-----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, VRG+qrw0pm3vSKDxUVTUtK9ds4qLp37xgTcRchnbP9zEeCeH2Nyl/HoAAwh0H7Bc QS8t7ZTEUmLpsXU3fcLvJA== 0000950131-98-000015.txt : 19980105 0000950131-98-000015.hdr.sgml : 19980105 ACCESSION NUMBER: 0000950131-98-000015 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 26 FILED AS OF DATE: 19980102 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAREER EDUCATION CORP CENTRAL INDEX KEY: 0001046568 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EDUCATIONAL SERVICES [8200] IRS NUMBER: 393932190 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-37601 FILM NUMBER: 98500499 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/A 1 AMENDMENT NO. 2 TO THE FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 2, 1998 REGISTRATION NO. 333-37601 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- AMENDMENT NO. 2 TO 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: [_] 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 JANUARY 2, 1998 2,850,000 Shares [LOGO OF CAREER EDUCATION] Common Stock ----------- The 2,850,000 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 $13.00 and $15.00 per share. For information relating to the factors considered in determining the initial offering price to the public, see "Underwriting." The Common Stock has been approved for listing on the Nasdaq National Market under the symbol "CECO," subject to official notice of issuance. 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 $2,000,000. (2) The Company and one of its stockholders have granted the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase a maximum of 401,238 additional shares from the Company and a maximum of 26,262 additional shares from such stockholder 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 stockholder 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 , 1998, against payment in immediately available funds. CREDIT SUISSE FIRST BOSTON SALOMON SMITH BARNEY Prospectus dated , 1998 CAREER EDUCATION CORPORATION BUILDING THE FUTURE OF PRIVATE POST- SECONDARY EDUCATION PHOTOGRAPH OF FIVE STUDENTS FROM ALLENTOWN BUSINESS SCHOOL WALKING ON CAMPUS. COMPUTER TECHNOLOGIES VISUAL COMMUNICATION AND DESIGN TECHNOLOGIES BUSINESS STUDIES CULINARY ARTS 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--LEFT] PICTURE OF THE FRONT OF AN OFFICE BUILDING BUSINESS STUDIES ("NUMBER 126") WHICH HOUSES THE KATHARINE GIBBS SCHOOL IN BOSTON, MASSACHUSETTS. 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. PICTURE OF TWO STUDENTS AND ONE INSTRUCTOR AT ONE OF THE COMPANY'S SCHOOLS. THEY ARE ALL LOOKING AT A COMPUTER SCREEN. PICTURE OF TWO PEOPLE AT A DESK IN A TRAVEL AGENT'S OFFICE WHERE STUDENTS ARE TAUGHT ABOUT TRAVEL-RELATED BUSINESS. . Allentown Business School . . The Katharine Gibbs School . PICTURE OF A KITCHEN CLASSROOM AT WESTERN CULINARY INSTITUTE, WITH SEVERAL CHEFS. IN THE FOREGROUND A CHEF INSTRUCTOR IS TEACHING A STUDENT. PICTURE OF A STUDENT FROM WESTERN CULINARY INSTITUTE DECORATING A CAKE. CULINARY ARTS 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 both fields. It endeavors to present students the different styles and experiences of the school's chef 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. . Western Culinary Institute . . International Culinary Academy . (a division of School of Computer Technology) AN AERIAL PHOTO OF THE PORTLAND AREA WHERE WESTERN CULINARY INSTITUTE IS LOCATED. [FRONT COVER GATEFOLD--RIGHT] COMPUTER TECHNOLOGIES PICTURE OF A BUILDING WHICH HOUSES THE SCHOOL OF COMPUTER TECHNOLOGY. 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 OF A STUDENT IN A COMPUTER TECHNOLOGIES PROGRAM AT ONE OF THE COMPANY'S SCHOOLS EXAMINING SEVERAL CIRCUIT BOARDS, WHILE AN INSTRUCTOR POINTS TO AN AREA ON THE CIRCUIT BOARD. PICTURE OF TWO STUDENTS WHO STUDY COMPUTER TECHNOLOGIES AT ONE OF THE COMPANY'S SCHOOLS AND AN INSTRUCTOR IN FRONT OF COMPUTERS. THE INSTRUCTOR IS POINTING AT A COMPUTER SCREEN. . Al Collins Graphic Design School . PICTURE OF A STUDENT IN A . Allentown Business School . VISUAL COMMUNICATIONS PROGRAM AT ONE OF THE COMPANY'S SCHOOLS WORKING . Brooks College . AT A DRAWING EASEL. . Brown Institute . . International Academy of Merchandising and Design . PICTURE OF A STUDENT IN A VISUAL COMMUNICATIONS PROGRAM AT ONE OF THE COMPANY'S SCHOOLS BEHIND A VIDEO CAMERA WITH OTHER STUDENTS AND BROADCASTING EQUIPMENT IN THE BACKGROUND. PICTURE OF AN OFFICE VISUAL COMMUNICATION AND BUILDING WHICH HOUSES ONE DESIGN TECHNOLOGIES OF THE INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN SCHOOLS 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 creativity and imagination, coupled with the solid training offered by our schools. . Al Collins Graphic Design School . . Allentown Business School . . Brooks College . . Brown Institute . . International Academy of Merchandising and Design . 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 approximately 13,000 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 1/94 891 1,008 13% BROOKS COLLEGE ("Brooks") 1970 6/94 960 1,112 16 ALLENTOWN BUSINESS SCHOOL ("Allentown") 1869 7/95 781 927 19 BROWN INSTITUTE ("Brown") 1946 7/95 1,452 1,575 8 WESTERN CULINARY INSTITUTE ("Western Culinary") 1983 10/96 453 467 3 SCHOOL OF COMPUTER TECHNOLOGY ("SCT") (2 campuses) 1967 2/97 940 1,053 12 THE KATHARINE GIBBS SCHOOLS ("Gibbs") (7 campuses) 1911 5/97 2,982 3,557 19 INTERNATIONAL ACADEMY OF MER- CHANDISING & DESIGN (U.S.) ("IAMD-U.S.") (2 campuses) 1977 6/97 1,202 1,518 26 INTERNATIONAL ACADEMY OF MER- CHANDISING & DESIGN (CANADA) ("IAMD-Canada") (2 campuses) 1983 6/97 1,231 1,779 45
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 nine months of 1997, net revenue was $50.8 million. 1996 pro forma net revenue, reflecting the results of operations of schools the Company acquired in 1997, would have been $87.5 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 38% over the past two years, from 3,347 at October 31, 1995 to 4,622 at October 31, 1997. In addition, approximately 88% of the available 1996 graduates of these four 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 continued 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............... 2,850,000 shares Common Stock to be outstanding after the Offering................ 6,756,382 shares (1) Use of proceeds.................... Repayment of certain indebtedness. See "Use of Proceeds." Proposed Nasdaq National Market symbol............................ CECO
- -------- (1) Excludes (i) 271,646 shares of Common Stock issuable upon the exercise of outstanding options and (ii) an aggregate of 1,277,406 shares of Common Stock reserved for issuance under the Career Education Corporation 1995 Stock Option Plan, the Career Education Corporation 1998 Employee Incentive Compensation Plan, the Career Education Corporation 1998 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 NINE MONTHS ENDED NINE MONTHS ENDED YEARS ENDED DECEMBER 31, DECEMBER 31, 1996 SEPTEMBER 30, SEPTEMBER 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 $79,640 $79,640 $ 19,299 $ 45,615 $ 68,172 $68,172 Other, net............. 1,692 3,066 4,311 7,836 7,836 3,130 5,152 6,464 6,464 -------- -------- -------- ------- ------- -------- --------- -------- ------- Total net revenue.... 7,486 19,396 33,580 87,476 87,476 22,429 50,767 74,636 74,636 Depreciation and amortization (4)....... 980 1,330 2,134 10,517 10,517 1,481 5,000 8,199 8,199 Income (loss) from operations............. (1,455) 404 2,420 (437) (437) 393 (354) (1,034) (1,034) Income (loss) before extraordinary item..... (1,589) 69 1,495 (5,041) (2,269) 21 (1,392) (4,431) (2,360) Extraordinary loss (5).. -- -- -- -- -- -- (418) -- -- -------- -------- -------- ------- ------- -------- --------- -------- ------- Net income (loss)....... (1,589) 69 1,495 (5,041) (2,269) 21 (1,810) (4,431) (2,360) ======== ======== ======== ======= ======= ======== ========= ======== ======= Income (loss) before extraordinary item attributable to common stockholders (6)....... (1,982) (804) 137 (5,041) (2,269) (995) (3,563) (4,431) (2,360) ======== ======== ======== ======= ======= ======== ========= ======== ======= Net income (loss) attributable to common stockholders (6)....... (1,982) (804) 137 (995) (3,981) ======== ======== ======== ======== ========= Pro forma income (loss) before extraordinary item attributable to common stockholders (7).................... $ 1,495 $(5,041) $(2,269) $ 21 $ (1,392) $ (4,431) $(2,360) ======== ======= ======= ======== ========= ======== ======= Pro forma income (loss) before extraordinary item per share attributable to common stockholders (7)(8).... $ (0.40) $ (0.42) ======= ======= OTHER DATA: EBITDA (9).............. $ (475) $ 1,734 $ 4,554 $10,080 $10,080 $ 1,874 $ 4,646 $ 7,165 $ 7,165 EBITDA margin (9)....... (6.3)% 8.9% 13.6% 11.5% 11.5% 8.4% 9.2% 9.6% 9.6% Cash flow provided by (used in): Operating activities... (1,000) 235 5,275 600 (6,274) Investing activities... (2,372) (3,478) (9,518) (952) (39,733) Financing activities... 6,014 4,566 8,076 (509) 43,650 Capital expenditures, net.................... 153 897 1,231 914 2,010 Student population (10). 1,131 3,347 4,537 10,892 3,533 10,951 10,951 Number of campuses (11). 2 4 5 18 4 18 18 SEPTEMBER 30, 1997 ------------------------------ PRO FORMA AS PRO ADJUSTED ACTUAL FORMA(12) (12)(13) --------- --------- -------- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents..................................................... $ 5,448 $ 5,448 $ 9,870 Working capital............................................................... 1,402 1,402 5,824 Total assets.................................................................. 103,369 103,369 107,791 Long-term debt, net of current maturities..................................... 46,892 46,892 16,207 Redeemable preferred stock and warrants....................................... 34,027 -- -- Total stockholders' investment................................................ (1,774) 32,253 67,360
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 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 2,850,000 shares of Common Stock offered hereby, at an assumed initial public offering price of $14.00 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 and deferred financing costs. (5) Represents the extraordinary loss of $651, net of a $233 tax benefit, resulting from the early extinguishment of debt during the nine months ended September 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 nine months ended September 30, 1996 and 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 as adjusted weighted average number of common and common stock equivalent shares outstanding totalling 5,649,336 and 5,641,861 at December 31, 1996 and September 30, 1997, respectively, includes (i) 2,200,000 and 2,191,786 shares, for the respective periods, of Common Stock issued in the Offering at an assumed initial public offering price of $14.00 in order to repay indebtedness as described in "Use of Proceeds," as if the Offering had occurred as of January 1, 1996 and (ii) 2,521,857 shares, for both periods, of Common Stock to be issued upon the Preferred Stock Conversion, assuming an initial public offering price of $14.00 per share. 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 deferred financing costs), 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 nine months ended September 30, 1996 and 1997, as of September 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 2,850,000 shares of Common Stock offered hereby at an assumed initial public offering price of $14.00 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 1998 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. SUBSTANTIAL DEPENDENCE ON STUDENT 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 (on a cash basis) 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 cannot be arranged, the Company's business, results of operations and financial condition would be adversely affected. Potential Adverse Effects of Failure to Comply with U.S. Financial Aid Regulatory Requirements 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, 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 ("Gibbs-Montclair"), 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 (on a cash basis) 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 83% of its revenue (on a cash basis) 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 "Potential Loss of Student Financial Aid Due to Failure to Meet Financial Responsibility Standards" below. 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 "--Potential Loss of Student Financial Aid Due to Failure to Maintain Accreditations"); and (iii) state postsecondary education regulatory bodies (see "--Potential Loss of Student Financial Aid Due to Failure to Maintain State Licenses or Authorizations"). 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 Federal Family Education Loan ("FFEL") program 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 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 That Legislative Action Will Reduce Financial Aid Funding or Increase Regulatory Burden 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 approximately 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 9 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. 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. See "Financial Aid and Regulation--Nature of Federal Support for Postsecondary Education in the U.S." There can be no assurance that any legislation 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. POTENTIAL LOSS OF STUDENT FINANCIAL AID DUE TO FAILURE TO MEET 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. An institution that is determined by the DOE not to meet any one of the standards of financial responsibility is nonetheless entitled to participate in the Title IV Programs if it can demonstrate 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. In November 1997, the DOE published new regulations regarding financial responsibility to take effect on July 1, 1998. See "Financial Aid and Regulation--Federal Oversight of the Title IV Programs--Financial Responsibility Standards." In reviewing the Company's acquisitions in the last 14 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 its review of the Company's financial statements as filed with the DOE in connection with the Company's applications for DOE certification of institutions acquired subsequent to September 1996, the DOE has questioned the Company's accounting for certain direct marketing costs and its valuation of courseware and other instructional materials of the Company's recently acquired institutions. 10 As a result of the DOE's concerns regarding the Company's accounting for direct marketing costs and courseware, the DOE has offered the Company the alternative of posting a letter of credit in favor of the DOE with respect to each institution the Company has acquired since September 1996. 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, the Company has posted and currently has outstanding letters of credit in the amount of $1.9 million with respect to Western Culinary, expiring on September 30, 1998; $1.2 million with respect to SCT, expiring on October 31, 1998; and $12.0 million with respect to Gibbs, expiring on October 31, 1998. In response to the DOE's directive, the Company has agreed to post an additional letter of credit in the amount of $5.2 million, expiring on October 31, 1998, with respect to IAMD-U.S. Further, beginning in October 1997, the DOE has imposed a condition that, through September 30, 1998, SCT, Gibbs and IAMD-U.S. may not disburse Title IV Program funds in excess of the total Title IV Program funds that students enrolled at each institution received in the most recent award year for which data are available to the DOE, which the DOE has calculated as $1.6 million in the case of SCT, $16.0 million in the case of Gibbs, and $7.0 million in the case of IAMD-U.S. In subsequent discussions, the DOE has agreed to consider potential increases in the Title IV Program funding available to students at the affected institutions, if the Company so requests and with the understanding that the Company would secure any such increase in Title IV Program funding by increasing the applicable letter of credit in an amount commensurate with the additional Title IV Program funding utilized by such students. The DOE has advised the Company that the DOE does not include William D. Ford Federal Direct Loan ("FDL") funds in calculating the amount of any letter of credit and that FDL funds are not considered in determining the total Title IV Program funding available to an affected institution. SCT disburses significant amounts of FDL funds to students enrolled in its educational programs. The DOE also has stated that, prior to a determination that the Company satisfies the standards of financial responsibility, the DOE will not consider applications to resume Title IV Program participation on behalf of any institutions that the Company may acquire in the future or applications that seek approval of any action that would expand the Title IV Program participation of any of the Company's U.S. institutions that already is certified for such participation. See "--Reliance on and Risks of Acquisition Strategy," "Business--Growth Strategy" and "Financial Aid and Regulation-- Federal Oversight of the Title IV Programs--Financial Responsibility Standards." In accordance with applicable law, the DOE will be required to rescind the letters of credit and related requirements if the Company and its U.S. institutions demonstrate that they satisfy the standards of financial responsibility using accounting treatments that are acceptable to the DOE. After discussions with the DOE, the Company changed its accounting to eliminate deferred direct marketing costs from its financial statements. In the course of further discussions with the DOE, the Company provided additional information regarding the valuation of courseware and instructional materials at one of the recently acquired institutions where such valuation was questioned by the DOE. Based upon these discussions, the Company believes its valuation of courseware and instructional materials as will be presented in its 1997 financial statements will not impair a determination by the DOE that the Company is financially responsible. Further, the DOE agreed that in the conduct of its next review of the financial responsibility of the Company and its U.S. institutions, the DOE will consider financial information reflecting the results of the Offering, as well as the 1997 audited financial statements of each entity. The Company expects to receive net proceeds from the Offering of approximately $35.1 million. See "Use of Proceeds." The Company believes that such proceeds and the cash generated from operations during 1997 will enable the Company and each of its U.S. institutions to satisfy each of the DOE's standards of financial responsibility, based on their 1997 audited financial statements and the Company's post-Offering financial information. Accordingly, the Company intends to seek the DOE's review of the Company's and its U.S. institutions' audited 1997 financial statements and the Company's post-Offering financial information on an expedited basis in the spring of 1998. However, there can be no assurance that the DOE will expedite its review or of the outcome of such review. As a result of the DOE's requirement that the Company provide the letters of credit discussed above, the Company will have to utilize approximately $20.3 million of availability under its credit agreement. In addition, 11 the DOE limitation on the aggregate dollar value of the Title IV Program participation of SCT, Gibbs and IAMD-U.S. 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 SCT, Gibbs or IAMD-U.S. or to file applications with the DOE for other newly acquired U.S. institutions to seek Title IV Program participation, 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." 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, SCT, Western Culinary and The Katharine Gibbs School in New York, New York ("Gibbs-New York"). See "Financial Aid and Regulation--Federal Oversight of the Title IV Programs-- Financial Responsibility Standards." POTENTIAL LOSS OF STUDENT FINANCIAL AID DUE TO HIGH STUDENT LOAN DEFAULT RATES 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 56% of the Company's U.S. tuition and fee revenue (on a cash basis). 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 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 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 Federal Perkins Loan ("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. One of the Company's institutions, The Katharine Gibbs School, Norwalk, Connecticut ("Gibbs-Norwalk"), has a cohort default rate of 27.4% for federal fiscal year 1995, which is the most recent year for which rates have been published. Two of the Company's institutions, including Gibbs-Norwalk, have had a cohort default rate exceeding 25% in one of the last three federal fiscal years for which such rates have been published. 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. See "Financial Aid and Regulation-- Federal Oversight of the Title IV Programs--Cohort Default Rates." These nine institutions collectively accounted for 12 approximately 59% of the Company's 1996 pro forma net revenue (on a cash basis), 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, for this reason, be placed on provisional certification status for all Title IV Program purposes, 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. 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 (on a cash basis). In 1995, the Gibbs institutions voluntarily chose to discontinue participation in the Perkins program. IAMD-U.S., SCT and Western Culinary also do not participate 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. POTENTIAL ADVERSE 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 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 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 months to five months from the dates of their respective acquisitions. Of the U.S. institutions that have been recertified, 13 are presently participating in the Title IV Programs under provisional certification. 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." After a review of a description of the Offering submitted by the Company, the DOE issued a letter stating its determination that the Offering will not constitute a change of ownership resulting in a change in control under the HEA or the DOE's regulations. However, if the Offering were determined to constitute a change of 13 ownership resulting in a change in control under state and/or accrediting agency standards, the Company would be required to reestablish the state authorization and accreditation of each of the affected U.S. campuses. Based upon its review of applicable state and accrediting agency standards, the Company does not believe that the Offering will constitute a change of ownership resulting in a change of control for state authorization or accreditation purposes, except as identified immediately below. The Offering will constitute a change of ownership under the standards of the Accrediting Council for Independent Colleges and Schools ("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, 10 of the Company's U.S. institutions will be subject to review by the ACICS to reaffirm their accreditation. In addition, the Accrediting Commission of Career Schools and Colleges of Technology ("ACCSCT") is still considering whether it will treat the Offering as a change of ownership and may choose to view the Offering as a substantive change in the existing accreditation of the affected institutions which would require review by ACCSCT or a change of ownership that would require the Company to reaffirm the accreditation of the affected institutions. The Company has been advised that certain states will consider the Offering to constitute a change of ownership. Therefore, the Company will be required to reaffirm the state approvals of the institutions operating in those states. A significant delay in reobtaining or the failure to reobtain state authorization or accreditation 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. POTENTIAL LOSS OF STUDENT FINANCIAL AID DUE TO FAILURE TO MAINTAIN STATE LICENSES OR AUTHORIZATIONS 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 agencies 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 agencies 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." POTENTIAL LOSS OF STUDENT FINANCIAL AID DUE TO FAILURE TO MAINTAIN ACCREDITATIONS 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. See "Financial Aid and Regulation--Accreditation." Certain states require institutions to maintain accreditation as a condition of continued authorization to grant degrees. Each of the Company's U.S. institutions is accredited by an accrediting agency recognized by the DOE, namely, ACICS, ACCSCT, and the Accrediting Commission for Community and Junior Colleges/Western Association of Schools and Colleges ("WASC/ACCJC"). The HEA requires accrediting agencies recognized by the DOE to review and monitor many aspects of an institution's operations and to take appropriate disciplinary action when the institution fails to comply with the accrediting agency's standards. Several of the Company's institutions were on reporting status, requiring them regularly to report their placement or retention results or both to their accrediting agency, during 1997. However, the Company expects all but two of these institutions, IAMD-U.S. in Chicago and Brown, to be removed from such reporting status in 1998. IAMD-U.S. in Chicago has also been and will continue to be on financial reporting to ACICS during 1998, based solely on the financial status of IAMD-U.S. in Chicago under its previous ownership. If any of the Company's campuses were to lose its 14 accreditation, 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--Accreditation." DEPENDENCE ON CANADIAN FINANCIAL AID; POTENTIAL ADVERSE EFFECTS OF CANADIAN REGULATION A substantial majority of the students attending IAMD-Canada receive student financial assistance from Canadian federal and/or provincial financial aid programs. 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"). To enable its students to receive such financial aid, a Canadian institution must meet certain eligibility standards to administer these programs and must comply with extensive statutes, rules, regulations and requirements. In particular, to maintain its right to administer Ontario student financial assistance programs, 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 must be approved by the Ontario Ministry of Education and Training as an eligible institution. Similarly, among other requirements, IAMD-Canada's institution and programs in Quebec must continue to be designated by the Quebec Minister of Education (the "QME") in order for the institution's students to be eligible for financial aid. Any failure of IAMD-Canada to meet the eligibility standards or comply with the applicable statutes, rules, regulations and requirements could have a material adverse effect on the Company's business, results of operations and financial condition. See "Financial Aid and Regulation--Canadian Regulation." Additionally, the Company may not operate a private vocational school in the province of Ontario unless such school is registered under the PVSA. 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 QME for the institution itself and for the educational services to be provided. 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. 15 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." HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY Since its inception in 1994, the Company has experienced an operating loss and net loss for 1994 and the first nine months of 1997; and a net loss attributable to common stockholders for 1994, 1995 and the first nine months of 1997. For the year ended December 31, 1996, on a pro forma basis reflecting the results of operations of schools the Company acquired in 1997, the Company would have incurred an operating loss, net loss and net loss attributable to common stockholders. To the extent that the Company earned operating income, net income or income attributable to common stockholders for any prior periods, the amounts earned were not substantial. The Company anticipates that it will report a net loss and a net loss attributable to common stockholders for the year ending December 31, 1997. See "Selected Historical Consolidated Financial and Other Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and the related notes thereto appearing elsewhere in this Prospectus. The Company may continue to incur losses, and there can be no assurance as to if or when the Company will be profitable in the future or, if profitability is achieved, that it can be sustained or that earnings will be substantial. The Company's future operating results will depend upon a number of factors, including the other factors discussed in these "Risk Factors." 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. The Company from time to time engages in, and is currently engaged in, evaluations of, and discussions with, possible acquisition candidates, including evaluations and discussions relating to acquisitions that may be material in size and/or scope. However, the Company currently has no agreements or commitments with respect to any acquisitions. 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. The Company's acquisition strategy may also be adversely affected by the DOE's request that the Company not submit additional applications to resume Title IV Program participation on behalf of any other institutions that the Company may acquire prior to a determination by the DOE that the Company satisfies the standards of financial responsibility. See "--Potential Loss of Student Financial Aid Due to Failure to Meet Financial Responsibility Standards." 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 16 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 "--Potential Adverse 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." 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. See "Business--Technology." 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, interior design and fashion merchandising students. As a result of these factors, total student enrollment and net revenue are typically highest in the fourth quarter (October through 17 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." HIGHLY 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." SIGNIFICANT OWNERSHIP AND 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, directors and director nominees of the Company, collectively, will beneficially own approximately 58.5% of the outstanding shares of Common Stock (approximately 55.3% 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 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 "Management--Arrangements for Nomination as Director," "Security Ownership of Certain Beneficial Owners and Management" and "Description of Capital Stock." POSSIBLE NEED FOR ADDITIONAL FINANCING TO IMPLEMENT GROWTH STRATEGY 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 18 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." RESTRICTIONS UNDER THE CREDIT AGREEMENT The Credit Agreement restricts the Company and its subsidiaries' ability to take certain actions, including incurring additional indebtedness, paying dividends or making other restricted payments or investments, acquiring new businesses, issuing subordinated debt, entering new business areas or substantially altering the Company's current method of conducting business. Accordingly, the Company may also be restricted in its ability to take certain actions which the Company's management believes would be desirable and in the best interests of the Company and its stockholders. The Credit Agreement additionally requires the Company to maintain specified financial ratios and satisfy certain financial tests. A breach of any covenants contained in the Credit Agreement could result in an event of default thereunder and allow the lenders to accelerate the indebtedness. 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 Company does not maintain key man life insurance on Mr. Larson, Mr. Klettke or any of its other employees. 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." 19 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 1,000,000 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 approximately 6,756,382 shares of Common Stock outstanding, of which the 2,850,000 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 3,906,382 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"), all of which 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 271,646 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, 3,879,380 of the currently outstanding Restricted Shares will be eligible for sale under Rule 144, subject to volume and other limitations (other than the holding period requirement) of such rule. Subject to the Lock-Up Agreements, the holders of 3,748,564 of such Restricted Shares of Common Stock also have been accorded registration rights under the Securities Act. An additional 26,262 Restricted Shares held by the Selling Stockholder will be eligible for sale upon expiration of the Lock-Up Agreements, without any volume or other limitations, pursuant to Rule 144(k), unless earlier sold by the Selling Stockholder upon exercise of the Underwriters' over-allotment option. 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 will be substantially higher than the net book value of the currently outstanding Common Stock. Therefore, assuming an initial public offering price of $14.00 per share, purchasers of the Common Stock offered hereby will experience immediate and substantial dilution of $9.11 per share 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. The Company is prohibited from paying any dividends on the Common Stock under the terms of the Credit Agreement. See "Dividend Policy." 20 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 Series D Preferred Stock, $.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 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 21,576 shares of Class D Common Stock (which Class D Common Stock will become 161,247 shares of Common Stock after the Certificate Amendment) and 48,525 shares of Class E Common Stock (which Class E Common Stock will become 362,649 shares of Common Stock after the Certificate Amendment), respectively; and (ii) the Amended and Restated Certificate of Incorporation of the Company shall be amended (the "Certificate Amendment" and, together with the Warrant Exercise, the "Transactions") 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 7.473 shares of Common Stock for every share of Existing Common Stock and (c) the conversion (the "Preferred Stock Conversion") of all Existing Preferred Stock (including all accrued paid-in-kind dividends thereon) into Common Stock at a rate determined by dividing the liquidation value of the Existing Preferred Stock (including the liquidation value of the accrued paid-in-kind dividends) by the initial public offering price of the Common Stock in the Offering (converting into 2,769,693 shares of Common Stock assuming an initial public offering price of $14.00 per share and consummation of the Offering on February 4, 1998). The consummation of the Offering and the Transactions are conditioned upon one another. 21 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 $35.1 million, assuming an initial public offering price of $14.00 per share (approximately $40.3 million if the Underwriters exercise in full the over-allotment option granted to them by the Company and one of its stockholders (the "Selling Stockholder")). The Company intends to use approximately $31.0 million of its net proceeds from the Offering to repay outstanding revolving credit borrowings under the Credit Agreement and approximately $4.1 million to repay the outstanding indebtedness on notes payable to the former shareholders of IAMD-U.S. and IAMD-Canada. After giving effect to the Offering and the application of the net proceeds therefrom as described above, the Company's remaining availability under the Credit Agreement would be approximately $41.1 million. 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 the Selling Stockholder, the Company will not receive any proceeds from the sale of the shares sold by the Selling Stockholder. 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. 22 CAPITALIZATION The following table sets forth the Company's cash and cash equivalents and capitalization (long-term debt plus stockholders' equity) (i) as of September 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 2,850,000 shares of Common Stock offered hereby at an assumed initial public offering price of $14.00 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 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.
SEPTEMBER 30, 1997 ------------------------------ PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- (DOLLARS IN THOUSANDS) Cash and cash equivalents....................... $ 5,448 $ 5,448 $ 9,870 ======= ======= ======= Long-term debt, net of current maturities....... $46,892 $46,892 $16,207 Redeemable preferred stock: Series A Preferred Stock, $.01 par value, 50,000 shares authorized, 7,852 shares outstanding, at redemption value, including $2,084,736 of accumulated dividends (1)................................ 9,937 -- -- Series C Preferred Stock, $.01 par value, 5,000 shares authorized, 4,954 shares outstanding, at redemption value (1).......................................... 4,338 -- -- Series D Preferred Stock, $.01 per value, 25,000 shares authorized, 22,500 shares outstanding, at redemption value, including $567,204 of accumulated dividends (1)................................ 18,323 -- -- Redeemable warrants: Exercisable into 23,636 shares of Class D Common Stock................................. 1,140 -- -- Exercisable into 3,514 shares of Class E Common Stock................................. 289 -- -- Stockholders' investment: Common Stock, $.01 par value, 1,100,000 shares authorized; 81,997 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 1,747 shares of Class E Common Stock, actual; 7,042,108 shares issued and outstanding, pro forma and as adjusted (2).................... 1 38 67 Warrants...................................... 4,777 -- -- Additional paid-in capital.................... 71 38,838 73,916 Foreign currency translation.................. 7 7 7 Accumulated deficit........................... (6,630) (6,630) (6,630) ------- ------- ------- Total stockholders' investment.............. (1,774) 32,253 67,360 ------- ------- ------- Total capitalization........................ $79,145 $79,145 $83,567 ======= ======= =======
- -------- (1) The 35,306 shares of Preferred Stock (including accrued paid-in-kind dividends thereon through September 30, 1997) would be converted into 2,711,281 shares of Common Stock (assuming an initial public offering price of $14.00 per share). (2) Does not include as of September 30, 1997 (i) 149,923 shares of Common Stock issuable upon the exercise of outstanding options at a weighted average exercise price of $9.20 per share and (ii) 7,406 shares of Common Stock reserved for issuance under the 1995 Plan (as defined under "Management--Stock Plans"). Upon consummation of the Offering, (i) 271,646 shares of Common Stock will be issuable upon the exercise of outstanding options at a weighted average exercise price of $6.42 per share, and (ii) 1,277,406 shares of Common Stock will be reserved for issuance under the Stock Plans. See "Management--Stock Plans," "Description of Capital Stock" and Notes 8 and 15 of the Notes to the Company's Consolidated Financial Statements. 23 DILUTION The net tangible book value of the Company as of September 30, 1997, after giving effect to the Transactions, was approximately $(696,000), or $(0.18) 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 2,850,000 shares of Common Stock offered hereby at an assumed initial public offering price of $14.00 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 September 30, 1997 would have been approximately $34,411,000, or $5.14 per share of Common Stock. This represents an immediate increase in net tangible book value of $5.32 per share to existing stockholders and an immediate dilution of $8.86 per share to new stockholders. The following table illustrates this per share dilution: Assumed initial public offering price per share........... $14.00 Net tangible book value per share as of September 30, 1997.................................................... $(56.66) Increase per share attributable to pro forma adjustments. 56.48 ------- Pro forma net tangible book value per share as of September 30, 1997....................................... (0.18) Increase per share attributable to new stockholders....... 5.32 ------- Pro forma net tangible book value per share as of September 30, 1997 after the Offering.................... 5.14 ------ Dilution per share to new stockholders.................... $ 8.86 ======
The following table summarizes, on a pro forma basis as of September 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........ 4,192,108 59.5% $35,366,000 47.0% $ 8.44 New investors................ 2,850,000 40.5 39,900,000 53.0 $14.00 --------- ----- ----------- ----- Total.................... 7,042,108 100.0% $75,266,000 100.0% ========= ===== =========== =====
The foregoing calculations do not give effect to, as of September 30, 1997, 143,939 shares of Common Stock issuable upon the exercise of outstanding options at a weighted average exercise price of $9.20 per share. To the extent any such options are exercised, there will be further dilution to new investors. See "Capitalization," "Management--Stock Plans," "Description of Capital Stock" and Notes 8 and 15 of the Notes to the Company's Consolidated Financial Statements. 24 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 2,850,000 shares of Common Stock in the Offering and the application of the estimated net proceeds therefrom to repay certain indebtedness 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 and Gibbs, the unaudited historical statement of operations of SCT, IAMD-U.S. and IAMD-Canada for the year then ended and the audited 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 nine months ended September 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, Gibbs, IAMD-U.S. and IAMD-Canada 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, Gibbs, Western Culinary, IAMD-U.S. and IAMD-Canada and the other historical financial information included elsewhere in this Prospectus. 25 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 $25,831 $6,404 $7,633 $ -- $79,640 $ -- Other, net........ 4,311 304 9 2,932 226 54 -- 7,836 -- ------- ------ ------ ------- ------ ------ ------- ------- ------ Total net revenue......... 33,580 4,601 6,215 28,763 6,630 7,687 -- 87,476 -- Operating Expenses: -- Educational services and facilities........ 14,404 697 2,063 6,427 2,970 2,479 29,040 -- General and administrative.... 14,622 3,476 3,807 19,388 3,508 4,566 (1,011)(1) 48,356 -- Depreciation and amortization...... 2,134 18 205 2,235 478 430 5,017 (2)(3) 10,517 -- ------- ------ ------ ------- ------ ------ ------- ------- ------ Total operating expenses........ 31,160 4,191 6,075 28,050 6,956 7,475 4,006 87,913 -- ------- ------ ------ ------- ------ ------ ------- ------- ------ Income (loss) from operations. 2,420 410 140 713 (326) 212 (4,006) (437) -- Interest expense... 717 1 55 1,038 107 145 2,541 (4) 4,604 (2,772)(8) ------- ------ ------ ------- ------ ------ ------- ------- ------ Income (loss) before provision (benefit) for income taxes.... 1,703 409 85 (325) (433) 67 (6,547) (5,041) 2,772 Provision (benefit) for income taxes... 208 164 34 -- (173) 27 (260)(5) -- -- ------- ------ ------ ------- ------ ------ ------- ------- ------ Net Income (Loss).. 1,495 245 51 (325) (260) 40 (6,287) (5,041) 2,772 Dividends paid or accrued on preferred stock... (1,128) -- -- -- -- -- 1,128 (6) -- -- Accretion to redemption value of preferred stock and warrants.......... (230) -- -- -- -- -- 230 (6) -- -- ------- ------ ------ ------- ------ ------ ------- ------- ------ Net income (loss) attributable to common stockholders....... $ 137 $ 245 $ 51 $ (325) $ (260) $ 40 $(4,929) $(5,041) $2,772 ======= ====== ====== ======= ====== ====== ======= ======= ====== Net income (loss) per share attributable to common stockholders....... $ (1.46) ======= Weighted average number of shares outstanding........ 3,449(7) 2,200(9) ======= ====== PRO FORMA AS ADJUSTED FOR THE OFFERING --------------- Revenue: Tuition and registration fees, net......... $79,640 Other, net........ 7,836 --------------- Total net revenue......... 87,476 Operating Expenses: Educational services and facilities........ 29,040 General and administrative.... 48,356 Depreciation and amortization...... 10,517 --------------- Total operating expenses........ 87,913 --------------- Income (loss) from operations. (437) Interest expense... 1,832 --------------- Income (loss) before provision (benefit) for income taxes.... (2,269) Provision (benefit) for income taxes... -- --------------- Net Income (Loss).. (2,269) Dividends paid or accrued on preferred stock... -- Accretion to redemption value of preferred stock and warrants.......... -- --------------- Net income (loss) attributable to common stockholders....... $(2,269) =============== Net income (loss) per share attributable to common stockholders....... $ (0.40) =============== Weighted average number of shares outstanding........ 5,649(7)(9) ===============
26 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL ------------------------------------------------ IAMD- IAMD- SCT GIBBS U.S. CANADA PRO FORMA (THROUGH (THROUGH (THROUGH (THROUGH AS ADJUSTED FEBRUARY 28, MAY 31, JUNE 30, JUNE 30, PRO FORMA OFFERING FOR THE CEC 1997) 1997) 1997) 1997) ADJUSTMENTS PRO FORMA ADJUSTMENTS OFFERING ------- ------------ -------- -------- -------- ----------- --------- ----------- ----------- Revenue: Tuition and registration fees, net.................. $45,615 $1,155 $11,606 $4,119 $5,677 $ -- $68,172 $ -- $68,172 Other, net............ 5,152 -- 1,222 63 27 -- 6,464 -- 6,464 ------- ------ ------- ------ ------ ------- ------- ------- ------- Total net revenue... 50,767 1,155 12,828 4,182 5,704 -- 74,636 -- 74,636 Operating Expenses: Educational services and facilities....... 22,269 408 3,029 1,966 2,177 -- 29,849 -- 29,849 General and administrative....... 23,852 1,071 8,043 2,091 2,565 -- 37,622 -- 37,622 Depreciation and amortization......... 5,000 6 901 387 470 1,435 (2)(3) 8,199 -- 8,199 ------- ------ ------- ------ ------ ------- ------- ------- ------- Total operating expenses........... 51,121 1,485 11,973 4,444 5,212 1,435 75,670 -- 75,670 ------- ------ ------- ------ ------ ------- ------- ------- ------- Income (loss) from operations......... (354) (330) 855 (262) 492 (1,435) (1,034) -- (1,034) Interest expense....... 2,046 7 242 103 235 764 (4) 3,397 (2,071)(8) 1,326 ------- ------ ------- ------ ------ ------- ------- ------- ------- Income (loss) before provision for income taxes.............. (2,400) (337) 613 (365) 257 (2,199) (4,431) 2,071 (2,360) Provision (benefit) for income taxes.......... (1,008) (135) -- (146) 103 1,186(5) -- -- -- ------- ------ ------- ------ ------ ------- ------- ------- ------- Income (Loss) before extraordinary item.... (1,392) (202) 613 (219) 154 (3,385) (4,431) 2,071 (2,360) Dividends on preferred stock...... (1,444) -- -- -- -- 1,444 (6) -- -- -- Accretion to redemption value of preferred stock and warrants............. (727) -- -- -- -- 727 (6) -- -- -- ------- ------ ------- ------ ------ ------- ------- ------- ------- Income (loss) before extraordinary item attributable to common stockholders.......... $(3,563) $ (202) $ 613 $ (219) $ 154 $(1,214) $(4,431) $ 2,071 $(2,360) ======= ====== ======= ====== ====== ======= ======= ======= ======= Income (loss) before extraordinary item per share attributable to common stockholders... $ (1.28) $ (0.42) ======= ======= Weighted average number of shares outstanding. 3,450(7) 2,192(9) 5,642(7)(9) ======= ======= =======
27 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1997 (IN THOUSANDS)
PRO FORMA AS ADJUSTED HISTORICAL PRO FORMA OFFERING FOR THE CEC (10) ADJUSTMENTS PRO FORMA ADJUSTMENTS OFFERING ---------- ----------- --------- ----------- ----------- ASSETS ------ Current assets.......... $ 22,642 $ -- $ 22,642 4,422 (8) $ 27,064 Property and equipment, net of accumulated depreciation and amortization........... 46,944 -- 46,944 -- 46,944 Other assets: Goodwill, net......... 20,509 -- 20,509 -- 20,509 Covenants not to compete, net......... 11,422 -- 11,422 -- 11,422 Other noncurrent assets............... 1,852 -- 1,852 -- 1,852 -------- -------- -------- ------- -------- Total other assets.. 33,783 -- 33,783 -- 33,783 -------- -------- -------- ------- -------- Total assets........ $103,369 $ -- $103,369 $ 4,422 $107,791 ======== ======== ======== ======= ======== LIABILITIES AND STOCKHOLDERS' INVESTMENT - ------------------------ Current liabilities..... $ 21,240 $ -- $ 21,240 -- 21,240 Long-term debt, net of current maturities..... 46,892 -- 46,892 (30,685)(8) 16,207 Deferred income tax liabilities............ 2,984 -- 2,984 -- 2,984 -------- -------- -------- ------- -------- Total liabilities... 71,116 -- 71,116 (30,685) 40,431 Redeemable preferred stock and warrants..... 34,027 (34,027)(11) -- -- -- Stockholders' investment............. (1,774) 34,027 (11) 32,253 35,107 67,360 -------- -------- -------- ------- -------- Total liabilities and stockholders' investment......... $103,369 $ -- $103,369 $ 4,422 $107,791 ======== ======== ======== ======= ========
28 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 totalling approximately $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 approximately $18.0 million, covenants not to compete of approximately $13.2 million and student contracts of approximately $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) The adjustment represents additional interest expense associated with approximately $30.8 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 nine months ended September 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 nine months ended September 30, 1997. (6) Redeemable preferred stock (including accrued paid-in-kind dividends) will be converted into Common Stock and all warrants will be exercised 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 stockholders to derive pro forma income attributable to common stockholders. 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) 2,521,857 shares of Common Stock that would be issued upon the Preferred Stock Conversion, assuming an initial public offering price of $14.00 per share (as defined under "The Transactions"). See "The Transactions" and "Use of Proceeds." (8) The Company's net proceeds from the Offering, estimated to be $35.1 million net of expenses and fees, will be applied as described in "Use of Proceeds." At September 30, 1997, the outstanding debt to be repaid in connection with the Offering totalled $30.7 million, resulting in excess cash from the Offering of $4.4 million. Interest expense associated with indebtedness repaid with the proceeds from the Offering has been eliminated. (9) The 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 in order to repay indebtedness as described under "Use of Proceeds." (10) The historical balance sheet of the Company at September 30, 1997 includes the effect of all of the acquisitions because they were all consummated before September 30, 1997. (11) The redemption value (including accrued paid-in-kind dividends) of the preferred stock will be converted into Common Stock. All warrants will be exercised prior to the consummation of the Offering. 29 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 Company's consolidated financial statements and the 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 Company for the years ended December 31, 1994, 1995 and 1996 and the nine months ended September 30, 1997 and the balance sheet data as of December 31, 1995 and 1996 and September 30, 1997 are derived from the audited consolidated financial statements of the Company included elsewhere in this Prospectus. The selected statement of operations data for the Company set forth below for the nine months ended September 30, 1996 are derived from the unaudited consolidated financial statements of the Company included elsewhere in this Prospectus. The unaudited statements of the Company include 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 and, in the opinion of management have been prepared on the same basis as the audited financial statements. The balance sheet data as of December 31, 1994 is derived from audited financial statements of the Company which are not included in this Prospectus.
YEARS ENDED DECEMBER NINE MONTHS ENDED 31, SEPTEMBER 30, -------------------------- ------------------- 1994(1) 1995 1996 1996 1997 ------- ------- ------- -------- --------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenue: Tuition and registration fees, net................... $ 5,794 $16,330 $29,269 $ 19,299 $ 45,615 Other, net................... 1,692 3,066 4,311 3,130 5,152 ------- ------- ------- -------- --------- Total net revenue.......... 7,486 19,396 33,580 22,429 50,767 Operating Expenses: Educational services and facilities.................. 3,074 8,565 14,404 9,579 22,269 General and administrative... 4,887 9,097 14,622 10,976 23,852 Depreciation and amortization................ 980 1,330 2,134 1,481 5,000 ------- ------- ------- -------- --------- Total operating expenses... 8,941 18,992 31,160 22,036 51,121 ------- ------- ------- -------- --------- Income (loss) from operations. (1,455) 404 2,420 393 (354) Interest expense.............. 134 311 717 358 2,046 ------- ------- ------- -------- --------- Income (loss) before provision for taxes and extraordinary item......................... (1,589) 93 1,703 35 (2,400) Provision (benefit) for income taxes........................ -- 24 208 14 (1,008) ------- ------- ------- -------- --------- Income (loss) before extraordinary item........... (1,589) 69 1,495 21 (1,392) Extraordinary loss on early extinguishment of debt (net of taxes of $233)............ -- -- -- -- (418) ------- ------- ------- -------- --------- Net income (loss)............. $(1,589) $ 69 $ 1,495 $ 21 $ (1,810) ======= ======= ======= ======== ========= Income (loss) attributable to common stockholders: Income (loss) before extraordinary item, as reported.................... $(1,589) $ 69 $ 1,495 $ 21 $ (1,392) Accrued dividends on preferred stock (2)......... (393) (777) (1,128) (841) (1,444) Accretion to redemption value of preferred stock and warrants (3)............ -- (96) (230) (175) (727) ------- ------- ------- -------- --------- Income (loss) before extraordinary item, attributable to common stockholders................. (1,982) (804) 137 (995) (3,563) Extraordinary loss, net...... -- -- -- -- (418) ------- ------- ------- -------- --------- Net income (loss) attributable to common stockholders....... $(1,982) $ (804) $ 137 $ (995) $ (3,981) ======= ======= ======= ======== ========= OTHER DATA: EBITDA (4).................... (475) 1,734 4,554 1,874 4,646 EBITDA margin (4)............. (6.3)% 8.9% 13.6% 8.4% 9.2% Cash flow provided by (used in): Operating activities......... (1,000) 235 5,275 600 (6,274) Investing activities......... (2,372) (3,478) (9,518) (952) (39,733) Financing activities......... 6,014 4,566 8,076 (509) 43,650 Capital expenditures, net..... 153 897 1,231 914 2,010 Student population (5)........ 1,131 3,347 4,537 3,533 10,951 Number of campuses (6)........ 2 4 5 4 18
30
DECEMBER 31, ------------------------- SEPTEMBER 30, 1994 1995 1996 1997 ------- ------- ------- ------------- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents............. $ 2,642 $ 3,965 $ 7,798 $ 5,448 Working capital....................... 578 1,314 1,379 1,402 Total assets.......................... 11,704 23,584 36,208 103,369 Long-term debt, net of current maturities........................... 1,890 6,725 13,783 46,892 Redeemable preferred stock and warrants............................. 8,243 13,628 14,561 34,027 Total stockholders' investment........ (1,982) (2,756) (2,589) (1,774)
- -------- (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 deferred financing costs), 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 nine months ended September 30, 1996 and 1997, as of September 30. (6) Represents the total number of campuses operated by the Company as of the end of the period. 31 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 approximately 13,000 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 288%, from 3,347 students at October 31, 1995 to 12,996 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. 32 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. 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 nine 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. COMPENSATION EXPENSE As of October 20, 1997, certain option agreements between the Company and two of its executive officers and directors were amended to fix, upon the consummation of the Offering, the number of shares of Common Stock issuable upon exercise of the stock options provided under these agreements. Under the amended options, which will be fully vested upon the consummation of the Offering, the holders will be entitled to purchase an aggregate of 97,734 shares of Common Stock at an exercise price of $0.01 per share. Additionally, during 1997 the Company issued options to one of these executive officers entitling such officer to purchase an aggregate of 6,838 shares of Common Stock at an exercise price of $0.01 per share, under a supplemental option agreement with such officer. As a result, assuming an initial public offering price of $14.00 per share and the consummation of the Offering in the first quarter of 1998, the Company will record a related one-time, non-cash compensation expense of approximately $1.5 million in the first quarter of 1998, substantially reducing operating and net income in such period and for the year ending December 31, 1998. See "Management--Executive Compensation," "Certain Relationships and Related Transactions" and Note 8 to the Notes to the Company's Consolidated Financial Statements. 33 RESULTS OF OPERATIONS The following table summarizes the Company's operating results as a percentage of net revenue for the period indicated.
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 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 43.9 General and administrative............ 65.2 46.8 43.5 48.9 47.0 Depreciation and amortization......... 13.1 6.9 6.4 6.6 9.8 ----- ----- ----- ----- ----- Total operating expenses............ 119.4 97.9 92.8 98.2 100.7 ----- ----- ----- ----- ----- Income (loss) from operations....... (19.4) 2.1 7.2 1.8 (0.7) Interest expense........................ 1.8 1.6 2.1 1.6 4.0 ----- ----- ----- ----- ----- Income (loss) before provision for taxes and extraordinary item......... (21.2) 0.5 5.1 0.2 (4.7) Provision (benefit) for income taxes.... -- 0.1 0.6 0.1 (1.9) ----- ----- ----- ----- ----- Income (loss) before extraordinary item. (21.2) 0.4 4.5 0.1 (2.8) Extraordinary loss on early extinguishment of debt (net of taxes).. -- -- -- -- (0.8) ----- ----- ----- ----- ----- Net income (loss)....................... (21.2) 0.4 4.5 0.1 (3.6) ===== ===== ===== ===== ===== Net income (loss) attributable to common stockholders........................... (26.5)% (4.1)% 0.4% (4.4)% (7.8)% ===== ===== ===== ===== =====
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1996 Revenue. Net tuition revenue increased 136% from $19.3 million in the first nine months of 1996 to $45.6 million in the first nine months of 1997, due to an approximately 16% 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 $21.5 million for schools acquired after the 1996 period. Other net revenue increased 65%, from $3.1 million in the first nine months of 1996 to $5.2 million in the first nine months of 1997, due to an increase in student population for schools owned during the 1996 period and the addition of $1.5 million from schools acquired after the 1996 period. Educational Services and Facilities Expense. Educational services and facilities expense increased 133%, from $9.6 million in the first nine months of 1996 to $22.3 million in the first nine months of 1997. Of this increase, $2.4 million was attributable to the increase in student population for schools owned during the 1996 period and $10.3 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 117%, from $11.0 million in the first nine months of 1996 to $23.9 million in the first nine months of 1997. The increase was primarily attributable to costs totaling $1.0 million related to increased personnel at the corporate level to enhance the Company's infrastructure and increased advertising and marketing of $0.1 million for schools owned during the 1996 period, as well as the addition of $10.7 million of expenses for schools acquired after the 1996 period. The increase in advertising and marketing expenses reflected, 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. 34 Depreciation and Amortization. Depreciation and amortization expense increased 238%, from $1.5 million in the first nine months of 1996 to $5.0 million in the first nine months of 1997. The increase was due to increased capital expenditures for schools owned during the 1996 period and related increased depreciation expense of $0.4 million in the first nine months of 1997. Additionally, depreciation expense increased $1.6 million due to the depreciation expense for schools acquired after the 1996 period. Amortization expense increased from an immaterial amount in the first nine months of 1996 to $1.5 million in the first nine 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 472% from $0.4 million in the first nine months of 1996 to $2.0 million in the first nine 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 (Benefit) for Income Taxes. The benefit for income taxes increased from an immaterial provision in the first nine months of 1996 to a $1.0 million benefit in the first nine months of 1997. Income (Loss) before Extraordinary Item. Net income (loss) before extraordinary item decreased to a net loss of $1.4 million in the first nine months of 1997 from net income of an immaterial amount in the first nine months of 1996. Extraordinary Item. During the first nine 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). Net income (loss) decreased to a net loss of $1.8 million in the first nine months of 1997 from net income of an immaterial amount in the first nine months of 1996. Net Income (Loss) Attributable to Common Stockholders. Net loss attributable to common stockholders decreased from a loss of $1.0 million in the first nine months of 1996 to a loss of $4.0 million in the first nine 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 totalling $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 reflected, 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 61%, from $1.3 million in 1995 to $2.1 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 131%, 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 totalling $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 reflected, 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 36%, 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 132%, 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. 36 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 $6.3 million in the first nine months of 1997, compared to net cash provided by operating activities of $0.6 million in the first nine months of 1996, due primarily to post-acquisition expenditures relating to SCT and Gibbs, along with the suspension of Title IV Program 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 $2.0 million in the first nine months of 1997 as compared to $0.9 million in the first nine 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 nine months of 1997 as compared to 10% in the first nine 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 nine months ended September 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 37 a term loan, and obtain up to $30 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 December 31, 1997, the Company had outstanding borrowings of $28.0 million under the revolving loan facility and $14.3 million under the term loan. Additionally, the Company had approximately $25.0 million of outstanding letters of credit as of such date. Prior to the consummation of the Offering, the Company expects to borrow an additional $3.4 million under the revolving loan facility to pay amounts owed to former owners of a school acquired by the Company. The Company intends to use approximately $31.0 million of its net proceeds from the Offering to repay outstanding revolving credit borrowings under the Credit Agreement. 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 outstanding indebtedness on notes payable to the former shareholders of IAMD-U.S. and IAMD-Canada. 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 September 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 current accounts receivable to total current liabilities) of at least 1:1, calculated at the end of the institution's fiscal year. 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 (on a cash basis) 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, Gibbs and IAMD-U.S., the DOE has reviewed the Company's financial statements and questioned the Company's accounting treatment for certain direct marketing costs and courseware and other instructional materials. However, the Company has maintained the eligibility of Western Culinary, SCT, and Gibbs to continue participating in the Title IV Programs by posting letters of credit in favor of the DOE in the aggregate amount of $15.1 million, and has agreed to post an additional letter of credit in favor of the DOE in the amount of $5.2 million with respect to IAMD-U.S. 38 After 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 $41.1 million. In discussions with the Company, the DOE has agreed to consider financial information reflecting the results of the Offering, as well as the 1997 audited financial statements in the DOE's next review of the financial responsibility of the Company and its U.S. institutions. The Company believes that proceeds to the Company from the Offering and the cash generated from operations during 1997 will enable the Company and each of its institutions to satisfy the DOE's standards of financial responsibility, based upon their 1997 audited financial statements and the Company's post-Offering financial information. The Company intends to seek the DOE's review of the Company's and its U.S. institutions' audited 1997 financial statements and the Company's post-Offering financial information on an expedited basis in the spring of 1998. 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 or increase its letters of credit in the future. See "Risk Factors--Potential Loss of Student Financial Aid Due to Failure to Meet Financial Responsibility Standards" and "Financial Aid and Regulation--Federal Oversight of the Title IV Programs--Company Compliance with Financial Responsibility Standards." NEW ACCOUNTING STANDARDS Recent pronouncements of the Financial Accounting Standards Board ("FASB"), which are not required to be adopted at this date, include Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS No. 131"), SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), SFAS No. 129, "Disclosure of Information about Capital Structure" ("SFAS No. 129") and SFAS No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 131 requires that a public business enterprise report financial and descriptive information about its reporting segments on the same basis that it uses internally for evaluating segment performance and deciding how to allocate resources to segments. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. SFAS Nos. 129 and 128 specify guidelines as to the method of computation of, as well as presentation and disclosure requirements for, earnings per share. Adoption of SFAS No. 128 is required for fiscal years ending after December 15, 1997. The other Statements discussed above are effective for fiscal years beginning after December 15, 1997 and earlier application is not permitted. The adoption of these Statements is not expected to have a material effect on the Company's consolidated financial statements. 39 BUSINESS OVERVIEW CEC is one of the largest providers of private, for-profit postsecondary education in North America, with approximately 13,000 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 891 1,008 13% BROOKS COLLEGE 1970 6/94 VC Yes Long Beach, CA 960 1,112 16 ALLENTOWN BUSINESS SCHOOL 1869 7/95 B, VC, CT, S Yes Allentown, PA 781 927 19 BROWN INSTI- TUTE 1946 7/95 VC, CT, RTB, E Yes Minneapolis, MN 1,452 1,575 8 WESTERN CULI- NARY INSTI- TUTE 1983 10/96 CA No Portland, OR 453 467 3 SCHOOL OF COM- PUTER TECH- NOLOGY 1967 2/97 CT, CA, LS Yes Fairmont, WV 169 184 9 Pittsburgh, PA 771 869 13 THE KATHARINE GIBBS SCHOOLS 1911 5/97 B, S, CT Yes Boston, MA 412 412 -- Melville, NY 354 440 24 Montclair, NJ 482 569 18 New York, NY 984 1,211 23 Norwalk, CT (4) 260 346 33 Piscataway, NJ (5) 228 307 35 Providence, RI (5) 262 272 4 INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (U.S.) 1977 6/97 VC Yes (3) Chicago, IL 741 871 18 Tampa, FL 461 647 40 INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (CANADA) 1983 6/97 VC No Montreal, PQ 394 619 57 Toronto, ON 837 1,160 39 --------- --------- --- Total 10,892 12,996 19% ========= ========= ===
- -------- (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) Does not offer degree programs. 40 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 nine months of 1997, net revenue was $50.8 million. 1996 pro forma net revenue, reflecting the results of operations of schools the Company acquired in 1997, would have been $87.5 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; secretarial and hospitality programs at Gibbs; and merchandising programs at Brooks, IAMD-Canada and IAMD-U.S. 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. 41 Several national economic, demographic and social trends are converging to contribute to growing demand for career-oriented school education: 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 Postsecondary Education. High school graduates and adults are seeking postsecondary 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 postsecondary 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 Postsecondary 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 institutions to serve, at more competitive prices, the postsecondary 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. 42 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 eight campuses); (iii) business studies (offered at eight campuses) and (iv) culinary arts (offered at two 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 43 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 directed by 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 four schools, the aggregate number of students has increased over 38% over the past two years, from 3,347 at October 31, 1995 to 4,622 at October 31, 1997. GROWTH STRATEGY The Company believes it can achieve superior long-term growth in revenue and profitability by continuing to expand existing operations and acquire additional schools in attractive North American markets. The Company believes it can achieve additional growth in the future by establishing new campuses and also by entering new service areas and expanding internationally. 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 is executing its business and operating strategy, including all of the elements described above, to accomplish this growth. The Company believes that expansion of operations at its existing schools, along with acquisitions of new schools, will be the primary generators of the Company's growth in the near term. 44 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 one of the most important elements of its growth strategy. The Company has an active acquisition program and from time to time engages in, and is currently engaged in, evaluations of, and discussions with, possible acquisition candidates, including evaluations and discussions relating to acquisitions that may be material in size and/or scope. However, the Company currently has no agreements or commitments with respect to any acquisitions. 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--Demonstrating the ability to attract, retain and place students, while meeting applicable federal and state regulatory criteria and accreditation standards; . ""Schools of Choice"--Possessing 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--Attracting 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." 45 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. The Company has not yet developed specific plans for any new campuses, nor made any determination as to when it will first develop, open and operate a new campus. 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. Although all of the Company's current operations are located in North America, 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 at some time in the future elect to 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 further enhance 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 (correspondence) recruiting, (ii) high school recruiting or (iii) in-house (adult) recruiting. Correspondence 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 46 and faculty 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 faculty, 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 47 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. 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 950 faculty members, of which approximately 24% were full-time employees of the Company and approximately 76% 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. 48 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 data which allow management to monitor the performance of each campus. Each operating department at the campus level is also required to compile certain quantitative 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 $5,700 to $14,270, for completion of an associate degree program ranges from $12,600 to $22,770, and for completion of a bachelor's degree program ranges from $31,800 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 87% 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 job-search 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. 49 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 year ended December 31, 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 Mendota Heights, MN............ 634 87.1 WESTERN CULINARY INSTITUTE Portland, OR................... 363 97.0 SCHOOL OF COMPUTER TECHNOLOGY Fairmont, WV................... 96 84.4 Pittsburgh, PA................. 314 92.0 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 94.3 Tampa, FL...................... 90 95.6 INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (CANADA) Montreal, PQ................... 110 90.7 Toronto, ON.................... 163 87.1 ----- ---- TOTAL........................ 4,713 87.5% ===== ====
- -------- (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. 50 The reputation of the Gibbs schools allows them to charge fees to employers upon placement of many of their 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 industry- current 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 997 full-time and 878 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 graduates' ability to find employment. 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. 51 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 December 31, 1997 with respect to the principal facilities of the Company:
APPROXIMATE FACILITY SQUARE FEET -------------------------------------------------------------- ----------- CEC CORPORATE HEADQUARTERS Hoffman Estates, IL......................................... 5,000 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 Mendota Heights, MN......................................... 118,000 WESTERN CULINARY INSTITUTE Portland, OR................................................ 26,000 SCHOOL OF COMPUTER TECHNOLOGY Fairmont, WV................................................ 10,000 Pittsburgh, PA.............................................. 46,000 THE KATHARINE GIBBS SCHOOLS Boston, MA.................................................. 27,000 Melville, NY................................................ 32,000 Montclair, NJ............................................... 34,000 New York, NY................................................ 52,000 Norwalk, CT................................................. 17,000 Piscataway, NJ.............................................. 17,000 Providence, RI.............................................. 15,000 INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (U.S.) Chicago, IL................................................. 45,000 Tampa, FL................................................... 30,000 INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (CANADA) Montreal, PQ................................................ 41,000 Toronto, ON................................................. 56,000
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. 52 LEGAL PROCEEDINGS CEC is subject to occasional lawsuits, investigations and claims arising out of the ordinary conduct of its business, including the following: 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. Brown believes that all of these claims are frivolous and without merit and is vigorously contesting the allegations. Although outcomes cannot be predicted with certainty, the Company does not believe that the above-described matter or any other legal proceeding to which the Company is a party will have a material adverse effect on the Company's financial performance, results of operations or liquidity. 53 FINANCIAL AID AND REGULATION ACCREDITATION Accreditation is a non-governmental process through which an institution submits itself to qualitative review by an organization of peer institutions. 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) programmatic accrediting agencies, which accredit specific educational programs offered by an institution. 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 of 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 campuses' interior design programs are accredited by the Foundation for Interior Design Education Research ("FIDER") and two of the campuses' culinary arts programs 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. 54 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. Several of the Company's institutions were on reporting status, requiring them regularly to report their placement or retention results or both to their accrediting agency, during 1997. However, the Company expects all but two of these institutions, IAMD-U.S. in Chicago and Brown, to be removed from such reporting status in 1998. IAMD-U.S. in Chicago has also been and will continue to be on financial reporting status to ACICS during 1998, based solely on the financial status of IAMD-U.S. in Chicago under its previous ownership. While on reporting status, an institution may be required to seek the permission of its accrediting agency to open and commence instruction at new locations. 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 (on a cash basis) 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 agencies 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. The process of reauthorizing the HEA by the U.S. Congress, which takes place approximately every five years, has begun and is expected to be completed in 1998. Numerous changes to the HEA have been proposed by the DOE and other parties. For example, the DOE has circulated proposals to amend the HEA as follows: (i) 55 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. 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 Federal Family Education Loan ("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. Students at the Company's institutions receive grants, loans and work opportunities to fund their education under several of the Title IV Programs, of which the two largest are the FFEL program 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 William D. Ford Federal Direct Loan ("FDL") program. Most 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 grants. 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, 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 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 56 award year equaled approximately 44% of the Company's U.S. tuition and fee revenue (on a cash basis). 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 (on a cash basis). 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 account, 75% of which was initially capitalized by the DOE. Subsequent federal capital contributions, with an institutional match 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 loans 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. IAMD-U.S., SCT and Western Culinary also do not participate 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 equalled 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. In addition, because the DOE periodically revises its regulations (e.g., in November 1997, the DOE published new regulations with respect to financial responsibility standards to 57 take effect July 1, 1998) 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. See "--Financial Responsibility Standards." 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 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 FFEL or FDL cohort default rate of 25% or greater for three consecutive federal fiscal years. For federal fiscal year 1995, the published cohort default rates for the Company's institutions ranged from a low of 10.7% to a high of 27.4%. The average cohort default rates for proprietary institutions nationally were 23.9%, 21.1% and 19.9% in federal fiscal years 1993, 1994 and 1995, respectively. Gibbs-Norwalk is the only one of the Company's institutions that received a cohort default rate for federal fiscal year 1995 that exceeds 25%, which rate is 27.4%. In addition, two of the Company's institutions, including Gibbs-Norwalk, have had an FFEL cohort default rate exceeding 25% in one of the last three federal fiscal years for which such rates have been published. 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%. 58 The following table sets forth the cohort default rates for the Company's institutions for federal fiscal years 1993, 1994 and 1995:
COHORT DEFAULT RATE ------------------ SCHOOL 1995 1994 1993 - ------------------------------------------------------------- ----- ----- ----- AL COLLINS GRAPHIC DESIGN SCHOOL Tempe, AZ.................................................. 13.8% 19.3% 28.4% ALLENTOWN BUSINESS SCHOOL Allentown, PA.............................................. 10.7% 7.1% 14.9% BROOKS COLLEGE Long Beach, CA............................................. 18.4% 18.4% 16.2% BROWN INSTITUTE Minneapolis, MN............................................ 18.1% 19.6% 18.6% WESTERN CULINARY INSTITUTE Portland, OR............................................... 14.3% 11.4% 14.2% SCHOOL OF COMPUTER TECHNOLOGY Pittsburgh, PA and Fairmont, WV............................ 11.2% 9.3% 14.6% THE KATHARINE GIBBS SCHOOLS Boston, MA................................................. 16.9% 16.7% 18.6% Melville, NY............................................... 16.0% 17.8% 18.2% Montclair, NJ and Piscataway, NJ........................... 16.3% 16.0% 19.2% New York, NY............................................... 14.5% 18.9% 17.5% Norwalk, CT................................................ 27.4% 17.7% 24.0% Providence, RI............................................. 14.7% 13.1% 17.3% INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (U.S.) Chicago, IL................................................ 15.7%* 13.3% 15.0% Tampa, FL.................................................. 13.3%* 15.0% 17.3%
- -------- * This is a "prepublication" cohort default rate. The Company has not yet received the published cohort default rate for federal fiscal year 1995 for this institution. 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. In 1995, the Gibbs institutions voluntarily chose to discontinue their participation in the Perkins program. 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 59 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 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. 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. An institution that is determined by the DOE not to meet any one of the standards of financial responsibility 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. In November 1997, the DOE published new regulations regarding financial responsibility to take effect on July 1, 1998. The regulations provide a transition year alternative which will permit institutions to have their financial responsibility for the 1998 fiscal year measured on the basis of either the new regulations or the current 60 regulations, whichever are more favorable. Under the new regulations, the DOE will calculate three financial ratios for an institution, each of which will be scored separately and which will then be combined to determine the institution's financial responsibility. If an institution's composite score is below the minimum requirement for unconditional approval but above a designated threshold level, such institution may take advantage of an alternative that allows it to continue to participate in the Title IV Programs for up to three years under additional monitoring and reporting procedures. If an institution's composite score falls below this threshold level or is between the minimum for unconditional approval and the threshold for more than three consecutive years, the institution will be required to post a letter of credit in favor of the DOE. The Company does not believe that these new regulations will have a material effect on the Company's compliance with the DOE's financial responsibility standards. Company Compliance with Financial Responsibility Standards In reviewing the Company's acquisitions in the last 14 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. 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 the Company's accounting for certain direct marketing costs and its valuation of courseware and other instructional materials of the Company's recently acquired institutions. The audited financial statements included in this Registration Statement have been restated to expense as incurred, and the audited 1997 financial statements to be submitted to the DOE will 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. The DOE also previously asserted that the Company did not satisfy the 1:1 acid test ratio based on its fiscal 1996 financial statements, but, after reviewing additional materials submitted by the Company, the DOE has recently indicated that the Company did in fact satisfy this test. As a result of the DOE's concerns regarding the Company's accounting for direct marketing costs and courseware and instructional materials, 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 $12.0 million, which expires on October 31, 1998, with respect to Gibbs. In addition, in response to the DOE's directive, the Company expanded an existing letter of credit with respect to SCT from the prior amount of $800,000 to the revised amount of $1.2 million, with an expiration date of October 31, 1998. Further, the Company has agreed to post an additional letter of credit in the amount of $5.2 million, to expire on October 31, 1998, with respect to IAMD- U.S. 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. Subsequently, the DOE increased the level of surety for SCT to, and established the level of surety of Gibbs and IAMD-U.S. at, 75% of the Title IV Program funds that students enrolled at each such institution received in the previous award year. Beginning in October 1997, the DOE has imposed a condition that, through September 30, 1998, SCT, Gibbs and IAMD-U.S. may not disburse Title IV Program funds in excess of the total Title IV Program funds that students enrolled at each institution received in the most recent award year for which data are available to the DOE. The DOE has calculated this amount to be $1.6 million in the case of SCT, $16.0 million in the case of Gibbs and $7.0 million in the case of IAMD-U.S. 61 In subsequent discussions, the DOE has agreed to consider potential increases in the Title IV Program funding available to students at the affected institutions, if the Company so requests and with the understanding that the Company would secure any such increase in Title IV Program funding by increasing the applicable letter of credit in an amount commensurate with the additional Title IV Program funding utilized by such students. The DOE has advised the Company that the DOE does not include William D. Ford Federal Direct Loan ("FDL") funds in calculating the amount of any letter of credit and that FDL funds are not considered in determining the total Title IV Program funding available to an affected institution. SCT disburses significant amounts of FDL funds to students enrolled in its educational programs. The DOE also has stated that, prior to a determination that the Company satisfies the standards of financial responsibility, the DOE will not consider applications to resume Title IV Program participation on behalf of any institutions that the Company may acquire in the future or applications that seek approval of any action that would expand the Title IV Program participation of any of the Company's U.S. institutions that already is certified for such participation. The DOE limitation on the aggregate dollar value of the Title IV Program participation of SCT, Gibbs and IAMD-U.S. 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 SCT, Gibbs and IAMD-U.S. and to file applications with the DOE for other newly acquired U.S. institutions to seek Title IV Program participation 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 Operations--Liquidity and Capital Resources." In accordance with applicable law, the DOE will be required to rescind the letters of credit and related requirements if the Company and its U.S. institutions demonstrate that they satisfy the standards of financial responsibility, using accounting treatments that are acceptable to the DOE. After discussions with the DOE, the Company changed its accounting to eliminate deferred direct marketing costs from its financial statements. In the course of further discussions with the DOE, the Company provided additional information regarding the valuation of courseware and instructional materials at one of the recently acquired institutions where such valuation was questioned by the DOE. Based upon these discussions, the Company believes its valuation of courseware and instructional materials as will be presented in its 1997 financial statements will not impair a determination by the DOE that the Company is financially responsible. Further, the DOE agreed that in the conduct of its next review of the financial responsibility of the Company and its U.S. institutions, the DOE will consider financial information reflecting the results of the Offering, as well as the 1997 audited financial statements of each entity. The Company expects to receive net proceeds from the Offering of approximately $35.1 million. See "Use of Proceeds." The Company believes that such proceeds and the cash generated from operations during 1997 will enable the Company and each of its U.S. institutions to satisfy each of the DOE's standards of financial responsibility, based on their audited financial statements and the Company's post-Offering financial information. Accordingly, the Company intends to seek the DOE's review of the Company's and its U.S. institutions' audited 1997 financial statements and the Company's post-Offering financial information on an expedited basis in the spring of 1998. However, there can be no assurance that the DOE will expedite its review 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. 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. 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. 62 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 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 83% 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 63 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. IAMD-Canada in Toronto has two buildings, each of which must be registered under the PVSA but which the Company operates together as a single campus. With respect to students who reside in the province of Ontario, the Ontario Ministry of Education and Training ("OMET") provides financial assistance to eligible students through the Ontario Student Assistance Plan ("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. 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 OMET 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 OMET, either as a separate institution if the branch administers OSAP without 64 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 Ontario. Institutions participating in OSAP, such as the IAMD-Canada campus in Toronto, cannot submit applications for loans to students enrolled in educational programs that have not been designated as OSAP-eligible by OMET. 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, OMET 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 OMET periodically revises its regulations and other requirements and changes its interpretations of existing laws and regulations, there can be no assurance that OMET will agree with the Company's understanding of each OMET requirement. IAMD-Canada, in Toronto, is required to audit its OSAP administration annually and OMET 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 its most recent annual compliance audits, IAMD-Canada, in Toronto has been found to be in substantial compliance with the requirements of OSAP and the Company believes that they continue to be in substantial compliance with these requirements. OMET has the authority to take any measures it deems necessary to protect the integrity of the administration of OSAP. If OMET deems a failure to comply to be minor, OMET will advise the institution of the deficiency and provide the institution with the opportunity to remedy the asserted deficiency. If OMET deems the failure to comply to be serious in nature, OMET 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 OMET determines that any non-compliance in an institution's OSAP administration is serious, OMET 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, OMET 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 OMET, 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 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 at both of its buildings, and the Company does not believe that there will be any impediment to renewal of such registrations on an annual basis. 65 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 registrations 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 Quebec Minister of Education (the "QME") for the institution itself and for the educational services to be provided. The QME 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 QME, and any entity holding a permit must advise the QME of any amalgamation, sale or transfer affecting such entity. The QME, 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 QME must provide the institution with a chance to present its views before revoking a permit. The Company does not believe that the Offering will be considered a "sale or transfer" affecting IAMD-Canada, in Quebec, or that it will invalidate the permit issued to IAMD-Canada, in Quebec, for the purposes of the ARPE. Given that the QME periodically revises its regulations and other requirements and changes its interpretations of existing laws and regulations, there can be no assurance that the QME will agree with the Company's understanding of each requirement of the QME. The Company does not believe that the QME's requirements will create significant obstacles to its plans to acquire additional institutions, or open new branches in Quebec or that the QME's requirements will create significant obstacles to its plans to add new educational programs at IAMD-Canada, in Quebec. The Company does not believe that there will be any impediment to renewal of the permit issued to IAMD-Canada, in Quebec, under the ARPE. 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.......... 47 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.......... 36 Director Thomas B. Lally......... 53 Nominee for Director Keith K. Ogata.......... 44 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 Holding Company. KEITH K. OGATA will become a director of the Company upon consummation of the Offering. Since 1995, Mr. Ogata has served as President of National Education Centers, Inc., a subsidiary of National Education Corporation. From 1991 to June 1997, he served as Vice President, Chief Financial Officer and Treasurer of National Education Corporation, with responsibility for finance, accounting, treasury, tax, mergers and acquisitions, human resources, investor and public relations and information systems. In June 1997, National Education Corporation was acquired by Harcourt General 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, 68 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 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. 69 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. 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 aid 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 1999, the terms of Messrs. Laub and Todd Steele expire at the annual meeting of the Company's stockholders in 2000, and the term of Mr. Larson expires at the annual meeting of the Company's stockholders in 2001. Mr. Lally's term will expire at the annual meeting of stockholders in 2001, and Mr. Ogata'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. 70 The Company and HECC intend to enter into an agreement, to be 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 will provide 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. 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 Messrs. Lally and Ogata 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 1998 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--Career Education Corporation 1998 Non-Employee Directors' Stock Option Plan." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Wallace O. 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 December 31, 1997 beneficially owned 69.9% of the outstanding 71 Common Stock of the Company; Electra Investment Trust P.L.C. ("EIT"), which as of December 31, 1997 owned, together with an affiliate, Electra Associates, Inc. ("EAP" and, collectively with EIT, "Electra"), 26.1% 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 Mr. Laub and Constance L. Laub (collectively, "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. 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 (including all accrued paid-in-kind dividends thereon) will be converted into shares of Common Stock at a rate determined by dividing the liquidation value of such Series D Preferred Stock by the initial public offering price of the Common Stock in the Offering. See "The Transactions." 72 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. The Company and Heller intend to enter into a Registration Rights Agreement (the "Heller Registration Rights Agreement") prior to the consummation of the Offering. Under the Heller Registration Rights Agreement, Heller will be 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 will be 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 $75,000. This obligation will terminate upon the consummation of the Transactions as described under "The Transactions." EXECUTIVE COMPENSATION The following table sets forth information with respect to all compensation paid by the Company for services rendered during the fiscal year ended December 31, 1997, to its Chief Executive Officer and the other executive officer of the Company (each, a "Named Executive Officer"). SUMMARY COMPENSATION TABLE
ANNUAL LONG TERM COMPENSATION COMPENSATION ------------------ ------------ SECURITIES SALARY UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITIONS ($) BONUS ($) OPTIONS (#) COMPENSATION ($) ---------------------------- ------ --------- ------------ ---------------- John M. Larson, President and Chief Executive Officer..................... $229,167 (1) 16,823 $8,930(2) William A. Klettke, Senior Vice President and Chief Financial Officer..... $152,500 (1) 7,847 $6,296(3)
- -------- (1) Bonuses for 1997 have not yet been determined. Bonuses paid to Messrs. Larson and Klettke for 1996 were $96,602 and $43,764, respectively. (2) Includes $8,594 in 401(k) matching contributions by the Company and $336 in term life insurance premium payments by the Company. (3) Includes $6,100 in 401(k) matching contributions by the Company and $196 in term life insurance premium payments by the Company. 73 OPTION GRANTS IN 1997 The following table contains information concerning the grant of stock options by the Company to the Named Executive Officers during 1997.
