LITIGATION. ---------- No Legal Requirement shall have been enacted, issued, promulgated or entered by any Governmental Body and no injunction or order of any court or other Governmental Body or Accrediting Body shall have been entered, in either case, which prohibits or restricts the transactions contemplated hereby, and no Proceeding shall have been instituted or threatened by any Person before a court or other Governmental Body or Accrediting Body: (i) seeking to restrain or prohibit any of the transactions contemplated hereby or (ii) challenging or questioning the right, title or interest of Sellers in and to the Shares to be transferred under this Agreement or the right of Sellers to transfer validly all of such right, title and interest in and to such Shares to Purchaser. 7.7. ACCREDITING BODY APPROVAL. ------------------------- To the extent available prior to Closing, the approvals of any applicable provincial regulatory agency with jurisdiction over the Schools and the applicable Accrediting Bodies for -46- (a) the consummation of the transactions contemplated by this Agreement with respect to the Schools, including approval for issuance of licenses or registrations to Purchaser to operate the Schools; and (b) the continuation of the Schools to be fully eligible for governmental programs of student financial assistance at levels not materially less than the levels for which the Schools have been eligible in the most recent academic year, shall have been received, shall continue in full force and effect, and shall not contain terms and conditions which, as a result of facts or circumstances attributable solely to Sellers, or to the condition of the Company, the Subsidiary or the Schools prior to Closing, in Purchaser's reasonable judgment reduce or are reasonably likely to reduce the economic benefit to Purchaser and its Affiliates that Purchaser anticipated to receive from the consummation of the transactions contemplated hereby, or would impose burdensome restrictions or limitations on the activities of Purchaser or its Affiliates unrelated to the Schools. 7.8. PROCEEDINGS. ----------- All proceedings to be taken in connection with the transactions contemplated by this Agreement and all documents incident thereto shall be reasonably satisfactory, in all material respects, in form and substance to Purchaser and its counsel, and Purchaser shall have received copies of all such documents and other evidence as Purchaser or its counsel may reasonably request in order to establish the consummation of such transactions and the taking of all appropriate proceedings in connection therewith. 7.9. FINANCIAL AID COMPLIANCE AUDIT. ------------------------------ Sellers shall have delivered to Purchaser a copy of its financial aid compliance audit report submitted to MET and the ME for the regulatory year ended June 30, 1996, which report shall be satisfactory to Purchaser acting reasonably. 7.10. CONSENTS AND APPROVALS. ---------------------- Sellers shall have obtained the consents and approvals set forth in Section 3.1(g), and such consents and approvals shall remain in full force and - -------------- effect. 7.11. ENVIRONMENTAL ASSESSMENT. ------------------------ Purchaser shall have received a Phase I environmental site assessment for each of the Leased Facilities, which assessments shall be satisfactory to Purchaser. Purchaser acknowledges it has received the assessments and such assessments are satisfactory to Purchaser. -47- 7.12. INVESTMENT CANADA ACT. --------------------- Purchaser shall have: (a) within thirty (30) days of the Closing Date, filed a notice with Investment Canada of the transaction contemplated hereunder; and (b) received a receipt issued under the Investment Canada Act (Canada) certifying that a notice in prescribed form in respect of the acquisition of the Shares by Purchaser as herein contemplated has been duly filed under the said Act and that such acquisition is not reviewable. 7.13. CORPORATE MATTERS PERTAINING TO COMPANY. --------------------------------------- (a) Sellers shall have delivered to Purchaser true, complete and -------- accurate copies of the corporate record books of the Company, in form and substance satisfactory to Purchaser. (b) Unless waived in writing by Purchaser, Sellers shall have delivered to Purchaser evidence that all necessary and appropriate actions have been taken to reinstate the Company in Quebec retroactive back to the date of non-compliance and that all taxes, penalties, interest, and other charges and fees related thereto have been paid. 7.14. SUBSIDIARY CORPORATE MATTERS. ---------------------------- (a) Sellers shall have delivered to Purchaser true, complete and -------- accurate corporate record books for the Subsidiary, in form and substance satisfactory to Purchaser. (b) Sellers shall have delivered to Purchaser evidence of the transfer of assets from the Company to the Subsidiary in form and substance satisfactory to Purchaser. 7.15. LEASE ON 31 WELLESLEY PROPERTY. ------------------------------ Sellers and Purchasers shall have entered into a lease for the real property located at 31 Wellesley Street West, Toronto, Ontario. If the Closing occurs, notwithstanding that not all of the foregoing conditions have been satisfied or so waived, Purchaser shall not be entitled to rescind its purchase by virtue thereof. 8. CONDITIONS TO SELLERS' OBLIGATIONS. ---------------------------------- The obligations of Sellers to consummate the transactions contemplated by this Agreement are subject to the satisfaction, or to the waiver in writing by Sellers, on or -48- before the Closing Date, or, where applicable, such other date as is set forth herein, of the following conditions: 8.1. TRUTH OF REPRESENTATIONS AND WARRANTIES. --------------------------------------- The representations and warranties of Purchaser contained in this Agreement and in any certificate delivered by Purchaser in accordance with the terms hereof shall be true and correct in all material respects on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of such date (except to the extent such representations and warranties speak of a particular date and except to the extent that any failure to satisfy this requirement would not have a material adverse effect on the business, assets or operations of Purchaser), and Purchaser shall have delivered to Sellers a certificate, dated as of the Closing Date, to such effect. 8.2. PERFORMANCE OF AGREEMENTS. ------------------------- Each and all of the agreements of Purchaser to be performed on or before the Closing Date pursuant to the terms hereof shall have been fully performed in all material respects, and each of the documents, agreements and other items, to be delivered to Sellers pursuant to Section 3.2 shall have been ----------- delivered, and Purchaser shall have delivered to Sellers a certificate, dated the Closing Date, to such effect. 8.3. LITIGATION. ---------- No Legal Requirement shall have been enacted, issued, promulgated or entered by any Governmental Body and no injunction or order of any court or other Governmental Body or Accrediting Body shall have been entered, in either case, which prohibits or restricts the transactions contemplated hereby, and no Proceeding shall have been instituted or threatened by any Person before a court or other Governmental Body or Accrediting Body; (i) seeking to restrain or prohibit any of the transactions contemplated hereby, or (ii) unless Purchaser has agreed to waive its right to indemnification with respect thereto, challenging or questioning the right, title or interest of Sellers to transfer validly all of such right, title and interest in and to the Shares to be transferred to Purchaser. 8.4. PROCEEDINGS. ----------- All proceedings to be taken in connection with the transactions contemplated by this Agreement and all documents incident thereto shall be reasonably satisfactory in form and substance, in all material respects, to Sellers and their counsel, and Sellers shall have received copies of all such documents and other evidence as they or their counsel may reasonably request in order to establish the consummation of such transactions and the taking of all appropriate proceedings in connection therewith. -49- LEASE ON 31 WELLESLEY PROPERTY. ------------------------------ Sellers and Purchasers shall have entered into a lease for the real property located at 31 Wellesley Street East, Toronto, Ontario. 9. INDEMNIFICATION REMEDIES ------------------------ 9.1. SURVIVAL; RIGHT TO INDEMNIFICATION NOT AFFECTED BY KNOWLEDGE ------------------------------------------------------------ All representations, warranties, covenants, and obligations in this Agreement, or in any other certificate or document delivered pursuant to this Agreement, will survive the Closing as provided herein. Subject to Section 5.8 ----------- hereof, the right to indemnification, through the payment of Damages based on a breach of such representations, warranties, covenants and obligations, will not be affected by any investigation conducted at any time before or after the execution of this Agreement or the Closing Date with respect to the accuracy or inaccuracy of, or compliance with, any such representation, warranty, covenant or obligation except as provided in this Agreement. 9.2. INDEMNIFICATION AND PAYMENT OF DAMAGES BY SELLERS ------------------------------------------------- Sellers will indemnify and hold harmless Purchaser for, and will pay to the Purchaser the amount of, any actual loss, liability, claim, damage (excluding any and all punitive, exemplary, or consequential damages), expense (including costs of investigation and defense and reasonable attorney's fees), whether or not involving a third-party claim, suffered or incurred by the Purchaser (including, all Damages suffered or incurred by the Company or the Subsidiary which would not have been suffered or incurred if there had been no breach of any representation, warranty or covenant made by Sellers under this Agreement or in any other document delivered by Sellers pursuant to this Agreement) (collectively, "DAMAGES"), arising, directly or indirectly, from or in connection with: (a) any breach of any representation or warranty made by Sellers in this Agreement or in any other document delivered by Sellers pursuant to this Agreement; (b) any breach by any Seller of any covenant in or obligation of, any Seller in this Agreement or any other document delivered by such Seller pursuant to his Agreement; (c) any claim by any person for brokerage or finder's fees or commissions or similar payments based upon any agreement or understanding alleged to have been made by any such Person with any Seller or the Company or any Subsidiary (or any Person acting on their behalf) in connection with any of the transactions contemplated by this Agreement; or (d) (i) any debt, obligation or liability of the Company or the Subsidiary, or any claim against any of them, of any kind, whether known or -50- unknown, contingent, absolute or otherwise, affecting the Company or any Subsidiary which resulted from or arose out of the operation of the Company or the Subsidiary prior to Closing, to the extent (A) not disclosed in this Agreement (including any of the Schedules hereto) or reflected or disclosed in the balance sheets forming a part of the Financial Statements (including without limitation, any liability for Taxes (other than Taxes not yet due and payable in the amounts reflected on the Final Balance Sheet, Taxes constituting sales taxes in connection with accounts payable reflected on the Final Balance Sheet and Taxes relating to the period after Closing not resulting from any breach of representation or warranty of Sellers hereunder)); (B) not taken into account in determining the Net Worth (as defined in Section 2.3(a)), or (C) not arising under nonmaterial contracts --------------- entered into in the ordinary course of business; (ii) financial aid irregularities relating to operation of the Schools that occurred or relate to activities or actions occurring prior to the Closing, including without limitation any liabilities resulting from or arising out of any show cause order, any audit review disallowances, improperly disbursed student financial assistance program funds or similar determinations ("PRE-CLOSING FINANCIAL AID IRREGULARITIES") or the cost of responding to any audits, program reviews or other investigations which disclose material Pre-Closing Financial Aid Irregularities, whether such audit or investigation is in progress as of the Closing Date or commences after the Closing or (iii) litigation affecting the Company or any Subsidiary pending or threatened as of Closing, other than litigation which is disclosed on Schedules hereto which is covered by Section 9.10 hereof. ------------ 9.3. INDEMNIFICATION AND PAYMENT OF DAMAGES BY PURCHASER. --------------------------------------------------- Purchaser will indemnify and hold harmless Sellers, and will pay to Sellers the amount of any Damages arising from or in connection with: (a) any breach of any representation or warranty made by Purchaser in this Agreement or in any certificate delivered by Purchaser pursuant to this Agreement; (b) any breach by Purchaser of any covenant or obligation of Purchaser in this Agreement; or (c) any claim by any Person for brokerage or finder's fees or commissions or similar payments based upon any agreement or understanding alleged to have been made by such Person with Purchaser or Purchaser (or any Person acting on their behalf) in connection with any of the transactions contemplated by this Agreement. -51- 9.4. LIMITATIONS ON AMOUNT --------------------- (a) Notwithstanding any provisions of this Agreement to the contrary, Sellers will have no liability with respect to the matters described in clause (a), clause (b), or clause (d) of Section 9.2 other than for (i) ----------- Damages up to the aggregate amount of $4,250,000 for which claims are made on or before the eighteen (18) month anniversary of the Closing, and (ii) Damages up to the aggregate amount of $2,550,000 for which claims are made after the eighteen (18) month anniversary and on or before the four (4) year anniversary of the Closing; provided that in no event shall the total liability of Sellers for indemnification pursuant to clause (a), clause (b) and clause (d) of Section 9.2 exceed $4,250,000 in the aggregate ----------- ("INDEMNIFICATION CAP") and further provided that in the event that there is an adjustment of the Purchase Price pursuant to Section 2.3 hereof, the ----------- Indemnification Cap shall be similarly adjusted by an amount equal to fifty percent (50%) of such adjustment to the Purchase Price but in no event shall such adjustment to the indemnification cap exceed $200,000. (b) Notwithstanding Section 9.4(a), in the event of any breach of (i) -------------- any Sellers' representations and warranties of which any Seller had actual knowledge at any time prior to the date on which such representation and warranty is made; or (ii) any intentional breach by Sellers of any covenant or obligation, Sellers will be liable for all Damages with respect to such breaches provided that in no event shall the total liability of any Seller hereunder exceed the total value of consideration received by such Seller. 9.5. LIABILITY OF INDIVIDUAL SELLERS; BREACHES BY INDIVIDUAL SELLERS --------------------------------------------------------------- (a) Notwithstanding any provision of this Section 9 to the contrary, --------- in the event of any breach of the provisions of Sections 2.5(d), 4.2(b), ------------------------ 4.3, 4.4(b), 4.6(a)(ii) or 4.18(b) resulting from the acts or capacity of, ---------------------------------- or knowledge or belief of, one or more specific Sellers (in their capacity as shareholders, as opposed to corporate directors, officers, employees or agents), only the particular Seller or Sellers whose acts or capacity, or knowledge or belief, are the basis for such breach shall be liable pursuant to Section 9.2 to indemnify Purchaser for Damages resulting therefrom ----------- provided that in no event shall the total liability of any Seller hereunder exceed the total value of consideration received by such Seller. (b) Except as provided in Section 9.5(a), each individual Seller's -------------- liability in respect of any claim for Damages shall be limited to an amount equal to the product of: (1) a fraction (i) the numerator of which is the total value of the consideration received by such Seller hereunder and (ii) the denominator of which is the total consideration paid to all Sellers hereunder, multiplied by (2) the total amount of such Damages provided, however, that -52- the indemnification amount shall not exceed the total value of the consideration received by such Seller hereunder. 9.6. FURTHER LIMITATIONS ON REMEDIES. ------------------------------- (a) Except in connection with the enforcement of their respective rights pursuant to Section 10 hereof or as otherwise expressly provided ---------- herein, any claim by any party hereto arising out of or relating in anyway to this Agreement shall have as its sole remedy the indemnification provided by this Section 9. Notwithstanding the foregoing, nothing herein --------- shall preclude any party from seeking to exercise or enforce any rights under any other agreements executed in connection with the transactions contemplated by this Agreement or injunctive or other equitable relief as may be necessary or desirable to protect its rights hereunder, Sellers hereby acknowledge and agree that no waiver or release by the Company or the Subsidiary or the Schools of the Sellers, or any of them, executed or issued prior to the Closing shall constitute a waiver, release or limitation in any way of the provisions of this Section 9. --------- (b) Except for Damages based upon or arising out of a breach of representation or warranty subject to Section 9.5(a) hereof, Sellers shall -------------- not be liable for indemnification for Damages until the amount of Damages exceeds, in the aggregate, the sum of $100,000 (the "INDEMNIFICATION THRESHOLD") (c) All Damages shall be determined net of any tax benefit or economic benefit to the Purchaser, Company, or Subsidiary, arising in respect of or as a result of the matters for which the Damages are claimed or insurance proceeds derived (or reasonably expected to be derived) by any of the foregoing. (d) Notwithstanding anything to the contrary contained herein, in no event shall any party be entitled to recover more than once for the same matter. 9.7. PROCEDURES. ---------- (a) Any claim under Section 9.2 or Section 9.3 shall be made in a ----------- ----------- written statement signed by the party seeking indemnification which shall specify in reasonable detail each individual item of Damage and the estimated amount thereof, the date such item was claimed or the facts giving rise to such claim were discovered, the basis for any alleged liability and the nature of the breach or claim to which each such item is related. (b) If the indemnifying party does not pay the amount specified in any such statement within thirty (30) days after it has been delivered by the party seeking indemnification, the party seeking indemnification may enforce its right in accordance with law. -53- (c) The party seeking indemnification in respect of any third party claim shall give the indemnifying party prompt notice of any Proceeding which might give rise to liability of the indemnifying party for indemnification hereunder; provided, that failure to give the indemnifying party prompt notice will not relieve such indemnifying party of any liability to the indemnified party hereunder, except to the extent the indemnifying party demonstrates that the defense of such action is prejudiced by the indemnified party's failure to give such notice. If the indemnifying party wishes to contest any third party claim, it will have the option to defend, at the indemnifying party's expense, any such matter, provided that the indemnified party (or in the case of the Company or the Subsidiary, that entity itself) shall have the right, at its own cost and expense, to participate in the defense of such claim or, if the indemnifying party elects not to defend the claim, to conduct the defense on its own behalf. If the indemnifying party conducts the defense of a claim, neither party (or in the case of the Company or the Subsidiary, that entity itself) will enter into any settlement agreement without the other party's consent; provided, that the indemnified party (or in the case of the Company or the Subsidiary, that entity itself) shall not object to any proposed settlement which requires only the payment of money by the indemnifying party and does not involve any admissions or stipulations by the indemnified party, the Company, the Subsidiary, or the Schools or any injunctive or similar relief or any other contractual obligations affecting the indemnified party (or in the case of the Company or the Subsidiary, that entity itself) or their respective business and operations. The indemnified party shall cooperate (and the Purchaser shall cause the Company and the Subsidiary to cooperate) with the indemnifying party in the defense, compromise or settlement of any claim for which indemnification is sought. If the indemnifying party elects not to conduct the defense of such claim, the indemnified party (or in the case of the Company or the Subsidiary, that entity itself) shall be permitted to settle or compromise any such claim on such terms as it deems appropriate and such settlement or compromise shall not prejudice the rights to indemnification hereunder. (d) Notwithstanding Section 9.7(c), if an indemnified party --------------- determines in good faith that there is a reasonable probability that a Proceeding may adversely affect it or its affiliates other than as a result of monetary damages for which it would be entitled to indemnification under this Agreement, the indemnified party may, by notice to the indemnifying party, assume the exclusive right to defend, compromise, or settle such Proceeding, but the indemnifying party will not be bound by any determination of a Proceeding so defended or any compromise or settlement effected without its consent (which may not be unreasonably withheld). (e) A claim for indemnification for any matter not involving a third- party claim may be asserted by notice to the party from whom indemnification is sought. -54- 9.8. PREVAILING PARTY TO BE AWARDED LEGAL FEES. ----------------------------------------- In the event of any litigation, whether at law or in equity, arising out of this Agreement, the party prevailing in such litigation shall be entitled to receive, upon application to the court, its reasonable legal fees and expenses incurred in connection therewith. 9.9. OFFSET. ------ (a) Purchaser's obligations pursuant to the Seller Note shall be subject to the offset rights set forth therein. (b) Purchaser's obligations to pay the $500,000 portion of the Holdback shall be subject to offset for alleged Damages according to the following provisions: (i) Purchaser's allegation of Damage shall be made in good faith and shall not include any amount reflected the Final Balance Sheet or in the first instance of a Claim for Damages be for amounts which in the aggregate are less than the Indemnification Threshold; (ii) Purchaser shall submit a notice of a claim for indemnification in respect of such Damages to Sellers (or to the Seller or Sellers from whom it claims indemnification if not proportionate as to all Sellers). The manner and procedure for making such claim and the resolution thereof shall be as provided in Sections 9.6 and 9.7 hereof. ------------ --- (iii) Until the claim for Damages is resolved by a written agreement of the parties or final, unappealable judgment issued by a court or similar tribunal of competent jurisdiction ("RESOLUTION"), the amount claimed shall remain in escrow pursuant to the terms of the Escrow Agreement. (c) It is understood, for the sake of clarity, that the recovery of Damages, whether by offset or otherwise, is subject to the limitations of Sections 9.4 and 9.5, and that this Section 9.9 is not ------------ --- ----------- intended to convey any rights to recover sums in excess of such limits. 9.10. Agreements Concerning Pending Litigation. ----------------------------------------- The parties agree to the following with respect to the undernoted litigation, all of which is pending or threatened as at the Closing Date and disclosed on Schedule 4.18(a): ---------------- -55- (a) with respect to the action against the Company by Barnes Security Services Ltd. (the "BARNES SECURITY MATTER"), the action threatened by Christopher Lotoski (the "LOTOSKI MATTER") and the action threatened by Emily Zarb (the "ZARB MATTER"), Purchaser shall cause the Company to defend the Barnes Security Matter, to defend any action brought against the Company or the Subsidiary (and/or any of the officers, directors or employees of the Company or the Subsidiary) by Christopher Lotoski in furtherance of the Lotoski Matter or by Emily Zarb in furtherance of the Zarb Matter, and also to commence and prosecute counterclaims in those actions, as and to the extent from time to time directed to do so by or on behalf of the Sellers as hereinafter in this Section 9.10 is provided; and ------------ as regards any such action brought by Christopher Lotoski or Emily Zarb, to claim indemnity or contribution from the Company's and/or the Subsidiary's insurers as and to the extent directed to do so by or on behalf of the Sellers as hereinafter provided. The Barnes Security Matter, the Lotoski Matter and the Zarb Matter, and all related proceedings defended or taken by or on behalf of the Company, are herein collectively referred to as the "INDEMNIFIED LITIGATION." The provisions of Section 9.7(c) hereof shall -------------- apply mutatis mutandis to the conduct of the Indemnified Litigation and the conduct of any negotiations regarding a settlement thereof. Each Seller agrees to indemnify Purchaser against 25% of all out-of-pocket costs (including without limitation attorneys' and filing fees), out-of-pocket expenses, adverse awards and other adverse judgments, incurred or paid after the Final Balance Sheet Date (but only to the extent not taken into account in determining the Net Worth) by the Company arising out of or in connection with the Indemnified Litigation, determined net of any tax benefit to the Company or the Subsidiary in that regard and after deduction therefrom of the net after-tax benefits to the Company or the Subsidiary of all favorable awards (including all favorable awards of costs and the net proceeds to the Company or the Subsidiary of any settlements), if any, obtained in or in respect of the Indemnified Litigation and all payments or indemnities provided in that regard by any of the Company's or the Subsidiary's insurers. In addition, each Seller agrees to advance to the Purchaser, upon written request of the Purchaser, an amount equal to 25% of the amount of out-of-pocket expenses of the Company or the Subsidiary from time to time accrued and paid by the Company or the Subsidiary after the Final Balance Sheet Date with respect to the Indemnified Litigation, calculated net of the tax benefits to the Company or the Subsidiary of such expenses. (b) with respect to the action against the Institute Superieur de Design de Mode as well as the related counterclaims which have been made in that action against the Company and/or the Subsidiary and all further counterclaims, if any, which may be made in such action, and all related proceedings (such action, counterclaims and related proceedings are collectively referred to as the "ISDM CLAIMS;" and the Company and the -56- Subsidiary, to the extent that they are parties to the action(s) or proceeding(s) falling within the definition of the "ISDM Claims," is/are referred to as the "CORPORATE ENTITY"), Purchaser shall cause the Corporate Entity to diligently prosecute and defend the same as and to the extent from time to time directed to do so by or on behalf of the Sellers as hereinafter in this Section 9.10 is provided. The provisions of Section ------------ ------- 9.7(c) hereof shall apply mutatis mutandis to the conduct of the ------ Indemnified Litigation and the conduct of any negotiations regarding settlements thereof. Forthwith after the time at which all of the ISDM Claims have been resolved (whether such resolution is by settlement or non- appealable judgment), Purchaser shall calculate the amount of all out-of- pocket costs (including without limitation attorneys' and filing fees), out-of-pocket expenses, adverse awards and other adverse judgments, incurred or paid after the Final Balance Sheet Date (but only to the extent not taken into account in determining the Net Worth) by the Corporate Entity arising out of or in connection with the ISDM Claims (the "PRE-TAX COSTS"), and also net of all tax benefits to the Corporate Entity in that regard (the amount of the Pre-Tax Costs less the amount of such tax benefits is hereinafter referred to as the "COSTS"), as well as the amount of the net after-tax benefit to the Corporate Entity of all favorable awards (including favorable awards of costs) obtained in the ISDM Claims and/or as a result of all settlements thereof (the "RECEIPTS"). If the amount of the Receipts exceeds the Costs, Purchaser shall pay to each Seller an amount equal to 25% of the amount of such excess (the "EXCESS"). If there is no Excess, each Seller shall pay to the Purchaser an amount equal to 25% of the amount remaining after deducting the amount of the Receipts from the Costs and deducting from that remainder the amount remaining after deducting from the amount of the Pre-Tax Costs, to a limit of $50,000 (Cdn) of the Pre-Tax Costs, the amount of all tax benefits to the Corporate Entity by virtue of its having incurred the Pre-Tax Costs to a limit of $50,000 (Cdn) of the Pre-Tax Costs. (c) With respect to the complaints of 15 students of the Toronto School enrolled in the full-time accelerated Year 1 class of Computer Animation and made by their letters of February 14, 1997 and June 10, 1997 of which copies have been provided to the Purchaser, as well as related complaints, claims and proceedings, Purchaser shall cause the Company to make all reasonable efforts to resolve the same by offering to those students free make-up courses, other courses, extra instruction and the like and to the extent that such offers are accepted, performing them, all without charge to or liability of the Sellers in that regard; and as regards such efforts shall cause the Company to follow the reasonable instructions of Larry Gross and keep him informed of all material developments. If notwithstanding such reasonable efforts by the Company any one or more of such students or related group of students shall commence any action against the Company in respect of any one or more of the subject matters of such complaints (all such action or actions -57- and all related proceedings is/are hereinafter collectively referred to as the "ANIMATION CLAIMS"), Purchaser shall cause the Company to defend the Amimation Claims as and to the extent from time to time directed to do so by or on behalf of the Sellers as hereinafter in this Section 9.10 is provided. The provisions of Section 9.7(c) hereof ------------ -------------- shall apply mutatis mutandis to the conduct of the Animation Claims and the conduct of any negotiations regarding a settlement thereof. Each Seller shall indemnify Purchaser against 25% of all out-of-pocket costs (including without limitation attorneys' and filing fees), out- of-pocket expenses, adverse awards and other adverse judgments, incurred or paid by the Company (but only to the extent not taken into account in determining the Net Worth) arising out of or in connection with the Animation Claims, determined net of any tax benefit to the Company in that regard, but excluding from the subject matter of this indemnity (for certainty) all costs and expenses, if any, which the Company incurs or will incur pursuant to any agreement to finally and fully resolve any of the Animation Claims by providing make-up courses, other courses, extra instruction or the like (collectively, the "EXCLUDED ITEMS"). In addition, each Seller agrees to advance to the Purchaser, upon written request of the Purchaser, an amount equal to 25% of the amount of out-of-pocket expenses of the Company from time to time accrued and paid by the Company, other than on account of the Excluded Items, with respect to the Animation Claims, calculated net of the tax benefits to the Company of such expenses. Any direction by or on behalf of Sellers pursuant to this Section 9.10 may be ------------ oral or may be in writing, and (i) if given in writing by a majority of the Sellers shall be binding upon all Sellers and (ii) if given either orally or in writing by any one of Leonard D. Rutstein or Michael Zdeb shall be binding upon all Sellers. If in the course of the defense or prosecution by the Company or the Subsidiary of any action which forms part of the subject matter of this Section 9.10 it is necessary for counsel to the Company, the Subsidiary or the - ------------ Sellers having carriage of that matter to obtain the immediate instructions of the Sellers and none of Leonard D. Rutstein or Michael Zdeb is then available to provide such instructions either in person or by telephone at his telephone number as then known to the Purchaser or such counsel, the instructions to such counsel in that regard given by the Purchaser, formulated by the Purchaser in good faith believing them to be in the best interests of the Company or the Subsidiary (as the case may be) without consideration of the financial arrangements provided for in clauses (a), (b) or (c) of this Section 9.10, shall ------------ be binding upon all Sellers. 10. FRAUD CLAIM. ----------- At or prior to the Closing, Sellers shall purchase from the Company for the sum of $30,000 (Cdn), but without any warranties of enforceability or collectibility either express or implied, all rights of the Company to recover from Helene Lapierre all sums which she has alleged to have stolen from the Company and all rights of the Company to receive from its insurers reimbursement therefor (the "LAPIERRE CLAIM"). From and after -58- the Closing, the Purchaser shall permit and shall cause the Company to permit the Sellers to prosecute in the name of the Company or in their own names as the Company's assignee, but at their sole cost and expense, such actions against the said Helene Lapierre, her heirs, executors, administrators and other legal representatives, and against the said insurers, as the Sellers in their discretion from time to time consider to be appropriate in order to recover such sums and receive such reimbursement and shall cause the Company to cooperate fully with the Sellers in that regard. Sellers shall indemnify the Company against all costs and expenses of such prosecution, including any award of costs which may be made against the Company in any action or proceedings commenced or prosecuted by the Sellers in that regard. Sellers represent and warrant that nothing related to the aforesaid claim was included in the Financial Statements and that nothing related to said claim in excess of $30,000 (Cdn) will be included on the Final Balance Sheet. 11. MISCELLANEOUS. ------------- 11.1. TERMINATION. ----------- This Agreement may be terminated at any time prior to the Closing Date: (a) by mutual written consent of the Purchaser and the Sellers; (b) prior to the Closing by Sellers or Purchaser, if the other party shall be in breach of any covenant, undertaking, or restriction contained herein, the breach of which shall have a material adverse effect on the transactions contemplated by this Agreement taken as a whole, and such breach has not been cured within ten (10) business days after giving written notice to the breaching party or parties of such breach; provided, that if such breach is, in the reasonable judgment of the non-breaching party, capable of being cured, but cannot reasonably be cured within such ten (10) business day period, no party shall be permitted to terminate this Agreement as a result of such breach so long as the breaching party is diligently pursuing cure of such breach; (c) by Purchaser or Sellers if the Closing shall not have occurred on or before June 30, 1997 or if a Legal Requirement shall have been enacted, issued, promulgated or entered by any Governmental Body or an injunction or order of a court or other Governmental Body or Accrediting Body has been entered, in either case, which prohibits or restricts the transactions contemplated hereby or an action or proceeding shall have been instituted or threatened by any Person or pending before a court or other Governmental Body or Accrediting Body seeking to restrain or prohibit any of the transactions contemplated hereby; (d) by the Purchaser if any of the conditions specified in Section 7 have not been met or waived prior to such time as such --------- condition can no longer be satisfied; or -59- (e) by the Sellers if any of the conditions specified in Section ------- 8 have not been met or waived prior to such time as such condition can - no longer be satisfied. In the event of termination of this Agreement, this Agreement shall forthwith become null and void except for this Section 11 and Section 9, which sections ---------- --------- shall remain in full force and effect and which shall survive such termination. 11.2. EXPENSES. -------- Each party hereto shall be liable for the payment of the fees and expenses incurred by such party or on such party's behalf in connection with the negotiation and execution of this Agreement and the consummation of the transactions contemplated by this Agreement, including, without limitation, legal, accounting, financial and tax advice, brokers, finders and other fees, expenses and commissions. No sales or transfer taxes under the laws of Ontario or Quebec will be payable by Sellers as a result of the sale of the Shares to Purchaser. 11.3. SUCCESSORS AND ASSIGNS. ---------------------- This Agreement and the rights hereunder shall not be assignable or transferable without the prior written consent of all the parties hereto provided however, that Purchaser shall be permitted to collaterally assign this - -------- ------- Agreement and all rights hereunder to its lender(s). Except as otherwise expressly provided herein, all covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto whether so expressed or not. Notwithstanding the foregoing, the provisions of this Agreement which are for Purchaser's benefit are also for the benefit of, and enforceable by, any subsequent owner of the Company, the Subsidiary or the Schools, or any of them if, such subsequent owner is an Affiliate of Purchaser or Purchaser. The only parties to this Agreement are the Purchaser and the Sellers and their successors, assigns, heirs, executors and administrators. 11.4. SEVERABILITY. ------------ Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. 11.5. COUNTERPARTS. ------------ This Agreement may be executed simultaneously in two or more counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together shall constitute one and the same Agreement. -60- DESCRIPTIVE HEADINGS; INTERPRETATION. ------------------------------------ The descriptive headings of this Agreement are inserted for convenience only and do not constitute a Section of this Agreement. 11.7. GOVERNING LAWS. -------------- This Agreement shall be construed and enforced in accordance with, and all questions concerning the construction, validity, interpretation and performance of this Agreement shall be governed by, the laws of the State of Illinois without giving effect to provisions thereof regarding conflict of laws. 11.8. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ---------------------------------------------- EACH PARTY HERETO CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF COOK, STATE OF ILLINOIS AND IRREVOCABLY AGREES THAT, UPON THE MOVING PARTY'S ELECTION, ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE OTHER RELATED DOCUMENTS SHALL BE LITIGATED IN SUCH COURTS. EACH PARTY HERETO ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NONCOVENIENS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. ANY PROCESS SERVED BY REGISTERED MAIL TO A PARTY IS HEREBY ACKNOWLEDGED BY SUCH PARTY TO BE EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF PURCHASER TO BRING PROCEEDINGS AGAINST SELLERS, OR ANY OF THEM, IN THE COURTS OF ANY OTHER JURISDICTION. 11.9. WAIVER OF JURY TRIAL. -------------------- EACH PARTY HERETO HEREBY WAIVES ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION AND THE RELATIONSHIP THAT IS BEING ESTABLISHED. EACH PARTY HERETO ALSO WAIVES ANY BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF THE OTHER PARTIES. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THESE TRANSACTIONS, INCLUDING WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, -61- AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. EACH PARTY HERETO ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH PARTY HERETO FURTHER WARRANTS AND REPRESENTS THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE TRANSACTIONS CONTEMPLATED HEREBY. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 11.10. NOTICES. ------- All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Agreement shall be in writing and shall be deemed to have been given (a) when delivered personally or sent by facsimile to the recipient, or (b) one (1) business day after the date such communication is sent to the recipient by reputable express courier service (charges prepaid). Such notices, demands and other communications shall be sent to the parties hereto at the addresses indicated below: If to Purchaser: Career Education Corporation 2800 West Higgins Road Hoffman Estates, Illinois 60195 Attention: John M. Larson, William Klettke Facsimile: (847) 781-3610 With copies to: D'Ancona & Pflaum 30 North LaSalle Street Suite 2900 Chicago, Illinois 60602 Attention: Michel J. Feldman Facsimile: (312) 580-0923 -62- and Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd. 55 East Monroe Street Suite 3700 Chicago, Illinois 60603 Attention: Dennis B. Black, Esq. Facsimile: (312) 332-2196 If to Non-Resident Sellers, as set forth hereto on Schedule -------- 11.10: ----- If to Gross: Lawrence N. Gross 175 Cumberland Street Suite 2204 Toronto, Ontario CANADA M5R 3M9 With copies to: Richard Bain Robins, Appleby & Taub 130 W. Adelaide Street Toronto, Ontario CANADA M5H 2M2 Facsimile: (416) 868-0306 or to such other address or to the attention of such other Person as the recipient party has specified by prior written notice to the sending party. 11.11. SELLERS' REPRESENTATIVE. ----------------------- Intentionally deleted. 11.12. ENTIRE AGREEMENT. ---------------- Except as otherwise expressly set forth herein and except for the Stock Purchase Agreement, this Agreement and the exhibits and schedules hereto embody the complete agreement and understanding by and among the parties and their respective Affiliates, and supersede and preempt any prior understandings, agreements or representations by or among the parties and their respective Affiliates, written or oral, which may have related to the subject matter hereof in any way, including, without limitation, that certain letter agreement dated February 11, 1997 between Purchaser and the Company (as representative for Sellers). -63- 11.13. CURRENCY. -------- Unless otherwise indicated all dollar amounts referred to in this Agreement, including the symbol "$", refer to lawful money of the United States of America. 11.14. ENGLISH LANGUAGE. ---------------- The parties confirm that it is their wish that this Agreement and any other documents delivered or given pursuant to this Agreement, including notices, have been and shall be in the English language only. Les parties aux presents confirment leur volonte que cette convention de meme tous les documents, y compris tous avis, s'y rattachant, soient rediges en anglais seulement. 11.15. ANNOUNCEMENTS. ------------- Except to the extent required by law or by any Governmental Body each of the parties hereto agrees that no disclosure or public announcement with respect to this Agreement or the transactions herein contemplated shall be made by any party hereto without the prior written consent of each of the other parties hereto, which consent shall not be unreasonably withheld. 11.16. TIME OF THE ESSENCE. ------------------- Time shall be of the essence of this Agreement. 11.17. WAIVER. ------ Notwithstanding anything to the contrary contained herein, no waiver by any party of any right or remedy hereunder shall be deemed to constitute a waiver by such party of any other right or remedy hereunder or to create a course of conduct. -64- IN WITNESS WHEREOF, the parties hereby have executed this Share Purchase Agreement on the date first written above. SELLERS: /s/ CLEM STEIN, JR. ---------------------------------------- Clem Stein, Jr. /s/ LEONARD RUTSTEIN ---------------------------------------- Leonard Rutstein /s/ BARBARA ANN SCOTT KING ---------------------------------------- Barbara Ann Scott King /s/ LAWRENCE N. GROSS ---------------------------------------- Lawrence N. Gross PURCHASER: CAREER EDUCATION CORPORATION, a Delaware corporation By: /s/ WILLIAM A. KLETTKE -------------------------------------- Its: Senior Vice President ------------------------------------- -65- LIST OF EXHIBITS AND SCHEDULES Exhibit A - Form of Escrow Agreement Exhibit B - Form of Seller Note Exhibit C - Form of Letter of Credit Exhibit D - Form of Sellers' Release Exhibit E - Form of Noncompetition Agreement Exhibit F - Form of Closing Checklist Exhibit G - Form of Purchaser's Counsel Opinion LIST OF SCHEDULES Schedule 2.2 - Payment of Purchase Price Schedule 3.1(c) - Allocation of Non-Competition Payments Schedule 3.1(h) - Sellers' Required Consents Schedule 3.1(j) - Preliminary Closing Balance Sheet Schedule 3.2(f) - Termination of Guarantees Schedule 4.4 - Sellers' Conflicts Schedule 4.6 - Capitalization Schedule 4.7 - Books & Records Schedule 4.8(a) - Compliance with Laws Schedule 4.8(b) - License and Permits Schedule 4.8(c) - Investigations Schedule 4.8(d) - New Programs Denied by ME Schedule 4.9(a) - List of Policy Guideline Documentation Schedule 4.9(b) - Material Deviations from Policy Guidelines Schedule 4.11(b) - Leased Real Property Schedule 4.11(c) - Capital Improvements to Leased Facilities Other Facilities Schedule 4.11(d)(i) - Leased and Licensed Assets Schedule 4.11(d)(ii) - Permitted Encumbrances Schedule 4.11(e) - List of Tangible Assets Schedule 4.11(f) - Other Facilities Schedule 4.12 - Material Miscellaneous Contracts Schedule 4.13(a) - Tradenames Schedule 4.14 - Financial Security Arrangements Schedule 4.14(c) - Debts Incurred Since Interim Balance Sheet Date Schedule 4.17 - List of Bank Accounts Schedule 4.18(a) - Litigation Schedule 4.18(b) - Judgments Schedule 4.19 - Insurance Schedule 4.20 - Environmental Matters Schedule 4.21(a) - Employee Benefit Plans Schedule 4.21(b) - Company Contributions to Employee Benefit Plans -66- Schedule 4.22(a) - List of Employees, Consultants and Other Service Providers; Compliance with Legal Requirements Schedule 4.22(b) - Confidentiality, Noncompetition and Proprietary Rights Agreements Schedule 4.22(c) - Retired Employees and Directors; Severance Agreements Schedule 4.23(a) - Labor Relations; Compliance Schedule 4.23(b) - Judgments Schedule 4.23(c) - Wrongful dismissals Schedule 4.24(a) - Tax Matters Schedule 4.24(b) - Tax Audits Schedule 4.24(c) - Interim Financial Statements Schedule 4.26 - Affiliate Transactions Schedule 4.27 - Absence of Certain Changes Schedule 4.28 - Indebtedness Schedule 4.29 - Conducted Business Since Interim Balance sheet Schedule 5.3 - Purchaser's Consents and Governmental Approvals Schedule 11.10 - Addresses for Notice to Non-Resident Sellers -67- EX-4.2 6 CREDIT AGREEMENT DTD 5/30/97 EXHIBIT 4.2 ================================================================================ CREDIT AGREEMENT dated as of May 30, 1997 among CAREER EDUCATION CORPORATION, as Borrower, THE LENDERS NAMED HEREIN, and LASALLE NATIONAL BANK, as Agent ================================================================================ The following Table of Contents has been inserted for convenience only and does not constitute a part of this Agreement. TABLE OF CONTENTS
PAGE ---- SECTION 1. DEFINITIONS AND ACCOUNTING TERMS.................. 2 1.1 Certain Defined Terms.............................. 2 --------------------- 1.2 Other Definitional Provisions...................... 23 ----------------------------- 1.3 Accounting and Financial Determinations............ 23 --------------------------------------- SECTION 2. THE COMMITMENTS................................... 24 2.1 Term Loan Commitment............................... 24 -------------------- 2.2 Revolving Loan Commitment.......................... 24 ------------------------- 2.3 Increase of Commitments............................ 24 ----------------------- 2.4 Automatic Reduction of Revolving Loan Commitments.. 26 ------------------------------------------------- 2.5 LC Commitment...................................... 26 ------------- 2.6 Commitments and Other Terms........................ 27 --------------------------- SECTION 3. THE LOANS......................................... 27 3.1 Various Types of Loans............................. 27 ---------------------- 3.2 Notice of Borrowing................................ 27 ------------------- 3.3 Funding............................................ 28 ------- 3.4 Funding Reliance................................... 28 ---------------- 3.5 Conversion and Continuation of Loans............... 28 ------------------------------------ 3.6 Repayment of Term Loans; Notes..................... 30 ------------------------------ 3.7 Repayment of Revolving Loans; Notes................ 30 ----------------------------------- 3.8 Recordkeeping...................................... 30 ------------- SECTION 4. THE LETTERS OF CREDIT............................. 30 4.1 Request for Issuance of Letters of Credit.......... 30 ----------------------------------------- 4.2 Expiration and other Terms......................... 31 -------------------------- 4.3 Participation...................................... 31 ------------- 4.4 Notification of Demand for Payment................. 31 ---------------------------------- 4.5 Funding by Agent................................... 31 ---------------- 4.6 Funding By Lenders................................. 31 ------------------ 4.7 Non-Conforming Demand For Payment.................. 32 --------------------------------- 4.8 Return of Funds Related to Non-Conforming Demand... 32 ------------------------------------------------ 4.9 Return of Letter of Credit......................... 32 -------------------------- 4.10 Reimbursement Agreement of the Borrower............ 32 --------------------------------------- 4.11 Obligation to Reimburse for or Participate in --------------------------------------------- Letter of Credit Payments......................... 33 ------------------------- 4.12 Mandatory Payment to Agent of LC Obligations....... 34 -------------------------------------------- SECTION 5. INTEREST AND FEES, ETC............................ 34 5.1 Interest Rates..................................... 34 --------------
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PAGE ---- 5.2 Default Interest Rate.............................. 35 --------------------- 5.3 Interest Payment Dates............................. 35 ---------------------- 5.4 Interest Periods................................... 35 ---------------- 5.5 Setting and Notice of Rates........................ 36 --------------------------- 5.6 Computation of Interest............................ 36 ----------------------- 5.7 Fees............................................... 36 ---- SECTION 6. REDUCTION OR TERMINATION OF THE COMMITMENTS; PAYMENTS AND PREPAYMENTS......................... 38 6.1 Voluntary Reduction or Termination of the Revolving Loan Commitments.................................. 38 6.2 Voluntary Reduction of the LC Commitments.......... 38 ----------------------------------------- 6.3 Voluntary Prepayments.............................. 38 --------------------- 6.4 Mandatory Prepayments.............................. 39 --------------------- 6.5 Making of Payments................................. 40 ------------------ 6.6 Due Date Extension................................. 41 ------------------ 6.7 Sharing of Payments................................ 41 ------------------- 6.8 Setoff............................................. 42 ------ 6.9 Net Payments....................................... 42 ------------ SECTION 7. CHANGES IN CIRCUMSTANCES.......................... 43 7.1 Increased Costs.................................... 43 --------------- 7.2 Change in Rate of Return........................... 44 ------------------------ 7.3 Basis for Determining Interest Rate Inadequate or ------------------------------------------------- Unfair............................................. 45 ------ 7.4 Changes in Law Rendering Certain Loans Unlawful.... 45 ----------------------------------------------- 7.5 Funding Losses..................................... 46 -------------- 7.6 Right of Lenders to Fund Through Other Offices..... 46 ---------------------------------------------- 7.7 Discretion of Lenders as to Manner of Funding...... 46 --------------------------------------------- 7.8 Conclusiveness of Statements; Survival of ----------------------------------------- Provisions........................................ 47 ---------- SECTION 8. COLLATERAL AND OTHER SECURITY..................... 47 8.1 Security Documents................................. 47 ------------------ 8.2 Further Assurances................................. 47 ------------------ SECTION 9. REPRESENTATIONS AND WARRANTIES.................... 48 9.1 Organization, etc.................................. 48 ----------------- 9.2 Authorization...................................... 48 ------------- 9.3 No Conflict........................................ 48 ----------- 9.4 Governmental Consents.............................. 49 --------------------- 9.5 Validity........................................... 49 -------- 9.6 Financial Statements............................... 49 -------------------- 9.7 Material Adverse Change............................ 49 ----------------------- 9.8 Litigation and Contingent Obligations.............. 49 ------------------------------------- 9.9 Liens.............................................. 50 ----- 9.10 Subsidiaries....................................... 50 ------------
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PAGE ---- 9.11 Pension and Welfare Plans.......................... 50 ------------------------- 9.12 Investment Company Act............................. 51 ---------------------- 9.13 Public Utility Holding Company Act................. 51 ---------------------------------- 9.14 Margin Regulation.................................. 51 ----------------- 9.15 Collateral......................................... 51 ---------- 9.16 Taxes.............................................. 51 ----- 9.17 Accuracy of Information............................ 52 ----------------------- 9.18 Environmental Warranties........................... 52 ------------------------ 9.19 Proceeds........................................... 53 -------- 9.20 Insurance.......................................... 54 --------- 9.21 Securities Laws.................................... 54 --------------- 9.22 Governmental Authorizations........................ 54 --------------------------- 9.23 Stock Purchase Transaction......................... 54 -------------------------- 9.24 Representations in Other Agreements True and -------------------------------------------- Correct............................................ 55 ------- 9.25 Business Locations; Trade Names.................... 55 ------------------------------- 9.26 Solvency........................................... 55 -------- 9.27 Title IV Compliance................................ 55 ------------------- 9.28 No Burdensome Restrictions......................... 57 -------------------------- 9.29 Copyrights, Patents, Trademarks and Licenses, etc.. 57 ------------------------------------------------- 9.30 Title to Assets; Leases............................ 58 ----------------------- 9.31 Labor Disputes..................................... 58 -------------- SECTION 10. AFFIRMATIVE COVENANTS............................ 58 10.1 Reports, Certificates and Other Information........ 58 ------------------------------------------- 10.2 Corporate Existence; Foreign Qualification......... 63 ------------------------------------------ 10.3 Books, Records and Inspections..................... 63 ------------------------------ 10.4 Insurance.......................................... 64 --------- 10.5 Taxes and Liabilities.............................. 64 --------------------- 10.6 Pension Plans and Welfare Plans.................... 64 ------------------------------- 10.7 Compliance with Laws............................... 64 -------------------- 10.8 Title IV Compliance................................ 64 ------------------- 10.9 Maintenance of Permits............................. 67 ---------------------- 10.10 Environmental Compliance........................... 67 ------------------------ SECTION 11. NEGATIVE COVENANTS............................... 67 11.1 Limitation on Indebtedness......................... 67 -------------------------- 11.2 Liens.............................................. 69 ----- 11.3 Consolidation, Merger, etc......................... 69 -------------------------- 11.4 Asset Disposition, etc............................. 70 ---------------------- 11.5 Dividends, etc..................................... 70 -------------- 11.6 Investments........................................ 71 ----------- 11.7 Rental Obligations................................. 71 ------------------ 11.8 Subordinated Debt.................................. 71 ----------------- 11.9 Take or Pay Contracts.............................. 72 --------------------- 11.10 Regulations G and U................................ 72 ------------------- 11.11 Subsidiaries....................................... 72 ------------ 11.12 Other Agreements................................... 73 ----------------
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PAGE ---- 11.13 Business Activities................................ 73 ------------------- 11.14 Change of Location or Name......................... 73 -------------------------- 11.15 Transactions with Affiliates....................... 74 ---------------------------- 11.16 Bank Accounts...................................... 74 ------------- 11.17 Limitation on Sales and Leasebacks................. 74 ---------------------------------- 11.18 Modification of Certain Documents.................. 74 --------------------------------- SECTION 12. FINANCIAL COVENANTS.............................. 75 12.1 Minimum Fixed Charge Coverage Ratio................ 75 ----------------------------------- 12.2 Minimum Interest Coverage.......................... 75 ------------------------- 12.3 Maximum Leverage Ratio............................. 75 ---------------------- 12.4 Maximum Capital Expenditures....................... 75 ---------------------------- 12.5 Minimum Tangible Net Worth......................... 75 -------------------------- SECTION 13. CONDITIONS....................................... 76 13.1 Initial Borrowing.................................. 76 ----------------- 13.2 Conditions of each Letter of Credit................ 78 ----------------------------------- 13.3 All Loans and Letters of Credit.................... 78 ------------------------------- 13.4 Loans for Stock Purchase Transactions.............. 79 ------------------------------------- 13.5 Loans for Permitted Acquisitions................... 79 -------------------------------- SECTION 14. EVENTS OF DEFAULT AND THEIR EFFECT............... 80 14.1 Events of Default.................................. 80 ----------------- 14.2 Effect of Event of Default......................... 83 -------------------------- SECTION 15. THE AGENT........................................ 83 15.1 Authorization and Action........................... 83 ------------------------ 15.2 Liability of the Agent............................. 83 ---------------------- 15.3 LaSalle and Affiliates............................. 84 ---------------------- 15.4 Lender Credit Decision............................. 84 ---------------------- 15.5 Indemnification.................................... 85 --------------- 15.6 Successor Agent.................................... 85 --------------- 15.7 Collateral Matters................................. 86 ------------------ SECTION 16. ASSIGNMENTS AND PARTICIPATIONS................... 86 16.1 Assignments........................................ 86 ----------- 16.2 Participations..................................... 88 -------------- 16.3 Disclosure of Information.......................... 88 ------------------------- 16.4 Foreign Transferees................................ 89 ------------------- SECTION 17. MISCELLANEOUS.................................... 89 17.1 Waivers and Amendments............................. 89 ---------------------- 17.2 Notices............................................ 90 ------- 17.3 Regulation U....................................... 91 ------------
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PAGE ---- 17.4 Payment of Costs and Expenses...................... 91 ----------------------------- 17.5 Indemnity.......................................... 92 --------- 17.6 Subsidiary References.............................. 92 --------------------- 17.7 Captions........................................... 92 -------- 17.8 Governing Law...................................... 92 ------------- 17.9 Counterparts....................................... 92 ------------ 17.10 SUBMISSION TO JURISDICTION; WAIVER OF VENUE....... 93 ------------------------------------------- 17.11 Service of Process................................ 93 ------------------ 17.12 WAIVER OF JURY TRIAL.............................. 94 -------------------- 17.13 Successors and Assigns............................ 94 ----------------------
-v- SCHEDULES AND EXHIBITS SCHEDULES - --------- SCHEDULE 2.1 Schedule of Lenders and Percentages SCHEDULE 9.1 Stockholders SCHEDULE 9.8 Material Litigation SCHEDULE 9.10 Subsidiaries SCHEDULE 9.11 ERISA SCHEDULE 9.15 Collateral SCHEDULE 9.18 Environmental Warranties SCHEDULE 9.20 Insurance SCHEDULE 9.25 Business Locations; Trade Names SCHEDULE 9.27(c) Title IV Compliance Information SCHEDULE 9.27(f) Title IV Compliance Disclosure SCHEDULE 9.27(g) Cohort Default Rate SCHEDULE 9.28 Intellectual Property SCHEDULE 9.30 Material Leases SCHEDULE 11.1 Indebtedness SCHEDULE 11.2 Liens SCHEDULE 11.6 Investments SCHEDULE 11.12 Subsidiaries SCHEDULE 11.16 Bank Accounts EXHIBITS - -------- EXHIBIT A Form of Term Note EXHIBIT B Form of Revolving Note EXHIBIT C Form of Borrowing Request EXHIBIT D Form of Continuation/Conversion Notice EXHIBIT E Form of LC Application EXHIBIT F Form of Security Agreement EXHIBIT G Form of Borrower Pledge Agreement EXHIBIT H Form of Gibbs Pledge Agreement EXHIBIT I Form of Collateral Assignment of Lease(s) EXHIBIT J Form of Subsidiary Guaranty EXHIBIT K-1 Form of Borrower Officer's Certificate EXHIBIT K-2 Form of Subsidiary Officer's Certificate EXHIBIT L Form of Borrower Trademark Security Agreement EXHIBIT M Form of Subordination Agreement EXHIBIT N Form of Borrower Solvency Certificate EXHIBIT O Form of Compliance Certificate EXHIBIT P Form of Landlord Waiver and Estoppel Certificate EXHIBIT Q Form of Excess Cash Flow Certificate EXHIBIT R Form of Gibbs Acquisition Agreement EXHIBIT S-1 [RESERVED] EXHIBIT S-2 [RESERVED] EXHIBIT T Form of Opinion of D'Ancona & Pflaum, counsel to the Borrower and its Subsidiaries -vi- EXHIBIT U Form of Assignment Agreement EXHIBIT V Form of Financing Request EXHIBIT W-1 Form of Step-up Lender Confirmation EXHIBIT W-2 Form of New Lender Confirmation EXHIBIT X [RESERVED] EXHIBIT Y Form of Post-Closing Agreement -vii- CREDIT AGREEMENT THIS CREDIT AGREEMENT, dated as of May 30, 1997, is made by and among CAREER EDUCATION CORPORATION, a Delaware corporation (the "Borrower"), the lenders party hereto (herein, together with any Eligible Assignees thereof, collectively called the "Lenders", and each individually called a "Lender"), and LASALLE NATIONAL BANK ("LaSalle"), as agent for the Lenders (herein, in such capacity, together with any successor thereto in such capacity, called the "Agent"). Background ---------- 1. The Borrower and K-III Prime Corporation, Inc., a Delaware corporation, entered into a Stock Sale Agreement, dated as of April 7, 1997 (as the same may be amended or modified in accordance with the Agreement, the "Gibbs Acquisition Agreement"), a copy of which is attached hereto as Exhibit R, --------- pursuant to which the Borrower will acquire all of the outstanding capital stock of The Katharine Gibbs Schools, Inc., a Delaware corporation ("Gibbs"). 2. IAMD Acquisition I, Ltd., a Delaware corporation and a wholly owned Subsidiary (as hereinafter defined) of the Borrower ("IAMD Acquisition") and the shareholders of IAMD Limited, an Illinois Corporation ("IAMD (U.S.)"), are currently negotiating a Stock Purchase Agreement (the "IAMD (U.S.) Acquisition Agreement"), pursuant to which IAMD Acquisition will acquire all of the outstanding capital stock of IAMD (U.S.). The Borrower and the shareholders of International Academy of Merchandising and Design (Canada), Ltd., an Ontario corporation ("IAMD (Canada)") are currently negotiating a Stock Purchase Agreement (the "IAMD (Canada) Acquisition Agreement"), pursuant to which the Borrower will acquire all of the outstanding capital stock of IAMD (Canada). The IAMD (U.S.) Acquisition Agreement and the IAMD (Canada) Acquisition Agreement are collectively referred to herein as the "IAMD Acquisition Agreements." 3. In connection with the transactions contemplated by the Gibbs Acquisition Agreement and the IAMD Acquisition Agreements (collectively, the "Stock Purchase Transactions"), the Borrower desires to obtain Commitments (as hereinafter defined) from the Lenders pursuant to which Loans (as hereinafter defined) will be made and/or Letters of Credit (as hereinafter defined) issued for the account of the Borrower. 4. (a) simultaneously with the closing under this Agreement, the Borrower will issue at least $15,000,000 of equity securities to Heller, Electra (each as hereinafter defined) and certain other stockholders of the Borrower in the form of preferred stock and common stock purchase warrants, and (b) upon the closing of the transactions contemplated by the IAMD Acquisition Agreements, the Borrower will issue at least an additional $5,500,000 (a portion of which may have previously been issued under clause (a)) of equity securities to Heller, Electra and certain other stockholders of the Borrower in the form of preferred stock and common stock purchase warrants, the proceeds referred to in the foregoing clauses (a) and (b) of which, together with the proceeds of the Loans, shall be - ------------------- used to (i) finance the Stock Purchase Transactions (including the payment of expenses incident thereto); provided that the purchase price of Gibbs shall not exceed $27,000,000 and the aggregate purchase price of IAMD (U.S) and IAMD (Canada) shall not exceed $18,000,000, (ii) to finance Permitted Acquisitions (as hereinafter defined) in addition to the Stock Purchase Transactions in an amount not to exceed $20,000,000, (iii) to pay (or in the case of letters of credit issued under the Provident Bank Credit Agreement (as hereinafter defined), to back up such letters of credit with Letters of Credit (as hereinafter defined) issued under this Agreement) the Indebtedness to be Refinanced (as hereinafter defined) and (iv) to provide general working capital. 5. The Lenders are willing to make the Loans and issue, or participate in the issuance of, the Letters of Credit, all subject to the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual promises herein contained and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: SECTION 1. DEFINITIONS AND ACCOUNTING TERMS SECTION 1.1 Certain Defined Terms. As used in this Agreement, the --------------------- following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "ABN AMRO" ABN AMRO a banking holding company organized under the laws of the Netherlands. "Acquired Person" shall mean any Person acquired or the Person holding the assets acquired upon the consummation of an Acquisition permitted by the terms of this Agreement. "Accrediting Body" shall mean, with respect to any Educational Institution, any entity or organization, whether governmental, government-chartered, inter- governmental, private or quasi-private, which engages in granting or withholding licensing, accreditation or similar approval for such Educational -2- Institution, in accordance with standards relating to the performance, operation, financial condition and/or academic standing of private post- secondary schools, including, without limitation, as applicable, the Accrediting Commission of Career Schools and Colleges of Technology and the Accrediting Council for Independent Colleges and Schools and the Western Association of Schools and Colleges. "Acquisition" shall mean any transaction or series of transactions for the purpose of or resulting, directly or indirectly, in (a) the acquisition (in one or a series of related transactions) of all or substantially all of the assets of a Person, or of any business or division of a Person, (b) the acquisition (in one or a series of related transactions) of in excess of 50% of the capital stock, partnership interests, membership interests or other equity securities of any Person, or otherwise causing any Person to become a Subsidiary of the Borrower, or (c) a merger or consolidation or any other combination of the Borrower or one of its Subsidiaries with another Person (other than a Person that is a Subsidiary of the Borrower immediately prior to such merger or consolidation); provided that the Borrower or such Subsidiary, as the case may -------- ---- be, is the surviving entity (unless otherwise consented to by the Agent), in each case subject to and to the extent permitted by the terms of this Agreement. "Affected Lender" - see Section 7.4. ----------- "Affiliate" of any Person shall mean any other Person which, directly or indirectly, controls, is controlled by or is under common control with such Person (excluding any trustee under, or any commitment with responsibility for administering, any Pension Plan). A Person shall be deemed to be "controlled by" any other Person if such other Person possesses, directly or indirectly, power (a) to vote 5% or more of the securities (on a fully diluted basis) having ordinary voting power for the election of directors or managing general partners; or (b) to direct or cause the direction of the management and policies of such Person whether through the ownership of voting securities, membership interests, by contract, or otherwise. "Agent" shall mean LaSalle in its capacity as agent for the Lenders hereunder, and any successor agent in accordance with the terms of Section 15.6. ------------ "Agreement" shall mean this Credit Agreement, as hereafter amended, modified, restated, refinanced, refunded or renewed from time to time in whole or in part. "Applicable Base Rate Margin" - see Section 5.1. ----------- -3- "Applicable LIBOR Rate Margin" - see Section 5.1. ----------- "Assignment Agreement" - see Section 16.1. ------------ "Base Rate" shall mean, for any day, a fluctuating rate of interest per annum equal to the greater of (a) the rate of interest in effect for such day as publicly announced from time to time by LaSalle in Chicago, Illinois, as its "prime rate", or (b) a rate of interest per annum (rounded upward to the next higher 1/16th of 1% if not already an integral multiple of 1/16th of 1%) equal to the Federal Funds Rate in effect at the commencement of business on such day plus 1/2% per annum. The "prime rate" is a rate of interest set by LaSalle based upon various factors including LaSalle's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. If for any reason the Agent shall have determined (which determination shall be conclusive in the absence of manifest error) that it is unable to ascertain the Federal Funds Rate for any reason (including, without limitation, the inability or failure of the Agent to obtain sufficient bids or publications in accordance with the terms hereof), the Base Rate shall be determined in accordance with clause (a) of this definition until the circumstances giving rise to such - ---------- inability no longer exist. "Base Rate Loan" shall mean any Loan which bears interest at or by reference to the Base Rate. "Beneficiary" shall mean the beneficiary under any Letter of Credit. "Borrower" - see Preamble. "Borrower Pledge Agreement" - see Section 8.1. ----------- "Borrower Trademark Security Agreement" shall mean that certain Borrower Trademark Security Agreement, dated as of the date hereof, among the Borrower and the Agent, substantially in the form of Exhibit L, as the same may be --------- amended or modified from time to time in whole or in part. "Borrowing" shall mean a borrowing hereunder consisting of Loans made to the Borrower at the same time by the Lenders pursuant to Section 2, and with --------- respect to LIBOR Rate Loans, having the same Interest Period. A Borrowing may be a Base Rate Borrowing or a LIBOR Rate Borrowing. "Borrowing Request" - see Section 3.2. ----------- "Business Day" shall mean: (a) in the case of a Business Day -4- which relates to a LIBOR Rate Loan, any day of the year on which banks are open for business in Chicago, Illinois and on which dealings are carried on in the London eurodollar market; and (b) in the case of a Business Day which relates to a Base Rate Loan, any day of the year on which banks are open for business in Chicago, Illinois. "Capitalized Lease Liabilities" shall mean, with respect to any Person, all monetary obligations of such Person under any leasing or similar arrangement which, in accordance with GAAP, would be classified as a capitalized lease, and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP, and the stated maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. "Cash Equivalents" shall mean (a) securities with maturities of three (3) months or less from the date of acquisition issued and fully guaranteed or insured by the United States Government or any agency thereof, (b) certificates of deposit, eurodollar time deposits, overnight bank deposits, bankers' acceptances and repurchase agreements of any Lender or any other commercial bank organized under the laws of the United States or any state thereof having capital and surplus and undivided profits aggregating at least $250,000,000 and whose unsecured long-term debt obligations are rated at least A-1 by S&P or A3 by Moody's having maturities of three (3) months or less from the date of acquisition, and (c) commercial paper rated at least A-1 by S&P or P-1 by Moody's. "CEC Management" shall mean CEC Management, Inc., an Illinois corporation. "CERCLA" shall mean the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended. "CERCLIS" shall mean the Comprehensive Environmental Response Compensation Liability Information System List. "C.F.R." shall mean the Code of Federal Regulations. "Change in Control" shall mean the time at which (a) any Person (including a Person's Affiliates and associates) or group (as that term is understood under Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder), other than the Control Group, has become the beneficial owner of a percentage (based on voting power, in the event different classes of stock shall have different voting powers) of the voting stock of the Borrower greater than twenty-five percent (25%), (b) the Control Group no longer has the -5- ability to control the appointment or election of a majority of the directors of the Borrower, (c) there shall occur a sale by Heller of more than fifty percent (50%) of its capital stock of the Borrower held on the Closing Date (after giving effect to the Equity Purchase Transaction), (d) there shall be consummated any consolidation or merger of the Borrower or any of its Subsidiaries pursuant to which the Borrower's or such Subsidiary's common stock (or other capital stock) would be converted into cash, securities or other property, other than a merger or consolidation of the Borrower or such Subsidiary in which the holders of such common stock (or such other capital stock) immediately prior to the merger have the same proportionate ownership, directly or indirectly, of common stock of the surviving corporation immediately after the merger as they had of the Borrower's or such Subsidiary's common stock immediately prior to such merger, (e) all or substantially all of the Borrower's or any of its Subsidiary's assets shall be sold, leased, conveyed or otherwise disposed of as an entirety or substantially as an entirety to any Person (including an Affiliate or associate of the Borrower or its Subsidiaries) in one or a series of transactions, (f) Jack M. Larson shall cease to perform his duties as President and CEO of the Borrower, unless within one hundred and twenty (120) days thereafter, a replacement for him acceptable to the Agent (in its reasonable judgment) is found, unless the Borrower is diligently pursuing appointment of a replacement chief executive officer, but in any event such replacement is appointed within 150 days, or (g) the Borrower ceases to own free and clear of all Liens (other than Permitted Liens), at least 100% of the outstanding shares of voting stock of any of its Subsidiaries existing on the Closing Date on a fully diluted basis and, with respect to any Subsidiary created or acquired after the Closing Date, at least 66-2/3% of the outstanding shares of voting stock of such Subsidiary on a fully diluted basis, except in connection with a disposition permitted by Section 11.3. ------------ "Charges" - see Section 6.9. ----------- "Closing Date" shall mean the date that the initial Loans are made under this Agreement after satisfaction of the conditions precedent set forth in Section 13. - ---------- "Code" shall mean the Internal Revenue Code of 1986, as amended. "Collateral" shall mean all of the collateral security described or provided for in Section 8 together with all property and/or rights on or in --------- which a Lien is now or hereafter granted by any Person to the Agent (or to any agent, trustee or other party acting on behalf of the Agent), for the benefit of the Lenders, pursuant to the Security Agreement, the Borrower Trademark Security Agreement, the Borrower Pledge Agreement, the Gibbs -6- Pledge Agreement, the Fee Mortgages, the Collateral Assignment of Lease(s) or any other instruments or documents provided for herein or delivered hereunder or in connection herewith or therewith. "Collateral Assignment of Lease(s)" shall mean the Collateral Assignment of Leases, substantially in the form of Exhibit I, as the same may be amended or --------- modified from time to time. "Commitment Fee" - see Section 5.7(a). -------------- "Commitment Increase" - see Section 2.3. ----------- "Commitment Increase Closing Items" - see Section 2.3. ----------- "Commitment Increase Date" - see Section 2.3. ----------- "Commitments" - see Section 2.6. ----------- "Compliance Certificate" - see Section 10.1.4. -------------- "Compliance Reports" - see Section 9.27(f). --------------- "Consolidated Capital Expenditures" shall mean, for any period, the capital expenditures of the Borrower and its Subsidiaries for such period, as the same are (or would in accordance with GAAP be) set forth in the consolidated statement of changes in financial position of the Borrower and its Subsidiaries for such period, and including in any event the amount of any Investment during such period pursuant to Sections 11.6(d) and 11.6(e). ---------------- ------- "Consolidated EBITDA" shall mean, for any period, Consolidated Net Income for such period, plus (a) Consolidated Interest Expense for such period, plus (b) the aggregate amounts deducted in determining Consolidated Net Income in respect of (i) cash Income Taxes paid, (ii) depreciation and amortization, and (iii) interest income, less (c) any Non-Recurring Items. "Consolidated Interest Expense" shall mean, for any period, the aggregate interest expense (net of interest income) of the Borrower and its Subsidiaries for such period including, without limitation, (a) the portion of any obligation under Capital Leases allocable to interest expense in accordance with GAAP, and (b) the portion of any debt discount that shall be amortized in such period. "Consolidated Net Income" shall mean, for any period, the consolidated net income (or loss) of the Borrower and its Subsidiaries for such period. "Consolidated Tangible Net Worth" shall mean the consolidated -7- net worth of the Borrower and its Subsidiaries after subtracting therefrom the aggregate amount of any assets of the Borrower and its Subsidiaries, constituting goodwill, franchises, licenses, patents, trademarks, trade names, copyrights, service marks, brand names and any other general intangibles as defined in GAAP. "Contingent Obligation" shall mean any agreement, undertaking or arrangement by which any Person guarantees, endorses or otherwise becomes or is contingently liable upon (by direct or indirect agreement, contingent or otherwise, to provide funds for payment, to supply funds to, or otherwise to invest in, a debtor, or otherwise to assure a creditor against loss) the debt, obligation or other liability of any other Person (other than by endorsements of instruments in the course of collection), or guarantees the payment of dividends or other distributions upon the shares of any other Person. The amount of any Person's obligation under any Contingent Obligation shall (subject to any limitation set forth therein) be deemed to be the outstanding principal amount (or maximum outstanding principal amount, if larger) of the debt, obligation or other liability guaranteed thereby. "Continuation/Conversion Notice" - see Section 3.5. ----------- "Control Group" shall mean, the Borrower, the Management Stockholders, Heller, Electra and Affiliates thereof. "Controlled Group" shall mean all members of a controlled group of corporations and all members of a controlled group of trades or businesses (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under section 414(b) or section 414(c) of the Code or section 4001 of ERISA. For purposes of this definition, the term Borrower shall be deemed to include any and all Subsidiaries of the Borrower. "Default" shall mean any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Disposition" - see Section 6.4(b). -------------- "DOE" shall mean the United States Department of Education and any successor agency administering federal student financial assistance under Title IV. "Dollars" and the sign "$" shall mean lawful money of the United States of America. "EAI" shall mean Electra Associates, Inc., a Delaware -8- corporation. "Educational Institution" shall mean each of the Subsidiaries of the Borrower (other than CEC Management, IAMD Acquisition and Market Direct) and any other Acquired Person acquired after the Effective Date pursuant to a Permitted Acquisition, in each case, which constitutes an Eligible Facility and satisfies clauses (c)-(e) of the definition of Permitted Acquisition. - --------------- "Effective Date" shall mean the date of this Agreement as set forth in the Preamble. "EIT" shall mean Electra Investment Trust P.L.C., a corporation formed under the laws of England and Wales. "Electra" shall mean, collectively, EIT and EAI. "Electra Permitted Cash Dividends" shall mean scheduled cash dividends required to be paid by the Borrower to Electra with respect to the Borrower's Series C Preferred Stock in an amount not to exceed $500,000 per year or such lesser proportionate amount reflecting any reduction in the number of shares of the Borrower's Series C Preferred Stock owned by Electra after the Closing Date. "Eligible Assignee" shall mean any bank (including, without limitation, any Federal Reserve Bank), insurance company, pension fund, mutual fund, investment fund, other financial institution. "Eligible Facility" shall mean a vocational or similar educational institution. "Environmental Laws" shall mean all federal, state or local laws, statutes, common law duties, rules, regulations, ordinances and codes, together with all administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authorities, in each case relating to environmental, health, safety and land use matters. "Equity Purchase Documents" shall mean, the stock purchase agreements, the subscription agreements, the stockholders' agreement(s), the registration rights agreements, the applicable certificate of designations, the stock certificates, the warrants, and the other agreements and instruments executed and delivered in connection with any Equity Purchase Transaction, as in effect on the Closing Date, or as the same may be amended or modified in accordance with the Agreement. "Equity Purchase Transaction" shall mean, collectively, (a) the purchase by certain stockholders of the Borrower of Series A Preferred Stock of the Borrower on January 31, 1994, (b) the -9- purchase by Heller of Series A Preferred Stock on June 20, 1994, (c) the purchase by Electra of shares of Series C Preferred Stock of the Borrower and the issuance of the warrants on July 31, 1995 pursuant to the applicable Equity Purchase Documents, (d) the purchase by Electra, Heller and certain other stockholders of the Borrower of shares of Series D Preferred Stock of the Borrower and the issuance of warrants on February 28, 1997 and (e) the purchase by Electra, Heller and certain other stockholders of the Borrower of shares of Series D Preferred Stock of the Borrower and the issuance of warrants on and/or after the Closing Date. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "Eurocurrency Reserve Percentage" shall mean, with respect to any LIBOR Rate Loan for any Interest Period, a percentage (expressed as a decimal) equal to the daily average during such Interest Period, as prescribed by the Federal Reserve Board, for determining the aggregate maximum reserve requirements (including all basic, supplemental, marginal and other reserves) applicable to "Eurocurrency liabilities" pursuant to Regulation D or any other then-applicable regulation of the Federal Reserve Board which prescribes reserve requirements applicable to "Eurocurrency liabilities," as defined in Regulation D, as applicable to the class of banks of which the Agent is a member. Without limiting the effect of the foregoing, the Eurocurrency Reserve Percentage shall reflect any other reserves required to be maintained by the Agent against (a) any category of liabilities that includes deposits by reference to which the LIBOR Rate (Reserve Adjusted) is to be determined, or (b) any category of extensions of credit or other assets that includes LIBOR Rate Loans. For purposes of this Agreement, any LIBOR Rate Loan hereunder shall be deemed to be "Eurocurrency liabilities," as defined in Regulation D, and, as such, shall be deemed to be subject to such reserve requirements without the benefit of, or credit for, proration, exceptions or offsets which may be available to the Agent from time to time under Regulation D. "Event of Default" shall mean any of the events described in Section 14.1. ------------ "Excess Cash Flow" shall mean, with respect to any period, (a) Consolidated EBITDA for such period, less (b) the sum of (i) Consolidated Interest Expense, (ii) the current portion of any principal or interest paid under this Agreement during such period, (iii) cash Taxes paid during such period, (iv) Consolidated Capital Expenditures made during such period and (v) Electra Permitted Cash Dividends. "Federal Funds Rate" shall mean, for any day, the rate set forth in the weekly statistical release designated as H.15(519), -10- or any successor publication, published by the Federal Reserve Bank of New York (including any such successor, "H.15(519)") on the preceding Business Day opposite the caption "Federal Funds (Effective)"; or, if for any relevant day such rate is not so published on any such preceding Business Day, the rate for such day will be the arithmetic mean as determined by the Agent of the rates for the last transaction in overnight Federal funds arranged prior to 9:00 a.m. (New York City time) on that day by each of three leading brokers of Federal funds transactions in New York City selected by the Agent. "Fee Letter" - see Section 5.7(d). -------------- "Fee Mortgages" shall mean the Fee Mortgages granted from time to time by the Borrower or its Subsidiaries to the Agent to secure the Loans in form and substance reasonably satisfactory to the Agent in its sole discretion, as the same may be amended or supplemented from time to time in whole or in part. "Fiscal Quarter" or "FQ" shall mean any fiscal quarter of a Fiscal Year. "Fiscal Year" or "FY" shall mean any period of twelve consecutive calendar months ending on December 31; references to a Fiscal Year with a number corresponding to any calendar year (e.g., the "1996 Fiscal Year") refer to the Fiscal Year ending on the December 31 occurring during such calendar year. "Fixed Charge Coverage Ratio" shall mean, with respect to any period, the ratio of (a) the sum of (i) Consolidated EBITDA for such period, plus (ii) expenses paid by the Borrower and its Subsidiaries with respect to operating leases during such period, plus (iii) Electra Permitted Cash Dividends paid during such period, minus (iv) to the extent permitted by this Agreement, Capital Expenditures made during such period, to (b) the sum of (i) scheduled principal and interest payments on the Senior Funded Debt during such Period, plus (ii) Consolidated Interest Expense during such period, plus (iii) expenses paid by the Borrower and its Subsidiaries with respect to operating leases during such period. "Funded Debt to Consolidated EBITDA Ratio" shall mean the ratio of Senior Funded Debt to Consolidated EBITDA. "GAAP" - see Section 1.3. ----------- "Gibbs" - see the first recital. "Gibbs Acquisition Agreement" - see the first recital. "Gibbs Pledge Agreement" - see Section 8.1. ----------- -11- "Guarantor" shall mean collectively, (or individually each a "Guarantor") Al Collins Graphic Design School, Ltd., Brooks College, Ltd., Allentown Business School, Ltd., Brown Institute, Ltd., Western Culinary Institute, Ltd., School of Computer Technology, Inc., IAMD Acquisition, Gibbs, each a Delaware corporation, Market Direct, CEC Management and any other Subsidiary of the Borrower that becomes a guarantor pursuant to Section 11.11. ------------- "Hazardous Material" shall mean: (a) any "hazardous substance," as defined by CERCLA; (b) any "hazardous waste," as defined by the Resource Conservation and Recovery Act, as amended; (c) any petroleum product; or (d) any pollutant or contaminant or hazardous, dangerous or toxic chemical, material or substance within the meaning of any other applicable federal, state or local law, regulation, ordinance or requirement (including consent decrees and administrative orders) relating to or imposing liability or standards of conduct concerning any hazardous, toxic or dangerous waste, substance or material, all as amended or hereafter amended. "Hedging Obligations" shall mean, with respect to any Person, all liabilities of such Person under interest rate swap agreements, interest rate cap agreements and interest rate collar agreements or agreements designed to protect such Person against fluctuations in interest rates or currency exchange rates. "Heller" shall mean Heller Equity Capital Corporation, a Delaware corporation and its Affiliates. "IAMD Acquisition" - see the second recital. "IAMD Acquisition Agreements" - see the second recital. "IAMD (Canada)" - see the second recital. "IAMD (Canada) Acquisition Agreement" - see the second recital. "IAMD (U.S.)" - see the second recital. "IAMD (U.S.) Acquisition Agreement" - see the second recital. "Income Taxes" shall mean, with respect to any Person, any Taxes in which the base is measured by net income of such Person. "Indebtedness" shall mean, with respect to any Person at any date, without duplication: (a) all obligations of such Person for borrowed money or in respect of loans or advances; (b) all obligations of such Person evidenced by bonds, debentures, notes -12- or other similar instruments including, without limitation, all obligations comprising Subordinated Debt of such Person; (c) all obligations in respect of letters of credit, whether or not drawn, and bankers' acceptances issued for the account of such Person; (d) all Capitalized Lease Liabilities of such Person; (e) all Hedging Obligations of such Person; (f) all obligations of such Person secured by a contractual lien; (g) all trade payables of such Person; (h) all obligations of such Person with respect to operating leases; (i) all other items (exclusive of negative goodwill) which, in accordance with GAAP, would be included as liabilities on the liability side of the balance sheet of such Person; (j) whether or not so included as liabilities in accordance with GAAP, all obligations of such Person to pay the deferred purchase price of property or services and Indebtedness secured by a Lien on property owned or being purchased by such Person (including Indebtedness arising under conditional sales or other title retention agreements) whether or not such Indebtedness shall have been assumed by such Person or is limited in recourse; and (k) and all Contingent Obligations of such Person whether or not in connection with the foregoing. "Indebtedness to be Refinanced" shall mean, collectively, (a) all Indebtedness of the Borrower under the Provident Bank Credit Agreement in an aggregate amount of $17,305,506.81, and (b) upon consummation of the IAMD (U.S.) and IAMD (Canada) acquisition, Indebtedness in an aggregate amount of $2,000,000 with the approval of the Agent. "Interest Coverage Ratio" shall mean, for any period, the ratio of Consolidated EBITDA for such period, to Consolidated Interest Expense for such period. "Interest Payment Date" shall mean, as to any LIBOR Rate Loan, the last day of each Interest Period applicable to such Loan and each date such Loan is converted into another Type of Loan and, as to any Base Rate Loan, the last Business Day of each Quarterly Payment Date; provided, however, that if any -------- ------- Interest Period for a LIBOR Rate Loan exceeds three (3) months, the date that falls three (3) months after the beginning of such Interest Period and after each Interest Payment Date thereafter is also an Interest Payment Date. "Interest Period" - see Section 5.4. ----------- "Investment" shall mean any investment in any Person, whether by means of share purchase, capital contribution, loan, time deposit or otherwise. "LaSalle" shall mean LaSalle National Bank, a national banking association having its principal place of business at 135 South LaSalle Street, Chicago, Illinois 60603, in its individual -13- capacity. "LC Administrative Fees" - see Section 5.7(c). -------------- "LC Application" - see Section 4.1. ----------- "LC Commitment Fee" - see Section 5.7(b). -------------- "LC Commitments" - see Section 2.5. ----------- "LC Obligations" shall mean any and all obligations of every description of the Borrower in connection with the Letters of Credit issued pursuant to this Agreement, including without limitation all reimbursement obligations (whether absolute or contingent) under any LC Application, and all obligations in respect of related fees or expenses. "Lenders" or "Lender" - see Preamble. "Lending Office" shall mean, with respect to any Lender, any office designated by such Lender in its sole discretion beneath its signature hereto (or in an Assignment Agreement) or otherwise from time to time by written notice to the Borrower and the Agent, as a Lending Office for purposes hereunder. A Lender may designate separate Lending Offices for the purposes of making, maintaining or continuing Base Rate Loans or LIBOR Rate Loans and, with respect to LIBOR Rate Loans, such Lending Office may be a foreign branch or an Affiliate of such Lender or such Lender's holding company. "Letters of Credit" - see Section 2.5. ----------- "Leverage Ratio" shall mean, with respect to any period, the ratio of (a) the aggregate of all Senior Funded Debt of the Borrower and its Subsidiaries for such period, to (b) Consolidated EBITDA for such period. "Liabilities" shall mean all obligations of the Borrower and/or any of its Subsidiaries to the Lenders and the Agent howsoever created, arising or evidenced, whether direct or indirect, joint or several, absolute or contingent, or now or hereafter existing, or due or to become due, which arise out of or in connection with (a) this Agreement, the Notes, the Letters of Credit or the other Related Documents, or (b) any agreement entered into by the Borrower or any of its Subsidiaries with respect to any Hedging Obligation. "LIBOR Rate" shall mean, with respect to any LIBOR Rate Loan for any Interest Period, the rate per annum equal to the average (rounded upward, if necessary, to the next higher 1/16th of 1%) of the respective rates notified to the Agent by ABN AMRO as the rate -14- per annum at which Dollar deposits in immediately available funds are offered to the Lending Office of ABN AMRO used for quoting such LIBOR Rates two Business Days prior to the beginning of such Interest Period by prime banks in the London eurodollar market at their request at approximately 11:00 A.M. (London time), for delivery on the first day of such Interest Period, for the number of days comprised therein and in an amount equal or comparable to the amount of the LIBOR Rate Loan of the Agent for such Interest Period. "LIBOR Rate Loan" shall mean any Loan which bears interest at a rate determined by reference to the LIBOR Rate (Reserve Adjusted). "LIBOR Rate (Reserve Adjusted)" shall mean, with respect to any LIBOR Rate Loan for any Interest Period, a rate per annum (rounded upward, if necessary, to the nearest 1/16th of 1%) determined pursuant to the following formula: LIBOR Rate = LIBOR Rate ---------- (Reserve Adjusted) 1-Eurocurrency Reserve Percentage "Lien" shall mean any security interest, mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), claim or other priority or preferential arrangement of any kind or nature whatsoever. "Litigation" shall mean any litigation, proceeding (including without limitation any governmental proceeding or arbitration proceeding), claim, lawsuit, and/or investigation pending or threatened against or involving the Borrower or any of its Subsidiaries or any of its or their businesses or operations, or the Stock Purchase Transactions. "Loans" - see Section 2.6. ----------- "Management Stockholders" shall mean those stockholders of the Borrower or any of its Subsidiaries who are management employees of the Borrower. "Market Direct" shall mean Market Direct, Inc., an Illinois corporation. "Material Adverse Change" or "Material Adverse Effect" shall mean any change, event, action, condition or effect which individually or in the aggregate (a) impairs the validity or enforceability of this Agreement, or any Related Document, or (b) subjects any officer of the Borrower or any of its Subsidiaries to criminal liability, or (c) materially and adversely affects the consolidated business, operations, prospects or financial -15- condition of the Borrower or any of its Subsidiaries, taken as a whole, or (d) impairs the ability of the Borrower or any of its Subsidiaries to perform its respective obligations under this Agreement and the Related Documents, or (e) materially adversely affects the perfection or priority of any Lien granted under any Related Document. "Material Litigation" or "Material Litigation Development" shall mean any Litigation, or development in any Litigation, as the case may be (a) which involves the Stock Purchase Transactions (other than post-closing purchase price adjustments which could not have a Material Adverse Effect), this Agreement, any Related Document or other transactions contemplated hereby or thereby, or (b) which reasonably could have a Material Adverse Effect. "Moody's" shall mean Moody's Investors Service, Inc. "Net Proceeds" shall mean, with respect to the disposition of any asset by any Person, the aggregate amount of cash and readily marketable Cash Equivalents received by such Person in respect of such disposition minus the sum of (a) reasonable costs and expenses (including costs of discontinuance and Taxes other than Income Taxes) incurred in connection with such disposition and required to be paid in cash, (b) the estimated Income Tax to be paid by such Person in connection with such disposition. For purposes of this definition, and (c) any reserves required in accordance with GAAP relating to any liabilities assumed or incurred by the Borrower in connection with any transaction resulting in Net Proceeds under Section 6.4(b) or 6.4(c), the Net Proceeds received by any Person -------------- ------ in respect of any disposition shall include such Cash Equivalents as may be received ("subsequent cash proceeds") by such Person at any time or from time to time in connection with the sale, transfer, lease or other disposition, or otherwise in respect of, any consideration other than cash or readily marketable Cash Equivalents received by such Person in respect of such disposition, less the estimated Taxes and Income Tax to be paid in connection with the receipt of such subsequent cash proceeds that were not theretofore deducted in computing Net Proceeds. "Non-Recurring Items" shall mean any of the following items of gain or loss to the extent reflected in the determination of Consolidated Net Income for any period: (a) extraordinary gains and losses under GAAP, and/or amortization of fees and expenses incurred in connection with the Transaction in an aggregate amount and (b) write-downs or write-offs of assets. "Notes" shall mean, collectively, the Term Notes and the Revolving Notes, together with any promissory note issued and accepted by any Lender in replacement of or substitution for any Term Note or Revolving Note. -16- "New Lender" - see Section 2.3. ----------- "Pension Plan" shall mean a "pension plan," as such term is defined in section 3(2) of ERISA (including a multiemployer plan as defined in section 4001(a)(3) of ERISA), to which the Borrower or any corporation, trade or business that is, along with the Borrower, a member of a Controlled Group, may have liability, including any liability by reason of having been a substantial employer within the meaning of section 4063 of ERISA at any time during the preceding six years, or by reason of being deemed to be a contributing sponsor under section 4069 of ERISA. For purposes of this definition, the term Borrower shall be deemed to include any and all Subsidiaries of the Borrower. "Percentage" shall mean, relative to any Lender, the percentage set forth opposite such Lender's name on Schedule 2.1 (or set forth in an Assignment ------------ Agreement), as such Percentage may be adjusted from time to time pursuant Section 2.3 or pursuant to Assignment Agreement(s) executed by such Lender and - ----------- its Eligible Assignee and delivered pursuant to Section 16.1. ------------ "Permitted Acquisition" shall mean an Acquisition on or after the Effective Date which meets all of the following requirements: (a) neither the Person being acquired nor its board of directors shall have (i) announced that it will oppose such Acquisition or (ii) commenced any litigation which alleges that such Acquisition or any other acquisition involving the Borrower or any of its Subsidiaries violates, or will violate, any applicable law; (b) the Person being acquired is an Eligible Facility or a holding company therefor and must demonstrate positive Consolidated EBITDA for the 12 month period immediately prior to the Acquisition; (c) prior to its Acquisition by the Borrower or any of its Subsidiaries, the Eligible Facility is and, subject to receipt of approval of the Acquisition by the DOE and/or each other applicable Accrediting Body, will be accredited by each applicable Accrediting Body, if any, and offers primarily associate and/or bachelor degree programs or certificate programs; (d) prior to its Acquisition by the Borrower or any of its Subsidiaries, the Eligible Facility, if applicable, is eligible, and after DOE review and approval of the change of control pursuant to the Acquisition, if applicable, will be eligible, for participation in Title IV Programs; -17- (e) the Acquisition of the Eligible Facility meets all conditions to change of ownership under Title IV, if applicable; (f) the Borrower shall have given the Agent and the Lenders at least 45 days prior notice of such Acquisition (it being understood that the Borrower and/or such Subsidiary making such Acquisition shall promptly provide such information as the Agent or any Lender may reasonably request regarding such Acquisition); (g) immediately prior to and after giving effect to such Acquisition (and the incurrence or assumption of any Indebtedness in connection therewith), the Borrower will be in pro forma compliance with each of the financial covenants set forth in Section 12, assuming for purposes of ---------- calculating Consolidated Net Income and related items, that such Acquisition had occurred one year prior to the last day of the most recently-ended Fiscal Quarter for which the Borrower has delivered financial statements pursuant to Section 10.1.1 or 10.1.2; ------ ------ (h) if the total consideration (including without limitation consideration in the form of cash, stock, assumed liabilities, non-compete payments or other payments), to be paid to acquire such Acquired Person is greater than or equal to $2,500,000, the Borrower shall have received the prior written consent of the Required Lenders; and (i) the Agent shall have received (and the Borrower or the applicable Subsidiary of the Borrower shall cause the duly authorized officers of such Acquired Person to duly execute and deliver to the Agent on behalf of such Acquired Person, to the extent applicable): (i) a guaranty agreement guaranteeing payment of the Liabilities; (ii) a security agreement granting to the Agent, for the benefit of the Lenders, a first priority perfected security interest in all presently owned and hereafter acquired tangible and intangible personal property (including, without limitation, all inventory, accounts, equipment, and general intangibles), fixtures and real estate (whether owned or leased) of such Acquired Person to secure payment of the Liabilities; (iii) a pledge agreement granting to the Agent, for the benefit of the Lenders, a first priority perfected pledge of all outstanding capital stock of such Acquired Person and all currently existing and hereafter created, acquired or organized Subsidiaries of such Acquired Person to secure payment of the Liabilities; (iv) mortgages (fee and/or leasehold), deeds of trust and any other documents necessary to grant in favor of the Agent, for the benefit of the Lenders, a first priority lien on any real estate (whether -18- owned or, if material and necessary to the business of such Acquired Person in the sole reasonable discretion of the Agent, leased) of such Acquired Person to secure payment of the Liabilities; and (v) any and all other agreements, financing statements, mortgages, deeds of trust and other documents necessary to create a first priority perfected security interest in favor of the Agent, for the benefit of the Lenders, in all presently owned and thereafter acquired tangible and intangible personal property (including without limitation all inventory, accounts, equipment and general intangibles), fixtures and real estate (whether owned or leased) of such Acquired Person. All guaranty agreements, security agreements, pledge agreements and such other documents shall be in the form prescribed by the Agent and acceptable to the Required Lenders. "Permitted Liens" - see Section 11.2. ------------ "Person" shall mean an individual, a corporation, a partnership, a sole proprietorship, a limited liability company or partnership, a joint venture, an association, a trust or any other entity or organization, including a government (whether federal, state, county, city, municipal or otherwise, including without limitation, any political subdivision or an agency or instrumentality thereof). "Post-Closing Agreement" shall mean the Post-Closing Agreement in the form of Exhibit Y attached hereto, as the same may be amended or modified. --------- "Process Agent" - see Section 17.11. ------------- "Qualification" shall mean, with respect to any certificate covering financial statements, a qualification to such certificate (such as a "subject to" or "except for" statement therein) (a) resulting from a limitation on the scope of examination of such financial statements or the underlying data, (b) as to the capability of the Person whose financial statements are certified to continue operations as a going concern, or (c) which could be eliminated by changes in financial statements or notes thereto covered by such certificate (such as by the creation of or increase in a reserve or a decrease in the carrying value of assets) and which if so eliminated by the making of any such change and after giving effect thereto would occasion a Default; provided that -------- ---- neither of the following shall constitute a Qualification: (i) a consistency exception relating to a change in accounting principles with which the independent public accountants for the Person whose financial statements are being certified have concurred, or (ii) a qualification relating to the outcome or disposition of threatened Litigation, pending Litigation being contested in good faith, pending or threatened -19- claims or contingencies which cannot be determined with sufficient certainty to permit such financial statements to be qualified. "Provident Bank Credit Agreement" shall mean that certain Credit Agreement dated as of July 31, 1995, as amended, waived or modified, by and among the Borrower, as the borrower, Al Collins Graphic Design, Ltd., Brooks College, Ltd., BI Acquisition, Ltd., CEC Management as subsidiaries, The Provident Bank, as agent, and the various lenders party thereto, as amended or modified as of the date hereof. "Quarterly Payment Date" shall mean the last day of each March, June, September and December or, if any such day is not a Business Day, the next succeeding Business Day. "Related Documents" shall mean the Notes, the LC Applications, the Letters of Credit, the Security Agreement, the Borrower Trademark Security Agreement, the Subsidiary Guaranty, the Fee Mortgages, the Collateral Assignment of Lease(s), the Borrower Pledge Agreement, the Gibbs Pledge Agreement, the Subordination Agreement and any and all other documents or instruments furnished or required to be furnished pursuant to Section 8 or Section 13, as the same may --------- ---------- be amended or modified from time to time in whole or in part. "Release" shall mean a "release," as such term is defined in CERCLA. "Reportable Event" shall have the meaning assigned to such term in ERISA. "Required Lenders" shall mean Lenders having at least 66-2/3% or more of the Commitments, or if the Commitments have terminated or expired, 66-2/3% of the aggregate Loans and LC Obligations outstanding at such time. "Responsible Officer" shall mean, in the case of the Borrower or any of its Subsidiaries, any of the following officers of such Person: the president, the chief financial officer, the secretary, the treasurer or any vice president. If any of the titles of the preceding officers are changed after the date hereof, the term "Responsible Officer" shall thereafter mean any officer performing substantially the same functions as are presently performed by one or more of the officers listed in the first sentence of this definition. "Revolving Loan(s)" - see Section 2.2. ----------- "Revolving Loan Commitment(s)" - see Section 2.2. ----------- "Revolving Note" shall mean a promissory note, substantially -20- in the form of Exhibit B with blanks appropriately completed in conformity --------- herewith, evidencing the Revolving Loans of any Lender. "Revolving Loan Termination Date" shall mean the earlier of (a) May 30, 2002, or (b) the date of termination in whole of the Revolving Loan Commitments pursuant to Sections 6.1, 6.2 and/or 14.2. ------------ --- ---- "S&P" shall mean Standard & Poor's, a Division of the McGraw Hill Companies. "Security Agreement" - see Section 8.1. ----------- "Senior Funded Debt" shall mean Indebtedness as set forth in clauses (a)- ----------- (e) of the definition of Indebtedness. - --- "Solvent", as to any Person on a particular date, shall mean that on such date (a) the fair value of the property of such Person is greater than the total amount of liabilities, including, without limitation, contingent liabilities, of such Person, (b) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liabilities of such Person on its debts as they become absolute and matured, (c) such Person is able to realize upon its assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (d) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature, and (e) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's property would constitute unreasonably small capital after giving due consideration to the prevailing practice in the industry in which such Person is engaged. In computing the amount of any contingent liability at any time, it is intended that such liability will be computed at the amount which, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "Step-up Lender" - see Section 2.3. ----------- "Stock Purchase Transactions" - see third recital. "Subordinated Debt" shall mean Indebtedness having payment terms and other terms, and subordinated in form and substance, satisfactory to the Required Lenders. "Subordination Agreement" shall mean a subordination agreement among the Agent, Heller and Electra substantially the form of Exhibit M. --------- -21- "Subsidiary" shall mean, as to any Person, any corporation, partnership, limited liability company, limited liability partnership, joint venture, trust, association or other unincorporated organization (other than a limited partnership in which such Person acts solely as a limited partner) of which or in which such Person and such Person's Subsidiaries own directly or indirectly an aggregate of more than 50% of (a) the combined voting power of all classes of stock having general voting power under ordinary circumstances to elect a majority of the board of directors, if it is a corporation, (b) the capital interest or partnership interest, if it is a partnership, joint venture or similar entity, or (c) the beneficial interest, if it is a trust, association or other unincorporated organization. "Subsidiary Guaranty" - see Section 8.1 ----------- "Taxes" shall mean all taxes of any nature whatsoever and however denominated, including, without limitation, excise, import, governmental fees, duties and all other charges, as well as additions to tax, penalties and interest thereon, imposed by any government or instrumentality, whether federal, state, local, foreign or other. "Term Loan Commitments" - see Section 2.1. ----------- "Term Loan Termination Date" shall mean the earlier of (a) May 30, 2002, or (b) the date of termination in whole of the Term Loan Commitments pursuant to Sections 6.1, 6.2, 6.4 and/or 14.2. - ------------ --- --- ---- "Term Loans" - see Section 2.1. ----------- "Term Note" shall mean a promissory note, substantially in the form of Exhibit A with blanks appropriately completed in conformity herewith, evidencing - --------- the Term Loans of any Lender. "Title IV" shall mean Chapter 28, Subchapter IV of the Higher Education Act of 1965, as amended, 20 U.S.C.A. (S)1070, and any amendments or successor statutes thereto. "Title IV Programs" shall mean the Title IV Programs as defined in Section 668.1(c) of 34 C.F.R. "Transferee" - see Section 16.3. ------------ "Type of Loan or Borrowing" - see Section 3.1. The various Types of Loans ----------- or Borrowings under this Agreement are as follows: Base Rate Loans or Borrowings and LIBOR Rate Loans or Borrowings. "UCC" shall mean the Uniform Commercial Code or comparable statute or any successor statutes thereto, as in effect from time -22- to time in the relevant jurisdiction. "Welfare Plan" shall mean a "welfare plan," as such term is defined in section 3(1) of ERISA. SECTION 1.2 Other Definitional Provisions. ----------------------------- (a) All terms defined in this Agreement shall have the above- defined meanings when used in any Related Document, or any certificate, report or other document made or delivered pursuant to this Agreement, unless the context therein shall clearly otherwise require. (b) The words "hereof," "herein," "hereunder" and similar terms when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. (c) The words "amended or modified" when used in this Agreement or any Related Document shall mean with respect to this Agreement or any Related Document such document as from time to time, in whole or in part, amended, modified, supplemented, restated, refinanced, refunded or renewed. (d) In the computation of periods of time in this Agreement from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding." (e) This Agreement and the Related Documents are the result of negotiations among and have been reviewed by counsel to the Agent, the Borrower and its Subsidiaries and the other parties, and are the products of all such Persons. Accordingly, they shall not be construed against the Agent or the Lenders merely because of the Agent's or Lenders' involvement in their preparation. SECTION 1.3 Accounting and Financial Determinations. For purposes of --------------------------------------- this Agreement, unless otherwise specified, all accounting terms used herein or in any Related Document shall be interpreted, all accounting determinations and computations hereunder or thereunder shall be made, and all financial statements required to be delivered hereunder or thereunder shall be prepared in accordance with, those generally accepted accounting principles ("GAAP") applied in the preparation of the financial statements referred to in Section 9.6, as such ----------- principles are modified from time to time in order to comply with -23- DOE and Title IV standards of accounting; provided that prior to giving effect to any modification of such principles for purposes of this Agreement, Borrower agrees to negotiate in good faith any such changes to the financial covenants set forth in Section 12 and the definitions related thereto to the extent the Agent deems necessary, in its sole discretion, so that such covenants reflect the financial condition of the Borrower and its Subsidiaries as nearly as possible to that provided by such covenants immediately prior to the proposed modification of such principles. SECTION 2. THE COMMITMENTS Subject to the terms and conditions of this Agreement and relying on the representations and warranties herein set forth: SECTION 2.1 Term Loan Commitment. Each of the Lenders, severally and for -------------------- itself alone, agrees to make a loan (herein collectively called "Term Loans" and individually called a "Term Loan") to the Borrower on or before the Term Loan Termination Date in such Lender's Percentage of such aggregate amount as the Borrower may request from all Lenders. Subject to Section 2.3, the aggregate ----------- principal amount of the Term Loan which any Lender shall be committed to make to the Borrower shall not exceed the amount with respect to Term Loans set opposite such Lender's name on Schedule 2.1 and the aggregate principal amount of the ------------ Term Loans which all Lenders shall be committed to make to the Borrower shall not exceed $12,500,000. Each Lender's Term Loan shall be disbursed in a single takedown as of the borrowing date of the initial Term Loan. Once repaid no Term Loan may thereafter be reborrowed. The foregoing commitment of each Lender is herein called its "Term Loan Commitment" and for all Lenders the "Term Loan Commitments." SECTION 2.2 Revolving Loan Commitment. Each of the Lenders, severally ------------------------- and for itself alone, agrees to make loans (herein collectively called "Revolving Loans" and individually called a "Revolving Loan") to the Borrower on a revolving basis from time to time before the Revolving Loan Termination Date in such Lender's Percentage of such aggregate amounts as the Borrower may from time to time request from all Lenders. Subject to Section 2.3, the aggregate ----------- principal amount of Revolving Loans which any Lender shall be committed to have outstanding to the Borrower, when added to the amount of such Lender's participation in the Letters of Credit issued and outstanding pursuant to Section 2.5 or drawn and not reimbursed pursuant to Section 4.10, shall not at - ----------- ------------ any one time exceed the amount with respect to Revolving Loans set opposite such Lender's name on Schedule 2.1 hereto. Subject to Section 2.3, the aggregate ------------ ----------- principal amount of Revolving Loans which all Lenders shall be committed to have outstanding hereunder to the Borrower, when added to the aggregate amount of Letters of -24- Credit issued and outstanding pursuant to Section 2.5 or drawn and not ----------- reimbursed pursuant to Section 4.10, shall not at any one time exceed ------------ $37,500,000. The foregoing commitment of each Lender is herein called its "Revolving Loan Commitment" and collectively the "Revolving Loan Commitments." SECTION 2.3 Increase of Commitments. The Borrower has requested that the ----------------------- aggregate Term Loan Commitments and Revolving Loan Commitments be increased pro rata by an aggregate maximum principal amount of $10,000,000 ($7,500,000 with respect to the Revolving Loan Commitments and $2,500,000 with respect to the Term Loan Commitments) (the amount of such increase called the "Commitment Increase"). For a period of 120 days after the Closing Date, the Agent shall use its best commercially reasonable efforts to syndicate the Commitment Increase through the increase of the Term Loan Commitments and Revolving Loan Commitments of Lenders (each such Lender which is willing to increase its Commitment being a "Step-up Lender") and/or by the addition of one or more new lenders agreed to by the Borrower whose approval shall not be unreasonably withheld or delayed (a "New Lender"). Any such Commitment Increase shall be effective as of the date the Agent completes such syndication, whereupon it shall promptly give written notice thereof to the Borrower, the Lenders, the Step-up Lenders and the New Lenders, as the case may be, and shall be effective as of the day after such notice is given (the "Commitment Increase Date"); provided, however, that: - -------- ------- ---- (a) such notice of Commitment Increase shall specify as to each Step- Up Lender and/or New Lender, the amount of the Commitment of such Lender after giving effect to such Commitment Increase; (b) it shall be in each Lender's sole discretion whether to increase its Commitment hereunder in connection with the proposed Commitment Increase; (c) the Borrower may not propose any more Commitment Increases other than the one reflected in the first sentence of this Section 2.3; ----------- (d) the minimum proposed Commitment Increase shall be $10,000,000; (e) in no event shall the aggregate Term Loan Commitments and Revolving Loan Commitments (after giving effect to such Commitment Increase) exceed $15,000,000 and $45,000,000, respectively; (f) no Commitment Increase shall be permitted at any time the Commitments shall have been reduced or terminated; and -25- (g) no Default or Event of Default shall have occurred and be continuing on such Commitment Increase Date. If by 10:00 A.M., Chicago time, on the proposed Commitment Increase Date, the Agent shall have received to the satisfaction of the Agent each of the following (the "Commitment Increase Closing Items"): (x) from each Step-Up Lender and/or New Lender, as applicable, a duly executed confirmation of Step-Up Commitment and/or New Lender Commitment, such confirmation to be substantially in the form of Exhibit W-1 or W-2, as ----------- --- applicable, and to be completed to reflect the amount of the Commitment of such Lender as specified in the Agent's notice of Commitment Increase, and (y) for each Step-up Lender and/or New Lender, as applicable, the items provided for in Section 13 as may be requested by such Lender ---------- including, in the case of a Step-up Lender, a replacement Note and, in the case of a New Lender, a new Note to reflect the principal amount of such Lenders increased or new Commitment, as the case may be, and applicable fees provided for in the Fee Letter. then the Commitment Increase specified by the Agent in its notice of Commitment Increase shall become effective on the Commitment Increase Date, whereupon each New Lender (if any) shall automatically become a party to this Agreement, be bound by the provisions hereof and be included in the definition of "Lender" and "Lenders" hereunder. Upon the effectiveness of such Commitment Increase, the Agent shall promptly notify the Lenders (including any New Lenders) and the Borrower of the occurrence of such Commitment Increase, and the Agent shall promptly distribute a revised Schedule 2.1 giving effect to such Commitment ------------ Increase. In the event that by 10:00 A.M., Chicago time, on the Commitment Increase Date the Agent shall not have received from the Borrower or any of its Subsidiaries each of the Commitment Increase Closing Items required to be provided by the Borrower or any of its Subsidiaries, or the Borrower by notice to the Agent prior to the Commitment Increase Date shall have withdrawn its notice of Commitment Increase, then the Borrower's notice of Commitment Increase shall be deemed to have been rescinded, whereupon any Commitment Increase Closing Items delivered to the Agent in respect thereof shall be deemed to be of no effect and all the rights and obligations of the parties shall continue as if no such notice had been given (it being understood that the Borrower may not thereafter propose any Commitment Increase). SECTION 2.4 Automatic Reduction of Revolving Loan Commitments. The ------------------------------------------------- aggregate amount of the Revolving Loan -26- Commitment shall automatically and permanently be reduced by $5,000,000 on the fourth anniversary of the Closing Date. The Borrower agrees to make any payment required under Section 6.4(a) in connection with any such reduction. -------------- SECTION 2.5 LC Commitment. LaSalle, as Agent, agrees for itself and the ------------- Lenders to issue from time to time before the Revolving Loan Termination Date such standby letters of credit (such letters of credit being herein collectively called "Letters of Credit" and individually a "Letter of Credit") as the Borrower or any Guarantor may request, it being understood that, pursuant to Section 4.3, concurrently with the issuance of each such Letter of Credit, each - ----------- Lender shall be deemed to have automatically purchased from the Agent a participation in such Letter of Credit. The aggregate amount of all Letters of Credit issued and outstanding pursuant to this Section 2.5 or drawn and not ----------- reimbursed pursuant to Section 4.10 shall not at any one time exceed $10,000,000 ------------ (or such reduced amount as may be fixed by the Borrower pursuant to Section ------- 6.2). The foregoing commitment of each Lender is herein called its "LC - ---- Commitment" and collectively the "LC Commitments." SECTION 2.6 Commitments and Other Terms. The Term Loans and the --------------------------- Revolving Loans are herein sometimes individually called a "Loan" and collectively called "Loans." The Term Loan Commitments, the Revolving Loan Commitments, and the LC Commitments are herein sometimes collectively called the "Commitments" and individually as to each Lender called a "Commitment." SECTION 3. THE LOANS SECTION 3.1 Various Types of Loans. Each Loan shall be either a Base ---------------------- Rate Loan or a LIBOR Rate Loan (each being herein called a "Type" of Loan) as the Borrower shall specify in the related Borrowing Request or Continuation/Conversion Notice pursuant to Section 3.2 or Section 3.5. Base ----------- ----------- Rate Loans and LIBOR Rate Loans may be outstanding at the same time, provided that (a) in the case of LIBOR Rate Loans, not more than five different Interest Periods shall be outstanding at any one time for all such Loans, and (b) the Borrower shall specify Loans and Interest Periods such that no payment or prepayment of any principal on any Loan shall result in a break-up of any Interest Period. SECTION 3.2 Notice of Borrowing. The Borrower shall give an irrevocable ------------------- notice (herein called a "Borrowing Request") to the Agent of each proposed Borrowing by 10:00 A.M., Chicago time, in the case of a Base Rate Borrowing, on the proposed date of such Borrowing, and in the case of a LIBOR Rate Borrowing, at least three (3) Business Days' prior to the proposed date of such -27- Borrowing. Each Borrowing Request shall be effective upon receipt by the Agent, shall be in writing (or by telephone to be promptly confirmed in writing) by the Borrower, substantially in the form of Exhibit C, and shall specify the date, --------- amount and Type of Borrowing, and in the case of a LIBOR Rate Borrowing, the initial Interest Period for such Borrowing. Notwithstanding the foregoing, the Borrower may revoke any Borrowing Request prior to the funding of the Borrowing so requested; provided that Borrower shall pay all reasonable costs incurred by the Lenders as a result thereof, on demand of the Agent or such Lender (together with a written calculation in reasonable detail showing such costs). SECTION 3.3 Funding. Promptly upon receipt of a Borrowing Request, the ------- Agent shall advise each Lender thereof. Not later than 2:00 P.M., Chicago time, on the date of a proposed Borrowing, each Lender shall provide the Agent at the Office of the Agent in Chicago with immediately available funds covering such Lender's Percentage of the Borrowing, and subject to receipt by the Agent of the documents required under Section 13 with respect to such Borrowing, the Agent ---------- shall pay over such funds to the Borrower on the requested Borrowing date. Each Borrowing involving Loans of the same Type shall be on a Business Day and, in the case of Base Rate Loans, shall be in an aggregate principal amount of at least $1,000,000 or any larger integral multiple of $250,000 in excess thereof and, in the case of LIBOR Rate Loans shall be in an aggregate amount of at least $2,500,000 or any larger integral multiple of $500,000 in excess thereof. All Borrowings shall be pro rata among the Lenders in accordance with their respective Commitments. SECTION 3.4 Funding Reliance. Unless the Agent shall have been notified ---------------- by telephone, confirmed in writing, by any Lender by 2:00 P.M., Chicago time, on the day of the proposed Borrowing that such Lender will not make available the amount which would constitute its Percentage of such Borrowing on the date specified therefor, the Agent may assume, subject to the satisfactory fulfillment by the Borrower of the conditions precedent set forth in Section 13, ---------- that such Lender has made such amount available to the Agent and, in reliance upon such assumption, make available to the Borrower a corresponding amount. If and to the extent that such Lender shall not have made such amount available to the Agent, such Lender and the Borrower severally agree to repay the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date the Agent made such amount available to the Borrower to the date such amount is repaid to the Agent, at the interest rate applicable at the time to Loans comprising such Borrowing. SECTION 3.5 Conversion and Continuation of Loans. The Borrower may, by ------------------------------------ delivery to the Agent of a Continuation/Conversion Notice (herein called a -28- "Continuation/Conversion Notice"), in the form of Exhibit D attached hereto with --------- appropriate insertions, before 10:00 A.M., Chicago time, three (3) Business Days prior to conversion or continuation, convert or continue Loans as follows: (a) convert Base Rate Loans into LIBOR Rate Loans, (b) convert LIBOR Rate Loans into Base Rate Loans, and (c) continue any such Loan into a subsequent Interest Period of the same duration or of any other duration permitted hereunder, subject to the following: (i) the Interest Period applicable to any LIBOR Rate Loan resulting from a conversion shall be specified by the Borrower in the Continuation/ Conversion Notice delivered pursuant to this Section; provided, however, that if no such Interest Period shall be specified, -------- ------- the Borrower shall be deemed to have selected an Interest Period of one month's duration. If the Borrower shall not have given timely notice to continue any Loan into a subsequent Interest Period and shall not otherwise have given notice to convert such Loan, such Loan, unless repaid pursuant to the terms hereof, shall automatically be converted into a Base Rate Loan; (ii) if less than all Loans at the time outstanding shall be converted or continued, such conversion or continuation shall be made pro rata among the Lenders, as applicable, in accordance with the respective principal amounts of Loans of such Type (and have the same Interest Period) held by such Lenders immediately prior to such conversion or continuation; (iii) in the case of a conversion or continuation of less than all Loans, the aggregate principal amount of such Loans converted or continued shall not be less than 2,500,000 or any larger integral multiple of $500,000 in excess thereof; (iv) if any LIBOR Rate Loan is converted at a time other than the last day of an Interest Period applicable thereto, the Borrower shall at the time of conversion pay any loss or expense (including, without limitation, breakage losses and expenses) associated therewith pursuant to Section 7.5; ----------- (v) any portion of a Loan maturing or required to be repaid in less than one month may not be converted into, or continued as, a LIBOR Rate Loan; (vi) any portion of a LIBOR Rate Loan required to be paid on any principal payment date occurring in less than one month after the end of the then-current -29- Interest Period applicable to such Loan shall be automatically converted at the end of such Interest Period into a Base Rate Loan; (vii) no Interest Period for any Term Loan shall extend beyond the Term Loan Termination Date and no Interest Period for any Revolving Loan shall extend beyond the Revolving Loan Termination Date; and (viii) no Interest Period applicable to a Term Loan or portion thereof shall extend beyond any date upon which is due any scheduled principal payment in respect of the Term Loans unless the aggregate principal amount of Term Loans represented by Base Rate Loans or LIBOR Rate Loans having Interest Periods that will expire on or before such date, equals or exceeds the amount of such principal payment. Notwithstanding the foregoing, so long as any Default shall exist, no Loans shall be converted to or continued as LIBOR Rate Loans. SECTION 3.6 Repayment of Term Loans; Notes. Subject to prepayment ------------------------------ pursuant to Section 6.4, the Term Loans of the Lenders shall be payable (and the ----------- Borrower agrees to pay such Term Loans) in equal principal installments of Six Hundred Twenty-Five Thousand Dollars ($625,000) on each Quarterly Payment Date, commencing on September 30, 1997; provided that such amount shall be increased to Seven Hundred Fifty Thousand Dollars ($750,000) (or such lesser porportionate amount to the extent the Term Loan Commitment is increased by an amount less than $2,500,000 on the Commitment Increase Date) after the Commitment Increase Date, and a final principal installment payable on the Term Loan Termination Date sufficient to pay the outstanding principal amount of the Term Loans in full. Subject to Section 2.3, the Term Loan of each Lender shall be evidenced ----------- by a Term Note payable to the order of such Lender in the original principal amount equal to such Lender's Term Loan Commitment (assuming for such purposes that the Commitment Increase Date has not occurred). SECTION 3.7 Repayment of Revolving Loans; Notes. The Revolving Loans of ----------------------------------- each Lender shall be payable (and the Borrower agrees to pay such Revolving Loans) on the Revolving Loan Termination Date. Subject to Section 2.3, the ----------- Revolving Loans of each Lender shall be evidenced by a Revolving Note, payable to the order of such Lender in the principal amount of the Revolving Loan Commitment of such Lender (or, if less, in the aggregate unpaid principal amount of all of such Lender's Revolving Loans hereunder outstanding on the Revolving Loan Termination Date). SECTION 3.8 Recordkeeping. Each Lender shall record in its records, or ------------- at its option on the schedule attached to its relevant -30- Note, the date and amount of each Loan made by such Lender, each repayment or conversion thereof, and in the case of each LIBOR Rate Loan the dates on which each Interest Period for such Loan shall begin and end. The information so recorded shall be conclusive absent manifest error. The failure to so record any such information or any error in so recording any such information shall not, however, limit or otherwise affect the obligations of the Borrower hereunder or under any Note to repay the principal amount of the Loans together with all interest accrued thereon. SECTION 4. THE LETTERS OF CREDIT SECTION 4.1 Request for Issuance of Letters of Credit. The Agent shall ----------------------------------------- receive from the Borrower or any Guarantor at least five (5) Business Days' prior written notice of a request for issuance of each Letter of Credit, each such request to be accompanied by an application substantially in the form of Exhibit E (an "LC Application") duly executed by the Borrower and in all - --------- respects in form and substance reasonably satisfactory to the Agent, together with such other documentation as the Agent may reasonably request in support thereof. The Agent shall promptly notify each Lender of any request from the Borrower that such Letter of Credit be issued. SECTION 4.2 Expiration and other Terms. Each Letter of Credit shall -------------------------- expire on or before the Revolving Loan Termination Date. SECTION 4.3 Participation. Concurrently with the issuance of each Letter ------------- of Credit, the Agent shall be deemed to have sold and transferred to each Lender, and each Lender shall be deemed irrevocably and unconditionally to have automatically purchased and received from the Agent, without recourse or warranty, an undivided interest and participation, to the extent of such Lender's Percentage, in such Letter of Credit and the Borrower's related LC Obligations and any security therefor. SECTION 4.4 Notification of Demand for Payment. The Agent shall promptly ---------------------------------- notify the Borrower and each Lender of the amount of each demand for payment under a Letter of Credit and of the date on which such payment is to be made. SECTION 4.5 Funding by Agent. With respect to each demand for payment ---------------- pursuant to a Letter of Credit, the Agent shall, promptly following its receipt thereof, examine all documents purporting to represent such demand to ascertain that the same appear on their face to be in conformity with the terms and conditions of such Letter of Credit. If the Agent determines (in accordance with the standards and practices applicable thereto) that a demand for payment under a Letter of Credit conforms to the -31- terms and conditions of such Letter of Credit, then the Agent shall make payment to the Beneficiary in accordance with the terms of such Letter of Credit. SECTION 4.6 Funding By Lenders. Not later than 11:00 A.M., Chicago time, ------------------ on each date on which payment is to be made under a Letter of Credit, each Lender shall make available to the Agent, in Dollars and in same day funds, such Lender's Percentage of the amount of such payment. If and to the extent any Lender shall not have made such amount available to the Agent on any such date, such Lender agrees (without limitation to any rights or remedies then available to any party with respect to such failure to make payments) to pay interest on such amount to the Agent for the account of the Agent forthwith on demand for each day from the date on which such payment was to be made to the date such amount is made available to the Agent. Such interest shall be determined at a rate per annum equal to the Federal Funds Rate from time to time in effect, based upon a year of 360 days. Any Lender's failure to make available to the Agent its Percentage of any payment under a Letter of Credit shall not relieve any other Lender of its obligation to make available to the Agent its Percentage of such payment on the date such payment is to be made, but no Lender shall be responsible for the failure of any other Lender to make available to the Agent such other Lender's Percentage of any such payment. SECTION 4.7 Non-Conforming Demand For Payment. If, after examination of --------------------------------- a demand for payment under a Letter of Credit, the Agent shall have determined that such demand does not conform to the terms and conditions of such Letter of Credit, then the Agent shall, as soon as reasonably practicable, give notice to the related Beneficiary and to the Borrower to the effect that demand was not in accordance with the terms and conditions of such Letter of Credit, stating the reasons therefor and that the relevant document is being held at the disposal of the Beneficiary or is being returned to the Beneficiary, as the Agent may elect. The Beneficiary may attempt to correct any such non-conforming demand for payment under such Letter of Credit if, and to the extent that, the Beneficiary is entitled (without regard to the provisions of this sentence) and able to do so. SECTION 4.8 Return of Funds Related to Non-Conforming Demand. If the ------------------------------------------------ Agent does not disburse funds to the Beneficiary for any reason after having received such funds from any Lender pursuant to Section 4.6, the Agent shall ----------- return such funds to such Lender on the next following Business Day together with interest on such funds from the date on which the Agent received such funds to the day on which the Agent so returns such funds at the Federal Funds Rate for each such day, based upon a year of 360 days. SECTION 4.9 Return of Letter of Credit. With respect to -------------------------- -32- each Letter of Credit, the Agent shall have the right; provided the Agent is not -------- then in default under such Letter of Credit by reason of its having wrongfully failed to honor a demand for payment previously made by the Beneficiary under such Letter of Credit, to require the Beneficiary to surrender such Letter of Credit to the Agent on the stated expiration date. The Borrower agrees, if necessary, to use its best efforts to cause the Beneficiary to surrender such Letter of Credit. SECTION 4.10 Reimbursement Agreement of the Borrower. The Borrower hereby --------------------------------------- unconditionally and irrevocably agrees to reimburse the Agent, immediately upon demand, for each payment made by the Agent in accordance herewith under a Letter of Credit honoring a demand for payment made by the Beneficiary thereunder, with interest on the amount so paid by the Agent from the date paid by the Agent to the date the Agent is reimbursed therefor, at a rate per annum equal to the Base Rate from time to time in effect (but not less than the Base Rate in effect on the date of such payment by the Agent) plus the Applicable Base Rate Margin. Interest shall be computed for the actual number of days elapsed on the basis of a year consisting of 360 days. Upon receipt of each payment under this Section ------- 4.10, the Agent shall promptly pay to each Lender which previously made the - ---- entire payment required under Section 4.6, in Dollars and in the kind of funds ----------- received, an amount equal to such Lender's Percentage of such payment. SECTION 4.11 Obligation to Reimburse for or Participate in Letter of ------------------------------------------------------- Credit Payments. The Borrower's obligation to reimburse the Agent for payments - --------------- made by the Agent under any Letter of Credit honoring a demand for payment by the Beneficiary thereunder, and each Lender's obligation to participate in and make available to the Agent its Percentage of such payments in accordance with this Agreement, shall be irrevocable, absolute and unconditional under any and all circumstances including, without limitation, any of the following circumstances: (a) any lack of legality, validity, regularity or enforceability of this Agreement, any Letter of Credit or any other Related Document; (b) the existence of any claim, setoff, defense or other right which the Borrower may have or have had at any time against any Beneficiary, the Agent, any Lender, any transferee of any Letter of Credit (or any Person for whom any such transferee may be acting) or any other Person, whether in connection with this Agreement, any Letter of Credit, any other Related Document, the transactions contemplated herein or therein or any unrelated transactions (including any underlying transaction between the Borrower and the Beneficiary of any Letter of Credit); -33- (c) any draft, certificate or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (d) the surrender or impairment of any security for the performance or observance of any of the terms of any of the Related Documents; (e) payment by the Agent under any Letter of Credit against presentation of a draft or certificate or other document that does not comply with the terms of such Letter of Credit; or (f) the occurrence of any Default or Event of Default; provided, however, that the Borrower shall not be obligated to reimburse the Agent for, and no Lender shall be obligated to participate in, any wrongful payment made by the Agent under any Letter of Credit as a result of acts or omissions constituting gross negligence or willful misconduct on the part of the Agent or any of its officers, employees or agents as finally judicially determined by a court of competent jurisdiction. SECTION 4.12 Mandatory Payment to Agent of LC Obligations. The Borrower -------------------------------------------- agrees that, on any termination of the LC Commitments pursuant to Section 6.2 or ----------- Section 14.2, it will pay to the Agent in Dollars and in same day funds an - ------------ amount equal to the principal amount of all LC Obligations under any LC Application, whether or not the related Letter of Credit has been drawn (which amount shall be retained by the Agent in a separate collateral account as security for the LC Obligations and the other Liabilities) plus the then aggregate accrued amount of unpaid fees arising under Sections 5.7(b) and --------------- 5.7(c). - ------ SECTION 5. INTEREST AND FEES, ETC. SECTION 5.1 Interest Rates. With respect to each Loan, the Borrower -------------- hereby promises to pay interest on the unpaid principal amount thereof for the period commencing on the date of such Loan until such Loan is paid in full, as follows: (a) At all times while such Loan is a Base Rate Loan, at a rate per annum equal to the Base Rate from time to time in effect, plus the Applicable Base Rate Margin (as hereinafter defined); and -34- (b) At all times while such Loan is a LIBOR Rate Loan, for each Interest Period, at a rate per annum equal to the LIBOR Rate (Reserve Adjusted) applicable to such Interest Period, plus the Applicable LIBOR Rate Margin, (as hereinafter defined). For purposes hereof, the Applicable Base Rate Margin and the Applicable LIBOR Rate Margin shall be determined based on the Funded Debt to Consolidated EBITDA Ratio as follows:
- -------------------------------------------------------------- Funded Debt to Applicable Base Applicable LIBOR Consolidated EBITDA Rate Margin Rate Margin Ratio - -------------------------------------------------------------- greater than .75% 2.00% 3.01:1.00 - -------------------------------------------------------------- 2.51:1.00 - .50% 1.75% 3.00:1.00 - -------------------------------------------------------------- 2.01:1.00 - .25% 1.50% 2.50:1.00 - -------------------------------------------------------------- less than 0% 1.25% 2.01:1.00 - --------------------------------------------------------------
Any adjustment in the Applicable Base Rate Margin or the Applicable LIBOR Rate Margin as a result of a change in the Funded Debt to Consolidated EBITDA Ratio shall be effective upon receipt by the Agent of a Compliance Certificate pursuant to Section 10.1.4 setting forth the calculation of the Funded Debt to -------------- Consolidated EBITDA Ratio and the financial statements required to be delivered in connection therewith; provided that, notwithstanding the foregoing, the -------- ---- Applicable Base Rate Margin and the Applicable LIBOR Rate Margin for the period commencing on the Closing Date through September 30, 1997 shall be .75% per annum and 2.00% per annum, respectively; and provided, further, that in no event -------- ------- ---- will the Applicable Base Rate Margin or the Applicable LIBOR Rate Margin be reduced at any time when a Default has occurred and is continuing. Any increase in the Applicable Base Rate Margin or the Applicable LIBOR Rate Margin shall be effective retroactively to the date that any Compliance Certificate should have been delivered to the Lenders pursuant to Section 10.1.4. -------------- SECTION 5.2 Default Interest Rate. Notwithstanding the provisions of --------------------- Section 5.1, in the event that any Default or Event of Default shall occur - ----------- hereunder, the Borrower hereby promises to pay interest on the unpaid principal amount of the Loans for the period commencing on the date of such Default or Event of Default until such Default or Event of Default is cured or waived by the Lenders in accordance with this Agreement at a rate per annum -35- equal to the applicable rate(s) otherwise in effect with respect to such Loans, plus 2.00% per annum. SECTION 5.3 Interest Payment Dates. Accrued interest on each Loan shall ---------------------- be payable on each Interest Payment Date and at maturity, commencing with the first of such dates to occur after the date hereof. After maturity, accrued interest on all Loans shall be payable on demand. SECTION 5.4 Interest Periods. Each "Interest Period" for a LIBOR Rate ---------------- Loan shall commence on the date such LIBOR Rate Loan was made, continued or converted from a Loan of a different Type, or on the expiration of the immediately preceding Interest Period for such LIBOR Rate Loan, and shall end on the date which is 1, 2, 3 or 6 months thereafter, as the Borrower may specify pursuant to Section 3.2 or Section 3.5 hereof. ----------- ----------- SECTION 5.5 Setting and Notice of Rates. The applicable LIBOR Rate --------------------------- (Reserve Adjusted) for each Interest Period shall be determined by the Agent, and notice thereof shall be given by the Agent promptly to the Borrower and each Lender. Each determination of the applicable LIBOR Rate (Reserve Adjusted) by the Agent shall be conclusive and binding upon the parties hereto, in the absence of manifest error. If ABN AMRO does not furnish a timely quotation, the provisions of Section 7.3 shall apply. If the Agent is unable to determine such ----------- a rate, the provisions of Section 7.2 shall apply. The Agent shall, upon ----------- written request of the Borrower or any Lender, deliver to the Borrower or such Lender a statement showing the computations used by the Agent in determining any applicable LIBOR Rate (Reserve Adjusted) hereunder. SECTION 5.6 Computation of Interest. Interest on all Loans and LC ----------------------- Obligations shall be computed for the actual number of days elapsed on the basis of a 360-day year. SECTION 5.7 Fees. The Borrower agrees to pay the following fees (all ---- such fees being non-refundable): (a) The Borrower agrees to pay to the Agent, for the account of each Lender, for the period (including any portion thereof when any of its Commitments are suspended by reason of the Borrower's inability to satisfy any condition of Section 13) commencing on the Effective Date ---------- and continuing to the Revolving Loan Termination Date, a commitment fee (the "Commitment Fee") at the rate set forth in Section 5.7(e) on -------------- such Lender's Percentage of the sum of the average daily unused portion of the Commitments. Such Commitment Fees shall be payable by the Borrower in arrears on each Quarterly Payment Date, commencing with the first -36- such Quarterly Payment Date following the Effective Date, and on the Revolving Loan Termination Date. (b) The Borrower agrees to pay to the Agent, for the account of each Lender, (i) a Commitment Fee for each Letter of Credit (the "LC Commitment Fee"), from the date of issuance thereof to the earlier to occur of the expiration or termination thereof or the date of payment by the Agent thereunder, at a rate per annum equal to the amount set forth in Section 5.7(e) of the aggregate outstanding undrawn amount of -------------- each such Letter of Credit, such fee to be payable in arrears on each Quarterly Payment Date (or at such other times as the Agent shall reasonably request, for any period prior to such date or time for which such Commitment Fee shall not have been theretofore paid). (c) The Borrower agrees to pay, such published fees and other amounts ("LC Administrative Fees") as the Agent shall customarily require in connection with the issuance, negotiation, processing and/or administration of Letters of Credit in similar situations, such fees to be in addition to the fees payable under the Fee Letter, with respect to the issuance and/or negotiation of each Letter of Credit. (d) The Borrower agrees to pay to the Agent, for its own account, the fees set forth in that certain fee letter, dated as of April 30, 1997 (the "Fee Letter") from the Agent addressed to and accepted by the Borrower, other than the fees otherwise expressly described herein. (e) For purposes hereof, the Commitment Fee and the LC Commitment Fee shall be determined based on the Funded Debt to Consolidated EBITDA Ratio as follows:
- ---------------------------------------------------------- Funded Debt to Applicable Applicable LC Consolidated EBITDA Commitment Fee Commitment Fee Ratio - ---------------------------------------------------------- greater than .375% 2.00% 3.01:1.00 - ---------------------------------------------------------- 2.51:1.00 - .25% 1.75% 3.00:1.00 - ---------------------------------------------------------- 2.01:1.00 - .25% 1.50% 2.50:1.00 - ---------------------------------------------------------- less than .25% 1.25% 2.01:1.00 - ----------------------------------------------------------
-37- Any adjustment in the Commitment Fee or the LC Commitment Fee as a result of a change in the Funded Debt to Consolidated EBITDA Ratio shall be effective upon receipt by the Agent of a Compliance Certificate pursuant to Section 10.1.4 -------------- setting forth the calculation of the Funded Debt to Consolidated EBITDA Ratio and the financial statements required to be delivered therewith; provided that, -------- ---- notwithstanding the foregoing, the Commitment Fee and the LC Commitment Fee for the period commencing on the Closing Date and September 30, 1997 thereafter shall be .25% per annum and 2.00% per annum, respectively; and provided, -------- further, that in no event will the Applicable Commitment Fee or the Applicable - ------- ---- LC Commitment Fee be reduced at any time when a Default has occurred and is continuing. Any increase in the Applicable Commitment Fee or the Applicable LC Commitment Fee shall be effective retroactively to the date that any Compliance Certificate should have been delivered to the Agent pursuant to Section 10.1.4. -------------- All such fees shall be computed for the actual number of days elapsed on the basis of a 360-day year without regard to any Default or Event of Default. SECTION 6. REDUCTION OR TERMINATION OF THE COMMITMENTS; PAYMENTS AND PREPAYMENTS SECTION 6.1 Voluntary Reduction or Termination of the Revolving Loan -------------------------------------------------------- Commitments. The Borrower may from time to time prior to the Revolving Loan - ----------- Termination Date on at least three (3) Business Days' prior written notice received by the Agent (which shall promptly advise each Lender thereof) permanently reduce the amount of the Revolving Loan Commitments (such reduction to be pro rata among the Lenders according to their respective Percentages) to an amount not less than the aggregate unpaid principal amount of the Revolving Loans then outstanding. Any such reduction shall be in an aggregate amount of $5,000,000 or an integral multiple of $1,000,000 in excess thereof. The Borrower may at any time on like notice from the Borrower prior to the Revolving Loan Termination Date terminate the Revolving Loan Commitments upon payment in full of the outstanding principal amount of the Revolving Loans and other obligations of the Borrower hereunder pertaining to the Revolving Loans. SECTION 6.2 Voluntary Reduction of the LC Commitments. The Borrower may, ----------------------------------------- from time to time on at least three (3) Business Days' prior written notice to the Agent, permanently reduce the amount of the LC Commitments to an amount not less than the maximum amount of the Letters of Credit then outstanding or drawn and not reimbursed. The Borrower may at any time on like notice terminate the LC Commitments upon payment to the Agent in accordance with Section 4.12 of all ------------ LC Obligations (whether -38- absolute or contingent) in connection with the Letters of Credit. SECTION 6.3 Voluntary Prepayments. The Borrower may from time to time --------------------- prepay the Loans in whole or in part, without premium or penalty; provided that -------- (a) the Borrower shall give the Agent (which shall promptly advise each Lender) not less than three (3) Business Days' prior notice thereof, specifying the Loans to be prepaid, and the date and amount of prepayment, (b) unless the fees and costs are paid pursuant to Section 7.5, LIBOR Rate Loans shall be prepaid ----------- only on the last day of the Interest Period relating thereto, (c) each partial prepayment shall be in a principal amount of $1,000,000, or an integral multiple $500,000 in excess thereof, (d) any prepayment of the principal amount of the Loans, or any portion thereof, shall include accrued interest to the date of prepayment, and (e) any prepayment of the Term Loans shall be applied to unpaid installments of the Term Loans in the inverse order of the maturity of such installments. SECTION 6.4 Mandatory Prepayments. The Borrower agrees to make mandatory --------------------- repayments of the Loans and LC Obligations as follows: (a) If, on any date, the aggregate unpaid principal amount of the Revolving Loans plus the aggregate amount of Letters of Credit issued and outstanding or drawn and not reimbursed shall exceed the aggregate Revolving Loan Commitments, the Borrower shall promptly repay the Revolving Loans and/or LC Obligations in an amount equal to such excess. (b) If, on any date, the Borrower or any of its Subsidiaries shall sell, assign, lease, transfer, contribute, convey or otherwise dispose of, or grant options, warrants or other rights with respect to, (any of the foregoing being a "Disposition") any of its assets, other than a Disposition permitted under Section 11.4 or a Disposition ------------ (or a portion of such a Disposition) in which the aggregate Net Proceeds received by the Borrower and its Subsidiaries during the Fiscal Year in which such Net Proceeds earned do not exceed $250,000 (together with Net Proceeds from all other Dispositions during such year which have not been applied as a prepayment pursuant to this Section 6.4(b)), the Borrower shall promptly notify the Agent of such -------------- Disposition, including the amount of Net Proceeds received by the Borrower or any Subsidiary of the Borrower in respect of such Disposition (and the amount and other type of consideration so received) and such Net Proceeds in excess of such $250,000 threshold shall be promptly applied to repay the principal installments of the Term Loans (together with any -39- interest accrued thereon) in the inverse order of maturities. To the extent the Net Proceeds of any such Disposition exceed the amount of the Term Loans then outstanding (together with any interest accrued thereon), or, at the time of such Disposition, the Term Loans shall have been paid in full, such Net Proceeds shall be applied to repay first, any Revolving Loans then outstanding (including interest accrued thereon), second, any LC Obligations then outstanding and due, and third, any remaining Liabilities then due; provided that no such payment with respect to Revolving Loans, LC Obligations and the remaining Liabilities (excluding Term Loans) shall reduce the Commitments. (c) If, on any date, the Borrower or any of its Subsidiaries shall sell, issue or grant options, contingent interest rights, warrants or other rights with respect to any of its equity or debt securities (any of the foregoing being a "Sale"), the Borrower shall promptly notify the Agent of such Sale, including the amount of Net Proceeds received by the Borrower or any such Subsidiary in respect of such Sale (and the amount and other type of consideration so received) and an amount equal to at least thirty-five percent (35%) of such Net Proceeds shall be promptly applied after the receipt from time to time of such Net Proceeds to repay outstanding principal of the Term Loans (together with any interest accrued thereon) in the inverse order of their maturities. To the extent the Net Proceeds of any such Sale exceed the amount of the Term Loans then outstanding (together with any interest accrued thereon), or, at the time of such Sale, the Term Loans shall have been paid in full, such Net Proceeds shall be applied to repay first, any Revolving Loans then outstanding (including interest accrued thereon), second, any LC Obligations then outstanding and due, and third, any remaining Liabilities then due; provided that no such payment with respect to Revolving Loans, LC Obligations and the remaining Liabilities (excluding Term Loans) shall reduce the Commitments. (d) Commencing April 15, 1999, and annually on such date thereafter, the Borrower agrees to repay the Term Loans in an amount equal to 50% of such Excess Cash Flow for the Fiscal Year most recently ended. Such repayment shall be applied to repay installments of the Term Loans (together with interest accrued) thereon in the inverse order of maturities. To the extent that the amount to be repaid exceeds the principal amount of Term Loans then outstanding (together with any unpaid interest accrued thereon) or, -40- at the time of such repayment, the Term Loans shall have been paid in full, the proceeds of such Excess Cash Flow shall be applied to repay first, any Revolving Loans then outstanding (including interest accrued thereon), second, any LC Obligations then outstanding and due, and third, any remaining Liabilities then due; provided that no such payment with respect to Revolving Loans, LC Obligations and the remaining Liabilities (excluding Term Loans) shall reduce the Commitments. SECTION 6.5 Making of Payments. Except as otherwise provided, all ------------------ payments (including those made pursuant to Section 5.7, Section 6.3 or Section ----------- ----------- ------- 6.4) in respect of the Loans or the Letters of Credit shall be made by the - --- Borrower to the Agent in immediately available funds for the account of the Lenders pro rata according to their respective Percentages of the unpaid principal amount of the Loans or LC Obligations held by them. All payments of fees pursuant to Section 5.7 (other than any such fee payable for the Agent's ----------- sole account) shall be made by the Borrower to the Agent for the account of the Lenders, pro rata according to their respective Percentages. All such payments shall be made to the Agent at its office in Chicago, not later than 12:30 P.M., Chicago time, on the date due, and funds received after that hour shall be deemed to have been received by the Agent on the next following Business Day. The Agent shall promptly remit to each Lender its pro rata share (based on its Percentage) of all such payments received in collected funds by the Agent for the account of such Lender. All payments under Sections 7.1, 7.2 and 7.5 shall ------------ --- --- be made by the Borrower directly to the Lender or Lenders entitled thereto. All payments under Sections 5.7(d) and 15.5 shall be made directly to, and for the --------------- ---- sole account of, the Agent. SECTION 6.6 Due Date Extension. If any payment provided for hereunder ------------------ falls due on a Saturday, Sunday or other day which is not a Business Day, then such due date shall be extended to the next following Business Day, and additional interest shall accrue and be payable for the period of such extension. SECTION 6.7 Sharing of Payments. (a) If any Lender shall obtain any ------------------- payment or other recovery (whether voluntary, involuntary, by application of offset or otherwise) on account of any Loan or LC Obligation (other than pursuant to the terms of Section 7) in excess of its pro rata share (based on --------- its Percentage) of payments and other recoveries obtained by all Lenders of Loans or LC Obligations on account of principal of and interest and fees with respect to Loans or reimbursement or fees with respect to LC Obligations then held by them, such Lender shall purchase from the other Lenders such participation in the Loans and LC Obligations held by them as shall be necessary to -41- cause such purchasing Lender to share the excess payment or other recovery ratably with each of them; provided, however, that if all or any portion of the -------- ------- excess payment or other recovery is thereafter recovered from such purchasing Lender, the purchase shall be rescinded and each Lender which has sold a participation to the purchasing Lender shall repay to the purchasing Lender the purchase price to the ratable extent of such recovery together with an amount equal to such selling Lender's ratable share (according to the proportion of (i) the amount of such selling Lender's required repayment to the purchasing Lender to (ii the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. (b) The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to Section 6.7(a) may, to the fullest extent permitted -------------- by law, exercise all its rights of payment (including pursuant to Section 6.8) ----------- with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation. If under any applicable bankruptcy, insolvency or other similar law, any Lender receives a secured claim in lieu of a setoff to which this Section applies, such Lender shall, to the extent practicable, exercise its rights in respect to such secured claim in a manner consistent with the rights of the Lenders entitled under this Section to share in the benefits of any recovery of such secured claim. SECTION 6.8 Setoff. Each Lender shall, upon the occurrence of any Event ------ of Default described in Section 14.1 or, with the consent of the Required ------------ Lenders, upon the occurrence of any other Event of Default, have the right to appropriate and apply to the payment of the Liabilities owing to it (whether or not then due), and (as security for such Liabilities) the Borrower hereby grants to each Lender a continuing security interest in, any and all balances, credits, deposits, accounts or moneys of the Borrower then or thereafter maintained with such Lender. Any such appropriation and application shall be subject to the provisions of Section 6.7. Each Lender agrees promptly to notify the Borrower ----------- and the Agent after any such setoff and application made by such Lender; provided, however, that the failure to give such notice shall not affect the - -------- ------- ---- validity of such setoff and application. The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff under applicable law or otherwise) which such Lender may have. SECTION 6.9 Net Payments. All payments by the Borrower of principal of, ------------ and interest on, the Loans and all other amounts payable hereunder shall be made free and clear of and without deduction for any present or future income, stamp or other Taxes, fees, duties, withholdings or other charges of any nature -42- whatsoever imposed by any taxing authority, other than Income Taxes (such non- excluded items being called "Charges"). In the event that any withholding or deduction from any payment to be made by the Borrower hereunder is required in respect of any Charges pursuant to any applicable law, rule or regulation, then the Borrower will: (a) pay directly to the relevant authority the full amount required to be so withheld or deducted; (b) promptly forward to the Agent an official receipt or other documentation reasonably satisfactory to the Agent evidencing such payment to such authority; and (c) pay to the Agent, for the account of the Lenders, such additional amount or amounts as is necessary to ensure that the net amount actually received by each Lender will equal the full amount such Lender would have received had no such withholding or deduction been required. Upon the request of the Borrower or the Agent, each Lender that is organized under the laws of a jurisdiction other than the U.S. shall, prior to the due date of any payments under the Loans or LC Obligations, execute and deliver to the Borrower and the Agent, on or about the first scheduled payment date in each calendar year, a United States Internal Revenue Service Form 4224 or Form 1001, as may be applicable (or any successor form), appropriately completed. Without prejudice to the survival of any other agreement of the Borrower hereunder or any other document, the agreements of the Borrower contained in this Section shall survive satisfaction of the Liabilities and termination of this Agreement. SECTION 7. CHANGES IN CIRCUMSTANCES SECTION 7.1 Increased Costs. If (a) Regulation D of the Board of --------------- Governors of the Federal Reserve System, or (b) after the date hereof, the adoption of any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or any Lending Office of such Lender) with any request or directive (whether or not having the force of law) or any such authority, central bank or comparable agency, (i) shall subject any Lender (or any Lending Office of such Lender) to any tax (other than Income Taxes), duty or other charge with respect to its Loans -43- or its LC Obligations or its obligation to make Loans, or issue or participate in the issuance of Letters of Credit or shall change the basis of taxation of payments to any Lender of the principal of or interest on its Loans, LC Obligations or any other amounts due under this Agreement in respect of its Loans or its obligation to make Loans or its LC Obligations (except for changes in the rate of Income Tax); or (ii) shall impose, modify or deem applicable any reserve (including, without limitation, any reserve imposed by the Board of Governors of the Federal Reserve System, but excluding any reserve included in the determination of interest rates pursuant to Section ------- 5), special deposit or similar requirement against assets of, deposits - with or for the account of, or credit extended by, any Lender (or any Lending Office of such Lender); or (iii) shall impose on any Lender (or its Lending Office) any other condition affecting its Loans or its LC Obligations; and the result of any of the foregoing is to increase the net cost to (or in the case of Regulation D referred to above, to impose a cost on) such Lender (or any Lending Office of such Lender) of making or maintaining any Loan, or any Letter of Credit or participation therein or to reduce the amount of any sum received or receivable by such Lender (or the Lending Office or such Lender) under this Agreement or under its Loans with respect thereto, then within thirty (30) days after demand by such Lender (which demand shall be accompanied by a statement setting forth in reasonable detail the basis of such demand); provided that such Lender makes the same demand on other of its similarly-situated borrowers, if any, the Borrower shall pay directly to such Lender such additional amount or amounts as will compensate such Lender for such increased cost or such reduction. SECTION 7.2 Change in Rate of Return. If, after the date hereof, any ------------------------ change in, or the introduction, adoption, effectiveness, interpretation, reinterpretation or phase-in of, any law or regulation, directive, guideline, decision or request (whether or not having the force of law) of any court, central bank, regulator or other governmental authority affects or would affect the amount of capital required or expected to be maintained by any Lender or any person controlling such Lender, and such Lender reasonably determines that the rate of return on its or such controlling person's capital as a consequence of its Commitments, the Loans or the Letters of Credit made by such Lender (or any participating interest therein held by such Lender) is reduced to a level below that which such Lender or such -44- controlling person could have achieved but for the occurrence of any such circumstance, then, in any such case the Borrower shall, within thirty (30) days after demand (accompanied by the statement described below) by such Lender; provided that such Lender makes the same demand on other of its similarly- situated borrowers, if any, the Borrower shall pay directly to such Lender additional amounts sufficient to compensate such Lender or such controlling person for such reduction in rate of return. A written statement of such Lender as to any such additional amount or amounts (including calculations thereof) in reasonable detail shall, in the absence of manifest error, be conclusive and binding on the Borrower. In determining such amount, such Lender may use any method of averaging and attribution that it shall reasonably deem applicable. Each Lender promptly shall notify the Borrower of any event of which it has knowledge, occurring after the date hereof, which will entitle such Lender to compensation pursuant to this Section 7.2. ----------- SECTION 7.3 Basis for Determining Interest Rate Inadequate or Unfair. If -------------------------------------------------------- with respect to any Interest Period: (a) the Agent is advised by ABN AMRO that deposits in Dollars (in the applicable amounts) are not being offered to ABN AMRO in the relevant market for such Interest Period, or the Agent otherwise determines (which determination shall be binding and conclusive on all parties) that by reason of circumstances affecting the interbank eurodollar market adequate and reasonable means do not exist for ascertaining the applicable LIBOR Rate; or (b) any Lender advises the Agent that, for reasons described in Section 7.1, 7.2 or 7.4, the LIBOR Rate (Reserve Adjusted), as ----------- --- --- determined by the Agent, will not adequately and fairly reflect the cost to such Lender of maintaining or funding such Loans for such Interest Period, or that the making or funding of LIBOR Rate Loans has become impracticable as a result of an event occurring after the date of this Agreement which in the opinion of such Lender materially and adversely changes such Loans, then, so long as such circumstances shall continue: (i) the Agent shall promptly notify the other parties thereof, (ii no Lender shall be under any obligation to make or convert into LIBOR Rate Loans so affected, and (ii on the last day of the then current Interest Period for Loans of the Type so affected, such Loans shall, unless then repaid in full, automatically convert to Base Rate Loans. If conditions subsequently change so that the foregoing conditions no longer exist, the Agent in the case of clause (a) or such Lender in the case of clause (b) will promptly -45- notify the Borrower and the Lenders thereof, and upon the receipt of such notice, the obligations of all Lenders to make or continue LIBOR Rate Loans shall be reinstated. Notwithstanding the foregoing, the Agent and each Lender shall take any reasonable actions available to it (including designation of a different Lending Office), consistent with legal and regulatory restrictions, that will avoid the need to take the steps described in this Section 7.3, which ----------- will not, in the reasonable judgment of the Agent or such Lender, be disadvantageous to the Agent or such Lender. SECTION 7.4 Changes in Law Rendering Certain Loans Unlawful. In the event ----------------------------------------------- that any change in (including the adoption of any new) applicable laws or regulations, or any change in the interpretation of applicable laws or regulations by any governmental or other regulatory body charged with the administration thereof, should make it unlawful for a Lender or the Lending Office of such Lender ("Affected Lender") to make, maintain or fund LIBOR Rate Loans, then (a) the Affected Lender shall promptly notify each of the other parties hereto, (b) the obligation of all Lenders to make, continue or convert into LIBOR Rate Loans shall, upon the effectiveness of such event, be suspended for the duration of such unlawfulness, and (c) on the last day of the current Interest Period for LIBOR Rate Loans (or, in any event, if the Affected Lender so requests, on such earlier date as may be required by the relevant law, regulation or interpretation), LIBOR Rate Loans shall, unless then repaid in full, automatically convert to Base Rate Loans. If conditions subsequently change so that the foregoing conditions no longer exist, such Lender will promptly notify the Borrower and the other Lenders thereof, and upon the receipt of such notice, the obligations of all Lenders to make, convert or continue LIBOR Rate Loans shall be reinstated. Notwithstanding the foregoing, the Agent and each Lender shall take any reasonable actions available to it (including designation of a different Lending Office), consistent with legal and regulatory restrictions, that will avoid the need to take the steps described in this Section 7.4, which will not, in the reasonable judgment of the Agent or such - ----------- Lender, be disadvantageous to the Agent or such Lender. SECTION 7.5 Funding Losses. The Borrower hereby agrees that upon demand -------------- by any Lender (which demand shall be accompanied by a statement setting forth in reasonable detail the basis for the calculations of the amount being claimed) the Borrower will indemnify such Lender against any net loss or expense which such Lender may sustain or incur (including, without limitation, any net loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund or maintain LIBOR Rate Loans), as reasonably determined by such Lender, as a result of (a) any payment or prepayment or conversion of any LIBOR Rate Loan of such Lender on a date other -46- than the last day of an Interest Period for such Loan, or (b) any failure of the Borrower to borrow, continue or convert any Loans on a date specified therefor in a Borrowing Request or Continuation/Conversion Notice pursuant to this Agreement. For this purpose, all notices to the Agent pursuant to this Agreement shall be deemed to be irrevocable. SECTION 7.6 Right of Lenders to Fund Through Other Offices. Each Lender ---------------------------------------------- may, if it so elects, fulfill its Commitment as to any LIBOR Rate Loan by causing its Lending Office to make such Loan; provided that in such event for -------- ---- the purposes of this Agreement, such Loan shall be deemed to have been made by such Lender and the obligation of the Borrower to repay such Loan shall nevertheless be to such Lender and shall be deemed held by it, to the extent of such Loan, for the account of such branch or affiliate. SECTION 7.7 Discretion of Lenders as to Manner of Funding. --------------------------------------------- Notwithstanding any provision of this Agreement to the contrary, each Lender shall be entitled to fund and maintain its funding of all or any part of its Loans in any manner it sees fit, it being understood, however, that for the purposes of this Agreement all determinations hereunder shall be made as if such Lender had actually funded and maintained each LIBOR Rate Loan during each Interest Period for such Loan through the purchase of deposits having a maturity corresponding to such Interest Period and bearing an interest rate equal to the LIBOR Rate for such Interest Period. SECTION 7.8 Conclusiveness of Statements; Survival of Provisions. ---------------------------------------------------- Determinations and statements of any Lender pursuant to Sections 7.1 through ------------ Section 7.5 shall be conclusive absent manifest error. The provisions of - ----------- Sections 7.1 through Section 7.5 shall survive termination of this Agreement. - ------------ ----------- SECTION 8. COLLATERAL AND OTHER SECURITY SECTION 8.1 Security Documents. Concurrently with or prior to the ------------------ initial Borrowing or issuance of the initial Letter of Credit: (a) Security Agreement. The Borrower and each of its ------------------ Subsidiaries shall execute and deliver to the Agent a security agreement, substantially in the form of Exhibit F (herein, as the same --------- may be amended or modified, called the "Security Agreement") covering, among other things, inventory, equipment, accounts, and general intangibles of the Borrower and its Subsidiaries. -47- (b) Borrower Trademark Security Agreement. The Borrower shall ------------------------------------- execute and deliver to the Agent the Borrower Trademark Security Agreement covering, among other things, all of the copyrights the Borrower. (c) Borrower Pledge Agreement. The Borrower shall execute and ------------------------- deliver to the Agent a pledge agreement, substantially in the form of Exhibit G (herein, as the same may be amended or modified, called the --------- "Borrower Pledge Agreement"), covering, among other things, all of the issued and outstanding capital stock of each Subsidiary of the Borrower, including, without limitation, all the issued and outstanding capital stock of each of the Guarantors. (d) Gibbs Pledge Agreement. Gibbs shall execute and deliver to ---------------------- the Agent a pledge agreement, substantially in the form of Exhibit H --------- (herein, as the same may be amended or modified, called the "Gibbs Pledge Agreement"), covering, among other things, all of the issued and outstanding capital stock of each Subsidiary of Gibbs. (e) Subsidiary Guaranty. Each Subsidiary of the Borrower shall ------------------- execute and deliver to the Agent a guaranty, substantially in the form of Exhibit J (herein, as the same may be amended or modified, called the "Subsidiary Guaranty") guarantying, among other things, the indefeasible payment in full of the Liabilities and each such Subsidiaries' obligations under the Subsidiary Guaranty. SECTION 8.2 Further Assurances. The Borrower agrees that upon the ------------------ request of the Agent (a) it shall forthwith deliver, or cause to be delivered to the Agent, in due form for transfer, all chattel paper, instruments, securities and documents of title, if any, at any time representing all or any of the Collateral, and (b) it shall forthwith execute and deliver or cause to be executed and delivered to the Agent, in due form for filing or recording (and pay the cost of filing or recording the same in all public offices reasonably deemed necessary by the Agent), such further assignment agreements, security agreements, pledge agreements, instruments, consents, waivers, financing statements, stock or bond powers, searches, releases, and other documents, and do such other acts and things, all as the Agent may from time to time reasonably request to establish and maintain to the satisfaction of the Agent a valid first priority perfected Lien on all Collateral (free of all other Liens, except Permitted Liens) to secure payment of the Liabilities. SECTION 9. REPRESENTATIONS AND WARRANTIES To induce the Lenders to enter into this Agreement and to -48- make Loans and to issue or participate in Letters of Credit hereunder, the Borrower represents and warrants to the Agent and to each of the Lenders that: SECTION 9.1 Organization, etc. The Borrower is a corporation duly ------------------ organized, validly existing and in good standing under the laws of the State of Delaware; each of its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation; and the Borrower and each such Subsidiary is duly qualified to transact business and in good standing as a foreign corporation authorized to do business in each jurisdiction where the nature of its business makes such qualification necessary and where failure to so qualify reasonably could have a Material Adverse Effect. The shares of capital stock of the Borrower and each of its Subsidiaries are owned by the Persons set forth in Schedule 9.1 in the amounts set forth therein. ------------ SECTION 9.2 Authorization. The Borrower and each of its Subsidiaries (to ------------- the extent it is a named party thereto) (a) has the corporate power to execute, deliver and perform this Agreement and the Related Documents, and (b) has taken all necessary corporate action to authorize the execution, delivery and performance by it of this Agreement and the Related Documents. SECTION 9.3 No Conflict. The execution, delivery and performance by the ----------- Borrower and each of its Subsidiaries (to the extent it is a named party thereto), of this Agreement and the Related Documents does not and will not (a) contravene or violate any provision of any law, statute, rule or regulation, (b) contravene or conflict with, result in any breach of, or constitute a default under, any material agreement or instrument binding on it, (c) result in the creation or imposition of or the obligation to create or impose any Lien (except for Permitted Liens) upon any of the property or assets of the Borrower or any such Subsidiary, or (d) contravene or violate any provision of the certificate or articles of incorporation or by-laws of the Borrower or any such Subsidiary. SECTION 9.4 Governmental Consents. No order, consent, approval, license, --------------------- authorization or validation of, or filing, recording or registration with (except as have been obtained or made prior to the Closing Date and except for filings or recordings of the UCC statements, the Fee Mortgages and any other documents contemplated to be filed or recorded by this Agreement or any Related Document with respect to the Collateral) or exemption by, any governmental or public body or authority, or any subdivision thereof, is required in connection with the execution, delivery and performance by the Borrower or any Subsidiary of the Borrower (to the extent it is a named party thereto) of this Agreement or the Related Documents, except those which have been -49- made or obtained or will be made or obtained as and when required thereby. SECTION 9.5 Validity. The Borrower and each of its Subsidiaries has duly -------- executed and delivered this Agreement (to the extent it is a named party hereto) and will have duly executed as and when required hereby the Related Documents (to the extent it is named as a party thereto), and each of such documents constitutes, or when so delivered will constitute the legal, valid and binding obligation of the Borrower and each such Subsidiary party thereto, enforceable in accordance with its terms. SECTION 9.6 Financial Statements. The Borrower's audited consolidated -------------------- financial statements as at December 31, 1996 and its unaudited consolidated financial statements as at March 31, 1997, copies of which have been furnished to the Agent, have been prepared in conformity with GAAP (except in the case of such unaudited statements, for the absence of notes and subject to normal year- end adjustments) applied on a basis consistent with that of the preceding Fiscal Year, except as disclosed therein, and accurately present in all material respects the financial condition of the Borrower and its Subsidiaries as at such dates and the results of operations for the periods then ended. The Borrower's pro forma financial statements for the periods ended December 31, 1996 through December 31, 2002, which were delivered to the Agent on March 14, 1997, are the most recent pro forma financial statements prepared by the Borrower and the projections and pro forma financial information contained therein are based upon good faith estimates and assumptions believed by such Persons to be reasonable at the time made, it being recognized by the Lenders that such projections as to future events are not to be viewed as facts or guarantees and that actual results during the period or periods covered by any such projections may differ from the actual results. SECTION 9.7 Material Adverse Change. No Material Adverse Change has ----------------------- occurred since December 31, 1996. SECTION 9.8 Litigation and Contingent Obligations. No Material ------------------------------------- Litigation is pending or, to the Borrower's knowledge after due inquiry, threatened except as set forth (including good faith estimates of the Dollar amounts involved with respect thereto) in Schedule 9.8. Neither the Borrower ------------ nor any of its Subsidiaries has any material Contingent Obligations other than as provided for or disclosed on Schedule 9.8 or in the financial statements ------------ referred to in Section 9.6. ----------- SECTION 9.9 Liens. None of the assets of the Borrower or any its ----- Subsidiaries is subject to any Lien, except for Permitted Liens. -50- SECTION 9.10 Subsidiaries. The Borrower has no Subsidiaries, except as ------------ set forth on Schedule 9.10. ------------- SECTION 9.11 Pension and Welfare Plans. ------------------------- (a) During the twelve-consecutive-month period prior to the Effective Date of this Agreement and prior to the date of any Borrowing hereunder, no steps have been taken to terminate or completely or partially withdraw from any Pension Plan or Welfare Plan, and no contribution failure has occurred with respect to any Pension Plan sufficient to give rise to a Lien on any assets of the Borrower or its Subsidiaries under section 302(f) of ERISA; (b) no condition exists or event or transactions have occurred with respect to any Pension Plan which might result in the incurrence by the Borrower or any other member of the Controlled Group of any material liability, fine, Tax or penalty which reasonably could have a Material Adverse Effect; (c) except as disclosed in Schedule 9.11 or the financial ------------- statement referred to in Section 9.6, neither the Borrower nor any ----------- member of the Controlled Group has any vested or contingent liability with respect to any post-retirement benefit under a Welfare Plan, other than liability for continuation coverage described in Part 6 of Title I of ERISA; (d) with respect to each Pension Plan maintained or contributed to by the Borrower which is intended to qualify under Section 401(a) of the Code, a favorable determination letter has been received from the Internal Revenue Service stating that such Pension Plan so qualifies and nothing has occurred since the date of issuance of such determination letter which would cause any such Pension Plan to cease to qualify under Section 401(a) of the Code; (e) each fiduciary (as defined in section 3(21) of ERISA) with respect to any Pension Plan or Welfare Plan and any Person who handles funds of any Pension Plan or Welfare Plan is bonded to the extent required under section 412 of ERISA; and (f) no Pension Plan maintained by or contributed to by the Borrower or any other member of the Controlled Group and subject to section 302 of ERISA or section 412 of the Code has incurred an accumulated funding deficiency as defined in section 302(a)(2) of -51- ERISA and Section 412(a) of the Code, whether or not waived. SECTION 9.12 Investment Company Act. Neither the Borrower nor any ---------------------- Subsidiary of the Borrower is an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. SECTION 9.13 Public Utility Holding Company Act. Neither the Borrower nor ---------------------------------- any Subsidiary of the Borrower is a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended. SECTION 9.14 Margin Regulation. Neither the Borrower nor any Subsidiary ----------------- of the Borrower is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation G or Regulation U of the Board of Governors of the Federal Reserve System). SECTION 9.15 Collateral. As security for the Liabilities, the Agent has ---------- or upon the filing or recording of the Fee Mortgages and UCC financing statements in the offices set forth in Schedule 9.15 and the other documents ------------- contemplated to be filed or recorded under the Related Documents and possession by the Agent of all Collateral which consists of instruments or securities as defined in the UCC will have a valid, first-priority Lien on the Collateral, subject only to Permitted Liens. There are no Liens or UCC financing statements on file in favor of any Person with respect to the Borrower or any of its Subsidiaries, except for Permitted Liens or Liens in connection with the Indebtedness to be Refinanced (which will be released concurrently with the Closing Date). SECTION 9.16 Taxes. The Borrower and each of its Subsidiaries has filed ----- all tax returns and reports required by law to have been filed by them and have paid or provided adequate reserves for all Taxes thereby shown to be owing, except any such Taxes which are being diligently contested in good faith by appropriate proceedings and for which adequate reserves have been established and are being maintained in accordance with GAAP. There is no ongoing audit or, to the Borrower's knowledge, other governmental investigation of the tax liability of the Borrower or any of its Subsidiaries and there is no unresolved claim by a taxing authority concerning the Borrower's or of its Subsidiary's tax liability, for any period for which returns have been filed or were due. The liability stated for Taxes as of December 31, 1996 in the financial statements described in Section 9.6 is sufficient in all material respects for all Taxes as ----------- of such date. -52- SECTION 9.17 Accuracy of Information. All factual information heretofore ----------------------- or contemporaneously furnished by or on behalf of the Borrower or any its Subsidiaries in writing to the Agent or any Lender for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all other such factual information hereafter furnished by or on behalf of the Borrower or any of its Subsidiaries to the Agent or any Lender will be, true and accurate in every material respect on the date as of which such information is dated or certified and as of the Effective Date, and such information is not, or shall not be, as the case may be, incomplete by omitting to state any material fact necessary to make such information not misleading. SECTION 9.18 Environmental Warranties. Except as set forth in Schedule ------------------------ -------- 9.18: - ---- (a) all facilities and property (including underlying groundwater) owned or leased by the Borrower or any of its Subsidiaries have been, and continue to be, owned or leased by the Borrower and its Subsidiaries in material compliance with all Environmental Laws; (b) there have been no past, and there are no pending or, to the best knowledge of the Borrower, threatened (i) claims, complaints, notices or requests for information received by the Borrower or any of its Subsidiaries with respect to any alleged violation of any Environmental Law, or (ii complaints, notices or inquiries as to the Borrower or any of its Subsidiaries regarding potential liability under any Environmental Law; (c) there have been no releases of Hazardous Materials at, on or under any property now or previously owned or leased by the Borrower or any of its Subsidiaries that, individually or in the aggregate, have had, or could have, a Material Adverse Effect; (d) the Borrower and each of its Subsidiaries has been issued and is in material compliance with all permits, certificates, approvals, licenses and other authorizations relating to environmental matters necessary for its business; (e) no property now or previously owned or leased by the Borrower or any of its Subsidiaries is listed or proposed for listing (with respect to owned property only) on the National Priorities List pursuant to -53- CERCLA, on the CERCLIS or on any similar state list of sites requiring investigation or clean-up; (f) there are no underground storage tanks, active or abandoned, including petroleum storage tanks, on or under any property now or previously owned or leased by the Borrower or any of its Subsidiaries that, individually, or in the aggregate, have had, or could have a Material Adverse Effect; (g) neither the Borrower nor any of its Subsidiaries has directly transported or directly arranged for the transportation of any Hazardous Material to any location which is listed or proposed for listing on the National Priorities List pursuant to CERCLA, on the CERCLIS or on any similar state list or which is the subject of federal, state or local enforcement actions or other investigations which may lead to material claims against the Borrower or any of its Subsidiaries for any remedial work, damage to natural resources or personal injury, including claims under CERCLA; (h) there are no polychlorinated biphenyls or friable asbestos present at any property now or previously owned or leased by the Borrower or any of its Subsidiaries that, individually or in the aggregate, has had, or could have, a Material Adverse Effect; and (i) to the best of Borrower's knowledge, no conditions exist at, on or under any property now or previously owned or leased by the Borrower or any of its Subsidiaries which, with the passage of time, or the giving of notice or both, would give rise to material liability under any Environmental Law. SECTION 9.19 Proceeds. The proceeds of the Term Loans and the initial -------- Revolving Loans will be used (a) for the payment in part of the obligations of the Borrower in connection with the Stock Purchase Transactions or other Permitted Acquisitions (in an aggregate amount not to exceed $20,000,000 excluding the Stock Purchase Transactions), (b) for the costs, expenses, fees and Taxes incurred by Borrower and its Subsidiaries in connection with the Stock Purchase Transactions or other Permitted Acquisitions, the Equity Purchase Transaction referred to in clause (c) of the definition thereof, and this ---------- Agreement, including, without limitation, costs, expenses, fees and Taxes incurred pursuant to Section 17.4; provided that the fees payable to Heller and ------------ Electra in connection with their purchase and/or commitment to purchase Series D Preferred Stock of the Borrower on the Closing Date shall -54- not exceed $200,000, (c) for payment in full (or in the case of letters of credit issued under the Provident Bank Credit Agreement, to back up such letters of credit with Letters of Credit) of the Indebtedness to be Refinanced, and (d) for working capital purposes. SECTION 9.20 Insurance. Schedule 9.20 hereto sets forth a true and --------- ------------- correct summary of all insurance carried by the Borrower and its Subsidiaries (or on their behalf). The Borrower and its Subsidiaries are, to the Borrower's best knowledge, adequately insured for their benefit under policies issued by insurers of recognized responsibility. No notice of any pending or threatened cancellation or material premium increase has been received by the Borrower or any of its Subsidiaries with respect to any of such insurance policies. The Borrower and its Subsidiaries are in substantial compliance with all conditions contained in such insurance policies. SECTION 9.21 Securities Laws. Neither the Borrower nor any Affiliate of --------------- the Borrower, nor anyone acting on behalf of any such Person, has directly or indirectly offered any interest in the Loans or any other Liabilities for sale to, or solicited any offer to acquire any such interest from, or has sold any such interest to, any Person that would subject the issuance or sale of the Loans or any other Liabilities to registration under the Securities Act of 1933, as amended. SECTION 9.22 Governmental Authorizations. The Borrower and each of its --------------------------- Subsidiaries has all licenses, franchises, permits and other governmental authorizations necessary for all businesses presently carried on by them (including ownership and leasing the real and personal property owned and leased by them), except where failure to obtain such licenses, franchises, permits and other governmental authorizations could not have a Material Adverse Effect, and except such authorizations as are required to be obtained (it being understood that the Borrower hereby agrees to promptly obtain such authorizations) following consummation of the Stock Purchase transactions. SECTION 9.23 Stock Purchase Transaction. The Borrower has furnished to -------------------------- the Agent and each Lender a true and correct copy of the Gibbs Acquisition Agreement. At the time of the making of the Loans to fund the acquisition contemplated thereby: (a) the transactions contemplated by Gibbs Acquisition Agreement will have been, or concurrently with the making of the Loans with respect thereto will be, consummated in accordance with the terms of the Gibbs Acquisition Agreement without material modification or waiver of any such terms; (b) all consents and approvals of, and filings and registrations with and all other actions in respect of, all Persons (including all governmental agencies, authorities or instrumentalities) required in order to consummate the -55- transactions contemplated by Gibbs Acquisition Agreement will have been obtained, given, filed or taken and shall be in full force and effect, and all required waiting periods will have elapsed, except as provided in Section 9.22; and (c) all actions by the Borrower or any of its Subsidiaries pursuant to or in furtherance of the transactions contemplated by Gibbs Acquisition Agreement will have been taken in compliance with all requirements of law, except as provided in Section 9.22. SECTION 9.24 Representations in Other Agreements True and Correct. Each ---------------------------------------------------- of the representations and warranties contained in (a) Gibbs Acquisition Agreement, (b) the IAMD Acquisition Agreements, and (c) each Related Document (each as originally executed notwithstanding any amendment, modification or termination thereof except to the extent consented to by the Required Lenders) are true and correct; provided, however, to the extent any such representations and warranties in any of the Gibbs Acquisition Agreement or the IAMD Acquisition Agreements are made by a Person other than the Borrower or any of its Subsidiaries, the representations and warranties made pursuant to this Section ------- 9.24 with respect thereto are limited to the Borrower's or such Subsidiaries' - ---- best knowledge after due inquiry. SECTION 9.25 Business Locations; Trade Names. Schedule 9.25 lists each of ------------------------------- ------------- the locations where the Borrower or any of its Subsidiaries maintains an office, a place of business, any records or Collateral together with each corporate, fictitious or trade name under or by which the Borrower or any of its Subsidiaries conducts or has conducted its business. SECTION 9.26 Solvency. The Borrower and each of its Subsidiaries is, and -------- after consummation of the transactions contemplated by this Agreement and the Stock Purchase Transactions, and after giving effect to all Indebtedness incurred and Liens created by the Borrower and its Subsidiaries in connection herewith and therewith will be, Solvent. SECTION 9.27 Title IV Compliance. ------------------- With respect to each Education Institution which is subject to Title IV: (a) Each Educational Institution is (or, in the case of any Educational Institution acquired on or after the Closing Date, immediately prior to the acquisition such Educational Institution was, and in the ordinary course of review by the DOE, will be) an "eligible proprietary institution of higher education," as defined in 34 C.F.R. Section 600.5. (b) Each Educational Institution has (or, in the case of any Educational Institution acquired on or after the Closing Date, -56- immediately prior to the acquisition such Educational Institution was, and in the ordinary course of review by the DOE, will be) received an eligibility notification, as that term is defined in 34 C.F.R. Section 600.21. (c) The Borrower has not changed, nor does the Borrower anticipate any change, in any of the information required by 34 C.F.R. Section 600.30 to be reported by each Educational Institution to the Secretary, except as provided in Schedule 9.27(c). - ---------------- (d) Each Educational Institution has (or, in the case of any Educational Institution acquired on or after the Closing Date, immediately prior to the acquisition such Educational Institution was, and in the ordinary course of review by the DOE, will be) met the standards for participation in Title IV Programs as set forth in 34 C.F.R., Party 668, Subpart B, and has a current program participation agreement with the Secretary. (e) Each Educational Institution has at all times during which it has been owned by the Borrower or a Subsidiary of the Borrower, and to the Borrower's or any such Subsidiary's knowledge at all times prior thereto, acted with the competency and integrity necessary to qualify as a fiduciary in the administration of Title IV Programs, as provided by 34 C.F.R. Section 668.82. (f) To the best of the Borrower's and each of its Subsidiaries' knowledge, and except as disclosed on Schedule 9.27(f), the Borrower's and each such ---------------- Subsidiary's operations with respect to each Educational Institution have, in all material respects, been conducted in all material respects in accordance with the Policy Guidelines and all relevant standards imposed by Accrediting Bodies, agencies administering state or federal government student aid programs in which any such Subsidiary participates, and all other applicable laws and regulations. The Borrower and each of its Subsidiaries have submitted all reports, audits and other information, whether periodic in nature or pursuant to specific requests, for each Educational Institution ("Compliance Reports") to all agencies or other entities with which such filings are required relating to its compliance with (i) applicable accreditation standards governing its activities or (ii) laws or regulations governing programs pursuant to which any Subsidiary or its students receive funding, and (iii) all articulation agreements, if any, with degree-granting colleges and universities in effect as of the date of this Agreement. To the best of the Borrower's and each such Subsidiary's knowledge after due inquiry, all such forms and records with respect to each Educational Institution have been prepared, completed, maintained and filed in all material respects in accordance with all applicable federal and state laws and regulations, and are true -57- and correct in all material respects. To the best knowledge of the Borrower and each Subsidiary of the Borrower, all financial aid grants and loans, disbursements and record keeping relating thereto have been completed in substantial compliance with all federal and state requirements, and there are no material deficiencies in respect thereto. To the best of the Borrower's and each of its Subsidiaries' knowledge and except as previously disclosed in prior audits by DOE, no student at any Educational Institution has been funded prior to the date for which such student was eligible for funding, and such student's records conform in all material respects in form and substance to all relevant regulatory requirements. (g) Schedule 9.27(g) sets forth the cohort default rate for each ---------------- Educational Institution, as calculated and published by the DOE, for each Educational Institution for the federal fiscal years ended December 31, 1993, 1994 and 1995. Except as set forth in the appeals described on Schedule -------- 9.27(f), to the best of the Borrower's and each of its Subsidiaries' knowledge, - ------- such schedule is materially accurate in all respects. To the best of the Borrower's and each of its Subsidiaries' knowledge, they have received no notice as to the calculation or publication of the cohort default rates for either Educational Institution for the federal fiscal year ended December 31, 1996. As used in this Section, all terms, unless otherwise defined herein, shall have the meanings as set forth in the citations referred to above or as otherwise defined in 34 C.F.R., Part 600 or Part 668, as the context requires. Section 9.28 No Burdensome Restrictions. Neither the Borrower nor any of -------------------------- its Subsidiaries is a party to or bound by any agreement, or subject to any restriction in its charter, by-laws or any other organizational document, or any federal, state or local law, rule or regulation, which could have a Material Adverse Effect. Section 9.29 Copyrights, Patents, Trademarks and Licenses, etc. The ------------------------------------------------- Borrower and each of its Subsidiaries owns or is licensed or otherwise has the right to use all of the patents, trademarks, service marks, trade names, copyrights, contractual franchises, authorizations and other rights that are reasonably necessary for the operation of their respective businesses, to Borrower's best knowledge without conflict with or violation of the rights of any other Person. To the best knowledge of the Borrower and its Subsidiaries, no slogan or other advertising device, product, process, method, substance, part or other material now employed, or now contemplated to be employed, by the Borrower or any of its Subsidiaries infringes upon any rights held by any other Person. Except as specifically disclosed in Schedule 9.29, no Litigation ------------- regarding any of the foregoing is pending or -58- to the Borrower's and its Subsidiaries' best knowledge, threatened, and no patent, invention, device, application, principle or any statute, law, rule, regulation, standard or code is pending or, to the knowledge of the Borrower or such Subsidiary, proposed, which, in either case, could have a Material Adverse Effect. SECTION 9.30 Title to Assets; Leases. The Borrower or its Subsidiaries, ----------------------- as the case may be, has good, sufficient and legal title to, or leasehold interest in, all the property and assets reflected as owned in the financial statements provided under Section 9.6, except such property and assets as have ----------- been disposed of in the ordinary course of business since the relevant dates thereof. The Borrower or its Subsidiaries, as the case may be, enjoys peaceful and undisturbed possession of all material property subject to leases and all such leases are valid and in full force and effect. All leases in effect on the Closing Date are set forth in Schedule 9.30. ------------- SECTION 9.31 Labor Disputes. There are no strikes or other labor -------------- disputes or grievances pending or, to the best knowledge of the Borrower, threatened against the Borrower or its Subsidiaries that could reasonably be expected to have a Material Adverse Effect. SECTION 10. AFFIRMATIVE COVENANTS The Borrower agrees that, on and after the Effective Date and for so long thereafter as any Lender has any Commitment hereunder or any of the Liabilities remain unpaid or outstanding, the Borrower will: SECTION 10.1 Reports, Certificates and Other Information. Unless ------------------------------------------- otherwise provided herein, furnish or cause to be furnished to the Agent and each Lender: 10.1.1 Audit Report. As soon as available, but in any event ------------ within ninety (90) days after the end of each Fiscal Year of the Borrower: (a) copies of the consolidated and consolidating balance sheet of the Borrower and its Subsidiaries as at the end of such Fiscal Year and the related statements of earnings, stockholders' equity and cash flow of the Borrower and its Subsidiaries for such Fiscal Year, in each case setting forth the figures for the previous year, prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein, certified, without Qualification by Arthur Anderson, L.L.P. (or such other independent certified public accountants of recognized standing -59- reasonably acceptable to the Required Lenders); (b) a certificate from such accountants containing a computation of, and showing compliance with, each of the financial ratios and restrictions contained in Section 12, and to the effect that, in making the examination ------- -- necessary for the signing of the annual audit report of the Borrower and its Subsidiaries by such accountants, they have not become aware of any non-compliance by the Borrower or any of its Subsidiaries, or any Default or Event of Default, under this Agreement or the Related Documents; and (c) a letter addressed to the Borrower from such accountants stating that such accountants have been informed that a primary intent of the Borrower was for the professional services such accountants provided to the Borrower and its Subsidiaries in preparing the financial statements and the certificate referred to above to benefit or influence the Agent and the Lenders, and identifying the Agent and the Lenders as parties that the Borrower has indicated intend to rely on such professional services provided to the Borrower and its Subsidiaries by such accountants; 10.1.2 Quarterly Reports. As soon as available, but in any ----------------- event within forty-five (45) days after the end of each Fiscal Quarter of the Borrower, copies of the unaudited consolidated and consolidating balance sheet of the Borrower and its Subsidiaries as at the end of such Fiscal Quarter and the related unaudited statements of earnings, stockholders' equity and cash flow for such Fiscal Quarter and the portion of the Fiscal Year through such Fiscal Quarter, in each case setting forth in comparative form the figures for the corresponding periods of the previous Fiscal Year, prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein and certified by the chief financial officer of the Borrower as presenting fairly the financial condition and results of operations of the Borrower and its Subsidiaries (subject to normal year-end audit adjustments and absence of footnotes); 10.1.3 Monthly Reports. As soon as available, but in any --------------- event within thirty (30) days after the end of each calendar month, copies of the unaudited consolidated and consolidating balance sheet of the Borrower and its Subsidiaries as at the end of such month and the related unaudited statements of earnings, stockholders' equity and cash flow for such month and the portion of the Fiscal Year through such month, in each case setting forth in comparative form the figures -60- for the corresponding periods of the previous Fiscal Year, prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein and certified by the chief financial officer of the Borrower as presenting fairly the financial condition and results of operations of the Borrower and its Subsidiaries (subject to normal year-end audit adjustments and absence of footnotes); 10.1.4 Compliance Certificate. Contemporaneously with the ---------------------- furnishing of a copy of each set of the statements and reports provided for in Sections 10.1.1 and 10.1.2, a duly completed --------------- ------ certificate, substantially in the form of Exhibit O (the "Compliance --------- Certificate"), signed by the chief financial officer of the Borrower, containing, among other things, (a) a computation of, and showing compliance with, each of the applicable financial ratios and restrictions contained in Section 12, (b) setting forth the most ------- -- recent cohort default rate for each Educational Institution, as calculated and published by the DOE, (c) setting forth the Funded Debt to Consolidated EBITDA Ratio, (d) such other financial ratios required by the DOE including revenue breakdowns, acid test (annually only), profitability and 85/15 ratios with respect to each Educational Institution, and (e) to the effect that as of such date no Default or Event of Default has occurred and is continuing; 10.1.5 Auditors' Materials. Promptly upon receipt thereof, ------------------- copies of all detailed financial and management reports regarding the Borrower or any of its Subsidiaries submitted to the Borrower or any such Subsidiary by independent public accountants in connection with each annual or interim audit report made by such accountants of the books of the Borrower or any of its Subsidiaries; 10.1.6 Business Plan. As soon as available, but in any event: ------------- (a) within 30 days after the beginning of each Fiscal Year of the Borrower, a copy of the plan and forecast (including a projected closing consolidated and consolidating balance sheet, income statement and funds flow statements) of the Borrower and its Subsidiaries for such Fiscal Year; and (b) within 30 days after the end of the second Fiscal Quarter of the Borrower in each Fiscal Year, an update of each plan and forecast delivered with respect to the Fiscal Year in which such Fiscal Quarter occurs, reflecting changes in such plan resulting from actual and then anticipated results and forecasts; -61- 10.1.7 Reports to SEC and to Stockholders. Promptly upon the ---------------------------------- filing or making thereof, copies of each filing and report made by the Borrower or any of its Subsidiaries with or to any securities exchange or the Securities and Exchange Commission and of each communication from the Borrower or to stockholders generally; 10.1.8 Notice of Default, Litigation and License Matters. ------------------------------------------------- Promptly upon learning of the occurrence of any of the following, written notice thereof, describing the same and the steps being taken by the Borrower with respect thereto: (a) the occurrence of a Default or Event of Default, (b) the institution of any Material Litigation or the occurrence of any Material Litigation Development, (c) the commencement of any dispute which might lead to the material modification, transfer, revocation, suspension or termination of any Related Document, (d) any Material Adverse Change, or (e) the termination or suspension of an Educational Institution's participation in Title IV Program, as set forth in 34 C.F.R. Section 668.26; 10.1.9 Insurance Reports. (a) within ninety (90) days after ----------------- the end of each Fiscal Year of the Borrower, a certificate signed by a Responsible Officer that summarizes the insurance policies carried by the Borrower or any of its Subsidiaries (such certificate to be in form and substance satisfactory to the Agent), (b) written notification thirty (30) days prior to any cancellation or material change of any such insurance by the Borrower or any of its Subsidiaries and within five (5) days after receipt of any notice (whether formal or informal) of cancellation or change by any of its insurers; 10.1.10 ERISA Liability. Promptly upon learning of the --------------- occurrence of the following, written notice thereof describing the same and the steps being taken by the Borrower with respect thereto: (a) the failure of any member of the Controlled Group to make a required contribution to any Pension Plan if such failure is sufficient to give rise to a Lien on the assets of the Borrower or any of its Subsidiaries under section 302(f)(1) or accumulated funding deficiency under section 302 of ERISA, (b) the institution of any steps by any member of the Controlled Group to withdraw from, or the institution of any steps by the Borrower to terminate, any Pension Plan, (c) the taking of any action with respect to a Pension Plan which could -62- result in the requirement that the Borrower or any of its Subsidiaries furnish a bond or other security to the Pension Benefit Guaranty Corporation or such Pension Plan, or (d) the occurrence of any event with respect to any Pension Plan which could result in the incurrence by the Borrower or any of its Subsidiaries of any liability, fine, Tax or penalty or any increase in the vested or contingent liability of the Borrower or any of its Subsidiaries with respect to any post- retirement Welfare Plan benefit if such penalty or increased liability would exceed $250,000; 10.1.11 Pension Plan Withdrawals. With respect to each Pension ------------------------ Plan which is a "multi-employer plan," as defined in section 4001 of ERISA as to which any member of the Controlled Group may incur any liability, (a) no less frequently than annually, a written estimate (which shall be based on information received from each such plan, it being expressly understood that the Borrower shall take all reasonable steps to obtain such information) of the withdrawal liability that would be incurred by the Controlled Group in the event that all members of the Controlled Group were to completely withdraw from such plan, and (b) written notice thereof, as soon as it has reason to believe (on the basis of the most recent information available to it) that the sum of (i) the withdrawal liability that would be incurred by the Controlled Group if all members of the Controlled Group completely withdrew from all multi-employer plans as to which any member of the Controlled Group has an obligation to contribute, and (ii) the aggregate amount of the outstanding withdrawal liability (without unaccrued interest) incurred by the Controlled Group to multi-employer plans exceeds $250,000; 10.1.12 Other Information Concerning the Borrower and its ------------------------------------------------- Subsidiaries. Promptly upon learning thereof, written notice of (a) ------------ the occurrence with respect to the Borrower or any Subsidiary of the Borrower of any of the events the occurrence of which in relation to the Borrower would constitute an Event of Default under Sections -------- 14.1.3 or 14.1.4; (b) the execution of any agreement by the Borrower ------ ------ or any of its Subsidiaries to merge with or consolidate into or with, or purchase or otherwise acquire all or substantially all of the assets or stock of any class of, or any partnership or joint venture interest in, any other Person, or for the sale, transfer, lease or conveyance by the Borrower or any of its Subsidiaries of all or any substantial part of its assets or sale or assignment without recourse of -63- any of its receivables; and (c) any action which may reasonably be expected to result in a Change in Control provided that nothing contained herein shall be deemed to permit any breach or violation of any other provision of this Agreement or any Related Document; 10.1.13 Environmental Liabilities. Promptly upon learning ------------------------- thereof, written notice (together with copies, if available) of all written claims, complaints, notices or inquiries relating to the Borrower's or any of its Subsidiaries' (a) properties or facilities, or (b) alleged non-compliance with Environmental Laws, together with a description of the steps being taken by the Borrower or such Subsidiary with respect thereto; 10.1.14 List of Officers and Directors. As soon as available, ------------------------------ but in any event (a) within 10 Business Days after each anniversary date of the initial Loan, a complete list of the officers and directors of the Borrower and each of its Subsidiaries to the extent changed from the prior Fiscal Year, and (b) within 15 Business Days of any change in such list, written notice of such change; 10.1.15 Excess Cash Flow Certificate. Contemporaneously with ---------------------------- the furnishing of a copy of each set of the statements and reports provided for in Section 10.1.1, a duly completed certificate, -------------- substantially in the form attached hereto as Exhibit Q, signed by a --------- Responsible Officer of the Borrower, containing, among other things, a computation of Excess Cash Flow for the previous Fiscal Year; and 10.1.16 Other Information. From time to time such other ----------------- information and certifications concerning the Borrower and any Subsidiary of the Borrower as the Agent or the Lender may reasonably request. SECTION 10.2 Corporate Existence; Foreign Qualification. Do, and cause ------------------------------------------ to be done at all times, all things necessary to (a) maintain and preserve the corporate existence of the Borrower and each Subsidiary of the Borrower, (b) be, and ensure that the Borrower and each Subsidiary of the Borrower is, duly qualified to do business and in good standing as foreign corporations in each jurisdiction where the nature of their business makes such qualification necessary and where failure to so qualify could have a Material Adverse Effect, and (c) comply, and cause its Subsidiaries to comply, with all contractual obligations and requirements of law binding upon such entity, except to the extent that the failure to comply therewith could not individually or in the aggregate have a Material Adverse Effect. -64- SECTION 10.3 Books, Records and Inspections. (a) Maintain, and cause ------------------------------ each of its Subsidiaries to maintain, complete and accurate books and records; (b) permit, and cause each of its Subsidiaries to permit, access at reasonable times by the Agent to its books and records; (c) permit, and cause each of its Subsidiaries to permit, the Agent to inspect at reasonable times its properties and operations; and (d) permit, and cause each of its Subsidiaries to permit, the Agent to discuss its business, operations and financial condition with its officers and internal and external accountants. SECTION 10.4 Insurance. Maintain, and cause each of its Subsidiaries to --------- maintain, with responsible insurance companies insurance with respect to its properties and business (including business interruption insurance) against such casualties and contingencies and of such types and in such amounts as is customary in the case of similar businesses. SECTION 10.5 Taxes and Liabilities. Pay, and cause each of its --------------------- Subsidiaries to pay, when due all Taxes and other material liabilities, except as contested in good faith and by appropriate proceedings with respect to which reserves have been established, and are being maintained, in accordance with GAAP if, and so long as, forfeiture of any part of the Collateral will not result from the failure to pay any such Taxes or other material liabilities during the period of any such contest. SECTION 10.6 Pension Plans and Welfare Plans. Maintain, and cause each ------------------------------- of its Subsidiaries to maintain, each Pension Plan and Welfare Plan as to which it may have any liability, in compliance in all material respects with all applicable requirements of law (including any rules and regulations promulgated thereunder). SECTION 10.7 Compliance with Laws. Comply, and cause each of its -------------------- Subsidiaries to comply, with all federal, state and local laws, rules and regulations related to its businesses (including, without limitation, all such laws, rules and regulations relating to Hazardous Materials or the disposal thereof) if the failure so to comply could have a Material Adverse Effect. SECTION 10.8 Title IV Compliance. The Borrower and each of its ------------------- Subsidiaries will: (a) other than actions for continued DOE and Accrediting Body approvals obtained in connection with an Acquisition, take no action which would cause any Educational Institution to fail to qualify as an "eligible institution," as defined in 34 C.F.R. Section 600.2, including, without limitation, under 34 C.F.R. Section 600.40; -65- (b) take no action which would cause any Educational Institution to fail to qualify as a Proprietary Institution of Higher Education in accordance with 34 C.F.R. Section 600.5; (c) not permit more than eighty five percent (85%) of each Educational Institution's revenues during the most recent twelve-month period to be derived from Title IV Program funds based on the formula set forth in 34 C.F.R. Section 600.5(d) except that with respect to the Al Collins Graphic Design School, during the first Loan Year such rate shall not exceed eighty-five percent (85%) and with respect to any Educational Institution acquired after the Closing Date, the Borrower shall have a period of 12 months to bring such Educational Institution in compliance with the first clause of this Section ------- 10.8(c); - ------- (d) submit to the Agent, for each Educational Institution, within one hundred twenty (120) days following the end of each Fiscal Year of such Educational Institution, the certified public accountant's report required by 34 C.F.R. Section 600.5(e), except that the report shall certify that the percentage of revenue derived from Title IV Program funds is not more than the amount of its revenue allowable under Section 10.8(c); --------------- (e) other than actions for continued DOE and Accrediting Body approvals obtained in connection with an acquisition, maintain each Educational Institution as an accredited institution, as defined in 34 C.F.R. Section 600.2; (f) except as provided in 34 C.F.R. Section 600.7(b)(3), take no action which would cause or permit, for the latest complete award year (i) more than forty percent (40%) of each Educational Institution's courses to be "correspondence courses" as calculated based on 34 C.F.R. Section 600.7(b) and defined in 34 C.F.R. Section 600.2; (ii) forty percent (40%) or more of each Educational Institution's regular enrolled students to be enrolled in correspondence courses; (iii) twenty percent (20%) or more of each Educational Institution's regular enrolled students to be incarcerated; (iv) forty percent (40%) or more of each Educational Institution's regular enrolled students to have neither a high school diploma nor the recognized equivalent of a high school diploma in cases where the Educational Institution provides a four-year or two-year educational program for which it awards a bachelor's degree or associate's degree, respectively; (g) take no action to commence, consent to, or acquiescence in any case, proceeding, or other action relating to bankruptcy, insolvency, reorganization or similar relief of any Subsidiary; (h) notify the Secretary and the Agent within ninety (90) days prior to the expiration of any Educational Institution's -66- program participation agreement and submit a materially completed application for a renewal of certification to the Secretary at least ninety (90) days prior to the expiration of such Educational Institution's current period of participation or, in the event of the Secretary's selection of an Educational Institution for recertification, submit a materially completed application for renewal to the Secretary on or before the date specified in the notice of selection for recertification; (i) comply with the application procedures set forth in 34 C.F.R. Section 600.20 and Section 668.12; (j) notify the Secretary and the Agent in writing no later than seven (7) days after a change occurs in any of the information provided in any Educational Institution's eligibility application, as set forth in 34 C.F.R. Section 600.30; (k) unless such action is contingent upon approval of or a ruling from the Secretary under 34 C.F.R. Section 600.31, take no action that would cause any Educational Institution to undergo a change of ownership that would result in a change of control, as set forth in 34 C.F.R. Section 600.31; (l) cause each Educational Institution to meet the standards for participation in Title IV Programs in 34 C.F.R., Part 668, Subpart B, and to have a current program participation agreement with the Secretary or in the case of an Acquired Person, immediately following its approval by the DOE, take such action as is necessary to comply with the foregoing; (m) cause not less than eighty percent (80%) of the tuition revenue derived from the programs provided at each Educational Institution to be derived from programs which qualify as eligible programs pursuant to 34 C.F.R. Section 668.8; (n) cause each Educational Institution to comply with all of the factors of financial responsibility set forth in 34 C.F.R. Section 668.15, except that (i) all payments of existing debt obligations shall be made within ninety (90) days; and (ii) no Educational Institution shall have operating losses for the two (2) latest fiscal years that result in a decrease in Consolidated Tangible Net Worth in excess of eight percent (8%) of such Educational Institution's Tangible Net Worth at the beginning of the first year of the two-year period (operating losses and tangible net worth being defined as set forth in 34 C.F.R. Section 668.15(B)(7); (o) monitor and prevent the Federal Stafford loan and Federal SLS published cohort default rate for each Educational Institution from exceeding twenty-five percent (25%) for any two consecutive 12-month periods or thirty percent (30%) for any -67- twelve month period; (p) cause each Educational Institution to comply with the standard of conduct required by each fiduciary in the administration of Title IV Programs, as set forth in 34 C.F.R. Section 668.82. As used in this Section, all terms shall have the meanings as set forth in the citations referred to above or as otherwise defined in 34 C.F.R., Part 600 or Part 668, as the context requires. SECTION 10.9 Maintenance of Permits. Maintain, and cause each of its ---------------------- Subsidiaries to maintain, all permits, licenses and consents as may be required for the conduct of its business by any state, federal or local government agency or instrumentality (including, without limitation, any such license, consent or permit relating to Hazardous Materials or the disposal thereof) if the failure to maintain such licenses, permits and consents could have a Material Adverse Effect. SECTION 10.10 Environmental Compliance. Maintain, and cause each of its ------------------------ Subsidiaries to maintain, (a) all necessary permits, approvals, certificates, licenses and other authorizations relating to environmental matters in effect and use and operate all of its facilities and properties in material compliance with all Environmental Laws, and (b) appropriate procedures for the handling of all Hazardous Materials in material compliance with all applicable Environmental Laws, and comply in all material respects with such procedures at all times. SECTION 11. NEGATIVE COVENANTS The Borrower agrees that, on and after the Effective Date and for so long thereafter as any Lender has any Commitment hereunder or any of the Liabilities remains unpaid or outstanding, the Borrower will: SECTION 11.1 Limitation on Indebtedness. Not, and not permit any of its -------------------------- Subsidiaries to, incur or at any time be liable with respect to any Indebtedness except: (a) Indebtedness outstanding under this Agreement in respect of the Loans and other Liabilities; (b) Subordinated Debt in an aggregate principal amount at any time outstanding not to exceed $5,000,000 without duplication of Indebtedness permitted by Section 11.1(c); provided that such --------------- -------- ---- Subordinated Debt (i) is unsecured, (ii) principal payments thereon are -68- not paid or scheduled for payment prior to six months after the Term Loan Termination Date and the Revolving Loan Termination Date, and (iii) does not contain any event of default, affirmative, negative or financial covenant that is more onerous than those provided in this Agreement; (c) Indebtedness outstanding on the Effective Date described on Schedule 11.1; provided that Indebtedness permitted by this clause (c) ------------- -------- ---- ---------- does not include any extension, renewal or refunding of any such outstanding Indebtedness; and provided, further, that the Indebtedness -------- ------- ---- to be Refinanced shall be repaid (or in the case of letters of credit issued under the Provident Bank Credit Agreement, be backed up with Letters of Credit) with the proceeds of the initial Borrowing and shall not thereafter be outstanding; (d) Indebtedness of Subsidiaries of the Borrower owing to the Borrower and unsecured Indebtedness of the Borrower owing to its Subsidiaries; provided that such Indebtedness is evidenced by promissory notes which are pledged to the Agent concurrently with the incurrence of such Indebtedness by such Subsidiary, for the benefit of the Lenders, under the Borrower Pledge Agreement or Gibbs Pledge Agreement, as the case may be; (e) Indebtedness secured by a Permitted Lien; (f) Indebtedness with respect to Contingent Obligations outstanding on the Effective Date and described on Schedule 11.1 and ------------- other Contingent Obligations in an aggregate principal amount not exceeding $1,000,000 per year (excluding any Contingent Obligation with respect to Indebtedness permitted by Section 11.7 and not set ------------ forth on Schedule 11.1); ------------- (g) Indebtedness in respect of deferred Taxes; (h) unsecured Indebtedness in respect of current accounts payable arising in the ordinary course of business (including open accounts extended by suppliers on normal trade terms in connection with purchases of goods and services, but excluding Indebtedness incurred through the borrowing of money or Contingent Obligations), except, without duplication, to the extent permitted by clause (f) ---------- above; (i) Indebtedness in respect of non-current accounts payable which the Borrower is contesting in -69- good faith and by appropriate proceedings, and with respect to which reserves have been established, and are being maintained, in accordance with GAAP; and (j) Indebtedness in the nature of seller holdbacks issued by the Borrower with respect to any Educational Institution acquired after the Closing Date for the period from such Acquisition until receipt of DOE approval of such Acquisition. SECTION 11.2 Liens. Not, and not permit any Subsidiary of the Borrower ----- to, create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except for the following (collectively called "Permitted Liens"): (a) Liens in favor of the Agent, for the benefit of the Lenders, pursuant to this Agreement and the Related Documents and, until released in accordance herewith, Liens evidencing the Indebtedness to be Refinanced; (b) Liens for current Taxes not delinquent or for Taxes being contested in good faith and by appropriate proceedings and with respect to which adequate reserves are being maintained in accordance with GAAP; (c) Liens in connection with the acquisition of fixed or capital assets after the date hereof to the extent permitted under Section ------- 12.4 and attaching only to the property being acquired, provided the ---- Indebtedness secured thereby does not exceed one hundred percent (100%) of the fair market value of such property at the time of acquisition thereof nor $500,000 in the aggregate at any one time outstanding; (d) Liens shown on Schedule 11.2; ------------- (e) Liens incurred in the ordinary course of business in connection with worker's compensation, unemployment insurance or other forms of governmental insurance or benefits or to secure performance of tenders, statutory obligations, leases and contracts (other than for borrowed money) entered into in the ordinary course of business or to some obligations on surety or appeal bonds; and (f) Liens of mechanics, carriers, materialmen and other like Liens arising in the ordinary course of business in respect of obligations which are not delinquent or which are being contested in good faith and by appropriate proceedings and with respect to -70- which adequate reserves are being maintained in accordance with GAAP. SECTION 11.3 Consolidation, Merger, etc. Not, and not permit any of its --------------------------- Subsidiaries to, liquidate or dissolve, consolidate with, or merge into or with, any other Person, or purchase or otherwise acquire all or substantially all of the assets of any Person (or of any division thereof) except: (a) any such Subsidiary may liquidate or dissolve voluntarily into, and may merge with and into, the Borrower or any other Subsidiary of the Borrower; and (b) so long as no Default or Event of Default has occurred and is continuing or would occur after giving effect thereto, any Permitted Acquisition, if permitted by Section 12.4 if made as a ------------ Consolidated Capital Expenditure. SECTION 11.4 Asset Disposition, etc. Not, and not permit any of its ----------------------- Subsidiaries to, sell, assign, lease, transfer, contribute, convey or otherwise dispose of, or grant options, warrants or other rights with respect to, any of its assets to any Person, unless: (a) such sale, assignment, transfer, lease, contribution, conveyance or other disposition constitutes bona fide sales of inventory in the ordinary course of its business or obsolete equipment or other property no longer used or useful in the business; or (b) the net book value of such assets, together with the net book value of all other assets sold, transferred, leased, contributed or conveyed otherwise than in the ordinary course of business by the Borrower or any of its Subsidiaries pursuant to this clause since the Effective Date, does not exceed $500,000. ; provided that (i) the consideration received is at least equal to the fair market value of such assets, (ii) the Net Proceeds received in connection with any such asset disposition are applied as required by Section 6.4(b) and (iii) -------------- no Default exists prior to or results from the consummation of such sale of assets. SECTION 11.5 Dividends, etc. Except with respect to (a) dividends paid --------------- to the Borrower to pay the Liabilities, (b) so long as no Default exists, the Electra Permitted Cash Dividends, and (c) if the purchase of IAMD (U.S.) and IAMD (Canada) is not consummated, the redemption of Series D Preferred Stock of the Borrower held by Heller, EIT and William Klettke issued on the -71- Closing Date in an aggregate amount not to exceed $4,125,000, not (i) declare, pay or make any dividend or distribution (in cash, property or obligations) on any shares of any class of capital stock (now or hereafter outstanding) of the Borrower or on any warrants, options or other rights with respect to any shares of any class of capital stock (now or hereafter outstanding) of the Borrower (other than dividends or distributions payable in its common stock or warrants to purchase its common stock or splitups or reclassifications of its stock into additional or other shares of its common stock) or apply, or permit any of its Subsidiaries to apply, any of its funds, property or assets to the purchase, redemption, sinking fund or other retirement of any shares of any class of capital stock (now or hereafter outstanding) of the Borrower or any option, warrant or other right to acquire shares of the Borrower's capital stock (other than any such payment pursuant to stock appreciation rights granted and exercised in accordance with applicable rules and regulations of the Securities and Exchange Commission); and (ii) make any deposit for any of the foregoing purposes. SECTION 11.6 Investments. Not, and not permit any of its Subsidiaries ----------- to, make, incur, assume or suffer to exist any Investment in any other Person, except: (a) Investments existing on the Effective Date and identified in Schedule 11.6; ------------- (b) Cash Equivalent Investments; (c) without duplication, Investments permitted as Indebtedness pursuant to Section 11.1; ------------ (d) in the ordinary course of business, Investments by the Borrower in any of its Subsidiaries, or by any such Subsidiary in any of its Subsidiaries, by way of contributions to capital or loans or advances; (e) other Investments in an aggregate amount at any one time not to exceed $100,000; and (f) Investments in connection with any Permitted Acquisition; provided, however, that no Investment otherwise permitted by clause (d), (e) and ---------- --- (f) shall be permitted to be made if, immediately before or after giving effect - --- thereto, any Default or Event of Default shall exist. SECTION 11.7 Rental Obligations. Not, and not permit any of its ------------------ Subsidiaries to, enter into at any time any arrangement which -72- involves the leasing by the Borrower or any of its Subsidiaries from any lessor of any real or personal property (or any interest therein), except arrangements which, together with all other such arrangements then in effect, will not require the payment of an aggregate amount of rentals by the Borrower and its Subsidiaries in excess of $14,000,000 for any Fiscal Year or $60,000,000 during the full remaining term of such arrangements; SECTION 11.8 Subordinated Debt. Not, and not permit any of its ----------------- Subsidiaries to: (a) make any payment (whether of principal, interest or otherwise) on any Subordinated Debt prior to the later of the Term Loan Termination Date and the Revolving Loan Termination Date, other than regularly scheduled payments of interest thereon so long as no Default or Event of Default exists; or (b) make any payment on any Subordinated Debt in contravention or violation of the subordination provisions thereof; or (c) prepay, redeem, purchase or defease any Subordinated Debt, or make any deposit for any of the foregoing purposes; or (d) enter into any amendment, supplement or modification of any Subordinated Debt, which results in a violation of the foregoing provisions of this Section or which adversely affects the interests or rights of any of the Borrower, any of its Subsidiaries, the Agent or the Lenders. SECTION 11.9 Take or Pay Contracts. Not, and not permit any of its --------------------- Subsidiaries to, enter into or be a party to any arrangement for the purchase of materials, supplies, other property or services if such arrangement by its express terms requires that payment be made by the Borrower or any Subsidiary of the Borrower regardless of whether such materials, supplies, other property or services are delivered or furnished to it. SECTION 11.10 Regulations G and U. Not, and not permit any of its ------------------- Subsidiaries to, use or permit any proceeds of the Loans or LC Obligations to be used, either directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of "purchasing or carrying margin stock" within the meaning of Regulations G and U of the Board of Governors of the Federal Reserve System, as amended from time to time. SECTION 11.11 Subsidiaries. Notwithstanding any provision of this ------------ Agreement to the contrary, not, and not permit any of its -73- Subsidiaries to, create or permit to exist any Subsidiary other than the Subsidiaries of the Borrower listed on Schedule 9.10 unless (a) such new ------------- Subsidiary shall promptly execute and deliver to the Agent, for the benefit of the Lenders, a supplement to the Subsidiary Guaranty and the Security Agreement, whereby such new Subsidiary agrees to be bound under each such agreement as a "Guarantor" and a "Subsidiary Grantor", respectively, and (b) (i) if any stock of such new Subsidiary is owned by another Subsidiary of the Borrower, such other Subsidiary shall promptly execute and deliver to the Agent, for the benefit of the Lenders, a pledge agreement, in the form of the Borrower Pledge Agreement, whereby such other Subsidiary pledges, to secure payment of the Liabilities and its obligations under the Subsidiary Guaranty, a first priority security interest (subject only to Permitted Liens) in all the outstanding capital stock of such new Subsidiary owned by such other Subsidiary, and (ii) if any stock of such new Subsidiary is owned by the Borrower or Gibbs, the Borrower or Gibbs, as the case may be, shall promptly pledge such stock under the Borrower Pledge Agreement or the Gibbs Pledge Agreement, as the case may be; the documents contemplated by each of the foregoing clauses (a) and (b) shall be in ------------------- form and substance satisfactory to the Agent and shall be accompanied by such other documents, agreements, filings, opinions or certificates reasonably requested by the Agent, including, without limitation, such other deliveries requested by the Agent pursuant to Section 8.2. ----------- SECTION 11.12 Other Agreements. Not, and not permit any of its ---------------- Subsidiaries to, enter into any agreement containing any provision which (a) would be violated or breached by the performance of its obligations hereunder or under any instrument or document delivered or to be delivered by it hereunder or in connection herewith, (b) prohibits or restricts the creation or assumption of any Lien upon its properties, revenues or assets (whether now owned or hereafter acquired) as security for the Liabilities hereunder, (c) prohibits or restricts the ability of any Subsidiary of the Borrower to make dividends or advances or payments to the Borrower, or (d) prohibits or restricts the ability of the Borrower or any of its Subsidiaries to amend or otherwise modify this Agreement or any other document executed in connection herewith, except in each case, to the extent required to comply in Title IV or other applicable laws, regulations, rules and guidelines of governmental authorities and Accreditating Bodies. SECTION 11.13 Business Activities. Not, and not permit any of its ------------------- Subsidiaries to, (a) engage in any type of business except the businesses which the Borrower and its Subsidiaries are presently engaged in, or (b) substantially alter the methods by which the Borrower or its Subsidiaries conduct such business. -74- SECTION 11.14 Change of Location or Name. Not, and not permit any of its -------------------------- Subsidiaries to, change (a) the location of its principal place of business, chief executive office, major executive office, chief place of business or its records concerning its business and financial affairs, or (b) its name or the name under or by which it conducts its business, in each case without first giving the Agent at least thirty (30) days' advance written notice thereof and having taken any and all action reasonably required or desirable to maintain and preserve the first perfected Lien on Collateral in favor of the Agent free and clear of any other Lien whatsoever (except for Permitted Liens); provided, -------- however, that notwithstanding the foregoing, neither the Borrower nor any of its - ------- Subsidiaries shall change the location of its principal place of business, chief executive office, major executive office, chief place of business or its records concerning its business and financial affairs to any place outside the contiguous continental United States of America or, with respect to IAMDC (Canada), Canada. SECTION 11.15 Transactions with Affiliates. Except for loans made by the ---------------------------- Borrower to officers of the Borrower in an aggregate principal amount not to exceed $150,000 which are evidenced by notes which have been pledged to the Agent pursuant to the Borrower Pledge Agreement, not, and not permit any of its Subsidiaries to, enter into, or cause, suffer or permit to exist any arrangement or contract with any of its other Affiliates unless such arrangement (a) is fair and equitable to the Borrower or such Subsidiary, (b) is of a sort which would be entered into by a prudent Person in the position of the Borrower or such Subsidiary with a Person which is not one of its Affiliates, and (c) is on terms which are not less favorable to the Borrower or such Subsidiary than are obtainable from a Person which is not one of its Affiliates. SECTION 11.16 Bank Accounts. Except as provided on Schedule 11.16, the ------------- -------------- Borrower and its Subsidiaries have no bank accounts and hereby agree that neither the Borrower nor any of its Subsidiaries shall open, maintain or otherwise have any bank account, except to the extent the Borrower notifies the Agent prior to opening any other bank account and (a) such bank account is a petty cash, payroll, restricted cash and other like accounts or accounts required under Title IV or other applicable standards or (b) the Borrower or its Subsidiary, as the case may be, promptly grants the Agent, for the benefit of the Lenders, a perfected security interest in such bank accounts subject to no Liens (other than Permitted Liens). SECTION 11.17 Limitation on Sales and Leasebacks. Not, and not permit its ---------------------------------- Subsidiaries to, at any time, directly or indirectly, sell and thereafter lease back any of their respective assets or properties. -75- SECTION 11.18 Modification of Certain Documents. The Borrower will not --------------------------------- consent to any amendment, supplement or other modification of any of the terms or provisions contained in, or applicable to, its charter, by-laws or other organizational documents, the Gibbs Acquisition Agreements, the IAMD Acquisition Agreements, or the Equity Purchase Documents, without the prior written consent of the Required Lenders if such amendment, supplement or other modification could have an adverse effect on the Borrower, or any of its Subsidiaries, the Agent or the Lenders or any rights of the Agent or Lenders under this Agreement or any of the Related Documents. SECTION 12. FINANCIAL COVENANTS The Borrower agrees that, on and after the Effective Date and for so long thereafter as any Lender has any Commitment hereunder or any of the Liabilities remain unpaid or outstanding, it will: SECTION 12.1 Minimum Fixed Charge Coverage Ratio. Not permit the Fixed ----------------------------------- Charge Coverage Ratio, at the end of any Fiscal Quarter (for the four Fiscal Quarters then ended) during any Fiscal Year of the Borrower, to be less than 1.25:1.00. SECTION 12.2 Minimum Interest Coverage Ratio. Not permit the Interest ------------------------------- Coverage Ratio, at the end of any Fiscal Quarter (for the four Fiscal Quarters then ended) during any Fiscal Year of the Borrower, to be less than 3.00:1.00. SECTION 12.3 Maximum Leverage Ratio. Not permit the Funded Debt to ---------------------- Consolidated EBITDA Ratio to exceed, at the end of any Fiscal Quarter (for the four Fiscal Quarters then ended) during any period set forth below, the applicable ratio set forth below opposite such period:
Period Ending Maximum Ratio ------------- ------------- 6/30/97-6/30/98 3.75:1.00 6/30/98-6/30/99 3.00:1.00 6/30/99 and thereafter 2.50:1
SECTION 12.4 Maximum Capital Expenditures. Not permit Consolidated ---------------------------- Capital Expenditures to exceed in any Fiscal Year of the Borrower an amount equal to four percent (4%) of the consolidated revenues of the Borrower and its Subsidiaries for the immediately preceding Fiscal Year; provided, that to the -------- ---- extent that Consolidated Capital Expenditures in any such Fiscal Year are less than the applicable maximum amount set forth above, the maximum amount set forth above for any subsequent Fiscal Year may be increased (but not to more than 50% of the amount set forth -76- above) by the amount of such shortfall. SECTION 12.5 Minimum Tangible Net Worth. Not permit Consolidated Tangible -------------------------- Net Worth, at the end of any Fiscal Quarter during any Fiscal Year of the Borrower, to be less than $7,500,000, plus (a) 50% of Consolidated Net Income, plus (b) 35% of the Net Proceeds received by the Borrower or its Subsidiaries in connection with the private or public sale of equity securities after the Closing Date. Notwithstanding the foregoing, for the purposes of Sections 12.1, 12.2 and ------------------- 12.3, Consolidated EBITDA shall be calculated for the Fiscal Quarters ending (a) - ---- June 30, 1997, based on the then ending Fiscal Quarter and shall be annualized by multiplying Consolidated EBITDA for such Fiscal Quarter by 4, and (b) September 30, 1997, based on the then ending Fiscal Quarter and the immediately preceding Fiscal Quarter and shall be annualized by multiplying the Consolidated EBITDA for such two Fiscal Quarters by 2. SECTION 13. CONDITIONS The obligation of each of the Lenders to make its Loans and of the Agent to issue Letters of Credit is subject to the performance by the Borrower of all of its obligations under this Agreement and to the satisfaction of the following conditions precedent or concurrent: SECTION 13.1 Initial Borrowing. In the case of the initial Borrowing, the ----------------- Agent shall have received all of the following, each, except to the extent otherwise specified below, duly executed by a Responsible Officer of the applicable party, dated the date of such Loan or Letter of Credit (or such earlier date as shall be satisfactory to the Agent), in form and substance reasonably satisfactory to the Agent, and each in sufficient number of signed counterparts to provide one for each Lender: 13.1.1 Evidence that the Borrower shall have paid (or the in the case of letters of credit issued under the Provident Bank Credit Agreement, shall have backed up such letters of credit with Letters of Credit), and caused to have been paid, in full all obligations (other than the Letters of Credit issued under the Provident Bank Credit Agreement) with respect to the Indebtedness to be Refinanced, together with UCC-3 termination statements releasing all Liens relating to such Indebtedness; 13.1.2 For each Lender, an appropriately completed Term Note, payable to the order of such -77- Lender in the principal amount of such Lenders Term Loan Commitment; 13.1.3 For each Lender, an appropriately completed Revolving Note, payable to the order of such Lender in the principal amount of such Lender's Revolving Loan Commitment; 13.1.4 An appropriately completed Borrowing Request; 13.1.5 The Security Agreement; 13.1.6 The Borrower Trademark Security Agreement; 13.1.7 The Post-Closing Agreement; 13.1.8 The Borrower Pledge Agreement, together with (a) the stock certificates evidencing all shares pledged under such Pledge Agreement, and (b) appropriate undated stock powers for such shares signed in blank; 13.1.9 The Gibbs Pledge Agreement, together with (a) the stock certificates evidencing all shares pledged under such Pledge Agreement, and (b) appropriate undated stock powers for such shares signed in blank; 13.1.10 The Subsidiary Guaranty; 13.1.11 The Subordination Agreement; 13.1.12 A favorable opinion of Messrs. D'Ancona & Pflaum, counsel to the Borrower and its Subsidiaries, substantially in the form of Exhibit T hereto, and addressing such other legal matters as --------- the Agent or its counsel reasonably may require; 13.1.13 An officer's certificate of the Borrower and its Subsidiaries, substantially in the form of Exhibits K-1 and K-2 hereto ------------ --- and dated as of the date hereof, signed by the president or a vice- president of the Borrower and each such Subsidiary, as the case may be, and attested to by its secretary, together with certified copies of the Borrower's, and each such Subsidiary's certificate or articles of incorporation, by-laws, resolutions, incumbency and any other documents pursuant to the terms thereof; 13.1.14 Evidence of the good standing of the -78- Borrower and each Subsidiary of the Borrower in the jurisdiction in which such Person is incorporated and any jurisdiction in which Collateral is located; 13.1.15 A certificate, substantially in the form of Exhibit N --------- hereto, signed by the chief financial officer of the Borrower to the effect that the Borrower is Solvent, together with copies of the pro forma financial statements; 13.1.16 Evidence that the Borrower and the Subsidiaries of the Borrower have obtained the insurance policies required by this Agreement and the Related Documents, or such policies have been obtained on the Borrower's or such Subsidiary's behalf; 13.1.17 Evidence that the Borrower shall have paid to the Agent the fees and expenses provided for herein and in the Fee Letter; 13.1.18 A letter from the Process Agent agreeing to receive service of process on behalf of the Borrower and each of its Subsidiaries pursuant to Section 17.11 hereof, unless a registered ------------- agent exists in the State of Illinois for such party; 13.1.19 Evidence of each filing, registration or recordation (and payment of any necessary fee, Tax or expense relating thereto) with respect to each document (including, without limitation, any UCC financing statement) required by the Related Documents or under law or reasonably requested by the Agent to be filed, registered or recorded in order to create, in favor of the Agent, for the benefit of the Lenders, a perfected first Lien on the Collateral (subject to Permitted Liens); 13.1.20 A calculation of the Funded Debt to Consolidated EBITDA Ratio as of the Closing Date certified by the chief financial officer of the Borrower; and 13.1.21 Such other information and documents as may reasonably be required by the Agent and the Agent's counsel. SECTION 13.2 Conditions of each Letter of Credit. The obligation of the ----------------------------------- Agent to issue each Letter of Credit is subject to the conditions precedent that (a) the Agent shall have received the related LC Application and, (b) the conditions set forth in Sections 13.1 and 13.3 have been satisfied. ------------- ---- -79- SECTION 13.3 All Loans and Letters of Credit. The obligation of each ------------------------------- Lender to make each Loan and of the Agent to issue each Letter of Credit is subject to the following further conditions precedent that: 13.3.1 The Agent and each Lender shall have received a Borrowing Request or an LC Application; 13.3.2 No Default or Event of Default exists or will result from the making of such Loan or issuance of such Letter of Credit; 13.3.3 The representations and warranties of the Borrower contained in Section 9 (except, with respect to Loans made or Letters --------- of Credit issued after the Effective Date, Sections 9.7 and 9.8) are ------------ --- true and correct with the same effect as though made on the date of the making of such Loan or issuance of such Letter of Credit (except to the extent they expressly relate solely to an earlier date, in which case, as of such date); 13.3.4 No Material Litigation exists except as disclosed on Schedule 9.8, and since the Effective Date of this Agreement no ------------ Material Litigation Development has occurred with respect to any Litigation so disclosed on Schedule 9.8; and ------------ 13.3.5 No Material Adverse Change has occurred since the date of the most recent financial statements delivered or required to be delivered pursuant to Section 9.6. ----------- SECTION 13.4 Loans for Stock Purchase Transactions. In addition to the ------------------------------------- satisfaction of the conditions precedent in Sections 13.1 through 13.3, the ------------- ---- obligation of the Lenders to make Loans to consummate any Stock Purchase Transaction permitted by this Agreement is subject to the following further conditions precedent: 13.4.1 The Borrower shall have delivered to the Agent in form and detail satisfactory to the Agent, (a) evidence that (i) the respective Stock Purchase Agreement has been duly executed, and (ii) the transactions contemplated by the respective Acquisition Agreement shall have been duly consummated in accordance with its terms, without material modification or waiver of any of such terms; and -80- (b) evidence that the Borrower shall have received not less than a total of (i) at least $15,000,000, in the case of the acquisition of Gibbs, and (ii) at least $5,500,000 in the case of the acquisition of IAMD, in net cash proceeds from the Equity Purchase Transaction set forth in clause (a) of the definition ---------- thereof in accordance with the terms of the respective Equity Purchase Documents, without material modification or waiver of any such terms, execution copies of which shall have been delivered to the Agent; and 13.4.2 The Borrower shall have delivered to the Agent and the Lenders such other information and documents as may reasonably be required or requested by the Agent, the Required Lenders and the Agents's counsel. SECTION 13.5 Loans for Permitted Acquisitions. In addition to the -------------------------------- satisfaction of the conditions precedent in Sections 13.1, 13.2, and 13.3 (as ------------------- ---- applicable), the obligation of the Lenders to make Loans to consummate any Permitted Acquisition is subject to the following further conditions precedent: 13.5.1 The Borrower shall have delivered to the Agent in form and detail satisfactory to the Agent and the Required Lenders, (a) at least thirty (30) days prior to any requested Borrowing, a duly executed preliminary financing request, substantially in the form of Exhibit V, outlining the aggregate principal amount of any --------- requested Borrowing which the Borrower will request to facilitate or consummate such Permitted Acquisition and containing pro forma financial projections of the Borrower and its Subsidiaries for the three years immediately following such acquisition and after giving effect thereto; (b) certified copies of any acquisition agreements, letters of intent, asset purchase agreements, stock purchase agreements or other related documentation or instruments proposed to be executed and delivered in connection therewith as the Agent shall reasonably request and all other documents required to be delivered pursuant to clause (i) of the definition of "Permitted Acquisition"; and ---------- (c) evidence of compliance with Section 9.19 both before and ------------ after giving effect to the requested Loans; and -81- 13.5.2 The Borrower shall have delivered to the Agent and the Lenders such other information and documents as may reasonably be required or requested by the Agent, the Required Lenders and the Agents's counsel. SECTION 14. EVENTS OF DEFAULT AND THEIR EFFECT SECTION 14.1 Events of Default. An "Event of Default" shall exist if any ----------------- one or more of the following events (herein collectively called "Events of Default") shall occur and be continuing: 14.1.1 Non-Payment of Loans, etc. (a) Default in the payment or ------------------------- prepayment when due of any principal on any Loan; or (b) default in the payment or prepayment when due of any reimbursement obligation with respect to any LC Obligation; or (c) default and continuance for three (3) days in the payment when due of any other amount owing by the Borrower or any other Person pursuant to this Agreement. 14.1.2 Non-Payment of Other Indebtedness. Default in the --------------------------------- payment when due (subject to any applicable grace period), whether by acceleration or otherwise, of any Indebtedness of the Borrower or any Subsidiary of the Borrower (other than Indebtedness in respect of this Agreement) in an amount in excess of $250,000 in the aggregate, or default in the performance or observance of any obligation or condition with respect to any such Indebtedness if the effect of such default is to accelerate the maturity of any such Indebtedness or to permit the holder or holders thereof, or any trustee or agent for such holders, to cause such Indebtedness to become due and payable prior to its expressed maturity. 14.1.3 Bankruptcy, Insolvency, etc. The Borrower or any Subsidiary of the Borrower becomes insolvent or generally fails to pay, or admits in writing its inability to pay, debts as they become due; or the Borrower or any such Subsidiary applies for, consents to, or acquiesces in the appointment of, a trustee, receiver or other custodian for the Borrower or such Subsidiary or any property thereof, or makes a general assignment for the benefit of creditors, or, in the absence of such application, consent or acquiescence; a trustee, receiver or other custodian is appointed for the Borrower or any such Subsidiary or for a substantial part of the property of any thereof and is not discharged within forty five (45) days; or any -82- bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law, or any dissolution or liquidation proceeding (except the voluntary dissolution, not under any bankruptcy or insolvency law, of a Subsidiary), is commenced in respect of the Borrower or any such Subsidiary and if such case or proceeding is not commenced by the Borrower or such Subsidiary, it is consented to or acquiesced in by the Borrower or such Subsidiary or remains for forty five (45) days undismissed; or the Borrower or any such Subsidiary takes any corporate action to authorize, or in furtherance of, any of the foregoing. 14.1.4 Defaults Under this Agreement. Failure by the Borrower ----------------------------- to comply with or perform any of the covenants or agreements of the Borrower set forth in Sections 10, 11 and 12. ----------- -- -- 14.1.5 Other Noncompliance with this Agreement. Failure by the --------------------------------------- Borrower or any Subsidiary of the Borrower to comply with or perform any other provision of this Agreement or the Related Documents applicable to it (other than those listed in Sections 14.1.4 or those --------------- constituting an Event of Default under any of the other provisions of this Section 14) and continuance of such failure for fifteen (15) days ---------- after notice thereof to the Borrower from the Agent or any Lender. 14.1.6 Representations and Warranties. Any representation or ------------------------------ warranty made by the Borrower, or any Subsidiary of the Borrower herein or in any of the Related Documents is false or misleading in any material respect as of the date hereof or as of the date hereafter certified, or any schedule, certificate, financial statement, report, notice, or other writing furnished by the Borrower, or any such Subsidiary to the Agent or any Lender is false or misleading in any material respect on the date as of which the facts therein set forth are stated or certified. 14.1.7 Pension Plans and Welfare Plans. With respect to any ------------------------------- Pension Plan as to which the Borrower or any Subsidiary of the Borrower may have any liability, there shall exist a deficiency of more than $250,000 in the Pension Plan assets available to satisfy the benefits guaranteeable under ERISA with respect to such Pension Plan, and steps are undertaken to terminate such plan or such Pension Plan is terminated or the Borrower or such Subsidiary withdraws from or institutes steps to withdraw from such Pension Plan or -83- any material Reportable Event with respect to such Pension Plan shall occur. With respect to any Welfare Plans as to which the Borrower may have any liability, there shall occur any event which could result in the incurrence by the Borrower of any increase in excess of $250,000 in the vested or contingent liability of the Borrower or with respect to any post-retirement Welfare Plan benefit. 14.1.8 Adverse Judgment. One or more final judgments or decrees ---------------- shall be entered against the Borrower or any of its Subsidiaries involving, in the aggregate, a liability (not covered by collectible insurance) of $250,000 or more and all such judgments or decrees shall not have been vacated, satisfied, discharged or stayed or bonded pending appeal within thirty (30) days from the entry thereof. 14.1.9 Related Documents. Any of the Related Documents shall ----------------- fail to remain in full force and effect or any action shall be taken by the Borrower or any Subsidiary of the Borrower to discontinue any of the Related Documents or to assert the invalidity of any thereof. 14.1.10 Change in Control. The occurrence of a Change in ----------------- Control. 14.1.11 Material Adverse Change. The occurrence of a Material ----------------------- Adverse Change. SECTION 14.2 Effect of Event of Default. If any Event of Default -------------------------- described in Section 14.1.3 shall occur and be continuing, the Commitments (if -------------- they have not theretofore terminated) shall immediately terminate and all Liabilities shall become immediately due and payable, all without notice, demand, presentment or protest of any kind; and, in the case of any other Event of Default, the Agent may (or shall, upon the written request of the Required Lenders) declare the Commitments (if they have not theretofore terminated) to be terminated and all Liabilities to be due and payable, whereupon the Commitments (if they have not theretofore terminated) shall immediately terminate and all Liabilities shall become immediately due and payable, all without presentment, demand, protest or notice of any kind. The Agent shall promptly advise the Borrower and each Lender of any such declaration, but failure to do so shall not impair the effect of such declaration. Notwithstanding the foregoing or any provision of Section 17.1, the effect as an Event of Default of any event ------------ described in Section 14.1.3 may be waived only by the written concurrence of the -------------- Lenders holding 100% of the aggregate unpaid principal amount of the Loans and LC Obligations, and the effect -84- as an Event of Default of any other event described in this Section 14 may be ---------- waived as provided in Section 17.1. ------------ SECTION 15. THE AGENT SECTION 15.1 Authorization and Action. Each Lender hereby appoints and ------------------------ authorizes the Agent to take such action as agent on its behalf and to exercise such powers to the extent provided herein or in any document or instrument delivered hereunder or in connection herewith, together with such other action as may be reasonably incidental thereto. As to matters not expressly provided for by this Agreement (including, without limitation, enforcement or collection of this Agreement or any Related Document) the Agent shall not be required to exercise any discretion, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Required Lenders and such instructions shall be binding upon all Lenders. Under no circumstances shall the Agent be required to take any action which exposes the Agent to personal liability or which is contrary to this Agreement or to the Related Documents or applicable law. SECTION 15.2 Liability of the Agent. Neither the Agent nor any of its ---------------------- directors, officers, agents or employees shall be liable to any Lender or any of such Lender's Affiliates for any action taken or omitted to be taken by it or them under or in connection with this Agreement and the Related Documents, except for its or their own gross negligence or willful misconduct as finally judicially determined by a court of competent jurisdiction. Without limiting the generality of the foregoing, the Agent (a) may treat the payee of any Note as the holder thereof until the Agent receives an executed Assignment Agreement entered into between a Lender and an Eligible Assignee pursuant to Section 16.1; ------------ (b) may consult with legal counsel (including counsel for the Borrower or any of its Subsidiaries), independent public accountants and other experts or consultants selected by it; (c) shall not be liable for any action taken or omitted to be taken in good faith by the Agent in accordance with the advice of counsel, accountants, consultants or experts; (d) makes no warranty or representation to any Lender and shall not be responsible to any Lender for any recitals, statements, warranties or representations, whether written or oral, made in or in connection with this Agreement or the Related Documents; (e) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, obligations, covenants or conditions of this Agreement on the part of the Borrower or any of its Subsidiaries or to inspect the property (including, without limitation, any books and records) of the Borrower or any Subsidiary of the Borrower; (f) shall not be responsible to any Lender for the due execution, legality, validity, enforceability, -85- genuineness, sufficiency or value of this Agreement, any Related Document, any Collateral or other support or security, or any other document furnished in connection with any of the foregoing; and (g) shall incur no liability under or in respect of this Agreement or any Related Document by action upon any written notice, statement, certificate, order, telephone message, facsimile or other document which the Agent believes in good faith to be genuine and correct and to have been signed, sent or made by the proper Person. SECTION 15.3 LaSalle and Affiliates. With respect to the Loans made by it ---------------------- and Letters of Credit issued by it, LaSalle shall have the same rights and powers under this Agreement and the other Related Documents as any other Lender and may exercise the same as though it were not the Agent; and the term "Lender" or "Lenders" shall, unless otherwise expressly indicated, include LaSalle in its individual capacity. LaSalle and its Affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with, the Borrower and any of its Subsidiaries and any Person who may do business with or own securities of the Borrower or any such Subsidiary, all as if LaSalle were not the Agent and without any duty to account therefor to the Lenders. SECTION 15.4 Lender Credit Decision. Each Lender acknowledges that it ---------------------- has, independently and without reliance upon the Agent or any other Lender and based on the financial statements referred to in Section 9.6 and such other ----------- documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. SECTION 15.5 Indemnification. The Lenders agree to indemnify the Agent --------------- (to the extent not reimbursed by the Borrower), ratably according to their Percentages, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or assessed against the Agent in any way relating to or arising out of this Agreement or the Related Documents, or any action taken or omitted by the Agent under this Agreement or the Related Documents; provided that no Lender shall be -------- liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Agent's gross negligence or willful misconduct as finally judicially determined by a court of competent jurisdiction. Without limiting any of the -86- foregoing, each Lender agrees to reimburse the Agent promptly upon demand for its Percentage of any out-of-pocket expenses (including reasonable counsel fees and expenses) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment, waiver or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under this Agreement or the Related Documents to the extent that the Agent is not reimbursed for such expenses by the Borrower. All obligations provided for in this Section 15.5 ------------ shall survive termination of this Agreement. SECTION 15.6 Successor Agent. The Agent may resign at any time by giving --------------- written notice thereof to the Lenders and the Borrower and may be removed at any time with or without cause by the Required Lenders. Upon any such resignation or removal, the Required Lenders shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Required Lenders, and shall have accepted such appointment within thirty (30) days after the retiring Agent's giving of notice of resignation or the Required Lenders' removal of the retiring Agent, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent which shall be a commercial bank having a combined capital and surplus of at least $250,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations in its capacity as Agent under this Agreement. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Section 15 shall inure to its benefit as to any ---------- actions taken or omitted to be taken by it while it was Agent under this Agreement. SECTION 15.7 Collateral Matters. (a) The Agent is authorized on behalf of ------------------ all the Lenders, without the necessity of any notice to or further consent from the Lenders, from time to time to take any action with respect to any Collateral or the Related Documents which may be necessary to perfect and maintain perfected the security interest in and Liens upon the Collateral granted pursuant to the Related Documents. (b) The Lenders irrevocably authorize the Agent, at its option and in its discretion, to release any Lien granted to or held by the Agent upon any Collateral (i) upon termination of the Commitments and payment in full of all Loans, LC Obligations and all other Liabilities known to the Agent and payable under this Agreement or any Related Document; (ii) constituting property sold or to be sold or disposed of as part of or in connection with any disposition permitted hereunder; (iii) constituting property in which the Borrower or any of its Subsidiaries owned no interest -87- at the time such Lien was granted or at any time thereafter; (iv) constituting property leased to the Borrower or any of its Subsidiaries under a lease which has expired or been terminated in a transaction permitted under this Agreement or is about to expire and which has not been, and is not intended by the Borrower or such Subsidiary to be, renewed or extended; (v) consisting of an instrument evidencing Indebtedness or other debt instrument, if the Indebtedness evidenced thereby has been paid in full; or (vi) if approved, authorized or ratified in writing by the Required Lenders or all the Lenders, as the case may be, as provided in Section 17.1. Upon request by the Agent at any time, the ------------ Lenders will confirm in writing the Agent's authority to release particular types or items of Collateral pursuant to this Section 15.7. ------------ SECTION 16. ASSIGNMENTS AND PARTICIPATIONS SECTION 16.1 Assignments. (a) Each Lender shall have the right at any ----------- time to assign, to any Eligible Assignee, all or any part of such Lender's rights and obligations under this Agreement and each Related Document including its rights in respect of Loans, Notes, Letters of Credit and LC Obligations and its obligations in respect of Commitments to make Loans or participate in Letters of Credit. Any such assignment shall be pursuant to an assignment agreement, substantially in the form of Exhibit U (an "Assignment Agreement"), --------- duly executed by such Lender and the Eligible Assignee, and acknowledged by the Agent. Although its failure to do so will not affect any of the rights or obligations provided for therein or herein, the Borrower agrees to duly acknowledge any Assignment Agreement executed by any assigning Lender promptly after its receipt of the same. No assignment by the Agent shall relieve it from its obligations in respect of the Letters of Credit, it being understood that any assignment by the Agent as to Letters of Credit shall be deemed to automatically constitute an assignment by the Agent and the purchase by the Eligible Assignee of a participating interest in such Letters of Credit. (b) Each assignment shall be pro rata with respect to all rights and obligations of the assigning Lender including the Loans, Notes, LC Obligations and Commitments of the assigning Lender. Each assignment, if to a Person other than a Lender or its Affiliate, shall be in an amount equal to or in excess of $5,000,000 (except for assignments of the entire unpaid balance of a Lender and if less than $5,000,000). In the case of any such assignment, the satisfaction or waiver of the conditions specified in clause (c) below, this Agreement shall ---------- be deemed to be amended to the extent, and only to the extent, necessary to reflect the addition of such Eligible Assignee, and the Eligible Assignee shall for all purposes be a Lender party hereto and shall have, to -88- the extent of such assignment, the same rights and obligations as a Lender hereunder, including the right to approve or disapprove actions which, in accordance with the terms hereof, require the approval of the Lenders or the Required Lenders, as the case may be, and the obligations to make Loans and to participate in Letters of Credit. (c) An assignment shall become effective hereunder when all of the following shall have occurred: (i) the Assignment Agreement shall have been executed by the assigning Lender and the Eligible Assignee, (ii) the Assignment Agreement shall have been acknowledged by the Agent and consented to by Borrower (which consent shall not be unreasonably withheld or delayed), (iii) either the assigning Lender or the Eligible Assignee shall have paid a processing fee of $3,500 to the Agent for its own account (other than in connection with an assignment to an Affiliate of such Lender), and (iv) the assigning Lender and the Agent shall have agreed upon a date upon which the Assignment shall become effective. Upon the Assignment becoming effective, the Agent shall forward all payments of interest, principal, fees and other amounts that would have been made to the assigning Lender, in proportion to the percentage of the assigning Lender's rights transferred, to the Eligible Assignee. (d) Upon the effectiveness of any assignment, the assigning Lender shall be relieved from its obligations hereunder to the extent of the obligations so assigned (except, (i) obligations of the Agent in respect of the Letters of Credit issued by it, and (ii) to the extent, if any, that the Borrower, any other Lender or the Agent has rights against such assigning Lender as a result of any default by such Lender under this Agreement) and appropriate arrangements shall be made so that, if required, replacement Notes are issued to such assigning Lender and new Notes or, as appropriate, replacement Notes are issued to the Eligible Assignee, in each case in principal amounts reflecting their outstanding Loans as adjusted pursuant to such Assignment Agreement. Promptly following the consummation of each assignment, the Agent shall furnish to the Borrower and each Lender, a revised Schedule 2.1, revised to reflect such ------------ assignment. SECTION 16.2 Participations. Each Lender may grant participations in all -------------- or any part of its Loans, Notes, Letters of Credit and LC Obligations to any commercial lender or other financial institution. A participant not shall have any rights -89- under this Agreement or any other document delivered in connection herewith (the participant's rights against such Lender in respect of such participation to be those set forth in the agreement executed by such Lender in favor of the participant relating thereto, which agreement with respect to such participation shall not restrict such Lender's ability to make any modification, amendment or waiver to this Agreement without the consent of the participant except that the consent of such participant may be required in connection with matters requiring the consent of all of the Lenders under Section 17.1). All amounts payable by ------------ the Borrower under this Agreement shall be determined as if the Lender had not sold such participation. In the event of any such sale by a Lender of participating interests to a participant, such Lender's obligations under this Agreement shall remain unchanged, such Lender shall remain solely responsible for the performance thereof, such Lender shall remain the holder of any obligation for all purposes under this Agreement, and the Borrower and the Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. SECTION 16.3 Disclosure of Information. The Borrower authorizes each ------------------------- Lender to disclose to any participant, assignee or Eligible Assignee (each, a "Transferee") and any prospective Transferee any and all financial and other information in such Lender's possession concerning the Borrower and any of its Subsidiaries which has been delivered to such Lender by or on behalf of the Borrower or any of its Subsidiaries in connection with such Lender's credit evaluation of the Borrower prior to entering into this Agreement or which has been delivered to such Lender by or on behalf of the Borrower or any of its Subsidiaries pursuant to this Agreement; provided that each Lender agrees that it shall hold all non-public, confidential and proprietary information obtained pursuant to the requirements of this Agreement (the "Information") confidential in accordance with safe and sound banking and business practices and may only make disclosure reasonably required by a Transferee or a prospective Transferee in connection with the contemplated transfer of any portion of the Loans. Notwithstanding anything to the contrary herein, any Lender may disclose Information: (a) that consists of information that has been filed with, and made public and generally available by, any governmental agency, or which has otherwise been publicly disclosed, (b) to regulatory authorities having jurisdiction to examine its books and records, (c) pursuant to subpoena or other legal process or as otherwise required by law, and (d) to its counsel and auditors in connection with matters concerning the transactions contemplated by this Agreement. SECTION 16.4 Foreign Transferees. If, pursuant to this Section 16, any ------------------- ---------- interest in this Agreement or any Loan, Letter of -90- Credit, Note or LC Obligation is transferred to any Transferee which is organized under the laws of any jurisdiction other than the United States or any state thereof, the transferor Lender shall cause such Transferee (other than any participant), and may cause any participant, concurrently with the effectiveness of such transfer, (a) to represent to the transferor Lender (for the benefit of the transferor Lender, the Agent, and the Borrower) that under applicable law and treaties no Taxes will be required to be withheld by the Agent, the Borrower or the transferor Lender with respect to any payments to be made to such Transferee in respect of the Loans, Notes, Letters of Credit or LC Obligations, (b) to furnish to the transferor Lender, the Agent and the Borrower either U.S. Internal Revenue Service Form 4224 or U.S. Internal Revenue Service Form 1001 (wherein such transfer claims entitlement to complete exemption from U.S. federal withholding tax on all interest payments hereunder), and (c) to agree (for the benefit of the transferor Lender, the Agent and the Borrower) to provide the transferor Lender, the Agent and the Borrower a new Form 4224 or Form 1001 upon the obsolescence of any previously delivered form and comparable statements in accordance with applicable U.S. laws and regulations and amendments duly executed and completed by such Transferee, and to comply from time to time with all applicable U.S. laws and regulations with regard to such withholding tax exemption. SECTION 17. MISCELLANEOUS SECTION 17.1 Waivers and Amendments. The provisions of this Agreement and ---------------------- of each Related Document may from time to time be amended, modified or waived, if such amendment, modification or waiver is in writing and consented to by the Borrower and the Required Lenders; provided that no such amendment, modification -------- ---- or waiver: (a) which would modify any requirement hereunder that any particular action be taken by all Lenders or by the Required Lenders, shall be effective without the consent of each Lender; (b) which would modify this Section 17.1, change the definition ------------ of "Required Lenders," change any Percentage for any Lender (except pursuant to an Assignment Agreement), reduce any fees (other than any fees payable to the Agent for its sole account), extend the Revolving Loan Termination Date, or subject any Lender to any additional obligations, shall be effective without the consent of each Lender; (c) which would permit the release of all or substantially all of the Collateral other than a -91- release in connection with a disposition permitted hereunder or otherwise permitted under the terms of the Related Documents, shall be effective without the consent of each Lender; (d) which would extend the due date for, or reduce the amount of, any payment or prepayment of principal of or interest on any Loan or any reimbursement obligation, interest or fees with respect to any LC Obligation, shall be effective without the consent of the holder of such Loan or LC Obligation; or (e) which would affect adversely the interests, rights or obligations of the Agent (in its capacity as the Agent), shall be effective without consent of the Agent. SECTION 17.2 Notices. All notices, requests and other communications to ------- any party hereunder shall be in writing (including bank wire, telex or similar writing) and shall be given to such party at its address or facsimile number set forth on the signature pages hereof or such other address or facsimile number as such party may hereafter specify for the purpose by notice to the Agent and the Borrower. Each such notice, request or other communication shall be effective (a) if given by facsimile, when such facsimile is transmitted to the facsimile number specified in this Section and the appropriate answerback is received, (b) if given by certified mail or overnight mail (via a reputable courier), 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (c) if given by any other means, when delivered at the address specified in this Section, provided that notices to the Agent under Sections 3, 4 and 15 shall not be effective until received by the ---------- - -- Agent. SECTION 17.3 Regulation U. Each Lender represents that it in good faith ------------ is not relying, either directly or indirectly, upon any margin stock (as such term is defined in Regulation U promulgated by the Board of Governors of the Federal Reserve System) as collateral security for the extension or maintenance by it of any credit provided for in this Agreement. SECTION 17.4 Payment of Costs and Expenses. The Borrower agrees to pay on ----------------------------- demand all reasonable expenses of the Agent (including the reasonable fees and out-of-pocket expenses of counsel to the Agent and of local counsel, if any, who may be retained by counsel to the Agent) in connection with (a) the negotiation, preparation, execution and delivery of this Agreement and of each Related Document, including schedules and exhibits, and any -92- amendments, waivers, consents, supplements or other modifications to this Agreement or any Related Document as may from time to time hereafter be required, whether or not the transactions contemplated hereby or thereby are consummated, (b) the filing, recording, refiling or rerecording of any of the Related Documents (including the Fee Mortgages, the Borrower Pledge Agreement, the Gibbs Pledge Agreement, the Security Agreement, and the Borrower Trademark Security Agreement) and/or any Uniform Commercial Code financing statements or Uniform Commercial Code, judgement, tax or other lien searches relating thereto and all amendments, supplements and modifications to any thereof and any and all other documents or instruments of further assurance required to be filed or recorded or refiled or rerecorded by the terms hereof or of the Related Documents, and (c) the preparation and/or review of the form of any document or instrument relevant to this Agreement or any Related Document. The Borrower further agrees to pay, and to save the Agent and the Lenders harmless from all liability for, any stamp or other Taxes which may be payable in connection with the execution or delivery of this Agreement, the Borrowings hereunder, or the issuance of the Notes, Letters of Credit or any other Related Documents. The Borrower also agrees to reimburse the Agent and each Lender upon demand for all reasonable out-of-pocket expenses (including reasonable attorneys' fees and legal expenses) incurred by the Agent or such Lender in connection with the enforcement of any Liabilities and the consideration of legal issues relevant to such enforcement. All obligations of the Borrower provided for in this Section 17.4 shall survive termination of this Agreement. ------------ SECTION 17.5 Indemnity. The Borrower agrees to indemnify the Agent and --------- each Lender and hold each Lender harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind (including, without limitation, the reasonable fees and disbursements of counsel for any Lender or the Agent) in connection with any investigative, administrative or judicial proceedings whether or not such Lender shall be designated a party thereto, which may be incurred by such Lender (or by the Agent in connection with its actions as Agent hereunder), relating to or arising out of this Agreement or any actual or proposed use of the proceeds of the Loans or LC Obligations hereunder; provided that neither the Agent nor any Lender shall have the right to be - -------- ---- indemnified hereunder for its own gross negligence or willful misconduct as finally judicially determined by a court of competent jurisdiction. All obligations -93- of the Borrower provided for in this Section 17.5 shall survive termination of ------------ this Agreement. SECTION 17.6 Subsidiary References. The provisions of this Agreement --------------------- relating to Subsidiaries shall apply only during such times as the Borrower have one or more Subsidiaries. SECTION 17.7 Captions. Section captions used in this Agreement are for -------- convenience only, and shall not affect the construction of this Agreement. SECTION 17.8 Governing Law. This Agreement, the Notes and each Loan and ------------- Letter of Credit and each other Related Document shall be a contract made under and governed by the laws of the State of Illinois, without regard to conflict of laws principles. All obligations of the Borrower and rights of the Agent and the Lenders expressed herein or in the Related Documents shall be in addition to and not in limitation of those provided by applicable law. SECTION 17.9 Counterparts. This Agreement may be executed in any number ------------ of counterparts and by the different parties on separate counterparts and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Agreement. When counterparts executed by all the parties shall have been lodged with the Agent (or, in the case of any Lender as to which an executed counterpart shall not have been so lodged, the Agent shall have received telegraphic, facsimile, telex or other written confirmation from such Lender of execution of a counterpart hereof by such Lender), this Agreement shall become effective as of the Effective Date hereof, and at such time the Agent shall notify the Borrower and each Lender. SECTION 17.10 SUBMISSION TO JURISDICTION; WAIVER OF VENUE. THE BORROWER, ------------------------------------------- ON BEHALF OF ITSELF AND EACH SUBSIDIARY OF THE BORROWER (A) HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY ILLINOIS STATE OR FEDERAL COURT SITTING IN CHICAGO, ILLINOIS OVER ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY RELATED DOCUMENT, AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH ILLINOIS STATE OR FEDERAL COURT, AND (B) AGREES NOT TO INSTITUTE ANY LEGAL ACTION OR PROCEEDING AGAINST THE AGENT OR ANY LENDER OR THE DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR PROPERTY OF ANY THEREOF, ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY RELATED DOCUMENT, IN ANY COURT OTHER THAN AS HEREINABOVE SPECIFIED IN THIS SECTION 17.10. THE BORROWER, ON BEHALF OF ------------- ITSELF AND EACH SUBSIDIARY, HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED OF THE BORROWER BY LAW, ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE IN ANY ACTION OR PROCEEDING (WHETHER BROUGHT BY -94- THE BORROWER, ANY SUBSIDIARY, THE AGENT, ANY LENDER, OR OTHERWISE) IN ANY COURT HEREINABOVE SPECIFIED IN THIS SECTION 17.10 AS WELL AS ANY RIGHT IT MAY NOW OR ------------- HEREAFTER HAVE TO REMOVE ANY SUCH ACTION OR PROCEEDING, ONCE COMMENCED, TO ANOTHER COURT ON THE GROUNDS OF FORUM NON CONVENIENS OR OTHERWISE. THE BORROWER ----- --- ---------- ON BEHALF OF ITSELF AND EACH SUBSIDIARY OF THE BORROWER AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. SECTION 17.11 Service of Process. The Borrower on behalf of itself and ------------------ each Subsidiary of the Borrower hereby irrevocably appoints C.T. Corporation (the "Process Agent"), with an office on the date hereof at 208 South LaSalle Street, Chicago, Illinois 60604, United States, as its agent to receive on behalf of the Borrower and its Subsidiaries and its property service of copies of the summons and complaint and any other process which may be served in any such action or proceeding, in each case, in the event it has no other duly appointed registered agent in Illinois, provided that a copy of such process is also mailed by registered or certified mail, postage prepaid, to the Borrower at its address specified pursuant to Section 17.2. Such service may be made by ------------ mailing or delivering a copy of such process to the Borrower in care of the Process Agent at the Process Agent's above address, and the Borrower hereby irrevocably authorizes and directs the Process Agent to accept such service on its behalf. The Borrower agrees to indemnify such Process Agent in connection with all matters relating to its appointment as agent of the Borrower for such purposes, to enter into any agreement relating to such appointment which such Process Agent may customarily require, and to pay such Process Agent's customary fees upon demand. As an alternative method of service, the Borrower for itself and its Subsidiaries also irrevocably consents to the service of any and all process in any such action or proceeding by the mailing of the Borrower at its address specified pursuant to Section 17.2. Nothing in this Section 17.11 shall ------------- ------------- affect the right of the Agent or any Lender to serve legal process in any other manner permitted by law or affect the right of the Agent or any Lender to bring any action or proceeding against the Borrower or its properties in the courts of any other jurisdictions. SECTION 17.12 WAIVER OF JURY TRIAL. THE BORROWER (ON BEHALF OF ITSELF AND -------------------- EACH OF ITS SUBSIDIARIES), THE AGENT AND EACH LENDER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM CONCERNING ANY RIGHTS UNDER THIS AGREEMENT, ANY RELATED DOCUMENT OR UNDER ANY OTHER DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH, OR ARISING FROM ANY BANKING RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT, AND AGREE THAT ANY SUCH ACTION, PROCEEDING OR COUNTERCLAIM SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY; -95- THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE AGENT AND THE LENDERS ENTERING INTO THIS AGREEMENT. SECTION 17.13 Successors and Assigns. This Agreement shall be binding ---------------------- upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns; provided, however, that: (a) the Borrower may -------- ------- ---- not assign or transfer its rights or obligations hereunder without the prior written consent of the Agent and all Lenders; and (b) the rights of the Lenders to make assignments or grant participations are subject to the provisions of Section 16. - ---------- -96- Delivered at Chicago, Illinois, as of the day and year first above written. CAREER EDUCATION CORPORATION By: /s/ WILLIAM A. KLETTKE ------------------------------ Name: William A. Klettke ---------------------------- Title: Senior Vice President --------------------------- Address: _________________________ Attention: _______________________ Telephone: _______________________ Facsimile: _______________________ LASALLE NATIONAL BANK, in its individual corporate capacity and as Agent By: /s/ MICHAEL FOSTER ------------------------------ Name: Michael Foster ---------------------------- Title: Senior Vice President ---------------------------- Notice Information Address: _________________________ Attention: _______________________ Telephone: _______________________ Facsimile: _______________________ Lending Office (Base Rate Loans) Address: _________________________ Attention: _______________________ Telephone: _______________________ Facsimile: _______________________ Lending Office (LIBOR Rate Loans) Address: _________________________ Attention: _______________________ Telephone: _______________________ Facsimile: _______________________ -97- June 5, 1997 CAREER EDUCATION CORPORATION 2800 W. Higgins Road; Suite 790 Hoffman Estates, IL 60195 Re: Amendment No. 1 to Credit Agreement ----------------------------------- Ladies and Gentlemen: We make reference to that certain Credit Agreement (as amended or modified, the "Credit Agreement") dated as of May 30, 1997 among Career Education Corporation ("CEC"), the lenders party thereto (the "Lenders") and LaSalle National Bank, as agent for the Lenders (the "Agent"). Capitalized terms used herein and not otherwise defined shall have the respective meanings provided in the Credit Agreement. We understand that CEC is currently negotiating a Stock Purchase Agreement with the shareholders of International Academy of Merchandising and Design (Canada), Limited, an Ontario corporation ("IAMD Canada"), pursuant to which CEC will acquire all of the issued and outstanding shares in the capital of IAMD Canada. We also understand that IAMD Acquisition I, Ltd., a Delaware corporation and a wholly-owned subsidiary of CEC ("IAMD Acquisition"), is currently negotiating a Stock Purchase Agreement with the shareholders of IAMD, Limited, an Illinois corporation ("IAMD U.S."), pursuant to which IAMD Acquisition will acquire all of the issued and outstanding shares of capital stock of IAMD U.S. In order to consummate the above referenced acquisitions of the shares of IAMD Canada and IAMD U.S., CEC and IAMD Acquisition will be required to deliver letters of credit to the sellers in an aggregate face amount in excess of the LC Commitments ($10,000,000). CEC has requested that the Agent and the Lenders agree to increase the aggregate LC Commitments to $20,000,000 to accommodate this obligation. The Agent and the Lenders agree that, effective as of the date first written above, Section 2.5 of the Credit Agreement is amended by deleting the number $10,000,000 from the second sentence thereof and replacing it with $20,000,000. Except as amended and modified by this letter, the Credit Agreement remains in full force and effect. CEC confirms that its representations, warranties, agreements and covenants contained in, and obligations and liabilities under, the Credit Agreement and the Related Documents are true and correct in all material respects as if made on the date hereof, except where such representation, warranty, agreement or covenant speaks as of a specified date. CEC also represents and warrants that no Default exists. If the foregoing is in accordance with your understanding and is acceptable to you, please so indicate by executing this letter in the space provided below and returning it to our counsel, Michael L. Boykins, at McDermott, Will & Emery, 227 West Monroe Street, Chicago, Illinois 60606. Very truly, yours, LaSalle National Bank, in its individual corporate capacity and as Agent By: /s/ MICHAEL FOSTER ------------------------------- Name: Michael Foster ----------------------------- Its: SVP ----------------------------- Agreed and Accepted this 5th day of June, 1997: CAREER EDUCATION CORPORATION By: /s/ WILLIAM A. KLETTKE ------------------------------- Name: William A. Klettke ----------------------------- Its: Sr VP & CFO ----------------------------- June 20, 1997 CAREER EDUCATION CORPORATION 2800 W. Higgins Road; Suite 790 Hoffman Estates, IL 60195 Re: Amendment No.2 to Credit Agreement ---------------------------------- Ladies and Gentlemen: We make reference to that certain Credit Agreement (as amended or modified, the "Credit Agreement") dated as of May 30, 1997, as amended as of June 5, 1997, among Career Education Corporation ("CEC"), the lenders party thereto (the "Lenders") and LaSalle National Bank, as agent for the Lenders (the "Agent"). Capitalized terms used herein and not otherwise defined shall have the respective meanings provided in the Credit Agreement. We understand that CEC is currently negotiating a Stock Purchase Agreement with the shareholders of International Academy of Merchandising and Design (Canada), Limited, an Ontario corporation ("IAMD Canada"), pursuant to which CEC will acquire all of the issued and outstanding shares in the capital of IAMD Canada. As a result of such acquisition, CEC be the ultimate parent of Academie Internationale du Design Inc. (a/k/a International Academy of Design, Inc.), a Quebec Corporation and a Subsidiary of IAMD Canada (the "Quebec Subsidiary"). Section 11.11 of the Credit Agreement requires each Subsidiary of CEC to execute and deliver a security agreement and a guaranty to secure the full payment of the Liabilities. Nonetheless, Quebec law limits the amount of liabilities that a subsidiary guarantor may guaranty, such that after giving effect to such guaranty the book of value of the subsidiary guarantor's assets would not thereby be less than the sum of its liabilities and its issued and paid-up share capital account. Accordingly, notwithstanding the provisions of Section 11.11 of the Credit Agreement, the Lenders agree that the Quebec Subsidiary's security agreement and guaranty shall be limited to secure the payment of Liabilities of CEC not exceeding $1,000,000 (Canadian). In consideration of such limitation: (i) Section 11.4(d) of the Credit Agreement is hereby amended to read in its entirety as follows: " (d) Indebtedness of Subsidiaries of the Borrower owing to the Borrower and unsecured Indebtedness of the Borrower owing to its Subsidiaries; provided that such Indebtedness is evidenced by promissory notes which are pledged to the Agent concurrently with the incurrence of such Indebtedness by such Subsidiary, for the benefit of the Lenders, under the Borrower Pledge Agreement, Gibbs Pledge Agreement, or such other pledge agreement which is in form and substance to the Agent, as the case may be; and provided, further, Indebtedness of Academie Internationale du Design Inc. (a/k/a International Academy of Design, Inc.), a Quebec Corporation (the "Quebec Subsidiary") to the Borrower and/or any of its Subsidiaries shall at no time exceed $[1,000,000] in the aggregate minus the aggregate amount of Investments then made by the Borrower and/or any of its Subsidiaries in the Quebec Subsidiary pursuant to Section ------- 11.6(d);" ------- (ii) Section 11.6(d) of the Credit Agreement is hereby amended to read in its entirety as follows: " (d) in the ordinary course of business, Investments by the Borrower in any of its Subsidiaries, or by any such Subsidiary in any of its Subsidiaries, by way of contributions to capital or loans or advances; provided, however, neither the Borrower nor any of its Subsidiaries shall make Investments in the Quebec Subsidiary which at any time exceeds $[1,000,000] in the aggregate minus the aggregate amount of Indebtedness of the Quebec Subsidiary then owing to the Borrower and/or any of its Subsidiaries pursuant to Section 11.1(d);" --------------- Except as amended and modified by this letter, the Credit Agreement remains in full force and effect. CEC confirms that its representations, warranties, agreements and covenants contained in, and obligations and liabilities under, the Credit Agreement and the Related Documents are true and correct in all material respects as if made on the date hereof, except where such representation, warranty, agreement or covenant speaks as of a specified date. CEC also represents and warrants that no Default exists. If the foregoing is in accordance with your understanding and is acceptable to you, please so indicate by executing this letter in the space provided below and returning it to our counsel, Michael L. Boykins, at McDermott, Will & Emery, 227 West Monroe Street, Chicago Illinois 60606. Very truly yours, LaSalle National Bank, in its individual corporate capacity and as Agent By: /s/ MICHAEL FOSTER ------------------------------ Name: Michael Foster ---------------------------- Its: SVP ---------------------------- Agreed and Accepted this 20 day of June, 1997: CAREER EDUCATION CORPORATION By: /s/ WILLIAM A. KLETTKE ---------------------------- Name: William A. Klettke -------------------------- Its: Vice President -------------------------- (b) A new definition called "Consolidated Net Worth" shall be added to Section 1.1 of the Existing Credit Agreement in appropriate alphabetical order and shall read in its entirety as follows: "Consolidated Net Worth" shall mean the consolidated net worth of the Borrower and its Subsidiaries. (c) The definition of Consolidated EBITDA set forth in Section 1.1 of the Existing Credit Agreement is deleted in its entirety and replaced with the following: "Consolidated EBITDA" shall mean, for any period, Consolidated Net Income for such period, plus (a) Consolidated Interest Expense for such period, plus (b) the aggregate amounts deducted in determining Consolidated Net Income in respect of (i) cash Income Taxes paid, (ii) depreciation and amortization, and (iii) interest income, plus or minus, (c) without duplication, any Non-Recurring Items to the extent agreed to by the Agent in its sole and absolute discretion, plus (d) without duplication, Acquired Person Adjusted Earnings of each Acquired Person acquired within the last four (4) Fiscal Quarters of the Borrower (calculated for the four (4) Fiscal Quarters then ended of such Acquired Person). (d) Clause (a) (ii) of the definition of Fixed Charge Coverage Ratio set forth in Section 1.1 of the Existing Credit Agreement is amended by deleting the word "plus" at the end thereof and replacing it with the word "minus". (e) The second sentence of the definition of "Net Proceeds" set forth in Section 1.1 of the Existing Credit Agreement is amended by moving the following words therein and inserting such words at the end of clause (b) of the first sentence thereof: ", and (c) any reserves required in accordance with GAAP relating to any liabilities assumed or incurred by the Borrower in connection with any transaction resulting in Net Proceeds under Section 6.4(b) or 6.4(c)". (f) Clause (i) of the definition of Permitted Acquisition set forth in Section 1.1 of the Existing Credit Agreement is amended by (i) deleting the word "and" at the end of clause (iv) thereof, (ii) deleting the "." at the end of clause (v) thereof and replacing it with "; and", and -2- AMENDMENT NO. 3 TO CREDIT AGREEMENT, DATED AS OF MAY 30, 1997 This Amendment No. 3 (this "Amendment") , dated as of September 24, 1997, is made by and among CAREER EDUCATION CORPORATION, a Delaware corporation (the "Borrower"), the financial institutions party hereto (the "Lenders"), and LASALLE NATIONAL BANK, as agent for the Lenders (in such capacity, the "Agent"). Terms defined in the Credit Agreement shall have the same respective meanings when used herein and the provisions of Sections 1.2 and 1.3 of the Credit Agreement shall apply, mutatis mutandis, to this Amendment. W I T N E S S E T H : WHEREAS, the parties hereto are parties to that certain Credit Agreement, dated as of May 30, 1997, as amended (as in effect on the date hereof, the "Existing Credit Agreement" and as amended and modified by this Amendment, the "Credit Agreement"); WHEREAS, the Borrower has requested that the Lenders and the Agent agree to amend and modify the Existing Credit Agreement as described herein; and WHEREAS, the Lenders and the Agent are willing to amend and modify the Existing Credit Agreement on the terms and conditions contained herein; NOW, THEREFORE, in consideration of the premises, the mutual covenants herein contained and other good and valuable consideration (the receipt, adequacy and sufficiency of which is hereby acknowledged), the parties hereto, intending legally to be bound, hereby agree as follows: 1. Amendments. Subject to the satisfaction of the conditions precedent set forth in Section 5 below, the Existing Credit Agreement is hereby amended as follows: (a) A new definition called "Acquired Person Adjusted Earnings" shall be added to Section 1.1 of the Existing Credit Agreement in appropriate alphabetical order and shall read in its entirety as follows: ""Acquired Person Adjusted Earnings" shall mean for any Acquired Person, for any period, Consolidated Net Income of such Acquired Person for such period, plus (a) Consolidated Interest Expense of such Acquired Person for such period, plus (b) the aggregate amounts deducted in determining consolidated Net Income in respect of (i) cash Income Taxes paid by such Acquired Person, (ii) depreciation and amortization, and (iii) interest income, plus or minus (c) without duplication, any Non-Recurring Items of such Acquired Person to the extent agreed to by the Agent in its sole and absolute discretion." (iii) adding a new clause (vi) thereto which shall read in its entirety as follows: "(vi) copies of the consolidated and consolidating balance sheet of each Acquired Person and its Subsidiaries as at the end of its most recent Fiscal Year and the related statements of earnings, stockholders' equity and cash flow of such Acquired Person and its Subsidiaries for such Fiscal Year, in each case setting forth the figures for the previous year, prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein, certified, without Qualification by independent certified public accountants of recognized national standing reasonably acceptable to the Agent, and such other interim financial statements of such Acquired Person as the Agent or the Required Lenders shall request." (g) The first sentence of Section 2.3 of the Existing Credit Agreement is deleted in its entirety and replaced with the following; "The Borrower has requested that the aggregate Term Loan Commitments and Revolving Loan Commitments be increased pro rata by an aggregate maximum principal amount of $30,000,000 ($27,500,000 with respect to the Revolving Loan Commitments and $2,500,000 with respect to the Term Loan Commitments) (the amount of such increase called the "Commitment increase")." (h) Clause (e) of Section 2.3 of the Existing Credit Agreement is deleted in its entirety and replaced with the following; "(e) in no event shall the aggregate Term Loan Commitments and Revolving Loan Commitments (after giving effect to such Commitment Increase) exceed $15,000,000 and $65,000,000, respectively;" (i) Section 2.4 of the Existing Credit Agreement is amended by deleting the number $5,000,000 therefrom and replacing it with $10,000,000. (j) The second paragraph of Section 5.1 of the Existing Credit Agreement is amended by inserting the following phrase after the word "follows" in the third line thereof: "(rounded upward to the nearest hundredth)". (k) Section 5.4 of the Existing Credit Agreement is amended by adding the following sentence to the end thereof: -3- "NotwithstandIng the foregoing, if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the following Business Day unless the result of such extension would be to carry each Interest Period into another calendar month, in which event such Interest Period shall end on the preceding Business Day." (l) Clause (e) of Section 5.7 of the Existing Credit Agreement is amended by deleting the first proviso contained therein in its entirety and replacing it with the following: "provided that, notwithstanding the foregoing, the Commitment Fee and the LC Commitment Fee for the period commencing on the Closing Date and ending September 30, 1997 shall be .375% per annum and 2.00% per annum, respectively;" (m) Clause (e) of Section 5.7 of the Existing Credit Agreement is amended by inserting the following phrase after the word "follows" in the first sentence: "(rounded upward to the nearest hundredth)". (n) A new clause (f) shall be added to Section 5.7 of the Existing Credit Agreement and shall read in its entirety as follows; (f) On the Commitment Increase Date, (i) the Borrower agrees to pay to the Agent, for its own account, the fees set forth in that certain fee letter, dated as of September 24, 1997 (the "Additional Fee Letter") from the Agent addressed to and accepted by the Borrower, and (ii) the Borrower agrees to pay to the Agent, for the benefit of the Lenders, a fee of $105,000. (o) The second sentence of Section 7.3 of the Existing Credit Agreement is amended by adding the following proviso at the end thereof: "; provided that in the case of clause (b), no such condition then exists with respect to any Lender". (p) The word "and" at the end of Section 10.1.15 is deleted; (q) Section 10.1.16 is renumbered Section 10.1.17 and a new Section 10.1.16 shall be added to Section 10 and shall read in its entirety as follows: "As soon as available, but in any event within ninety (90) days after the end of each Fiscal Year of the Borrower, each annual compliance report prepared by the Company's independent public accountants and delivered to the DOE; and -4- (r) A new Section 10.11 shall be added to Section 10 of the Existing Credit Agreement and shall read in its entirety as follows: "Section 10.11 Interest Hedge Agreements. On or prior to December 31, 1997, the Borrower shall have entered into Hedging Obligations, with counterparties satisfactory to the Agent, on terms and conditions (which terms and conditions shall not include the granting of collateral to any Person other than a Lender) reasonably acceptable to the Agent having (i) an aggregate notional principal amount of at least $7,500,000 and (ii) a maturity of at one year, which one year period will be automatically renewed for two additional one year periods." (s) Section 12.5 of the Existing Credit Agreement is deleted in its entirety and replaced with the following: "SECTION 12.5. Minimum Net Worth. Not permit Consolidated Net Worth, at the end of any Fiscal Quarter during any Fiscal Year of the Borrower (commencing June 30, 1997), to be less than $34,000,000, plus (a) 100% of Consolidated Net Income (if positive), plus (b) 35% of the Net Proceeds received by the Borrower or its Subsidiaries in connection with the private or public sale of equity securities after the Closing Date, minus (c) Electra Permitted Cash Dividend." (t) A new Section 12.6 shall be added to the Existing Credit Agreement immediately prior to the last paragraph of Section 12 and shall read in its entirety as follows: "Section 12.6 Consolidated Tangible Net Worth. Not permit Consolidated Tangible Net Worth, at any time, to be less than $1.00." (u) The final paragraph of Section 12 of the Existing Credit Agreement shall be deleted in its entirety and replaced with the following: "Notwithstanding the foregoing, for the purposes of Sections 12.1, 12.2 and 12.3, Consolidated EBITDA shall be calculated for the four (4) Fiscal Quarters then ended." (v) Clause (c)(ii) of Section 16.1 shall be amended by adding the following proviso at the end thereof: "; provided, that the consent of the Borrower shall not be required if a default or Event of Default shall exist at the time of such Assignment". -5- (w) Clause (c) of 17.1 is amended by deleting the words "all or substantially all" in the first and second line thereof and replacing such words with the word "any". (x) Section 17.1 of the Existing Credit Agreement is amended by: (i) deleting the word "or" at the end of clause (d) thereof; (ii) deleting the "." at the end of clause (e) thereof and replacing it with ";", and (iii) adding new clause (f) and (g) thereto which will read in their entirety as follows: "(f) would increase the Revolving Loan Commitment or Term Loan Commitment of any Lender, without the consent of such Lender; (g) which would permit the release of any guaranty of any guarantor other than in connection with a disposition permitted hereunder or otherwise permitted under the terms of the Related Documents, shall be effective without the consent of each Lender." (y) Exhibit O to the Existing Credit Agreement is deleted in its entirety and replaced with Exhibit A attached hereto. 2. Documents Remain in Effect. Except as amended and modified by this Amendment, the Existing Credit Agreement remains in full force and effect and the Borrower confirms that its representations, warranties, agreements and covenants contained in, and obligations and liabilities under, the Credit Agreement and each of the other Related Documents are true and correct in all material respects as if made on the date hereof, except where such representation, warranty, agreement or covenant speaks as of a specified date. 3. References in Other Documents. References to the Existing Credit Agreement in any other document shall be deemed to include a reference to the Credit Agreement, whether or not reference is made to this Amendment. 4. Representations. The Borrower hereby represents and warrants to the Lenders and the Agent that: (a) The execution, delivery and performance of this Amendment is within the Borrower's corporate authority, has been duly authorized by all necessary corporate action, has received all necessary consents and approvals (if any shall be required), and does not and will not contravene or conflict with any -6- provision of law or of the Certificate of Incorporation or By-laws of the Borrower or its Subsidiaries, or of any other agreement binding upon the Borrower or its Subsidiaries or their respective property; (b) This Amendment constitutes the legal, valid, and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms; and (c) no Default has occurred and is continuing or will result from this Amendment. 5. Conditions Precedent. The effectiveness of this Amendment is subject to the receipt by the Agent of each of the following, each appropriately completed and duly executed as required and otherwise in form and substance satisfactory to the Agent: (a) Certified copies of resolutions of the Board of Directors of the Borrower authorizing or ratifying the execution, delivery and performance by the Borrower of this Amendment; (b) A certificate of the President or a Vice-President of the Borrower that all necessary consents or approvals with respect to this Amendment have been obtained; (c) A certificate of the Secretary or Assistant Secretary of the Borrower, certifying the name(s) of the officer(s) of the Borrower authorized to sign this Amendment and the documents related hereto on behalf of the Borrower; (d) An opinion of Katten Muchin & Zavis covering those matters set forth in clauses (a) and (b) of Section 4 and such other legal matters as the Agent or its counsel may request; and (e) Such other instruments, agreements and documents as the Administrative Agent may reasonably request, in each case duly executed as required and otherwise in form and substance satisfactory to the Lenders. 6. Miscellaneous. (a) Section headings used in this Amendment are for convenience of reference only, and shall not affect the construction of this Amendment. (b) This Amendment and any amendment hereof or supplement hereto may be executed in any number of counterparts and by the different parties on separate counterparts and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same agreement. (c) This Amendment shall be a contract made under and governed by the internal laws of the State of Illinois, without giving effect to principles of conflicts of laws. -7- (d) All obligations of the Borrower and rights of the Lenders and the Agent, that are expressed herein, shall be in addition to and not in limitation to those provided by applicable law. (e) Whenever possible, each provision of this Amendment shall be interpreted in such manner as to be effective and valid under applicable law; but if any provision of this Amendment shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Amendment. (f) This Amendment shall be binding upon the Borrower, the Lenders and the Agent and their respective successors and assigns, and shall inure to the benefit of the Borrower, the Lenders and the Agent and their respective successors and assigns. * * * -8- IN WITNESS WHEREOF, the parties hereto have caused the execution and delivery hereof by their respective representatives thereunto duly authorized as of the date first herein appearing. CAREER EDUCATION CORPORATION By: /s/ WILLIAM A. KLETTKE -------------------------------------- Name: William A. Klettke ------------------------------------ Title: Sr. VP & CFO ----------------------------------- LASALLE NATIONAL BANK, in its individual corporate capacity and as Agent By: /s/ MICHAEL FOSTER -------------------------------------- Name: Michael Foster ------------------------------------ Title: SVP ----------------------------------- EX-10.9 7 SUPPLEMENTAL OPTION AGREEMENT DTD 7/31/95 EXHIBIT 10.9 SUPPLEMENTAL OPTION AGREEMENT THIS SUPPLEMENTAL OPTION AGREEMENT (this "AGREEMENT"), dated as of July 31, 1995, is between Career Education Corporation, a Delaware corporation ("CEC"), and John M. Larson ("LARSON"). RECITALS A. Larson and CEC are parties to that certain Larson Option Agreement, dated as of January 31, 1994 (the "ORIGINAL AGREEMENT") pursuant to which Larson was granted options to purchase certain shares of CEC's common stock, $.01 par value based upon the returns achieved by Heller Equity Capital Corporation ("HECC"), on its behalf and as successor to Heller Financial, Inc. B. Larson and CEC have decided to restructure a portion of Larson's rights to receive the options in connection with the extension of Larson's Employment Agreement as reflected in this Agreement and the Amended and Restated Option Agreement of even date herewith between Larson and CEC. AGREEMENTS In consideration of the recitals and the mutual covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I DEFINITIONS ----------- I.1 In addition to the terms defined elsewhere in this Agreement, as used in this Agreement: (a) "CAUSE" has the meaning set forth in the Larson Employment Agreement. (b) "CEC COMMON" means the common stock of CEC, $.01 par value, regardless of class. (c) "COMMISSION" means the Securities and Exchange Commission. (d) "DOWDELL OPTION" means the option granted to Robert E. Dowdell ("Dowdell") pursuant to the Amended and Restated Dowdell Option Agreement, of even date herewith, between CEC and Dowdell. (e) "EXERCISE PRICE" means $.01 per share (adjusted proportionately in the event the CEC Common is combined into a lesser number or divided into a greater number but in no event less than the par value of such CEC Common). (f) "EXISTING STOCKHOLDERS" means Larson, Dowdell and HECC and each of their respective successors and permitted assigns. (g) "GOOD REASON" has the meaning set forth in the Larson Employment Agreement. (h) "LARSON EMPLOYMENT AGREEMENT" means the Employment and Non- Competition Agreement, dated as of January 31, 1994, between Larson and CEC, as amended as of July 31, 1994. (i) "LARSON OPTION" means the option granted to Larson pursuant to the Amended and Restated Larson Option Agreement, of even date herewith, between CEC and Larson. (j) "OPTION" has the meaning set forth in Section 2.1 hereof. ----------- (k) "OPTION AMOUNT" means 2,199 shares of CEC Common, constituting the number of shares of CEC Common equal to 2.0% of the number of shares of CEC Common on a fully diluted basis outstanding as of the date hereof (excluding any shares of CEC Common to be issued pursuant to the Larson Option or the Dowdell Option) after giving effect to the issuance, and assuming the exercise, of warrants to Electra Investment Trust PLC and Electra Associates, Inc. (collectively, "ELECTRA") or their respective successors or assigns pursuant to the Securities Purchase Agreement of even date herewith among CEC and Electra and the issuance of warrants to Provident National Bank pursuant to the Warrant Agreement of even date herewith between Provident National Bank and CEC; provided, that the Option Amount shall be adjusted proportionately in the event the CEC Common is combined into a lesser number, divided into a greater number or converted into or exchanged for other shares of capital stock as the result of any recapitalization, recombination or stock split. (l) "OPTION TERMINATION DATE" means the earliest of (i) January 31, 2004, (ii) the date Larson ceases to be employed by CEC resulting from Larson's voluntary decision to terminate his employment (other than for Good Reason) or a termination of Larson's employment with CEC for Cause, (iii) the date of any material violation by Larson of any provision of Section 5 of the --------- Larson Employment Agreement following the termination of his employment with CEC and (iv) twenty-four (24) months after the date Larson and his Permitted Transferees cease to be stockholders of CEC. (m) "PERMITTED TRANSFEREE" has the meaning set forth in Section 2.6 ----------- of the Stockholders' Agreement. (n) "PERSON" means a natural person, a partnership, a corporation, an association, a joint stock company, a trust, an estate, a joint venture, an unincorporated organization or other entity or a governmental entity or any department, agency or political subdivision thereof. (o) "SECURITIES ACT" means the Securities Act of 1933, as amended. (w) "VESTED PERCENTAGE" means the percentage identified below as determined by the number of years from the date hereof Larson is a director of CEC or is employed as an executive officer of CEC (pursuant to the Larson Employment Agreement or otherwise), plus any additional period during which Larson continues to receive his Base Salary pursuant to Section 5.1 of the Larson Employment Agreement, as determined below:
Years of Employment Vested Percentage ------------------- ----------------- January 31, 1995 20% January 31, 1996 40% January 31, 1997 60% January 31, 1998 80% January 31, 1999 100%
Notwithstanding the foregoing, if Larson ceases to be an executive officer of CEC as the direct result of (i) a the consummation of a transaction described in Section 2.4(c) of the Stockholders' Agreement prior to January -------------- 31, 1999 or (ii) any person other than Dowdell, Larson or Heller acquiring a majority of the CEC Common and exercising the power to elect a majority of CEC's Board of Directors, the Vested Percentage shall be 100%. -3- ARTICLE II THE OPTION PROVISIONS --------------------- 2.1 GRANT OF THE OPTION. Subject to the terms and conditions set ------------------- forth herein, CEC hereby grants to Larson an option (the "OPTION") to purchase CEC Common from CEC at a price, per share, equal to the Exercise Price. The Option shall be exercisable with respect to the Vested Percentage of the Option Amount from time to time. 2.2 PROCEDURES FOR EXERCISE. Larson or a Permitted Transferee may ----------------------- exercise the Vested Percentage of the Option Amount (in whole or in part) at any time prior to the Option Termination Date by delivering written notice to CEC setting forth the portion of the Option (not to exceed the Vested Percentage of the Option Amount) to be exercised, together with cash (or a bank check payable to the order of CEC or its designee) in an amount equal to the aggregate Exercise Price for the shares of CEC Common with respect to which Larson or a Permitted Transferee is exercising such Option. The shares subject to the Option shall be shares of such class or classes of the CEC Common as CEC shall determine. As promptly as practicable after receiving such written notice and payment, CEC shall deliver to Larson or a Permitted Transferee, as the case may be, certificates for the shares of CEC Common with respect to which Larson or a Permitted Transferee has exercised the Option. For all purposes, Larson or a Permitted Transferee, as the case may be, will be deemed to have exercised the Option and to have purchased and become the holder of the applicable CEC Common as of the date CEC receives written notice and payment from Larson or a Permitted Transferee, as the case may be, as provided in this Section 2.2. ----------- 2.3 PAYMENTS IN LIEU OF EXERCISE OF OPTION. If at the time the -------------------------------------- Option or any portion thereof is exercised neither Larson nor his Permitted Transferees are stockholders of CEC, CEC shall have the right, but not the obligation, to pay Larson or his Permitted Transferees the cash or cash equivalent consideration attributable to the CEC Common that Larson would have otherwise been entitled to purchase pursuant to Section 2.2 above. To ----------- the extent that Larson or his Permitted Transferees are to receive cash or cash equivalent consideration pursuant to this Section 2.3 in lieu of the ----------- issuance of shares of CEC Common, CEC shall transfer to Larson an aggregate amount of cash or cash equivalent consideration equal to the value of the CEC Common that Larson would have been entitled to purchase pursuant to such exercised Options less the Exercise Price with respect to such CEC Common. The per share value of the CEC Common referred to in the preceding sentence shall be equal to the Fair Market Value of such shares, as determined in accordance with the Stockholders' Agreement. -4- 2.4 TERMINATION OF THE OPTIONS. Notwithstanding anything else to -------------------------- the contrary in this Agreement, the Options will expire and terminate immediately upon the Option Termination Date and thereafter will be void and of no force and effect. 2.5 NON-TRANSFERABLE. Larson or any Permitted Transferee feree will ---------------- not transfer, sell, convey, exchange or otherwise dispose of (herein referred to as "DISPOSITION" or "TO DISPOSE OF") the Options and the rights and privileges of Larson or such Permitted Transferee under this Agreement, except (i) in the event of Larson's death or incompetency, to a Permitted Transferee who consents in writing to be bound by the terms of this Agreement to the same extent as Larson or (ii) by exercise pursuant to the terms of this Agreement. 2.6 NO RIGHTS AS A STOCKHOLDER. The Options do not confer upon -------------------------- Larson or a Permitted Transferee any right to vote or consent or to receive notice as a stockholder of CEC that do not otherwise exist in respect of any matters whatsoever, or any other rights or liabilities as a stockholder, prior to the exercise of the Options as hereinbefore provided. ARTICLE III MISCELLANEOUS ------------- 3.1 NOTICES. All notices, demands or other COMMUNICATIONS D to be ------- given or delivered under or by reason of the provisions of this Agreement shall be in writing and shall be deemed to have been given when delivered personally to the recipient, sent to the recipient by reputable express courier service (charges prepaid), sent by facsimile or mailed to the recipient by certified or registered mail, return receipt requested and postage prepaid. Such notices, demands and other communications shall be sent to the Company and to Larson at the addresses indicated below: If to CEC: Career Education Corporation 2300 N. Barrington Road, Suite 400 Hoffman Estates, Illinois 60195 Attention: President Facsimile: (708) 884-9423 With copies to: Heller Equity Capital Corporation 500 West Monroe Street Chicago, Illinois 60661 Attention: Todd H. Steele Facsimile: (312) 441-7378 -5- Heller International Corporation 500 West Monroe Street Chicago, Illinois 60661 Attention: Charles P. Brissman, Esq. Facsimile: (312) 441-7208 and Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd. 55 East Monroe Street Suite 3700 Chicago, Illinois 60603 Attention: Robert M. Heinrich, Esq. Facsimile: (312) 332-2196 If to Larson: John M. Larson 36 Lakeside Drive South Barrington, Illinois 60010 With copies to: Quinn, Kully & Morrow 520 South Grand Avenue Los Angeles, California 90071 Attention: Russel Kully, Esq. Facsimile: (213) 622-3799 or to such other address or to the attention of such other person as the recipient party has specified by prior written notice to the sending party. 3.2 ENTIRE AGREEMENT. Except as otherwise expressly set forth ---------------- herein, this Agreement and the other agreements executed in connection here embody the complete agreement and understanding among the parties and supersede and preempt any prior understand understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way, including, without limitation, the Original Agreement. 3.3 SUCCESSORS AND ASSIGNS. All covenants and agree agreements ---------------------- contained in this Agreement by or on behalf of either party hereto shall bind and inure to the benefit of the other party hereto and their heirs, legal representatives, successors and assigns whether so expressed or not. 3.4 GOVERNING LAW. This Agreement shall be construed and enforced ------------- in accordance with, and all questions concerning the -6- construction, validity, interpretation and performance of this Agreement shall be governed by the laws of the State of Illinois without giving effect to the provisions thereof regarding conflict of laws. 3.5 CONSENT TO JURISDICTION AND SERVICE OF PROCESS. EACH PARTY ---------------------------------------------- HERETO HEREBY CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF COOK, STATE OF ILLINOIS AND IRREVOCABLY AGREES THAT SUBJECT TO CEC'S ELECTION, ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE OTHER RELATED DOCUMENTS SHALL BE LITIGATED IN SUCH COURTS. EACH PARTY HERETO ACCEPTS FOR ITSELF AND HIMSELF, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. LARSON DESIGNATES AND APPOINTS CT CORPORATION SYSTEM AND SUCH OTHER PERSONS AS MAY HEREINAFTER BE SELECTED BY CEC WHO IRREVOCABLY AGREE IN WRITING TO SO SERVE AS AGENT TO RECEIVE ON SUCH PARTY'S BEHALF SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDINGS IN ANY SUCH COURT, SUCH SERVICE BEING HEREBY ACKNOWLEDGED BY EACH PARTY TO BE EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT. A COPY OF ANY SUCH PROCESS SO SERVED SHALL BE MAILED BY REGISTERED MAIL TO EACH PARTY AS PROVIDED HEREIN, EXCEPT THAT UNLESS OTHERWISE PROVIDED BY APPLICABLE LAW, ANY FAILURE TO MAIL SUCH COPY SHALL NOT AFFECT THE VALIDITY OF SERVICE OF PROCESS. IF ANY AGENT APPOINTED BY A PARTY REFUSES TO ACCEPT SERVICE, SUCH PARTY HEREBY AGREES THAT SERVICE UPON IT BY MAIL SHALL CONSTITUTE SUFFICIENT NOTICE. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF CEC TO BRING PROCEEDINGS AGAINST LARSON IN ANY OTHER COURT HAVING JURISDICTION OVER LARSON. 3.6 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES ITS -------------------- RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION AND THE RELATIONSHIP THAT IS BEING ESTABLISHED. EACH PARTY HERETO ALSO WAIVES ANY BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF THE OTHER PARTY. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS AGREEMENT, INCLUDING WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. EACH PARTY HERETO ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH PARTY HERETO FURTHER WARRANTS AND REPRESENTS THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS OR HIS JURY TRIAL RIGHTS -7- FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE TRANSACTIONS CONTEMPLATED HEREBY. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 3.7 DESCRIPTIVE HEADINGS; INTERPRETATION. The descriptive headings ------------------------------------ of this Agreement are inserted for convenience only and do not constitute a part of this Agreement . 3.8 COUNTERPARTS. This Agreement may be executed simultaneously in ------------ two or more counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together shall constitute one and the same Agreement. 3.9 AMENDMENTS AND WAIVERS. No modification, amendment or waiver ---------------------- of any provisions of this Agreement shall be effective unless approved in writing by each of the parties hereto. The failure of any party at any time to enforce any of the provisions of this Agreement shall in no way be construed as a waiver of such provisions and will not affect the right of such party to enforce each and every provision hereof in accordance with its terms. 3.10 SEVERABILITY. Whenever possible, each provision of this ------------ Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. 3.11 LARSON'S INVESTMENT REPRESENTATIONS. Larson hereby represents ----------------------------------- on the date hereof, and any person that acquires all or any portion of the Options in accordance with the provisions of this Agreement represents with respect to such person as of the date of such acquisition, that such person is acquiring the Options for such person's own account with the present intention of holding the Options and any shares of common stock of CEC acquired pursuant to the Options for purposes of investment, and that such person has no intention of selling either the Options or any shares of common stock of CEC acquired pursuant to the Options in a public distribution d in violation of the federal securities laws or any applicable state securities laws. Larson hereby represents on the date hereof, and any person that acquires all or any portion of the Options in accordance with the provisions of this Agreement represents with respect to such person as of the date of exercise, that such person (a) has such -8- knowledge and experience in financial and business matters that such person is capable of evaluating the merits and risks of such person's investment in the Options and any shares of common stock of CEC acquired pursuant to the Options; (b) is able to bear the complete loss of his investment in the Options and any shares of common stock of CEC acquired pursuant to the Options; (c) has had the opportunity to ask questions of, and receive answers from, CEC concerning the terms and conditions of the Options and the common stock of CEC and to obtain additional information about CEC; (d) is an "accredited investor" within the meaning of Rule 501 of Regulation D promulgated by the Commission under the Securities Act; and (e) understands that no assurances can be given that CEC's business plan, as currently proposed or subsequently modified, will be effectuated and that none of HECC, HFI or their respective affiliates has any commitment or obligation to provide additional equity or debt financing, or other financial accommodations, to CEC or its subsidiaries to effectuate such business plan or otherwise. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. CAREER EDUCATION CORPORATION By /s/ JOHN M. LARSON --------------------------- Its President --------------------------- JOHN M. LARSON /s/ JOHN M. LARSON ------------------------------------ -9- EX-10.13 8 AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT EXHIBIT 10.13 CAREER EDUCATION CORPORATION AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT -------------------------------------------- THIS AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT is made as of July 31, 1995 by and among Career Education Corporation, a Delaware corporation (the "Corporation"), Heller Equity Capital Corporation, a Delaware corporation ("Heller"), John M. Larson ("Larson") and Robert E. Dowdell ("Dowdell"), The Provident Bank, an Ohio banking corporation ("Provident"), Electra Investment Trust P.L.C., a corporation organized under the laws of England and Wales, and its successors and assigns ("EIT"), and Electra Associates, Inc., a Delaware corporation, and its successors and assigns ("EAI," and together with EIT, "Electra"). Heller, EIT, EAI, Larson and Dowdell are hereafter collectively referred to as the "Stockholders." BACKGROUND ---------- The Corporation was incorporated in the State of Delaware on January 5, 1994 for the purpose of acquiring the operations of post secondary vocational and trade schools through wholly-owned operating subsidiaries of the Corporation. The Corporation's current capitalization is as follows: (1) The Corporation has 5,250 shares of its Class A Voting Common Stock, $.01 par value (the "Class A Stock"), issued and outstanding, of which 750 shares are owned by Larson and 4,500 shares are owned by Dowdell. (2) The Corporation has 5,100 shares of its Class B voting Common Stock, $.01 par value (the "Class B Stock"), issued and outstanding, all of which is owned by Heller. The Class B Stock is convertible into shares of Class A Stock at any time at the discretion of the holder. (3) The Corporation has 69,900 shares of its Class C Non-voting Common Stock, $.01 par value (the "Class C Stock"), issued and outstanding, all of which is owned by Heller. The Class C Stock is convertible into shares of Class B Stock at any time at the discretion of the holder. (4) The Corporation has authorized 100,000 shares of its Class D Non- voting Common Stock, $.01 par value (the "Class D Stock") of which none are issued and outstanding. (5) The Corporation has authorized 100,000 shares of its Class E Non- voting Common Stock, $.01 par value, (the "Class E Stock") of which none are issued and outstanding. (6) The Corporation has 7,850 shares of its Preferred Stock, Series A, $.01 par value (the "Series A Preferred"), issued and outstanding, of which 7,500 shares are owned by Heller, 300 shares are owned by Dowdell, and 50 shares are owned by Larson. (7) The Corporation has no shares of its Preferred Stock, Series B, $.01 par value (the "Series B Preferred"), issued and outstanding. (8) The Corporation has 500 shares of its Preferred Stock, Series C, $.01 par value (the "Series C Preferred"), issued and outstanding, of which 425 are owned by EIT and 75 are owned by EAI. In addition, EIT has a Warrant, subject to adjustment in accordance with the terms thereof, exercisable into 21,492 shares and EAI has a Warrant, subject to adjustment in accordance with the terms thereof, (each Warrant, together with any Penalty Warrants issued to each of EIT and EAI, the "Warrants"), exercisable into 3,793 shares, of the Corporation's Class D Stock (such Shares of Class D Stock are hereinafter referred to as the "Warrant Shares"). For purposes of calculating the number of Warrant Shares issuable upon exercise of the Warrant at any time of determination as required pursuant to any provision in this Agreement, the number of Warrant Shares so issuable shall be adjusted to reflect the Earned Amount (as defined in the Warrant) as if fixed and finally determined as of such date. (9) The Corporation has issued a warrant (the "Provident Warrant") to Provident, which, subject to adjustment in accordance with the terms thereof, is exercisable into ____ shares of the Corporation's Class D Stock (the "Provident Shares"). The parties hereto constitute the record and beneficial owners of all of the outstanding capital stock of the Corporation as of the date hereof. The Stockholders desire to provide for the continuity of management of the Corporation and the orderly perpetuation and disposition of the ownership of the shares of Class A Stock, Class B Stock, Class C Stock, the Class D Stock and the Class E Stock and the Series A Preferred, Series B Preferred and Series C Preferred (collectively, the "Shares") as more fully set forth herein. The Class A Stock, the Class B Stock, the Class C Stock, the Class D Stock and the Class E Stock are collectively referred to herein as the "Common Shares" and the Series A Preferred, Series B Preferred and Series C Preferred are collectively referred to herein as the "Preferred Shares." The Warrants and the Provident Warrants, along with any other options, rights or warrants to acquire Common Shares held by any Stockholder from time to time, are collectively referred to herein as the "Rights". Accordingly, the parties hereto agree as follows: -2- ARTICLE I --------- 1.1. Voting Agreements. Until the termination of this Agreement or, if earlier, ten (10) years from the date hereof: each Stockholder (including any person or entity purchasing or succeeding, by conversion or otherwise, to any shares of Class A Stock or Class B Stock or other capital stock with the right to vote under conditions hereinafter specified) agrees to vote the applicable Shares held by such Stockholder and shall undertake or cause to be undertaken any and all actions necessary in whatever capacity whether as a Stockholder or through membership or representation on the Board of Directors of the Corporation (the "Board"), so as to carry out the provisions of this Agreement applicable to the voting of such Shares. (a) Directors. Except as hereinafter provided, there shall be six (6) Directors ("Directors") elected to the Corporation's Board as follows: (i) Larson shall be nominated and elected to be a Director so long as he is the President of the Corporation and owns not less than ten percent (10%) of the Class A Stock; (ii) Dowdell shall be nominated and elected to be a Director so long as he remains a paid consultant to the Corporation or owns not less than forty percent (40%) of the Class A Stock; (iii) two persons designated by Heller (the "Heller Directors") shall be nominated and elected to be Directors so long as Heller and its affiliates continue to own Shares (such Directors shall initially be Pat Pesch and Todd H. Steele); (iv) the fifth Director shall be designated by the other Directors and shall not be affiliated with any of the Stockholders and (v) once the shares of Series C Preferred are no longer outstanding, for so long as Electra and its affiliates or designees own at least five percent (5%) of the issued and outstanding Common Shares, one person designated by Electra or its designee (the "Electra Director") shall be nominated and elected to be the sixth director and shall be appointed to serve on the Corporation's and each Subsidiary's compensation and audit committees. For purposes of the Corporation's Second Restated Certificate of Incorporation, as amended, a copy of which is attached hereto as Exhibit A (the "Certificate"), Larson and Dowdell shall be the Class I Directors, the Heller Directors shall be the Class II Directors, the fifth Director shall be the Class III Director and the sixth Director shall be the Class IV Director. In the event Larson or Dowdell ceases to be a Director as the result of removal, resignation, death, disability or otherwise, the resulting vacancy shall be filled in accordance with the Corporation's by-laws without reference to this Agreement. The affirmative vote of Directors holding not less than five (5) votes shall be required to approve or disapprove any matter to be voted upon by the Board. Immediately upon the delivery of any Conversion Notice (as defined in the Certificate), each of the Class II Directors shall be entitled to two and one-half (2.5) votes on all matters to be voted upon by the Board. In the event that all shares of Class B Stock and Class C Stock are converted into shares of Class A Stock, the agreements contained in this Section 1.1 shall expire with respect to the Class I and Class III Directors only and all Class I and Class III Directors shall immediately -3- resign as Directors of the Corporation. All other provisions of this Section 1.1 shall continue in full force and effect in accordance with the terms of this Agreement. (b) Subsidiary Directors. The President of the Corporation shall be nominated and elected to be the sole Director of each of its currently-owned and hereafter acquired wholly-owned operating subsidiaries (including, without limitation, Al Collins Graphic Design School, Ltd., a Delaware corporation, ABS Acquisition, Ltd., a Delaware corporation, BI Acquisition, Ltd., a Delaware corporation, and CEC Management, Inc., an Illinois corporation), unless and until his successor is appointed or elected in accordance with the by-laws of such subsidiaries; provided, that the Board of Directors shall have the right to redesignate the number and composition of the board of directors of any of its wholly-owned operating subsidiaries at any time with the prior written approval of Heller and Electra. Following the exercise by the holders of the Series C Preferred of their rights pursuant to Section 6(c) of the Certificate of Designations attached to and incorporated by reference in the Certificate the provisions of this Section 1.1(b) shall cease to be effective. (c) Bylaws. The By-laws of the Corporation in effect as of the date hereof shall remain in effect following the execution of this Agreement. (d) Compensation Committee. The Directors have appointed a Compensation Committee to determine and review the compensation of the executive officers and employees of the Corporation and to determine and review the granting of stock options, if any, to the executive officers and employees of the Corporation. Such committee shall have three (3) members none of whom shall be, to the extent possible, officers or employees of the Corporation. The Committee consist of the one (1) Heller Director and one (1) Electra Director and the fifth Director specified in Section 1.1(a)(iv) above. (e) Other Matters Subject to Stockholder Vote. ----------------------------------------- So long as any Warrant remains outstanding and the Voting Amount (as defined below) is greater than zero, each Stockholder (including any person or entity purchasing or succeeding, by conversion or otherwise, to any shares of Class A Stock or Class B Stock or other capital stock with the right to vote on such matter (the "Voting Stock")), agrees to vote all Shares held by such Stockholder on all matters submitted to the Stockholders for vote (other than those covered by subparagraph (a) above) in support of any determination made by the Requisite Equity Holders pursuant to the provisions of this subparagraph (e). (i) For purposes hereof, the term "Equity Holders" shall mean the holders of Voting Stock and the holders of the Warrants to the extent of the Voting Amount (as defined below) and teh term "Requisite Equity Holders" shall mean Equity Holders holding the Requisite -4- Amount (as defined below) and the term "Requisite Equity Holders" shall mean Equity Holders holding the Requisite Amount (as defined below) of Voting Stock deemed outstanding (assuming for purposes of this Section 1.1(e) only that the Warrants have been exercised for and/or converted into Voting Stock to the extent of the Voting Amount). "Requisite Amount" shall mean the number of shares of Voting Stock required to approve any particular corporate action pursuant to the Certificate, the By-laws or applicable law. "Voting Amount" shall mean a number of shares of Voting Stock, after giving effect to the deemed issuance and conversion of Warrant Shares described above, representing a percentage of the Voting Stock equal to the lesser of (x) 24.9% of the Voting Stock or (y) the percentage of outstanding Common Shares represented by the Warrant Shares assuming exercise of all the Warrants; provided, that clause (x) above shall not be applicable to any matter where pursuant to the Certificate, the By-laws or applicable law all Common Shares will constitute Voting Stock as defined herein; and; provided, further, that in all cases the Voting Amount shall be reduced on a share for share basis by all shares of Voting Stock received upon exercise of the Warrant and/or, to the extent applicable, the conversion of Warrant Shares into Class A Stock in accordance with the Certificate. (ii) In the event that a vote of Stockholders is required, by law, the Corporation's Certificate, the Corporation's bylaws, agreement or otherwise, in connection with any matter and unless waived in writing by the Requisite Equity Holders following notice to all Equity Holders, the Corporation shall send the Equity Holders a written ballot describing the matter(s) to be voted on not less than ten (10) nor more than sixty (60) days prior to the date on which such vote is scheduled to be taken, whether at a meeting or by written consent (the "Scheduled Date"). Each Equity Holder shall register its vote(s) on said ballot and return said ballot to the Corporation's Secretary at the Corporation's principal address not less than five (5) days prior to the Scheduled Date. The Corporation's Secretary shall then count the votes set forth on the ballots and send the holders of Voting Stock written notice of the vote of the Requisite Equity Holders with respect to each matter subject to vote by the holders of Voting Stock not less than one (1) day prior to the Scheduled Date. The holders of Voting Stock shall each then vote on the Scheduled Date as designated by the Requisite Equity Holders. 1.2. Issuance of Additional Shares to Heller. The Stockholders hereby acknowledge that Heller and certain of its successors or permitted assigns may purchase additional Common Shares and Preferred Shares from time to time to fund additional acquisitions or working capital needs of the Corporation. The Stockholders agree that Heller shall be permitted to purchase and the Corporation shall offer for sale to Heller investment units consisting of (a) additional shares of Series A Preferred at a price equal to $1,000.00 per share -5- and (b) additional Common Shares (which shall be Class B Stock and/or Class C Stock as specified by Heller) equal to the Dilution Number (as defined below) at a price equal to $.10 per Share (the original issuance price of the Common Shares as of the date hereof) or such other price as may be determined by the Board and subject to approval by Heller. The "Dilution Number" is the additional number of Common Shares to be issued to Heller equal to the number of additional Preferred Shares to be purchased by Heller multiplied by the ratio of the number of outstanding Common Shares prior to such purchase to the number of outstanding Preferred Shares prior to such purchase. Heller shall only purchase additional Shares in the investment units described herein. Notwithstanding anything herein to the contrary, neither Heller nor its affiliates shall be deemed by their execution of this Agreement or any other documents related hereto or the consummation of the transactions contemplated hereby to have committed or otherwise obligated themselves to make any equity or debt investments in, or provide any other financial accommodations to, the Corporation or its subsidiaries beyond those made on the date hereof. Dowdell and Larson shall have no right to participate in any offering of additional Shares by the Corporation; provided, that on or after such time as Heller has purchased a number of Preferred Shares (the "Heller Investment") having an aggregate Liquidation Value, at the time of their issuance, of $5,000,000.00, Larson and Dowdell shall be entitled to limited preemptive rights as set forth herein. The Corporation shall give Larson and Dowdell at least five (5) days prior written notice of any Heller Investment, which notice shall describe the terms of such Heller Investment. At such time as the Heller Investment exceeds $5,000,000.00, Dowdell and Larson shall have the right to purchase for a period of thirty (30) days (the "Exercise Period") after they receive written notice of an additional Heller Investment, to purchase upon the same terms and conditions, including purchase price per Common Share, as offered to Heller, a number of Class A Shares necessary to permit each of Larson and Dowdell to maintain the same percentage ownership interest in the Common Shares subsequent to the Heller Investment as they each maintained prior to such Heller Investment. All of the foregoing limited preemptive rights granted to Dowdell and Larson shall terminate with respect to all Shares purchased by Heller on or after such time as the Heller Investment equals $8,000,000.00 for the first time. Dowdell and Larson may exercise their rights hereunder by delivery of written notice to the Corporation and Heller at any time prior to the expiration of the Exercise Period, and they shall purchase all Common Shares to be purchased hereunder by the later of ten (10) business days after delivery of such notice or the date upon which Heller, or any of its Permitted Transferees (as defined below), purchase Shares pursuant to the Heller Investment. Notwithstanding anything herein to the contrary, Heller or such Permitted Transferees shall be permitted to purchase all Shares to be included in the Heller Investment (less the Common Shares which may be purchased by Larson and Dowdell hereunder) at any time prior to or during the Exercise Period. To the extent Dowdell or Larson elect not to exercise each of their respective rights hereunder or waive such rights, Heller or such Permitted Transferee shall purchase the Common Shares which could have been purchased by Larson and Dowdell hereunder by the later of (i) three (3) business days after the waiver or failure of Larson or Dowdell to exercise his rights hereunder or (ii) concurrent with the purchase of the remaining Shares included in the Heller Investment. All Shares issued to Larson and Dowdell shall be shares of Class A Stock unless the common equity securities to be -6- issued pursuant to the Heller Investment do not participate equally in dividends and distributions with the shares of Class A Stock, in which case Larson and Dowdell shall receive shares of stock of the same class or series as offered to all participants in the Heller Investment. 1.3. Additional Equity Issuances. (a) In case at any time or from time to time the Corporation shall issue or sell the following (collectively hereinafter referred to as the "Additional Capital Stock"): any shares of its capital stock or issue or sell options, rights or warrants to subscribe for or purchase shares of its capital stock (or securities convertible into shares of its capital stock) ("Options"), including but not limited to issuances pursuant to Section 1.2 above, other than (i) shares of Class D Stock to be issued to the holders of the Warrants upon exercise thereof or pursuant to an adjustment provided for under Section 5 of the Warrant Certificate and Section 5 of the Penalty Warrant Certificate issued to each of EIT and EAI, (ii) up to 12,492 Common Shares (subject to antidilution adjustments in the case of recapitalizations, recombinations or stock splits) issued upon the exercise of any stock options granted pursuant to present or future employee benefit plans or the Corporation, (iii) any Common Shares issued to the holders of the Provident Warrant upon exercise thereof, and (iv) any Common Shares issuable upon exercise of any Options which have previously been treated as Additional Capital Stock for purposes hereof, Electra, Heller and Provident, respectively, shall have the right to purchase, on the same terms and conditions and at the same time, such shares of Additional Capital Stock equal to the percentage of Common Shares then owned by Electra, Heller or Provident, as applicable; treating, for such purposes, all Warrants and Provident Warrants as if they had been exercised. (b) The Corporation shall at least 30 days prior to the consummation of any issuance or sale for the price per share described in subparagraph (a) above, deliver notice of such sale or issuance to Electra, Heller and Provident, which notice shall state the terms and conditions of the proposed sale or issuance and that such holders shall have the right to purchase shares of the Additional Capital Stock as provided in subparagraph (a) above. Electra, Heller and Provident shall have the option to exercise their respective preemptive rights no later than 15 days prior to the proposed date of the consummation of such issuance or sale, which exercise shall be consummated contemporaneously with such issuance or sale. If any or all of Electra, Provident and/or Heller exercises its preemptive rights in accordance with this subparagraph (b) and, with respect to Electra, subparagraph (c) below, the Corporation shall then be entitled to sell or issue to third parties the balance of the securities initially offered. The Corporation shall then be entitled for a period of 90 days thereafter to sell or issue to third parties any or all of the securities initially offered which were not purchased by Heller, Electra or Provident pursuant to this Section 1.3 on the terms and conditions and at the price originally offered. -7- (c) For the purposes of this Section 1.3, EIT and EAI shall have the right to exercise this preemptive right on a pari passu basis or on such other basis as they shall mutually determine. If EIT or EAI does not exercise its preemptive rights hereunder (the "Non-Participating Holder"), the Non-Participating Holder shall offer such shares of Additional Capital Stock to which it would otherwise be entitled to acquire hereunder (the "Remaining Shares") to whichever of EIT and EAI has exercised such rights (the "Exercising Holder"), and the Exercising Holder shall then be permitted, in accordance with the terms of this Section 1.3, to purchase the Remaining Shares in addition to the shares of Additional Capital Stock it would otherwise be entitled to acquire hereunder. 1.4. Stock Option Plan. Within thirty (30) days from the date hereof, the Stockholders shall vote their Shares or Voting Stock to approve a stock option plan (the "Plan" to be offered to the executive management of the Corporation and shall reserve not less than 12,215 shares of Class E Non-voting Stock for issuance upon the exercise of such options, (subject to antidilution adjustments in the case of recapitalizations, recombinations or stock splits). All such stock options to be issued pursuant to the Plan shall be issued pursuant to stock option agreements in a form acceptable to the Board; provided, that each such agreement shall require that as a condition to the exercise of any stock options by any person (an "Option Holder"), such Option Holder must execute and deliver a Restricted Stock Agreement, in a form approved by the Corporation, Heller and Electra, evidencing their agreement to be bound by the terms of this Agreement and providing for certain repurchase rights on behalf of the Corporation upon termination of such person's employment with the Corporation under the circumstances specified therein (the "Restricted Stock Agreement"). ARTICLE II ---------- 2.1. Applicable Definitions. For purposes of this Article II of this Agreement, the following definitions shall be applicable: (a) "Cash Inflows" shall equal the sum of all payments of dividends on the shares of Series C Preferred made to Electra as a holder of the shares of Series C Preferred, all payments in respect of the redemption of the shares of Series C Preferred made to Electra as a holder of the shares of Series C Preferred, and all cash proceeds received by Electra from any disposition of Covered Securities prior to or at any proposed date of sale pursuant to an offer under subsection 2.4(c) (net of all selling expenses, brokerage commissions and other expenses incurred in such sale), but shall not include the value of any Penalty Warrants issued by the Company to Electra. (b) "Cash Outflows" shall mean $5,000,000 (representing the amount invested by Electra under the Securities Purchase Agreement). (c) "Cause" with respect to Larson, shall have the meaning set forth in the Larson Employment Agreement, and with respect to Dowdell shall have the meaning set forth in the Dowdell Consulting Agreement, respectively. -8- (d) "Covered Securities" shall consist of the shares of Series C Preferred and the Warrants originally issued to Electra under the Securities Purchase Agreement, any Warrant Shares, and any shares received in a stock split or similar transaction with respect to the Warrant Shares. (e) "Disability" shall have the meaning set forth in the Larson Employment Agreement. (f) "Dowdell Consulting Agreement" means the Consulting and Non- Competition Agreement dated January 31, 1994 between the Corporation and Robert E. Dowdell, as amended on July 31, 1995. (g) "Fair Market Value" shall mean the fair market value of any Common Shares as agreed upon by the Corporation and Dowdell or Larson, as applicable or their respective estates within ten (10) days of the Corporation's receipt of notice of a Dowdell Termination Event or a Larson Termination Event pursuant to Section 2.2 hereof; provided, that if such parties fail to agree upon the fair market value of such Shares within such ten (10) day period, the Fair Market Value shall be determined as follows: (i) The Corporation and Dowdell or Larson, as applicable, or their respective estates, shall each select an independent and reputable investment banking firm or business appraiser (an "Appraiser") within five (5) days after the end of such ten (10) day period. If either party fails to specify an Appraiser, the determination of the Appraiser properly selected by the other party shall be binding on the parties hereto. (ii) The two (2) Appraisers shall have thirty (30) days to complete their respective appraisals and submit a written determination of Fair Market Value to the Corporation. If the lower of the two appraisals is at least ninety percent (90%) of the higher appraisal, then the Fair Market Value shall be the average of such appraisals. (iii) If the lower of the two appraisals is less than ninety percent (90%) of the higher appraisal, then the two Appraisers shall, within five (5) days after the submission of the last appraisal to the Corporation, jointly specify a third Appraiser. Within fifteen (15) days after its selection, the third Appraiser shall complete an appraisal and submit a written determination of Fair Market Value to the Corporation. The median of such three appraisals shall be the Fair Market Value The determination of the Appraisers as set forth above shall be final and binding on all parties thereto. The Corporation shall pay the fees and expenses of the Appraisers. In making any determination of Fair Market Value, (i) it shall be assumed that all outstanding stock options, warrants or similar rights to acquire capital stock issued by -9- the Corporation which are then exercisable or which will become exercisable within twelve (12) months from the date of such determination have been fully exercised, (ii) any discount which might otherwise be taken for the fact that the Common Shares represent a minority position on the Corporation shall be excluded, and (iii) the value of the Common Shares shall be appropriately discounted to reflect the lack of a public market for such Common Shares by a percentage reasonably determined. (h) "Family Member(s)" shall mean the husband, wife, child (whether natural or adopted), grandchild, parent or brother or sister of an individual, or a trust (or custodial arrangement), all of the primary beneficiaries of which are such related individuals, or a corporation, all of the primary stockholders of which are such individual and such related individuals; provided, that with respect to all intervivos transfers to Family Members, the Stockholder shall retain the sole right to vote such Shares. (i) "Good Reason" shall have the meaning set forth in the Larson Employment Agreement. (j) "IRR" shall mean an internal rate of return (compounded annually) which, when used to calculate the net present value as of July ___, 1995 of all Cash Inflows and Cash Outflows, causes such net amount to equal zero. For purposes of the net present value computation, each Cash Inflow and each Cash Outflow specified above shall be deemed to have been received or made on the first day of the month nearest to the actual date of such payment. (k) "Larson Employment Agreement" means the Employment and Non- Competition Agreement dated January 31, 1994 between the Corporation and John M. Larson, as amended on July 31, 1995. (l) "Liquidation Value" shall have the meaning set forth in the Certificate. (m) "Permitted Transferee" shall have the meaning set forth in Section 2.6 of this Agreement. (n) The expression, "sell, transfer or dispose," (and other forms of such words) as used herein, shall include a sale, transfer or any other act whereby a Stockholder's rights or ownership are disposed of or in any way impaired or affected, except as otherwise stated herein, provided, that it is understood and agreed that no pledge, hypothecation or other encumbrance of the Shares is permitted hereunder. 2.2. Redemption Upon Termination, Disability or Death of Larson or Dowdell. (a) Termination of Larson. Upon the death or Disability of Larson or the termination of his employment with the Corporation (a "Larson Termination Event"), -10- the Corporation shall have the option for a period of ninety (90) days after the occurrence of such event to purchase any or all Shares held by Larson or his estate (including any Shares held by any Family Members on the date of such repurchase) at a purchase price per Share equal to the Fair Market Value of such Common Shares and the Liquidation Value of such Preferred Shares; provided, that if his employment is terminated pursuant to Section 3.3 or 3.4 of the Larson Employment Agreement, as the result of the Corporation's refusal to renew the Larson Employment Agreement, or as the result of Larson's refusal to renew the Larson Employment Agreement for Good Reason, the Larson Termination Event shall not be deemed to occur until the expiration of the Non-Competition Period, as defined in the Larson Employment Agreement. Notwithstanding anything in the foregoing to the contrary, if such Larson Termination Event results from a termination of Larson's employment for Cause or if a material violation of any provision of Section 5 of the Larson Employment Agreement occurs after the termination of Larson's employment with the Corporation (a "Larson Covenant Breach"), the purchase price per Share for each Common Share owned by Larson, his estate or his Family Members shall be equal to the lowest of the Fair Market Value of such Common Shares and the original purchase price for such Common Shares as purchased by Larson; and the purchase price per Share for each Preferred Share owned by Larson, his estate or his Family Members shall be equal to the lesser of the Liquidation Value of such Preferred Shares and the Fair Market Value of such Preferred Shares. In the event the Corporation fails to purchase all of the Shares held by Larson hereunder in accordance with the previous sentences, Heller and Electra and each of their respective successors, assigns and Permitted Transferees shall have the option for an additional period of thirty (30) days to purchase on a pro rata basis (treating, for such purposes, all Warrants as if they had been exercised) any and all remaining Shares not purchased by the Corporation on the same terms and conditions applicable to the Corporation. Any purchases by Electra shall be allocated among EIT and EAI on a pro rata basis or on such other basis as they may mutually determine. To the extent that Heller or Electra does not purchase such number of Shares to which it would otherwise be entitled (the "Non-Participating Holder"), the Non-Participating Holder shall offer such shares to which it would otherwise be entitled to acquire hereunder (the "Remaining Shares") to the other (the "Exercising Holder"), and the Exercising Holder shall then be permitted to purchase the Remaining Shares in addition to the Shares it would otherwise be entitled to acquire hereunder. The closing of all purchases made hereunder shall be on or prior to the later of one hundred eighty (180) days after Larson receives written notification of the applicable Larson Termination Event or Larson Covenant Breach and sixty (60) days after the completion of any determination of Fair Market Value with respect to any Common Shares (the "Sale Date"). The purchase price for all Shares purchased shall be, at the sole discretion of the purchaser, either (i) made in immediately available funds or (ii) evidenced by a five (5) year promissory note of the purchaser, secured by a pledge of the Shares so purchased, bearing interest at the rate of two hundred (200) basis points above the then applicable five (5)-year treasury note rate, per annum payable semiannually and with principal -11- payments to be made in three equal annual installments beginning on the third anniversary of the issuance of the note (the "Deferred Payment Note"). (b) Termination of Dowdell. Upon the death of Dowdell or Dowdell's voluntary resignation as, or refusal to continue to serve as, a consultant and Director of the Corporation (a "Dowdell Termination Event"), the Corporation shall have the option for a period of ninety (90) days after the occurrence of such Dowdell Termination Event to purchase any or all Shares held by Dowdell or his estate (including any Shares held by any Family Members on the date of such repurchase) at a purchase price per Share equal to the Fair Market Value of such Common Shares and the Liquidation Value of such Preferred Shares. Upon the termination of the Dowdell Consulting Agreement for Cause or a material violation by Dowdell of any provision of Section 5 of the Dowdell Consulting Agreement (a "Dowdell Covenant Breach"), the purchase price per Share for each Common Share owned by Dowdell, his estate or his Family Members shall be equal to the lesser of the Fair Market Value of such Common Shares and the original purchase price for such Common Shares as purchased by Dowdell; and the purchase price per share for each Preferred Share owned by Dowdell, his estate or his Family Members, shall be equal to the lesser of the Liquidation Value of such Preferred Shares and the Fair Market Value of such Preferred Shares. In the event the Corporation fails to purchase all of the Shares held by Dowdell hereunder in accordance with the previous sentence, Heller and Electra and each of their respective successors, assigns and Permitted Transferees shall have the option for an additional period of thirty (30) days to purchase on a pro rata basis (treating, for such purposes, all Warrants as if they had been exercised, adjusted to reflect the Earned Amount as if fixed and finally determined as of such date), any and all remaining Shares not purchased by the Corporation or the same terms and conditions applicable to the Corporation. Any purchases by Electra shall be allocated among EIT and EAI on a pro rata basis or on such other basis as they may mutually determine. To the extent that Heller or Electra does not purchase such number of Shares to which it would otherwise be entitled, such Non-Participating Holder shall offer the Remaining Shares to the Exercising Holder, and the Exercising Holder shall then be permitted to purchase the Remaining Shares in addition to the Shares it would otherwise be entitled to acquire hereunder. The closing of all purchases made hereunder shall be no later than the Sale Date (as defined in Section 2.2(a)) and the purchase price for all Shares purchased shall be, at the sole discretion of the purchase, either (i) made in immediately available funds or (ii) evidenced by the Deferred Payment Note (as defined in Section 2.2(a)). (c) Application to Earn-Up Shares. For purposes of this Section 2.2 and not by way of limitation, all Common Shares acquired by Larson or Dowdell as described in Section 2.6(b) hereof shall be included within the Shares held by Larson and Dowdell, as applicable. 