POTENTIAL REALIZABLE PERCENTAGE VALUE AT ASSUMED ANNUAL NUMBER OF OF TOTAL FAIR RATES OF STOCK PRICE SHARES OPTIONS MARKET VALUE APPRECIATION FOR UNDERLYING GRANTED TO EXERCISE OR ON DATE OF OPTION TERM (1) OPTIONS EMPLOYEES IN BASE PRICE GRANT EXPIRATION ------------------------- NAME GRANTED (#) FISCAL YEAR ($/SH) ($/SH) DATE 0%($) 5% ($) 10% ($) ---- ----------- ------------ ----------- ------------ ---------- ------- -------- -------- John M. Larson.......... 6,838(2) 11.1% $ 0.01 $14.00(3) 1/31/2004 $95,664 $134,616 $186,467 1,465(4) 2.4% $17.37(5) $17.37 2/27/2007 -- $ 16,006 $ 40,562 8,520(4) 13.8% $18.46(5) $18.46 6/29/2007 -- $ 98,902 $250,637 William A. Klettke...... 1,099(4) 1.8% $17.37(5) $17.37 2/27/2007 -- $ 12,004 $ 30,421 6,748(4) 10.9% $18.46(5) $18.46 6/29/2007 -- $ 78,341 $198,531
- -------- (1) 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 appreciates at the indicated annual rates (set by the Securities and Exchange Commission (the "Commission")), compounded annually, for the term of the option. The 0%, 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. (2) These options were granted under a supplemental option agreement, dated as of July 31, 1995, between the Company and Mr. Larson. These options were 60% vested on the grant date and vest an additional 20% on each of January 31, 1998 and January 31, 1999. (3) Assumes for this purpose that the fair market value on the date of grant equals the assumed initial public offering price of the Common Stock of $14.00 per share. (4) These options were granted under the Career Education Corporation 1995 Stock Option Plan. Each of these options is an incentive stock option and vests in five equal annual installments on each of the first five anniversaries of the grant date; provided, however, that these options become exercisable in full upon stockholder approval of the Offering. See "--Stock Plans--Career Education Corporation 1995 Stock Option Plan." (5) The exercise price of each of these options equals the fair market value of the option shares on the date of grant, as determined by the Company's Board of Directors based on the most recent price prior to the grant date at which the Company sold or agreed to sell Preferred Stock in capital raising transactions. FISCAL YEAR-END OPTION VALUES The following table contains information regarding the Named Executive Officers' unexercised options as of December 31, 1997. Neither of the Named Executive Officers exercised any options during 1997.
NUMBER OF SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS AS OF DECEMBER 31, 1997 (#) OPTIONS AS OF DECEMBER 31, 1997 ($) (1) --------------------------------------- --------------------------------------- NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE ---- --------------------------------------- --------------------------------------- John M. Larson.......... 24,179/26,102 $288,594/$192,373 William A. Klettke...... 262/20,365 $ 2,389/$114,315
- -------- (1) The value per option is calculated by subtracting the exercise price of the option from the assumed initial public offering price of the Common Stock of $14.00 per share. 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 of his 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 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"). As of December 31, 1997, options to acquire 120,651 shares of Common Stock were outstanding under the 1995 Plan, and an additional 7,406 shares of Common Stock were reserved for issuance under the 1995 Plan. 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 1998 Employee Incentive Compensation Plan The Company's Board of Directors has adopted, and prior to the consummation of the Offering the Company's stockholders are expected to approve, the Career Education Corporation 1998 Employee Incentive Compensation Plan (the "Employee Plan"), effective upon the consummation of the Offering. The Employee 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 Employee 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 Employee 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 Employee Plan is administered by the Compensation Committee. 75 The Employee Plan provides for the award of up to 600,000 shares of Common Stock. At the discretion of the Compensation Committee, shares of Common Stock subject to an award under the Employee 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 Employee 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 Employee Plan and the number, class and price of shares subject to outstanding awards. Career Education Corporation 1998 Non-Employee Directors' Stock Option Plan The Company's Board of Directors has adopted, and prior to the consummation of the Offering the Company's stockholders are expected to approve, the Career Education Corporation 1998 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 200,000 shares of Common Stock. The Directors' Plan provides for (i) the grant of an option to purchase 5,000 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 3,000 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 has adopted, and prior to the consummation of the Offering the Company's stockholders are expected to approve, the Career Education Corporation 1998 Employee Stock Purchase Plan (the "Stock Purchase Plan"), effective as of April 1, 1998. A total of 500,000 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. 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. Payroll deductions may not exceed $5,000 76 for any employee in any purchase period. No more than 25,000 shares in the aggregate may be issued to all participants in any purchase period. 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 "Management--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 $99,982. At that time, the Company made an interest- free loan in the amount of $99,982 to Mr. Klettke to be used to purchase these shares. This loan was repaid by Mr. Klettke in full in January 1997. As of October 20, 1997, certain option agreements between the Company and John M. Larson, the Company's President and Chief Executive Officer, and Robert E. Dowdell, one of the Company's directors, were amended to fix, upon the consummation of the Offering, the number of shares issuable upon exercise of the stock options provided under these agreements. Under these amended options, which will be fully vested upon consummation of the Offering, Messrs. Larson and Dowdell will be entitled to purchase 59,490 shares and 38,244 shares, respectively, of Common Stock at an exercise price of $0.01 per share. 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 December 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, (iv) all of the Company's directors and executive officers as a group, and (v) the Selling Stockholder. 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 SHARES OF COMMON STOCK STOCK BENEFICIALLY BENEFICIALLY OWNED PRIOR TO OWNED AFTER THE THE OFFERING (1) OFFERING (1) ----------------- -------------------- NAME NUMBER PERCENT NUMBER PERCENT ---- --------- ------- --------- ------- Heller Equity Capital Corporation (2)................................. 2,731,921 69.9% 2,731,921 40.4% Electra Investment Trust P.L.C. (3).. 939,378 24.1 939,378 13.9 Electra Associates, Inc. (3)......... 77,265 2.0 77,265 1.1 The Provident Bank................... 26,262 * 26,262(4) * John M. Larson (5)................... 120,321 3.0 120,321 1.8 William A. Klettke (6)............... 48,441 1.2 48,441 * Robert E. Dowdell (7)................ 106,417 2.7 108,083(8) 1.6 Thomas B. Lally...................... -- -- 1,666(9) * Wallace O. Laub...................... 24,616 * 26,282(8) * Keith K. Ogata....................... -- -- 1,666(9) * Patrick K. Pesch..................... -- -- 1,666(9) * Scott D. Steele...................... -- -- -- -- Todd H. Steele....................... -- -- 1,666(9) * All directors and executive officers as a group (7 persons).............. 299,795 7.4 306,459 4.4
- -------- * 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 December 31, 1997 (including options that will become exercisable upon consummation of the Offering). (2) The address of HECC is 500 West Monroe Street, Chicago, Illinois 60661. (3) The address of EIT and Electra Associates, Inc. ("EAI") is c/o EIT, 65 Kingsway, London, England WC2B 6QT. (4) 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 26,262 shares, and it would own no shares of Common Stock after the Offering. (5) Includes 105,117 shares of Common Stock which may be acquired by Larson upon the exercise of currently exercisable stock options. (6) Includes 20,626 shares of Common Stock which may be acquired by Klettke upon the exercise of currently exercisable stock options. (7) Includes 187 shares of Common Stock held by Mr. Dowdell, as Custodian for Brian M. Dowdell under the Uniform Transfers to Minors Act; 187 shares of Common Stock held by Mr. Dowdell, as Custodian for Sharon T. Dowdell under the Uniform Transfers to Minors Act; 351 shares of Common Stock held by Robert E. Dowdell Defined Benefit Plan and Trust, under Agreement dated 12/9/96; 306 shares of Common Stock held by Robert E. Dowdell and Grace C. Dowdell, as Trustees under Trust Agreement dated July 1, 1991; 1,173 shares of Common Stock held by Delaware Charter Guarantee and Trust Co., Custodian for Robert E. Dowdell Individual Retirement Account; and 38,243 shares of Common Stock which may be acquired by Mr. Dowdell upon the exercise of currently exercisable stock options. (8) Includes 1,666 shares of Common Stock which may be acquired upon the exercise of the immediately exercisable portion of the option to be automatically granted to this non-employee director under the Directors' Plan upon consummation of the Offering. (9) Represents shares of Common Stock which may be acquired upon the exercise of the immediately exercisable portion of the option to be automatically granted to this non-employee director under the Directors' Plan upon consummation of the Offering. 78 DESCRIPTION OF CAPITAL STOCK Upon consummation of the Offering, the authorized capital stock of the Company will consist of 50,000,000 shares of Common Stock, $.01 par value per share ("Common Stock"), and 1,000,000 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 December 31, 1997, 612,798 shares of Common Stock were outstanding and held by eight holders of record. Approximately 6,756,382 shares of Common Stock will be outstanding upon consummation of the Offering (assuming an initial public offering price of the Common Stock of $14.00 per share). 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 79 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 Harris Trust and Savings Bank. 80 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 approximately 6,756,382 shares of Common Stock outstanding, assuming no exercise of the Underwriters' over-allotment option and no exercise of outstanding options. Of these shares, the 2,850,000 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 3,906,382 shares of Common Stock outstanding upon completion of the Offering will be Restricted Shares. All directors, officers and 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 Credit Suisse First Boston Corporation. 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, (i) 3,905,642 Restricted Shares will become eligible for public resale immediately following expiration of the Lock-Up Agreements under the provisions of Rules 144 and 144(k), subject in the case of 3,879,380 of such shares to the volume and manner of sale limitations under such rules, and (ii) the remaining 740 Restricted Shares will become eligible for public resale in September 1998. 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. Upon consummation of the Offering, options to purchase 271,646 shares of Common Stock will be issued and outstanding, of which options to purchase 246,988 shares of Common Stock will be exercisable. See "Management--Stock Plans." 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. 81 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. 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. Upon consummation of the Offering, Electra will hold 1,016,643 shares covered by the Electra Registration Rights Agreement. The Company and Heller intend to enter into the Heller Registration Rights Agreement, to be effective upon the consummation of the Offering. Under the Heller Registration Rights Agreement, Heller will be 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. Upon consummation of the Offering, Heller will hold 2,731,921 shares which will be covered by the Heller Registration Rights Agreement. See "Management-- Compensation Committee Interlocks and Insider Participation." 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. The 26,262 shares of Common Stock underlying the Provident Warrants are covered by these registration rights, all of which will be sold pursuant to this Prospectus if the Underwriters exercise their over-allotment option in full and all of which will otherwise be eligible for sale upon expiration of the Lock-Up Agreements, without any volume or other limitations, pursuant to Rule 144(k). See "Security Ownership of Certain Beneficial Owners and Management." 82 UNDERWRITING Upon the terms and subject to the conditions contained in an Underwriting Agreement dated , 1998 (the "Underwriting Agreement"), the underwriters named below (the "Underwriters"), for whom Credit Suisse First Boston Corporation and Smith Barney Inc. 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................................................ --------- Total....................................................... 2,850,000 =========
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 Company and the Selling Stockholder 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 401,238 additional shares from the Company and up to an aggregate of 26,262 shares from the Selling Stockholder 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 Stockholder 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. At the request of the Company, the Underwriters are reserving shares of Common Stock from the Offering for sale to certain persons identified by the Company. Any sales to such persons will be at the public offering price. Any shares not purchased in this reserve program will be sold to the general public in the Offering. 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, directors and director nominees, the Selling Stockholder and all other current stockholders of the Company, who, immediately following the consummation of the Offering, will own an aggregate of 3,906,382 shares of Common Stock and vested and exercisable options to purchase an additional 178,236 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 83 Suisse First Boston Corporation, for a period 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 Stockholder 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. The Common Stock has been approved for listing on the Nasdaq National Market under the symbol "CECO," subject to official notice of issuance. 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 Stockholder 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 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 Stockholder 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 Stockholder and the dealer from whom such purchase confirmation is 84 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 Stockholder 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. 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 September 30, 1997, and for each of the three years in the period ended December 31, 1996 and for the nine months ended September 30, 1997, the consolidated financial statements of IAMD, Limited and Subsidiaries as of June 30, 1997 and for the year ended June 30, 1997, the consolidated financial statements of International Academy of Merchandising & Design (Canada) Ltd. and Subsidiary as of June 30, 1997 and for the ten months ended June 30, 1997, and the statements of operations and cash flows of Western Culinary Institute (a division of Phillips Educational Group of Portland, Inc., a wholly owned subsidiary of Phillips Colleges, Inc.) for the nine months and twenty-one days ended October 21, 1996, included in this 85 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. The financial statements of International Academy of Merchandising & Design (Canada) Ltd. as of August 31, 1996 and for the year ended August 31, 1996, included in this Prospectus and elsewhere in the Registration Statement, have been audited by Price Waterhouse, independent accountants, whose report thereon appears herein. Such financial statements have been so included in reliance on their report given on the authority of said firm as experts in auditing and accounting. The financial statements of IAMD, Limited and Subsidiaries as of and for the year ended June 30, 1996, included in this Prospectus and elsewhere in the Registration Statement, have been audited by Gleeson, Sklar, Sawyers & Cumpata LLP, independent accountants, whose report thereon appears herein. Such financial statements have been so included in reliance on their report given on the authority of said firm as experts in auditing and accounting. The consolidated financial statements of The Katharine Gibbs Schools, Inc. and subsidiaries as of December 31, 1995 and 1996 and for the period from March 7, 1994 to December 31, 1994, and for the years ended December 31, 1995 and 1996, included in this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein and elsewhere in the Registration Statement, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. 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. 86 INDEX TO FINANCIAL STATEMENTS
PAGE --------- CONSOLIDATED FINANCIAL STATEMENTS OF CAREER EDUCATION CORPORATION AND SUBSIDIARIES: Report of Independent Public Accountants....................... F-3 Consolidated Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997........................................ F-4 Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996 and the nine months ended September 30, 1996 (unaudited) and September 30, 1997......... F-7 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and the nine months ended September 30, 1996 (unaudited) and September 30, 1997......... F-8 Consolidated Statements of Stockholders' Investment for the years ended December 31, 1994, 1995 and 1996, and the nine months ended September 30, 1997............................... F-9 Notes to Consolidated Financial Statements..................... F-11 CONSOLIDATED FINANCIAL STATEMENTS OF THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES: Report of Independent Public Accountants....................... F-36 Consolidated Balance Sheets as of December 31, 1995 and 1996... F-37 Statements of Consolidated Operations for the period from March 7, 1994 to December 31, 1994, and the years ended December 31, 1995 and 1996................................................. F-38 Statements of Shareholder's Deficiency for the period from March 7, 1994 to December 31, 1994, and the years ended December 31, 1995 and 1996.................................... F-39 Statements of Consolidated Cash Flows for the period from March 7, 1994 to December 31, 1994, and the years ended December 31, 1995 and 1996................................................. F-40 Notes to Consolidated Financial Statements..................... F-41 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES: Unaudited Condensed Consolidated Balance Sheets as of June 30, 1996 and May 31, 1997......................................... F-46 Unaudited Condensed Consolidated Statements of Operations for the six months ended June 30, 1996 and five months ended May 31, 1997...................................................... F-47 Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1996 and five months ended May 31, 1997...................................................... F-48 Notes to Unaudited Condensed Consolidated Financial Statements. F-49 CONSOLIDATED FINANCIAL STATEMENTS OF IAMD, LIMITED AND SUBSIDIARIES: Reports of Independent Public Accountants...................... F-50 Consolidated Balance Sheets as of June 30, 1996 and 1997....... F-52 Consolidated Statements of Operations for the years ended June 30, 1996 and 1997............................................. F-53 Consolidated Statements of Cash Flows for the years ended June 30, 1996 and 1997............................................. F-54 Consolidated Statements of Stockholders' Investment for the years ended June 30, 1996 and 1997............................ F-55 Notes to Consolidated Financial Statements..................... F-56
F-1
PAGE ---- CONSOLIDATED FINANCIAL STATEMENTS OF INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (CANADA) LTD. AND SUBSIDIARY: Reports of Independent Public Accountants............................... F-63 Consolidated Balance Sheets as of August 31, 1996 and June 30, 1997..... F-65 Consolidated Statements of Operations for the year ended August 31, 1996 and for the ten months ended June 30, 1997............................. F-66 Consolidated Statements of Cash Flows for the year ended August 31, 1996 and for the ten months ended June 30, 1997............................. F-67 Consolidated Statements of Stockholders' Equity for the year ended August 31, 1996 and for the ten months ended June 30, 1997............. F-68 Notes to Consolidated Financial Statements.............................. F-69 FINANCIAL STATEMENTS OF WESTERN CULINARY INSTITUTE (A DIVISION OF PHILLIPS EDUCATIONAL GROUP OF PORTLAND, INC., A WHOLLY OWNED SUBSIDIARY OF PHILLIPS COLLEGES, INC.): Report of Independent Public Accountants................................ F-74 Statement of Operations for the nine months and twenty-one days ended October 21, 1996....................................................... F-75 Statement of Cash Flows for the nine months and twenty-one days ended October 21, 1996....................................................... F-76 Notes to Consolidated Financial Statements.............................. F-77
F-2 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 September 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 nine months ended September 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 September 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 nine months ended September 30, 1997 in conformity with generally accepted accounting principles. As explained in Note 14 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 November 19, 1997 F-3 CAREER EDUCATION CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31 SEPTEMBER 30 --------------- ----------------------- PRO FORMA 1995 1996 1997 1997 (NOTE 15) ------- ------- -------- -------------- ASSETS (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents............ $ 3,965 $ 7,798 $ 5,448 $ 5,448 Receivables-- Students, net of allowance for doubtful accounts of $258, $455 and $1,403 at December 31, 1995 and 1996 and September 30, 1997, respectively...................... 2,414 2,159 12,513 12,513 From former owners of acquired businesses........................ -- 523 87 87 Stockholder........................ -- 100 -- -- Other.............................. 250 120 1,378 1,378 Inventories.......................... 167 213 412 412 Prepaid expenses and other current assets.............................. 505 725 1,921 1,921 Deferred income tax assets........... -- 194 883 883 ------- ------- -------- -------- Total current assets............. 7,301 11,832 22,642 22,642 ------- ------- -------- -------- PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization........................ 12,841 19,560 46,944 46,944 ------- ------- -------- -------- OTHER ASSETS: Deferred income tax assets........... -- 195 -- -- Intangible assets, net............... 2,813 3,407 31,931 31,931 Deposits............................. 113 154 547 547 Perkins program fund, net............ 225 262 287 287 Deferred financing costs, net........ 151 346 634 634 Organization costs, net.............. 140 452 384 384 ------- ------- -------- -------- Total other assets............... 3,442 4,816 33,783 33,783 ------- ------- -------- -------- TOTAL ASSETS........................... $23,584 $36,208 $103,369 $103,369 ======= ======= ======== ========
F-4 CAREER EDUCATION CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (DOLLARS IN THOUSANDS)
DECEMBER 31 SEPTEMBER 30 ------------- --------------------- PRO FORMA 1995 1996 1997 1997 (NOTE 15) ------ ------ ------ -------------- LIABILITIES AND STOCKHOLDERS' INVESTMENT (UNAUDITED) CURRENT LIABILITIES: Current maturities of long-term debt.......... $1,309 $2,676 $3,993 $3,993 Book overdraft................................ -- 683 1,688 1,688 Accounts payable.............................. 640 502 2,500 2,500 Accrued expenses-- Payroll and related benefits................ 505 678 1,502 1,502 Other....................................... 747 1,658 2,950 2,950 Deferred tuition revenue...................... 2,786 4,256 8,607 8,607 ------ ------ ------ ------ Total current liabilities................. 5,987 10,453 21,240 21,240 ------ ------ ------ ------ LONG TERM DEBT, net of current maturities shown above.......................................... 6,725 13,783 46,892 46,892 ------ ------ ------ ------ DEFERRED INCOME TAX LIABILITIES................. -- -- 2,984 2,984 ------ ------ ------ ------ 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 September 30, 1997, respectively, at liquidation value (stated value plus accumulated dividends)....................... 8,729 9,432 9,937 -- 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 September 30, 1997, at liquidation value. 4,065 4,259 4,338 -- 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 September 30, 1997, at liquidation value (stated value plus accumulated dividends)....................... -- -- 18,323 -- Warrants exercisable into 27,484 shares of Class D common stock at December 31, 1995 and 1996, and 21,576 shares of Class D common stock at September 30, 1997, at an exercise price of $0.01 per share, at estimated redemption value............................. 834 870 1,140 -- Warrants exercisable into 3,514 shares of Class E common stock at September 30, 1997, at an exercise price of $0.01 per share, at estimated redemption value................... -- -- 289 -- ------ ------ ------ ------ Total redeemable preferred stock and warrants................................. 13,628 14,561 34,027 -- ------ ------ ------ ------
F-5 CAREER EDUCATION CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (DOLLARS IN THOUSANDS)
DECEMBER 31 SEPTEMBER 30 ---------------- ------------------------ PRO FORMA 1995 1996 1997 1997 (NOTE 15) ------- ------- -------- -------------- 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 September 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 September 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 September 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 September 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, 1,747 shares issued and outstanding at September 30, 1997. -- -- -- -- Common stock....................... -- -- -- 38 Warrants........................... -- -- 4,777 -- Additional paid-in capital......... 30 60 71 38,838 Foreign currency translation....... -- -- 7 7 Accumulated deficit................ (2,787) (2,650) (6,630) (6,630) ------- ------- -------- -------- Total stockholders' investment... (2,756) (2,589) (1,774) 32,253 ------- ------- -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT.......................... $23,584 $36,208 $103,369 $103,369 ======= ======= ======== ========
The accompanying notes are an integral part of these statements. F-6 CAREER EDUCATION CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED FOR THE NINE MONTHS DECEMBER 31 ENDED SEPTEMBER 30 ------------------------- ------------------- 1994 1995 1996 1996 1997 ------- ------- ------- ----------- ------- (UNAUDITED) REVENUE: Tuition and registration fees, net.................... $ 5,794 $16,330 $29,269 $19,299 $45,615 Other, net.................... 1,692 3,066 4,311 3,130 5,152 ------- ------- ------- ------- ------- Total net revenue......... 7,486 19,396 33,580 22,429 50,767 OPERATING EXPENSES: Educational services and facilities................... 3,074 8,565 14,404 9,579 22,269 General and administrative.... 4,887 9,097 14,622 10,976 23,852 Depreciation and amortization................. 980 1,330 2,134 1,481 5,000 ------- ------- ------- ------- ------- Total operating expenses.. 8,941 18,992 31,160 22,036 51,121 ------- ------- ------- ------- ------- Income (loss) from operations............... (1,455) 404 2,420 393 (354) INTEREST EXPENSE............... 134 311 717 358 2,046 ------- ------- ------- ------- ------- Income (loss) before provision for income taxes and extraordinary item..................... (1,589) 93 1,703 35 (2,400) PROVISION (BENEFIT) FOR INCOME TAXES......................... -- 24 208 14 (1,008) ------- ------- ------- ------- ------- Income (loss) before extraordinary item....... (1,589) 69 1,495 21 (1,392) EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT (net of taxes of $233, Note 4)........ -- -- -- -- (418) ------- ------- ------- ------- ------- NET INCOME (LOSS).............. $(1,589) $ 69 $ 1,495 $ 21 $(1,810) ======= ======= ======= ======= ======= INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS Income (loss) before extraordinary item........... $(1,589) $ 69 $ 1,495 $ 21 $(1,392) Dividends on preferred stock.. (393) (777) (1,128) (841) (1,444) Accretion to redemption value of preferred stock and warrants..................... -- (96) (230) (175) (727) ------- ------- ------- ------- ------- Income (loss) before extraordinary item attributable to common stockholders............. (1,982) (804) 137 (995) (3,563) Extraordinary loss............ -- -- -- -- (418) ------- ------- ------- ------- ------- Net income (loss) attributable to common stockholders............. $(1,982) $ (804) $ 137 $ (995) $(3,981) ======= ======= ======= ======= ======= PRO FORMA (UNAUDITED): Income (loss) before extraordinary item attributable to common stockholders, as reported.... $(1,982) $ (804) $ 137 $ (995) $(3,563) Dividends on preferred stock...................... 393 777 1,128 841 1,444 Accretion to redemption value of preferred stock and warrants............... -- 96 230 175 727 ------- ------- ------- ------- ------- Pro forma income (loss) before extraordinary item attributable to common stockholders.................. $(1,589) $ 69 $ 1,495 $ 21 $(1,392) ======= ======= Extraordinary loss............ -- -- (418) ------- ------- ------- Pro forma net income (loss) attributable to common stockholders.................. $ 1,495 $ 21 $(1,810) ======= ======= ======= Pro forma income (loss) before extraordinary item per share.. $ 0.69 $ 0.01 $ (0.50) ======= ======= ======= Pro forma net income (loss) per share attributable to common stockholders.................. $ 0.69 $ 0.01 $ (0.65) ======= ======= ======= Pro forma weighted average number of common and common stock equivalent shares outstanding................... 2,169 2,169 2,764 ======= ======= =======
The accompanying notes are an integral part of these statements. F-7 CAREER EDUCATION CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
FOR THE NINE FOR THE YEAR ENDED MONTHS ENDED DECEMBER 31 SEPTEMBER 30 ------------------------- -------------------- 1994 1995 1996 1996 1997 ------- ------- ------- ----------- -------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).......... $(1,589) $ 69 $ 1,495 $ 21 $ (1,810) 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 1,493 5,083 Warrants issued to a bank.................... -- -- -- -- 180 Deferred income taxes.... -- -- (208) (1,008) Loss on sale of assets... 2 -- -- -- -- Extraordinary loss....... -- -- -- -- 651 Changes in operating assets and liabilities, net of acquisitions-- Receivables, net....... (708) (869) 385 (194) (6,100) Inventories, prepaid expenses and other current assets........ (101) (246) (245) (179) (1,111) Deposits............... (116) 33 8 (12) (101) Accounts payable....... (14) 118 (138) (52) 1,998 Accrued expenses....... (142) (233) 752 (78) (2,090) Deferred tuition 688 12 1,038 (399) (1,966) revenue............... ------- ------- ------- ------ -------- Net cash provided by (used in) operating (1,000) 235 5,275 600 (6,274) activities.......... ------- ------- ------- ------ -------- CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisitions, net of cash................... (1,985) (1,622) (8,250) -- (36,250) Acquisition and organizational costs...... (234) (959) -- -- (1,467) Purchase of property and equipment, net............ (153) (897) (1,231) (914) (2,010) Investment in Perkins -- -- (37) (38) (6) program fund.............. ------- ------- ------- ------ -------- Net cash used in investing (2,372) (3,478) (9,518) (952) (39,733) 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) (372) (372) Equity and debt financing costs..................... -- (535) (553) -- (670) Book overdraft............. -- -- 683 -- 1,005 Payments of long-term debt...................... (1,836) (6,363) (1,309) (3,400) (577) Net proceeds from (repayment of) revolving credit facility........... -- 6,771 1,500 3,263 (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................. -- -- -- -- 26,635 Proceeds from issuance of term loans under Credit Agreement................. -- -- -- -- 12,500 Payments on term loans -- -- -- -- (750) under Credit Agreement.... ------- ------- ------- ------ -------- Net cash provided by (used in) financing 6,014 4,566 8,076 (509) 43,650 activities.......... ------- ------- ------- ------ -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH............. -- -- -- -- 7 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... 2,642 1,323 3,833 (861) (2,350) 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 $3,104 $ 5,448 ======= ======= ======= ====== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for-- Interest................... $ 119 $ 327 $ 407 $ 305 $ 1,944 Taxes...................... -- -- 80 -- 2,306 ======= ======= ======= ====== ======== NON-CASH INVESTING AND FINANCING ACTIVITIES: Accretion to redemption value of preferred stock and warrants.............. $ -- $ 96 $ 230 $ 175 $ 727 Dividends on preferred stock added to liquidation value..................... 393 570 632 470 1,072 ======= ======= ======= ====== ========
The accompanying notes are an integral part of these statements. F-8 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.. -- -- -- -- -- -- -- -- -- -- -- Exercise of warrants.. -- -- -- -- -- -- -- -- 99 1 1 Dividends paid........ -- -- -- -- -- -- -- -- -- -- -- Dividends on preferred stock for the period. -- -- -- -- -- -- -- -- -- -- -- Preferred stock and warrant accretion.... -- -- -- -- -- -- -- -- -- -- -- Net loss.............. -- -- -- -- -- -- -- -- -- -- -- ----- ---- ----- ---- ------ ---- --- ---- ----- ---- ---- BALANCE, September 30, 1997.................. 5,250 $ 53 5,100 $ 51 69,900 $699 -- $-- 1,747 $ 17 $820 ===== ==== ===== ==== ====== ==== === ==== ===== ==== ====
The accompanying notes are an integral part of these statements. F-9 CAREER EDUCATION CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT (CONTINUED)
WARRANTS ---------- FOREIGN CLASS E ADDITIONAL CURRENCY TOTAL COMMON PAID-IN TRANSLATION ACCUMULATED STOCKHOLDERS' STOCK CAPITAL ADJUSTMENT 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 Exercise of warrants.. (11,136) 11,135 -- -- -- Dividends paid........ -- -- -- (371,550) (371,550) Dividends on preferred stock for the period. -- -- -- (1,072,352) (1,072,352) Preferred stock and warrant accretion.... -- -- -- (726,586) (726,586) Net loss.............. -- -- -- (1,809,588) (1,809,588) Foreign currency translation.......... -- -- 7,072 -- 7,072 ---------- ------- ------ ----------- ----------- BALANCE, September 30, 1997................... $4,777,427 $71,083 $7,072 $(6,630,314) $(1,773,912) ========== ======= ====== =========== ===========
F-10 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 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 Katharine 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 nine months ended September 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 nine months ended September 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-11 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) the Higher Education Act of 1965 ("Title IV Programs"), as amended. Approximately 70%, 73%, 72%, 69% and 59% of the Company's net revenue, on a cash basis, was collected from Title IV Program funds for the years ended December 31, 1994, 1995 and 1996 and for the nine months ended September 30, 1996 and 1997, respectively. 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 September 30, 1997, the Company had estimated that approximately $225,000, $262,000 and $287,000, 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, $2,887,000 and $6,767,000 for the years ended December 31, 1994, December 31, 1995, December 31, 1996 and the nine months ended September 30, 1996 and 1997, respectively (Note 14). 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-12 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 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 September 30, 1997, are as follows (dollars in thousands):
DECEMBER 31, --------------- SEPTEMBER 30, 1995 1996 1997 LIFE ------- ------- ------------- ---------- Buildings.......................... $ 350 $ 350 $ 1,190 31 years Classroom equipment, courseware and other instructional materials........... 10,237 17,905 40,313 3-15 years Furniture, fixtures and equipment.. 2,653 2,926 6,447 3-10 years Leasehold improvements............. 843 1,296 4,648 1-7 years Vehicles........................... 40 40 40 5 years ------- ------- ------- 14,123 22,517 52,638 Less-Accumulated depreciation and amortization...................... 1,282 2,957 5,694 ------- ------- ------- $12,841 $19,560 $46,944 ======= ======= =======
The gross cost of assets recorded under capital leases included above amounted to $39,000 at December 31, 1995, and 1996 and $2,835,000 at September 30, 1997. 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 September 30, 1997, the cost basis and useful lives of intangible assets consist of the following (dollars in thousands):
DECEMBER 31, ------------- SEPTEMBER 30, ESTIMATED 1995 1996 1997 LIVES ------ ------ ------------- --------- Goodwill............................... $2,824 $3,470 $20,858 40 years Covenants not-to-compete............... 100 500 13,250 3-5 years Student contracts...................... 1,055 1,107 -- 1 year ------ ------ ------- 3,979 5,077 34,108 Less-Accumulated amortization.......... 1,166 1,670 2,177 ------ ------ ------- $2,813 $3,407 $31,931 ====== ====== =======
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-13 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 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 September 30, 1997, was $94,000, $153,000 and $247,000, 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 September 30, 1997, was $14,000, $59,000 and $36,000, 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-14 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 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 1) stock splits described in Notes 5 and 15 for all periods presented, 2) shares of redeemable preferred stock and warrants converted into shares of common stock and 3) the conversion of all existing classes of common stock into a single new class of common stock. 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 net income (loss) before extraordinary item per share attributable to common stockholders for the year ended December 31, 1996 and for the nine months ended September 30, 1996 and September 30, 1997 of $0.72, $0.09 and $(0.03), 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 assumed sale by the Company of approximately 2,200,000 and 2,191,786 shares of common stock in the offering resulting in net proceeds sufficient to pay indebtedness as described in Note 15 in 1996 and 1997, respectively. Supplemental pro forma net income (loss) per share attributable to common stockholders of $0.72, $0.09 and $(0.11) for the year ended December 31, 1996 and for the nine months ended September 30, 1996 and September 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 by the Financial Accounting Standards Board. 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 F-15 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) (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 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 nine months ended September 30, 1996 and September 30, 1997, had the Company calculated earnings per share before extraordinary item using SFAS No. 128, the basic earnings per share would have been $0.77, $0.01 and $(0.50), respectively, and the diluted earnings per share would have been $0.69, $0.01 and $(0.50), 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 September 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 September 30, 1997, the impact of this pronouncement has not been determined. F-16 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) t. Foreign Currency Translation The Company acquired IAMD-Canada, an entity with operations in Canada, on June 30, 1997. At September 30, 1997, revenues and expenses related to these operations have been translated at average exchange rates in effect at the time the underlying transactions occurred. Transaction gains or losses are included in income. Assets and liabilities of this subsidiary have been translated at month-end exchange rates, with gains and losses resulting from such translation at approximately $7,000 being included in stockholders' investment at September 30, 1997. 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-17 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 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 September 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 September 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 $7,800,000. Subsequent adjustments to the purchase price may result in changes to the purchase price allocation. At September 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 in exchange for $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 September 30, 1997, the Company estimates that $1,657,000 is still owed to the seller. 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. F-18 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) 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 September 30, 1997, the Company estimates that the purchase price will be increased by approximately $90,000 as a result of purchase price adjustments and has reflected such amount in the accompanying September 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. 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 $4,588,000. At September 30, 1997, the Company estimates that the purchase price will be decreased by approximately $87,000 as a result of purchase price adjustments and has reflected such amount as due from former owners of acquired businesses in the accompanying September 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 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. F-19 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) The following unaudited pro forma results of operations data (in thousands) for the years ended December 31, 1994, December 31, 1995 and December 31, 1996, and the nine months ended September 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 nine months ended September 30, 1997, are not necessarily indicative of results that may be expected for the fiscal year ending December 31, 1997.
FOR THE NINE MONTHS FOR THE YEARS ENDED ENDED DECEMBER 31 SEPTEMBER 30 ------------------------ ------------ 1994 1995 1996 1997 ------- ------- ------- ------------ (UNAUDITED) Net revenue........................ $23,243 $32,175 $87,476 $74,636 Income (loss) before extraordinary item.............................. (902) 1,070 (5,041) (4,431) Net income (loss).................. (902) 1,070 (5,041) (4,849)
F-20 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) 4. DEBT Debt of the Company at December 31, 1995, December 31, 1996 and September 30, 1997, consists of the following:
DECEMBER 31 -------------- SEPTEMBER 30 1995 1996 1997 ------ ------- ------------ (IN THOUSANDS) Borrowings under Credit Agreement with a syndicate of banks as discussed below-- Revolving loans................................. $ -- $ -- $26,635 Term loan....................................... -- -- 11,750 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 a weighted average interest rate of 21.9%.......... 50 27 1,502 Other............................................. -- -- 91 ------ ------- ------- 8,034 16,459 50,885 Less--Current portion............................. 1,309 2,676 3,993 ------ ------- ------- $6,725 $13,783 $46,892 ====== ======= =======
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 $30,000,000 in outstanding letters of credit. Outstanding letters of credit reduce the revolving F-21 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) credit 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 $750,000. 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 September 30, 1997, or the Federal Funds Rate plus 0.50%, 7.00% at September 30, 1997) or at LIBOR plus 2% (7.77% at September 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 September 30, 1997, the Company had outstanding, under the amended Credit Agreement, $26,635,000 in revolving credit borrowings and a $11,750,000 term loan and had issued various letters of credit totaling approximately $11,805,000 (to meet certain Department of Education financial responsibility requirements and to guarantee certain purchase price payments). At September 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 nine months ended September 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-22 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 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 September 30, 1997, the Company was either in compliance with or had obtained a waiver for the covenants of the Credit Agreement, as amended. As of September 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 September 30, 1997, future annual principal payments of long-term debt mature as follows (in thousands): For the 12 months ended September 30, 1999........................................... $ 3,380 2000........................................... 3,107 2001........................................... 18,620 2002........................................... 16,638 2003 and thereafter............................ 5,147 ------- $46,892 =======
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-23 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 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 September 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-24 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 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 SCT. 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 September 30, 1997, the total number of shares of Class D common stock into which these warrants are exercisable was adjusted to be 21,576. 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 (based upon the relative fair market value of the debt and warrants) of $79,997 to these warrants. The fair market value of the warrants was determined with reference to the exercise price of the warrants, the fair market value of the Company's common stock at the date the warrants were issued (considering its recent sale of stock to third parties) and the period the warrants can be exercised. In connection with the sales of Series D preferred stock through the various securities purchase agreements, the outstanding warrants to purchase 2,199 shares of Class F-25 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) 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 (based upon a Black-Scholes option pricing model with assumptions as described in Note 8) 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 $.10 per share, are earned and become exercisable based upon certain financial returns earned and realized in a cash payment by certain stockholders and are subject to other conditions. In July 1995, the option agreements were amended to reduce the total number of shares of common stock for which the options could be exercised to 11.5% of the outstanding shares, and a supplemental option agreement was entered into entitling one of these stockholders to purchase 2,199 shares of common stock at $0.10 per share. The supplemental option vests over a five year period. Under the supplemental option agreement, additional options to purchase a total of 915 shares of common stock at an exercise price of $0.01 per share were issued in 1997. These options vest over the same period as the initial supplemental option. At December 31, 1995, December 31, 1996, and September 30, 1997, 440, 880, and 1,868 of the supplemental options, respectively, had vested. As of September 30, 1997, none of the options granted under the amended option agreements had been earned. On October 20, 1997, the original option agreements were further amended to fix the number of shares that the stockholders may exercise only upon the closing of an initial public offering ("IPO"). Under these amended agreements, in addition to the options issued under the supplemental option agreement, the stockholders may purchase an aggregate of 13,077.5 shares of common stock of the Company at any time after the IPO closing, but prior to January 1, 2004. The options (other than the supplemental options) will be fully vested upon the IPO closing. Assuming that the IPO is completed and that the price per share is $14.00 (post split), the Company will record related compensation expense of approximately $1.5 million upon the IPO closing. 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 nine months ended September 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................................... 7,336 129.85-137.95 136.83 Cancelled................................. (285) 36.38 36.38 ------ Outstanding as of September 30, 1997........ 16,144 $36.38-137.95 $82.03 ====== ============= ====== Stock options exercisable at 1,102 $36.38 $36.38 December 31, 1996.......................... ====== ====== ====== September 30, 1997......................... 1,558 $36.38 $36.38 ====== ====== ======
F-26 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) The following table summarizes information about all stock options outstanding as of September 30, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------------- --------------------------------- NUMBER OUTSTANDING WEIGHTED WEIGHTED AVERAGE NUMBER EXERCISABLE WEIGHTED AS OF AVERAGE REMAINING AT AVERAGE EXERCISE PRICE RANGES SEPTEMBER 30, 1997 EXERCISE PRICE CONTRACTUAL LIFE SEPTEMBER 30, 1997 EXERCISE PRICE - --------------------- ------------------ -------------- ---------------- ------------------ -------------- $0.01-$0.10............. 3,114 $ 0.04 6.3 1,868 0.04 $36.38-$36.38........... 8,808 36.38 8.3 1,558 36.38 $129.85-$137.95......... 7,336 136.83 9.7 -- -- ------ ------- --- ----- ----- $0.01-$137.95........... 19,258 68.76 8.5 3,426 16.57 ====== ======= === ===== =====
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 nine months ended September 30, 1997, was approximately $16.58, $16.87 and $24.21, respectively. WARRANTS During 1997, 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. 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-27 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 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 nine months ended September 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...................................... (3,709) 0.01 -- -- Exercised...................................... -- -- (99) 0.01 Exchanged...................................... (2,199) 0.01 2,199 0.01 ------ ------ Outstanding as of September 30, 1997............. 21,576 0.01 48,525 0.01 ====== ===== ====== ===== Warrants exercisable at December 31, 1996........ 27,484 $0.01 -- $ -- ====== ===== ====== ===== Warrants exercisable at September 30, 1997....... 21,576 $0.01 48,525 $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 September 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 nine months ended September 30, 1997 was approximately $132.93. As of September 30, 1997, the remaining contractual life of these warrants was approximately 7.8 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 (in thousands, except per share data):
DECEMBER 31 SEPTEMBER 30 ------------ ------------------- 1995 1996 1996 1997 ----- ------ ----------- ------- (UNAUDITED) Pro forma income (loss) before extraordinary item attributable to common stockholders................... $ 64 $1,475 $ 6 $(1,420) Pro forma income (loss) before extraordinary item per share attributable to common stockholders... $0.04 $ 0.68 $0.00 $ (0.51)
F-28 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 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. At September 30, 1997, the unamortized compensation expense under FASB No. 123 is approximately $405,000. 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 (benefit) for income taxes for the years ended December 31, 1994, December 31, 1995, December 31, 1996, and for the nine months ended September 30, 1996 and 1997 consists of the following (in thousands):
FOR THE YEAR FOR THE NINE ENDED MONTHS ENDED DECEMBER 31 SEPTEMBER 30 -------------- ------------------- 1994 1995 1996 1996 1997 ---- ---- ---- ----------- ------- (UNAUDITED) Current-- Federal................................. $-- $-- $150 $12 $ -- State and local......................... -- 24 260 2 -- Foreign................................. -- -- -- -- -- ---- ---- ---- --- ------- Total current......................... -- 24 410 14 -- ---- ---- ---- --- ------- Deferred-- Federal................................. -- -- (172) -- (639) State and local......................... -- -- (30) -- (150) Foreign................................. -- -- -- -- (219) ---- ---- ---- --- ------- Total deferred........................ -- -- (202) -- (1,008) ---- ---- ---- --- ------- Total provision (benefit) for income tax- es....................................... $-- $ 24 $208 $14 $(1,008) ==== ==== ==== === =======
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 nine months ended September 30, 1996 and 1997, is as follows:
YEAR ENDED DECEMBER NINE MONTHS 31 ENDED SEPTEMBER 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% 10.0% (5.0%) Foreign............................ --% --% --% --% (1.6%) Permanent differences and other.... 1.4% (11.2%) 4.8% 4.8% (1.4%) Valuation allowance................ (40.0%) (14.0%) (36.6%) (8.8%) -- % ------ ------ ------ ----- ------ Effective income tax rate.......... -- % 25.8% 12.2% 40.0% (42.0%) ====== ====== ====== ===== ======
F-29 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) Components of deferred income tax assets and liabilities consist of the following at December 31, 1995, December 31, 1996, and September 30, 1997 (in thousands):
DECEMBER 31 SEPTEMBER 30 ------------- ------------ 1995 1996 1997 ------- ---- ------------ Deferred tax assets: Tax net operating loss carryforwards.......... $ 967 $281 $ 1,372 Allowance for doubtful accounts............... 103 182 561 Other......................................... 114 49 322 ------- ---- ------- Total deferred tax assets................... 1,184 512 2,255 ------- ---- ------- Deferred tax liabilities: Depreciation and amortization................. 137 86 4,356 Other......................................... 2 37 -- ------- ---- ------- Total deferred tax liabilities.............. 139 123 4,356 Valuation allowance........................... (1,045) -- -- ------- ---- ------- Net deferred income tax..................... $ -- $389 $(2,101) ======= ==== =======
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 September 30, 1997, such tax net operating loss carryforwards totalled $3,176,000 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 nine months ended September 30, 1996 and 1997 was $124,000, $135,000, $135,000, $101,000 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 nine months ended September 30, 1996 and 1997, was approximately $595,000, $1,589,000, $2,649,000, $1,923,000 and $5,014,000, respectively. F-30 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) Future minimum lease payments under these leases as of September 30, 1997, are as follows (in thousands):
CAPITAL OPERATING LEASES LEASES TOTAL ------- --------- ------- Remainder of-- 1997.......................................... $ 371 $ 2,711 $ 3,082 1998.......................................... 986 10,015 11,001 1999.......................................... 307 9,117 9,424 2000.......................................... 66 7,982 8,048 2001.......................................... 12 7,092 7,104 2002 and thereafter........................... 1 13,636 13,637 ------ ------- ------- 1,743 $50,553 $52,296 ======= ======= Less--Portion representing interest at a weighted average rate of 21.9%............... 241 ------ Principal payments............................ 1,502 Less--Current portion......................... 993 ------ $ 509 ======
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 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 education 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. The DOE may measure the financial responsibility standards on a school-by-school basis or on a corporate consolidated basis. 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 and compliance reviews of its subsidiaries. In November 1997, the DOE published new regulations regarding financial responsibility to take effect on July 1, 1998. The regulations provide a transition year alternative which will permit institutions to have their financial responsibility for the 1998 fiscal year measured on the basis of either the new regulations or the current regulations, whichever are more favorable. Under the new regulations, the DOE will calculate three financial ratios for an institution, each of which will be scored separately and which will then be combined to determine the institution's financial responsibility. If an institution's composite score is below the minimum requirement for unconditional approval but above a designated threshold level, such institution may take advantage of an alternative that allows it to continue to participate in the Title IV Programs for up to three years under additional monitoring and reporting procedures. If an institution's composite score falls below this threshold level or is between the minimum for unconditional approval and the threshold for more than three consecutive years, the institution will be required to post a letter of credit in favor of the DOE. The Company does not believe that these new regulations will have a material effect on the Company's compliance with the DOE's financial responsibility standards. F-31 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) The process of reauthorizing the HEA by the U.S. Congress, which takes place approximately 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. 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 agencies of the state in which such campus is located. Each of the Company's U.S. campuses is licensed or authorized by the relevant agencies 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. In reviewing the Company's acquisitions in the last 14 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. 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 the Company's accounting for certain direct marketing costs and its valuation of courseware and other instructional materials of the Company's recently acquired institutions. The audited financial statements included herein have been restated to expense as incurred all direct marketing and advertising costs which had previously been deferred. (Note 14) As a result of the DOE's concerns regarding the Company's accounting for direct marketing costs and courseware and instructional materials, 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 $12.0 million, which expires on October 31, 1998, with respect to Gibbs. In addition, in response to the DOE's directive, the Company expanded an existing letter of credit with respect to SCT from the prior amount of $800,000 to the revised amount of $1.2 million, with an expiration date of October 31, 1998. Further, the Company has agreed to post an additional letter of credit in the amount of $5.2 million, to expire on October 31, 1998, with respect to IAMD- U.S. F-32 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) 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. Subsequently, the DOE increased the level of surety for SCT to, and established the level of surety of Gibbs and IAMD-U.S. at, 75% of the Title IV Program funds that students enrolled at each such institution received in the previous award year. Beginning in October 1997, the DOE has imposed a condition that, through September 30, 1998, SCT, Gibbs and IAMD-U.S. may not disburse Title IV Program funds in excess of the total Title IV Program funds that students enrolled at each institution received in the most recent award year for which data are available to the DOE. The DOE has calculated this amount to be $1.6 million in the case of SCT, $16.0 million in the case of Gibbs and $7.0 million in the case of IAMD-U.S. In subsequent discussions, the DOE has agreed to consider potential increases in the Title IV Program funding available to students at the affected institutions, if the Company so requests and with the understanding that the Company would secure any such increase in Title IV Program funding by increasing the applicable letter of credit in an amount commensurate with the additional Title IV Program funding utilized by such students. The DOE has advised the Company that the DOE does not include William D. Ford Federal Direct Loan ("FDL") funds in calculating the amount of any letter of credit and that FDL funds are not considered in determining the total Title IV Program funding available to an affected institution. SCT disburses significant amounts of FDL funds to students enrolled in its educational programs. The DOE also has stated that, prior to a determination that the Company satisfies the standards of financial responsibility, the DOE will not consider applications to resume Title IV Program participation on behalf of any institutions that the Company may acquire in the future or applications that seek approval of any action that would expand the Title IV Program participation of any of the Company's U.S. institutions that already is certified for such participation. In accordance with applicable law, the DOE will be required to rescind the letters of credit and related requirements if the Company and its U.S. institutions demonstrate that they satisfy the standards of financial responsibility, using accounting treatments that are acceptable to the DOE. The Company changed its accounting to eliminate deferred direct marketing costs from its financial statements and during discussions with the DOE, provided additional information regarding the valuation of courseware and instructional materials at one of the recently acquired institutions where such valuation was questioned by the DOE. The DOE agreed that in the conduct of its next review of the financial responsibility of the Company and its U.S. institutions, the DOE will consider financial information reflecting the results of the Offering, as well as the 1997 audited financial statements of each entity. The Company intends to seek the DOE's review of the Company's and its U.S. institutions' audited 1997 financial statements and the Company's post-Offering financial information on an expedited basis in the spring of 1998. 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, $225,000, and $237,000 for the years ended December 31, 1994, 1995, 1996 and the nine months ended September 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, $56,000 and $57,000 for the years ended December 31, 1995, 1996 and the nine months ended September 30, 1996 and 1997, respectively. The Company has also entered into a stock subscription agreement with an employee, as discussed in Note 5. F-33 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) 13. EMPLOYEE BENEFIT PLAN The Company maintains a 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, $191,000 and $288,000, for the years ended December 31, 1994, 1995, 1996 and the nine months ended September 30, 1996 and 1997, respectively. 14. CHANGE IN ACCOUNTING METHODS Deferred Advertising Costs In December, 1993, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position No. 93-7 ("SOP"), "Reporting on Advertising Costs." The SOP generally requires advertising costs to be expensed as incurred. The SOP was effective for financial statements for fiscal years beginning after December 15, 1994. The Company adopted the SOP effective January 1, 1995. In adopting the SOP in 1995, the Company's total advertising costs were expensed as incurred in 1995, rather than deferred and amortized as in prior periods. In connection with adopting the SOP, the Company amortized approximately $951,000 of the deferred advertising cost balance as of December 31, 1994, in 1995 and also expensed advertising costs incurred in 1995 totaling $1,262,985. The SOP did not permit restatement of periods prior to January 1, 1995. In connection with the IPO (Note 15), the Company has restated its 1994 financial statement to expense all advertising costs as incurred. Deferred Direct Marketing Costs Direct marketing costs incurred related to the enrollment of new students were capitalized using the successful efforts method. Direct marketing costs include recruiting representatives' salaries, employee benefits and other direct costs. Direct marketing costs were amortized on a straight-line basis over a twelve month period beginning on the first day of the quarter following the expenditure. The Company adopted this method of accounting for deferred direct marketing costs effective January 1, 1995. In connection with the IPO (Note 15), the Company changed its accounting for deferred direct marketing costs to a more preferable method of expensing such marketing and advertising costs as incurred. The Company has restated the accompanying financial statements for all periods presented for such deferred direct marketing costs. 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 Act of 1933 to sell shares of its common stock in an initial public stock offering. The Company intends to repay outstanding revolving credit loans under its amended Credit Agreement (which totalled $26.6 million at September 30, 1997) and repay amounts owed to former owners of acquired businesses (which totalled $4.1 million at September 30, 1997). The unaudited pro forma balance sheet information gives effect to (i) the conversion of all outstanding shares of all series of preferred stock and accumulated dividends into common stock, (ii) the conversion of all classes of common stock into a new class of common stock and (iii) the exercise of all warrants. No other contemplated transactions in connection with the proposed offering are included in the unaudited pro forma balance sheet. F-34 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) In November 1997, the Company adopted, subject to stockholder approval, the 1998 Non-Employee Directors' Stock Option Plan, effective as of the consummation of the initial public offering. The plan provides for the Company to grant an option to purchase shares of common stock to directors. Each person who is a non-employee director on the effective date shall become a participant and shall be granted an option to purchase 5,000 shares of common stock. On an annual basis, as long as such director continues to serve as a director, he shall receive an option to purchase 3,000 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 3,000 shares of common stock. Each participant shall receive additional grants in subsequent years. Each option becomes exercisable in three equal annual installments and expires ten years from the date of grant. The Company has reserved 200,000 shares of common stock for issuance under the plan on the effective date. In November 1997, the Company adopted, subject to stockholder approval, the 1998 Employee Incentive Compensation Plan, effective as of the consummation of the initial public offering. The plan provides for the Company to grant stock options, stock appreciation rights, restricted stock, deferred stock and other awards (including stock bonus and performance awards) which are exercisable into shares of common stock to directors, officers, employees and consultants of the Company. The plan shall be administered by a committee of the board of directors which shall have the authority to determine the persons to receive awards, the type of awards to be issued, the number of shares of common stock to be covered by each award, and the terms and conditions. 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. The Company has reserved 600,000 shares of common stock for distribution pursuant to awards issued under the plan on the effective date. In November 1997, the Company adopted, subject to stockholder approval, the 1998 Employee Stock Purchase Plan effective April 1, 1998. The Plan provides for the issuance of up to 500,000 shares of common stock to be purchased by eligible employees of the Company through periodic offerings. Employees of the Company may purchase common stock through payroll deductions (not to exceed $20,000 per person within any calendar year) at 85% of the fair market value. Prior to consummation of the IPO, the Company will increase the number of authorized shares of common stock and complete a 7.473-for-1 stock split. F-35 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Career Education Corporation Hoffman Estates, Illinois We have audited the accompanying consolidated balance sheets of The Katharine Gibbs Schools, Inc. and subsidiaries (a wholly-owned subsidiary of K-III Communications Corporation) (the "Company") as of December 31, 1995 and 1996, and the related statements of consolidated operations, shareholder's deficiency, and consolidated cash flows for the period from March 7, 1994 to December 31, 1994, and for the years ended December 31, 1995 and 1996. 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 1995 and 1996, and the results of their operations and their cash flows for the period from March 7, 1994 to December 31, 1994, and for the years ended December 31, 1995 and 1996 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP New York, New York October 27, 1997 F-36 THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1996 (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1995 1996 ------- -------- ASSETS CURRENT ASSETS: Cash...................................................... $ 5,507 $ 6,296 Receivables: Students, net of allowance for doubtful accounts of approximately $520 and $433 at December 31, 1995 and 1996, respectively..................................... 1,464 1,067 Other................................................... 456 630 Prepaid expenses and other current assets................. 599 103 ------- -------- Total current assets.................................. 8,026 8,096 ------- -------- PROPERTY AND EQUIPMENT, Net................................. 3,995 4,082 ------- -------- OTHER ASSETS: Intangible assets, net.................................... 21,364 20,285 Investment in Perkins loan program, net................... 50 29 Other non-current assets.................................. 217 292 ------- -------- Total other assets.................................... 21,631 20,606 ------- -------- TOTAL ASSETS................................................ $33,652 $ 32,784 ======= ======== LIABILITIES AND SHAREHOLDER'S DEFICIENCY CURRENT LIABILITIES: Accounts payable.......................................... $ 1,605 $ 1,201 Accrued expenses.......................................... 2,117 2,312 Advance student payments.................................. 1,999 2,395 Deferred tuition revenue.................................. 1,727 1,072 Other current liabilities................................. 1,173 791 Current maturities of capital lease obligations........... 96 29 ------- -------- Total current liabilities............................. 8,717 7,800 ------- -------- NON-CURRENT LIABILITIES: Capital lease obligations, less current maturities........ 39 89 Payable to K-III Communications Corporation............... 26,679 26,851 Other non-current liabilities............................. 653 805 ------- -------- Total non-current liabilities......................... 27,371 27,745 ------- -------- COMMITMENTS AND CONTINGENCIES SHAREHOLDER'S DEFICIENCY: Common stock, $.01 par value; 1,000 shares authorized, 1,000 shares issued and outstanding...................... -- -- Accumulated deficit....................................... (2,436) (2,761) ------- -------- Total shareholder's deficiency........................ (2,436) (2,761) ------- -------- TOTAL LIABILITIES AND SHAREHOLDER'S DEFICIENCY.............. $33,652 $ 32,784 ======= ========
See notes to consolidated financial statements. F-37 THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED OPERATIONS FOR THE PERIOD FROM MARCH 7, 1994 TO DECEMBER 31, 1994, AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 (DOLLARS IN THOUSANDS)
1994 1995 1996 ------- ------- ------- REVENUES: Tuition and registration fees, net................. $18,142 $22,343 $25,831 Other, net......................................... 1,507 2,507 2,932 ------- ------- ------- Total revenues................................... 19,649 24,850 28,763 ------- ------- ------- OPERATING COSTS AND EXPENSES: Instruction........................................ 4,719 5,945 6,427 Selling, general and administrative................ 11,959 16,937 18,991 Depreciation and amortization...................... 1,804 2,400 2,235 Management fees charged by K-III Communications Corporation....................................... 159 354 397 ------- ------- ------- Total operating costs and expenses............... 18,641 25,636 28,050 ------- ------- ------- INCOME (LOSS) FROM OPERATIONS........................ 1,008 (786) 713 INTEREST EXPENSE..................................... 1,264 1,394 1,038 ------- ------- ------- NET LOSS............................................. $ (256) $(2,180) $ (325) ======= ======= =======
See notes to consolidated financial statements. F-38 THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES STATEMENTS OF SHAREHOLDER'S DEFICIENCY FOR THE PERIOD FROM MARCH 7, 1994 TO DECEMBER 31, 1994, AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 (DOLLARS IN THOUSANDS)
COMMON STOCK ------------- ACCUMULATED SHARES AMOUNT DEFICIT ------ ------ ----------- Balance at March 7, 1994.............................. 1,000 $ -- $ -- Net loss............................................ -- -- (256) ----- ----- ------- Balance at December 31, 1994.......................... 1,000 -- (256) Net loss............................................ -- -- (2,180) ----- ----- ------- Balance at December 31, 1995.......................... 1,000 -- (2,436) Net loss............................................ -- -- (325) ----- ----- ------- Balance at December 31, 1996.......................... 1,000 $ -- $(2,761) ===== ===== =======
See notes to consolidated financial statements. F-39 THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS FOR THE PERIOD FROM MARCH 7, 1994 TO DECEMBER 31, 1994, AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 (DOLLARS IN THOUSANDS)
1994 1995 1996 -------- ------- ------- OPERATING ACTIVITIES: Net loss.......................................... $ (256) $(2,180) $ (325) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization.................... 1,804 2,400 2,235 Changes in operating assets and liabilities: (Increase) decrease in: Accounts receivable--students.................. 5,986 463 397 Accounts receivable--other..................... (32) (195) (174) Prepaid expenses and other current assets...... (460) (121) 496 Other non-current assets....................... (134) (29) (75) Increase (decrease) in: Accounts payable and accrued expenses.......... 1,654 1,087 (209) Advance student payments and other current liabilities................................... (521) (1,158) 14 Deferred tuition revenue....................... (7,465) 639 (655) Other non-current liabilities.................. 454 199 152 -------- ------- ------- Net cash provided by operating activities... 1,030 1,105 1,856 -------- ------- ------- INVESTING ACTIVITIES: Purchases of property and equipment............... (2,151) (1,025) (1,157) Investment in Perkins loan program, net........... (4) 9 21 Payment for business acquired..................... (20,000) -- -- -------- ------- ------- Net cash used in investing activities....... (22,155) (1,016) (1,136) -------- ------- ------- FINANCING ACTIVITIES: Principal payments under capital lease obligations...................................... (51) (85) (103) Increase in payable to K-III Communications Corporation...................................... 25,013 1,666 172 -------- ------- ------- Net cash provided by financing activities... 24,962 1,581 69 -------- ------- ------- NET INCREASE IN CASH............................... 3,837 1,670 789 CASH, BEGINNING OF PERIOD.......................... -- 3,837 5,507 -------- ------- ------- CASH, END OF PERIOD................................ $ 3,837 $ 5,507 $ 6,296 ======== ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Business acquired: Fair value of assets acquired.................... $ 34,599 $ -- $ -- Liabilities assumed.............................. (14,599) -- -- -------- ------- ------- Cash paid for business acquired................... $ 20,000 $ -- $ -- ======== ======= ======= Interest paid..................................... $ 31 $ 26 $ 16 ======== ======= ======= NON-CASH INVESTING AND FINANCING ACTIVITIES-- Equipment acquired under capital lease obligations...................................... $ -- $ 57 $ 86 ======== ======= =======
See notes to consolidated financial statements. F-40 THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD FROM MARCH 7, 1994 TO DECEMBER 31, 1994, AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 (DOLLARS IN THOUSANDS) 1. DESCRIPTION OF THE BUSINESS AND GENERAL The Katharine Gibbs Schools, Inc. (which together with its subsidiaries is herein referred to as the "Company") is headquartered in New York, New York, and has wholly-owned subsidiary campuses in New York, New York; Melville, New York; Boston, Massachusetts; Montclair, New Jersey; Piscataway, New Jersey; Norwalk, Connecticut; and Providence, Rhode Island. The schools are private post-secondary vocational schools which are engaged in the instruction of business career education programs leading towards degrees or certificates of completion in secretarial arts, business administration, hospitality management, and hotel and restaurant management. On March 7, 1994, the operating assets and liabilities of the Company were acquired from Phillips Colleges, Inc. by The Katharine Gibbs Schools, Inc. (formerly K-III KG Holdings Corporation), a wholly-owned subsidiary of K-III Communications Corporation (the ultimate parent company, "K-III"). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation--The consolidated financial statements include the accounts of The Katharine Gibbs Schools, Inc. and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Concentration of Credit Risk--The Company extends unsecured credit for tuition to a significant portion of the students who are in attendance at the schools. A substantial portion of credit extended to students is repaid through the student's participation in Federally funded financial aid programs. The Company generally completes and approves the financial aid packet of each student who qualifies for financial aid prior to the student's beginning of 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, as amended ("Title IV Programs"). Approximately 46%, 62% and 63% of the Company's net revenue was collected from funds distributed under these programs during the period from March 7, 1994 to December 31, 1994, and for the years ended December 31, 1995 and 1996, respectively. Investment in Perkins Loan Program, Net--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. There is a 25% institutional matching requirement for Perkins loans. The Company carries its investment at cost, net of an allowance of $19 at December 31, 1995 and 1996. Marketing and Advertising Costs--Marketing and advertising costs are expensed as incurred. Marketing and advertising costs included in selling, general and administrative expenses were $2,849, $4,282 and $5,687 for the period from March 7, 1994 to December 31, 1994, and for the years ended December 31, 1995 and 1996, respectively. Property and Equipment, Net--Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are recognized utilizing the straight-line method over their useful F-41 THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE PERIOD FROM MARCH 7, 1994 TO DECEMBER 31, 1994, AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 (DOLLARS IN THOUSANDS) lives. Leasehold improvements are amortized over their useful lives or lease term, whichever is shorter. Improvements are capitalized while maintenance and repairs are expensed as incurred. The estimated useful lives and cost basis of property and equipment at December 31, 1995 and 1996, are as follows:
1995 1996 LIFE ------ ------ --------------- Building................................... $ 608 $ 633 31.5 years Furniture, fixtures and equipment.......... 4,040 5,194 5 to 7 years Leasehold improvements..................... 844 908 1.5 to 11 years ------ ------ Total at cost.............................. 5,492 6,735 Less accumulated depreciation and amortization.............................. 1,497 2,653 ------ ------ $3,995 $4,082 ====== ======
The cost of equipment acquired under capital leases was $256 and $143 at December 31, 1995 and 1996, respectively. Accumulated amortization of equipment acquired under capital leases was $138 and $18 at December 31, 1995 and 1996, respectively. Intangible Assets--Intangible assets include the excess of purchase price over net assets acquired resulting from the business acquisition described in Note 1. Intangible assets are being amortized on a straight-line basis over their estimated useful life. At December 31, 1995 and 1996, the cost basis and useful lives of intangible assets consist of the following:
1995 1996 LIFE ------- ------- -------- Excess of purchase price over net assets acquired...................................... $ 9,464 $ 9,464 40 years Trademarks..................................... 6,569 6,569 40 years Non-compete agreement.......................... 1,000 1,000 2 years Curriculum..................................... 7,038 7,038 12 years ------- ------- 24,071 24,071 Less accumulated amortization.................. 2,707 3,786 ------- ------- $21,364 $20,285 ======= =======
The recoverability of the carrying values of the excess of the purchase price over the net assets acquired and other intangible assets is evaluated quarterly to determine if an impairment in value has occurred. An impairment in value will be considered to have occurred when it is determined that the undiscounted future operating cash flows generated by the acquired business is not sufficient to recover the carrying values of such intangible assets. If it has been determined that an impairment in value has occurred, the excess of the purchase price over the net assets acquired and other intangible assets would be written down to an amount which will be equivalent to the present value of the future operating cash flows to be generated by the acquired business. Revenue Recognition--Revenue is derived primarily from courses taught at the schools. Tuition revenue is recognized ratably over the length of the applicable course. Textbook sales and other revenues are recognized as services are performed. If a student withdraws, future revenue would be reduced by the amount of refund due to the student. Refunds are calculated in accordance with Federal, state and accrediting agency standards. F-42 THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE PERIOD FROM MARCH 7, 1994 TO DECEMBER 31, 1994, AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 (DOLLARS IN THOUSANDS) Deferred Rent Obligations--Certain of the schools' facility 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 7 to 11 years. Rent expense recognized differs from the actual cash payments required to be made under these lease agreements. 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 assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results may differ from these estimates. In 1996, the Company recorded an adjustment to reduce certain liabilities established in prior periods, which decreased net loss by approximately $341. Fair Value of Financial Instruments--The fair value of financial instruments approximates carrying value. 3. INCOME TAXES The results of operations of the Company are included in the consolidated Federal income tax return of K-III. The income tax provision has been computed as if the Company filed a separate return. At December 31, 1996, the Company, on a stand-alone basis, had aggregate net operating loss carryforwards of approximately $4,200 for Federal and state income taxes. As a result of the disposition of the Company on May 31, 1997, as discussed in Note 8, K-III will retain all net operating losses up to the date of disposition. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. The components of the deferred income tax assets consist of the following at December 31, 1995 and 1996:
1995 1996 ----- ------ Allowance for doubtful accounts receivable........................ $ 212 $ 195 Book depreciation over tax depreciation........................... 6 136 Deferred rent obligations......................................... 292 352 Intangible assets................................................. 190 99 Operating loss carryforwards...................................... 1,200 1,675 Other............................................................. 493 250 ----- ------ Total deferred tax assets....................................... 2,393 2,707 Less valuation allowance.......................................... 2,393 2,707 ----- ------ Total............................................................. $ -- $ -- ===== ======
4. CAPITAL LEASE OBLIGATIONS The Company leases certain equipment under capital leases. The Company incurred interest expense related to these capital leases of $31, $26 and $16 for the period from March 7, 1994 to December 31, 1994, and for the years ended December 31, 1995 and 1996, respectively. F-43 THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE PERIOD FROM MARCH 7, 1994 TO DECEMBER 31, 1994, AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 (DOLLARS IN THOUSANDS) The future minimum payments on the obligations under capital leases as of December 31, 1996, are as follows: 1997................................................................ $ 37 1998................................................................ 37 1999................................................................ 37 2000................................................................ 31 2001................................................................ 5 ---- 147 Less portion applicable to interest at rates ranging from 5.18 percent to 10.38 percent........................................... 29 ---- Principal obligations under capital leases.......................... 118 Less current portion................................................ 29 ---- $ 89 ====
5. COMMITMENTS AND CONTINGENCIES Operating Leases--The Company rents seven of its eight administrative and classroom facilities and certain equipment under noncancellable operating leases. The facility leases require the Company to make monthly payments covering rent, taxes, insurance and maintenance costs and expire at various times through 2007. Rent expense under operating leases exclusive of taxes, insurance and maintenance of the facilities and equipment for the period from March 7, 1994 to December 31, 1994, and for the years ended December 31, 1995 and 1996, was approximately $2,804, $3,418 and $4,098, respectively. Future minimum lease payments under these noncancellable operating leases as of December 31, 1996, are approximately as follows: 1997............................. $ 3,646 1998............................. 3,590 1999............................. 3,611 2000............................. 3,690 2001............................. 3,295 2002 and thereafter.............. 7,441 ------- $25,273 =======