2.3. Restrictions on Sale of Shares by Dowdell; Rights of First Refusal. Dowdell, or any of his successors or permitted assigns, shall be permitted to sell, transfer or -12- dispose of Shares to any person in a transaction (not otherwise permitted by Section 2.6 below) solely in compliance with this Section 2.3. If Dowdell, or any of his successors or permitted assigns, shall desire at any time to sell, transfer or otherwise dispose of all or any part of the Shares held by him, then the Corporation and each of Heller, Electra and their respective successors, permitted assigns and any Permitted Transferees of Heller and Electra (collectively, the "Eligible Stockholders") shall have the first right to purchase on a pro rata basis (treating, for such purposes, all Warrants as if they had been exercised), such Shares for the price and in the manner hereinbelow provided. Any purchases by Electra shall be allocated among EIT and EAI on a pro rata basis or on such other basis as they may mutually determine. In the event that Dowdell, or any of his successors or permitted assigns, ("Offeror"), shall receive and intend to accept a bona fide written offer from a non-affiliated third party with a good business reputation for financial integrity, who is not directly or indirectly engaged in activities which are competitive with the Corporation's and its subsidiaries' operations and who is reasonably acceptable to the Board as a new Stockholder (a "Purchaser") for the sale, transfer or other disposition of all or any portion of his Shares (the "Offered Shares"), he shall not sell, transfer or dispose of said Shares without first giving the Corporation and each of the Eligible Stockholders a written notice ("Offer") of the offer to purchase or acquire such Offered Shares, which notice shall fully disclose all material terms of the proposed transaction, including, but not limited to, the name of the proposed Purchaser, the purchase price and terms of sale and any information as to the ability of the Purchaser to perform such offer that the Offeror then possesses (collectively, the "Offered Terms"). No proposed offer will be deemed to be an Offer for purposes hereof, and accordingly, no sale of the Offered Shares may be made to a Purchaser, if such offer or sale would give rise to a default or breach, or accelerate any payments due, under any contract, lease, loan or other agreement to which the Corporation is a party, irrespective of the exercise of the options described in this Section 2.3. (a) Purchase by the Corporation. For a period (the "Corporation Option Period") of thirty (30) days after the delivery of the Offer, the Corporation shall have the sole and exclusive right to purchase all or any portion of the Offered Shares specified in the Offer upon the Offered Terms. The Corporation may elect by written notice to the Stockholders to waive its right of first refusal. Immediately upon the expiration of the Corporation Option Period, or upon the waiver of such right, the Corporation shall give to each of the Eligible Stockholders written notice stating the Offered Terms for the Offered Shares specified in the Offer and the number and amount of Offered Shares, if any, for which the Corporation has not exercised its option under this subsection (a). To the extent practicable, the Corporation shall not purchase fewer Shares than the number of Shares, that when aggregated with all other concurrent sales by the Offeror, is necessary to prevent such purchase by the Corporation from being deemed to be a dividend pursuant to Section 302 of the Internal Revenue Code of 1986, as amended. (b) Purchase by Eligible Stockholders. --------------------------------- -13- (i) If within the Corporation Option Period the Corporation does not exercise the option provided in subsection (a) above for all of the Offered Shares or waives such option as to any portion of the Offered Shares, then for a period (the "Initial Option Period") of fifteen (15) days commencing upon expiration of the Corporation Option Period, each Eligible Stockholder shall have the option to purchase on the Offered Terms its pro rata share (treating, for such purposes, all Warrants as if they had been exercised) of the Offered Shares that the Corporation did not elect to purchase. (ii) In the event that any Eligible Stockholder fails to exercise in full its option to purchase its pro rata share of the Offered Shares within the Initial Option Period, the Corporation shall give to each Eligible Stockholder who has exercised such rights in full written notice of such failure within five (5) days after expiration of the Initial Option Period stating the number and amount of Offered Shares (the "Remaining Shares") which have not been accepted for purchase under subsection (b)(i) above. Each such Eligible Stockholder shall have an additional period of three (3) business days (the "Final Option Period") from the date of giving of such notice in which to exercise its option to purchase all or a specified portion of the Remaining Shares at the Offered Terms. In the event that Eligible Stockholders give notices under this subsection (b)(ii) for the purchase of an aggregate quantity of Shares in excess of the Remaining Shares available for purchase, then the Remaining Shares shall be allocated pro rata among the Eligible Stockholders giving such notice on the basis of their relative percentage ownership of Shares, provided, that if any Eligible Stockholder has requested to purchase less than its pro rata share of the Remaining Shares, then any Remaining Shares which remain unallocated as a result of such proration shall be allocated among the Eligible Stockholders desiring to purchase more than their pro rata share in proportion to the number of Shares specified in their respective notices until, to the extent possible, the options on all of the Remaining Shares are exercised. (c) Sale to Purchaser. After the expiration of the Corporation Option Period, the Initial Option Period and the Final Option Period, if the Corporation and Eligible Stockholders have not exercised their respective options to purchase all of the Offered Shares, then within a period ending sixty (60) days after the expiration of the Final Option Period, the Offeror may sell or otherwise dispose of all of the Offered Shares, but only in strict accordance with the Offered Terms. (d) Exercise of Option. Any option granted under this Section 2.3 may be exercised by notice in writing to the Offeror and to the Corporation stating that such -14- option is exercised, and also stating the specific number of Shares to which the exercise is applicable. (e) Delivery of Shares. In the event that the options under this Section 2.3 are exercised as to all of the Offered Shares, delivery of the certificate or certificates evidencing the Offered Shares involved, properly endorsed, shall be made by the Offeror against payment therefor within thirty (30) days after the expiration of the Final Option Period, or after the last date on which any of such options to purchase such Offered Shares have been exercised, at the principal office of the Corporation, unless a different time or place is agreed upon by the parties to such transaction, and the purchase price with respect to such option shall be paid in accordance with the Offered Terms. (f) Transfer of Option. Notwithstanding anything hereinabove to the contrary, the Eligible Stockholders may, at any time, elect to transfer all or a portion of their option rights to any Permitted Transferee in accordance with Section 2.6. (g) Reinstatement. Any Shares purchased pursuant to this Section 2.3 shall remain subject to this Agreement. If all the Offered Shares are not sold either pursuant to the Offer or the options granted hereunder within sixty (60) days after the Final Option Period, the provisions of this Section 2.3 shall remain in full force as to subsequent offers and sales for the Offered Shares. During such sixty (60)-day period, the Offeror shall be permitted to transfer the Offered Shares only pursuant to the Offered Terms or the options granted hereunder. Any such Purchaser of said Shares shall hold same subject to the terms and provisions of this Agreement, including, without limitation, the foregoing rights of first refusal. At the closing of any sale of the Offered Shares to the Purchaser, the Purchaser shall execute such document as the Corporation and Heller shall reasonably request agreeing to be bound by the terms of this Agreement. 2.4. Co-Sale. ------- (a) (i) In the event that Heller shall have received and intends to accept an offer from a Purchaser to purchase more than fifty percent (50%) of the Common Shares owned by Heller and its successors and permitted assigns at the time of such offer, Heller shall provide to all Stockholders a notice containing the information described in Section 2.3 (the "Heller Notice"), and, any other Stockholder or Provident holding Common Shares or Rights (a "Holder") may elect to participate in the contemplated transfer to the Purchaser by delivering written notice to Heller within thirty (30) days after receipt by said Holder (the "Co-Sale Election Period"). If any such Holder elects to participate in the contemplated transfer (a "Participating Holder"), Heller and each Participating Holder shall be entitled to participate in the contemplated -15- transfer pro rata based on the relative ownership of Common Shares (treating, for such purposes, all Warrants as if they had been exercised) among Heller and all Participating Holders. The purchase by the Purchaser of the Common Shares of Participating Holders and Heller shall be upon the terms set forth in the Heller Notice. If Electra and/or Provident elects to participate in any sale pursuant to this Section 2.4, Electra shall, to the extent required by the Purchaser thereof, exercise the Warrants or Provident Warrants, as applicable, for sufficient number of Warrant Shares or Provident Shares, as applicable to participate in such sale. (ii) In the event that Heller shall have received and intends to accept an offer from a Purchaser to purchase any of the Common Shares up to fifty (50%) percent of such Common Shares (for a purchase greater than fifty (50%) percent, clause (i) above shall apply), owned by Heller and its successors and permitted assigns at the time of the offer, Heller shall provide to Electra and Provident the Heller Notice and Electra or Provident may elect to participate in the contemplated transfer to the Purchaser by delivering written notice to Heller within the Co-Sale Election Period. If either Electra or Provident elects to participate in the contemplated transfer (hereinafter, for purposes of subsection 2.6(b) below, Electra and/or Provident, as applicable, shall be considered a "Participating Holder"), Electra and/or Provident, as applicable, shall be entitled to participate in the contemplated transfer pro rata (treating, for such purposes, all Warrants and Provident Warrants, as applicable, as if they had been exercised) with Heller. The purchase by the Purchaser of the Warrant Shares of Electra, the Provident Shares of Provident and the Common Shares of Heller shall be upon the terms set forth in the Heller Notice. If Electra and/or Provident elects to participate in any sale pursuant to this Section 2.4, Electra and/or Provident shall, to the extent required by the Purchaser thereof, exercise the Warrants or Provident Warrants, as applicable, for sufficient number of Warrant Shares or Provident Shares, as applicable, to participate in such sale. (b) Heller shall use its best efforts to obtain the agreement of the Purchaser to the inclusion of the Common Shares owned by the Participating Holders in lieu of a portion of Heller's Common Shares in the proposed sale; provided, that if the Purchaser declines to allow the participation of the Participating Holders in such sale, Heller may proceed with such transfer of Common Shares; provided, that Heller offers to purchase Shares from such Participating Holders on the same terms and in the same proportions as would have been applicable if such Shares were sold to the Purchaser. (c) Notwithstanding the terms of Section 2.3 or subsection 2.4(a), if the terms of any bona fide offer are such that an offer by any non- affiliated third party (i) is -16- made to all holders of outstanding Common Shares and Rights for all of their Common Shares and Rights and makes provision for the purchase or redemption of all Preferred Shares outstanding and Heller elects to sell all of the Common Shares owned by it; (ii) provides for the purchase of all or substantially all of the assets of the Corporation; or (iii) contemplates the merger of the Corporation with and into any other corporation in which the Holders would receive cash and/or securities of such other corporation; provided, however, that with respect to any actions contemplated by clauses (i), (ii) or (iii), such actions would result in Electra realizing on a cumulative basis an IRR of at least twenty percent (20%) to the date of the proposed closing date of such offer (in addition to the consideration to be received by Electra in such transaction with respect to securities of the Corporation it may own other than the Shares of Series C Preferred Stock and the Warrants issued under the Securities Purchase Agreement), then if the holders of a majority of the outstanding Common Shares (voting as a single class) desire to accept such offer, all of the Holders shall be deemed by virtue of their being parties to this Agreement to have (x) accepted such offer and they shall sell the Common Shares (and, to the extent applicable, Preferred Shares or Rights) held by them to the Purchaser making such offer on the terms contained in such offer and (y) agreed to vote all Shares held by them, regardless of class or series, to approve such transactions and to take all other actions necessary to permit the consummation of such transactions. 2.5. Involuntary Transfers by Bankrupt Stockholders. In the event that the Shares of any Stockholder shall be attached or taken in execution, or in the event a Stockholder shall be adjudicated a bankrupt or makes an assignment for the benefit of creditors or its Shares are taken by reason of garnishment or other charging order (hereinafter for convenience called a "Bankrupt Stockholder"), then the successors in interest to the Bankrupt Stockholder shall succeed to all of the rights of the Bankrupt Stockholder hereunder and shall be bound by all of the obligations of and restrictions upon a Stockholder under this Agreement, including, without limitation, the rights of first refusal of the Corporation and the Eligible Stockholders under Section 2.3, provided, however, if any such execution, assignment or involuntary adjudication of bankruptcy or charging order is not vacated, reversed or otherwise revoked within thirty (30) days after such action is taken, then the Corporation and the other Stockholders shall have the successive options to purchase all of the Shares of the Bankrupt Stockholder in the same manner and within the same time period (measured from thirty (30) days and after written notice of any such involuntary transfer is received by the Corporation and the other Stockholders) as provided above in Section 2.3, except (a) the purchase price for the Common Shares of the Bankrupt Stockholder shall be equal to the Fair Market Value of such Common Shares and the purchase price for the Preferred Shares owned by the Bankrupt Stockholder shall be equal to the Liquidation Value of such Preferred Shares, and (b) the purchase price shall be payable, subject to Section 2.8, by a Deferred Payment Note; provided that such note shall bear interest at the applicable federal rate as determined by the Internal Revenue Service pursuant to the Internal Revenue Code of 1986, as amended, for notes of similar duration at the date of purchase. -17- 2.6. Permitted Transfers. A Holder may not sell, transfer or dispose of any Shares or Rights except as expressly permitted by this Article II; provided, that nothing herein shall prevent any Shares from being sold, transferred or otherwise disposed of to the following persons or entities ("Permitted Transferees"): (a) In the case of any individual Holder, to any Family Member thereof whether pursuant to an intervivos gift or pursuant to the laws of descent or to any corporation, partnership, trust or other entity which is owned solely by such individual Holder and his Family Members; and distribution or in the case of Heller and Electra, to any officer, director or stockholder thereof, any "associate of a licensee," as defined in 13 CFR 107.3, or any entity controlled by, controlling or under common control with Heller, Provident or Electra; provided, that said donee or transferee executes and delivers to the Corporation for the benefit of the Corporation and the other Stockholders, concurrently with the acceptance of such gift or transfer, a written instrument, signifying his, her or its consent to be bound by the terms of this Agreement and any amendments hereto and to the assumption of all of the terms and provisions of this Agreement and any amendments hereto and provided further, that, if required by the Corporation, such transferor provides the Corporation with an opinion of securities counsel acceptable to the Corporation that such transfer is exempt from registration under the Securities Act of 1933, as amended, and applicable state securities laws; (b) By Heller, Electra or Provident to Dowdell or Larson; (c) In the case of the Shares or Rights held by Heller or Provident to any person if such transfer is ordered or required by any governmental body or agency with jurisdiction over Heller or Provident, as applicable, or their respective corporate affiliates or determined by Heller or Provident, as applicable, to be necessary in order to comply with any laws or regulations applicable to it or its corporate affiliates; (d) In the case of the Shares or Rights held by Electra, to Electra Fleming Equity Partners or any Affiliate (as defined in the Securities Purchase Agreement) of Electra; (e) In the case of the Provident Warrant, to any assignee of all of Provident's rights pursuant to the Credit Agreement, dated July 31, 1995, between Provident and the Corporation to the extent permitted thereby; and (f) In the case of Shares or Rights held by Heller, Electra or Provident, to any person if such transfer does not result in a violation of Section 2.4(a), in the case of Electra, Section 2.9(b) or, in the case of Provident, Section 2.10(b). 2.7. Assumption by Successors. It is expressly agreed that any Person which shall acquire, consistent with Article II, all or any part of the Shares or Rights in an arm's length transaction and for value or by reason of any permitted transfer or successorship (and including the transferee of a Bankrupt Stockholder for the purposes hereof) shall succeed to all of the -18- rights (except as otherwise hereinabove provided) and shall be bound by all of the obligations of and restrictions upon the transferring Holder under this Agreement. Contemporaneously with any such transfer or succession, the transferee or successor shall expressly assume in writing, all of the obligations of a Holder under this Agreement and shall execute and deliver to the Corporation for the benefit of the Corporation and the other Holders such document as the Corporation and Heller shall reasonably request agreeing to be bound by the terms of this Agreement. 2.8. Limitation on Purchases by the Corporation. Notwithstanding any other provision of this Agreement, the Corporation shall not have the right or the obligation to purchase any Shares except out of funds legally available therefor. If, at the time the Corporation desires to purchase Shares pursuant to this Agreement, its surplus is legally insufficient for that purpose, then, subject to compliance with applicable contractual obligations or restrictions, if any, the Corporation may borrow the funds necessary to complete the purchase and/or the entire available surplus of the Corporation may be applied to the purchase and the Corporation and the Stockholders agree promptly to take all such action as may be permitted by law and applicable contractual obligations or restrictions, if any, to arrange for such borrowing and/or to reduce the capital of the Corporation or to revalue its assets so as to increase its surplus to the extent necessary to permit the Corporation to purchase all of the Shares it desires to purchase. 2.9. Right of First Offer-Electra. ---------------------------- (a) If Electra desires to sell or otherwise transfer (except to Permitted Transferees under Section 2.6(a), (b) and (d) hereof) (the "Proposed Disposition") any of its shares of Series C Preferred, its Rights or any of its Warrant Shares or any other shares of the Corporation's capital stock which Electra may acquire from time to time (the "Disposition Securities"), whether or not to a then-identified third party (the "Electra Purchaser"), Electra shall notify Heller and the Corporation of such desire (the "Disposition Notice"). Electra agrees that for a period of thirty (30) days from delivery of the Disposition Notice (the "Discussion Period") to Heller that it will engage in good faith negotiations with Heller concerning the terms of such Proposed Disposition. If Electra and Heller are unable to reach a mutually satisfactory arrangement with respect to the Disposition Securities, Electra shall then be free for a period of six (6) months thereafter to so proceed with the Proposed Disposition regardless of the terms thereof and without the need to re-offer the Disposition Securities to Heller. If Electra does not conclude such a sale within such six (6) month period, then Electra shall be required to comply with this Section 2.9. Notwithstanding the foregoing, if Electra receives an unsolicited bona fide written offer during the Discussion Period to purchase part or all of its Securities, it shall not be required to comply with this Section 2.9 except for subparagraph (b) below and shall be permitted to effect the Proposed Disposition unless prohibited pursuant to said subparagraph (b). -19- (b) Electra shall not complete the Proposed Disposition (unless the Proposed Disposition is to a Permittee Transferee under Section 2.6(a), (b) and (d) hereof in which case this subparagraph (b) shall not apply) if the Corporation, by a good faith determination of the Board of Directors of the Corporation, notifies Electra in writing, within ten (10) days of the later of receipt of the Disposition Notice and receipt of written notice disclosing the identity of the Electra Purchaser that the Electra Purchaser is or is an Affiliate (as defined in the Securities Purchase Agreement) of a competitor of the Corporation or that, based upon a legal opinion of counsel to the Corporation with respect to federal and/or state educational regulatory affairs delivered to the Company and Electra, the consummation of the Proposed Disposition to the particular Electra Purchaser will have a materially adverse impact on the ability of the Corporation or any of its Subsidiaries to remain eligible for Title IV funding or the maintenance of accreditation by Corporation or any of its Subsidiaries with any Accrediting Body (as defined on the Securities Purchase Agreement); provided, that notwithstanding the foregoing, Electra shall not complete a proposed disposition of the Series C Preferred without the consent of the Corporation, which consent shall not be unreasonably withheld. (c) The provisions of this Section 2.9 shall not apply from and after the occurrence of a Preferred Stock Failure Event, or, once the shares of Series C Preferred Stock are no longer outstanding, any material breach of any term or provision contained in the Securities Purchase Agreement which survives pursuant to the terms thereof. 2.10. Right of First Offer-Provident. ------------------------------ (a) If Provident desires to sell or otherwise transfer (except to Permitted Transferees under Section 2.6(a), (b) and (c) hereof) (the "Proposed Disposition") any of its Provident Shares, its Rights or any other shares of the Corporation's capital stock which Provident may acquire from time to time (the "Disposition Securities"), whether or not to a then- identified third party (the "Provident Purchaser"), Provident shall notify Heller, Electra and the Corporation of such desire (the "Disposition Notice"). Provident agrees that for a period of thirty (30) days from delivery of the Disposition Notice (the "Discussion Period") to Heller that it will engage in good faith negotiations with Heller and Electra concerning the terms of such Proposed Disposition. If Provident, Heller and/or Electra are unable to reach a mutually satisfactory arrangement with respect to the Disposition Securities, Provident shall then be free for a period of six (6) months thereafter to so proceed with the Proposed Disposition regardless of the terms thereof and without the need to re- offer the Disposition Securities to Heller. If Provident does not conclude such a sale within such six (6) month period, then Provident shall be required to comply with this Section 2.10. Notwithstanding the foregoing, if Provident receives an unsolicited bona fide written offer during the Discussion Period to purchase part or all of its Securities, it shall not be required to comply with this Section 2.10 except for subparagraph (b) below and shall be permitted to effect the Proposed Disposition unless prohibited pursuant to said subparagraph (b). -20- Heller and Electra agree that in the event either enters into an agreement to purchase the Disposition Securities, such party shall notify the other of such agreement and offer to such other party the opportunity to participate in such purchase. If both Heller and Electra desire to participate in a purchase of the Disposition Securities they shall do so on a pro rata basis based upon their respective ownership of the Common Shares on a fully diluted basis. (b) Provident shall not complete the Proposed Disposition (unless the Proposed Disposition is to a Permittee Transferee under Section 2.6(a) and (b) hereof in which case this subparagraph (b) shall not apply) if the Corporation, by a good faith determination of the Board of Directors of the Corporation, notifies Provident in writing, within ten (10) days of the later of receipt of the Disposition Notice and receipt of written notice disclosing the identity of the Provident Purchaser that the Provident Purchaser is or is an Affiliate (as defined in the Securities Purchase Agreement) of a competitor of the Corporation or that, based upon a legal opinion of counsel to the Corporation with respect to federal and/or state educational regulatory affairs delivered to the Company and Provident, the consummation of the Proposed Disposition to the particular Provident Purchaser will have a materially adverse impact on the ability of the Corporation or any of its Subsidiaries to remain eligible for Title IV funding or the maintenance of accreditation by Corporation or any of its Subsidiaries with any Accrediting Body (as defined on the Securities Purchase Agreement). 2.11. Potential PTP Action. In the event of the commencement of any Potential PTP Action (as defined in the Dowdell Consulting Agreement), the Corporation shall have the right, exercisable by written notice given to Dowdell, to require that Dowdell's rights to take any of the following action shall be temporarily suspended, (a) the right to attend any meetings of the Board or otherwise participate or act as a Director, (b) the right to vote his Shares or otherwise participate in any meetings of the Stockholders, (c) the right to make any sale, transfer or disposition of his Shares or Rights or purchase any additional Shares or Rights, whether pursuant to options or otherwise, and (d) any other right to participate in any manner in the management, operations or finances of the Corporation. ARTICLE III ----------- 3.1. Certain Affiliated Transactions. Subject to approval by the Board of Directors and the provisions of the Securities Purchase Agreement, each of the Stockholders hereby acknowledges that Heller and certain of its affiliates (collectively, the "Heller Entities") are authorized and may from time to time charge the Corporation and its subsidiaries certain fees and require the reimbursement of certain expenses relating to (a) the consummation of the acquisition of certain subsidiaries and operations of the Corporation and (b) ongoing consulting, advisory or related services provided by the Heller Entities. -21- ARTICLE IV ---------- 4.1. Term of this Agreement. This Agreement shall be effective as of the date hereof and shall continue in effect until: (a) a written agreement to terminate is executed by the Corporation and Stockholders owning in excess of sixty percent (60%) of each class of the outstanding Common Shares (voting separately as a class); (b) the substantial permanent cessation of the Corporation's business; (c) the dissolution of the Corporation or the entering of an order against the Corporation for reorganization or liquidation under the United States Bankruptcy Code, or the assignment of substantially all of its assets for the benefit of creditors; or (d) the consummation of an IPO as defined in the Certificate; provided, however, that Electra shall continue to have the right to designate a Director of the Corporation and such Director shall continue to have the right to serve on the Corporation's and each Subsidiary's compensation and audit committees for so long as Electra owns at least five (5%) percent of the issued and outstanding Common Shares, or, if earlier, ten (10) years from the date hereof. In addition, each holder of Class B Stock, Class C Stock, Class D Stock and Class E Stock hereby agrees that upon the occurrence of any event described in subparagraph (d) above, such holder shall convert all shares of Class B Stock, Class C Stock, Class D Stock and Class E Stock into shares of Class A Stock in accordance with the terms of the Certificate. ARTICLE V --------- 5.1. Legend on Share Certificates. All certificates representing the Shares shall also have imprinted thereon a legend (in addition to or incorporating any securities law legend) substantially to the following effect: "The sale, transfer or other disposition or pledge or other encumbrance of Shares represented by this Certificate is subject to an Amended and Restated Stockholders' Agreement dated as of July 31, 1995, among Career Education Corporation, a Delaware corporation (the "Corporation"), and certain of the Stockholders of the Corporation, including certain options to purchase or sell the Shares represented by this Certificate. A copy of said Agreement is on file in the office of the Secretary of the Corporation and may be reviewed by application thereto. Each holder hereof shall be bound by all provisions of said Agreement." -22- 5.2. Amendments. This Agreement may be amended or altered in any of its provisions by the agreement of the Corporation and Stockholders owning in excess of sixty percent (60%) of each class of the outstanding Common Shares (voting separately as a class), and any such amendment or alteration shall become effective upon its being reduced to writing and executed by said parties; provided, that such amendment does not adversely affect any Holder not consenting thereto. 5.3. Notices. Notices, directions, consents and all other communications required or permitted hereunder shall be in writing and shall be deemed received and become effective upon personal delivery or by telecopy or the day after deposit with a reputable overnight courier to the several parties at the addresses specified below (or to any address which is changed after similar notice in writing). Larson: John M. Larson 36 Lakeside Drive South Barrignton, Illinois 60010 Dowdell: Robert E. Dowdell 1951 Calle Roja Santa Ana, California 92705 In each case with a copy to: Quinn, Kully & Morrow 520 South Grand Avenue Los Angeles, California 90071 Attention: Russel Kully, Esq. Heller: Heller Equity Capital Corporation 500 West Monroe Street 16th Floor Chicago, Illinois 60661 Attention: Todd H. Steele with copies to: Heller Equity Capital Corporation 500 West Monroe Street 16th Floor Chicago, Illinois 60661 Attention: Charles P. Brissman, Esq. Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd. 55 East Monroe Street Suite 3700 Chicago, Illinois 60603 Attention: Dennis B. Black, Esq. -23- Corporation: Career Education Corporation 2300 N. Barrignton, Suite 400 Hoffman Estates, Illinois 60195 Attention: President EIT and EAI: Electra Investment Trust P.L.C. 65 Kingsway London, England WC2B 6QT Attention: Mr. Philip Dyke with copies to: Electra, Inc. 70 E. 55th Street New York, New York 10022 Attention: Ms. Diane M. Smith Senior Vice President Provident: The Provident Bank One East Fourth Street Cincinnati, Ohio 45202 Attention: Eric L. Jeffries with copies to: Keating, Muething & Klekamp 1800 Provident Tower One East Fourth Street Attention: J. David Rosenberg, Esq. 5.4. General. (a) Governing Law. This Agreement shall be subject to and governed by the laws of the State of Delaware. (b) Superseding Agreement. This Agreement shall supersede, revoke and nullify all and any agreements bearing prior date by or between the Corporation and the Stockholders, or any of them, relating to or restricting the Stockholders on disposition, whether voluntary or involuntary, of all or any of the Shares. All such agreements, and all promises, rights, duties and obligations established pursuant thereto are hereby rendered void. (c) Counterparts. This Agreement may be executed in several counterparts (including by way of separate signature pages, which may be attached hereto) by one or more of the parties, each of which shall be deemed an original but all of said counterparts (and signature pages) shall be deemed to constitute or be part of one and the same instrument. -24- (d) Severability. Should any particular provisions of this Agreement be adjudicated to be invalid or unenforceable such provision shall be deemed deleted and the remainder of the Agreement, nevertheless, remain unaffected and fully enforceable; further, to the extent any provision herewith is deemed unenforceable by virtue of its scope but may be made enforceable by limitation thereof, the parties hereto agree the same shall, nevertheless, be enforceable to the fullest extent possible under the laws and public policies applied in the jurisdiction in which enforcement or interpretation is sought. (e) Ratification. This Agreement and all of the terms and provisions hereof shall be affirmed and approved by the Board. (f) Further Assurances. Upon request of the Corporation or any party hereto, all parties hereto agree to promptly execute and deliver all such other instruments and take all such other actions or any party hereto may reasonably request from time to time in order to effectuate and carry out the purposes, privileges, restrictions, rights and duties of the parties and other provisions of this Agreement. (g) Headings. The headings or other subdivision in this Agreement are intended solely for convenience of reference and shall be given no effect in the construction or interpretation of this Agreement. (h) Specific Performance. Each party's obligations under this Agreement are unique. The acquisition of Shares by a party entitled to purchase Shares under this Agreement is a unique prospect for the purchasing party. If any party should default in any of his or her obligations under this Agreement, the parties each acknowledge that it would be impracticable to measure the resulting damages and that it may not be possible to adequately compensate the injured party by monetary damages. Accordingly, without prejudice to his right to seek and recover monetary damages, each non-defaulting party shall be entitled to sue in equity for specific performance of this Agreement, and each party hereby expressly waives the defense that a remedy in damages would be adequate. Each party further acknowledges that any consideration to be paid for Shares by the Corporation under this Agreement is fair and adequate. (i) Consent to Jurisdiction and Service of Process. THE CORPORATION AND EACH OF THE STOCKHOLDERS HEREBY CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF COOK, STATE OF ILLINOIS AND IRREVOCABLY AGREES THAT ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE OTHER RELATED DOCUMENTS SHALL BE LITIGATED IN SUCH COURTS. EACH PARTY HERETO ACCEPTS FOR ITSELF AND HIMSELF, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS, AND IRREVOCABLY -25- AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. LARSON AND DOWDELL HEREBY DESIGNATE AND APPOINT CT CORPORATION SYSTEM AND SUCH OTHER PERSONS AS MAY HEREINAFTER BE SELECTED BY THE CORPORATION WHICH IRREVOCABLY AGREE IN WRITING TO SO SERVE AS AGENT TO RECEIVE ON SUCH PARTY'S BEHALF SERVICE OF ALL PROCESS IN ANY PROCEEDINGS IN ANY SUCH COURT, SUCH SERVICE BEING HEREBY ACKNOWLEDGED BY EACH PARTY TO BE EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT. A COPY OF ANY SUCH PROCESS SO SERVED SHALL BE MAILED BY REGISTERED MAIL TO EACH PARTY AS PROVIDED HEREIN, EXCEPT THAT UNLESS OTHERWISE PROVIDED BY APPLICABLE LAW, ANY FAILURE TO MAIL SUCH COPY SHALL NOT AFFECT THE VALIDITY OF SERVICE OF PROCESS. IF ANY AGENT APPOINTED BY A PARTY REFUSES TO ACCEPT SERVICE, SUCH PARTY HEREBY AGREES THAT SERVICE UPON IT BY MAIL SHALL CONSTITUTE SUFFICIENT NOTICE. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF THE CORPORATION TO BRING PROCEEDINGS AGAINST LARSON OR DOWDELL IN ANY OTHER COURT HAVING JURISDICTION THEREOVER. (j) Waiver of Jury Trial. THE CORPORATION AND EACH OF THE STOCKHOLDERS HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION AND THE RELATIONSHIP THAT IS BEING ESTABLISHED. THE CORPORATION AND EACH OF THE STOCKHOLDERS ALSO WAIVE ANY BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF THE OTHER PARTIES. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. THE CORPORATION AND EACH OF THE STOCKHOLDERS ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. THE CORPORATION AND EACH OF THE STOCKHOLDERS FURTHER WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY -26- WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR TO ANY OTHER DOCUMENTS OR MODIFICATIONS TO THIS AGREEMENT OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE TRANSACTION CONTEMPLATED HEREBY. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. IN WITNESS WHEREOF, the undersigned have set their hands and seals as of the date first above written. CAREER EDUCATION CORPORATION, a Delaware corporation By /s/ JOHN M. LARSON ------------------------------- John M. Larson Its President HELLER EQUITY CAPITAL CORPORATION, a Delaware corporation By /s/ TODD STEELE ------------------------------------ Its Vice President /s/ JOHN M. LARSON ------------------------------------ John M. Larson /s/ ROBERT E. DOWDELL ------------------------------------ Robert E. Dowdell ELECTRA INVESTMENT TRUST P.L.C., a corporation organized under the laws of England and Wales By /s/ HUGH M. MUMFORD ------------------------------- -27- Its Director --------------------------------- ELECTRA ASSOCIATES, INC., a Delaware corporation By /s/ R.J. LEWIS --------------------------------- Its Director --------------------------------- -28- Signature page continued. The undersigned hereby executes this Agreement solely for purposes of evidencing its agreement to be bound by or subject to Sections 1.3, 2.4, 2.6, 2.7, 2.8, 2.10 and 4.1, and Article V of this Agreement and shall not be deemed to be a party to this Agreement for any other purposes. PROVIDENT BANK, an Ohio banking corporation By /s/ KEVIN WARD --------------------------------------- Its Vice President --------------------------------------- -29- FIRST AMENDMENT TO CAREER EDUCATION CORPORATION AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT THIS FIRST AMENDMENT TO CAREER EDUCATION CORPORATION AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT (this "First Amendment") is made as of February 28, 1997 by and among Career Education Corporation, a Delaware corporation (the "Corporation"), Heller Equity Capital Corporation, a Delaware corporation ("Heller"), John M. Larson ("Larson"), Robert E. Dowdell ("Dowdell"), Wallace O. Laub and Constance L. Laub (the "Laubs"), William A. Klettke ("Klettke"), The Provident Bank, an Ohio banking corporation ("Provident"), Electra Investment Trust P.L.C., a corporation organized under the laws of England and Wales, and its successors and assigns ("EIT"), and Electra Associates, Inc., a Delaware corporation, and its successors and assigns ("EAI," and together with EIT, "Electra"). Heller, EIT, EAI, Larson, Dowdell, the Laubs and Klettke are hereafter collectively referred to as the "Stockholders." Capitalized terms not otherwise defined herein shall have the respective meanings ascribed to such terms in the Stockholders' Agreement (defined below). WITNESSETH: WHEREAS, the Corporation, the Stockholders and Provident are parties to that certain Career Education Corporation Amended and restated Stockholders' Agreement dated as of July 31, 1995 (the "Stockholders' Agreement"); WHEREAS, the Stockholders are the holders of all of the issued and outstanding capital stock and options to acquire capital stock of the Corporation (other than certain warrants held by Provident and certain options issued to employees of the Corporation pursuant to its 1995 Stock Option Plan dated August 23, 1995 (as amended, the "Management Option Plan"); WHEREAS, pursuant to that certain Securities Purchase Agreement (the "Securities Purchase Agreement") of even date herewith among the Corporation and the Stockholders other than EAI (such Stockholders sometimes being referred to herein as the "Purchasers"), the Purchasers have agreed to provide additional equity financing to the Corporation in the amount of up to Seven Million Five Hundred Thousand Dollars ($7,500,000) in exchange for up to 7,500 shares of the Corporation's Series D Redeemable Preferred Stock, with a stated value of One Thousand Dollars ($1,000) per share, together with certain warrants to purchase the Corporation's Class E Non-Voting Common Stock, on the terms and subject to the conditions set forth in the Securities Purchase Agreement; and WHEREAS, in connection with the transactions contemplated by the Securities Purchase Agreement, the parties hereto now wish to make certain amendments to the Stockholders' Agreement. NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be bound, hereby agree as follows: 1. Definition of Shares and Preferred Shares. All references in the Stockholders' Agreement to "Shares" and/or "Preferred Shares" shall be deemed to include (in addition to the Corporation's Class A Stock, Class B Stock, Class C Stock, Class D Stock, Class E Stock, Series A Preferred, Series B Preferred, and Series C Preferred), the Corporation's Series D Preferred Stock, $.01 par value (the "Series D Preferred"), of which 2,000 shares have been issued as of the date hereof and of which up to an additional 5,500 shares may be issued in the future pursuant to the Securities Purchase Agreement. 2. Additional Warrants. Pursuant to the Securities Purchase Agreement, the Corporation has agreed to issue warrants (the "Additional Warrants") to purchase up to 8,924 shares of the Corporation's Class E Stock, of which 2,380 Additional Warrants have been issued as of the date hereof and of which up to an additional 6,544 Additional Warrants may be issued in the future. With respect to such Additional Warrants, the Stockholders hereby agree as follows: (a) All references in the Stockholders' Agreement, as amended by this First Amendment, to the term "Additional Warrants" shall refer to the Additional Warrants (as defined herein). All references in the Stockholders' Agreement, as amended by this First Amendment, to the term "Additional Warrant Shares" shall mean the shares of Class E Stock to be issued upon exercise of the Additional Warrants. (b) All references in the Stockholders' Agreement to "Rights" shall be deemed to include the Additional Warrants. (c) Section 1.3(a) of the Stockholders' Agreement is hereby amended and restated in its entirety as follows: (a) In case at any time or from time to time the Corporation shall issue or sell the following (collectively hereinafter referred to as the "Additional Capital Stock"): any shares of its capital stock or issue or sell options, rights or warrants to subscribe for or purchase shares of its capital stock (or securities convertible into shares of its capital stock) ("Options"), including but not limited to issuances pursuant to Section 1.2 above, other than (i) shares of Class D Stock to be issued to the holders of the Warrants upon exercise thereof or pursuant to an adjustment provided for under Section 5 of the Warrant Certificate and Section 5 of the Penalty Warrant Certificate issued to each of EIT and EAI, (ii) up to 13,400 Common Shares (subject to -2- antidilution adjustments in the case of recapitalizations, recombinations or stock splits) issued upon the exercise of any stock options granted pursuant to present or future employee benefit plans or the Corporation, (iii) any Common Shares issued to the holders of the Provident Warrant upon exercise thereof, (iv) shares of Class E Stock to be issued to the holders of the Additional Warrants upon exercise thereof or pursuant to an adjustment provided for under Section 5 of each of the Warrant Certificates evidencing such Additional Warrants, and (v) any Common Shares issuable upon exercise of any Options which have previously been treated as Additional Capital Stock for purposes hereof, Electra, Heller and Provident, respectively, shall have the right to purchase, on the same terms and conditions and at the same time, such shares of Additional Capital Stock equal to the percentage of Common Shares then owned by Electra, Heller or Provident, as applicable; treating, for such purposes, all Warrants, Provident Warrants and Additional Warrants as if they had been exercised. (d) Section 2.4(a) of the Stockholders' Agreement is hereby amended and restated in its entirety as follows: (a) (i) In the event that Heller shall have received and intends to accept an offer from a Purchaser to purchase more than fifty percent (50%) of the Common Shares owned by Heller and its successors and permitted assigns at the time of such offer, Heller shall provide to all Stockholders and Provident a notice containing the information described in Section 2.3 (the "Heller Notice"), and, any other Stockholder or Provident holding Common Shares or Rights (a "Holder") may elect to participate in the contemplated transfer to the Purchaser by delivering written notice to Heller within thirty (30) days after receipt by said Holder (the "Co-Sale Election Period"). If any such Holder elects to participate in the contemplated transfer (a "Participating Holder"), Heller and each Participating Holder shall be entitled to participate in the contemplated transfer pro rata based on the relative ownership of Common Shares (treating, for such purposes, all Warrants, the Provident Warrant and all Additional Warrants, as if they had been exercised) among Heller and all Participating Holders. The purchase by the Purchaser of the Common Shares of the Participating Holders and Heller shall be upon the terms set forth in the Heller Notice. If Electra and/or Provident elects to participate in any sale pursuant to this Section 2.4(a)(i), Electra and/or Provident shall, to the extent required by the Purchaser thereof, exercise the Warrants or Provident Warrants, as applicable, for sufficient number of Warrant Shares or Provident Shares, as applicable to participate in such sale. If any Holder elects to participate in any sale pursuant to this Section 2.4(a)(i), such Holder shall, to the extent required by the Purchaser thereof, exercise its Additional Warrants for a sufficient number of Additional Warrant Shares to participate in such sale. -3- (ii) In the event that Heller shall have received and intends to accept an offer from a Purchaser to purchase any of the Common Shares up to fifty (50%) percent of such Common Shares (for a purchase greater than fifty (50%) percent, clause (i) above shall apply), owned by Heller and its successors and permitted assigns at the time of the offer, Heller shall provide to Electra and Provident the Heller Notice, and Electra or Provident may elect to participate in the contemplated transfer to the Purchaser by delivering written notice to Heller within the Co-Sale Election Period. If either Electra or Provident elects to participate in the contemplated transfer (hereinafter, for purposes of subsection 2.4(b) below, Electra and/or Provident, as applicable, shall be considered a "Participating Holder"), Electra and/or Provident, as applicable, shall be entitled to participate in the contemplated transfer pro rata (treating, for such purposes, all Warrants, Provident Warrants and all Additional Warrants, as applicable, as if they had been exercised) with Heller. The purchase by the Purchaser of the Warrant Shares and Additional Warrant Shares of Electra, the Provident Shares and Additional Warrant Shares of Provident and the Common Shares and Additional Warrant Shares of Heller shall be upon the terms set forth in the Heller Notice. Furthermore, if Electra and/or Provident elects to participate in any sale pursuant to this Section 2.4(a)(ii), Electra and/or Provident shall, to the extent required by the Purchaser thereof, exercise the Warrants, Provident Warrants and/or Additional Warrants, as applicable, for sufficient number of Warrant Shares, Provident Shares and/or Additional Warrant Shares, as applicable, to participate in such sale. 3. Waivers. (a) Issuances of Additional Shares to Heller. Notwithstanding the provisions of Section 1.2 of the Stockholders' Agreement, the Stockholders and Provident hereby agree that Heller shall be permitted to purchase and the Corporation shall offer for sale to Heller investment units consisting of Series D Preferred and Additional Warrants in accordance with the Securities Purchase Agreement. Furthermore, Larson, Dowdell, the Laubs and Klettke hereby (i) waive all presently existing and future rights granted to them pursuant to Section 1.2 of the Stockholders Agreement with respect to any Heller Investment between $5,000,000 and $8,000,000, (ii) acknowledge and agree that as a result of the consummation of the Initial Investment (as defined in Securities Purchase Agreement), the Heller Investment is now in excess of $8,000,000, and (iii) therefore, all rights of Larson, Dowdell, the Laubs and Klettke to purchase additional Shares (beyond those previously purchased, if any) pursuant to Section 1.2 of the Stockholders' Agreement are now expired and terminated. (b) Additional Equity Issuances. Each of Heller, Electra and Provident hereby acknowledges and agrees that the Additional Capital Stock purchased or to be purchased pursuant to the Securities Purchase Agreement by each of such parties is in -4- proportion to the percentage of Common Shares now owned by each of Heller, Electra and Provident, respectively, and hereby waives its preemptive rights under Section 1.3 of the Stockholders' Agreement with respect to all transactions contemplated by the Securities Purchase Agreement. (c) Electra Securities Purchase Agreement and Warrants. Except as otherwise specifically provided in the Securities Purchase Agreement or the Securities (as defined in the Securities Purchase Agreement) issued pursuant thereto, each of EIT and EAI hereby waives all of its rights to purchase or otherwise receive Additional Capital Stock as a result of the transactions contemplated by the Securities Purchase Agreement, including without limitation all rights granted pursuant to (i) that certain Securities Purchase Agreement dated July 31, 1995 between Electra and the Corporation, (ii) the Warrants; and (iii) Series C Preferred Stock Rights granted pursuant to Exhibit A to the Restated Certificate of Incorporation of Career Education Corporation, as amended. (d) Provident Warrant. Provident hereby waives all of its rights to purchase or otherwise receive Additional Capital Stock as a result of the transactions contemplated by the Securities Purchase Agreement, other than those rights provided in the Provident Warrant. Furthermore, Provident and the Corporation hereby agree that, notwithstanding any provision of the Provident Warrant to the contrary, for each Share of Class D Stock to which Provident is or may become entitled to pursuant to the Provident Warrant as a result of the transactions contemplated by the Securities Purchase Agreement, the Corporation shall issue to Provident, and Provident shall accept, in exchange therefor, one Share of Class E Stock. In addition, Provident and the Corporation hereby agree that, assuming the issuance of all 8,924 Additional Warrants contemplated by the Securities Purchase Agreement, the Additional Capital Stock which Provident will be entitled to receive upon exercise of the Provident Warrant as a result of the issuance of such Additional Warrants is four hundred ninety (490) Shares of Class E Stock, which number of Shares will be reduced pro rata in the event any lesser number of Additional Warrants had been issued at the time of exercise of the Provident Warrant. 4. Issuance of Securities to the Klettke IRA. The Company and Klettke hereby agree and acknowledge that certain Shares and Rights of which Klettke is the beneficial owner have been and/or may be issued to First Chicago, Custodian, William A. Klettke IRA (the "Klettke IRA"). Klettke hereby represents and warrants that he is the sole beneficiary of the Klettke IRA with power of direction, and agrees that, in the event of the issuance of any Shares and/or Rights to the Klettke IRA, he will cause the Klettke IRA to be bound by the terms of the Stockholders Agreement, as amended hereby, the Securities Purchase Agreement and all other agreements governing the rights of the Corporation's stockholders to which Klettke is a party. Furthermore, Klettke hereby agrees to execute and deliver, or to cause the Klettke IRA to execute and deliver, such other documents as the Company may reasonably require in connection with any issuance of such Shares and/or Rights to the Klettke IRA and Klettke's beneficial ownership thereof. -5- 5. Ratification of Prior Issuance of Shares to Klettke IRA. Each of the Stockholders (other than Klettke) and Provident hereby ratifies, confirms and approves the prior issuance to the Klettke IRA of 824 Shares of Class E Stock and 70 Shares of Series A Preferred, and hereby acknowledges its, his or her consent to such issuance and its, his or her waiver of all rights to purchase or otherwise receive Additional Capital Stock as a result of such issuance, including without limitation all rights granted pursuant to the agreements and other documents described in Section 3 of this First Amendment. 6. References to the Stockholders' Agreement. All references to "this Agreement" or similar language in the Stockholders' Agreement shall be deemed to refer to the Stockholders' Agreement as amended by this First Amendment. 7. Stockholders' Agreement. Except as modified by this First Amendment, the Stockholders' Agreement shall remain in full force and effect, and is hereby ratified and confirmed. [SIGNATURE PAGE FOLLOWS] -6- IN WITNESS WHEREOF, the undersigned have set their hands and seals as of the date first above written. CAREER EDUCATION CORPORATION, a Delaware corporation By: /s/ JOHN M. LARSON -------------------------------- John M. Larson Its President HELLER EQUITY CAPITAL CORPORATION, a Delaware corporation By: /s/ RENEE REMPE -------------------------------- Its Vice President /s/ JOHN M. LARSON -------------------------------- John M. Larson /s/ ROBERT E. DOWDELL -------------------------------- Robert E. Dowdell /s/ WALLACE O. LAUB -------------------------------- Wallace O. Laub /s/ CONSTANCE L. LAUB -------------------------------- Constance L. Laub /s/ WILLIAM KLETTKE -------------------------------- William Klettke ELECTRA INVESTMENT TRUST P.L.C., a corporation organized under the laws of England and Wales By: /s/ HUGH M. MUMFORD ------------------------------- Its: Director ------------------------------- ELECTRA ASSOCIATES, INC., a Delaware corporation By: R.J. LEWIS ------------------------------ Its: Director ------------------------------ The undersigned hereby executes this Agreement solely for purposes of evidencing its agreement to be bound or subject to this First Amendment to the extent applicable to Sections 1.3, 2.4, 2.6, 2.7, 2.8, 2.10 and 4.1, and Article V of the Stockholders Agreement or its rights under the Provident Warrant, and shall not be deemed to be a party to this First Amendment for other purposes. PROVIDENT BANK, an Ohio banking corporation By: /s/ KEVIN WARD ---------------------------------- Its: Vice President --------------------------------- SECOND AMENDMENT TO CAREER EDUCATION CORPORATION AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT THIS SECOND AMENDMENT TO CAREER EDUCATION CORPORATION AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT (this "Second Amendment") is made as of May 30, 1997 by and among Career Education Corporation, a Delaware corporation (the "Corporation"), Heller Equity Capital Corporation, a Delaware corporation ("Heller"), John M. Larson ("Larson"), Robert E. Dowdell ("Dowdell"), Wallace O. Laub and Constance L. Laub (the "Laubs"), William A. Klettke ("Klettke"), The Provident Bank, an Ohio banking corporation ("Provident"), Electra Investment Trust P.L.C., a corporation organized under the laws of England and Wales, and its successors and assigns ("EIT"), and Electra Associates, Inc., a Delaware corporation, and its successors and assigns ("EAI," and together with EIT, "Electra"). Heller, EIT, EAI, Larson, Dowdell, the Laubs and Klettke are hereafter collectively referred to as the "Stockholders." Capitalized terms not otherwise defined herein shall have the respective meanings ascribed to such terms in the Stockholders' Agreement (defined below). WITNESSETH: WHEREAS, the Corporation, the Stockholders and Provident are parties to that certain Career Education Corporation Amended and Restated Stockholders' Agreement dated as of July 31, 1995, as amended by that certain First Amendment to Career Education Corporation Amended and Restated Stockholders' Agreement dated as of February 28, 1997 (the "Stockholders' Agreement"); WHEREAS, the Stockholders are the holders of all of the issued and outstanding capital stock and options to acquire capital stock of the Corporation (other than certain warrants held by Provident and certain options issued to employees of the Corporation pursuant to its 1995 Stock Option Plan dated August 23, 1995 (as amended, the "Management Option Plan"); WHEREAS, pursuant to that certain Securities Purchase Agreement (the "Securities Purchase Agreement") of even date herewith among the Corporation and certain of the Stockholders (such Stockholders sometimes being referred to herein as the "Purchasers"), the Purchasers have agreed to provide additional equity financing to the Corporation in the amount of up to Fifteen Million Dollars ($15,000,000) in exchange for up to 15,000 shares of the Corporation's Series D Redeemable Preferred Stock, with a stated value of One Thousand Dollars ($1,000) per share, together with certain Warrants to purchase the Corporation's Class E Non-Voting Common Stock, on the terms and subject to the conditions set forth in the Securities Purchase Agreement; and WHEREAS, in connection with the transactions contemplated by the Securities Purchase Agreement, the parties hereto now wish to make certain amendments to the Stockholders' Agreement. NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be bound, hereby agree as follows: 1. Definition of Shares and Preferred Shares. All references in the Stockholders' Agreement to "Shares" and/or "Preferred Shares" shall be deemed to include (in addition to the Corporation's Class A Stock, Class B Stock, Class C Stock, Class D Stock, Class E Stock, Series A Preferred, Series B Preferred, and Series C Preferred), the Corporation's Series D Preferred Stock, $.01 par value (the "Series D Preferred"), of which 7,500 shares have been issued as of the date hereof and of which up to an additional 15,000 shares are being or may be issued in the future pursuant to the Securities Purchase Agreement. 2. Additional Warrants. Pursuant to the Securities Purchase Agreement, the Corporation has agreed to issue warrants (the "Additional Warrants") to purchase up to 36,186 shares of the Corporation's Class E Stock, which are being or may be issued in the future pursuant to the Securities Purchase Agreement. With respect to such Additional Warrants, the Stockholders hereby agree as follows: (a) All references in the Stockholders' Agreement, as amended by this Second Amendment, to the term "Additional Warrants" shall refer to the Additional Warrants (as defined herein). All references in the Stockholders' Agreement, as amended by this Second Amendment, to the term "Additional Warrant Shares" shall mean the shares of Class E Stock to be issued upon exercise of the Additional Warrants. (b) All references in the Stockholders' Agreement to "Rights" shall be deemed to include the Additional Warrants. 3. Waivers. (a) Issuances of Additional Shares to Heller. Notwithstanding the provisions of Section 1.2 of the Stockholders' Agreement, the Stockholders and Provident hereby agree that Heller shall be permitted to purchase and the Corporation shall offer for sale to Heller investment units consisting of Series D Preferred and Additional Warrants in accordance with the Securities Purchase Agreement. (b) Additional Equity Issuances. Each of Heller, Electra and Provident hereby acknowledges and agrees that the Additional Capital Stock purchased or to be purchased pursuant to the Securities Purchase Agreement by each of such parties is in proportion to the percentage of Common Shares now owned by each of Heller, Electra and Provident, respectively, and hereby waives its preemptive rights under Section 1.3 of the -2- Stockholders' Agreement with respect to all transactions contemplated by the Securities Purchase Agreement. (c) Electra Securities Purchase Agreement and Warrants. Except as otherwise specifically provided in the Securities Purchase Agreement or the Securities (as defined in the Securities Purchase Agreement) issued pursuant thereto, each of EIT and EAI hereby waives all of its rights to purchase or otherwise receive Additional Capital Stock as a result of the transactions contemplated by the Securities Purchase Agreement, including without limitation all rights granted pursuant to (i) that certain Securities Purchase Agreement dated July 31, 1995 between Electra and the Corporation, (ii) the Warrants; and (iii) Series C Preferred Stock Rights granted pursuant to Exhibit A to the Restated Certificate of Incorporation of Career Education Corporation, as amended. (d) Provident Warrant. Provident hereby waives all of its rights to purchase or otherwise receive Additional Capital Stock as a result of the transactions contemplated by the Securities Purchase Agreement, other than those rights provided in the Provident Warrant. Furthermore, Provident and the Corporation hereby agree that, notwithstanding any provision of the Provident Warrant to the contrary, for each Share of Class D Stock to which Provident is or may become entitled to pursuant to the Provident Warrant as a result of the transactions contemplated by the Securities Purchase Agreement, the Corporation shall issue to Provident, and Provident shall accept, in exchange therefor, one Share of Class E Stock. In addition, Provident and the Corporation hereby agree that, assuming the issuance of all 36,186 Additional Warrants contemplated by the Securities Purchase Agreement, the Additional Capital Stock which Provident will be entitled to receive upon exercise of the Provident Warrant as a result of the issuance of such Additional Warrants is Eight Hundred Twenty-Five (825) Shares of Class E Stock, which number of Shares will be reduced pro rata in the event any lesser number of Additional Warrants had been issued at the time of exercise of the Provident Warrant. 4. Issuance of Securities to the Klettke IRA. The Company and Klettke hereby agree and acknowledge that certain Shares and Rights of which Klettke is the beneficial owner have been and/or may be issued to First Chicago, Custodian, William A. Klettke IRA (the "Klettke IRA"). Klettke hereby represents and warrants that he is the sole beneficiary of the Klettke IRA with power of direction, and agrees that, in the event of the issuance of any Shares and/or Rights to the Klettke IRA, he will cause the Klettke IRA to be bound by the terms of the Stockholders Agreement, as amended hereby, the Securities Purchase Agreement and all other agreements governing the rights of the Corporation's stockholders to which Klettke is a party. Furthermore, Klettke hereby agrees to execute and deliver, or to cause the Klettke IRA to execute and deliver, such other documents as the Company may reasonably require in connection with any issuance of such Shares and/or Rights to the Klettke IRA and Klettke's beneficial ownership thereof. -3- 5. References to the Stockholders' Agreement. All references to "this Agreement" or similar language in the Stockholders' Agreement shall be deemed to refer to the Stockholders' Agreement as amended by this Second Amendment. 6. Stockholders' Agreement. Except as modified by this Second Amendment, the Stockholders' Agreement shall remain in full force and effect, and is hereby ratified and confirmed. [SIGNATURE PAGE FOLLOWS] -4- IN WITNESS WHEREOF, the undersigned have set their hands and seals as of the date first above written. CAREER EDUCATION CORPORATION, a Delaware corporation By /s/ JOHN M. LARSON ------------------------------- John M. Larson Its President HELLER EQUITY CAPITAL CORPORATION, a Delaware corporation By /s/ RENEE REMPE ------------------------------- Its Vice President /s/ JOHN M. LARSON ------------------------------- John M. Larson /s/ ROBERT E. DOWDELL ------------------------------- Robert E. Dowdell /s/ WALLACE O. LAUB ------------------------------- Wallace O. Laub /s/ CONSTANCE L. LAUB ------------------------------- Constance L. Laub /s/ WILLIAM KLETTKE ------------------------------- William Klettke ELECTRA INVESTMENT TRUST P.L.C., a corporation organized under the laws of England and Wales By A.M. VINTON ------------------------------- Its Authorized Signatory ------------------------------ ELECTRA ASSOCIATES, INC., a Delaware corporation By R.J. LEWIS ------------------------------- Its ------------------------------ The undersigned hereby executes this Agreement solely for purposes of evidencing its agreement to be bound or subject to this Second Amendment to the extent applicable to Sections 1.3, 2.4, 2.6, 2.7, 2.8, 2.10 and 4.1, and Article V of the Stockholders Agreement or its rights under the Provident Warrant, and shall not be deemed to be a party to this Second Amendment for other purposes. PROVIDENT BANK, an Ohio banking corporation [PROVIDENT DID NOT SIGN] By_________________________________________ Its________________________________________ EX-10.15 9 WARRANT AGREEMENT DTD 7/31/95 EXHIBIT 10.15 WARRANT AGREEMENT THIS WARRANT AGREEMENT ("Agreement") is made and entered into as of July 31, 1995, by and between CAREER EDUCATION CORPORATION, a Delaware corporation (the "Company"), and THE PROVIDENT BANK, an Ohio banking corporation ("Holder" and sometimes referred to as the "Initial Holder"). WHEREAS, the Initial Holder, Company, certain subsidiaries of Company, and various lenders and other financial institutions as described therein are parties to a certain Credit Agreement dated as of even date herewith, as the same may be amended or supplemented from time to time (the "Credit Agreement"); and WHEREAS, as a condition to the obligations of the Initial Holder under the Credit Agreement, the Company is required to (a) enter into this Agreement, and (b) issue to the Initial Holder stock purchase warrants to purchase certain shares of Common Stock (as defined below) upon an exercise of said warrants at the price and upon the terms and conditions specified herein and therein (said warrants and all warrants subsequently issued by the Company to the Initial Holder, its successors and assigns including any Holder (as defined below), pursuant hereto or pursuant to any of said warrants, whether upon transfer, exchange or replacement thereof or otherwise, being hereinafter referred to collectively as the "Warrants", and each individually as a "Warrant"); NOW, THEREFORE, the parties hereto agree as follows: 1. CERTAIN DEFINITIONS. In addition to terms defined elsewhere in this Agreement, the following terms shall have the following respective meanings: "Applicable Holders" shall mean in the case of a registration pursuant to Section 6.1 hereof, those Holders requesting inclusion of Warrant Stock in such registration and whose Warrant Stock will be included in such registration. "Appraised Value" shall mean a price per share equal to the greater of (i) the common stock book value of the Company, as of the end of the most recently completed fiscal quarter and as reflected on the balance sheet of the Company as of such date, plus the aggregate amount of proceeds to be received by the Company upon the exercise, conversion and/or exchange of all warrants, options and convertible securities of the Company or other rights to acquire equity of the Company whose exercise price is less than the fair market value of the Common Stock and which are then -2- exercisable or which will become exercisable within twelve (12) months from the date of such determination (the "Exercisable Convertible Securities"), divided by the total number of shares of Common Stock then outstanding on the date of calculation (assuming the conversion, exercise or exchange of all Exercisable Convertible Securities), all determined in accordance with generally accepted accounting principles (GAAP) in the United States applied on a basis consistent with prior years, and (B) the "Fair Market Value Per Share" as determined in good faith by the Board of Directors of the Company; provided, however, that if the holders of 51% of the Warrants shall not be reasonably satisfied with the determination of the Board of Directors of the Company, the Fair Market Value Per Share shall be determined in accordance with the following procedures: first, by an investment banking firm selected by holders of 51% of the Warrants which are subject to such Put, which determination shall be made within thirty (30) days after the delivery of the notice of the exercise of the Put, second, if such determination shall not be satisfactory to the Company, as evidenced by a written objection by the Company delivered to the holders of the Warrants subject to such Put within two weeks of receipt by the Company of such determination, the Company shall be entitled to select an investment banking firm which shall make its own determination within thirty (30) days of its appointment, and if such determination shall differ by less than 10% from the determination of the investment banking firm selected by the Company, the Fair Market Value Per Share shall be the average of such determinations and third, if such determinations shall differ by 10% or more, such investment banking firms shall appoint a third investment banking firm which shall make its own determination within two weeks of its appointment, which determination shall be binding upon the Company and the holders of the Warrants subject to the put. Any and all determinations required to be made by an investment banking firm pursuant to this definition shall be performed by an investment banking firm experienced in the conduct of corporate valuations and shall be based upon the fair market value of 100% of the Company on a consolidated basis if sold as a going concern, without giving effect to any discount for lack of liquidity of the shares of Common Stock or to any restrictions upon the conversion of any shares of nonvoting common stock into voting common stock, or to any or to the fact that the shares of Common Stock issuable upon exercise of the Warrants being put to the Company represent a minority equity interest in the Company, or to any discount relating to, or reclassification because of, the right of any stockholder, Series C Preferred Stock holder or warrant holder of the Company to sell its shares of Common Stock, Series C Preferred Stock or warrants to the Company, including pursuant to this Put. In addition, in making such determination, the investment banking firm shall assume the conversion, exercise or exchange of all Exercisable Convertible Securities and shall take into account the valuations associated with companies engaged in businesses and with capital structures similar to the Company and such other matters as are relevant to the valuation of the Company. Notwithstanding anything herein to the contrary, in determining Fair Market Value Per Share under this definition, (i) any adverse changes in GAAP from the date of original issuance of this Warrant Agreement shall be disregarded such that any computations shall be made as if the -3- GAAP change had not been implemented, and (ii) any dividends paid or redemptions or repurchases of any of the securities of the Company (other than the Series C Preferred Stock) by the Company within one year of the exercise of the put shall be disregarded and any amounts distributed shall be treated as if such amounts had been retained by the Company. All costs of such determinations shall be borne by the Company. "Capital Transaction" shall mean any transaction whereby the Company is merged with or into or consolidated with another person or entity and, immediately after giving effect to such merger or consolidation, less than 50% of the total voting power of the outstanding voting stock of the surviving or resulting person is then beneficially owned in the aggregate by the stockholders of the Company immediately prior to such merger or consolidation. "Certificate of Applicable Holders" shall mean in the case of a registration pursuant to Section 6.1 hereof, a resolution signed by the Holders of a majority of the Warrant Stock that will be or were included in such registration. "Commission" shall mean the United States Securities and Exchange Commission and any successor federal agency having similar powers. "Common Stock" shall mean all series of the common stock of the Company, par value $0.01 per share. "Company Documents" shall mean this Agreement and the Warrants, as any of the same may be amended, modified, supplemented or restated from time to time. "Consolidated" means, with respect to any accounting matter, such matter or amount computed on a consolidated basis for Borrower and any Subsidiaries in accordance with GAAP. "Convertible Securities" shall mean any evidence of indebtedness, shares of stock or other securities which are directly or indirectly convertible into or exchangeable for, with or without payment of additional consideration, shares of Stock, either immediately or upon the arrival of a specified date or the happening of a specified event. "EBITDA" shall have the meaning set forth in the Credit Agreement, provided that in the event that the Credit Agreement is no longer in effect, the term EBITDA shall have the last meaning attributable to it during the effectiveness of the Credit Agreement. -4- "Electra Warrant" shall mean the warrants and warrant certificates of the Company issued to Electra Investment Trust P.L.C. and Electra Associates, Inc., pursuant to a Securities Purchase Agreement dated as of July 31, 1995. "Entity Value" shall mean the greatest of (a) the fair market value of the Company or any successor thereto as established as of any Capital Transaction, (b) the Formula Value, or (c) the Appraised Value. "Exercise Price" of a share of Stock issuable upon the exercise of a Warrant shall mean $0.01. "Formula Value" shall mean the value of the Company as established by the following formula: 5 x EBITDA for EBITDA of up to $4,500,000 and 4 x EBITDA for EBITDA in excess of $4,500,000 for the trailing four fiscal quarters of the Company as determined by reference to the most recently available unaudited income statement of the Company (or the audited financial statements in the case of quarters constituting the fiscal year), prepared in accordance with GAAP for the period ended as of the last day of the month ending immediately prior to the date the Formula Value is being determined, less funded debt and redeemable preferred stock of the Company, other than Preferred Stock, Series A and Preferred Stock, Series B, on any day of calculation, plus cash on any day of calculation held by the Company. "GAAP" shall mean generally accepted accounting principles in the United States at the time in effect. "Holder" and "Holders" shall mean the Initial Holder and its registered successors and assigns of the Warrants and of the Stock exchanged for the Warrants pursuant to this Agreement. "IPO" shall mean (i) the time at which the Company becomes a registered public company under the Securities Exchange Act of 1934, as amended (the "Exchange Act") subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, or (ii) the first time at which an offering, whether primary or secondary, of Common Stock or options, warrants or other securities convertible into or exchangeable or exercisable for Common Stock, is registered pursuant to an effective registration statement (other than a registration statement on Form S-4 or Form S-8 or any successor forms thereto) filed by the Company under the Securities Act of 1933, as amended, or (iii) the merger of the Company into a corporation or other entity which at the time of such merger is required to file reports, proxy statements and other information with the Securities and Exchange Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act. An IPO will be deemed to be consummated (i) on the date such registration is declared effective by the Securities and Exchange Commission and (ii) in the case of a merger, upon the effectiveness of the merger. -5- "Law" shall mean any law (including common law), constitution, statute, treaty, regulation, rule, ordinance, order, injunction, writ, decree or award of any Official Body. "Lien" means any lien, mortgage, pledge, security interest, charge or other encumbrance of any kind including any conditional sale or other title retention agreement, any lease in the nature thereof, and any agreement to give any security interest. "Official Body" shall mean any governmental or political subdivision or any agency, authority, bureau, central bank, commission, department or instrumentality of either, or any court, tribunal, grand jury or arbitrator, in each case whether foreign or domestic. "Outstanding Common Stock" shall mean the total number of outstanding shares of Common Stock of the Company on a fully diluted basis, including, without limitation, all shares of Class A Common Stock, Class B Common Stock, Class C Common Stock and Class D Common Stock and all shares which may be issued pursuant to all outstanding Convertible Securities, the Warrants, warrants, options or agreements of any nature. "Person" shall include an individual, a company, a corporation, an association, a partnership, a joint venture, an unincorporated trade or business enterprise, a trust, an estate, or other legal entity or a government (national, regional or local), court, arbitrator or any agency, instrumentality or official of the foregoing. "Public Offering" shall mean any underwritten public offering of the Common Stock. "Purchase Price" shall have the meaning attributed to it in Section 5.3. "Put Exercise Date" shall mean any of the following (a) July 31, 2001, (b) the date of prepayment or repayment in full of the Loans, (c) the date of declaration of the acceleration of the Loans or (d) the date of any Capital Transaction. The terms "register," "registered" and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act of 1933, as amended (the "Securities Act"), and the declaration or ordering of the effectiveness of such registration statement. "Stock" shall mean (i) all classes and categories of the capital stock of the Company whether then issued or issuable, including without limitation, any shares of Common Stock and (ii) any shares of Common Stock issued or issuable with respect to the Common Stock by way of a stock -6- dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. "Stockholders Agreement" means that certain Amended and Restated Stockholders' Agreement dated as of July 31, 1995 to which the Company is a party, as the same may be amended or restated from time to time. "Subsidiary" means, as to Company, a corporation, partnership or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by Company. "Warrant Stock" shall mean Common Stock issuable upon exercise of a Warrant in accordance with its terms and any capital stock or other securities into which or for which such Common Stock shall have been converted or exchanged pursuant to any recapitalization, reorganization or merger of the Company. 2. WARRANT PURCHASE; ANTIDILUTION. 2.1 Warrant Purchase. Contemporaneously with the execution of this Agreement, the Company shall issue to the Initial Holder Warrants in the form attached hereto as Exhibit A, evidencing the Initial Holder's right to purchase 2,199 shares of Class D Common Stock at the Exercise Price per share. 2.2 No Voting Rights. Except as set forth herein, this Agreement shall not entitle any Holder to any voting rights or other rights as a shareholder of the Company, and no dividend or interest shall be payable or accrued in respect of the Warrant or this Agreement or the interest represented hereby or the shares of Warrant Stock which may be purchased hereunder until and unless, and except to the extent that, a Holder has duly exercised its rights under any Warrant issued to such Holder or its predecessor in interest upon such exercise and tender of the Exercise Price. The Company shall thereupon treat such Holder (or its designee) as the record owner of the shares of Warrant Stock obtained by such exercise for voting and all other purposes. 2.3 Good Faith by Company. The Company will not, by amendment to its Certificate of Incorporation or through any reorganization, reclassification, consolidation, merger, sale of assets, dissolution, issue or sale of securities or other action, avoid or seek to avoid the -7- observance or performance of any of the terms of this Agreement, but will at all times in good faith carry out all such terms and take all such action as may be necessary or appropriate to protect the rights of the Holders hereunder. 2.4 Term. This Agreement shall terminate ten (10) years from the date hereof. 3. REPRESENTATIONS AND WARRANTIES OF HOLDERS. 3.1 The Initial Holder hereby represents and warrants to the Company as set forth in this Section 3.1 and each Holder other than the Initial Holder shall, upon its acquisition of a Warrant, be deemed to represent and warrant to the Company (severally and not jointly) as set forth in this Section 3.1. In addition, the representations and warranties set forth in this Section 3.1 shall be deemed to be remade by a Holder from time to time to the Company as of the date a Warrant is exercised by such Holder. (a) Authorization. (i) Authorization and Compliance With Law. The execution and delivery of this Agreement by the Holder, and any exercise or exchange of such Holder's Warrant pursuant to the terms hereof or thereof, have been duly authorized by all necessary action, corporate and otherwise, on the part of the Holder. The entry into this Agreement by the Holder, the acquisition and ownership of the Warrant issued to such Holder and the exercise or exchange of such Warrant pursuant to the terms hereof and thereof do not and will not violate any Law applicable to such Holder. (ii) Approvals. No authorization, consent, approval, license or filing with any third party or any Official Body is or will be necessary for the valid execution, delivery or performance of this Agreement by the Holder, the acquisition and ownership of the Warrant issued to the Holder or the exercise or exchange of such Warrant pursuant to the terms hereof or thereof. (b) Investment Representations. (i) No Distributive Intent; Restricted Securities. The Holder is acquiring the Warrant issued to it and, if applicable, the Warrant Stock (all of which shall be collectively referred to in this Section 3 as the "Securities" and singly, by type, as a "Security") for its own account with no present intention of reselling or otherwise -8- distributing any such Security or participating in a distribution of such Securities in violation of the Securities Act, or any applicable state securities laws. The Holder acknowledges that it has been advised and is aware that (A) the Company is relying upon an exemption from registration under the Securities Act and applicable state securities laws predicated upon such Holder's representations and warranties contained in this Section 3.1 in connection with the issuance of such Securities pursuant to this Agreement, and (B) such Securities in the hands of the Holder will be "restricted securities" within the meaning of Rule 144 promulgated by the Commission pursuant to the Securities Act and, unless and until registered under the Securities Act, will be subject to limitations on resale (including, among others, limitations on the amount of securities that can be resold and the timing and manner of resale) set forth in Rule 144 or in administrative interpretations of the Securities Act by the Commission or in other rules and regulations promulgated thereunder by the Commission, in effect at the time of the proposed sale or other disposition of the Securities. (ii) Compliance with Law Upon Transfer. To the extent that the Holder is entitled to transfer or pledge any of the Securities, the Holder will not transfer or pledge any of such Securities in violation of the Securities Act or any other applicable Laws, and in the event the Holder pledges or transfers any of such Securities it will advise the pledgee or transferee of the transfer restrictions imposed on such Securities. (iii) No Commission. No outside parties have participated with respect to the negotiation of this transaction on behalf of the Holder, and the Holder shall indemnify and hold the Company harmless with respect to any claim for any broker's or finder's fees or commissions with respect to the transactions contemplated hereby by anyone found to have been acting on behalf of the Holder with the Holder's consent. (iv) Legends. The Holder consents to the endorsement on each certificate representing the Securities of the legends described in Section 3.2(b) indicating that the Securities are not registered, except as and when such Securities may be registered pursuant to the terms hereof. (c) Execution and Binding Effect. This Agreement has been duly and validly executed and delivered by such Holder and constitutes legal, valid and binding obligations of such Holder, enforceable against such Holder in accordance with its terms. -9- 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to the Initial Holder and any other Holder of a Warrant that: (a) The Company has the requisite corporate power and authority to (i) own and hold its properties and to carry on its business as now conducted and as proposed to be conducted, (ii) execute and deliver this Agreement and the Warrants, (iii) issue, sell and deliver the Securities and the shares of Common Stock issuable upon exercise of the Warrants (the "Warrant Shares"); and (iv) carry out and perform the provisions of this Agreement and the Warrants. (b) The (i) execution and delivery by the Company of this Agreement and the Warrants, (ii) performance of all obligations of the Company hereunder and thereunder, (iii) issuance, sale and delivery of the Securities and (iv) issuance and delivery of the Warrant Stock, have been duly authorized by all requisite corporate action on the part of the Company, its officers, directors and stockholders, and have not and will not violate any provision of applicable law (except that no representation shall be deemed to be made with respect to the compliance with any regulations of the Department of Education in relating to Title IV of the Higher Education Act or with the Bank Holding Company Act, in connection with the conversion of any Warrant Stock into other Common Stock), any order of any court or other agency of government, the Articles of Incorporation of the Company, as amended or supplemented (the "Charter"), or the By-Laws of the Company, as amended (the "By-Laws"), or any provision of any indenture, agreement or other instrument to which the Company, or any of its respective properties or assets is bound, or conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any such indenture, agreement or other instrument, or result in the creation or imposition of any Lien, upon any of the properties or assets of the Company. (c) The Warrant Stock, when issued, sold and delivered in accordance with the terms of this Agreement for the consideration herein expressed, will be duly and validly issued, fully paid and nonassessable shares of Common Stock, with no personal liability attaching to the ownership thereof and will be free and clear of all Liens imposed by or through the Company, except as set forth herein. The Warrants, when issued, sold and delivered in accordance with the terms of this Agreement for the consideration herein expressed, will be duly and validly issued, free and clear of all Liens imposed by or through the Company, except as herein provided. The Warrant Stock has been duly and validly reserved for issuance. Neither the issuance, sale or delivery of the Securities, nor the issuance or delivery of the Warrant Stock are subject to any preemptive right of stockholders of the Company or any subsidiary thereof or to any right of first refusal or other right in favor of any person, except as herein provided. -10- (d) This Agreement and the Warrants have been duly executed and delivered by the Company and, assuming the execution and delivery of such agreements by the Initial Holder, constitute the legal valid and binding obligations of the Company, enforceable in accordance with their terms, except as their enforceability may be limited by applicable bankruptcy, insolvency, reorganization, or other laws affecting the enforcement of creditors' rights generally, or by general equitable principles. (e) Subject to the accuracy of the representations and warranties of the Initial Holder set forth in Section 3.1 hereof, no registration or filing with, or consent or approval of or other action by, any Federal, state or other governmental agency or instrumentality is or will be necessary for (a) the valid execution, delivery and performance by the Company of this Agreement and the Warrants, (b) the issuance, sale and delivery of the Securities, and (c) upon conversion and exercise thereof, respectively, the issuance and delivery of the Warrant Stock, other than filings pursuant to Federal and state securities laws (all of which filings have been or, with respect to those filings which may be duly made after the Closing will be, made by or on behalf of the Company) in connection with the sale of the Securities and the Warrant Stock. 5. CERTAIN RIGHTS WITH RESPECT TO WARRANTS AND WARRANT STOCK. 5.1 Put Rights. On or at any time after a Put Exercise Date, the Holders of at least 51% of the Warrant Stock shall have the right to "put" to the Company all or any part of its Warrant or the Warrant Stock obtained or obtainable by the Holder through the exercise of its Warrants on two occasions. The Company shall, within ten (10) days following the later of receipt of a written notice that the Holder intends to exercise its put rights hereunder or the date the parties reach agreement on the Purchase Price (but in no event later than ninety (90) days after the date of such notice), purchase the Warrants (or portion thereof) or the Warrant Stock being sold by the Holder for the Purchase Price calculated in accordance with Section 5.3. Notwithstanding the foregoing, all of the Holder's Put Rights shall expire on the earliest to occur of (X) the consummation of an IPO or (Y) July 31, 2005. 5.2 Call Rights. On or at any time after one year following the Put Exercise Date, the Company shall have the right to require the Holder to sell to the Company all or any part of its Warrant or the Warrant Stock obtained or obtainable by the Holder through the exercise of its Warrants. The Company shall give to the Holder a written notice that the Company intends to exercise its call rights hereunder which notice shall specify the Purchase Price for the Warrants or Warrant Stock, calculated in accordance with Section 5.3. -11- 5.3 Purchase Price. Upon exercise of the put rights set forth in Section 5.1, the purchase price ("Purchase Price") (a) for each share of Warrant Stock being put shall equal the Entity Value of the Company as defined herein divided by the total number of shares of Outstanding Common Stock, and (b) for each Warrant being put shall equal the price per share determined pursuant to clause (a) above multiplied by the number of shares of Warrant Stock which such Warrant entitles the Holder thereof to purchase, in each case net of the Exercise Price therefor. 5.4 Default. If the Company shall, for any reason fail to pay in full the Purchase Price (or portion thereof) pursuant to Sections 5.1 and 5.3 when such amount is due and payable in accordance with Section 5.1 (the "Due Date"), the Company shall pay to such Holder, on demand, in immediately available funds, an amount equal to the sum of (i) the unpaid amount of the Purchase Price due to such Holder on the Due Date (the "Unpaid Portion") plus (ii) interest on such Unpaid Portion from the Due Date, computed on a daily basis and on the basis of a 360-day year, through the date upon which demand is made pursuant to this Section (the "Demand Date"), at a rate per annum equal to the greater of Prime plus Four Percent (4%) and Twelve Percent (12%) per annum. Until such time as the Purchase Price for each unrepurchased share of Warrant Stock has been paid in full in cash, the Holder of such unrepurchased Warrant Stock shall be entitled to retain legal and beneficial ownership of such unrepurchased Stock and to exercise all rights with respect to such unrepurchased Warrant Stock under this Agreement. In the event of such a default, Holder shall have the right to any remedy now or hereafter existing at law or in equity or by statute or otherwise to enforce its right to payment hereunder. 6. REGISTRATION RIGHTS. 6.1 Registrations. (a) If at any time prior to the Expiration Date, the Company shall propose to file a Registration Statement for the purpose of a primary or secondary offering for itself or any securityholder of the Company (the "Initiating Securityholder") under the Act, including the Company's Initial Public Offering, on Form S-1, S-2 or S-3 or any equivalent general form or any other Company offering for registration of Common Stock under the Act with respect to a public offering of Common Stock, the Company shall as promptly as practicable, but in no event later than thirty (30) days prior to the proposed filing date, give notice of such intention to each Holder and upon the request in writing of any such Holder within fifteen (15) days after receipt of any such notice (which request shall specify the Warrants or Warrant Stock intended to be sold or disposed of by such Holder), the Company will include in such Registration Statement all such Warrants or Warrant Stock specified in such request to be so registered. In the event such Registration Statement shall be filed for the purpose of complying with any demand registration requirement of the shares of stock represented by or issued pursuant to the Electra Warrant ("Electra Stock"), the Warrant -12- Stock shall be the first shares to be included in such Registration (after the inclusion of the Electra Stock) or if underwriters restrict or reduce the number of shares subject to such Registration Statement, the Warrant Stock shall be the last shares removed to effect such reduction prior to any reduction in the number of shares of Electra Stock subject to such Registration Statement. (b) Any request for registration shall specify the number of shares of Warrant Stock as to which such request relates, express the Applicable Holders' present intention to offer such Warrant Stock for distribution and contain an undertaking to provide all such information and materials and take all such actions and execute all such documents as may be required in order to permit the Company to comply with all applicable requirements of the Commission, to obtain acceleration of the effective date of the Registration Statement and to enter into satisfactory underwriting arrangements, if the distribution of Warrant Stock is to be underwritten. Any request shall designate an Authorized Holder and such Authorized Holder's address for the purpose of delivering notices under the Agreement to the Applicable Holders. 6.2 Costs, Expenses and Qualifications of Registration. (a) The Company shall bear the entire cost and expense of any registration made pursuant to Section 6.1 of this Agreement, including, without limitation, all registration and filing fees, printing expenses, the fees and expenses of the Company's counsel and its independent accountants and all other out-of-pocket expenses of the Company incident to the preparation, printing and filing under the Act of the Registration Statement and all amendments and supplements thereto, the cost of furnishing copies of each preliminary prospectus, each final prospectus and each amendment or supplement thereto to underwriters, brokers and dealers and other purchasers of the securities so registered, the fees and expenses of one firm of legal counsel and one firm of accountants to represent all Holders in connection with such Registration Statement and the costs and expenses incurred in connection with the qualification of the securities so registered under "blue sky" or other state securities laws (all such expenses are herein called "Registration Expenses"), provided, however, each Holder participating in any registration hereunder shall pay the underwriter's discount with respect to any Warrant Stock included in such registration. (b) If the Warrants or any Warrant Stock issued or issuable pursuant hereto require registration or qualification with or approval of any United States or governmental official or authority in addition to registration under the Securities Act before the Warrants or such Warrant Stock may be sold, the Company will take all requisite action in connection with such registration and will use its best efforts to cause any such shares and/or such Warrants to be duly registered or approved as may be required; provided, however, that it shall not be required to give a general consent to service of process or to qualify as a foreign corporation or subject itself to taxation as doing business in any such state. -13- 6.3 Indemnification. (a) Indemnity to the Holders. The Company will indemnify the Applicable Holders and each underwriter of the Common Stock against all claims, losses, damages, liabilities and expenses resulting from any untrue statement or alleged untrue statement of a material fact contained in a prospectus or in any related Registration Statement, notification or similar filing under securities laws of any jurisdiction or from any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same may have been based upon information furnished in writing to the Company by any Holder or any underwriter expressly for use therein and used in accordance with such writing. (b) Indemnity to the Company. The Applicable Holders, severally and not jointly, by having their Warrant Stock included in a registration pursuant to Section 6.1 hereof, agree to furnish to the Company such information concerning them as may be requested by the Company and which is necessary in connection with any registration or qualification of the Warrant Stock and to indemnify the Company against all claims, losses, damages, liabilities and expenses resulting from any untrue statement or alleged untrue statement of a material fact contained in such information and the utilization of any such information furnished in writing to the Company expressly for use therein and used in accordance with such writing. (c) Indemnification Procedures. If any action is brought or any claim is made against any party indemnified pursuant to this Section 6.3 in respect of which indemnity may be sought against the indemnitor pursuant to this Section 6.3, such party shall promptly notify the indemnitor in writing of the institution of such action or the making of such claim and the indemnitor shall assume the defense of such action or claim, including the employment of counsel and payment of expenses. Such party shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such party unless the employment of such counsel shall have been authorized in writing by the indemnitor by a resolution of the Board of Directors of the Company or by a Certificate of Applicable Holders, whichever the case may be, in connection with the defense of such action or claim or such indemnified party or the parties shall have reasonably concluded that there are defenses available to it or them which are in conflict with those available to the indemnitor (in which case the indemnitor shall not have the right to interpose such conflicting defense but otherwise shall retain control of such action or claim on behalf of the indemnified party or parties), in any of which events the reasonable fees and expenses of not more than one additional counsel for the indemnified parties shall be borne by the indemnitor. Except as expressly provided above, in the event that the indemnitor shall not previously have assumed the defense of any such action or claim, at such time as the indemnitor does not assume the defense of such action or claim, the indemnitor shall thereafter be liable to any person indemnified pursuant to -14- this Agreement for any reasonable legal or other expenses subsequently incurred by such person in investigating, preparing or defending against such action or claim. Anything in this paragraph to the contrary notwithstanding, the indemnitor shall not be liable for any settlement of any such claim or action effected without its written consent. 6.4 RULE 144. At all times following completion by the Company of its Initial Public Offering, the Company shall take such action as any holder of Warrant Stock may reasonably request, all to the extent required from time to time to enable such Holder to sell shares of its Warrant Stock without registration under the Act pursuant to and in accordance with (x) Rule 144 or Rule 144A under the Act, as either of such Rules may be amended from time to time, or (y) any similar rule or regulation hereafter adopted by the Commission. Upon the request of any Holder, the Company will deliver to such Holder a written statement as to whether it has complied with such requirements. 7. AMENDMENTS AND WAIVERS. This Agreement may be amended, and the Company may take any action herein prohibited or omit to perform any act herein required to be performed by it, only if Company shall have obtained the advance written consent of the Holders holding Warrants exercisable for 51% or more of the Warrant Stock issuable upon exercise of outstanding Warrants at such time. 8. NOTICES. Notices and other communications under this Agreement shall be in writing and shall be either hand delivered, or sent by first-class certified mail, postage prepaid, or sent by telex, nationally-recognized overnight courier, telecopier or facsimile transmission addressed as follows: (a) to any Holder of Warrant Stock or Warrants at the address shown on the Stock or Warrant transfer books of the Company unless such Holder has advised the Company in writing of a different address as to which notices shall be sent under this Agreement; and (b) if to Company at 400 Barrington Pointe, 2300 North Barrington Road, Hoffman Estates, Illinois, 60195 or to such other address as Company shall have furnished to the Holder at the time outstanding. -15- 9. MISCELLANEOUS. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, whether so expressed or not, and, in particular, shall inure to the benefit of and be enforceable by any Holder or Holders except that any transfer of the rights of a Holder hereunder or of the Warrant Stock shall not be effective unless made in compliance with the Stockholders Agreement. This Agreement and the Company Documents embody the entire agreement and understanding between the Company and the other parties hereto with respect to the subject matter hereof and supersede all prior agreements and understandings relating to the subject matter hereof. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE. The headings in this Agreement are for purposes of reference only and shall not limit or otherwise affect the meaning hereof. This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their respective officers thereunto duly authorized as of the date first above written. ATTEST: CAREER EDUCATION CORPORATION /s/ JAKOB P. GRUVER By /s/ JOHN M. LARSON, President ------------------------------ -------------------------------- ATTEST: THE PROVIDENT BANK /s/ JANET SHEPPARD By /s/ ERIC JEFFRIES ------------------------------ ---------------------------------- THE WARRANTS AND ANY SHARES ACQUIRED UPON THE EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECUR TIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. THESE WARRANTS AND SUCH SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER ABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER SAID ACT AND SUCH LAWS PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISK OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THESE WARRANTS AND SUCH SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR OTHER REGULATORY AUTHORITY. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. THESE WARRANTS AND ANY SHARES ACQUIRED UPON THE EXERCISE HEREOF ARE SUBJECT TO RESTRICTIONS ON TRANSFER AND MAY NOT BE SOLD, EXCHANGED, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH AND SUBJECT TO ALL THE TERMS AND CONDITIONS OF A CERTAIN AMENDED AND RESTATED STOCKHOLDERS AGREEMENT, DATED AS OF JULY __, 1995, AMONG THE COMPANY AND ITS STOCKHOLDERS, A COPY OF WHICH THE COMPANY WILL FURNISH TO THE HOLDER OF THESE WARRANTS UPON REQUEST AND WITHOUT CHARGE. Warrant Certificate No. 2 Warrants for 2199 Shares of Class D Common Stock Original Issue Date: July 31, 1995 Exercise Price: $0.01 Per Share WARRANT TO PURCHASE CLASS D COMMON STOCK OF CAREER EDUCATION CORPORATION This certifies that THE PROVIDENT BANK, an Ohio banking corporation, or its registered assigns ("Holder"), is entitled, subject to the terms set forth below, at any time on or after the date hereof and for a period of ten (10) years thereafter to purchase from CAREER -2- EDUCATION CORPORATION (the "Company"), a Delaware corporation, up to Two Thousand One Hundred Ninety-Nine (2,199) fully paid and non-assessable shares of the Company's Class D Common Stock ("Common Stock") upon surrender hereof, at the principal office of the Company, with the subscription form annexed hereto duly executed, and simultaneous payment therefor, at the purchase price per share set forth above (the "Exercise Price"). The number and character of such shares of Common Stock are subject to adjustment as provided herein. For purposes of this Warrant, all capitalized terms used herein and not otherwise defined in this Warrant shall have the meanings assigned to them in the Warrant Agreement (as defined below). 1. The Warrants. This Warrant is issued to Holder in connection with a certain Warrant Agreement dated as of July 31, 1995, between the Company and The Provident Bank (the "Warrant Agreement"). The term "Warrants" as used herein shall include all Warrants issued in connection with the Warrant Agreement and also any warrants delivered in substitution or exchange therefor as provided herein. This Warrant does not entitle the Holder to any rights as a stockholder of the Company except as set forth herein or in the Warrant Agreement. 2. Exercise. 2.1 Full Exercise. Subject to compliance with the provisions hereof, this Warrant may be exercised by the Holder, in whole or in part, during the period of exercise specified above, at any time or from time to time, on any business day, by surrendering the Warrant at the principal office of the Company, 400 Barrington Pointe, 2300 North Barrington Road, Hoffman Estates, Illinois, 60195 with the form of Election to Exercise in substantially the form of Exhibit A, together with payment of the sum obtained by multiplying (a) the number of shares of Common Stock for which the Warrant is being exercised; by (b) the Exercise Price. 2.2 Partial Exercise. This Warrant may be exercised for less than the full number of shares of Common Stock or any fraction thereof called for hereby, during the period of exercise specified above, at any time or from time to time, in the manner set forth in Section 2.1. Upon any partial exercise, the number of shares receivable upon the exercise of this Warrant as a whole, and the sum payable upon the exercise of this Warrant as a whole, shall be proportionately reduced. Upon such partial exercise, this Warrant shall be surrendered and a new Warrant of like tenor and date for the purchase of the number of such shares not purchased upon such exercise shall be issued by the Company to the registered Holder hereof within ten (10) days after such exercise. A Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the shares of Common Stock issuable upon such exercise shall be treated for all purposes as the Holder of such shares of record as of the close of business on such date. As soon as practicable on or after such date, but in any event within ten (10) days after payment of the Exercise Price pursuant to this Section 2, the Company shall issue and deliver to the person -3- or persons entitled to receive the same a certificate or certificates for the number of full shares of Common Stock issuable upon such exercise, together with cash, in lieu of any fraction of a share, equal to such fraction of the then current Market Price (as defined below) of one (1) full share. 2.3 Net Issue Exercise. Notwithstanding any provisions herein to the contrary, in lieu of exercising this Warrant for cash, the Holder may elect to receive Warrant Stock equal to the value (as determined below) of this Warrant (or the portion thereof being exercised) by surrender of this Warrant at the principal office of the Company, together with the form of Election to Exercise attached hereto fully executed, in which event the Company shall issue to the Holder that number of Shares of Warrant Stock computed using the following formula: X = Y x (A-B) / A Where Y = the aggregate number of Shares of Warrant Stock purchasable under this Warrant or, if only a portion of this Warrant is being exercised, the number of Shares of Warrant Stock for which this Warrant is being exercised (at the date of such calculation) A = Market Price of one Share of Common Stock (at the date of such calculation) B = Exercise Price (as adjusted to the date of such calculation). For the purposes of this Section 2.3, "Market Price" shall mean, if the Warrant Stock is traded on a national securities exchange, the Nasdaq National Market or the over-the-counter market, the last reported price on the date of valuation at which the Warrant Stock has traded on the Nasdaq National Market or the average of the bid and asked prices on the over-the-counter market on the date of valuation or, if no sale took place on such date, the last date on which a sale took place. If the Warrant Stock is not so traded, "Market Price" shall be the Purchase Price determined pursuant to Section 5.3 of the Warrant Agreement. 3. Payment of Taxes. All shares of Common Stock issued upon the exercise of a Warrant shall be validly issued, fully paid and non-assessable and free of any security interest or other adverse claims or encumbrances (except those created by the Holder) and free of claims of pre-emptive rights. The Company shall pay all issuance taxes and similar governmental charges that may be imposed in respect of the issue or delivery thereof, but in no event shall the Company pay a tax on or measured by the net income or gain attributed to such exercise. The Company shall not be required, however, to pay any tax or other charge imposed in connection with any transfer of a Warrant or any transfer involved in the issue of any certificate for shares of Common Stock in any name other than that of the registered Holder of the Warrant surrendered in -4- connection with the purchase of such shares, and in such case the Company shall not be required to issue or deliver any stock certificate until such tax or other charge has been paid or it has been established to the Company's reasonable satisfaction that no tax or other charge is due. 4. Unregistered Securities. The Holder acknowledges that, (i) neither the Warrant nor the shares of Common Stock issuable upon exercise thereof have been registered under the Securities Act or the securities laws of any state or other jurisdiction, (ii) the securities are subject to restrictions on transferability and resale and may not be transferred or resold except as permitted under said Act and such laws pursuant to registration or exemption therefrom and (iii) the Holder will therefore be required to bear the financial risk of this investment for an indefinite period of time. The Holder also acknowledges that appropriate legends reflecting the status of the Warrants and the shares of Common Stock issuable upon exercise thereof under federal and state securities laws may be placed on the face of the Warrant certificates at the time of their transfer and delivery to the Holder hereof or upon Certificates representing shares of Common Stock at the time of their issuance to the Holder upon exercise of the Warrant. The transfer of this Warrant and the shares of Common Stock issuable upon exercise of this Warrant is subject to the terms of this Warrant and the terms and provisions of the Warrant Agreement. 5. Exchanges. This Warrant is exchangeable, upon the surrender hereof by the Holder at the principal office of the Company together with the form of transfer authorization attached hereto as Exhibit B duly executed, for new Warrants in such denominations as the Holder shall designate, of like tenor and date representing in the aggregate the right to subscribe for and purchase the number of shares of Warrant Stock issuable hereunder. 6. Adjustments. 6.1 Adjustments for Issue or Sale of Common Stock at Less Than Purchase Price. If the Company shall issue or sell shares of its Common Stock (other than those excepted by Section 6.1(k)) for a consideration per share less than the greater of $104.59 (as adjusted by application of the adjustment provisions in this Section 6) or the Appraised Value (the "Purchase Price"), then and in each such case the holder of this Warrant, upon the exercise hereof as provided in Section 2, shall be entitled to receive, in lieu of the shares of Common Stock theretofore receivable upon the exercise of this Warrant, a number of shares of Common Stock determined by (a) dividing the Purchase Price by an Adjusted Purchase Price to be computed as provided below in this Section 6.1, and (b) multiplying the resulting quotient by the number of shares of Common Stock called for on the face of this Warrant. Such "Adjusted Purchase Price" shall be computed (to the nearest cent, a half cent or more being considered a full cent) by dividing: -5- (A) the sum of (x) the result obtained by multiplying the number of shares of Common Stock of the Company outstanding immediately prior to such issue or sale by the Purchase Price (or, if an Adjusted Purchase Price shall be in effect by reason of a previous adjustment under this Section 6.1, by such Adjusted Purchase Price), and (y) the aggregate consideration, if any received by the Company upon such issue or sale; by (B) the number of shares of Common Stock of the Company outstanding immediately after such issue or sale. No adjustment of the Purchase Price, or Adjusted Purchase Price if in effect, however, shall be made in an amount less than $.01 per share, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which together with any adjustments as so carried forward shall amount to $.01 per share or more. For the purpose of this Section 6.1, the following paragraphs 6.1(a) to 6.1(k) shall be applicable; (a) Dividends in Common Stock. If the Company shall declare any dividend or order any other distribution, upon any stock of the Company of any class payable in Common Stock, such declaration or distribution shall be deemed to be an issue and sale (as of the record date), without consideration, of such Common Stock. (b) Other Distributions. In case at any time or from time to time the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive any dividend or other distribution (collectively, a "Distribution") of: (i) cash, (ii) any evidences of its indebtedness (other than any stock or other securities directly or indirectly convertible into or exchangeable for Common Stock (any such stock or other securities being hereinafter called "Convertible Securities")), any shares of its Capital Stock (other than additional shares of Common Stock or Convertible Securities) or any other securities or property of any nature whatsoever (other than cash), or (iii) any options or warrants or other rights to subscribe for or purchase any of the following: any evidences of its indebtedness (other than Convertible Securities), any shares of its capital stock (other than additional shares of Common Stock or Convertible Securities) or any other securities or property of any nature whatsoever, then the holder or holders of Warrants shall be entitled to receive upon the exercise thereof (or upon exercise of the Put pursuant to 5.1 of the Warrant Agreement) at any time on or -6- after the taking of such record the number of shares of Common Stock to be received upon exercise of such Warrants determined as stated herein and, in addition and without further payment, the cash (including interest at a rate equal to the T-bill rate in effect from time to time) from the date such cash was paid to the other stockholders through the date of payment to the holders of the Warrants, stock, securities, other property, options, warrants and/or other rights to which such holder or holders would have been entitled by way of the Distribution and subsequent dividends and distributions if such holder or holders (x) had exercised such Warrants immediately prior to such Distribution, and (y) had retained the Distribution in respect of the Common Stock and all subsequent dividends and distributions of any nature whatsoever in respect of any stock or securities paid as dividends and distributions and originating directly or indirectly from such Common Stock. A reclassification of the Common Stock into shares of Common Stock and shares of any other class of stock shall be deemed a distribution by the Company to the holders of its Common Stock of such shares of such other class of stock within the meaning of this paragraph 6.1(b) and, if the outstanding shares of Common Stock shall be changed into a larger or smaller number of shares of Common Stock as a part of such reclassification, such event shall be deemed a subdivision or combination, as the case may be, of the outstanding shares of Common Stock within the meaning of paragraph 6.1(a). (c) Issuance or Sale of Convertible Securities. If the Company shall issue or sell any Convertible Securities, there shall be determined the price per share for which Common Stock is issuable upon the conversion or exchange thereof, such determination to be made by dividing (i) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof by (ii) the maximum number of shares of Common Stock of the Company issuable upon conversion or exchange of all of such Convertible Securities; and such issue or sale shall be deemed to be an issue or sale for cash (as of the date of issue or sale of such Convertible Securities) of such maximum number of shares of Common Stock at the price per share so determined. If such Convertible Securities shall by their terms provide for an increase or increases, with the passage of time, in the amount of additional consideration, if any, payable to the Company, or in the rate of exchange, upon the conversion or exchange thereof, the Adjusted Purchase Price shall, forthwith upon any such increase becoming effective, be readjusted (but to no greater extent than originally adjusted) to reflect the same. If any rights of conversion or exchange evidenced by such Convertible Securities shall expire without having been exercised, the Adjusted Purchase Price shall forthwith be -7- readjusted to be the Adjusted Purchase Price which would have been in effect had an adjustment been made on the basis that the only shares of Common Stock actually issued or sold were those issued upon the conversion or exchange of such Convertible Securities, and that they were issued or sold for the consideration actually received by the Company upon such conversion or exchange, plus the consideration, if any, actually received by the Company for the issue or sale of each of the Convertible Securities as were actually converted or exchanged. The provisions of this subsection shall not apply to any issuance of additional shares of Common Stock for which an adjustment is provided pursuant to this subsection. (d) Grant of Rights, Warrants or Options for Common Stock. If the Company shall grant any rights, warrants or options to subscribe for, purchase or otherwise acquire Common Stock (other than those excepted by Section 6.1(k)), there shall be determined the minimum price per share for which Common Stock is issuable upon the exercise of such rights, warrant or options, such determination to be made by dividing (i) the total amount, if any, received or receivable by the Company as consideration for the granting of such rights, warrants or options, plus the minimum aggregate amount of additional consideration payable to the Company upon the exercise of such rights, warrants or options, by (ii) the maximum number of shares of Common Stock of the Company issuable upon the exercise of such rights, warrant or options; and such grant shall be deemed to be an issue or sale for cash (as of the date of the granting of such rights, warrants or options) of such maximum number of shares of Common Stock at the price per share so determined. If such rights, warrants or options shall by their terms provide for an increase or increases, with the passage of time, in the amount of additional consideration payable to the Company upon the exercise thereof, the Adjusted Purchase Price shall, forthwith upon any such increase becoming effective, be readjusted (but to no greater extent than originally adjusted) to reflect the same. If any such rights, warrants or options shall expire without having been exercised, the Adjusted Purchase Price shall forthwith be readjusted to the Adjusted Purchase Price which would have been in effect had an adjustment been made on the basis that the only shares of Common Stock so issued or sold were those actually issued or sold upon the exercise of such rights, warrants or options and that they were issued or sold for the consideration actually received by the Company upon such exercise, plus the consideration, if any, actually received by the Company for the granting of all such rights, warrants or options. -8- The provisions of this subsection shall not apply to any issuance of additional shares of Common Stock for which an adjustment is provided pursuant to this subsection. (e) Grant of Rights, Warrants or Options for Convertible Securities. If the Company shall grant any rights, warrants or options to subscribe for, purchase or otherwise acquire Convertible Securities, such Convertible Securities shall be deemed, for the purpose of Section 6.1(c), to have been issued and sold (as of the actual date of issue or sale of such Convertible Securities) for the total amount received or receivable by the Company as consideration for the granting of such rights, warrants or options plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the exercise of such rights, warrants or options. If such rights, warrants or options shall by their terms provide for an increase or increases, with the passage of time, in the amount of additional consideration payable to the Company upon the exercise thereof, the Adjusted Purchase Price shall, forthwith upon any such increase becoming effective, be readjusted (but to no greater extent than originally adjusted) to reflect the same. If any such rights, warrants or options shall expire without having been exercised, the Adjusted Purchase Price shall forthwith be readjusted to be the Adjusted Purchase Price which would have been in effect had an adjustment been made upon the basis that the only Convertible Securities so issued or sold were those issued or sold upon the exercise of such rights, warrants or options and that they were issued or sold for the consideration actually received by the Company for the granting of such rights, warrants or options actually exercised. The provisions of this subsection shall not apply to any issuance of additional shares of Common Stock for which an adjustment is provided pursuant to this subsection. (f) Dilution in Case of Other Stock or Securities. In case any shares of stock or other securities, other than Common Stock of the Company, shall at the time be receivable upon the exercise of this Warrant, and in case any additional shares of such stock or any additional such securities (or any stock or other securities convertible into or exchangeable for any such stock or securities) shall be issued or sold for a consideration per share which is below the Purchase Price, then and in each such case the Adjusted Purchase Price and the number of shares of Warrant Stock shall forthwith be adjusted, substantially in the manner provided for above in this Section 6.1. (g) Expenses Deducted. Upon any issuance or sale for cash of any shares of Common Stock or Convertible Securities or any rights or options to subscribe for, -9- purchase or otherwise acquire any Common Stock or Convertible Securities, the consideration received therefor shall be deemed to be the net amount received by the Company thereof, after deducting all underwriting commissions paid by the Company in connection with such issue or sale. (h) Determination of Consideration. Upon any issuance or sale for a consideration other than cash, or a consideration part of which is other than cash, of any shares of Common Stock or Convertible Securities or any rights or options to subscribe for, purchase or otherwise acquire any Common Stock or Convertible Securities, the amount of the consideration other than cash received by the Company shall be deemed to be the fair value of such consideration as determined in good faith by the Board of Directors of the Company. In case any Common Stock or Convertible Securities or any rights or options to subscribe for, purchase or otherwise acquire any Common Stock or Convertible Securities shall be issued or sold together with other stock or securities or other assets of the Company for a consideration which covers both, the consideration for the issue or sale of such Common Stock or Convertible Securities or such rights or options shall be deemed to be the portion of such consideration allocated thereto in good faith by the Board of Directors of the Company. In the event that warrants or rights are sold together with Permitted Preferred (as defined in the Electra Warrant) to the extent that no adjustment is required to be made to the shares purchasable upon exercise of the Electra Warrant as a result of the issuance of such warrants or rights as set forth in the Electra Warrant, no adjustments shall be required hereunder. (i) Record Date Deemed Issue Date. In case the Company shall take a record of the holders of shares of its stock of any class for the purpose of entitling them (i) to receive a dividend or a distribution payable in Common Stock or in Convertible Securities, or (ii) to subscribe for, purchase or otherwise acquire Common Stock of Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the Common Stock issued or sold or deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution, or the date of the granting of such rights or subscription, purchase of other acquisition, as the case may be. (j) Shares Considered Outstanding. The number of shares of Common Stock outstanding at any given time shall not include shares (A) issuable in respect to scrip certificates issued in lieu of fractions of shares of Common Stock, or (B) held in the treasury of the Company or by subsidiaries of the Company. (k) Duration of Adjustment Purchase Price. Following each computation or readjustment of an Adjusted Purchase Price as provided in this Section 6.1, the new -10- Adjusted Purchase Price shall remain in effect until a further computation or readjustment thereof is required by this Section 6.1. (l) Excepted Issues and Sales. No adjustments pursuant to this Section 6.1 shall be made in respect of the issuance of shares of Common Stock upon exercise of Warrants issued pursuant to the Agreement or upon exercise of the Electra Warrants. The number of shares of Common Stock referred to in this subparagraph shall be proportionately adjusted to reflect any reclassification, subdivision or combination of Common Stock or any distribution or dividends on the Common Stock payable in Common Stock. 6.2 Reorganization, Consolidation, Merger. In case of any reorganization of the Company (or any other corporation the stock or other securities of which are at the time receivable on the exercise of this Warrant), or in case the Company (or any such other corporation) shall consolidate with or merge into another corporation or convey all or substantially all of its assets to another corporation, then and in each such case the holder of this Warrant, upon the exercise hereof as provided in Section 2, at any time after the consummation of such reorganization, consolidation, merger or conveyance, shall be entitled to receive, in lieu of the stock or other securities and property receivable upon the exercise of this Warrant prior to such consummation, the stock or other securities or property to which such holder would have been entitled upon such consummation if such holder had exercised this Warrant immediately prior thereto, all subject to further adjustment as provided in this Section 6. In each such case the terms of this Warrant shall be applicable to the shares of stock or other securities or property receivable upon the exercise of this Warrant after such consummation. 6.3 Other Adjustments. In case at any time conditions arise by reason of action taken by the Company which, in the opinion of its Board of Directors or in the opinion of the holders of Warrants representing a majority of the shares of Common Stock issuable upon exercise of such Warrants, are not adequately covered by the other provisions of this Section 6 and which might materially and adversely affect the exercise rights of the holders of the Warrants, then the Board of Directors of the Company shall appoint a firm of independent certified public accountants of recognized national standing (other than the accountants then auditing the books of the Company) to determine the adjustment, if any, on a basis consistent with the standards established in the other provisions of this Section 6, necessary with respect to the Exercise Price or adjusted Exercise Price, as so to preserve, without dilution, the exercise rights of the holders of the Warrants. Upon receipt of such opinion, the Board of Directors of the Company shall forthwith make the adjustments described in such report. 6.4 No Dilution or Impairment. The Company will not, by amendment or restatement of its certificate of incorporation or by-laws or through reorganization, consolidation, -11- merger, dissolution, issue or sale of securities, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Warrants, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate in order to protect the rights of the holders of the Warrants herein and in the Warrant Agreement. Without limiting the generality of the foregoing, the Company shall take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable shares upon the exercise of all Warrants at the time outstanding. 6.5 Accountants' Certificate as to Adjustments. In each case of an adjustment in the shares of Common Stock or other stock, securities or property receivable on the exercise of the Warrants, the Company at its expense shall cause a firm of independent certified public accountants of recognized standing selected by the Company (who may be the accountants then auditing the books of the Company) to compute such adjustment in accordance with the terms of the Warrants and prepare a certificate setting forth such adjustment and showing in detail the facts upon which such adjustment is based, including a statement of: (a) the consideration received or to be received by the Company for any additional shares of Warrant Stock issued or sold or deemed to have been sold; and (b) the number of shares of Warrant Stock outstanding or deemed to be outstanding. The Company will forthwith mail a copy of each certificate to each Holder of a Warrant at the time outstanding. 6.6 Notices of Record Date. If and when the Company shall establish a record date for the holders of its Stock (or such other securities at the time receivable upon the exercise of the Warrant) for the purpose: (a) of determining the holders entitled to receive any dividend or other distribution, or any right to subscribe for or purchase any shares of stock of any class or any securities, or to receive any other right; or (b) of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company with or into another corporation; or (c) of any voluntary dissolution, liquidation or winding-up of the Company; then, and in each such case, the Company will mail or cause to be mailed, to each holder of a Warrant at the time outstanding a notice specifying, as the case may be, the record date established with respect to such dividend, distribution, voting or other right, and stating the amount and character of such dividend, distribution, voting or other right, or the date on which such -12- reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up is to take place, and the time, if any, to be fixed as of which the holders of record of Stock (or such other securities at the time receivable upon the exercise of the Warrants) shall be entitled to vote upon or exchange their shares of Stock (or such other securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up. Such notice shall be mailed at least thirty (30) days prior to the date therein specified. The rights to notice provided in this Section 6.6 are in addition to the rights provided elsewhere herein or in the Warrant Agreement. 7. Loss or Mutilation. Upon receipt by the Company of evidence satisfactory to it in the exercise of reasonable discretion, of the ownership of and the loss, theft, destruction or mutilation of any Warrant and, in the case of loss, theft or destruction, of indemnity satisfactory to it in the exercise of reasonable discretion, and, in the case of mutilation, upon surrender and cancellation thereof, the Company will execute and deliver in lieu thereof a new Warrant of like tenor. 8. Reservation of Common Stock. The Company shall at all times reserve and keep available for issue upon the exercise of Warrants such number of its authorized but unissued shares of Common Stock as will be sufficient to permit the exercise in full of all outstanding Warrants and the issuance of all shares of Warrant Stock. 9. Definitions. For purposes of this Warrant the terms capitalized herein have the meanings set forth below. "Generally Accepted Accounting Principles" shall mean accounting principles which are (i) consistent with the principles promulgated or adopted for the United States by the Financial Accounting Standards Board and its predecessors in effect from time to time, (ii) applied on a basis consistent with prior periods, and (iii) such that a certified public account would, insofar as the use of accounting principles is pertinent, be in a position to deliver an unqualified opinion as to financial statements in which such principles have been properly applied. "Securities Act" shall mean the Securities Act of 1933, as amended, or any successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Warrant Stock" shall mean Common Stock issuable upon exercise of this Warrant in accordance with its terms and any capital stock or other securities into which or for which such Common Stock shall have been converted or exchanged pursuant to any recapitalization, reorganization or merger of the Company. -13- 10. Warrant Agreement. The terms of the Warrant Agreement are incorporated by reference in this Warrant as fully as if the same were set forth herein, shall be considered an integral part of this Warrant and shall entitle the parties hereto to all rights and benefits accruing thereunder. 11. Information. The Company shall furnish each Holder of Warrants with copies of all reports, proxy statements, and similar materials that it furnishes to Holders of its Stock. In addition, it shall furnish to each such Holder of Warrants copies of all reports filed by it with the Securities and Exchange Commission. 12. Notices. All notices and other communications under this Warrant shall be in writing and shall be delivered as provided in the Warrant Agreement. 13. Change, Waiver. Neither this Warrant nor any term hereof may be changed, waived, discharged or terminated orally but only by an instrument in writing signed by the party against which enforcement by the change, waiver, discharge or termination is sought. 14. Headings. The headings in this Warrant are for purposes of convenience of reference only and shall not be deemed to constitute a part hereof. 15. Law Governing. This Warrant is delivered in the State of Delaware and shall be construed and enforced in accordance with and governed by the internal substantive laws of such State. July 31, 1995 CAREER EDUCATION CORPORATION BY: /s/ JOHN M. LARSON, President ----------------------------------------- EXHIBIT A [Subscription Form to Be Executed Upon Exercise of Warrant] The undersigned registered Holder or assignee of such registered Holder of the within Warrant, hereby (1) subscribes for _______________ shares which the undersigned is entitled to purchase under the terms of the within Warrant, (2) makes payment of the Exercise Price called for by the within Warrant, and (3) directs that the shares issuable upon exercise of said Warrant be issued as follows: ___________________________________________ (Name) ___________________________________________ (Address) Signature:__________________________________ Dated:__________________________, 199_ EXHIBIT B [ASSIGNMENT] (To be executed by the registered Holder to enact a transfer of the within Warrant) FOR VALUE RECEIVED, ______________________________ hereby sells, assigns, and transfers unto ______________________________ of __________________________, the right to purchase shares evidenced by the within Warrant, and does hereby irrevocably constitute and appoint ______________________________ to transfer such right on the books of the Company, with full power of substitution. Dated:_______________, 199_ _________________________________________ Signature WITNESS: - ------------------------------ EX-10.16 10 SECURITIES PURCHASE AGREEMENT DTD 7/31/95 EXHIBIT 10.16 ================================================================================ ------------------------------- SECURITIES PURCHASE AGREEMENT ------------------------------- Series C Redeemable Preferred Stock ($5,000,000) and Warrants to Purchase Common Stock (Exercisable for 25,285 Aggregate Shares, $.01 per share Exercise Price) Dated as of July 31, 1995 ================================================================================ TABLE OF CONTENTS (Not Part of the Agreement)
Page ---- 1. AUTHORIZATION OF FINANCING 2 -------------------------- 2. PURCHASE AND SALE OF SECURITIES 2 ------------------------------- 3. CLOSING OF SALE OF SECURITIES 3 ----------------------------- 4. CONDITIONS OF CLOSING 3 --------------------- 4.1 CLOSINGS UNDER THE PURCHASE AGREEMENT 3 ------------------------------------- 4.2 CLOSINGS UNDER THE SENIOR LOAN DOCUMENTS 4 ---------------------------------------- 4.3 OPINION OF COUNSEL 4 ------------------ 4.4 REPRESENTATIONS AND WARRANTIES; NO PREFERRED STOCK -------------------------------------------------- FAILURE EVENT 4 ------------- 4.5 PURCHASE PERMITTED BY APPLICABLE LAWS 4 ------------------------------------- 4.6 NO ADVERSE LEGISLATION, ACTION OR DECISION 4 ------------------------------------------ 4.7 APPROVALS AND CONSENTS 5 ---------------------- 4.8 PROCEEDINGS 5 ----------- 4.9 FINANCING FEE 5 ------------- 4.10 LEGAL FEES 5 ---------- 4.11 NO MATERIAL ADVERSE CHANGE 6 -------------------------- 4.12 SERIES C PREFERRED STOCK AND WARRANT CERTIFICATES 6 ------------------------------------------------- 4.13 STOCKHOLDERS AGREEMENT 6 ---------------------- 4.14 REGISTRATION RIGHTS AGREEMENT 6 ----------------------------- 4.15 GUARANTY AGREEMENT 6 ------------------ 4.16 CERTIFICATE OF DESIGNATIONS 6 --------------------------- 4.17 FINANCIAL INFORMATION 6 --------------------- 4.18 BOARD OF DIRECTORS APPROVAL 6 --------------------------- 4.19 DUE DILIGENCE INVESTIGATION 7 ---------------------------
i TABLE OF CONTENTS (Not Part of the Agreement)
Page ---- 4.20 COMPLIANCE CERTIFICATE 7 ---------------------- 4.21 SECRETARY'S CERTIFICATES; GOOD STANDING 7 --------------------------------------- 4.22 PROCESS AGENT CONSENT LETTER 7 ---------------------------- 4.23 ADDITIONAL INFORMATION 8 ---------------------- 5. AFFIRMATIVE COVENANTS 8 --------------------- 5.1 FINANCIAL STATEMENTS AND OTHER REPORTS 8 -------------------------------------- 5.2 INSPECTION OF PROPERTY 13 ---------------------- 5.3 MAINTENANCE OF PROPERTIES; INSURANCE 13 ------------------------------------ 5.4 EXISTENCE, ETC 14 -------------- 5.5 PAYMENT OF TAXES AND CLAIMS 14 --------------------------- 5.6 COMPLIANCE WITH LAWS, ETC. 14 -------------------------- 5.7 ADDITIONAL FEES 15 --------------- 5.8 USE OF PROCEEDS 15 --------------- 5.9 ACCOUNTANTS 15 ----------- 5.10 FURTHER ASSURANCES 16 ------------------ 5.11 ACCOUNTS AND RECORDS 16 -------------------- 5.12 RESERVATION OF SHARES 16 --------------------- 6. NEGATIVE COVENANTS 16 ------------------ 6.1 LIMITATION ON DEBT 16 ------------------ 6.2 LIMITATION ON RESTRICTED PAYMENTS 16 --------------------------------- 6.3 LIMITATION ON INVESTMENTS 16 ------------------------- 6.4 TRANSACTIONS WITH AFFILIATES 17 ---------------------------- 6.5 MERGER, CONSOLIDATION, SALE OR TRANSFER OF ASSETS 17 ------------------------------------------------- 6.6 SALES OF ASSETS 18 --------------- 6.7 ANNUAL BUDGET 18 ------------- 6.8 CERTAIN CONTRACTS 19 -----------------
ii TABLE OF CONTENTS (Not Part of the Agreement)
Page ---- 6.9 NO NEW SUBSIDIARIES; NO AMENDMENT OF CERTAIN -------------------------------------------- DOCUMENTS 20 --------- 6.10 CHANGE IN BUSINESS 20 ------------------ 6.11 EXECUTIVE OFFICERS 21 ------------------ 6.12 WITHHOLDING TAXES 21 ----------------- 6.13 NO PLEDGE OF SHARES 22 ------------------- 6.14 CHANGE IN CONTROL 22 ----------------- 6.15 SALE OF EQUITY SECURITIES 22 ------------------------- 6.16 FISCAL YEAR; CHANGE IN ACCOUNTING PRACTICES 23 ------------------------------------------- 7. PREFERRED STOCK FAILURE EVENTS 23 ------------------------------ 7.1 PREFERRED STOCK FAILURE EVENTS 23 ------------------------------ 7.2 OTHER REMEDIES 27 -------------- 8. REPRESENTATIONS, COVENANTS AND WARRANTIES 28 ----------------------------------------- 8.1 ORGANIZATION; AUTHORITY 28 ----------------------- 8.2 AUTHORIZATION 28 ------------- 8.3 CAPITAL STOCK AND RELATED MATTERS 29 --------------------------------- 8.4 LITIGATION 31 ---------- 8.5 COMPLIANCE 31 ---------- 8.6 OFFERING 32 -------- 8.7 ERISA AND LABOR RELATIONS 32 ------------------------- 8.8 FINANCIAL STATEMENTS; MATERIAL FACTS 37 ------------------------------------ 8.9 OUTSTANDING DEBT 38 ---------------- 8.10 TAXES 38 ----- 8.11 CONFLICTING AGREEMENTS 39 ---------------------- 8.12 POLLUTION AND OTHER REGULATIONS 39 -------------------------------
iii TABLE OF CONTENTS (Not Part of the Agreement)
Page ---- 8.13 CERTAIN ACTS 40 ------------ 8.14 GOVERNMENTAL PERMITS, CONSENTS, ETC 40 ----------------------------------- 8.15 FEES AND COMMISSIONS 41 -------------------- 8.16 INTELLECTUAL PROPERTY 41 --------------------- 8.17 ABSENCE OF CERTAIN CHANGES 42 -------------------------- 8.18 LEASES 42 ------ 8.19 PURCHASE AGREEMENT 42 ------------------ 8.20 INSURANCE 43 --------- 8.21 RESERVATION OF SHARES 43 --------------------- 8.22 TITLE TO PROPERTIES 43 ------------------- 8.23 CONTRACTS AND AGREEMENTS 44 ------------------------ 8.24 RECRUITMENT; ADMISSIONS PROCEDURES; ATTENDANCE; ----------------------------------------------- REPORTS 45 ------- 8.25 COHORT DEFAULT RATE 46 ------------------- 8.26 RECEIVABLES 46 ----------- 8.27 WORKING CAPITAL AT THE DATE OF THIS AGREEMENT 46 --------------------------------------------- 9. REPRESENTATIONS OF ELECTRA 47 -------------------------- 9.1 PURCHASE OF SECURITIES 47 ---------------------- 9.2 INCORPORATION; AUTHORIZATION 47 ---------------------------- 9.3 NO CONFLICTS 47 ------------
iv TABLE OF CONTENTS (Not Part of the Agreement)
Page ---- 9.4 NO BROKERS' FEES 48 ---------------- 10. DEFINITIONS 48 ----------- 11. MISCELLANEOUS 64 ------------- 11.1 PAYMENTS 64 -------- 11.2 EXPENSES; INDEMNITY 65 ------------------- 11.3 CONSENT TO AMENDMENTS; SUBORDINATION 66 ------------------------------------ 11.4 PERSONS DEEMED OWNERS 67 --------------------- 11.5 SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE -------------------------------------------------- AGREEMENT 67 --------- 11.6 SUCCESSORS AND ASSIGNS 68 ---------------------- 11.7 NOTICES 68 ------- 11.8 DESCRIPTIVE HEADINGS, ETC. 68 -------------------------- 11.9 GOVERNING LAW; CHOICE OF FORUM 68 ------------------------------ 11.10 WAIVER OF JURY TRIAL 69 --------------------
v SCHEDULES: - --------- Schedule 1 Investors Schedule 4.11 Material Adverse Change Schedule 6.1 Existing Debt Schedule 6.4 Transactions with Affiliates Schedule 8.1 Jurisdictions Where Qualified; Subsidiaries Schedule 8.2 Authorization Schedule 8.3 Capitalization Schedule 8.4 Litigation Schedule 8.5 Compliance Schedule 8.7 ERISA and Labor Relations Schedule 8.11 Conflicting Agreements Schedule 8.12 Pollution and Other Regulations Schedule 8.14 Governmental Permits Schedule 8.16 Licenses and Options Schedule 8.18 Leases Schedule 8.19 Amendments to the Purchase Agreement Schedule 8.20 Insurance Schedule 8.22 Real Property Schedule 8.23 Contracts Schedule 8.24 Recruitment; Admissions Procedures; Attendance; Reports Schedule 8.25 Cohort Default Rate Schedule 10.1 Existing Liens EXHIBITS: - -------- Exhibit 1A Form of Certificate of Designations Exhibit 1B Form of Warrant Certificate Exhibit 4.1 Purchase Agreement Exhibit 4.3 Form of Opinion of the Company's Counsel Exhibit 4.13 Form of Stockholders Agreement Exhibit 4.14 Form of Registration Rights Agreement Exhibit 4.15 Form of Guaranty Agreement Exhibit 7.1 Form of Penalty Warrant Certificate vi SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT, dated as of July 31, 1995, by and among CAREER EDUCATION CORPORATION, a Delaware corporation (the "Company"), ------- ELECTRA INVESTMENT TRUST P.L.C. ("EIT"), ELECTRA ASSOCIATES, INC. ("EAI", and --- --- together with EIT, "Electra"). ------- W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Company has entered into an Asset Purchase Agreement, dated as of April 14, 1994, as amended on April 24, 1995, May 5, 1995, May 12, 1995, May 26, 1995, June 15, 1995, June 27, 1995, July 12, 1995 and July 28, 1995 (the "Purchase Agreement"), with National Education Centers, Inc., a ------------------ California corporation ("NEC, Inc."), and National Education Corporation, a Delaware corporation and sole stockholder of NEC, Inc. ("NEC"), pursuant to which, among other things, the Company will be acquiring substantially all of the assets of NEC, Inc. relating to Brown Institute and Allentown Business School (collectively, the "NEC Schools"), and the Company will assume from NEC, Inc. certain of NEC, Inc.'s liabilities pertaining to the NEC Schools (the "Acquisition"); and - ------------ WHEREAS, the Company has requested that Electra extend certain financial accommodations to the Company in connection with the financing of the Acquisition and certain of the working capital needs of the Company; and WHEREAS, the Company desires, upon the terms and conditions hereinafter provided, to sell the Series C Preferred Stock and the Warrants (as each is hereinafter defined, and collectively, the "Securities") to Electra; and ---------- WHEREAS, Electra desires, upon the terms and conditions hereinafter provided, to purchase from the Company the Series C Preferred Stock and the Warrants; 1 NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be bound, hereby agree as follows: Certain terms used in this Agreement are defined in Section 10 hereof. Unless otherwise indicated, references to statutes are to statutes of the United States of America. Accounting terms used herein shall be construed in accordance with GAAP. In addition, unless the contrary intention appears, terms and expressions having a defined or generally accepted meaning under the securities laws of the United States shall have the same meaning in this Agreement. 1. AUTHORIZATION OF FINANCING. -------------------------- In order to provide funds for, among other things, the Acquisition, the Company has authorized the issuance, sale and delivery of (i) 500 shares of its Series C Redeemable Preferred Stock, par value $.01 per share, with a stated value of $10,000 per share (the "Series C Preferred Stock"), which series has ------------------------ the rights, restrictions, privileges and preferences as set forth in the Certificate of Designations for the Series C Preferred Stock of the Company, substantially in the form of Exhibit 1A attached hereto (the "Certificate of ---------- -------------- Designations"), and (ii) the warrants (together with any such Penalty Warrants - ------------ (as hereinafter defined) that may be issued to the holders of the Series C Preferred Stock from time to time pursuant to Section 7.1 hereof, collectively, the "Warrants" and each individually, a "Warrant") to purchase a maximum -------- ------- aggregate, without giving effect to the issuance of any Penalty Warrants which may be issued from time to time, of 23.0%, subject to certain adjustments, of the outstanding shares of Common Stock of the Company, on a fully diluted basis, at an exercise price of $.01 per share, evidenced by one or more warrant certificates (the "Warrant Certificates") to be substantially in the form of -------------------- Exhibit 1B attached hereto. - ---------- 2. PURCHASE AND SALE OF SECURITIES. ------------------------------- 2 The Company hereby agrees to issue and sell to each Electra entity and each Electra entity, severally and not jointly, agrees, subject to the terms and conditions herein set forth and in reliance upon the representations, warranties and agreements of the Company herein contained, to purchase at the Closing from the Company (i) the aggregate number of shares of Series C Preferred Stock set forth opposite the Electra entity's name in Schedule 1 attached hereto for the ---------- purchase price set forth opposite the Electra entity's name and registered in the Electra entity's name or that of the Electra entity's nominee, as the Electra entity shall request, and (ii) the aggregate number of Warrants, set forth opposite the Electra entity's name in Schedule 1 attached hereto, in the ---------- form of one or more Warrant Certificates, registered in the Electra entity's name or that of the Electra entity's nominee, as the Electra entity shall request. 3. CLOSING OF SALE OF SECURITIES. ----------------------------- The purchase and delivery of the Securities shall take place at the offices of Pryor, Cashman, Sherman & Flynn, 410 Park Avenue, New York, New York 10022 (the "Closing") to be held simultaneously with the execution and delivery of ------- this Agreement, or at such other place or on such other date as Electra and the Company may agree upon, but in no event later than August 31, 1995 (the "Closing ------- Date"). At the Closing, the Company will deliver one or more certificates - ---- evidencing the Series C Preferred Stock and one or more certificates evidencing the Warrants to each of the appropriate Electra entities, against payment of the purchase price therefor by transfer of immediately available funds to such bank or other financial institution as the Company may direct in writing, for credit to the Company's account, and the Company shall pay a non-refundable financing fee to EI of $100,000 (the "Financing Fee"). If at the Closing, the Company ------------- shall fail to tender to Electra any of the Securities or to EI the Financing Fee provided for above in this Section 3, or any of the conditions specified in Section 4 hereof shall not have been satisfied or waived by Electra, Electra shall, at its election, be relieved of all further obligations under this Agreement, without thereby waiving any other rights its may have by reason of such failure or such non-fulfillment. 3 4. CONDITIONS OF CLOSING. --------------------- Electra's obligation to purchase and pay for the Securities is subject to the satisfaction prior to or at the Closing of each of the following conditions: 4.1 CLOSINGS UNDER THE PURCHASE AGREEMENT. The transactions ------------------------------------- contemplated under the Purchase Agreement, in the form of Exhibit 4.1 hereto, ----------- shall close simultaneously with the transactions contemplated herein, without any material terms or conditions therein being waived by the Company, unless the Company has the prior written consent to such waiver by Electra. The Company shall have provided to Electra an Officer's Certificate setting forth the status of all consents, approvals and authorizations from the DOE or any Accrediting Body required in connection with the consummation of the transactions contemplated under the Purchase Agreement, stating that all such consents, approvals and authorizations which have not been obtained prior to the Closing shall be obtained within 180 days following the Closing, and shall contain a certification that the Company has no reason to believe that any such consents, approvals or authorizations will not be obtained within such time period. 4.2 CLOSINGS UNDER THE SENIOR LOAN DOCUMENTS. The Senior Loan ---------------------------------------- Documents shall have been entered into simultaneously with the transactions contemplated herein and in the Purchase Agreement and the Company shall have satisfied all of the conditions in the Senior Loan Document to allow it to borrow at the Closing of up to $6,500,000 from the reducing revolving credit facility. In addition, the Company shall have a minimum unused availability under the reducing revolving credit facility of $1,500,000. 4.3 OPINION OF COUNSEL. Electra shall have received from Goldberg, ------------------ Kohn, Bell, Black, Rosenbloom & Moritz, Ltd., special counsel to the Company, an opinion substantially in the form set forth in Exhibit 4.3, addressed to ----------- Electra, dated the Closing Date and otherwise reasonably satisfactory in form and substance to Electra. 4 4.4 REPRESENTATIONS AND WARRANTIES; NO PREFERRED STOCK FAILURE EVENT. ---------------------------------------------------------------- The representations and warranties of the Company contained in this Agreement, the other Transaction Documents and those otherwise made in any writing by the Company, furnished in connection with or pursuant to this Agreement and the other Transaction Documents or in connection with the transactions contemplated hereby or thereby, shall be true and correct when made and at the time of the Closing as though made at such time, and the Company shall have performed or complied with the covenants, conditions and agreements contained in this Agreement and the other Transaction Documents required to be performed and complied with by the Company at or prior to the Closing, other than covenants, conditions and agreements contained in the Third Party Documents which have been waived by the parties thereto and disclosed to Electra on or prior to the Closing; and there shall exist at the time of the Closing and after giving effect to such transactions no Preferred Stock Failure Event or Preferred Stock Failure. 4.5 PURCHASE PERMITTED BY APPLICABLE LAWS. The purchase of and ------------------------------------- payment for the Securities shall not violate any applicable law or governmental regulation (including, without limitation, Section 5 of the Securities Act) and shall not subject Electra to any tax, penalty, liability or other onerous condition under or pursuant to any applicable law or governmental regulation or order. Electra shall have received such certificates or other evidence as they may reasonably request to establish compliance with the conditions set forth in this Section 4.5. 4.6 NO ADVERSE LEGISLATION, ACTION OR DECISION. After the date ------------------------------------------ hereof, no legislation, order, rule, ruling or regulation shall have been enacted or made by or on behalf of any governmental body, department or agency, nor shall have any legislation been introduced and favorably reported for passage to either House of Congress by any committee of either such House to which such legislation has been referred for consideration or any state legislature in any jurisdiction in which the Schools operate or by any committee of such legislature to which such legislation has been referred for consideration, nor shall any 5 decision of any court of competent jurisdiction within the United States have been rendered which, in Electra's judgment, would have a Material Adverse Effect. There shall be no action, suit, investigation, or proceeding pending, or to the Company's knowledge, threatened, against or affecting the Company or any of its Subsidiaries, the Company's or such Subsidiaries' properties or rights, or any of the Company's or such Subsidiaries' Affiliates, officers or directors, before any court, arbitrator or administrative or governmental body which (i) seeks to restrain, enjoin, prevent the consummation of or otherwise affect the transactions contemplated by this Agreement or the other Transaction Documents or (ii) questions the validity or legality of any such transactions or seeks to recover damages or to obtain other relief in connection with any such transactions, and, to the Company's knowledge, there shall be no valid basis for any such action, proceeding or investigation. 4.7 APPROVALS AND CONSENTS. The Company shall have duly received all ---------------------- authorizations, waivers, consents, approvals, licenses, franchises, permits and certificates (collectively, "Consents") by or of all federal, state and local -------- governmental authorities and all material Consents by or of all other Persons necessary or advisable for the issuance of the Securities, and all thereof shall be in full force and effect at the time of Closing. 4.8 PROCEEDINGS. All proceedings taken or to be taken in connection ----------- with the transactions contemplated hereby and in the other Transaction Documents, and all documents incident thereto, shall be reasonably satisfactory in form and substance to Electra, and Electra shall have received all such counterpart originals or certified or other copies of such documents as it may request. 4.9 FINANCING FEE. EI shall have received payment in full of the ------------- Financing Fee set forth in Section 3 hereof. 4.10 LEGAL FEES. Pryor, Cashman, Sherman & Flynn, special counsel to ---------- Electra, shall have received payment of its fees and expenses referred to in Section 11.2 hereof. 6 4.11 NO MATERIAL ADVERSE CHANGE. Except as specifically set forth on -------------------------- Schedule 4.11, since December 31, 1994, there shall have been no Material Adverse Change in the Company or any of the Schools. 4.12 SERIES C PREFERRED STOCK AND WARRANT CERTIFICATES. The Company ------------------------------------------------- shall have delivered to Electra one or more Series C Preferred Stock and Warrant certificates, each representing the number of shares of Series C Preferred Stock or Warrants being purchased from the Company by each Electra entity as set forth on Schedule 1 hereto. ---------- 4.13 STOCKHOLDERS AGREEMENT. The Stockholders Agreement, in the ---------------------- form of Exhibit 4.13 hereto (the "Stockholders Agreement"), shall be executed ------------ ---------------------- and delivered to Electra contemporaneously with the transactions contemplated herein. 4.14 REGISTRATION RIGHTS AGREEMENT. The Registration Rights ----------------------------- Agreement, in the form of Exhibit 4.14 hereto (the "Registration Rights ------------ ------------------- Agreement"), shall be executed and delivered to Electra contemporaneously with - --------- the transactions contemplated herein. 4.15 GUARANTY AGREEMENT. The Guaranty Agreement, in the form of ------------------ Exhibit 4.15 hereto (the "Guaranty Agreement"), shall be executed and delivered - ------------ ------------------ to Electra contemporaneously with the transactions contemplated herein. 4.16 CERTIFICATE OF DESIGNATIONS. The Certificate of Designations --------------------------- for the Series C Preferred Stock shall be executed and duly filed with the Delaware Secretary of State. 4.17 FINANCIAL INFORMATION. The Company shall have delivered to --------------------- Electra, to the extent available, the monthly consolidated profit and loss statements and balance sheets for the Company and its Subsidiaries and for the NEC Schools since December 31, 1994 for all monthly periods ending prior to the Closing Date, which financial information shall not represent a Material Adverse Change in the Company. The Company shall have delivered to Electra its best reasonable estimate of a consolidated pro forma opening balance sheet of the Company and 7 its Subsidiaries, as of the Closing Date, giving effect to the Acquisition and the transactions contemplated by this Agreement and the other Transaction Documents, in form and substance satisfactory to Electra. The Company shall have delivered to Electra copies of the audited financial statements for each of the NEC Schools for the years ended December 31, 1993 and 1994. 4.18 BOARD OF DIRECTORS APPROVAL. The approval of the Board of --------------------------- Directors of each Electra entity approving the terms and conditions of this Agreement and the other Transaction Documents to which they are a party and all of the transactions contemplated hereby and thereby shall have been obtained. 4.19 DUE DILIGENCE INVESTIGATION. Electra and its special counsel --------------------------- shall have completed their business and legal due diligence investigation to their satisfaction. Electra shall not have discovered any fact which in its reasonable determination would make the consummation of the transactions contemplated by this Agreement or the other Transaction Documents not in its best interest. 4.20 COMPLIANCE CERTIFICATE. Electra shall have received an ---------------------- Officers' Certificate, dated the Closing Date, certifying that the conditions specified in Article 4 required to be fulfilled on the Closing Date (other than actions required to be taken by Electra) have been fulfilled. 4.21 SECRETARY'S CERTIFICATES; GOOD STANDING. The Company shall --------------------------------------- have delivered to Electra (i) a certificate of its corporate secretary or assistant secretary as to (I) resolutions of its Board of Directors or shareholders action, as required, approving and authorizing the execution, delivery and performance of each of the Transaction Documents to which it is a party and authorizing the issuance and delivery of Series C Preferred Stock and the Warrants, as being in full force and effect without modification, supplementation or amendment and (II) as to its Certificate of Incorporation (including, without limitation, the Certificate of 8 Designations) and the By-laws and all amendments to date as being in full force and effect, with true, correct and complete copies of such resolutions, Certificates of Incorporation (including, without limitation, the Certificate of Designations) and By-laws attached thereto, (ii) an incumbency certificate of its officers executing this Agreement and the other Transaction Documents to which it is a party and (iii) a certificate of subsistence and/or good standing of the Company and each Subsidiary, dated as of a recent date prior to the Closing, issued by the Secretary of State of Delaware and of each other state in which the Company and such Subsidiary is qualified to do business. 4.22 PROCESS AGENT CONSENT LETTER. On or prior to the Closing Date, ---------------------------- Electra shall have received a letter from CT Corporation System located at 1633 Broadway, New York, New York 10019, indicating its consent to its appointment by the Company as its agent to receive service of process as specified in Section 11.9 hereof. 4.23 ADDITIONAL INFORMATION. The Company shall have executed and/or ---------------------- delivered such other information and documentation as Electra and its special counsel shall request. Electra shall have received such other documents and opinions, in form and substance satisfactory to Electra, and its special counsel, relating to matters incident to the Acquisition and the transactions contemplated by the Transaction Documents. 5. AFFIRMATIVE COVENANTS. --------------------- The Company hereby covenants that from and after the date of this Agreement through the Closing and thereafter so long as any Securities remain outstanding, as follows; provided, however, that upon the redemption in full of all of the -------- ------- shares of Series C Preferred Stock, Sections 5.7 through 5.9 shall no longer be applicable: 5.1 FINANCIAL STATEMENTS AND OTHER REPORTS. The Company covenants -------------------------------------- that it will deliver, or cause to be delivered, to each of the Significant Holders: (i) as soon as practicable and in any event at least 30 days prior to the commencement of each fiscal year of the Company, the Company's preliminary annual operating budget and the capital budget, including consolidated and 9 consolidating statements of budgeted cash flow and income of the Company and its Subsidiaries for each month in such fiscal year, all in reasonable detail, and as soon as practicable and in any event no later than 30 days following the commencement of each fiscal year of the Company, the Company's final annual operating budget and the capital budget; (ii) as soon as practicable and in any event within 30 days after the end of each fiscal month of the Company (other than the last month of each fiscal quarter), consolidated and consolidating statements of income and cash flow of the Company and its Subsidiaries for such month and for the period from the beginning of the current fiscal year to the end of such month and consolidated and consolidating balance sheets of the Company and its Subsidiaries as at the end of such month, and (a) setting forth in each case, in comparative form, figures relating to figures for the corresponding months in the annual budget (including, without limitation, the initial annual budget prepared on or prior to the Closing on a pro forma basis giving effect to the consummation of the Acquisition), all in reasonable detail, and (b) in comparative form, figures for the corresponding months in the preceding fiscal year, all in reasonable detail; (iii) as soon as practicable and in any event within 45 days after the end of each fiscal quarter of the Company, consolidated and consolidating statements of income and cash flow of the Company and its Subsidiaries for such quarter and for the period from the current fiscal year to the end of such quarter and consolidated and consolidating balance sheets of the Company and its Subsidiaries as at the end of such quarter, and (a) setting forth, in comparative form, figures for the corresponding quarter in the annual budget (including, without limitation, the initial annual budget prepared on or prior to the Closing on a pro forma basis giving effect to the consummation of the Acquisition), all in reasonable detail, and (b) setting forth, in comparative form, figures for the corresponding quarter in the preceding fiscal year, all in reasonable detail, and (I) if 10 requested by the Significant Holders in connection with the determination of the Earned Amount (as defined in the Warrant), reviewed by Arthur Andersen or another independent accounting firm of nationally recognized standing and (II) certified by the chief financial officer of the Company as being a true and correct reflection in all material respects of the financial condition and results of operation of the Company and its Subsidiaries on a consolidated and consolidating basis (determined in accordance with GAAP), subject to changes resulting from year-end adjustments and except as otherwise noted therein; (iv) as soon as practicable and in any event within 120 days after the end of each fiscal year, audited consolidated and consolidating statements of income and cash flow of the Company and its Subsidiaries for such year, and audited consolidated and consolidating balance sheets of the Company and its Subsidiaries as at the end of such year, and setting forth, in each case, in comparative form, corresponding figures from the preceding fiscal year, and corresponding figures for such year from the annual budget ( including, without limitation, the initial annual budget prepared on or prior to the Closing on a pro forma basis giving effect to the consummation of the Acquisition) (which comparisons to the annual budget need not be audited), all in reasonable detail, and, as to the consolidated statements, reported upon by Arthur Andersen or another independent accounting firm of nationally recognized standing whose certification shall be without qualification as to the scope of the audit or as to GAAP, and, as to the consolidating statements, certified by the chief financial officer of the Company; (v) promptly upon transmission thereof, copies of all such financial statements, proxy statements, notices and reports as it or any of its Subsidiaries shall send to its security holders, copies of all reports which it or any of its officers or directors send to, and all registration statements (without exhibits) which it files, with the Commission or any securities exchange (should the Company or any of its Subsidiaries be or become public companies), copies of all press releases and other statements made 11 generally available by the Company or any Subsidiary to the public concerning material developments in the business of the Company and its Subsidiaries, as the case may be, copies of communications sent to or received from stockholders of the Company (in their capacity as stockholders) and copies of all material communications sent to or received from the Senior Lenders or any other lender to the Company; (vi) promptly upon receipt thereof, a copy of each other report (including, without limitation, each management and/or controller letter) submitted to the Company or any of its Subsidiaries by independent accountants in connection with any annual, interim or special audit of the books of the Company or any of its Subsidiaries made by such accountants; (vii) together with each delivery of financial statements required by clauses (iii) and (iv) above, an Officers' Certificate of the Company (a) stating that the signers have reviewed the terms of this Agreement and the Securities and have made, or caused to be made under their supervision, a review in reasonable detail of the transactions and condition of the Company and its Subsidiaries during the fiscal period covered by such financial statements and that such review has not disclosed the existence during or at the end of such fiscal period, and that the signers do not have knowledge of the existence, as at the date of the Officers' Certificate, of any condition or event which constitutes a Preferred Stock Failure Event or Preferred Stock Failure or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action, if any, the Company has taken or is taking or proposes to take with respect thereto, and (b) demonstrating (with computations in reasonable detail) compliance by the Company and its Subsidiaries with, to the extent each remains applicable at such time, (I) the provisions of Sections 6.1 and 6.7 and (II) in the event of the sale, lease, transfer or other disposition of material assets of the Company or any of its Subsidiaries, either directly or through the sale of stock or other equity of any such Subsidiary, during such fiscal period, Sections 6.5, 12 6.6, 6.14 or 6.15, as the case may be; (viii) together with each delivery of consolidated financial statements required by clause (iv) above, a certificate of the independent public accountants giving the report thereon stating that in conducting the audit of such financial statements, they have obtained no knowledge of any Preferred Stock Failure Event or Preferred Stock Failure or, if they have obtained knowledge of any Preferred Stock Failure Event or Preferred Stock Failure, specifying the nature and period of existence thereof; (ix) immediately upon any executive officer of the Company or any of its Subsidiaries obtaining knowledge (a) of any condition or event which constitutes a Preferred Stock Failure Event or Preferred Stock Failure, (b) that the holder of any Preferred Shares has given any notice or taken any other action with respect to a claimed Preferred Stock Failure Event or Preferred Stock Failure under this Agreement, (c) of any condition or event which, in the opinion of management of the Company, could have a Material Adverse Effect, (d) that any Person has given any notice to the Company or any of its Subsidiaries or taken any other action with respect to a claimed default or event or condition of the type referred to in clause (ii) of Section 7.1 hereof, or (e) of the institution of any litigation involving claims against the Company or any of its Subsidiaries equal to or greater than $100,000 with respect to any single cause of action or $250,000 with respect to the aggregate of all causes of action, or any adverse determination in any litigation involving a potential liability to the Company or any of its Subsidiaries equal to or greater than $100,000 with respect to any single cause of action or $250,000 with respect to the aggregate of all causes of action, an Officers' Certificate specifying the nature and period of existence of any such condition or event, or specifying the notice given or action taken by such holder or Person and the nature of such claimed Preferred Stock Failure Event, Preferred Stock Failure, event or condition, and what action, if any, the Company has taken, is taking or proposes to take with respect thereto; 13 (x) immediately upon any officer of the Company or any of its Subsidiaries becoming aware of the occurrence of (i) any "reportable event", as such term is defined in Section 4043 of ERISA, in connection with any Plan or trust created thereunder, (ii) an event requiring the Company or any Subsidiary to provide security to a Plan under Section 401(a)(29) of the Code, (iii) any "prohibited transaction" incurred by the Company, any of its Subsidiaries or any "Disqualified Person" (as defined in Section 4975 of the Code) (other than an exempt "prohibited transaction"), as such term is defined in section 4975 of the Code or in section 406 of ERISA in connection with any Plan or any trust created thereunder, (iv) the institution of proceedings or the taking or expected taking of action by the PBGC or the Company or any of its Subsidiaries to terminate or withdraw or partially withdraw from a Multiemployer Plan within the meaning of Section 4203 or 4205 of ERISA or under Section 4062, 4063 or 4064 of ERISA (in connection with any Plan or any trust created thereunder), (v) any "accumulated funding deficiency" within the meaning of Section 412 of the Code or Section 302 of ERISA or any delinquency as to contributions or payments to or in respect of any Plans, (vi) any employee benefit Plan and trust which is intended to be qualified within the meaning of Section 401(a) and tax exempt within the meaning of 501(a) of the Code, no longer being qualified or tax exempt, (vii) any transaction or any failure to take any action or make any required contributions or any act or omission which would give rise to liability for any excise tax under Section 4971 through 4980B of the Code inclusive, (viii) any action or event which would materially increase the cost of any employee benefit Plan, or (ix) any other action taken by the Internal Revenue Service, the PBGC or the Department of Labor in connection with any employee benefit Plan and trust of the Company or its Subsidiaries, a written notice specifying the nature thereof, what action, if any, the Company or any such Subsidiary has taken, is taking or proposes to take with respect thereto, and, when known, any action taken or threatened by the Internal Revenue Service or the PBGC with respect thereto; 14 (xi) immediately upon any revision to any of the financial statements referred to in clauses (i), (ii), (iii) or (iv) above, such financial statements, as revised; (xii) with reasonable promptness, such other information and data with respect to the Company or any of its Subsidiaries as such Significant Holder may reasonably request; (xiii) (a) within 30 days after Closing, an audited opening balance sheet of the NEC Schools on a stand-alone basis as of the Closing Date, with an opinion of Arthur Andersen, and (b) within 60 days after Closing, an opening certified consolidated balance sheet of the Company, with a review opinion of Arthur Andersen or another independent accounting firm of nationally recognized standing; (xiv) together with each delivery of financial statements required by clauses (iii) and (iv) above, and, to the extent prepared by the Company, clause (ii) above, an Officers' Certificate of the Company containing an analysis of the variance between the results of operations and the budget for such period and a management commentary as to such results of operation; and (xv) promptly upon transmission thereof, copies of all applications, notices and other reports as it or any of its Subsidiaries shall send to DOE or any Accrediting Body. 5.2 INSPECTION OF PROPERTY. The Company covenants that it, and ---------------------- each of its Subsidiaries, will permit any Person designated by a majority of the holders of the Securities in writing, at such holders' expense, to visit and inspect any of the properties of the Company and any of its Subsidiaries, to examine the books and financial records of the Company and any of its Subsidiaries and make copies thereof or extracts therefrom and to discuss its affairs, finances and accounts with its officers and its independent public accountants, all at such reasonable times during normal business hours, upon reasonable prior notice and as often as such holders may reasonably request. 15 5.3 MAINTENANCE OF PROPERTIES; INSURANCE. The Company and its ------------------------------------ Subsidiaries will maintain or cause to be maintained in good repair, working order and condition (ordinary wear and tear excepted) all material properties used in the business of the Company and its Subsidiaries and from time to time will make or cause to be made all appropriate repairs, renewals and replacements thereof. The Company and its Subsidiaries shall not permit any lease or agreement pursuant to which the Company or any Subsidiary leases, uses or occupies any of its respective real or personal property to be canceled or terminated by the other party to such lease or agreement prior to the expiration of its stated term which individually or in the aggregate would have a Material Adverse Effect. The Company and its Subsidiaries will maintain or cause to be maintained, with financially sound and reputable insurers who are rated by A. M. Best Company's Rating Service as "A" or higher or, as to workers' compensation or similar insurance, in an insurance fund or by self-insurance authorized by the laws of the jurisdiction in question, insurance with respect to their respective properties and businesses against loss or damage of the kinds customarily insured against by corporations of established reputation engaged in the same or similar businesses and similarly situated, of such type and in such amounts including appropriate deductible levels as are customarily carried under similar circumstances by such other corporations. All policies under this Section 5.3 shall provide that 30 days prior written notice shall be given to the holders of the Securities by the insurer prior to a termination of such policy. The Company, in its discretion, will use the proceeds of all such casualty insurance policies to either (i) repay the Senior Debt, (ii) redeem the Series C Preferred Stock, subject to the rights of the Senior Lenders under the Senior Loan Documents, (iii) repair or replace the damaged property or (iv) reinvest such proceeds in the Company's business in accordance with the Senior Loan Documents. The Company will use every reasonable effort to provide Directors and Officers insurance to all of its directors and officers on commercially reasonable terms within sixty (60) days after the Closing Date. 5.4 EXISTENCE, ETC. Subject to the sales of assets permitted in -------------- accordance with Section 6.6, the Company will, and 16 will cause each of its Subsidiaries to, at all times preserve and keep in full force and effect its corporate existence, and Permits, rights, licenses, franchises, trademarks, trade names, patents and other proprietary information material to its business, and will qualify and cause each of its Subsidiaries to qualify to do business in any jurisdiction where the ownership of such property or Permits or the operation of its business makes such qualification necessary except where the failure to so qualify does not have a Material Adverse Effect. 5.5 PAYMENT OF TAXES AND CLAIMS. The Company will, and will cause --------------------------- each of its Subsidiaries to, pay all taxes, assessments and other governmental charges imposed upon it or any of its properties or assets or in respect of any of its franchises, business income or properties before any penalty or interest accrues thereon, and all claims (including, without limitation, claims for labor, services, materials and supplies) for sums which have become due and payable and which by law have or may become a Lien upon any of their properties or assets; provided, however, that no such charge or claim need be paid if being -------- ------- contested in Good Faith and if adequate reserves shall have been made therefor in accordance with GAAP. 5.6 COMPLIANCE WITH LAWS, ETC. The Company will, and will cause ------------------------- each of its Subsidiaries to, comply with the requirements of all applicable laws, rules, regulations and orders of any court, Accrediting Body or other governmental authority, including, without limitation, 34 C.F.R. Section 600 and Section 668, except where the failure to so comply will not have, and is not likely to result in, a Material Adverse Effect. The Company will, and will cause each of its Subsidiaries to, timely make all filings required to be made by it with all relevant Federal, state and/or local regulatory bodies, except where the failure to so file will not have, and is not likely to result in, a Material Adverse Effect. 5.7 ADDITIONAL FEES. The Company hereby agrees to pay an annual --------------- non- refundable portfolio administration fee to EI of $75,000, payable in equal quarterly installments commencing on September 30, 1995 for the pro rata period from the Closing Date and, thereafter, every March 31, June 30, September 30 and 17 December 31, for so long as any Preferred Shares are outstanding, and for the pro-rata period from the payment of the last quarterly installment to the date on which the Preferred Shares are no longer outstanding. Such payments shall be made by either a check drawn on a U.S. bank and delivered to EI at 70 East 55th Street, New York, New York 10022 or a wire transfer of immediately available funds to EI at NatWest Bank, N.A., 175 Water Street, 14th Floor, New York, New York 10038, Account Name: Electra, Inc., ABA Number: 021000322, Account Number: 2753103667 or at such other bank or other financial institution and account therein as shall be designated by Electra or EI, as appropriate. The parties hereby agree that the portfolio administration fee is intended solely as, and represents, reasonable compensation to EI for its time and expenses in administering Electra's investment in the Securities and is not and shall not be regarded as a consulting or financial advisory or other similar fee. 5.8 USE OF PROCEEDS. The Company shall use all of the proceeds --------------- received from the sale of the Securities pursuant to this Agreement to fund (i) the Acquisition, (ii) the closing costs associated with the closing under this Agreement and the transactions contemplated herein and/or (iii) working capital in the ordinary course of business. 5.9 ACCOUNTANTS. The Company has retained Arthur Andersen to audit ----------- the Company's and its Subsidiaries' financial statements. In the event the services of Arthur Andersen or any firm of independent public accountants hereafter so employed by the Company are terminated, the Company will promptly thereafter notify the Significant Holders and will request the firm of independent public accountants whose services were terminated to deliver to the Significant Holders a letter of such firm setting forth the reasons for the termination of their services. In its notice, the Company shall state whether the change of accountants was recommended or approved by the Board of Directors or any committee thereof. In the event of any such termination, the Company will promptly thereafter engage a firm of independent public accountants of recognized national standing or other firm of independent public accountants approved by the Significant Holders. 18 5.10 FURTHER ASSURANCES. From time to time the Company will, and ------------------ will cause each of its Subsidiaries to, execute and deliver to the Significant Holders, such other instruments, certificates agreements and documents and take such other action and do all other things as may be requested by any of the Significant Holders in order to implement or effectuate the terms and provisions of this Agreement and the other Transaction Documents (other than the Third Party Documents). 5.11 ACCOUNTS AND RECORDS. The Company and all of its Subsidiaries -------------------- will keep true records and books of account in which full, true and correct entries will be made of all dealings or transactions in relation to its business and affairs. 5.12 RESERVATION OF SHARES. The Company shall at all times keep --------------------- reserved and available for issuance the number of shares of Common Stock for issuance upon exercise of all of the Warrants (as such number may be adjusted from time to time pursuant to the terms of the Warrants), and, upon issuance of any Penalty Warrants, will reserve and keep available for issuance the number of shares of Common Stock issuable upon exercise of the Penalty Warrants (as such number may be adjusted from time to time pursuant to the terms of the Penalty Warrants). 6. NEGATIVE COVENANTS. ------------------ The Company hereby covenants from and after the date of this Agreement through the Closing and thereafter so long as any Securities remain outstanding as follows; provided, however, that upon the redemption in full of all of the -------- ------- shares of Series C Preferred Stock, (i) Sections 6.1 through 6.3, 6.9, 6.13, 6.14 and 6.16 shall no longer be applicable and (ii) Sections 6.5, 6.6 and 6.15 shall be amended as provided therein: 6.1 LIMITATION ON DEBT. The Company covenants that it will not, ------------------ and will not permit any of its Subsidiaries to, create, incur, assume, suffer to exist or otherwise become or be liable with respect to any Debt except for Permitted Indebtedness. 6.2 LIMITATION ON RESTRICTED PAYMENTS. The Company --------------------------------- 19 covenants that it will not, and will not permit any of its Subsidiaries to, directly or indirectly, pay or declare or set apart for payment any Restricted Payment. 6.3 LIMITATION ON INVESTMENTS. The Company covenants that it will ------------------------- not, and will not permit any of its Subsidiaries to, make or obligate itself to make, directly or indirectly, any Investment, other than Permitted Investments. 6.4 TRANSACTIONS WITH AFFILIATES. The Company covenants that it ---------------------------- will not, and will not permit any of its Subsidiaries to, directly or indirectly, purchase, acquire or lease any property to, or otherwise deal with, in the ordinary course of business or otherwise, any Affiliate of the Company or its Subsidiaries except (i) as set forth on Schedule 6.4 hereto, (ii) on an ------------ arm's length basis in transactions which are on no less favorable terms to the Company or such Subsidiary than would be the case with a similar transaction with an unaffiliated Person; provided, however, that if the transaction or -------- ------- series of related transactions is over $50,000 then the transaction shall be approved by a majority of the independent directors of the Company, (iii) the Company may pay the fees provided for in Section 5.7 hereof, (iv) reasonable, customary and regular fees to the non-management directors of the Company or any of its Subsidiaries, (v) any Restricted Payment that is not otherwise prohibited by Section 6.2 hereof, (vi) any transaction among the Company and its Wholly- Owned Subsidiaries or among such Sub sidiaries in the ordinary course of their respective businesses, or (vii) any transaction related to compensation or benefit arrangements in the ordinary course of business, with an employee benefit plan or trust for the benefit of employees of the Company or its Subsidiaries. Notwithstanding the foregoing, the Company covenants that it will not, and will not permit any of its Subsidiaries to, without the consent of the Significant Holders, make any payments to Heller of fees and/or reimbursement of expenses (other than reasonable third-party expenses and, to the extent that during any fiscal year Heller shall not otherwise have received or be entitled to receive a fee as provided below, direct out of pocket expenses incurred by Heller) relating to (a) the consummation of the acquisition of certain subsidiaries and operations of the Company and/or (b) consulting, advisory or 20 other services provided by Heller; provided, however, that the Company shall be -------- ------- permitted to pay Heller fees in respect of such services not to exceed $100,000 during any fiscal year so long as no Preferred Stock Failure Event or Preferred Stock Failure, or Event of Default or Default (each as defined in the Senior Loan Agreement), shall be in existence at the time of such payment or would result from the payment of such fees. 6.5 MERGER, CONSOLIDATION, SALE OR TRANSFER OF ASSETS. The Company ------------------------------------------------- covenants that it shall not, and will not permit any of its Subsidiaries to, be a party to any merger or consolidation with any Person or sell, lease or transfer or otherwise dispose of all or substantially all of its assets or the assets acquired in the Acquisition, to any Person, except that (i) any Wholly- Owned Subsidiary of the Company may merge into the Company or another Wholly- Owned Subsidiary of the Company if the Company or such other Wholly-Owned Subsidiary, as the case may be, shall be the surviving corporation, and if, immediately after giving effect to such transaction, no condition or event shall exist which constitutes a Preferred Stock Failure Event or Preferred Stock Failure, and (ii) any Subsidiary of the Company may sell, lease, transfer or otherwise dispose of any of its assets to the Company or to any other Wholly- Owned Subsidiary of the Company, whether by dissolution, liquidation or otherwise; provided, however, that from and after the date on which the shares -------- ------- of Series C Preferred Stock shall have been redeemed in full, none of the foregoing transactions shall be prohibited if as a result of such transaction there shall be a general distribution to stockholders of the Company whereby Electra shall realize its IRR Threshold Amount (as defined in the Stockholder Agreement). 6.6 SALES OF ASSETS. Except for (i) the pledge of and security --------------- interest in assets under the terms of the Senior Loan Documents, (ii) Permitted Liens incurred in connection with Permitted Indebtedness, and (iii) any Subsidiary of the Company selling or leasing its assets in the manner described in Section 6.5(ii) hereof, the Company covenants that it will not, and will not permit any of its Subsidiaries to, sell, lease, transfer or otherwise dispose of, in a single transaction or a series of related transactions, any asset, directly or through the sale of Capital Stock or other equity of a Subsidiary of the Company to 21 any Person in excess of $100,000 in any fiscal year, other than sales of obsolete equipment and equipment to be replaced in accordance with the capital budget and the proposed sale of the building located at 3118 Lake Street East, Minneapolis, Minnesota. Notwithstanding the foregoing, from and after the date on which the shares of Series C Preferred Stock shall have been redeemed in full, none the foregoing transactions shall be prohibited (i) if as a result of such transaction there shall be a general distribution to stockholders whereby Electra shall realize its IRR Threshold Amount or (ii) if such sale or series of related sales of assets, when aggregated with all sales of assets during the twelve (12) months preceding such sale, does not involve a Substantial Part. 6.7 ANNUAL BUDGET. The Company covenants that it will submit the ------------- preliminary annual budget of the Company and its Subsidiaries, setting forth, on a consolidated basis, the aggregate expenditures for capital assets and lease expenses expected to be made by the Company and its Subsidiaries during the fiscal year to which such budget relates, and any subsequent material modifications thereto, to the Significant Holders prior to the submission of such preliminary annual budget (and such material modifications thereto) to the Board of Directors for its approval. 6.8 CERTAIN CONTRACTS. The Company covenants that it will not, and ----------------- will not permit any of its Subsidiaries to, without the prior written consent of the Significant Holders, enter into or be a party to, or amend, modify, supplement or waive any provisions under, the following types of agreements: (i) except as permitted by Section 6.3, any contract or agreement providing for the making of loans, advances or capital contributions to any Person or for the purchase of any property from any Person, in each case in order to enable such Person to maintain working capital, net worth or any other balance sheet condition or to pay debts, dividends or expenses; (ii) any contract or agreement for the purchase of materials, supplies or other property or services if such 22 contract (or any related document) requires that payment by the Company or a Subsidiary for such materials, supplies or other property or services shall be made regardless of whether or not delivery of such materials, supplies or other property or services is ever made or tendered; (iii) any contract or agreement to rent or lease (as lessee) any real or personal property if such contract (or any related document) provides that such obligation to make payments thereunder is absolute and unconditional under conditions not customarily found in commercial leases then in general use or requires that the lessee purchase or otherwise acquire securities or obligations of the lessor; (iv) any contract or agreement for the sale or use of materials, supplies or other property, or the rendering of services, if such contract (or any related document) requires that payment for such materials, supplies or other property, or the use thereof, or payment for such services, shall be expressly subordinated to any indebtedness of the purchaser or user of such materials, supplies or other property or the Person entitled to the benefit of such services owed or to be owed to any Person; or (v) except as permitted by Section 6.3, any other contract or agreement which, in economic effect, is substantially equivalent to a guarantee (other than as permitted in accordance with Section 6.1), except by the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business. 6.9 NO NEW SUBSIDIARIES; NO AMENDMENT OF CERTAIN DOCUMENTS. The ------------------------------------------------------ Company covenants that, without the prior written consent of the Significant Holders, it will not (i) except in connection with a Permitted Acquisition, create any new Subsidiaries or enter into any joint ventures or partnerships; provided, that any new Subsidiaries created in connection with a Permitted - -------- Acquisition shall be incorporated in the State of Delaware, the Certificate of Incorporation and Bylaws of such newly-formed Subsidiary shall be substantially similar to the 23 Certificates of Incorporation and Bylaws of the Company's Subsidiaries in existence on the date hereof, and such newly-formed Subsidiary shall have agreed to become a party to the Guaranty Agreement by the execution of a counterpart signature page thereto, (ii) permit any amendment of, or modification or supplement to, its or any of its Subsidiaries' Certificates of Incorporation or By-laws, (iii) enter into, or permit any Subsidiary to enter into, any management or similar agreement for the management of any school unless such management or similar agreement contains an option for the purchase of such school, or (iv) permit any amendment of, or modification or supplement to, the Transaction Documents or the Senior Loan Documents; provided, however, that, -------- ------- without the prior written consent of the Significant Holders, (x) the School Management Agreement may be amended in any manner that does not increase the exercise price for the purchase of Arizona Automotive Institute or make more onerous the covenants and obligations of the Company under the School Management Agreement and any other management or similar agreement entered into by the Company from time to time may be amended in a similar fashion, and (y) the Senior Loan Documents may be amended provided that such amendment does not (1) increase the amount of such indebtedness, (2) result in any earlier scheduled maturity date or payment date of any amount under the Senior Loan Agreement, (3) result in any increase in the interest rate by more than 150 basis points, prepayment charges, fees or other amounts payable pursuant to the Senior Loan Agreement, (4) increase the amount of collateral securing such Senior Debt, (5) result in the Senior Debt having a Weighted Average Life to Maturity less than the Weighted Average Life to Maturity of such Senior Debt prior to such amendment, or (6) in the judgment of the Company's Board of Directors contain terms, provisions and conditions that taken as a whole are more burdensome or onerous to the Company than those in effect prior to such contemplated amendment. 6.10 CHANGE IN BUSINESS. Neither the Company nor any of its ------------------ Subsidiaries will enter into or engage in any business other than that currently engaged in or as currently anticipated, and previously disclosed in writing to the Significant Holders, as a result of the consummation of the Acquisition and the Transaction Documents. 24 6.11 EXECUTIVE OFFICERS. The Company covenants that (i) if at any one ------------------ time John M. Larson shall cease to serve as the chief executive officer of the Company, the Company will, within 180 days of such individual's ceasing to serve as the chief executive officer, fill such individual's position or have such individual's responsibilities assumed by an individual, who has been approved by the Significant Holders, with comparable stature, reputation and experience in the industry as the individual ceasing to serve and (ii) the Company shall employ a chief financial officer, which individual shall be approved by the Significant Holders, and if at any time such individual shall cease to serve as the chief financial officer of the Company, the Company will, within 180 days of such individual's ceasing to serve as the chief financial officer, fill such individual's position or have such individual's responsibilities assumed by an individual, who has been approved by the Significant Holders, with comparable stature, reputation and experience in the industry as the individual ceasing to serve. 6.12 WITHHOLDING TAXES. (a) The Company covenants that it will not ----------------- withhold United States withholding taxes from payments to be made to holders of the Securities if such holders (i) are corporations organized under the laws of a jurisdiction out side the United States or are otherwise persons not resident in the United States for United States federal income tax purposes, and (ii) provide the Company, upon the Company's reasonable request, with one or more of Internal Revenue Service Form W-8, Form 4224 or other applicable forms, certificates or documents certifying as to entitlement to an exemption from any such withholding requirements. (b) The Company covenants that it will not withhold United States withholding taxes from payments to be made to holders of the Securities in excess of an applicable treaty rate if such holders (i) are corporations organized under the laws of a jurisdiction outside the United States or are otherwise persons not resident in the United States for United States federal income tax purposes, and (ii) provide the Company, upon the Company's reasonable request, with one or more of certifications of their residence address, Internal Revenue 25 Service Form 1001 or other applicable forms, certificates or documents certifying as to entitlement to a reduced rate of withholding under any such withholding requirements. (c) Neither Section 6.12(a) nor Section 6.12(b) hereof shall require the Company to apply an exemption or reduced rate of withholding during any period when it shall have received notice or has knowledge (i) that the residence information previously provided on any applicable form, certificate or document is incorrect and no corrected form, certificate or document as applicable has been provided to the Company, or (ii) of any other information which would render such exemption or reduced rate inapplicable. 6.13 NO PLEDGE OF SHARES. The Company covenants that it will not ------------------- mortgage, pledge, hypothecate or create or permit to exist any security interest in, or Lien on, any shares of the Capital Stock of its Subsidiaries, other than as may be con templated by the Senior Loan Documents. 6.14 CHANGE IN CONTROL. Prior to the effective date of an Initial ----------------- Public Offering, (i) there shall not occur a Disposition and (ii) Heller shall at no time own less than 40% of the outstanding shares of Common Stock of the Company on a fully diluted basis. 6.15 SALE OF EQUITY SECURITIES. The Company covenants that it will ------------------------- not, and will not permit any of its Subsidiaries to, sell or otherwise dispose of, or part with control of, any shares of Capital Stock of the Company or any of its Subsidiaries; provided, however, that the Company shall be permitted -------- ------- to sell (i) any of its shares of Capital Stock in a public offering of securities registered pursuant to Section 5 of the Securities Act if, and only if, (a) such offering shall meet the thresholds set forth in the definition of "Initial Public Offering" herein and (b) the net proceeds of such offering (after making any and all payments required under the Senior Loan Documents) are sufficient to allow the Company to make the mandatory redemption payments required under Section 5 of the Certificate of Designations, (ii) any of its shares of Capital Stock in a private offering of securities which is exempt from the registration requirements of 26 Section 5 of the Securities Act in conjunction with the Permitted Acquisitions, (iii) shares of Common Stock under and pursuant to the stock option plan to be instituted for the benefit of the management employees of the Company and which plan shall provide for the issuance of up to 12,215 shares of Common Stock (as such number may be adjusted in accordance with such plan) and (iv) any Subsidiary of the Company may issue additional shares of its Capital Stock to the Company. In no event will the Company at any time, directly or indirectly, own less than 100% of the Capital Stock of each of its Subsidiaries. Notwithstanding anything herein to the contrary, from and after the redemption in full of all of the shares of Series C Preferred Stock, the only limitation of this Section 6.15(i) which shall continue shall be the requirement that a public offering of securities by the Company must meet the thresholds set forth in the definition of "Initial Public Offering" herein. 6.16 FISCAL YEAR; CHANGE IN ACCOUNTING PRACTICES. Neither the Company ------------------------------------------- nor any of its Subsidiaries shall change its fiscal year for accounting or tax purposes from a period consisting of the 12-month period ending on December 31 of each calendar year. The Company covenants that it will not, and will not permit any of its Subsidiaries to, change the accounting practices which have been consistently applied, other than in compliance with required changes in GAAP. 7. PREFERRED STOCK FAILURE EVENTS. ------------------------------ 7.1 PREFERRED STOCK FAILURE EVENTS. If any of the following events ------------------------------ shall occur and be continuing for any reason whatsoever (and whether such occurrence shall be voluntary or involuntary or come about or be effected by operation of law or otherwise): (i) the Company defaults in the payment of any dividends payable on the Series C Preferred Stock on the scheduled dividend payment date or breaches any other material terms of the Certificate of Designations, which default is not cured within five (5) days of such date; or (ii) any representation or warranty made in 27 writing by the Company in this Agreement, in any other Transaction Document (other than the Third Party Documents) or in any writing furnished to Electra in connection with or pursuant to this Agreement, the Transaction Documents (other than the Third Party Documents) or in connection with the transactions contemplated by this Agreement, shall be false or misleading in any material respect on the date as of which made; or (iii) the Company fails to perform or observe any agreement, term or condition contained in this Agreement or in any other Transaction Document (other than the Certificate of Designations as provided in clause (i) above or the Third Party Documents), and, if such failure is capable of being remedied, such failure shall not have been remedied within 60 days after such failure shall first have become known to any officer of the Company or written notice shall have been received by the Company (regardless of the source of such notice); or (iv) Any Plan (or any employee benefit Plan of any entity which is in the same controlled group of corporations as the Company or any Subsidiary (the "Related Plans")) which is subject to ERISA or the Code shall have incurred an "accumulated funding deficiency" within the meaning of Section 412 of the Code or Section 302 of ERISA, or any lien shall arise with respect to any such Plan or any such Related Plan under Section 412(n) of the Code, which in either case results in the imposition of liability on the Company or any Subsidiary in an amount in excess of $250,000. (v) the Company or any Subsidiary makes an assignment for the benefit of creditors or is generally not paying its debts as such debts become due; or any order or decree for relief in respect of the Company or any Subsidiary is entered under any bankruptcy, reorganization, compromise, arrangement, insolvency, readjustment of debt, dissolution or liquidation or similar law, whether now or hereafter in effect (herein called the "Bankruptcy Law"), of any jurisdiction; or the Company or any of its -------------- Subsidiaries petitions or applies to any tribunal for, or consents to, 28 the appointment of, or taking possession by, a trustee, receiver, custodian, liquidator or similar official of the Company or any of its Subsidiaries, or of any Substantial Part of the assets of the Company or any of its Subsidiaries, or commences a voluntary case under the Bankruptcy Law of the United States or any proceedings relating to the Company or any of its Subsidiaries under the Bankruptcy Law of any other jurisdiction; or (vi) any such petition or application is filed, or any such proceedings are commenced, against the Company or any of its Subsidiaries and such petition, application or proceeding is unstayed or undismissed within 60 days, or any such petition or application is filed, or any such proceedings are commenced against the Company or any of its Subsidiaries and the Company or such Subsidiary by any act indicates its approval thereof, consent thereto or acquiescence therein, or an order, judgment or decree is entered appointing any such trustee, receiver, custodian, liquidator or similar official, or approving the petition in any such proceedings, and such order, judgment or decree remains unstayed and in effect for more than 60 days; or (vii) any order, judgment or decree is entered in any proceedings against the Company or any of its Subsidiaries decreeing the dissolution of the Company or such Subsidiary, a split-up of the Company or such Subsidiary which requires the divestiture of a Substantial Part, or the divestiture of the stock of the Company or its Subsidiary, as the case may be, the assets of which constitute a Substantial Part, of the assets of the Company and its Subsidiaries, and such order, judgment or decree remains unstayed and in effect for more than 60 days; or (viii) a judgment in an amount in excess of $250,000 is rendered against the Company or any of its Subsidiaries and, within 60 days after entry thereof, such judgment is not discharged or execution thereof stayed pending appeal, or within 60 days after the expiration of any such stay, such judgment is not discharged; or 29 (ix) The Company fails to pay when due two or more interest payments or principal payments (whether scheduled or upon a mandatory prepayment date) during any rolling six (6) month period on the Senior Debt or any other Debt in excess of $250,000, whether or not such Senior Debt or other Debt is accelerated, or the Senior Debt or any other Debt in excess of $250,000 shall have been accelerated for any reason; or (x) (a) there shall occur a cessation of a substantial part of the business of the Company and/or any of its Subsidiaries for a period which significantly affects the Company's and/or any of its Subsidiaries' capacity to continue their businesses, or (b) Title IV funding is terminated or suspended for any School, or any School subsequently acquired, constituting a Substantial Part, or the continuation of Title IV funding is qualified with operational restrictions which would have a Material Adverse Effect compared to the restrictions previously imposed (I) on the operation of the NEC Schools as conducted by NEC and NEC, Inc., or (II) on the operation of the other Schools as conducted by the Company and its Subsidiaries prior to the date of this Agreement or, with respect to Schools subsequently acquired on the operation of such Schools as conducted immediately prior to such acquisition, or (c) the Company or any Subsidiary shall suffer the loss or revocation of any material license or Permit now held or hereafter acquired by the Company or any Subsidiary which is necessary to the continued or lawful operation of a substantial part of their businesses; or (d) the Company or any Subsidiary shall be enjoined, restrained or in any way prevented by court, governmental or administrative order from conducting all or any material part of their business affairs for a period of thirty days (other than (I) the suspension of Title IV funding under 34 C.F.R. Section 600.31 in connection with the acquisition of any school permitted hereunder, or (II) a change in ownership resulting in a change of control under 34 C.F.R. Section 600.31 which occurs as a result of the exercise of the Warrants and the conversion of Class D Non- voting Common Stock held by Electra into voting stock, when there is not otherwise a 30 Preferred Stock Failure Event then in existence); provided, that with respect to clause (b) above, no Preferred Stock Failure Event shall be deemed to occur as the result of (X) the granting of a provisional approval pursuant to 34 C.F.R. Section 600.10 in connection with the acquisition of the NEC Schools or any other schools subsequently acquired by the Company or its Subsidiaries or (Y) the implementation of new or revised rules or regulations by the DOE which are generally applicable to all private post- secondary schools unless such rules or regulations result in a termination or suspension of Title IV funding in accordance with (b) above or otherwise have a Material Adverse Effect; or (xi) there shall occur an event or circumstance as specified in Section 11 of the Purchase Agreement giving rise to a right and option of rescission on the part of the Company pursuant to Section 11 of the Purchase Agreement, whether or not such right and option is exercised by the Company; then the holders of a majority of the Preferred Shares then outstanding may, at any time and from time to time, by written demand to the Company, (a) (i) cause the Company to increase the size of its Board of Directors and (ii) allow the holders of the Series C Preferred Stock to elect a majority of directors to the Board of Directors in the manner set forth in paragraph 6(c) of the Certificate of Designations until such time as the Preferred Shares are redeemed in full; provided, however, that the remedies set -------- ------- forth in this clause (a) shall not be available if (1) the Preferred Stock Failure Event is an event described in Section 7.1(i) by reason of nonpayment of dividends unless the failure to pay such dividends occurs on two or more required dividend payments during any rolling four quarter periods; (2) the Preferred Stock Failure Event is an event described in Section 7.1(iii) and (A) arises solely out of the failure of the Company to observe the agreements, terms and conditions set forth in Sections 5.7 through 5.11, 6.7, 6.11(ii), 6.12 or 6.16 of this Agreement, or (B) arises solely out of the failure of the Company to observe the agreements, terms and conditions set forth in 31 Section 5.5, unless such failure would have, or would be likely to have, a Material Adverse Effect, in which case the remedies set forth in this clause (a) shall be available, or (C) arises solely out of the failure of the Company to observe the agreements, terms and conditions set forth in Section 6.4, unless either (x) Heller shall have knowledge of the existence of such transaction or (y) such failure by the Company would have, or would be likely to have, a Material Adverse Effect, in either case the remedies set forth in this clause (a) shall be available, or (3) the Preferred Stock Failure Event is an event described in Section 7.1(xi) and the shares of Series C Preferred Stock are redeemed in full within ninety (90) days of receipt by the Company of the written demand from the holders of the Series C Preferred Stock as provided below, and/or (b) in conjunction with clause (a) or otherwise, require the Company to purchase in full the Preferred Shares in the manner set forth in paragraph 5 of the Certificate of Designations. In addition, if (x) such event is the failure of the Company to pay a dividend payable on the Series C Preferred Stock on the scheduled dividend payment date and (y) at such time the holders of the Series C Preferred Stock shall not have exercised their right to elect a majority of the directors to the Board of Directors, then for each fiscal quarter or portion thereof that such Preferred Stock Failure Event remains uncured, the holders of the shares of Series C Preferred Stock shall receive additional penalty warrants (together with any such warrants which may be issued hereunder in substitution or exchange therefor, collectively, the "Penalty Warrants" and each individually, a "Penalty ---------------- ------- Warrant") to purchase an aggregate of 0.5%, subject to certain adjustments, of - ------- the then outstanding shares of Class A Voting Common Stock, par value $.01 per share, of the Company, on a fully diluted basis, at an exercise price of $.01 per share, evidenced by one or more warrant certificates (the "Penalty Warrant --------------- Certificates") to be substantially in the form of Exhibit 7.1 attached hereto. - ------------ ----------- If such Preferred Stock Failure Event is an event or circumstance specified in Section 7.1(xi) above and the holders of the Series C Preferred Stock have given the written demand to the Company under clause (b) 32 above, subject to the immediately following proviso, the Company shall have the right, exercisable within ninety (90) days of the occurrence of such Preferred Stock Failure Event, to repurchase the Warrants for an aggregate consideration of $1.00; provided, however, that the Company shall not be permitted to -------- ------- repurchase the Warrants unless it shall have paid, or concurrently therewith is paying, to the holders of the Series C Preferred Stock all amounts required to redeem all of the Series C Preferred Stock then outstanding. 7.2 OTHER REMEDIES. No remedy conferred in this Agreement upon the -------------- holder of any Preferred Shares is intended to be exclusive of any other remedy available to such holder, and each and every such remedy shall be cumulative and shall be in addition to every other remedy conferred herein or now or hereafter existing at law or in equity or by statute or otherwise. 8. REPRESENTATIONS, COVENANTS AND WARRANTIES. ----------------------------------------- The Company hereby represents, covenants and warrants for the benefit of each holder from time to time of the Securities and Electra, as of the Closing and after giving effect to the transactions contemplated by this Agreement and the other Transaction Documents, as follows: 8.1 ORGANIZATION; AUTHORITY. Each of the Company and its ----------------------- Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all requisite corporate power and authority to own or lease and operate its properties and to carry on its business as presently conducted and as proposed to be conducted after the Closing. Each of the Company and its Subsidiaries is duly qualified and in good standing as a foreign corporation duly authorized to do business in each jurisdiction where it owns or leases property or in which the conduct of its existing business or its business as of the Closing Date requires it so to qualify or be licensed, except in those jurisdictions in which the failure to qualify will not individually or in the aggregate have a Material Adverse Effect. Schedule 8.1 hereto sets forth each jurisdiction where the ------------ Company and each of its Subsidiaries is qualified or licensed to do business. Other than 33 as listed on Schedule 8.1 hereto, the Company has no Subsidiaries and does not ------------ own of record or beneficially any Capital Stock or equity interest or investment in any corporation, association, partnership, joint venture or other entity. The Company and each of its Subsidiaries have furnished Electra with true, correct and complete copies of its Certificate of Incorporation (including, without limitation, the Certificate of Designations) and By-laws, each as amended to date. 8.2 AUTHORIZATION. All corporate action on the part of the Company ------------- and its directors and stockholders necessary for the authorization, execution, delivery and performance by (i) the Company of this Agreement, the Series C Preferred Stock certificates, the Warrants, the Penalty Warrants and the other Transaction Documents, and (ii) the consummation of the transactions contemplated herein and therein shall have been taken or will be taken prior to the Closing. Each of the Transaction Documents to which the Company is a party is the legal, valid and binding obligation of the Company enforceable against it in accordance with its terms. The execution, delivery and performance by the Company of each Transaction Document to which it is a party and compliance therewith and the issuance and sale of the shares of Series C Preferred Stock, the Warrants and the Penalty Warrants will not result in any violation of and will not (i) conflict with, or result in a breach of, any of the terms of, or constitute a default under, (a) any provision of state or Federal law to which the Company is subject, (b) the Company's Certificate of Incorporation (including, without limitation, the Certificate of Designations) or By-laws, or (c) any mortgage, indenture, agreement, instrument, judgment, decree, order, rule or regulation, or other restriction to which the Company is a party or by which it is bound, or (ii) result in the creation of any Lien (except as contemplated by the Transaction Documents) upon any of the properties or assets of the Company (including, without limitation, any assets acquired in the Acquisition) pursuant to any such term, or (iii) except as set forth on Schedule -------- 8.2, result in the suspension, revocation, impairment, forfeiture or non-renewal - --- of any Permit, license, authorization or approval applicable to the Company's operations or any of its assets (including, without limitation, any assets acquired in the Acquisition) or properties. No stockholder has any preemptive 34 rights or rights of first refusal by reason of the issuance of the Warrants or the shares of Series C Preferred Stock. The shares of Series C Preferred Stock have been duly and validly issued and are fully paid and non-assessable. The shares of Common Stock issuable upon exercise of the Warrants, have, in each case, been duly and validly reserved and are not subject to any preemptive rights or rights of first refusal and, upon issuance, will be validly issued, fully paid and non-assessable. The shares of Common Stock issuable upon exercise of the Penalty Warrants, if issued, will be duly and validly reserved and will not be subject to any preemptive rights or rights of first refusal and, upon issuance, will be validly issued, fully paid and non-assessable. 8.3 CAPITAL STOCK AND RELATED MATTERS. At the time of the Closing --------------------------------- and after giving effect to the Acquisition and the transactions contemplated by this Agreement, (i) the authorized capital stock of the Company will consist of (a) 500,000 shares of Class A Voting Common Stock, par value $.01 per share, of which 5,250 shares will be issued and outstanding, (b) 100,000 shares of Class B Voting Common Stock, par value $.01 per share, of which 5,100 shares will be issued and outstanding, (c) 100,000 shares of Class C Non-voting Common Stock, par value $.01 per share, of which 69,900 shares will be issued and outstanding, (d) 100,000 shares of Class D Non-voting Common Stock, par value $.01 per share, of which no shares will be issued and outstanding and 25,295 shares will be reserved for issuance upon the exercise of the Warrants, (e) 100,000 shares of Class E Non-voting Common Stock, par value $.01 per share, of which no shares will be issued and outstanding, (f) 50,000 shares of Series A Preferred Stock, par value $.01 per share, of which 7,850 shares will be issued and outstanding, (g) 1,000 shares of Series B Preferred Stock, par value $.01 per share, none of which shares will be issued and outstanding, (h) 500 shares of Series C Preferred Stock, par value $.01 per share, of which 500 shares of Series C Preferred Stock will be issued to Electra and outstanding, and (i) 10,000 shares of Undesignated Preferred Stock, par value $.01 per share, of which no shares will be issued and outstanding; (ii) no shares of Common Stock will be owned or held by or for the account of the Company; (iii) all of the outstanding shares of Common Stock and Preferred Stock (including without limitation 35 the Series C Preferred Stock) will be validly issued and outstanding, fully paid and non-assessable and will be owned of record and, to the best knowledge of the Company, beneficially, free and clear of any Liens (except as may be contemplated by the Senior Loan Documents) by the individuals and entities and in the amounts set forth on Schedule 1 and Schedule 8.3 hereto; (iv) except ---------- ------------ for the Class A Voting Common Stock, the Class B Voting Common Stock, the Class C Non-voting Common Stock, the Class D Non-voting Common Stock, the Class E Non- voting Common Stock, the Series A Preferred Stock, the Series C Preferred Stock, and the Warrants, and except as set forth on Schedule 8.3 hereto, the Company ------------ has no, and at the time of the Closing will not have, outstanding stock or securities convertible into or exchangeable for any shares of its Capital Stock, or any outstanding rights (either preemptive or other) to subscribe for or to purchase, or any outstanding options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any outstanding calls, commitments or claims of any character relating to, any Capital Stock or any stock or securities convertible into or exchangeable for any Capital Stock of the Company, or any outstanding demand or piggyback registration rights to register any Capital Stock or any stock or securities convertible into or exchangeable for the Capital Stock of the Company; (v) except with respect to the Warrants, the Series C Preferred Stock and the Series A Preferred Stock, the Company will not be subject to any obligation (contingent or other) to repurchase, otherwise acquire or retire any shares of Capital Stock; and (vi) the Company has no knowledge of any agreement (except as set forth in this Agreement or the Stockholders Agreement) restricting the transfer of any shares of the Company's Capital Stock, except as set forth on Schedule 8.3. Schedule ------------ -------- 8.3 sets forth the number of shares of Capital Stock, the holders thereof, and - --- the percentage held by each holder of the issued and outstanding Capital Stock of the Company and each Subsidiary at the time of the Closing and after giving effect to the Acquisition and the transactions contemplated by this Agreement. 8.4 LITIGATION. Except as disclosed on Schedule 8.4 hereto, there is ---------- ------------ no action, suit, investigation or proceeding pending, or, to the Company's knowledge threatened, or any basis 36 therefor or threat thereof, in, nor is there any existing judgment, order or decree of, any court, governmental authority, arbitration board or tribunal, foreign or domestic to which the Company or any of its Subsidiaries is or may be named as a party or its property is or may be subject or which challenges this Agreement or any of the transactions contemplated hereby, or to the Company's knowledge, to which any officer, employee or stockholder of the Company or any of its Subsidiaries is subject, and the Company has no knowledge of any unasserted claim, the assertion of which is likely and which, if asserted, will seek damages, an injunction or other legal, equitable, monetary or nonmonetary relief which claim individually or collectively with other such unasserted claims, if granted, or actions, suits, investigations or proceedings would have a Material Adverse Effect or which challenges this Agreement or any of the other Transaction Documents or any of the transactions contemplated hereby or thereby. No legislation, order, rule, ruling or regulation has been enacted or made by or on behalf of any governmental body, department or agency, nor to the Company's knowledge has there been any legislation introduced and favorably reported for passage to either House of Congress by any committee of either such House to which such legislation has been referred for consideration or any state legislature in any jurisdiction in which the Schools operate or by any committee of such legislature to which such legislation has been referred for consideration, nor to the Company's knowledge has any decision of any court of competent jurisdiction within the United States been rendered which, in the Company's judgment, would have a Material Adverse Effect. 8.5 COMPLIANCE. (a) Neither the Company nor any Subsidiary is in ---------- violation of any statute, law, ordinance, governmental rule or regulation (including environmental laws) or any judgment, order or decree (federal, state, local or foreign) to which it is subject, except where such violation would not have, and is not likely to result in, a Material Adverse Effect, nor has it failed to obtain any, and it possesses all, licenses, Permits, franchises or other governmental authorizations necessary for the ownership or operation of its properties or the conduct of its business as presently conducted and as proposed to be conducted, except where the failure to so obtain or to so 37 possess would not have, and is not likely to result in, a Material Adverse Effect. (b) Neither the Company nor any Subsidiary is in violation of any term of its Certificate of Incorporation, as amended (including, without limitation, the Certificate of Designations in the case of the Company), or By- laws, as amended. (c) Neither the Company nor any Subsidiary is in violation of any term of any Contract, judgment, decree, order, statute, rule or regulation to which either the Company or any Subsidiary is subject or which would permit any party to any Contract to terminate, amend or modify such Contract, except for any violations which do not cause, and are not likely to result in, a Material Adverse Effect. To the Company's knowledge, neither the Company nor any Subsidiary has waived any right or default by any party under any Contract. All Contracts are in full force and effect, and the Company and its Subsidiaries each have no knowledge that any party to any Contract, or any parties to any Contract is or is seeking or presently intends to seek to (i) terminate, amend or modify such Contract or (ii) upon the expiration of such Contract, not renew such Contract on terms substantially similar to those terms currently in such Contract, except where the termination, amendment, modification or failure to renew does not have, and is not likely to result in, a Material Adverse Effect. 8.6 OFFERING. Based upon the representations and warranties of -------- Electra set forth in Section 9 hereof, the offer, sale and issuance of the shares of Series C Preferred Stock, the Warrants, the Penalty Warrants and the shares of Common Stock issuable upon the exercise of the Warrants and the Penalty Warrants are all exempt from the registration requirements of the Securities Act and from the registration or qualification requirements of the laws of any applicable state or other jurisdiction, and neither the Company nor anyone acting on its behalf will take any action hereafter that would cause the loss of such exemption. 8.7 ERISA AND LABOR RELATIONS. (a) Schedule 8.7 hereto contains a ------------------------- ------------ true and complete list of each written (or, to 38 the knowledge of the Company and its Subsidiaries, oral), employee bonus, retirement, pension, profit sharing, savings, stock option, stock appreciation, stock purchase, incentive, deferred compensation, hospitalization, medical, dental, vision, life or other health or disability (whether provided by insurance or otherwise), severance, termination or other similar plan, policy or program of the Company and each Subsidiary, including, without limitation, any collective bargaining agreement involving direct or indirect compensation (the "Employee Benefit Plans"), including, without limitation, each "employee pension ---------------------- benefit plan" within the meaning of Section 3(2) of ERISA (without regard to any applicable exception from ERISA), each employee welfare benefit plan as defined in Section 3(1) of ERISA (without regard to any applicable exception from ERISA). Schedule 8.7 sets forth the expense charged for financial accounting ------------ purposes (whether through insurance premiums or otherwise) attributable to each plan determined on an annual basis for the past fiscal year. (b) To the Company's knowledge, neither the Company nor any Subsidiary nor any "disqualified person" (as defined in Section 4975 of the Code) nor any Employee Benefit Plan has engaged in any non-exempt prohibited transaction within the meaning of Section 4975 of the Code or Section 406 of ERISA which would result in any liability to the Company or any Subsidiary which has had or would have a Material Adverse Effect. To the Company's knowledge, all contributions required to have been made by same to each Employee Benefit Plan have been timely made. No premium payments have been or are required to be made to the PBGC. (c) Each Employee Benefit Plan has been maintained substantially in compliance with its terms, and with the requirements prescribed by any and all statutes, orders, rules and regulations, including, without limitation, ERISA and the Code, which are applicable to such Employee Benefit Plan, except those which could not, individually or in the aggregate, have a Material Adverse Effect. (d) Except as set forth in the Purchase Agreement or this Agreement, neither the execution and delivery of this Agreement or the other Transaction Documents nor the consummation 39 of the Acquisition and the transactions contemplated thereby will (i) result in any payment to be made by the Company or any Subsidiary (including, without limitation, severance, unemployment compensation, golden parachute, or otherwise) becoming due to any employee under any Employee Benefit Plan or otherwise or (ii) increase any benefits otherwise payable under any Employee Benefit Plan. (e) No benefit payable or which may become payable by the Company or any Subsidiary pursuant to any Employee Benefit Plan shall constitute an "excess parachute payment" (as defined in Section 280G(b)(1) of the Code) which is subject to the imposition of an excise tax under Section 4999 of the Code or which would not be deductible by reason of Section 280G of the Code. (f) The execution and delivery of this Agreement or the other Transaction Documents, the issue and sale of the Securities and the consummation of the Acquisition and the transactions contemplated by the Transaction Documents will not involve any transaction which is subject to the prohibitions of section 406 of ERISA or in connection with which a tax could be imposed pursuant to Section 4975 of the Code. (g) Except as set forth on Schedule 8.7, since December 31, 1994 and ------------ other than with respect to the acquisition of the NEC Schools, there has been no amendment to, interpretation or announcement (whether or not written) by the Company or any Subsidiary relating to, or change in, employee participation or coverage under, any Employee Benefit Plan which would increase the level of the expense incurred in respect thereof for the current fiscal year or any prior year. The Company and its Subsidiaries do not maintain and have not maintained any Plans. (h) To the Company's knowledge, the Company and each Subsidiary has provided, or will have provided, to individuals entitled thereto all required notices within the applicable time period and coverage pursuant to Section 4980B of the Code with respect to any "qualifying event" (as defined in Section 4980B(f)(3) of the Code), and no tax payable on account 40 of Section 4980B of the Code has been incurred with respect to any employees of the Company or any Subsidiary. (i) No lawsuits, claims (other than routine claims for benefits) or complaints to, or by, any Person or governmental entity have been filed, are pending or, to the best of the Company's knowledge, have been threatened, and, to the Company's knowledge, no facts or contemplated events exist that could be expected to give rise to any such lawsuit, claim (other than a routine claim for benefits) or complaint, with respect to any Employee Benefit Plan where the Company or any Subsidiary may be either (i) liable directly on such lawsuit, claim or complaint, or (ii) obligated to indemnify any Person, group of Persons, or entity with respect to such lawsuit, claim or complaint. (j) To the Company's knowledge, neither the Company nor any Subsidiary has engaged in any transaction, failed to make required contributions, committed any act or omission, or otherwise incurred any liability for any excise tax under Section 4971 through 4980B of the Code. (k) Neither the Company nor any Subsidiary maintains nor has each ever maintained a foreign Employee Benefit Plan. (l) Each Employee Benefit Plan and, if any, the applicable, related trust agreement, which are intended to be qualified within the meaning of Section 401(a) of the Code and tax exempt within the meaning of Section 501(a) of the Code, has received a favorable determination letter from the IRS and to the Company's knowledge nothing has occurred since the date of such letter which would prevent any such Employee Benefit Plan from remaining qualified. The Company has furnished to Electra the most recent IRS determination letter with respect to any such Employee Benefit Plan. (m) To the Company's knowledge, except as disclosed on Schedule 8.7, ------------ the Company and each Subsidiary have no obligation to provide any employee welfare benefits to retirees, including, without limitation, any medical and life 41 insurance benefits. With respect to former employees or retirees of the Company and each Subsidiary, Schedule 8.7 separately indicates the life insurance, ------------ medical, severance, pension benefits, and similar benefits provided to former employees and retirees and shall include true and complete copies of any calculations prepared by a third party at the Company's request with respect to the estimated present value of the liabilities and, which calculations shall, where appropriate, specify the underlying actuarial assumptions used by such third party in calculating such liabilities. (n) Current copies of all Employee Benefit Plans of the Company and each Subsidiary (and, if applicable, related trust or other funding arrangements, including but not limited to insurance contracts), and all amendments thereto and written interpretations thereof (including summary plan descriptions and summaries of material modifications) have been furnished to Electra, other than the three (3) (or such smaller number, if applicable) most recent annual reports (Form 5500, including, if applicable, Schedule B thereto) prepared in connection with any such Employee Benefit Plan, which will be delivered to Electra as soon as available following the Closing, but including with respect to any Employee Benefit Plan providing post-retirement medical or other welfare benefits, a calculation of the actual liability accrued (or which would have been accrued had the employer elected to comply) under such Employee Benefit Plan under Financial Accounting Standard 106 as of the date hereof. (o) No Employee Benefit Plan constitutes, or within the past 6 years, has constituted, a Multiemployer Plan within the meaning of Section 4001(a)(3) of ERISA. (p) Except as otherwise disclosed in Schedule 8.7, the Company and ------------ any Subsidiary have furnished to Electra true and complete copies of all Summary Plan Descriptions and Summary of Material Modifications and other written employee benefit communications provided to employees with respect to any employee welfare plan. The Company believes that it has legally reserved the right to increase the level of employee contributions to any employee welfare plan. 42 (q) (i) There are no discrimination charges (relating to sex, age, race, national origin, handicap or veteran status or otherwise) pending or, to the Company's knowledge, threatened, against, or involving the Company or any Subsidiary; (ii) except as disclosed on Schedule 8.4, to the Company's ------------ knowledge, there are no grievances or disputes between the Company or any Subsidiary and any such Employee; (iii) neither the Company nor any Subsidiary is delinquent in payments to any of such Employees for any wages, salaries, commissions, bonuses, benefits or other direct or indirect compensation for any services performed by them; (iv) the Company and each Subsidiary is in compliance with all Federal, state, local and foreign laws and regulations respecting labor, employment, wages, hours and benefits, except where the failure to so comply does not cause, and is not likely to result in, a Material Adverse Effect; (v) there is no unfair labor practice with respect to the Company or any Subsidiary pending before the National Labor Relations Board or any comparable state, local or foreign agency; (vi) there is no labor strike, dispute, slowdown or stoppage actually pending or, to the Company's knowledge, threatened, against or involving the Company or any Subsidiary; (vii) to the best of the Company's knowledge, no labor organization activities have occurred with respect to employees of any School during the past three (3) years, and there are no collective bargaining agreements binding on the Company relating the operation of any School. (r) Set forth on Schedule 8.7 hereto is a true, correct and complete ------------ list (including the term, expiration date and amount of annual compensation) of all employment, consulting and non-competition agreements to which the Company and the Subsidiaries is a party or by which the Company and the Subsidiaries is bound, and all union and non-union employees of the Company and its Subsidiaries (true, correct and complete copies of which have previously been delivered to Electra) and which, in the case of employees of the Company or its Subsidiaries, involve annual compensation in excess of $50,000. To the Company's knowledge, except as set forth on Schedule 8.7, no current or former employee of the ------------ Company or any Subsidiary is in violation of any term of any employment contract with the Company or any Subsidiary or any non-compete or confidentiality agreement entered into for the benefit of the Company or any Subsidiary, nor is any employee of the Company or any of its Subsidiaries in violation of any employment contract, or any other contract or agreement with or any restrictive covenant or any other common law obligation to a former employer relating to the right of any such employee to be employed by the Company or any 43 Subsidiary because of the nature of the business conducted or to be conducted by the Company and any Subsidiary or to the use of trade secrets or proprietary information of others, and, except as set forth in Schedule 8.7, to the Company's knowledge, the employment of the Company's or its Subsidiaries' employees does not subject the Company or its Subsidiaries to liability in connection with such covenants or agreements. There is neither pending nor, to the Company's knowledge threatened any actions, suits, proceedings or claims with respect to any contract, agreement, covenant or obligation referred to above. 8.8 FINANCIAL STATEMENTS; MATERIAL FACTS. The Company has furnished ------------------------------------ Electra with true, correct and complete copies of (i) the audited consolidated financial statements of the Company for the year ended December 31, 1994, (ii) the audited financial statements of NEC, Inc. for the NEC Schools for the years ended December 31, 1994 and 1993, (iii) to the extent available, the unaudited financial statements of each of the Company and NEC, Inc. for the Schools for each of the months prior to the Closing since December 31, 1994, (iv) the pro forma consolidated balance sheet of the Company and its Subsidiaries as of the Closing Date after giving effect to the Acquisition and the transactions contemplated hereby and under the Transaction Documents, (v) the proposed annual operating and capital budget for the Company and its Subsidiaries for the fiscal year ending December 31, 1995 (collectively, known as the "Financials") and (vi) ---------- the financial projections contained in the Memorandum (the "Projections"). The ----------- Financials and the Projections, are herein collectively called the "Financial --------- Disclosure Documents." The Financials (i) have been prepared in conformity in - -------------------- all material respects with GAAP (and with respect to historical interim periods subject only to normal year-end adjustments consistent with past practices), (ii) disclose all liabilities, direct and contingent, required to be shown in accordance with such principles and (iii) accurately reflect the financial position of the respective companies at the dates indicated and results of operations for the periods 44 indicated. In the opinion of the Company, the Projections reflect the reasonable estimates of the Company on the date made and on the date hereof of the results of operations and other information projected therein, and were prepared in Good Faith in accordance with substantially the same accounting principles, standards and assumptions with respect to which the Financials have been prepared, and on estimates, information and assumptions which are reasonable in light of current conditions on the date made and on the date hereof. The Financial Disclosure Documents, this Agreement and the other Electra Documents do not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein and herein, in light of the circumstances under which they were made, not misleading. 8.9 OUTSTANDING DEBT. Except as set forth on Schedule 6.1, the ---------------- ------------ Company and its Subsidiaries do not have any outstanding secured or unsecured Debt or commitments for any such Debt, other than with respect to the Senior Loan Agreement. 8.10 TAXES. The Company and its Subsidiaries have each timely ----- filed such federal, state and other tax returns required by law to be filed by it, and all taxes, assessments and other governmental charges which are due and payable, other than those presently payable without penalty or interest, have been timely paid. All taxes, assessments and other governmental charges which are presently payable without penalty or interest have been adequately reserved for in accordance with GAAP. There are no tax liens upon any properties or assets of the Company or any Subsidiary. All such tax reports or returns fairly reflect the taxes of the Company and its Subsidiaries for the periods covered thereby. Neither the Company nor any Subsidiary is delinquent in the payment of any taxes, assessments or governmental charges, there are no tax deficiencies or delinquencies asserted against the Company and its Subsidiaries, and, except as provided above, there are no unpaid assessments, proposals for additional taxes, deficiencies or delinquencies in the payment of any of the taxes of the Company and its Subsidiaries or any violations of any federal, state, local or foreign tax laws that could be asserted 45 by any taxing authority. No Internal Revenue Service audit of the Company and its Subsidiaries is pending or, to the knowledge of the Company and its Subsidiaries, threatened, and the results of any completed audits are properly reflected in the financial statements. Other than an extension for filing of corporate tax returns, federal and state, for the Company and its Subsidiaries for the fiscal year ended December 31, 1994, neither the Company nor its Subsidiaries have granted any extension to any taxing authority of the limitation period during which any tax liability may be asserted. Neither the Company nor its Subsidiaries have committed any violation of any federal, state, local or foreign tax laws, except for any violations which do not have, and are not likely to have, a Material Adverse Effect. All monies required to be withheld by the Company or its Subsidiaries from employees or collected from customers for income taxes, social security and unemployment insurance taxes and sales, excise and use taxes, and the portion of any such taxes to be paid by the Company or its Subsidiaries to governmental agencies or set aside in accounts for such purpose have been so paid or set aside, or such monies have been approved, reserved against and entered upon the books and financial statements of the Company and its Subsidiaries, except where the failure to do any of the foregoing does not have, and is not likely to have, a Material Adverse Effect. 8.11 CONFLICTING AGREEMENTS. Neither the Company nor any of its ---------------------- Subsidiaries is a party to any contract or agreement or subject to any restriction which would have, or would be likely to have, a Material Adverse Effect. Except as set forth on Schedule 8.11 hereto, neither the Company nor ------------- any of its Subsidiaries is a party to or otherwise subject to any contract or agreement which limits the amounts of, or otherwise imposes restrictions on, the issuance of the Warrants, the Series C Preferred Stock or the Common Stock (upon the exercise of the Warrants). 