Litigation--The Company is subject to occasional lawsuits, investigations and claims arising out of the normal conduct of its business. Management does not believe the outcome of any of these legal actions and claims will have a material adverse impact on the Company's consolidated financial statements. Regulatory--Each of the Company's schools has Federal financial assistance programs which are subject to ongoing program reviews by the DOE, Title IV program audits by external auditors and state program audits by state agencies. Any regulatory violation could be the basis for the initiation of a suspension, limitation or termination proceeding against the Company. To minimize risks associated with noncompliance, the Company conducts periodic reviews of its schools' financial conditions. Changes in DOE funding of Federal student financial aid programs could impact the Company's ability to attract students. F-44 THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) FOR THE PERIOD FROM MARCH 7, 1994 TO DECEMBER 31, 1994, AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 (DOLLARS IN THOUSANDS) Each of the Company's schools 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 its two most recent fiscal years that result in a decline of more than 10% of the individual school's tangible net worth at the beginning of that two-year period, and not having cohort default rates on Federal student loans that equal or exceed 25% for three consecutive federal fiscal years, amongst others. At December 31, 1996, each of the Company's schools was in compliance with such requirements. 6. TRANSACTIONS WITH PARENT COMPANY The payable to K-III Communications Corporation includes a note payable to K-III of $13,865 and $11,413 as of December 31, 1995 and 1996, respectively. Interest accrues on the note payable at K-III's weighted average borrowing rate. Interest expense of $1,233, $1,368 and $1,022 on the note payable to K- III has been recorded for the period from March 7, 1994 to December 31, 1994, and for the years ended December 31, 1995 and 1996, respectively. The note payable to K-III is payable on demand, however, K-III has no intention of demanding payment in the next twelve months. The Company pays K-III management fees for costs and expenses incurred by K-III on behalf of the Company for certain services, including treasury, consulting, insurance, tax, financing and other services. 7. EMPLOYEE BENEFIT PLANS The Company participates in a K-III contributory profit sharing plan, established pursuant to the provisions of Section 401(k) of the Internal Revenue Code, that provides retirement benefits for eligible employees of the Company. This plan requires matching contributions to eligible employees. The Company's matching contributions were $0, $12, and $23 for the period from March 7, 1994 to December 31, 1994, and for the years ended December 31, 1995 and 1996, respectively. 8. SUBSEQUENT EVENTS On May 31, 1997, K-III sold 100% of the outstanding shares of capital stock of the Company to Career Education Corporation ("CEC") for approximately $20,000. The sales price is subject to certain adjustments. In connection with the sale, K-III also entered into a covenant not-to-compete agreement with CEC for proceeds totaling $7,000. The covenant not-to-compete restricts K-III's ability to own or operate certain types of post-secondary vocational schools for a period of five years. * * * * * * F-45 THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, 1996, AND MAY 31, 1997 (UNAUDITED, DOLLARS IN THOUSANDS)
JUNE 30, MAY 31, 1996 1997 ------- ------- ASSETS CURRENT ASSETS: Cash....................................................... $ 5,992 $ 1,157 Accounts receivable, net of allowance for doubtful accounts of approximately $668 and $607 at June 30, 1996, and May 31, 1997, respectively.................................... 1,495 2,987 Prepaid expenses and other current assets.................. 617 75 ------- ------- Total current assets..................................... 8,104 4,219 ------- ------- PROPERTY AND EQUIPMENT, net.................................. 4,082 3,901 ------- ------- OTHER ASSETS: Intangibles, net........................................... 20,751 19,830 Other noncurrent assets.................................... 259 60 ------- ------- Total other assets....................................... 21,010 19,890 ------- ------- TOTAL ASSETS................................................. $33,196 $28,010 ======= ======= LIABILITIES AND SHAREHOLDER'S DEFICIENCY CURRENT LIABILITIES: Current maturities of capital lease obligations............ $ 68 $ 83 Accounts payable........................................... 934 282 Accrued expenses........................................... 2,354 1,782 Deferred tuition revenue................................... 2,558 3,772 ------- ------- Total current liabilities................................ 5,914 5,919 ------- ------- NON-CURRENT LIABILITIES, net of current portion.............. 767 1,069 ------- ------- PAYABLE TO K-III COMMUNICATIONS CORPORATION.................. 29,754 23,170 ------- ------- COMMITMENTS AND CONTINGENCIES SHAREHOLDER'S DEFICIENCY: Common stock, $0.01 par value; 1,000 shares authorized, issued and outstanding at June 30, 1996, and May 31, 1997. -- -- Accumulated deficit........................................ (3,239) (2,148) ------- ------- Total shareholder's deficiency........................... (3,239) (2,148) ------- ------- TOTAL LIABILITIES AND SHAREHOLDER'S DEFICIENCY............... $33,196 $28,010 ======= =======
The accompanying notes are an integral part of these statements. F-46 THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996, AND FOR THE FIVE MONTHS ENDED MAY 31, 1997 (UNAUDITED, DOLLARS IN THOUSANDS)
JUNE 30, 1996 MAY 31, 1997 ------------- ------------ REVENUE: Tuition and registration fees, net................ $12,179 $11,606 Other, net........................................ 1,316 1,222 ------- ------- Total net revenue............................... 13,495 12,828 ------- ------- OPERATING COSTS AND EXPENSES: Instruction....................................... 3,247 3,029 Selling, general and administrative............... 9,261 8,028 Depreciation and amortization..................... 1,199 901 Management fees charged by K-III Communications Corporation...................................... 82 15 ------- ------- Total operating expenses........................ 13,789 11,973 ------- ------- Income (loss) from operations................... (294) 855 ------- ------- INTEREST EXPENSE.................................... 509 242 ------- ------- Income (loss) before provision for income taxes. (803) 613 PROVISION FOR INCOME TAXES.......................... -- -- ------- ------- NET INCOME (LOSS)................................... $ (803) $ 613 ======= =======
The accompanying notes are an integral part of these statements. F-47 THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1996, AND FOR THE FIVE MONTHS ENDED MAY 31, 1997 (UNAUDITED, DOLLARS IN THOUSANDS)
JUNE 30, MAY 31, 1996 1997 -------- ------- CASH FLOWS FROM OPERATING ACTIVITIES........................ $(1,436) $(1,057) -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment, net.................. (542) (134) -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase (decrease) in Payable to K-III Communications Corporation.............................................. 2,464 (3,948) -------- ------- NET INCREASE (DECREASE) IN CASH............................. 486 (5,139) CASH, beginning of period................................... 5,506 6,296 -------- ------- CASH, end of period......................................... $ 5,992 $ 1,157 ======== ======= NONCASH INVESTING AND FINANCING ACTIVITIES: Capital leases entered into for the purchase of equipment. $ 34 $ 158 ======== =======
The accompanying notes are an integral part of these statements. F-48 THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996, AND MAY 31, 1997 1. BASIS OF PRESENTATION The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of financial position and the results of operations and cash flows have been included, and the disclosures made are adequate to prevent the information presented from being misleading. Operating results for the six months ended June 30, 1996, and the five months ended May 31, 1997, are not necessarily indicative of the results that may be expected for the fiscal years ended December 31, 1996 and 1997. These financial statements should be read in conjunction with, and have been prepared in conformity with the accounting principles reflected in the financial statements and related notes of The Katharine Gibbs Schools, Inc. and Subsidiaries (the "Company") as of and for the year ended December 31, 1996. 2. SUBSEQUENT EVENTS On May 31, 1997, K-III Communications Corporation ("K-III"), the sole shareholder of the Company, sold 100% of the outstanding shares of capital stock of the Company to Career Education Corporation ("CEC") for approximately $20,000,000. The sales price is subject to certain adjustments. In connection with the sale, K-III also entered into a covenant not-to-compete agreement with CEC for proceeds totaling $7,000,000. The covenant not-to-compete restricts K-III's ability to own or operate certain types of postsecondary vocational schools for five years. 3. 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 the reported amounts of revenues and expenses during the reported period. Actual results could differ from these estimates. F-49 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors and Stockholders IAMD, Limited and Subsidiaries Chicago, Illinois We have audited the accompanying consolidated balance sheet of IAMD, LIMITED AND SUBSIDIARIES as of June 30, 1996, and the related consolidated statements of operations, stockholders' investment and cash flows for the year then ended. 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of IAMD, Limited and Subsidiaries as of June 30, 1996, and the consolidated results of its operations and cash flows for the year then ended, in conformity with generally accepted accounting principles. As explained in Note 9 to the consolidated financial statements, the Company has given retroactive effect to the change in accounting for deferred marketing costs. Gleeson, Sklar, Sawyers & Cumpata LLP Skokie, Illinois August 16, 1996 (except for Notes 4, 8 and 9, as to which the date is October 23, 1997) F-50 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of IAMD, Limited and Subsidiaries: We have audited the accompanying consolidated balance sheet of IAMD, LIMITED (an Illinois Corporation) AND SUBSIDIARIES as of June 30, 1997, and the related consolidated statements of operations, stockholders' investment and cash flows for the year then ended. 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all materials respects, the financial position of IAMD, Limited and Subsidiaries as of June 30, 1997, and the results of their operations and their cash flows for the year ended, in conformity with generally accepted accounting principles. Arthur Andersen LLP Chicago, Illinois September 16, 1997 F-51 IAMD, LIMITED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1996 AND 1997
1996 1997 ----------- ----------- ASSETS CURRENT ASSETS: Cash............................................... $ 407,432 $ 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........................... 968,670 712,764 ----------- ----------- PROPERTY AND EQUIPMENT, net.......................... 658,389 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 ----------- ----------- COMMITMENTS AND CONTINGENCIES 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 Stockholders' 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-52 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 4,523,813 General and administrative.......................... 1,954,283 2,994,915 Depreciation and amortization....................... 304,339 679,318 ---------- ----------- Total operating expenses.......................... 6,396,355 8,198,046 ---------- ----------- Loss from operations.............................. (51,129) (705,361) OTHER EXPENSES: Interest expense.................................... 95,072 288,301 Loss on sale of property............................ -- 15,769 ---------- ----------- Total other expenses.............................. 95,072 304,070 ---------- ----------- 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-53 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.............................. (78,797) (281,076) Loss on sale of property........................... -- 15,769 Changes in operating assets and liabilities-- Receivables, net................................. (16,966) 64,401 Refundable income taxes.......................... -- (180,749) Inventories...................................... 12,840 (16,014) Prepaid expenses and other current assets........ (22,734) 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...... 355,395 148,364 --------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment, net............. (103,629) (1,418,111) --------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under long-term debt...................... 30,000 1,417,904 Payments on long-term debt........................... (251,028) (529,720) --------- ----------- Net cash (used in) provided by financing activities.................................... (221,028) 888,184 --------- ----------- NET INCREASE (DECREASE) IN CASH........................ 30,738 (381,563) CASH, BEGINNING OF YEAR................................ 376,694 407,432 --------- ----------- CASH, END OF YEAR...................................... $ 407,432 $ 25,869 ========= =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for-- Interest........................................... $ 85,428 $ 261,143 Taxes.............................................. 85,218 7,669 ========= =========== Noncash financing activities-- Acquisition of property and equipment in exchange for issuance of long term debt.................... $ 101,164 $ -- Acquisition of machinery and equipment under capital leases.................................... -- 26,098 Distribution of stockholders' notes receivable..... -- 143,850 ========= ===========
The accompanying notes are an integral part of these statements. F-54 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-55 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 net 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-56 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 and amortization............................ 1,462,869 2,161,532 ---------- ---------- Property and equipment, net.............. $ 658,389 $1,407,511 ========== ==========
The gross cost of assets recorded under capital leases included above amounted to approximately $81,000 at June 30, 1997. 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. FINANCIAL INSTRUMENTS The carrying value for current assets and liabilities reasonably approximates their fair value due to their short maturity periods. Cash deposits at individual banks are insured by the Federal Deposit Insurance Corporation up to $100,000. 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. F-57 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 (8.25% and 8.5% at June 30, 1996 and 1997, respectively).. $400,000 $ 700,000 Bank note payable in monthly principal and interest in- stallments of $2,104, through December 1998, bearing interest at 9.25%.......... 55,973 36,919 Bank note payable in monthly principal and interest in- stallments of $12,213, through April 1998, bearing interest at 9.25%............. 256,128 137,890 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%............ 129,080 95,807 Bank note payable in monthly principal and interest in- stallments of $805, through March 1999, bearing interest at 16.21%............ 21,338 15,838 Bank note payable in monthly principal and interest in- stallments of $1,004 through June 2000, bearing interest at 18.87%............. 33,661 -- Bank note payable in monthly principal and interest in- stallments of $1,356 through March 1997, bearing interest at 13.85%............ 10,647 -- Capital lease obligations-interest ranging from 10.6% to 15.9%, expiring through 1999.............................................. 39,344 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 (8.25% and 8.5% at June 30, 1996 and 1997, respectively). The maximum permitted borrowings under the line of credit at June 30, 1996 and 1997 were $400,000 and $700,000, respectively. 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). F-58 IAMD, LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1996 AND 1997 4. STOCKHOLDERS' INVESTMENT PREFERRED STOCK Holders of preferred stock are entitled to cumulative dividends at a rate of 18% but do not retain any voting rights. The Company may call preferred stock at any time after October 1992, at par plus accumulated dividends in arrears. As of June 30, 1996 and 1997, the accumulated dividends in arrears totaled approximately $114,000 and $137,000, respectively. 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 an increase 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's institutions are 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, not having cumulative net operating losses during the two 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, collecting less than 85% of its revenues from Title IV funds on an annual basis, and not having cohort default rates on federal student loans that equal or exceed 25% for three consecutive federal fiscal years, among others. At June 30, 1997, the Company's institutions were not in compliance with some 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 $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-59 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........................................... $ 10,255 $ (68,898) State and local................................... 14,807 (39,626) -------- --------- Total current................................... 25,062 (108,524) -------- --------- Deferred-- Federal........................................... (66,977) (238,914) State and local................................... (11,820) (42,162) -------- --------- Total deferred.................................. (78,797) (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-60 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 assets........................... $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 $0 and $35,000 in 1996 and 1997, respectively. 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. 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 F-61 IAMD, LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1996 AND 1997 and stockholders' investment as of June 30, 1996 to reflect the change in this method. The effect of this change was to increase the accumulated deficit by approximately $136,000, net of a deferred tax benefit of $91,000 as of June 30, 1995. 10. 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-62 AUDITORS' REPORT To the Stockholders of International Academy of Merchandising & Design (Canada) Ltd.: We have audited the balance sheet of International Academy of Merchandising & Design (Canada) Ltd. as at August 31, 1996, and the statements of operations, stockholders' equity and cash flows for the year then ended. 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 audit. We conducted our audit 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 audit provides 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 International Academy of Merchandising & Design (Canada) Ltd. as of August 31, 1996, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles in the United States. Price Waterhouse Chartered Accountants Toronto, Canada October 11, 1996 F-63 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of International Academy of Merchandising & Design (Canada) Ltd.: We have audited the accompanying consolidated balance sheet of INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (CANADA) LTD. (an Ontario corporation) AND SUBSIDIARY as of June 30, 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for the ten 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 audit. We conducted our audit 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 audit provides 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 International Academy of Merchandising & Design (Canada) Ltd. and Subsidiary as of June 30, 1997, and the results of their operations and their cash flows for the ten months ended June 30, 1997, in conformity with generally accepted accounting principles in the United States. Arthur Andersen LLP Chicago, Illinois September 17, 1997 F-64 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-65 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-66 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-67 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-68 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 since they are included in the total in both periods. 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. 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 significant portion of the Company's students receive financial assistance from both federal and provincial financial aid programs which is used to repay the credit granted to the students. Student financial assistance is received by the students in the form of either loans or bursaries administered by the ministries of education of the provinces. The total financial assistance received from all Canadian sources amounted to 75% and 79% of the Company's net revenue for the year ended August 31, 1996 and ten months ended June 30, 1997, respectively. 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 August 31, 1996 and June 30, 1997. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is recognized utilizing an accelerated method. 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 F-69 INTERNATIONAL ACADEMY OF MERCHANDISING & DESIGN (CANADA) LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) betterments are expensed as incurred; major 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 and amortization............................. 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. 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. 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-70 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 chartered 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-71 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% (29.1)% Provincial income taxes, net of federal benefit...... 15.2 (13.2) Permanent difference and other....................... (1.9) 7.2 ---- ----- 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-72 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 In fiscal 1997, the Company identified an employee who misappropriated corporate funds totalling approximately $87,000. The individual resigned from the Company. The loss associated with this activity resulted in a reduction of operating income in fiscal 1997. 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. F-73 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Phillips Educational Group of Portland, Inc.: We have audited the accompanying statements of operations and cash flows for the nine months and twenty-one days ended October 21, 1996 of WESTERN CULINARY INSTITUTE (a division of Phillips Educational Group of Portland, Inc., a wholly owned subsidiary of Phillips Colleges, Inc.). 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the Western Culinary Institute results of operations and cash flows for the nine months and twenty-one days ended October 21, 1996 in conformity with generally accepted accounting principles. As discussed in Notes 8 and 9, on October 21, 1996, the assets and certain liabilities of the Western Culinary Institute were sold in accordance with provisions of the agreements with Phillips Colleges, Inc., the U.S. Department of Education, U.S. Department of Justice and various banks. ARTHUR ANDERSEN LLP Chicago, Illinois October 24, 1997 F-74 WESTERN CULINARY INSTITUTE STATEMENT OF OPERATIONS FOR THE NINE MONTHS AND TWENTY-ONE DAYS ENDED OCTOBER 21, 1996 REVENUE: Tuition and registration fees, net................................ $4,296,565 Other revenue, net................................................ 304,350 ---------- Total net revenue............................................... 4,600,915 ---------- OPERATING EXPENSES: Educational services and facilities............................... 697,345 General and administrative........................................ 2,032,711 Depreciation and amortization..................................... 17,736 Management fees to parent......................................... 1,443,970 ---------- Total operating expenses........................................ 4,191,762 ---------- Income from operations, before provision for income taxes....... 409,153 PROVISION FOR INCOME TAXES.......................................... 163,661 ---------- NET INCOME.......................................................... $ 245,492 ==========
The accompanying notes are an integral part of this statement. F-75 WESTERN CULINARY INSTITUTE STATEMENT OF CASH FLOWS FOR THE NINE MONTHS AND TWENTY-ONE DAYS ENDED OCTOBER 21, 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................................ $ 245,492 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization................................... 17,736 Changes in operating assets and liabilities resulting in an increase (decrease) in cash-- Student receivables........................................... (344,355) Inventories................................................... 18,652 Prepaid expenses and other current assets..................... (11,251) Accounts payable.............................................. (414,549) Accrued expenses.............................................. 35,709 Deferred tuition revenue and advance student payments......... 532,801 --------- Net cash provided by operating activities................... 80,235 --------- CASH FLOWS FROM FINANCING ACTIVITIES: Capital contribution from parent.................................. 76,999 --------- NET INCREASE IN CASH................................................ 157,234 CASH, beginning of period........................................... 77,217 --------- CASH, end of period................................................. $ 234,451 ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Approximate cash paid during the period for-- Interest........................................................ $ 1,000 Income taxes.................................................... $ -- =========
The accompanying notes are an integral part of this statement. F-76 WESTERN CULINARY INSTITUTE NOTES TO FINANCIAL STATEMENTS FOR THE NINE MONTHS AND TWENTY-ONE DAYS ENDED OCTOBER 21, 1996 1. DESCRIPTION OF THE BUSINESS Western Culinary Institute (the "Company" or the "School"), located in Portland, Oregon, is a private post-secondary vocational school that offers a degree in culinary arts. The Company is a division of Phillips Educational Group of Portland, Inc., a wholly owned subsidiary of Phillips Colleges, Inc. ("Phillips"). Phillips manages and operates educational institutions through its wholly owned subsidiaries. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONCENTRATION OF CREDIT RISK The Company extends unsecured credit for tuition to a significant portion of the students who are in attendance at the school. 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 the Higher Education Act of 1965 ("Title IV Programs"), as amended. Approximately 52% of the Company's net revenue was collected from Title IV Program funds during the nine months and twenty-one days ended October 21, 1996. The Company generally reviews 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 for federal student financial aid programs could impact the Company's ability to attract students. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is recognized utilizing the straight-line method over the estimated useful lives of the assets which range from three to eighteen years for financial reporting purposes and accelerated methods for income tax purposes. Leasehold improvements are amortized over the shorter of the estimated useful life of the asset or the lease term. Maintenance, repairs and minor renewals and betterments are expensed; major improvements are capitalized. MARKETING AND ADVERTISING COSTS Marketing and advertising costs are expensed as incurred. Marketing and advertising costs included in general and administrative expenses were $109,000 during the nine months and twenty-one days ended October 21, 1996. INCOME TAXES The Company files a consolidated federal income tax return with Phillips and state income tax returns with its Oregon affiliates. Liabilities related to the Company's current year taxable income are included in the capital contribution from Phillips during 1997 (Note 4). Current and deferred income taxes are allocated to the Company as if it were a separate taxpayer. There are no significant temporary differences and the Company's effective tax rate on a stand-alone basis is equal to its statutory rate of approximately 40%. 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 would be reduced by the amount of refund due to the student. Refunds are calculated in accordance with federal, state and accrediting agency standards. F-77 WESTERN CULINARY INSTITUTE NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 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 these estimates. 3. EMPLOYEE BENEFIT PLANS Prior to January 31, 1996, eligible employees of the Company participated in the Phillips Colleges, Inc. Employee Retirement Savings Plan (the "Plan"), a defined contribution plan. Effective January 31, 1996, the Plan was terminated by Phillips. The Plan was fully funded after termination and Plan assets were subsequently paid out to Plan participants. The Company made no contributions to the Plan during the nine months and twenty-one days ended October 21, 1996. 4. PHILLIPS' INVESTMENT The change in Phillips' investment in the Company for the nine months and twenty-one days ended October 21, 1996 consists of the following: Balance, January 1, 1996...................................... $(374,606) Net income for the period..................................... 245,492 Capital contribution from parent.............................. 76,999 --------- Balance, October 21, 1996..................................... $ (52,115) =========
The Company had a net receivable due from Phillips of $648,089 at December 31, 1995, for which no formal note agreement exists. The realizability of this amount is uncertain given the insolvency of Phillips (Note 8) and, therefore, its amount has been recorded as a reduction in Phillips' investment in the Company at January 1, 1996. Phillips' investment in the Company has not been reduced for any contingent liabilities described in Note 7 or 8. 5. RELATED-PARTY TRANSACTIONS The Company pays management fees to Phillips for certain administrative services provided. Management fees charged to the Company by Phillips during the nine months and twenty-one days ended October 21, 1996 were $1,443,970. 6. OPERATING LEASES The Company leases its administrative and classroom facilities under two operating leases which expire July 31, 1997 and October 31, 1998. Rent expense under these agreements for the nine months and twenty-one days ended October 21, 1996, was approximately $256,000. Future minimum lease payments under these leases as of October 21, 1996, are approximately as follows: Remainder of 1996............... $ 58,000 1997............................ 199,000 1998............................ 56,000 -------- $313,000 ========
F-78 WESTERN CULINARY INSTITUTE NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 7. COMMITMENTS AND CONTINGENCIES REGULATORY The Company is 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 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 and other regulatory standards must be complied with in order to qualify to participate in Title IV programs. Under such standards, the school 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, (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 Company's tangible net worth at the beginning of that two-year period, (iv) collect less than 85% of its education revenues from Title IV funds on an annul basis, and (v) not have cohort default rates on federal student loans that equal or exceed 25% for three consecutive federal fiscal years, among others. The DOE may measure the above financial standards on a school-by-school basis or on a corporate consolidated basis. Any regulatory violation could be the basis for the initiation of a suspension, limitation or termination proceeding against the Company. In order to operate and award degrees, diplomas and certificates and to participate in the Title IV Programs in the U.S., a school must be licensed or authorized to offer its programs of instruction by the relevant agency of the state in which such school is located. The Company 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. The Company is accredited by at least one accrediting agency recognized by the DOE. TERMINATION OF TITLE IV FUNDING A notice of intent to terminate the availability of Title IV funding to Phillips was issued by the DOE on August 18, 1995. This notice resulted from the expiration of the Financial Responsibility Agreement between Phillips and the DOE and the subsequent claim by the DOE that Phillips failed to meet the acid test ratio required by the current financial responsibility regulations. Additionally, Phillips received a decision on an administrative appeal made to the Secretary of Education which resulted in an assessment of liability related to commissioned sales practices by Phillips' colleges during the period from 1987 to 1991 in the amount of approximately $114 million. The total assessed liability of approximately $114 million related to the commissioned sales issue has been recorded as a corporate liability in Phillips' financial statements as of December 31, 1995. 8. ORDERLY SALE OF ASSETS On October 11, 1996, Phillips reached agreements with the DOE, U.S. Department of Justice and various banks which called for the orderly sale or closure of all schools owned by Phillips by December 31, 1996. The agreements require that upon sale of a school, one-third of the net proceeds from the sale of the assets of the school, as defined, be distributed to the DOE and two-thirds distributed to banks which had outstanding obligations to Phillips totaling $8.2 million at October 11, 1996. In addition, Phillips had letters of credit totaling approximately $1.7 million at October 11, 1996. The proceeds distributed to the DOE are to be applied to the commissioned sales liability. The terms of the agreement provide that prospective buyers of Phillips colleges would not be required to assume any portion of the commissioned sales liability as a trailing liability. F-79 WESTERN CULINARY INSTITUTE NOTES TO FINANCIAL STATEMENTS--(CONTINUED) At October 21, 1996, all assets of the Company and Phillips other schools are pledged as collateral under the debt agreement entered into by Phillips. In addition, each of Phillips' subsidiaries have guaranteed, jointly and severally, the payment of amounts outstanding under the bank agreement. 9. SUBSEQUENT EVENTS On October 21, 1996, Phillips sold certain assets and liabilities of the Company to WCI Acquisition, Ltd., a wholly owned subsidiary of Career Education Corporation ("CEC"), for a sales price, subject to certain adjustments, of approximately $8,000,000. Simultaneously with the purchase, WCI Acquisition, Ltd. changed its name to Western Culinary Institute, Inc. In connection with the sale, Phillips also entered into a covenant not-to-compete agreement with CEC for proceeds totaling $400,000. The covenant not-to-compete restricts Phillips from owning or operating certain types of post-secondary vocational schools for four years. In connection with the sale, the net proceeds were distributed in accordance with the agreements disclosed in Note 8. F-80 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 November 19, 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 nine months ended September 30, 1997...... 455 517 431 1,403
S-2 [INSIDE BACK COVER] MAP OF NORTH AMERICA WITH LOGOS OF THE COMPANY AND ITS SCHOOLS SUPERIMPOSED ON THE MAP, INDICATING THE LOCATION OF EACH CAMPUS. BELOW THE MAP ARE THE LOGOS, FULL NAMES AND ADDRESSES OF EACH OF THE SCHOOLS AND THEIR CAMPUSES. - -------------------------------------------------------------------------------- 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, THE 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.......................................................... 21 Use of Proceeds........................................................... 22 Dividend Policy........................................................... 22 Capitalization............................................................ 23 Dilution.................................................................. 24 Unaudited Pro Forma Condensed Consolidated Financial Data................. 25 Selected Historical Consolidated Financial and Other Data................. 30 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 32 Business.................................................................. 40 Financial Aid and Regulation.............................................. 54 Management................................................................ 67 Certain Relationships and Related Transactions............................ 77 Security Ownership of Certain Beneficial Owners and Management............ 78 Description of Capital Stock.............................................. 79 Shares Eligible for Future Sale........................................... 81 Underwriting.............................................................. 83 Notice to Canadian Residents.............................................. 84 Legal Matters............................................................. 85 Experts................................................................... 85 Additional Information.................................................... 86 Index to Financial Statements............................................. F-1 Financial Statement Schedule.............................................. S-1
----------- UNTIL , 1998 (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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- [LOGO OF CAREER EDUCATION CORPORATION] 2,850,000 Shares Common Stock PROSPECTUS CREDIT SUISSE FIRST BOSTON SALOMON SMITH BARNEY - -------------------------------------------------------------------------------- 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.
AMOUNT* ---------- Securities and Exchange Commission registration fee........... $ 16,989 NASD filing fee............................................... 6,107 Nasdaq National Market application fee........................ 50,000 Accountants' fees and expenses................................ 1,000,000 Blue Sky fees and expenses.................................... 5,000 Legal fees and expenses....................................... 600,000 Transfer Agent and Registrar fees and expenses................ 15,000 Printing and engraving........................................ 150,000 Miscellaneous expenses........................................ 156,904 ---------- Total..................................................... $2,000,000 ==========
- -------- *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. Each of the sales of securities described above is claimed to be exempt from registration with the Securities and Exchange Commission pursuant to Section 4(2) of the Securities Act as transactions by an issuer not involving any public offering, in that the transactions involved the issuance and sale by the Company of its securities to financially sophisticated institutions or individuals who represented that they took such securities for investment for their own account and not for distribution and understood the ramifications of the same. All certificates representing the securities issued in each of the sales of unregistered securities have been legended. 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 Form of 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.
II-3 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 1998 Employee Incentive Compensation Plan. 10.4 Forms of Option Agreements under the Registrant's 1998 Employee Incentive Compensation Plan. 10.5 Career Education Corporation 1998 Non-Employee Directors' Stock Option Plan. 10.6 Form of Option Agreement under the Registrant's 1998 Non- Employee Directors' Stock Option Plan. 10.7 Career Education Corporation 1998 Employee Stock Purchase Plan. 10.8 Amended and Restated Option Agreement dated as of July 31, 1995, between the Registrant and John M. Larson, and Amendment thereto dated as of October 20, 1997. 10.9+ Supplemental Option Agreement dated July 31, 1995, between the Registrant and John M. Larson. 10.10 Amended and Restated Option Agreement dated as of July 31, 1995, between the Registrant and Robert E. Dowdell, and Amendment thereto dated as of October 20, 1997. 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., and Amendment No. 1 thereto. 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 between the Registrant and Heller Equity Capital Corporation. 10.24 Form of Agreement between the Registrant and Heller Equity Capital Corporation, regarding designation of directors of the Registrant. 11 Statement regarding computation of per share earnings.
II-4 21+ Subsidiaries of the Registrant. 23.1 Consent of Arthur Andersen LLP with respect to financial statements of Career Education Corporation and Subsidiaries. 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 23.4 Consent of Arthur Andersen LLP with respect to the financial statements of Western Culinary Institute (a division of Phillips Educational Group of Portland, Inc., a wholly owned subsidiary of Phillips Colleges, Inc.). 23.5 Consent of Arthur Andersen LLP with respect to the financial statements of IAMD, Limited and Subsidiaries. 23.6 Consent of Arthur Andersen LLP with respect to the financial statements of International Academy of Merchandising and Design (Canada), Ltd. and Subsidiary. 23.7 Consent of Gleeson, Sklar, Sawyers and Cumpata LLP with respect to the financial statements of IAMD, Limited and Subsidiaries. 23.8 Consent of Price Waterhouse with respect to the financial statements of International Academy of Merchandising and Design (Canada), Ltd. and Subsidiary. 23.9 Consent of Deloitte & Touche LLP with respect to the financial statements of The Katharine Gibbs Schools, Inc. and subsidiaries. 23.10 Consent of Keith K. Ogata. 24+ Power of Attorney. 27+ Financial Data Schedule.
- -------- +Previously filed as part of this Registration Statement. *To be filed by amendment.
PAGE (b) FINANCIAL STATEMENT SCHEDULES. ---- 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 AMENDMENT NO. 2 TO THE 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 31ST DAY OF DECEMBER, 1997. Career Education Corporation /s/ William A. Klettke By: _________________________________ William A. Klettke Senior Vice President PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED ON DECEMBER 31, 1997.
SIGNATURE TITLE --------- ----- * 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) * Director ___________________________________________ Robert E. Dowdell * Director ___________________________________________ Wallace O. Laub * Director ___________________________________________ Patrick K. Pesch * Director ___________________________________________ Scott D. Steele * Director ___________________________________________ Todd Steele
/s/ William A. Klettke *By: ________________________________ William A. Klettke Attorney-in-fact II-6 INDEX TO EXHIBITS
EXHIBIT NUMBER DOCUMENT DESCRIPTION ------- -------------------- 1 Form of Underwriting Agreement. 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 Form of specimen stock certificate representing Common Stock. 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 1998 Employee Incentive Compensation Plan. 10.4 Forms of Option Agreements under the Registrant's 1998 Employee Incentive Compensation Plan. 10.5 Career Education Corporation 1998 Non-Employee Directors' Stock Option Plan. 10.6 Form of Option Agreement under the Registrant's 1998 Non- Employee Directors' Stock Option Plan. 10.7 Career Education Corporation 1998 Employee Stock Purchase Plan. 10.8 Amended and Restated Option Agreement dated as of July 31, 1995, between the Registrant and John M. Larson, and Amendment thereto dated as of October 20, 1997. 10.10 Amended and Restated Option Agreement dated as of July 31, 1995, between the Registrant and Robert E. Dowdell, and Amendment thereto dated as of October 20, 1997. 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. 10.24 Form of Agreement between the Registrant and Heller Equity Capital Corporation, regarding designation of directors of the Registrant. 11 Statement regarding computation of per share earnings. 23.1 Consent of Arthur Andersen LLP with respect to financial statements of Career Education Corporation and Subsidiaries. 23.4 Consent of Arthur Andersen LLP with respect to the financial statements of Western Culinary Institute (a division of Phillips Educational Group of Portland, Inc., a wholly owned subsidiary of Phillips Colleges, Inc.). 23.5 Consent of Arthur Andersen LLP with respect to the financial statements of IAMD, Limited and Subsidiaries. 23.6 Consent of Arthur Andersen LLP with respect to the financial statements of International Academy of Merchandising and Design (Canada), Ltd. and Subsidiary. 23.7 Consent of Gleeson, Sklar, Sawyers and Cumpata LLP with respect to the financial statements of IAMD, Limited and Subsidiaries. 23.8 Consent of Price Waterhouse with respect to the financial statements of International Academy of Merchandising and Design (Canada), Ltd. and Subsidiary. 23.9 Consent of Deloitte & Touche LLP with respect to the financial statements of The Katharine Gibbs Schools, Inc. and subsidiaries. 23.10 Consent of Keith K. Ogata.
EX-1 2 FORM OF UNDERWRITING AGREEMENT Exhibit 1 Draft: December 29, 1997 2,850,000 Shares CAREER EDUCATION CORPORATION Common Stock, $.01 par value UNDERWRITING AGREEMENT ---------------------- ________, 1998 Credit Suisse First Boston Corporation Smith Barney Inc. As Representatives of the Several Underwriters, c/o Credit Suisse First Boston Corporation Eleven Madison Avenue New York, N.Y. 10010-3629 Ladies and Gentlemen: 1. Introductory. Career Education Corporation, a Delaware corporation ("Company"), proposes to issue and sell 2,850,000 shares of its Common Stock, $.01 par value ("Securities") (such 2,850,000 shares of Securities being hereinafter referred to as the "Firm Securities"). The Company also proposes to sell to the Underwriters, at the option of the Underwriters, an aggregate of not more than 401,238 additional shares of its Securities, and the stockholder listed in Schedule A hereto (the "Selling Stockholder") proposes to sell to the Underwriters, at the option of the Underwriters, an aggregate of not more than 26,262 additional outstanding shares of Securities, as set forth below (such 427,500 additional shares being hereinafter referred to as the "Optional Securities"). The Firm Securities and the Optional Securities are herein collectively called the "Offered Securities." The Company and the Selling Stockholder hereby agree with the several Underwriters named in Schedule B hereto ("Underwriters") as follows: 2. Representations and Warranties of the Company and the Selling Stockholder. (a) The Company represents and warrants to, and agrees with, the several Underwriters that: (i) A registration statement (No. 333-37601) relating to the Offered Securities, including a form of prospectus, has been filed with the Securities and Exchange Commission ("Commission") and either (A) has been declared effective under the Securities Act of 1933, as amended ("Act"), and is not proposed to be amended or (B) is proposed to be amended by amendment or post-effective amendment. If such registration statement (the "initial registration statement") has been declared effective, either (A) an additional registration statement (the "additional registration statement") relating to the Offered Securities may have been filed with the Commission pursuant to Rule 462(b) ("Rule 462(b)") under the Act and, if so filed, has become effective upon filing pursuant to such Rule, and the Offered Securities all have been duly registered under the Act pursuant to the initial registration statement and, if applicable, the additional registration statement, or (B) such an additional registration statement is proposed to be filed with the Commission pursuant to Rule 462(b) and will become effective upon filing pursuant to such Rule and, upon such filing, the Offered Securities will all have been duly registered under the Act pursuant to the initial registration statement and such additional registration statement. If the Company does not propose to amend the initial registration statement or if an additional registration statement has been filed and the Company does not propose to amend it, and if any post-effective amendment to either such registration statement has been filed with the Commission prior to the execution and delivery of this Agreement, the most recent amendment (if any) to each such registration statement has been declared effective by the Commission or has become effective upon filing pursuant to Rule 462(c) ("Rule 462(c)") under the Act or, in the case of the additional registration statement, Rule 462(b). For purposes of this Agreement, "Effective Time" with respect to the initial registration statement or, if filed prior to the execution and delivery of this Agreement, the additional registration statement means (A) if the Company has advised the Representatives that it does not propose to amend such registration statement, the date and time as of which such registration statement, or the most recent post-effective amendment thereto (if any) filed prior to the execution and delivery of this Agreement, was declared effective by the Commission or has become effective upon filing pursuant to Rule 462(c), or (B) if the Company has advised the Representatives that it proposes to file an amendment or post-effective amendment to such registration statement, the date and time as of which such registration statement, as amended by such amendment or post-effective amendment, as the case may be, is declared effective by the Commission. If an additional registration statement has not been filed prior to the execution and delivery of this Agreement but the Company has advised the Representatives that it proposes to file one, "Effective Time" with respect to such additional registration statement means the date and time as of which such registration statement is filed and becomes effective pursuant to Rule 462(b). "Effective Date" with respect to the initial registration statement or the additional registration statement (if any) means the date of the Effective Time thereof. The initial registration statement, as amended at its Effective Time, including all information contained in the additional registration statement (if any) and deemed to be a part of the initial registration statement as of the Effective Time of the additional registration statement pursuant to the General Instructions of the Form on which it is filed and including all information (if any) deemed to be a part of the initial registration statement as of its Effective Time pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act, is hereinafter referred to as the "Initial Registration Statement." The additional registration statement, as amended at its Effective Time, including the contents of the initial registration statement incorporated by reference therein and including all -2- information (if any) deemed to be a part of the additional registration statement as of its Effective Time pursuant to Rule 430A(b), is hereinafter referred to as the "Additional Registration Statement." The Initial Registration Statement and the Additional Registration Statement are hereinafter referred to collectively as the "Registration Statements" and individually as a "Registration Statement." The form of prospectus relating to the Offered Securities, as first filed with the Commission pursuant to and in accordance with Rule 424(b) ("Rule 424(b)") under the Act or (if no such filing is required) as included in a Registration Statement, is hereinafter referred to as the "Prospectus." No document has been or will be prepared or distributed in reliance on Rule 434 under the Act. (ii) If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement: (A) on the Effective Date of the Initial Registration Statement, the Initial Registration Statement conformed in all material respects to the requirements of the Act and the rules and regulations of the Commission ("Rules and Regulations") and did not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, (B) on the Effective Date of the Additional Registration Statement (if any), each Registration Statement conformed or will conform, in all material respects to the requirements of the Act and the Rules and Regulations and did not include, or will not include, any untrue statement of a material fact and did not omit, or will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and (C) on the date of this Agreement, the Initial Registration Statement and, if the Effective Time of the Additional Registration Statement is prior to the execution and delivery of this Agreement, the Additional Registration Statement each conforms, and at the time of filing of the Prospectus pursuant to Rule 424(b) or (if no such filing is required) at the Effective Date of the Additional Registration Statement in which the Prospectus is included, each Registration Statement and the Prospectus will conform, in all material respects to the requirements of the Act and the Rules and Regulations, and none of such documents includes, or will include, any untrue statement of a material fact or omits, or will omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. If the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement: on the Effective Date of the Initial Registration Statement, the Initial Registration Statement and the Prospectus will conform in all material respects to the requirements of the Act and the Rules and Regulations, neither of such documents will include any untrue statement of a material fact or will omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and no Additional Registration Statement has been or will be filed. The two preceding sentences do not apply to statements in or omissions from a Registration Statement or the Prospectus based upon written information furnished to the Company by the Selling Stockholder or by any Underwriter through the Representatives specifically for use -3- therein, it being understood and agreed that the only such information furnished by any Underwriter is that described as such in Section 7(c) hereof. (iii) The Company has been duly incorporated and is an existing corporation in good standing under the laws of the State of Delaware, with corporate power and authority to own its properties and conduct its business as described in the Prospectus; and the Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification, except for failures to be so qualified and in good standing that, individually or in the aggregate, would not have, or reasonably be likely to have, a material adverse effect on the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries, taken as a whole (a "Material Adverse Effect"). (iv) Each of the subsidiaries of the Company listed in Schedule A hereto (the "Material Subsidiaries") has been duly incorporated and is an existing corporation in good standing under the laws of the jurisdiction of its incorporation, with corporate power and authority to own its properties and conduct its business as described in the Prospectus; and each Material Subsidiary of the Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification, except for failures to be so qualified or in good standing that, individually or in the aggregate, would not have, or reasonably be likely to have, a Material Adverse Effect; all of the issued and outstanding capital stock of each Material Subsidiary of the Company has been duly authorized and validly issued and is fully paid and nonassessable; and the capital stock of each Material Subsidiary is owned by the Company, directly or through subsidiaries, free from any mortgage, pledge, lien, security interest, claim, encumbrance or other defect of any kind, except any of the foregoing that has been or will be granted under the Credit Agreement (as defined in the Prospectus); and, there are no rights granted to or in favor of any third party (whether acting in an individual, fiduciary or other capacity) other than the Company to acquire such capital stock, any additional capital stock or any other securities of any such Material Subsidiary. The subsidiaries of the Company that are not Material Subsidiaries do not, in the aggregate, constitute a "significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X under the Act. (v) The Offered Securities (other than the Optional Securities offered by the Selling Stockholder) have been duly authorized and will be, when issued and paid for in accordance with this Agreement, validly issued, fully paid and nonassessable and no further approval or authorization of the stockholders or the Board of Directors of the Company is or will be required for the issuance and sale of the Firm Securities as contemplated by this Agreement; on each Closing Date (as defined below), all other outstanding shares of capital stock of the Company will be duly authorized, validly issued, fully paid and nonassessable and will have been issued in compliance with applicable -4- federal and state securities laws; the authorized and outstanding capital stock of the Company on each Closing Date will conform to the descriptions thereof contained in the Prospectus under the captions "Capitalization" and "Description of Capital Stock;" and on each Closing Date the stockholders of the Company will have no preemptive or similar rights with respect to the Offered Securities or any other securities of the Company. (vi) Except as described in the Prospectus, there are no contracts, agreements or understandings between the Company and any person that would give rise to a valid claim against the Company or any Underwriter for a brokerage commission, finder's fee or other like payment in connection with this Agreement. (vii) Except as described in the Prospectus, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to a Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act. (viii) The Securities have been approved for listing subject to notice of issuance on the Nasdaq National Market. (ix) Except as described in the Prospectus, no consent, approval, authorization or order of, or filing with, any governmental agency or body or any court is required to be obtained or made by the Company for the consummation of the transactions contemplated by this Agreement or described in the Prospectus under the caption "The Transactions," except such as have been, or will be, obtained or made on or prior to First Closing Date. (x) The execution, delivery and performance by the Company of this Agreement and the agreements, documents or instruments entered into by the Company in connection with the transactions described in the Prospectus under the caption "The Transactions" and the consummation by the Company of the transactions contemplated herein or described in the Prospectus under the caption "The Transactions" have been duly authorized by all necessary corporate action on the part of the Company and, to the extent required, its stockholders and do not and will not conflict with or result in a breach or violation of any of the terms and provisions of, and do not and will not constitute a default (or an event which with the giving of notice or the lapse of time or both would constitute a default) under, and do not and will not result in the creation or imposition of any lien, charge or encumbrance upon any assets, properties or operations of the Company or any of its subsidiaries (including any individual institution within such entity ("subsidiaries")) under, (A) the charter, by-laws or other organizational documents of the Company or any such subsidiary, (B) any statute, rule, regulation, requirement, order or decree of any governmental, regulatory or accrediting agency or body or any court having jurisdiction -5- over the Company or any such subsidiary or any of their properties, assets or operations, including, without limitation, The Higher Education Act of 1965, as amended, and the regulations promulgated thereunder (the "HEA"), or (C) any indenture, mortgage, loan or credit agreement, note, lease, permit, license or other agreement or instrument to which the Company or any such subsidiary is a party or by which the Company or any such subsidiary is bound or to which any of the properties, assets or operations of the Company or any such subsidiary is subject, except, in each case, for such conflicts, breaches, violations, defaults, liens, charges or encumbrances that, individually or in the aggregate, would not have, or reasonably be likely to have, a Material Adverse Effect or have, or reasonably be likely to have, a material adverse effect on the ability of the Company to consummate the transactions contemplated by this Agreement and perform its obligations hereunder or consummate the transactions described in the Prospectus under the caption "The Transactions." The issuance and sale of the Firm Securities or consummation of the other transactions contemplated by this Agreement or described in the Prospectus under the caption "The Transactions," will not constitute a change of ownership resulting in a "change of control" of the Company as defined in the HEA. (xi) This Agreement and the agreements, documents or instruments entered into by the Company in connection with the transactions described in the Prospectus under the caption "The Transactions" have been duly executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms, except to the extent that (A) enforceability may be limited by bankruptcy, insolvency, reorganization, receivership, moratorium or other similar laws relating to creditors' rights generally and by general principles of equity, whether applied by a court of law or equity, and (B) rights to indemnity and contribution may be limited by federal or state securities laws or policies underlying such laws. (xii) Except as described in the Prospectus, the Company and its Material Subsidiaries have good and marketable title to all real properties and all other properties and assets owned by them, in each case free from any mortgage, pledge, lien, security interest, claim, encumbrance or other defect of any kind that would, individually or in the aggregate, materially affect the value thereof or materially interfere with the use made or to be made thereof by them; and except as disclosed in the Prospectus, the Company and its Material Subsidiaries hold any leased real or personal property under valid and enforceable leases with no exceptions that would materially interfere with the use made or to be made thereof by them. (xiii) Except as described in the Prospectus, the Company and its subsidiaries possess all accreditations, approvals, authorizations, certificates, permits and licenses (collectively, "Licenses") issued by appropriate governmental, regulatory or accrediting agencies or bodies, including, without limitation, all authorizations required for participation in federal aid programs under Title IV of the HEA ("Title IV Programs"), as -6- are necessary to own, lease or operate their properties and to conduct the business now operated by them and all such Licenses are in full force and effect, except for failures to possess any such Licenses or failures of any such Licenses to be in full force and effect that, individually or in the aggregate, would not have, or reasonably be likely to have, a Material Adverse Effect; the Company and its subsidiaries are in compliance with their respective obligations under such Licenses, subject to such qualifications as are described in the Prospectus; and, except as described in the Prospectus, neither the Company nor any of its subsidiaries has received written notice of any proceedings, investigations or inquiries (or has knowledge of any facts that could form a reasonable basis for any proceedings, investigations or inquiries) relating to the revocation, modification, termination or suspension of any such License, except for any such revocations, modifications, terminations or suspensions that, individually or in the aggregate, would not have, or reasonably be likely to have, a Material Adverse Effect. (xiv) No labor dispute with the employees of the Company or any subsidiary exists or, to the knowledge of the Company, is imminent that is reasonably likely to have a Material Adverse Effect. (xv) The Company and its subsidiaries own, possess or can acquire on reasonable terms, adequate trademarks, trade names and other rights to inventions, know-how, patents, copyrights, confidential information and other intellectual property (collectively, "intellectual property rights") necessary to conduct the business now operated by them, or currently employed by them, and have not received any notice of infringement of or conflict with asserted rights of others with respect to any intellectual property rights that, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have, or reasonably be likely to have, a Material Adverse Effect. (xvi) Except as described in the Prospectus, neither the Company nor any of its subsidiaries is in violation of any statute, rule, regulation, decision or order of any governmental agency or body or any court, domestic or foreign, relating to the use, disposal or release of hazardous or toxic substances or relating to the protection or restoration of the environment or human exposure to hazardous or toxic substances (collectively, "environmental laws"), owns or operates any real property contaminated with any substance that is subject to any environmental laws, is liable for any off-site disposal or contamination pursuant to any environmental laws, or is subject to any claim relating to any environmental laws, which violation, contamination, liability or claim would individually or in the aggregate have, or reasonably be likely to have, a Material Adverse Effect; and the Company is not aware of any pending investigation that is reasonably likely to lead to such a claim. (xvii) Except as described in the Prospectus, there are no pending actions, suits or proceedings against or affecting the Company, any of its subsidiaries or any of their respective properties that, if determined adversely to the Company or any of its -7- subsidiaries, would individually or in the aggregate have, or reasonably be likely to have, a Material Adverse Effect or would materially and adversely affect the ability of the Company to perform its obligations under this Agreement or consummate the transactions described in the Prospectus under the caption "The Transactions," or which are otherwise material in the context of the sale of the Offered Securities; and no such actions, suits or proceedings are, to the Company's knowledge, threatened. (xviii) The financial statements included in each Registration Statement and the Prospectus present fairly the financial position of the entities covered thereby as of the dates shown and their results of operations and cash flows for the periods shown, and such financial statements have been prepared in conformity with the generally accepted accounting principles in the United States of America applied on a consistent basis (except, with respect to unaudited interim financial statements, as otherwise described in the Prospectus); any financial statement schedules included in each Registration Statement present fairly the information required to be stated therein; and the assumptions used in preparing the pro forma financial information included in each Registration Statement and the Prospectus provide a reasonable basis for presenting the significant effects directly attributable to the transactions or events described therein, the related pro forma adjustments give appropriate effect to those assumptions and the pro forma columns therein reflect the proper application of those adjustments to the corresponding historical financial statement amounts. (xix) Since the date of the latest financial statements of the Company included in the Prospectus there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as a whole, and, except as disclosed in or contemplated by the Prospectus, there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. (xx) Except as described in the Prospectus, there are no outstanding (A) securities or obligations of the Company convertible into or exchangeable for any capital stock of the Company, (B) warrants, rights or options to subscribe for or purchase from the Company any such capital stock or any such convertible or exchangeable securities or obligations or (C) obligations of the Company to issue any such capital stock, convertible or exchangeable securities or obligations, or warrants, rights or obligations. (xxi) The Company and its Material Subsidiaries maintain a system of internal accounting controls sufficient in all material respects for purposes of the prevention or detection of errors or irregularities in amounts that could be expected to be material to the Company's consolidated financial statements and the recording of transactions so as to permit the preparation of such consolidated financial statements in conformity with generally accepted accounting principles. -8- (xxii) Neither the Company nor any of its subsidiaries is in violation of (A) its charter, by-laws or other organizational documents or (B) any statute, rule, regulation, requirement, order, decree or judgment of any governmental, regulatory or accrediting agency or body or any court having jurisdiction over the Company or any such subsidiary; and no event of default (or event which with the giving of notice or the lapse of time, or both, would constitute an event of defaults) exists under any indenture, mortgage, loan or credit agreement, note, lease, permit, license or other agreement or instrument to which the Company or any such Subsidiary is a party or by which the Company or any such subsidiary is bound or to which any of the properties, assets or operations of the Company or any such subsidiary is subject, except, in each case, for violations or events of default that, individually or in the aggregate, would not have, or reasonably be likely to have, a Material Adverse Effect. (xxiii) The Company and its Material Subsidiaries carry or are entitled to the benefits of insurance in such amounts and covering such risks as the Company believes are generally maintained by companies of established repute engaged in the same or a similar business, and all such insurance is in full force and effect. (xxiv) The Company has not taken and will not take, directly or indirectly, any action designed to or that could cause or result in the stabilization or manipulation of the price of the Offered Securities to facilitate the sale or resale of the Offered Securities. (xxv) The Company is not and, after giving effect to the offering and sale of the Offered Securities and the application of the proceeds therefrom as described in the Prospectus, will not be an "investment company" as defined in the Investment Company Act of 1940, as amended (the "Investment Company Act"). (b) The Selling Stockholder represents and warrants to, and agrees with, the several Underwriters that: (i) The Selling Stockholder has and on the Optional Closing Date hereinafter mentioned, if any, the Selling Stockholder will have valid and unencumbered title to the Optional Securities to be delivered by the Selling Stockholder on such Optional Closing Date and full right, power and authority to enter into this Agreement and to sell, assign, transfer and deliver the Optional Securities to be delivered by the Selling Stockholder on such Optional Closing Date hereunder; and upon the delivery of and payment for the Optional Securities on each Optional Closing Date hereunder, if any, the several Underwriters will acquire valid and unencumbered title to the Optional Securities to be delivered by the Selling Stockholder on such Optional Closing Date. (ii) If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement: (A) on the Effective Date of the Initial Registration Statement, the Initial Registration Statement conformed in all material -9- respects to the requirements of the Act and the Rules and Regulations and did not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, (B) on the Effective Date of the Additional Registration Statement (if any), each Registration Statement conformed, or will conform, in all material respects to the requirements of the Act and the Rules and Regulations and did not include, or will not include, any untrue statement of a material fact and did not omit, or will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and (C) on the date of this Agreement, the Initial Registration Statement and, if the Effective Time of the Additional Registration Statement is prior to the execution and delivery of this Agreement, the Additional Registration Statement each conforms, and at the time of filing of the Prospectus pursuant to Rule 424(b) or (if no such filing is required) at the Effective Date of the Additional Registration Statement in which the Prospectus is included, each Registration Statement and the Prospectus will conform, in all material respects to the requirements of the Act and the Rules and Regulations, and none of such documents includes, or will include, any untrue statement of a material fact or omits, or will omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. If the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement: on the Effective Date of the Initial Registration Statement, the Initial Registration Statement and the Prospectus will conform in all material respects to the requirements of the Act and the Rules and Regulations, neither of such documents will include any untrue statement of a material fact or will omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. The two preceding sentences apply only to the extent that any statements in, or omissions from, a Registration Statement or the Prospectus are based on written information furnished to the Company by the Selling Stockholder specifically for use therein. (iii) This Agreement and, to the extent applicable to the Selling Stockholder, the agreements, documents or instruments entered into by the Selling Stockholder in connection with the transactions described in the Prospectus under the caption "The Transactions" have each been duly authorized, executed and delivered by or on behalf of the Selling Stockholder and constitute the legal, valid and binding obligations of the Selling Stockholder enforceable against the Selling Stockholder in accordance with their respective terms, except to the extent that (A) enforceability may be limited by bankruptcy, insolvency, reorganization, receivership, moratorium or other similar laws relating to creditors' rights generally and by general principles of equity, whether applied by a court of law or equity, and (B) rights to indemnity and contribution may be limited by federal and state securities laws or policies underlying such laws. (iv) No consent, approval, authorization, order, registration or qualification of, or filing with, any third party (whether acting in an individual, fiduciary or other capacity) or any governmental or regulatory agency or body or any court is required to be obtained or -10- made for the consummation by the Selling Stockholder of the transactions contemplated by this Agreement or described in the Prospectus under the caption "The Transactions," except such as have been obtained and made under the Act and such as may be required under state securities laws. (v) The execution, delivery and performance by the Selling Stockholder of this Agreement and, to the extent applicable to the Selling Stockholder, the agreements, documents or instruments entered into by the Selling Stockholder in connection with the transactions described in the Prospectus under the caption "The Transactions," the sale of the Optional Securities, if any, by the Selling Stockholder and the consummation by the Selling Stockholder of any of the other transactions herein contemplated or described in the Prospectus under the caption "The Transactions," do not and will not conflict with or result in a breach or violation of any of the terms and provisions of, or constitute or will constitute a default (or an event which with the giving of notice or the lapse of time or both could reasonably be likely to constitute a default) under, or result in the creation or imposition of any lien, charge or encumbrance upon the Optional Securities under (A) the charter, by-laws or other organizational documents of the Selling Stockholder, (B) any statute, any rule, regulation, requirement, order or decree of any governmental or regulatory agency or body, or any court having jurisdiction over the Selling Stockholder or any of its properties, assets or operations or (C) any indenture, mortgage, loan or credit agreement, note, lease, permit, license or other agreement or instrument to which the Selling Stockholder is a party or by which the Selling Stockholder is bound or to which any of the properties, assets or operations of the Selling Stockholder is subject, except, in each case, for such conflicts, breaches, violations, defaults, liens, charges and encumbrances which would not, individually or in the aggregate, have, or reasonably be likely to have, a material adverse effect on the ability of the Selling Stockholder to consummate the transactions contemplated by this Agreement or perform the Selling Stockholder's obligations hereunder or consummate the transactions described in the Prospectus under the caption "The Transactions". (vi) Except as described in the Prospectus, there are no contracts, agreements or understandings between the Selling Stockholder and any third party that would give rise to a valid claim against the Selling Stockholder or any Underwriter for a brokerage commission, finder's fee or other like payment in connection with the transactions contemplated by this Agreement. (vii) The Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to or that could cause or result in the stabilization or manipulation of the price of the Offered Securities to facilitate the sale or resale of the Offered Securities. 3. Purchase, Sale and Delivery of Offered Securities. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to the Underwriters, and the Underwriters -11- agree, severally and not jointly, to purchase from the Company, at a purchase price of $_____ per share, the respective numbers of shares of Firm Securities set forth opposite the names of the Underwriters in Schedule B hereto. The Company will deliver the Firm Securities to the Representatives for the accounts of the Underwriters against payment of the purchase price in Federal (same day) funds by official bank check or checks or wire transfer to an account at a bank designated by the Company and acceptable to Credit Suisse First Boston Corporation ("CSFBC") drawn to the order of the Company at the office of ____________________, at _____ A.M., New York time, on __________, or at such other time not later than seven full business days thereafter as CSFBC and the Company determine (such time being herein referred to as the "First Closing Date"). For purposes of Rule 15c6-1 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the First Closing Date (if later than the otherwise applicable settlement date) shall be the settlement date for payment of funds and delivery of securities for all the Offered Securities sold pursuant to this Agreement. The certificates for the Firm Securities so to be delivered will be in definitive form, in such denominations and registered in such names as CSFBC requests and will be made available for checking and packaging at the office of CSFBC, Eleven Madison Avenue, New York, New York 10010, at least 24 hours prior to the First Closing Date. In addition, upon written notice from CSFBC given to the Company and the Selling Stockholder from time to time not more than 30 days subsequent to the date of the Prospectus, the Underwriters may purchase all or less than all of the Optional Securities at the purchase price per share to be paid for the Firm Securities. The Company and the Selling Stockholder agree, severally and not jointly, to sell to the Underwriters the respective numbers of Optional Securities obtained by multiplying the number of Optional Securities specified in such notice by a fraction the numerator of which is ________, in the case of the Company, and the number of shares set forth opposite the name of the Selling Stockholder in Schedule A hereto under the caption "Number of Optional Securities to be Sold," and the denominator of which is the total number of Optional Securities (subject to adjustment by CSFBC to eliminate fractions). Such Optional Securities shall be purchased from the Company and the Selling Stockholder for the account of each Underwriter in the same proportion as the number of Firm Securities set forth opposite such Underwriter's name bears to the total number of Firm Securities (subject to adjustment by CSFBC to eliminate fractions) and may be purchased by the Underwriters only for the purpose of covering over-allotments made in connection with the sale of the Firm Securities. No Optional Securities shall be sold or delivered unless the Firm Securities previously have been, or simultaneously are, sold and delivered. The right to purchase the Optional Securities or any portion thereof may be exercised from time to time and to the extent not previously exercised may be surrendered and terminated at any time upon notice by CSFBC to the Company and the Selling Stockholder. Each time for the delivery of and payment for the Optional Securities, being herein referred to as an "Optional Closing Date," which may be the First Closing Date (the First Closing Date and each Optional Closing Date, if any, being sometimes referred to as a "Closing Date"), shall be determined by CSFBC but shall be not later than five full business days after written -12- notice of election to purchase Optional Securities is given. The Company and the Selling Stockholder will deliver the Optional Securities being purchased on each Optional Closing Date to the Representatives for the accounts of the several Underwriters against payment of the purchase price therefor in Federal (same day) funds by official bank check or checks or wire transfer to an account at a bank acceptable to CSFBC drawn to the order of the Company, in the case of Optional Securities offered by the Company, and the name of the Selling Stockholder, in the case of the Optional Securities offered by the Selling Stockholder. The certificates for the Optional Securities being purchased on each Optional Closing Date will be in definitive form, in such denominations and registered in such names as CSFBC requests upon reasonable notice prior to such Optional Closing Date and will be made available for checking and packaging at the office of CSFBC, Eleven Madison Avenue, New York, New York 10010, at a reasonable time in advance of such Optional Closing Date. 4. Offering by Underwriters. It is understood that the several Underwriters propose to offer the Offered Securities for sale to the public as set forth in the Prospectus. 5. Certain Agreements of the Company and the Selling Stockholder. The Company agrees with the several Underwriters and the Selling Stockholder and, with respect to clauses (j) and (k) below, the Selling Stockholder agrees with the Company and the several Underwriters that: (a) If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, the Company will file the Prospectus with the Commission pursuant to and in accordance with subparagraph (1) (or, if applicable and if consented to by CSFBC, subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the second business day following the execution and delivery of this Agreement or (B) the fifteenth business day after the Effective Date of the Initial Registration Statement. The Company will advise CSFBC promptly of any such filing pursuant to Rule 424(b). If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement and an additional registration statement is necessary to register a portion of the Offered Securities under the Act but the Effective Time thereof has not occurred as of such execution and delivery, the Company will file the additional registration statement or, if filed, will file a post-effective amendment thereto with the Commission pursuant to and in accordance with Rule 462(b) on or prior to 10:00 P.M., New York time, on the date of this Agreement or, if earlier, on or prior to the time the Prospectus is printed and distributed to any Underwriter, or will make such filing at such later date as shall have been consented to by CSFBC. (b) The Company will advise CSFBC promptly of any proposal to amend or supplement the initial or any additional registration statement as filed or the related prospectus or the Initial Registration Statement, the Additional Registration Statement (if any) or the Prospectus and will not effect such amendment or supplementation without -13- CSFBC's consent, which consent shall not be unreasonably withheld; and the Company will also advise CSFBC promptly of the effectiveness of each Registration Statement (if its Effective Time is subsequent to the execution and delivery of this Agreement) and of any amendment or supplementation of a Registration Statement or the Prospectus and of the institution by the Commission of any stop order proceedings in respect of a Registration Statement and will use its best efforts to prevent the issuance of any such stop order and to obtain as soon as possible its lifting, if issued. (c) If, at any time when a prospectus relating to the Offered Securities is required to be delivered under the Act in connection with sales by any Underwriter or dealer, any event occurs as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus to comply with the Act, the Company will promptly notify CSFBC of such event and will promptly prepare and file with the Commission, at its own expense, an amendment or supplement that will correct such statement or omission or an amendment which will effect such compliance. Neither CSFBC's consent to, nor the Underwriters' delivery of, any such amendment or supplement shall constitute a waiver of any of the conditions set forth in Section 6. (d) As soon as practicable, but not later than the Availability Date (as defined below), the Company will make generally available to its security holders an earnings statement covering a period of at least 12 months beginning after the Effective Date of the Initial Registration Statement (or, if later, the Effective Date of the Additional Registration Statement) that will satisfy the provisions of Section 11(a) of the Act. For the purpose of the preceding sentence, "Availability Date" means the 45th day after the end of the fourth fiscal quarter following the fiscal quarter that includes such Effective Date, except that, if such fourth fiscal quarter is the last quarter of the Company's fiscal year, "Availability Date" means the 90th day after the end of such fourth fiscal quarter. (e) The Company will furnish to the Representatives copies of each Registration Statement (four of which will be signed and will include all exhibits), each related preliminary prospectus and, so long as a prospectus relating to the Offered Securities is required to be delivered under the Act in connection with sales by any Underwriter or dealer, the Prospectus and all amendments and supplements to such documents, in each case in such quantities as CSFBC reasonably requests. The Prospectus shall be so furnished on or prior to 5:00 P.M., New York time, on the business day following the later of the execution and delivery of this Agreement or the Effective Time of the Initial Registration Statement. All other such documents shall be so furnished as soon as available. The Company will pay the expenses of printing and distributing to the Underwriters all such documents. -14- (f) The Company will arrange for the qualification of the Offered Securities for sale under the laws of such jurisdictions as CSFBC designates and will continue such qualifications in effect so long as required for the distribution; provided, that the Company shall not be required to file a general consent to service of process or qualify to do business in any jurisdiction in which it is not so qualified. (g) During the period of five years hereafter, the Company will furnish to the Representatives and, upon request, to each of the other Underwriters, as soon as practicable after the end of each fiscal year, a copy of its annual report to stockholders for such year; and the Company will furnish to the Representatives (i) as soon as available, a copy of each report and any definitive proxy statement of the Company filed with the Commission under the Exchange Act or mailed to stockholders, and (ii) from time to time, such other information concerning the Company as CSFBC may reasonably request. (h) For a period of 180 days after the date of the initial public offering of the Offered Securities, the Company will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Commission a registration statement under the Act relating to, any additional shares of its Securities or securities convertible into or exchangeable or exercisable for any shares of its Securities, or publicly disclose the intention to make any such offer, sale, pledge, disposition or filing, without the prior written consent of CSFBC, except issuances of Securities 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 hereof, or grants of employee stock options pursuant to the terms of a plan in effect on the date hereof or issuances of Securities pursuant to the exercise of such options. (i) The Company and the Selling Stockholder agree with the several Underwriters that the Company and the Selling Stockholder will pay all expenses incident to the performance of the obligations of the Company and the Selling Stockholder, as the case may be, under this Agreement, for any filing fees and other expenses (including fees and disbursements of counsel) in connection with qualification of the Offered Securities for sale under the laws of such jurisdictions as CSFBC designates and the printing of memoranda relating thereto, for the filing fee incident to, and the reasonable fees and disbursements of counsel to the Underwriters in connection with, the review by the National Association of Securities Dealers, Inc. (the "NASD") of the Offered Securities, for any travel expenses of the Company's officers and employees and any other expenses of the Company in connection with attending or hosting meetings with prospective purchasers of the Offered Securities and for expenses incurred in distributing preliminary prospectuses and the Prospectus (including any amendments and supplements thereto) to the Underwriters. The Selling Stockholder will reimburse the Underwriters (if and to the extent incurred by them) for any transfer taxes on the sale by the Selling Stockholder of Optional Securities to the Underwriters. -15- (j) The Selling Stockholder agrees to deliver to CSFBC, attention: Transactions Advisory Group, on or prior to the Optional Closing Date, if any, a properly completed and executed United States Treasury Department Form W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof). (k) The Selling Stockholder agrees, for a period of 180 days after the date of the initial public offering of the Offered Securities, not to offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any additional shares of the Securities of the Company or securities convertible into or exchangeable or exercisable for any shares of Securities, or publicly disclose the intention to make any such offer, sale, pledge or disposal, without the prior written consent of CSFBC. 