8.12 POLLUTION AND OTHER REGULATIONS. Except as set forth in ------------------------------- Schedule 8.12, (i) the operations of the Company and its Subsidiaries are in full compliance with Environmental Laws, except where the failure to so comply does not have and is not likely to have a Material Adverse Effect; (ii) the Company and 46 its Subsidiaries have obtained all necessary permits or authorizations required under Environmental Laws, except where the failure to so obtain does not have, and is not likely to have, a Material Adverse Effect; (iii) to the knowledge of the Company and its Subsidiaries, there has been no Release at any of the properties owned or operated by the Company and its Subsidiaries or a Predecessor, or at any disposal or treatment facility which received Hazardous Materials generated by the Company, any of its Subsidiaries or any Predecessor; (iv) no Environmental Claims relating to (A) any assets, properties or businesses of the Company, any Subsidiary or any Predecessor; (B) properties adjoining properties or businesses owned or operated by the Company, any Subsidiary or any Predecessor; or (C) any facilities which received Hazardous Materials generated by the Company, any Subsidiary or any Predecessor, have been asserted against the Company or any of its Subsidiaries or, to the knowledge of the Company and its Subsidiaries, any Predecessor, nor does the Company or any of its Subsidiaries have knowledge or notice that any such Environmental Claim is threatened or pending; and (v) to the knowledge of the Company and its Subsidiaries, no Environmental Claim has been asserted against any facilities that may have received Hazardous Materials generated by the Company or any of its Subsidiaries or any Predecessor; provided, that for the purposes of clauses -------- (iii) and (v) of this Section 8.12, knowledge of the Company and its Subsidiaries with respect to offsite facilities shall mean actual knowledge without inquiry other than the review by the Company and its Subsidiaries of certain environmental database search results of offsite facilities, copies of which have been previously provided to Electra and which are described on Schedule 8.12. The Company does not believe that any of the items listed on - ------------- Schedule 8.12 pertaining to clauses (iii), (iv) and (v) above are likely to have - ------------- a Material Adverse Effect. 8.13 CERTAIN ACTS. Neither the Company nor any of its Subsidiaries ------------ is an "investment company," or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended, nor will it become such by virtue of the transactions contemplated hereby or by the Transaction Documents. Neither the Company nor any of its Subsidiaries is a "holding company," or a "subsidiary company" of 47 a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," as such terms are defined in the Public Utility Holding Company Act of 1935, as amended, nor will it become such by virtue of the transactions contemplated hereby or by the Transaction Documents. None of the transactions contemplated by this Agreement (including, without limitation, the use of the proceeds from the sale of the Securities) will violate or result in a violation Section 7 of the Exchange Act or any regulation issued pursuant thereto, including, without limitation, Regulations G, T, U, and X of the Board of Governors of the Federal Reserve System. 8.14 GOVERNMENTAL PERMITS, CONSENTS, ETC. Except as set forth on ----------------------------------- Schedule 8.14, no consent, approval, authorization, exemption or other action - ------------- by, or notice to or filing with, any court or administrative or governmental body which has not been obtained, taken or made is required in connection with the execution and delivery of this Agreement or the Transaction Documents, the consummation of the transactions contemplated hereby or thereby or fulfillment of or compliance with the terms and provisions hereof. Schedule 8.14 hereto sets ------------- forth all material permits, licenses and use authorizations (the "Permits") ------- issued or anticipated to be issued to the Company and its Subsidiaries by the appropriate Federal, state, local and foreign regulatory bodies. The Permits constitute all material permits necessary to own and operate the Company's and/or its Subsidiaries' businesses as presently being conducted and as contemplated to be conducted after the Closing. Except as set forth on Schedule 8.14, all Permits are valid and subsisting and in full force and effect. There are no proceedings pending, or to the Company's knowledge, threatened, that seek the revocation, cancellation, suspension or any adverse modification of any Permit. The Company and each of its Subsidiaries are in compliance in all material respects with the terms of such Permits obtained as of the date hereof. The Company has received no notice that any of the Permits will not be renewed and to the best of the Company's knowledge, there is no basis for nonrenewal. Except as set forth on Schedule 8.14, each School is accredited by the ------------- Accrediting Body or Accrediting Bodies set forth opposite such School's name on Schedule 8.14 hereto and, except as set forth on Schedule 8.14, is certified by - ------------- ------------- the DOE as 48 a qualified institution under Title IV, and is a party to, and in compliance with, valid program participation agreements with the DOE with respect to the operations of such School. The Company has not received any notice, not previously complied with, and the Company does not have any knowledge of any such notice, with respect to any alleged violation of the rules or regulations of the DOE or any applicable Accrediting Body in respect of any School, including sales and marketing activities, or the terms of any program participation agreement to which it is or was a party. If any such notices have been received and complied with, the Company has disclosed their receipt and disposition to Electra prior to the execution of this Agreement in writing. Except as set forth on Schedule 8.14 hereto, the Company is not aware of any ------------- investigation or review of the student financial aid programs of any School or any review of the accreditation of any School by any Person. 8.15 FEES AND COMMISSIONS. No broker's or finder's fee or -------------------- commission will be payable by the Company with respect to the issuance and sale of the Securities or the transactions con templated hereby, other than an investment banking fee payable to Bowles Hollowell Conner & Co. 8.16 INTELLECTUAL PROPERTY. Each of the Company and its Subsidiaries --------------------- possesses all Intellectual Property, including, without limitation, all patents, patent rights, trademarks, trademark rights, trade names, trade name rights, service marks, patents, copyrights, trade secrets, know-how, manufacturing processes, formulas, information, proprietary rights and processes and options, licenses and agreements relating to the above, necessary to conduct its business as contemplated herein and in the Transaction Documents after the Closing, (i) to the knowledge of the Company, without conflict with or infringement upon any valid rights of others, (ii) which are owned by the Company or its Subsidiaries free and clear of any and all liabilities, obligations, Liens or claims, other than in favor of the Senior Lenders, if any, and (iii) the lack of which could have a Material Adverse Effect, and have not received any notice of infringement upon or conflict with the asserted rights of others. Except as set forth on Schedule 8.16 hereto and other than licenses for software purchased by the - ------------- Company in retail 49 transactions, there are no outstanding options, licenses, or agreements of any kind relating to the foregoing, nor is the Company or any Subsidiary bound by or a party to any option, license or agreement of any kind with respect to the patents, patent rights, copyrights, trade secrets, information, proprietary rights and processes of any other person or entity. No stockholder, director, officer or employee of the Company or any Subsidiary has any interest in any such patents, patent rights, trademarks, trademark rights, trade names, trade name rights, copyrights, trade secrets, information, proprietary rights and processes. 8.17 ABSENCE OF CERTAIN CHANGES. Except as set forth on Schedule -------------------------- 4.11 hereto, since December 31, 1994, and as of the date hereof, there has not been any event or change of any character which has or would reasonably be expected to have a Material Adverse Effect, including, but not limited to (i) any damage, destruction or loss of any of the properties or assets of the Company and/or any its Subsidiaries (whether or not covered by insurance), (ii) any waiver by the Company and/or any of its Subsidiaries of a valuable right (including without limitation, in the case of the Company, any rights under the Purchase Agreement) or of a material debt owed to it, (iii) any material change or amendment to a Contract or arrangement by which the Company, any of its Subsidiaries or any of their respective assets or properties is bound or subject, (iv) any declaration, setting aside for payment or other distribution in respect of any of the Company's or any of its Subsidiaries' capital stock, or any direct or indirect redemption, purchase or other acquisition of any of such stock by the Company or any of its Subsidiaries, or (v) any labor trouble, problem, grievance, dispute or controversy with any union or other organization of the Company's or any of its Subsidiaries' employees, or threats of strikes, work stoppages or any asserted pending demands for collective bargaining by any union or organization. 8.18 LEASES. Set forth on Schedule 8.18 hereto is a complete and ------ ------------- correct list (including the amount of rents called for and a description of the leased property) of all leases of real property under which the Company or any of its Subsidiaries is a lessee. The Company and its Subsidiaries enjoy peaceful and 50 undisturbed possession under all such leases, all of such leases are valid and subsisting and none of them is in default in any material respect, nor has the Company or any of its Subsidiaries received any written notice of its default under any such lease. 8.19 PURCHASE AGREEMENT. (a) The Purchase Agreement has not been ------------------ amended, modified or supplemented, nor have any conditions precedent to closing or defaults under such Purchase Agreement been waived by the Company or NEC or NEC, Inc. without the prior written consent of Electra. Assuming the accuracy of the representations and warranties of NEC and NEC, Inc. contained in the Purchase Agreement, the obligations of each of the parties to the Purchase Agreement are the legal, valid and binding obligations of each such party. Except as set forth on Schedule 8.19, the Company has not waived any right or default by any party under the Purchase Agreement. (b) The Company is not in violation of any term of the Purchase Agreement, judgment, decree, order, statute, rule or regulation to which the Company is subject or which would permit any party to the Purchase Agreement to terminate, amend or modify such agreement. The Purchase Agreement is in full force and effect, and the Company and its Subsidiaries each have no knowledge that any party to such agreement is or is seeking or presently intends to seek to terminate, amend or modify such agreement. 8.20 INSURANCE. Schedule 8.20 attached hereto sets forth all --------- ------------- insurance policies maintained by the Company and each of its Subsidiaries. The insurance maintained by the Company and each of its Subsidiaries is in amounts and of a nature as is customarily maintained by Persons conducting operations similar to that of the Company and its Subsidiaries and, except as otherwise indicated on Schedule 8.20, is with insurance carriers who are rated by A. M. ------------- Best Company's Rating Service as "A" or better. Since December 31, 1994, neither the business, proper ties nor assets (including, without limitation, the assets acquired in the Acquisition) of the Company or any of its Subsidiaries has suffered a loss which would have, or would be likely to have, a Material Adverse Effect (whether or not covered by insurance) as a result of fire, flood, act of God or any other 51 casualty or similar event. 8.21 RESERVATION OF SHARES. The Company has reserved for issuance --------------------- the number of its authorized but unissued shares of Common Stock necessary to permit the exercise in full of all the outstanding Warrants. 8.22 TITLE TO PROPERTIES. (a) Subject to the right of rescission ------------------- set forth in Section 11 of the Purchase Agreement, the Company and its Subsidiaries have, and on the Closing Date will have, (i) good and marketable title to all of their assets and properties, real, personal and mixed, including, without limitation, the assets acquired in the Acquisition and all of the other assets and properties reflected on their respective balance sheets, in each case free and clear of any Liens or claims affecting any such assets or properties referred to above (other than as contemplated under the Senior Loan Documents). (b) Schedule 8.22 hereto sets forth all of the real property ------------- owned or leased by the Company and its Subsidiaries. All required certificates of occupancy, certificates relating to electrical work, zoning, building, housing, safety, fire and health approvals, and other permits, franchises and licenses necessary to enable the Company and each Subsidiary to use or operate its facilities in the manner currently used or operated, or as is currently anticipated to be used or operated by it, have been issued and are in full force and effect, except where the failure to obtain such approvals, permits, franchises or licenses would not have, or would not be likely to have, a Material Adverse Effect. There are no proceedings pending for the reduction of the assessed valuation of any real property owned by the Company and each Subsidiary. No default or breach now exists and no event has occurred or is continuing which, with notice or the passage of time or both, would constitute a default under any of the covenants, restrictions, rights of way, easements or other agreements affecting any of the facilities of the Company or its Subsidiaries. Under existing easements, rights at law, certificates, deeds, leases and other applicable agreements and instruments, the Company and each Subsidiary after the Closing Date shall have access to and the same rights to utilize all access roads, utilities, and other facilities not 52 belonging to it which have been used in the operation of its facilities at full capacity prior to the Closing Date, on the same terms and conditions as have been previously available. No state of facts exists which would or could prevent the Company and each Subsidiary after the Closing Date from carrying on, or impair or restrict its ability to carry on, the business of operating such facilities in the same manner as they have been previously operated at full capacity prior to the Closing Date, or as they are anticipated to be operated by the Company and each Subsidiary after the Closing Date. The Company does not have any knowledge of any condemnation or eminent domain proceedings now pending nor has the Company or any Subsidiary received notice or has any knowledge of any such proceeding being contemplated with respect to its facilities. (c) The facilities, machinery, equipment, furniture, fixtures, vehicles, any related capitalized items and other tangible property material to the business of the Company or its Subsidiaries are, and on the Closing Date will be in operating condition suitable for their intended use, except for (i) maintenance in the ordinary course and (ii) normal wear and tear. 8.23 CONTRACTS AND AGREEMENTS. Schedule 8.23 hereto sets forth a ------------------------ ------------- list of all of the Contracts relating to the Schools or the assets acquired in the Acquisition or to which the Company or any of its Subsidiaries is a party or has any present or future liabilities, obligations or rights to, or in, pursuant to the Purchase Agreement. 8.24 RECRUITMENT; ADMISSIONS PROCEDURES; ATTENDANCE; REPORTS. ------------------------------------------------------- Schedule 8.24 hereto sets forth a complete list of all policy manuals and other - ------------- statements of procedures or instruction relating to recruitment of students for each School (other than the NEC Schools), including (a) procedures for assisting in the application by prospective students for direct or indirect state or federal financial assistance; (b) admissions procedures, including any descriptions of procedures for insuring compliance with state or federal or other appropriate standards or tests of eligibility; and (c) procedures for encouraging and verifying attendance, minimum required attendance policies, and other relevant criteria relating to course completion and certification 53 (collectively, the "Policy Guidelines"). The Company has delivered to Electra true, correct and complete copies of all Policy Guidelines for the Schools (other than the NEC Schools) and true and complete copies of the Policy Guidelines received with respect to the NEC Schools. To the best of the Company's knowledge, and except as disclosed on Schedule 8.24 or Schedule 4.6 to ------------- ------------ the Purchase Agreement, the operations of each School have, in all material respects, been conducted in accordance and all relevant standards imposed by applicable Accrediting Bodies, agencies administering state or federal governmental programs in which the Company or such School participates, and other applicable laws or regulations. All reports, audits, and other information, whether periodic in nature or pursuant to specific requests, for each School (other than the NEC Schools) ("Compliance Reports") have been submitted to all agencies or other entities with which such filings are required relating to such School's compliance with (i) applicable accreditation standards governing its activities or (ii) laws or regulations governing programs pursuant to which the School or its students receive funding, and (iii) all articulation agreements, if any, with degree-granting colleges and universities in effect as of the date of this Agreement. Complete and accurate records in all material respects for all present and past students attending each School (other than the NEC Schools) have been maintained consistent with the operations of a school business. To the best of the Company's knowledge, all forms and records with respect to each School have been prepared, completed, maintained and filed in all material respects in accordance with all applicable federal and state laws and regulations, and are true and correct in all material respects. All financial aid grants and loans, disbursements and record keeping relating thereto with respect to the Schools (other than the NEC Schools) have been completed in substantial compliance with all federal and state requirements, and there are no material deficiencies in respect thereto. To the best of the Company's knowledge and except as previously disclosed in prior audits by DOE, no student at any School has been funded prior to the date for which such student was eligible for funding, and such student's records conform in form and substance to all relevant regulatory requirements. To the knowledge of the Company, the representations of NEC and NEC, Inc. set forth in Section 4.6 of the Purchase Agreement are true, 54 complete and correct. 8.25 COHORT DEFAULT RATE. Schedule 8.25 hereto sets forth the ------------------- ------------- published cohort default rate for each School, calculated in the manner prescribed by the DOE, of all students attending such school receiving assistance pursuant to Title IV programs for the years ended December 31, 1989 through 1992. Except as set forth in the appeals described on Schedule 8.25, to ------------- the best of the Company's knowledge, such schedule is materially accurate in all respects. To the best of the Company's knowledge, except as set forth on Schedule 8.25, no notice has been received as to the calculation or amount of - ------------- the cohort default rates for any School for the years ended December 31, 1993 and 1994. 8.26 RECEIVABLES. The tuition receivable and accounts receivable ----------- of each School (other than the NEC Schools), except to the extent of the allowance for cancellations and doubtful accounts set forth in the Financial Statements, are bona fide receivables, arose out of arms' length transactions in the normal and usual practices of the Company and such School, are recorded correctly on the applicable books and records of the Company and such School, and to the best of the Company's knowledge, are collectable in full in the ordinary course of business, within the ordinary time frame for such receivables, subject in the case of certain receivables to reserves established for such receivables in the Financial Statements. Such receivables are not subject to any defense, counterclaim or setoff or trade discounts or credits not reflected in the Financial Statements (other than tuition refund policies administered in accordance with all applicable legal requirements and the applicable Policy Guidelines), and the Company has no knowledge of any facts or circumstances which would cause any of such receivables to have to be written down or written off. To the knowledge of the Company, the representations and warranties of NEC and NEC, Inc. set forth in Section 4.12 of the Purchase Agreement are true, complete and correct. 8.27 WORKING CAPITAL AT THE DATE OF THIS AGREEMENT. All items --------------------------------------------- comprising the net working capital for each School (other than the NEC Schools) at the date of this Agreement, 55 including cash, accounts receivable, tuition deposits and tuition receivable, less accounts payable and accrued expenses, are at normal amounts for the current level of operations at such School and consistent with normal practices, and tuition receivable and the reserve for cancellation relating thereto, are consistent with the experience during the past twelve (12) months. To the knowledge of the Company, the representations and warranties of NEC and NEC, Inc. set forth in Section 4.25 of the Purchase Agreement are true, complete and correct. 9. REPRESENTATIONS OF ELECTRA. Each Electra entity represents, severally -------------------------- and not jointly, and in making its purchase hereunder it is specifically understood and agreed, that: 9.1 PURCHASE OF SECURITIES. Such Electra entity is purchasing the ---------------------- Securities set forth opposite its name on Schedule 1 hereto for its own account, ---------- for investment purposes and not with a view to or for sale in connection with any distribution thereof; and (ii) it is an "accredited investor" within the meaning of Regulation D promulgated under the Securities Act. Such Electra entity agrees that it will not, directly or indirectly, offer, transfer, sell, assign, pledge, hypothecate or otherwise dispose of any of the Securities purchased by it hereunder (or solicit any offers to buy, purchase, or otherwise acquire or take a pledge of any of such Securities), except in compliance with the Securities Act, the Exchange Act, any applicable state securities or blue sky laws and the Stockholders Agreement. 9.2 INCORPORATION; AUTHORIZATION. Such Electra entity is a ---------------------------- corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and such Electra entity has the full legal right, power and authority to enter into this Agreement and to perform its obligations hereunder without the need for the consent of any other person; and this Agreement has been duly authorized, executed and delivered and constitutes the legal, valid and binding obligation of such Electra entity enforceable against such Electra entity in accordance with the terms hereof. 9.3 NO CONFLICTS. The execution, delivery and ------------ 56 performance by such Electra entity of each Transaction Document to which it is a party and compliance therewith and the purchase of the Securities will not result in any violation of and will not conflict with, or result in a breach of, any of the terms of, or constitute a default under, (a) any provision of state, Federal or foreign law to which it is subject, (b) its Certificate of Incorporation or By-laws, or (c) any mortgage, indenture, agreement, instrument, judgment, decree, order, rule or regulation, or other restriction to which it is a party or by which it is bound. 9.4 NO BROKERS' FEES. Such Electra entity has not agreed or ---------------- committed to pay any broker's or finder's fee or commission with respect to the purchase of the Securities or the transactions contemplated hereby. 10. DEFINITIONS. ----------- For the purpose of this Agreement, the following terms shall have the meanings specified with respect thereto below: "Accrediting Body" shall mean, with respect to any School, any entity or ---------------- organization, whether governmental, government-chartered, inter-governmental, private or quasi-private, which engages in granting or withholding licensing, accreditation or similar approval for such School, in accordance with standards relating to the performance, operation, financial condition and/or academic standing of private post-secondary schools, including, without limitation, the instrumentality or instrumentalities of the relevant state in which such School is situated, and, as applicable, the Accrediting Commission of Career Schools and Colleges of Technology, the Accrediting Council for Independent Colleges and Schools, the Commission of Colleges of the Western Association of Colleges and Schools, and the other entities listed on Exhibit I to the Purchase Agreement. "Acquisition" has the meaning set forth in the recitals hereof. ----------- "Affiliate" means, with respect to any Person, any other Person directly or --------- indirectly controlling, controlled by, or 57 under direct or indirect common control with, such Person, but shall exclude, with respect to the Company, Electra and any transferee that might be deemed to be an Affiliate of the Company solely by reason of its ownership of Securities purchased by Electra under this Agreement or securities issued in exchange for any such Securities, or by reason of its benefiting from any agreements or covenants of the Company contained in this Agreement. A Person shall be deemed to control another Person if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such other Person, whether through the ownership of voting securities, by contract or otherwise. "Agreement" means this Securities Purchase Agreement, as this Agreement may --------- be amended from time to time, together with all Exhibits and Schedules hereto. "Bankruptcy Law" has the meaning specified in clause (vi) of Section 7.1 -------------- hereof. "Business Day" means any day other than a Saturday, a Sunday or a day on ------------ which commercial banks in New York City are required or authorized to be closed. "By-laws" means for any Person all By-laws, Codes of Regulation or other ------- equivalent charter documents in the jurisdiction of incorporation of such Person. "Capital Expenditures" means as to any Person for any period, the aggregate -------------------- amount of all capital expenditures which would be classified as capital expenditures in a statement of income or operations of such Person for such period prepared in accordance with GAAP. "Capital Lease" means, at the time any determination thereof is to be made, ------------- any lease of property, real or personal, in respect of which the present value of the minimum rental commitment would be capitalized on a balance sheet of the lessee in accordance with GAAP. "Capital Lease Obligation" means, at the time any determina- ------------------------ 58 tion thereof is to be made, the amount of the liability in respect of a Capital Lease which would at such time be so required to be capitalized on a balance sheet of the lessee in accordance with GAAP. "Capital Stock" means any and all shares, interests, rights to purchase, ------------- warrants, options, participations or other equivalents of, rights to acquire, or interests in (however designated) corporate stock, including, without limitation, any security which is convertible into or exercisable for such corporate stock. "Certificate of Designations" has the meaning set forth in Section 1 --------------------------- hereof. "Certificate of Incorporation" means for any Person all Certificates of ---------------------------- Incorporation, Articles of Incorporation or other equivalent charter documents in the jurisdiction of incorporation of such Person. "Closing" has the meaning specified in Section 3 hereof. ------- "Closing Date" has the meaning specified in Section 3 hereof. ------------ "Code" means the Internal Revenue Code of 1986, as amended ---- from time to time. "Commission" means the United States Securities and Exchange Commission or ---------- any governmental body or agency succeeding to the functions thereof. "Common Stock" means the Company's common stock, par value $.01 per share. ------------ "Company" means Career Education Corporation, a Delaware corporation, and ------- its successors and assigns. "Consents" has the meaning specified in Section 4E hereof. -------- "Consolidated Net Earnings" means consolidated gross revenues of the ------------------------- Company and its Subsidiaries less all operating and non-operating expenses of the Company and its Subsidiaries, 59 including all charges of a proper character (including current and deferred Taxes on income, provisions for Taxes on income, provisions for Taxes on unremitted foreign earnings which are included in gross revenues, and current additions to reserves), all determined in accordance with GAAP, but not including (to the extent otherwise included) in gross revenues (i) any gains (net of expenses and taxes applicable thereto) in excess of losses resulting from the sale, conversion or other disposition of capital assets (i.e., assets --- other than Current Assets), (ii) any gains resulting from the write-up of assets, (iii) any gains resulting from an acquisition by the Company or any of its Subsidiaries at a discount of any Debt of the Company or any of its Subsidiaries, (iv) any equity of the Company or any of its Subsidiaries in the unremitted earnings of any corporation which is not a Subsidiary of the Company, (v) any earnings of any Person acquired by the Company or any of its Subsidiaries through purchase, merger or consolidation or otherwise for any time prior to the date of acquisition, or (vi) any deferred credit representing the excess of equity in any Subsidiary of the Company at the date of acquisition over the cost of the investment in such Subsidiary. "Contracts" means any written or oral contract, agreement, commitment, --------- note, bond, pledge, lease, sublease, deed, mortgage, guaranty, indenture, license, option, consulting agreement, supply contract, repair contract, distribution agreement, purchase order, joint venture agreement, franchise, technology and know-how agreement, employment agreement, instrument or any other contractual commitment that is binding on any Person or its property, which provide for payments from or to such Person of $50,000 or more after the date hereof. "Current Assets" means current assets of the Company and its -------------- Subsidiaries, as computed under GAAP. "Current Liabilities" means the liabilities of the Company and its ------------------- Subsidiaries which in accordance with GAAP are classified as "current"; provided, however, that the current portion of Debt permitted under Section 6.1 - -------- ------- hereof shall be considered "current liabilities". "Debt" means, as to any Person, any indebtedness, whether or ---- 60 not contingent, in respect of borrowed money or evidenced by bonds, notes, debentures or similar instrument or letters of credit (or reimbursement agreements in respect thereof) or representing the balance deferred and unpaid of the purchase price of any property (including pursuant to Capital Leases), if and to the extent any of the foregoing indebtedness would appear as a liability upon a balance sheet of such Person prepared on a consolidated basis in accordance with GAAP, and shall also include, to the extent not otherwise included, (a) the guarantee of items which would be included within this definition and any joint obligation of such Person in respect of items which would be included in this definition, and (b) any indebtedness of a third person of the type that would be included in this definition which is secured by a Lien on the property or assets of such Person. "Disposition" means any transaction or series of related transactions ----------- (other than a Non-Surviving Combination) if, after giving effect to such transaction, any one or more Unrelated Persons beneficially own, directly or indirectly, in the aggregate 50% or more of the Common Stock on a fully diluted basis (without giving effect to any shares purchased or purchasable upon exercise of the Warrants), outstanding as of the date of computation. "DOE" means the United States Department of Education and any successor --- agency administering federal student financial assistance under Title IV. "EAI" means Electra Associates, Inc., a Delaware corporation, and its --- successors and assigns. "EI" means Electra Inc., a Delaware corporation, and its successors and -- assigns. "EIT" means Electra Investment Trust P.L.C., a corporation organized under --- the laws of England and Wales, and its successors and assigns. "Electra" means EIT and EAI. ------- 61 "Electra Documents" means the Transaction Documents other than the Third ----------------- Party Documents. "Employee Benefit Plan" has the meaning specified in Section 8.7 hereof. --------------------- "Environmental Claim" means any complaint, summons, citation, notice, ------------------- directive, order, claim, litigation, investigation, judicial or administrative proceeding, judgment, letter or other communication from any Governmental Authority, or any third party involving violations of Environmental Laws or Releases. "Environmental Laws" means any and all laws, statutes, ordinances, rules, ------------------ regulations, orders, or determinations of any governmental authority pertaining to health or the environment in effect in any and all jurisdictions in which the Company and its Subsidiaries are conducting or at any time have conducted business, including, without limitation, the Clean Air Act, as amended, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA"), as amended, the Federal Water Pollution Control Act, as amended, the ------- Occupational Safety and Health Act of 1970, as amended, the Resource Conservation and Recovery Act of 1976 ("RCRA"), as amended, the Safe Drinking ---- Water Act, as amended, the Toxic Substances Control Act, as amended, the Superfund Amendments and Reauthorization Act of 1986, as amended, and other environmental conservation or protection laws. "Environmental Liabilities" means any monetary obligations, losses, ------------------------- damages, punitive damages, consequential damages, treble damages, costs and expenses (including all reasonable out-of-pocket fees, disbursements and expenses of counsel, out-of-pocket expert and consulting fees and out-of-pocket costs for environmental site assessments, remedial investigation and feasibility studies), fines, penalties, sanctions and interest incurred as a result of any Environmental Claim filed by any Governmental Authority or any third party which relate to any environmental condition, remedial action, Release or threatened Release from or onto (i) any presently or formerly owned by the Borrower or any of its Subsidiaries or a Predecessor, or (ii) any 62 facility which received Hazardous Materials generated by the Borrower or any of its Subsidiaries or a Predecessor. "Environmental Permit" means any permit, license, notice, order, approval -------------------- or other authorization under any applicable law, rule, regulation or other requirement of the United States or Canada or of any state, municipality or other subdivision thereof required by any Environmental Law. "ERISA" means the Employee Retirement Income Security Act of 1974, as ----- amended from time to time. "Exchange Act" means the Securities Exchange Act of 1934, as amended, from ------------ time to time, and any successor statute or law thereto. "Existing Indebtedness" means, as to the Company and its Subsidiaries, the --------------------- Debt of the Company and its Subsidiaries outstanding as of the Closing Date, reflected in Schedule 6.1 hereto, other than the Senior Debt. ------------ "Financial Disclosure Documents" has the meaning specified in Section 8.8 ------------------------------ hereof. "Financials" has the meaning set forth in Section 8.8 hereof. ---------- "Financing Fee" has the meaning set forth in Section 3 hereof. ------------- "GAAP" means generally accepted accounting principles in the United States ---- of America as in effect at the time any determina tion is made or financial statement is required hereunder as promulgated by the American Institute of Certified Public Accountants, the Accounting Principles Board, the Financial Accounting Standards Board or any other body existing from time to time which is authorized to establish or interpret such principles, applied on a consistent basis throughout any applicable period, subject to any change required by a change in GAAP; provided, however, that if any change in generally accepted -------- ------- accounting principles during the term of this Agreement affects 63 the calculation of any financial covenant or determination of value contained herein, the parties hereto hereby agree to amend this Agreement to the effect that each such financial covenant or determination of value is not more or less restrictive than such covenant as in effect on the date hereof. "Good Faith" means honesty in fact in the conduct or transaction ---------- concerned, without regard to whether standards which might be deemed reasonable by another Person have been observed; but which does not include intentionally unreasonable conduct. "Governmental Authority" means any action of government, any state, local ---------------------- or other political subdivision thereof and any other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to such government. "Hazardous Materials" means (a) any element, compound, or chemical that is ------------------- defined, listed or otherwise classified by a Governmental Authority as a contaminant, pollutant, toxic pollutant, toxic or hazardous substances, extremely hazardous substance or chemical, hazardous waste, medical waste, biohazardous or infectious waste, special waste, or solid waste under Environmental Laws; (b) petroleum and its refined products; (c) polychlorinated biphenyls; (d) any substance exhibiting a hazardous waste characteristic as defined in 40 C.F.R. 261.21-.24; and (e) any raw materials, building components, including but not limited to asbestos-containing materials and manufactured products, containing Hazardous Materials. "Heller" shall mean, collectively, Heller Equity Capital Corporation, a ------ Delaware corporation, and any entity controlling or under common control with Heller Equity Capital Corporation. "Initial Public Offering" shall mean an initial underwritten public ----------------------- offering and sale for cash by the Corporation of the Common Stock of the Corporation to an underwriter or underwriters pursuant to a "firm commitment" underwriting agreement and a registration statement declared effective by the Securities and Exchange Commission under the Securities Act of 1933, as amended, in which (i) the minimum equity valuation of the Corporation is 64 $45,000,000 before December 31, 1999 and $55,000,000 thereafter and (ii) the Corporation receives gross proceeds of at least $20,000,000. The valuation of the Corporation will be determined by dividing the dollar amount raised in such public offering on a gross basis by the percentage of equity in the Corporation sold in such public offering on a fully-diluted basis, taking into account all shares outstanding, and all warrants, options and convertible securities or other rights to acquire equity of the Corporation. An Initial Public Offering shall be deemed consummated upon the first sale of Common Stock under the related registration statement. An Initial Public Offering shall not include the registration of an offer and sale of the Common Stock (i) to the employees of or other persons providing services to the Corporation pursuant to an employee benefit or similar benefit plan registered on Form S-8 or a successor form or (ii) relating to a merger, acquisition or other transaction of the type described in Rule 145 or a successor rule registered on Form S-4 or a successor form. "Intellectual Property" means, as to any Person, that Person's Patents and --------------------- Patent Applications, Trademarks, licenses and brand names, and including without limitation all logos and designs, trade secrets, technical information, engineering procedures, designs, know-how and processes, software, copyrights, and other intellectual property. "Investment" in any Person includes all investments by stock purchase, ---------- capital contribution, loan, advance, guarantee of any indebtedness or creation or assumption of any other liability in respect of any indebtedness of such Person, or otherwise. "knowledge" means, with respect to any Person, such Person's best knowledge --------- after due inquiry; provided, that with respect to the NEC Schools no knowledge -------- of any managerial personnel of the NEC Schools, who were not managerial personnel of the Company immediately prior to the Acquisition, shall be imputed to the Company. "Lien" means any mortgage, pledge, security interest, encumbrance, lien or ---- charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title 65 retention agreement, any lease in the nature thereof and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction). "Material Adverse Change" of such Person means a material adverse change in ----------------------- the business, condition (financial or otherwise), assets, properties or operations or prospects of such Person. "Material Adverse Effect" means a material adverse effect on the business, ----------------------- condition (financial or other), assets, properties or operations or prospects of the Company and its Subsidiaries, taken as a whole. "Memorandum" means that certain Financing Memorandum dated April 1995 ---------- prepared by Bowles Hollowell Conner & Co., a copy of which was provided to Electra by the Company. "Multiemployer Plan" means any "multiemployer plan" (as such term is ------------------ defined in Section 3(37) of ERISA and Section 414(f) of the Code) to which contributions are or have been made by the Company or any of its Subsidiaries. "NEC Schools" shall have the meaning assigned to such term in the ----------- preambles. "Net Cash Flow" means the amount shown as the "Cash from Operations" on the ------------- cash flow statements prepared by the Company and delivered to the Significant Holders in accordance with Section 5.1 hereof, determined in accordance with GAAP. "Non-Surviving Combination" means any merger, consolidation or other ------------------------- business combination of the Company with or into one or more Persons in which the Person other than the Company is the survivor, or a sale of all or a substantial part of the assets of the Company (whether held directly by the Company or through a subsidiary of the Company) to one or more such other Persons (including but not limited to a voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company); provided that if any such merger, consolidation or other business combination or sale of assets, in which the holders of Common Stock receive cash or non-cash consideration, 66 is structured in the form of a reverse subsidiary merger so that the Company is the surviving entity, such transaction shall nevertheless be deemed to be a Non- Surviving Combination. "Officers' Certificate" means a certificate signed in the name of the --------------------- Company, as applicable, by its chief executive officer, president or one of its vice presidents and by its chief financial officer, treasurer or controller. "Patents and Patent Applications" means, as to any Person, all of such ------------------------------- Person's right, title and interest in and to all of its now owned or existing and filed and hereinafter acquired or arising and filed patents and patent applications, inventions and improvements thereto, and (a) the reissues, divisions, continua tions, renewals, extensions, and continuations-in-part thereof, (b) all income, royalties, damages and payments now or hereafter due and/or payable under or with respect thereto, including without limitation damages and payments for past or future infringements thereof, (c) the right to sue for past, present and future infringements thereof, (d) all rights corresponding thereto throughout the world, and (e) all right as licensor or licensee with respect to any of the foregoing. "PBGC" means the Pension Benefit Guaranty Corporation or any corporation or ---- governmental body or agency succeeding to the functions thereof. "Penalty Warrant Certificates" shall have the meaning set forth in Section ---------------------------- 7.1 hereof. "Penalty Warrants" shall have the meaning set forth in Section 7.1 hereof. ---------------- "Permitted Acquisitions" shall mean acquisitions by the Company or its ---------------------- Subsidiaries (including newly-formed Subsidiaries to the extent permitted hereunder) of vocational or similar schools meeting the requirements set forth in Section 4.2(e)(iii), (iv), (v) and (vi) of the Senior Loan Document; provided, that (i) during any twelve-month period there shall not be more than - -------- four (4) Permitted Acquisitions and the aggregate purchase price (including all deferred payments and seller notes) 67 for all such Permitted Acquisitions during such twelve-month period shall not exceed $14,000,000, and (ii) the the total acquisition price (including all deferred payments and seller notes) with respect to the acquisition of any school may not exceed five (5) times EBITDA of such school for the most recently completed fiscal year (as the EBITDA of such school may be adjusted to eliminate the effect of any extraordinary compensation arrangements with regard to the operation of such school). "Permitted Indebtedness" means: (a) the Senior Debt, (b) the Existing ---------------------- Indebtedness, (c) Debt giving rise to Permitted Liens, (d) current trade accounts payable or accrued, operating lease obligations and deferred liabilities other than for borrowed money, all incurred and continuing in the ordinary course of business, (e) Capital Lease Obligations which are with recourse to the Company or other Debt of the Company which is with recourse to the Company incurred for the purchase of real or personal property or businesses that do not exceed, as of any date outstanding, the aggregate amount of such Debt permitted under the Senior Loan Documents; provided, however, that, subject -------- ------- to the other terms and conditions set forth herein, the Company may incur Capital Lease Obligations or other Debt incurred for the purchase of real or personal property or businesses in any amount so long as such Capital Lease Obligations and other Debt is without recourse to the Company, (f) Debt which serves to refund or refinance the Existing Indebtedness to the extent in each case permitted by the terms of the documents and instruments evidencing such Debt (each of such Debt being so incurred, "Refinancing Indebtedness"), it being ------------------------ understood that the Company shall be permitted to pay prepayment penalties and premiums in connection with such refunding or refinancing; provided, however, -------- ------- that such Refinancing Indebtedness (i) is subordinated to the Senior Debt to at least the same extent as such Debt being refunded or refinanced, (ii) bears an interest rate per annum which does not exceed by more than 150 basis points the interest rate per annum then payable under such Debt being refunded or refinanced (calculated in accordance with any formula set forth in the documents evidencing any such Debt), (iii) has an aggregate principal amount outstanding which does not exceed the then outstanding aggregate amount of such Debt being refunded or 68 refinanced plus customary transaction costs incurred in connection with such refinancing, and (iv) has, at the time of such refunding or refinancing, a Weighted Average Life to Maturity greater than the Weighted Average Life to Maturity of such Debt being refunded or refinanced, (g) Debt incurred in the ordinary course of the Company's business in connection with any lease obligations of the Company pursuant to any lease agreements executed by the Company as lessee of any real property, (h) Debt payable to any seller or sellers in Permitted Acquisition(s) by the Company up to a maximum of $2,000,000 in the aggregate for all such acquisitions (which amount shall not include any amounts payable immediately and contingent upon the resumption of Title IV funding with respect to the school which is the subject of such Permitted Acquisition (the "Deferred Payment"), but shall be deemed to include the stated value of any shares of preferred stock which provide for a current-pay dividend and which are issued in connection with a Permitted Acquisition), (i) additional Debt up to a maximum of $1,000,000, (j) any Deferred Payment and (k) additional Debt incurred solely for the purposes of satisfying the Acid Test of DOE, or if such requirement shall no longer be applicable, such similar requirement as in effect at such time; provided, however, that such Debt (i) shall be fully cash- -------- ------- collateralized, (ii) shall have a stated maturity of in excess of 1-year, and (iii) shall not remain outstanding for a period of time in excess of one-hundred twenty (120) days. "Permitted Investments" means (i) an Investment by the Company or any --------------------- Wholly-Owned Subsidiary of the Company in a Wholly-Owned Subsidiary of the Company, subject, in the case of any such Investments that constitute Debt, to the provisions of Section 6.1 hereof; (ii) loans or advances made in the ordinary course of business to employees of the Company or its Sub sidiaries for travel and like expenses and relocation expenses; (iii) Investments in direct obligations of the United States of America or obligations of any instrumentality or agency thereof, the payment of which is unconditionally guaranteed by the United States of America; (iv) negotiable certificates of deposit issued by any commercial bank or trust company organized under the laws of the United States of America or any state thereof having capital and surplus of not less than $100,000,000; (v) readily marketable commercial paper rated A-1 by Standard & Poor's 69 Corporation or Prime-1 by NCO/Moody's Commercial Paper Division of Moody's Investor Services, Inc. (all of which Investments shall be payable in U.S. dollars in the United States of America and shall have maturities not in excess of twelve months); (vi) Current Assets arising from the sale of goods and services in the ordinary course of business of the Company and its Subsidiaries; (vii) Investments not to exceed $100,000 in the aggregate in connection with the operation of any and all third party schools pursuant to any management or similar agreement (including the School Management Agreement); provided, that -------- such Investment shall only be permitted if (A) the Company has an option to purchase such school and (B) the Board of Directors determines that such Investment is necessary to preserve the value of such option to the Company; and (viii) Permitted Acquisitions. "Permitted Liens" means as to the property, personal and real, tangible and --------------- intangible, of any Person: (a) Liens for Taxes or assessments and similar charges either (i) not delinquent, or (ii) contested in Good Faith by appropriate proceedings which have the effect of staying any action to foreclose or to obtain a judgment to enforce such Liens and as to which such Person shall have set aside on its books adequate reserves; (b) Liens incurred or pledges and deposits in connection with workers' compensation, unemployment insurance and other social security benefits, or securing the performance of bids, tenders, leases, contracts (other than for the repayment of borrowed money), statutory obligations, progress payments, surety and appeal bonds and other obligations of like nature, incurred in the ordinary course of business; (c) Liens imposed by law, such as mechanics', carriers', warehousemen's, materialmen's, supplier's and vendors' Liens, incurred in Good Faith in the ordinary course or contested in Good Faith by appropriate proceedings which have the effect of staying any action to foreclose or to obtain a judgment to enforce such Liens; (d) zoning restrictions, easements, licenses, covenants, reservations, restrictions on the use of real property or minor irregularities of title incident thereto which do not in the aggregate materially impair the use of such property in the operation of the businesses of such Person; (e) Liens, other than as described in clause (j) of this definition of Permitted Liens, existing on assets or properties at the time of, or in connection with, the acquisition thereof by a Person which do not materially 70 interfere with the use of the property subject thereto or extend to or cover any assets or property of such Person other than the assets or property being acquired; (f) Liens existing on the Closing Date and disclosed on Schedule 10.1 ------------- hereto; (g) Liens of landlords or mortgages of landlords, arising solely by operation of law, on fixtures and movable property located on premises leased in the ordinary course of business, provided that the rental payments secured thereby are not yet due; (h) Liens of judgment creditors to the extent (i) any judgment secured by such Lien does not give rise to a Preferred Stock Failure, and (ii) not material alone or in the aggregate; (i) Liens in favor of the Senior Lenders or to secure Debt permitted by subparagraph (e) of the definition of Permitted Indebtedness, provided, however, that, if not in favor of the -------- ------- Senior Lenders or any lender refinancing the Senior Debt, such Liens do not extend to any assets other than the assets being acquired with the proceeds of such Debt or being leased; and (j) Liens granted as a result of any Refinancing Indebtedness (as defined in subparagraph (f) of the definition of Permitted Indebtedness), provided that in the case of any such Refinancing Indebtedness the aggregate scope of all Liens, if any, on the property, real and personal, tangible and intangible, of the Company securing the Debt being refunded or refinanced are not increased thereby (e.g., additional types or items of --- collateral have been added). "Person" means and includes an individual, a partnership, a joint venture, ------ a corporation, a trust, an unincorporated organization, a government or any department or agency thereof, and any other legal entity. "Plan" means an employee pension benefit plan within the meaning of Section ---- 3(2) of ERISA, maintained or contributed to by the Company or any Subsidiary, and subject to Section 412 of the Code. "Predecessor" means those entities from whom the Company or its ----------- Subsidiaries, as the case may be, has purchased or concurrently with the Closing is purchasing assets constituting a private post-secondary vocational school, or on whose behalf commencing concurrently with the Closing will operate a private post-secondary vocational school as of the date hereof. Such 71 entities are (i) F.C. Collins Investment Corporation, an Arizona corporation formerly known as Al Collins Graphic Design School, Ltd., (ii) BC Venture, a Texas general partnership formerly known as Brooks College, and (iii) National Education Centers, Inc., a California corporation, with respect only to the operations of the NEC Schools and Arizona Automotive Institute. "Preferred Shares" means the shares of Series C Preferred Stock of the ---------------- Company. "Preferred Stock Failure Event" means any of the events specified in ----------------------------- Section 7.1 hereof, provided that there has been satisfied any requirement set forth therein in connection with such event for the giving of notice, or the lapse of time, or the happening of any further condition, event or act, and "Preferred Stock Failure" shall mean any of such events, whether or not any such ----------------------- requirement has been satisfied. "Projections" has the meaning specified in Section 8.8 hereof. ----------- "Purchase Agreement" has the meaning set forth in the recitals hereto. ------------------ "Registration Rights Agreement" has the meaning set forth in Section 4.14 ----------------------------- hereof. "Release" means any spilling, leaking, pumping, emitting, emptying, ------- discharging, injecting, escaping, leaching, dumping, or disposing of Hazardous Materials (including the abandonment or discarding of barrels, containers or other closed receptacles containing Hazardous Materials) into the environment. "Restricted Payment" means (i) any dividend on, or any distribution in ------------------ respect of, any shares of Capital Stock of the Company or any of its Subsidiaries or the incurrence of any liability in respect thereof, other than (a) a dividend payable solely in shares of that class of stock, (b) dividends by any of its Wholly-Owned Subsidiaries to the Company, (c) dividends payable on the shares of Series C Preferred Stock and (d) dividends payable on any shares of preferred stock issued in 72 connection with the Permitted Acquisitions, (ii) any payment or distribution on account of the redemption, purchase, retirement or other acquisition of any shares of Capital Stock of the Company or any of its Subsidiaries or any warrant, option or other right to purchase or acquire any shares of Capital Stock of the Company or any of its Subsidiaries, other than (a) the redemption of the Series C Preferred Stock, (b) the redemption, purchase, retirement or other acquisition of any and all shares of the Series C Preferred Stock in connection with the "put" provided for in, and pursuant to, the Certificate of Designations, (c) the exercise of the Warrants, (d) the redemption, purchase, retirement or other acquisition of any and all Warrants in connection with the "put" provided for in, and pursuant to, the Warrant Certificates, and (e) the redemption, purchase, retirement or other acquisition of any and all warrants in connection with the "put" provided for in, and pursuant to, the warrant certificates issued to the Senior Lender as provided in the Senior Loan Documents, and (iii) any payment, prepayment or retirement of Debt of the Company or any of its Subsidiaries other than (a) mandatory scheduled payments made in accordance with the terms of such Debt, (b) payments of the Senior Debt and (c) payments of trade debt made in the ordinary course of business. "Revolving Loans" means the total of all advances and extensions of --------------- credit, if any, made from time to time on a revolving basis under the Senior Loan Agreement. "School Management Agreement" means the School Management Agreement, dated --------------------------- the Closing Date, by and among NEC, NEC, Inc. CEC Management, Inc., an Illinois corporation, and the Company. "Schools" means (i) the NEC Schools, (ii) the Al Collins Graphic Design ------- School in Tempe, Arizona, and (iii) Brooks College in Long Beach, California. "Securities" means the Warrants and the Series C Preferred Stock. ---------- "Securities Act" means the Securities Act of 1933, as amended, and the -------------- rules and regulations promulgated thereunder. 73 "Senior Debt" means, subject to the proviso of Section 6.1 hereof and ----------- Section 6.9 hereof, the Debt created pursuant to the Senior Loan Agreement in a maximum aggregate principal amount equal to $20,000,000, minus the aggregate amount of (a) all payments and prepayments of principal made from time to time after the Closing Date (excluding any payments made on the Revolving Loans) and (b) all permanent reductions made from time to time after the Closing Date in the maximum commitment amounts for the Revolving Loans, and any refinancing thereof; provided, however, that such refinancing shall not (i) increase the -------- ------- amount of such indebtedness (other than with respect to prepayment penalties or premiums or capitalized loan origination fees or expenses), (ii) result in any earlier scheduled maturity date or payment date of any amount under the Senior Loan Agreement, (iii) result in any increase in the interest rate by more than 150 basis points, prepayment charges, fees or other amounts payable pursuant to the Senior Loan Agreement, (iv) increase the amount of collateral securing such Senior Debt, (v) have, at the time of such refunding or refinancing, a Weighted Average Life to Maturity less than the Weighted Average Life to Maturity of such Senior Debt being refunded or refinanced, or (vi) in the judgment of the Company's Board of Directors contain terms, provisions and conditions that taken as a whole are more burdensome to the Company than those of the Senior Loan Agreement. "Senior Loan Agreement" means the loan agreement to be entered into by and --------------------- among the Senior Lenders and the Company, in form and substance reasonably acceptable to Electra. "Senior Loan Documents" means the Senior Loan Agreement and the documents --------------------- entered into in connection with or provided for in the Senior Loan Agreement, each in form and substance reasonably acceptable to Electra. "Senior Lenders" means the lenders under the Senior Loan Agreement, and -------------- their successors, assigns and participants. "Series C Preferred Stock" means the Series C Redeemable Preferred Stock of ------------------------ the Company, par value $.01 per share with a stated value of $10,000 per share, to be issued solely to 74 Electra. "Significant Holder" means, for so long as any shares of Series C Preferred ------------------ Stock are outstanding, any holder holding at least 25% of the outstanding shares of Series C Preferred Stock, and thereafter, any holder holding at least 25% of the outstanding Warrants. Any approval or consent of the Significant Holders required or given hereunder shall be deemed given if the holders of a majority of the aggregate shares of Series C Preferred Stock (or Warrants, if applicable) then outstanding held by all Significant Holders give such approval or consent. "Stockholders Agreement" has the meaning set forth in Section 4.13 hereof. ---------------------- "Subsidiary" means, with respect to any Person, any corporation or similar ---------- entity, a majority of the Capital Stock or other equity of which, except directors' qualifying shares, shall, at the time as of which any determination is being made, be owned by such Person either directly or through Subsidiaries. "Substantial Part" means, as of any date, assets (i) having a net book ---------------- value equal to or in excess of 15% of the consolidated assets of the Company and its Subsidiaries (determined in accordance with GAAP) or (ii) which have provided 15% or more of Consolidated Net Earnings in any of the three most recent fiscal years of the Company. "Taxes" means, as to any Person, any present or future income, stamp or ----- other taxes, levies, imposts, duties, charters, fees, deductions or withholdings, of every kind and nature, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority, including net income and franchise taxes. "Third Party Documents" means the Purchase Agreement, the School Management --------------------- Agreement and the Senior Loan Documents. "Title IV" means Chapter 28, Subchapter IV of the Higher Education Act of -------- 1965, as amended, 20 U.S.C.A. Section 1070, and any amendments or successor statutes thereto. 75 "Trademarks" means, as to any Person, all of such Person's right, title and ---------- interest in and to all of its now owned or existing and filed, and hereafter acquired or arising and filed, trademarks, service marks, trademark or service mark registrations, trade names, trademark rights, trade name rights and trademark or service mark applications, and (a) the reissues, divisions, continuations, renewals, extensions and continuations-in-part thereof, (b) all income, royalties, damages and payments now or hereafter due and/or payable with respect thereto, including, without limitation, damages and payment for past or future infringements thereof, (c) the right to sue for past, present and future infringements thereof, (d) all rights corresponding thereto throughout the world, (e) all rights as licensor or licensee with respect to any of the foregoing, and (f) together in each case with the goodwill of such Person's business connected with the use of, and symbolized by any of the foregoing. "Transaction Documents" means this Agreement, the Warrants, the Penalty --------------------- Warrants, the Warrant Certificates, the Penalty Warrant Certificates, the Certificate of Designations, the Stockholders Agreement, the Registration Rights Agreement, the Guaranty Agreement, the Purchase Agreement, the School Management Agreement and the Senior Loan Documents. "United States" or "U.S." means the United States of America. ------------- ---- "Unrelated Person" means any Person other than (i) a Person that, on the ---------------- date of this Agreement, owns, directly or indirectly, any shares of any class of common stock of the Company, and (ii) an Affiliate of a Person specified in clause (i). "Warrant Certificates" shall have the meaning set forth in Section 1 -------------------- hereof. "Warrants" shall have the meaning set forth in Section 1 hereof. -------- 76 "Weighted Average Life to Maturity" means, when applied to any Debt at any --------------------------------- date, the number of years obtained by dividing (a) the then outstanding principal amount of such Debt into (b) the sum of all products obtained by multiplying (i) the amount of each then remaining installment, sinking fund, serial maturity or other required payment of principal, including payment at final maturity, in respect thereof, by (ii) the number of years (calculated to the nearest 1/12th) which will elapse between such date and the making of such payment. "Wholly-Owned Subsidiary" means any Subsidiary of which 100% of the total ----------------------- voting power of shares of stock entitled to vote in the election of directors, managers or trustees thereof (other than directors' qualifying shares) is at the time owned or controlled, directly or indirectly, by any Person or one or more of the other Subsidiaries of that Person or a combination thereof. 11. MISCELLANEOUS. ------------- 11.1 PAYMENTS. The Company agrees that, so long as any Electra -------- entity shall hold any Securities, it will make payments in respect of such Securities, in compliance with the terms of this Agreement and the other Transaction Documents, by wire transfer of immediately available funds for credit to the account set forth on Schedule 1 opposite such Electra entity's ---------- name, or to such other account or accounts as such Electra entity may designate in writing, notwithstanding any contrary provision herein or in any Transaction Document with respect to the place of payment. The Company agrees to afford the benefits of this Section 11.1 to any transferee which shall have made the same agreements as Electra has made in this Section 11.1. ------------ 11.2 EXPENSES; INDEMNITY. (a) The Company hereby agrees, whether or ------------------- not the transactions hereby contemplated shall be consummated, to pay, and save any holder harmless against liability for the payment of, the costs and expenses incurred by such holder, including, without limitation, the fees and disbursements of special counsel engaged by the Significant Holders, on behalf of Electra and any subsequent holder of Securities, in connection with (i) this Agreement, the Warrants, the Series C Preferred Stock, the other Transaction Documents or the trans- 77 actions contemplated hereby or thereby, (ii) any subsequent proposed amendment to, modification of, or proposed consent under, whether or not such proposed modification shall be effected or proposed consent granted, and (iii) the costs and expenses, including attorney's fees, incurred by Electra or any subsequent holder of the Securities in enforcing its rights under any of this Agreement, the Warrants, the Series C Preferred Stock or any other Transaction Document (other than the Third Party Documents) or in responding to any subpoena or other legal process issued in connection with this Agreement or the other Transaction Documents or the transactions contemplated hereby or by reason of Electra's or any subsequent holder's of the Securities having acquired any Security, including without limitation, costs and expenses incurred in any bankruptcy case involving the Company or any of its Subsidiaries; provided, however, that the -------- ------- Company shall not be obligated to pay any costs, fees or expenses incurred by any holder solely by reason of such holder's gross negligence or willful misconduct. The obligations of the Company under this Section 11.2 shall survive the transfer of any Securities or portion thereof or interest therein by Electra or any subsequent holder of the Securities and the redemption of the Preferred Shares. (b) Notwithstanding any investigation performed by Electra prior to the Closing, from and after the Closing the Company shall indemnify, save and hold harmless, release and discharge each holder of any Securities and all of its officers, directors, stockholders, agents, representatives, consultants, employees, and Affiliates, and all of its heirs, successors and permitted assigns from and against any and all damages, obligations, losses, claims, deficiencies, penalties, interest, expenses, fines, assessments, charges and costs (including attorneys' fees and court costs) and other liabilities of any kind, including, without limitation, Environmental Liabilities (collectively, "Damages"), arising from, out of or in any manner connected with or based on (i) notwithstanding any disclosure in this Agreement (including the exhibits and schedules attached hereto) or otherwise, the breach of any covenant of the Company or the failure by the Company to perform any of its obligations contained herein or in any of the agreements, documents or instruments required to be executed and delivered by the Company 78 in connection with the transactions contemplated hereby and in the other Transaction Documents, (ii) any inaccuracy in or breach of any representation or warranty of the Company under this Agreement or any agreement, document or instrument required to be executed and delivered by the Company in connection with the transactions contemplated hereby and in the other Transaction Documents, (iii) notwithstanding any disclosure in this Agreement (including the exhibits and schedules attached hereto) or otherwise, any and all acts, omissions, events, conditions or circumstances involving or related to the assets, properties, businesses, operations or activities of the Company, any of its Subsidiaries or any predecessor of any thereof, whether occurring or existing on, prior to or after the Closing, except if any such Damages arise solely as a result of Electra's gross negligence or willful misconduct and (iv) any of the items disclosed in Schedule 8.12. ------------- 11.3 CONSENT TO AMENDMENTS; SUBORDINATION. (a) This Agreement may be ------------------------------------ amended and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company shall have obtained the written consent to such amendment, action or omission to act, of the holders of sixty-six and two-thirds (66 2/3%) of the number of shares of Series C Preferred Stock at the time outstanding, and each holder of any shares of Series C Preferred Stock at the time or thereafter outstanding shall be bound by any consent authorized by this Section 11.3. No course of dealing between the Company and the holder of any share of Series C Preferred Stock nor any delay in exercising any rights hereunder or under any share of Series C Preferred Stock shall operate as a waiver of any rights of any holder of such shares of Series C Preferred Stock. As used herein, the term "this Agreement" and references -------------- thereto shall mean this Agreement as it may from time to time be amended or supplemented. (b) Once the Preferred Shares have been redeemed in full, this Agreement may be amended and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company shall have obtained the written consent to such amendment, action or omission to act, of the holders of 51% of the then outstanding 79 Warrants, and each holder of Warrants at the time or thereafter outstanding shall be bound by any consent authorized by this paragraph 11.3. (c) Electra and the Company agree that, prior to the Company's taking any action prohibited by Section 6 above, the Company will deliver to the holders of the Warrants and/or shares of Series C Preferred Stock, as the case may be, a written notice (the "Company Notice") setting forth in reasonable detail the proposed action to be taken by the Company or any of its Subsidiaries. Unless the Company receives written authorization from the percentage of holders of Preferred Shares or the Warrants, as the case may be, required for consent in paragraphs (a) and (b) above by the 20th Business Day after delivery of the Company Notice, the Company may not proceed with the proposed action set forth in the Company Notice. 11.4 PERSONS DEEMED OWNERS. Prior to due presentment for --------------------- registration of transfer, the Company may treat the Person in whose name any shares of Series C Preferred Stock is registered as the owner and holder of such shares of Series C Preferred Stock for the purpose of receiving payment of the liquidation value of, and dividends on, such shares and for all other purposes whatsoever. 11.5 SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT. ------------------------------------------------------------ All representations and warranties contained herein and under the other Transaction Documents or made in writing by or on behalf of the Company in connection herewith or therewith or in connection with the transactions contemplated hereby or thereby shall survive the execution and delivery of this Agreement and the Securities, the transfer by Electra of any Securities or portion thereof or interest therein, or the repurchase or redemption of the Securities and may be relied upon by any transferee regardless of any investigation made at any time by or on behalf of Electra or any subsequent Significant Holder; provided, however, that the representations and warranties -------- ------- set forth in any Transaction Document shall survive only for such period of time specifically set forth in such Transaction Document to the extent that a shorter period is set forth therein. Subject to the preceding sentence, this Agreement, the 80 Securities and the other Transaction Documents embody the entire agreement and understanding among Electra, the Company and supersede all prior agreements and understandings relating to the subject matter hereof. 11.6 SUCCESSORS AND ASSIGNS. All covenants and other agreements in ---------------------- this Agreement contained by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto (including, without limitation, any subsequent Significant Holder and Electra) whether so expressed or not. 11.7 NOTICES. All written communications provided for hereunder ------- shall be sent by first class mail or nationwide overnight delivery service (with charges prepaid) and (i) if to Electra, addressed to it at 65 Kingsway, London, England WC2B 6QT, Telecopier No.: 011-4471-242-1806, Attention: Mr. Philip Dyke, with a copy to Electra Inc., 70 East 55th Street, New York, New York 10022, Telecopier No.: 212-319-3069, Attention: Ms. Diane M. Smith, Senior Vice President, with copies to Pryor, Cashman, Sherman & Flynn, 410 Park Avenue, New York, New York 10022, Telecopier No.: 212-326-0806, Attention: Selig D. Sacks, Esq., or to such other address or addresses as Electra shall have specified to the parties hereto in writing, (ii) if to any other holder of any shares of Series C Preferred Stock, addressed to such holder at such address as such other holder shall have specified to the Company in writing or, if any such other holder shall not have so specified an address to the Company, then addressed to such other holder in care of the last holder of such share of Series C Preferred Stock which shall have so specified an address to the Company, and (iii) if to the Company, addressed to it at Career Education Corporation, 2300 N. Barrington, Suite 400, Hoffman Estates, Illinois 60195, Telecopier No.: (708) 884-8973, Attention: President, with a copy to: D'Ancona and Pflaum, 30 North LaSalle Street, Suite 2900, Chicago, Illinois 60602, Telecopier No.: (312) 580-0923, Attention: Michael J. Feldman, Esq., and with a copy to Heller Equity Capital Corp., 500 West Monroe Street, Chicago, Illinois 60661, Telecopier No.: (312) 441-7378, Attention: Todd H. Steele, or to such other address or addresses as the Company may have designated in writing to each holder of the Securities at the time outstanding. 81 11.8 DESCRIPTIVE HEADINGS, ETC. The descriptive headings of the ------------------------- several Sections of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. References herein to a Section are, unless otherwise specified, to one of the Sections of this Agreement and references to an "Exhibit" or "Schedule" are, unless otherwise specified, to one of the ------- -------- Exhibits or Schedules to this Agreement. 11.9 GOVERNING LAW; CHOICE OF FORUM. THIS AGREEMENT SHALL BE DEEMED ------------------------------ TO HAVE BEEN EXECUTED AND DELIVERED AT AND SHALL BE DEEMED TO HAVE BEEN MADE IN NEW YORK, NEW YORK. THIS AGREEMENT, AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE SUBSTANTIVE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO ANY CONFLICTS OF LAW RULES OR PRINCIPLES) AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THE SERIES C PREFERRED STOCK SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE SUBSTANTIVE LAWS OF THE STATE OF DELAWARE (WITHOUT GIVING EFFECT TO ANY CONFLICTS OF LAW RULES OR PRINCIPLES). ANY LEGAL ACTION OR PROCEEDING WITH RESPECT HERETO AND THERETO SHALL ONLY BE BROUGHT IN THE COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE COMPANY HEREBY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS AND IRREVOCABLY WAIVES ANY DEFENSE OR CLAIM TO SUCH JURISDICTION WHICH EITHER OR BOTH MAY HAVE BASED, DIRECTLY OR INDIRECTLY, ON THE GROUNDS OF FORUM NON CONVENIENS. IF ANY ACTION IS COMMENCED IN ANY OTHER JURISDICTION, THE PARTIES HERETO HEREBY CONSENT TO THE REMOVAL OF SUCH ACTION TO THE SOUTHERN DISTRICT OF NEW YORK. THE COMPANY HEREBY IRREVOCABLY DESIGNATES CT CORPORATION SYSTEM, AS THE DESIGNEE, APPOINTEE AND AGENT, OF THE COMPANY TO RECEIVE, FOR AND ON BEHALF OF THE COMPANY, SERVICE OF PROCESS IN SUCH RESPECTIVE JURISDICTIONS IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR THE RIGHTS AND OBLIGATIONS HEREUNDER OR THEREUNDER OR UNDER THE SERIES C PREFERRED STOCK AND SUCH SERVICE SHALL BE DEEMED COMPLETED UPON DELIVERY THEREOF TO SUCH AGENT. IT IS UNDERSTOOD THAT A COPY OF SUCH PROCESS SERVED ON SUCH AGENT WILL BE PROMPTLY FORWARDED BY MAIL TO THE COMPANY AT ITS ADDRESS SET FORTH IN SECTION 11.7, BUT THE FAILURE OF THE COMPANY TO RECEIVE 82 SUCH COPY SHALL NOT AFFECT IN ANY WAY THE SERVICE OF SUCH PROCESS. THE COMPANY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE COMPANY AT ITS ADDRESS, SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER SUCH MAILING. NOTHING HEREIN SHALL AFFECT THE RIGHT OF ELECTRA, OR ANY HOLDER OF ANY OF THE SECURITIES TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE COMPANY IN ANY OTHER JURISDICTION. 11.10 WAIVER OF JURY TRIAL. THE COMPANY AND ELECTRA HEREBY WAIVE -------------------- THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THE RELATIONSHIP THAT IS BEING ESTABLISHED HEREUNDER. THE COMPANY AND ELECTRA ALSO WAIVE ANY BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF THE OTHER PARTIES. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. THE COMPANY AND ELECTRA ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. THE COMPANY AND ELECTRA FURTHER WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE TRANSACTIONS CONTEMPLATED HEREBY. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 83 IN WITNESS WHEREOF, the Company and Electra have caused this Agreement to be executed by its duly authorized officer as of the date first above written. CAREER EDUCATION CORPORATION By: /s/ JOHN M. LARSON ------------------------------- Name: John M. Larson Title: President ELECTRA INVESTMENT TRUST P.L.C. By: /s/ HUGH M. MUMFORD ------------------------------- Name: Hugh M. Mumford Title: Director ELECTRA ASSOCIATES, INC. By: /s/ R.J. LEWIS ------------------------------- Name: R.J. Lewis Title: Director 84 EX-10.17 11 FORM OF WARRANT CERTIFICATE EXHIBIT 10.17 ------------- FORM OF WARRANT CERTIFICATE THESE WARRANTS AND ANY SHARES ACQUIRED UPON THE EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY APPLICABLE STATE SECURITIES LAWS. THESE WARRANTS AND SUCH SHARES AND ANY INTEREST OR PARTICIPATION HEREIN OR THEREIN MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT AND UNDER ANY APPLICABLE STATE SECURITIES LAWS. THESE WARRANTS AND SUCH SHARES MAY NOT BE TRANSFERRED EXCEPT UPON THE CONDITIONS SPECIFIED IN THIS WARRANT CERTIFICATE, AND NO TRANSFER OF THESE WARRANTS OR SUCH SHARES SHALL BE VALID OR EFFECTIVE UNLESS AND UNTIL SUCH CONDITIONS SHALL HAVE BEEN COMPLIED WITH. THESE WARRANTS AND ANY SHARES ACQUIRED UPON THE EXERCISE HEREOF ARE SUBJECT TO RESTRICTIONS ON TRANSFER AND MAY NOT BE SOLD, EXCHANGED, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH AND SUBJECT TO ALL THE TERMS AND CONDITIONS OF A CERTAIN AMENDED AND RESTATED STOCKHOLDERS AGREEMENT, DATED AS OF JULY 31, 1995, AMONG CAREER EDUCATION CORPORATION AND ITS STOCKHOLDERS, A COPY OF WHICH THE COMPANY WILL FURNISH TO THE HOLDER OF THESE WARRANTS UPON REQUEST AND WITHOUT CHARGE. THESE WARRANTS AND THE OBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATE IN THE MANNER AND TO THE EXTENT SET FORTH IN THAT CERTAIN SUBORDINATION AGREEMENT (THE "SUBORDINATION AGREEMENT") DATED AS OF JULY 31, 1995 AMONG CAREER EDUCATION CORPORATION ("COMPANY"), AND THE PROVIDENT BANK, TO THE DEBT (INCLUDING INTEREST) OWED BY THE HOLDERS OF ALL SENIOR INDEBTEDNESS (AS DEFINED IN THE SUBORDINATION AGREEMENT) IN ACCORDANCE WITH THE TERMS THEREOF. WARRANT CERTIFICATE To Purchase Shares of Class D Common Stock of CAREER EDUCATION CORPORATION No. 1 ______ Warrants THIS CERTIFIES THAT, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Electra Investment Trust P.L.C. or its registered assigns (the "holder"), is the registered owner of the number of Warrants specified above, each of which Warrants entitles the holder hereof, subject to the adjustment provisions and the conditions and limitations hereinafter set forth, to purchase from CAREER EDUCATION CORPORATION (the "Company"), a corporation organized and existing under the laws of the State of Delaware (the "Company"), one share of the Company's Class D Common Stock, par value $.01 per share (the "Common Stock"), at a purchase price of $.01 per share (the "Exercise Price"). The Warrants shall not be terminable by the Company prior to the Expiration Date. The shares of Common Stock issuable upon exercise of the Warrants (and any other or additional shares, securities or property that may hereafter be issuable upon exercise of the Warrants) are sometimes referred to herein as the "Warrant Shares," and the maximum number of shares so issuable under this Warrant Certificate is sometimes referred to as the "Aggregate Number" (as such number may be increased or decreased, as more fully set forth herein). The Warrants shall be void and all rights represented hereby shall cease on the Expiration Date (as defined in Section 10 hereof). The Warrants represented hereby are part of an authorized issue of 25,285 Warrants, Warrant Certificates for all of which were originally issued on July 31, 1995 (such originally issued Warrants, or such number thereof as shall from time to time remain unexercised, together with all Penalty Warrants (as defined in the Securities Purchase Agreement (as defined below)) issued pursuant to the provisions of Section 7.1 of the Securities Purchase Agreement, or such number of Penalty Warrants as shall from time to time remain unexercised, being herein collectively called the "Warrants"). The Warrants (other than any such Penalty Warrants) are being issued concurrently with the issuance by the Company of shares of its Series C Preferred Stock pursuant to a Securities Purchase Agreement dated as of July 31, 1995 (the "Securities Purchase Agreement"). Certain terms used in this Warrant Certificate are defined in Section 10 hereof. The Warrants are subject to the following provisions, terms and conditions: 1. Exercise; Issue of Certificates; Payment for Shares. --------------------------------------------------- (a) The rights represented by this Warrant Certificate may be exercised by the holder hereof, in whole or in part (but not as to fractional shares of Common Stock), to purchase a total number of shares equal to 21,492 shares (subject to the 2 adjustments described in Section 5 hereof), less the Earned Amount; provided, -------- however, that upon the receipt of a notice from the Electra Investors of an ------- occurrence of a Preferred Stock Failure Event under the Securities Purchase Agreement and the exercise by the Electra Investors of their rights under clause (a) of Section 7.1 of the Securities Purchase Agreement, or upon the occurrence of a Triggering Event, the Earned Amount, if any, shall be fixed and finally determined as of the date of the occurrence of such Preferred Stock Failure Event or Triggering Event, as the case may be, and, with respect to any period from and after the March 31 immediately preceding such date, no additional calculations under the definition of the Earned Amount shall be made; provided, further, however, that nothing contained herein is intended to -------- ------- ------- deny the Company the right to receive payment of the Clawback Amount (as defined in Section 4.2(c)(ii)) in accordance with the provisions of Section 4.2. (b) The Warrants shall be exercisable by surrendering this Warrant Certificate (with the Exercise Form annexed hereto as Schedule 1 properly completed and executed) to the Company at its principal office specified in Section 15, or its then current address, and upon payment to the Company of the Exercise Price for the Warrant Shares being purchased. (c) Payment of the Exercise Price may be made, in the sole discretion of the holder, in the form of any of the following: (i) cash, (ii) a check or bank draft in New York Clearing House funds, or (iii) by the surrender of a portion of the Warrants other than that which is then being exercised. For purposes of making payment of the Exercise Price in accordance with the foregoing clause (iii), the portion of any Warrants being surrendered shall be deemed to have a value as determined by a good faith determination of the Board of Directors of the Company. The shares so purchased shall be and shall be deemed to be issued to the holder hereof as the record owner of such shares as of the close of business on the date on which this Warrant Certificate shall have been surrendered and payment made for such shares as aforesaid. (d) Certificates for the shares so purchased shall be delivered to the holder hereof within a reasonable time, not exceeding 10 days, after this Warrant Certificate shall have been so exercised, and unless the Warrants have expired, a new Warrant Certificate representing the number of shares, if any, with respect to which this Warrant Certificate shall not then have been exercised or tendered as payment of the Exercise Price as provided in Section 1(c)(iii) above shall also be delivered to the holder hereof within such time. Such certificate or certificates shall be deemed to have been issued and any Person so designated to be named therein shall be deemed for all 3 purposes to have become a holder of record of such Warrant Shares as of the close of business on the date of the surrender of this Warrant Certificate and payment of the Exercise Price as aforesaid. (e) Mandatory Exercise Upon Threshold Public Offering. Concurrently ------------------------------------------------- with the consummation of a Threshold Public Offering, if the shares of Series C Preferred Stock shall have been redeemed in full prior to the Threshold Public Offering or if the shares of Series C Preferred Stock will be paid in full upon the consummation of the Threshold Public Offering, the holder of this Warrant shall be required to exercise this Warrant. 2. Shares to be Fully Paid; Reservation of Shares; Listing. The ----------------------------------------------- ------- Company covenants and agrees that: (a) all Warrant Shares will, upon issuance, be original-issue shares (and not treasury stock) fully paid and nonassessable and free from all taxes, claims, liens, charges and other encumbrances with respect to the issue thereof; (b) without limiting the generality of the foregoing, it will from time to time take all such action as may be required to assure that the par value per share of Common Stock shall at all times be less than or equal to the Exercise Price; (c) during the period within which the rights represented by this Warrant Certificate may be exercised, the Company will at all times have authorized and reserved for the purpose of issue or transfer upon exercise of the Warrants a sufficient number of original-issue shares of its Common Stock to provide for the exercise of all the Warrants; (d) upon the exercise of the Warrants represented by this Warrant Certificate, it will, at its expense, promptly notify each securities exchange on which any Common Stock is at the time listed of such issuance, and maintain a listing of all shares of Common Stock from time to time issuable upon the exercise of the Warrants to the extent such shares can be listed. 3. Representations and Warranties. All representations, warranties and ------------------------------ covenants contained in Article 8 of the Securities Purchase Agreement are true and correct as of the date of the Closing (as defined in the Securities Purchase Agreement) and are incorporated herein as if made by the Company to the holders from time to time of the Warrants. 4. Put and Other Rights. -------------------- 4.1 Put Right. (a) On or after the earliest of (i) March 31, --------- 2001, (ii) the occurrence of a Preferred Stock Failure Event as described in paragraphs 7.1(v) through 7.1(vii) of the Securities Purchase Agreement, or (iii) the failure to pay all amounts payable in respect of the redemption of the shares of 4 Series C Preferred Stock, including the stated value, dividends, interest, if any, and any costs, fees and expenses covered by Section 11.2 of the Securities Purchase Agreement, in full within 15 days after the acceleration of the redemption date of the shares of Series C Preferred Stock due to a Preferred Stock Failure Event (other than those events specified in clause (ii) above) under the Securities Purchase Agreement, but prior to the earlier of (x) the Expiration Date and (y) the occurrence of a Triggering Event, holders of at least 51% of the Warrants then outstanding shall have the right (the "Put"), upon 90 days written notice to the Company, to require the Company, on one occasion, to purchase on the date specified in such notice all or any part of the then outstanding Warrants of such holders, and any additional holders who wish to join such exercise after receipt of the notice provided in the next succeeding sentence, subject to the provisions of Section 4.1(d) below. The Company shall promptly give written notice to all holders of Warrants of the receipt by it of notification of the exercise of the Put provided for in this Section 4.1(a). The purchase price for each tendered Warrant shall be determined as provided in Section 4.1(b) below, and payable as provided in Section 4.1(c) below. If the Company shall not have sufficient surplus to permit it lawfully to purchase the Warrants, the Company shall take such action as it may be lawfully permitted to take to reduce the stated capital of the Company to the extent permitted by law or to authorize such other steps as may be appropriate or necessary in order to enable the Company, if possible, lawfully to purchase such Warrants. (b) Repurchase Price. (i) The purchase price (the "Repurchase ---------------- Price") of each Warrant properly tendered to the Company pursuant to Section 4.1(a) shall be equal to the number of Warrant Shares that each Warrant is exercisable for multiplied by the Fair Market Value Per Share calculated as of the date notice of the exercise of such Put is given pursuant to Section 4.1(e). (ii) Fair Market Value Per Share shall be equal to the greater of (A) the common stock book value of the Company, as of the end of the most recently completed fiscal quarter and as reflected on the balance sheet of the Company as of such date, plus the aggregate amount of proceeds to be received ---- by the Company upon the exercise, conversion and/or exchange of all warrants, options and convertible securities of the Company or other rights to acquire equity of the Company whose exercise price is less than the fair market value of the Common Stock and which are then exercisable or which will become exercisable within twelve (12) months from the date of such determination (the "Exercisable Convertible Securities"), divided by the total number of shares of Common Stock then outstanding on 5 the date of calculation (assuming the conversion, exercise or exchange of all Exercisable Convertible Securities), all determined in accordance with generally accepted accounting principles (GAAP) in the United States applied on a basis consistent with prior years, (B) four (4) times EBITDA of the Company and its Subsidiaries for the most recently completed fiscal year, less ---- outstanding Debt (as defined in the Securities Purchase Agreement) and non- convertible preferred stock of the Company and its Subsidiaries as of the end of the most recently completed fiscal quarter, plus any discount recorded due ---- to the allocation of value to the Warrants or the Provident Warrant, plus all cash and cash equivalents and marketable securities of the Company and its Subsidiaries as of the end of the most recently completed fiscal quarter, plus ---- the aggregate amount of proceeds to be received by the Company upon the exercise, conversion and/or exchange of all Exercisable Convertible Securities, divided by the total number of shares of Common Stock then outstanding on the date of calculation (assuming the conversion, exercise or exchange of all Exercisable Convertible Securities), all determined in accordance with generally accepted accounting principles (GAAP) in the United States applied on a basis consistent with prior years, and (C) the Fair Market Value Per Share as determined in good faith by the Board of Directors of the Company; provided, however, that if the holders of the Warrants subject to -------- ------- such Put shall not be satisfied for any reason with the determination of the Board of Directors of the Company, the Fair Market Value Per Share shall be determined in accordance with the following procedures: first, by an ----- investment banking firm selected by holders of 51% of the Warrants which are subject to such Put, which determination shall be made within thirty (30) days after the delivery of the notice of the exercise of the Put, second, if such ------ determination shall not be satisfactory to the Company, as evidenced by a written objection by the Company delivered to the holders of the Warrants subject to such Put within two weeks of receipt by the Company of such determination, the Company shall be entitled to select an investment banking firm which shall make its own determination within thirty (30) days of its appointment, and if such determination shall differ by less than 10% from the determination of the investment banking firm selected by the Company, the Fair Market Value Per Share shall be the average of such determinations and third, ----- if such determinations shall differ by 10% or more, such investment banking firms shall appoint a third investment banking firm which shall make its own determination within two weeks of its appointment, which determination shall be binding upon the Company and the holders of the Warrants subject to the put. Any and all determinations required to be made by an investment banking firm pursuant to this Section 4.1(b) shall be performed by an investment banking firm experienced in the conduct of corporate valuations and shall 6 be based upon the fair market value of 100% of the Company on a consolidated basis if sold as a going concern, without giving effect to any discount for lack of liquidity of the shares of Common Stock, or to any restrictions upon the conversion of any shares of non-voting common stock into voting common stock, or to the fact that the shares of Common Stock issuable upon exercise of the Warrants being put to the Company represent a minority equity interest in the Company, or to any discount relating to, or reclassification because of, the right of any stockholder, Preferred Stock holder or warrant holder of the Company to sell its shares of Common Stock, Preferred Stock or warrants to the Company, including pursuant to this Put. In addition, in making such determination, the investment banking firm shall assume the conversion, exercise or exchange of all Exercisable Convertible Securities and shall take into account the valuations associated with companies engaged in businesses and with capital structures similar to the Company and such other matters as are relevant to the valuation of the Company. Notwithstanding anything herein to the contrary, in determining Fair Market Value Per Share under this Section 4.1(b)(ii), (i) any adverse changes in GAAP from the date of original issuance of this Warrant Certificate shall be disregarded such that any computations shall be made as if the GAAP change had not been implemented, and (ii) any dividends paid or redemptions or repurchases of any of the securities of the Company (other than the Series C Preferred Stock) by the Company within one year of the exercise of the put shall be disregarded and any amounts distributed shall be treated as if such amounts had been retained by the Company. All costs of such determinations shall be borne by the Company. (c) Payment. Upon surrender of any Warrants in conformity with ------- the provisions of this Section 4.1, all amounts due to a holder in connection with a Put shall be paid to such holder in immediately available funds on the date specified for payment set forth in the notice (the "Repurchase Date"). (d) Inability To Comply With Put Option. If the Company does ----------------------------------- not purchase the Warrants within 30 days after the Repurchase Date (the "Grace Period") for any reason whatsoever, or in the event that there has occurred and is continuing an event which would (but for the redemption in full of the shares of Series C Preferred Stock) be a Preferred Stock Failure Event (as defined in the Securities Purchase Agreement) following the exercise of the Put option set forth in Section 4.1(a)(ii), then, in addition to any other remedy under this Warrant, the Securities Purchase Agreement or at law or in equity the holder might have, upon the expiration of the Grace Period, the Company shall remain liable on demand to the holder for the Repurchase 7 Price of Warrants which it has failed to repurchase, plus interest thereon at the rate of 12% per annum from the Repurchase Date; provided that there shall -------- be deducted from the outstanding Repurchase Price all amounts received by the holder upon the sale of the Warrants, less an amount equal to the sum of (A) interest on the outstanding Repurchase Price at the rate of 12% per annum from the Repurchase Date to and including the date of sale, and (B) all costs and expenses relating to the sale of the Warrants which is consummated at any time after the Grace Period; provided, further, that upon any such sale of the -------- ------- Warrants, the Company shall remain liable to the purchaser of the Warrants for interest relating solely to the period in which such purchaser held the Warrants. (e) Notice. The Company shall promptly deliver notice of the ------ exercise of any Put rights to all holders of Warrants which notice shall specify (i) the Warrants subject to purchase, (ii) the Repurchase Date, which date shall be no later than 30 days from the date of determination of the Repurchase Price in accordance with the provisions of Section 4.1(b), and (iii) that such holders shall have the right to put their Warrants and require the Company to purchase such Warrants on the specified Repurchase Date. 4.2 IRR Clawback. (a) At such time (the "Exit") as EIT sells or ------------ otherwise disposes of for cash all of the Covered Securities (as defined in Section 4.2(b)(iii) below) owned by EIT, whether through the sale of the Company or otherwise, if EIT shall have realized on a cumulative basis an IRR of at least 28% to the date of Exit, EIT shall pay to the Company the Clawback Amount (as defined below); provided, however, that for purposes of this -------- ------- Section 4.2 the sale or other disposition by EIT to a Permitted Transferee (as defined in the Stockholders Agreement) in accordance with Section 2.6(a) or (d) of the Stockholders Agreement shall not be deemed a sale or other disposition. Such payment shall be made at the election of EIT in cash, other securities of the Company, or any combination thereof. (b) Defined Terms. For purposes of this Section 4.2, the ------------- following terms shall have the meanings specified with respect thereto: (i) "Cash Inflows" shall equal the sum of all payments of dividends on the shares of Series C Preferred Stock made to EIT as a holder of the shares of Series C Preferred Stock, all payments in respect of the redemption of the shares of Series C Preferred Stock made to EIT as a holder of the shares of Series C Preferred Stock, and all cash proceeds received by EIT from any disposition of Covered Securities prior to or at Exit (net of all selling expenses, brokerage commissions and other 8 expenses incurred in such sale), but shall not include the value of any Penalty Warrants issued by the Company to EIT. (ii) "Clawback Amount" shall mean the product of (A) the percentage represented by a fraction, the numerator of which is the difference of (I) the Applicable Percentage multiplied by 9,894 (as such number may be adjusted in accordance with the principles of Section 5), minus (II) the Earned Amount (determined as of such date), such difference multiplied by 50%, and the denominator of which is the Prior Outstanding Number (as defined in Section 5(c) below), multiplied by (B) the Enterprise Value (as defined below); provided, however, that in no event shall the payment of the Clawback -------- ------- Amount reduce the IRR of EIT to less than 28%. (iii) "Covered Securities" shall consist of the shares of Series C Preferred Stock and the Warrants originally issued to EIT under the Securities Purchase Agreement, any shares of Common Stock issued upon exercise of such Warrants, and any shares received in a stock split or similar transaction with respect to the Common Stock issued upon exercise of such Warrants. (iv) "Enterprise Value" shall mean, as of the date of determination, the quotient of (x) the difference of (A) Cash Inflows minus (B) the sum of all payments of dividends on the shares of Series C Preferred Stock made to EIT, plus all payments in respect of the redemption of the ---- shares of Series C Preferred Stock made to EIT, plus all cash proceeds ---- received by EIT from any disposition of shares of Series C Preferred Stock prior to or at Exit, divided by (y) the percentage represented by the fraction, (A) the numerator of which is the sum of the number of Warrant Shares sold by EIT plus the number of Warrant Shares which may be issued upon ---- the exercise of any Warrants sold by EIT, and (B) the denominator of which is the total outstanding shares of Common Stock as of such date (assuming for purposes of such calculation the conversion, exercise or exchange of all Exercisable Convertible Securities). (v) "IRR" shall mean an internal rate of return (compounded annually) which, when used to calculate the net present value as of July 31, 1995 of all Cash Inflows and Cash Outflows, causes such net amount to equal zero. For purposes of the net present value computation, each Cash Inflow and each Cash Outflow specified above shall be deemed to have been received or made on the first day of the month nearest to the actual date of such payment. (vi) "Cash Outflows" shall mean $4,250,000 (representing the amount invested by EIT under the Securities 9 Purchase Agreement). 5. Adjustments to Aggregate Number. ------------------------------- Under certain conditions, the Aggregate Number is subject to adjustment as set forth herein. The Aggregate Number shall be subject to adjustment from time to time as follows and thereafter as adjusted shall be deemed to be the Aggregate Number hereunder. (a) In case at any time or from time to time the Company shall: (i) take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend payable in, or other distribution of, Common Stock, (ii) subdivide its outstanding shares of Common Stock into a larger number of shares of Common Stock, or (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) change the class or classes of stock of the Warrant Shares that are issuable upon a Recapitalization or otherwise, or (v) consummate a Non-Surviving Combination, then the Aggregate Number in effect immediately prior thereto shall be adjusted so that the holder or holders of Warrants shall thereafter be entitled to receive, upon exercise thereof, the number of shares of Common Stock or shares of other stock, securities or property that such holder or holders of Common Stock would have owned or have been entitled to receive after the occurrence of such Recapitalization, Non-Surviving Combination or other event had such Warrants been exercised immediately prior to the occurrence of such event. (b) In case at any time or from time to time the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive any dividend or other distribution (collectively, a "Distribution") of: (i) cash, (ii) any evidences of its indebtedness (other than Convertible Securities), any shares of its 10 Capital Stock (other than additional shares of Common Stock or Convertible Securities) or any other securities or property of any nature whatsoever (other than cash), or (iii) any options or warrants or other rights to subscribe for or purchase any of the following: any evidences of its indebtedness (other than Convertible Securities), any shares of its capital stock (other than additional shares of Common Stock or Convertible Securities) or any other securities or property of any nature whatsoever, then the holder or holders of Warrants shall be entitled to receive upon the exercise thereof (or upon exercise of the Put pursuant to Section 4.1 hereof) at any time on or after the taking of such record the number of shares of Common Stock to be received upon exercise of such Warrants determined as stated herein and, in addition and without further payment, the cash (including interest at a rate equal to the T-bill rate in effect from time to time) from the date such cash was paid to the other stockholders through the date of payment to the holders of the Warrants, stock, securities, other property, options, warrants and/or other rights to which such holder or holders would have been entitled by way of the Distribution and subsequent dividends and distributions if such holder or holders (x) had exercised such Warrants immediately prior to such Distribution, and (y) had retained the Distribution in respect of the Common Stock and all subsequent dividends and distributions of any nature whatsoever in respect of any stock or securities paid as dividends and distributions and originating directly or indirectly from such Common Stock. A reclassification of the Common Stock into shares of Common Stock and shares of any other class of stock shall be deemed a distribution by the Company to the holders of its Common Stock of such shares of such other class of stock within the meaning of this paragraph (b) and, if the outstanding shares of Common Stock shall be changed into a larger or smaller number of shares of Common Stock as a part of such reclassification, such event shall be deemed a subdivision or combination, as the case may be, of the outstanding shares of Common Stock within the meaning of paragraph (a) of this Section 5. (c) In case at any time or from time to time prior to a Threshold Public Offering the Company shall (except as hereinafter provided) issue or sell any additional shares of Common Stock or securities at a price per share which is (A) less than $36.386, as adjusted by application of the principles set forth in this Section 5, then the Aggregate Number in effect immediately prior thereto shall be adjusted immediately so that the Aggregate Number thereafter shall be an amount equal to the product of (x) the percentage represented by the fraction, the 11 numerator of which is the Aggregate Number in effect immediately prior to such issuance or sale and the denominator of which is the total outstanding shares of Common Stock immediately prior to such issuance or sale (assuming for purposes of such calculation the exercise of all of the Warrants, and the conversion, exercise or exchange of all other securities then outstanding and convertible, exercisable or exchangeable into shares of Common Stock, but not the exercise of options to acquire up to 12,215 shares (as such number may be adjusted in accordance with the terms of the Employee Benefit Plans (as defined in the Securities Purchase Agreement)) of Common Stock granted pursuant to the Employee Benefit Plans (the "Management Plan Shares") (such total number of shares of Common Stock outstanding immediately prior to such issuance or sale, the "Prior Outstanding Number"), and (y) the total number of shares of Common Stock outstanding immediately after such issuance or sale (assuming for purpose of such calculation (i) the exercise of all of the Warrants, and (ii) the conversion, exercise or exchange of all other securities then outstanding convertible, exercisable or exchangeable into shares of Common Stock; but not the exercise of options to acquire the Management Plan Shares) or (B) equal to or in excess of $36.386, as adjusted by application of the principles set forth in this Section 5, but less than the fair market value per share of Common Stock as determined in good faith by the Board of Directors of the Company, then the Aggregate Number then in effect shall be adjusted immediately so that the Aggregate Number thereafter shall be an amount equal to the product of (x) the fraction, (1) the numerator of which is the Prior Outstanding Number plus the difference between (A) the ---- number of shares of Common Stock actually issued or sold in such transaction and (B) the number of shares of Common Stock which the aggregate consideration received by the Company for all such shares of Common Stock issued or sold in such transaction would purchase at the fair market value in effect immediately prior to the issuance or sale of such additional shares of Common Stock, and (2) the denominator of which shall be the Prior Outstanding Number, and (y) the Aggregate Number immediately prior to such issuance or sale. The provisions of this paragraph (c) shall not apply to any issuance of additional shares of Common Stock for which an adjustment is provided under Section 5(a). (d) In case at any time or from time to time prior to a Threshold Public Offering the Company shall (except as hereinafter provided) take a record of the holders of its Common Stock for the purpose of entitling them to receive a distribution of, or shall in any manner issue or sell, any warrants or other rights to subscribe for or purchase (x) any shares of Common Stock or (y) any Convertible Securities, whether or not the 12 rights to subscribe, purchase, exchange or convert thereunder are immediately exercisable, at a purchase price per share of Common Stock which is (A) less than $36.386, as adjusted by application of the principles set forth in this Section 5, then the Aggregate Number in effect immediately prior thereto shall be adjusted immediately so that the Aggregate Number thereafter shall be an amount equal to the product of (x) the percentage represented by the fraction, the numerator of which is the Aggregate Number in effect immediately prior to such distribution, issuance or sale and the denominator of which is the total outstanding shares of Common Stock immediately prior to such distribution, issuance or sale (assuming for purposes of such calculation the exercise of all of the Warrants, and the conversion, exercise or exchange of all other securities then outstanding and convertible, exercisable or exchangeable into shares of Common Stock, but not the exercise of options to acquire the Management Plan Shares) and (y) the total number of shares of Common Stock outstanding immediately after such issuance or sale (assuming for purposes of such calculation (i) the exercise of all of the Warrants, (ii) the exercise of the warrants or other rights and/or the conversion of the Convertible Securities distributed, issued or sold at such time, and (iii) the conversion, exercise or exchange of all other securities then outstanding convertible, exercisable or exchangeable into shares of Common Stock; but not the exercise of options to acquire the Management Plan Shares) or (B) equal to or in excess of $36.386, as adjusted by application of the principles set forth in this Section 5, but less than the fair market value per share of Common Stock as determined in good faith by the Board of Directors of the Company, then the Aggregate Number then in effect shall be adjusted immediately so that the Aggregate Number thereafter shall be an amount equal to the product of (x) the fraction, (1) the numerator of which is the Prior Outstanding Number plus the ---- difference between (A) the number of shares of Common Stock issuable upon exercise of such rights or upon exercise or conversion of such Convertible Securities issuable upon exercise of the warrants or other rights actually issued or sold in such transaction and (B) the number of shares of Common Stock which the aggregate consideration received by the Company for all warrants or other rights issued or sold in such transaction, and/or receivable by the Company upon exercise of such warrants or other rights and/or upon exercise or conversion of the Convertible Securities issuable upon exercise of such warrants or other rights, would purchase at the fair market value in effect immediately prior to the issuance or sale of such warrants or other rights, and (2) the denominator of which shall be the Prior Outstanding Number, and (y) the Aggregate Number immediately prior to such issuance or sale. Notwithstanding anything in the foregoing, if in connection with the issuance of Permitted Preferred the Company 13 shall issue or sell any warrants or other rights to subscribe for or purchase (x) any shares of Common Stock or (y) any Convertible Securities, with respect to which an adjustment of the Aggregate Number pursuant to Section 5(d)(A) would otherwise be required, no adjustment of the Aggregate Number shall be required pursuant hereto if the total number of shares of Common Stock issuable upon exercise of such warrant or right (assuming the conversion of all Convertible Securities received upon such exercise) does not exceed 3.68% of the total outstanding shares of Common Stock at the time of such issuance (assuming for purposes of such calculation the conversion, exercise or exchange of all Exercisable Convertible Securities including the options or rights which are the subject of such issuance) for each $1,000,000 of stated amount of Permitted Preferred issued. If the warrants or rights issued constitute in excess of the percentage set forth above, the Aggregate Number would be adjusted in accordance with Section 5(d)(A). Nothing herein shall prevent the application of Section 5(d)(B) to such issuance, to the extent applicable; provided, that the amount specified in Section 5(d)(B)(1)(B) shall be calculated based upon the aggregate consideration received for the Permitted Preferred and such warrants or rights. In calculating the percentage of warrants or rights issued in connection with any Permitted Preferred, such calculation shall be made without giving effect to any provisions therein which permit the Company to reduce the number of shares issuable pursuant to such warrants or rights or to recover a portion of the warrants or rights originally issued based upon the satisfaction of certain conditions or criteria. In calculating the stated amount of Permitted Preferred issued, the amount of the exercise price of any such warrants or rights (including any amounts payable in connection with the conversion, exercise or exchange of any Convertible Securities issuable upon exercise of such warrants or rights) shall be aggregated with the stated purchase price of the Permitted Preferred. The provisions of this paragraph (d) shall not apply to any issuance of additional shares of Common Stock for which an adjustment is provided under Section 5(a). (e) In case at any time or from time to time prior to a Threshold Public Offering the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a distribution of or shall in any manner issue or sell Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, at an exercise price per share of Common Stock which is (A) less than $36.386, as adjusted by application of the principles set forth in this Section 5, then the Aggregate Number in effect immediately prior thereto shall be adjusted immediately so that the Aggregate Number thereafter shall be an amount equal 14 to the product of (x) the percentage represented by the fraction, the numerator of which is the Aggregate Number in effect prior to such distribution, issuance or sale and the denominator of which is the total outstanding shares of Common Stock immediately before such distribution, issuance or sale (assuming for purposes of such calculation the exercise of all of the Warrants, and the conversion, exercise or exchange of all other securities then outstanding and convertible, exercisable or exchangeable into shares of Common Stock, but not the exercise of options to acquire the Management Plan Shares) and (y) the total number of shares of Common Stock outstanding immediately after such issuance or sale (assuming for purpose of such calculation (i) the exercise of the Warrants, (ii) the conversion of the Convertible Securities distributed, issued or sold at such time, and (iii) the conversion, exercise or exchange of all other securities then outstanding and convertible, exercisable or exchangeable into shares of Common Stock; but not the exercise of options to acquire the Management Plan Shares) or (B) equal to or in excess of $36.386, as adjusted by application of the principles set forth in this Section 5, but less than the fair market value per share of Common Stock as determined in good faith by the Board of Directors of the Company, then the Aggregate Number then in effect shall be adjusted immediately so that the Aggregate Number thereafter shall be an amo unt equal to the product of (x) the fraction, (1) the numerator of which is the Prior Outstanding Number plus the difference between (A) the number of shares of ---- Common Stock issuable upon exercise or conversion of such Convertible Securities actually issued or sold in such transaction and (B) the number of shares of Common Stock which the aggregate consideration received by the Company for all such Convertible Securities issued or sold in such transaction and/or receivable by the Company upon exercise or conversion of such Convertible Securities would purchase at the fair market value in effect immediately prior to the issuance or sale of such Convertible Securities, and (2) the denominator of which shall be the Prior Outstanding Number, and (y) the Aggregate Number immediately prior to such issuance or sale. No adjustment of the Aggregate Number shall be made under this Section 5(e) upon the issuance of any Convertible Securities which are issued pursuant to the exercise of any warrants or other subscription or purchase rights if an adjustment shall previously have been made. (f) In case at any time or from time to time the Company desires to issue or sell any shares of Common Stock or Convertible Securities, or options, rights or warrants to subscribe for or purchase Common Stock or Convertible Securities, as contemplated by subparagraphs (c), (d) or (e) above (other than (A) in a registered public offering (i.e., an underwritten ---- 15 public offering and sale for cash by the Company of securities of the Company to an underwriter(s) pursuant to a binding underwriting agreement and the registration statement has been declared effective by the Commission) or (B) pursuant to the exercise of options to acquire the Management Plan Shares), each holder of the Warrants shall have the right to purchase a portion of such securities as provided in accordance with the terms and conditions of that certain Amended and Restated Stockholders Agreement, dated as of July 31, 1995, among the Corporation and its stockholders (the "Stockholders Agreement"). (g) The following provisions shall be applicable to the making of adjustments of the Aggregate Number hereinbefore provided for in this Section 5: (i) The sale or other disposition of any issued shares of Common Stock owned or held by or for the account of the Company shall be deemed an issuance thereof for the purposes of this Section 5. (ii) The adjustments required by the preceding paragraphs of this Section 5 shall be made whenever and as often as any specified event requiring an adjustment shall occur, except as expressly provided herein. For the purpose of any adjustment, any specified event shall be deemed to have occurred at the close of business on the date of its occurrence. (iii) In computing adjustments under this Section 5 fractional interests in Common Stock shall be taken into account to the nearest one-thousandth (.001) of a share and shall be aggregated until they equal one whole share. (iv) If the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend, distribution, warrants or subscription or purchase rights under Sections 5(a) through 5(e) hereof, but abandon its plan to pay or deliver such dividend, distribution, warrants, subscription or purchase rights, then no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled. (v) Notwithstanding anything herein to the contrary, no adjustment shall be made to the Aggregate Number as a result of the issuance of the Management Plan Shares or the issuance of the options to acquire the Management Plan Shares. 16 (vi) Upon the expiration or termination of any of the warrants or other rights or options referred to in Section 5(d) above or the Convertible Securities referred to in Section 5(e) above, the Aggregate Number after the expiration or termination of any such warrants, rights, options or Convertible Securities, the issuance of which caused an adjustment to the Aggregate Number, shall be readjusted to such Aggregate Number as would have been obtained had the adjustment made upon the issuance of such warrants, rights, options or Convertible Securities, been made upon the basis of the issuance of only the number of shares of Common Stock actually issued upon the exercise of such warrants, options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities and subsequent conversion or exchange thereof. Upon the cancellation, expiration or termination of the Provident Warrant or any options issued under the Larson Supplemental Option Agreement, or in either case any portion thereof (other than in connection with the redemption, or the payment of or parting by the Company with consideration in connection with the cancellation, expiration or termination, of the Provident Warrant or any options issued under the Larson Supplemental Option Agreement, or in either case any portion thereof), the Aggregate Number after such expiration or termination shall be adjusted to an Aggregate Number as would have been in effect if such Provident Warrant or options issued under the Larson Supplemental Option Agreement (or such applicable portion) had not been issued. For purposes of this Section 5, the vesting, from time to time, of any options under the terms of the Larson Option Agreement and the Dowdell Option Agreement shall be deemed to be an issuance of options to Larson and/or Dowdell, as the case may be, as of the date of such vesting. (vii) For the purposes of such Sections 5(c), (d) and (e), the determination of fair market value shall be made by the Board of Directors of the Company, with a majority of independent directors voting in favor thereof; provided that, for purposes hereof no director who is an Affiliate of a Significant Holder or a stockholder of the Company shall be deemed to be independent. If a determination of fair market value cannot be agreed upon as aforesaid, the fair market value shall be determined in accordance with Section 4.1(b)(ii)(C) hereof, without regard to references to Puts included therein. In addition, for purposes of Sections 5(c), (d) and (e) hereof, the date as of which the applicable fair market value per share shall be computed shall be as close to the date of actual issuance of such additional shares of Common Stock, warrants or 17 Convertible Securities, as practical. (viii) The consideration for any additional shares of Common Stock issuable pursuant to any options, warrants or other rights to subscribe for or purchase the same shall be the consideration received or receivable by the Company for issuing such options, warrants or other rights, plus the additional consideration payable to the Company upon the exercise of such options, warrants or other rights. The consideration for any additional shares of Common Stock issuable pursuant to the terms of any Convertible Securities shall be the consideration received or receivable by the Company for issuing any options, warrants or other rights to subscribe for or purchase such Convertible Securities, plus the consideration paid or payable to the Company in respect of the subscription for or purchase of such Convertible Securities, plus the additional consideration, if any, payable to the Company upon the exercise of the right of conversion, exercise or exchange of such Convertible Securities. In case of the issuance at any time of any additional shares of Common Stock or Convertible Securities in payment or satisfaction of any dividend upon any class of stock other than Common Stock, the Company shall be deemed to have received for such additional shares of Common Stock or Convertible Securities a consideration equal to the amount of such dividend so paid or satisfied. (h) (i) If any event occurs as to which the other provisions of this Section 5 are not strictly applicable but the lack of any provision for the exercise of the rights of a holder or holders of Warrants would not fairly protect the purchase rights of such holder or holders of Warrants in accordance with the essential intent and principles of such provisions, or, if strictly applicable, would not fairly protect the conversion rights of the holder or holders of Warrants in accordance with the essential intent and principles of such provisions, then the Company shall appoint a firm of independent certified public accountants in the United States (which may be the regular auditors of the Company) of recognized national standing in the United States reasonably satisfactory to the Significant Holders, which shall give their opinion as to the adjustments, if any, necessary to preserve, without dilution, on a basis consistent with the essential intent and principles established in the other provisions of this Section 5, the exercise rights of the holders of Warrants. Upon receipt of such opinion, the Company shall forthwith make the adjustments described therein. (ii) In the case of a Non-Surviving Combination or Recapitalization contemplated by Section 5(a)(v) hereof, appropriate adjustments (as determined in good faith by 18 the Board of Directors) shall be made in the application of the provisions in this Section 5 with respect to the rights and interests thereafter of the holders of the Warrant, to the end that the provisions of this Section 5 shall thereafter be applicable, as nearly as reasonable, in relation to any shares of stock, securities or other property thereafter deliverable upon exercise of the Warrant. (i) Within 45 days after the end of each fiscal quarter during which an event occurred that resulted in an adjustment pursuant to this Section 5, and at any time upon the request of any holder of Warrants, the Company shall cause to be promptly mailed to each holder of Warrants by first- class mail, postage prepaid, notice of each adjustment or adjustments to the Aggregate Number effected since the date of the last such notice and a certificate of the Company's Chief Financial Officer or, in the case of any such notice delivered within 45 days after the end of a fiscal year, a firm of independent public accountants in the United States selected by the Company and reasonably acceptable to the Significant Holder(s) (who may be the regular accountants employed by the Company), in each case, setting forth the Aggregate Number after such adjustment, a brief statement of the facts requiring such adjustment and the computation by which such adjustment was made. The fees and expenses of such accountants shall be paid by the Company. (j) The occurrence of a single event shall not trigger an adjustment of the Aggregate Number under more than one paragraph of this Section 5. 6. Taxes on Conversion. The issuance of certificates for Warrant Shares ------------------- upon the exercise of the Warrants shall be made without charge to the holder exercising any such Warrant for any issue or stamp tax in respect of the issuance of such certificates, and such certificates shall be issued in the respective names of, or in such names as may be directed by, the holder; provided, however, that the Company shall not be required to pay any tax that -------- ------- may be payable in respect of any transfer involved in the issuance and delivery of any such certificate in a name other than that of the holder, and the Company shall not be required to issue or deliver such certificates unless or until the Person or Persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. 7. Limitation of Liability. No provision hereof in the absence of the ----------------------- exercise of the Warrants by the holder and no enumeration herein of the rights or privileges of the holder shall give rise to any liability on the part of the holder for 19 the Exercise Price of the Warrant Shares or as a stockholder of the Company, whether such liability is asserted by the Company or by any creditor of the Company. 8. Closing of Books. The Company will at no time close its transfer ---------------- books against the transfer of any Warrant or of any shares of Common Stock issued or issuable upon the exercise of any Warrant in any manner that interferes with the timely exercise of the Warrants. The Company shall deem and treat the registered holder of this Warrant as the absolute owner thereof for all purposes, including without limitation for the purpose of exercise thereof. The Company agrees that, upon exercise of this Warrant in accordance with the terms hereof (including receipt by the Company of payment of the aggregate Exercise Price), the shares so purchased shall be deemed to be issued to such holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been exercised and the holder of this Warrant shall be deemed for all purposes a stockholder of the Company with respect to such shares as though the certificate for such shares had been issued on the date of such exercise. 9. Restrictions on Transfer. ------------------------ (a) Transfer in Accordance with Securities Laws; Restrictive -------------------------------------------------------- Legends. Any transfer of these Warrants or any Warrant Shares may only be ------- made in compliance with the Securities Act and applicable state securities laws or pursuant to an exemption therefrom and any transferee shall acquire the Warrants and/or Warrant Shares subject to all of the terms and conditions of this Warrant Certificate. Each certificate for any Warrant Shares issued upon the exercise of any Warrant, and each stock certificate issued upon the transfer of any such Warrant Shares (except as otherwise permitted by this Section 9) shall be stamped or otherwise imprinted with a legend in substantially the following form: THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY APPLICABLE STATE SECURITIES LAWS. SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR ANY EXEMPTION THEREFROM UNDER SUCH ACT AND UNDER ANY APPLICABLE STATE SECURITIES LAWS. THESE SHARES MAY NOT BE TRANSFERRED EXCEPT UPON THE CONDITIONS SPECIFIED IN THIS WARRANT CERTIFICATE, AND NO TRANSFER OF THESE SHARES SHALL BE VALID OR EFFECTIVE UNLESS AND UNTIL SUCH CONDITIONS SHALL HAVE BEEN COMPLIED WITH. Each Warrant Certificate issued in substitution for any Warrant Certificate pursuant to Section 11, 12 or 13 hereof and 20 each Warrant Certificate issued upon the transfer of any Warrant (except as otherwise permitted by this Section 9) shall be stamped or otherwise imprinted with a legend in substantially the following form: THESE WARRANTS AND ANY SHARES ACQUIRED UPON THE EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY APPLICABLE STATE SECURITIES LAWS. THESE WARRANTS AND SUCH SHARES AND ANY INTEREST OR PARTICIPATION THEREIN MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT AND UNDER ANY APPLICABLE STATE SECURITIES LAWS. THESE WARRANTS AND SUCH SHARES MAY NOT BE TRANSFERRED EXCEPT UPON THE CONDITIONS SPECIFIED IN THIS WARRANT CERTIFICATE, AND NO TRANSFER OF THESE WARRANTS OR SUCH SHARES SHALL BE VALID OR EFFECTIVE UNLESS AND UNTIL SUCH CONDITIONS SHALL HAVE BEEN COMPLIED WITH. (b) Termination of Restrictions. The restrictions imposed by this --------------------------- Section 9 upon the transferability of Warrants and Warrant Shares shall cease and terminate as to any particular Warrants or Warrant Shares, (a) when such securities shall have been effectively registered under the Securities Act and disposed of in accordance with the registration statement covering such securities, or (b) when in the reasonable opinion of counsel for the Company or upon the written opinion of counsel for the holder thereof reasonably acceptable to the Company such restrictions are no longer required in order to comply with the Securities Act. Whenever such restrictions shall terminate as to any Warrants or Warrant Shares, the holder thereof shall be entitled to receive from the Company, without expense, new certificates of like tenor not bearing the restrictive legends set forth in Section 9(a). 10. Definitions. As used in this Warrant Certificate, unless the ----------- context otherwise requires, the following terms have the following respective meanings: Aggregate Number: as set forth in the first paragraph of the ---------------- Warrant Certificate and as may be adjusted pursuant to Section 5. Applicable Percentage: shall mean the percentage represented by the --------------------- fraction, the numerator of which is the Aggregate Number and the denominator of which is 25,285 (as such number may be adjusted in accordance with the principles of Section 5). Capital Stock: shall mean any and all shares, in- ------------- 21 terests, rights to purchase, warrants, options, participations or other equivalents of or interest in (however designated) corporate stock. Commission: the United States Securities and Exchange Commission ---------- and any other similar or successor agency of the United States federal government administering the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. Common Stock: the shares of Common Stock, par value $.01 per share, ------------ of the Company, currently provided for in the Certificate of Incorporation of the Company, and including, for all purposes hereunder, any other capital stock of the Company into which such shares of Common Stock may be converted or reclassified or that may be issued in respect of, in exchange for, or in substitution of, such Common Stock by reason of any stock splits, stock dividends, distributions, mergers, consolidations or like events. Company: Career Education Corporation, a Delaware corporation, and ------- its successors and assigns. Convertible Securities: securities convertible into or exchangeable ---------------------- for Common Stock. Disposition: any transaction or series of related transactions ----------- (other than a Non-Surviving Combination) if, after giving effect to such transaction, any one or more Unrelated Persons beneficially own, directly or indirectly, in the aggregate 50% or more of the Common Stock on a fully diluted basis (without giving effect to any Warrant Shares purchased or purchasable), outstanding as of the date of computation. Distribution: shall have the meaning specified in Section 5(b). ------------ Dowdell Option Agreement: shall mean that certain Dowdell Option ------------------------ Agreement, dated as of January 31, 1994, between the Company and Robert E. Dowdell ("Dowdell"), as such agreement may be amended from time to time. EAI: shall mean, collectively, Electra Associates, Inc., a Delaware --- corporation, and its successors and assigns. Earned Amount: shall mean the aggregate of the following: (i) with ------------- respect to each of the twelve-month periods ending ending March 31, 1997 or March 31, 1998, 22 considered individually, if the Company shall have met or exceeded the applicable EBITDA Target for such period, the Company shall automatically be deemed to have earned back the product of (w) the Applicable Percentage and (x) 1,649 (as such number may be adjusted in accordance with the principles of Section 5) Warrants, and if the Company shall not have met or exceeded the applicable EBITDA Target for such period but shall have achieved at least 80% of the EBITDA Target for such period and the Company shall have met or exceeded the applicable EBITDA Target for the next succeeding twelve-month period, the Company shall automatically be deemed to have earned back the product of (y) the Applicable Percentage and (z) 824.5 (as such number may be adjusted in accordance with the principles of Section 5) Warrants, for such period, (ii) with respect to each of the twelve-month periods ending ending March 31, 1999, March 31, 2000 or March 31, 2001, considered individually, if the Company shall have met or exceeded the applicable EBITDA Targets for such period, the Company shall automatically be deemed to have earned back the product of (w) the Applicable Percentage and (x) 2199 (as such number may be adjusted in accordance with the principles of Section 5) Warrants, and if the Company shall not have met or exceeded the applicable EBITDA Target for such period but shall have achieved at least 80% of the EBITDA Target for such period and the Company shall have met or exceeded the applicable EBITDA Target for the next succeeding twelve-month period, the Company shall automatically be deemed to have earned back the product of (y) the Applicable Percentage and (z) 1099.5 (as such number may be adjusted in accordance with the principles of Section 5) Warrants, for such period; and (iii) if the Company shall have met or exceeded the EBITDA Target for the twelve-month period ending March 31, 2001, and the Company shall have achieved at least 75% of the cumulative EBITDA Target for the five year period ending March 31, 2001, then, subject to the immediately following proviso, the Company shall automatically be deemed to have earned back 50% of the Warrants that the Company would have earned back in any year in which it failed to do so had it met the applicable EBITDA Target for such year; provided, however, that the maximum amount of Warrants which -------- ------- the Company shall be entitled to earn back (including pursuant to the operation of Section 4.2) shall be the product of (w) the Applicable Percentage and (x) 9,894 (as such number may be adjusted in accordance with the principles of Section 5) Warrants. EBITDA: shall mean for any period, the following, each calculated ------ on a consolidated basis for such period: (a) Net Income (without deduction of income and franchise taxes), 23 plus (b) Interest Expenses paid or accrued, plus (c) amortization and depreciation deducted in determining Net Income, plus (d) non-cash charges arising from changes in non-current assets and non-current liabilities, plus (e) to the extent reflected in Net Income for such period, the fees, charges or expenses paid or accrued in respect of the Warrants. EBITDA Targets: shall mean $6,000,000 for the twelve-month period -------------- ending March 31, 1997; $9,500,000 for the twelve-month period ending March 31, 1998; $13,500,000 for the twelve-month period ending March 31, 1999; $16,000,000 for the twelve-month period ending March 31, 2000; and $17,500,000 for the twelve-month period ending March 31, 2001. EIT: shall mean, collectively, Electra Investment Trust P.L.C., a --- corporation organized under the laws of England and Wales, and its successors and assigns. Electra Investors: shall mean, collectively, EIT and EAI. ----------------- Exchange Act: shall mean the Securities Exchange Act of 1934, as ------------ amended from time to time, and any successor statute or law thereto. Expiration Date: July 31, 2005. --------------- Interest Expenses: shall mean, without duplication, for any period, ----------------- the following, each calculated for such period: (a) interest expenses deducted in the determination of Net Income (excluding in the case of the Company (i) the amortization of fees, costs and expenses with respect to the transactions contemplated hereunder or under the Senior Loan Agreement (as defined in the Securities Purchase Agreement); (ii) interest paid in kind and (iii) the amortization of any "original issue discount" transaction costs); less (b) interest income included in the ---- determination of Net Income. Larson Option Agreement: shall mean that certain Larson Option ----------------------- Agreement, dated as of January 31, 1994, between the Company and John M. Larson ("Larson"), as such agreement may be amended from time to time. Larson Supplemental Option Agreement: shall mean that certain ------------------------------------ Larson Supplemental Option Agreement, dated as of July 31, 1995, between the Company and Larson, as such agreement may be amended from time to time. 24 Net Income: shall mean, with respect to any Person and for any ---------- period, such Person's net income (or loss) after income and franchise taxes determined in conformity with generally accepted accounting principles, but excluding: (a) the income of any unconsolidated entity in which such Person has an ownership interest, unless such income is received by such Person in a cash distribution; (b) after-tax gains or losses from sales or other dispositions of assets outside of the ordinary course of business; and (c) to the extent not included in clauses (a) and (b) above, any after-tax extraordinary or non-recurring non-cash gains or losses. Non-Surviving Combination: any merger, consolidation or other ------------------------- business combination of the Company with or into one or more Persons in which the Person other than the Company is the survivor, or a sale of all or a substantial part of the assets of the Company (whether held directly by the Company or through a subsidiary of the Company) to one or more such other Persons (including but not limited to a voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company); provided that if any such merger, consolidation or other business combination or sale of assets, in which the holders of Common Stock receive cash or non-cash consideration, is structured in the form of a reverse subsidiary merger so that the Company is the surviving entity, such transaction shall nevertheless be deemed to be a Non- Surviving Combination. Permitted Preferred: preferred stock of the Company with the ------------------- following characteristics: (a) a dividend rate (including for this purpose any original issue discount) not to exceed the greater of 12.5% or 400 basis points above the then current yield for 10-year treasury notes; (b) a redemption date not earlier than the later of five years from the date of issuance or three (3) months after the mandatory redemption date for the Series C Preferred Stock and no right to require prepayment prior to July 31, 2003; (c) no right to convert into Common Stock or other Convertible Securities; (d) no right to receive any additional dividends based on income or earnings and not otherwise entitled to any success fees, termination fees or other fees or charges (other than stated dividends, closing fees and reasonable management fees); and (e) junior with respect to dividends and upon liquidation to the Series C Preferred Stock. Person: an individual, corporation, partnership, trust or ------ unincorporated organization, or other legal entity, or a government or any agency or political subdivision thereof. 25 Provident: The Provident Bank, and its successors and assigns. --------- Provident Warrant: the warrant to purchase Class D Common Stock of ----------------- the Company issued to Provident pursuant to the Provident Warrant Agreement. Provident Warrant Agreement: the Warrant Agreement dated as of July --------------------------- 31, 1995 between the Company and Provident. Recapitalization: any reorganization or recapitalization or other ---------------- change of outstanding shares of Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value). Securities Act: the Securities Act of 1933, as amended, from time -------------- to time, and any successor statute or law thereto. Securities Purchase Agreement: the Securities Purchase Agreement, ----------------------------- dated as of July 31, 1995, among the Company and the purchasers named therein. Significant Holder: any holder holding at least 25% of the ------------------ outstanding Warrants and Warrant Shares (it being understood that two or more investment funds which have the same investment manager shall be treated as one holder for this purpose). Any approval or consent of the Significant Holders required or given hereunder shall be deemed given if the holders of a majority of the Warrants and Warrant Shares then outstanding held by all Significant Holders give such approval or consent. Threshold Public Offering: shall mean an initial underwritten ------------------------- public offering and sale for cash by the Company of the Common Stock of the Company to an underwriter or underwriters pursuant to a "firm commitment" underwriting agreement and a registration statement declared effective by the Commission under the Securities Act of 1933, as amended, in which (i) the minimum equity valuation of the Company is $45,000,000 before December 31, 1999 and $55,000,000 thereafter, and (ii) the Company receives gross proceeds of at least $20,000,000. The valuation of the Company will be determined by dividing the dollar amount raised in such public offering on a gross basis by the percentage of equity in the Company sold in such public offering on a fully-diluted basis, taking into account all shares outstanding, and all warrants, options and convertible securities or other rights to acquire equity of the Company. A Threshold Public Offering shall be deemed consummated upon the first 26 sale of Common Stock under the related registration statement. A Threshold Public Offering shall not include the registration of an offer and sale of the Common Stock (i) to the employees of or other persons providing services to the Corporation pursuant to an employee benefit or similar benefit plan registered on Form S-8 or a successor form or (ii) relating to a merger, acquisition or other transaction of the type described in Rule 145 or a successor rule registered on Form S-4 or a successor form. Triggering Event: shall mean (i) a Disposition or Non-Surviving ---------------- Combination or the sale of all or substantially all of the stock of the Company or (ii) the occurrence of a Threshold Public Offering. Unrelated Person: any Person other than (i) a Person that, on the ---------------- date of this Agreement, owns, directly or indirectly, any shares of any class of common stock of the Company, and (ii) an Affiliate of a Person specified in clause (i). Warrants: as set forth in the first paragraph of this Warrant -------- Certificate. Warrant Shares: as set forth in the first paragraph of this Warrant -------------- Certificate. 11. Warrants Transferable. These Warrants are issued as Warrants for --------------------- which there is a register maintained by the Company. Subject to the provisions of Section 9 and applicable securities laws, the transfer of any Warrant and all rights hereunder, in whole or in part, is registerable at the office or agency of the Company referred to in Section 1 hereof by the holder hereof in person or by duly authorized attorney, upon surrender of this Warrant Certificate with a properly completed Form of Assignment in the form annexed hereto as Schedule 2. Each taker and holder of any Warrant, by taking ---------- or holding the same, consents and agrees that this Warrant Certificate, when endorsed in blank, shall be deemed negotiable, and that the holder hereof, when this Warrant Certificate shall have been so endorsed, may be treated by the Company and all other persons dealing with this Warrant Certificate as the absolute owner hereof for any purpose and as the person entitled to exercise the rights represented by this Warrant Certificate, or to the registration of transfer hereof on the books of the Company; and until due presentment for registration of transfer on such books, the Company may treat the registered holder hereof as the owner for all purposes, and the Company shall not be affected by notice to the contrary. 12. Warrant Certificates Exchangeable for Different ----------------------------------------------- 27 Denominations. This Warrant Certificate is exchangeable, upon the surrender - -------------- hereof by the holder hereof at such office or agency of the Company, for new Warrant Certificates of like tenor representing in the aggregate the right to purchase the number of shares that may be purchased hereunder, each of such new Warrant Certificates to represent the right to purchase such number of shares as shall be designated by said holder at the time of such surrender. 13. Replacement of Warrant Certificates. Upon receipt of evidence ----------------------------------- reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant Certificate and, in the case of any such loss, theft or destruction, upon delivery of an indemnity bond (or, in the case of the original holder hereof or any substantial financial institution to which any Warrants represented by this Warrant Certificate may be transferred, an unsecured indemnity agreement) reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, upon surrender and cancellation of such Warrant Certificate, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant Certificate of like tenor. 14. Certificate Rights and Obligations Survive Exercise of Warrants. --------------------------------------------------------------- The rights and obligations of the Company contained in this Warrant Certificate shall survive the exercise or repurchase of any or all of the Warrants to the extent that such survival is necessary to give effect to a provision hereof. 15. Notices. All notices, requests and other communications required or ------- permitted to be given or delivered to the holders of Warrants shall be in writing, and shall be delivered by hand, first class mail (certified or registered mail, return receipt requested), telex, telecopier or overnight air courier guaranteeing next day delivery, to each holder at the address shown on such holder's Warrant Certificate, or at such other address as shall have been furnished to the Company by notice from such holder. All notices, requests and other communications required or permitted to be given or delivered to the Company shall be in writing, and shall be delivered by hand, first class mail (certified or registered mail, return receipt requested), telex, telecopier or overnight air courier guaranteeing next day delivery, to the office of the Company at 2400 North Barrington, Suite 400, Hoffman Estates, Illinois 60195, Attention: John M. Larson, with a copy to: D'Ancona and Pflaum, 30 North LaSalle Street, Suite 2900, Chicago, Illinois 60602, Attention: Michel H. Feldman, Esq., and with a copy to Heller Equity Capital Corp., 500 West Monroe Street, Chicago, Illinois 60661, Attention: Todd H. Steele. Any such notice, request or other communication sent by telecopy or telex shall in such case be subsequently confirmed by a writing delivered or sent by certified or registered mail as 28 provided above. All notices shall be deemed to have been given either at the time of the delivery thereof to (or the receipt by, in the case of a telecopy or telex) any officer or employee of the person entitled to receive such notice at the address of such person for purposes of this Section 15, or, if mailed, at the completion of the third full day following the time of such mailing thereof to such address, as the case may be. 16. Amendments. Neither this Warrant Certificate nor any term or ---------- provision may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought, provided that any change or waiver of any term or provision hereof, and any consent or direction given hereunder by the holders may be effected by the holders of 51% in interest of the Warrants then outstanding, except that no change or waiver that would (i) increase the Exercise Price of any Warrant, reduce the Aggregate Number, or change or waive any of the provisions of Section 4.1 with respect to Put rights shall be effective as to any holder of a Warrant without the consent of such holder, or (ii) change or waive any of the provisions of this Section with respect to the requisite persons required to effect any change, waiver or amendment of a particular Section of this Warrant Certificate shall be effective without the consent of such requisite persons. 17. Remedies. The Company stipulates that remedies at law of the holder -------- of this Warrant Certificate in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant Certificate are not and will not be adequate, and that such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof of otherwise. If any default under the terms of this Warrant Certificate shall occur and be continuing, the holders of the Warrants may proceed to protect and enforce their rights under this Warrant Certificate and the Securities Purchase Agreement by exercising such remedies as are available to such holders in respect thereof under applicable law, either by suit in equity or by action at law, or both, whether for specific performance of any covenant or other agreement contained in this Warrant Certificate or the Securities Purchase Agreement or in aid of the exercise of any power granted in this Warrant Certificate or the Securities Purchase Agreement. No remedy conferred in this Warrant Certificate or the Securities Purchase Agreement upon the holder of any Warrants is intended to be exclusive of any other remedy available to such holder, and each and every such remedy shall be cumulative and shall be in addition to every other remedy conferred herein or now or hereafter existing at law or in equity or by statute or 29 otherwise. 18. Governing Law. THIS WARRANT CERTIFICATE HAS BEEN EXECUTED AND ------------- DELIVERED AT AND SHALL BE DEEMED TO HAVE BEEN MADE IN NEW YORK, NEW YORK. THIS WARRANT CERTIFICATE AND THE RIGHTS GRANTED HEREIN SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED UNDER THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO ANY CONFLICTS OF LAW RULES OR PRINCIPLES). ANY JUDICIAL PROCEEDING BROUGHT BY OR AGAINST THE COMPANY WITH RESPECT TO THIS WARRANT CERTIFICATE OR ANY RELATED AGREEMENT SHALL BE BROUGHT IN ANY COURT OF COMPETENT JURISDICTION IN THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND, BY EXECUTION AND DELIVERY OF THIS WARRANT CERTIFICATE, THE COMPANY ACCEPTS THE EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS WARRANT. IF ANY ACTION IS COMMENCED IN ANY OTHER JURISDICTION THE PARTIES HERETO HEREBY CONSENT TO THE REMOVAL OF SUCH ACTION TO THE SOUTHERN DISTRICT OF NEW YORK. THE COMPANY HEREBY IRREVOCABLY DESIGNATES CT CORPORATION SYSTEM, AS THE DESIGNEE, APPOINTEE AND AGENT, OF THE COMPANY TO RECEIVE, FOR AND ON BEHALF OF THE COMPANY, SERVICE OF PROCESS IN THE ABOVE DESCRIBED JURISDICTION IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS WARRANT, THE WARRANT SHARES OR THE RIGHTS AND OBLIGATIONS HEREUNDER OR THEREUNDER AND SUCH SERVICE SHALL BE DEEMED COMPLETED UPON DELIVERY THEREOF TO SUCH AGENT. IT IS UNDERSTOOD THAT A COPY OF SUCH PROCESS SERVED ON SUCH AGENT WILL BE PROMPTLY FORWARDED BY MAIL TO THE COMPANY AT ITS ADDRESS SET FORTH IN SECTION 15 HEREOF, BUT THE FAILURE OF THE COMPANY TO RECEIVE SUCH COPY SHALL NOT AFFECT IN ANY WAY THE SERVICE OF SUCH PROCESS. THE COMPANY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE COMPANY AT ITS ADDRESS, SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER SUCH MAILING. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE HOLDERS OF THE WARRANTS OR THE WARRANT SHARES TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR COMMENCE LEGAL PROCEEDINGS IN OR OTHERWISE PROCEED AGAINST THE COMPANY IN ANY OTHER JURISDICTION. 19. WAIVER OF JURY TRIAL. THE COMPANY AND THE HOLDER OF THIS WARRANT -------------------- HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS WARRANT OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS WARRANT AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THE RELATIONSHIP THAT IS BEING ESTABLISHED HEREUNDER. THE COMPANY AND THE HOLDER OF THIS WARRANT ALSO WAIVE ANY BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF THE OTHER PARTIES. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT 30 MATTER OF THIS WARRANT, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. THE COMPANY AND THE HOLDER OF THIS WARRANT ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS WARRANT AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. THE COMPANY AND THE HOLDER OF THIS WARRANT FURTHER WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS WARRANT OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE TRANSACTIONS CONTEMPLATED HEREBY. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 20. Withholding Taxes. (a) The Company covenants that it will not ----------------- withhold United States withholding taxes from payments to be made to holders of Warrants if such holders (i) are corporations organized under the laws of a jurisdiction outside the United States or are otherwise persons not resident in the United States for United States federal income tax purposes, and (ii) provide the Company, upon the Company's reasonable request, with Internal Revenue Service Form W-8, Form 4224, Form 1001 or other applicable form, certificate or document prescribed by the Internal Revenue Service certifying as to such holders' entitlement to an exemption from any such withholding requirements. (b) The Company further covenants that it will not withhold United States withholding taxes from payments to be made to holders of Warrants in excess of an applicable treaty rate under an income tax treaty between the United States and the holders' country of tax residence if such holders (i) are corporations organized under the laws of a jurisdiction outside the United States or are otherwise persons not resident in the United States for United States federal income tax purposes, and (ii) provide the Company, upon the Company's reasonable request, with Internal Revenue Service Form 1001 or other applicable form, certificate or document prescribed by the Internal Revenue Service certifying as to such holders' entitlement to a reduced rate of withholding under any such withholding requirements. (c) Neither Section 20(a) nor Section 20(b) shall require the Company to apply an exemption or reduced rate of withholding during any period when it shall have received notice or has actual knowledge that the residence information previously provided on any applicable form, certificate or document is in- 31 correct and no corrected form, certificate or document as applicable has been provided to the Company. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be executed as a deed by its duly authorized officer and this Warrant Certificate to be dated July 31, 1995. CAREER EDUCATION CORPORATION By:___________________________ Name: Title: 32 SCHEDULE 1 ---------- EXERCISE FORM [To be executed only upon exercise of Warrant] To: CAREER EDUCATION CORPORATION The undersigned irrevocably exercises ______________ of the Warrants for the purchase of one share (subject to adjustment) of Class D Common Stock, par value $.01 per share, of Career Education Corporation (the "Company") for each Warrant represented by the within Warrant Certificate and herewith makes payment of $____ (such payment being in cash or by check or bank draft in immediately available funds payable to the order of the Company or by the surrender of a portion of the Warrants other than that which is being exercised), all at the exercise price and on the terms and conditions specified in the within Warrant Certificate, surrenders the within Warrant Certificate and all right, title and interest therein (except as to any unexercised Warrants) to the Company and directs that the shares of Class D Common Stock deliverable upon the exercise of such Warrants be registered or placed in the name and at the address specified below and delivered thereto. Date:______________ _______________________________ (Signature of Owner) _______________________________ (Street Address) _______________________________ (City) (State) (Zip Code) _________________ (1) The signature must correspond with the name as written upon the face of the within Warrant Certificate in every particular, without alteration or enlargement or any change whatever. SCHEDULE 2 ---------- FORM OF ASSIGNMENT FOR VALUE RECEIVED the undersigned registered Holder of the within Warrant Certificate hereby sells, assigns, and transfers unto the Assignee(s) named below (including the undersigned with respect to any Warrants constituting a part of the Warrants evidenced by the within Warrant Certificate not being assigned hereby) all of the right of the undersigned under the within Warrant Certificate, with respect to the number of Warrants set forth below: Social securi- ty or other identifying Names of number of Number of Assignees Address Assignee(s) Warrants --------- ------- ----------- -------- and does hereby irrevocably constitute and appoint ______________ the undersigned's attorney to make such transfer on the books of Career Education Corporation maintained for that purpose, with full power of substitution in the premises. Dated: ______________ _______________________________ (1) (Signature of Owner) _______________________________ (Street Address) _______________________________ (City) (State) (Zip Code) _____________________ (1) The signature must correspond with the name as written upon the face of the within Warrant Certificate in every particular, without alteration or enlargement or any change whatever. EX-10.18 12 SECURITIES PURCHASE AGREEMENT DTD 2/28/97 EXHIBIT 10.18 ---------------------------------------- SECURITIES PURCHASE AGREEMENT ---------------------------------------- Series D Redeemable Preferred Stock of Career Education Corporation ($7,500,000.00) and Warrants to Purchase Class E Common Stock of Career Education Corporation (Exercisable for 8,924 Aggregate Shares, $.01 per share Exercise Price) Dated as of February 28, 1997 TABLE OF CONTENTS (Not Part of the Agreement)
Page ---- 1. AUTHORIZATION OF FINANCING.............................................. 2 2. PURCHASE AND SALE OF SECURITIES; CLOSING................................ 2 2.1. PURCHASE AND SALE................................................ 2 2.2. CLOSING.......................................................... 2 3. CONDITIONS TO EACH CLOSING.............................................. 3 3.1. CLOSING OF THE COMPUTERTECH ACQUISITION.......................... 3 3.2. OPINION OF COUNSEL............................................... 3 3.3. REPRESENTATIONS AND WARRANTIES................................... 3 3.4. PURCHASE PERMITTED BY APPLICABLE LAWS............................ 4 3.5. NO ADVERSE LEGISLATION, ACTION OR DECISION....................... 4 3.6. APPROVALS AND CONSENTS........................................... 4 3.7. PROCEEDINGS...................................................... 5 3.8. SERIES D PREFERRED STOCK AND WARRANT CERTIFICATES................ 5 3.9. STOCKHOLDERS AGREEMENT........................................... 5 3.10. CERTIFICATE OF DESIGNATION...................................... 5 3.11. COMPLIANCE CERTIFICATE.......................................... 5 3.12. ADDITIONAL INFORMATION.......................................... 5 3.13. NO CHANGE RESULTING IN MATERIAL ADVERSE EFFECT.................. 6 4. SUBSEQUENT INVESTMENTS.................................................. 6 4.1. CONDITIONS TO SUBSEQUENT INVESTMENTS............................. 6 4.2. LIMITATION OF OBLIGATION OF PURCHASERS TO MAKE ANY SUBSEQUENT INVESTMENT.......................................... 7 4.3. FURTHER LIMITATION OF OBLIGATION OF INDIVIDUAL INVESTORS TO MAKE ANY SUBSEQUENT INVESTMENT.................... 7 5. AFFIRMATIVE COVENANTS................................................... 7 5.1. FINANCIAL STATEMENTS AND OTHER REPORTS........................... 8 5.2. USE OF PROCEEDS.................................................. 8 5.3. RESERVATION OF SHARES............................................ 8 6. NEGATIVE COVENANTS...................................................... 8 6.1. WITHHOLDING TAXES................................................ 8 7. OTHER REMEDIES.......................................................... 9
-i- 8. REPRESENTATIONS, COVENANTS AND WARRANTIES OF THE COMPANY................ 9 8.1. ORGANIZATION; AUTHORITY.......................................... 9 8.2. AUTHORIZATION.................................................... 10 8.3. CAPITAL STOCK AND RELATED MATTERS................................ 10 8.4. LITIGATION....................................................... 12 8.5. COMPLIANCE....................................................... 12 8.6. OFFERING......................................................... 13 8.7. CONFLICTING AGREEMENTS........................................... 13 8.8. GOVERNMENTAL PERMITS, CONSENTS, ETC.............................. 13 8.9. FEES AND COMMISSIONS............................................. 14 8.10. RESERVATION OF SHARES........................................... 14 9. REPRESENTATIONS OF THE PURCHASERS....................................... 14 9.1. PURCHASE OF SECURITIES........................................... 14 9.2. INCORPORATION AND AUTHORIZATION OF INSTITUTIONAL INVESTORS....... 14 9.3. NO CONFLICTS..................................................... 14 9.4. NO BROKERS' FEES................................................. 15 10. DEFINITIONS............................................................ 15 11. MISCELLANEOUS.......................................................... 19 11.1. PAYMENTS........................................................ 19 11.2. EXPENSES; INDEMNITY............................................. 19 11.3. CONSENT TO AMENDMENTS; SUBORDINATION............................ 20 11.4. PERSONS DEEMED OWNERS........................................... 21 11.5. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT.... 21 11.6. SUCCESSORS AND ASSIGNS.......................................... 22 11.7. NOTICES......................................................... 22 11.8. DESCRIPTIVE HEADINGS, ETC....................................... 22 11.9. GOVERNING LAW; CHOICE OF FORUM.................................. 23 11.10. WAIVER OF JURY TRIAL........................................... 24 11.11. ISSUANCE OF SECURITIES TO KLETTKE.............................. 24
-ii- LIST OF SCHEDULES AND EXHIBITS SCHEDULES: - --------- Schedule 1 Investments Schedule 8.2 Authorization Schedule 8.3 Capitalization Schedule 8.4 Litigation Schedule 8.7 Conflicting Agreements Schedule 8.8 Governmental Permits EXHIBITS: - -------- Exhibit A Form of Certificate of Designations for Series D Preferred Stock Exhibit B Form of Warrant Certificate Exhibit C Form of Opinion of the Company's Counsel Exhibit D Form of First Amendment to Stockholders Agreement -iii- SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT, dated as of February 28, 1997, is made by and among CAREER EDUCATION CORPORATION, a Delaware corporation (the "COMPANY"), HELLER EQUITY CAPITAL CORPORATION, an Illinois corporation ("HELLER"), ELECTRA INVESTMENT TRUST P.L.C. ("EIT"), Robert E. Dowdell ("DOWDELL"), John M. Larson ("LARSON"), Wallace O. Laub and Constance L. Laub (collectively, the "LAUBS"), and William A. Klettke ("KLETTKE" and together with Dowdell, Larson and the Laubs, the "INDIVIDUAL INVESTORS"). Heller and EIT are sometimes collectively referred to herein as the "INSTITUTIONAL INVESTORS." The Institutional Investors and the Individual Investors are sometimes collectively referred to herein as the "PURCHASERS." W I T N E S S E T H: WHEREAS, Purchasers are the holders of all of the issued and outstanding capital stock of the Company, and all issued and outstanding warrants and other options and rights to purchase capital stock of the Company (other than certain options issued to employees of the Company pursuant to its 1995 Stock Option Plan dated August 23, 1995 (as amended, the "MANAGEMENT OPTION PLAN") and certain Warrants issued to The Provident Bank. WHEREAS, the Company has requested additional equity financing in the amount of up to Seven Million Five Hundred Thousand Dollars ($7,500,000) from Purchasers, and desires to sell the Series D Preferred Stock and the Warrants (as each is hereinafter defined, and collectively, the "SECURITIES") to the Purchasers, for the purpose of providing funds for, among other things, the acquisition of capital stock of The School of Computer Technology, Inc., a Pennsylvania corporation (the "COMPUTERTECH ACQUISITION") and for other future private, post-secondary vocational school acquisitions by the Company (each, a "FUTURE ACQUISITION"); and WHEREAS, the Purchasers desire, upon the terms and conditions hereinafter provided, to purchase from the Company the Series D Preferred Stock and Warrants; NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be bound, hereby agree as follows: Certain terms used in this Agreement are defined in Section 10 hereof. ---------- Unless otherwise indicated, references to statutes are to statutes of the United States. Accounting terms used herein shall be construed in accordance with GAAP. In addition, unless the contrary intention appears, terms and expressions having a defined or generally -1- accepted meaning under the securities laws of the United States shall have the same meaning in this Agreement. 1. AUTHORIZATION OF FINANCING. -------------------------- The Company has authorized the issuance, sale and delivery of (a) 7,500 shares of its Series D Redeemable Preferred Stock, par value $.01 per share, with a stated value of $1,000 per share (the "SERIES D PREFERRED STOCK"), which series has the rights, restrictions, privileges and preferences as set forth in the Certificate of Designations for the Series D Preferred Stock of the Company, substantially in the form of Exhibit A attached hereto (the --------- "CERTIFICATE OF DESIGNATIONS"), and (b) the detachable warrants to be issued in connection with each issuance of Series D Preferred Stock in accordance with Schedule 1 attached hereto (collectively, the "WARRANTS" and each individually, - ---------- a "WARRANT") to purchase a maximum aggregate of 8,924 shares of Class E Common Stock of the Company, at an exercise price of $.01 per share, evidenced by one or more warrant certificates (the "WARRANT CERTIFICATES") to be substantially in the form of Exhibit B attached hereto. --------- 2. PURCHASE AND SALE OF SECURITIES; CLOSING. ---------------------------------------- 2.1. PURCHASE AND SALE. ----------------- The Company hereby agrees to issue and sell to each Purchaser and each Purchaser, severally and not jointly, agrees, subject to the terms and conditions herein set forth and in reliance upon the representations, warranties and agreements of the Company herein contained, to purchase at the Closings from the Company for the purchase price set forth opposite such Purchaser's name in Schedule 1 attached hereto, (a) the aggregate number of shares of Series D - ---------- Preferred Stock set forth opposite such Purchaser's name under the heading Total Investment in Schedule 1 attached hereto, and registered in such Purchaser's ---------- name (or, in the case of Heller and EIT, the name of such Institutional Investor's nominee, as such Institutional Investor shall request) and (b) the aggregate number of Warrants set forth opposite such Purchaser's name under the heading Total Investment in Schedule 1 attached hereto, in the form of one or ---------- more Warrant Certificates, registered in such Purchaser's name (or, in the case of Heller and EIT, the name of such Institutional Investor's nominee, as such Institutional Investor shall request). 2.2. CLOSING. ------- The purchase and delivery of the Securities shall take place at the offices of Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd., 55 E. Monroe Street, Suite 3700, Chicago, Illinois 60603 at one or more closings (each, a "CLOSING"). Subject to the satisfaction or waiver of the conditions described in Section 3 below, the Closing of the purchase and sale of the Securities set --------- forth opposite each Purchaser's name under the heading Initial Investment in Schedule 1 attached hereto, which Closing shall pertain to an aggregate - ---------- investment of $2,000,000 (the "INITIAL INVESTMENT"), shall be held -2- simultaneously with the execution and delivery of this Agreement, or at such other place or on such other date as the Institutional Investors and the Company may agree upon, but in no event later than February 28, 1997 (the "INITIAL CLOSING DATE"). Subject to the satisfaction or waiver of the conditions described in Section 3 and Section 4 below, each Closing of the purchase and --------- --------- sale of the Securities, or any portion thereof, set forth opposite each Purchaser's name under the heading Subsequent Investment(s) in Schedule 1 ---------- attached hereto, which Closings shall pertain to an aggregate investment of up to $5,500,000 (each, a "SUBSEQUENT INVESTMENT"), shall be held simultaneously with the closing of a Future Acquisition which the Company intends to finance with the proceeds of such Subsequent Investment. At each Closing, the Company will deliver one or more certificates evidencing the appropriate number of shares of Series D Preferred Stock and one or more certificates evidencing the appropriate number of Warrants to each Purchaser, against payment by such Purchaser of the purchase price therefor by transfer of immediately available funds to such bank or other financial institution as the Company may direct in writing, for credit to the Company's account The date of each Closing hereunder is sometimes referred to as a "CLOSING DATE". 3. CONDITIONS TO EACH CLOSING. -------------------------- Each Purchaser's obligation to purchase and pay for the Securities to be sold in connection with the Initial Investment and each Subsequent Investment is subject to the satisfaction prior to or at each Closing of each of the following conditions: 3.1. CLOSING OF THE COMPUTERTECH ACQUISITION. --------------------------------------- With respect to the Initial Closing only, the ComputerTech Acquisition shall close simultaneously with the Initial Investment, in accordance with the terms and subject to the conditions approved by the Board of Directors of the Company, without any material deviation therefrom. 3.2 OPINION OF COUNSEL. ------------------ The Institutional Investors shall have received from Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd., special counsel to the Company, an opinion substantially in the form set forth in Exhibit C, addressed to the --------- Institutional Investors, dated the Closing Date and otherwise reasonably satisfactory in form and substance to such parties. 3.3. REPRESENTATIONS AND WARRANTIES. ------------------------------ The representations and warranties of the Company contained in this Agreement and those otherwise made in any writing by the Company, furnished in connection with or pursuant to this Agreement and the ComputerTech Acquisition or Future Acquisition to be financed hereby, as applicable (the "TRANSACTION DOCUMENTS") or in connection with the transactions contemplated hereby or thereby, shall be true and correct when made and at the time of such Closing (unless expressly made as of a -3- particular date) as though made at such time, and the Company shall have performed or complied with the covenants, conditions and agreements contained in this Agreement and the applicable Transaction Documents required to be performed and complied with by the Company at or prior to such Closing, other than covenants, conditions and agreements contained in such Transaction Documents which have been waived by the parties thereto and disclosed to the Institutional Investors on or prior to such Closing. 3.4. PURCHASE PERMITTED BY APPLICABLE LAWS. ------------------------------------- The purchase of and payment for the Securities to be purchased at such Closing shall not violate any applicable law or governmental regulation (including, without limitation, Section 5 of the Securities Act) and shall not subject the Purchasers to any tax, penalty, liability or other onerous condition under or pursuant to any applicable law or governmental regulation or order. Each Purchaser shall have received such certificates or other evidence as they may reasonably request to establish compliance with the conditions set forth in this Section 3.4. ----------- 3.5. NO ADVERSE LEGISLATION, ACTION OR DECISION. ------------------------------------------ After the date hereof and prior to the applicable Closing Date, no legislation, order, rule, ruling or regulation shall have been enacted or made by or on behalf of any governmental body, department or agency, nor shall have any legislation been introduced and favorably reported for passage to either House of Congress by any committee of either such House to which such legislation has been referred for consideration or any state legislature in any jurisdiction in which the Company operates or by any committee of such legislature to which such legislation has been referred for consideration, nor shall any decision of any court of competent jurisdiction within the United States have been rendered which, in any Institutional Investor's judgment, would have a Material Adverse Effect. There shall be no action, suit, investigation, or proceeding pending, or to the Company's knowledge, threatened, against or affecting the Company or any of its Subsidiaries, the Company's or any such Subsidiary's properties or rights, or any of the Company's or any such Subsidiary's Affiliates, officers or directors, before any court, arbitrator or administrative or governmental body which (a) seeks to restrain, enjoin, prevent the consummation of or otherwise affect the transactions contemplated by this Agreement or the applicable Transaction Documents or (b) questions the validity or legality of any such transactions or seeks to recover damages or to obtain other relief in connection with any such transactions, and, to the Company's knowledge, there shall be no valid basis for any such action, proceeding or investigation. 3.6. APPROVALS AND CONSENTS. ---------------------- The Company shall have duly received all material authorizations, waivers, consents, approvals, licenses, franchises, permits and certificates (collectively, "CONSENTS") by or of all federal, state and local governmental authorities and all material Consents by or -4- of all other Persons necessary or advisable for the issuance of the applicable Securities, and all thereof shall be in full force and effect at the time of Closing. 3.7. PROCEEDINGS. ----------- All proceedings taken or to be taken in connection with the transactions contemplated hereby and in the applicable Transaction Documents, and all documents incident thereto, shall be reasonably satisfactory in form and substance to each Institutional Investor, and each Institutional Investor shall have received all such counterpart originals or certified or other copies of such documents as it may request. 3.8. SERIES D PREFERRED STOCK AND WARRANT CERTIFICATES. ------------------------------------------------- The Company shall have delivered to each Purchaser one or more Series D Preferred Stock certificates and one or more Warrant certificates representing the aggregate number of shares of Series D Preferred Stock and Warrants being purchased from the Company by such Purchaser at such Closing. 3.9. STOCKHOLDERS AGREEMENT. ---------------------- The First Amendment to the Amended and Restated Stockholders' Agreement of the Company, in the form of Exhibit D hereto, shall have been --------- executed and delivered by and to all parties thereto. 3.10. CERTIFICATE OF DESIGNATION. -------------------------- The Certificate of Designations shall have been executed and duly filed with the Delaware Secretary of State, and shall remain in full force and effect, and since the date of such filing the Company will not have adopted or filed any other document designating terms, relative rights or preferences of its Preferred Stock, or otherwise amending or modifying the Certificate of Designation, without the prior written consent of the Institutional Investors. 3.11. COMPLIANCE CERTIFICATE. ---------------------- Each Purchaser shall have received an Officers' Certificate, dated as of such Closing Date, certifying that the conditions specified in this Section 3 --------- required to be fulfilled on such Closing Date (other than actions required to be taken by such Purchaser) have been fulfilled. 3.12. ADDITIONAL INFORMATION. ---------------------- The Company shall have executed and/or delivered such other information and documentation as each Purchaser and its counsel may reasonably request. Each Purchaser shall have received such other documents and opinions, in form and substance -5- satisfactory to its counsel, relating to matters incident to the ComputerTech Acquisition or relevant Future Acquisition, as applicable, and the transactions contemplated by the applicable Transaction Documents. 3.13. NO CHANGE RESULTING IN MATERIAL ADVERSE EFFECT. ---------------------------------------------- Since November 30, 1996, there shall have been no change in the business or operations of the Company, nor any other event, which has had, or is likely to have, in any Institutional Investor's reasonable judgment, a Material Adverse Effect. Any condition specified in this Section 3 (or in Section 4 below) may --------- --------- be waived with respect to any Purchaser upon express written consent executed by such Purchaser. 4. SUBSEQUENT INVESTMENTS. ---------------------- 4.1. CONDITIONS TO SUBSEQUENT INVESTMENTS. ------------------------------------ Following the Initial Closing, upon written request of the Company, each Purchaser shall be obligated to make one or more Subsequent Investments, for the purchase of Series D Preferred Stock and Warrants up to a maximum aggregate purchase in the amount set forth opposite such Purchaser's name under the heading Subsequent Investment(s) in Schedule 1 attached hereto, subject to ---------- the satisfaction prior to or at the Closing of such Subsequent Investment of each of the following conditions: (a) No Event of Default. No default or event of default shall ------------------- exist or be continuing under the Senior Loan Agreement, other than any default or event of default caused by the Purchasers' failure to purchase all or any of the Series D Preferred Stock or Warrants or which would be cured by the purchase of the Series D Preferred Stock and Warrants being requested by the Company. (b) Representations and Warranties. The representations and ------------------------------ warranties contained in Section 8 (other than those made as of a particular --------- date) shall be true and correct in all material respects as of the date of such Closing. (c) Conditions. The conditions contained in Section 3 shall ---------- --------- continue to be fulfilled in all material respects. (d) Approval of Company Board of Directors; Use of Proceeds. The ------------------------------------------------------- proceeds of such Subsequent Investment shall be used to fund a Future Acquisition previously approved by the Board of Directors of the Company, which approval shall include the affirmative vote of the Heller Director (as defined in the Stockholders Agreement), Patrick K. Pesch (or any successor to his seat on the Board of Directors). -6- (e) Prior Notice. The Company shall have given to each ------------ Purchaser written notice of the Company's request for a Subsequent Investment not less than thirty (30) days prior to the date of the Closing for such Subsequent Investment, which notice shall indicate the number of shares of Series D Preferred Stock and the number of Warrants which such Purchaser is requested to purchase, the price therefor, and the anticipated date of such Closing. 4.2. LIMITATION OF OBLIGATION OF PURCHASERS TO MAKE ANY SUBSEQUENT ------------------------------------------------------------- INVESTMENT. ---------- Notwithstanding any provision of this Agreement to the contrary, in no event shall Purchasers, or any one of them, be obligated to make a Subsequent Investment, the proceeds of which will be used by the Company to pay in excess of thirty-five percent (35%) of the aggregate consideration for the Future Acquisition to be funded with the proceeds of such Subsequent Investment. Furthermore, in no event shall any Purchaser be obligated to make any Subsequent Investment after July 31, 1998. 4.3. FURTHER LIMITATION OF OBLIGATION OF INDIVIDUAL INVESTORS TO ----------------------------------------------------------- MAKE ANY SUBSEQUENT INVESTMENT. ------------------------------ Notwithstanding any provision of this Agreement to the contrary, no Individual Investor shall be obligated to make any Subsequent Investment pursuant to this Agreement; provided, that within fifteen (15) days after any -------- Individual Investor desiring not to make a Subsequent Investment receives notice of the Company's request for such Subsequent Investment in accordance with subsection 4.1(e) above, such Individual Investor provides written notice to the - ----------------- Company of his election not to participate in such Subsequent Investment. No notice given pursuant to the immediately preceding sentence shall be deemed an election by the Individual Investor giving such notice not to participate in any later Subsequent Investment. In the event that one or more Individual Investors elect not to participate in any Subsequent Investment pursuant to this Section ------- 4.3, the parties hereto agree that the Securities that would have been purchased - --- by such Individual Investor or Investors shall be purchased at the closing of such Subsequent Investment by the Institutional Investors, pro rata. 5. AFFIRMATIVE COVENANTS. --------------------- The Company hereby covenants from and after the date of this Agreement, so long as any Securities remain outstanding, as follows: 5.1. FINANCIAL STATEMENTS AND OTHER REPORTS. -------------------------------------- The Company covenants that it will deliver, or cause to be delivered, to each Purchaser, the financial statements and other reports described in Section 5.1 of the Electra Securities Agreement, in the form and in accordance with the deadlines for delivery of such financial statements and other reports set forth in the Electra Securities Agreement. -7- 5.2. USE OF PROCEEDS. --------------- The Company shall use all of the proceeds received from the sale of the Securities pursuant to this Agreement to fund (a) in the case of the Initial Investment, the ComputerTech Acquisition and related costs and expenses, (b) in the case of any Subsequent Investment, the Future Acquisition for which such Subsequent Investment is requested by the Company and any related costs and expenses. 5.3. RESERVATION OF SHARES. --------------------- The Company shall at all times keep reserved, and available for issuance, the number of shares of Common Stock for issuance upon exercise of all of the Warrants (as such number may be adjusted from time to time pursuant to the terms of the Warrants). 6. NEGATIVE COVENANTS. ------------------ The Company hereby covenants from and after the date of this Agreement, so long as any Securities remain outstanding, as follows: 6.1. WITHHOLDING TAXES. ----------------- (a) The Company covenants that it will not withhold United States withholding taxes from payments to be made to holders of the Securities if such holders (i) are corporations organized under the laws of a jurisdiction outside the United States or are otherwise persons not resident in the United States for United States federal income tax purposes, and (ii) provide the Company, upon the Company's reasonable request, with one or more of Internal Revenue Service Form W-8, Form 4224 or other applicable forms, certificates or documents certifying as to entitlement to an exemption from any such withholding requirements. (b) The Company covenants that it will not withhold United States withholding taxes from payments to be made to holders of the Securities in excess of an applicable treaty rate if such holders (i) are corporations organized under the laws of jurisdictions outside the United States or are otherwise persons not resident in the United States for United States federal income tax purposes, and (ii) provide the Company, upon the Company's reasonable request, with one or more of certifications of their residence address, Internal Revenue Service Form 1001 or other applicable forms, certificates or documents certifying as to entitlement to a reduced rate of withholding under any such withholding requirements. (c) Neither subsection 6.1(a) nor subsection 6.1(b) hereof shall ----------------- ----------------- require the Company to apply an exemption or reduced rate of withholding during any period when it shall have received notice or has knowledge (i) that the residence information previously provided on any applicable form, -8- certificate or document is incorrect and no corrected form, certificate or document as applicable has been provided to the Company, or (ii) of any other information which would render such exemption or reduced rate inapplicable. 7. OTHER REMEDIES. -------------- No remedy conferred in this Agreement upon the holder of any Preferred Shares is intended to be exclusive of any other remedy available to such holder, and each and every such remedy shall be cumulative and shall be in addition to every other remedy conferred herein or now or hereafter existing at law or in equity or by statute or otherwise. 8. REPRESENTATIONS, COVENANTS AND WARRANTIES OF THE COMPANY. -------------------------------------------------------- The Company hereby represents, covenants and warrants for the benefit of each holder from time to time of the Securities and the Purchasers, as of the applicable Closing and after giving effect to the transactions contemplated by this Agreement to be consummated simultaneously with such Closing, as follows: 8.1. ORGANIZATION; AUTHORITY. ----------------------- Each of the Company and its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all requisite corporate power and authority to own or lease and operate its properties and to carry on its business as presently conducted and as proposed to be conducted. Each of the Company and its Subsidiaries is duly qualified and in good standing as a foreign corporation duly authorized to do business in each jurisdiction where it owns or leases property or in which the conduct of its business requires it so to qualify or be licensed, except in those jurisdictions in which the failure to qualify will not individually or in the aggregate have a Material Adverse Effect. Other than the Subsidiaries, the Company does not own of record or beneficially any Capital Stock or equity interest or investment in any corporation, association, partnership, joint venture or other entity. The Company and each of its Subsidiaries have furnished Purchasers with true, correct and complete copies of its Certificate of Incorporation (including, without limitation, the Certificate of Designations) and By-Laws, each as amended to date. 8.2. AUTHORIZATION. ------------- All corporate action on the part of the Company and its directors and stockholders necessary for the authorization, execution, delivery and performance by (a) the Company of this Agreement, the Series D Preferred Stock certificates, the Warrants and the other transactions to be consummated in connection with the applicable Closing, and (b) the consummation of the transactions contemplated herein and therein shall have been taken or will be taken prior to such Closing. Each of the Transaction Documents to which the Company is a party is the legal, valid and binding obligation of the Company enforceable against it in accordance with its terms. The execution, delivery and -9- performance by the Company of each Transaction Document to which it is a party and compliance therewith and the issuance and sale of the shares of Series D Preferred Stock and the Warrants will not result in any violation of and will not (i) conflict with, or result in a breach of, any of the terms of, or constitute a default under, (a) any provision of state or Federal law to which the Company is subject, (b) the Company's Certificate of Incorporation (including, without limitation, the Certificate of Designations) or By-Laws, or (c) any mortgage, indenture, agreement, instrument, judgment, decree, order, rule or regulation, or other restriction to which the Company is a party or by which it is bound, or (ii) result in the creation of any Lien (except as contemplated by the Senior Loan Documents) upon any of the properties or assets of the Company pursuant to any such term, or (iii) except as set forth on Schedule 8.2, result in the suspension, revocation, impairment, forfeiture or - ------------ non-renewal of any permit, license, authorization or approval applicable to the Company's operations or any of its assets or properties. No stockholder has any preemptive rights or rights of first refusal by reason of the issuance of the Warrants or the shares of Series D Preferred Stock which have not previously been waived. The issued and outstanding shares of Series D Preferred Stock have been duly and validly issued and are fully paid and non-assessable. The shares of Common Stock issuable upon exercise of the Warrants, have, in each case, been duly and validly reserved, and are not subject to any preemptive rights or rights of first refusal which have not previously been waived, and, upon issuance, will be validly issued, fully paid and non-assessable. 8.3. CAPITAL STOCK AND RELATED MATTERS. --------------------------------- At the time of the Closing of the Initial Investment, (a) the authorized capital stock of the Company will consist of (i) 500,000 shares of Class A Voting Common Stock, par value $.01 per share, of which 5,250 shares will be issued and outstanding, (ii) 100,000 shares of Class B Voting Common Stock, par value $.0l per share, of which 5,100 shares will be issued and outstanding, (iii) 100,000 shares of Class C Non-Voting Common Stock, par value $.01 per share, of which 69,900 shares will be issued and outstanding, (iv) 100,000 shares of Class D Non-Voting Common Stock, par value $.01 per share, of which no shares will be issued and outstanding and 27,484 shares will be reserved for issuance upon the exercise of certain warrants held by Electra and The Provident Bank, (v) 100,000 shares of Class E Non-Voting Common Stock, par value $.01 per share, of which 1,648 shares will be issued and outstanding and 13,400 shares will be reserved for issuance upon exercise of certain management stock options, 490 shares will be reserved for issuance upon exercise of certain warrants held by The Provident Bank and 8,924 shares will be reserved for issuance upon exercise of the Warrants, (vi) 50,000 shares of Series A Preferred Stock, par value $.01 per share, of which 7,852 shares will be issued and outstanding, (vii) 1,000 shares of Series B Preferred Stock, par value $.01 per share, none of which shares will be issued and outstanding, (viii) 5,000 shares of Series C Preferred Stock, par value $.01 per share, of which 4,954 shares of Series C Preferred Stock will be issued to Electra and outstanding, and (ix) 10,000 shares of Series D Preferred Stock, par value $.01 per share, per share, of which 2,000 shares will be issued and outstanding, (b) no shares of Common Stock will be owned or held by or for the account of the Company; (c) all of the issued and outstanding shares of the Company's Capital Stock will be validly -10- issued and outstanding, fully paid and non-assessable and will be owned of record (other than shares attributable to Klettke, which shall be owned of record by First Chicago, Custodian, William A. Klettke IRA) and, to the best knowledge of the Company, beneficially, free and clear of any Liens (except as may be contemplated by the Senior Loan Documents) by the individuals and entities and in the amounts set forth on Schedule 1 and Schedule 8.3 hereof; (d) ---------- ------------ except for the Class A Voting Common Stock, the Class B Voting Common Stock, the Class C Non-Voting Common Stock, warrants for the Class D Non-Voting Common Stock, the Class E Non-Voting Common Stock and certain warrants and options for the Class E Non-Voting Common Stock, the Series A Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock, and the Warrants, and except as set forth on Schedule 8.3 hereto, the Company has no, and at the time of the ------------ Closing of the Initial Investment will not have, outstanding stock or securities convertible into or exchangeable for any shares of its Capital Stock, or any outstanding rights (either preemptive or other) to subscribe for or to purchase, or any outstanding options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any outstanding calls, commitments or claims of any character relating to, any Capital Stock or any stock or securities convertible into or exchangeable for any Capital Stock of the Company, or any outstanding demand or piggyback registration rights to register any Capital Stock or any stock or securities convertible into or exchangeable for the Capital Stock of the Company (other than rights of certain Purchasers which have been waived or are being waived simultaneously herewith); (e) except with respect to the Series C Preferred Stock, the Series A Preferred Stock and the Series D Preferred Stock, the Company will not be subject to any obligation (contingent or other) to repurchase, otherwise acquire or retire any shares of Capital Stock; and (f) the Company has no knowledge of any agreement (except as set forth in this Agreement, the Electra Securities Agreement or the Stockholders Agreement) restricting the transfer of any shares of the Company's Capital Stock, except as set forth on Schedule 8.3. Schedule 8.3 sets forth the ------------ ------------ number of shares of Capital Stock, the holders thereof, and the percentage held by each holder of the issued and outstanding Capital Stock of the Company and each Subsidiary at the time of the Closing of the Initial Investment and after giving effect to the Initial Investment. 8.4. LITIGATION. ---------- Except as disclosed on Schedule 8.4 hereto, there is no action, suit, ------------ investigation or proceeding pending, or, to the Company's knowledge threatened, or any basis therefor or threat thereof, in, nor is there any existing judgment, order or decree of, any court, governmental authority, arbitration board or tribunal, foreign or domestic to which the Company or any of its Subsidiaries is or may be named as a party or its property is or may be subject or which challenges this Agreement or any of the transactions contemplated hereby, or to the Company's knowledge, to which any officer, employee or stockholder of the Company or any of its Subsidiaries is subject, and the Company has no knowledge of any unasserted claim, the assertion of which is likely and which, if asserted, will seek damages, an injunction or other legal, equitable, monetary or nonmonetary relief which claim individually or collectively with other such unasserted claims, if granted, or -11- actions, suits, investigations or proceedings would have a Material Adverse Effect or which challenges this Agreement or any of the other Transaction Documents or any of the transactions contemplated hereby or thereby. No legislation, order, rule, ruling or regulation has been enacted or made by or on behalf of any governmental body, department or agency, nor to the Company's knowledge has there been any legislation introduced and favorably reported for passage to either House of Congress by any committee of either such House to which such legislation has been referred for consideration or any state legislature in any jurisdiction in which the schools operated by the Company and its Subsidiaries operate or by any committee of such legislature to which such legislation has been referred for consideration, nor to the Company's knowledge has any decision of any court of competent jurisdiction within the United States been rendered which, in the Company's judgment, would have a Material Adverse Effect. 8.5. COMPLIANCE. ---------- (a) Neither the Company nor any Subsidiary is in violation of any statute, law, ordinance, governmental rule or regulation (including environmental laws) or any judgment, order or decree (federal, state, local or foreign) to which it is subject, except where such violation would not have, and is not likely to result in, a Material Adverse Effect, nor has it failed to obtain any, and it possesses all, licenses, permits, franchises or other governmental authorizations necessary for the ownership or operation of its properties or the conduct of its business as presently conducted and as proposed to be conducted, except where the failure to so obtain or to so possess would not have, and is not likely to result in, a Material Adverse Effect. (b) Neither the Company nor any Subsidiary is in violation of any term of its Certificate of Incorporation, as amended (including, without limitation, the Certificate of Designations in the case of the Company), or By-Laws, as amended. (c) Neither the Company nor any Subsidiary is in violation of any term of any Contract, judgment, decree, order, statute, rule or regulation to which either the Company or any Subsidiary is subject or which would permit any party to any Contract to terminate, amend or modify such Contract, except for any violations which do not cause, and are not likely to result in, a Material Adverse Effect. To the Company's knowledge, neither the Company nor any Subsidiary has waived any right or default by any party under any Contract. All Contracts are in full force and effect, and the Company and its Subsidiaries each have no knowledge that any party to any Contract, or any parties to any Contract is or is seeking or presently intends to seek to (i) terminate, amend or modify such Contract or (ii) upon the expiration of such Contract, not renew such Contract on terms substantially similar to those terms currently in such -12- Contract, except where the termination, amendment, modification or failure to renew does not have, and is not likely to result in, a Material Adverse Effect. 8.6. OFFERING. -------- Based upon the representations and warranties of each Purchaser set forth in Section 9 hereof, the offer, sale and issuance of the shares of Series --------- D Preferred Stock, the Warrants, and the shares of Common Stock issuable upon the exercise of the Warrants are all exempt from the registration requirements of the Securities Act and from the registration or qualification requirements of the laws of any applicable state or other jurisdiction, and neither the Company nor anyone acting on its behalf will take any action hereafter that would cause the lose of such exemption. 8.7. CONFLICTING AGREEMENTS. ---------------------- Neither the Company nor any of its Subsidiaries is a party to any Contract or subject to any restriction which would have, or would be likely to have, a Material Adverse Effect. Except as set forth on Schedule 8.7 hereto, ------------ neither the Company nor any of its Subsidiaries is a party to or otherwise subject to any Contract which limits the amounts of, or otherwise imposes restrictions on, the issuance of the Warrants, the Series D Preferred Stock or the Common Stock (upon the exercise of the Warrants). 8.8. GOVERNMENTAL PERMITS, CONSENTS, ETC. ----------------------------------- Except as set forth on Schedule 8.8, no consent, approval, ------------ authorization, exemption or other action by, or notice to or filing with, any court or administrative or governmental body which has not been obtained, taken or made is required in connection with the execution and delivery of this Agreement or the Transaction Documents, the consummation of the transactions contemplated hereby or thereby or fulfillment of or compliance with the terms and provisions hereof. 8.9. FEES AND COMMISSIONS. -------------------- No broker 's or finder 's fee or commission will be payable by the Company with respect to the issuance and sale of the Securities or the transactions contemplated hereby. 8.10. RESERVATION OF SHARES. --------------------- The Company has reserved for issuance the number of its authorized but unissued shares of Common Stock necessary to permit the exercise in full of all the outstanding Warrants. -13- 9. REPRESENTATIONS OF THE PURCHASERS. --------------------------------- Each Purchaser represents, severally and not jointly, and in making its purchase hereunder it is specifically understood and agreed, that: 9.1. PURCHASE OF SECURITIES. ---------------------- Such Purchaser is purchasing the Securities set forth opposite his or its name on Schedule 1 hereto for its own account, (a) for investment purposes ---------- and not with a view to or for sale in connection with any distribution thereof; and (b) it, he or she is an "accredited investor" within the meaning of Regulation D promulgated under the Securities Act. Such Purchaser agrees that it will not, directly or indirectly, offer, transfer, sell, assign, pledge, hypothecate or otherwise dispose of any of the Securities purchased by it hereunder (or solicit any offers to buy, purchase, or otherwise acquire or take a pledge of any of such Securities), except in compliance with the Securities Act, the Exchange Act, any applicable state securities or blue sky laws and the Stockholders Agreement. 9.2. INCORPORATION AND AUTHORIZATION OF INSTITUTIONAL INVESTORS. ---------------------------------------------------------- In the case of each Institutional Investor, such Institutional Investor is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and such Institutional Investor has the full legal right, power and authority to enter into this Agreement and to perform its obligations hereunder without the need for the consent of any other person; and this Agreement has been duly authorized, executed and delivered and constitutes the legal, valid and binding obligation of such Institutional Investor enforceable against such Institutional Investor in accordance with the terms hereof. 9.3. NO CONFLICTS. ------------ The execution, delivery and performance by such Purchaser of this Agreement and each Transaction Document to which it is a party and compliance therewith and the purchase of the Securities will not result in any violation of and will not conflict with, or result in a breach of, any of the terms of, or constitute a default under, (a) any provision of state, Federal or foreign law to which it is subject, (b) where applicable, its Certificate of Incorporation or By-Laws, or (c) any mortgage, indenture, agreement, instrument, judgment, decree, order, rule or regulation, or other restriction to which it is a party or by which it is bound. 9.4. NO BROKERS' FEES. ---------------- Such Purchaser has not agreed or committed to pay any broker's or finder's fee or commission with respect to the purchase of the Securities or the transactions contemplated hereby. -14- 10. DEFINITIONS. ----------- For the purpose of this Agreement, the following terms shall have the meanings specified with respect thereto below: "AFFILIATE" means, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person, but shall exclude, with respect to the Company, Electra and any transferee that might be deemed to be an Affiliate of the Company solely by reason of its ownership of Securities purchased by EIT under this Agreement or any other agreement or securities issued in exchange for any such Securities, or by reason of its benefiting from any agreements or covenants of the Company contained in this Agreement. A Person shall be deemed to control another Person if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such other Person, whether through the ownership of voting securities, by contract or otherwise. "AGREEMENT" means this Securities Purchase Agreement, as this Agreement may be amended from time to time, together with all Exhibits and Schedules hereto. "BY-LAWS" means for any Person all By-Laws, Codes of Regulation or other equivalent charter documents in the jurisdiction of incorporation of such Person. "CAPITAL STOCK" means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of, rights to acquire, or interests in (however designated) corporate stock, including, without limitation, any security which is convertible into or exercisable for such corporate stock. "CERTIFICATE OF DESIGNATIONS" has the meaning set forth in Section 1 --------- hereof. "CERTIFICATE OF INCORPORATION" means for any Person all Certificates of Incorporation, Articles of Incorporation or other equivalent charter documents in the jurisdiction of incorporation of such Person. "CLOSING" has the meaning specified in Section 2.2 hereof. ----------- "CLOSING DATE" has the meaning specified in Section 2.2 hereof. ----------- "COMMON STOCK" means the Company's common stock, par value $.01 per share. -15- "COMPANY" means Career Education Corporation, a Delaware corporation, and its successors and assigns. "COMPUTERTECH ACQUISITION" has the meaning set forth in the second recital to this Agreement. "CONSENTS" has the meaning specified in Section 3.6 hereof. ----------- "CONTRACT" means any written or oral contract, agreement, commitment, note, bond, pledge, lease, sublease, deed, mortgage, guaranty, indenture, license, option, consulting agreement, supply contract, repair contract, distribution agreement, purchase order, joint venture agreement, franchise, technology and know-how agreement, employment agreement, instrument or any other contractual commitment that is binding on any Person or its property, which provide for payments from or to such Person of $50, 000 or more after the date hereof. "DAMAGES" has the meaning set forth in subsection 11.2(b) hereof. ------------------ "DOWDELL" means Robert E. Dowdell, an individual residing at 1951 Calle Roja, Santa Ana, California 92705. "EAI" means Electra Associates, Inc., a Delaware corporation, and its successors and assigns. "EIT" means Electra Investment Trust P.L.C., a corporation organized under the laws of England and Wales, and its successors and assigns. "ELECTRA" means EIT and EAI. "ELECTRA SECURITIES AGREEMENT" means that certain Securities Purchase Agreement dated as of July 31, 1995 between the Company and Electra. "EXCHANGE ACT" means the Securities Act of 1934, as amended, from time to time, and any successor statute or law thereto. "FUTURE ACQUISITION" has the meaning set forth in the second recital to this Agreement. "GAAP" means generally accepted accounting principles in the United States as in effect at the time any determination is made or financial statement is required hereunder as promulgated by the American Institute of Certified Public Accountants, the Accounting Principles Board, the Financial Accounting Standards Board or any other body existing from time to time which is authorized to establish or interpret such principles, applied on a consistent basis throughout any applicable period, subject to any change -16- required by a change in GAAP; provided, however, that if any change in -------- ------- generally accepted accounting principles during the term of this Agreement affects the calculation of any financial covenant or determination of value contained herein, the parties hereto hereby agree to amend this Agreement to the effect that each such financial covenant or determination of value is not more or less restrictive than such covenant as in effect on the date hereof. "HELLER" means, collectively, Heller Equity Capital Corporation, a Delaware corporation, and any entity controlling or under common control with Heller Equity Capital Corporation, and their successors and assigns. "INDIVIDUAL INVESTORS" has the meaning set forth in the introductory paragraph of this Agreement. "INITIAL CLOSING DATE" has the meaning set forth in Section 2.2 ----------- hereof. "INITIAL CLOSING" means the Closing of the Initial Investment. "INITIAL INVESTMENT" has the meaning set forth in Section 2.2 hereof. ----------- "INSTITUTIONAL INVESTORS" has the meaning set forth in the introductory paragraph of this Agreement. "KLETTKE" means William A. Klettke, an individual residing at 6117 North Wyndwood Drive, Crystal Lake, Illinois 60014. "LARSON" means John M. Larson, an individual residing at 36 Lakeside Drive, South Barrington, Illinois 60010. "LAUBS" means Wallace O. Laub and Constance L. Laub, a married couple residing at 46-380 Manitou Drive, Indian Wells, California 92210. "LIEN" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any agreement to give any of the foregoing, any conditions sale or other title retention agreement, any lease in the nature thereof and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction). "MANAGEMENT OPTION PLAN" has the meaning set forth in the first recital of this Agreement. "MATERIAL ADVERSE EFFECT" means a material adverse effect on the business, condition (financial or other), assets, properties or operations or prospects of the Company and its Subsidiaries, taken as a whole. -17- "OFFICERS' CERTIFICATE" means a certificate signed in the name of the Company, as applicable, by its chief executive officer, president or one of its vice presidents and by its chief financial officer, treasurer or controller. "PERSON" means and includes an individual, a partnership, a joint venture, a corporation, a trust, an unincorporated organization, a government or any department or agency thereof, and any other legal entity. "PREFERRED SHARES" means the shares of Series D Preferred Stock of the Company. "PURCHASERS" has the meaning set forth in the introductory paragraph of this Agreement. "SECURITIES" means the Warrants and the Series D Preferred Stock. "SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "SENIOR LOAN AGREEMENT" means that certain Credit Agreement dated as of July 31, 1995 by and among the Company and various of its Subsidiaries, The Provident Bank, as Agent, and various lenders, as amended. "SENIOR LOAN DOCUMENTS" means the Senior Loan Agreement and the documents entered into in connection with or provided for in the Senior Loan Agreement. "SERIES D PREFERRED STOCK" means the Series D Redeemable Preferred stock of the Company, par value $.01 per share with a stated value of $1,000.00 per share. "STOCKHOLDERS AGREEMENT" means that certain Amended and Restated Stockholders Agreement dated as of July 31, 1995 among the Company and the Purchasers, as amended by that certain First Amendment to Amended and Restated Stockholders Agreement of even date herewith among the Company and Purchasers. "SUBSEQUENT INVESTMENT" has the meaning set forth in Section 2.2 ----------- hereof. "SUBSIDIARY" means, with respect to any Person, any corporation or similar entity, a majority of the Capital Stock or other equity of which, except directors' qualifying shares, shall, at the time as of which any determination is being made, be owned by such Person either directly or through Subsidiaries. -18- "TRANSACTION DOCUMENTS" has the meaning set forth in Section 3.3 ----------- hereof. "UNITED STATES" or "U.S." means the United States of America. "WARRANT CERTIFICATE" shall have the meaning set forth in Section 1 --------- hereof. "WARRANTS" shall have the meaning set forth in Section 1 hereof. --------- 11. MISCELLANEOUS. ------------- 11.1. PAYMENTS. -------- The Company agrees that, so long as any Purchaser shall hold any Securities, it will make payments in respect of such Securities, in compliance with the terms of this Agreement, and the other Transaction Documents, by wire transfer of immediately available funds for credit to such account or accounts as such Purchaser may designate in writing. 11.2. EXPENSES; INDEMNITY. ------------------- (a) The Company hereby agrees, whether or not the transactions hereby contemplated shall be consummated, to pay, and save any holder harmless against liability for the payment of, the costs and expenses incurred by such holder, including, without limitation, the reasonable fees and disbursements of counsel engaged by Heller, EIT and the Individual Investors, in connection with (i) any subsequent proposed amendment to, modification of, or proposed consent under (whether or not such proposed modification shall be effected or proposed consent granted) and (ii) the costs and expenses, including attorney's fees, incurred by Heller, EIT and the Individual Investors, in enforcing its rights under, any of this Agreement, the Warrants or the Series D Preferred Stock or in responding to any subpoena or other legal process issued in connection with this Agreement or the transactions contemplated hereby or by reason of such Purchaser's having acquired any Security, including without limitation, costs and expenses incurred in any bankruptcy case involving the Company or any of its Subsidiaries; provided, however, that the Company shall not be obligated to -------- ------- pay any costs, fees or expenses incurred by any holder solely by reason of such holder's gross negligence or willful misconduct. The obligations of the Company under this Section 11.2 shall survive the transfer of any Securities or ------------ portion thereof or interest therein by any Purchaser or any subsequent holder of the Securities and the redemption of the Preferred Shares. (b) Notwithstanding any investigation performed by any Purchaser prior to any Closing of the Initial Investment or any Subsequent Investment, from and after the Closing of the Initial Investment, the Company shall indemnify, save and hold harmless, release and discharge each holder of any Securities and all of its -19- officers, directors, stockholders, agents, representatives, consultants, employees, and Affiliates, and all of its heirs, successors and permitted assigns from and against any and all damages, obligations, cases, claims, deficiencies, penalties, interest, expenses, fines, assessments, charges and costs (including attorneys' fees and court costs) and other liabilities of any kind, including, without limitation, environmental liabilities (collectively, "DAMAGES"), arising from, out of or in any manner connected with or based on (i) notwithstanding any disclosure in this Agreement (including the exhibits and schedules attached hereto) or otherwise, the breach of any covenant of the Company or the failure by the Company to perform any of its obligations contained herein or in any of the agreements, documents or instruments required to be executed and delivered by the Company in connection with the transactions contemplated hereby and in any other Transaction Documents, (ii) any inaccuracy in or breach of any representation or warranty of the Company under this Agreement or any agreement, document or instrument required to be executed and delivered by the Company in connection with the transactions contemplated hereby and in any other Transaction Documents, (iii) notwithstanding any disclosure in this Agreement (including the exhibits and schedules attached hereto) or otherwise, any and all acts, omissions, events, conditions or circumstances involving or related to the assets, properties, businesses, operations or activities of the Company, any of its Subsidiaries or any predecessor of any thereof, whether occurring or existing on, prior to or after the Closing of the Initial Investment, except if any such Damages arise solely as a result of such Person's gross negligence or willful misconduct. 11.3. CONSENT TO AMENDMENTS; SUBORDINATION. ------------------------------------- (a) This Agreement may be amended and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company shall have obtained the written consent to such amendment, action or omission to act, of the holders of eighty percent (80%) of the number of shares of Series D Preferred Stock at the time outstanding, and each holder of any shares of Series D Preferred Stock at the time or thereafter outstanding shall be bound by any consent authorized by this Section 11.3. No course of dealing between the Company and the holder of any - ------------ share of Series D Preferred Stock nor any delay in exercising any rights hereunder or under any share of Series D Preferred Stock shall operate as a waiver of any rights of any holder of such shares of Series D Preferred Stock. (b) Once the Preferred Shares have been redeemed in full, this Agreement may be amended and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company shall have obtained the written consent to such amendment, action or omission to act, of the holders of eighty percent (80%) of the then outstanding Warrants, and each holder of Warrants at the time or thereafter outstanding shall be bound by any consent authorized by this Section 11.3. ------------ -20- 11.4. PERSONS DEEMED OWNERS. --------------------- Prior to due presentment for registration of transfer, the Company may treat the Person in whose name any shares of Series D Preferred Stock is registered as the owner and holder of such shares of Series D Preferred Stock for the purpose of receiving payment of the liquidation value of, and dividends on, such shares and for all other purposes whatsoever. 11.5. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT. ------------------------------------------------------------ All representations and warranties contained herein and under any other Transaction Documents or made in writing by or on behalf of the Company in connection herewith or therewith or in connection with the transactions contemplated hereby or thereby shall survive the execution and delivery of this Agreement and the Securities, the transfer by any Purchaser of any Securities or portion thereof or interest therein, or the repurchase or redemption of the Securities and may be relied upon by any transferee regardless of any investigation made at any time by or on behalf of such Purchaser; provided, -------- however, that the representations and warranties set forth in any Transaction - ------- Document shall survive only for such period of time specifically set forth in such Transaction Document to the extent that a shorter period is set forth therein. Subject to the preceding sentence, this Agreement, the Securities and the other Transaction Documents embody the entire agreement and understanding among the Purchasers and the Company and supersede all prior agreements and understandings relating to the subject matter hereof. 11.6. SUCCESSORS AND ASSIGNS. ---------------------- All covenants and other agreements in this Agreement contained by or on behalf of any of the parties hereto shall bind and inure to the benefit of the of the parties hereto whether so expressed or not. 11.7. NOTICES. ------- All written communications provided for hereunder shall be sent by first class mail or nationwide overnight delivery service (with charges prepaid) and (a) if to Heller, addressed to it at 500 West Monroe Street, Chicago, Illinois 60661, Telecopier no.: 312-441-7236, Attention: Renee M. Rempe, with copies to Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd., 55 East Monroe Street, Suite 3700, Chicago, Illinois 60603, Telecopier No.: 312-332-2196, Attention: Dennis B. Black, (b) if to EIT, addressed to it at 65 Kingsway, London, England WC2B 6QT, Telecopier no.: 011-4471-242-1806, Attention: Mr. Philip Dyke, with a copy to Electra Fleming, Inc., 320 Park Avenue, 28th Floor, New York, New York 10022, Telecopier No.: 212-319-3069, Attention: Ms. Diane M. Smith, Senior Vice President, with copies to Pryor, Cashman, Sherman & Flynn, 410 Park Avenue, New York, New York 10022, Telecopier No.: 212-326-0806, Attention: Selig D. Sacks, Esq., or to such other address or addresses as EIT shall have specified to -21- the parties hereto in writing, (c) if to any other holder of any shares of Series D Preferred Stock or Warrants, including without limitation the Individual Investors, addressed to such holder at such address as such other holder shall have specified to the Company in writing or, if any such other holder shall not have so specified an address to the Company, then addressed to such other holder in care of the last holder of such share of Series D Preferred Stock or Warrants which shall have so specified an address to the Company, and (d) if to the Company, addressed to it at Career Education Corporation, 2800 West Higgins Road, Suite 790, Hoffman Estates, Illinois 60195, Telecopier No.: 847-781-3610, Attention: President, with a copy to: D'Ancona and Pflaum, 30 North LaSalle Street, Suite 2900, Chicago, Illinois 60602, Telecopier No.: 312- 580-0923, Attention: Michel J. Feldman, Esq., and with a copy to Heller Equity Capital Corp., 500 West Monroe Street, Chicago, Illinois 60661, Telecopier No.: 312-441-7236, Attention: Renee M. Rempe, or to such other address or addresses as the Company may have designated in writing to each holder of the Securities at the time outstanding. 11.8. DESCRIPTIVE HEADINGS, ETC. -------------------------- The descriptive headings of the several Sections of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. References herein to a Section are, unless otherwise specified, to one of the Sections of this Agreement and references to an "Exhibit" or "Schedule" are, unless otherwise specified, to one of the Exhibits or Schedules to this Agreement. 11.9. GOVERNING LAW; CHOICE OF FORUM. ------------------------------ THIS AGREEMENT SHALL BE DEEMED TO HAVE BEEN EXECUTED AND DELIVERED AT AND SHALL BE DEEMED TO HAVE BEEN MADE IN CHICAGO, ILLINOIS. THIS AGREEMENT, AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE SUBSTANTIVE LAWS OF THE STATE OF ILLINOIS (WITHOUT GIVING EFFECT TO ANY CONFLICTS OF LAW RULES OR PRINCIPLES) AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THE SERIES D PREFERRED STOCK SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE SUBSTANTIVE LAWS OF THE STATE OF DELAWARE (WITHOUT GIVING EFFECT TO ANY CONFLICTS OF LAW RULES OR PRINCIPLES). ANY LEGAL ACTION OR PROCEEDING WITH RESPECT HERETO AND THERETO SHALL ONLY BE BROUGHT IN THE COURTS OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF ILLINOIS, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE COMPANY AND EACH PURCHASER HEREBY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS AND IRREVOCABLY WAIVES ANY DEFENSE OR CLAIM TO SUCH JURISDICTION WHICH EITHER OR BOTH MAY HAVE BASED, DIRECTLY OR INDIRECTLY, ON THE GROUNDS OF FORUM NON CONVENIENS. IF ANY ACTION IS COMMENCED IN ANY OTHER JURISDICTION, THE PARTIES -22- HERETO HEREBY CONSENT TO THE REMOVAL OF SUCH ACTION TO THE NORTHERN DISTRICT OF ILLINOIS. THE COMPANY HEREBY IRREVOCABLY DESIGNATES CT CORPORATION SYSTEM, AS THE DESIGNEE, APPOINTEE AND AGENT, OF THE COMPANY TO RECEIVE, FOR AND ON BEHALF OF THE COMPANY, SERVICE OF PROCESS IN SUCH RESPECTIVE JURISDICTIONS IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR THE RIGHTS AND OBLIGATIONS HEREUNDER OR THEREUNDER OR UNDER THE SERIES D PREFERRED STOCK AND SUCH SERVICE SHALL BE DEEMED COMPLETED UPON DELIVERY THEREOF TO SUCH AGENT. IT IS UNDERSTOOD THAT A COPY OF SUCH PROCESS SERVED ON SUCH AGENT WILL BE PROMPTLY FORWARDED BY MAIL TO THE COMPANY AT ITS ADDRESS SET FORTH IN SECTION 11.7, BUT ------------ THE FAILURE OF THE COMPANY TO RECEIVE SUCH COPY SHALL NOT AFFECT IN ANY WAY THE SERVICE OF SUCH PROCESS. THE COMPANY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE COMPANY AT ITS ADDRESS, SUCH SERVICE TO BECOME EFFECTIVE THIRTY (30) DAYS AFTER SUCH MAILING. NOTHING HEREIN SHALL AFFECT THE RIGHT OF ANY PURCHASER, OR ANY OTHER HOLDER OF ANY OF THE SECURITIES TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE COMPANY IN ANY OTHER JURISDICTION. 11.10. WAIVER OF JURY TRIAL. -------------------- THE COMPANY AND EACH PURCHASER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THE RELATIONSHIP THAT IS BEING ESTABLISHED HEREUNDER. THE COMPANY AND EACH PURCHASER ALSO WAIVE ANY BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF THE OTHER PARTIES. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. THE COMPANY AND EACH PURCHASER ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. THE COMPANY AND EACH PURCHASER FURTHER WARRANT AND -23- REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE TRANSACTIONS CONTEMPLATED HEREBY. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 11.11. ISSUANCE OF SECURITIES TO KLETTKE. --------------------------------- The Company and Klettke hereby agree that upon Klettke's prior written request, any Securities to be issued to Klettke pursuant to this Agreement may be issued to First Chicago, Custodian, William A. Klettke IRA (the "KLETTKE IRA"); provided, that the issuance of such Securities to the Klettke IRA would -------- not result in a breach of the representations and warranties of Klettke in Section 9 hereof if such representations and warranties were made by the Klettke - --------- IRA. Klettke hereby represents and warrants that he is the sole beneficiary of the Klettke IRA with power of direction, and agrees that, in the event of the issuance of any Securities to the Klettke IRA, he will cause the Klettke IRA to be bound by the terms of this Agreement, the Stockholders Agreement and all other agreements governing the rights of the Company's stockholders to which Klettke is a party. Furthermore, Klettke hereby agrees to execute and deliver, or to cause the Klettke IRA to execute and deliver, such other documents as the Company may reasonably require in connection with any issuance of Securities to the Klettke IRA. [Signature page follows.] -24- IN WITNESS WHEREOF, the Company and each Purchaser have caused this Agreement to be executed by its duly authorized officer as of the date first above written. CAREER EDUCATION CORPORATION /s/ ROBERT E. DOWDELL By /s/ WILLIAM A. KLETTKE - ----------------------------------- ------------------------------- Robert E. Dowdell Name William A. Klettke ----------------------------- /s/ JOHN M. LARSON Title Vice President & CFO - ----------------------------------- ---------------------------- John M. Larson HELLER EQUITY CAPITAL CORPORATION /s/ WALLACE O. LAUB - ----------------------------------- By /s/ RENEE M. REMPE Wallace O. Laub ------------------------------- Name Renee M. Rempe ----------------------------- /s/ CONSTANCE L. LAUB Title Vice President - ----------------------------------- ---------------------------- Constance L. Laub ELECTRA INVESTMENT TRUST P.L.C. /s/ WILLIAM A. KLETTKE By /s/ HUGH M. MUMFORD - ----------------------------------- ------------------------------- William A. Klettke Name Hugh M. Mumford ----------------------------- Title Director ---------------------------- EX-10.19 13 SECURITIES PURCHASE AGREEMENT DTD 5/30/97 EXHIBIT 10.19 ________________________________________ SECURITIES PURCHASE AGREEMENT ________________________________________ Series D Redeemable Preferred Stock of Career Education Corporation ($15,000,000) and Warrants to Purchase Class E Common Stock of Career Education Corporation (Exercisable for 36,186 Aggregate Shares, $.01 per share Exercise Price) Dated as of May 30, 1997 TABLE OF CONTENTS (Not Part of the Agreement) Page ---- 1. AUTHORIZATION OF FINANCING............................................ 2 2. PURCHASE AND SALE OF SECURITIES; CLOSING.............................. 2 2.1. PURCHASE AND SALE.............................................. 2 2.2. CLOSING........................................................ 2 3. CONDITIONS TO EACH CLOSING............................................ 3 3.1. CLOSING OF THE GIBBS ACQUISITION AND CLOSING OF LASALLE LOANS.. 3 3.2. OPINION OF COUNSEL............................................. 3 3.3. REPRESENTATIONS AND WARRANTIES................................. 3 3.4. PURCHASE PERMITTED BY APPLICABLE LAWS.......................... 4 3.5. NO ADVERSE LEGISLATION, ACTION OR DECISION..................... 4 3.6. APPROVALS AND CONSENTS......................................... 5 3.7. PROCEEDINGS.................................................... 5 3.8. SERIES D PREFERRED STOCK AND WARRANT CERTIFICATES.............. 5 3.9. STOCKHOLDERS AGREEMENT......................................... 5 3.10. AMENDMENT TO RESTATED CERTIFICATE OF INCORPORATION AND CERTIFICATE OF DESIGNATION................................ 6 3.11. COMPLIANCE CERTIFICATE......................................... 6 3.12. ADDITIONAL INFORMATION......................................... 6 3.13. NO CHANGE RESULTING IN MATERIAL ADVERSE EFFECT................. 6 4. FUTURE ACQUISITIONS................................................... 6 4.1. CONDITIONS TO FUTURE ACQUISITIONS.............................. 6 4.2. LIMITATION OF COMPANY'S RIGHT TO MAKE ANY FUTURE ACQUISITION... 7 4.3. [REDEMPTION OF UNUSED PROCEEDS SUBSEQUENT TO JULY 31, 1997].... 7 5. AFFIRMATIVE COVENANTS................................................. 8 5.1. FINANCIAL STATEMENTS AND OTHER REPORTS......................... 8 5.2. USE OF PROCEEDS................................................ 8 5.3. RESERVATION OF SHARES.......................................... 8 6. NEGATIVE COVENANTS.................................................... 8 6.1. WITHHOLDING TAXES............................................... 8 -i- 7. OTHER REMEDIES......................................................... 9 8. REPRESENTATIONS, COVENANTS AND WARRANTIES OF THE COMPANY............... 9 8.1. ORGANIZATION; AUTHORITY.......................................... 9 8.2. AUTHORIZATION.................................................... 10 8.3. CAPITAL STOCK AND RELATED MATTERS................................ 11 8.4. LITIGATION....................................................... 12 8.5. COMPLIANCE....................................................... 12 8.6. OFFERING......................................................... 13 8.7. CONFLICTING AGREEMENTS........................................... 13 8.8. GOVERNMENTAL PERMITS, CONSENTS, ETC.............................. 14 8.9. FEES AND COMMISSIONS............................................. 14 8.10. RESERVATION OF SHARES........................................... 14 9. REPRESENTATIONS OF THE PURCHASERS...................................... 14 9.1. PURCHASE OF SECURITIES........................................... 14 9.2. INCORPORATION AND AUTHORIZATION OF INSTITUTIONAL INVESTORS....... 14 9.3. NO CONFLICTS..................................................... 15 9.4. NO BROKERS' FEES................................................. 15 10. DEFINITIONS............................................................ 15 11. MISCELLANEOUS.......................................................... 19 11.1. PAYMENTS........................................................ 19 11.2. EXPENSES; INDEMNITY............................................. 20 11.3. CONSENT TO AMENDMENTS; SUBORDINATION............................ 21 11.4. PERSONS DEEMED OWNERS........................................... 21 11.5. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT.... 21 11.6. SUCCESSORS AND ASSIGNS.......................................... 22 11.7. NOTICES......................................................... 22 11.8. DESCRIPTIVE HEADINGS, ETC....................................... 22 11.9. GOVERNING LAW; CHOICE OF FORUM.................................. 23 11.10. WAIVER OF JURY TRIAL........................................... 24 11.11. ISSUANCE OF SECURITIES TO KLETTKE................................... 24 -ii- LIST OF SCHEDULES AND EXHIBITS SCHEDULES: - --------- Schedule 1 Investments Schedule 8.2 Authorization Schedule 8.3 Capitalization Schedule 8.4 Litigation Schedule 8.7 Conflicting Agreements Schedule 8.8 Governmental Permits EXHIBITS: - -------- Exhibit A Form of Amendment to Restated Certificate of Incorporation Exhibit B Form of Certificate of Designations for Series D Preferred Stock Exhibit C Form of Warrant Certificate Exhibit D Form of Opinion of the Company's Counsel Exhibit E Form of Second Amendment to Stockholders Agreement -iii- SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT, dated as of May 30, 1997, is made by and among CAREER EDUCATION CORPORATION, a Delaware corporation (the "Company"), HELLER EQUITY CAPITAL CORPORATION, an Illinois corporation ("Heller"), ELECTRA INVESTMENT TRUST P.L.C. ("EIT") and William A. Klettke ("Klettke") (Klettke is sometimes referred to herein as the "Individual Investor"). Heller and EIT are sometimes collectively referred to herein as the "Institutional Investors." The Institutional Investors and the Individual Investor are sometimes collectively referred to herein as the "Purchasers." W I T N E S S E T H: WHEREAS, Purchasers are the holders of issued and outstanding capital stock of the Company, and issued and outstanding warrants and other options and rights to purchase capital stock of the Company. WHEREAS, the Company has requested additional equity financing in the amount of up to Fifteen Million Dollars ($15,000,000) from Purchasers, and desires to sell the Series D Preferred Stock and the Warrants (as each is hereinafter defined, and collectively, the "Securities") to the Purchasers, for the purpose of providing funds for, among other things, the acquisition of The Katharine Gibbs Schools, Inc. (the "Gibbs Acquisition") and for the acquisition of either or both of IAMD, Limited, an Illinois corporation and International Academy of Merchandising and Design (Canada), Limited, an Ontario corporation by the Company (each, a "Future Acquisition"); and WHEREAS, the Purchasers desire, upon the terms and conditions hereinafter provided, to purchase from the Company the Securities; NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be bound, hereby agree as follows: Certain terms used in this Agreement are defined in Section 10 hereof. Unless otherwise indicated, references to statutes are to statutes of the United States. Accounting terms used herein shall be construed in accordance with GAAP. In addition, unless the contrary intention appears, terms and expressions having a defined or generally accepted meaning under the securities laws of the United States shall have the same meaning in this Agreement. -1- 1. AUTHORIZATION OF FINANCING. -------------------------- The Company has authorized the issuance, sale and delivery of (a) 15,000 shares of its Series D Redeemable Preferred Stock, par value $.01 per share, with a stated value of $1,000 per share (the "Series D Preferred Stock"), which series has the rights, restrictions, privileges and preferences as set forth in the Certificate of Designations for the Series D Preferred Stock of the Company, substantially in the form of Exhibit B attached hereto, as amended by the Amendment to Restated Certificate of Incorporation substantially in the form of Exhibit A attached hereto (the "Certificate of Designations"), and (b) the detachable warrants to be issued in connection with each issuance of Series D Preferred Stock in accordance with Schedule 1 attached hereto (collectively, the "Warrants" and each individually, a "Warrant") to purchase a maximum aggregate of 36,186 shares of Class E Common Stock of the Company, at an exercise price of $.01 per share, evidenced by one or more warrant certificates (the "Warrant Certificates") to be substantially in the form of Exhibit C attached hereto. 2. PURCHASE AND SALE OF SECURITIES; CLOSING. ---------------------------------------- 2.1. PURCHASE AND SALE. ----------------- The Company hereby agrees to issue and sell to each Purchaser and each Purchaser, severally and not jointly, agrees, subject to the terms and conditions herein set forth and in reliance upon the representations, warranties and agreements of the Company herein contained, to purchase at the Closings from the Company for the purchase price set forth opposite such Purchaser's name in Schedule 1 attached hereto, (a) the aggregate number of shares of Series D Preferred Stock set forth opposite such Purchaser's name under the heading Total Investment in Schedule 1 attached hereto, and registered in such Purchaser's name (or, in the case of Heller and EIT, the name of such Institutional Investor's nominee, as such Institutional Investor shall request) and (b) the aggregate number of Warrants set forth opposite such Purchaser's name under the heading Total Investment in Schedule 1 attached hereto, in the form of one or more Warrant Certificates, registered in such Purchaser's name (or, in the case of Heller and EIT, the name of such Institutional Investor's nominee, as such Institutional Investor shall request). 2.2. CLOSING. ------- The purchase and delivery of the Securities shall take place at the offices of Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd., 55 E. Monroe Street, Suite 3700, Chicago, Illinois 60603 at one or more closings (each, a "Closing"). Subject to the satisfaction or waiver of the conditions described in Section 3 below, the Closing of the purchase and sale of the Securities set forth opposite each Purchaser's name under the heading Initial Investment in Schedule 1 attached hereto, shall be held simultaneously with the execution and delivery of this Agreement, or at such other place or on such other date as the Institutional Investors and the Company may agree upon, but in no event later than May 30, 1997 (the "Initial Closing Date"). Subject to the satisfaction or waiver of the -2- conditions described in Section 3 and Section 4 below, each Closing of the purchase and sale of Securities, or any portion thereof, set forth opposite each Purchaser's name under the heading Subsequent Investment in Schedule 1 attached hereto, shall be held simultaneously with the Closing of a Future Acquisition which the Company intends to finance with the proceeds of such Subsequent Investment. Simultaneously with each Closing or as promptly as practicable thereafter, the Company will deliver one or more certificates evidencing the appropriate number of shares of Series D Preferred Stock and one or more certificates evidencing the appropriate number of Warrants to each Purchaser, against payment by such Purchaser of the purchase price therefor by transfer of immediately available funds to such bank or other financial institution as the Company may direct in writing, for credit to the Company's account The date of each Closing hereunder is sometimes referred to as a "Closing Date". Notwithstanding anything to the contrary contained herein, each Purchaser shall be permitted, at its option, to purchase all of the Securities set forth opposite such Purchaser's name on Schedule 1 at the Initial Closing. 3. CONDITIONS TO EACH CLOSING. -------------------------- Each Purchaser's obligation to purchase and pay for the Securities to be sold in connection with the Initial Investment and each Subsequent Investment is subject to the satisfaction prior to or at each Closing of each of the following conditions: 3.1. CLOSING OF THE GIBBS ACQUISITION AND CLOSING OF LASALLE LOANS. ------------------------------------------------------------- With respect to the Initial Closing only, the Gibbs Acquisition shall close simultaneously with the Initial Closing, in accordance with the terms and subject to the conditions approved by the Board of Directors of the Company, without any material deviation therefrom. The transactions contemplated by that certain Credit Agreement dated as of May 30, 1997 by and among the Company, LaSalle National Bank, as agent and certain lenders thereunder, shall close simultaneously with the Initial Closing, in accordance with the terms and subject to conditions approved by the Board of Directors of the Company, without any material deviation therefrom. 3.2. OPINION OF COUNSEL. ------------------ Simultaneously with each Closing or as promptly as practicable thereafter, the Institutional Investors shall have received from Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd., special counsel to the Company, an opinion substantially in the form set forth in Exhibit D, addressed to the Institutional Investors, dated the Closing Date and otherwise reasonably satisfactory in form and substance to such parties. 3.3. REPRESENTATIONS AND WARRANTIES. ------------------------------ The representations and warranties of the Company contained in this Agreement and those otherwise made in any writing by the Company, furnished in -3- connection with or pursuant to this Agreement and the Gibbs Acquisition or Future Acquisitions to be financed hereby, as applicable (the "Transaction Documents") or in connection with the transactions contemplated hereby or thereby, shall be true and correct when made and at the time of such Closing (unless expressly made as of a particular date) as though made at such time, and the Company shall have performed or complied with the covenants, conditions and agreements contained in this Agreement and the applicable Transaction Documents required to be performed and complied with by the Company at or prior to such Closing, other than covenants, conditions and agreements contained in such Transaction Documents which have been waived by the parties thereto and disclosed to the Institutional Investors on or prior to such Closing. 3.4. PURCHASE PERMITTED BY APPLICABLE LAWS. ------------------------------------- The purchase of and payment for the Securities to be purchased at such Closing shall not violate any applicable law or governmental regulation (including, without limitation, Section 5 of the Securities Act) and shall not subject the Purchasers to any tax, penalty, liability or other onerous condition under or pursuant to any applicable law or governmental regulation or order. Each Purchaser shall have received such certificates or other evidence as they may reasonably request to establish compliance with the conditions set forth in this Section 3.4. 3.5. NO ADVERSE LEGISLATION, ACTION OR DECISION. ------------------------------------------ After the date hereof and prior to the applicable Closing Date, no legislation, order, rule, ruling or regulation shall have been enacted or made by or on behalf of any governmental body, department or agency, nor shall have any legislation been introduced and favorably reported for passage to either House of Congress by any committee of either such House to which such legislation has been referred for consideration or any state legislature in any jurisdiction in which the Company operates or by any committee of such legislature to which such legislation has been referred for consideration, nor shall any decision of any court of competent jurisdiction within the United States have been rendered which, in any Institutional Investor's judgment, would have a Material Adverse Effect. There shall be no action, suit, investigation, or proceeding pending, or to the Company's knowledge, threatened, against or affecting the Company or any of its Subsidiaries, the Company's or any such Subsidiary's properties or rights, or any of the Company's or any such Subsidiary's Affiliates, officers or directors, before any court, arbitrator or administrative or governmental body which (a) seeks to restrain, enjoin, prevent the consummation of or otherwise affect the transactions contemplated by this Agreement or the applicable Transaction Documents or (b) questions the validity or legality of any such transactions or seeks to recover damages or to obtain other relief in connection with any such transactions, and, to the Company's knowledge, there shall be no valid basis for any such action, proceeding or investigation. -4- 3.6. APPROVALS AND CONSENTS. ---------------------- The Company shall have duly received all material authorizations, waivers, consents, approvals, licenses, franchises, permits and certificates (collectively, "Consents") by or of all federal, state and local governmental authorities and all material Consents by or of all other Persons necessary or advisable for the issuance of the applicable Securities, and all thereof shall be in full force and effect at the time of Closing. 3.7. PROCEEDINGS. ----------- All proceedings taken or to be taken in connection with the transactions contemplated hereby and in the applicable Transaction Documents, and all documents incident thereto, shall be reasonably satisfactory in form and substance to each Institutional Investor, and each Institutional Investor shall have received all such counterpart originals or certified or other copies of such documents as it may request. 3.8. SERIES D PREFERRED STOCK AND WARRANT CERTIFICATES. ------------------------------------------------- The Company shall have delivered to each Purchaser one or more Series D Preferred Stock certificates and one or more Warrant certificates representing the aggregate number of shares of Series D Preferred Stock and Warrants being purchased from the Company by such Purchaser at or promptly after the applicable Closing. 3.9. STOCKHOLDERS AGREEMENT. ---------------------- The Second Amendment to the Amended and Restated Stockholders' Agreement of the Company, in the form of Exhibit E hereto, shall have been executed and delivered by and to all parties thereto. 3.10. AMENDMENT TO RESTATED CERTIFICATE OF INCORPORATION AND ------------------------------------------------------ CERTIFICATE OF DESIGNATION. -------------------------- The Amendment to Restated Certificate of Incorporation and Certificate Designation of Series D Preferred Stock increasing the number of authorized shares of Class A Common Stock to 600,000, the number of authorized shares of Class E Non-voting Common Stock to 200,000 and the number of authorized shares of Series D Preferred Stock to 25,000, in the form of Exhibit A shall have been approved by the requisite stockholders and the Board of Directors of the Company and shall have been executed and duly filed with the Delaware Secretary of State, and shall remain in full force and effect, and since the date of such filing, the Company will not have adopted or filed any other document or instrument amending or modifying the Restated Certificate of Incorporation or the Certificate of Designation of Series D Preferred Stock. -5- 3.11. COMPLIANCE CERTIFICATE. ---------------------- Each Purchaser shall have received an Officers' Certificate, dated as of each Closing Date, certifying that the conditions specified in this Section 3 required to be fulfilled on such Closing Date (other than actions required to be taken by such Purchaser) have been fulfilled. 3.12. ADDITIONAL INFORMATION. ---------------------- The Company shall have executed and/or delivered such other information and documentation as each Purchaser and its counsel may reasonably request. Each Purchaser shall have received such other documents and opinions, in form and substance satisfactory to its counsel, relating to matters incident to the Gibbs Acquisition and the transactions contemplated by the Transaction Documents. 