6. Conditions of the Obligations of the Underwriters. The obligations of the several Underwriters to purchase and pay for the Firm Securities on the First Closing Date and the Optional Securities to be purchased on each Optional Closing Date will be subject to the accuracy of the representations and warranties on the part of the Company and the Selling Stockholder, to the accuracy of the statements of Company officers made pursuant to the provisions hereof, to the performance by the Company and the Selling Stockholder of their obligations hereunder and to the following additional conditions precedent: (a) The Representatives shall have received a letter, dated the date of delivery thereof (which, if the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, shall be on or prior to the date of this Agreement or, if the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement, shall be prior to the filing of the amendment or post-effective amendment to the registration statement to be filed shortly prior to such Effective Time), of Arthur Andersen LLP confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating to the effect that: (i) in their opinion the financial statements and any schedules examined by them and included in the Registration Statements comply as to form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations; (ii) they have performed the procedures specified by the American Institute of Certified Public Accountants for a review of interim financial information as described in Statement of Auditing Standards No. 71, Interim Financial Information, on the unaudited financial statements of the Company included in the Registration Statements; (iii) on the basis of the review referred to in clause (ii) above, a reading of the latest available interim financial statements of the Company, inquiries of -16- officials of the Company who have responsibility for financial and accounting matters and other specified procedures, nothing came to their attention that caused them to believe that: (A) the unaudited financial statements of the Company included in the Registration Statements do not comply as to form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations or any material modifications should be made to such unaudited financial statements for them to be in conformity with generally accepted accounting principles; (B) the information set forth in the Prospectus under the captions "Summary Consolidated Financial and Other Data" and "Selected Historical Consolidated Financial and Other Data" does not agree with the amounts set forth in the unaudited consolidated financial statements or the audited consolidated financial statements, as the case may be, from which it was derived or was not determined on a basis substantially consistent with that of the corresponding amounts in the audited statements included in the Registration Statements and the Prospectus; (C) at the date of the latest available balance sheet read by such accountants, or at a subsequent specified date not more than three business days prior to the date of this Agreement, there was any decrease in stockholders' equity or change in the capital stock or any increase in short-term indebtedness or long- term debt of the Company and its consolidated subsidiaries or, at the date of the latest available balance sheet read by such accountants, there was any decrease in consolidated net current assets or net assets, as compared with amounts shown on the latest balance sheet included in the Prospectus; or (D) for the period from the closing date of the latest income statement included in the Prospectus to the closing date of the latest available income statement read by such accountants there were any decreases, as compared with the corresponding period of the previous year, in consolidated total net revenue or income from operations of the Company or in the total or per share amounts of consolidated net income of the Company, or any increases or decrease, as the case may be, in other items specified by the Representatives; except in all cases set forth in clauses (C) and (D) above for changes, increases or decreases which the Prospectus discloses have occurred or may occur or which are described in such letter; and -17- (iv) they have read any unaudited pro forma information included in the Prospectus; inquired of certain officials of the Company who have responsibility for financial and accounting matters about the basis for their determination of the pro forma adjustments and whether such unaudited pro forma financial information complies as to form in all material respects with the applicable requirements of Rule 11-02 of Regulation S-X under the Act; and proved the arithmetic accuracy of the application of the pro forma adjustments to the historical amounts in the unaudited pro forma financial information; (v) on the basis of the procedures specified in clause (iv) above, nothing came to their attention that caused them to believe that the unaudited pro forma financial information referred to in clause (iv) above does not comply as to form in all material respects with the applicable accounting requirements of Rule 11-02 of Regulation S-X under the Act and that the pro forma adjustments have not been properly applied to the historical amounts in the compilation of that information; and (vi) they have compared specified dollar amounts (or percentages derived from such dollar amounts) and other financial information contained in the Registration Statements (in each case to the extent that such dollar amounts, percentages and other financial information are derived from the general accounting records of the Company and its subsidiaries subject to the internal controls of the Company's accounting system or are derived directly from such records by analysis or computation) with the results obtained from inquiries, a reading of such general accounting records and other procedures specified in such letter and have found such dollar amounts, percentages and other financial information to be in agreement with such results, except as otherwise specified in such letter. For purposes of this subsection, (i) if the Effective Time of the Initial Registration Statements is subsequent to the execution and delivery of this Agreement, "Registration Statements" shall mean the initial registration statement as proposed to be amended by the amendment or post- effective amendment to be filed shortly prior to its Effective Time, (ii) if the Effective Time of the Initial Registration Statements is prior to the execution and delivery of this Agreement but the Effective Time of the Additional Registration Statement is subsequent to such execution and delivery, "Registration Statements" shall mean the Initial Registration Statement and the additional registration statement as proposed to be filed or as proposed to be amended by the post-effective amendment to be filed shortly prior to its Effective Time, and (iii) "Prospectus" shall mean the prospectus included in the Registration Statements. (b) The Representatives shall have received a letter, dated the date of delivery thereof (which, if the Effective Time of the Initial Registration Statement is prior to the -18- execution and delivery of this Agreement, shall be on or prior to the date of this Agreement or, if the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement, shall be prior to the filing of the amendment or post-effective amendment to the registration statement to be filed shortly prior to such Effective Time), of each of the accounting firms whose report as to audited financial statements of a company other than the Company is included in the Registration Statement to the effect that (i) they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and (ii) in their opinion the financial statements and any schedules examined by them and included in the Registration Statements comply as to form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations. (c) If the Effective Time of the Initial Registration Statement is not prior to the execution and delivery of this Agreement, such Effective Time shall have occurred not later than 10:00 P.M., New York time, on the date of this Agreement or such later date as shall have been consented to by CSFBC. If the Effective Time of the Additional Registration Statement (if any) is not prior to the execution and delivery of this Agreement, such Effective Time shall have occurred not later than 10:00 P.M., New York time, on the date of this Agreement or, if earlier, the time the Prospectus is printed and distributed to any Underwriter, or shall have occurred at such later date as shall have been consented to by CSFBC. If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, the Prospectus shall have been filed with the Commission in accordance with the Rules and Regulations and Section 5(a) of this Agreement. Prior to such Closing Date, no stop order suspending the effectiveness of a Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or, to the knowledge of the Selling Stockholder, the Company or the Representatives, shall be threatened by the Commission. (d) Subsequent to the execution and delivery of this Agreement, there shall not have occurred (i) any change, or any development or event involving a prospective change, in the condition (financial or other), business, properties or results of operations of the Company or its subsidiaries, taken as a whole, which, in the judgment of a majority in interest of the Underwriters (including the Representatives), is material and adverse and makes it impractical or inadvisable to proceed with completion of the public offering or the sale of and payment for the Offered Securities; (ii) any suspension or limitation of trading in securities generally on the New York Stock Exchange, or any setting of minimum prices for trading on such exchange, or any suspension of trading of any securities of the Company on any exchange or in the over-the-counter market; (iii) any banking moratorium declared by U.S. Federal or New York authorities; or (iv) any outbreak or escalation of major hostilities in which the United States of America is involved, any declaration of war by Congress or any other substantial national or international calamity or emergency if, in the judgment of a majority in interest of the Underwriters (including the Representatives), the effect of any such outbreak, escalation, -19- declaration, calamity or emergency makes it impractical or inadvisable to proceed with completion of the public offering or the sale of and payment for the Offered Securities. (e) The Representatives shall have received an opinion, dated such Closing Date, of Katten Muchin & Zavis, counsel for the Company, to the effect that: (i) The Company has been duly incorporated and is an existing corporation in good standing under the laws of the State of Delaware, with corporate power and authority to own its properties and conduct its business as described in the Prospectus; and the Company is qualified to do business as a foreign corporation in good standing in each jurisdiction listed in Schedule B hereto; (ii) Each Material Subsidiary of the Company has been duly incorporated and is an existing corporation in good standing under the laws of the jurisdiction of its incorporation, with corporate power and authority to own its properties and conduct its business as described in the Prospectus; each Material Subsidiary of the Company is qualified to do business as a foreign corporation in good standing in each jurisdiction listed opposite its name in Schedule A hereto; and all of the issued and outstanding capital stock of each Material Subsidiary of the Company has been duly authorized and validly issued and is fully paid and nonassessable; (iii) The Offered Securities (other than the Optional Securities offered by the Selling Stockholder) have been duly authorized and, when issued and paid for in accordance with the terms hereof, will be validly issued, fully paid and nonassessable; all other outstanding shares of capital stock of the Company are duly authorized, validly issued, fully paid and nonassessable; and the authorized and outstanding capital stock of the Company conforms to the descriptions thereof contained in the Prospectus under the captions "Capitalization" and "Description of Capital Stock;" (iv) Except as described in the Prospectus, to the knowledge of such counsel, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act; (v) No consent, approval, authorization or order of, or filing with, any governmental agency or body or any court is required to be obtained or made by the Company for the consummation of the transactions contemplated by this Agreement or the Prospectus (it being understood that such counsel need express -20- no opinion as to the matters described in Section 6(g)(ii), as to which Dow, Lohnes & Albertson is providing an opinion to the Underwriters, or Section 6(h)(ii), as to which Fraser & Beatty is providing an opinion to the Underwriters); (vi) The execution, delivery and performance by the Company of this Agreement and the agreements, documents or instruments entered into by the Company in connection with the transactions described in the Prospectus under the caption "The Transactions" and the consummation by the Company of the transactions herein contemplated and described in the Prospectus under the caption "The Transactions" have been duly authorized by all necessary corporate action on the part of the Company and, to the extent required, its stockholders and do not result in a breach or violation of any of the terms and provisions of, and do not constitute a default (or an event which with the giving of notice or the lapse of time or both would constitute a default) under, and do not result in the creation or imposition of any lien, charge or encumbrance upon any assets, properties or operations of the Company or any of its Material Subsidiaries under, (A) the charter, by-laws or other organizational documents of the Company or any such Material Subsidiary, (B) any statute, rule, regulation, requirement, order or decree of any governmental, regulatory or accrediting agency or body or any court having jurisdiction over the Company or any such Material Subsidiary or any of their properties, assets or operations or (C) to the knowledge of such counsel, any material indenture, mortgage, loan or credit agreement, note, lease, permit, license or other agreement or instrument to which the Company or any such Material Subsidiary is a party or by which the Company or any such Material Subsidiary is bound or to which any of the properties, assets or operations of the Company or any such Material Subsidiary is subject (it being understood that, in the case of clause (B) above, such counsel need express no opinion as to the matters described in Section 6(g)(iii), as to which Dow, Lohnes & Albertson is providing an opinion to the Underwriters, or Section 6(h)(iii), as to which Fraser & Beatty is providing an opinion to the Underwriters); (vii) The Initial Registration Statement was declared effective under the Act as of the date and time specified in such opinion, the Additional Registration Statement (if any) was filed and became effective under the Act as of the date and time (if determinable) specified in such opinion, the Prospectus either was filed with the Commission pursuant to the subparagraph of Rule 424(b) specified in such opinion on the date specified therein or was included in the Initial Registration Statement or the Additional Registration Statement (as the case may be), and, to the knowledge of such counsel, no stop order suspending the effectiveness of a Registration Statement or any part thereof has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Act, and each Registration Statement and the Prospectus, and each amendment or supplement thereto, as of their respective effective or issue dates, -21- complied as to form in all material respects with the requirements of the Act and the Rules and Regulations; the descriptions in the Registration Statements and Prospectus of statutes, legal and governmental proceedings and contracts and other documents are accurate and fairly present the information required to be shown; and such counsel do not know of any legal or governmental proceedings required to be described in a Registration Statement or the Prospectus which are not described as required or of any contracts or documents of a character required to be described in a Registration Statement or the Prospectus or to be filed as exhibits to a Registration Statement which are not described and filed as required (it being understood that such counsel need express no opinion as to the matters described in Section 6(g)(i), as to which Dow, Lohnes & Albertson is providing an opinion to the Underwriters, or Section 6(h)(i), as to which Fraser & Beatty is providing an opinion to the Underwriters); (viii) This Agreement and the agreements, documents or instruments entered into by the Company in connection with the transactions described in the Prospectus under the caption "The Transactions" have been duly executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms, except to the extent that (A) enforceability may be limited by bankruptcy, insolvency, reorganization, receivership, moratorium or other similar laws relating to creditors' rights generally and by general principles of equity, whether applied by a court of law or equity, and (B) rights to indemnity and contribution may be limited by federal and state securities laws or policies underlying such laws; (ix) Except as disclosed in the Prospectus, there are no pending or, to the knowledge of such counsel, threatened actions, suits, proceedings or investigations against or affecting the Company or any of its subsidiaries or any of their respective properties, assets or operations that, if determined adversely to the Company or any of its subsidiaries would, individually or in the aggregate, have, or reasonably be likely to have, a Material Adverse Effect or could materially and adversely affect the ability of the Company to perform its obligations under this Agreement or consummate the transactions described in the Prospectus under the caption "The Transactions" or which are otherwise material in the context of the sale of the Offered Securities; (x) The transactions described in the Prospectus under the caption "The Transactions" have been consummated; and In addition, such counsel shall state that they have no reason to believe that any part of a Registration Statement or any amendment thereto, as of its effective date or as of such Closing Date, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to -22- make the statements therein not misleading; or that the Prospectus or any amendment or supplement thereto, as of its issue date or as of such Closing Date, contained any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no belief as to the financial statements and schedules and other financial and accounting data contained in the Registration Statements or the Prospectus). In rendering such opinion, such counsel may rely as to matters governed by the laws of jurisdictions other than the laws of jurisdictions in which such counsel is admitted to practice and the federal laws of the United States of America upon the opinions of counsel reasonably satisfactory to the Representatives and counsel for the Underwriters. (f) On any such Closing Date that is also an Optional Closing Date, if any, the Representatives shall have received an opinion, dated such Closing Date, of [Name], counsel for the Selling Stockholder, to the effect that: (i) Immediately prior to such Closing Date, the Selling Stockholder was the sole registered owner of the Optional Securities delivered by the Selling Stockholder on such Closing Date and has full corporate power and authority to enter into this Agreement and to sell, assign, transfer and deliver the Optional Securities delivered by the Selling Stockholder on such Closing Date; assuming the Underwriters have purchased the Optional Securities delivered by the Selling Stockholder on such Closing Date for value, in good faith and without knowledge of any adverse claim, the Underwriters will have acquired valid title to such shares free of any adverse claim, any lien in favor of the Company and any restrictions on transfer imposed by the Company; (ii) This Agreement and, to the extent applicable to the Selling Stockholder, the agreements, documents or instruments entered into by the Selling Stockholder in connection with the transactions described in the Prospectus under the caption "The Transactions" have each been duly authorized, executed and delivered on behalf of the Selling Stockholder and constitute the legal, valid and binding obligations of the Selling Stockholder enforceable against the Selling Stockholder in accordance with their respective terms, except to the extent that (A) enforceability may be limited by bankruptcy, insolvency, reorganization, receivership, moratorium or other similar laws relating to creditors' rights generally and by general principles of equity, whether applied by a court of law or equity, and (B) rights to indemnity and contribution may be limited by federal and state securities laws or policies underlying such laws; -23- (iii) No consent, approval, authorization, order, registration or qualification of, or filing with, any third party (whether acting in an individual, fiduciary or other capacity) or any governmental or regulatory agency or body or any court is required to be obtained or made by the Selling Stockholder for the consummation by the Selling Stockholder of the transactions contemplated by this Agreement or described in the Prospectus under the caption "The Transactions" (it being understood that such counsel need express no opinion as to the matters described in Section 6(g)(ii), as to which Dow, Lohnes & Albertson is providing an opinion to the Underwriters, or Section 6(h)(ii), as to which Fraser & Beatty is providing an opinion to the Underwriters); and (iv) The execution, delivery and performance by the Selling Stockholder of this Agreement and, to the extent applicable to the Selling Stockholder, the agreements, documents or instruments entered into by the Selling Stockholder in connection with the transactions described in the Prospectus under the caption "The Transactions," the sale of the Optional Securities by the Selling Stockholder and the consummation by the Selling Stockholder of any of the other transactions herein contemplated or described in the Prospectus under the caption "The Transactions," do not result in a breach or violation of any of the terms and provisions of, and do not constitute a default (or an event which with the giving of notice or the lapse of time or both would constitute a default) under, or result in the creation or imposition of any lien, charge or encumbrance upon the Optional Securities being sold by the Selling Stockholder under (A) the charter, by-laws or other organizational documents of the Selling Stockholder, (B) any statute, rule, regulation, requirement, order or decree of any governmental or regulatory agency or body, or any court having jurisdiction over the Selling Stockholder or any of its properties, assets or operations or (C) to the knowledge of such counsel, any indenture, mortgage, loan or credit agreement, note, lease, permit, license or other agreement or instrument to which the Selling Stockholder is a party or by which the Selling Stockholder is bound or to which any of the properties, assets or operations of the Selling Stockholder is subject, except, in each case, for such breaches, violations, defaults, liens, charges and encumbrances which could not, individually or in the aggregate, have a material adverse effect on the ability of the Selling Stockholder to consummate the transactions contemplated by this Agreement or perform the Selling Stockholder's obligations hereunder or consummate the transactions described in the Prospectus under the caption "The Transactions" (it being understood that, in the case of clause (B) above, such counsel need express no opinion as to the matters described in Section 6(g)(iii), as to which Dow, Lohnes & Albertson is providing an opinion to the Underwriters, or Section 6(h)(iii), as to which Fraser & Beatty is providing an opinion to the Underwriters). -24- (g) The Representatives shall have received from Dow, Lohnes & Albertson, special United States regulatory counsel to the Company, such opinion or opinions, dated as of such Closing Date, to the effect that: (i) The statements contained in the Prospectus under the captions "Risk Factors -- Substantial Dependence on Student Financial Aid; Potential Adverse Effects of Regulation; -- Potential Loss of Student Financial Aid Due to Failure to Meet Financial Responsibility Standards; -- Potential Loss of Student Financial Aid Due to High Student Loan Default Rates; -- Potential Adverse Regulatory Consequences of a Change of Ownership or Control; -- Potential Loss of Student Financial Aid Due to Failure to Maintain State Licenses or Authorizations; and -- Potential Loss of Student Financial Aid Due to Failure to Maintain Accreditations" and "Financial Aid and Regulation" to the extent related to educational regulatory matters other than Canadian educational regulatory matters (collectively, "U.S. Regulatory Matters"), insofar as such statements constitute a summary of legal matters, documents or proceeding with respect to the operation of post-secondary educational institutions and the offering of programs of post-secondary education in the United States of America, are accurate in all material respects; (ii) No consent, approval, authorization, order, registration or qualification of, or filing with, any governmental or regulatory agency or body under the HEA or any similar state statute governing the authorization to operate post-secondary educational institutions is required for the consummation by the Company of the transactions contemplated by this Agreement or described in the Prospectus under the caption "The Transactions;" (iii) The execution, delivery and performance by the Company of this Agreement and the agreements, documents or instruments entered into by the Company in connection with the transactions described in the Prospectus under the caption "The Transactions" and the consummation by the Company of the transactions contemplated herein or described in the Prospectus under the caption "The Transactions" do not result in a breach or violation of (A) Title IV of the HEA; (B) any rule, regulation or requirement of the U.S. Department of Education promulgated under Title IV of the HEA; or (C) any similar state statute, except for any such violations that, individually or in the aggregate, would not have, or reasonably be likely to have, a Material Adverse Effect; (iv) The issuance and sale of the Offered Securities and the consummation of the other transactions contemplated by this Agreement or described in the Prospectus under the caption "The Transactions" will not constitute a change of ownership resulting in a "change of control" as defined in the HEA; and -25- (v) To the knowledge of such counsel, except as disclosed in the Prospectus, the Company and its subsidiaries have all necessary Licenses required for the Company and such subsidiaries to participate in the Title IV Programs as described in the Registration Statements and the Prospectus, except failures to possess any such Licenses that, individually or in the aggregate, would not have, or reasonably be likely to have, a Material Adverse Effect. Such counsel shall also state that they have participated in the preparation of those portions of the Registration Statements and the Prospectus relating to U.S. Regulatory Matters and have no reason to believe that the information relating to U.S. Regulatory Matters contained in any Registration Statement or any amendment thereto, as of its effective date or as of such Closing Date, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading, or that any such information contained in the Prospectus or any amendment or supplement thereto, as of its issue date or as of such Closing Date, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (h) The Representatives shall have received an opinion, dated such Closing Date, of Fraser & Beatty, special Canadian regulatory counsel for the Company, to the effect that: (i) The statements contained in the Prospectus under the captions "Risk Factors -- Dependence on Canadian Financial Aid; Potential Adverse Effects of Canadian Regulation" and "Financial Aid and Regulation -- Canadian Regulation" and other references in the Prospectus, in each case, only to the extent related to Ontario and Quebec educational regulatory matters and the federal laws of Canada applicable thereto (collectively, "Canadian Regulatory Matters"), insofar as such statements constitute a summary of legal matters, documents or proceedings, are accurate in all material respects; (ii) No consent, approval, authorization, order, registration or qualification of, or filing with, any governmental or regulatory agency or body under any statute, rule, regulation or requirement related to Canadian Regulatory Matters ("Canadian Educational Laws") is required for the consummation by the Company of the transactions contemplated by this Agreement or described in the Prospectus under the caption "The Transactions;" and (iii) The execution, delivery and performance by the Company of this Agreement and the agreements, documents or instruments entered into by the Company in connection with the transactions described in the Prospectus under the -26- caption "The Transactions" and the consummation by the Company of the transactions contemplated herein and described in the Prospectus under the caption "The Transactions" do not result in a breach or violation of any Canadian Educational Law. Such counsel shall also state that they have participated in the preparation of those portions of the Registration Statements and the Prospectus relating to Canadian Regulatory Matters but (a) have not conducted any special or independent investigation or due diligence to determine the existence or absence of any facts or circumstances relating to the Company, except in requesting and reviewing certain documents relating to the Company's two schools in Ontario and one school in Quebec, and no inference as to such counsel's knowledge of the existence of such facts or circumstances should be drawn merely from such counsel's representation of the Company; (b) have not participated in any due diligence sessions or drafting meetings relating to the Registration Statements or Prospectus; (c) have received instructions from, and communicated exclusively through, Dow, Lohnes & Albertson, special United States regulatory counsel to the Company; and (d) have acted as special Canadian regulatory counsel for the Company in respect of Canadian Regulatory Matters only; and, subject to the foregoing qualifications, such counsel have no reason to believe that the information relating to Canadian Regulatory Matters contained in any Registration Statement or any amendment thereto, as of its effective date or as of such Closing Date, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading, or that any such information relating to Canadian Regulatory Matters contained in the Prospectus or any amendment or supplement thereto, as of its issue date or as of such Closing Date, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. In rendering such opinion, such counsel may rely as to matters governed by the laws of jurisdictions other than the laws of jurisdictions in which such counsel is admitted to practice and the federal laws of the United States of America upon the opinions of counsel reasonably satisfactory to the Representatives and counsel for the Underwriters. (i) The Company shall have delivered to the Representatives agreements of certain officers, directors and stockholders (other than the Selling Stockholder) of the Company specified by the Representatives to the effect that, for a period of 180 days after the date of the initial public offering of the Offered Securities, such officers, directors and stockholders will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any additional shares of Securities or securities convertible into or exchangeable -27- or exercisable for any shares of Securities, or publicly disclose the intention to make any such offer, sale, pledge or disposition, without the prior written consent of CSFBC. (j) The Representatives shall have received from Sidley & Austin, counsel for the Underwriters, such opinion or opinions, dated such Closing Date, with respect to the incorporation of the Company, the validity of the Offered Securities delivered on such Closing Date, the Registration Statements, the Prospectus and other related matters as the Representatives may require, and the Selling Stockholder and the Company shall have furnished to such counsel such documents as they reasonably request for the purpose of enabling them to pass upon such matters. (k) The Representatives shall have received a certificate of the Company, dated such Closing Date, executed on behalf of the Company by the President or any Vice President and a principal financial or accounting officer of the Company after their reasonable investigation, to the effect that: the representations and warranties of the Company in this Agreement are true and correct; the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to such Closing Date; no stop order suspending the effectiveness of any Registration Statement has been issued and no proceedings for that purpose have been instituted or are, to the knowledge of such officers, threatened by the Commission; the Additional Registration Statement (if any) satisfying the requirements of subparagraphs (1) and (3) of Rule 462(b) was filed pursuant to Rule 462(b), including payment of the applicable filing fee in accordance with Rule 111(a) or (b) under the Act, prior to the time the Prospectus was printed and distributed to any Underwriter; and, subsequent to the date of the most recent financial statements in the Prospectus, there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as a whole, except as set forth in or contemplated by the Prospectus or as described in such certificate. (l) On any such Closing Date that is also an Optional Closing Date, if any, the Representatives shall have received a certificate, dated such Closing Date, of the Selling Stockholder, which shall be executed on behalf of the Selling Stockholder by a senior executive officer of the Selling Stockholder, after reasonable investigation, to the effect that: the representations and warranties of the Selling Stockholder in this Agreement are true and correct and the Selling Stockholder has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to such Closing Date. (m) The Representatives shall have received a letter, dated such Closing Date, of Arthur Andersen LLP, which meets the requirements of subsection (a) of this Section, and from each of the accounting firms described in subsection (b) of this Section, which meets the requirements of such subsection, except, in each case, that the specified date referred -28- to in such subsections will be a date not more than three business days prior to such Closing Date for the purposes of this subsection. (n) The Representatives shall have received such other opinions, certificates, letters and other documents from or on behalf of the Company or the Selling Stockholder as the Representatives shall reasonably request. The Selling Stockholder and the Company will furnish the Representatives with such conformed copies of such opinions, certificates, letters and documents as the Representatives reasonably request. CSFBC may in its sole discretion waive on behalf of the Underwriters compliance with any conditions to the obligations of the Underwriters hereunder, whether in respect of an Optional Closing Date or otherwise. 7. Indemnification and Contribution. (a) The Company will indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement, the Prospectus, or any amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement in or omission or alleged omission from any of such documents in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives specifically for use therein, it being understood and agreed that the only such information furnished by any Underwriter consists of the information described as such in subsection (c) below; and provided, further, however, that the foregoing indemnity with respect to any preliminary prospectus shall not inure to the benefit of any Underwriter (or to the benefit of any person controlling such Underwriter) from whom the person asserting any such losses, claims, damages or liabilities purchased the Offered Securities if a copy of the Prospectus was not sent or given to such person at or prior to the written confirmation of the sale of such Offered Securities to such person if required by the Act and the Prospectus would have cured the defect giving rise to such loss, claim, damage or liability. (b) The Selling Stockholder will indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement, the Prospectus, or any -29- amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement was made in reliance upon and in conformity with written information furnished to the Company or its representatives by or on behalf of the Selling Stockholder specifically for use therein, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the liability of the Selling Stockholder pursuant to this Section 7(b) is limited to the proceeds received (less underwriting discounts and commissions) by the Selling Stockholder, if any, from the sale of the Optional Securities; and provided, further, however, that the foregoing indemnity with respect to any preliminary prospectus shall not inure to the benefit of any Underwriter (or to the benefit of any person controlling such Underwriter) from whom the person asserting any such losses, claims, damages or liabilities purchased the Offered Securities if a copy of the Prospectus was not sent or given to such person at or prior to the written confirmation of the sale of such Offered Securities to such person if required by the Act and the Prospectus would have cured the defect giving rise to such loss, claim, damage or liability. (c) Each Underwriter will severally and not jointly indemnify and hold harmless the Company and the Selling Stockholder against any losses, claims, damages or liabilities to which the Company or the Selling Stockholder may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement, the Prospectus, or any amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representatives specifically for use therein, and will reimburse any legal or other expenses reasonably incurred by the Company and the Selling Stockholder in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred, it being understood and agreed that the only such information furnished by any Underwriter consists of the following information in the Prospectus furnished on behalf of each Underwriter: the last paragraph at the bottom of the cover page concerning the terms of the offering by the Underwriters, the legend responsive to Regulation M under the Act on the inside front cover page, the list under the caption "Underwriting" setting forth the names of the Underwriters and the number of Offered Securities to be purchased by each Underwriter, the concession and reallowance figures appearing in the fourth paragraph under the caption "Underwriting," and the information regarding sales to discretionary accounts and/or passive market making and other transactions contained in the sixth and eleventh paragraphs under the caption "Underwriting." -30- (d) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under subsection (a), (b) or (c) above, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under subsection (a), (b) or (c) above. In case any such action is brought against any indemnified party and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party (who shall not, except with the consent of such indemnified party, be counsel to the indemnifying party), and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the prior written consent of the relevant indemnified party, effect any settlement of any pending or threatened action in respect of which indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party unless such settlement includes an unconditional release of such indemnified party from all liability on any claims that are the subject matter of such action. (e) If the indemnification provided for in this Section is unavailable or insufficient to hold harmless an indemnified party under subsection (a), (b) or (c) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in subsection (a), (b) or (c) above (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Stockholder on the one hand and the Underwriters on the other from the offering of the Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Selling Stockholder on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholder on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering of the Securities (before deducting expenses) received by the Company and the Selling Stockholder bear to the total underwriting discounts and commissions received by the Underwriters. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, the Selling Stockholder or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (e) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or -31- claim which is the subject of this subsection (e). Notwithstanding the provisions of this subsection (e), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission, and the Selling Stockholder shall not be required to contribute any amount in excess of the amount by which the proceeds received (less underwriting discounts and commissions) by the Selling Stockholder, if any, from the sale of the Optional Securities exceeds the amount of any damages which the Selling Stockholder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (e) to contribute are several in proportion to their respective underwriting obligations and not joint. (f) The obligations of the Company and the Selling Stockholder under this Section shall be in addition to any liability which the Company and the Selling Stockholder may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Underwriter within the meaning of the Act; and the obligations of the Underwriters under this Section shall be in addition to any liability which the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each director of the Company, to each officer of the Company who has signed a Registration Statement and to each person, if any, who controls the Company within the meaning of the Act. 8. Default of Underwriters. If any Underwriter or Underwriters default in their obligations to purchase Offered Securities hereunder on either the First or any Optional Closing Date and the aggregate number of shares of Offered Securities that such defaulting Underwriter or Underwriters agreed but failed to purchase does not exceed 10% of the total number of shares of Offered Securities that the Underwriters are obligated to purchase on such Closing Date, CSFBC may make arrangements satisfactory to the Company and the Selling Stockholder for the purchase of such Offered Securities by other persons, including any of the Underwriters, but if no such arrangements are made by such Closing Date, the non-defaulting Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the Offered Securities that such defaulting Underwriters agreed but failed to purchase on such Closing Date. If any Underwriter or Underwriters so default and the aggregate number of shares of Offered Securities with respect to which such default or defaults occur exceeds 10% of the total number of shares of Offered Securities that the Underwriters are obligated to purchase on such Closing Date and arrangements satisfactory to CSFBC, the Company and the Selling Stockholder for the purchase of such Offered Securities by other persons are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non- defaulting Underwriter, the Company or the Selling Stockholder, except as provided in Section 9 (provided that if such default occurs with respect to Optional Securities after the First Closing Date, this Agreement will not terminate as to the Firm Securities or any Optional -32- Securities purchased prior to such termination). As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section. Nothing herein will relieve a defaulting Underwriter from liability for its default. 9. Survival of Certain Representations and Obligations. The respective indemnities, agreements, representations, warranties and other statements of the Selling Stockholder or their officers (if applicable), of the Company or its officers and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation, or statement as to the results thereof, made by or on behalf of any Underwriter, the Selling Stockholder, the Company or any of their respective representatives, officers or directors or any controlling person, and will survive delivery of and payment for the Offered Securities. If this Agreement is terminated pursuant to Section 8 or if for any reason the purchase of the Offered Securities by the Underwriters is not consummated, the Company and the Selling Stockholder shall remain responsible for the expenses to be paid or reimbursed by them pursuant to Section 5 and the respective obligations of the Company, the Selling Stockholder and the Underwriters pursuant to Section 7 shall remain in effect, and if any Offered Securities have been purchased hereunder the representations and warranties in Section 2 and all obligations under Section 5 shall also remain in effect. If the purchase of the Offered Securities by the Underwriters is not consummated for any reason other than solely because of the termination of this Agreement pursuant to Section 8 or the occurrence of any event specified in clause (ii), (iii) or (iv) of Section 6(d), the Company and the Selling Stockholder will, jointly and severally, reimburse the Underwriters for all out- of-pocket expenses (including fees and disbursements of counsel) reasonably incurred by them in connection with the offering of the Offered Securities. 10. Notices. All communications hereunder will be in writing and, if sent to the Underwriters, will be mailed or delivered to the Representatives, c/o Credit Suisse First Boston Corporation, Eleven Madison Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking Department - Transactions Advisory Group, or, if sent to the Company, will be mailed or delivered to it at 2800 West Higgins Road, Suite 790, Hoffman Estates, Illinois 60195, Attention: Chief Financial Officer, or, if sent to the Selling Stockholder, will be mailed or delivered to the addresses set forth in Schedule A hereto; provided, however, that any notice to an Underwriter pursuant to Section 7 will be mailed or delivered, telegraphed and confirmed to such Underwriter. 11. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective personal representatives and successors and the officers and directors and controlling persons referred to in Section 7, and no other person will have any right or obligation hereunder. 12. Representation. The Representatives will act for the several Underwriters in connection with the transactions contemplated by this Agreement, and any action under this Agreement taken by the Representatives jointly or by CSFBC will be binding upon all the Underwriters. -33- 13. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same Agreement. 14. Applicable Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to principles of conflict of laws. The Company hereby submits to the non-exclusive jurisdiction of the Federal and state courts in the Borough of Manhattan in The City of New York in any suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. -34- If the foregoing is in accordance with the Representatives' understanding of our agreement, kindly sign and return to the Company one of the counterparts hereof, whereupon it will become a binding agreement among the Selling Stockholder, the Company and the several Underwriters in accordance with its terms. Very truly yours, CAREER EDUCATION CORPORATION By............................... THE PROVIDENT BANK By............................... The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. CREDIT SUISSE FIRST BOSTON CORPORATION SMITH BARNEY INC. Acting on behalf of themselves and as the Representatives of the several Underwriters. By CREDIT SUISSE FIRST BOSTON CORPORATION By.............................. -35- SCHEDULE A
Number of Optional Selling Stockholder Securities to be Sold ------------------- --------------------- The Provident Bank 26,262 [Address] [City, State Zip]
A-1 SCHEDULE B
Number of Firm Underwriter Securities to be Purchased ----------- -------------------------- Credit Suisse First Boston Corporation Smith Barney Inc. ------------- TOTAL 2,850,000 =============
B-1 EX-3.1 3 FORM OF AMENDED AND RESTATED CERTIFICATE Exhibit 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF CAREER EDUCATION CORPORATION ---------------------------- (originally incorporated on January 5, 1994) Career Education Corporation (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "DGCL"), does hereby certify that this Amended and Restated Certificate of Incorporation of the Corporation set forth below has been duly adopted in accordance with Sections 242 and 245 of the DGCL: ARTICLE I --------- The name of the corporation is Career Education Corporation (the "Company"). ARTICLE II ---------- The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, Corporation Trust Center, Wilmington, County of New Castle, Delaware 19801. The name of the Corporation's registered agent at such address is The Corporation Trust Company. ARTICLE III ----------- The nature of the business to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the DGCL. ARTICLE IV ---------- A. Capital Stock. ------------- 1. Authorized Stock. ---------------- Immediately prior to the filing of this Amended and Restated Certificate of Incorporation, the total numbers of shares of capital stock of all classes which the Company had authority to issue was 966,000 shares, including (i) 500,000 shares of Class A Voting Common Stock, par value $.01 per share ("Class A Common"), (ii) 100,000 shares of Class B Voting Common Stock, par value $.01 per share ("Class B Common"), (iii) 100,000 shares of Class C Non-voting Common Stock, par value $.01 per share ("Class C Common"), (iv) 100,000 shares of Class D Non-voting Common Stock par value $.01 per shares ("Class D Common"), (v) 100,000 shares of Class E Non-voting Common Stock, par value $.01 per share ("Class E Common" and, collectively with the Class A Common, Class B Common, Class C Common and Class D Common, "Old Common Stock"), (vi) 50,000 shares of Preferred Stock, Series A, par value $.01 per share ("Series A Preferred"), (vii) 1,000 shares of Preferred Stock, Series B, par value $.01 per share, (viii) 5,000 shares of Preferred Stock, Series C, par value $.01 per share ("Series C Preferred"), and (ix) 10,000 shares of Series D Preferred Stock, par value $.01 per share ("Series D Preferred" and, collectively with the Series A Preferred and Series C Preferred, "Preferred Stock"). Effective upon the filing of this Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware, the Corporation shall have authority to issue the following classes of stock, in the number of shares and at the par value as indicated opposite the name of the class:
NUMBER OF SHARES PAR VALUE CLASS AUTHORIZED PER SHARE -------------- ----------- --------- Common Stock 50,000,000 $0.01 Preferred Stock 1,000,000 $0.01
2. Conversion of Common Stock and Preferred Stock. ---------------------------------------------- At the time of the filing of this Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware, (a) each outstanding whole share of Old Common Stock shall automatically, without the necessity of any further action on the part of the holder thereof, be changed and reclassified into 7.473438 shares of Common Stock, and (b) each outstanding whole share of Preferred Stock shall automatically, without the necessity of further action on the part of the holder thereof, be changed and reclassified into such number of shares of Common Stock as shall be determined by dividing the book value of such share of Preferred Stock (i.e., the book value of such share plus, in the case of Series A Preferred or Series D Preferred, all accrued dividends previously added to the liquidation value pursuant to the terms thereof) by the initial price per share to the public in the Company's initial public offering of Common Stock. Upon the occurrence of the reclassifications effected by this Section A.2. (the "Conversions"), each certificate for outstanding shares of Old Common Stock or Preferred Stock dated prior to the effective date of the Conversions shall evidence, and be deemed to evidence, the number of shares of Common Stock into which the shares previously evidenced by such certificate shall have been reclassified in accordance with this Section A.2., and the Conversions shall become effective in accordance with the terms hereof, whether or not any or all of the certificates evidencing Old Common Stock and Preferred Stock shall have been surrendered or new certificates evidencing the number of shares of Common Stock into which such shares have been reclassified have been issued in accordance with Section A.3. hereof. -2- 3. Subsequent Reissuance of Certificates. ------------------------------------- Following the occurrence of the Conversions, each holder of shares of Old Common Stock or Preferred Stock shall either (a) surrender each certificate evidencing any such shares at the office of the Corporation or (b) notify the Corporation that such certificate has been lost, stolen or destroyed and execute an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with the reissuance of such lost, stolen or destroyed certificate. The Corporation shall thereupon issue and deliver to such holder a certificate or certificates, in the name shown on such certificate evidencing Old Common Stock or Preferred Stock, for the number of whole shares of Common Stock into which the shares of Old Common Stock or Preferred Stock evidenced by the surrendered (or lost, stolen or destroyed) certificate have been reclassified, dated as of the date on which the Conversions become effective. The Corporation shall not be obligated to issue any certificate evidencing shares of Common Stock in connection with the Conversions except in accordance with this Section A.3. 4. Fractional Shares. ----------------- Notwithstanding the foregoing, no fraction of a share of Common Stock shall be issued by virtue of the Conversions, but in lieu thereof, each holder of shares of Preferred Stock who would otherwise be entitled to a fraction of a share of Common Stock (after aggregating all fractional shares of Common Stock to be received by such holder) shall receive from the Corporation an amount in cash (rounded to the nearest whole cent) equal to the product of (i) such fraction multiplied by (ii) the initial price per share to the public in the Company's initial public offering of Common Stock. B. Designations and Rights. ----------------------- The designations and the powers, preferences and relative, participating, optional or other rights of the capital stock and the qualifications, limitations or restrictions thereof are as follows: 1. Common Stock. ------------ a. Voting Rights: Except as otherwise required by law or expressly provided herein, the holders of shares of Common Stock shall be entitled to one vote per share on each matter submitted to a vote of the stockholders of the Corporation. b. Dividends: Subject to the rights of the holders, if any, of Preferred Stock, the holders of Common Stock shall be entitled to receive dividends at such times and in such amounts as may be determined by the Board of Directors of the Corporation. c. Liquidation Rights: In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the Corporation and -3- the preferential amounts to which the holders of any outstanding shares of Preferred Stock shall be entitled upon dissolution, liquidation or winding up, the assets of the Corporation available for distribution to stockholders shall be distributed ratably among the holders of the shares of Common Stock. 2. Preferred Stock. --------------- Preferred Stock may be issued from time to time in one or more series. Subject to the other provisions of this Certificate of Incorporation and any limitations prescribed by law, the Board of Directors is authorized to provide for the issuance of and issue shares of the Preferred Stock in series and, by filing a certificate pursuant to the laws of the State of Delaware, to establish from time to time the number of shares to be included in each such series and to fix the designation, powers, preferences and rights of the shares of each such series and any qualifications, limitations or restrictions thereof. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the Common Stock, without a vote of the holders of any Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to the certificate or certificates establishing such series of Preferred Stock. ARTICLE V --------- The business and affairs of the Corporation shall be managed by or under the direction of a board of directors consisting of not less than five (5) nor more than nine (9) directors. The exact number shall be determined from time to time by resolution adopted by the affirmative vote of a majority of the directors in office at the time of adoption of such resolution. Initially, the number of directors shall be seven (7) and shall consist of the following persons: Robert E. Dowdell, Wallace O. Laub, Thomas B. Lally, John M. Larson, Keith K. Ogata, Patrick K. Pesch and Todd H. Steele. The directors shall be divided into three classes, Class I, Class II and Class III with each class having two members. Class I shall initially consist of the following directors: Messrs. Dowdell and Pesch. Class II shall initially consist of the following directors: Messrs. Laub, Ogata and Steele. Class III shall initially consist of the following directors: Messrs. Lally and Larson. The initial term of office of the Class I, Class II and Class III directors shall expire at the annual meeting of stockholders in 1999, 2000 and 2001, respectively. Beginning in 1999, at each annual meeting of stockholders, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes by the Board of Directors so as to maintain the number of directors in each class as nearly equal as is reasonably possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class. In no case will a decrease in the number of directors, shorten the term of any incumbent director, even though such decrease may result in an inequality of the classes until the expiration of such term. A director shall hold office until the annual meeting of stockholders in the year in which his or her term expires and until his or her successor shall be elected and qualified -4- subject, however, to prior death, resignation, retirement or removal from office. Directors may only be removed for cause, except as otherwise provided by law, by the holders of at least sixty-six and two-thirds percent (66 2/3%) of the shares entitled to vote at an election of directors. Except as required by law or the provisions of this Certificate of Incorporation, all vacancies on the Board of Directors and newly-created directorships shall be filled by the Board of Directors. Any director elected to fill a vacancy not resulting from an increase in the number of directors shall have the same remaining term as that of his or her predecessor. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock issued by the Corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of this Certificate of Incorporation and any resolutions of the Board of Directors applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Article V. Notwithstanding anything to the contrary contained in this Certificate of Incorporation, the affirmative vote of the holders of at least eighty percent (80%) of the voting power of the shares entitled to vote generally in the election of directors shall be required to amend, alter or repeal, or to adopt any provision inconsistent with, this Article V. ARTICLE VI ---------- A. Written Consent. Any action required or permitted to be taken by the stockholders of the Corporation shall be effected only at a duly called annual or special meeting of stockholders of the Corporation and shall not be effected by consent in writing by the holders of outstanding stock pursuant to Section 228 of the DGCL or any other provision of the DGCL. B. Special Meetings. Special meetings of stockholders of the Corporation may be called upon not less than ten (10) nor more than sixty (60) days' written notice by the Board of Directors, pursuant to a resolution approved by a majority of the Board of Directors. C. Amendment. Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least eighty percent (80%) of the shares entitled to vote generally in the election of directors shall be required to amend, alter or repeal, or to adopt any provision inconsistent with, this Article VI. ARTICLE VII ----------- In furtherance and not in limitation of the power conferred by statute, the Board of Directors is expressly authorized to make, alter, amend or repeal the By-laws of the Corporation. The By-laws of the Corporation may be altered, amended, or repealed, or new By-laws may be adopted, by the Board of Directors in accordance with the preceding sentence or by the vote of the holders of at least eighty percent (80%) of the voting power of the shares of the Corporation entitled to vote generally in the election of directors at an annual or special meeting of stockholders, provided that, if such alteration, amendment, repeal or adoption of new -5- By-laws is effected at a duly called special meeting, notice of such alteration, amendment, repeal or adoption of new By-laws is contained in the notice of such special meeting. ARTICLE VIII ------------ A director of the Corporation shall not, in the absence of fraud, be disqualified by his office from dealing or contracting with the Corporation either as a vendor, purchaser or otherwise, nor in the absence of fraud shall a director of the Corporation be liable to account to the Corporation for any profit realized by him from or through any transaction or contract of the Corporation by reason of the fact that such director, or any firm of which such director is a member or any corporation of which such director is an officer, director or stockholder, was interested in such transaction or contract if such transaction or contract has been authorized, approved or ratified in a manner provided in the DGCL for authorization, approval or ratification of transactions or contracts between the Corporation and one or more of its directors or officers or between the Corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are directors or officers or have a financial interest. ARTICLE IX ---------- Meetings of stockholders may be held within or without the State of Delaware as the By-laws of the Company may provide. The books of the Corporation may be kept outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors of the Corporation or in the By-laws of the Corporation. Election of directors need not be by written ballot unless the By-laws of the Corporation so provide. ARTICLE X --------- Whenever a compromise or arrangement is proposed between the Corporation and its creditors or any class of them and/or between the Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of the Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for the Corporation under the provisions of Section 291 of the DGCL or on the application of trustees in dissolution or of any receiver or receivers appointed for the Corporation under the provisions of Section 279 of the DGCL, order a meeting of the creditors or class of creditors and/or the stockholders or class of stock of the Corporation, as the case may be, to be summoned in such manner as said court directs. If a majority in number representing three-fourths (3/4) of the value of the creditors or class of creditors and/or the stockholders or class of stockholders the Corporation, as the case may be, agree to any compromise or arrangement or to any reorganization of the Corporation as a consequence of such compromise or arrangement, said compromise or arrangement of said reorganization shall, if sanctioned by the Court to which said application has been made, be binding on all the creditors or class of creditors and/or on all the stockholders or class of stockholders, of the Corporation, as the case may be, and also on the Corporation. -6- ARTICLE XI ---------- The Board of Directors of the Corporation may adopt a resolution proposing to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute. ARTICLE XII ----------- A. Indemnification of Officers and Directors: The Corporation shall: 1. indemnify, to the fullest extent permitted by the DGCL, any present or former director of the Corporation and any present or former officer, employee or agent of the Corporation selected by the Board of Directors for indemnification, such selection to be evidenced by an indemnification agreement, who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that such person is or was a director, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or if such person has previously been designated for indemnification by a resolution of the Board of Directors, is or was an officer, employee or agent of the Corporation, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that such person's conduct was unlawful; and 2. indemnify any present or former director of the Corporation and any present or former officer, employee or agent of the Corporation selected by the Board of Directors for indemnification, such selection to be evidenced by an indemnification agreement, who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was a director, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or if such person has previously been designated for indemnification by a resolution of the Board of Directors, is or was an officer, employee or agent of the Corporation, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to -7- the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to, the Corporation, unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper; and 3. indemnify any present or former director or officer or any present or former employee or agent of the Corporation selected by the Board of Directors for indemnification, such selection to be evidenced by an indemnification agreement, against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith, to the extent that such person has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Article XII.A.1. and 2., or in defense of any claim, issue or matter therein; and 4. make any indemnification under Article XII.A.1. and 2. (unless ordered by a court) only as authorized in the specific case upon a determination that indemnification of the present or former director, officer, employee or agent is proper in the circumstances because such director, officer, employee or agent has met the applicable standard of conduct set forth in Article XII.A.1. and 2. Such determination shall be made, with respect to a person who is an officer or director at the time of such determination, (a) by a majority vote of the directors who are not parties to such action, suit or proceeding, even if less than a quorum, or (b) by a committee of such directors designated by a majority vote of such directors , even if less than a quorum, or (c) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (d) by the stockholders of the Corporation; and 5. pay expenses incurred by a director or officer in defending a civil or criminal action, suit or proceeding in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such director or officer is not entitled to be indemnified by the Corporation as authorized in this Article XII. Notwithstanding the foregoing, the Corporation shall not be obligated to pay expenses incurred by a director or officer with respect to any threatened, pending, or completed claims, suits or actions, whether civil, criminal, administrative, investigative or otherwise ("Proceedings"), initiated or brought voluntarily by such director or officer and not by way of defense (other than Proceedings brought to establish or enforce a right to indemnification under the provisions of this Article XII, unless a court of competent jurisdiction determines that each of the material assertions made by such director or officer in such Proceedings were not made in good faith or were frivolous). The Corporation shall not be obligated to indemnify such director or officer for any amount paid in settlement of a Proceeding covered hereby without the prior written consent of the Corporation to such settlement; and 6. not deem the indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this Article XII as exclusive of any other -8- rights to which those seeking indemnification or advancement of expenses may be entitled under any By-law, agreement or vote of stockholders or disinterested directors, or otherwise, both as to action in such director's or officer's official capacity and as to action in another capacity while holding such office; and 7. have the right, authority and power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of this Article XII; and 8. deem the provisions of this Article XII to be a contract between the Corporation and each director, or appropriately designated officer, employee or agent who serves in such capacity at any time while this Article XII is in effect, and any repeal or modification of this Article XII shall not affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any action, suit or proceeding theretofore or thereafter brought or threatened based in whole or in part upon such state of facts. The provisions of this Article XII shall not be deemed to be a contract between the Corporation and any directors, officers, employees or agents of any other corporation (the "Second Corporation") which shall merge into or consolidate with the Corporation when the Corporation shall be the surviving or resulting corporation, and any such directors, officers, employees or agents of the Second Corporation shall be indemnified to the extent required under the DGCL only at the discretion of the board of Directors of the Corporation; and 9. continue the indemnification and advancement of expenses provided by, or granted pursuant to, this Article XII, unless otherwise provided when authorized or ratified, as to a person who has ceased to be a director, officer, employee or agent of the Corporation, and the indemnification and advancement of expenses provided by, or granted pursuant to, this Article XII shall inure to the benefit of the heirs, executors and administrators of such a person. B. Elimination of Certain Liability of Directors: No director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL, as the same exists or hereafter may be amended, or (iv) for any transaction from which the director derived an improper personal benefit. If the DGCL is amended to authorize the further elimination or limitation of liability of directors, then the liability of a director of the Corporation, in addition to the limitation on personal liability provided herein, shall be limited to the fullest extent permitted by the amended DGCL. Any repeal or modification of this Article XII by the stockholders of the Corporation shall be prospective only and shall not adversely -9- affect any limitation on the personal liability of a director of the Corporation existing at the time of such repeal or modification. IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated Certificate of Incorporation to be signed by its President and Secretary on January ___, 1998. CAREER EDUCATION CORPORATION By: __________________________________ John M. Larson President, Chief Executive Officer and Secretary Attest: ________________________________ William A. Klettke Senior Vice President, Chief Financial Officer and Treasurer -10- EX-3.2 4 FORM OF AMENDED AND RESTATED BY-LAWS EXHIBIT 3.2 AMENDED AND RESTATED BY-LAWS OF CAREER EDUCATION CORPORATION (Amended and Restated ___________, 1998) ARTICLE I --------- OFFICES ------- Section 1.1. Registered Office. The registered office of Career Education Corporation (the "Corporation") shall be in the City of Wilmington, County of New Castle, State of Delaware. Section 1.2. Other Offices. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II ---------- MEETINGS OF STOCKHOLDERS ------------------------ Section 2.1. Place of Meeting. All meetings of the stockholders for the election of directors shall be held at such place either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such time and place, within or without the State of Delaware, as shall be stated by the Board of Directors in its notice of the meeting or in a duly executed waiver of notice thereof. Section 2.2. Time of Annual Meeting. Annual meetings of stockholders shall be held on the third Thursday in May, if not a legal holiday, and if a legal holiday, then on the next secular day following, at 10:00 A.M., or at such other date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting, at which stockholders shall elect directors to hold office for the term provided in Section 3.2 of these By-laws and conduct such other business as shall be considered. Section 2.3. Notice of Annual Meetings. Except as otherwise required by law, written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not fewer than ten (10) nor more than sixty (60) days before the date of the meeting. Section 2.4. Director Nominations. Only persons who are nominated in accordance with the following procedures shall be eligible to serve as directors. Nominations of persons for election to the Board of Directors of the Corporation at a meeting of stockholders may be made (i) by or at the direction of the Board of Directors, or (ii) by any stockholder of the Corporation entitled to vote in the election of directors at the meeting who complies with the notice procedures set forth in this Article II, Section 2.4. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to, or mailed and received by, the Secretary of the Corporation at the principal executive offices of the Corporation not less than ninety (90) days prior to the first anniversary of the date of the previous year's annual meeting of stockholders; provided, however, that if no annual meeting of stockholders was held in the previous year or if the date of the annual meeting is advanced by more than thirty (30) days prior to, or delayed by more than sixty (60) days after, such anniversary date, notice by the stockholder to be timely must be so delivered, or mailed and received, not later than the close of business on the later of (a) the sixtieth (60th) day prior to such annual meeting or (b) the tenth (10th) day following the day on which the date of such meeting has been first "publicly disclosed" (in the manner provided in the last sentence of this Article II, Section 2.4) by the Corporation. Notwithstanding the foregoing, in the event that the number of directors to be elected to the Board of Directors is increased and the names of all of the nominees for director position are not "publicly disclosed" by the Corporation at least seventy (70) days prior to the date of the first anniversary of the prior year's annual meeting of stockholders, a stockholder's notice pursuant to this Article II, Section 2.4 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to, or mailed and received by, the Secretary of the Corporation at the principal executive offices of the Corporation not later than the close of business on the tenth (10th) day following the day on which such names have been first "publicly disclosed" by the Corporation. Any stockholder's notice pursuant to this Article II, Section 2.4 shall set forth (i) as to each person whom the stockholder proposes to nominate for election or re-election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serving as director if elected); and (ii) as to the stockholder giving notice (A) the name and address, as they appear on the Corporation's books, of such stockholder and (B) the class and number of shares of the Corporation which are beneficially owned by such stockholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. No person shall be eligible to serve as a director of the Corporation unless nominated in accordance with the procedures set forth herein. The presiding officer shall, if the facts so warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the By-laws, and if such officer should so determine, such officer shall so declare to the meeting, and the defective nomination shall be disregarded. For purposes of these By-laws, "publicly disclosed" or "public disclosure" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or a comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission. -2- Section 2.5. Annual Meeting Agenda Items. At an annual meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting (i) by or at the direction of the Board of Directors, or (ii) by any stockholder of the Corporation who complies with the notice procedures set forth in this Article II, Section 2.5, in the time herein provided. For business to be properly brought before an annual meeting by a stockholder, the stockholder must deliver written notice to, or mail such written notice so that it is received by, the Secretary of the Corporation, at the principal executive offices of the Corporation, not less than ninety (90) days prior to the first anniversary of the date of the previous year's annual meeting of stockholders; provided, however, that if no annual meeting of stockholders was held in the previous year or if the date of the annual meeting is advanced by more than thirty (30) days prior to, or delayed by more than sixty (60) days after, such anniversary date, notice by the stockholder to be timely must be so delivered, or mailed and received, not later than the close of business on the later of (a) the sixtieth (60th) day prior to such annual meeting or (b) the tenth (10th) day following the day on which the date of the meeting has been first "publicly disclosed" (in the manner provided in Article II, Section 2.4 above) by the Corporation. Any stockholder's notice pursuant to this Article II, Section 2.5 shall set forth as to each matter the stockholder proposes to bring before the annual meeting (A) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (B) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (C) the class and number of shares of the Corporation which are beneficially owned by the stockholder and (D) any material interest of the stockholder in such business. At an annual meeting, the presiding officer shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Article, Section 2.5, and if such officer should so determine, such officer shall so declare to the meeting, and any such business not properly brought before the meeting shall not be transacted. Whether or not the foregoing procedures are followed, no matter which is not a proper matter for stockholder consideration shall be brought before the meeting. Section 2.6. Special Meetings of the Stockholders. Special meetings of the stockholders of the Corporation may be called only by the Board of Directors pursuant to a resolution approved by a majority of the Board of Directors. The business transacted at any special meeting of the stockholders shall be limited to the purposes stated in the notice for the meeting transmitted to stockholders. Section 2.7. Notice of Special Meetings. Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given by the Secretary of the Corporation, not fewer than ten (10) nor more than sixty (60) days before the date of the meeting, to each stockholder entitled to vote at such meeting. Section 2.8. Fixing of Record Date. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which shall not precede the date upon which the resolution fixing the record date is adopted and which shall be (i) not more than sixty (60) nor less than ten (10) days before the date of a -3- meeting, and (ii) not more than sixty (60) days prior to any other action. A determination of stockholders of record entitled to notice of, or to vote at, a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for any adjourned meeting. Section 2.9. Voting Lists. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder who is present. Section 2.10. Quorum and Adjournments. The holders of a majority of the voting power of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business, except as otherwise provided by statute or by the Corporation's Certificate of Incorporation. If, however, such quorum shall not be present or represented at any such meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented; provided that if the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed by the directors for the adjourned meeting, a new notice shall be transmitted to the stockholders of record entitled to vote at the adjourned meeting. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. Section 2.11. Vote Required. When a quorum is present at any meeting of all stockholders, the affirmative vote of the holders of a majority of the voting power of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall decide any question brought before such meeting, unless the question is one upon which, by express provision of statute or of the Corporation's Certificate of Incorporation, a different vote is required, in which case such express provision shall govern and control the decision of such question; provided, however, all elections of directors shall be determined by a plurality of the votes cast. Section 2.12. Voting Rights. Unless otherwise provided in the Corporation's Certificate of Incorporation, each stockholder having voting power shall at every meeting of the stockholders be entitled to one (1) vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted on after three (3) years from its date, unless the proxy provides for a longer period. At any meeting of the stockholders, every stockholder entitled to vote may vote in person or by proxy authorized by an instrument in writing or by a transmission permitted by law filed in accordance with the procedure established for the meeting. Any copy, facsimile telecommunication or other reliable -4- reproduction of the writing or transmission created pursuant to this paragraph may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used; provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. All voting, including on the election of directors, may (except where otherwise required by law) be by a voice vote; provided, however, that upon demand therefor by a stockholder entitled to vote or by his or her proxy, a stock vote shall be taken. Every stock vote shall be taken by ballots, each of which shall state the name of the stockholder or proxy voting and such other information as may be required under the procedure established for the meeting. The Corporation may, and to the extent required by law shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting may, and to the extent required by law shall, appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath to faithfully execute the duties of inspector with strict impartiality and according to the best of his or her ability. Every vote taken by ballots shall be counted by an inspector or inspectors appointed by the chairman of the meeting. Section 2.13. Presiding Over Meetings. The Chairman of the Board of Directors shall preside at all meetings of the stockholders. In the absence or inability to act of the Chairman, the Vice Chairman, the President or a Vice President (in that order) shall preside, and in their absence or inability to act another person designated by one of them shall preside. The Secretary of the Corporation shall act as Secretary of each meeting of the stockholders. In the event of his or her absence or inability to act, the chairman of the meeting shall appoint a person who need not be a stockholder to act as Secretary of the meeting. Section 2.14. Conducting Meetings. Meetings of the stockholders shall be conducted in a fair manner but need not be governed by any prescribed rules of order. The presiding officer of the meeting shall establish an agenda for the meeting. The presiding officer's rulings on procedural matters shall be final. The presiding officer is authorized to impose reasonable time limits on the remarks of individual stockholders and may take such steps as such officer may deem necessary or appropriate to assure that the business of the meeting is conducted in a fair and orderly manner. ARTICLE III ----------- DIRECTORS --------- Section 3.1. General Powers. The business and affairs of the Corporation shall be under the direction of, and managed by, a board comprised of directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not required by statute, by the Corporation's Certificate of Incorporation or by these By-laws to be done by the stockholders. Directors need not be residents of the State of Delaware or stockholders of the -5- Corporation. The number of directors shall be determined in the manner provided in the Corporation's Certificate of Incorporation. Section 3.2. Election. Directors shall be elected by class for three (3) year or other terms as specified in the Corporation's Certificate of Incorporation, and each director elected shall hold office during the term for which he or she is elected and until his or her successor is elected and qualified, subject, however, to his or her prior death, resignation, retirement or removal from office. Section 3.3. Removal. Directors may only be removed for cause, except as otherwise provided by law, by the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of the shares entitled to vote at an election of directors. Section 3.4. Vacancies. Any vacancies occurring in the Board of Directors and newly created directorships shall be filled in the manner provided in the Corporation's Certificate of Incorporation. Section 3.5. Place of Meetings. The Board of Directors of the Corporation may hold meetings, both regular and special, either within or without the State of Delaware. The first meeting of each newly elected Board of Directors shall be held immediately following the adjournment of the annual meeting of the stockholders at the same place as such annual meeting and no notice of such meeting shall be necessary to the newly elected directors in order to legally constitute the meeting, provided a quorum shall be present. In the event such meeting is not held at such time and place, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a written waiver signed by all of the directors. Section 3.6. Participation by Conference Telephone. Unless otherwise restricted by the Corporation's Certificate of Incorporation or these By-laws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation by such means shall constitute presence in person at such meeting. Section 3.7. Regular Meetings. Regular meetings of the Board of Directors may be held, without notice, at such time and at such place as shall from time to time be determined by the Board of Directors. Section 3.8. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board, the Chief Executive Officer or the President on at least one day's notice to each director, either personally, or by courier, telephone, telefax, mail or telegram. Special meetings shall be called by the Chairman, the Chief Executive Officer or the President in like manner and on like notice at the written request of two or more of the directors comprising the Board of Directors stating the purpose or purposes for which such meeting is requested. Notice of any meeting of the Board of Directors for which a notice is required may be waived in writing signed by the person or persons entitled to such notice, whether before or after the time of such meeting, and such waiver shall be equivalent to the giving of such notice. -6- Attendance of a director at any such meeting shall constitute a waiver of notice thereof, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because such meeting is not lawfully convened. Neither the business to be transacted at, nor the purpose of, any meeting of the Board of Directors for which a notice is required need be specified in the notice, or waiver of notice, of such meeting. The Chairman shall preside at all meetings of the Board of Directors. In the absence or inability to act of the Chairman, then the Vice Chairman (if one shall have been chosen by the Board), the Chief Executive Officer, the President or the Chief Financial Officer (in that order) shall preside, and in their absence or inability to act, another director designated by one of them shall preside. Section 3.9. Quorum; No Action on Certain Matters. At all meetings of the Board of Directors, a majority of the then duly elected directors shall constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Corporation's Certificate of Incorporation. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 3.10. Resignations. Any director of the Corporation may resign at any time by giving written notice to the Board of Directors, the Chairman or the President. Such resignation shall take effect at the time specified therein and, unless tendered to take effect upon acceptance thereof, the acceptance of such resignation shall not be necessary to make it effective. Section 3.11. Informal Action. Unless otherwise restricted by the Corporation's Certificate of Incorporation or these By-laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board of Directors or committee consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. Section 3.12. Presumption of Assent. A director of the Corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be conclusively presumed to have assented to the action taken unless his or her dissent shall be entered in the minutes of the meeting or unless he or she shall file his or her written dissent to such action with the person acting as the Secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. Section 3.13. Compensation of Directors. In the discretion of the Board of Directors, the directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors or a committee thereof, may be paid a stated salary or a fixed sum for attendance at each meeting of the Board of Directors or a committee thereof and may be awarded other compensation for their service as directors. No such payment or award shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. -7- ARTICLE IV ---------- COMMITTEES OF DIRECTORS ----------------------- Section 4.1. Appointment and Powers. The Board of Directors may designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to the following matters: (a) approving or adopting, or recommending to the stockholders, any action or matter expressly required by the Delaware General Corporation Law to be submitted to stockholders for approval or (b) adopting, amending or repealing any of the By-laws. Section 4.2. Committee Minutes. Each committee shall keep regular minutes of its meetings and shall file such minutes and all written consents executed by its members with the Secretary of the Corporation. Each committee may determine the procedural rules for meeting and conducting its business and shall act in accordance therewith, except as otherwise provided herein or required by law. Adequate provision shall be made for notice to members of all meetings; one- third of the members shall constitute a quorum unless the committee shall consist of one or two members, in which event one member shall constitute a quorum; and all matters shall be determined by a majority vote of the members present. Action may be taken by any committee without a meeting if all members thereof consent thereto in writing and the writing or writings are filed with the minutes of the proceedings of such committee. ARTICLE V --------- NOTICES ------- Section 5.1. Manner of Notice. Whenever, under applicable law or the Corporation's Certificate of Incorporation or these By-laws, notice is required to be given to any director or stockholder, unless otherwise provided in the Corporation's Certificate of Incorporation or these By-laws, such notice may be given in writing, by courier or mail, addressed to such director or stockholder, at such director's or stockholder's address as it appears on the records of the Corporation, with freight or postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall have been deposited with such courier or in the United States mail. Notice may be given orally if such notice is confirmed in writing in a manner provided therein. Notice to directors may also be given by telegram, mailgram, telex or telecopier. -8- Section 5.2. Waiver. Whenever any notice is required to be given under applicable law or the provisions of the Corporation's Certificate of Incorporation or these By-laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE VI ---------- OFFICERS -------- Section 6.1. Number and Qualifications. The officers of the Corporation shall be chosen by the Board of Directors and shall be a Chairman of the Board, a Chief Executive Officer, a President, a Chief Financial Officer, one or more Vice Presidents, a Secretary and a Treasurer. The Board of Directors may also choose a Vice Chairman for the Board (or Vice Chairman), one or more Assistant Secretaries and Assistant Treasurers and such additional officers as the Board of Directors may deem necessary or appropriate from time to time. Membership on the Board of Directors shall not be a prerequisite to the holding of any other office. Any number of offices may be held by the same person, unless the Corporation's Certificate of Incorporation or these By-laws otherwise provide. Section 6.2. Election. The Board of Directors at its first meeting after each annual meeting of stockholders shall elect a Chairman of the Board, a Chief Executive Officer, a President, a Chief Financial Officer, one or more Vice Presidents, a Secretary and a Treasurer, and may choose a Vice Chairman of the Board, one or more Assistant Secretaries and Assistant Treasurers and such other officers as the Board of Directors shall deem desirable. Section 6.3. Other Officers and Agents'. The Board of Directors may choose such other officers and agents as it shall deem necessary, which officers and agents shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. Section 6.4. Salaries. The salaries or other compensation of the officers and agents of the Corporation shall be fixed from time to time by the Board of Directors, and no officer shall be prevented from receiving such salary or other compensation by reason of the fact that such officer is also a director of the Corporation. Section 6.5. Term of Office. The officers of the Corporation shall hold office until their successors are chosen and qualified or until their earlier resignation or removal. Any officer elected or appointed by the Board of Directors may be removed at any time, either with or without cause, by the affirmative vote of a majority of the directors then in office at any meeting of the Board of Directors. If a vacancy shall exist in the office of the Corporation, the Board of Directors may elect any person to fill such vacancy, such person to hold office as provided in Section 6.1 of this Article VI. Section 6.6. The Chairman of the Board. The Chairman of the Board (or Chairman) shall preside at all meetings of the stockholders and of the Board of Directors and shall see that -9- orders and resolutions of the Board of Directors are carried into effect. The Chairman of the Board shall perform such duties as may be assigned to him by the Board of Directors. Section 6.7. The Chief Executive Officer. The Chief Executive Officer shall be the principal executive officer of the Corporation and shall, in general, supervise and control all of the business and affairs of the Corporation, unless otherwise provided by the Board of Directors. In the absence of the Chairman of the Board, the Chief Executive Officer shall preside at all meetings of the stockholders and of the Board of Directors and shall see that orders and resolutions of the Board of Directors are carried into effect. The Chief Executive Officer may sign bonds, mortgages, certificates for shares and all other contracts and documents, whether or not under the seal of the Corporation, except in cases where the signing and execution thereof shall be expressly delegated by law, by the Board of Directors or by these By-laws to some other officer or agent of the Corporation. The Chief Executive Officer shall have general powers of supervision and shall be the final arbiter of all differences between officers of the Corporation, and the Chief Executive Officer's decision as to any matter affecting the Corporation shall be final and binding as between the officers of the Corporation, subject only to its Board of Directors. Section 6.8. The President. Unless another party has been designated as Chief Operating Officer, the President shall be the Chief Operating Officer of the Corporation responsible for the day-to-day active management of the business of the Corporation, under the general supervision of the Chief Executive Officer. In the absence of the Chief Executive Officer, the President shall perform the duties of the Chief Executive Officer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Chief Executive Officer. The President shall have concurrent power with the Chief Executive Officer to sign bonds, mortgages, certificates for shares and other contracts and documents, whether or not under the seal of the Corporation, except in cases where the signing and execution thereof shall be expressly delegated by law, by the Board of Directors or by these By-laws to some other officer or agent of the Corporation. In general, the President shall perform all duties incident to the office of the President and such other duties as the Chief Executive Officer or the Board of Directors may from time to time prescribe. Section 6.9. The Chief Financial Officer. The Chief Financial Officer shall be the principal financial and accounting officer of the Corporation. The Chief Financial Officer shall: (a) have charge of and be responsible for the maintenance of adequate books of account for the Corporation; (b) have charge and custody of all funds and securities of the Corporation, and be responsible therefor and for the receipt and disbursement thereof; and (c) perform all the duties incident to the office of the Chief Financial Officer and such other duties as from time to time may be assigned to him by the President or by the Board of Directors. If required by the Board of Directors, the Chief Financial Officer shall give a bond for the faithful discharge of the Chief Financial Officer's duties in such sum and with such surety or sureties as the Board of Directors may determine. Section 6.10. The Vice Presidents. In the absence of the President, or in the event of the President's inability or refusal to act, the Vice Presidents (in the order designated, or in the absence of any designation, then in the order of their election) shall perform the duties of the President, and when so acting, shall have all the powers of, and be subject to all the restrictions -10- upon, the President. The Vice Presidents shall perform such other duties and have such other powers as the Chief Executive Officer or the Board of Directors may from time to time prescribe. Section 6.11. The Secretary. The Secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record all the proceedings of the meetings of the Corporation and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. The Secretary shall give, or cause to be given, or cause to be given notice of all meetings of the stockholders and special meetings of the Board of Directors and shall perform such other duties as may be prescribed by the Board of Directors or the Chief Executive Officer, under whose supervision the Secretary shall be. The Secretary shall have custody of the corporate seal of the Corporation and the Secretary or an Assistant Secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by the Secretary's signature or by the signature of such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by such officer's signature. Section 6.12. The Treasurer. In the absence of the Chief Financial Officer or in the event of the Chief Financial Officer's inability or refusal to act, the Treasurer shall perform the duties of the Chief Financial Officer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Chief Financial Officer. The Treasurer shall perform such other duties and have such other powers as the Chief Executive Officer or the Board of Directors may from time to time prescribe. Section 6.13. The Assistant Secretary. The Assistant Secretary, or if there be more than one, the Assistant Secretaries in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election), shall, in the absence of the Secretary or in the event of the Secretary's inability or refusal to act, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Chief Executive Officer or the Board of Directors may from time to time prescribe. Section 6.14. The Assistant Treasurer. The Assistant Treasurer, or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election), shall, in the absence of the Treasurer or in the event of the Treasurer's inability or refusal to act, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as the Chief Executive Officer or the Board of Directors may from time to time prescribe. -11- ARTICLE VII ----------- CERTIFICATES OF STOCK, TRANSFERS AND RECORD DATES ------------------------------------------------- Section 7.1. Form of Certificates. Every holder of stock in the Corporation shall be entitled to have a certificate signed by, or in the name of, the Corporation by (a) the Chairman of the Board, the Vice-Chairman of the Board or the President of the Corporation, and (b) the Secretary, the Treasurer, an Assistant Secretary or an Assistant Treasurer of the Corporation, certifying the number of shares owned by such holder in the Corporation. If the Corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock; provided that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth, on the face or back of the cer tificate which the Corporation shall issue to represent such class or series of stock, a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Subject to the foregoing, certificates of stock of the Corporation shall be in such form as the Board of Directors may from time to time prescribe. Section 7.2. Facsimile Signatures. Where a certificate is countersigned (i) by a transfer agent other than the Corporation or its employee or (ii) by a registrar other than the Corporation or its employee, any other signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed, or whose facsimile signature has been placed upon, a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. Section 7.3. Lost Certificates. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or such owner's legal representative, to advertise the same in such manner as the Corporation shall require and/or give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation or its transfer agent or registrar with respect to the certificate alleged to have been lost, stolen or destroyed. Section 7.4. Transfers of Stock. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the -12- Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 7.5. Registered Stockholders. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not the Corporation shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VIII ------------ CONFLICT OF INTERESTS --------------------- Section 8.1. Contract or Relationship Not Void. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are directors or officers or have a financial interest shall be void or voidable solely for this reason, or solely because such director or officer is present at, or participates in, the meeting of the Board of Director's or committee thereof which authorizes the contract or transaction, or solely because such director's or officer's vote is counted for such purpose, if: (i) The material facts as to such director's or officer's relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the board or committee in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (ii) The material facts as to such director's or officer's relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (iii) The contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified by the Board of Directors, a committee thereof, or the stockholders. Section 8.2. Quorum. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. -13- ARTICLE IX ---------- GENERAL PROVISIONS ------------------ Section 9.1. Dividends. Dividends upon the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property or in shares of the capital stock or rights to acquire same, subject to the provisions of the Corporation's Certificate of Incorporation. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the directors shall think conducive to the interest of the Corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. Section 9.2. Checks. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. Section 9.3. Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. Section 9.4. Seal. The corporate seal shall have inscribed thereon the name of the Corporation and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. Section 9.5. Stock in Other Corporations. Shares of any other corporation which may from time to time be held by this Corporation may be represented and voted at any meeting of stockholders of such corporation by the Chairman, the Chief Executive Officer, the President, the Chief Financial Officer or a Vice President of the Corporation, or by any proxy appointed in writing by the Chairman, the Chief Executive Officer, the President, the Chief Financial Officer or a Vice President of the Corporation, or by any other person or persons thereunto authorized by the Board of Directors. Shares represented by certificates standing in the name of the Corporation may be endorsed for sale or transfer in the name of the Corporation by the Chairman, the Chief Executive Officer, the President, the Chief Financial Officer or any Vice President of the Corporation or by any other officer or officers thereunto authorized by the Board of Directors. Shares belonging to the Corporation need not stand in the name of the Corporation, but may be held for the benefit of the Corporation in the individual name of the Chief Financial Officer or of any other nominee designated for the purpose of the Board of Directors. -14- ARTICLE X --------- AMENDMENTS ---------- These By-laws may be altered, amended or repealed or new by-laws may be adopted only in the manner provided in the Corporation's Certificate of Incorporation. -15- EX-4.1 5 SPECIMEN STOCK CERTIFICATE Exhibit 4.1 Description of Specimen Stock Certificate for the Common Stock of Career Education Corporation (the "Company") Face of Certificate: The front of the specimen stock certificate for the Company's Common Stock (the "Certificate") contains the logo of the Company above the name of the Company. Beneath the name of the Company are the words, "INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE." The Common Stock's CUSIP number (141665 10 9) appears flush with the right edge of the Certificate beneath the name of the Company. The Certificate is signed by William A. Klettke, Treasurer of the Company, and John M. Larson, President of the Company. In the lower right corner of the Certificate is a space for the Certificate to be countersigned and registered by Harris Trust and Savings Bank, as Transfer Agent and Registrar. The Company's corporate seal is centered slightly above the bottom edge of the Certificate. The face of the Certificate also contains the following language: This certifies that ____________________ is the owner of ____________ FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE, OF CAREER EDUCATION CORPORATION (the "Corporation") transferable on the books of the Corporation by the owner in person or by duly authorized attorney upon surrender of this certificate properly endorsed. This certificate and the shares represented hereby are issued and shall be held subject to all the provisions of the Certificate of Incorporation and Bylaws of the Corporation and all amendments thereto and restatements thereof (copies of which are on file with the Transfer Agent), to all of which the holder, by acceptance hereof, assents. This certificate is not valid unless countersigned by the Transfer Agent and registered by the Registrar. In Witness Whereof, the Corporation has caused this certificate to be signed by its duly authorized officers, and its corporate seal to be hereunto affixed. Reverse of Certificate: The back of the certificate contains the following language: CAREER EDUCATION CORPORATION THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS A STATEMENT OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF OF THE CORPORATION, AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS. SUCH REQUEST MAY BE MADE TO THE CORPORATION OR THE TRANSFER AGENT. The reverse of the Certificate also contains standard stock transfer instructions. EX-10.1 6 CEC 1995 STOCK OPTION PLAN EXHIBIT 10.1 CAREER EDUCATION CORPORATION 1995 STOCK OPTION PLAN 1. PURPOSE. The purpose of this Stock Option Plan (the "Plan") is to enable Career Education Corporation (the "Company") to attract and retain people of initiative and ability as employees, advisors and directors. The Plan is also intended to provide additional incentives to employees, advisors and directors to maximize the Company's share price. Reference hereinafter to "employee" shall also include advisors and non-employee members of the Company's Board of Directors. Reference to "employment" shall also include tenure under a consulting agreement or as a member of the Company's Board of Directors. 2. SHARES SUBJECT TO THE PLAN. Subject to adjustment as provided below and in Paragraph 7, the shares to be offered under the Plan shall consist of Class E Non-Voting Common Stock of the Company ("Shares"). The total number of Shares that may be issued under the Plan shall not exceed twelve-thousand two- hundred fifteen (12,215) Shares. If an option right granted under the Plan expires, terminates or is canceled, the unissued Shares subject to such option shall again be available under the Plan. 3. EFFECTIVE DATE AND DURATION OF PLAN. (a) Effective Date. The Plan shall become effective on August 1, 1995 (the "Effective Date"). However, no option granted under the Plan shall become exercisable until after the Plan is approved by the affirmative vote of the holders of a majority of the Common Stock of the Company represented at a shareholders' meeting at which a quorum is present. Any awards under the Plan prior to such approval shall be conditioned on and subject to such approval. Subject to this limitation, options may be granted under the Plan at any time after the Effective Date and before termination of the Plan. (b) Duration. The Board of Directors may at any time suspend or terminate the Plan. Unless previously terminated by the Board, this Plan shall terminate on July 31, 2005. The rights and obligations under any option granted while the Plan is in effect shall not be altered or impaired by suspension or termination of the Plan, except by the consent of the person to whom the option was granted. 4. ADMINISTRATION. The Plan shall be administered by a committee appointed by the Board of directors of the Company consisting of not less than two directors (the "Committee"). The Committee shall determine and designate from time to time the employees to whom awards shall be made, the amount of the awards, and the other terms and conditions of the awards, except that only the Board of Directors may amend or terminate the Plan as provided in Paragraphs 3 and 10. Subject to the provisions of the Plan, the Committee may from time to time adopt and amend rules and regulations relating to administration of the Plan, advance the lapse of any waiting period, accelerate any exercise date, waive or modify any restriction applicable to Shares (except those restrictions imposed by law) and make all other determinations in the judgment of the Committee necessary or desirable for the administration of the Plan. The interpretation and construction of the provisions of the Plan and related agreements by the Committee shall be final and conclusive. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any related agreement in the manner and to the extent it shall deem expedient to carry the Plan into effect, and it shall be the sole and final judge of such expediency. 5. ELIGIBILITY. Any awards may be made to employees, including advisors and non-employee directors of the Company. Advisors shall be eligible for an award only if they have rendered services to the Company, other than those in connection with the sale of securities in a capital-raising transaction. The Committee shall specify the action taken with respect to each employee to whom an award is made under the Plan. At the discretion of the Committee, an employee may be given an election to surrender an award in exchange for the grant of a new award. 6. OPTION GRANT. (a) Grant. The Committee has the authority and discretion to grant options under the Plan. With respect to each option grant, the Committee shall determine the number of Shares subject to the option, the option price, the period of the option, and the time or times at which the option may be exercised. In addition, the Committee may provide for any other restrictions or provisions in the option agreement which it deems appropriate. Options shall be either Incentive Stock Options or Nonstatutory Stock Options. Incentive Stock Options shall meet all of the requirements of this Paragraph 6. Nonstatutory Options shall meet the requirements of Subparagraphs (c) through (g). (b) Incentive Stock Option. Incentive Stock Options ("ISOs") shall be subject to the following terms and conditions (for the purposes of this Paragraph 6(b), references to "employee" shall not include advisors or non- employee directors of the Company; only common law employees may receive ISOs): (i) ISOs may be granted under the Plan to an employee possessing more than 10% directly or by attribution, of the total combined voting power of all classes of stock of the Company only if the option price is at least 110% of the fair market value of the Shares subject to the option on the date it is granted, as described in 6(b)(iii), and the option by its terms is not exercisable after the expiration of five years from the date it is granted. (ii) Subject to Paragraphs 6(b)(i) and 6(c), ISOs granted under the Plan shall continue in effect for the period fixed by the Committee, except that no ISO shall be exercisable after the expiration of ten years from the date it is granted. (iii) The option price per share shall be determined by the Committee at the time of grant. Subject to Paragraph 6(b)(i), the exercise price shall not be less than 100% of the fair market value of the Shares covered by the ISO at the date -2- the option is granted. The fair market value shall be deemed to be the closing of the Shares of the Company as reported on the date preceding the date the option is granted, or if there has been no sale on that date, on the last preceding date on which a sale occurred, or as reasonably determined by the Committee. (iv) No ISO shall be granted on or after the tenth anniversary of the Effective Date of the Plan. (c) Exercise of Options. Except as provided in Paragraph 6(f), no option granted under the Plan may be exercised unless, at the time of such exercise, the optionee is employed by the Company or is rendering services to the Company and shall have been so employed or retained continuously since the date such option was granted. Absence on leave or on account of illness or disability under rules established by the Committee shall not, however, be deemed an interruption of employment for this purpose. Except as provided in Paragraphs 6(f), 7 and 8, options granted under the Plan may be exercised from time to time over the period stated in each option in such amounts and at such times as shall be prescribed by the Committee, provided that options shall not be exercised for factional shares. Unless otherwise determined by the Committee, if the optionee does not exercise an option in any one year with respect to the full number of Shares to which the optionee is entitled in that year, the optionee's rights shall be cumulative and the optionee may purchase those Shares in any subsequent year during the term of the option. (d) Nontransferability. Each stock option granted under the Plan by its terms shall be nonassignable and nontransferable by the optionee, either voluntarily or by operation of law, except by will or by the laws of descent and distribution of the state or country of the optionee's domicile at the time of death, and each option by its terms shall be exercisable during the optionee's lifetime only by the optionee. (e) Vesting. Options granted under the Plan shall vest according to such schedule as the Committee may prescribe at the time of grant, which may include full and immediate vesting. Reference to "option" in this Plan means all vested and non-vested options. (f) Termination of Employment or Death. With respect to ISOs: (i) If the employment of an option holder is terminated, any then outstanding and exercisable stock option held by such person shall remain exercisable, in accordance with the provision of the stock option agreement, by such employee until the expiration date of such stock option or within three months after the date of termination of employment, whichever is the shorter period. (ii) Notwithstanding the provisions of (f)(i), if the employee's -3- employment is terminated because of a disability described in Section 422(c)(6) of the Internal Revenue Code ("Disability"), any then outstanding and exercisable stock option held by such employee shall remain exercisable, in accordance with the stock option agreement, by such employee until the expiration of such option agreement or within one year after the date of termination of employment whichever is the shorter period. (iii) Notwithstanding the provisions of (f)(i), if the employee dies, any then outstanding and exercisable stock option held by such employee on the date of death shall be exercisable, in accordance with the provisions of the stock option agreement, by the duly appointed representative of the employee's estate at any time prior to the expiration of such option agreement or within one year after the date of death, whichever is the shorter period. If a termination under (f)(ii) or (iii) occurs, any unvested portion of the option held by the employee shall become vested, provided that the aggregate value of Shares with respect to which any ISO first becomes exercisable in the calendar year of the termination of employment does not exceed $100,000. If the value of Shares that become fully vested in a calendar year under an ISO exceed $100,000, such excess shall be treated as stock subject to a Nonstatutory Stock Option. For purposes of the $100,000 limitation, the fair market value of the Shares on the date the ISO was granted shall be used in determining the value of the Shares. With respect to Nonstatutory Options: The Committee may specify in the option agreement what restrictions will apply in the event of termination of employment. For all options issued hereunder, to the extent that the option of any deceased optionee or any optionee whose employment terminates is not exercised within the applicable period, all further rights to purchase Shares to such option shall cease and terminate. (g) Purchase of Shares. Unless the Committee determines otherwise, Shares may be acquired pursuant to an option granted under the Plan only upon receipt by the Company of notice in writing from the optionee of the optionee's intention to exercise, specifying the number of Shares as to which the optionee desires to exercise the option and the date on which the optionee desires to complete the transaction, and if required in order to comply with the Securities Act of 1933, as amended, containing a representation that it is the optionee's present intention to acquire the Shares for investment and not with a view toward distribution. Unless the Committee determines otherwise, on or before the date specified for completion of the purchase of Shares pursuant to an option, the optionee must have paid the Company the full purchase price of such shares in cash. No Shares shall be issued until full payment therefor has been made. If the Company is required to withhold on account of any present or future tax imposed as a result of an -4- exercise, the Company shall so notify the optionee and the optionee shall be required to pay all such withholding in cash as a condition to the receipt of shares. 7. CHANGES IN CAPITAL STRUCTURE. If the outstanding shares of Common Stock of the Company are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation by reason of any reorganization, merger, consolidation, plan of exchange, recapitalization, reclassification, stock split-up, combination of shares or dividend payable in shares, appropriate adjustment shall be made by the Committee in the number and kind of shares available for awards under the Plan, provided that this Paragraph 7 shall not apply with respect to transactions referred to in Paragraph 8. In addition, the Committee shall make appropriate adjustment in the number and kind of shares as to which outstanding options, or portions thereof then unexercised, shall be exercisable, to the end that the optionee's proportionate interest is maintained as before the occurrence of such event. The Committee may also require that any securities issued in respect of or exchange for Shares issued hereunder that are subject to restrictions be subject to similar restrictions. Notwithstanding the foregoing, the Committee shall have no obligation to effect any adjustment that would or might result in the issuance of fractional shares, and any fractional shares from any adjustment may be disregarded or provided for in any manner determined by the Committee. Any such adjustments made by the Committee shall be conclusive. 8. CHANGE OF CONTROL. Notwithstanding any other provisions of the Plan, a change of control ("Change of Control") shall occur at any time when the Stockholders of the Company approve one of the following ("Approved Transactions"): (i) Any consolidation, merger, plan of exchange, or on involving the Company ("Merger") in which the Company is not the continuing or surviving corporation or pursuant to which the majority of the Common Stock of the Company would be converted into cash, securities or other property, other than (A) a Merger involving the Company in which the holders of the Common Stock of the Company immediately prior to the Merger have the same proportionate ownership of common stock of the surviving corporation after the Merger, (B) any transaction in connection with an initial public offering; (C) any private placement where a substantial block of stock is sold to one or more new investors; or (D) the conversion of shares from one class of stock to another or the exercise of any warrant; or (ii) Any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company or the adoption of any plan or proposal for the liquidation or dissolution of the Company. In addition, a Change of Control shall occur in the event a "person" (within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended) after the Effective Date first becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, in one or more transactions, of shares of common stock of the Company representing 50% or more of the total number of votes that may be -5- cast by all stockholders of the Company voting as a single class, without the approval or consent of the Board of Directors, other than (A) any transaction in connection with an initial public offering; (B) any private placement where a substantial block of stock is sold to one or more new investors; or (C) the conversion of shares from one class of stock to another or the exercise of any warrant. 9. CORPORATE MERGERS, ACQUISITIONS, ETC. The Committee may also grant options under the Plan having terms, conditions and provisions that vary from those specified in this Plan, provided that any such awards are granted in substitution for, or in connection with the assumption of, existing options, issued by another corporation and assumed or otherwise agreed to be provided for by the Company pursuant to or by reason of a transaction involving a corporate merger, consolidation, plan of exchange, acquisition of property or stock, separation, reorganization, or liquidation to which the Company is a party. 10. AMENDMENT OF PLAN. The Board of Directors may at any time, and from time to time, modify or amend the Plan in such respects as it shall deem advisable because of changes in the law while the Plan is in effect or for any other reason. Except as provided in Paragraphs 6(f), 7 and 8, however, no change in an award already granted shall be made without the written consent of the holder of such award. 11. APPROVALS. The obligations of the Company under the Plan are subject to the approval of state and federal authorities or agencies with jurisdiction in the matter. The Company will use its best efforts to take steps required by applicable state or federal law or regulations, including rules and regulations of the Securities and Exchange Commission and any stock exchange or trading system on which this Company's shares may then be listed or admitted for trading, in connection with grants under the Plan. The foregoing notwithstanding, the Company shall not be obligated to issue or deliver Common Stock under the Plan if such issuance or delivery would violate applicable state or federal securities law. 12. EMPLOYMENT RIGHTS. Nothing in the Plan or any award pursuant to the Plan shall confer upon any option holder any right to be continued in the employment of the Company or shall interfere in any way with the right of the Company to terminate such employee's employment at any time, for any reason, with or without cause, or to increase or decrease such employee's compensation or benefits. 13. RIGHTS AS A SHAREHOLDER. The recipient of any award under the Plan shall have no rights as a shareholder with respect to any Shares until the date of issue to the recipient of a stock certificate for such shares. Except as otherwise expressly provided in the Plan, no adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. 14. GOVERNING LAW. All questions arising with respect to the provisions of the Plan shall be determined by application of the laws of the State of Illinois, except to the extent that Illinois laws are preempted by any federal statute, regulation, judgment or court order, including but not limited to, the Internal Revenue Code. -6- 15. HEADINGS. The titles of Paragraphs are included for convenience only, and are not to be considered in the construction of the provisions thereof. IN WITNESS WHEREOF, this Plan is executed this 23rd day of August, 1995, to be effective as of the Effective Date. CAREER EDUCATION CORPORATION, a Delaware Corporation By: /s/ John M. Larson -------------------------------- Its: President -------------------------- -7- AMENDMENT No. 1 TO ------------------- CAREER EDUCATION CORPORATION ---------------------------- 1995 STOCK OPTION PLAN ---------------------- THIS AMENDMENT NO. 1 relates to that certain Career Education Corporation 1995 Stock Option Plan executed as of August 23, 1995 (the "Plan") and is effective as of February 27, 1997. WHEREAS, pursuant to the Plan, Career Education Corporation (the "Company") authorized the issuance under the Plan of up to 12,215 shares of Class E Non- Voting Common Stock of the Company (the "Shares"); WHEREAS, the Company now wishes to increase the number of Shares authorized for issuance under the Plan and such increase was approved by the Company's directors by Unanimous Written Consent dated as of February 28, 1997. NOW, THEREFORE, pursuant to Section 10 of the Plan, the Company's Board of Directors hereby amend the Plan as follows: 1. Section 2 of the Plan is amended and restated in its entirety, and shall be replaced with the following provision: 2. Shares Subject to the Plan. Subject to adjustment as provided below and in Paragraph 7, he shares to be offered under the Plan shall consist of Class E Non-Voting Common Stock of the Company ("Shares"). The total number of Shares that may be issued under the Plan shall not exceed thirteen-thousand-two-hundred-fifteen (13,215) Shares. If an option right granted under the Plan expires, terminates or is canceled, the unissued Shares subject to such option shall again be available under the Plan. 2. Except as specifically amended herein, the terms and conditions of the Plan shall remain in full force and effect. 3. This Amendment shall be effective as of February 27, 1997. IN WITNESS WHEREOF, the Company's Board of Directors has executed this Amendment as of December 31, 1997. CAREER EDUCATION CORPORATION /s/ WILLIAM A. KLETTKE ------------------------------- WILLIAM A. KLETTKE Senior Vice President, Chief Financial Officer and Treasurer 2 AMENDMENT No. 2 TO ------------------- CAREER EDUCATION CORPORATION ---------------------------- 1995 STOCK OPTION PLAN ---------------------- THIS AMENDMENT NO. 2 relates to that certain Career Education Corporation 1995 Stock Option Plan executed as of August 23, 1995 (the "Plan") and is effective as of May 30, 1997. WHEREAS, pursuant to the Plan, Career Education Corporation (the "Company") originally authorized the issuance under the Plan of up to 12,215 shares of Class E Non-Voting Common Stock of the Company and authorized the issuance of an additional 1,000 shares of Class E Non-Voting Common Stock as of February 27, 1997 (the "Shares"); WHEREAS, the Company now wishes to increase the number of Shares authorized for issuance under the Plan and such increase was approved by the Company's directors by Unanimous Written Consent dated as of May 30, 1997. NOW, THEREFORE, pursuant to Section 10 of the Plan, the Company's Board of Directors hereby amend the Plan as follows: 1. Section 2 of the Plan is amended and restated in its entirety, and shall be replaced with the following provision: 2. Shares Subject to the Plan. Subject to adjustment as provided below and in Paragraph 7, the shares to be offered under the Plan shall consist of Class E Non-Voting Common Stock of the Company ("Shares"). The total number of Shares that may be issued under the Plan shall not exceed seventeen-thousand-one-hundred-thirty-five (17,135) Shares. If an option right granted under the Plan expires, terminates or is canceled, the unissued Shares subject to such option shall again be available under the Plan. 2. Except as specifically amended herein, the terms and conditions of the Plan shall remain in full force and effect. 3. This Amendment shall be effective as of May 30, 1997. IN WITNESS WHEREOF, the Company has executed this Amendment as of December 31, 1997. CAREER EDUCATION CORPORATION /s/ WILLIAM A. KLETTKE ------------------------------- William A. Klettke Senior Vice President, Chief Financial Officer and Treasurer 2 EX-10.2 7 FORM OF OPTION AGREEMENT EXHIBIT 10.2 CAREER EDUCATION CORPORATION 1995 STOCK OPTION PLAN INCENTIVE STOCK OPTION AGREEMENT Career Education Corporation (the "Company"), desiring to afford an opportunity to the Grantee named below to purchase certain shares of the Company's common stock in order to give the Grantee an added incentive as an employee of the Company, hereby grants to Grantee, pursuant to the terms of the Career Education Corporation 1995 Stock Option Plan (the "Plan"), an option ("Option") to purchase a number of shares specified below, during the term ending at 5 o'clock p.m. (prevailing local time at the Company's principal offices) on the expiration date of this Option specified below, at the Option exercise price specified below, subject to and upon the following terms and conditions: 1. Identifying Provisions. As used in this Option, the following terms ---------------------- shall have the following respective meanings: (a) Grantee: ______________ (b) Date of grant: _______________ (c) Number of shares optioned: ________________ (d) Option exercise price per share: __________________ (e) Expiration date: _______________ 2. Timing of Purchases. Subject to the other terms of this Agreement ------------------- regarding the exercisability of this Option, this Option may be exercised in accordance with the following schedule: This Option shall be Exercisable With Respect to the Following On or After This Date Cumulative Number of Shares --------------------- --------------------------- ___________ _______ ___________ _______ ___________ _______ ___________ _______ ___________ _______ 3. Exercise: Payment for and Delivery of Stock. Grantee shall acquire -------------------------------------------- shares pursuant to this Option by delivering to the Company a written notice of exercise, specifying the number of shares as to which Grantee desires to exercise this Option and the date on which Grantee desires to complete the transaction. Unless the Committee determines otherwise, Grantee shall pay to the Company the full purchase price of the shares to be acquired hereunder, in cash, on or before the date specified for completion of the purchase. No shares shall be issued hereunder until full payment has been made to the Company. If the Company is required to withhold federal income taxes on account of any present or future tax imposed in connection with Grantee's exercise of the Option, Grantee shall be required to pay all such withholding in cash as a condition to the receipt of shares. 4. Restrictions on Exercise. The following additional provisions shall ------------------------ apply to the exercise of this Option: a. If the employment by the Company of the Grantee who is not disabled within the meaning of Section 422(c)(6) of the Internal Revenue Code (a "Disabled Grantee") is terminated, the unexercised, vested portion of this Option shall be exercisable (to the extent then exercisable), by the Grantee at any time prior to the expiration date or within three months after the date of termination of employment, whichever is the shorter period; b. If a Disabled Grantee terminates employment, any unexercised portion of this Option held by the Grantee shall be exercisable in full (including the portion that, but for this provision, would not be exercisable) by the Grantee at any time prior to the expiration date or within one year after the date of termination of employment, whichever is the shorter period; and c. Following the death of the Grantee during employment, the unexercised portion of this Option at the time of death shall be exercisable in full (including the portion that, but for this provision, would not be exercisable) by the person or persons entitled to do so under the will of the Grantee, or, if the Grantee shall fail to make testamentary disposition of the Option or shall die intestate, by the legal representative of the Grantee at any time prior to the expiration date of such Option or within one year after the date of death, whichever is the shorter period. Whether the Grantee is Disabled within the meaning of Section 422(c)(6) of the Internal Revenue Code (the "Code") shall be determined in each case by the Committee, whose determination shall be final and binding. Notwithstanding the above, as a condition of exercise the Grantee must execute and deliver to the Company a restricted stock agreement in the form attached hereto evidencing Grantee's agreement to be bound by the Career Education Corporation Amended and Restated Stockholders Agreement dated July 31, 1995, and also providing for certain repurchase rights on behalf of the Company upon the termination of Grantee's employment with the Company under the circumstances specified therein. 5. Nontransferability. The Grantee may not transfer this Option except ------------------ by will or the -2- laws of descent and distribution. This Option shall not be otherwise transferred, assigned, pledged, hypothecated or disposed of in any way, whether by operation of law or otherwise, and shall be exercisable during the Grantee's lifetime only by the Grantee or his guardian or legal representative. The designation of a beneficiary shall not constitute a transfer. 6. Changes in Capital Structure. If the outstanding shares of Common ---------------------------- Stock of the Company are increased or decreased or changed into or exchanged for a different number of kind of shares or other securities of the Company or of another corporation by reason of any reorganization, consolidation, plan of exchange, recapitalization, reclassification, stock split, combination of shares, or dividend payable in shares, appropriate adjustment shall be made by the Committee to the end that the Grantee's proportionate interest derived under this Option is maintained as before the occurrence of such event. The Committee may also require that any securities issued in respect of or exchange for shares issued hereunder that are subject to restrictions be subject to similar restrictions. Notwithstanding the foregoing, the Committee shall have no obligation to effect any adjustment that would or might result in the issuance of fractional shares, and any fractional shares resulting from any adjustment may be disregarded or provided for in any manner determined by the Committee. Any such adjustments made by the Committee shall be conclusive. If any such adjustment provided for in this Paragraph 6 requires the approval of shareholders of the Company in order to enable the Company to adjust the Option, then no such adjustment shall be made without the required shareholder approval. Notwithstanding the foregoing, if the effect of any such adjustment would be to cause this Option to fail to qualify as an Incentive Stock Option or to cause a modification, extension or renewal of this Option within the meaning of Section 424(h) of the Code, the Company may elect that such adjustment not be made but rather shall use reasonable efforts to effect such other adjustment of this Option as the Company in its sole discretion shall deem equitable and which will not result in any disqualification, modification, extension or renewal (within the meaning of Section 424(h) of the Code) of this Option. 7. Special Acceleration of Vesting Upon Change of Control. ------------------------------------------------------ a. Notwithstanding any other provisions of this Option and subject to the limitations described below, this Option shall become fully exercisable with respect to all shares issuable hereunder as of the date when the shareholders of the Company approve one of the following ("Approved - ------------ Transactions"): (i) Any consolidation, merger, plan of exchange, or transaction involving the Company ("Merger") in which the Company is not the continuing or surviving corporation or pursuant to which the majority of the Common Stock of the Company would be converted into cash, securities or other property, other than (A) a Merger involving the Company in which the holders of the Common Stock of the Company immediately prior to the Merger have the same proportionate ownership of common stock of the surviving corporation after the Merger; (B) any transaction in connection with an initial public offering: (C) any ----------------------- private placement where a substantial block of stock is sold to one or more new -3- investors; or (D) the conversion of shares from one class of stock to another or the exercise of any warrant; or (ii) Any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company or the adoption of any plan or proposal for the liquidation or dissolution of the Company. In addition, a Change of Control shall occur in the event a "person" (within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended) after the Effective Date first becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, in one or more transactions, of shares of common stock of the Company representing 50% or more of the total number of votes that may be cast by all stockholders of the Company voting as a single class, without the approval or consent of the Board of Directors, other than (A) any transaction in connection with an initial public offering; (B) any private placement where a substantial block of stock is sold to one or more new investors; or (C) the conversion of shares from one class of stock to another or the exercise of any warrant. Accelerated vesting under this paragraph shall be limited to the maximum number of additional shares such that the acquisition or disposition of such shares that vest in connection with an Approved Transaction shall not result in an excess parachute payment to Grantee (as defined in Section 280G of the Code), unless the Company authorizes accelerated vesting in excess of such maximum amount. The Company is authorized by Grantee to collect from Grantee any additional income or excise taxes which the Company may incur due to a violation of this provision. All shares with respect to which this Option would not be exercisable except for this paragraph shall be deemed to be nonstatutory option shares pursuant to Section 422(d) of the Code. In such event, Grantee shall recognize taxable income equal to the difference between the fair market value of the nonstatutory shares and the exercise price paid for such shares. b. The Committee may, in its sole discretion, designate a 30-day period prior to an Approved Transaction during which Grantee shall be the right to exercise this Option, in whole or in part, and upon the expiration of such 30-day period all rights hereunder with respect to unexercised shares shall immediately terminate. 8. Rights in Shares Before Issuance and Delivery. Grantee, or his --------------------------------------------- executor, administrator or legatee if he is deceased, shall have no rights as a shareholder with respect to any stock covered by this Option until the date of issuance of the stock certificate to him for such stock after receipt of the consideration in full set forth herein, or as may be approved by the Company. No adjustments shall be made for dividends, whether ordinary or extraordinary, whether in cash, securities or other property, for distributions in which the record date is prior to the date for which the stock certificate is issued. 9. Requirements of Law. The certificate or certificates representing the ------------------- shares of the common stock to be issued or delivered upon exercise of this Option may bear a legend -4- evidencing the foregoing and other legends required by any applicable securities laws. Furthermore, nothing herein shall require the Company to issue any stock upon exercise of this Option if the issuance would, in the opinion of counsel for the Company, constitute a violation of the Securities Act of 1933, as amended, the Illinois or Delaware securities laws, or any other applicable rule or regulation then in effect. 10. Disposition of Shares--Restrictions. Except in connection with ----------------------------------- reorganizations or other transactions described in Paragraph 6 hereof, no stock acquired by the exercise of this Option shall be transferable, otherwise than by will or the laws of descent and distribution, within two (2) years after the date the Option is granted or within one (1) year after the transfer of such share of stock to the Grantee pursuant to the exercise of the Option. Any disposition during such periods shall disqualify this Option as an Incentive Stock Option, and the tax rules applicable to nonstatutory stock options shall apply. 11. No Right to Continued Service. This Option shall not confer upon the ----------------------------- Grantee any right with respect to continued service with the Company, nor shall it alter, modify, limit or interfere with any right or privilege of the Company under any employment or consulting contract, heretofore or hereinafter executed, with the Grantee, including the right to terminate the Grantee's service at any time for or without cause. 12. Career Education, Corporation 1995 Stock Option Plan. Grantee hereby ---------------------------------------------------- acknowledges receipt of a copy of the Plan and agrees to be bound by all terms and provisions thereof and as the same shall have been amended from time to time in accordance with the terms thereof, provided that no such amendment shall deprive the Grantee, without his consent, of this Option or any of his rights hereunder. Grantee acknowledges and agrees that such provisions are acceptable to him for all purposes. Grantee further acknowledges and agrees that in the event of any conflict herewith, the provisions of the Plan shall govern and control, and this Agreement or the applicable provision hereof shall automatically be deemed modified to conform ab initio. 13. Notices. Any notice to be given to the Committee shall be addressed ------- to the Committee in care of the Company at its principal office, and any notice to be given to the Grantee shall be addressed to him at the address given beneath his signature hereto or at such other address as the Grantee may hereafter designate in writing to the Company. Any such notice shall be deemed duly given when enclosed in a properly sealed envelope or wrapper addressed as aforesaid, registered or certified, and deposited, postage and registry or certification fee prepaid, in a post office or branch post office regularly maintained by the United States Postal Service. 14. Miscellaneous. This Agreement and the Plan constitute the entire ------------- agreement and understanding between the Company and the Grantee and may not be changed, modified or amended by oral statements to the contrary, but only by written document signed by both parties hereto. The titles to each paragraph herein are for convenience only and are not to be used in the construction or interpretation of this document. This Agreement shall be binding on and inure to the benefit of the parties hereto, and their respective heirs, legatees, successors and assigns. This Agreement shall be construed in accordance with the laws of the State of Illinois. -5- This document constitutes an offer by the Company to enter into an Agreement under the terms and conditions herein set forth. Said offer will expire and terminate without further notice at 5 o'clock p.m. (prevailing local time at the Company's principal office) on May 31, 1996 unless sooner accepted by the Grantee by delivering a copy of this Agreement, executed by the Grantee, to the Company on or before said time and date. IN WITNESS THEREOF, the Company has granted this Option on the date of grant specified above. ACCEPTED: CAREER EDUCATION CORPORATION, a Delaware corporation, Grantee: ____________________ By:_______________________ Address: ____________________ Title:____________________ _____________________________ Date:_____________________ _____________________________ -6- NOTATIONS AS TO PARTIAL EXERCISE Date of Exercise Number of Balance of Authorized Notation Date -------- ------------- Purchased Shares on Signature --------- Shares Option ------ ------ -7- EX-10.3 8 CEC 1998 EMPLOYEE INCENTIVE COMPENSATION PLAN EXHIBIT 10.3 CAREER EDUCATION CORPORATION 1998 EMPLOYEE INCENTIVE COMPENSATION PLAN TABLE OF CONTENTS
Page ARTICLE I ESTABLISHMENT........................................... 1 1.1 Purpose................................................. 1 ARTICLE II DEFINITIONS............................................. 1 2.1 "Affiliate"............................................. 1 2.2 "Agreement"............................................. 1 2.3 "Award"................................................. 1 2.4 "Beneficiary"........................................... 1 2.5 "Board of Directors" or "Board"......................... 2 2.6 "Cash Incentive Award".................................. 2 2.7 "Cause"................................................. 2 2.8 "Change in Control" and "Change in Control Price"....... 2 2.9 "Code" or "Internal Revenue Code"....................... 2 2.10 "Commission"............................................ 2 2.11 "Committee"............................................. 2 2.12 "Common Stock".......................................... 2 2.13 "Company"............................................... 2 2.14 "Covered Employee"...................................... 3 2.15 "Deferred Stock"........................................ 3 2.16 "Disability"............................................ 3 2.17 "Dividend Equivalent"................................... 3 2.18 "Effective Date"........................................ 3 2.19 "Exchange Act".......................................... 3 2.20 "Fair Market Value"..................................... 3 2.21 "Grant Date"............................................ 4 2.22 "Incentive Stock Option"................................ 4 2.23 "Initial Public Offering"............................... 4 2.24 "Nasdaq"................................................ 4 2.25 "Non-Qualified Stock Option"............................ 4 2.26 "Option Period"......................................... 4 2.27 "Option Price".......................................... 4 2.28 "Other Stock-Based Awards".............................. 4 2.29 "Participant"........................................... 4 2.30 "Performance Award"..................................... 4 2.31 "Plan".................................................. 4 2.32 "Representative"........................................ 4 2.33 "Restricted Stock"...................................... 5 2.34 "Retirement"............................................ 5 2.35 "Rule 16b-3"............................................ 5 2.36 "Securities Act"........................................ 5 2.37 "Stock Appreciation Right".............................. 5 2.38 "Stock Option" or "Option".............................. 5 2.39 "Termination of Employment"............................. 5
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2.40 "Transfer".............................................. 5 ARTICLE III ADMINISTRATION.......................................... 6 3.1 Committee Structure and Authority....................... 6 ARTICLE IV STOCK SUBJECT TO PLAN................................... 8 4.1 Number of Shares........................................ 8 4.2 Release of Shares....................................... 8 4.3 Restrictions on Shares.................................. 8 4.4 Stockholder Rights...................................... 8 4.5 Reasonable Efforts To Register.......................... 9 4.6 Anti-Dilution........................................... 9 ARTICLE V ELIGIBILITY............................................. 9 5.1 Eligibility............................................. 9 5.2 Per Person Award Limitations............................ 10 ARTICLE VI STOCK OPTIONS........................................... 10 6.1 General................................................. 10 6.2 Grant and Exercise...................................... 10 6.3 Terms and Conditions.................................... 10 6.4 Termination by Reason of Death.......................... 12 6.5 Termination by Reason of Disability..................... 12 6.6 Other Termination....................................... 12 6.7 Cashing Out of Option................................... 13 ARTICLE VII STOCK APPRECIATION RIGHTS............................... 13 7.1 General................................................. 13 7.2 Grant................................................... 13 7.3 Terms and Conditions.................................... 13 ARTICLE VIII RESTRICTED STOCK........................................ 15 8.1 General................................................. 15 8.2 Awards and Certificates................................. 15 8.3 Terms and Conditions.................................... 15 ARTICLE IX DEFERRED STOCK.......................................... 16 9.1 General................................................. 16 9.2 Terms and Conditions.................................... 17 ARTICLE X OTHER AWARDS............................................ 18 10.1 Bonus Stock and Awards In Lieu of Obligations........... 18 10.2 Dividend Equivalents.................................... 18 10.3 Other Stock-Based Awards................................ 18 10.4 Performance Awards...................................... 18
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ARTICLE XI PROVISIONS APPLICABLE TO STOCK ACQUIRED UNDER THE PLAN............................................................. 21 11.1 Limited Transfer During Offering..................................... 21 11.2 Committee Discretion................................................. 21 11.3 No Company Obligation................................................ 21 ARTICLE XII CHANGE IN CONTROL PROVISIONS......................................... 22 12.1 Impact of Event...................................................... 22 12.2 Definition of Change in Control...................................... 22 12.3 Change in Control Price.............................................. 23 ARTICLE XIII MISCELLANEOUS........................................................ 23 13.1 Amendments and Termination........................................... 23 13.2 Stand-Alone, Additional, Tandem, and Substitute Awards............... 24 13.3 Form and Timing of Payment Under Awards; Deferrals................... 24 13.4 Status of Awards Under Code Section 162(m)........................... 24 13.5 Unfunded Status of Plan; Limits on Transferability................... 25 13.6 General Provisions................................................... 25 13.7 Mitigation of Excise Tax............................................. 26 13.8 Rights with Respect to Continuance of Employment..................... 27 13.9 Awards in Substitution for Awards Granted by Other Corporations...... 27 13.10 Procedure for Adoption............................................... 27 13.11 Procedure for Withdrawal............................................. 27 13.12 Delay................................................................ 27 13.13 Headings............................................................. 27 13.14 Severability......................................................... 27 13.15 Successors and Assigns............................................... 28 13.16 Entire Agreement..................................................... 28
iii CAREER EDUCATION CORPORATION 1998 EMPLOYEE INCENTIVE COMPENSATION PLAN ARTICLE I --------- ESTABLISHMENT ------------- 1.1 Purpose. The Career Education Corporation 1998 Employee Incentive Compensation Plan is hereby established by Career Education Corporation. The purpose of the Plan is to promote the overall financial objectives of the Company and its stockholders by motivating those persons selected to participate in the Plan to achieve long-term growth in stockholder equity in the Company and by retaining the association of those individuals who are instrumental in achieving this growth. At the time the Company is a publicly held corporation, if any, it is intended that compensation awarded under the Plan qualifies for tax deductibility under Section 162(m) of the Code to the extent deemed appropriate by the Committee (as defined herein). The Plan and the grant of awards hereunder are expressly conditioned upon the Plan's approval by the stockholders of the Company. If such approval is not obtained, then this Plan and all Awards (as defined herein) hereunder shall be null and void ab initio. The Plan is adopted, subject to stockholder approval, effective as of the date of consummation of the Initial Public Offering (as defined herein). ARTICLE II ---------- DEFINITIONS ----------- For purposes of the Plan, the following terms are defined as set forth below: 2.1 "Affiliate" means any individual, corporation, partnership, association, joint-stock company, trust, unincorporated association or other entity (other than the Company) that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the Company including, without limitation, any member of an affiliated group of which the Company is a common parent corporation as provided in Section 1504 of the Code. 2.2 "Agreement" or "Award Agreement" means, individually or collectively, any agreement entered into pursuant to the Plan pursuant to which an Award is granted to a Participant. 2.3 "Award" means any Option, Stock Appreciation Right, Restricted Stock, Deferred Stock, Stock, Dividend Equivalent, Other Stock-Based Award, Performance Award or Cash Incentive Award, together with any other right or interest granted to a Participant under the Plan. 2.4 "Beneficiary" means the person, persons, trust or trusts which have been designated by a Participant in such Participant's most recent written beneficiary designation filed with the Committee to receive the benefits specified under the Plan upon such Participant's death or to which Awards or other rights are transferred if and to the extent permitted hereunder. If, upon a Participant's death, there is no designated Beneficiary or surviving designated Beneficiary, then the term Beneficiary means the person, persons, trust or trusts entitled by will or the laws of descent and distribution to receive such benefits. 2.5 "Board of Directors" or "Board" means the Board of Directors of the Company. 2.6 "Cash Incentive Award" means a conditional right granted to a Participant under Section 10.4(c) hereof to receive a cash payment, unless otherwise determined by the Committee, after the end of a specified period. 2.7 "Cause" shall mean, for purposes of whether and when a Participant has incurred a Termination of Employment for Cause, any act or omission which permits the Company to terminate the written agreement or arrangement between the Participant and the Company or an Affiliate for "cause" as defined in such agreement or arrangement, or in the event there is no such agreement or arrangement or the agreement or arrangement does not define the term "cause" or a substantially equivalent term, then Cause shall mean (a) any act or omission which the Company believes is of a criminal nature and the result of which the Company believes is detrimental to the interests of the Company or an Affiliate, (b) the material breach of a fiduciary duty owing to the Company, including, without limitation, fraud or embezzlement or (c) conduct, or the omission of conduct, on the part of the Participant which constitutes a material breach of any statutory or common-law duty of loyalty to the Company or an Affiliate. 2.8 "Change in Control" and "Change in Control Price" have the meanings set forth in Sections 12.2 and 12.3, respectively. 2.9 "Code" or "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended, Treasury Regulations (including proposed regulations) thereunder and any subsequent Internal Revenue Code. 2.10 "Commission" means the Securities and Exchange Commission or any successor agency. 2.11 "Committee" means the Compensation Committee of the Board and/or such other individuals designated by the Board to administer the Plan. 2.12 "Common Stock" means the shares of the Company's Common Stock, $.01 par value, whether presently or hereafter issued, and any other stock or security resulting from adjustment thereof as described hereinafter or the common stock of any successor to the Company which is designated for the purpose of the Plan. 2.13 "Company" means Career Education Corporation, a Delaware corporation, and includes any successor or assignee corporation or corporations into which the Company may be merged, changed or consolidated; any corporation for whose securities the securities of the Company shall be exchanged; and any assignee of or successor to substantially all of the assets of the Company. 2 2.14 "Covered Employee" means a Participant who is a "covered employee" within the meaning of Section 162(m) of the Code. 2.15 "Deferred Stock" means a right, granted to a Participant under Section 9.1 hereof, to receive Common Stock, cash or a combination thereof at the end of a specified deferral period. 2.16 "Disability" means a mental or physical illness that entitles the Participant to receive benefits under the long-term disability plan of the Company or an Affiliate, or if the Participant is not covered by such a plan or the Participant is not an employee of the Company or an Affiliate, a mental or physical illness that renders a Participant totally and permanently incapable of performing the Participant's duties for the Company or an Affiliate. Notwithstanding the foregoing, a Disability shall not qualify under this Plan if it is the result of (i) a willfully self-inflicted injury or willfully self- induced sickness; or (ii) an injury or disease contracted, suffered, or incurred while participating in a felony criminal offense. Determination of Disability shall be made by the Committee. Determination of Disability for purposes of this Plan shall not be construed to be an admission of disability for any other purpose. 2.17 "Dividend Equivalent" means a right, granted to a Participant under Section 10.2, to receive cash, Common Stock, other Awards or other property equal in value to dividends paid with respect to a specified number of shares of Common Stock. 2.18 "Effective Date" means the date of consummation of the Initial Public Offering. 2.19 "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. 2.20 "Fair Market Value" means the value determined on the basis of the good faith determination of the Committee, without regard to whether the Common Stock is restricted or represents a minority interest, pursuant to the applicable method described below: (a) if the Common Stock is listed on a national securities exchange or quoted on Nasdaq, the closing price of the Common Stock on the relevant date (or, if such date is not a business day or a day on which quotations are reported, then on the immediately preceding date on which quotations were reported), as reported by the principal national exchange on which such shares are traded (in the case of an exchange) or by Nasdaq, as the case may be; (b) if the Common Stock is not listed on a national securities exchange or quoted on Nasdaq, but is actively traded in the over-the- counter market, the average of the closing bid and asked prices for the Common Stock on the relevant date (or, if such date is not a business day or a day on which quotations are reported, then on the immediately preceding date on which quotations were reported), or the most recent preceding date for which such quotations are reported; and (c) if, on the relevant date, the Common Stock is not publicly traded or reported as described in (a) or (b), the fair market value determined in good faith by the Committee. 3 2.21 "Grant Date" means the date as of which an Agreement is entered into pursuant to the Plan. 2.22 "Incentive Stock Option" means any Stock Option intended to be and designated as an "incentive stock option" which satisfies the requirements of Section 422 of the Code. 2.23 "Initial Public Offering" means the Company's initial public offering of Common Stock under the Securities Act. 2.24 "Nasdaq" means The Nasdaq Stock Market, including the Nasdaq National Market. 2.25 "Non-Qualified Stock Option" means an Option which is not an Incentive Stock Option. 2.26 "Option Period" means the period during which an Option shall be exercisable in accordance with the related Agreement and Article VI. 2.27 "Option Price" means the price at which the Common Stock may be purchased under an Option as provided in Section 6.3(b). 2.28 "Other Stock-Based Awards" means Awards granted to a Participant under Section 10.3 hereof. 2.29 "Participant" means a person who satisfies the eligibility conditions of Article V and with whom an Agreement has been entered into under the Plan, and in the event a Representative is appointed for a Participant or another person becomes a Representative, then the term "Participant" shall mean such Representative. The term shall also include a trust for the benefit of the Participant, the Participant's parents, spouse or descendants, or a custodian under a uniform gifts to minors act or similar statute for the benefit of the Participant's descendants, to the extent permitted by the Committee. Notwithstanding the foregoing, the term "Termination of Employment" shall mean the Termination of Employment of the person to whom the Award was originally granted. 2.30 "Performance Award" means a right, granted to a Participant under Section 10.4 hereof, to receive Awards based upon performance criteria specified by the Committee. 2.31 "Plan" means the Career Education Corporation 1998 Stock Incentive Compensation Plan, as herein set forth and as may be amended from time to time. 2.32 "Representative" means (a) the person or entity acting as the executor or administrator of a Participant's estate pursuant to the last will and testament of a Participant or pursuant to the laws of the jurisdiction in which the Participant had the Participant's primary residence at the date of the Participant's death; (b) the person or entity acting as the guardian or temporary guardian of a Participant; (c) the person or entity which is the Beneficiary of the Participant upon or following the Participant's death; or (d) any person to whom an Option has been permissibly transferred; provided that only one of the foregoing shall be the Representative at any point in time as determined under applicable law and recognized by the Committee. 4 2.33 "Restricted Stock" means Common Stock granted to a Participant under Section 8.1 hereof, that is subject to certain restrictions and to a risk of forfeiture. 2.34 "Retirement" means the Participant's Termination of Employment after attaining either the normal retirement age or the early retirement age as defined in the principal (as determined by the Committee) tax-qualified plan of the Company or an Affiliate, if the Participant is covered by such a plan, or if the Participant is not covered by such a plan, then age 65. 2.35 "Rule 16b-3" means Rule 16b-3, as from time to time in effect and applicable to the Plan and Participants, promulgated by the Commission under Section 16 of the Exchange Act. 2.36 "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. 2.37 "Stock Appreciation Right" means a right granted under Article VII. 2.38 "Stock Option" or "Option" means a right, granted to a Participant under Section 6.1 hereof, to purchase Common Stock at a specified price during specified time periods. 2.39 "Termination of Employment" means the occurrence of any act or event that actually or effectively causes or results in the person's ceasing, for whatever reason, to be an officer, director or employee of, or consultant to, the Company or of any subsidiary of the Company, or to be an officer, director or employee of, or consultant to, any entity that provides services to the Company or a subsidiary of the Company, including, without limitation, death, Disability, dismissal, severance at the election of the Participant, Retirement, or severance as a result of the discontinuance, liquidation, sale or transfer by the Company or its subsidiaries of all businesses owned or operated by the Company or its subsidiaries. With respect to any person who is not an employee with respect to the Company, an Agreement shall establish what act or event shall constitute a Termination of Employment for purposes of the Plan. A transfer of employment from the Company to a subsidiary, or from a subsidiary to the Company, will not be a Termination of Employment, unless expressly determined by the Committee. A Termination of Employment shall occur for an employee who is employed by a subsidiary of the company if the subsidiary shall cease to be a subsidiary and the Participant shall not immediately thereafter become an employee of the Company or a subsidiary of the Company. 2.40 "Transfer" means any sale, gift, assignment, distribution, conveyance, pledge, hypothecation, encumbrance or other transfer of title, whether by operation of law or otherwise. In addition, certain other terms used herein have definitions given to them in the first place in which they are used. 5 ARTICLE III ----------- ADMINISTRATION -------------- 3.1 Committee Structure and Authority. The Plan shall be administered by a committee (the "Committee") of the Board of Directors composed of no fewer than two directors designated by the Board of Directors. A majority of the Committee shall constitute a quorum, and the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by all of the members, shall be the acts of the Committee. A member of the Committee shall not exercise any discretion respecting himself or herself under the Plan. The Board shall have the authority to remove, replace or fill any vacancy of any member of the Committee upon notice to the Committee and the affected member. Any member of the Committee may resign upon notice to the Board. The Board may select different Committees to administer Awards for different classes of Participants. The Committee may allocate among one or more of its members, or may delegate to one or more of its agents, such duties and responsibilities as it determines. Among other things, the Committee shall have the authority, subject to the terms of the Plan: (a) to select those persons to whom Awards may be granted from time to time; (b) to determine whether and to what extent Awards are to be granted hereunder; (c) to determine the number of shares of Common Stock to be covered by each Award granted hereunder; (d) to determine the terms and conditions of any Award granted hereunder (including, but not limited to, any Option Price or Option Period, any exercise restriction or limitation or exercise acceleration, forfeiture or waiver, and any performance criteria); (e) to adjust the terms and conditions, at any time or from time to time, of any Award, subject to the limitations of Section 13.1; (f) to determine to what extent and under what circumstances Common Stock and other amounts payable with respect to an Award shall be deferred; (g) to determine under what circumstances an Award may be settled in cash or Common Stock; (h) to provide for the forms of Agreements to be utilized in connection with the Plan; (i) to determine whether a Participant has a Disability or a Retirement; 6 (j) to determine what securities law requirements are applicable to the Plan, Awards and the issuance of shares of Common Stock under the Plan and to require of a Participant that appropriate action be taken with respect to such requirements; (k) to cancel, with the consent of Participants or as otherwise provided in the Plan or an Agreement, outstanding Awards; (l) to interpret and make final determinations with respect to the remaining number of shares of Common Stock available under this Plan; (m) to require, as a condition of the exercise of an Award or the issuance or transfer of a certificate of Common Stock, the withholding from a Participant of such amount of any Federal, state or local taxes as may be necessary in order for the Company or any other employer to obtain a deduction or as may be otherwise required by law; (n) to determine whether and under what circumstances a Participant has incurred a Termination of Employment; (o) to determine whether the Company or any other person has a right or obligation to purchase Common Stock from a Participant and, if so, the terms and conditions on which such Common Stock is to be purchased; (p) to determine the restrictions or limitations on the transfer of Common Stock; (q) to determine whether an Award is to be adjusted, modified or purchased, or is to become fully exercisable, under the Plan or the terms of an Agreement; (r) to determine the permissible methods of Award exercise and payment, including cashless exercise arrangements; (s) to adopt, amend and rescind such rules and regulations as, in its opinion, may be advisable in the administration of the Plan; and (t) to appoint and compensate agents, counsel, auditors or other specialists to aid it in the discharge of its duties. The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable, to interpret the terms and provisions of the Plan and any Award issued under the Plan (and any Agreement) and to otherwise supervise the administration of the Plan. The Committee's policies and procedures may differ with respect to Awards granted at different times or to different Participants. Any determination made by the Committee pursuant to the provisions of the Plan shall be made in its sole discretion and, in the case of any determination relating to an Award, may be made at the time of the grant of the Award or, unless in contravention of any express term 7 of the Plan or an Agreement, at any time thereafter. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Participants. No determination shall be subject to de novo review if challenged in court. ARTICLE IV ---------- STOCK SUBJECT TO PLAN --------------------- 4.1 Number of Shares. Subject to the adjustment under Section 4.6, the total number of shares of Common Stock reserved and available for distribution pursuant to Awards under the Plan shall be 600,000 shares of Common Stock authorized for issuance on the Effective Date. Such shares may consist, in whole or in part, of authorized and unissued shares or treasury shares. 4.2 Release of Shares. Subject to Section 6.3(f), if any shares of Common Stock that are subject to any Award cease to be subject to an Award or are forfeited, if any Award otherwise terminates without issuance of shares of Common Stock being made to the Participant, or if any shares (whether or not restricted) of Common Stock are received by the Company in connection with the exercise of an Award, including the satisfaction of tax withholding, such shares, in the discretion of the Committee, may again be available for distribution in connection with Awards under the Plan. 4.3 Restrictions on Shares. Shares of Common Stock issued as or in conjunction with an Award shall be subject to the terms and conditions specified herein and to such other terms, conditions and restrictions as the Committee in its discretion may determine or provide in an Agreement. The Company shall not be required to issue or deliver any certificates for shares of Common Stock, cash or other property prior to (i) the listing of such shares on any stock exchange or Nasdaq (or other public market) on which the Common Stock may then be listed (or regularly traded), (ii) the completion of any registration or qualification of such shares under Federal or state law, or any ruling or regulation of any government body which the Committee determines to be necessary or advisable, and (iii) the satisfaction of any applicable withholding obligation in order for the Company or an Affiliate to obtain a deduction with respect to the exercise of an Award. The Company may cause any certificate for any share of Common Stock to be delivered to be properly marked with a legend or other notation reflecting the limitations on transfer of such Common Stock as provided in this Plan or as the Committee may otherwise require. The Committee may require any person exercising an Award to make such representations and furnish such information as it may consider appropriate in connection with the issuance or delivery of the shares of Common Stock in compliance with applicable law or otherwise. Fractional shares shall not be delivered, but shall be rounded to the next lower whole number of shares. 4.4 Stockholder Rights. No person shall have any rights of a stockholder as to shares of Common Stock subject to an Award until, after proper exercise of the Award or other action required, such shares shall have been recorded on the Company's official stockholder records as having been issued or transferred. Upon exercise of an Award or any portion thereof, the Company will have thirty (30) days in which to issue the shares, and the Participant will not be 8 treated as a stockholder for any purpose whatsoever prior to such issuance. No adjustment shall be made for cash dividends or other rights for which the record date is prior to the date such shares are recorded as issued or transferred in the Company's official stockholder records, except as provided herein or in an Agreement. 4.5 Reasonable Efforts To Register. The Company will use its reasonable efforts to register under the Securities Act the Common Stock delivered or deliverable pursuant to Awards on Commission Form S-8 if available to the Company for this purpose (or any successor or alternate form that is substantially similar to that form to the extent available to effect such registration), in accordance with the rules and regulations governing such forms, when the Committee, in its sole discretion, shall deem such registration appropriate. The Company will use its reasonable efforts to cause the registration statement to become effective and to file such supplements and amendments to the registration statement as may be necessary to keep the registration statement in effect until the earliest of (a) one year following the expiration of the Award Period of the last Award outstanding, (b) the date the Company is no longer a reporting company under the Exchange Act and (c) the date all Participants have disposed of all shares delivered pursuant to any Award. 4.6 Anti-Dilution. In the event, after the Effective Date, of any Company stock dividend, stock split, combination or exchange of shares, recapitalization or other change in the capital structure of the Company, corporate separation or division of the Company (including, but not limited to, a split-up, spin-off, split-off or distribution to Company stockholders other than a normal cash dividend), sale by the Company of all or a substantial portion of its assets (measured on either a stand-alone or consolidated basis), reorganization, rights offering, partial or complete liquidation, or any other corporate transaction, Company stock offering or event involving the Company and having an effect similar to any of the foregoing, then the Committee shall adjust or substitute, as the case may be, the number of shares of Common Stock available for Awards under the Plan, the number of shares of Common Stock covered by outstanding Awards, the exercise price per share of outstanding Awards, and performance conditions and any other characteristics or terms of the Awards as the Committee shall deem necessary or appropriate to reflect equitably the effects of such changes to the Participants; provided, however, that the Committee may limit any such adjustment so as to maintain the deductibility of the Awards under Section 162(m) and that any fractional shares resulting from such adjustment shall be eliminated by rounding to the next lower whole number of shares with appropriate payment for such fractional shares as shall reasonably be determined by the Committee. ARTICLE V --------- ELIGIBILITY ----------- 5.1 Eligibility. Except as herein provided, the persons who shall be eligible to participate in the Plan and be granted Awards shall be those persons who are directors, officers, and employees of, and consultants to, the Company or any subsidiary of the Company, who shall be in a position, in the opinion of the Committee, to make contributions to the growth, management, protection and success of the Company and its subsidiaries. Of those persons described in the preceding sentence, the Committee may, from time to time, select persons to be 9 granted Awards and shall determine the terms and conditions with respect thereto. In making any such selection and in determining the form of the Award, the Committee may give consideration to the person's functions and responsibilities, the person's contributions to the Company and its subsidiaries, the value of the individual's service to the Company and its subsidiaries and such other factors deemed relevant by the Committee. 5.2 Per Person Award Limitations. In each fiscal year during any part of which this Plan is in effect, a Participant may not be granted Awards relating to more than 100,000 shares of Common Stock, subject to adjustment as provided in Section 4.6, under each of Articles VI, VII, VIII and IX and Sections 10.1, 10.2, 10.3 and 10.4(b). In addition, the maximum aggregate amount that may be paid out as final Cash Incentive Awards or other cash Awards in any fiscal year to any Participant shall be $1,000,000. ARTICLE VI ---------- STOCK OPTIONS ------------- 6.1 General. The Committee shall have authority to grant Stock Options under the Plan at any time or from time to time. Stock Options may be either Incentive Stock Options or Non-Qualified Stock Options. An Option shall entitle the Participant to receive shares of Common Stock upon exercise of such Option, subject to the Participant's satisfaction in full of any conditions, restrictions or limitations imposed in accordance with the Plan or an Option Agreement (the terms and provisions of which may differ from other Agreements), including, without limitation, payment of the Option Price. 6.2 Grant and Exercise. The grant of a Stock Option shall occur as of the date the Committee determines. Each Option granted under this Plan shall be evidenced by an Agreement, in a form approved by the Committee, which shall embody the terms and conditions of such Option and which shall be subject to the express terms and conditions set forth in the Plan. Such Agreement shall become effective upon execution by the Participant. To the extent that any Stock Option is not designated as an Incentive Stock Option or, even if so designated, does not qualify as an Incentive Stock Option, it shall constitute a Non-Qualified Stock Option. Anything in the Plan to the contrary notwithstanding, no term of the Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be exercised, so as to disqualify the Plan under Section 422 of the Code or, without the consent of the Participant affected, to disqualify any Incentive Stock Option under such Section 422. 6.3 Terms and Conditions. Stock Options shall be subject to such terms and conditions as shall be determined by the Committee, including the following: (a) Option Period. The Option Period of each Stock Option shall be fixed by the Committee; provided that no Stock Option shall be exercisable more than ten (10) years after the date the Stock Option is granted. In the case of an Incentive Stock Option granted to an individual who owns more than ten percent (10%) of the combined voting power of all classes of stock of the Company, a corporation which is a parent corporation 10 of the Company or any subsidiary of the Company (each as defined in Section 424 of the Code), the Option Period shall not exceed five (5) years from the date of grant. No Option which is intended to be an Incentive Stock Option shall be granted more than ten (10) years from the date the Plan is adopted by the Company or the date the Plan is approved by the stockholders of the Company, whichever is earlier. (b) Option Price. The Option Price per share of the Common Stock purchasable under an Option shall be determined by the Committee in its sole and absolute discretion; provided, however, that in the case of an Incentive Stock Option granted to an individual who owns more than ten percent (10%) of the combined voting power of all classes of stock of the Company, a corporation which is a parent corporation of the Company or any subsidiary of the Company (each as defined in Section 424 of the Code), the Option Price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share on the date the Option is granted. (c) Exercisability. Subject to Section 12.1, Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee. If the Committee provides that any Stock Option is exercisable only in installments, the Committee may at any time waive such installment exercise provisions, in whole or in part, and, subject to the foregoing, may at any time accelerate the exercisability of any Stock Option. If the Committee intends that an Option be an Incentive Stock Option, the Committee may, in its discretion, provide that the aggregate Fair Market Value (determined at the date the Option is granted) of the Common Stock as to which such Incentive Stock Option which is exercisable for the first time during any calendar year shall not exceed $100,000. (d) Method of Exercise. Subject to the provisions of this Article VI, a Participant may exercise Stock Options, in whole or in part, at any time during the Option Period by the Participant's giving to the Company written notice of exercise on a form provided by the Committee (if available) specifying the number of shares of Common Stock subject to the Stock Option to be purchased. Such notice shall be accompanied by payment in full of the purchase price by cash or check or such other form of payment as the Company may accept. If set forth in an Agreement or otherwise approved by the Committee, payment in full or in part may also be made (i) by delivering Common Stock already owned by the Participant having a total Fair Market Value on the date of such delivery equal to the Option Price; (ii) by the execution and delivery of a note or other evidence of indebtedness (and any security agreement thereunder) satisfactory to the Committee and permitted in accordance with Section 6.3(e); (iii) by the delivery of cash or the extension of credit by a broker-dealer to whom the Participant has submitted a notice of exercise or otherwise indicated an intent to exercise the Option (in accordance with Part 220, Chapter II, Title 12 of the Code of Federal Regulations, so-called "cashless" exercise); or (iv) by any combination of the foregoing. In the case of an Incentive Stock Option, the right to make a payment in the form of already owned shares of Common Stock of the same class as the Common Stock subject to the Stock Option may be authorized only at the time the Stock Option is granted. No shares of Common Stock shall be issued until full payment therefor, as determined by the Committee, has been made. 11 (e) Company Loan or Guarantee. Upon the exercise of any Option and subject to the pertinent Agreement and the discretion of the Committee, the Company may at the request of the Participant: (i) lend to the Participant an amount equal to such portion of the Option Price as the Committee may determine; or (ii) guarantee a loan obtained by the Participant from a third- party for the purpose of tendering the Option Price. The terms and conditions of any loan or guarantee, including the term, interest rate and any security interest thereunder and whether the loan shall be with recourse, shall be determined by the Committee, except that no extension of credit or guarantee shall obligate the Company for an amount to exceed the lesser of the aggregate Fair Market Value per share of the Common Stock on the date of exercise, less the par value of the shares of Common Stock to be purchased upon the exercise of the Award, or the amount permitted under applicable laws or the regulations and rules of the Federal Reserve Board and any other governmental agency having jurisdiction. (f) Non-transferability of Options. Except as provided herein or in an Agreement, no Stock Option or interest therein shall be transferable by the Participant other than by will or by the laws of descent and distribution, and all Stock Options shall be exercisable during the Participant's lifetime only by the Participant. 6.4 Termination by Reason of Death. Unless otherwise provided in an Agreement or determined by the Committee, if a Participant incurs a Termination of Employment due to death, any unexpired and unexercised Stock Option held by such Participant shall thereafter be fully exercisable for a period of ninety (90) days following the date of the appointment of a Representative (or such other period or no period as the Committee may specify) or until the expiration of the Option Period, whichever period is the shorter. 6.5 Termination by Reason of Disability. Unless otherwise provided in an Agreement or determined by the Committee, if a Participant incurs a Termination of Employment due to a Disability, any unexpired and unexercised Stock Option held by such Participant shall thereafter be fully exercisable by the Participant for the period of ninety (90) days (or such other period or no period as the Committee may specify) immediately following the date of such Termination of Employment or until the expiration of the Option Period, whichever period is shorter, and the Participant's death at any time following such Termination of Employment due to Disability shall not affect the foregoing. In the event of the Participant's Termination of Employment by reason of Disability, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. 6.6 Other Termination. Unless otherwise provided in an Agreement or determined by the Committee, if a Participant incurs a Termination of Employment due to Retirement or if the Termination of Employment is involuntary on the part of the Participant (but is not due to death or Disability or with Cause), any Stock Option held by such Participant shall immediately 12 terminate, except that such Stock Option, to the extent then exercisable, may be exercised for the a period of the ninety (90) days immediately following the date of such Termination of Employment or until the expiration of the Option Period, whichever is shorter. Unless otherwise provided in an Agreement or determined by the Committee, if a Participant incurs a Termination of Employment which is voluntary on the part of the Participant (and is not due to Retirement) or if the Participant's Termination of Employment is for Cause, any Stock Option held by such Participant shall terminate immediately, without any exercise thereof. The death or Disability of a Participant after a Termination of Employment otherwise provided herein shall not extend the time permitted to exercise an Option. 6.7 Cashing Out of Option. On receipt of written notice of exercise, the Committee may elect to cash out all or part of the portion of any Stock Option to be exercised by paying the Participant an amount, in cash or Common Stock, equal to the excess of the Fair Market Value of the Common Stock that is subject to the Option over the Option Price times the number of shares of Common Stock subject to the Option on the effective date of such cash-out. ARTICLE VII ----------- STOCK APPRECIATION RIGHTS ------------------------- 7.1 General. The Committee shall have authority to grant Stock Appreciation Rights under the Plan at any time or from time to time. Subject to the Participant's satisfaction in full of any conditions, restrictions or limitations imposed in accordance with the Plan or an Agreement, a Stock Appreciation Right shall entitle the Participant to surrender to the Company the Stock Appreciation Right and to be paid therefor in shares of the Common Stock, cash or a combination thereof as herein provided, the amount described in Section 7.3(b). 7.2 Grant. Stock Appreciation Rights may be granted in conjunction with all or part of any Stock Option granted under the Plan, in which case the exercise of the Stock Appreciation Right shall require the cancellation of a corresponding portion of the Stock Option, and the exercise of a Stock Option shall result in the cancellation of a corresponding portion of the Stock Appreciation Right. In the case of a Non-Qualified Stock Option, such rights may be granted either at or after the time of grant of such Stock Option. In the case of an Incentive Stock Option, such rights may be granted only at the time of grant of such Stock Option. A Stock Appreciation Right may also be granted on a stand-alone basis. Each Stock Appreciation Right granted under this Plan shall be evidenced by an Agreement, which shall embody the terms and conditions of such Stock Appreciation Right and which shall be subject to the terms and conditions set forth in this Plan. 7.3 Terms and Conditions. Stock Appreciation Rights shall be subject to such terms and conditions as shall be determined by the Committee, including the following: (a) Period and Exercise. The term of a Stock Appreciation Right shall be established by the Committee. If granted in conjunction with a Stock Option, the Stock Appreciation Right shall have a term which is the same as the Option Period and shall be exercisable only at such time or times and to the extent the related Stock Options 13 would be exercisable in accordance with the provisions of Article VI. A Stock Appreciation Right which is granted on a stand-alone basis shall be for such period and shall be exercisable at such times and to the extent provided in an Agreement. Stock Appreciation Rights shall be exercised by the Participant's giving written notice of exercise on a form provided by the Committee (if available) to the Company specifying the portion of the Stock Appreciation Right to be exercised. (b) Amount. Upon the exercise of a Stock Appreciation Right granted in conjunction with a Stock Option, a Participant shall be entitled to receive an amount in cash, shares of Common Stock or both as determined by the Committee or as otherwise permitted in an Agreement equal in value to the excess of the Fair Market Value per share of Common Stock over the Option Price per share of Common Stock specified in the related Agreement multiplied by the number of shares in respect of which the Stock Appreciation Right is exercised. In the case of a Stock Appreciation Right granted on a stand-alone basis, the Agreement shall specify the value to be used in lieu of the Option Price per share of Common Stock. The aggregate Fair Market Value per share of the Common Stock shall be determined as of the date of exercise of such Stock Appreciation Right. (c) Non-transferability of Stock Appreciation Rights. Stock Appreciation Rights shall be transferable only when and to the extent that a Stock Option would be transferable under the Plan, unless otherwise provided in an Agreement. (d) Termination. A Stock Appreciation Right shall terminate at such time as a Stock Option would terminate under the Plan, unless otherwise provided in an Agreement. (e) Effect on Shares Under the Plan. Upon the exercise of a Stock Appreciation Right, the Stock Option or part thereof to which such Stock Appreciation Right is related shall be deemed to have been exercised for the purpose of the limitation set forth in Section 4.1 on the number of shares of Common Stock to be issued under the Plan, but only to the extent of the number of shares of Common Stock covered by the Stock Appreciation Right at the time of exercise based on the value of the Stock Appreciation Right at such time. (f) Incentive Stock Option. A Stock Appreciation Right granted in tandem with an Incentive Stock Option shall not be exercisable unless the Fair Market Value of the Common Stock on the date of exercise exceeds the Option Price. In no event shall any amount paid pursuant to the Stock Appreciation Right exceed the difference between the Fair Market Value on the date of exercise and the Option Price. 14 ARTICLE VIII ------------ RESTRICTED STOCK ---------------- 8.1 General. The Committee shall have authority to grant Restricted Stock under the Plan at any time or from time to time, either alone or in addition to other Awards granted under the Plan. The Committee shall determine the persons to whom and the time or times at which grants of Restricted Stock will be awarded, the number of shares of Restricted Stock to be awarded to any Participant, the time or times within which such Awards may be subject to forfeiture and any other terms and conditions of the Awards. Each Award shall be confirmed by, and be subject to the terms of, an Agreement. The Committee may condition the grant of Restricted Stock upon the attainment of specified performance goals by the Participant or by the Company or an Affiliate (including a division or department of the Company or an Affiliate) for or within which the Participant is primarily employed or upon such other factors or criteria as the Committee shall determine. The provisions of Restricted Stock Awards need not be the same with respect to any Participant. 8.2 Awards and Certificates. Notwithstanding the limitations on issuance of shares of Common Stock otherwise provided in the Plan, each Participant receiving an Award of Restricted Stock shall be issued a certificate in respect of such shares of Restricted Stock. Such certificate shall be registered in the name of such Participant and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Award as determined by the Committee. The Committee may require that the certificates evidencing such shares be held in custody by the Company until the restrictions thereon shall have lapsed and that, as a condition of any Award of Restricted Stock, the Participant shall have delivered a stock power, endorsed in blank, relating to the Common Stock covered by such Award. 8.3 Terms and Conditions. Shares of Restricted Stock shall be subject to the following terms and conditions: (a) Limitations on Transferability. Subject to the provisions of the Plan and the Agreement, during a period set by the Committee commencing with the date of such Award (the "Restriction Period"), the Participant shall not be permitted to sell, assign, transfer, pledge or otherwise encumber any interest in shares of Restricted Stock. (b) Rights. Except as provided in Section 8.3(a), the Participant shall have, with respect to shares of Restricted Stock, all of the rights of a stockholder of the Company holding the class of Common Stock that is the subject of the Restricted Stock, including, if applicable, the right to vote the shares and the right to receive any cash dividends. Unless otherwise determined by the Committee and subject to the Plan, cash dividends on the class of Common Stock that is the subject of the Restricted Stock shall be automatically deferred and reinvested in additional Restricted Stock, and dividends on the class of Common Stock that is the subject of the Restricted Stock payable in Common Stock shall be paid in the form of Restricted Stock of the same class as the Common Stock on which such dividends were paid. 15 (c) Acceleration. Based on service, performance by the Participant or by the Company or an Affiliate, including any division or department for which the Participant is employed, or such other factors or criteria as the Committee may determine, the Committee may provide for the lapse of restrictions in installments and may accelerate the vesting of all or any part of any Award and waive the restrictions for all or any part of such Award. (d) Forfeiture. Unless otherwise provided in an Agreement or determined by the Committee, if the Participant incurs a Termination of Employment during the Restriction Period due to death or Disability, the restrictions shall lapse and the Participant shall be fully vested in the Restricted Stock. Unless otherwise provided in an Agreement or determined by the Committee, upon a Participant's Termination of Employment for any reason during the Restriction Period other than death or Disability, all shares of Restricted Stock still subject to restriction shall be forfeited by the Participant, except the Committee shall have the discretion to waive in whole or in part any or all remaining restrictions with respect to any or all of such Participant's Restricted Stock. (e) Delivery. If and when the Restriction Period expires without a prior forfeiture of the Restricted Stock subject to such Restriction Period, certificates for such shares shall be delivered to the Participant. (f) Election. A Participant may elect to further defer receipt of the Restricted Stock for a specified period or until a specified event, subject in each case to the Committee's approval and to such terms as are determined by the Committee. Subject to any exceptions adopted by the Committee, such election must be made one (1) year prior to completion of the Restriction Period. ARTICLE IX ---------- DEFERRED STOCK -------------- 9.1 General. The Committee shall have authority to grant Deferred Stock under the Plan at any time or from time to time, either alone or in addition to other Awards granted under the Plan. The Committee shall determine the persons to whom and the time or times at which Deferred Stock will be awarded, the number of shares of Deferred Stock to be awarded to any Participant, the duration of the period (the "Deferral Period") prior to which the Common Stock will be delivered, and the conditions under which receipt of the Common Stock will be deferred and any other terms and conditions of the Awards. Each Award shall be confirmed by, and be subject to the terms of, an Agreement. The Committee may condition the grant of Deferred Stock upon the attainment of specified performance goals by the Participant or by the Company or an Affiliate, including a division or department of the Company or an Affiliate for or within which the Participant is primarily employed, or upon such other factors or criteria as the Committee shall determine. The provisions of Deferred Stock Awards need not be the same with respect to any Participant. 16 9.2 Terms and Conditions. Deferred Stock Awards shall be subject to the following terms and conditions: (a) Limitations on Transferability. Subject to the provisions of the Plan and the Agreement, Deferred Stock Awards, or any interest therein, may not be sold, assigned, transferred, pledged or otherwise encumbered during the Deferral Period. At the expiration of the Deferral Period (or Elective Deferral Period as defined in Section 9.2(e), where applicable), the Committee may elect to deliver Common Stock, cash equal to the Fair Market Value of such Common Stock or a combination of cash and Common Stock to the Participant for the shares covered by the Deferred Stock Award. (b) Rights. Unless otherwise determined by the Committee and subject to the Plan, cash dividends on the Common Stock that is the subject of the Deferred Stock Award shall be automatically deferred and reinvested in additional Deferred Stock, and dividends on the Common Stock that is the subject of the Deferred Stock Award payable in Common Stock shall be paid in the form of Deferred Stock of the same class as the Common Stock on which such dividends were paid. (c) Acceleration. Based on service, performance by the Participant or by the Company or the Affiliate, including any division or department for which the Participant is employed, or such other factors or criteria as the Committee may determine, the Committee may provide for the lapse of deferral limitations in installments and may accelerate the vesting of all or any part of any Award and waive the deferral limitations for all or any part of such Award. (d) Forfeiture. Unless otherwise provided in an Agreement or determined by the Committee, if the Participant incurs a Termination of Employment during the Deferral Period due to death or Disability, the restrictions shall lapse and the Participant shall be fully vested in the Deferred Stock. Unless otherwise provided in an Agreement or determined by the Committee, upon a Participant's Termination of Employment for any reason during the Deferral Period other than death or Disability, the rights to the shares still covered by the Award shall be forfeited by the Participant, except the Committee shall have the discretion to waive in whole or in part any or all remaining deferral limitations with respect to any or all of such Participant's Deferred Stock. (e) Election. A Participant may elect further to defer receipt of the Deferred Stock payable under an Award (or an installment of an Award) for a specified period or until a specified event (an "Elective Deferral Period"), subject in each case to the Committee's approval and to such terms as are determined by the Committee. Subject to any exceptions adopted by the Committee, such election must be made at least one (1) year prior to completion of the Deferral Period for the Award (or of the applicable installment thereof). 17 ARTICLE X --------- OTHER AWARDS ------------ 10.1 Bonus Stock and Awards In Lieu of Obligations. The Committee is authorized to grant Common Stock as a bonus, or to grant Common Stock or other Awards in lieu of Company obligations to pay cash or deliver other property under other plans or compensatory arrangements. Common Stock or Awards granted hereunder shall be subject to such other terms as shall be determined by the Committee. 10.2 Dividend Equivalents. The Committee is authorized to grant Dividend Equivalents to a Participant, entitling the Participant to receive cash, Common Stock, other Awards, or other property equal in value to dividends paid with respect to a specified number of shares of Common Stock. Dividend Equivalents may be awarded on a free-standing basis or in connection with another Award. The Committee may provide that Dividend Equivalents will be paid or distributed when accrued or will be deemed to have been reinvested in additional Common Stock, Awards or other investment vehicles, and subject to such restrictions on transferability and risks of forfeiture, as the Committee may specify. 10.3 Other Stock-Based Awards. The Committee is authorized, subject to limitations under applicable law, to grant to Participants such other Awards that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, Common Stock, as deemed by the Committee to be consistent with the purposes of the Plan, including, without limitation, convertible or exchangeable debt securities, other rights convertible or exchangeable into Common Stock, purchase rights for Common Stock, Awards with value and payment contingent upon performance of the Company or any other factors designated by the Committee, and Awards valued by reference to the book value of Common Stock or the value of securities of or the performance of specified subsidiaries. The Committee shall determine the terms and conditions of such Awards. Common Stock delivered pursuant to an Award in the nature of a purchase right granted under this Section 10.3 shall be purchased for such consideration and paid for at such times, by such methods, and in such forms, including, without limitation, cash, Common Stock, other Awards, or other property, as the Committee shall determine. Cash awards, as an element of or supplement to any other Award under the Plan, may also be granted pursuant to this Section 10.3. 10.4 Performance Awards. (a) Performance Conditions. The right of a Participant to exercise or receive a grant or settlement of any Award, and its timing, may be subject to performance conditions specified by the Committee. The Committee may use business criteria and other measures of performance it deems appropriate in establishing any performance conditions, and may exercise its discretion to reduce or increase the amounts payable under any Award subject to performance conditions, except as limited under Sections 10.4(b) and 10.4(c) hereof in the case of a Performance Award intended to qualify under Code Section 162(m). 18 (b) Performance Awards Granted to Designated Covered Employees. If the Committee determines that a Performance Award to be granted to a person the Committee regards as likely to be a Covered Employee should qualify as "performance-based compensation" for purposes of Code Section 162(m), the grant and/or settlement of such Performance Award shall be contingent upon achievement of preestablished performance goals and other terms set forth in this Section 10.4(b). (i) Performance Goals Generally. The performance goals for any such Performance Awards shall consist of one or more business criteria and a targeted level or levels of performance with respect to such criteria, as specified by the Committee consistent with this Section 10.4(b). Performance goals shall be objective and shall otherwise meet the requirements of Code Section 162(m), including the requirement that the level or levels of performance targeted by the Committee result in the performance goals being "substantially uncertain." (ii) Business Criteria. One or more of the following business criteria for the Company, on a consolidated basis, and/or for specified subsidiaries or business units of the Company (except with respect to the total stockholder return and earnings per share criteria), shall be used exclusively by the Committee in establishing performance goals for such Performance Awards: (1) total stockholder return; (2) such total stockholder return as compared to total return (on a comparable basis) of a publicly available index, such as, but not limited to, the Standard & Poor's 500 or the Nasdaq-U.S. Index; (3) net revenue; (4) net income; (5) pre-tax income; (6) EBITDA (earnings before interest, taxes, depreciation and amortization); (7) EBITDA margin (EBITDA as a percentage of net revenue); (8) operating income; (9) operating margin (operating income as a percentage of net revenue); (10) earnings per share; (11) return on equity; (12) return on capital; and (13) return on investment. The foregoing business criteria shall also be exclusively used in establishing performance goals for Cash Incentive Awards granted under Section 10.4(c) hereof. (iii) Performance Period: Timing For Establishing Performance Goals. Achievement of performance goals in respect of such Performance Awards shall be measured over such periods as may be specified by the Committee. Performance goals shall be established on or before the dates that are required or permitted for "performance-based compensation" under Code Section 162(m). (iv) Settlement of Performance Awards; Other Terms. Settlement of such Performance Awards may be in cash or Common Stock, or other Awards, or other property, in the discretion of the Committee. The Committee may, in its discretion, reduce the amount of a settlement otherwise to be made in connection with such Performance Awards, but may not exercise discretion to increase any such amount payable in respect of a Performance Award subject to this Section 10.4(b). The Committee shall specify the circumstances in which such Performance Awards shall be forfeited or paid in the event of a Termination of Employment or a Change in Control prior to the end of a performance period or 19 settlement of Performance Awards, and other terms relating to such Performance Awards. (c) Cash Incentive Awards Granted to Designated Covered Employees. The Committee may grant Cash Incentive Awards to Participants including those designated by the Committee as likely to be Covered Employees, which Awards shall represent a conditional right to receive a payment in cash, unless otherwise determined by the Committee, after the end of a specified fiscal year or fiscal quarter or other period specified by the Committee, in accordance with this Section 10.4(c). (i) Cash Incentive Award. The Cash Incentive Award for Participants the Committee regards as likely to be regarded as Covered Employees shall be based on achievement of a performance goal or goals based on one or more of the business criteria set forth in Section 10.4(b), and may be based on such criteria for any other Participant. The Committee may specify the amount of the individual Cash Incentive Award as a percentage of any such business criteria, a percentage thereof in excess of a threshold amount or another amount which need not bear a strictly mathematical relationship to such business criteria. The Committee may establish a Cash Incentive Award pool that includes Participants the Committee regards likely to be Covered Employees, which shall be an unfunded pool, for purposes of measuring Company performance in connection with Cash Incentive Awards. The amount of the Cash Incentive Award pool shall be based upon the achievement of a performance goal or goals based on one or more of the business criteria set forth in Section 10.4(b) hereof in the given performance period, as granted by the Committee. The Committee may specify the amount of the Cash Incentive Award pool as a percentage of any of such business criteria, a percentage thereof in excess of a threshold amount or another amount which need not bear a strictly mathematical relationship to such business criteria. (ii) Potential Cash Incentive Awards. Not later than the date required or permitted for "qualified performance-based compensation" under Code Section 162(m), the Committee shall determine the Participants who will potentially receive Cash Incentive Awards for the specified fiscal year, quarter or other period, either as individual Cash Incentive Awards or out of an Cash Incentive Award pool established by such date and the amount or method for determining the amount of the individual Cash Incentive Award or the amount of such Participant's portion of the Cash Incentive Award pool. (iii) Payout of Cash Incentive Awards. After the end of the specified fiscal year, quarter or other period, as the case may be, the Committee shall determine the amount, if any, of potential individual Cash Incentive Award payable to a Participant or of any Cash Incentive Award pool and the maximum amount of potential Cash Incentive Award payable to each Participant in any Cash Incentive Award pool. The Committee may, in its discretion, determine that the amount payable to any Participant as a final Cash Incentive Award shall be increased or reduced from the amount of his or her potential Cash Incentive Award, including a determination to make no final Award whatsoever, but may 20 not exercise discretion to increase any such amount in the case of a Cash Incentive Award intended to qualify under Code Section 162(m). The Committee shall specify the circumstances in which a Cash Incentive Award shall be paid or forfeited in the event of Termination of Employment by the Participant or a Change in Control prior to the end of the period for measuring performance or the payout of such Cash Incentive Award, and other terms relating to such Cash Incentive Award in accordance with the Plan. Upon the completion of the measuring period and the determination of the right to payment and the amount, the Committee shall direct the Company to make payment. (d) Written Determinations. All determinations by the Committee as to the establishment of performance goals and the potential Performance Awards or Cash Incentive Awards related to such performance goals and as to the achievement of performance goals relating to such Awards, the amount of any Cash Incentive Award pool and the amount of final Cash Incentive Awards, shall be made in writing in the case of any Award intended to qualify under Code Section 162(m). The Committee may not delegate any responsibility relating to such Performance Awards or Cash Incentive Awards. ARTICLE XI ---------- PROVISIONS APPLICABLE TO STOCK ACQUIRED UNDER THE PLAN ------------------------------------------------------ 11.1 Limited Transfer During Offering. In the event there is an effective registration statement under the Securities Act pursuant to which shares of Common Stock shall be offered for sale in an underwritten offering, a Participant shall not, during the period requested by the underwriters managing the registered public offering, effect any public sale or distribution of shares received directly or indirectly as, or pursuant to an exercise of, any Award. 11.2 Committee Discretion. The Committee may in its sole discretion include in any Agreement an obligation that the Company purchase a Participant's shares of Common Stock received upon the exercise of an Award (including the purchase of any unexercised Awards which have not expired), or may obligate a Participant to sell shares of Common Stock to the Company, upon such terms and conditions as the Committee may determine and set forth in an Agreement. The provisions of this Article XI shall be construed by the Committee in its sole discretion and shall be subject to such other terms and conditions as the Committee may from time to time determine. Notwithstanding any provision herein to the contrary, the Company may upon determination by the Committee assign its right to purchase shares of Common Stock under this Article XI, whereupon the assignee of such right shall have all the rights, duties and obligations of the Company with respect to purchase of the shares of Common Stock. 11.3 No Company Obligation. None of the Company, an Affiliate or the Committee shall have any duty or obligation to disclose affirmatively to a record or beneficial holder of Common Stock or an Award, and such holder shall have no right to be advised of, any material information regarding the Company or any Affiliate at any time prior to, upon or in connection 21 with receipt or the exercise of an Award or the Company's purchase of Common Stock or an Award from such holder in accordance with the terms hereof. ARTICLE XII ----------- CHANGE IN CONTROL PROVISIONS ---------------------------- 12.1 Impact of Event. Notwithstanding any other provision of the Plan to the contrary, unless otherwise provided in an Agreement, in the event of a Change in Control (as defined in Section 12.2): (a) Any Stock Appreciation Rights and Stock Options outstanding as of the date such Change in Control and not then exercisable shall become fully exercisable to the full extent of the original grant; (b) The restrictions and deferral limitations applicable to any Restricted Stock, Deferred Stock or other Award shall lapse, and such Restricted Stock, Deferred Stock or other Award shall become free of all restrictions and become fully vested and transferable to the full extent of the original grant. (c) The performance goals and other conditions with respect to any outstanding Performance Award or Cash Incentive Award shall be deemed to have been satisfied in full, and such Award shall be fully distributable, if and to the extent provided by the Committee in the Agreement relating to such Award or otherwise, notwithstanding that the Award may not be fully deductible to the Company under Section 162(m) of the Code. (d) Notwithstanding any other provision of the Plan, unless the Committee shall provide otherwise in an Agreement, a Participant shall have the right, whether or not the Award is fully exercisable or may be otherwise realized by the Participant, by giving notice during the sixty (60) day period from and after a Change in Control to the Company, to elect to surrender all or part of a stock-based Award to the Company and to receive cash, within thirty (30) days of such notice, in an amount equal to the amount by which the "Change in Control Price" (as defined in Section 12.3) per share of Common Stock on the date of such election shall exceed the amount which the Participant must pay to exercise the Award per share of Common Stock under the Award (the "Spread"), multiplied by the number of shares of Common Stock granted under the Award as to which the right granted under this Section 12.1 shall have been exercised. 12.2 Definition of Change in Control. For purposes of this Plan, a "Change in Control" shall be deemed to have occurred if (a) any corporation, person or other entity (other than the Company, a majority-owned subsidiary of the Company or any of its subsidiaries, or an employee benefit plan (or related trust) sponsored or maintained by the Company), including a "group" as defined in Section 13(d)(3) of the Exchange Act, becomes the beneficial owner of stock representing more than twenty percent (20%) of the combined voting power of the Company's 22 then outstanding securities; (b)(i) the stockholders of the Company approve a definitive agreement to merge or consolidate the Company with or into another corporation other than a majority-owned subsidiary of the Company, or to sell or otherwise dispose of all or substantially all of the Company's assets, and (ii) the persons who were the members of the Board of Directors of the Company prior to such approval do not represent a majority of the directors of the surviving, resulting or acquiring entity or the parent thereof; (c) the stockholders of the Company approve a plan of liquidation of the Company; or (d) within any period of 24 consecutive months, persons who were members of the Board of Directors of the Company immediately prior to such 24-month period, together with any persons who were first elected as directors (other than as a result of any settlement of a proxy or consent solicitation contest or any action taken to avoid such a contest) during such 24-month period by or upon the recommendation of persons who were members of the Board of Directors of the Company immediately prior to such 24-month period and who constituted a majority of the Board of Directors of the Company at the time of such election, cease to constitute a majority of the Board. 12.3 Change in Control Price. For purposes of the Plan, "Change in Control Price" means the higher of (a) the highest reported sales price of a share of Common Stock in any transaction reported on the principal exchange on which such shares are listed or on Nasdaq during the sixty (60) day period prior to and including the date of a Change in Control or (b) if the Change in Control is the result of a tender or exchange offer, merger, consolidation, liquidation or sale of all or substantially all of the assets of the Company (in each case a "Corporate Transaction"), the highest price per share of Common Stock paid in such Corporate Transaction, except that, in the case of Incentive Stock Options and Stock Appreciation Rights relating to Incentive Stock Options, such price shall be based only on the Fair Market Value of the Common Stock on the date any such Incentive Stock Option or Stock Appreciation Right is exercised. To the extent that the consideration paid in any such Corporate Transaction consists all or in part of securities or other non-cash consideration, the value of such securities or other non-cash consideration shall be determined in the sole discretion of the Committee. ARTICLE XIII ------------ MISCELLANEOUS ------------- 13.1 Amendments and Termination. The Board may amend, alter or discontinue the Plan at any time, but no amendment, alteration or discontinuation shall be made which would impair the rights of a Participant under a Stock Option, Stock Appreciation Right, Restricted Stock Award or Deferred Stock Award theretofore granted without the Participant's consent. In addition, no such amendment shall be made without the approval of the Company's stockholders to the extent such approval is required by law or agreement. The Committee may amend the Plan at any time provided that (a) no amendment shall impair the rights of any Participant under any Award theretofore granted without the Participant's consent, and (b) any amendment shall be subject to the approval or rejection of the Board. 23 The Committee may amend the terms of any Award or other Award theretofore granted, prospectively or retroactively, but no such amendment shall impair the rights of any Participant without the Participant's consent or reduce an Option Price. Subject to the above provisions, the Board shall have authority to amend the Plan to take into account changes in law and tax and accounting rules, as well as other developments, and to grant Awards which qualify for beneficial treatment under such rules without stockholder approval. Notwithstanding anything in the Plan to the contrary, if any right under this Plan would cause a transaction to be ineligible for pooling of interests accounting that would, but for the right hereunder, be eligible for such accounting treatment, the Committee may modify or adjust the right so that pooling of interests accounting shall be available, including the substitution of Common Stock having a Fair Market Value equal to the cash otherwise payable hereunder for the right which caused the transaction to be ineligible for pooling of interests accounting. 13.2 Stand-Alone, Additional, Tandem, and Substitute Awards. Awards granted under the Plan may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with, or in substitution or exchange for, any other Award or any award granted under another plan of the Company, any subsidiary, or any business entity to be acquired by the Company or a subsidiary, or any other right of a Participant to receive payment from the Company or any subsidiary. Such additional, tandem, and substitute or exchange Awards may be granted at any time. If an Award is granted in substitution or exchange for another Award or award, the Committee shall require the surrender of such other Award or award in consideration for the grant of the new Award. In addition, Awards may be granted in lieu of cash compensation, including in lieu of cash amounts payable under other plans of the Company or any subsidiary. 13.3 Form and Timing of Payment Under Awards; Deferrals. Subject to the terms of the Plan and any applicable Agreement, payments to be made by the Company or an Affiliate upon the exercise of an Award or settlement of an Award may be made in such forms as the Committee shall determine, including, without limitation, cash, Common Stock, other Awards or other property, and may be made in a single payment or transfer, in installments, or on a deferred basis. The settlement of any Award may be accelerated, and cash may be paid in lieu of Common Stock in connection with such settlement, in the discretion of the Committee or upon occurrence of one or more specified events (in addition to a Change in Control). Installment or deferred payments may be required by the Committee (subject to Section 13.1 of the Plan) or permitted at the election of the Participant. Payments may include, without limitation, provisions for the payment or crediting of reasonable interest on installment or deferred payments or the granting or crediting of Dividend Equivalents in respect of installment or deferred payments denominated in Common Stock. 13.4 Status of Awards Under Code Section 162(m). It is the intent of the Company that Awards granted to persons who are Covered Employees within the meaning of Code Section 162(m) shall constitute "qualified performance-based compensation" satisfying the requirements of Code Section 162(m). Accordingly, the provisions of the Plan shall be interpreted in a manner consistent with Code Section 162(m). If any provision of the Plan or any agreement relating to such an Award does not comply or is inconsistent with the requirements 24 of Code Section 162(m), such provision shall be construed or deemed amended to the extent necessary to conform to such requirements. 13.5 Unfunded Status of Plan; Limits on Transferability. It is intended that the Plan be an "unfunded" plan for incentive and deferred compensation. The Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Common Stock or make payments; provided, however, that, unless the Committee otherwise determines, the existence of such trusts or other arrangements is consistent with the "unfunded" status of the Plan. Unless otherwise provided in this Plan or in an Agreement, no Award shall be subject to the claims of Participant's creditors, and no Award may be transferred, assigned, alienated or encumbered in any way other than by will or the laws of descent and distribution or to a Representative upon the death of the Participant. 13.6 General Provisions. (a) Representation. The Committee may require each person purchasing or receiving shares pursuant to an Award to represent to and agree with the Company in writing that such person is acquiring the shares without a view to the distribution thereof. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. (b) No Additional Obligation. Nothing contained in the Plan shall prevent the Company or an Affiliate from adopting other or additional compensation arrangements for its employees. (c) Withholding. No later than the date as of which an amount first becomes includible in the gross income of the Participant for Federal income tax purposes with respect to any Award, the Participant shall pay to the Company (or other entity identified by the Committee), or make arrangements satisfactory to the Company or other entity identified by the Committee regarding the payment of, any Federal, state, local or foreign taxes of any kind required by law to be withheld with respect to such amount required in order for the Company or an Affiliate to obtain a current deduction. If the Participant disposes of shares of Common Stock acquired pursuant to an Incentive Stock Option in any transaction considered to be a disqualifying transaction under the Code, the Participant must give written notice of such transfer and the Company shall have the right to deduct any taxes required by law to be withheld from any amounts otherwise payable to the Participant. Unless otherwise determined by the Committee, withholding obligations may be settled with Common Stock, including Common Stock that is part of the Award that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional on such payment or arrangements, and the Company and its Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the Participant. (d) Reinvestment. The reinvestment of dividends in additional Deferred or Restricted Stock at the time of any dividend payment shall be permissible only if sufficient shares of Common Stock are available under the Plan for such reinvestment (taking into account then outstanding Options and other Awards). 25 (e) Representation. The Committee shall establish such procedures as it deems appropriate for a Participant to designate a Representative to whom any amounts payable in the event of the Participant's death are to be paid. (f) Controlling Law. The Plan and all Awards made and actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Illinois (other than its law respecting choice of law). The Plan shall be construed to comply with all applicable law and to avoid liability to the Company, an Affiliate or a Participant, including, without limitation, liability under Section 16(b) of the Exchange Act. (g) Offset. Any amounts owed to the Company or an Affiliate by the Participant of whatever nature may be offset by the Company from the value of any shares of Common Stock, cash or other thing of value under this Plan or an Agreement to be transferred to the Participant, and no shares of Common Stock, cash or other thing of value under this Plan or an Agreement shall be transferred unless and until all disputes between the Company and the Participant have been fully and finally resolved and the Participant has waived all claims to such against the Company or an Affiliate. (h) Fail Safe. With respect to persons subject to Section 16 of the Exchange Act, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3, as applicable. To the extent any action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. 13.7 Mitigation of Excise Tax. If any payment or right accruing to a Participant under this Plan (without the application of this Section 13.7), either alone or together with other payments or rights accruing to the Participant from the Company or an Affiliate ("Total Payments"), would constitute a "parachute payment" (as defined in Section 280G of the Code and regulations thereunder), such payment or right shall be reduced to the largest amount or greatest right that will result in no portion of the amount payable or right accruing under the Plan being subject to an excise tax under Section 4999 of the Code or being disallowed as a deduction under Section 280G of the Code. The determination of whether any reduction in the rights or payments under this Plan is to apply shall be made by the Committee in good faith after consultation with the Participant, and such determination shall be conclusive and binding on the Participant. The Participant shall cooperate in good faith with the Committee in making such determination and providing the necessary information for this purpose. The foregoing provisions of this Section 13.7 shall apply with respect to any person only if, after reduction for any applicable Federal excise tax imposed by Section 4999 of the Code and Federal income tax imposed by the Code, the Total Payments accruing to such person would be less than the amount of the Total Payments as reduced, if applicable, under the foregoing provisions of the Plan and after reduction for only Federal income taxes. In addition, the foregoing provisions of this Section 13.7 are not meant to be exclusive with regard to any Participant, and the Company or an Affiliate may, pursuant to employment, severance or other agreements, provide for additional payments to a Participant due to a Participant's rights under an award constituting a "parachute payment." 26 13.8 Rights with Respect to Continuance of Employment. Nothing contained herein shall be deemed to alter the relationship between the Company or an Affiliate and a Participant, or the contractual relationship between a Participant and the Company or an Affiliate if there is a written contract regarding such relationship. Nothing contained herein shall be construed to constitute a contract of employment between the Company or an Affiliate and a Participant. The Company or an Affiliate and each of the Participants continue to have the right to terminate the employment or service relationship at any time for any reason, except as provided in a written contract. 13.9 Awards in Substitution for Awards Granted by Other Corporations. Awards (including cash in respect of fractional shares) may be granted under the Plan from time to time in substitution for awards held by employees, directors or service providers of other corporations who are about to become officers, directors or employees of the Company or an Affiliate as the result of a merger or consolidation of the employing corporation with the Company or an Affiliate, or the acquisition by the Company or an Affiliate of the assets of the employing corporation, or the acquisition by the Company or Affiliate of the stock of the employing corporation, as the result of which it becomes a designated employer under the Plan. The terms and conditions of the Awards so granted may vary from the terms and conditions set forth in this Plan at the time of such grant as the Committee may deem appropriate to conform, in whole or in part, to the provisions of the awards in substitution for which they are granted. 13.10 Procedure for Adoption. Any Affiliate of the Company may by resolution of such Affiliate's board of directors, with the consent of the Board of Directors and subject to such conditions as may be imposed by the Board of Directors, adopt the Plan for the benefit of its employees as of the date specified in the board resolution. 13.11 Procedure for Withdrawal. Any Affiliate which has adopted the Plan may, by resolution of the board of directors of such Affiliate, with the consent of the Board of Directors and subject to such conditions as may be imposed by the Board of Directors, terminate its adoption of the Plan. 13.12 Delay. The Company shall have the right to suspend or delay any time period described in the Plan or an Agreement if the Committee shall determine that the action may constitute a violation of any law or result in liability under any law to the Company, an Affiliate or a stockholder of the Company until such time as the action required or permitted shall not constitute a violation of law or result in liability to the Company, an Affiliate or a stockholder of the Company. 13.13 Headings. The headings contained in this Plan are for reference purposes only and shall not affect the meaning or interpretation of this Plan. 13.14 Severability. If any provision of this Plan shall for any reason be held to be invalid or unenforceable, such invalidity or unenforceability shall not effect any other provision hereby, and this Plan shall be construed as if such invalid or unenforceable provision were omitted. 27 13.15 Successors and Assigns. This Plan shall inure to the benefit of and be binding upon each successor and assign of the Company. All obligations imposed upon a Participant, and all rights granted to the Company hereunder, shall be binding upon the Participant's heirs, legal representatives and successors. 13.16 Entire Agreement. This Plan and the Agreements constitute the entire agreement with respect to the subject matter hereof and thereof, provided that in the event of any inconsistency between the Plan and any Agreement, the terms and conditions of the Plan shall control. 28 EX-10.4 9 FORM OF OPTION AGREEMENT-INCENTIVE COMPENSATION EXHIBIT 10.4 INCENTIVE STOCK OPTION AGREEMENT -------------------------------- THIS STOCK OPTION AGREEMENT (the "Agreement") dated as of ______________ ("Grant Date"), is between Career Education Corporation, a Delaware corporation (the "Company"), and _______________, a _______________ of the Company (the "Participant"). WHEREAS, the Company desires, by affording the Participant an opportunity to purchase shares of the Company's Common Stock as hereinafter provided, to carry out the purposes of the Career Education Corporation 1998 Employee Incentive Compensation Plan (the "Plan"); and WHEREAS, the Committee has duly made all determinations necessary or appropriate to the grants hereunder; and NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth and for other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto have agreed, and do hereby agree, as follows: 1. Definitions. ----------- For purposes of this Agreement, the definitions of terms contained in the Plan hereby are incorporated by reference, except to the extent that any term is specifically defined in this Agreement. 2. Grant of Option, Option Price and Term. -------------------------------------- (a) The Company hereby grants to the Participant, as a matter of separate agreement and not in lieu of salary or any other compensation for services, the right and option (the "Option") to purchase ________ shares of the Common Stock of the Company ("Option Shares") on the terms and conditions herein set forth. Participant shall have all the rights and obligations as provided for in this Agreement. (b) For each of the Option Shares purchased, the Participant shall pay to the Company $________ per share (the "Option Price"). Accordingly, the aggregate Option Price to exercise all of the Option is $________ ("Aggregate Option Price"). (c) The term of this Option shall be a period of ten (10) years from the Grant Date (the "Option Period"). The termination of the Option Period shall result in the termination and cancellation of the Option. In no event shall the Option be exercisable for any period greater than the Option Period. During the Option Period, the Option shall be exercisable in accordance with the determination of the Committee, but in no event later than the earlier of (i) the date the Option is vested or (ii) immediately prior to a Change in Control. (d) Subject to Sections 2(e) and 2(f) below, unvested options shall be forfeited at termination of employment for any reason. The percentage of Options which are vested and which will not be forfeited at termination of employment (unless such termination is for Cause) shall be determined in accordance with the following schedule: Cumulative Percentage of Date Option Shares Vested --------------------------------------------------------------------------- _____ Anniversary _____% _____ Anniversary _____% _____ Anniversary _____% _____ Anniversary _____% (e) Notwithstanding the foregoing Section 2(d), all Options shall be 100% vested if any of the following events occur: (i) a Change in Control, or (ii) a Participant's Termination of Employment for any reason other than a voluntary resignation or quit by the Participant or Termination for Cause. (f) Any portion of the Option which is not vested, pursuant to Section 2(d) or 2(e), as of a Participant's Termination of Employment is cancelled simultaneously with the date of such Termination of Employment. (g) The Option granted hereunder is, to the extent permitted by law, designated as an Incentive Stock Option, as such term is defined in Section 422 of the Internal Revenue Code. (h) The Company shall not be required to issue any fractional Option Shares. 3. Termination of Option. With respect to vested Option Shares: (a) If a Participant incurs a Termination of Employment due to any reason other than Cause, the vested Option shall continue in effect for the remainder of the term. (b) If the Participant incurs a Termination of Employment which is for Cause, the Option shall terminate immediately. -2- The death or Disability of a Participant after a Termination of Employment otherwise provided herein shall not extend the time permitted to exercise an Option. 4. Exercise. The Option shall be exercisable during the Participant's lifetime only by the Participant (or his or her guardian or legal representative), and after the Participant's death only by the Representative. The Option may only be exercised by the delivery to the Company of a properly completed written notice, in form satisfactory to the Committee, which notice shall specify the number of Option Shares to be purchased and the aggregate Option Price for such shares, together with payment in full of such aggregate Option Price. Payment shall only be made: (a) in cash or by check; (b) with the prior written approval of the Committee, by the delivery to the Company of a valid and enforceable stock certificate (or certificates) representing shares of Common Stock held by the Participant, which is endorsed in blank or accompanied by an executed stock power (or powers) and guaranteed in a manner acceptable to the Committee; (c) by a loan extended by the Company; (d) in cash by a broker-dealer to whom the Participant has submitted a notice of exercise; or (e) in any combination of (a), (b), (c) or (d). If any part of the payment of the Option Price is made in shares of Common Stock, such shares shall be valued by using their Fair Market Value as of their date of delivery. The Option shall not be exercised unless there has been compliance with all the preceding provisions of this Paragraph 4, and, for all purposes of this Agreement, the date of the exercise of the Option shall be the date upon which there is compliance with all such requirements. 5. Payment of Withholding Taxes. If the Company is obligated to withhold an amount on account of any tax imposed as a result of the exercise of the Option, the Participant shall be required to pay such amount to the Company, as provided in the Plan. 6. Requirements of Law; Registration and Transfer Requirements. The Company shall not be required to sell or issue any shares under the Option if the issuance of such shares shall constitute a violation of any provision of any law or regulation of any governmental authority applicable to the Company. This Option and each and every obligation of the Company hereunder are subject to the requirement that the Option may not be exercised or performed, in whole or in part, unless and until the Option Shares are listed, registered or qualified, properly marked with a legend or other notation, or otherwise restricted, as is provided for in the Plan. -3- 7. Adjustments/Change in Control. In the event of a Change in Control or other corporate restructuring provided for in the Plan, the Participant shall have such rights, and the Committee shall take such actions, as provided in the Plan. 8. Nontransferability. A Participant may at any time make a transfer of shares of Common Stock received pursuant to the exercise of an Option to his parents, spouse or descendants, to any trust for the benefit of the foregoing or to a partnership the interest of which are principally for the foregoing or to a custodian under a uniform gifts to minors act or similar statute for the benefit of any of the Participant's descendants. An Option and any interest in the Option may not otherwise be sold, assigned, conveyed, gifted, pledged, hypothecated or otherwise transferred in any manner without the prior written consent of the Company, and any such attempted sale, assignment, conveyance, gift, pledge, hypothecation or transfer other than as permitted herein shall be null and void. 9. Plan. Notwithstanding any other provision of this Agreement, the Option is granted pursuant to the Plan, as shall be adopted by the Company, and is subject to all the terms and conditions of the Plan, as the same may be amended from time to time; provided, however, that no provision of the Plan shall deprive the Participant, without the Participant's consent, of the Option or of any of Participant's rights under this Agreement. The reasonable interpretation and construction by the Committee of the Plan, this Agreement and the Option, and such rules and regulations as may be adopted by the Committee for the purpose of administering the Plan, shall be final and binding upon the Participant. 10. Stockholder Rights. Until the Option shall have been duly exercised to purchase such Option Shares and such shares have been officially recorded as issued on the Company's official stockholder records, no person or entity shall be entitled to vote, receive distributions or dividends or be deemed for any purpose the holder of any Option Shares, and adjustments for dividends or otherwise shall be made only if the record date therefor is subsequent to the date such shares are recorded and after the date of exercise and without duplication of any adjustment. 11. Employment Rights. No provision of this Agreement or of the Option granted hereunder shall give the Participant any right to continue in the employ of the Company or any of its Affiliates, create any inference as to the length of employment of the Participant, affect the right of the Company or its Affiliates to Terminate the Employment of the Participant, with or without cause, or give the Participant any right to participate in any employee welfare or benefit plan or other program (other than the Plan) of the Company or any of its Affiliates. 12. Disclosure Rights. The Company shall have no duty or obligation to affirmatively disclose to the Participant or a Representative, and the Participant or Representative shall have no right to be advised of, any material information regarding the Company or an Affiliate at any time prior to, upon or in connection with the exercise of an Option. -4- 13. Changes in Company's Capital Structure. The existence of the Option shall not affect in any way the right or authority of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stock ahead of or affecting the Common Stock or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. 14. Investment Representation and Agreement. If, in the opinion of counsel for the Company, a particular representation is required under the Securities Act of 1933 or any other applicable federal or state law, or any regulation or rule of any governmental agency, the Company may require such representations as the Company reasonably may determine to be necessary. 15. Governing Law. This Agreement and the Option granted hereunder shall be governed by, and construed and enforced in accordance with, the laws of the State of Illinois (other than its laws respecting choice of law). 16. Entire Agreement. This Agreement, together with the Plan, constitute the entire obligation of the parties hereto with respect to the subject matter hereof and shall supersede any prior expressions of intent or understanding with respect to this transaction. 17. Amendment. Any amendment to this Agreement shall be in writing and signed by the Company and the Participant. 18. Waiver; Cumulative Rights. The failure or delay of either party to require performance by the other party of any provision hereof shall not affect its right to require performance of such provision unless and until such performance has been waived in writing. Each and every right hereunder is cumulative and may be exercised in part or in whole from time to time. 19. Counterparts. This Agreement may be signed in two counterparts, each of which shall be an original, but both of which shall constitute but one and the same instrument. 20. Notices. Any notice which either party hereto may be required or permitted to give the other shall be in writing and may be delivered personally or by mail, postage prepaid, addressed to the Secretary of the Company, at its then corporate headquarters, and to the Participant at his address as shown on the Company's records, or to such other address as the Participant, by notice to the Company, may designate in writing from time to time. 21. Headings. The headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. -5- 22. Severability. If any provision of this Agreement shall for any reason by held to be invalid or unenforceable, such invalidity or unenforceability shall not effect any other provision hereof, and this Agreement shall be construed as if such invalid or unenforceable provision were omitted. 23. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon each successor and assign of the Company. All obligations imposed on the Participant or a Representative, and all rights granted to the Company hereunder, shall be binding upon the Participant's or the Representative's heirs, legal representatives and successors. IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed by an officer thereunto duly authorized, and the Participant has hereunto set his hand, all as of the day and year first above written. CAREER EDUCATION CORPORATION By: ---------------------------- ------------------------------- Title PARTICIPANT: ------------------------------- -6- NON-QUALIFIED STOCK OPTION AGREEMENT ------------------------------------ THIS STOCK OPTION AGREEMENT (the "Agreement") dated as of ______________ ("Grant Date"), is between Career Education Corporation, a Delaware corporation (the "Company"), and _______________, a _______________ of the Company (the "Participant"). WHEREAS, the Company desires, by affording the Participant an opportunity to purchase shares of the Company's Common Stock as hereinafter provided, to carry out the purposes of the Career Education Corporation 1998 Employee Incentive Compensation Plan (the "Plan"); and WHEREAS, the Committee has duly made all determinations necessary or appropriate to the grants hereunder; and NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth and for other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto have agreed, and do hereby agree, as follows: 1. Definitions. For purposes of this Agreement, the definitions of terms contained in the Plan hereby are incorporated by reference, except to the extent that any term is specifically defined in this Agreement. 2. Grant of Option, Option Price and Term. (a) The Company hereby grants to the Participant, as a matter of separate agreement and not in lieu of salary or any other compensation for services, the right and option (the "Option") to purchase ________ shares of the Common Stock of the Company ("Option Shares") on the terms and conditions herein set forth. Participant shall have all the rights and obligations as provided for in this Agreement. (b) For each of the Option Shares purchased, the Participant shall pay to the Company $________ per share (the "Option Price"). Accordingly, the aggregate Option Price to exercise all of the Option is $________ ("Aggregate Option Price"). (c) The term of this Option shall be a period of ten (10) years from the Grant Date (the "Option Period"). The termination of the Option Period shall result in the termination and cancellation of the Option. In no event shall the Option be exercisable for any period greater than the Option Period. During the Option Period, the Option shall be exercisable in accordance with the determination of the Committee, but in no event later than the earlier of (i) the date the Option is vested or (ii) immediately prior to a Change in Control. (d) Subject to Sections 2(e) and 2(f) below, unvested options shall be forfeited at termination of employment for any reason. The percentage of Options which are vested and which will not be forfeited at termination of employment (unless such termination is for Cause) shall be determined in accordance with the following schedule: Cumulative Percentage of Date Option Shares Vested -------------------------------------------------------------------- _____ Anniversary _____% _____ Anniversary _____% _____ Anniversary _____% _____ Anniversary _____% (e) Notwithstanding the foregoing Section 2(d), all Options shall be 100% vested if any of the following events occur: (i) a Change in Control, or (ii) a Participant's Termination of Employment for any reason other than a voluntary resignation or quit by the Participant or a Termination for Cause. (f) Any portion of the Option which is not vested, pursuant to Section 2(d) or or 2(e), as of a Participant's Termination of Employment is cancelled simultaneously with the date of such Termination of Employment. (g) The Option granted hereunder is designated as a Non-Qualified Stock Option. (h) The Company shall not be required to issue any fractional Option Shares. 3. Termination of Option. With respect to vested Option Shares: (a) If a Participant incurs a Termination of Employment due to any reason other than Cause, the vested Option shall continue in effect for the remainder of the term. (b) If the Participant incurs a Termination of Employment which is for Cause, the Option shall terminate immediately. The death or Disability of a Participant after a Termination of Employment otherwise provided herein shall not extend the time permitted to exercise an Option. -2- 4. Exercise. The Option shall be exercisable during the Participant's lifetime only by the Participant (or his or her guardian or legal representative), and after the Participant's death only by the Representative. The Option may only be exercised by the delivery to the Company of a properly completed written notice, in form satisfactory to the Committee, which notice shall specify the number of Option Shares to be purchased and the aggregate Option Price for such shares, together with payment in full of such aggregate Option Price. Payment shall only be made: (a) in cash or by check; (b) with the prior written approval of the Committee, by the delivery to the Company of a valid and enforceable stock certificate (or certificates) representing shares of Common Stock held by the Participant, which is endorsed in blank or accompanied by an executed stock power (or powers) and guaranteed in a manner acceptable to the Committee; (c) by a loan extended by the Company; (d) in cash by a broker-dealer to whom the Participant has submitted a notice of exercise; or (e) in any combination of (a), (b), (c) or (d). If any part of the payment of the Option Price is made in shares of Common Stock, such shares shall be valued by using their Fair Market Value as of their date of delivery. The Option shall not be exercised unless there has been compliance with all the preceding provisions of this Paragraph 4, and, for all purposes of this Agreement, the date of the exercise of the Option shall be the date upon which there is compliance with all such requirements. 5. Payment of Withholding Taxes. If the Company is obligated to withhold an amount on account of any tax imposed as a result of the exercise of the Option, the Participant shall be required to pay such amount to the Company, as provided in the Plan. 6. Requirements of Law; Registration and Transfer Requirements. The Company shall not be required to sell or issue any shares under the Option if the issuance of such shares shall constitute a violation of any provision of any law or regulation of any governmental authority applicable to the Company. This Option and each and every obligation of the Company hereunder are subject to the requirement that the Option may not be exercised or performed, in whole or in part, unless and until the Option Shares are listed, registered or qualified, properly marked with a legend or other notation, or otherwise restricted, as is provided for in the Plan. -3- 7. Adjustments / Change in Control. In the event of a Change in Control or other corporate restructuring provided for in the Plan, the Participant shall have such rights, and the Committee shall take such actions, as provided in the Plan. 8. Nontransferability. A Participant may at any time make a transfer of shares of Common Stock received pursuant to the exercise of an Option to his parents, spouse or descendants, to any trust for the benefit of the foregoing or to a partnership the interest of which are principally for the foregoing or to a custodian under a uniform gifts to minors act or similar statute for the benefit of any of the Participant's descendants. An Option and any interest in the Option may not otherwise be sold, assigned, conveyed, gifted, pledged, hypothecated or otherwise transferred in any manner without the prior written consent of the Company, and any such attempted sale, assignment, conveyance, gift, pledge, hypothecation or transfer other than as permitted herein shall be null and void. 9. Plan. Notwithstanding any other provision of this Agreement, the Option is granted pursuant to the Plan, as shall be adopted by the Company, and is subject to all the terms and conditions of the Plan, as the same may be amended from time to time; provided, however, that no provision of the Plan shall deprive the Participant, without the Participant's consent, of the Option or of any of Participant's rights under this Agreement. The reasonable interpretation and construction by the Committee of the Plan, this Agreement and the Option, and such rules and regulations as may be adopted by the Committee for the purpose of administering the Plan, shall be final and binding upon the Participant. 10. Stockholder Rights. Until the Option shall have been duly exercised to purchase such Option Shares and such shares have been officially recorded as issued on the Company's official stockholder records, no person or entity shall be entitled to vote, receive distributions or dividends or be deemed for any purpose the holder of any Option Shares, and adjustments for dividends or otherwise shall be made only if the record date therefor is subsequent to the date such shares are recorded and after the date of exercise and without duplication of any adjustment. 11. Employment Rights. No provision of this Agreement or of the Option granted hereunder shall give the Participant any right to continue in the employ of the Company or any of its Affiliates, create any inference as to the length of employment of the Participant, affect the right of the Company or its Affiliates to Terminate the Employment of the Participant, with or without cause, or give the Participant any right to participate in any employee welfare or benefit plan or other program (other than the Plan) of the Company or any of its Affiliates. 12. Disclosure Rights. The Company shall have no duty or obligation to affirmatively disclose to the Participant or a Representative, and the Participant or Representative shall have no right to be advised of, any material information regarding the Company or an Affiliate at any time prior to, upon or in connection with the exercise of an Option. 13. Changes in Company's Capital Structure. The existence of the Option shall not affect in any way the right or authority of the Company or its stockholders to make or authorize any or -4- all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stock ahead of or affecting the Common Stock or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. 14. Investment Representation and Agreement. If, in the opinion of counsel for the Company, a particular representation is required under the Securities Act of 1933 or any other applicable federal or state law, or any regulation or rule of any governmental agency, the Company may require such representations as the Company reasonably may determine to be necessary. 15. Governing Law. This Agreement and the Option granted hereunder shall be governed by, and construed and enforced in accordance with, the laws of the State of Illinois (other than its laws respecting choice of law). 16. Entire Agreement. This Agreement, together with the Plan, constitute the entire obligation of the parties hereto with respect to the subject matter hereof and shall supersede any prior expressions of intent or understanding with respect to this transaction. 17. Amendment. Any amendment to this Agreement shall be in writing and signed by the Company and the Participant. 18. Waiver; Cumulative Rights. The failure or delay of either party to require performance by the other party of any provision hereof shall not affect its right to require performance of such provision unless and until such performance has been waived in writing. Each and every right hereunder is cumulative and may be exercised in part or in whole from time to time. 19. Counterparts. This Agreement may be signed in two counterparts, each of which shall be an original, but both of which shall constitute but one and the same instrument. 20. Notices. Any notice which either party hereto may be required or permitted to give the other shall be in writing and may be delivered personally or by mail, postage prepaid, addressed to the Secretary of the Company, at its then corporate headquarters, and to the Participant at his address as shown on the Company's records, or to such other address as the Participant, by notice to the Company, may designate in writing from time to time. 21. Headings. The headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. 22. Severability. If any provision of this Agreement shall for any reason by held to be invalid or unenforceable, such invalidity or unenforceability shall not effect any other provision hereof, and this Agreement shall be construed as if such invalid or unenforceable provision were omitted. -5- 23. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon each successor and assign of the Company. All obligations imposed on the Participant or a Representative, and all rights granted to the Company hereunder, shall be binding upon the Participant's or the Representative's heirs, legal representatives and successors. IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed by an officer thereunto duly authorized, and the Participant has hereunto set his hand, all as of the day and year first above written. CAREER EDUCATION CORPORATION By: ________________________________________ _____________________________________________ Title PARTICIPANT: _____________________________________________ -6- EX-10.5 10 CEC 1998 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN EXHIBIT 10.5 CAREER EDUCATION CORPORATION 1998 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN TABLE OF CONTENTS
Page ---- ARTICLE I ESTABLISHMENT...................................... 1 1.1 Purpose............................................ 1 ARTICLE II DEFINITIONS........................................ 1 2.1 "Affiliate"........................................ 1 2.2 "Agreement" or "Option Agreement".................. 1 2.3 "Board of Directors" or "Board".................... 1 2.4 A "Change in Control".............................. 1 2.5 "Code" or "Internal Revenue Code".................. 2 2.6 "Commission"....................................... 2 2.7 "Committee"........................................ 2 2.8 "Common Stock"..................................... 2 2.9 "Company".......................................... 2 2.10 "Director"......................................... 2 2.11 "Disability"....................................... 2 2.12 "Effective Date"................................... 2 2.13 "Exchange Act"..................................... 3 2.14 "Fair Market Value"................................ 3 2.15 "Grant Date"....................................... 3 2.16 "Initial Public Offering".......................... 3 2.17 "Nasdaq"........................................... 3 2.18 "Option"........................................... 3 2.19 "Option Period".................................... 3 2.20 "Option Price"..................................... 3 2.21 "Participant"...................................... 3 2.22 "Plan"............................................. 4 2.23 "Representative"................................... 4 2.24 "Rule 16b-3"....................................... 4 2.25 "Securities Act"................................... 4 ARTICLE III ADMINISTRATION..................................... 4 3.1 Committee Structure and Authority.................. 4 ARTICLE IV STOCK SUBJECT TO PLAN.............................. 5 4.1 Number of Shares................................... 5 4.2 Release of Shares.................................. 5 4.3 Restrictions on Shares............................. 5 4.4 Reasonable Efforts To Register..................... 6 4.5 Adjustments........................................ 6 4.6 Limited Transfer During Offering................... 6
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Page ---- ARTICLE V OPTIONS........................................... 7 5.1 Eligibility....................................... 7 5.2 Grant and Exercise................................ 7 5.3 Terms and Conditions.............................. 7 5.4 Termination....................................... 8 ARTICLE VI MISCELLANEOUS..................................... 8 6.1 Amendments and Termination........................ 8 6.2 General Provisions................................ 9 6.3 Special Provisions Regarding a Change in Control.. 10 6.4 Headings.......................................... 11 6.5 Severability...................................... 11 6.6 Successors and Assigns............................ 11 6.7 Entire Agreement.................................. 11
ii CAREER EDUCATION CORPORATION NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN ARTICLE I --------- ESTABLISHMENT ------------- 1.1 Purpose. The Career Education Corporation 1998 Non-employee Directors' Stock Option Plan is hereby established by Career Education Corporation, effective as of the date of consummation of the Initial Public Offering (as defined herein). The purpose of the Plan is to promote the overall financial objectives of the Company and its stockholders by motivating directors of the Company who are not employees, to further align the interests of such directors with those of the stockholders of the Company and to achieve long-term growth and performance of the Company. The Plan and the grant of Options hereunder are expressly conditioned upon the Plan's approval by the stockholders of the Company. ARTICLE II ---------- DEFINITIONS ----------- For purposes of the Plan, the following terms are defined as set forth below: 2.1 "Affiliate" means any individual, corporation, partnership, limited liability company, association, joint-stock company, trust, unincorporated association or other entity (other than the Company) that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the Company, including, without limitation, any member of an affiliated group of which the Company is a common parent corporation as provided in Section 1504 of the Code. 2.2 "Agreement" or "Option Agreement" means, individually or collectively, any agreement entered into pursuant to this Plan pursuant to which an Option is granted to a Participant. 2.3 "Board of Directors" or "Board" means the Board of Directors of the Company. 2.4 A "Change in Control" shall be deemed to have occurred if (a) any corporation, person or other entity (other than the Company, a majority-owned subsidiary of the Company or any of its subsidiaries, or an employee benefit plan (or related trust) sponsored or maintained by the Company), including a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, becomes the beneficial owner of stock representing more than twenty percent (20%) of the combined voting power of the Company's then outstanding securities; (b)(i) the stockholders of the Company approve a definitive agreement to merge or consolidate the Company with or into another corporation other than a majority-owned subsidiary of the Company, or to sell or otherwise dispose of all or substantially all of the Company's assets, and (ii) the persons who were the members of the Board of Directors of the Company prior to such approval do not represent a majority of the directors of the surviving, resulting or acquiring entity or the parent thereof; (c) the stockholders of the Company approve a plan of liquidation of the Company; or (d) within any period of 24 consecutive months, persons who were members of the Board of Directors of the Company immediately prior to such 24- month period, together with any persons who were first elected as directors (other than as a result of any settlement of a proxy or consent solicitation contest or any action taken to avoid such a contest) during such 24-month period by or upon the recommendation of persons who were members of the Board of Directors of the Company immediately prior to such 24-month period and who constituted a majority of the Board of Directors of the Company at the time of such election, cease to constitute a majority of the Board. 2.5 "Code" or "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended, Treasury Regulations (including proposed regulations) thereunder and any subsequent Internal Revenue Code. 2.6 "Commission" means the Securities and Exchange Commission or any successor agency. 2.7 "Committee" means the person or persons appointed by the Board of Directors to administer the Plan. 2.8 "Common Stock" means the shares of the Common Stock, par value $.__ per share, of the Company, whether presently or hereafter issued, and any other stock or security resulting from adjustment thereof as described hereinafter or the common stock of any successor to the Company which is designated for the purpose of the Plan. 2.9 "Company" means Career Education Corporation and includes any successor or assignee corporation or corporations into which the Company may be merged, changed or consolidated; any corporation for whose securities the securities of the Company shall be exchanged; and any assignee of or successor to substantially all of the assets of the Company. 2.10 "Director" means each and any director who serves on the Board and who is not an officer or employee of the Company or any of its Affiliates. 2.11 "Disability" means a mental or physical illness that renders a Participant totally and permanently incapable of performing the Participant's duties for the Company or an Affiliate. Notwithstanding the foregoing, a Disability shall not qualify under the Plan if it is the result of (i) a willfully self-inflicted injury or willfully self-induced sickness; or (ii) an injury or disease contracted, suffered, or incurred, while participating in a criminal offense. The determination of Disability shall be made by the Committee. The determination of Disability for purposes of the Plan shall not be construed to be an admission of disability for any other purpose. 2.12 "Effective Date" means the date of consummation of the Initial Public Offering. 2 2.13 "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. 2.14 "Fair Market Value" means the value determined on the basis of the good faith determination of the Committee, pursuant to the applicable method described below: (a) if the Common Stock is listed on a national securities exchange or quoted on Nasdaq, the closing price of the Common Stock on the relevant date (or, if such date is not a business day or a day on which quotations are reported, then on the immediately preceding date on which quotations were reported), as reported by the principal national exchange on which such shares are traded (in the case of an exchange) or by Nasdaq, as the case may be; (b) if the Common Stock is not listed on a national securities exchange or quoted on Nasdaq, but is actively traded in the over-the- counter market, the average of the closing bid and asked prices for the Common Stock on the relevant date (or, if such date is not a business day or a day on which quotations are reported, then on the immediately preceding date on which quotations were reported), or the most recent preceding date for which such quotations were reported; and (c) if, on the relevant date, the Common Stock is not publicly traded or reported as described in (a) or (b), the fair market value determined in good faith by the Committee. 2.15 "Grant Date" means the date as of which an Option is granted pursuant to the Plan. 2.16 "Initial Public Offering" means the Company's initial public offering of Common Stock under the Securities Act. 2.17 "Nasdaq" means The Nasdaq Stock Market, including the Nasdaq National Market. 2.18 "Option" means the right to purchase the number of shares of Common Stock specified by the Plan at a price and for a term fixed by the Plan, and subject to such other limitations and restrictions as the Plan and the Committee impose. 2.19 "Option Period" means the period during which the Option shall be exercisable in accordance with the Agreement and Article V. 2.20 "Option Price" means the price at which the Common Stock may be purchased under an Option as provided in Section 5.3. 2.21 "Participant" means a Director to whom an Option has been granted under the Plan, and in the event a Representative is appointed for a Participant or another person becomes a Representative, then the term "Participant" shall mean such appointed Representative. The term shall also include a trust for the benefit of the Participant, the Participant's parents, spouse or descendants; a partnership the interests in which are for the benefit of the Participant, the Participant's parents, spouse or descendants; or a custodian under a uniform gifts to minors act 3 or similar statute for the benefit of the Participant's descendants, to the extent permitted by the Committee. Notwithstanding the foregoing, the term "Termination of Directorship" shall mean the Termination of Directorship of the Director. 2.22 "Plan" means the Career Education Corporation Non-employee Directors' Stock Option Plan, as herein set forth and as may be amended from time to time. 2.23 "Representative" means (a) the person or entity acting as the executor or administrator of a Participant's estate pursuant to the last will and testament of a Participant or pursuant to the laws of the jurisdiction in which the Participant had the Participant's primary residence at the date of the Participant's death; (b) the person or entity acting as the guardian or temporary guardian of a Participant; (c) the person or entity which is the beneficiary of the Participant upon or following the Participant's death; or (d) any person to whom an Option has been permissibly transferred by the Committee; provided that only one of the foregoing shall be the Representative at any point in time as determined under applicable law and recognized by the Committee. 2.24 "Rule 16b-3" means Rule 16b-3, as promulgated under the Exchange Act, as amended from time to time, or any successor thereto, in effect and applicable to the Plan and Participants. 2.25 "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. In addition, certain other terms used herein have definitions given to them in the first place in which they are used. ARTICLE III ----------- ADMINISTRATION -------------- 3.1 Committee Structure and Authority. The Plan shall be administered by the Committee which, except as provided herein, shall be comprised of one or more persons appointed by the Board. In the absence of an appointment, the Board shall be the Committee; provided that only those members of the Board who participate in the decision relative to Options under the Plan shall be deemed to be part of the "Committee" for purposes of the Plan. A majority of the Committee shall constitute a quorum at any meeting thereof (including telephone conference), and the acts of a majority of the members present, or acts approved in writing by a majority of the entire Committee without a meeting, shall be the acts of the Committee for purposes of the Plan. The Committee may authorize any one or more of its members or an officer of the Company to execute and deliver documents on behalf of the Committee. A member of the Committee shall not exercise any discretion respecting himself or herself under the Plan. The Board shall have the authority to remove, replace or fill any vacancy of any member of the Committee upon notice to the Committee and the affected member. Any member of the Committee may resign upon notice to the Board. The Committee may allocate among one 4 or more of its members, or may delegate to one or more of its agents, such duties and responsibilities as it determines. The Committee shall have the authority, subject to the terms of the Plan, to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable, to interpret the terms and provisions of the Plan and any Option issued under the Plan and to otherwise supervise the administration of the Plan. The Committee's policies and procedures may differ with respect to Options granted at different times or to different Participants. Any determination made by the Committee pursuant to the provisions of the Plan shall be made in its sole discretion. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Participants. Any determination shall not be subject to de novo review if challenged in court. ARTICLE IV ---------- STOCK SUBJECT TO PLAN --------------------- 4.1 Number of Shares. Subject to the adjustment under Section 4.5, the total number of shares of Common Stock reserved and available for issuance pursuant to Options under the Plan shall be Two Hundred Thousand (200,000) shares of Common Stock authorized for issuance on the Effective Date. Such shares may consist, in whole or in part, of authorized and unissued shares or treasury shares. 4.2 Release of Shares. The Committee shall have full authority to determine the number of shares of Common Stock available for Stock Options, and in its discretion may include (without limitation) as available for distribution any shares of Common Stock that have ceased to be subject to Stock Options, any shares of Common Stock subject to any Stock Options that are forfeited, any Stock Options that otherwise terminate without issuance of shares of Common Stock being made to the Participant, or any shares (whether or not restricted) of Common Stock that are received by the Company in connection with the exercise of a Stock Option, including the satisfaction of any tax liability or the satisfaction of a tax withholding obligation. If any shares could not again be available for Options to a particular Participant under applicable law, such shares shall be available exclusively for Options to Participants who are not subject to such limitations. 4.3 Restrictions on Shares. Shares of Common Stock issued upon exercise of an Option shall be subject to the terms and conditions specified herein and to such other terms, conditions and restrictions as the Committee in its discretion may determine or provide in the Option Agreement. The Company shall not be required to issue or deliver any certificates for shares of Common Stock, cash or other property prior to (i) the listing of such shares on any stock exchange, Nasdaq or other public market on which the Common Stock may then be listed (or regularly traded), (ii) the completion of any registration or qualification of such shares under federal or state law, or any ruling or regulation of any government body which the Committee determines to be necessary or advisable, and (iii) the satisfaction of any applicable withholding 5 obligation in order for the Company or an Affiliate to obtain a deduction with respect to the exercise of the Option. The Company may cause any certificate for any share of Common Stock to be delivered to be properly marked with a legend or other notation reflecting the limitations on transfer of such Common Stock as provided in the Plan or as the Committee may otherwise require. The Committee may require any person exercising an Option to make such representations and furnish such information as it may consider appropriate in connection with the issuance or delivery of the shares of Common Stock in compliance with applicable law or otherwise. Fractional shares shall not be delivered, but shall be rounded to the next lower whole number of shares. 4.4 Reasonable Efforts To Register. The Company will use its reasonable efforts to register under the Securities Act the Common Stock delivered or deliverable pursuant to Options on Commission Form S-8 if available to the Company for this purpose (or any successor or alternate form that is substantially similar to that form to the extent available to effect such registration), in accordance with the rules and regulations governing such forms, when the Committee, in its sole discretion, shall deem such registration appropriate. The Company will use its reasonable efforts to cause the registration statement to become effective and to file such supplements and amendments to the registration statement as may be necessary to keep the registration statement in effect until the earliest of (a) one year following the expiration of the Option Period of the last Option outstanding, (b) the date the Company is no longer a reporting company under the Exchange Act and (c) the date all Participants have disposed of all shares delivered pursuant to any Option. The Company may delay the foregoing obligation if the Committee reasonably determines that any such registration would materially and adversely affect the Company's interests or if there is no material benefit to Participants. 4.5 Adjustments. In the event, after the Effective Date, of a stock dividend, stock split, combination or exchange of shares, recapitalization or other change in the capital structure of the Company, corporate separation or division of the Company (including, but not limited to, a split-up, spin-off, split-off or distribution to Company stockholders other than a normal cash dividend), sale by the Company of all or a substantial portion of its assets (measured on either a stand-alone or consolidated basis), reorganization, rights offering, partial or complete liquidation, or any other corporate transaction, Company stock offering or event involving the Company and having an effect similar to any of the foregoing, then the Committee shall adjust or substitute, as the case may be, the number of shares of Common Stock available for Options under the Plan, the number of shares of Common Stock covered by outstanding Options, the exercise price per share of outstanding Options, and any other characteristics or terms of the Options as the Committee shall deem necessary or appropriate to reflect equitably the effects of such changes to the Participants; provided, however, that any fractional shares resulting from such adjustment shall be eliminated by rounding to the next lower whole number of shares with appropriate payment for such fractional shares as shall reasonably be determined by the Committee. 4.6 Limited Transfer During Offering. In the event there is an effective registration statement under the Securities Act pursuant to which shares of Common Stock shall be offered for sale in an underwritten offering, a Participant shall not, during the period requested by the underwriters managing the registered public offering, effect any public sale or distribution of shares received directly or indirectly pursuant to an exercise of an Option. 6 ARTICLE V --------- OPTIONS ------- 5.1 Eligibility. Each Director shall be granted Options to purchase shares of Common Stock as provided herein. 5.2 Grant and Exercise. Each person who is a Director on the Effective Date shall become a Participant and shall be granted an Option to purchase Five Thousand (5,000) shares of Common Stock without further action by the Board or the Committee. Each person who is subsequently elected or appointed as a Director shall become a Participant and shall, on his date of election or appointment, without further action by the Board or the Committee, be granted an Option to purchase Five Thousand (5,000) shares of Common Stock. Thereafter, on the date each annual meeting of stockholders of the Company after which a Participant continues as a Director, in any year following the year of the initial grant of an Option to such Participant, such Participant shall be granted an Option to purchase Three Thousand (3,000) shares of Common Stock. If the number of shares of Common Stock available to grant under the Plan on a scheduled date of grant is insufficient to make all automatic grants required to be made pursuant to the Plan on such date, then each eligible Director shall receive an Option to purchase a pro rata number of the remaining shares of Common Stock available under the Plan; provided further, however, that if such proration results in fractional shares of Common Stock, then such Option shall be rounded down to the nearest number of whole shares of Common Stock. If there is no whole number of shares remaining to be granted, then no grants shall be made under the Plan. Each Option granted under the Plan shall be evidenced by an Agreement, in a form approved by the Committee, which shall embody the terms and conditions of such Option and which shall be subject to the express terms and conditions set forth in the Plan. Such Agreement shall become effective upon execution by the Participant. 5.3 Terms and Conditions. Options shall be subject to such terms and conditions as shall be determined by the Committee, including in each case the following: (a) Option Period. The Option Period of each Option shall be ten (10) years. (b) Option Price. The Option Price per share of the Common Stock purchasable under an Option shall be the Fair Market Value as of the Grant Date. (c) Exercisability. Unless an alternative time is specified in an Agreement, and subject to the provisions of Section 6.3, Options shall become exercisable in three equal annual installments on the Grant Date and each of the first two anniversaries thereof. An Option only shall be exercisable during the Option Period. (d) Method of Exercise. Subject to the provisions of this Article V, a Participant may exercise Stock Options, in whole or in part, at any time during the Option Period by the Participant's giving to the Company written notice of exercise on a form provided by the Committee (if available) specifying the number of shares of Common Stock subject to the Stock Option to be purchased. Except when waived by the Committee, such notice shall be accompanied by payment in full of the purchase price by cash or check or such other form of 7 payment as the Company may accept. If approved by the Committee (including approval at the time of exercise), payment in full or in part may also be made (i) by delivering Common Stock already owned by the Participant having a total Fair Market Value on the date of such delivery equal to the Option Price; (ii) by the execution and delivery of a note or other evidence of indebtedness (and any security agreement thereunder) satisfactory to the Committee and permitted in accordance with Section 5.3(e); (iii) by the delivery of cash or the extension of credit by a broker-dealer to whom the Participant has submitted a notice of exercise or otherwise indicated an intent to exercise an Option (in accordance with Part 220, Chapter II, Title 12 of the Code of Federal Regulations, so-called "cashless" exercise); or (iv) by any combination of the foregoing or by any other method permitted by the Committee. (e) Nontransferability of Options. Except as provided in an Agreement as determined by the Committee, no Option or interest therein shall be transferable by a Participant other than by will or by the laws of descent and distribution, and all Options shall be exercisable during the Participant's lifetime only by the Participant. 5.4 Termination. Unless otherwise provided in an Agreement or determined by the Committee, if a Participant ceases to be a Director due to death, any unexpired and unexercised Stock Option held by such Participant shall thereafter be fully exercisable for a period of ninety (90) days following the date of the appointment of a Representative (or such other period or no period as the Committee may specify) or until the expiration of the Option Period, whichever period is the shorter. Unless otherwise provided in an Agreement or determined by the Committee, if a Participant ceases to be a Director due to a Disability, any unexpired and unexercised Stock Option held by such Participant shall thereafter be fully exercisable by the Participant for the period of ninety (90) days (or such other period or no period as the Committee may specify) immediately following the date the Participant ceases to be a Director or until the expiration of the Option Period, whichever period is shorter, and the Participant's death at any time following the date the Participant ceases to be a Director due to Disability shall not affect the foregoing. Unless otherwise provided in an Agreement or determined by the Committee, if a Participant's directorship is terminated for any reason other than due to Participant's death or Disability, any Option held by such Participant shall terminate upon the second anniversary of the date the Participant first ceased to hold the position of Director. Unless otherwise provided in an Agreement, the death or Disability of a Participant after a termination of Directorship otherwise provided herein shall not extend the exercisability of the time permitted to exercise an Option. ARTICLE VI ---------- MISCELLANEOUS ------------- 6.1 Amendments and Termination. The Board may amend, alter or discontinue the Plan at any time, but no amendment, alteration or discontinuation shall be made which would impair the rights of a Participant under a Stock Option previously granted, without the Participant's consent, except such an amendment (a) made to avoid an expense charge to the 8 Company or an Affiliate, or (b) made to permit the Company or an Affiliate a deduction under the Code. In addition, no such amendment shall be made without the approval of the Company's stockholders to the extent such approval is required by law or agreement. The Committee may amend the Plan at any time subject to the same limitations (and exceptions to limitations) as applied to the Board and further subject to any approval or limitations the Board may impose. The Committee may amend the terms of any Stock Option theretofore granted, prospectively or retroactively, but no such amendment shall impair the rights of any Participant without the Participant's consent or reduce an Option Price, except such an amendment made to avoid an expense charge to the Company or an Affiliate or qualify for a deduction. Subject to the above provisions, the Board shall have authority to amend the Plan to take into account changes in law and tax and accounting rules, as well as other developments, and to grant Awards which qualify for beneficial treatment under such rules without stockholder approval. Notwithstanding anything in the Plan to the contrary, if any right under this Plan would cause a transaction to be ineligible for pooling of interests accounting that would, but for the right hereunder, be eligible for such accounting treatment, the Committee may modify or adjust the right so that pooling of interests accounting is available. 6.2 General Provisions. (a) Representation. The Committee may require each person purchasing or receiving shares pursuant to an Option to represent to and agree with the Company in writing that such person is acquiring the shares without a view to the distribution thereof in violation of the Securities Act. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. (b) Withholding. If determined to be required to protect the Company, no later than the date as of which an amount first becomes includible in the gross income of the Participant for Federal income tax purposes with respect to any Option, the Participant shall pay to the Company (or other entity identified by the Committee), or make arrangements satisfactory to the Company or other entity identified by the Committee regarding the payment of, any Federal, state, local or foreign taxes of any kind required by law to be withheld with respect to such amount. Unless otherwise determined by the Committee, withholding obligations may be settled with Common Stock. The obligations of the Company under the Plan shall be conditional on such payment or arrangements, and the Company and its Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the Participant. (c) Controlling Law. The Plan and all Options made and actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Illinois (other than its law respecting choice of law). The Plan shall be construed to comply with all applicable law, and to avoid liability to the Company, an Affiliate or a Participant, including, without limitation, liability under Section 16(b) of the Exchange Act. 9 (d) Offset. Any amounts owed to the Company or an Affiliate by the Participant of whatever nature may be offset by the Company from the value of any shares of Common Stock, cash or other thing of value under the Plan or an Agreement to be transferred to the Participant, and no shares of Common Stock, cash or other thing of value under the Plan or an Agreement shall be transferred unless and until all disputes between the Company and the Participant have been fully and finally resolved and the Participant has waived all claims to such against the Company or an Affiliate. (e) Fail-Safe. With respect to persons subject to Section 16 of the Exchange Act, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3. To the extent any action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. 6.3 Special Provisions Regarding a Change in Control. Notwithstanding any other provision of the Plan to the contrary, unless otherwise provided in an Agreement, in the event of a Change in Control: (a) Any Stock Options outstanding as of the date of such Change in Control and not then exercisable shall become fully exercisable to the full extent of the original grant; (b) The Committee shall have full discretion, notwithstanding anything herein or in an Option Agreement to the contrary, to do any or all of the following with respect to an outstanding Stock Option: (1) To cause any Stock Option to be cancelled, provided notice of at least fifteen (15) days thereof is provided before the date of cancellation; (2) To provide that the securities of another entity be substituted hereunder for the Common Stock and to make equitable adjustment with respect thereto; (3) To grant the Participant, by giving notice during a pre-set period, the right to surrender all or part of a Stock Option to the Company and to receive cash in an amount equal to the amount by which the "Change in Control Price" (as defined in Section 6.3(c)) per share of Common Stock on the date of such election shall exceed the amount which the Participant must pay to exercise the Option per share of Common Stock under the Option (the "Spread"), multiplied by the number of shares of Common Stock granted under the Option; (4) To require the assumption of the obligation of the Company under the Plan subject to appropriate adjustment; and (5) To take any other action the Committee determines to take. 10 (c) For purposes of this Section, "Change in Control Price" means the higher of (i) the highest reported sales price of a share of Common Stock in any transaction reported on the principal exchange on which such shares are listed or on Nasdaq during the sixty (60)-day period prior to and including the date of a Change in Control, or (ii) if the Change in Control is the result of a corporate transaction, the highest price per share of Common Stock paid in such tender or exchange offer or a corporate transaction. To the extent that the consideration paid in any such transaction described above consists all or in part of securities or other non-cash consideration, the value of such securities or other non-cash consideration shall be determined in the sole discretion of the Committee. 6.4 Headings. The headings contained in the Plan are for reference purposes only and shall not affect the meaning or interpretation of the Plan. 6.5 Severability. If any provision of the Plan shall for any reason be held to be invalid or unenforceable, such invalidity or unenforceability shall not effect any other provision hereby, and the Plan shall be construed as if such invalid or unenforceable provision were omitted. 6.6 Successors and Assigns. The Plan shall inure to the benefit of and be binding upon each successor and assign of the Company. All obligations imposed upon a Participant, and all rights granted to the Company hereunder, shall be binding upon the Participant's heirs, legal representatives and successors. 6.7 Entire Agreement. The Plan and the Agreement constitutes the entire agreement with respect to the subject matter hereof and thereof, provided that in the event of any inconsistency between the Plan and any Agreement, the terms and conditions of the Plan shall control. 11 EX-10.6 11 FORM OF OPTION AGREEMENT-DIRECTOR'S STOCK OPTION Exhibit 10.6 NON-EMPLOYEE DIRECTOR'S STOCK OPTION AGREEMENT ---------------------------------------------- THIS STOCK OPTION AGREEMENT (the "Agreement") dated as of _____________ ("Grant Date"), is between Career Education Corporation, a Delaware corporation (the "Company"), and _______________, a non-employee director of the Company (the "Participant"). WHEREAS, the Company desires, by affording the Participant an opportunity to purchase shares of the Company's Common Stock as hereinafter provided, to carry out the purposes of the Career Education Corporation 1998 Non-Employee Director's Stock Option Plan (the "Plan"); and WHEREAS, the Committee has duly made all determinations necessary or appropriate to the grants hereunder; and NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth and for other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto have agreed, and do hereby agree, as follows: 1. Definitions. For purposes of this Agreement, the definitions of terms contained in the Plan hereby are incorporated by reference, except to the extent that any term is specifically defined in this Agreement. 2. Grant of Option, Option Price and Term. (a) The Company hereby grants to the Participant the right and option (the "Option") to purchase ________ shares of the Common Stock of the Company ("Option Shares") on the terms and conditions herein set forth. Participant shall have all the rights and obligations as provided for in this Agreement. (b) For each of the Option Shares purchased, the Participant shall pay to the Company $________ per share (the "Option Price"). Accordingly, the aggregate Option Price to exercise all of the Option is $________ ("Aggregate Option Price"). (c) The term of this Option shall be a period of ten (10) years from the Grant Date (the "Option Period"). The termination of the Option Period shall result in the termination and cancellation of the Option. In no event shall the Option be exercisable for any period greater than the Option Period. During the Option Period, the Option shall be exercisable in accordance with the determination of the Committee, but in no event later than the earlier of (i) the date the Option is vested or (ii) immediately prior to a Change in Control. (d) Unvested options shall be forfeited at termination of Participant's Directorship for any reason. Subject to Section 3 below, the percentage of Options which are vested and which shall not be forfeited at Termination of Participant's Directorship shall be determined in accordance with the following schedule: Cumulative Percentage of Date Option Shares Vested - -------------------------------------------------------------------------------- Grant Date 33-1/3% 1st Anniversary of Grant Date 66-2/3% 2nd Anniversary of Grant Date 100% (e) Subject to Section 2(f) and Section 3 below, any portion of the Option which, as of the date of Termination of Participant's Directorship, has vested pursuant to Section 2(d) but which has not been exercised by Participant as of that same date shall terminate upon the first anniversary of the termination of Participant's Directorship. (f) Notwithstanding Section 2(e), if Participant's Directorship is terminated due to Participant's death or Disability, Participant's vested but unexercised and unexpired Option shall continue for the period of ninety (90) days immediately following the date on which the Participant ceases to be a Director or until the expiration of the Option Period whichever period is shorter, and the Participant's death at any time following the date on which the Participant ceases to be a Director due to Disability shall not affect the foregoing. (g) The Option granted hereunder is, to the extent permitted by law, designated as a non-qualified stock option. (h) The Company shall not be required to issue any fractional Option Shares. 3. Special Provisions Regarding a Change of Control. Notwithstanding Sections 2(d), 2(e) and 2(f), a Participant's unvested shares shall be 100% vested in the event of a Change of Control, except that, in the event of a Change of Control, the Company shall have full discretion, with regard to any outstanding vested or unvested Option, (a) to cause any Option to be cancelled, provided that notice of at least fifteen (15) days is provided to Participant before the date of cancellation; or (b) to provide that the securities of another entity be substituted for the Common Stock and to make equitable adjustment with respect thereto; or -2- (c) to grant the Participant by giving notice during a pre-set period the right to surrender all or part of an Option to the Company and to receive cash in an amount equal to the amount by which the Change in Control Price per share of Common Stock on the date of such election shall exceed the amount which the Participant must pay to exercise the Option per share of Common Stock under the Option, multiplied by the number of shares of Common Stock granted under the Option; or (d) to take any other action the Committee determines to make. 4. Exercise. The Option shall be exercisable during the Participant's lifetime only by the Participant (or his or her guardian or legal representative), and after the Participant's death only by the Representative. The Option may only be exercised by the delivery to the Company of a properly completed written notice, in form satisfactory to the Committee, which notice shall specify the number of Option Shares to be purchased and the aggregate Option Price for such shares, together with payment in full of such aggregate Option Price. Payment shall only be made: (a) in cash or by check; (b) with the prior written approval of the Committee, by the delivery to the Company of a valid and enforceable stock certificate (or certificates) representing shares of Common Stock held by the Participant, which is endorsed in blank or accompanied by an executed stock power (or powers) and guaranteed in a manner acceptable to the Committee; (c) by a loan extended by the Company; (d) in cash by a broker-dealer to whom the Participant has submitted a notice of exercise; or (e) in any combination of (a), (b), (c) or (d). If any part of the payment of the Option Price is made in shares of Common Stock, such shares shall be valued by using their Fair Market Value as of their date of delivery. The Option shall not be exercised unless there has been compliance with all the preceding provisions of this Paragraph 4, and, for all purposes of this Agreement, the date of the exercise of the Option shall be the date upon which there is compliance with all such requirements. 5. Payment of Withholding Taxes. If the Company is obligated to withhold an amount on account of any tax imposed as a result of the exercise of the Option, the Participant shall be required to pay such amount to the Company, as provided in the Plan. -3- 6. Requirements of Law; Registration and Transfer Requirements. The Company shall not be required to sell or issue any shares under the Option if the issuance of such shares shall constitute a violation of any provision of any law or regulation of any governmental authority applicable to the Company. This Option and each and every obligation of the Company hereunder are subject to the requirement that the Option may not be exercised or performed, in whole or in part, unless and until the Option Shares are listed, registered or qualified, properly marked with a legend or other notation, or otherwise restricted, as is provided for in the Plan. 7. Adjustments/Change in Control. In the event of a Change in Control or other corporate restructuring provided for in the Plan, the Participant shall have such rights, and the Committee shall take such actions, as provided in the Plan. 8. Nontransferability. A Participant may at any time make a transfer of shares of Common Stock received pursuant to the exercise of an Option to his parents, spouse or descendants, to any trust for the benefit of the foregoing or to a partnership the interest of which are principally for the foregoing or to a custodian under a uniform gifts to minors act or similar statute for the benefit of any of the Participant's descendants. An Option and any interest in the Option may not otherwise be sold, assigned, conveyed, gifted, pledged, hypothecated or otherwise transferred in any manner without the prior written consent of the Company, and any such attempted sale, assignment, conveyance, gift, pledge, hypothecation or transfer other than as permitted herein shall be null and void. 9. Plan. Notwithstanding any other provision of this Agreement, the Option is granted pursuant to the Plan, as shall be adopted by the Company, and is subject to all the terms and conditions of the Plan, as the same may be amended from time to time; provided, however, that no provision of the Plan shall deprive the Participant, without the Participant's consent, of the Option or of any of Participant's rights under this Agreement. The reasonable interpretation and construction by the Committee of the Plan, this Agreement and the Option, and such rules and regulations as may be adopted by the Committee for the purpose of administering the Plan, shall be final and binding upon the Participant. 10. Stockholder Rights. Until the Option shall have been duly exercised to purchase such Option Shares and such shares have been officially recorded as issued on the Company's official stockholder records, no person or entity shall be entitled to vote, receive distributions or dividends or be deemed for any purpose the holder of any Option Shares, and adjustments for dividends or otherwise shall be made only if the record date therefor is subsequent to the date such shares are recorded and after the date of exercise and without duplication of any adjustment. 11. Term of Directorship. No provision of this Agreement or of the Option granted hereunder shall give the Participant any right to continue as a Director of the Company, create any inference as to the length of Participant's term as a Director, or affect the right of the Company to terminate Participant's Directorship. -4- 12. Changes in Company's Capital Structure. The existence of the Option shall not affect in any way the right or authority of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stock ahead of or affecting the Common Stock or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. 13. Investment Representation and Agreement. If, in the opinion of counsel for the Company, a particular representation is required under the Securities Act of 1933 or any other applicable federal or state law, or any regulation or rule of any governmental agency, the Company may require such representations as the Company reasonably may determine to be necessary. 14. Governing Law. This Agreement and the Option granted hereunder shall be governed by, and construed and enforced in accordance with, the laws of the State of Illinois (other than its laws respecting choice of law). 15. Entire Agreement. This Agreement, together with the Plan, constitute the entire obligation of the parties hereto with respect to the subject matter hereof and shall supersede any prior expressions of intent or understanding with respect to this transaction. 16. Amendment. Any amendment to this Agreement shall be in writing and signed by the Company and the Participant. 17. Waiver; Cumulative Rights. The failure or delay of either party to require performance by the other party of any provision hereof shall not affect its right to require performance of such provision unless and until such performance has been waived in writing. Each and every right hereunder is cumulative and may be exercised in part or in whole from time to time. 18. Counterparts. This Agreement may be signed in two counterparts, each of which shall be an original, but both of which shall constitute but one and the same instrument. 19. Notices. Any notice which either party hereto may be required or permitted to give the other shall be in writing and may be delivered personally or by mail, postage prepaid, addressed to the Secretary of the Company, at its then corporate headquarters, and the Participant at his address as shown on the Company's records, or to such other address as the Participant, by notice to the Company, may designate in writing from time to time. 20. Headings. The headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. -5- 21. Severability. If any provision of this Agreement shall for any reason by held to be invalid or unenforceable, such invalidity or unenforceability shall not effect any other provision hereof, and this Agreement shall be construed as if such invalid or unenforceable provision were omitted. 22. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon each successor and assign of the Company. All obligations imposed on the Participant or a Representative, and all rights granted to the Company hereunder, shall be binding upon the Participant's or the Representative's heirs, legal representatives and successors. IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed by an officer thereunto duly authorized, and the Participant has hereunto set his hand, all as of the day and year first above written. CAREER EDUCATION CORPORATION By: ____________________________________________ _________________________________________________ Title PARTICIPANT: _________________________________________________ -6- EX-10.7 12 CEC 1998 EMPLOYEE STOCK PURCHASE PLAN Exhibit 10.7 CAREER EDUCATION CORPORATION 1998 EMPLOYEE STOCK PURCHASE PLAN --------------------------------- INTRODUCTION ------------ The purpose of this Employee Stock Purchase Plan (the "Plan") is to benefit Career Education Corporation (the "Corporation") (and its parent or subsidiaries) by offering eligible employees a favorable opportunity to become stockholders of the Corporation over a period of years, thereby giving them a proprietary interest in the growth and prosperity of the Corporation and encouraging the continuance of their dedicated services with the Corporation (or its parent or subsidiaries). Pursuant to this Plan, 500,000 shares of authorized but unissued common stock, $.01 par value ("Common Stock"), of the Corporation may be offered for sale to eligible employees (as determined under Section 2 of this Plan) through periodic offerings to be made during the ten-year period commencing April 1, 1998 (the "Effective Date"). The Plan will be implemented by making four (4) offerings annually of the Common Stock (the "Offerings" and individually, an "Offering"), beginning on the first day of each calendar quarter, each Offering terminating on the last day of such quarter ("Offering Period"). The maximum number of shares of Common Stock issued in each Offering shall be 25,000 shares. The Plan is intended to qualify as an Employee Stock Purchase Plan under Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations promulgated thereunder. 1. Committee. The Plan will be administered by a committee (the "Committee") appointed by the Corporation's Board of Directors. The Committee shall consist of one or more members of the Board of Directors, none of whom shall be eligible to participate in the Plan. The Committee's interpretations and decisions with regard thereto shall be final and conclusive. 2. Eligibility. All employees of the Corporation (and its parent (if any) and subsidiaries) on the date of any Offering (as hereinafter described) shall be eligible to participate in the Plan, except that the following classes of employees shall not be eligible: (a) employees who are not employed by the Corporation (or its parent or one of its subsidiaries) as of the date one year prior to the first day of an Offering; (b) employees whose customary employment is for not more than five (5) months in any calendar year; (c) employees who would, immediately after the grant of an option under the Plan, own Corporation stock possessing 5% or more of the total combined voting power or value of all classes of stock of the Corporation (or its parent or subsidiaries); (d) employees whose customary employment with the Corporation is 20 hours or less per week; and (e) members of the Committee. For purposes of subparagraph (a), above, a participating employee who terminates his or her employment and is subsequently reemployed by the Corporation (or its parent or one of its subsidiaries) within one year of the termination date shall be eligible to participate in any Offering under this Plan as of the first day of the Offering Period following the one year anniversary of the date of such reemployment (as if the employee were a new employee). Additionally, in determining an employee's employment for purposes of this Plan, such employee's employment with any business entity, the assets, business, stock or product line of which is acquired by the Corporation (or its parent or one of its subsidiaries) through purchase, merger or otherwise, will be deemed to be employment with the Corporation. For purposes of subparagraph (c) of this Section 2, the rules of Section 424(d) of the Code shall apply in determining the stock ownership of an employee, and stock which the employee may purchase under outstanding options shall be treated as stock owned by the employee. For purposes of this Plan, a subsidiary of the Corporation shall mean a "subsidiary corporation" as defined in Section 424(f) of the Code, and a parent of the Corporation shall mean a "parent corporation" as defined in section 424(e) of the Code. 3. Offerings. The Corporation will make four (4) annual Offerings to employees to purchase stock under this Plan. Each Offering Period shall be three (3) months in duration, during which the amounts of Base Compensation (as defined below) directed pursuant to Section 4 by an employee (plus the amount of any dividends received on any shares purchased by the employee under the Plan while such shares are registered in the name of a custodian, if one is appointed pursuant to Section 9 hereof) shall constitute the measure by which the employee's participation in the Offering is based. For all purposes of this Plan, "Base Compensation" shall mean cash payments on account of the employee's employment with the Corporation or its subsidiaries, and shall include regular wage or salary payments only. Overtime premium, shift pay for Saturday, Sunday or holiday work, emergency call-in cash payments, bonuses, commissions and all other non-regular compensation, if any, shall be excluded from Base Compensation for both salaried and hourly employees. No employee may be granted an option which permits his rights to purchase stock under this Plan, and any other stock purchase plan of the Corporation (and its parent or subsidiaries), to accrue at a rate which exceeds $25,000 of the fair market value of such stock (determined at the effective date of the Offering) for each calendar year in which the Offering is outstanding at any time. For purposes of the preceding sentence, the rules set forth in Section 423(b)(8) of the Code shall apply. -2- 4. Participation. Subject to the third sentence of Section 7, an employee eligible on the effective date of any Offering may participate in such Offering on any enrollment date by completing and forwarding a payroll deduction authorization form to the Human Resources Department. The form will authorize a regular payroll deduction from the employee's direct, after-tax Base Compensation, and must specify the date on which such deduction is to commence, which shall be the first day of the next Offering Period and may not be retroactive. The form may also authorize the purchase of additional shares with any dividends received on any shares purchased by the employee under this Plan while such shares are registered in the name of a custodian, if one is appointed pursuant to Section 9 hereof. 5. Payroll Deductions. The Corporation will maintain payroll deduction accounts for all participating employees. With respect to any Offering made under this Plan, an employee may authorize a payroll deduction in terms of whole number percentages from a minimum of 1% up to a maximum of 10% of the gross, pre-tax Base Compensation an employee receives during the Offering Period. Notwithstanding the foregoing, in no event may more than $5,000 be deducted from an employee's Base Compensation for each Offering Period. 6. Deduction Terminations. An employee may, at any time, terminate the employee's payroll deduction by filing a payroll deduction termination form. The termination will not become effective sooner than the next pay period after receipt of the form by the Human Resources Department. Upon filing such payroll deduction termination form, the employee shall also be deemed to have elected a "withdrawal of funds" in accordance with Section 7, below. 7. Withdrawal of Funds. An employee may at any time more than 15 days prior to the end of an Offering Period, and for any reason, permanently draw out the balance accumulated in the employee's account for the Offering Period for which such payroll deduction form is effective and thereby withdraw from participation in an Offering for the Offering Period. Upon an election in accordance with this Section 7, all payroll withdrawals for the Offering Period shall be returned to the employee as soon as administratively practicable, and such employee's option shall be automatically terminated. An employee may thereafter resume participation again only as of the first day of the next Offering Period (and/or the first day of any Offering Period thereafter); provided, however, that an employee who is an officer or director of the Corporation may not thereafter resume participation in that Offering or participate in a subsequent Offering until the first day of an Offering Period which occurs at least six months after the date of such withdrawal. Partial withdrawals will not be permitted. 8. Purchase of Shares. Each employee participating in any Offering under this Plan will be granted an option, upon the effective date of such Offering, for as many full or fractional shares of Common Stock as can be purchased by such employee, which shall equal the sum of the following: (a) the amount of payroll deduction elected by the employee up to 10% of such employee's gross, pre-tax Base Compensation received during the specified Offering Period, but not to exceed $5,000; and -3- (b) the amount of any dividends received on any shares purchased by the employee under this Plan while such shares are registered in the name of a custodian appointed pursuant to Section 9 hereof, if any. 9. Purchase Price of Shares. The purchase price for each share of Common Stock purchased with funds allocated from payroll deductions in accordance with Section 8(a) will be 85% of the fair market value (as defined in Section 11) of the stock at the time the option is exercised. The purchase price for each share of Common Stock purchased with funds allocated from dividends received on Common Stock held on behalf of the Participant under Section 8(b) of the Plan will be 100% of the fair market value (as defined in Section 11) of the stock at the time the option is exercised. Such prices shall each hereinafter be referred to as the "Subscription Price," as such definition shall apply in context. Each option shall be automatically exercised at the Subscription Price at the end of the Offering Period. The employee's account shall be charged for the amount of the purchase price, and ownership of such share or shares shall be appropriately entered in the books of the Corporation. The Committee may appoint a custodian to accept custody of such shares on behalf of each participating employee. Upon an employee's request, the employee shall be issued a certificate for any or all of the shares held by the custodian on his or her behalf by completing a form approved by the Committee. If no such custodian is appointed, employees will be issued a certificate for shares as soon as practical after exercising an option. A participating employee may not purchase a share under any Offering beyond 60 months from the effective date thereof. Any balance remaining in an employee's payroll deduction account or dividend account, if any, at the end of an Offering Period shall be returned to the employee. 10. Registration of Certification. Any certificates issued to an employee may be registered only in the name of the employee or, if the employee so indicates on the employee's payroll deduction authorization form, in the employee's name jointly with a member of the employee's family, with right of survivorship. 11. Fair Market Value. The "fair market value" for a share of Common Stock for any day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the Nasdaq National Market or, if such Common Stock is not listed or admitted to trading on the Nasdaq National Market, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange or market on which the Common Stock is listed or admitted to trading or, if the Common Stock not then listed or admitted to trading on any national securities exchange or market, the last quoted sale price on such date or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System or such other system then in use or, if on any such date the Common Stock is not quoted by any such organization, the average of the -4- closing bid and asked prices as furnished by a professional market maker making a market in such shares selected by the Committee. If such prices are not available on a given day, then the Committee may use the prices of the Common Stock on the next preceding trading day for which such prices are available. 12. Rights as a Stockholder. None of the rights or privileges of a stockholder of the Corporation shall exist with respect to shares purchased under this Plan unless and until a stock certificate with respect to such full shares shall have been issued to the employee or the custodian, if any, on his behalf. 13. Rights on Retirement, Death or Termination of Employment. In the event of a participating employee's retirement, death or termination of employment (other than an authorized leave of absence), no payroll deduction shall be taken from any pay due and owing to an employee at such time, and the balance in the employee's account shall be paid to the employee or, in the event of the employee's death, to the employee's estate, as soon as practicable thereafter. Such employee's option shall be automatically terminated. 14. Rights Not Transferable. Rights under this Plan are not transferable by a participating employee other than by will or the laws of descent and distribution, and, during the employee's lifetime, said rights are exercisable only by the employee. 15. Application of Funds. All funds received or held by the Corporation under this Plan may be used for any corporate purpose, and the Corporation shall not be obligated to segregate any payroll deductions. No interest shall be allocated to the payroll deductions credited to an employee's account under the Plan. 16. Adjustment in Case of Changes Affecting Career Education Corporation Stock. The number of shares subject to the Plan and to Offerings granted under the Plan shall be adjusted as follows: (a) in the event that the outstanding Common Stock is changed by any stock dividend, stock split or combination of shares, the number of shares of Common Stock subject to the Plan and to Offerings theretofore granted thereunder shall be proportionately adjusted; (b) in the event of any merger or consolidation of the Corporation with any other corporation or corporations, there shall be substituted for each share of Career Education Corporation then subject to the Plan, whether or not at the time subject to outstanding Offerings, the number and kind of shares of common stock or other securities to which the holders of Common Stock will be entitled pursuant to the transaction; and (c) in the event of any other relevant change in the capitalization of the Corporation, the Committee shall provide for an equitable adjustment in the number of shares of Common Stock subject to the Plan, whether or not then subject to outstanding Offerings. In the event of any such adjustment, the Subscription Price(s) per share shall be appropriately adjusted. 17. Amendment of the Plan. The Committee may at any time, or from time to time, amend this Plan in any respect, except that, without the approval of a majority of the shares of stock of the Corporation then issued and outstanding and entitled to vote, no amendment shall -5- be made (i) increasing or decreasing the number of shares of Common Stock approved for this Plan (other than as provided in Section 16 hereof) or (ii) amending provisions governing which employees (or class of employees) are eligible to receive options under the Plan. Said stockholder approval must be obtained within 12 months of the amendment's adoption by the Committee. 18. Termination of the Plan. This Plan and all rights of employees under any Offering pursuant to the Plan hereunder shall terminate: (a) on the day that participating employees become entitled to purchase a number of shares of Common Stock equal to or greater than the number of shares remaining available for purchase. If the number of shares so purchasable is greater than the shares remaining available, the available shares shall be allocated by the Committee on a pro rata basis of each participant's Base Compensation earned during the prior Offering Period or, if none, during the immediately prior fiscal year of the Corporation; or (b) at any time, at the discretion of the Board of Directors. No Offering hereunder shall be made which shall extend beyond the ten (10) year anniversary of the Effective Date. Upon termination of this Plan, all amounts in the accounts of participating employees shall be carried forward into the employees' payroll deduction account under a successor employee stock purchase plan, if any, or refunded as soon as practicable thereafter. 19. Governmental Regulations. The Corporation's obligation to sell and deliver Common Stock under this Plan is subject to the approval of any governmental authority required in connection with the authorization, issuance or sale of the Common Stock. Each option shall also be subject to the requirement that, if at any time the Corporation determines, in its discretion, that the listing, registration or qualification of the shares of Common Stock subject to the option upon any securities exchange or under any state or federal law, or the consent or approval of any government regulatory body, is necessary or desirable as a condition of, or in connection with, the issue or purchase of shares thereunder, the option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable by the Corporation. 20. Purchase of Shares. Purchase of outstanding shares of Common Stock may be made pursuant to and on behalf of this Plan, upon such terms of the Corporation may approve, for delivery under this Plan. 21. Stockholder Approval. No options shall be exercised or shares or Common Stock issued hereunder before the Plan shall have been approved by the stockholders of the -6- Company. Such approval must be obtained within 12 months before or after the date the Plan is adopted, and shall comply with all applicable laws and the requirements of Section 423 of the Code. 22. No Employment Rights. The Plan does not provide any employment rights to any employee, and it shall not be deemed to interfere in any way with the right of the Corporation (and its parent or subsidiaries) to terminate, or otherwise modify, an employee's employment at any time. 23. Applicable Law. The Plan shall be governed by, and construed under, the laws of the State of Illinois, without giving effect to its principles of conflicts of law, except to the extent such laws are superseded by the laws of the United States. 24. Additional Restrictions of Rule 16b-3. The terms and conditions of options granted hereunder to, and the purchase of shares by, persons subject to Section 16 of the Securities Exchange Act of 1934, as amended ("Section 16"), shall comply with the applicable provisions of Rule 16b-3. This Plan shall be deemed to contain, such options shall contain, and the shares issued upon exercise thereof shall be subject to, such additional conditions and restrictions as may be required by Rule 16b-3 to qualify for the maximum exemption from Section 16 with respect to Plan transactions. 25. Plan Administration. The Committee shall have full and exclusive discretionary authority to construe, interpret and apply the terms of the Plan, to determine eligibility and to adjudicate all disputed claims under the Plan. All notices or other communications hereunder shall be deemed to have been duly given when received in the form specified by the Committee at the location, or by the person, designated by the Committee for the receipt thereof. EX-10.8 13 AMENDED AND RESTATED OPTION AGREEMENT EXHIBIT 10.8 AMENDED AND RESTATED OPTION AGREEMENT THIS AMENDED AND RESTATED 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. In connection with the extension of Larson's Employment Agreement, Larson and CEC have decided to restructure a portion of Larson's rights to receive the options, as reflected in this Agreement and the Supplemental 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 ----------- 1.1 In addition to the terms defined elsewhere in this Agreement, as used in this Agreement: (a) "Adjusted Shares" means the number of shares of CEC Common (assuming full exercise of all Option Shares) at the time of the exercise of the Option, exclusive of (i) any shares of CEC Common issued or issuable pursuant to the Supplemental Option or the Dowdell Option; (ii) any shares of CEC Common issued to the management of CEC pursuant to any stock option plans duly adopted by the Board of Directors from time to time; and (iii) any shares of CEC Common sold at a price equal to the market value of such shares (as reasonably determined by the Board of Directors of CEC) to any Person who is not affiliated with any of the Existing Stockholders. For purposes hereof, if CEC issues any Option Securities or CEC Common in connection with the issuance of any shares of preferred stock of CEC (or any other capital stock with a preference as to dividends or liquidation), such Option Securities and any CEC Common issuable upon the exercise, exchange or conversion thereof shall be deemed to have been issued at market value (regardless of the stated exercise, exchange or purchase price of such CEC Common) if the Board of Directors reasonably determines that the total price paid for all such equity securities (including the Option Securities, preferred stock and CEC Common) equals the market value of the portion of total capitalization represented by all such equity securities. It is hereby acknowledged that all CEC Common issuable in connection with the Warrant (along with any Penalty Warrants issued from time to time) issued 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 constitute shares of CEC Common issued at market value for purposes of this Agreement. (b) "Cash Equivalent" means (a) marketable direct obligations issued or unconditionally guarantied by the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within ninety (90) days from the date of acquisition thereof; (b) commercial paper maturing no more than ninety (90) days from the date issued and, at the time of acquisition, having a rating of at least A-1 from Standard & Poor's Corporation or at least P-1 from Moody's Investors Service, Inc.; and (c) certificates of deposit or bankers' acceptances maturing within ninety (90) days from the date of issuance thereof issued by, or overnight reverse repur chase agreements from, any commercial bank organized under the laws of the United States or any state thereof or the District of Columbia having combined capital and surplus of not less than $500,000,000 and not subject to setoff rights in favor of such bank. (c) "Cause" has the meaning set forth in the Larson Employment Agreement. (d) "CEC Common" means the common stock of CEC, $.01 par value, regardless of class, and any securities (including, without limitation, options and warrants) which are exercisable or exchangeable for or convertible into CEC Common (an "OPTION SECURITY"); provided, that for purposes of calculating the Option Amount hereunder, the CEC Common issuable upon exercise, exchange or conversion of any Option Security shall, upon its issuance, be deemed to have been sold to the holder of the Option Security as of the date of the issuance of the Option Security for an amount equal to the exercise, exchange or conversion price provided in such Option Security plus the consideration received by CEC upon the issuance of the Option Security (as reasonably determined by the Board of Directors of CEC in connection with the issuance of such Option Securities). (e) "Commission" means the Securities and Exchange Commission. (f) "Dilution Factor" means a fraction, the numerator of which is the number of shares of CEC Common outstanding at the time of such determination plus the then exercisable portion of ---- the Option Amount pursuant to the Option and the Dowdell Option, and the denominator of which is the number of shares of CEC Common outstanding at the time of such determination. (g) "Dowdell Option" means the option granted to Dowdell pursuant to the Amended and Restated Dowdell Option Agreement, of even date herewith, between CEC and Dowdell. (h) "Earn-Up Target" means, at the time of determination, an amount of cash or cash equivalents that HECC and its affiliates would have to receive in connection with the sale, transfer, redemption, repayment, or other disposition of all or part of the Heller Investment (net of related transaction expenses including fees and expenses of counsel) or any cash dividend or interest declared and paid thereon in order for HECC and their respective affiliates (including, without limitation, all consulting, non-competition, advisory or similar fees received by HECC and its affiliates) to (i) earn, in the aggregate with respect to the Heller Investment, an IRR of at least the amount specified with respect to such Earn-Up Target and (ii) receive aggregate cash or cash equivalent consideration of at least twice the total amount of Heller Investment. All Earn- Up Targets shall be calculated on a pro forma basis assuming that all shares of CEC Common subject to the Supplemental Option and all shares of CEC Common subject to the Supplemental Option and all shares of CEC Common subject to the Option and the Dowdell Option that would become exercisable upon achievement of such Earn-Up Target have been exercised and such shares were issued and outstanding prior to -3- the transaction or payment with respect to which achievement of the Earn-Up Target is being calculated. The Earn-Up Targets shall be based on the achievement of the IRR identified below: Earn-Up Target IRR -------------- --- Initial Earn-Up Target 25% Second Earn-Up Target 30% Third Earn-Up Target 35% Fourth Earn-Up Target 40% Final Earn-Up Target 45% (i) "Exercise Percentage" means the percentage of the Option Amount with respect to which the Option is exercisable based upon the achievement of the Earn-Up Targets as determined in accordance with the following: Percentage of Option Amount Earn-Up Target then Exercisable -------------- ---------------- Initial Earn-Up Target 28.6% Second Earn-Up Target 42.9% Third Earn-Up Target 57.1% Fourth Earn-Up Target 78.6% Final Earn-Up Target 100% (j) "Exercise Price" means $.10 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). (k) "Existing Stockholders" means Larson, Dowdell and HECC and each of their respective successors and permitted assigns. (l) "Good Reason" has the meaning set forth in the Larson Employment Agreement. (m) "Heller Investment" means any and all equity and debt investments in CEC or its subsidiaries made by HECC or any of its affiliates on or prior the exercise of an Option. (n) "IRR" means the annual rate of interest that causes (i) the net present value as of January 31, 1994 of all cash or cash equivalent payments received by HECC and its affiliates on or prior to the date of any calculation hereof with respect to the Heller Investment (whether such payments are received from CEC -4- or any third party, and whether such payments are received as principal, interest, dividends, sale proceeds, upon redemption of any portion of the Heller Investment, upon liquidation of CEC or otherwise including, without limitation, all consulting, non- competition, advisory or similar fees received by HECC and its affiliates), to equal (ii) the sum of (A) $3,000,000 plus (B) the ---- net present value (calculated using an interest rate equal to the IRR) as of January 31, 1994 of each additional cash payment made, directly or indirectly, subsequent to January 31, 1994 by HECC or its affiliates to CEC or to others to acquire additional debt or equity securities of CEC as part of the Heller Investment. The IRR shall be calculated on a pre-tax basis. (o) "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. (p) "Non-Earn-Up Sale" means the consummation of the sale, transfer or other disposition by HECC and its affiliates of all or the last portion of the Heller Investment in one or more arm's- length transactions to independent third parties resulting in the receipt by HECC and its affiliates of cash in an amount which when aggregated with all prior cash dispositions by HECC or its affiliates of the Heller Investment, all cash dividends and interest declared and paid in respect thereof and all consulting, non-competition, advisory or similar fees received by HECC and its affiliates is less than the Initial Earn-Up Target. (q) "Option" has the meaning set forth in Section 2.1 hereof. ----------- (r) "Option Amount" means the number of shares of CEC Common equal to 7.0% of the Adjusted Shares as reduced by the number of shares of CEC Common previously issued pursuant to the Option. (s) "Option Termination Date" means the earliest of (i) January 31, 2004, (ii) the date of the closing of a Non-Earn-Up Sale, (iii) 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, (iv) 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 (v) twenty- -5- four (24) months after the date Larson and his Permitted Transferees cease to be stockholders of CEC. (t) "Permitted Transferee" has the meaning set forth in Section 2.6 of the Stockholders' Agreement. ----------- (u) "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. (v) "Securities Act" means the Securities Act of 1933, as amended. (v) "Supplemental Option" means the option granted to Larson pursuant to the Supplemental Option Agreement of even date herewith between CEC and Larson. (w) "Vested Percentage" means the percentage identified below as determined by the number of years from January 31, 1994 that 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 ------------------- ----------------- After January 31, 1995 25% After January 31, 1996 50% After January 31, 1997 75% After January 31, 1998 100% Notwithstanding the foregoing, if Larson ceases to be an executive officer of CEC as the direct result of (i) the consummation of a transaction described in Section 2.4(c) of the Stockholders' Agreement prior to the -------------- fourth anniversary hereof 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%. -6- 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 Option Amount applicable to the achievement of the corresponding Earn-Up Target. 2.2 Procedures for Exercise. Subject to the Option becoming ----------------------- exercisable pursuant to Section 2.3 of this Agreement, Larson or a Permitted ----------- Transferee may exercise the Exercise Percentage of the Option Amount (in whole or in part) at any time thereafter and prior to the Option Termination Date by delivering written notice to CEC setting forth the portion of the Option (not to exceed the Exercise 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 Conditions to Exercise of the Options. The Option shall only ------------------------------------- become exercisable as follows: (a) The Option will become exercisable with respect to the Exercise Percentage of the Option Amount on or after the first date on which HECC and/or its affiliates receive an amount of cash or cash equivalents necessary to achieve the Earn-Up Target applicable to such Exercise Percentage. (b) At the time of the exercise of the Option, Larson shall be entitled to exercise the Option with respect to a number of shares of CEC Common equal to the Exercise Percentage of the Option Amount applicable to the achievement of such Earn-Up Target, less the number of shares of CEC Common previously ---- purchased -7- pursuant to the Option. (c) If at the time of the exercise of the Option, Larson is not employed as an executive officer of CEC, Larson shall only be entitled to exercise the Option with respect to the Vested Percentage of the Exercise Percentage of the CEC Common, determined as of the date Larson ceased to be so employed, otherwise subject to the Option in accordance herewith. 2.4 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 2.3 above. To the extent ----------- that Larson or his Permitted Transferees are to receive cash or cash equivalent consideration pursuant to this Section 2.4 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. The per share value of the CEC Common referred to in the preceding sentence shall be equal (a) to (i) the sum of the cash or cash equivalent consideration received by HECC and its affiliates in any transaction or redemption resulting in the achievement of an Earn-Up Target attributable to the CEC Common sold by such parties, divided by (ii) the aggregate number of shares of CEC Common to be sold by such parties or redeemed by CEC in such transaction multiplied by the Dilution Factor; or (b) if no shares of CEC Common were sold or redeemed in connection with the achievement of such Earn-Up Target, the Fair Market Value of such shares, as determined in accordance with the Stockholders' Agreement. 2.5 Notice of Internal Rate of Return. After each sale, transfer, --------------------------------- redemption or other disposition of any portion of the Heller Investment, the receipt of any cash dividend or interest thereon or the payment of any consulting, non-competition, advisory or similar fees received by HECC and its affiliates, the Compensation Committee of the Board of Directors of CEC (with the assistance of HECC) will, if requested by Larson in writing, deliver within seven (7) days of Larson's request written notice to Larson of the IRR after giving effect to such transaction in order to determine whether an Earn-Up Target has been met. If one or more Earn-Up Targets have been achieved, such notice shall also contain a calculation of the Exercise Percentage of the Option Amount and the number of shares of CEC Common which Larson is then entitled to purchase upon exercise of the Option. 2.6 Termination of the Options. Notwithstanding -------------------------- -8- 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. 2.7 Non-Transferable. Larson or any Permitted Trans 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. 2.8 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 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 -9- 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 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 ments 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 construction, validity, interpretation and performance of this -10- 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 FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS -11- 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 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 knowledge and experience in financial and business matters that -12- 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 --------------------------- -13- AMENDMENT TO AMENDED AND RESTATED OPTION AGREEMENT THIS AMENDMENT (the "Amendment"), dated as of October 20, 1997, is made by and between Career Education Corporation, a Delaware corporation ("CEC"), and John M. Larson ("Larson") and amends that certain Amended and Restated Option Agreement (the "Option Agreement") dated as of July 31, 1995, between CEC and Larson. WHEREAS, pursuant to the Option Agreement, CEC granted Larson an option (the "Option") to purchase a number of shares of CEC common stock equal to 7.0% of the CEC common stock, $.01 par value, at the time of the exercise of the Option (assuming full exercise of all outstanding warrants, options and convertible securities), adjusted as set forth in the Option Agreement; and WHEREAS, CEC is pursuing an initial public offering of its common stock pursuant to a Registration Statement on Form S-1, Registration No. 333-37601 (the "Offering"), and in contemplation of the Offering, Larson and CEC have agreed to amend certain terms and conditions of the Option Agreement. NOW, THEREFORE, pursuant to Section 3.9 of the Option Agreement, CEC and Larson agree as follows: 1. Paragraph(s) of Section 1.1 of the Option Agreement is hereby amended by adding the following sentence at the end of such Paragraph: Notwithstanding the foregoing, after the closing (the "IPO Closing") of the initial public offering by CEC of the CEC Common (the "Offering"), "Option Termination Date" shall mean January 31, 2004. 2. Section 2.1 of the Option Agreement is hereby amended by adding the following sentence at the end of such Section: Notwithstanding the foregoing, at any time after the IPO Closing, the Option shall be exercisable with respect to 7,960.2 shares of CEC Common, subject to adjustment from time to time as provided in this Article II. 3. Section 2.3 of the Option Agreement is hereby amended by adding the following sentence at the end of such Section: Notwithstanding the foregoing, the Option will become exercisable in full (fully vested) upon the IPO Closing, and at the time of any exercise of the Option, Larson shall be entitled to exercise the Option with respect to a number of shares of CEC Common equal to 7,960.2 (subject to adjustment as provided in this Article II) less the number of shares previously purchased pursuant to the Option, whether or not Larson is employed as an executive officer of CEC at such exercise time. 4. Section 2.4 of the Option Agreement is hereby amended by adding the following sentence at the end of such Section: Notwithstanding the foregoing, at any time after the IPO Closing, the per share value of CEC Common referred to in this Section 2.4 shall be equal to the closing (last sale) price per share of CEC Common, as reported on the Nasdaq National Market (or, if other than the Nasdaq National Market, the principal market or exchange on which CEC Common is then traded) for the most recent day on which CEC Common is traded prior to the date on which CEC receives written notice of, and payment for, exercise of the Option pursuant to Section 2.2 of this Agreement. 5. The Option Agreement is hereby amended by adding the following Section 2.9: 2.9 Subdivision or Combination of CEC Common. If CEC at any time (whether prior to or after the IPO Closing) subdivides (by any stock split, stock dividend, recapitalization or otherwise), the outstanding shares of CEC Common into a greater number of shares, the number of shares of CEC Common obtainable upon exercise of the Option will be proportionately increased. If CEC at any time (whether prior to or after the IPO Closing) combines (by combination, reverse stock split or otherwise) the outstanding shares of CEC Common into a smaller number of shares, the number of shares of CEC Common obtainable upon exercise of the Option will be proportionately decreased. 6. The Option Agreement is hereby amended by adding the following Section 2.10: 2.10 Reorganization, Reclassification, Consolidation, Merger or Sale. Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of CEC's assets to another person or entity, or other transaction which is effected in such a way that holders of CEC Common are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for CEC Common is referred to herein as "Organic Change." Prior to the consummation of any Organic Change, CEC will make appropriate provision (in form and substance reasonably satisfactory to Larson) to insure that Larson will thereafter, upon the basis and the terms and in the manner provided in this Agreement, have the right to acquire and receive in lieu of or addition to (as the case may be) the shares of CEC Common immediately theretofore acquirable and receivable upon the exercise of the Option, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for the number of shares of CEC Common immediately theretofore acquirable and receivable upon the exercise of the Option Agreement -2- had such Organic Change not taken place. CEC will not effect any such consolidation, merger or sale, unless prior to the consummation thereof, the successor entity (if other than CEC) resulting from consolidation or merger or the entity purchasing such assets assumes by written instrument (in form and substance reasonably satisfactory to Larson) the obligation to deliver to Larson such shares of stock, securities or assets as, in accordance with the foregoing provisions, Larson may be entitled to acquire. 7. Section 3.1 of the Option Agreement is hereby amended to read in its entirety as follows: 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 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 CEC and to Larson at the addresses indicated below: If to CEC: Career Education Corporation 2800 West Higgins Road, Suite 790 Hoffman Estates, Illinois 60195 Attention: President Facsimile: (847) 781-3610 With copies to: Heller Equity Capital Corporation 500 West Monroe Street Chicago, Illinois 60661 Attention: Patrick K. Pesch Facsimile: (312) 441-7236 Heller International Corporation 500 West Monroe Street Chicago, Illinois 60661 Attention: Charles P. Brissman, Esq. Facsimile: (312) 441-7173 -3- Katten Muchin & Zavis 525 West Monroe Street, Suite 1600 Chicago, Illinois 60661-3693 Attention: Lawrence D. Levin, Esq. Facsimile: (312) 902-1061 and Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd. 55 East Monroe Street, Suite 3700 Chicago, Illinois 60603 Attention: William R. Loesch, Esq. Facsimile: (312) 332-2196 If to Larson: John M. Larson 36 Lakeside Drive South Barrington, Illinois 60010 With copies to: Arnold & Porter 777 South Figueroa Street, 44th Floor Los Angeles, California 90017-2513 Attention: Russel Kully, Esq. Facsimile: (213) 243-4199 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. -4- IN WITNESS WHEREOF, CEC and Larson have executed this Amendment as of October 20, 1997. CAREER EDUCATION CORPORATION By: /s/ W. A. Klettke /s/ John M. Larson ----------------------- ------------------ John M. Larson Name: William A. Klettke --------------------- Title: Sr. VP & CFO -------------------- -5- EX-10.10 14 AMENDED AND RESTATED OPTION AGREEMENT EXHIBIT 10.10 AMENDED AND RESTATED OPTION AGREEMENT THIS AMENDED AND RESTATED OPTION AGREEMENT (this "AGREEMENT"), dated as of July 31, 1995, is between Career Education Corporation, a Delaware corporation ("CEC"), and Robert E. Dowdell ("DOWDELL"). RECITALS A. Dowdell and CEC are parties to that certain Dowdell Option Agreement, dated as of January 31, 1994 (the "ORIGINAL AGREEMENT") pursuant to which Dowdell 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. Dowdell and CEC have decided to amend and restate certain provisions relating to the Agreement as set forth below. 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 ----------- 1.1 In addition to the terms defined elsewhere in this Agreement, as used in this Agreement: (a) "Adjusted Shares" means the number of shares of CEC Common (assuming full exercise of all Option Shares) at the time of the exercise of the Option, exclusive of (i) any shares of CEC Common issued or issuable pursuant to the Supplemental Option or the Larson Option; (ii) any shares of CEC Common issued to the management of CEC pursuant to any stock option plans duly adopted by the Board of Directors from time to time; and (iii) any shares of CEC Common sold at a price equal to the market value of such shares (as reasonably determined by the Board of Directors of CEC) to any Person who is not affiliated with any of the Existing Stockholders. For purposes hereof, if CEC issues any Option Securities or CEC Common in connection with the issuance of any shares of preferred stock of CEC (or any other capital stock with a preference as to dividends or liquidation), such Option Securities and any CEC Common issuable upon the exercise, exchange or conversion thereof shall be deemed to have been issued at market value (regardless of the stated exercise, exchange or purchase price of such CEC Common) if the Board of Directors reasonably determines that the total price paid for all such equity securities (including the Option Securities, preferred stock and CEC Common) equals the market value of the portion of total capitalization represented by all such equity securities. It is hereby acknowledged that all CEC Common issuable in connection with the Warrant (along with any Penalty Warrants issued from time to time) issued 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 constitute shares of CEC Common issued at market value for purposes of this Agreement. (b) "Cash Equivalent" means (a) marketable direct obligations issued or unconditionally guarantied by the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within ninety (90) days from the date of acquisition thereof; (b) commercial paper maturing no more than ninety (90) days from the date issued and, at the time of acquisition, having a rating of at least A-1 from Standard & Poor's Corporation or at least P-1 from Moody's Investors Service, Inc.; and (c) certificates of deposit or bankers' acceptances maturing within ninety (90) days from the date of issuance thereof issued by, or overnight reverse repurchase agreements from, any commercial bank organized under the laws of the United States or any state thereof or the District of Columbia having combined capital and surplus of not less than $500,000,000 and not subject to setoff rights in favor of such bank. (c) "Cause" has the meaning set forth in the Dowdell Option Agreement. (d) "CEC Common" means the common stock of CEC, $.01 par value, regardless of class, and any securities (including, without limitation, options and warrants) which are exercisable or exchangeable for or convertible into CEC Common (an "OPTION SECURITY"); provided, that for purposes of calculating the Option Amount hereunder, the CEC Common issuable upon exercise, exchange or conversion of any Option Security shall, upon its issuance, be deemed to have been sold to the holder of the Option Security as of the date of the issuance of the Option Security for an amount equal to the exercise, exchange or conversion price provided in such Option Security plus the consideration received by CEC upon the issuance of the Option Security (as reasonably determined by the Board of Directors of CEC in connection with the issuance of such Option Securities). (e) "Commission" means the Securities and Exchange Commission. (f) "Dilution Factor" means a fraction, the numerator of which is the number of shares of CEC Common outstanding at the time of such determination plus the then exercisable portion of the Option Amount ---- pursuant to the Option and the Larson Option, and the denominator of which is the number of shares of CEC Common outstanding at the time of such determination. (g) "Dowdell Consulting Agreement" means the Consulting and Non- Competition Agreement, dated as of January 31, 1994, between Dowdell and CEC, as amended as of July 31, 1994. (h) "Earn-Up Target" means, at the time of determination, an amount of cash or cash equivalents that HECC and its affiliates would have to receive in connection with the sale, transfer, redemption, repayment, or other disposition of all or part of the Heller Investment (net of related transaction expenses including fees and expenses of counsel) or any cash dividend or interest declared and paid thereon in order for HECC and their respective affiliates (including, without limitation, all consulting, non-competition, advisory or similar fees received by HECC and its affiliates) to (i) earn, in the aggregate with respect to the Heller Investment, an IRR of at least the amount specified with respect to such Earn-Up Target and (ii) receive aggregate cash or cash equivalent consideration of at least twice the total amount of Heller Investment. All Earn-Up Targets shall be calculated on a pro forma basis assuming that all shares of CEC Common subject to the Supplemental Option and all shares of CEC Common subject to the Option and the Larson Option that would become exercisable upon achievement of such Earn-Up Target have been exercised and such shares were issued and outstanding prior to the transaction or payment with respect to which achievement of the Earn-Up Target is being calculated. The Earn-Up Targets shall be based on the achievement -3- of the IRR identified below:
Earn-Up Target IRR -------------- --- Initial Earn-Up Target 25% Second Earn-Up Target 30% Third Earn-Up Target 35% Fourth Earn-Up Target 40% Final Earn-Up Target 45%
(i) "EXERCISE PERCENTAGE" means the percentage of the Option Amount with respect to which the Option is exercisable based upon the achievement of the Earn-Up Targets as determined in accordance with the following:
Earn-Up Target Percentage of Option Amount then Exercisable ------------------ ---------------- Initial Earn-Up Target 44.4% Second Earn-Up Target 55.5% Third Earn-Up Target 66.7% Fourth Earn-Up Target 83.3% Final Earn-Up Target 100%
(j) "Exercise Price" means $.10 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). (k) "Existing Stockholders" means Larson, Dowdell and HECC and each of their respective successors and permitted assigns. (l) "Heller Investment" means any and all equity and debt investments in CEC or its subsidiaries made by HECC or any of its affiliates on or prior the exercise of an Option. (m) "IRR" means the annual rate of interest that causes (i) the net present value as of January 31, 1994 of all cash or cash equivalent payments received by HECC and its affiliates on or prior to the date of any calculation hereof with respect to the Heller Investment (whether such payments are received from CEC or any third party, and whether such payments are received as principal, interest, dividends, sale proceeds, upon redemption of any portion of the Heller Investment, upon liquidation of CEC or otherwise including, without limitation, all consulting, non-competition, advisory or similar fees received by HECC and its affiliates), to equal (ii) the sum of (A) $3,000,000 plus (B) the net present value (calculated -4- using an interest rate equal to the IRR) as of January 31, 1994 of each additional cash payment made, directly or indirectly, subsequent to January 31, 1994 by HECC or its affiliates to CEC or to others to acquire additional debt or equity securities of CEC as part of the Heller Investment. The IRR shall be calculated on a pre-tax basis. (n) "Larson Option" means the option granted to Larson pursuant to the Amended and Restated Option Agreement, of even date herewith, between CEC and Larson. (o) "Non-Earn-Up Sale" means the consummation of the sale, transfer or other disposition by HECC and its affiliates of all or the last portion of the Heller Investment in one or more arm's-length transactions to independent third parties resulting in the receipt by HECC and its affiliates of cash in an amount which when aggregated with all prior cash dispositions by HECC or its affiliates of the Heller Investment, all cash dividends and interest declared and paid in respect thereof and all consulting, non-competition, advisory or similar fees received by HECC and its affiliates is less than the Initial Earn-Up Target. (p) "Option" has the meaning set forth in Section 2.1 hereof. ----------- (q) "Option Amount" means the number of shares of CEC Common equal to 4.5% of the Adjusted Shares as reduced by the number of shares of CEC Common previously issued pursuant to the Option. (r) "Option Termination Date" means the earliest of (i) January 31, 2004, (ii) the date of the closing of a Non-Earn-Up Sale, (iii) a termination of Dowdell's engagement as a consultant with CEC for Cause, (iv) the date of any material violation by Dowdell of any provision of Section 5 of the Dowdell Consulting Agreement following --------- the termination of his employment with CEC and (v) twenty-four (24) months after the date Dowdell and his Permitted Transferees cease to be stock holders of CEC. (s) "Permitted Transferee" has the meaning set forth in Section 2.6 ----------- of the Stockholders' Agreement. (t) "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 -5- governmental entity or any department, agency or political subdivision thereof. (u) "Securities Act" means the Securities Act of 1933, as amended. (v) "Supplemental Option" means the option granted to Larson pursuant to the Supplemental Option Agreement of even date herewith between CEC and Larson. (w) "Vested Percentage" means the percentage identified below as determined by the number of years from January 31, 1994 Dowdell is a director of CEC or is engaged as a consultant of CEC (pursuant to the Dowdell Consulting Agreement or otherwise), plus any additional period during which Dowdell continues to receive his Consultant Fee pursuant to Section 5.1 of the Dowdell Consulting Agreement, as determined below:
Years of Employment Vested Percentage ------------------- ----------------- After January 31, 1995 25% After January 31, 1996 50% After January 31, 1997 75% After January 31, 1998 100%
Notwithstanding the foregoing, if Dowdell ceases to be a director of or a consultant to CEC as the direct result of (i) the consummation of a transaction described in Section 2.4(c) of the Stockholders' -------------- Agreement prior to the fourth anniversary hereof 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%. ARTICLE II THE OPTION PROVISIONS --------------------- 2.1 Grant of the Option. Subject to the terms and conditions set ------------------- forth herein, CEC hereby grants to Dowdell 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 Option Amount applicable to the achievement of the corresponding Earn-Up Target. 2.2 Procedures for Exercise. Subject to the Option becoming ----------------------- exercisable pursuant to Section 2.3 of this Agreement, Dowdell or a Permitted ----------- Transferee may exercise the Exercise Percentage of the Option Amount (in whole or in part) at any time thereafter and prior to the Option Termination Date by delivering -6- written notice to CEC setting forth the portion of the Option (not to exceed the Exercise 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 Dowdell 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 Dowdell or a Permitted Transferee, as the case may be, certificates for the shares of CEC Common with respect to which Dowdell or a Permitted Transferee has exercised the Option. For all purposes, Dowdell 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 Dowdell or a Permitted Transferee, as the case may be, as provided in this Section 2.2. - ----------- 2.3 Conditions to Exercise of the Options. The Option shall only ------------------------------------- become exercisable as follows: (a) The Option will become exercisable with respect to the Exercise Percentage of the Option Amount on or after the first date on which HECC and/or its affiliates receive an amount of cash or cash equivalents necessary to achieve the Earn-Up Target applicable to such Exercise Percentage. (b) At the time of the exercise of the Option, Dowdell shall be entitled to exercise the Option with respect to a number of shares of CEC Common equal to the Exercise Percentage of the Option Amount applicable to the achievement of such Earn-Up Target, less the number ---- of shares of CEC Common previously purchased pursuant to the Option. (c) If at the time of the exercise of the Option, Dowdell is not a director of CEC or engaged as a consultant by CEC, Dowdell shall only be entitled to exercise the Option with respect to the Vested Percentage of the Exercise Percentage of the CEC Common, determined as of the date Dowdell ceased to be so engaged, otherwise subject to the Option in accordance herewith. -7- 2.4 Payments in Lieu of Exercise of Option. If at the time the -------------------------------------- Option or any portion thereof is exercised neither Dowdell nor his Permitted Transferees are stockholders of CEC, CEC shall have the right, but not the obligation, to pay Dowdell or his Permitted Transferees the cash or cash equivalent consideration attributable to the CEC Common that Dowdell would have otherwise been entitled to purchase pursuant to Section 2.3 above. To the ----------- extent that Dowdell or his Permitted Transferees are to receive cash or cash equivalent consideration pursuant to this Section 2.4 in lieu of the issuance of ----------- shares of CEC Common, CEC shall transfer to Dowdell an aggregate amount of cash or cash equivalent consideration equal to the value of the CEC Common that Dowdell would have been entitled to purchase pursuant to such exercised Options. The per share value of the CEC Common referred to in the preceding sentence shall be equal (a) to (i) the sum of the cash or cash equivalent consideration received by HECC and its affiliates in any transaction or redemption resulting in the achievement of an Earn-Up Target attributable to the CEC Common sold by such parties, divided by (ii) the aggregate number of shares of CEC Common to be sold by such parties or redeemed by CEC in such transaction multiplied by the Dilution Factor; or (b) if no shares of CEC Common were sold or redeemed in connection with the achievement of such Earn-Up Target, the Fair Market Value of such shares, as determined in accordance with the Stockholders' Agreement. 2.5 Notice of Internal Rate of Return. After each shall, transfer, --------------------------------- redemption or other disposition of any portion of the Heller Investment, the receipt of any cash dividend or interest thereon or the payment of any consulting, non-competition, advisory or similar fees received by HECC and its affiliates, the Compensation Committee of the Board of Directors of CEC (with the assistance of HECC) will, if requested by Dowdell in writing, deliver within seven (7) days of Dowdell's request written notice to Dowdell of the IRR after giving effect to such transaction in order to determine whether an Earn-Up Target has been met. If one or more Earn-Up Targets have been achieved, such notice shall also contain a calculation of the Exercise Percentage of the Option Amount and the number of shares of CEC Common which Dowdell is then entitled to purchase upon exercise of the Option. 2.6 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. 2.7 Non-Transferable. Dowdell or any Permitted Transferee 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 Dowdell or such Permitted Transferee under this Agreement, except (i) in the event -8- of Dowdell'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 Dowdell or (ii) by exercise pursuant to the terms of this Agreement. 2.8 No Rights as a Stockholder. The Options do not confer upon -------------------------- Dowdell 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 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 Dowdell 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 Heller International Corporation 500 West Monroe Street Chicago, Illinois 60661 Attention: Charles P. Brissman, Esq. Facsimile: (312) 441-7208 -9- 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 Dowdell: Robert E. Dowdell 1951 Calle Roja Santa Ana, California 92705 Facsimile: (213) 250-9811 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 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 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 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. ---------------------------------------------- -10- 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. DOWDELL 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 DOWDELL IN ANY OTHER COURT HAVING JURISDICTION OVER DOWDELL. 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 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, -11- 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 Dowdell's Investment Representations. Dowdell 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 in violation of the federal securities laws or any applicable state securities laws. Dowdell 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 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 -12- 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 -------------------------- ROBERT E. DOWDELL /s/ Robert E. Dowdell ------------------------------ -13- AMENDMENT TO ------------ AMENDED AND RESTATED OPTION AGREEMENT ------------------------------------- THIS AMENDMENT (the "Amendment"), dated as of October 20, 1997, is made by and between Career Education Corporation, a Delaware corporation ("CEC"), and Robert E. Dowdell ("Dowdell") and amends that certain Amended and Restated Option Agreement (the "Option Agreement") dated as of July 31, 1995, between CEC and Dowdell. WHEREAS, pursuant to the Option Agreement, CEC granted Dowdell an option (the "Option") to purchase a number of shares of CEC common stock equal to 4.5% of the CEC common stock, $.01 par value, at the time of the exercise of the Option (assuming full exercise of all outstanding warrants, options and convertible securities), adjusted as set forth in the Option Agreement; and WHEREAS, CEC is pursuing an initial public offering of its common stock pursuant to a Registration Statement on Form S-1, Registration No. 333-37601 (the "Offering"), and in contemplation of the Offering, Dowdell and CEC have agreed to amend certain terms and conditions of the Option Agreement. NOW, THEREFORE, pursuant to Section 3.9 of the Option Agreement, CEC and Dowdell agree as follows: 1. Paragraph (r) of Section 1.1 of the Option Agreement is hereby amended by adding the following sentence at the end of such Paragraph: Notwithstanding the foregoing, after the closing (the "IPO Closing") of the initial public offering by CEC of the CEC Common (the "Offering"), "Option Termination Date" shall mean January 31, 2004. 2. Section 2.1 of the Option Agreement is hereby amended by adding the following sentence at the end of such Section: Notwithstanding the foregoing, at any time after the IPO Closing, the Option shall be exercisable with respect to 5117.3 shares of CEC Common, subject to adjustment from time to time as provided in this Article II. 3. Section 2.3 of the Option Agreement is hereby amended by adding the following sentence at the end of such Section: Notwithstanding the foregoing, the Option will become exercisable in full (fully vested) upon the IPO Closing, and at the time of any exercise of the Option, Dowdell shall be entitled to exercise the Option with respect to a number of shares of CEC Common equal to 5,117.3 (subject to adjustment as provided in this Article II) less the number of shares previously purchased pursuant to the Option, whether or not Dowdell is serving as a director of CEC at such exercise time. 4. Section 2.4 of the Option Agreement is hereby amended by adding the following sentence at the end of such Section: Notwithstanding the foregoing, at any time after the IPO Closing, the per share value of CEC Common referred to in this Section 2.4 shall be equal to the closing (last sale) price per share of CEC Common, as reported on the Nasdaq National Market (or, if other than the Nasdaq National Market, the principal market or exchange on which CEC Common is then traded) for the most recent day on which CEC Common is traded prior to the date on which CEC receives written notice of, and payment for, exercise of the Option pursuant to Section 2.2 of this Agreement. 5. The Option Agreement is hereby amended by adding the following Section 2.9: 2.9 Subdivision or Combination of CEC Common. If CEC at any time (whether prior to or after the IPO Closing) subdivides (by any stock split, stock dividend, recapitalization or otherwise), the outstanding shares of CEC Common into a greater number of shares, the number of shares of CEC Common obtainable upon exercise of the Option will be proportionately increased. If CEC at any time (whether prior to or after the IPO Closing) combines (by combination, reverse stock split or otherwise) the outstanding shares of CEC Common into a smaller number of shares, the number of shares of CEC Common obtainable upon exercise of the Option will be proportionately decreased. 6. The Option Agreement is hereby amended by adding the following Section 2.10: 2.10 Reorganization, Reclassification, Consolidation, Merger or Sale. Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of CEC's assets to another person or entity, or other transaction which is effected in such a way that holders of CEC Common are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for CEC Common is referred to herein as "Organic Change." Prior to the consummation of any Organic Change, CEC will make appropriate provision (in form and substance reasonably satisfactory to Dowdell) to insure that Dowdell will thereafter, upon the basis and the terms and in the manner provided in this Agreement, have the right to acquire and receive in lieu of or addition to (as the case may be) the shares of CEC Common immediately theretofore acquirable and receivable upon the exercise of the Option, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for the number of shares of CEC Common immediately theretofore acquirable and receivable upon the exercise of the Option Agreement -2- had such Organic Change not taken place. CEC will not effect any such consolidation, merger or sale, unless prior to the consummation thereof, the successor entity (if other than CEC) resulting from consolidation or merger or the entity purchasing such assets assumes by written instrument (in form and substance reasonably satisfactory to Dowdell) the obligation to deliver to Dowdell such shares of stock, securities or assets as, in accordance with the foregoing provisions, Dowdell may be entitled to acquire. 7. Section 3.1 of the Option Agreement is hereby amended to read in its entirety as follows: 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 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 CEC and to Dowdell at the addresses indicated below: If to CEC: Career Education Corporation 2800 West Higgins Road, Suite 790 Hoffman Estates, Illinois 60195 Attention: President Facsimile: (847) 781-3610 With copies to: Heller Equity Capital Corporation 500 West Monroe Street Chicago, Illinois 60661 Attention: Patrick K. Pesch Facsimile: (312) 441-7236 Heller International Corporation 500 West Monroe Street Chicago, Illinois 60661 Attention: Charles P. Brissman, Esq. Facsimile: (312) 441-7173 -3- Katten Muchin & Zavis 525 West Monroe Street, Suite 1600 Chicago, Illinois 60661-3693 Attention: Lawrence D. Levin, Esq. Facsimile: (312) 902-1061 and Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd. 55 East Monroe Street, Suite 3700 Chicago, Illinois 60603 Attention: William R. Loesch, Esq. Facsimile: (312) 332-2196 If to Dowdell: Robert E. Dowdell 1951 Calle Roja Santa Ana, California 92705 Facsimile: (714) 544-2330 With copies to: Arnold & Porter 777 South Figueroa Street, 44th Floor Los Angeles, California 90017-2513 Attention: Russel Kully, Esq. Facsimile: (213) 243-4199 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. -4- IN WITNESS WHEREOF, CEC and Dowdell have executed this Amendment as of October 20, 1997. CAREER EDUCATION CORPORATION By: /s/ W. A. Klettke /s/ Robert E. Dowdell ------------------------- ------------------------- Name: William A. Klettke Robert E. Dowdell ------------------------- Title: Sr. VP & CFO ------------------------- -5- EX-10.11 15 EMPLOYEE AND NON-COMPETITION AGREEMENT EXHIBIT 10.11 EMPLOYMENT AND NON-COMPETITION AGREEMENT THIS EMPLOYMENT AND NON-COMPETITION AGREEMENT (this "Agreement") is entered into as of this 9th day of October, 1997 by and between JOHN M. LARSON, ("Larson"), and CAREER EDUCATION CORPORATION, a Delaware corporation (the "Company"). RECITALS WHEREAS, Larson has experience and expertise in the acquisition and management of private post-secondary vocational schools, and has served as the Company's President and Chief Executive Officer since its founding; WHEREAS, the Company is engaged in the ownership, management, operation and acquisition of post-secondary vocational schools (collectively, the "Schools"); and WHEREAS, Larson has agreed to act as President and Chief Executive Officer of the Company and not to engage in certain activities competitive with the Company or its subsidiaries or to disclose certain confidential or proprietary information, on the terms and subject to the conditions set forth below. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is hereby agreed that: 1. Employment. The Company hereby employs Larson, and Larson hereby accepts employment with the Company, as President and Chief Executive Officer, with authority over the day to day operations of the Company and its operating subsidiaries. Larson shall devote all of his business time and services to the business and affairs of the Company. Larson shall also perform such other executive-level duties consistent with his position as President and Chief Executive Officer as may be assigned to him from time to time by the Board of Directors of the Company, including, without limitation, serving as chief executive officer and/or director of the Company's operating subsidiaries. The duties and services to be performed by Larson hereunder shall be substantially rendered at the Company's principal offices as determined by the Board of Directors, except for reasonable travel on the Company's business incident to the performance of Larson's duties. 2. Compensation. As compensation for Larson's services provided hereunder, the Company agrees to provide the following compensation: 2.1. Base Salary. During the term of this Agreement, the Company agrees to pay to Larson a base salary at the rate of $250,000 per annum commencing on the date hereof ("Base Salary"). The Base Salary shall be subject to annual review by the Board of Directors and may be increased by the Board of Directors in their sole and absolute discretion. Such salary shall be payable to Larson in such equal periodic payments as the Company generally pays its employees, but in no event less frequently than monthly. In addition to the foregoing, the Company agrees that Larson's base salary under the terms and conditions of his prior employment arrangements with the Company shall be deemed increased to $250,000 per annum effective June 1, 1997, and the Company shall promptly pay to Larson all past due amounts resulting from such increase. 2.2. Cash Bonus. Larson shall be eligible for an annual achievement based cash bonus based upon annual quantitative and qualitative performance targets as established by the Company's Board of Directors ("Cash Bonus"); provided, that there will be no guaranteed minimum Cash Bonus, and that the bonus plan will permit Larson to earn a Cash Bonus based on an increasing scale of targets with a maximum bonus of up to sixty percent (60%) of the Base Salary. Bonuses shall be payable, if at all, after the date of the delivery of the audited financial statements for the applicable fiscal year. The Board of Directors shall establish a bonus plan for the each fiscal year of the Company. 2.3. Fringe Benefits. The Company shall, during the term of Larson's employment under this Agreement: (i) provide Larson with health and hospitalization, dental and disability insurance under the Company's or its subsidiaries group policy on terms comparable to those provided to other executive officers of the Company ("Insurance"); (ii) provide Larson with such pension, profit sharing, paid vacations, non-contributory term life insurance and other fringe benefits as the Company provides to its executive officers in accordance with the usual and ordinary practices of the Company (provided, that notwithstanding and in lieu of Company policy with respect to provision of life insurance to executive officers, during the term of this Agreement the Company shall provide Larson, at the Company's expense, a $5,000,000 term life insurance policy and such policy shall be deemed included in Insurance for the purposes of Section 2.4 below); (iii) pay, upon submission of appropriate vouchers and supporting documentation, all ordinary and necessary expenses of Larson incurred in the performance of his duties, including, without limitation, travel, lodging and entertainment expenses; and (iv) provide such other benefits as are generally made available to executive officers of the Company. The Company and Larson hereby further agree and acknowledge that as of June 30, 1997 the Company issued additional options to Larson to purchase one-quarter percent (0.25%) of the outstanding common stock of the Company pursuant to the Company's Management Stock Option Plan as additional consideration for Larson's continued employment by the Company. 2.4. Severance Benefits. In the event Larson's employment is terminated pursuant to Sections 3.3, 3.4 or 3.6 the Company shall be relieved of any further duties or obligations hereunder, except the Company shall remain obligated to pay or provide to Larson the lesser of (i) the balance of Base Salary and Insurance (or the after tax economic equivalent thereof) payable through the end of the Initial Term (as defined below) and (ii) Base Salary and Insurance (or the after tax economic equivalent thereof) from the date of such termination to the date which is twelve (12) months after such termination, payable in -2- twelve (12) equal monthly installments without interest; in either case, plus a portion of the Cash Bonus, if any, Larson would have received had he been employed through the end of the fiscal year in which he was terminated pro rated based upon the months (or fractions thereof) actually worked by Larson during such fiscal year. In the event this Agreement or Larson's employment are terminated for any other reason, the Company shall be relieved of any further duties or obligations to Larson hereunder, except to pay accrued and unpaid Base Salary and Insurance through such termination date and the Company shall have no obligation for any salary or benefit accruing thereafter. 3. Term; Termination. 3.1. Unless this Agreement is terminated earlier pursuant to the provisions of this Section 3, the Company, its successors and assigns, shall employ Larson, and Larson shall remain employed by the Company, for a period ending on July 31, 2000 (the "Initial Term"); provided, that the Company shall have the option at the end of the Initial Term or subsequent renewal term to continue this Agreement for successive periods of one (1) year by delivery of written notice to Larson to such effect at least ninety (90) days prior to the end of the then current term. 3.2. Termination by the Company for Cause. The Company may terminate Larson's employment under this Agreement at any time for Cause (as hereinafter defined). The termination shall be evidenced by written notice thereof to Larson, which shall specify the cause for termination. For purposes of this Section 3.2, the term "Cause" shall be limited to the following: (i) commission of any act of fraud by Larson with respect to which there is an admission of guilt or an indictment, conviction or civil judgment; (ii) misappropriation of funds or embezzlement by Larson with respect to which there is an admission of guilt or an indictment, conviction or civil judgment; (iii) Larson's indictment or conviction on any felony criminal charges (excluding vehicular crimes unless a prison term of thirty (30) days or more is actually imposed); (iv) willful misconduct or malfeasance in the performance of Larson's duties in any material respect; (v) any willful misrepresentation or willful series of misrepresentations made by Larson to the Company or its Board of Directors in connection with the performance of his duties hereunder which individually or in the aggregate are material; (vi) cessation of the Company due to bankruptcy or insolvency; (vii) any material breach by Larson of any of the provisions of Sections 4 or 5 of this Agreement; or (viii) any other material breach by Larson of this Agreement (including, without limitation, any willful failure to adhere to instructions given by the Board of Directors) which is not cured by Larson within thirty (30) days after his receipt of written notice thereof; provided, that if such failure is curable but is incapable of cure within thirty (30) days after such written notice, Larson shall have ninety (90) days after such notice to cure the failure, so long as Larson commences action to cure such failure within such thirty (30) day period and thereafter diligently and continuously takes action to cure such failure during the remainder of such ninety (90) days. -3- 3.3. Termination by Larson for Good Reason. Larson may terminate his employment for Good Reason (as hereinafter defined) at any time, by written notice to the Company. As used herein, the term "Good Reason" shall mean any of the following: (a) any material breach by the Company of the terms of this Agreement, (b) any material change by the Company in Larson's duties or responsibilities inconsistent with the terms hereof or the assignment to Larson by the Company of duties or responsibilities inconsistent with Larson's position as President and Chief Executive Officer of the Company, (c) a relocation of the principal offices of the Company which requires Larson to relocate his current residence to an area outside of the greater Chicago metropolitan area, or (d) a Change of Control; provided, that clause (d) above shall be effective only from and after the date of the consummation of an initial public offering by the Company, and that Larson's termination right following a Change of Control event may only be exercised during a period commencing thirty (30) days following such Change of Control event and terminating ninety (90) days following such Change of Control event. For purposes of this Agreement, "Change of Control" shall mean: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of twenty percent (20%) or more of either (A) the then-outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (B) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control; (A) any acquisition by an individual, entity or group who immediately prior to such acquisition beneficially owned twenty percent (20%) or more of the Outstanding Common Stock or twenty percent (20%) or more of the Outstanding Company Voting Securities, as the case may be, (B) any acquisition by (1) Heller Equity Capital Corporation or any of its Affiliates (as defined in Section 5.2), or (2) Electra Investment Trust P.L.C., Electra Associates, Inc. or any of their respective Affiliates, (C) any acquisition by the Company, (D) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (E) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii) of this Section 3.3; (ii) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual -4- becoming a director subsequent to the date hereof whose appointment or election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest (as such terms are used in Rule 14a-11 or Regulation 14A under the Exchange Act, including any successor to such Rule) with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of an individual, entity or group other than the Board; (iii) Consummation of a reorganization, merger, consolidation, sale or other disposition of all or substantially all of the assets of the Company, or similar corporate transaction (a "Business Combination"), in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than fifty percent (50%) of, respectively, the then-outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no individual, entity or group (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, twenty percent (20%) or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination, or the combined voting power of the then outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the -5- time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. 3.4. Termination by the Company Without Cause. Immediately upon delivery of written notice to Larson, the Company shall be entitled to terminate Larson's employment without Cause, as defined in Section 3.2 hereof, in which event Larson shall be entitled to severance benefits under Section 2.4 hereof. 3.5. Termination by Larson Without Good Reason. Upon sixty (60) days prior written notice to the Company, Larson shall be entitled to terminate his employment without Good Reason, as defined in Section 3.3 hereof. 3.6. Death or Disability. The employment of Larson may be terminated by the Company upon Larson's death or Disability (as defined herein). For purposes hereof, "Disability" shall mean the substantial inability of Larson, by reason of physical or mental illness or accident, to perform his regular responsibilities hereunder for a period of sixty (60) consecutive days or ninety (90) days in any three hundred sixty (360) day period. The determination that a Disability exists shall be made by a physician reasonably selected by the Board of Directors of the Company whose determination shall be binding on the parties hereto. 4. Inventions and Creations. Larson agrees that all inventions, discoveries, improvements, ideas and other contributions (herein called collectively "Inventions") whether or not copyrighted or copyrightable, patented or patentable, or otherwise protectable in law, which are conceived, made, developed or acquired by Larson, either individually or jointly, during his employment with the Company or any of its subsidiaries, and which relate in any manner to the business of the Company or any of its subsidiaries, shall belong to the Company and Larson does hereby assign and transfer to the Company his entire right, title and interest in the Inventions. Larson agrees to promptly and fully disclose the Inventions to the Company, in writing if requested by the Company, and to execute and deliver any and all lawful application, assignment and other documents which the Company requests for protecting the Inventions in the United States or any other country. The Company shall have the full and sole power to prosecute such applications and to take all other action concerning the Inventions, and Larson will cooperate fully within a lawful manner, at the expense of the Company, in the preparation and prosecution of all such applications and in any legal actions and proceedings concerning the Inventions. The provisions of this Section 4 shall survive the termination of this Agreement. 5. Non-Competition; Non-Solicitation; Confidential Information. 5.1. Non-Competition Agreement. Larson agrees that during the Non- Competition Period (as defined below), he shall not own or engage in, either directly or -6- indirectly, as an officer, manager, employee, independent contractor, consultant, director, partner, sole proprietor or stockholder, any business operating any post-secondary, private trade or vocational schools, that offers classes, courses or instruction in or is otherwise engaged in any curriculum or field of study offered by any of the Schools or any other curriculum or field of study which the Company has expressed an interest in offering whether through the Schools or through a potential acquisition (the "Competitive Activities"). Larson hereby acknowledges that the Company intends to promote the Schools on an international basis 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 and any other country where the Company and its subsidiaries are promoting the Schools at the time of Larson's termination of employment or resignation or removal of Larson as a director, as applicable. Nothing herein shall prevent Larson from owning less than 2% of the capital stock of a company whose stock is publicly traded and which is engaged in Competitive Activities. For purposes hereof, "Non-Competition period" shall mean the period commencing on the date hereof and ending two (2) years after the later of the termination of Larson's employment hereunder (including the expiration of the term of this Agreement) or the resignation or removal of Larson as a director of the Company; provided, (a) that if Larson's employment is terminated pursuant to Sections 3.3 or 3.4 the Non-Competition Period shall expire on the later of the resignation or removal of Larson as a director the Company or six (6) months after the termination of his employment; provided, that the Company may, at its sole option which option must be exercised by the later of sixty (60) days after termination of Larson's employment pursuant to Sections 3.3 or 3.4 or sixty (60) days after the Company receives notice of Larson's resignation or termination as a director, extend such six (6) month period by up to an additional eighteen (18) months as specified in the notice exercising such option if it notifies Larson in writing of such extension and the Company pays Larson his Base Salary in equal monthly installments (plus, beginning on the twelfth (12th) month of the extended portion of the Non- Competition Period, if any, one twelfth of an amount equal to seventy-five percent (75%) of the Cash Bonus paid to Larson with respect to his last full year of employment hereunder (the "Bonus Payment")) during the period of such extension and, to the extent comparable benefits are not available to Larson from another employer, insurance (or the after tax economic equivalent thereof); or (b) that if Larson's employment is terminated upon expiration of the term of this Agreement and the Company refuses to renew this Agreement or Larson refuses the renewal of this Agreement for Good Reason, the Non-Competition Period shall expire on the later of the resignation or removal of Larson as a director of the Company or the termination of his employment provided, that the Company may, at its sole option, which option must be exercised by the later of sixty (60) days after the termination of Larson's employment hereunder or sixty (60) days after the Company receives notice of Larson's resignation or termination as a director, extend the Non-Competition Period up to twenty-four (24) months as specified in the notice to Larson exercising such option if the Company pays Larson his Base Salary in equal monthly installments (plus the Bonus Payment) during the period of such extension and, to the extent comparable benefits are not -7- available to Larson from another employer, Insurance (or the after tax economic equivalent thereof). 5.2. Non-Solicitation Agreement. During the term of this Agreement and for two (2) years thereafter, Larson shall not, directly or indirectly, individually or on behalf of any Person (as defined below) solicit, aid or induce (a) any then current employee of the Company or its Affiliates (as defined below) to leave the Company or its Affiliates in order to accept employment with or render services for Larson or such Person or (b) any student, customer, client, vendor, lender, supplier or sales representative of the Company or its Affiliates or similar persons engaged in business with the Company or its Affiliates to discontinue the relationship or reduce the amount of business done with the Company or its Affiliates. "Person" means any individual, a partnership, a corporation, an association, a limited liability company, a joint stock company, a trust, a joint venture, an unincorporated organization, a governmental entity, or any department, agency or political subdivision thereof, or an accrediting body. "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. 5.3. Confidential Information. Larson acknowledges and agrees that he is in possession of and will be exposed to during the course of, and incident to, his employment by and affiliations with the Company, Confidential Information (as defined herein) relating to the Company, its Affiliates and each School. For purposes hereof, "Confidential Information" shall mean all proprietary or confidential information concerning the business, finances, financial statements, curricula, properties and operations of the Company, its Affiliates and each School, including, without limitation, all student and prospective student and 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, its Affiliates and each School (including, without limitation, personnel files and student records). During the Non-Competition Period and at all times thereafter, Larson 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 himself or any third party except (a) as required in the performance of his duties as an employee, director or stockholder of the Company, (b) as required by the order of any court or similar tribunal or any other governmental body or agency of appropriate jurisdiction; provided, that Larson shall, to the extent practicable, give the Company prior written notice of any such disclosure and shall cooperate with the Company in obtaining a protective order or such similar protection as the Company 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 action by Larson, becomes generally available to the public. Upon termination of any employment or consulting relationship between the Company and Larson (including any Affiliate of Larson), Larson shall promptly return to the Company all physical embodiments -8- of the Confidential Information (regardless of form or medium) in the possession of or under the control of Larson. 5.4. Scope of Restriction. The parties have attempted to limit the scope of the covenants set forth in Section 5 to the extent necessary to provide the Company with the benefit of its purchase of each School. 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. 5.5. Remedies. The parties hereto recognize that the Company will suffer irreparable injury in the event of a breach of the terms of Section 5 by Larson. In the event of a breach of the terms of Section 5, the Company 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 Section 5 by Larson or any Persons acting for or in concert with him. Such remedy, however, shall be cumulative and nonexclusive and shall be in addition to any other remedy which the parties may have. 5.6. Common Law of Torts or Trade Secrets. The parties agree that nothing in this Agreement shall be construed to limit or negate the common law of torts or trade secrets where it provides the Company with broader protection than that provided herein. 5.7. Survival of Section 5. The provisions of Section 5 shall survive the termination of Larson's employment and the termination of this Agreement. 6. General Provisions. 6.1. 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 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 the Company: Career Education Corporation 2800 West Higgins Road Suite 790 Hoffman Estates, Illinois 60195 Attention: Senior Vice President Facsimile: (847) 781-3600 -9- With copies to: Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd. 55 East Monroe Street Suite 3700 Chicago, Illinois 60603 Attention: William R. Loesch, Esq. Facsimile: (312) 332-2196 and Katten, Muchin & Zavis 525 West Monroe Street Suite 1600 Chicago, Illinois 60661 Attention: Lawrence D. Levin, Esq. Facsimile: (312) 902-1061 If to Larson: John M. Larson 36 Lakeside Drive South Barrington, Illinois 60010 With copies to: Arnold & Porter 777 South Figueroa, Suite 4400 Los Angeles, California 90017 Attention: Russel Kully, Esq. Facsimile: (213) 243-4199 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. 6.2. 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 understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. 6.3. Successors and Assigns. All covenants and agreements contained in this Agreement by or on behalf of either party hereto shall bind such party and its heirs, legal representatives, successors and assigns and inure to the benefit of the other party hereto and their heirs, legal representatives, successors and assigns. 6.4. Governing Law. 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 the provisions thereof regarding conflict of laws. -10- 6.5. 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 COMPANY'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 THE COMPANY WHO IRREVOCABLY AGREE IN WRITING TO SO SERVE AS AGENT TO RECEIVE ON LARSON'S BEHALF SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDINGS IN ANY SUCH COURT, SUCH SERVICE BEING HEREBY ACKNOWLEDGED BY LARSON 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 OR HIM 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 COMPANY TO BRING PROCEEDINGS AGAINST LARSON IN ANY OTHER COURT HAVING JURISDICTION OVER LARSON. 6.6. 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 -11- 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 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. 6.7. Representations of Larson. Larson hereby represents and warrants to the Company that his execution, delivery and performance of this Agreement will not violate or result in any breach of any agreement, contract, understanding or written policy to which Larson is subject as a result of any prior employment, any investment or otherwise. Larson is not subject to any agreement, contract or understanding which in any way restricts or limits his ability to accept employment with the Company or perform services with respect to Schools of any type. 6.8. Descriptive Headings; Interpretation. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 6.9. 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. 6.10. 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 Company's failure 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 the Company to enforce each and every provision hereof in accordance with its terms. 6.11. Non-Assignment. This Agreement shall not be assigned by Larson without the prior written consent of the Company. -12- 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 /CEO /s/ John M. Larson -------------------- John M. Larson -13- EX-10.12 16 FORM OF INDEMNIFICATION AGREEMENT EXHIBIT 10.12 FORM OF ------- INDEMNIFICATION AGREEMENT ------------------------- THIS INDEMNIFICATION AGREEMENT (the "Agreement") is entered into as of this ___ day of _______________, 1997, by and between CAREER EDUCATION CORPORATION, a Delaware corporation (the "Corporation"), and _________________ ("Indemnitee"). RECITALS -------- A. The Corporation is aware that because of the increased exposure to litigation costs and risks resulting from service to corporations, talented and experienced persons are increasingly reluctant to serve or continue serving as directors or executive officers of corporations unless they are protected by comprehensive liability insurance and indemnification; B. Plaintiffs often seek damages in such large amounts, and the costs of litigation may be so great (whether or not the case is meritorious), that the defense and/or settlement of such litigation is usually beyond the personal resources of directors and executive officers; C. Based upon their experience as business managers, the Board of Directors of the Corporation (the "Board") has concluded that, to retain and attract talented and experienced individuals to serve as directors and executive officers of the Corporation, it is appropriate for the Corporation to contractually indemnify its directors and certain of its executive officers, and to assume for itself liability for expenses and damages in connection with claims against such directors and executive officers in connection with their service to the Corporation; and D. The Corporation believes that it is fair and proper to protect its directors and certain executive officers of the Corporation from the risk of judgments, settlements and other expenses which may occur as a result of their service to the Corporation. NOW, THEREFORE, the parties, intending to be legally bound, for good and valuable consideration, hereby agree as follows: 1. Definitions. ----------- (a) Agent. "Agent" means a director or executive officer of the Corporation or a director or executive officer of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise serving at the request, for the convenience, or to represent the interests of the Corporation. (b) Corporation. "Corporation" means Career Education Corporation, a Delaware corporation, its successors or assigns, or any Subsidiary of the Corporation. "Subsidiary" means, and "Subsidiaries" include, (i) any company of which more than fifty percent (50%) of the outstanding voting securities are owned directly or indirectly by the Corporation, or which is otherwise controlled by the Corporation, and (ii) any partnership, joint venture, trust or other entity of which more than fifty percent (50%) of the equity interest is owned directly or indirectly by the Corporation, or which is otherwise controlled by the Corporation. (c) Liabilities. "Liabilities" means losses, claims, damages, liabilities, obligations, penalties, judgments, fines, settlement payments, awards, costs, expenses and disbursements (and any and all costs, expenses or disbursements in giving testimony or furnishing documents in response to a subpoena or otherwise), including, without limitation, all reasonable attorneys' fees, costs, expenses and disbursements, as and when incurred. (d) Proceeding. "Proceeding" means any threatened, pending, or completed action, suit or other proceeding, whether civil, criminal, administrative, investigative or any other type whatsoever. (e) Control. "Control" means, with respect to any person or entity, the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such person or entity, whether through the ownership of voting securities, by contract or otherwise. 2. Maintenance of Liability Insurance. ---------------------------------- The Corporation hereby covenants and agrees to and with Indemnitee that, so long as Indemnitee shall continue to serve as an Agent and thereafter so long as Indemnitee shall be subject to any claim or Proceeding by reason of the fact that Indemnitee was an Agent or in connection with Indemnitee's acts as such an Agent, the Corporation, subject to Section 2(b), shall obtain and maintain in full force and effect directors' and officers' liability insurance ("D&O Insurance") in reasonable amounts from established and reputable insurers. In all policies of D&O Insurance, Indemnitee shall be named as an insured. 3. Indemnification of Agent. ------------------------ (a) Third Party Actions. If Indemnitee is a person who was or is a party or is threatened to be made a party to any Proceeding (other than an action by or in the right of the Corporation) by reason of the fact that Indemnitee is or was an Agent of the Corporation, or by reason of anything done or not done by Indemnitee in any such capacity or otherwise at the request of the Corporation or of its officers, directors or stockholders, the Corporation shall indemnify, defend and hold harmless Indemnitee against any and all Liabilities actually and reasonably incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of such Proceeding, so long as Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or Proceeding, if Indemnitee had no reasonable cause to believe his conduct was unlawful. -2- (b) Derivative Actions. If Indemnitee is a person who was or is a party, or is threatened to be made a party, to any Proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that Indemnitee is or was an Agent of the Corporation, or by reason of anything done or not done by Indemnitee in any such capacity or otherwise at the request of the Corporation or of its officers, directors or stockholders, the Corporation shall indemnify, defend and hold harmless Indemnitee against all Liabilities actually and reasonably incurred by such person in connection with the investigation, defense, settlement or appeal of such Proceeding, if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Corporation; provided, however, that no indemnification under this Section 3(b) shall be made in respect of any claim, issue or matter for which such person is adjudged to be liable for gross negligence or willful misconduct in the performance of Indemnitee's duties to the Corporation, unless, and only to the extent that, the court in which such Proceeding was brought shall determine upon application that, despite the adjudication of liability, but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such Liabilities as the court shall deem proper. (c) Actions Where Indemnitee Is Deceased. If Indemnitee is a person who was or is a party or is threatened to be made a party to any Proceeding by reason of the fact that he is or was an Agent of the Corporation, or by reason of anything done or not done by Indemnitee in any such capacity, and prior to, during the pendency of, or after completion of, such Proceeding, Indemnitee shall die, then the Corporation shall indemnify, defend and hold harmless the estate, heirs and legatees of Indemnitee against any and all Liabilities incurred by such estate, heirs or legatees in connection with the investigation, defense, settlement or appeal of such Proceeding on the same basis as provided for Indemnitee in Sections 3(a) and 3(b) above. (d) Reduction of Liabilities. The Liabilities covered hereby shall be net of any payments to or on behalf of Indemnitee by D&O Insurance carriers or others with respect to the subject Proceeding. 4. Indemnification as Witness. Notwithstanding any other provision of this Agreement, to the extent Indemnitee is, by reason of the fact that Indemnitee is or was an Agent of the Corporation, involved in any investigative Proceeding, including, but not limited to, testifying as a witness or furnishing documents in response to a subpoena or otherwise, Indemnitee shall be indemnified against any and all Liabilities actually and reasonably incurred by or for Indemnitee in connection therewith. 5. Advancement of Liabilities. Subject to the provisions of Section 6(c), until a determination that Indemnitee is not entitled to be indemnified by the Corporation under the terms hereof, and unless the provisions of Section 9 apply, the Corporation shall reimburse Indemnitee for Liabilities previously paid by Indemnitee and may advance Liabilities which the Corporation reasonably determines will be due and payable by Indemnitee within a reasonable time after a request for advancement is made by Indemnitee. The execution and delivery of this Agreement by the Corporation evidences the specific approval by the Board of the reimbursement and advancement of Liabilities -3- as provided for in this Section 5. As a condition to such reimbursement and/or advancement, Indemnitee shall, at the request of the Corporation, undertake in a manner satisfactory to the Corporation to repay such amounts reimbursed and/or advanced, without interest, if it shall ultimately be determined pursuant to Section 7 or 9 below that Indemnitee is not entitled to be indemnified by the Corporation under the terms of this Agreement. Subject to the foregoing, the reimbursement and/or advances to be made hereunder shall be paid by the Corporation to Indemnitee within twenty (20) business days following delivery of a written request by Indemnitee to the Corporation, which request shall be accompanied by vouchers, invoices and similar evidence documenting the amounts incurred or to be incurred by Indemnitee. 6. Indemnification Procedures. -------------------------- (a) Notice by Indemnitee. Promptly after receipt by Indemnitee of notice of the commencement or threat of commencement of any Proceeding, Indemnitee shall, if Indemnitee believes that indemnification with respect thereto may be sought from the Corporation under this Agreement, notify the Corporation of the commencement or threat of commencement thereof, provided that any failure to so notify the Corporation shall not relieve the Corporation of its obligations hereunder, except to the extent that such failure or delay increases the liability of the Corporation hereunder. (b) D & O Insurance. If, at the time of receipt of a notice pursuant to Section 6(a) above, the Corporation has D&O Insurance in effect, the Corporation shall give prompt notice of the Proceeding or claim to its insurers in accordance with the procedures set forth in the applicable policies. The Corporation shall thereafter take all necessary or desirable action to cause such insurers to pay all amounts payable as a result of such Proceeding in accordance with the terms of such policies, and Indemnitee shall not take any action (by waiver, settlement or otherwise) which would adversely affect the ability of the Corporation to obtain payment from its insurers. (c) Assumption of Defense. In the event the Corporation shall be obligated under this Agreement to pay the Liabilities of Indemnitee, the Corporation shall be entitled to assume the defense (with counsel reasonably acceptable to Indemnitee, approval thereof not to be unreasonably withheld) of the Proceeding to which the Liabilities relate. The Corporation agrees to promptly notify Indemnitee upon its election to assume such defense. Once the Corporation (i) provides Indemnitee with notice of its election to assume such defense and (ii) obtains approval from Indemnitee of the counsel retained, the Corporation will not be liable to Indemnitee under this Agreement for any attorney's fees or other Liabilities subsequently incurred by Indemnitee with respect to such Proceeding, unless (x) the Liabilities incurred by Indemnitee were previously authorized by the Corporation or (y) counsel for Indemnitee shall have provided the Corporation with an opinion of counsel stating that there is a likelihood that a conflict of interest exists between the Corporation and Indemnitee in the conduct of any such defense. -4- 7. Determination of Right to Indemnification. ----------------------------------------- (a) Successful Proceeding. To the extent Indemnitee has been successful, on the merits or otherwise, in the defense of any Proceeding referred to in Sections 3(a) or 3(b) above, the Corporation shall indemnify Indemnitee against all Liabilities incurred by him in connection therewith. If Indemnitee is not wholly successful in such Proceeding, but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, then the Corporation shall indemnify Indemnitee against all Liabilities actually or reasonably incurred by or for him in connection with each successfully resolved claim, issue or matter. For purposes of this Section 7(a), and without limitation, the termination of any Proceeding, or any claim, issue or matter in such a Proceeding, by dismissal, with or without prejudice, shall be deemed to be a successful result as to such Proceeding, claim, issue or matter, so long as there has been no finding (either adjudicated or pursuant to Section 7(c) below) that Indemnitee (i) did not act in good faith, (ii) did not act in a manner reasonably believed to be in, or not opposed to, the best interests of the Corporation, or (iii) with respect to any criminal proceeding, had reasonable grounds to believe his conduct was unlawful. (b) Other Proceedings. In the event that Section 7(a) above is inapplicable, the Corporation shall nevertheless indemnify Indemnitee, unless and only to the extent that the forum listed in Section 7(c) below determines that Indemnitee has not met the applicable standard of conduct set forth in Sections 3(a) or 3(b) above required to entitle Indemnitee to such indemnification. (c) Forum in Event of Dispute. The determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct set forth in Sections 3(a) or 3(b) shall be made (i) by the Board, by a majority vote of the directors who are not parties to such Proceeding, even though less than a quorum or (ii) by a committee of such disinterested directors designated by a majority of such disinterested directors, even though less than a quorum, or (iii) if there are no such disinterested directors, or if such disinterested directors shall so direct, by independent legal counsel in a written opinion, or (iv) by the stockholders of the Corporation. The choice of which forum shall make the determination shall be made by the Board. The forum shall act in the utmost good faith to assure Indemnitee a complete opportunity to present to the forum Indemnitee's case that Indemnitee has met the applicable standard of conduct. (d) Appeal to Court. Notwithstanding a determination by any forum listed in Section 7(c) above that Indemnitee is not entitled to indemnification with respect to a specific Proceeding, Indemnitee shall have the right to apply to the court in which that Proceeding is or was pending or any other court of competent jurisdiction for the purpose of enforcing Indemnitee's right to indemnification pursuant to this Agreement. (e) Indemnity for Liabilities in Enforcement of Agreement. Notwithstanding any other provision in this Agreement to the contrary, the Corporation shall indemnify Indemnitee against all Liabilities incurred by Indemnitee in connection with any other Proceeding between the Corporation and Indemnitee involving the -5- interpretation or enforcement of the rights of Indemnitee under this Agreement, unless a court of competent jurisdiction finds that the material claims and/or defenses of Indemnitee in any such Proceeding were frivolous or made in bad faith. 8. Contribution. If and to the extent that a final adjudication shall specify that the Corporation is not obligated to indemnify Indemnitee under this Agreement for any reason (including but not limited to the exclusion set forth in Section 9 hereof), then in respect of any Proceeding in which the Corporation is jointly liable with Indemnitee (or would be so liable if joined in such action, suit or proceeding), the Corporation shall contribute to the amount of Liabilities reasonably incurred and paid or payable by Indemnitee in connection with such Proceeding in such proportion as is appropriate to reflect (i) the relative benefits received by the Corporation, on the one hand, and Indemnitee, on the other hand, from the transaction with respect to which such Proceeding arose, and (ii) the relative fault of the Corporation, on the one hand, and Indemnitee, on the other hand in connection with the circumstances which resulted in such Liabilities, as well as any other relevant equitable considerations. The relative fault of the Corporation, on the one hand, and Indemnitee, on the other hand, shall be determined by reference to, among other things, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent the circumstances resulting in such Liabilities. The Corporation agrees that it would not be just and equitable if contribution pursuant to this Section 8 were determined by pro rata allocation or any other method of allocation which does not take account of the foregoing equitable considerations. 9. Exceptions. (a) Claims Initiated by Indemnitee. Notwithstanding any other provision herein to the contrary, the Corporation shall not be obligated pursuant to the terms of this Agreement to indemnify or advance Liabilities to Indemnitee with respect to Proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to Proceedings brought to establish or enforce a right to indemnification under this Agreement, but such indemnification or advancement of expenses may be provided by the Corporation in specific cases if the Board finds it to be appropriate. (b) Unauthorized Settlements. Notwithstanding any other provision herein to the contrary, the Corporation shall not be obligated pursuant to the terms of this Agreement to indemnify Indemnitee under this Agreement for any amount paid in settlement of a Proceeding without the prior written consent of the Corporation to such settlement. (c) No Duplicative Payment. The Corporation shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise. -6- 10. Certificate of Incorporation and By-laws. The Corporation agrees that the Certificate of Incorporation and By-laws of the Corporation in effect on the date hereof shall not be amended to reduce, limit, hinder or delay (a) the rights of Indemnitee granted hereby, or (b) the ability of the Corporation to indemnify Indemnitee as required hereby. The Corporation further agrees that it shall exercise the powers granted to it under its Certificate of Incorporation and By-laws and by applicable law to indemnify any Indemnitee to the fullest extent possible as required hereby. 11. Non-exclusivity. The provisions for indemnification and advancement of Liabilities set forth in this Agreement shall not be deemed exclusive of any other rights which Indemnitee may have under any provision of law, the Corporation's Certificate of Incorporation or By-laws, the vote of the Corporation's stockholders or disinterested directors, other agreements or otherwise. 12. Interpretation of Agreement. It is understood that the parties hereto intend this Agreement to be interpreted and enforced so as to provide indemnification to Indemnitee to the fullest extent now or hereafter permitted by law. 13. Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever, (a) the validity, legality and enforceability of the remaining provisions of the Agreement (including, without limitation, all portions of any paragraphs of this Agreement containing any such provision held to be invalid, illegal or unenforceable) shall not in any way be effected or impaired thereby, and (b) to the fullest extent possible, the provisions of this Agreement (including, without limitation, all portions of any paragraph of this Agreement containing any such provision held to be invalid, illegal, or unenforceable that are not themselves invalid, illegal, or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable and to give effect to Section 12 hereof. 14. Modification and Waiver. No supplement, modification or amendment to this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed, or shall constitute, a waiver of any other provisions hereof (whether or not similar), nor shall such waiver constitute a continuing waiver. 15. Subrogation. In the event that the Corporation makes any payment under this Agreement, the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers and do all things that may be necessary to secure such rights, including but not limited to the execution of such documents as shall be necessary to enable the Company effectively to bring suit to enforce such rights. 16. Survival, Successors, and Assigns. Indemnitee's rights under this Agreement shall continue after Indemnitee has ceased acting as an Agent of the Corporation. The terms of this Agreement shall be binding on and inure to the benefit of the Corporation -7- and its successors and assigns and shall be binding on and inure to the benefit of Indemnitee and Indemnitee's heirs, executors and administrators. 17. Notices. All notices, demands, consents, requests, approvals and other communications between the parties pursuant to this Agreement must be in writing and will be deemed given when delivered in person, one (1) business day after being dispatched by a nationally recognized overnight courier service, three (3) business days after being deposited in the U.S. Mail, registered or certified mail, return receipt requested, or one (1) business after being sent by facsimile (with receipt acknowledged), to the Corporation at the address of its principal office in Hoffman Estates, Illinois and to Indemnitee at Indemnitee's address as shown on the Corporation's records. Indemnitee may change Indemnitee's address for notice purposes by delivering notice to the Corporation in accordance with this Section 17. All notices sent to the Corporation shall also be delivered to Katten Muchin & Zavis, 525 West Monroe Street, Suite 1600, Chicago, Illinois 60661-3693, Attention: Mark D. Wood, Esq., Facsimile No. (312-902-1061). 18. Governing Law. This Agreement shall be governed exclusively by and construed according to the laws of the State of Illinois, without regard to its principles of conflicts of laws. 19. Counterparts. This agreement may be executed in counterparts, each of which when so executed and delivered shall be deemed an original, and such counterparts together shall constitute one instrument. -8- The parties hereto have entered into this Indemnification Agreement effective as of the date first above written. CAREER EDUCATION CORPORATION By: ----------------------------------- Name: ------------------------------ Its: ------------------------------ INDEMNITEE: --------------------------------------- (Sign Name) --------------------------------------- (Print Name) --------------------------------------- --------------------------------------- (Print Address) -9- EX-10.24 17 AGREEMENT BETWEEN CAREER EDUCATION AND HELLER Exhibit 10.24 Heller Equity Capital Corporation 500 West Monroe Street Chicago, Illinois 60661 312-441-7200 - -------------------------------------------------------------------------------- Heller Equity Capital Corporation December_________, 1997 Career Education Corporation 2800 West Higgins Road Hoffman Estates, Illinois 60195 Attention: John M. Larson, Chairman and Chief Executive Officer Ladies and Gentlemen: The purpose of this letter is to set forth the agreement of Career Education Corporation (the "Company") and Heller Equity Capital Corporation ("Heller") regarding representation of Heller on the Company's Board of Directors (the "Board") following an initial public offering by the Company of its common stock, $0.01 par value per share, pursuant to a registration statement on Form S-1, Registration No. 333 - 38545 filed with the U.S. Securities Exchange Commission (the "IPO"), and certain related matters. 1. Heller Directors. Subject to approval by the Company's stockholders, in connection with the IPO, the Company agrees that Article V of the Company's Amended and Restated Certificate of Incorporation (the "Certificate") as filed with the secretary of the State of Delaware prior to the consummation of the IPO shall designate a person nominated by Heller for one (1) Class I director's position (the "Heller I Director") and an additional person nominated by Heller for one (1) Class III director's position (the "Heller III Director") on the Company's initial post-IPO board of directors. (Collectively, the Heller I Director and the Heller III Director are sometimes referred to herein as the "Heller Directors.") Heller hereby designates Patrick K. Pesch as the initial Heller I Director and Thomas B. Lally as the initial Heller III Director. Subject to Sections 3 and 5 below, for each annual meeting at which the term of any Heller Director expires, the Company shall (a) cause such Heller Director (or any replacement therefor designated in writing by Heller prior to the last day for nomination by stockholders of directors for consideration at such meeting, as set forth in the Company's By-laws) to be nominated for the term applicable to the Class of the Heller Director proposed for re-election at such meeting, (b) solicit proxies ("Management Proxies") from the Company's stockholders to vote in favor of the election of such Heller Director, (c) cause the shares represented by Management Proxies which are duly executed and returned to the Company to appear for purposes of a quorum at such annual meeting and (d) vote the shares represented by such Management Proxies which are duly executed and returned to the Company in favor of such Heller Director. Notwithstanding the foregoing, the Company shall not be required to vote any Management Proxy in favor of a Heller Director where (i) the stockholder granting such Management Proxy appears at such meeting to vote or otherwise revokes such Management Proxy or (ii) where the stockholder granting such Management Proxy withholds authority to vote for the election of the Heller Director. Whenever a person then designated as a Heller Director shall cease to serve as a director of the Company for any reason prior to the expiration of the term for which such Heller Director was elected, the Company shall cause the resulting vacancy (and the resulting vacancies in committees of the Board of Directors) to be filled by another person designated by Heller for the remainder of the term of the Heller Director who ceased to serve as a director. 2. Committees. At all times during the tenure of one or more Heller Directors on the Board of Directors of the Company, the Company shall cause a Heller Director to be appointed to each of the audit and compensation committees, and the nominating committee (if established as Board), of the Board of Directors (and any successor committees). Notwithstanding the foregoing, if a Heller Director appointed to the compensation committee of the Board of Directors fails at any time to qualify as an "outside director," as defined in the regulations promulgated by the Internal Revenue Service under Section 162 (m) ("Section 162(m)") of the Internal Revenue Code of 1986, as amended, then, to the extent stock option and other compensation awards to any of the Company's executive officers are intended to qualify as "performance-based" compensation under Section 162 (m), such Heller Director will excuse himself from any determinations with respect to such awards and will not be considered part of the compensation committee for purposes thereof. 3. Reduction in Number of Heller Directors. Notwithstanding any provision of Sections 1 or 2 to the contrary, in the event that Heller and its Approved Transferees (as defined in paragraph 6 below), if any, cease to own, collectively, securities representing (or converting into other securities representing) at least 25% of the aggregate voting power of the Company's outstanding capital stock, the rights of Heller pursuant to Sections 1 and 2 shall terminate with respect to the Heller Director whose then current term is the later to expire following the date on which Heller's ownership falls below such 25% threshold; provided, that such Heller Director shall serve out the balance of his or her then current term on the Board of Directors in accordance with the Certificate and the Company's By-Laws. Following any such termination, Heller's rights hereunder with respect to the remaining Heller Director shall remain in full force and effect, subject only to termination in accordance with Section 5 below. 4. Heller Representative. So long as this Agreement remains in effect, Heller shall also have the right to have one other person (as such person may be designated or redesignated from time to time, the "Heller Representative") present (whether in person or by telephone) at all meetings of the Company's Board of Directors and at all meetings of committees thereof which are attended by a Heller Director. The Heller Representative shall not be entitled to vote at any such meetings. The Company shall send to the Heller Representative all of the notices, information and other materials that are distributed to -2- directors of the Company at the same time, and in the same manner, as the same are distributed to the directors of the Company. The Heller Representative will be subject to the Company's insider trading and similar policies and will execute reasonable confidentiality and other agreements intended to protect the interests of the Company and the Board of Directors. 5. Termination. Upon Heller and its Approved Transferees, if any, ceasing to own, collectively, securities representing (or convertible into other securities representing) at least 10% of the aggregate voting power of the Company's outstanding capital stock, this Agreement will terminate, and Heller and its Approved Transferees, if any, will have no continuing rights hereunder. 6. General. The agreement set forth in this letter will be governed and enforced in accordance with the laws of the State of Delaware, without giving effect to that State's principles of conflicts of laws. The rights granted to Heller hereunder may not be assigned, transferred or sold in connection with the sale of voting securities of the Company, other than to Heller Financial, Inc., a Delaware corporation ("HFI"), or to a wholly-owned subsidiary of Heller or HFI (collectively, the "Approved Transferees"), but shall be solely for the benefit of Heller (or any Approved Transferee in the event of a transfer thereto) so long as Heller and its Approved Transferees hold, collectively, not less than the requisite amount of such securities described in Section 5 above. 7. This letter agreement may be executed in any number of counterparts, each of which shall constitute an original and all of which together shall constitute one and the same agreement. [Signature page follows] -3- The Company's execution of this letter will confirm its acceptance of this letter as the agreement between the Company and Heller regarding the matters set forth herein. Very truly yours, HELLER EQUITY CAPITAL CORPORATION By:_________________________ Name:_______________________ Title:______________________ Accepted and agreed to as of the date of this letter. CAREER EDUCATION CORPORATION By:_________________________ Name:_______________________ Title:______________________ -4- EX-11 18 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 Career Education Corporation and Subsidiaries EXHIBIT 11 Statement Regarding Computation of Earnings Per Share (amounts in thousands, except per share data)
For The Nine Months Ended For The Year ------------------------------ Ended December 31, September 30, September 30, 1996 1996 1997 ------------------ ------------- ------------- Income Attributable to common stockholders, as reported $ 137 $(995) $(1,392) Dividends on preferred stock 1,128 841 1,444 Accretion to redemption value of preferred stocks and warrants 230 175 727 ------ ----- ------- Pro forma income (loss) before extraordinary item attributable to common stockholders 1,495 21 (1,392) Extraordinary item -- -- (418) ------ ----- ------- Pro forma net income (loss) attributable to common stockholders $1,495 $ 21 $(1,810) ====== ===== ======= Primary Earnings Per Share: Common stock outstanding 612 612 612 Preferred stock conversion 1,027 1,027 1,837 Common stock equivalents 530 530 315 ------ ----- ------- Total weighted average shares outstanding 2,169 2,169 2,764 ====== ===== ======= Pro forma income (loss) before extraordinary item attributable to common stockholders $ 0.69 $0.01 $ (0.50) ====== ===== ======= Pro forma net income (loss) attributable to common stockholders $ 0.69 $0.01 $ (0.65) ====== ===== ======= Fully Diluted Earnings Per Share: Common stock outstanding 612 612 612 Preferred stock conversion 1,027 1,027 1,837 Common stock equivalents 530 530 315 ------ ----- ------- Total weighted average shares outstanding 2,169 2,169 2,764 ====== ===== ======= Pro forma income (loss) before extraordinary item attributable to common stockholders $ 0.69 $0.01 $ (0.50) ====== ===== ======= Pro forma net income (loss) attributable to common stockholders $ 0.69 $0.01 $ (0.65) ====== ===== =======
EX-23.1 19 CONSENT OF ARTHUR ANDERSEN LLP -- CAREER EDUCATION EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use in this registration statement of our report dated November 19, 1997, on the financial statements of CAREER EDUCATION CORPORATION and SUBSIDIARIES included herein and to all references to our Firm included in this registration statement. Arthur Andersen LLP Chicago, Illinois December 31, 1997 EX-23.4 20 CONSENT OF ARTHUR ANDERSEN LLP -- WESTERN CULINARY Exhibit 23.4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use in this registration statement of our report dated October 24, 1997, on the financial statements of WESTERN CULINARY INSTITUTE (a division of Phillips Educational Group of Portland, Inc., a wholly owned subsidiary of Phillips Colleges, Inc.) included herein and to all references to our Firm included in this registration statement. Arthur Andersen LLP Chicago, Illinois December 31, 1997 EX-23.5 21 CONSENT OF ARTHUR ANDERSEN LLP - IAMD Exhibit 23.5 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use in this registration statement of our report dated September 16, 1997, on the financial statements of IAMD, LIMITED AND SUBSIDIARIES included herein and to all references to our Firm included in this registration statement. Arthur Andersen LLP Chicago, Illinois December 31, 1997 EX-23.6 22 CONSENT OF ARTHUR ANDERSEN LLP -- IAMD Exhibit 23.6 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use in this registration statement of our report dated September 17, 1997, on the financial statements of INTERNATIONAL ACADEMY OF MERCHANDISING AND DESIGN (CANADA), LTD. AND SUBSIDIARY included herein and to all references to our Firm included in this registration statement. Arthur Andersen LLP Chicago, Illinois December 31, 1997 EX-23.7 23 CONSENT OF GLEESON, SKLAR, SAWYERS AND CUMPATA LLP EXHIBIT 23.7 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of our report dated August 16, 1996 (except for notes 4, 8 and 9, as to which the date is October 23, 1997) relating to the financial statements of IAMD, Limited and Subsidiaries which appears in such Prospectus. We also consent to the references to us under the headings "Experts" in such Prospectus. Gleeson, Sklar, Sawyers & Cumpata LLP October 30, 1997 EX-23.8 24 CONSENT OF PRICE WATERHOUSE EXHIBIT 23.8 [LETTERHEAD PRICE WATERHOUSE] [LOGO] October 29, 1997 Consent of Independent Accountants We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of our report dated October 11, 1996 relating to the financial statements of International Academy of Design and Merchandising (Canada) Ltd. which appears in such Prospectus. We also consent to the references to us under the headings "Experts" in such Prospectus. /s/ Price Waterhouse Chartered Accountants EX-23.9 25 CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.9 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 2 to the Registration Statement No. 333-37601 of Career Education Corporation on Form S-1 of our report dated October 27, 1997, relating to the consolidated financial statements of The Katharine Gibbs Schools, Inc. and subsidiaries as of December 31, 1995 and 1996 and for the period from March 7, 1994 to December 31, 1994, and for the years ended December 31, 1995 and 1996, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. DELOITTE & TOUCHE LLP New York, New York November 19, 1997 EX-23.10 26 CONSENT OF KEITH K. OGATA EXHIBIT 23.10 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 23.10 to the Registration Statement. /s/ KEITH K. OGATA ----------------------------------- Keith K. Ogata Dated: December 31, 1997 -----END PRIVACY-ENHANCED MESSAGE-----