3.13. NO CHANGE RESULTING IN MATERIAL ADVERSE EFFECT. ---------------------------------------------- Since February 28, 1997, there shall have been no change in the business or operations of the Company, nor any other event, which has had, or is likely to have, in any Institutional Investor's reasonable judgment, a Material Adverse Effect. Any condition specified in this Section 3 (or in Section 4 below) may be waived with respect to any Purchaser upon express written consent executed by such Purchaser. 4. FUTURE ACQUISITIONS. ------------------- 4.1. CONDITIONS TO FUTURE ACQUISITIONS. --------------------------------- Following the Initial Closing, the Company shall be permitted to use the proceeds from the sale of Securities hereunder which are not used to fund the Gibbs Acquisition (the "Unused Proceeds") to fund Future Acquisitions, subject to the satisfaction, or waiver by each Institutional Investor, prior to or at the Closing of such Future Acquisitions, of each of the following conditions: (a) No Event of Default. No default or event of default shall exist or be continuing under the Senior Loan Agreement, other than any default or event of default caused by the Purchasers' failure to purchase all or any of the Series D Preferred Stock or Warrants or which would be cured by the purchase of the Series D Preferred Stock and Warrants being requested by the Company. (b) Representations and Warranties. The representations and warranties of the Company contained in this Agreement and those otherwise made in any writing by the Company furnished in connection with or pursuant to this Agreement and the Future Acquisition in question (the "Future Acquisition Transaction Documents") and in connection with the -6- transactions contemplated hereby and thereby, shall be true and correct in all material respects as of the closing of the Future Acquisition (unless expressly made as of a particular date). (c) Conditions. The Company shall have performed or complied with the covenants, conditions and agreements contained in this Agreement and the applicable Future Acquisition Transaction Documents required to be performed and complied with by the Company at or prior to such closing, other than covenants, conditions and agreements contained in such future Acquisition Transaction Documents which have been waived by the parties thereto and disclosed to the Institutional Investors on or prior to such closing. (d) Approval of Company Board of Directors; Use of Proceeds. The Unused Proceeds shall be used to fund a Future Acquisition previously approved by the Board of Directors of the Company, which approval shall include the affirmative vote of the Heller Director (as defined in the Stockholders Agreement), Patrick K. Pesch (or any successor to his seat on the Board of Directors), provided that a new approval of the Board of Directors shall be required in order to fund one Future Acquisition without the other or to fund a Future Acquisition after June 30, 1997, which approval shall include the approval of the Heller Director. (e) Prior Notice. The Company shall have given to each Purchaser written notice of the proposed closing of the Future Acquisition not less than five (5) days prior to the date of the Closing for such Future Acquisition, which notice shall indicate the nature of the Future Acquisition and the aggregate consideration to be paid by the Company. Any Purchaser who has not previously purchased all or a sufficient portion of the Securities set forth opposite such Purchaser's name on Schedule 1 to fund its portion of such Future Acquisition shall be obligated to purchase such additional 4.2. LIMITATION OF COMPANY'S RIGHT TO MAKE ANY FUTURE ACQUISITION. ------------------------------------------------------------ Notwithstanding any provision of this Agreement to the contrary, in no event shall the Company be permitted to obligate any Purchaser to fund any Future Acquisitions after the earlier of July 31, 1997, or (ii) the occurrence of a Triggering Event. 4.3. REDEMPTION OF UNUSED PROCEEDS SUBSEQUENT TO JULY 31, 1997. --------------------------------------------------------- Notwithstanding any provision of this Agreement to the contrary, in the event that the Company has not used all or any portion of the Unused Proceeds to fund Future Acquisitions before the earlier of (i) July 31, 1997, or (ii) the occurrence of a -7- Triggering Event, then the Investors will cause the Company to redeem such number of shares of Series D Preferred Stock issued hereunder in respect of Subsequent Investments from each of the Purchasers of such shares, to the extent the proceeds of such Subsequent Investments constitute Unused Proceeds, so as to return such Unused Proceeds to the applicable Purchasers, for a redemption price equal to the Liquidation Value (as defined in the Certificate of Designations) of such Securities, and, in connection with such redemption, the number of the Warrants allocable to the redeemed shares of Series D Preferred Stock in accordance with Schedule 1 attached hereto shall be cancelled. 5. AFFIRMATIVE COVENANTS. --------------------- The Company hereby covenants from and after the date of this Agreement, so long as any Securities remain outstanding, as follows: 5.1. FINANCIAL STATEMENTS AND OTHER REPORTS. -------------------------------------- The Company covenants that it will deliver, or cause to be delivered, to each Purchaser, the financial statements and other reports described in Section 5.1 of the Electra Securities Agreement, in the form and in accordance with the deadlines for delivery of such financial statements and other reports set forth in the Electra Securities Agreement. 5.2. USE OF PROCEEDS. --------------- The Company shall use all of the proceeds received from the sale of the Securities pursuant to this Agreement to fund (a) the Gibbs Acquisition and related costs and expenses and (b) any Future Acquisition permitted hereunder and any related costs and expenses. The Company shall invest any Unused Proceeds in a segregated, interest bearing account pending disbursement in connection with a Future Acquisition or application to a redemption pursuant to Section 4.3 above. 5.3. RESERVATION OF SHARES. --------------------- The Company shall at all times keep reserved, and available for issuance, the number of shares of Common Stock for issuance upon exercise of all of the Warrants (as such number may be adjusted from time to time pursuant to the terms of the Warrants). 6. NEGATIVE COVENANTS. ------------------ The Company hereby covenants from and after the date of this Agreement, so long as any Securities remain outstanding, as follows: 6.1. WITHHOLDING TAXES. ----------------- (a) The Company covenants that it will not withhold United States withholding taxes from payments to be made to holders of the Securities if such holders (i) are corporations organized under the laws of a jurisdiction -8- outside the United States or are otherwise persons not resident in the United States for United States federal income tax purposes, and (ii) provide the Company, upon the Company's reasonable request, with one or more of Internal Revenue Service Form W-8, Form 4224 or other applicable forms, certificates or documents certifying as to entitlement to an exemption from any such withholding requirements. (b) The Company covenants that it will not withhold United States withholding taxes from payments to be made to holders of the Securities in excess of an applicable treaty rate if such holders (i) are corporations organized under the laws of jurisdictions outside the United States or are otherwise persons not resident in the United States for United States federal income tax purposes, and (ii) provide the Company, upon the Company's reasonable request, with one or more of certifications of their residence address, Internal Revenue Service Form 1001 or other applicable forms, certificates or documents certifying as to entitlement to a reduced rate of withholding under any such withholding requirements. (c) Neither subsection 6.1(a) nor subsection 6.1(b) hereof shall require the Company to apply an exemption or reduced rate of withholding during any period when it shall have received notice or has knowledge (i) that the residence information previously provided on any applicable form, certificate or document is incorrect and no corrected form, certificate or document as applicable has been provided to the Company, or (ii) of any other information which would render such exemption or reduced rate inapplicable. 7. OTHER REMEDIES. -------------- No remedy conferred in this Agreement upon the holder of any Securities is intended to be exclusive of any other remedy available to such holder, and each and every such remedy shall be cumulative and shall be in addition to every other remedy conferred herein or now or hereafter existing at law or in equity or by statute or otherwise. 8. REPRESENTATIONS, COVENANTS AND WARRANTIES OF THE COMPANY. -------------------------------------------------------- The Company hereby represents, covenants and warrants for the benefit of each holder from time to time of the Securities and the Purchasers, as of the applicable Closing, and after giving effect to the transactions contemplated by this Agreement to be consummated simultaneously with such Closing, as follows: 8.1. ORGANIZATION; AUTHORITY. ----------------------- Each of the Company and its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all requisite corporate power and authority to own or lease and operate its properties -9- and to carry on its business as presently conducted and as proposed to be conducted. Each of the Company and its Subsidiaries is duly qualified and in good standing as a foreign corporation duly authorized to do business in each jurisdiction where it owns or leases property or in which the conduct of its business requires it so to qualify or be licensed, except in those jurisdictions in which the failure to qualify will not individually or in the aggregate have a Material Adverse Effect. Other than the Subsidiaries, the Company does not own of record or beneficially any Capital Stock or equity interest or investment in any corporation, association, partnership, joint venture or other entity. The Company and each of its Subsidiaries have furnished Purchasers with true, correct and complete copies of its Certificate of Incorporation (including, without limitation, the Certificate of Designations) and By-Laws, each as amended to date. 8.2. AUTHORIZATION. ------------- All corporate action on the part of the Company and its directors and stockholders necessary for the authorization, execution, delivery and performance by (a) the Company of this Agreement, the Series D Preferred Stock certificates, the Warrants and the other transactions to be consummated in connection with the applicable Closing, and (b) the consummation of the transactions contemplated herein and therein shall have been taken or will be taken prior to such Closing. Each of the Transaction Documents to which the Company is a party is the legal, valid and binding obligation of the Company enforceable against it in accordance with its terms. The execution, delivery and performance by the Company of each Transaction Document to which it is a party and compliance therewith and the issuance and sale of the shares of Series D Preferred Stock and the Warrants will not result in any violation of and will not (i) conflict with, or result in a breach of, any of the terms of, or constitute a default under, (a) any provision of state or Federal law to which the Company is subject, (b) the Company's Certificate of Incorporation (including, without limitation, the Certificate of Designations) or By-Laws, or (c) any mortgage, indenture, agreement, instrument, judgment, decree, order, rule or regulation, or other restriction to which the Company is a party or by which it is bound, or (ii) result in the creation of any Lien (except as contemplated by the Senior Loan Documents) upon any of the properties or assets of the Company pursuant to any such term, or (iii) except as set forth on Schedule 8.2, result in the suspension, revocation, impairment, forfeiture or non-renewal of any permit, license, authorization or approval applicable to the Company's operations or any of its assets or properties. No stockholder has any preemptive rights or rights of first refusal by reason of the issuance of the Warrants or the shares of Series D Preferred Stock which have not previously been waived. The issued and outstanding shares of Series D Preferred Stock have been duly and validly issued and are fully paid and non-assessable. The shares of Common Stock issuable upon exercise of the Warrants, have, in each case, been duly and validly reserved, and are not subject to any preemptive rights or rights of first refusal which have not previously been waived, and, upon issuance, will be validly issued, fully paid and non-assessable. -10- 8.3. CAPITAL STOCK AND RELATED MATTERS. --------------------------------- Immediately following the Closing, (a) the authorized capital stock of the Company will consist of (i) 600,000 shares of Class A Voting Common Stock, par value $.01 per share, of which 5,250 shares will be issued and outstanding, (ii) 100,000 shares of Class B Voting Common Stock, par value $.0l per share, of which 5,100 shares will be issued and outstanding, (iii) 100,000 shares of Class C Non-Voting Common Stock, par value $.01 per share, of which 69,900 shares will be issued and outstanding, (iv) 100,000 shares of Class D Non-Voting Common Stock, par value $.01 per share, of which no shares will be issued and outstanding and 27,484 shares will be reserved for issuance upon the exercise of certain warrants held by Electra and The Provident Bank, (v) 200,000 shares of Class E Non-Voting Common Stock, par value $.01 per share, of which 1,648 shares will be issued and outstanding and 13,400 shares will be reserved for issuance upon exercise of certain management stock options, 1,315 shares will be reserved for issuance upon exercise of certain warrants held by The Provident Bank and 45,110 shares will be reserved for issuance upon exercise of the Warrants and certain other warrants, (vi) 50,000 shares of Series A Preferred Stock, par value $.01 per share, of which 7,852 shares will be issued and outstanding, (vii) 1,000 shares of Series B Preferred Stock, par value $.01 per share, none of which shares will be issued and outstanding, (viii) 5,000 shares of Series C Preferred Stock, par value $.01 per share, of which 4,954 shares of Series C Preferred Stock will be issued to Electra and outstanding, and (ix) 25,000 shares of Series D Preferred Stock, par value $.01 per share, per share, of which 21,125 shares will be issued and outstanding and 1,375 shares will be reserved for issuance upon the closing of unconsummated Subsequent Investments, (b) no shares of Common Stock will be owned or held by or for the account of the Company; (c) all of the issued and outstanding shares of the Company's Capital Stock will be validly issued and outstanding, fully paid and non-assessable and will be owned of record (other than shares attributable to Klettke, which shall be owned of record by First Chicago, Custodian, William A. Klettke IRA) and, to the best knowledge of the Company, beneficially, free and clear of any Liens (except as may be contemplated by the Senior Loan Documents) by the individuals and entities and in the amounts set forth on Schedule 1 and Schedule 8.3 hereof; (d) except for the Class A Voting Common Stock, the Class B Voting Common Stock, the Class C Non-Voting Common Stock, warrants for the Class D Non-Voting Common Stock, the Class E Non-Voting Common Stock and certain warrants and options for the Class E Non-Voting Common Stock, the Series A Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock, and the Warrants, and except as set forth on Schedule 8.3 hereto, the Company has no, and at the time of the Initial Closing, will not have, outstanding stock or securities convertible into or exchangeable for any shares of its Capital Stock, or any outstanding rights (either preemptive or other) to subscribe for or to purchase, or any outstanding options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any outstanding calls, commitments or claims of any character relating to, any Capital Stock or any stock or securities convertible into or exchangeable for any Capital Stock of the Company, or any outstanding demand or piggyback registration rights to register any Capital Stock or any stock or securities convertible into or exchangeable for -11- the Capital Stock of the Company (other than rights of certain Purchasers which have been waived or are being waived simultaneously herewith); (e) except with respect to the Series C Preferred Stock, the Series A Preferred Stock and the Series D Preferred Stock, the Company will not be subject to any obligation (contingent or other) to repurchase, otherwise acquire or retire any shares of Capital Stock; and (f) the Company has no knowledge of any agreement (except as set forth in this Agreement, the Electra Securities Agreement or the Stockholders Agreement) restricting the transfer of any shares of the Company's Capital Stock, except as set forth on Schedule 8.3. Schedule 8.3 sets forth the number of shares of Capital Stock, the holders thereof, and the percentage held by each holder of the issued and outstanding Capital Stock of the Company and each Subsidiary at the time of the Closing of the Initial Investment and after giving effect to the Initial Investment. 8.4. LITIGATION. ---------- Except as disclosed on Schedule 8.4 hereto, there is no action, suit, investigation or proceeding pending, or, to the Company's knowledge threatened, or any basis therefor or threat thereof, in, nor is there any existing judgment, order or decree of, any court, governmental authority, arbitration board or tribunal, foreign or domestic to which the Company or any of its Subsidiaries is or may be named as a party or its property is or may be subject or which challenges this Agreement or any of the transactions contemplated hereby, or to the Company's knowledge, to which any officer, employee or stockholder of the Company or any of its Subsidiaries is subject, and the Company has no knowledge of any unasserted claim, the assertion of which is likely and which, if asserted, will seek damages, an injunction or other legal, equitable, monetary or nonmonetary relief which claim individually or collectively with other such unasserted claims, if granted, or actions, suits, investigations or proceedings would have a Material Adverse Effect or which challenges this Agreement or any of the other Transaction Documents or any of the transactions contemplated hereby or thereby. No legislation, order, rule, ruling or regulation has been enacted or made by or on behalf of any governmental body, department or agency, nor to the Company's knowledge has there been any legislation introduced and favorably reported for passage to either House of Congress by any committee of either such House to which such legislation has been referred for consideration or any state legislature in any jurisdiction in which the schools operated by the Company and its Subsidiaries operate or by any committee of such legislature to which such legislation has been referred for consideration, nor to the Company's knowledge has any decision of any court of competent jurisdiction within the United States been rendered which, in the Company's judgment, would have a Material Adverse Effect. 8.5. COMPLIANCE. ---------- (a) Neither the Company nor any Subsidiary is in violation of any statute, law, ordinance, governmental rule or regulation (including environmental laws) or any judgment, order or decree (federal, state, local or foreign) to which it is subject, except where such violation would not have, -12- and is not likely to result in, a Material Adverse Effect, nor has it failed to obtain any, and it possesses all, licenses, permits, franchises or other governmental authorizations necessary for the ownership or operation of its properties or the conduct of its business as presently conducted and as proposed to be conducted, except where the failure to so obtain or to so possess would not have, and is not likely to result in, a Material Adverse Effect. (b) Neither the Company nor any Subsidiary is in violation of any term of its Certificate of Incorporation, as amended (including, without limitation, the Certificate of Designations in the case of the Company), or By-Laws, as amended. (c) Neither the Company nor any Subsidiary is in violation of any term of any Contract, judgment, decree, order, statute, rule or regulation to which either the Company or any Subsidiary is subject or which would permit any party to any Contract to terminate, amend or modify such Contract, except for any violations which do not cause, and are not likely to result in, a Material Adverse Effect. To the Company's knowledge, neither the Company nor any Subsidiary has waived any right or default by any party under any Contract. All Contracts are in full force and effect, and the Company and its Subsidiaries each have no knowledge that any party to any Contract, or any parties to any Contract is or is seeking or presently intends to seek to (i) terminate, amend or modify such Contract or (ii) upon the expiration of such Contract, not renew such Contract on terms substantially similar to those terms currently in such Contract, except where the termination, amendment, modification or failure to renew does not have, and is not likely to result in, a Material Adverse Effect. 8.6. OFFERING. -------- Based upon the representations and warranties of each Purchaser set forth in Section 9 hereof, the offer, sale and issuance of the shares of Series D Preferred Stock, the Warrants, and the shares of Common Stock issuable upon the exercise of the Warrants are all exempt from the registration requirements of the Securities Act and from the registration or qualification requirements of the laws of any applicable state or other jurisdiction, and neither the Company nor anyone acting on its behalf will take any action hereafter that would cause the lose of such exemption. 8.7. CONFLICTING AGREEMENTS. ---------------------- Neither the Company nor any of its Subsidiaries is a party to any Contract or subject to any restriction which would have, or would be likely to have, a Material Adverse Effect. Except as set forth on Schedule 8.7 hereto, neither the Company nor any of its Subsidiaries is a party to or otherwise subject to any Contract which limits the amounts of, -13- or otherwise imposes restrictions on, the issuance of the Warrants, the Series D Preferred Stock or the Common Stock (upon the exercise of the Warrants). 8.8. GOVERNMENTAL PERMITS, CONSENTS, ETC. ----------------------------------- Except as set forth on Schedule 8.8, no consent, approval, authorization, exemption or other action by, or notice to or filing with, any court or administrative or governmental body which has not been obtained, taken or made is required in connection with the execution and delivery of this Agreement or the Transaction Documents, the consummation of the transactions contemplated hereby or thereby or fulfillment of or compliance with the terms and provisions hereof. 8.9. FEES AND COMMISSIONS. -------------------- No broker's or finder's fee or commission will be payable by the Company with respect to the issuance and sale of the Securities or the transactions contemplated hereby. 8.10. RESERVATION OF SHARES. --------------------- The Company has reserved for issuance the number of its authorized but unissued shares of Common Stock necessary to permit the exercise in full of all the outstanding Warrants. 9. REPRESENTATIONS OF THE PURCHASERS. --------------------------------- Each Purchaser represents, severally and not jointly, and in making its purchase hereunder it is specifically understood and agreed, that: 9.1. PURCHASE OF SECURITIES. ---------------------- Such Purchaser is purchasing the Securities set forth opposite his or its name on Schedule 1 hereto for its own account, (a) for investment purposes and not with a view to or for sale in connection with any distribution thereof; and (b) it, he or she is an "accredited investor" within the meaning of Regulation D promulgated under the Securities Act. Such Purchaser agrees that it will not, directly or indirectly, offer, transfer, sell, assign, pledge, hypothecate or otherwise dispose of any of the Securities purchased by it hereunder (or solicit any offers to buy, purchase, or otherwise acquire or take a pledge of any of such Securities), except in compliance with the Securities Act, the Exchange Act, any applicable state securities or blue sky laws and the Stockholders Agreement. 9.2. INCORPORATION AND AUTHORIZATION OF INSTITUTIONAL INVESTORS. ---------------------------------------------------------- In the case of each Institutional Investor, such Institutional Investor is a corporation duly organized, validly existing and in good standing under the laws of its -14- jurisdiction of incorporation and such Institutional Investor has the full legal right, power and authority to enter into this Agreement and to perform its obligations hereunder without the need for the consent of any other person; and this Agreement has been duly authorized, executed and delivered and constitutes the legal, valid and binding obligation of such Institutional Investor enforceable against such Institutional Investor in accordance with the terms hereof. 9.3. NO CONFLICTS. ------------ The execution, delivery and performance by such Purchaser of this Agreement and each Transaction Document to which it is a party and compliance therewith and the purchase of the Securities will not result in any violation of and will not conflict with, or result in a breach of, any of the terms of, or constitute a default under, (a) any provision of state, Federal or foreign law to which it is subject, (b) where applicable, its Certificate of Incorporation or By-Laws, or (c) any mortgage, indenture, agreement, instrument, judgment, decree, order, rule or regulation, or other restriction to which it is a party or by which it is bound. 9.4. NO BROKERS' FEES. ---------------- Such Purchaser has not agreed or committed to pay any broker's or finder's fee or commission with respect to the purchase of the Securities or the transactions contemplated hereby. 10. DEFINITIONS. ----------- For the purpose of this Agreement, the following terms shall have the meanings specified with respect thereto below: "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person, but shall exclude, with respect to the Company, Electra and any transferee that might be deemed to be an Affiliate of the Company solely by reason of its ownership of Securities purchased by EIT under this Agreement or any other agreement or securities issued in exchange for any such Securities, or by reason of its benefiting from any agreements or covenants of the Company contained in this Agreement. A Person shall be deemed to control another Person if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such other Person, whether through the ownership of voting securities, by contract or otherwise. "Agreement" means this Securities Purchase Agreement, as this Agreement may be amended from time to time, together with all Exhibits and Schedules hereto. -15- "By-Laws" means for any Person all By-Laws, Codes of Regulation or other equivalent charter documents in the jurisdiction of incorporation of such Person, all as amended. "Capital Stock" means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of, rights to acquire, or interests in (however designated) corporate stock, including, without limitation, any security which is convertible into or exercisable for such corporate stock. "Certificate of Designations" has the meaning set forth in Section 1 --------- hereof. "Certificate of Incorporation" means for any Person all Certificates of Incorporation, Articles of Incorporation or other equivalent charter documents in the jurisdiction of incorporation of such Person, all as amended. "Closing" has the meaning specified in Section 2.2 hereof. ----------- "Closing Date" has the meaning specified in Section 2.2 hereof. ----------- "Common Stock" means the Company's common stock, par value $.01 per share. "Company" means Career Education Corporation, a Delaware corporation, and its successors and assigns. "Consents" has the meaning specified in Section 3.6 hereof. ----------- "Contract" means any written or oral contract, agreement, commitment, note, bond, pledge, lease, sublease, deed, mortgage, guaranty, indenture, license, option, consulting agreement, supply contract, repair contract, distribution agreement, purchase order, joint venture agreement, franchise, technology and know-how agreement, employment agreement, instrument or any other contractual commitment that is binding on any Person or its property, which provide for payments from or to such Person of $50,000 or more after the date hereof. "Damages" has the meaning set forth in subsection 11.2(b) hereof. ------------------ "EAI" means Electra Associates, Inc., a Delaware corporation, and its successors and assigns. "EIT" means Electra Investment Trust P.L.C., a corporation organized under the laws of England and Wales, and its successors and assigns. -16- "Electra" means EIT and EAI. "Electra Securities Agreement" means that certain Securities Purchase Agreement dated as of July 31, 1995 between the Company and Electra, as amended from time to time. "Exchange Act" means the Securities Act of 1934, as amended, from time to time, and any successor statute or law thereto. "Future Acquisition" has the meaning set forth in the second recital to this Agreement. "GAAP" means generally accepted accounting principles in the United States as in effect at the time any determination is made or financial statement is required hereunder as promulgated by the American Institute of Certified Public Accountants, the Accounting Principles Board, the Financial Accounting Standards Board or any other body existing from time to time which is authorized to establish or interpret such principles, applied on a consistent basis throughout any applicable period, subject to any change required by a change in GAAP; provided, however, that if any change in generally accepted accounting principles during the term of this Agreement affects the calculation of any financial covenant or determination of value contained herein, the parties hereto hereby agree to amend this Agreement to the effect that each such financial covenant or determination of value is not more or less restrictive than such covenant as in effect on the date hereof. "Gibbs Acquisition" has the meaning set forth in the second recital to this Agreement. "Heller" means, collectively, Heller Equity Capital Corporation, a Delaware corporation, and any entity controlling or under common control with Heller Equity Capital Corporation, and their successors and assigns. "Individual Investors" has the meaning set forth in the introductory paragraph of this Agreement. "Initial Closing Date" has the meaning set forth in Section 2.2 hereof. "Initial Public Offering" means an initial underwritten public offering and sale for cash by the Company of the Common Stock of the Corporation to an underwriter or underwriters pursuant to a "firm commitment" underwriting agreement and a registration statement declared effective by the Securities and Exchange Commission under the Securities Act of 1933, as amended, in which (i) the minimum equity valuation of the Company is $45,000,000 before December 31, 1999 and $55,000,000 thereafter, and (ii) the Company receives gross proceeds of at least $20,000,000. -17- "Institutional Investors" has the meaning set forth in the introductory paragraph of this Agreement. "Klettke" means William A. Klettke, an individual residing at 6117 North Wyndwood Drive, Crystal Lake, Illinois 60014. "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any agreement to give any of the foregoing, any conditions sale or other title retention agreement, any lease in the nature thereof and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction). "Material Adverse Effect" means a material adverse effect on the business, condition (financial or other), assets, properties or operations or prospects of the Company and its Subsidiaries, taken as a whole. "Officers' Certificate" means a certificate signed in the name of the Company, as applicable, by its chief executive officer, president or one of its vice presidents and by its chief financial officer, treasurer or controller. "Person" means and includes an individual, a partnership, a joint venture, a corporation, a trust, an unincorporated organization, a government or any department or agency thereof, and any other legal entity. "Preferred Shares" means the shares of Series D Preferred Stock of the Company. "Purchasers" has the meaning set forth in the introductory paragraph of this Agreement. "Securities" means the Warrants and the Series D Preferred Stock. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "Senior Loan Agreement" means that certain Credit Agreement dated as of May 30, 1997 by and among the Company and various of its Subsidiaries and LaSalle National Bank, as agent and certain lenders thereunder, as amended from time to time. "Senior Loan Documents" means the Senior Loan Agreement and the documents entered into in connection with or provided for in the Senior Loan Agreement. -18- "Series D Preferred Stock" means the Series D Redeemable Preferred stock of the Company, par value $.01 per share with a stated value of $1,000.00 per share. "Stockholders Agreement" means that certain Amended and Restated Stockholders Agreement dated as of July 31, 1995 among the Company and the Purchasers, as amended by that certain First Amendment to Amended and Restated Stockholders Agreement, dated as of February 28, 1997 among the Company and Purchasers and as further amended by that certain Second Amendment to Amended and Restated Stockholders Agreement of even date herewith among the Company, Purchaser and the other stockholders of the Company. "Subsidiary" means, with respect to any Person, any corporation or similar entity, a majority of the Capital Stock or other equity of which, except directors' qualifying shares, shall, at the time as of which any determination is being made, be owned by such Person either directly or through Subsidiaries. "Transaction Documents" has the meaning set forth in Section 3.3 hereof. "Triggering Event" means (i) a sale, lease or exchange of all or substantially all of the assets of the Company, (ii) a sale by the Stockholders of all or substantially all of the outstanding shares of Common Stock, or (iii) an Initial Public Offering. "United States" or "U.S." means the United States of America. "Warrant Certificate" shall have the meaning set forth in Section 1 hereof. "Warrants" shall have the meaning set forth in Section 1 hereof. 11. MISCELLANEOUS. ------------- 11.1. PAYMENTS. -------- The Company agrees that, so long as any Purchaser shall hold any Securities, it will make payments in respect of such Securities, in compliance with the terms of this Agreement, and the other Transaction Documents, by wire transfer of immediately available funds for credit to such account or accounts as such Purchaser may designate in writing. -19- 11.2. EXPENSES; INDEMNITY. ------------------- (a) The Company hereby agrees, whether or not the transactions hereby contemplated shall be consummated, to pay, and save any holder harmless against liability for the payment of, the costs and expenses incurred by such holder, including, without limitation, the reasonable fees and disbursements of counsel engaged by Heller, EIT and the Individual Investors, in connection with (i) any subsequent proposed amendment to, modification of, or proposed consent under (whether or not such proposed modification shall be effected or proposed consent granted) and (ii) the costs and expenses, including attorney's fees, incurred by Heller, EIT and the Individual Investors, in enforcing its rights under, any of this Agreement, the Warrants or the Series D Preferred Stock or in responding to any subpoena or other legal process issued in connection with this Agreement or the transactions contemplated hereby or by reason of such Purchaser's having acquired any Security, including without limitation, costs and expenses incurred in any bankruptcy case involving the Company or any of its Subsidiaries; provided, however, that the Company shall not be obligated to pay any costs, fees or expenses incurred by any holder solely by reason of such holder's gross negligence or willful misconduct. The obligations of the Company under this Section 11.2 shall survive the transfer of any Securities or portion thereof or interest therein by any Purchaser or any subsequent holder of the Securities and the redemption of the Preferred Shares. (b) Notwithstanding any investigation performed by any Purchaser prior to any Closing, the Company shall indemnify, save and hold harmless, release and discharge each holder of any Securities and all of its officers, directors, stockholders, agents, representatives, consultants, employees, and Affiliates, and all of its heirs, successors and permitted assigns from and against any and all damages, obligations, cases, claims, deficiencies, penalties, interest, expenses, fines, assessments, charges and costs (including attorneys' fees and court costs) and other liabilities of any kind, including, without limitation, environmental liabilities (collectively, "Damages"), arising from, out of or in any manner connected with or based on (i) notwithstanding any disclosure in this Agreement (including the exhibits and schedules attached hereto) or otherwise, the breach of any covenant of the Company or the failure by the Company to perform any of its obligations contained herein or in any of the agreements, documents or instruments required to be executed and delivered by the Company in connection with the transactions contemplated hereby and in any other Transaction Documents, (ii) any inaccuracy in or breach of any representation or warranty of the Company under this Agreement or any agreement, document or instrument required to be executed and delivered by the Company in connection with the transactions contemplated hereby and in any other Transaction Documents, (iii) notwithstanding any disclosure in this Agreement (including the exhibits and schedules attached hereto) or otherwise, any and all acts, omissions, events, conditions or circumstances involving or related to the assets, properties, businesses, operations or activities of the Company, any of its Subsidiaries or any predecessor of any thereof, whether occurring or existing on, prior to or after -20- the Initial Closing, except if any such Damages arise solely as a result of such Person's gross negligence or willful misconduct. 11.3. CONSENT TO AMENDMENTS; SUBORDINATION. ------------------------------------- (a) This Agreement may be amended and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company shall have obtained the written consent to such amendment, action or omission to act, of the holders of eighty percent (80%) of the number of shares of Series D Preferred Stock at the time outstanding, and each holder of any shares of Series D Preferred Stock at the time or thereafter outstanding shall be bound by any consent authorized by this Section 11.3. No course of dealing between the Company and the holder of any share of Series D Preferred Stock nor any delay in exercising any rights hereunder or under any share of Series D Preferred Stock shall operate as a waiver of any rights of any holder of such shares of Series D Preferred Stock. (b) Once the Preferred Shares have been redeemed in full, this Agreement may be amended and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company shall have obtained the written consent to such amendment, action or omission to act, of the holders of eighty percent (80%) of the then outstanding Warrants, and each holder of Warrants at the time or thereafter outstanding shall be bound by any consent authorized by this Section 11.3. 11.4. PERSONS DEEMED OWNERS. --------------------- Prior to due presentment for registration of transfer, the Company may treat the Person in whose name any shares of Series D Preferred Stock is registered as the owner and holder of such shares of Series D Preferred Stock for the purpose of receiving payment of the liquidation value of, and dividends on, such shares and for all other purposes whatsoever. 11.5. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT. ------------------------------------------------------------ All representations and warranties contained herein and under any other Transaction Documents or made in writing by or on behalf of the Company in connection herewith or therewith or in connection with the transactions contemplated hereby or thereby shall survive the execution and delivery of this Agreement and the Securities, the transfer by any Purchaser of any Securities or portion thereof or interest therein, or the repurchase or redemption of the Securities and may be relied upon by any transferee regardless of any investigation made at any time by or on behalf of such Purchaser; provided, however, that the representations and warranties set forth in any Transaction Document shall survive only for such period of time specifically set forth in such -21- Transaction Document to the extent that a shorter period is set forth therein. Subject to the preceding sentence, this Agreement, the Securities and the other Transaction Documents embody the entire agreement and understanding among the Purchasers and the Company with respect to the subject matter hereof and supersede all prior agreements and understandings relating to the subject matter hereof. 11.6. SUCCESSORS AND ASSIGNS. ---------------------- All covenants and other agreements in this Agreement contained by or on behalf of any of the parties hereto shall bind and inure to the benefit of the of the parties hereto whether so expressed or not. 11.7. NOTICES. ------- All written communications provided for hereunder shall be sent by first class mail or nationwide overnight delivery service (with charges prepaid) and (a) if to Heller, addressed to it at 500 West Monroe Street, Chicago, Illinois 60661, Telecopier no.: 312-441-7236, Attention: Renee M. Rempe, with copies to Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd., 55 East Monroe Street, Suite 3700, Chicago, Illinois 60603, Telecopier No.: 312-332-2196, Attention: Dennis B. Black, (b) if to EIT, addressed to it at 65 Kingsway, London, England WC2B 6QT, Telecopier no.: 011-4471-242-1806, Attention: Mr. Philip Dyke, with a copy to Electra Fleming, Inc., 320 Park Avenue, 28th Floor, New York, New York 10022, Telecopier No.: 212-319-3069, Attention: Ms. Diane M. Smith, Senior Vice President, with copies to Pryor, Cashman, Sherman & Flynn, 410 Park Avenue, New York, New York 10022, Telecopier No.: 212-326-0806, Attention: Selig D. Sacks, Esq., or to such other address or addresses as EIT shall have specified to the parties hereto in writing, (c) if to any of the Individual Investors, addressed to such holder at such address as such other holder shall have specified to the Company in writing or, if any such other holder shall not have so specified an address to the Company, then addressed to such other holder in care of the last holder of the Securities issued hereunder which shall have so specified an address to the Company, and (d) if to the Company, addressed to it at Career Education Corporation, 2800 West Higgins Road, Suite 790, Hoffman Estates, Illinois 60195, Telecopier No.: 847-781-3610, Attention: President, with a copy to: D'Ancona and Pflaum, 30 North LaSalle Street, Suite 2900, Chicago, Illinois 60602, Telecopier No.: 312-580-0923, Attention: Michel J. Feldman, Esq., and with a copy to Heller Equity Capital Corp., 500 West Monroe Street, Chicago, Illinois 60661, Telecopier No.: 312- 441-7236, Attention: Renee M. Rempe, or to such other address or addresses as the Company may have designated in writing to each holder of the Securities at the time outstanding. 11.8. DESCRIPTIVE HEADINGS, ETC. -------------------------- The descriptive headings of the several Sections of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. References herein to a Section are, unless otherwise specified, to one of the Sections of this Agreement -22- and references to an "Exhibit" or "Schedule" are, unless otherwise specified, to one of the Exhibits or Schedules to this Agreement. 11.9. GOVERNING LAW; CHOICE OF FORUM. ------------------------------ THIS AGREEMENT SHALL BE DEEMED TO HAVE BEEN EXECUTED AND DELIVERED AT AND SHALL BE DEEMED TO HAVE BEEN MADE IN CHICAGO, ILLINOIS. THIS AGREEMENT, AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE SUBSTANTIVE LAWS OF THE STATE OF ILLINOIS (WITHOUT GIVING EFFECT TO ANY CONFLICTS OF LAW RULES OR PRINCIPLES) AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES WITH RESPECT TO THE SECURITIES SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE SUBSTANTIVE LAWS OF THE STATE OF DELAWARE (WITHOUT GIVING EFFECT TO ANY CONFLICTS OF LAW RULES OR PRINCIPLES). ANY LEGAL ACTION OR PROCEEDING WITH RESPECT HERETO AND THERETO SHALL ONLY BE BROUGHT IN THE COURTS OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF ILLINOIS, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE COMPANY AND EACH PURCHASER HEREBY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS AND IRREVOCABLY WAIVES ANY DEFENSE OR CLAIM TO SUCH JURISDICTION WHICH EITHER OR BOTH MAY HAVE BASED, DIRECTLY OR INDIRECTLY, ON THE GROUNDS OF FORUM NON CONVENIENS. IF ANY ACTION IS COMMENCED IN ANY OTHER JURISDICTION, THE PARTIES HERETO HEREBY CONSENT TO THE REMOVAL OF SUCH ACTION TO THE NORTHERN DISTRICT OF ILLINOIS. THE COMPANY HEREBY IRREVOCABLY DESIGNATES CT CORPORATION SYSTEM, AS THE DESIGNEE, APPOINTEE AND AGENT, OF THE COMPANY TO RECEIVE, FOR AND ON BEHALF OF THE COMPANY, SERVICE OF PROCESS IN SUCH RESPECTIVE JURISDICTIONS IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR THE RIGHTS AND OBLIGATIONS HEREUNDER OR THEREUNDER OR WITH RESPECT TO THE SECURITIES AND SUCH SERVICE SHALL BE DEEMED COMPLETED UPON DELIVERY THEREOF TO SUCH AGENT. IT IS UNDERSTOOD THAT A COPY OF SUCH PROCESS SERVED ON SUCH AGENT WILL BE PROMPTLY FORWARDED BY MAIL TO THE COMPANY AT ITS ADDRESS SET FORTH IN SECTION 11.7, BUT THE FAILURE OF THE COMPANY TO RECEIVE SUCH COPY SHALL NOT AFFECT IN ANY WAY THE SERVICE OF SUCH PROCESS. THE COMPANY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE COMPANY AT ITS ADDRESS, SUCH SERVICE TO BECOME EFFECTIVE THIRTY (30) DAYS AFTER SUCH MAILING. NOTHING HEREIN SHALL AFFECT THE RIGHT OF ANY PURCHASER, OR ANY OTHER HOLDER OF ANY OF THE SECURITIES TO SERVE -23- PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE COMPANY IN ANY OTHER JURISDICTION. 11.10. WAIVER OF JURY TRIAL. -------------------- THE COMPANY AND EACH PURCHASER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THE RELATIONSHIP THAT IS BEING ESTABLISHED HEREUNDER. THE COMPANY AND EACH PURCHASER ALSO WAIVE ANY BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF THE OTHER PARTIES. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. THE COMPANY AND EACH PURCHASER ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. THE COMPANY AND EACH PURCHASER FURTHER WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE TRANSACTIONS CONTEMPLATED HEREBY. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 11.11. ISSUANCE OF SECURITIES TO KLETTKE. --------------------------------- The Company and Klettke hereby agree that upon Klettke's prior written request, any Securities to be issued to Klettke pursuant to this Agreement may be issued to First Chicago, Custodian, William A. Klettke IRA (the "Klettke IRA"); provided, that the issuance of such Securities to the Klettke IRA would not result in a breach of the representations and warranties of Klettke in Section 9 hereof if such representations and warranties were made by the Klettke IRA. Klettke hereby represents and warrants that he is the sole beneficiary of the Klettke IRA with power of direction, and agrees that, in the -24- event of the issuance of any Securities to the Klettke IRA, he will cause the Klettke IRA to be bound by the terms of this Agreement, the Stockholders Agreement and all other agreements governing the rights of the Company's stockholders to which Klettke is a party. Furthermore, Klettke hereby agrees to execute and deliver, or to cause the Klettke IRA to execute and deliver, such other documents as the Company may reasonably require in connection with any issuance of Securities to the Klettke IRA. [Signature page follows.] -25- IN WITNESS WHEREOF, the Company and each Purchaser have caused this Agreement to be executed by its duly authorized officer as of the date first above written. CAREER EDUCATION CORPORATION By /s/ JOHN M. LARSON ---------------------------- Name John M. Larson --------------------------- Title CEO -------------------------- HELLER EQUITY CAPITAL CORPORATION By /s/ RENEE M. REMPE ---------------------------- Name Renee M. Rempe --------------------------- Title Vice President -------------------------- ELECTRA INVESTMENT TRUST P.L.C. By /s/ A.M. VINTON ---------------------------- Name A.M. Vinton --------------------------- Title Authorized Signatory -------------------------- /s/ WILLIAM A. KLETTKE -------------------------------- William A. Klettke EX-10.20 14 FORM OF WARRANT CERTIFICATE EXHIBIT 10.20 ------------- FORM OF WARRANT CERTIFICATE THESE WARRANTS AND ANY SHARES ACQUIRED UPON THE EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1993, AS AMENDED, OR UNDER ANY APPLICABLE STATE SECURITIES LAWS. THESE WARRANTS AND SUCH SHARES AND ANY INTEREST OR PARTICIPATION HEREIN OR THEREIN MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT AND UNDER ANY APPLICABLE STATE SECURITIES LAWS. THESE WARRANTS AND SUCH SHARES MAY NOT BE TRANSFERRED EXCEPT UPON THE CONDITIONS SPECIFIED IN THIS WARRANT CERTIFICATE, AND NO TRANSFER OF THESE WARRANTS OR SUCH SHARES SHALL BE VALID OR EFFECTIVE UNLESS AND UNTIL SUCH CONDITIONS SHALL HAVE BEEN COMPLIED WITH. THESE WARRANTS AND ANY SHARES ACQUIRED UPON THE EXERCISE HEREOF ARE SUBJECT TO RESTRICTIONS ON TRANSFER AND MAY NOT BE SOLD, EXCHANGED, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH AND SUBJECT TO ALL THE TERMS AND CONDITIONS OF A CERTAIN AMENDED AND RESTATED STOCKHOLDERS AGREEMENT, DATED AS OF JULY 31, 1995, AMONG CAREER EDUCATION CORPORATION AND ITS STOCKHOLDERS, AS AMENDED BY THAT CERTAIN FIRST AMENDMENT TO STOCKHOLDERS AGREEMENT DATED AS OF THE DATE HEREOF (THE "STOCKHOLDERS AGREEMENT"), COPIES OF WHICH THE COMPANY WILL FURNISH TO THE HOLDER OF THESE WARRANTS UPON REQUEST AND WITHOUT CHARGE. WARRANT CERTIFICATE To Purchase Shares of Class E Common Stock of CAREER EDUCATION CORPORATION No. __ _____ Warrants THIS CERTIFIES THAT, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, [NAME, ADDRESS] ________________________ (the "HOLDER"), is the registered owner of the number of Warrants specified above, each of which Warrants entitles the holder hereof, subject to the adjustment provisions and the conditions and limitations hereinafter set forth, to purchase from CAREER EDUCATION CORPORATION (the "COMPANY"), a corporation organized and existing under the laws of the State of Delaware, one share of the Company's Class E Common Stock, par value $.01 per share (the "CLASS E COMMON STOCK"), at a purchase price of $.01 per share (the "EXERCISE PRICE"). The Warrants shall not be terminable by the Company prior to the Expiration Date. The shares of Class E Common Stock issuable upon exercise of the Warrants (and any other or additional shares, securities or property that may hereafter be issuable upon exercise of the Warrants) are sometimes referred to herein as the "WARRANT SHARES," and the maximum number of shares so issuable under this Warrant Certificate is sometimes referred to as the "AGGREGATE NUMBER" (as such number may be increased or decreased, as more fully set forth herein). The Warrants shall be void and all rights represented hereby shall cease on the Expiration Date (as defined in Section 10 hereof). The Warrants represented hereby are part of an authorized issue of Eight Thousand Nine Hundred Twenty-Four (8,924) Warrants to purchase Class E Common Stock of the Company, Warrant Certificates for Two Thousand Three Hundred Eighty (2,380) of which were originally issued on the date hereof (such originally issued Warrants, or such number thereof as shall from time to time remain unexercised, together with all subsequently issued Warrants (as may be issued from time to time in accordance with the provisions of Section 4 of the Securities Purchase Agreement (as defined below)), or such number of such subsequently issued Warrants as shall from time to time remain unexercised, being herein collectively called the "WARRANTS"). Two Thousand Three Hundred Eighty (2,380) of the Warrants are being issued concurrently with the issuance by the Company of Two Thousand (2,000) shares of its Series D Preferred Stock pursuant to a Securities Purchase Agreement dated as of the date hereof among the Company and various Purchasers (as defined therein) (the "SECURITIES PURCHASE AGREEMENT"). Certain terms used in this Warrant Certificate are defined in Section 10 hereof. The Warrants are subject to the following provisions, terms and conditions: 1. Exercise; Issue of Certificates; Payment for Shares. --------------------------------------------------- (a) The rights represented by this Warrant Certificate may be exercised by the holder hereof, in whole or in part (but not as to fractional shares of Class E Common Stock), to purchase a total number of shares equal to ________ shares (subject to the adjustments described in Section 5 hereof). (b) The Warrants shall be exercisable by surrendering this Warrant Certificate (with the Exercise Form annexed hereto as Schedule 1 properly ---------- completed and executed) to the Company at its principal office specified in Section 15, or its then current address, and upon payment to the Company of the Exercise Price for the Warrant Shares being purchased. (c) Payment of the Exercise Price may be made, in the sole discretion of the holder, in the form of any of the following: (i) cash, (ii) a check or bank draft in New -2- York Clearing House funds, or (iii) by the surrender of a portion of the Warrants other than that which is then being exercised. For purposes of making payment of the Exercise Price in accordance with the foregoing clause (iii), the portion of any Warrants being surrendered shall be deemed to have a value as determined by a good faith determination of the Board of Directors of the Company. The shares so purchased shall be and shall be deemed to be issued to the holder hereof as the record owner of such shares as of the close of business on the date on which this Warrant Certificate shall have been surrendered and payment made for such shares as aforesaid. (d) Certificates for the shares so purchased shall be delivered to the holder hereof within a reasonable time, not exceeding 10 days, after this Warrant Certificate shall have been so exercised, and unless the Warrants have expired, a new Warrant Certificate representing the number of shares, if any, with respect to which this Warrant Certificate shall not then have been exercised or tendered as payment of the Exercise Price as provided in subsection 1(c)(iii) above shall also be delivered to the holder hereof within such time. Such certificate or certificates shall be deemed to have been issued and any Person properly so designated to be named therein shall be deemed for all purposes to have become a holder of record of such Warrant Shares as of the close of business on the date of the surrender of this Warrant Certificate and payment of the Exercise Price as aforesaid. (e) Mandatory Exercise Upon Threshold Public Offering. Concurrently ------------------------------------------------- with the consummation of a Threshold Public Offering, if the then issued and outstanding shares of Series D Preferred Stock shall have been redeemed in full prior to the Threshold Public Offering or if the shares of Series D Preferred Stock will be paid in full upon the consummation of the Threshold Public Offering, the holder of this Warrant shall be required to exercise this Warrant. 2. Shares to be Fully Paid; Reservation of Shares; Listing. The ------------------------------------------------------- Company covenants and agrees that: (a) all Warrant Shares will, upon issuance, be original-issue shares (and not treasury stock) fully paid and nonassessable and free from all taxes, claims, liens, charges and other encumbrances with respect to the issue thereof; (b) without limiting the generality of the foregoing, it will from time to time take all such action as may be required to assure that the par value per share of Class E Common Stock shall at all times be less than or equal to the Exercise Price; (c) during the period within which the rights represented by this Warrant Certificate may be exercised, the Company will at all times have authorized and reserved for the purpose of issue or transfer upon exercise of the Warrants a sufficient number of original-issue shares of its Class E Common Stock to provide for the exercise of all the Warrants; (d) upon the exercise of the Warrants represented by this Warrant Certificate, it will, at its expense, promptly notify each securities exchange on which any Class E Common Stock is at the time listed of such issuance, and maintain a listing of all shares of Class E Common Stock from time to time issuable upon the exercise of the Warrants to the extent such shares can be listed. 3. Representations and Warranties. All representations, warranties ------------------------------ and covenants contained in Article 8 of the Securities Purchase Agreement are true and correct as -3- of the date of the Closing (as defined in the Securities Purchase Agreement) and are incorporated herein as if made by the Company to the holders from time to time of the Warrants. 4. [INTENTIONALLY OMITTED]. 5. Adjustments to Aggregate Number/Distributions. Under certain --------------------------------------------- conditions, the Aggregate Number is subject to adjustment as set forth herein. The Aggregate Number shall be subject to adjustment from time to time as follows and thereafter as adjusted shall be deemed to be the Aggregate Number hereunder. For purposes of this Section 5, Warrants as may be issued from --------- time to time in accordance with the provisions of Section 4 of the Securities --------- Purchase Agreement which have not yet been issued at the time of any application of this Section 5 shall be treated as previously issued for purposes of --------- calculation of adjustments to the Aggregate Number and all other adjustments and Distributions (defined below) pursuant to this Section 5, and upon issuance --------- thereof, the holder of any such Warrants shall be entitled to receive the benefit of all such adjustments to the Aggregate Number and all such other adjustments and Distributions as if such Warrants had been issued prior thereto. (a) In case at any time or from time to time the Company shall: (i) take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend payable in, or other distribution of, Common Stock or Convertible Securities, or (ii) subdivide its outstanding shares of Common Stock into a larger number of shares of Common Stock or Convertible Securities, or (iii) combine its outstanding shares of Common Stock or Convertible Securities into a smaller number of shares of Common Stock or Convertible Securities, respectively, or (iv) change the class or classes of stock of the Warrant Shares that are issuable upon a Recapitalization or otherwise, or (v) consummate a Non-Surviving Combination, then the Aggregate Number in effect immediately prior thereto shall be adjusted so that the holder or holders of Warrants shall thereafter be entitled to receive, upon exercise thereof, the number of shares of Class E Common Stock or shares of other stock, securities or property that such holder or holders of Class E Common Stock would have owned or have been entitled to receive after the occurrence of such Recapitalization, Non-Surviving Combination or other event had such Warrants been exercised immediately prior to the occurrence of such event. -4- (b) In case at any time or from time to time the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive any dividend or other distribution (collectively, a "DISTRIBUTION") of: (i) cash, or (ii) any evidences of its indebtedness (other than Convertible Securities), any shares of its Capital Stock (other than additional shares of Common Stock or Convertible Securities) or any other securities or property of any nature whatsoever (other than cash), or (iii) any options or warrants or other rights to subscribe for or purchase any of the following: any evidences of its indebtedness (other than Convertible Securities), any shares of its Capital Stock (other than additional shares of Common Stock or Convertible Securities) or any other securities or property of any nature whatsoever, then the holder or holders of Warrants shall be entitled to receive upon the exercise thereof at any time on or after the taking of such record the number of shares of Common Stock to be received upon exercise of such Warrants determined as stated herein and, in addition and without further payment, the cash (including interest at a rate equal to the T-bill rate in effect from time to time from the date such cash was paid to the other stockholders through the date of payment to the holders of the Warrants), stock, securities, other property, options, warrants and/or other rights to which such holder or holders would have been entitled by way of the Distribution and subsequent dividends and distributions if such holder or holders (A) had exercised such Warrants immediately prior to such Distribution, and (B) had retained the Distribution in respect of the Class E Common Stock and all subsequent dividends and distributions of any nature whatsoever in respect of any stock or securities paid as dividends and distributions and originating directly or indirectly from such Class E Common Stock. A reclassification of the Class E Common Stock into shares of Common Stock and shares of any other class of stock shall be deemed a distribution by the Company to the holders of its Common Stock of such shares of such other class of stock within the meaning of this subsection 5(b) and, if the outstanding shares of Common Stock shall be changed into a larger or smaller number of shares of Common Stock as a part of such reclassification, such event shall be deemed a subdivision or combination, as the case may be, of the outstanding shares of Common Stock within the meaning of subsection 5(a). (c) In case at any time or from time to time prior to a Threshold Public Offering the Company shall issue or sell any additional shares of Common Stock or securities at a price per share which is less than the fair market value per share of Common Stock as determined in good faith by the Board of Directors of the Company, then the Aggregate Number then in effect shall be adjusted immediately so that the Aggregate Number thereafter shall be an amount equal to the product of (1) the fraction, (A) the numerator of which is the Prior Outstanding Number plus the difference between (x) the number of shares of ---- Common -5- Stock actually issued or sold in such transaction and (y) the number of shares of Common Stock which the aggregate consideration received by the Company for all such shares of Common Stock issued or sold in such transaction would purchase at the fair market value in effect immediately prior to the issuance or sale of such additional shares of Common Stock, and (B) the denominator of which shall be the Prior Outstanding Number, and (2) the Aggregate Number immediately prior to such issuance or sale. The provisions of this subsection 5(c) shall not apply to any issuance of additional shares of Common Stock for which an adjustment is provided under subsection 5(a). (d) In case at any time or from time to time prior to a Threshold Public Offering the Company shall (except as hereinafter provided) take a record of the holders of its Common Stock for the purpose of entitling them to receive a distribution of, or shall in any manner issue or sell, any warrants or other rights to subscribe for or purchase (i) any shares of Common Stock or (ii) any Convertible Securities, whether or not the rights to subscribe, purchase, exchange or convert thereunder are immediately exerciseable, at a purchase price per share of Common Stock which is less than the fair market value per share of Common Stock as determined in good faith by the Board of Directors of the Company, then the Aggregate Number then in effect shall be adjusted immediately so that the Aggregate Number thereafter shall be an amount equal to the product of (1) the fraction, (A) the numerator of which is the Prior Outstanding Number plus the difference between (x) the number of shares of Common Stock issuable - ---- upon exercise of such rights or upon exercise or conversion of such Convertible Securities issuable upon exercise of the warrants or other rights actually issued or sold in such transaction and (y) the number of shares of Common Stock which the aggregate consideration received by the Company for all warrants or other rights issued or sold in such transaction, and/or receivable by the Company upon exercise of such warrants or other rights and/or upon exercise or conversion of the Convertible Securities issuable upon exercise of such warrants or other rights, would purchase at the fair market value in effect immediately prior to the issuance or sale of such warrants or other rights, and (B) the denominator of which shall be the Prior Outstanding Number, and (2) the Aggregate Number immediately prior to such issuance or sale. The provisions of this subsection 5(d) shall not apply to any issuance of additional shares of Common Stock for which an adjustment is provided under subsection 5(a). (e) In case at any time or from time to time prior to a Threshold Public Offering the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a distribution of, or shall in any manner issue or sell, Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, at an exercise price per share of Common Stock which is less than the fair market value per share of Common Stock as determined in good faith by the Board of Directors of the Company, then the Aggregate Number then in effect shall be adjusted immediately so that the Aggregate Number thereafter shall be an amount equal to the product of (1) the fraction, (A) the numerator of which is the Prior Outstanding Number plus the ---- -6- difference between (x) the number of shares of Common Stock issuable upon exercise or conversion of such Convertible Securities actually issued or sold in such transaction and (y) the number of shares of Common Stock which the aggregate consideration received by the Company for all such Convertible Securities issued or sold in such transaction and/or receivable by the Company upon exercise or conversion of such Convertible Securities would purchase at the fair market value in effect immediately prior to the issuance or sale of such Convertible Securities, and (B) the denominator of which shall be the Prior Outstanding Number, and (2) the Aggregate Number immediately prior to such issuance or sale. No adjustment of the Aggregate Number shall be made under this subsection 5(e) upon the issuance of any Convertible Securities which are issued pursuant to the exercise of any warrants or other subscription or purchase rights if an adjustment shall previously have been made. (f) The following provisions shall be applicable to the making of adjustments of the Aggregate Number hereinbefore provided for in this Section 5: (i) The sale or other disposition of any issued shares of Common Stock owned or held by or for the account of the Company shall be deemed an issuance thereof for the purposes of this Section 5. (ii) The adjustments required by the preceding paragraphs of this Section 5 shall be made whenever and as often as any specified event requiring an adjustment shall occur, except as expressly provided herein. For the purpose of any adjustment, any specified event shall be deemed to have occurred at the close of business on the date of its occurrence. (iii) In computing adjustments under this Section 5 fractional interests in Common Stock shall be taken into account to the nearest one- thousandth (.001) of a share and shall be aggregated until they equal one whole share. (iv) If the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend, distribution, warrants or subscription or purchase rights under subsections 5(a) through 5(e) hereof, but abandon its plan to pay or deliver such dividend, distribution, warrants, subscription or purchase rights, then no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled. (v) Notwithstanding anything herein to the contrary, no adjustment shall be made to the Aggregate Number as a result of the issuance of the securities pursuant to the Management Option Plan (as defined in the Securities Purchase Agreement) or the issuance of the options to acquire securities pursuant to the Management Option Plan. -7- (vi) The consideration for any additional shares of Common Stock issuable pursuant to any options, warrants or other rights to subscribe for or purchase the same shall be the consideration received or receivable by the Company for issuing such options, warrants or other rights, plus the additional consideration payable to the Company upon the exercise of such options, warrants or other rights. The consideration for any additional shares of Common Stock issuable pursuant to the terms of any Convertible Securities shall be the consideration received or receivable by the Company for issuing any options, warrants or other rights to subscribe for or purchase such Convertible Securities, plus the consideration paid or payable to the Company in respect of the subscription for or purchase of such Convertible Securities, plus the additional consideration, if any, payable to the Company upon the exercise of the right of conversion, exercise or exchange of such Convertible Securities. In case of the issuance at any time of any additional shares of Common Stock or Convertible Securities in payment or satisfaction of any dividend upon any class of stock other than Common Stock, the Company shall be deemed to have received for such additional shares of Common Stock or Convertible Securities a consideration equal to the amount of such dividend so paid or satisfied. (vii) Upon the expiration or termination of any of the warrants or other rights or options referred to in subsection 5(d) above or the Convertible Securities referred to in Section 5(e) above, the Aggregate Number after the expiration or termination of any such warrants, rights, options or Convertible Securities, the issuance of which caused an adjustment to the Aggregate Number, shall be readjusted to such Aggregate Number as would have been obtained had the adjustment made upon the issuance of such warrants, rights, options or Convertible Securities, been made upon the basis of the issuance of only the number of shares of Common Stock actually issued upon the exercise of such warrants, options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities and subsequent conversion or exchange thereof. (viii) For the purposes of such subsections 5(c), 5(d) and 5(e), the determination of fair market value shall be made by the Board of Directors of the Company, with a majority of independent directors voting in favor thereof; provided that, for purposes hereof no director who is an -------- Affiliate of a Significant Holder or a stockholder of the Company shall be deemed to be independent. If a determination of fair market value cannot be agreed upon as aforesaid, the fair market value shall be determined in accordance with the procedure described in subsection 4.1(b)(ii)(C) of the form of Warrant Certificate attached as Exhibit 1B to the Electra Securities Agreement (as defined in the Securities Purchase Agreement), with appropriate adjustments to reflect the issuance of Warrants pursuant to the Securities Purchase Agreement and without regard to references to "Puts" included therein. In addition, for -8- purposes of subsections 5(c), 5(d) and 5(e) hereof, the date as of which the applicable fair market value per share shall be computed shall be as close to the date of actual issuance of such additional shares of Common Stock, warrants or Convertible Securities, as practical. (g) (i) If any event occurs as to which the other provisions of this Section 5 are not strictly applicable but the lack of any provision for the exercise of the rights of a holder or holders of Warrants would not fairly protect the purchase rights of such holder or holders of Warrants in accordance with the essential intent and principles of such provisions, or, if strictly applicable, would not fairly protect the conversion rights of the holder or holders of Warrants in accordance with the essential intent and principles of such provisions, then the Company shall appoint a firm of independent certified public accountants in the United States (which may be the regular auditors of the Company) of recognized national standing in the United States reasonably satisfactory to the Institutional Investors (as defined in the Securities Purchase Agreement), which shall give their opinion as to the adjustments, if any, necessary to preserve, without dilution, on a basis consistent with the essential intent and principles established in the other provisions of this Section 5, the exercise rights of the holders of Warrants. Upon receipt of such opinion, the Company shall forthwith make the adjustments described therein. (ii) In the case of a Non-Surviving Combination or Recapitalization contemplated by subsection 5(a) hereof, appropriate adjustments (as determined in good faith by the Board of Directors) shall be made in the application of the provisions in this Section 5 with respect to the rights and interests thereafter of the holders of the Warrant, to the end that the provisions of this Section 5 shall thereafter be applicable, as nearly as reasonable, in relation to any shares of stock, securities or other property thereafter deliverable upon exercise of the Warrant. (h) Within 45 days after the end of each fiscal quarter during which an event occurred that resulted in an adjustment pursuant to this Section 5, and at any time upon the request of any holder of Warrants, the Company shall cause to be promptly mailed to each holder of Warrants by first-class mail, postage prepaid, notice of each adjustment or adjustments to the Aggregate Number effected since the date of the last such notice and a certificate of the Company's Chief Financial Officer or, in the case of any such notice delivered within 45 days after the end of a fiscal year, a firm of independent public accountants in the United States selected by the Company and reasonably acceptable to the Institutional Investors (as defined in the Securities Purchase Agreement) (who may be the regular accountants employed by the Company), in each case, setting forth the Aggregate Number after such adjustment, a brief statement of the facts requiring such adjustment and the computation by which such adjustment was made. The fees and expenses of such accountants shall be paid by the Company. (i) The occurrence of a single event shall not trigger an adjustment of the Aggregate Number under more than one paragraph of this Section 5. -9- 6. Taxes on Conversion. The issuance of certificates for Warrant ------------------- Shares upon the exercise of the Warrants shall be made without charge to the holder exercising any such Warrant for any issue or stamp tax in respect of the issuance of such certificates, and such certificates shall be issued in the respective names of, or in such names as may be properly directed by, the holder; provided, however, that the Company shall not be required to pay any tax -------- ------- that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate in a name other than that of the holder, and the Company shall not be required to issue or deliver such certificates unless or until the Person or Persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. 7. Limitation of Liability. No provision hereof in the absence of ----------------------- the exercise of the Warrants by the holder and no enumeration herein of the rights or privileges of the holder shall give rise to any liability on the part of the holder for the Exercise Price of the Warrant Shares or as a stockholder of the Company, whether such liability is asserted by the Company or by any creditor of the Company. 8. Closing of Books. The Company will at no time close its transfer ---------------- books against the transfer of any Warrant or of any shares of Common Stock issued or issuable upon the exercise of any Warrant in any manner that interferes with the timely exercise of the Warrants. The Company shall deem and treat the registered holder of this Warrant as the absolute owner thereof for all purposes, including without limitation for the purpose of exercise thereof. The Company agrees that, upon exercise of this Warrant in accordance with the terms hereof (including receipt by the Company of payment of the aggregate Exercise Price), the shares so purchased shall be deemed to be issued to such holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been exercised and the holder of this Warrant shall be deemed for all purposes a stockholder of the Company with respect to such shares as though the certificate for such shares had been issued on the date of such exercise. 9. Restrictions on Transfer. ------------------------ (a) Transfer in Accordance with Securities Laws; Restrictive -------------------------------------------------------- Legends. Any transfer of these Warrants or any Warrant Shares may only be made - -------- in compliance with the Securities Act and applicable state securities laws or pursuant to an exemption therefrom and any transferee shall acquire the Warrants and/or Warrant Shares subject to all of the terms and conditions of this Warrant Certificate. Each certificate for any Warrant Shares issued upon the exercise of any Warrant, and each stock certificate issued upon the transfer of any such Warrant Shares (except as otherwise permitted by this Section 9) shall be stamped or otherwise imprinted with legends in substantially the following form: THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY APPLICABLE STATE SECURITIES LAWS. SUCH SHARES MAY NOT BE SOLD OR -10- TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR ANY EXEMPTION THEREFROM UNDER SUCH ACT AND UNDER ANY APPLICABLE STATE SECURITIES LAWS. THESE SHARES MAY NOT BE TRANSFERRED EXCEPT UPON THE CONDITIONS SPECIFIED IN THAT CERTAIN WARRANT CERTIFICATE DATED _____________ PURSUANT TO WHICH SUCH SHARES WERE ORIGINALLY ISSUED, AND NO TRANSFER OF THESE SHARES SHALL BE VALID OR EFFECTIVE UNLESS AND UNTIL SUCH CONDITIONS SHALL HAVE BEEN COMPLETED WITH. THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER AND MAY NOT BE SOLD, EXCHANGED, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH AND SUBJECT TO ALL THE TERMS AND CONDITIONS OF A CERTAIN AMENDED AND RESTATED STOCKHOLDERS AGREEMENT, DATED AS OF JULY 31, 1995, AMONG CAREER EDUCATION CORPORATION AND ITS STOCKHOLDERS, AS AMENDED BY THAT CERTAIN FIRST AMENDMENT TO STOCKHOLDERS AGREEMENT DATED AS OF ________________ (THE "STOCKHOLDERS AGREEMENT"), COPIES OF WHICH THE COMPANY WILL FURNISH TO THE HOLDER OF THIS CERTIFICATE UPON REQUEST AND WITHOUT CHARGE. Each Warrant Certificate issued in substitution for any Warrant Certificate pursuant to Section 11, 12, or 13 hereof and each Warrant Certificate issued upon the transfer of any Warrant (except as otherwise permitted by this Section 9) shall be stamped or otherwise imprinted with a legend in substantially the following form: THESE WARRANTS AND ANY SHARES ACQUIRED UPON THE EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY APPLICABLE STATE SECURITIES LAWS. THESE WARRANTS AND SUCH SHARES AND ANY INTEREST OR PARTICIPATION THEREIN MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT AND UNDER ANY APPLICABLE STATE SECURITIES LAWS. THESE WARRANTS AND SUCH SHARES MAY NOT BE TRANSFERRED EXCEPT UPON THE CONDITIONS SPECIFIED IN THIS WARRANT CERTIFICATE, AND NO TRANSFER OF THESE WARRANTS OR SUCH SHARES SHALL BE VALID OR EFFECTIVE UNLESS AND UNTIL SUCH CONDITIONS SHALL HAVE BEEN COMPLIED WITH. THESE WARRANTS AND ANY SHARES ACQUIRED UPON THE EXERCISE HEREOF ARE SUBJECT TO RESTRICTIONS ON TRANSFER -11- AND MAY NOT BE SOLD, EXCHANGED, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH AND SUBJECT TO ALL THE TERMS AND CONDITIONS OF A CERTAIN AMENDED AND RESTATED STOCKHOLDERS AGREEMENT, DATED AS OF JULY 31, 1995, AMONG CAREER EDUCATION CORPORATION AND ITS STOCKHOLDERS, AS AMENDED BY THAT CERTAIN FIRST AMENDMENT TO STOCKHOLDERS AGREEMENT DATED AS OF ______________ (THE "STOCKHOLDERS AGREEMENT"), COPIES OF WHICH THE COMPANY WILL FURNISH TO THE HOLDER OF THIS CERTIFICATE UPON REQUEST AND WITHOUT CHARGE. (b) Termination of Restrictions. The restrictions imposed by this --------------------------- Section 9 upon the transferability of Warrants and Warrant Shares shall cease and terminate as to any particular Warrants or Warrant Shares, (i) when such securities shall have been effectively registered under the Securities Act and disposed of in accordance with the registration statement covering such securities, or (ii) when in the reasonable opinion of counsel for the Company or upon the written opinion of counsel for the holder thereof reasonably acceptable to the Company such restrictions are no longer required in order to comply with the Securities Act. Whenever such restrictions shall terminate as to any Warrants or Warrant Shares, the holder thereof shall be entitled to receive from the Company, without expense, new certificates of like tenor not bearing the restrictive legends set forth in subsection 9(a). 10. Definitions. as used in this Warrant Certificate, unless the ----------- context otherwise requires, the following terms have the following respective meanings: Aggregate Number: as set forth in the preamble of this Warrant ---------------- Certificate and as may be adjusted pursuant to Section 5. Capital Stock: shall mean any and all shares, interests, rights to ------------- purchase, warrants, options, participations or other equivalents of or interest in (however designated) corporate stock. Class E Common Stock: as set forth in the preamble of this Warrant -------------------- Certificate. Commission: means the United States Securities and Exchange Commission ---------- or any governmental body or agency succeeding to the functions thereof. Common Stock: the shares of common stock, par value $.01 per share, of ------------ the Company, currently provided for in the Certificate of Incorporation of the Company, and including, for all purposes hereunder, any other capital stock of the Company into which such shares of Common Stock may be converted or reclassified or that may be issued in respect of, in exchange for, -12- or in substitution of, such Common Stock by reason of any stock splits, stock dividends, distributions, mergers, consolidations or like events. Company: Career Education Corporation , a Delaware corporation, and ------- its successors and assigns. Convertible Securities: securities convertible into or exchangeable ---------------------- for Common Stock. Distribution: shall have the meaning specified in subsection 5(b) of ------------ this Warrant Certificate. Exercise Price: shall have the meaning specified in the preamble of -------------- this Warrant Certificate. Expiration Date: July 31, 2005. --------------- Non-Surviving Combination: any merger, consolidation or other business ------------------------- combination of the Company with or into one or more Persons in which the Person other than the Company is the survivor, or a sale of all or a substantial part of the assets of the Company (whether held directly by the Company or through a subsidiary of the Company) to one or more such other Persons (including but not limited to a voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company); provided, that if any such merger, consolidation or other business -------- combination or sale of assets, in which the holders of Common Stock receive cash or non-cash consideration, is structured in the form of a reverse subsidiary merger so that the Company is the surviving entity, such transaction shall nevertheless be deemed to be a Non-Surviving Combination. Person: an individual, corporation, limited liability company, ------ partnership, trust or unincorporated organization, or other legal entity, or a government or any agency or political subdivision thereof. Prior Outstanding Number: the total number of shares of Common Stock ------------------------ outstanding immediately prior to any issuance or sale of Common Stock (assuming for purposes of such calculation the exercise of all of the Warrants, and the conversion, exercise or exchange of all other securities then outstanding and convertible, exercisable or exchangeable into shares of Common Stock, but not the exercise of options to acquire up to 13,400 shares granted pursuant to the Management Option Plan (as defined in the Securities Purchase Agreement) (as such number may be adjusted in accordance with the terms of said Management Option Plan). -13- Recapitalization: any reorganization or recapitalization or other ---------------- change of outstanding shares of Common Stock (other than a change in par value, or from par value to no par value, or from no par value, to par value). Securities Act: the Securities Act of 1933, as amended, from time to -------------- time, and any successor statute or law thereto. Securities Purchase Agreement: the Securities Purchase Agreement, ----------------------------- dated as of February __, 1997, among the Company and the purchasers named therein. Significant Holder: any holder holding at least 20% of the outstanding ------------------ Warrants and Warrant Shares (it being understood that two or more investment funds which have the same investment manager shall be treated as one holder for this purpose). Threshold Public Offering: shall mean an initial underwritten public ------------------------- offering and sale for cash by the Company of the Common Stock of the Company to an underwriter or underwriters pursuant to a "firm commitment" underwriting agreement and a registration statement declared effective by the Commission under the Securities Act of 1933, as amended, in which (i) the minimum equity valuation of the Company is Forty-Five Million and No/100 Dollars ($45,000,000) before December 31, 1999 and Fifty-Five Million and No/100 Dollars ($55,000,000) thereafter, and (ii) the Company receives gross proceeds of at least Twenty Million and No/100 Dollars ($20,000,000). The valuation of the Company will be determined by dividing the dollar amount raised in such public offering on a gross basis by the percentage of equity in the Company sold in such public offering on a fully-diluted basis, taking into account all shares outstanding, and all warrants, options and convertible securities or other rights to acquire equity of the Company. A Threshold Public Offering shall be deemed consummated upon the first sale of Common Stock under the related registration statement. A Threshold Public Offering shall not include the registration of an offer and sale of the Common Stock (i) to the employees of or other persons providing services to the Corporation pursuant to an employee benefit or similar benefit plan registered on Form S-8 or a successor form or (ii) relating to a merger, acquisition or other transaction of the type described in Rule 145 or a successor rule registered on Form S-4 or a successor form. Warrants: as set forth in the preamble of this Warrant Certificate. -------- Warrant Shares: as set forth in the preamble of this Warrant -------------- Certificate. 11. Warrants Transferable. These Warrants are issued as Warrants for --------------------- which there is a register maintained by the Company. Subject to the provisions of Section 9, -14- the Stockholders Agreement and applicable securities laws, the transfer of any Warrant and all rights hereunder, in whole or in part, is registerable at the office or agency of the Company referred to in Section 1 hereof by the holder hereof in person or by duly authorized attorney, upon surrender of this Warrant Certificate with a properly completed Form of Assignment in the form annexed hereto as Schedule 2. Each taker and holder of any Warrant, by taking or holding ---------- the same, consents and agrees that this Warrant Certificate, when endorsed in blank, shall be deemed negotiable, and that the holder hereof, when this Warrant Certificate shall have been so endorsed, may be treated by the Company and all other persons dealing with this Warrant Certificate as the absolute owner hereof for any purpose and as the person entitled to exercise the rights represented by this Warrant Certificate, or to the registration of transfer hereof on the books of the Company; and until due presentment for registration of transfer on such books, the Company may treat the registered holder hereof as the owner for all purposes, and the Company shall not be affected by notice to the contrary. 12. Warrant Certificates Exchangeable for Different Denominations. ------------------------------------------------------------- This Warrant Certificate is exchangeable, upon the surrender hereof by the holder hereof at such office or agency of the Company, for new Warrant Certificates of like tenor representing in the aggregate the right to purchase the number of shares that may be purchased hereunder, each of such new Warrant Certificates to represent the right to purchase such number of shares as shall be designated by said holder at the time of such surrender. 13. Replacement of Warrant Certificates. Upon receipt of evidence ----------------------------------- reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant Certificate and, in the case of any such loss, theft or destruction, upon delivery of an indemnity bond (or, in the case of any substantial financial institution to which any Warrants represented by this Warrant Certificate may be transferred, an unsecured indemnity agreement) reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, upon surrender and cancellation of such Warrant Certificate, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant certificate of like tenor. 14. Certificate Rights and Obligations Survive Exercise of Warrants. --------------------------------------------------------------- The rights and obligations of the Company contained in this Warrant Certificate shall survive the exercise or repurchase of any or all of the Warrants to the extent that such survival is necessary to give effect to a provision hereof. 15. Notices. All notices, requests and other communications required ------- or permitted to be given or delivered to the holders of Warrants shall be in writing, and shall be delivered by hand, first class mail (certified or registered mail, return receipt requested), telex, telecopier or overnight air courier guaranteeing next day delivery, to each holder at the address shown on such holder's Warrant Certificate, or at such other address as shall have been furnished to the Company by notice from such holder. All notices, requests and other communications required or permitted to be given or delivered to the Company shall be in writing, and shall be delivered by hand, first class mail (certified or registered mail, return receipt requested), telex, telecopier or overnight air courier guaranteeing next day delivery, to -15- the office of the Company at 2800 West Higgins Road, Suite 790, Hoffman Estates, Illinois 60195, Attention: John M. Larson, with a copy to: D'Ancona and Pflaum, 30 North LaSalle Street, Suite 2900, Chicago, Illinois 60602, Attention: Michel H. Feldman, Esq., and with a copy to Heller Equity Capital Corp., 500 West Monroe Street, Chicago, Illinois 60661, Attention: Renee M. Rempe. Any such notice, request or other communication sent by telecopy or telex shall in such case be subsequently confirmed by a writing delivered or sent by certified or registered mail as provided above. All notices shall be deemed to have been given either at the time of the delivery thereof to (or the receipt by, in the case of a telecopy or telex) any officer or employee of the person entitled to receive such notice at the address of such person for purposes of this Section 15, or, if mailed, at the completion of the third full day following the time of such mailing thereof to such address, as the case may be. 16. Amendments. Neither this Warrant Certificate nor any term or ---------- provision may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought, provided that any change or -------- waiver of any term or provision hereof, and any consent or direction given hereunder by the holders may be effected by the holders of eighty percent (80%) of the Warrants and Warrant Shares then outstanding, except that no change or waiver that would (a) increase the Exercise Price of any Warrant or reduce the Aggregate Number shall be effective as to any holder of a Warrant without the consent of such holder, or (b) change or waive any of the provisions of this Section with respect to the requisite persons required to effect any change, waiver or amendment of a particular Section of this Warrant Certificate shall be effective without the consent of such requisite persons. 17. Remedies. The Company stipulates that remedies at law of the -------- holder of this Warrant Certificate in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant Certificate are not and will not be adequate, and that such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. If any default under the terms of this Warrant Certificate shall occur and be continuing, the holders of the Warrants may proceed to protect and enforce their rights under this Warrant Certificate and the Securities Purchase Agreement by exercising such remedies as are available to such holders in respect thereof under applicable law, either by suit in equity or by action at law, or both, whether for specific performance of any covenant or other agreement contained in this Warrant Certificate or the Securities Purchase Agreement or in aid of the exercise of any power granted in this Warrant Certificate or the Securities Purchase Agreement. No remedy conferred in this Warrant Certificate or the Securities Purchase Agreement upon the holder of any Warrants is intended to be exclusive of any other remedy available to such holder, and each and every such remedy shall be cumulative and shall be in addition to every other remedy conferred herein or now or hereafter existing at law or in equity or by statute or otherwise. 18. Governing Law. THIS WARRANT CERTIFICATE HAS BEEN EXECUTED AND ------------- DELIVERED AT AND SHALL BE DEEMED TO HAVE BEEN -16- MADE IN CHICAGO, ILLINOIS. THIS WARRANT CERTIFICATE AND THE RIGHTS GRANTED HEREIN SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED UNDER THE LAWS OF THE STATE OF ILLINOIS (WITHOUT GIVING EFFECT TO ANY CONFLICTS OF LAW RULES OR PRINCIPLES). ANY JUDICIAL PROCEEDING BROUGHT BY OR AGAINST THE COMPANY WITH RESPECT TO THIS WARRANT CERTIFICATE OR ANY RELATED AGREEMENT SHALL BE BROUGHT IN ANY COURT OF COMPETENT JURISDICTION IN THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF ILLINOIS, AND, BY EXECUTION AND DELIVERY OF THIS WARRANT CERTIFICATE, THE COMPANY ACCEPTS THE EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS WARRANT. IF ANY ACTION IS COMMENCED IN ANY OTHER JURISDICTION THE PARTIES HERETO HEREBY CONSENT TO THE REMOVAL OF SUCH ACTION TO THE NORTHERN DISTRICT OF ILLINOIS. THE COMPANY HEREBY IRREVOCABLY DESIGNATES CT CORPORATION SYSTEM, AS THE DESIGNEE, APPOINTEE AND AGENT, OF THE COMPANY TO RECEIVE, FOR AND ON BEHALF OF THE COMPANY, SERVICE OF PROCESS IN THE ABOVE DESCRIBED JURISDICTION IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS WARRANT, THE WARRANT SHARES OR THE RIGHTS AND OBLIGATIONS HEREUNDER OR THEREUNDER AND SUCH SERVICE SHALL BE DEEMED COMPLETED UPON DELIVERY THEREOF TO SUCH AGENT. IT IS UNDERSTOOD THAT A COPY OF SUCH PROCESS SERVED ON SUCH AGENT WILL BE PROMPTLY FORWARDED BY MAIL TO THE COMPANY AT ITS ADDRESS SET FORTH IN SECTION 15 HEREOF, BUT THE FAILURE OF THE COMPANY TO RECEIVE SUCH COPY SHALL NOT AFFECT IN ANY WAY THE SERVICE OF SUCH PROCESS. THE COMPANY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE COMPANY AT ITS ADDRESS, SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER SUCH MAILING. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE HOLDERS OF THE WARRANTS OR THE WARRANT SHARES TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR COMMENCE LEGAL PROCEEDINGS IN OR OTHERWISE PROCEED AGAINST THE COMPANY IN ANY OTHER JURISDICTION. 19. Waiver of Jury Trial. THE COMPANY AND THE HOLDER OF THIS WARRANT -------------------- HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS WARRANT OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS WARRANT AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THE RELATIONSHIP THAT IS BEING ESTABLISHED HEREUNDER. THE COMPANY AND THE HOLDER OF THIS WARRANT ALSO WAIVE ANY BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS -17- WAIVER, BE REQUIRED OF THE OTHER PARTIES. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS WARRANT, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. THE COMPANY AND THE HOLDER OF THIS WARRANT ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS WARRANT AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. THE COMPANY AND THE HOLDER OF THIS WARRANT FURTHER WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS WARRANT OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE TRANSACTIONS CONTEMPLATED HEREBY. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 20. Withholding Taxes. (a) The Company covenants that it will not ----------------- withhold United States withholding taxes from payments to be made to holders of Warrants if such holders (i) are corporations organized under the laws of a jurisdiction outside the United States or are otherwise persons not resident in the United States for United States federal income tax purposes, and (ii) provide the Company, upon the Company's reasonable request, with Internal Revenue Service Form W-8, Form 4224, Form 1001 or other applicable form, certificate or document prescribed by the Internal Revenue Service certifying as to such holders' entitlement to an exemption from any such withholding requirements. (b) The Company further covenants that it will not withhold United States withholding taxes from payments to be made to holders of Warrants in excess of an applicable treaty rate under an income tax treaty between the United States and the holders' country of tax residence if such holders (i) are corporations organized under the laws of a jurisdiction outside the United States or are otherwise persons not resident in the United States for United States federal income tax purposes, and (ii) provide the Company, upon the Company's reasonable request, with internal Revenue Service Form 1001 or other applicable form, certificate or document prescribed by the Internal Revenue Service certifying as to such holders' entitlement to a reduced rate of withholding under any such withholding requirements. (c) Neither subsection 20(a) nor subsection 20(b) shall require the Company to apply an exemption or reduce rate of withholding during any period when it shall have received notice or has actual knowledge that the residence information previously -18- provided on any applicable form, certificate or document is incorrect and no corrected form, certificate or document as applicable has been provided to the Company. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be executed as a deed by its duly authorized officer and this Warrant Certificate to be dated ________, 199__. CAREER EDUCATION CORPORATION By________________________________ Name _____________________________ Title _____________________________ -19- SCHEDULE 1 ---------- EXERCISE FORM [To be executed only upon exercise of Warrant] To: CAREER EDUCATION CORPORATION The undersigned irrevocably exercises ____________________ of the Warrants for the purchase of one share (subject to adjustment) of Class E Common Stock, par value $.01 per share, of Career Education Corporation (the "COMPANY") for each Warrant represented by the within Warrant certificate and herewith makes payment of $__________ (such payment being in cash or by check or bank draft in immediately available funds payable to the order of the Company or by the surrender of a portion of the Warrants other than that which is being exercised), all at the exercise price and on the terms and conditions specified in the within Warrant Certificate, surrenders the within Warrant Certificate and all right, title and interest therein (except as to any unexercised Warrants) to the Company and directs that the shares of Class E Common Stock deliverable upon the exercise of such Warrants be registered or placed in the name and at the address specified below and delivered thereto. Dated:__________ _______________________________________ (Signature of Owner) /(1)/ _______________________________________ (Street Address) _______________________________________ (City) (State) (Zip Code) _________________________ (1) The signature must correspond with the name as written upon the face of the within Warrant Certificate in every particular, without alteration or enlargement or any change whatever. SCHEDULE 2 ---------- FORM OF ASSIGNMENT FOR VALUE RECEIVED, the undersigned registered Holder of the within Warrant Certificate hereby sells, assigns, and transfers unto the Assignee(s) named below (including the undersigned with respect to any Warrants constituting a part of the Warrants evidenced by the within Warrant Certificate not being assigned hereby) all of the right of the undersigned under the within Warrant Certificate, with respect to the number of Warrants set forth below:
Social security or other identifying number of Names of Assignees Address Assignee(s) Number of Warrants - ------------------ ------- ----------- ------------------
and does hereby irrevocably constitute and appoint ____________________ the undersigned's attorney to make such transfer on the books of Career Education Corporation maintained for that purpose, with full power of substitution in the premises. Dated:__________ ____________________________________ (Signature of Owner) /(1)/ ____________________________________ (Street Address) ____________________________________ (City) (State) (Zip Code) ______________________ (1) The signature must correspond with the name as written upon the face of the within Warrant Certificate in every particular, without alteration or enlargement or any change whatever. EX-10.21 15 FORM OF MANAGEMENT FEE AGREEMENT EXHIBIT 10.21 CAREER EDUCATION C O R P O R A T I O N - -------------------------------------------------------------------------------- Suite 790 2800 West Higgins Road Hoffman Estates, IL 60195 Tel: (847) 781-3600 Fax: (847) 781-3610 FORM OF MANAGEMENT FEE AGREEMENT -------------------------------- This agreement is made as of ________ ____, 19___, by and between Career Education Corporation ("CEC") and _______________ ("____") (this "Agreement"). WITNESSETH ---------- WHEREAS, CEC is a management holding corporation which through its subsidiaries provides post secondary educational opportunities; and WHEREAS, CEC through its subsidiaries, including but not limited to ___________, operates several post secondary proprietary schools; and WHEREAS, _____________ is in need of the expertise and financial capabilities of CEC in order to obtain and follow the standards and methods with respect to marketing, accreditation, curriculum, financing, management information systems and other services described below; and WHEREAS, CEC is prepared to assist the local management of _____________ to meet such standards and methods with respect to academics, financing, organization, accreditation and other services. NOW, THEREFORE, in consideration of the foregoing recitals, and of the mutual covenants and agreement set forth below, the parties hereto agree as follows: 1. SERVICES In consideration of payment by _____________ to CEC, CEC hereby agrees to provide to ___________ the following services (hereinafter referred to as the "Services"): (a) SYSTEMS AND PROCEDURES CEC shall issue the standard systems and procedures for ____________ with respect to accounting, management information systems, financial aid, academics, regulatory agencies, marketing, finance and administration, and CEC hereby assures ____________ that these standards shall be available for use by ____________ at the time of execution of this Agreement, and CEC agrees further that CEC shall provide additional assistance in explaining and establishing such standards, if so requested in writing by ____________. _____________ shall be responsible for all equipment and maintenance costs associated with the systems selected by CEC. (b) MANAGEMENT CONSULTING CEC shall provide consulting services to _____________, which consulting services may include services with respect to organizational structure, work procedures, work relationships, marketing, academics, financial aid and assignment of staff to _____________. In particular, CEC shall perform the following services upon the request of ______________: (i) suggest methods to collect delinquent accounts receivable; (ii) review and recommend compensation along with review of non-government employee benefits; (iii) design and recommend lending and other financial programs to assist financial aid; (iv) perform evaluations of facilities, curriculum and staffing levels; and (v) analyze capital expenditure proposals, review annual budgets and perform other financial evaluations and services. (c) INFORMATION SERVICES, FINANCING AND ACCOUNTING CEC shall assist in solving special problems encountered by ____________ with respect to local accounting or management rules. CEC will provide and manage all banking and financing requirements for _____________. CEC will also arrange for and coordinate all annual outside financial audits and assist __________ in the resolution of any audit findings from any outside auditor or regulatory agency. (d) LEGAL ASSISTANCE CEC shall arrange for legal advice on matters of special concern to ___________ and/or of common concern to _____________ and other subsidiaries of CEC including, but not limited to, legal advice on matters relating to trade names, trademarks, patents, licensing authority, accreditation, and degree authority. CEC also may obtain referrals for _____________ for legal advice, and will apprise _____________ of the activities of local attorneys with respect to matters concerning _____________. (e) TAX ADVICE CEC shall arrange for advice with regard to any local or state tax issues that may be encountered by ____________ as a consequence of being a subsidiary of CEC. CEC will consolidate all subsidiaries for federal tax purposes and will allocate tax expenses to _____________ and other subsidiaries based upon the TAX SHARING AGREEMENT dated January 1, 1996. (f) MARKET RESEARCH, MARKETING AND DISTRIBUTION CEC shall provide _____________ with results of its market research and marketing analyses. CEC also shall coordinate the purchasing of marketing materials used by _____________ and other subsidiaries of CEC. (g) ADVERTISING CEC shall coordinate advertising on a local, regional and national basis, which coordination shall be for the purpose of (i) deriving savings through the sharing of certain base costs; and (ii) presenting a professionally prepared, uniform image of _____________, CEC and all other subsidiaries of CEC. (h) INSURANCE CEC shall provide advice and assistance in obtaining insurance coverage at the lowest possible rates for the protection of the assets and earnings of ______________ and shall also coordinate the purchasing of employee and non-employee insurance coverage. 2. BASIC FEE For the Services describe above, CEC will charge and _____________ hereby agrees to pay, at the times and in the manner described below, a service fee (hereinafter referred to as the "Basic Fee"). The amount of the Basic Fee payable by _____________ to CEC per year shall be based upon the actual total revenues of _____________ multiplied by x% ("Percentage Rate"), plus charges for any additional costs associated with such Services, including but not limited to, charges incurred by CEC for travel. The Percentage Rate may be increased or decreased by CEC from time to time during the term, however, the Percentage Rate once established will not change during a fiscal year. With respect to Services rendered during the time between the date hereof and ____________(the "Initial Period"), the basic fee will be invoiced monthly, one month in arrears. Each invoice will be payable by _____________ to CEC with terms of net 30 days. 3. TERM The maximum term of this Agreement will be for 15 years. The Initial Period will be _______________, through _________________. After the Initial Period, this Agreement will be extended automatically for two year periods beginning ____________ through _____________. This Agreement may be terminated with the mutual agreement of both parties. In the case of termination, _____________ will be liable for all charges for Services provided by CEC to _____________ through the effective date of termination. 4. REVIEWS As an additional service, CEC hereby agrees to review for effectiveness, on a monthly basis, all of the operations performed by _____________, and ____________ hereby agrees, in order to aid CEC in such reviews, to complete, in a timely manner, the weekly Flash Reports, the monthly financial statements, forecasting reports and other required reports. 5. STANDARD OF CARE: WAIVER OF CLAIMS AGAINST CEC (a) In performing the Services under this agreement, CEC at all times shall act in good faith and in a manner which it believes to be in or not opposed to the best interests of _____________. (b) Notwithstanding anything to the contrary contained in this Agreement or provided by law, to the maximum extent permitted by law, ____________ hereby unconditionally and irrevocably waives all claims and causes of action against CEC (and its shareholders, officers, directors and employees), of every kind and character, including claims and causes of action for loss of or injury to business and property, caused by or deriving from any act or omission of CEC (or its shareholders, officers, directors and employees) under this Agreement, including acts and omissions constituting negligence or gross negligence, except for such acts or omissions of CEC made or omitted in bad faith. 6. NO THIRD PARTY BENEFITS Nothing contained in this Agreement, express or implied, shall grant to or confer upon any person or entity other than the parties hereto any rights or remedies. 7. SUCCESSORS AND ASSIGNS Subject to the availability of personnel of CEC, the rights and obligations of the parties hereto under this Agreement shall be binding upon and shall inure to the benefit of the parties hereto, their successors and assigns. CEC hereby expressly reserves the right to assign or delegate to any third party its rights or obligations hereunder, which assignment or delegation may be effected without notice to ______________; provided, however, that if CEC assigns to a third party its rights to receive payments of the Basic Fee as described in Paragraph 2 above, then CEC shall notify _______________ of such assignment sufficiently prior thereto, and shall provide ___________ opportunity to make payments of such Basic Fee in a timely manner. 8. ENTIRE AGREEMENT This Agreement contains the entire understanding of the parties thereto with respect to the subject matter hereto. AGREED: IN WITNESS WHEREOF, CEC and _____________ have caused this Agreement to be executed by their duly authorized officers, all on the ________________. CAREER EDUCATION CORPORATION By: ______________________________ Its: _____________________________ ______________ By: ______________________________ Its: _____________________________ EX-10.22 16 FORM OF TAX SHARING AGREEMENT CAREER EDUCATION EXHIBIT 10.22 C O R P O R A T I O N - -------------------------------------------------------------------------------- Suite 790 2800 West Higgins Road Hoffman Estates, IL 60195 Tel: (847) 781-3600 Fax: (847) 781-3610 FORM OF TAX SHARING AGREEMENT --------------------- This agreement is made as of _________________, by and between Career Education Corporation ("CEC"), and such other affiliates, whether presently existing or hereafter acquired, as are or shall be part of the "Group" as hereinafter defined (hereinafter referred to individually as "Subsidiary" and collectively as "Subsidiaries") for taxable years commencing on and after January 1, 1996. WITNESSETH ---------- WHEREAS, CEC, Subsidiaries, and any other corporation which together with CEC form an affiliated Group (the "Group") within the meaning of Section 1504(a) of the Internal Revenue Code (the "Code") desire to continue to file a consolidated Federal income tax return and consolidated or combined state income tax returns where allowed by law; and WHEREAS, CEC and Subsidiaries wish to preserve the economic rights and privileges which would accrue to each from the filing of separate Federal and state income tax returns and, further, wish to set forth their agreement regarding those rights and privileges in writing. NOW, THEREFORE, CEC and Subsidiaries hereby agree as follows: I. Consolidated Return A. It would be to the mutual advantage of the parties hereto, and could result in smaller Federal and state income tax being paid by all parties, if a consolidated Federal income tax return and consolidated or combined state income tax returns (where allowed) are filed which will include any Subsidiaries and affiliates of the parties in accordance with the terms of the Code and related Income Tax Regulations ("Regulations"). B. CEC and Subsidiaries shall file such consents and other documents and take such action as may be necessary to continue in filing a consolidated tax return for the Group. 1 C. CEC and Subsidiaries shall cause any corporation which hereafter becomes an affiliate of any of them and a member of the Group to join in this Agreement. D. CEC and Subsidiaries shall maintain, and shall cause any subsidiaries subsequently formed or acquired to maintain, concurrent fiscal years. E. CEC shall make all elections under the consolidated return regulations or required to be made for the consolidated group and shall approve all elections made with respect to each member of the Group. F. CEC and Subsidiaries agree to pay to CEC all amounts sufficient to pay for their respective allocable share of Federal and state tax liabilities as calculated in accordance with the provisions of Sections II and III, including without limitation amounts satisfying quarterly estimated tax liabilities, as well provisions of Section IV hereof. II. Calculation of Individual Corporate Income Tax Liability A. Beginning with the year ended December 31, 1996, and for each tax year thereafter, each member of the Group will calculate its Federal corporate income tax liability as if it were to file a separate Federal tax return for such period. B. In so computing the separate Federal income tax liability of each member of the Group: 1. Except as otherwise provided herein, "separate company taxable income" shall be determined as if CEC and each Subsidiary were filing a separate tax return, and the term will not have the same meaning as set forth in Regulation Section 1,1502-12; 2. Any dividends received by CEC from Subsidiaries, or by one Subsidiary from another, will be assumed to qualify for the 100% dividend received deduction of Code Section 243, or shall be eliminated from such calculation in accordance with Regulation Section 1. 1502-14(a)(1); 3. Gain or loss on intercompany transactions, whether deferred or not, shall be treated by each member of the Group in the manner required by Regulation Section 1.1502-13; 4. Limitation on the calculation of a deduction, the utilization of credits, or the calculation of the liability shall be made on a consolidated basis. Accordingly, the limitations provided in Code Sections 170(b)(2), 2 172(b)(2), 38(c), and 53(a) and similar limitations shall be applied on the consolidated basis; 5. The amounts in each taxable income bracket in Code Section 11(b) shall be allocated in any given year to members of the Group as Parent shall elect. Such election shall be made on an annual basis and shall be binding upon all parties to this Agreement; and 6. The amount of any excess tax credits utilized by the Group on a consolidated basis shall be allocated in any given year to the members of the Group as determined by CEC. (Excess tax credits are the total tax credits utilized on a consolidated basis that would not have been utilized on a separate company basis.) 7. In calculating any carryback of carryover of net operating losses, adjustments shall be made to such prior or subsequent year's separate company tax liability as determined under Code Section 172(b)(2). For purposes of this calculation the election under Code Section 172(b)(3) shall be made on a separate company basis. C. For purposes of 1 above, separate company taxable income of each member of the Group shall take into account only those items of income, deduction, gain and loss recorded on the books and records of such member. III. Liability For Tax Payments A. CEC will pay the Federal corporate income tax liabilities of the Group for any year in which the Group is required to file consolidated Federal and state income tax returns. B. If any Subsidiary would be subject to Federal corporate income tax if it filed a separate income or franchise tax returns, that Subsidiary shall pay to CEC that sum which shall result from the calculations required by paragraph II, above. C. If any Subsidiary would be entitled to a refund of Federal corporate income tax if it filed a separate Federal income tax return, or if currently generated losses or credits of any Subsidiary reduce the current tax liability of the consolidated group, Parent shall pay to that Subsidiary that sum which shall result from the calculation required by Paragraph II, above. In the event that a Subsidiary's separate company taxable income is a loss in any given year as calculated under paragraph II, and the consolidated group is unable to utilize the loss to reduce its current tax liability, the Subsidiary will first offset this loss against the prior three years' taxable income. If the loss is greater than the prior three years' profits, the excess will be carried 3 forward against future years' taxable income. The tax repayment from CEC to the Subsidiary under this paragraph will be calculated on the amount of the loss carried back to prior years, and no further tax will be payable from CEC to the Subsidiary until the losses carried forward are utilized against future years' income. D. If CEC is found liable to pay any state corporate tax with respect to income earned by Subsidiary or CEC, as the case may be, Subsidiary and CEC agree to pay to CEC the entire amount of such amount representing their respective state corporate tax liability. E. Payment to Parent by any Subsidiary must not include any deferred tax liability incurred by Subsidiary. IV. Method and Time of Payment Payments by Parent of consolidated estimated tax for the consolidated Group at the normal quarterly due dates will reimbursed by the Subsidiaries at those quarterly due dates based on estimates prepared by CEC. Each Subsidiary shall make/receive these quarterly payments/receipts of estimated tax liability/repayment on account to/from CEC based on the Subsidiary's separate company taxable income calculated under paragraph II, above, as of the close of the appropriate quarter. As soon as the Group's consolidated tax liability for the year is determined, each Subsidiary shall make/receive payment to/from Parent pursuant to paragraph III, above, less amounts already paid for estimated tax. V. Adjustment of Tax Liability In the event of any adjustment of the tax liability shown on the Federal or state income tax returns of the Group, by reason of the filing of an amended return or claim for refund, or arising out of an audit by a taxing authority, the liability of Parent and any Subsidiary hereunder shall be redetermined after fully giving effect to such adjustment as if such adjustment had been made as part of the original computation. VI. Earnings and Profits Adjustments This agreement is not intended to establish the method by which the earnings and profits of each member of the Group will be determined. CEC reserves the right to elect the method for allocating tax liability for the purposes of determining earnings and profits as set forth in Regulation Sections 1.1552-1(a) and 1.1502-33(d). VII. Financial Statement Tax Provision In consolidating financial statements of CEC and its Subsidiaries, the financial reporting policy for tax provision allocations shall be based upon a separate entity concept whereby 4 each subsidiary provides income tax expense (or benefits) as if each were a separate tax return basis and the consolidated financial reporting allocation basis shall be charged or credited to CEC's separate tax provision. VII. Successors Assigns The provisions and terms of this Agreement shall be binding on and inure to the benefit of any successor, by merger, acquisition of assets or otherwise, of any of the parties hereto. VIII. New Members If, at any time any other company becomes a member of the Group, the parties hereto agree that such member may become a party to this Agreement by executing a duplicate copy of this Agreement. Unless otherwise specified, such named member shall have all the rights and obligations of a subsidiary under this Agreement. IX. Parent Designate At the election of the CEC, CEC can designate a Subsidiary to act on behalf of CEC in performing the duties identified in this agreement. X. Duration Unless earlier terminated by mutual agreement of the parties, this Agreement shall remain in effect with respect to any tax year for which consolidated Federal and state income tax returns are filed by the Group. Notwithstanding the termination of this Agreement, its provision will remain in effect with respect to any period of time during the tax year in which termination occurs, for which the income of the termination party must be included in the consolidated return. The preceding sentence shall not be construed, however, to require a Subsidiary to contribute to consolidated tax liability for any period for which it files a separate return. Allocations of consolidated tax liability shall be made hereunder only for periods covered by a consolidated Federal income tax return. XI. General All material including but not limited to, returns, supporting schedules, workpapers, correspondence and other documents relating to the consolidated return shall be made available to any party to this Agreement during regular business hours. This Agreement shall be governed by the laws of Illinois and Delaware. 5 THIS AGREEMENT contains the entire agreement of the parties and there are no agreements, representations or warranties not contained herein. This Agreement may not be modified or amended except by written instrument executed with the same formality as this Agreement. IN WITNESS WHEREOF, the parties hereto have caused their names to be subscribed and executed by their respective authorized officers on the dates indicated, effective as of the date first written above. Career Education Corporation By: ______________________________ Its: _____________________________ __________________________________ By: ______________________________ Its: _____________________________ 6 EX-21 17 CAREER EDUCATION CORP. SUBSIDIARIES EXHIBIT 21 CAREER EDUCATION CORPORATION SUBSIDIARIES Jurisdiction Subsidiary of Incorporation ---------- ---------------- CEC Management, Inc. Illinois Market Direct, Inc., Illinois d/b/a Market Direct Al Collins Graphic Design School, Ltd., Delaware d/b/a Al Collins Graphic Design School Allentown Business School, Ltd., Delaware d/b/a Allentown Business School Brooks College, Ltd., Delaware d/b/a Brooks College Brown Institute, Ltd., Delaware d/b/a Brown Institute International Academy of Merchandising & Design, Ltd., Illinois d/b/a IAMD Chicago International Academy of Merchandising & Design, Inc., Florida d/b/a IAMD-Tampa IAMD, Limited (holding company) Delaware International Academy of Design - Toronto, Ontario d/b/a IAOD-Toronto International Academy of Design - Montreal, Quebec d/b/a IAOD-Montreal International Academy of Merchandising and Design, Ontario (Canada), Ltd. The Katharine Gibbs School of Norwalk, Inc., Connecticut d/b/a Gibbs College K-III KG Corporation - Massachusetts, Massachusetts d/b/a Katharine Gibbs School-Massachusetts The Katharine Gibbs School of Montclair, Inc., New Jersey d/b/a Katharine Gibbs School-Montclair The Katharine Gibbs School of Piscataway, Inc., New Jersey d/b/a Katharine Gibbs School-Piscataway The Katharine Gibbs Corporation - Melville, New York d/b/a Katharine Gibbs School-Melville The Katharine Gibbs Corporation - New York, New York d/b/a Katharine Gibbs School-New York The Katharine Gibbs School of Providence, Inc., Rhode Island d/b/a Katharine Gibbs School-Providence The Katharine Gibbs Schools, Inc. Delaware School of Computer Technology, Inc., d/b/a Computer Tech & International Culinary Academy Western Culinary Institute, Inc., Delaware d/b/a Western Culinary Institute EX-23.1 18 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report (and to all references to our Firm) included in or made a part of this registration statement. Arthur Andersen LLP Chicago, Illinois October 9, 1997 EX-23.3 19 CONSENT OF THOMAS B. LALLY EXHIBIT 23.3 CONSENT I hereby consent to the use of my name as a nominee for the Board of Directors of Career Education Corporation in the Prospectus forming part of this Registration Statement on Form S-1 (the "Registration Statement") and for use of this consent for filing as Exhibit 23.3 to the Registration Statement. /s/ Thomas B. Lally ------------------------------------- Thomas B. Lally Dated: October 9, 1997 EX-27 20 FINANCIAL DATA SCHEDULE
5 1,000 YEAR 6-MOS DEC-31-1996 DEC-31-1997 JAN-01-1996 JAN-01-1997 DEC-31-1996 JUN-30-1997 7,798 9,745 0 0 3,237 8,158 455 1,026 213 427 11,832 19,154 22,517 51,223 2,957 4,135 36,208 100,767 10,453 15,404 0 0 13,691 31,697 0 0 1 1 (1,720) 2,379 36,208 100,767 29,269 23,073 33,580 25,652 31,205 24,141 0 0 0 0 0 0 672 985 1,703 526 208 210 1,495 316 0 0 0 418 0 0 1,495 (102) 0 0 0 0
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